<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MORLEY CAPITAL
ACCUMULATION FUND
ANNUAL REPORT
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
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<PAGE> 2
MORLEY CAPITAL ACCUMULATION FUND
ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Management Discussion of Performance........................ 3
Statement of Investments.................................... 4
Statement of Assets and Liabilities......................... 5
Statement of Operations..................................... 6
Statement of Changes in Net Assets.......................... 7
Financial Highlights........................................ 8
Notes to Financial Statements............................... 9
Independent Auditors' Report................................ 14
</TABLE>
<PAGE> 3
MANAGEMENT DISCUSSION OF PERFORMANCE
The total return for the Morley Capital Appreciation Fund, Institutional Class
("IC") for the period ended October 31, 1999 was 3.91%*, compared to 0.05% for
the Lehman Brothers Intermediate Corporate/Government Bond Index, the Fund's
benchmark, and 3.87% the Dealer Commercial Paper (90 day) Rate as published in
the Wall Street Journal.
The Fund began on February 1, 1999, and began operations by investing in
mortgage-backed securities issued by federal agencies such as Federal Home Loan
Bank System (FHLB) and Federal Home Loan Mortgage Corp. (FHLMC). Management
believed that these securities offered the highest available yield consistent
with safety of principal and reasonable market performance. This sector
allocation proved fortunate as the interest rate spreads on the Fund's
securities narrowed relative to Treasury securities, thereby enabling the Fund
to outperform competing securities on a price basis. This was despite the fact
that interest rates in general rose by more than 1.25% between February and
October.
The most prominent feature of the Fund effecting performance during this period
has been the effect of the "wrap contracts," which helps maintain a stable value
of the principal of the Fund. At all times during this period, the net asset
value of the shares has been maintained at $10.00. During the same nine month
period, the total return was 3.60% for ISC and IRA Shares and 3.91% for IC
Shares. By contrast, the Lehman Brothers Intermediate Government/Corporate Index
(an index consisting of securities of comparable credit quality and duration)
produced flat returns of 0.05% as sharp increases in interest rates resulted in
lower bond prices that essentially offset any coupon interest received.
As the new fiscal year begins, interest rates may continue to rise as the
Federal Reserve strives to control inflation against a background of strong
domestic, and improving international, economic activity. If such an environment
persists, the Fund will continue to pay wrap premiums and show the value of
"wrap contracts" in maintaining the value of shareholders' invested principal.
At the same time, management believes that the agency mortgage-backed securities
sector continues to offer the best relative blend of yield, safety, and
marketability, and plans to remain invested in this sector.
- ---------------
*Assuming all distributions are reinvested.
None of the shares are subject to front-end sales charges.
PORTFOLIO COMPOSITION
(Subject to Change)
<TABLE>
- ----------------------------------------------
<S> <S>
Repurchase Agreement 2.7%
- ----------------------------------------------
U.S. Government Obligations 94.0%
- ----------------------------------------------
</TABLE>
AVERAGE ANNUAL (COMPOUND) TOTAL RETURN
(For Period Ended October 31, 1999)
<TABLE>
<CAPTION>
YEARS ISC SHARES IC SHARES IRA SHARES
<S> <C> <C> <C>
- ----------------------------------------------
Life** 3.60% 3.91% 3.60%
- ----------------------------------------------
</TABLE>
Past performance is no guarantee of future results.
There are no sales charges on the Shares of the Morley Capital Accumulation
Fund.
** All 3 classes of shares were first offered to the public on February 1, 1999.
Fund Performance
<TABLE>
<CAPTION>
ISC SHARES ISC SHARES IC SHARES IRA SHARES LBIC/G
- ---------- ---------- --------- ---------- ------
<S> <C> <C> <C> <C>
2/99 10000.00 10000.00 10000.00 10000.00
1999 10360.00 10391.00 10360.00 10005.00
</TABLE>
Comparative performance of $10,000 invested in the Fund and the Lehman Brothers
Intermediate Corporate/Government Bond Index (LBIC/GB)*** since inception
(2/1/99) to 10/31/99. Unlike our Fund, the index does not reflect any fees or
expenses.
*** The LBIC/GB generally reflects the total return of intermediate-term U.S.
government and corporate securities.
MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT 3
<PAGE> 4
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
STATEMENT OF INVESTMENTS -- OCTOBER 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT SPONSORED AND AGENCY
OBLIGATIONS (94.0%)
GOVERNMENT AGENCY (5.0%)
$ 400,000 FHLB, 6.25%, 07/19/02 $ 398,035
---------
TOTAL GOVERNMENT AGENCY
(cost $400,000) 398,035
---------
GOVERNMENT SPONSORED AND AGENCY-
COLLATERALIZED MORTGAGE
OBLIGATIONS (89.0%)
1,224,800 FHLMC Gold 15 Year, Pool E00616,
6.00%, 01/01/04 1,179,441
709,502 FHLMC Gold 15 Year, Pool E74820,
6.00%, 01/01/09 691,113
995,999 FNMA Pool 496705, 6.50%, 08/01/06 982,449
1,180,462 FNMA Pool 252318, 6.00%, 02/01/09 1,155,857
2,034,203 FNMA REMIC Series 24-BA, 6.00%,
11/18/23 1,970,087
1,204,693 GNMA REMIC Series 18-B, 6.25%,
07/16/26 1,155,926
---------
TOTAL GOVERNMENT SPONSORED AND
AGENCY-COLLATERALIZED MORTGAGE
OBLIGATIONS
(cost $7,311,298) 7,134,873
---------
TOTAL U.S. GOVERNMENT SPONSORED
AND AGENCY OBLIGATIONS
(cost $7,711,298) 7,532,908
---------
</TABLE>
<TABLE>
- ---------------------------------------------------------
<CAPTION>
PRINCIPAL SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (2.7%)
$ 213,000 Fifth Third Bank 5.06%, 11/01/99,
Collateralized by $218,000 FHLMC
Gold 15 Year, Pool E00570, 6.00%,
09/01/13, market value $218,000
(cost $213,000) $ 213,000
---------
TOTAL INVESTMENTS
(cost $7,924,298) $7,745,908
=========
</TABLE>
- --------------------------------------------------------------------------------
The abbreviations in the above statement stand for the following:
<TABLE>
<S> <C>
FHLB Federal Home Loan Bank System
FHLMC Federal Home Loan Mortgage Corp.
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
REMIC Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<S> <C>
VALUE OF WRAP CONTRACTS:
Wrap contract with Bank of America NT&SA $ 59,463
Wrap contract with Deutsche Bank America 59,463
Wrap contract with Transamerica Life Insurance Company 59,464
--------
TOTAL WRAPPER CONTRACTS $178,390
========
Wrap Contracts: Each wrap contract obligates the wrapper
provider to maintain the book value of a portion of the
Fund's assets upon the occurrence of certain specified
events. Value of wrap contracts is the fair value as
determined under valuation procedures approved by the
Trust's Board of Trustees.
</TABLE>
- ------------------------------------------------------
Cost also represents cost for Federal income tax purposes.
Portfolio holding percentages represent market value as a percentage of net
assets.
See accompanying notes to financial statements.
4 MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT
<PAGE> 5
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $7,711,298) $ 7,532,908
Repurchase agreements (cost $213,000) 213,000
Wrap contracts, at value 178,390
Cash 611
Receivable from adviser 37,444
Accrued interest and dividends receivable 38,723
Prepaid assets 20,377
Other receivables 27
-----------
Total assets 8,021,480
-----------
LIABILITIES
Accrued management fees 1,721
Accrued fund administration fees 435
Accrued distribution fees, ISC Shares 250
Accrued distribution fees, IRA Shares 387
Accrued transfer agent fees, ISC Shares 10
Accrued transfer agent fees, IC Shares 43
Accrued transfer agent fees, IRA Shares 16
Accrued wrap contract premiums, ISC Shares 32
Accrued wrap contract premiums, IC Shares 663
Accrued wrap contract premiums, IRA Shares 316
Other accrued expenses 7,514
-----------
Total liabilities 11,387
-----------
NET ASSETS $ 8,010,093
===========
NET ASSETS REPRESENTED BY:
Capital $ 8,010,117
Net unrealized depreciation on investments and wrap
contracts (5,760)
Accumulated net investment income 7,549
Accumulated net realized (loss) from investments (1,813)
-----------
NET ASSETS $ 8,010,093
===========
NET ASSETS:
ISC Shares $ 1,050,553
IC Shares 5,131,013
IRA Shares 1,828,527
-----------
Total $ 8,010,093
===========
SHARES OUTSTANDING (unlimited number of shares authorized):
ISC Shares 105,056
IC Shares 513,103
IRA Shares 182,853
-----------
Total 801,012
===========
NET ASSET VALUE AND OFFERING PRICE PER SHARE:*
ISC Shares $ 10.00
IC Shares $ 10.00
IRA Shares $ 10.00
</TABLE>
- ------------------------------------------------------
* None of the share classes are subject to a front-end sales charge.
