<PAGE> 1
'33 ACT FILE NO.333-40455
'40 ACT FILE NO.811-08495
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933/X/
POST-EFFECTIVE AMENDMENT NO. 13
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
AMENDMENT NO. 14
(CHECK APPROPRIATE BOX OR BOXES)
NATIONWIDE MUTUAL FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NATIONWIDE MID CAP GROWTH FUND
NATIONWIDE GROWTH FUND
NATIONWIDE FUND
NATIONWIDE S&P 500 INDEX FUND
NATIONWIDE BOND FUND
NATIONWIDE TAX-FREE INCOME FUND
NATIONWIDE LONG-TERM U.S. GOVERNMENT BOND FUND
NATIONWIDE INTERMEDIATE U.S. GOVERNMENT BOND FUND
NATIONWIDE MONEY MARKET FUND
NATIONWIDE FOCUS FUND
NATIONWIDE SMALL CAP VALUE FUND II
NATIONWIDE HIGH YIELD BOND FUND
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
MORLEY CAPITAL ACCUMULATION FUND
MORLEY ENHANCED INCOME FUND
PRESTIGE LARGE CAP VALUE FUND
PRESTIGE LARGE CAP GROWTH FUND
PRESTIGE SMALL CAP FUND
PRESTIGE BALANCED FUND
PRESTIGE INTERNATIONAL FUND
THE AGGRESSIVE FUND
THE MODERATELY AGGRESSIVE FUND
THE MODERATE FUND
THE MODERATELY CONSERVATIVE FUND
THE CONSERVATIVE FUND
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (614) 249-7855
SEND COPIES OF COMMUNICATIONS TO:
---------------------------------
MS. ELIZABETH A. DAVIN
----------------------
DIETRICH, REYNOLDS AND KOGLER
-----------------------------
ONE NATIONWIDE PLAZA
--------------------
COLUMBUS, OHIO 43215
--------------------
1
<PAGE> 2
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------------------------
It is proposed that this filing will become effective:
[X] 75 days after filing pursuant to paragraph (a) (2) of Rule 485.
2
<PAGE> 3
NATIONWIDE MUTUAL FUNDS
NATIONWIDE MID CAP GROWTH FUND
NATIONWIDE GROWTH FUND
NATIONWIDE FUND
NATIONWIDE S&P 500 INDEX FUND
NATIONWIDE BOND FUND
NATIONWIDE TAX-FREE INCOME FUND
NATIONWIDE LONG-TERM U.S. GOVERNMENT BOND FUND
NATIONWIDE INTERMEDIATE U.S. GOVERNMENT BOND FUND
NATIONWIDE MONEY MARKET FUND
NATIONWIDE FOCUS FUND
NATIONWIDE SMALL CAP VALUE FUND II
NATIONWIDE HIGH YIELD BOND FUND
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
MORLEY CAPITAL ACCUMULATION FUND
MORLEY ENHANCED INCOME FUND
PRESTIGE LARGE CAP VALUE FUND
PRESTIGE LARGE CAP GROWTH FUND
PRESTIGE SMALL CAP FUND
PRESTIGE BALANCED FUND
PRESTIGE INTERNATIONAL FUND
THE AGGRESSIVE FUND
THE MODERATELY AGGRESSIVE FUND
THE MODERATE FUND
THE MODERATELY CONSERVATIVE FUND
THE CONSERVATIVE FUND
<TABLE>
CROSS REFERENCE SHEET
<CAPTION>
<S> <C> <C>
N-1A ITEM NO. LOCATION
PART A
Item 1. Cover Page Cover Page
Item 2. Risk/Return Summary: Investments, Risks, and Performance Fund Summaries: Objective and Principal
Strategies, Principal Risks, Performance
Item 3. Risk/Return Summary: Fee Table Fund Summaries: Fees and Expenses
Item 4. Investment Objectives, Principal Investment Strategies, and Fund Summaries: Objective and Principal
Related Risks Strategies, Principal Risks, Performance
Item 5. Management's Discussion of Fund Performance *
Item 6. Management, Organization, and Capital Structure Management
Item 7. Shareholder Information Buying, Selling and Exchanging Fund
Shares; Distributions and Taxes
Item 8. Distribution Arrangements Management: Distribution Plan; Buying,
Selling and Exchanging Fund Shares
Item 9. Financial Highlights Information Financial Highlights
<CAPTION>
PART B
Item 10. Cover Page and Table of Contents Cover Page; Table of Contents
Item 11. Fund History General Information and History
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C> <C>
Item 12. Description of the Fund and its Investment Risks Investment Objectives and Policies
Item 13. Management of the Fund Trustees and Officers of the Trust;
Investment Advisory and Other Services
Item 14. Control Persons and Principal Holders of Securities Major Shareholders
Item 15. Investment Advisory and Other Services Investment Advisory and Other Services
Item 16. Brokerage Allocation and Other Practices Brokerage Allocation
Item 17. Capital Stock and Other Securities *
Item 18. Purchase, Redemption and Pricing of Shares Additional Information on Purchases
and Sales; Valuation of Shares
Item 19. Taxation of the Fund Additional General Tax Information
Item 20. Underwriters *
Item 21. Calculation of Performance Data Fund Performance Advertising
Item 22. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration statement.