See accompanying notes to financial statements.
MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT 5
<PAGE> 6
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 1, 1999 TO OCTOBER 31, 1999 (a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Interest $ 237,192
---------
EXPENSES:
Investment management fees 14,495
Distribution fees, ISC Shares 1,932
Distribution fees, IRA Shares 2,138
Fund administration fees 2,899
Transfer agent fees, ISC Shares 78
Transfer agent fees, IC Shares 251
Transfer agent fees, IRA Shares 86
Wrap contract premiums, ISC Shares 1,005
Wrap contract premiums, IC Shares 3,267
Wrap contract premiums, IRA Shares 1,881
Professional services 111,742
Shareholders' reports 27,499
Registration fees 19,000
Custodian fees 499
Trustees' fees and expenses 125
Other 5,523
---------
Total expenses before waived or reimbursed expenses 192,420
Total waived or reimbursed expenses (163,137)
---------
Net expenses 29,283
---------
NET INVESTMENT INCOME $ 207,909
=========
NET REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS
AND WRAP CONTRACTS:
Net change in unrealized depreciation of investments $(178,390)
Net change in unrealized appreciation of wrap contracts $ 178,390
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
WRAP CONTRACTS --
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 207,909
=========
</TABLE>
- ------------------------------------------------------
(a) The Fund commenced operations and all three Classes of Shares were offered
first on February 1, 1999.
See accompanying notes to financial statements.
6 MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT
<PAGE> 7
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM FEBRUARY 1, 1999 TO OCTOBER 31, 1999 (a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 207,909
Net change in unrealized depreciation of investments (178,390)
Net change in unrealized appreciation of wrap contracts 178,390
-----------
Net increase in net assets resulting from operations 207,909
-----------
DISTRIBUTIONS TO ISC SHAREHOLDERS FROM:
Net investment income (36,651)
-----------
DISTRIBUTIONS TO IC SHAREHOLDERS FROM:
Net investment income (130,488)
-----------
DISTRIBUTIONS TO IRA SHAREHOLDERS FROM:
Net investment income (40,794)
-----------
DECREASE IN NET ASSETS FROM SHAREHOLDER DISTRIBUTIONS (207,933)
-----------
CAPITAL SHARE TRANSACTIONS:*
Net proceeds from sale of shares 9,324,720
Net asset value of shares issued to shareholders from
reinvestment of dividends 207,718
Cost of shares redeemed (1,522,321)
-----------
Increase in net assets derived from capital share
transactions 8,010,117
-----------
NET INCREASE IN NET ASSETS 8,010,093
NET ASSETS -- BEGINNING OF PERIOD --
-----------
NET ASSETS--END OF PERIOD $ 8,010,093
===========
Undistributed net investment income included in net assets
at end of period $ 7,549
===========
Distributions in excess of net realized gain (loss) on
investments included in net assets at end of period $ (1,813)
===========
SHARE ACTIVITY:*
Shares sold 932,471
Reinvestment of dividends 20,773
Shares redeemed (152,232)
-----------
Net increase in number of shares 801,012
===========
</TABLE>
- ------------------------------------------------------
* Both the Capital Share Transactions and Share Activity sections represent ISC,
IC, and IRA Shares collectively.
(a) The Fund commenced operations and all three Classes of Shares were offered
first on February 1, 1999.
See accompanying notes to financial statements.
MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT 7
<PAGE> 8
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL OUTSTANDING
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISC SHARES (a) IC SHARES (a) IRA SHARES (a)
------------------- ------------------- -------------------
PERIOD FROM PERIOD FROM PERIOD FROM
FEBRUARY 1, 1999 FEBRUARY 1, 1999 FEBRUARY 1, 1999
TO OCTOBER 31, 1999 TO OCTOBER 31, 1999 TO OCTOBER 31, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
Net investment income 0.35 0.38 0.35
Dividends from net investment income (0.35) (0.38) (0.35)
------- ------- -------
NET ASSET VALUE -- END OF PERIOD $ 10.00 $ 10.00 $ 10.00
======= ======= =======
Total Return 3.60% 3.91% 3.60%
Net Assets, End of Period (000) $ 1,051 $ 5,131 $ 1,829
Ratio of expenses to average net assets 0.95%(b) 0.55%(b) 0.95%(b)
Ratio of expenses to average net assets* 6.10%(b) 4.18%(b) 4.65%(b)
Ratio of net investment income to average
net assets 4.74%(b) 5.17%(b) 4.77%(b)
Ratio of net investment income to average
net assets* (0.41%)(b) 1.54%(b) 1.07%(b)
Portfolio turnover(c) 8.2% 8.2% 8.2%
</TABLE>
- ------------------------------------------------------
* Ratios calculated as if no fees waived or expenses reimbursed.
(a) The Fund commenced operations and all three Classes of Shares were offered
first on February 1, 1999.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing among the classes of shares.
See accompanying notes to the financial statements.
8 MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT
<PAGE> 9
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nationwide Mutual Funds ("NMF" or the "Trust"), formerly known as Nationwide
Investing Foundation III, is an open-end management investment company. NMF was
created under the laws of Ohio as an Ohio business trust pursuant to a
Declaration of Trust dated as of October 30, 1997, as amended as of November 5,
1999, and is registered under the Investment Company Act of 1940, as amended.
The Trust offers shares in fifteen separate series, or mutual funds, each with
its own investment objectives. The accompanying financial statements and
financial highlights relate to the Morley Capital Accumulation Fund (the "Fund")
only, a diversified portfolio.
The Fund currently offers three classes of shares: Institutional Service Class
("ISC Shares"), Institutional Class ("IC Shares"), and IRA Class ("IRA Shares").
ISC and IRA Shares are both subject to a 0.25% distribution fee and a 0.15%
administrative servicing fee, while IC Shares are not subject to either. There
were no administrative servicing fees for the period ended October 31, 1999.
(A) SECURITY VALUATION
1. U.S. Government and agency securities are valued at the last quoted
bid price as provided by an independent pricing agent. All other debt
securities are valued by a combination of daily quotes and matrix
evaluations.
2. The value of a repurchase agreement generally equals the purchase
price paid by the Fund (cost) plus the interest accrued to date. The
seller, under the repurchase agreement, is required to maintain the market
value of the underlying collateral at not less than the value of the
repurchase agreement. Securities subject to repurchase agreements are held
by the Federal Reserve/Treasury book-entry system or by the Fund's
custodian or an approved sub-custodian.
3. The aggregate value of the Fund's wrap contracts (see note 1.(g))
will typically equal the difference between the Fund's book value (purchase
price of the underlying assets minus sale price of the underlying assets
liquidated to fund share redemptions, plus interest accrued at the
crediting rate) and market value (plus accrued interest). The wrap
contracts will be an asset on the balance sheet if the book value is
greater than market value or a liability on the balance sheet if the book
value is less than market value. The Trust's Board of Trustees has approved
a fair valuation methodology to value the wrap contracts which takes into
account the ability of each wrap provider to fulfill its contractual
obligations.
4. Securities for which reliable market quotations are not available
or for which an independent pricing agent does not provide a value or
provides a value that does not represent fair value in the judgement of the
Fund's investment adviser, are valued in accordance with procedures
authorized by the Trust's Board of Trustees.
(B) SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are recorded on the trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on an accrual
basis and includes, where applicable, the pro rata amortization of premium or
discount.