* Not applicable or negative answer.
4
<PAGE> 5
The Prospectus as well as the Statement of Additional Information for the Mid
Cap Growth Fund, Growth Fund, Nationwide Fund, Bond Fund, Tax-Free Income Fund,
Long-Term U.S. Government Bond Fund, Intermediate U.S. Government Bond Fund, and
Money Market Fund-Prime Shares and the Prospectus and Statement of Additional
Information for the Money Market Fund- Class R shares, the Prospectuses and
Statements of Additional Information for the Local Fund Shares, Class R and
Class Y shares of the S&P 500 Index Fund, and Morley Capital Accumulation Fund,
and the Prospectus and Statement of Additional Information for the Large Cap
Value Fund, Large Cap Growth Fund, Small Cap Fund, Balanced Fund and
International Fund are incorporated by reference into this filing of
Post-Effective Amendment No. 13 to the Registration Statement.
5
<PAGE> 6
PROSPECTUS
------------------------------, 2000
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Funds' shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FUND SUMMARIES.....................................................................................1
Nationwide Small Cap Index Fund...........................................................1
Nationwide International Index Fund.......................................................5
Nationwide Bond Index Fund................................................................8
MORE ABOUT THE FUNDS...............................................................................12
INVESTMENT RISKS...................................................................................15
MANAGEMENT.........................................................................................21
BUYING, SELLING AND EXCHANGING FUND SHARES.........................................................23
DISTRIBUTIONS AND TAXES............................................................................34
CERTAIN HISTORICAL PERFORMANCE.....................................................................35
ADDITIONAL INFORMATION.............................................................................Back Cover
</TABLE>
-i-
<PAGE> 8
FUND SUMMARIES
This Prospectus provides information about three of Nationwide Mutual Funds:
Nationwide Small Cap Index Fund, Nationwide International Index Fund and
Nationwide Bond Index Fund (together the "Funds"). "You" and "your" refer to
potential investors and current shareholders of one or more of the Funds.
This section summarizes key information about the Funds. Use these summaries to
compare the Funds with other mutual funds. More detailed information about the
risks and investment techniques of each Fund can be found in "MORE ABOUT THE
FUNDS."
A QUICK NOTE ABOUT SHARE CLASSES
Each Fund has three different share classes -- Class A, Class B and Service
Class. The fees, sales charges and expenses for each share class are different,
but each share class of a particular Fund represents an investment in the same
assets of that Fund.
The fees and expenses for each Fund are set forth in the Fund Summaries. For
more information about which share class is right for you, see "BUYING, SELLING
AND EXCHANGING FUND SHARES -- Choosing a Share Class."
ABOUT EACH FUND GENERALLY
Each Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of that Fund's index. Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its assets
in securities or other financial instruments in, or correlated with, the
applicable index. A Fund may change its target index if Fund management believes
a different index would better enable the Fund to match the performance of the
market segment represented by the current index.
Each Fund invests all of its assets in a Series of Index Master Series Trust
that has the same goals as the Fund. All investments will be made at the level
of the Series. This structure is sometimes called a "master/feeder" structure.
Each Fund's investment results will correspond directly to the investment
results of the underlying Series it invests in. For simplicity, this Prospectus
uses the term "Fund" to include the underlying Series a Fund invests in. There
is no guarantee that the Funds will achieve their objectives.
NATIONWIDE SMALL CAP INDEX FUND
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Russell 2000 Index (the "Russell
2000") as closely as possible before the deduction of Fund expenses. The Russell
2000 is a market-weighted index composed of approximately 2,000 common stocks
issued by smaller-capitalization U.S. companies in a wide range of businesses.
<PAGE> 9
Market capitalization is a common way to measure the size of a company based on
the price of its common stock; it is simply the number of outstanding shares of
the company multiplied by the current share price. [Inset Box]
Market-weighted index is an index in which the weighting of each security is
based on its market capitalization. In a market-weighted index, changes in the
price of a company with a large capitalization affect the level of the index
more than changes in the price of a company with smaller market capitalization.
[Inset Box]
The Small Cap Index Fund invests in a statistically selected sample of stocks
included in the Russell 2000 and in derivative instruments linked to the Russell
2000. The Fund may not invest in all of the common stocks in the Russell 2000,
or in the same weightings as in the Russell 2000. The Fund chooses investments
so that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the Russell 2000 as a whole. The Fund may also engage in securities lending.
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. Individual stocks and other equity investments in the Small Cap Index
Fund - as well as the stock market as a whole -- could lose value. Individual
stocks can lose value if investors lose confidence in a company's ability to
grow or sustain profits. Investor confidence in stocks, economic developments in
the U. S. and foreign countries, interest rate changes and other factors can
also affect the broader stock market. Typically, stocks are more volatile than
bonds.
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the index, may perform differently
from the securities in the index. The Fund will attempt to be fully invested at
all times and will not hold a significant portion of its assets in cash. The
Fund will generally not attempt to hedge against adverse market movements.
Therefore, the Fund might go down in value more than other mutual funds in the
event of a general market decline. In addition, an index fund has operating and
other expenses while an index does not. As a result, while the Fund will attempt
to track the Russell 2000 as closely as possible, it will tend to underperform
the index to some degree over time.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but also hurts the Fund's
performance when its investments are unsuccessful.
PERFORMANCE
No performance information is provided because the Small Cap Index Fund will not
begin operations until on or about January 1, 2000.
-2-
<PAGE> 10
FEES AND EXPENSES
THIS TABLE DESCRIBED THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE SMALL CAP INDEX FUND.
<TABLE>
<CAPTION>
Shareholder Fees(1) Class A Shares Class B Shares Service Class Shares
- ------------------ -------------- -------------- --------------------
(paid directly from your
investment)
<S> <C> <C> <C>
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees(6) . 0.08% 0.08% 0.08%
Distribution and/or Service
(12b-1) Fees(7) 0.25 0.25 0.25
Other Expenses(8) 1.09 0.94 0.84
------ ------ ------
Total Annual Fund
Operating Expenses(9) 1.42 % 2.02 % 1.17%
====== ====== ======
</TABLE>
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Buying Shares - Contingent deferred sales charge (CDSC) on Class A and
Class B shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series. The investment adviser of the Series has entered into
contractual arrangements to provide that the management fee for the Series, when
combined with administrative fees of certain funds that invest in the Series,
will not exceed specific amounts. As a result of these contractual arrangements,
the investment adviser of the Series currently receives a management fee of
0.01%.
(7) Paid by the Fund.
-3-
<PAGE> 11
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust ("VSA")
has agreed to waive fees or otherwise reimburse expenses for the Fund so that
the Total Annual Operating Expenses will not exceed 0.79% for Class A shares,
1.54% for Class B shares and 0.54% for Service Class shares. This waiver of fees
and reimbursement of expenses is subject to a possible reimbursement of VSA by
the Fund within five years of the Fund's commencement of operations if the
reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THIS FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares $653 $819
Class B Shares $698 $912
Service Class Shares $112 $350
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class B Shares $198 $210
</TABLE>
-4-
<PAGE> 12
THE NATIONWIDE INTERNATIONAL INDEX FUND
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Morgan Stanley Capital
International Europe, Asia and Far East Capitalization Weighted Index (the "EAFE
Index") as closely as possible before the deduction of Fund expenses. The EAFE
Index is composed of equity securities of companies from various industrial
sectors whose primary trading markets are located outside the United States.
Companies included in the EAFE Index are selected from among the larger
capitalization companies in these markets. The weighting of the EAFE index is
based on the market capitalization of each of the countries in the index.
The International Index Fund invests in a statistically selected sample of
equity securities included in the EAFE Index and in derivative instruments
linked to the EAFE Index. The Fund may not invest in all of the countries, or
all of the companies within a country, represented in the EAFE Index, or in the
same weightings as in the EAFE Index. The Fund will choose investments so that
the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the EAFE Index as a whole. The Fund may also engage in securities lending.
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. Individual stocks and other equity investments in the International Index
Fund - as well as a stock market as a whole -- could lose value. Individual
stocks can lose value if investors lose confidence in a company's ability to
grow or sustain profits. Investor confidence in stocks, economic developments in
the U. S. and in foreign countries, interest rate changes and other factors can
also affect the broader stock market. Typically, stocks are more volatile than
bonds.
Since the Fund invests principally in foreign securities, including securities
denominated in foreign currencies, the Fund's investments involve special risks,
including the possibility of substantial volatility due to adverse political,
economic or other developments. Foreign securities may also be less liquid and
harder to value than U.S. securities. In addition, the securities in which the
Fund invests are subject to significant changes in value due to exchange rate
fluctuations.
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the EAFE Index, may perform
differently from the securities in the EAFE Index. The Fund will attempt to be
fully invested at all times and will not hold a significant portion of its
assets in cash. The Fund will generally not attempt to hedge against adverse
market movements. Therefore, the Fund might go down in value more than other
mutual funds in the event of a general market decline. In addition, an index
fund has operating and other expenses while an index does not. As a result,
while the Fund will attempt to track the EAFE Index as closely as possible, it
will tend to underperform the index to some degree over time.
-5-
<PAGE> 13
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but also hurts the Fund's
performance when its investments are unsuccessful.
PERFORMANCE
No performance information is provided because the International Index Fund will
not begin operations until on or about January 1, 2000.
FEES AND EXPENSES
THIS TABLE DESCRIBED THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE INTERNATIONAL INDEX FUND.