(C) FEDERAL INCOME TAXES
The Fund's policy is to qualify as a regulated investment company under the
Internal Revenue Code, and to distribute all taxable income, if any, to its
shareholders. Therefore no provision has been made for federal income taxes as
it is the intention of the Fund to continue such qualification and to distribute
all taxable income, if any,
MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT 9
<PAGE> 10
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
to its shareholders. To the extent net realized gains are offset through the
application of a capital loss carryover, they will not be distributed to
shareholders and will be retained by the Fund. Withholding taxes have been paid
or provided for in accordance with the applicable tax rates and rules.
For the period ended October 31, 1999, the Fund had a capital loss carry over
$1,813. If unused it will expire in 8 years.
(D) DIVIDENDS TO SHAREHOLDERS
1) Dividend income, if any, is declared and recorded daily and paid
monthly.
2) Distributable net realized capital gains, if any, are declared and
distributed at least annually.
3) Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These "book/tax" differences are
considered either permanent or temporary in nature. In accordance with
AICPA (American Institute of Certified Public Accountants) Statement of
Position 93-2, permanent differences are reclassified within the capital
accounts based on their nature for federal income tax purposes; temporary
differences do not require reclassification. Dividends and distributions
that exceed net investment income and net realized gains for financial
reporting purposes but not for tax purposes are reported as dividends in
excess of net investment income and net realized gains. To the extent
distributions exceed current and accumulated earnings and profits for
federal income tax purposes, they are reported as distributions of
paid-in-capital. These reclassifications have no effect upon the net asset
value of the Fund. For the period ended October 31, 1999, a $5,760
reclassification was made to increase net unrealized depreciation on
investments and wrap contracts. In addition, a reclassification was made to
increase accumulated net investment income by $1,813 and to increase
accumulated net realized loss from investments by $1,813.
(E) EXPENSES
General expenses of the Trust, not directly attributable to the Fund or to any
class of shares, are allocated to the Fund based upon the Fund's relative
average net assets or another appropriate basis, as approved by the Trust's
Board of Trustees. Once these expenses are allocated to the Fund, they are
sub-allocated to the classes based on total settled shares outstanding for each
class.
Direct expenses of the Fund are paid by the Fund and sub-allocated to the
classes as described above.
Direct expenses of a class are allocated to that class unless otherwise directed
by the Trust's Board of Trustees. For example, distribution fees, administrative
servicing fees, transfer agent fees and wrapper premiums are borne by the
specific class of shares to which they apply.
(F) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
(G) WRAP CONTRACTS VALUATION
In order for the Fund to achieve its investment objective of maintaining a
stable net asset value per share, the Fund has entered into book value
maintenance agreements ("wrap contracts") with the following institutions: Bank
of America NT&SA, Deutsche Bank America, and Transamerica Life Insurance Company
(collectively
10 MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT
<PAGE> 11
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
the "wrap providers"). The wrap contracts obligate the wrap providers and the
Fund to make payments in specified circumstances , and allow the Fund under most
circumstances to maintain net asset value at $10.00 per share.
(H) CAPITAL SHARE TRANSACTIONS
Transactions in class level shares of the Funds were as follows:
<TABLE>
<CAPTION>
CAPITAL TRANSACTIONS
--------------------
FOR THE PERIOD FROM
FEBRUARY 1, 1999 TO
OCTOBER 31, 1999
--------------------
<S> <C>
ISC SHARES:
Proceeds from shares
issued................... $2,536,393
Dividends reinvested....... 36,448
Cost of shares redeemed.... (1,522,286)
----------
Change in net assets..... $1,050,555
==========
IC SHARES:
Proceeds from shares
issued................... $5,000,556
Dividends reinvested....... 130,476
Cost of shares redeemed.... --
----------
Change in net assets..... $5,131,032
==========
IRA SHARES:
Proceeds from shares
issued................... $1,787,771
Dividends reinvested....... 40,794
Cost of shares redeemed.... (35)
----------
Change in net assets..... $1,828,530
==========
<CAPTION>
SHARE TRANSACTIONS
--------------------
FOR THE PERIOD FROM
FEBRUARY 1, 1999 TO
OCTOBER 31, 1999
--------------------
ISC SHARES:
Issued..................... 253,639
Reinvested................. 3,645
Redeemed................... (152,228)
----------
Change in shares....... 105,056
==========
IC SHARES:
Issued..................... 500,055
Reinvested................. 13,048
Redeemed................... --
----------
Change in shares....... 513,103
==========
IRA SHARES:
Issued..................... 178,777
Reinvested................. 4,080
Redeemed................... (4)
----------
Change in shares....... 182,853
==========
</TABLE>
2. TRANSACTIONS WITH AFFILIATES
Union Bond & Trust Company ("UBT") provides investment advisory services to the
Fund pursuant to an Investment Advisory Agreement. UBT is a majority owned
subsidiary of Morley Financial Services, Inc., a wholly owned subsidiary of
Villanova Capital, Inc., which is a majority owned subsidiary of Nationwide
Financial Services ("NFS"). Under the terms of the Investment Advisory
Agreement, UBT is entitled to an advisory fee of 0.35% of the Fund's average
daily net assets. UBT has voluntarily agreed to waive 0.10% of the fee until
further written notice to the shareholders. For the period ended October 31,
1999, investment advisory fees for UBT were $14,495, of which $4,141 was waived.
Fees may be waived or expenses reimbursed in order to maintain expense ratios at
or below stated expense caps. For the period ended October 31, 1999, Fund
expenses were limited to 0.95% for ISC Shares, 0.55% for IC Shares, and 0.95%
for IRA Shares. During the period ended October 31, 1999, fees were waived or
expenses were reduced as per the following table:
<TABLE>
<CAPTION>
TOTAL TOTAL FEES NET
FUND FEES FEES WAIVED/ FUND
EXPENSES WAIVED* REIMBURSED REIMBURSED EXPENSES
- --------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C>
$192,420 $14,495 $148,642 $163,137 $29,283
</TABLE>
* Advisory fees.
Each fee waiver or expense reimbursement by UBT is subject to possible
reimbursement by the Fund. UBT is entitled to such reimbursements, in whole or
in part, in any fiscal year during which the total Fund assets are
MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT 11
<PAGE> 12
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
greater than $50,000,000, and expenses are below the stated caps. Such
reimbursements to UBT are subject to quarterly approval by the Trust's Board of
Trustees. UBT is only entitled to recover reimbursements for three fiscal years
from inception and only if such reimbursement could be done under stated expense
caps.
Nationwide Advisory Services, Inc. ("NAS"), an indirect subsidiary of NFS, is
the Distributor of the Fund and may receive fees for distribution and/or
shareholder services pursuant to a Rule 12b-1 Distribution Plan approved by the
Trust's Board of Trustees. These fees are based on average daily net assets of
the respective class of the Fund at an annual rate of 0.25% for ISC Shares and
0.25% for IRA Shares. During the period ended October 31, 1999, the Fund paid
distribution fees totaling $4,070.
On September 1, 1999, Villanova SA Capital Trust ("VSA"), a subsidiary of
Villanova Capital, Inc., replaced NAS as administrator. Pursuant to a Fund
Administration Agreement, VSA receives fees from the Fund calculated daily and
paid monthly. This fee is based on average daily net assets of the Fund at an
annual rate of 0.07% on the first $250 million, 0.05% on the next $750 million,
and 0.04% on $1 billion and more. The Fund Administration fee is subject to a
minimum of $50,000 per year. This minimum was waived by NAS and/or VSA for the
period ended October 31, 1999.
Nationwide Investors Services, Inc. ("NISI"), a subsidiary of VSA serves as
Transfer and Dividend Disbursing Agent for the Fund. For these services, NISI
receives fees at an annual rate of 0.01% based on average daily net assets of
each class.
Also on September 1, 1999, VSA entered into an agreement with BISYS Fund
Services Ohio, Inc., to provide sub-administration and sub-transfer agent
services.
As stated above, on September 1, 1999, NAS was replaced by VSA as administrator.
Fund administration fees paid by the Fund prior to that date were paid to NAS.
After September 1, 1999, fund administration fees were paid to VSA. The
information provided in this report relates to the total fund administration
fees paid by the Fund for the fiscal period ended October 31, 1999.