<TABLE>
<CAPTION>
Shareholder Fees(1) Class A Shares Class B Shares Service Class Shares
- ------------------ -------------- -------------- --------------------
<S> <C> <C> <C>
(paid directly from your
investment)
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees(6) . 0.01% 0.01% 0.01%
Distribution and/or Service
(12b-1) Fees(7) 0.25 1.00 0.25
Other Expenses(8) 1.16 1.01 0.91
------ ---- ----
Total Annual Fund
Operating Expenses(9) 1.42% 2.02% 1.17%
====== ==== ====
</TABLE>
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
-6-
<PAGE> 14
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Buying Shares - Contingent deferred sales charge (CDSC) on Class B
shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series.
(7) Paid by the Fund.
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust
("VSA") has agreed to waive fees or otherwise reimburse expenses for the Fund so
that the Total Annual Operating Expenses will not exceed 0.86% for Class A
shares, 1.61% for Class B shares and 0.61% for Service Class shares. This waiver
of fees and reimbursement of expenses is subject to a possible reimbursement of
VSA by the Fund within five years of the Fund's commencement of operations if
the reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THIS FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares $660 $840
Class B Shares $705 $934
Service Class Shares $119 $372
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class B Shares $205 $217
</TABLE>
-7-
<PAGE> 15
NATIONWIDE BOND INDEX FUND
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks to match the performance of the Lehman Brothers Aggregate Bond
Index (the "Aggregate Bond Index") as closely as possible before the deduction
of Fund expenses. The Aggregate Bond Index is composed primarily of
dollar-denominated investment grade bonds of different types.
The Bond Index Fund invests in a statistically selected sample of bonds that are
included in or correlated with the Aggregate Bond Index, and in derivative
instruments linked to the Aggregate Bond Index. The Fund may not invest in all
of the bonds in the Aggregate Bond Index, or in the same weightings as in the
Aggregate Bond Index. The Fund may invest in bonds not included in the index,
but which are selected to reflect characteristics such as maturity, duration, or
credit quality similar to bonds in the index. This may result in different
levels of interest rate, credit or prepayment risks from the levels of risks in
the Aggregate Bond Index. The Aggregate Bond Index is composed of a variety of
dollar-denominated investment grade bonds, including bonds issued by the U.S.
Government and foreign governments and their agencies, and bonds issued by the
U.S. or foreign companies, among others. The Fund may also engage in securities
lending.
Maturity is the time at which the principal amount of a bond is scheduled to be
repaid. [Inset Box]
Duration is the sensitivity of a bond or bond portfolio to changes in interest
rates. [Inset Box]
PRINCIPAL RISKS
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of the Fund's shares -- may go up or down. And because the value of
your investment in the Fund will fluctuate, there is the risk that you will lose
money. The Fund's investments are subject to interest rate and credit risk.
Interest rate risk is the risk that when interest rates go up, the value of debt
instruments generally goes down. In general, the market price of debt securities
with longer maturities will go up or down more in response to changes in
interest rates than shorter term securities. Credit risk is the risk that the
issuer will be unable to pay the interest or principal when due. The degree of
credit risk depends on both the financial condition of the issuer and the terms
of the obligation.
The Bond Index Fund may invest in foreign securities to the extent foreign
securities are represented in the Aggregate Bond Index. Currently, the Aggregate
Bond Index includes a portion of foreign securities. The Fund will invest only
in dollar-denominated foreign securities. Because the Fund invests in foreign
securities, an investment in the Fund involves special risks, including the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities.
-8-
<PAGE> 16
The Fund is also subject to selection risk, which is the risk that the Fund's
investments, which may not fully replicate the Aggregate Bond Index, may perform
differently from the securities in the index. The Fund will attempt to be fully
invested at all times and will not hold a significant portion of its assets in
cash. The Fund will generally not attempt to hedge against adverse market
movements. Therefore, the Fund might go down in value more than other mutual
funds in the event of a general market decline. In addition, an index fund has
operating and other expenses while an index does not. As a result, while the
Fund will attempt to track Aggregate Bond Index as closely as possible, it will
tend to underperform the index to some degree over time.
The Fund is a non-diversified fund, which means that it invests more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance. This helps the Fund's
performance when its investments are successful, but also hurts the Fund's
performance when its investments are unsuccessful.
PERFORMANCE
No performance information is provided because the Bond Index Fund will not
begin operations until on or about January 1, 2000.
FEES AND EXPENSES
THIS TABLE DESCRIBED THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
HOLDING SHARES OF THE BOND INDEX FUND.
<TABLE>
<CAPTION>
Shareholder Fees(1) Class A Shares Class B Shares Service Class Shares
- ------------------ -------------- -------------- --------------------
<S> <C> <C> <C>
(paid directly from your
investment)
Maximum Sales Charge (Load) 5.75%(2) None None
imposed upon purchases
(as a percentage of offering price)
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original purchase
price or sale proceeds, as applicable)
Annual Fund Operating Expenses
(deducted from Fund assets)(5)
Management Fees(6) 0.06% 0.06% 0.06%
Distribution and/or Service
(12b-1) Fees(7) 0.25 1.00 0.25
Other Expenses(8) 1.11 0.96 0.86
---- ---- ----
Total Annual Fund
Operating Expenses(9) 1.42% 2.02% 1.17%
==== ==== ====
</TABLE>
-9-
<PAGE> 17
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "BUYING, SELLING
AND EXCHANGE FUND SHARES -- Buying Shares -- Class A sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Buying Shares - Contingent deferred sales charge (CDSC) on Class B
shares."
(5) Fees and expenses include the expenses of both the Fund and the Fund's pro
rata share of the expenses of the Series it invests in.
(6) Paid by the Series. The investment adviser of the Series has entered into
contractual arrangements to provide that the management fee for the Series, when
combined with administrative fees of certain funds that invest in the Series,
will not exceed specific amounts. As a result of these contractual arrangements,
the investment adviser of the Series currently receives a management fee of
0.01%.
(7) Paid by the Fund.
(8) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year. "Other Expenses"
include transfer agent, fund accounting and administration fees and expenses
paid by the Funds and fund accounting fees and expenses paid by the Series.
(9) At least through ______________, 2000, Villanova SA Capital Trust ("VSA")
has agreed to waive fees or otherwise reimburse expenses for the Fund so that
the Total Annual Operating Expenses will not exceed 0.81% for Class A shares,
1.56% for Class B shares and 0.56% for Service Class shares. This waiver of fees
and reimbursement of expenses is subject to a possible reimbursement of VSA by
the Fund within five years of the Fund's commencement of operations if the
reimbursement by the Fund can be implemented within the annual expense
limitations described above.
EXAMPLE
THIS EXAMPLE SHOWS WHAT YOU COULD PAY IN EXPENSES OVER TIME. YOU CAN ALSO USE
THIS EXAMPLE TO COMPARE THE COSTS OF THIS FUND WITH OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS
INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. IT
ASSUMES A 5% RETURN EACH YEAR AND NO CHANGES IN EXPENSES. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares $655 $825
</TABLE>
-10-
<PAGE> 18
<TABLE>
<S> <C> <C>
Class B Shares $685 $873
Service Class Shares $114 $356
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Class A Shares $185 $197
</TABLE>
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<PAGE> 19
MORE ABOUT THE FUNDS
ALL FUNDS
The Funds will not attempt to buy or sell securities based on Fund management's
economic, financial or market analysis, but will instead employ a "passive"
investment approach. This means that Fund management will attempt to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the respective index before deduction of Fund expenses. A Fund
will only buy or sell securities when Fund management believes it is necessary
to do so in order to match the performance of the respective index. Accordingly,
it is anticipated that a Fund's portfolio turnover and trading costs will be
lower than "actively" managed funds. However, the Funds have costs operating and
other expenses, while an index does not. Therefore, each Fund will tend to
underperform its target index to some degree over time.
Each Fund will be substantially invested in securities in the applicable index,
and will invest at least 80% of its assets in securities or other financial
instruments which are contained in or correlated with securities in the
applicable index. A Fund may change its target index if Fund management believes
a different index would better enable the Fund to match the performance of the
market segment represented by the current index and, accordingly, the investment
objective of a Fund may be changed without shareholder approval. In addition to
the investment strategies described below, each Fund may also invest in illiquid
securities and repurchase agreements, and may engage in securities lending.
Each Fund will also invest in short term money market instruments as cash
reserves to maintain liquidity. These instruments may include obligations of the
U.S. Government, its agencies or instrumentalities, highly rated bonds or
comparable unrated bonds, commercial paper, bank obligations and repurchase
agreements. To the extent a Fund invests in short term money market instruments,
it will generally also invest in options, futures or other derivatives in order
to maintain full exposure to the index. The Funds will not invest in options,
futures, other derivative instruments or short term money market instruments in
order to lessen the Funds' exposure to common stocks or bonds, as the case may
be, as a defensive strategy, but will instead attempt to remain fully invested
at all times.
THE SMALL CAP INDEX FUND
The Russell 2000 is composed of the common stocks of the 1001st through the
3000th largest U.S. companies by market capitalization, as determined by the
Frank Russell Company. The stocks represented in the index are issued by
small-capitalization (generally less than $1.5 billion) U.S. companies in a wide
range of businesses. The Russell 2000 is a market-weighted index, which means
that the largest stocks represented in the index have the most effect on the
index's performance. The Russell 2000 is generally considered broadly
representative of the performance of publicly traded U.S. smaller-capitalization
stocks. Frank Russell Company's selection of a stock for the Russell 2000 does
not mean that Frank Russell Company believes the stock to be an attractive
investment.
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<PAGE> 20
The Frank Russell Company updates the Russell 2000 once each year, at which time
there may be substantial changes in the composition of the index (and
consequently, significant turnover in the Fund). Stocks of companies that merge,
are acquired or otherwise cease to exist during the year are not replaced in the
index.