Pursuant to a servicing agreement, financial institutions or other service
providers including Nationwide Financial Services, Inc., may receive fees under
the terms of an Administrative Services Plan for providing administrative
support services including but not limited to the following: establishing and
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging bank wires, performing shareholder sub-accounting,
answering inquires regarding the Funds, and other such services. These fees are
based on an annual rate of up to 0.15% of the average daily net assets of the
ISC and IRA Shares. During the period ended October 31, 1999, the Fund paid no
administrative servicing fees.
A redemption fee of 2.0% may be incurred (on the amount redeemed) by a
shareholder if the shareholder redeems shares when the yield of the Fund
(computed before subtraction of expenses) has fallen, and remains, below the
Dealer Commercial Paper 90-day Index. The redemption fee will be retained by the
Fund to help minimize the impact such redemptions may have on Fund performance
and to support administrative costs associated with redemptions from the Fund.
Additionally, the fee may discourage market timing by those shareholders
initiating redemptions to take advantage of short-term movements in interest
rates. During the period ended October 31, 1999, the events that would trigger
the imposition of a redemption fee did not occur and the Fund did not collect
any redemption fees.
12 MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT
<PAGE> 13
NATIONWIDE(R) MUTUAL FUNDS
MORLEY CAPITAL ACCUMULATION FUND
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
3. BANK LOANS
NMF has an unsecured bank line of credit of $50,000,000 for the purpose of
funding redemptions. Borrowings under these arrangements bear interest at the
Federal Funds rate plus 0.50%. These interest costs are included in custodian
fees in the Statements of Operations. No compensating balances are required.
4. INVESTMENT TRANSACTIONS
For the period ended October 31, 1999, there were no purchases, sales, or
maturities of non-U.S. Government securities. Purchases and maturities of U.S.
Government Securities were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES
- ----------------------------------------
PURCHASES MATURITIES
- ---------- -----------
<S> <C>
$8,210,325 $460,667
</TABLE>
Realized gains and losses have been computed on the first-in, first-out basis.
Included in net unrealized depreciation for investments, based on cost for
federal income tax purposes, at October 31, 1999, are the following components:
<TABLE>
<CAPTION>
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
APPRECIATION (DEPRECIATION) (DEPRECIATION)
- ------------ -------------- --------------
<S> <C> <C>
$ -- $(178,390) $(178,390)
</TABLE>
5. YEAR 2000 (UNAUDITED)
UBT, VSA and NAS have developed and implemented a plan to address issues related
to the Year 2000. The problem relates to many existing computer systems using
only two digits to identify a year in a date field. These systems were designed
and developed without considering the impact of the upcoming change in the
century. If not corrected, many computer systems could fail or create erroneous
results when processing information dated after December 31, 1999. UBT, VSA and
NAS have completed an inventory and assessment of all computer systems and have
implemented a plan to renovate or replace all applications that were identified
as not Year 2000 compliant. UBT, VSA and NAS have also tested each application
for its Year 2000 Compliance.
Systems supporting the Fund's infrastructure, such as telecommunications, voice
and networks, have also been tested, renovated or replaced, and are compliant.
UBT's, VSA's and NAS' assessment of Year 2000 issues has also included
non-information technology systems with embedded computer chips.
In addition to resolving internal Year 2000 readiness issues, UBT, VSA and NAS
are surveying significant external organizations (business partners) to assess
if they will be Year 2000 compliant. UBT, VSA and NAS continue their efforts to
identify external risk factors and have developed contingency plans as part of
their ongoing risk-management strategy.
MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT 13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
Nationwide Mutual Funds:
We have audited the accompanying statement of assets and liabilities of
Nationwide Mutual Funds-Morley Capital Accumulation Fund (the Fund), including
the statement of investments, as of October 31, 1999, and the related statement
of operations, statement of changes in net assets and financial highlights for
the period from February 1, 1999 (commencement of operations) to October 31,
1999. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights 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 statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1999, by
correspondence with the custodian and brokers. 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 statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of October 31, 1999, the results of its operations, the changes in its
net assets, and the financial highlights for the period from February 1, 1999
(commencement of operations) to October 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Columbus, Ohio
December 17, 1999
14 MORLEY CAPITAL ACCUMULATION FUND ANNUAL REPORT