The Fund may not invest in all of the common stocks in the Russell 2000, or in
the same weightings as in the Russell 2000. Instead, the Fund may invest in a
statistically selected sample of the stocks included in the Russell 2000. The
Fund will choose investments so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks and derivative
instruments in its portfolio are similar to the Russell 2000 as a whole.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts linked to the
performance of the Russell 2000. Derivatives allow the Fund to increase or
decrease its exposure to the Russell 2000 quickly and at less cost than buying
or selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the event of
subscriptions to purchase shares of the Fund, to maintain liquidity in the event
of redemptions and to keep trading costs low. In connection with the use of
derivative instruments, the Fund may enter into short sales in order to adjust
the weightings of particular securities represented in a derivative to more
accurately reflect the securities' weightings in the target index.
THE INTERNATIONAL INDEX FUND
The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the United
States. Companies included in the EAFE Index are selected from among the larger
capitalization companies in these markets. The countries currently included in
the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United
Kingdom. The weighting of the EAFE Index among these countries is based upon
each country's relative market capitalizations. The stocks in the EAFE Index are
chosen by Morgan Stanley Capital International Limited ("Morgan Stanley").
Morgan Stanley chooses stocks for inclusion in the EAFE Index based on market
capitalization, trading activity and the overall mix of industries represented
in the index, among other factors. The EAFE Index is generally considered
broadly representative of the performance of stocks traded in the international
markets. Morgan Stanley's selection of a stock for the EAFE Index does not mean
that Morgan Stanley believes the stock to be an attractive investment.
The Fund may not invest in all of the countries, or all of the companies within
a country, represented in the EAFE Index, or in the same weightings as the EAFE
Index. Instead, the International Index Fund may invest in a statistically
selected sample of equity securities included in the EAFE Index and in
derivative instruments correlated with countries within the EAFE Index.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index.
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<PAGE> 21
Derivatives allow the Fund to increase or decrease its exposure to the EAFE
Index quickly and at less cost than buying or selling stocks. The Fund will
invest in options and futures and other derivative instruments in order to gain
market exposure quickly in the event of subscriptions for shares of the Fund, to
maintain liquidity in the event of redemptions and to keep trading costs low. In
connection with the use of derivative instruments, the Fund may enter into short
sales in order to adjust the weightings of particular securities represented in
a derivative to more accurately reflect the securities' weightings in the target
index.
THE BOND INDEX FUND
The Aggregate Bond Index is a market-weighted index comprised of 6,500
dollar-denominated investment grade bonds with maturities greater than one year.
The Aggregate Bond Index includes:
- U.S. government and government agency securities
- Securities issued by supranational entities, such as the World
Bank
- Securities issued by foreign governments and U.S. and foreign
corporations
- Mortgage backed securities
Mortgage backed securities are securities that give their holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. [Inset Box]
Lehman Brothers' selection of a bond for the Aggregate Bond Index does not mean
that Lehman Brothers believes the security to be an attractive investment.
The Fund may not invest in all of the bonds in the Aggregate Bond Index, or in
the same weightings as in the Aggregate Bond Index. Instead, the Fund may invest
in a statistically selected sample of bonds included in the Aggregate Bond
Index, or in a statistically selected sample of bonds not included in the index
but correlated with bonds that are in the index, and in derivative instruments
linked to the Aggregate Bond Index. The Fund may invest in bonds not included in
the index, but which are selected to reflect characteristics such as maturity,
duration, or credit quality similar to bonds in the index. This may result in
different levels of interest rate, credit or other risks from the levels of
risks on the securities included in the Aggregate Bond Index. The Bond Index
Fund may trade securities to the extent necessary to maintain the duration of
certain segments of the portfolio close to the duration of corresponding
segments of the index, and, accordingly, the Bond Index Fund may have a higher
portfolio turnover rate than the other Funds.
Because the Aggregate Bond Index is composed of investment grade bonds, the Fund
will invest in corporate bonds rated investment grade (rated at least Baa3 by
Moody's Investors Services, Inc. or BBB by Standard & Poor's Ratings Group), or
if unrated, of comparable quality. The Fund may continue to hold a security that
is downgraded below investment grade.
-14-
<PAGE> 22
The Fund will usually invest a substantial portion of its assets in mortgage
backed securities. Mortgage backed securities may be either pass through
securities or collateralized mortgage obligations.
Pass through securities represent a right to receive principal and interest
payments collected on a pool of mortgages, which are passed through to security
holders (less servicing costs). [Inset Box]
Collateralized Mortgage Obligations are mortgage backed securities that divide
the principal and interest payments collected on a pool of mortgages into
several revenue streams with different priority rights to various portions of
the underlying mortgage payments. [Inset Box]
The Fund may also purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. This is when the Fund buys or
sells securities with payment and delivery taking place in the future so that
the Fund can lock in a favorable yield and price at the time of entering into
the transaction. The Fund may also enter into dollar rolls in which the Fund
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar securities on a future date from the same
party. During the period between the Fund's sale of one security and purchase of
a similar security, the Fund does not receive principal and interest on the
securities sold. The Fund may also enter into standby commitment agreements in
which the Fund is committed, for a stated period of time, to buy a stated amount
of a fixed income security which may be issued and sold to the Fund at the
option of the issuer. The price of the security is fixed at the time of the
commitment, and the Fund is paid a commitment fee whether the security is issued
or not.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with the performance of the Aggregate Bond Index. Derivatives may allow the Fund
to increase or decrease its exposure to the Aggregate Bond Index quickly and at
less cost than buying or selling bonds. The Fund may invest in options and
futures and other derivative instruments in order to gain market exposure
quickly in the event of subscriptions to purchase shares of the Fund, to
maintain liquidity in the event of redemptions and to keep trading costs low. In
connection with the use of derivative instruments, the Fund may enter into short
sales in order to adjust the weightings of particular securities represented in
a derivative to more accurately reflect the securities' weightings in the target
index.
INVESTMENT RISKS
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that a Fund's performance will be positive for any period of time.
SMALL CAP INDEX FUND AND INTERNATIONAL INDEX FUND
STOCK MARKET RISK - Stock market risk is the risk that the stock markets will go
down in value, including the possibility that the markets will go down sharply
and unpredictably. The stock
-15-
<PAGE> 23
market is affected by numerous factors, including interest rates, the outlook
for corporate profits, the health of the U.S. and global economies, national and
world social and political events, and the fluctuations of other stock markets
around the world. There is also the risk that large capitalization companies
could fall out of favor and investors may look to other types of investments.
BOND INDEX FUND
INTEREST RATE RISK - Interest rate risk is the risk that increases in market
interest rates may decrease the value of the bonds in the Fund's portfolio.
Usually the prices of bonds fall when interest rates increase, and rise when
interest rates decrease. Typically, the longer the maturity of a bond, the more
sensitive it is to price shifts as a result of interest rate changes. Likewise,
the longer the Fund holds a bond, the greater the chance that interest rate
changes will affect the bond's value.
INFLATION RISK - Inflation risk affects the value of fixed-rate investments such
as bonds. If the Fund buys bonds when inflation and interest rates are low, the
value of these bonds could fall as inflation rises and interest rates increase.
This could happen as investors find the bonds with lower interest rates less
attractive than bonds that pay higher interest rates.
CREDIT RISK - Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
EVENT RISK - Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added debt,
the credit quality and market value of a company's bonds may decline
significantly.
MORTGAGE BACKED SECURITIES - When interest rates fall, borrowers may refinance
or otherwise repay principal on their mortgages earlier than scheduled. When
this happens, certain types of mortgage backed securities will be paid off more
quickly than originally anticipated and owners of these securities have to
invest the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rates rise, however, fewer borrowers refinance
and certain types of mortgage backed securities are paid off more slowly than
originally anticipated, which causes the value of these securities to fall. This
risk is known as "extension risk." Because of prepayment risk and extension
risk, small movements in interest rates (both increases and decreases) may
significantly reduce the value of certain mortgage backed securities.
DOLLAR ROLLS - Dollar Rolls involve the risk that the market value of the
securities that the Fund is committed to buy may decline below the price of the
securities the Fund has sold. These transactions may involve leverage. The Fund
will engage in dollar rolls to enhance return and not for the purpose of
borrowing.
STANDBY COMMITMENT AGREEMENTS - Standby commitment agreements involve the risk
that the value of the security on the delivery date may be less than its
purchase price.
-16-
<PAGE> 24
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS -
When issued and delayed delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery.
There also is the risk that the security will not be issued or that the other
party will not meet its obligation. If this occurs the Fund loses both the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.
FOREIGN GOVERNMENT DEBT - The Bond Index Fund may invest in debt securities
issued or guaranteed by foreign governments or their agencies. Investments in
these securities subject the Fund to the risk that a government entity may delay
or refuse to pay interest or repayment of principal on its debt for various
reasons, including cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of its debt position to its economy
or its failure to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a government entity defaults,
it may ask for more time in which to pay or for further loans. There is no
bankruptcy proceeding by which all or part of debt securities that a government
entity has not repaid may be collected.
INTERNATIONAL INDEX FUND AND BOND INDEX FUND
FOREIGN MARKET RISK - Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that a Fund will lose
money. In particular, a Fund is subject to the risk that because there are
generally fewer investors in foreign markets and a smaller number of securities
traded each day, it may make it difficult for a Fund to buy and sell certain
securities. In addition, prices of foreign securities may go up and down more
than prices of securities traded in the U.S.
FOREIGN ECONOMY RISK - The economies of certain foreign markets often do not
compare favorably with that of the U.S. with respect to such issues as growth of
gross national product, reinvestment of capital, resources, and balance of
payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer a Fund's assets or income back
into the U.S., or otherwise adversely affect a Fund's operations. Other foreign
market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the U.S. or other
foreign countries.
-17-
<PAGE> 25
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS - Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. does. Other countries may not have laws to protect
investors the way that the U.S.' securities laws do. For example, some foreign
countries may have no laws or rules against insider trading (this is when a
person buys or sells a company's securities based on "inside" non-public
information about that company). Accounting standards in other countries are not
necessarily the same as in the U.S. If the accounting standards in another
country do not require as much detail as U.S. accounting standards, it may be
harder for a Fund's portfolio manager to completely and accurately determine a
company's financial condition. Also, brokerage commissions and other costs of
buying and selling securities often are higher in foreign countries than they
are in the United States. This reduces the amount the fund can earn on its
investments.
INTERNATIONAL INDEX FUND
CURRENCY RISK AND EXCHANGE RISK - Securities in which the International Index
Fund invests are usually denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect the value of the
securities of the Fund. Generally, when the U.S. dollar rises in value against a
foreign currency, your investment in a security denominated in that currency
loses value because the currency is worth fewer U.S. dollars. Conversely, when
the U.S. dollar decreases in value against a foreign currency, your investment
in a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk is generally known as "currency risk" which
is the possibility that a stronger U.S. dollar will reduce returns for U.S.
investors investing overseas and a weak U.S. dollar will increase returns for
U.S. investors investing overseas.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE U.S. - The International Index
Fund generally holds the foreign securities and cash in which it invests outside
the U.S. in foreign banks and securities depositories. Certain of such foreign
banks and securities depositories may be recently organized or new to the
foreign custody business and/or may have operations subject to limited or no
regulatory oversight. Also, the laws of certain countries may put limits on the
Fund's ability to recover its assets if a foreign bank or depository or issuer
of a security or any of their agents goes bankrupt. In addition, it can be
expected that it will be more expensive for the Fund to buy, sell, and hold
securities in certain foreign markets than in the U.S. market due to higher
brokerage, transaction, custody and/or other costs. The increased expense to
invest in foreign markets reduces the amount the Fund can earn on its
investments and typically results in a higher operating expense ratio for the
Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the U.S. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or
delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the U.S. and emerging market countries may
be unreliable, increasing the risk of delayed settlements or losses of security
certificates. Settlements in certain foreign countries at times have not kept
pace with the number of securities transactions; these problems may make it
difficult for the Fund to carry out transactions. If the Fund cannot settle or
is delayed in settling a purchase of securities, it may miss attractive
-18-
<PAGE> 26
investment opportunities and certain of its assets may be uninvested with no
return earned thereon for some period. If a Fund cannot settle or is delayed in
settling a sale of securities, it may lose money if the value of the security
then declines or, if it has contracted to sell the security to another party,
the Fund could be liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations may
apply.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") - A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced in January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and make
dividend and other payments only in euros. Like other investment companies and
business organizations, including the companies in which the Funds invest, the
Funds could be adversely affected:
- If the transition to euro, or EMU as a whole, does not proceed
as planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by a
Fund's service providers, or by other entities with which the
Fund or its service providers do business, are not capable of
recognizing the euro as a distinct currency.
SMALL CAP INDEX FUND
SMALL CAP - Small cap companies may have limited product lines or markets. They
may be less financially secure than larger, more established companies. They may
depend on a small number key personnel. If a product fails, or if management
changes, or there are other adverse developments, the Fund's investment in a
small cap company may lose substantial value.
Small cap securities generally trade in lower volumes and are subject to greater
and more unpredictable price changes than larger cap securities or the stock
market as a whole. Investing in small caps securities requires a long-term view.
ALL FUNDS
SELECTION RISK - Selection risk is the risk that a Fund's investments, which may
not fully replicate the index, may perform differently from the securities in
the index.
DERIVATIVES - Derivatives allow a Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments. Each Fund may use
the following types of derivative instruments including: futures, forwards and
options, options on futures, swaps and indexed securities.
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<PAGE> 27
Futures are exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
[Inset Box]
Forwards are private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time. [Inset
Box]
Options are exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change in value of certain assets or an index) from another party
at a specified price with a specified time period. [Inset Box]
Swaps are private contracts involving the obligation of each party to exchange
specified payments, which may be based on the value of an index or asset, with
the other party at specified times. [Inset Box]
Indexed Securities are debt obligations that return a variable amount of
principal or interest based on the value of an index at a specified time. [Inset
Box]
Derivatives are volatile and involve significant risks, which may include:
LEVERAGE RISK - the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
CREDIT RISK - the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to a Fund.
CURRENCY RISK - the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LIQUIDITY RISK - the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Funds may use derivatives for anticipatory hedging. Anticipatory hedging is
a strategy in which a Fund uses a derivative to offset the risk that securities
in which the Fund intends to invest will increase in value before the Fund has
an opportunity to purchase the securities. The Funds will use derivatives for
anticipatory hedging in order to gain exposure efficiently to their underlying
indexes in the event the Funds receive cash inflows.
BORROWING AND LEVERAGE - The Funds may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of
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<PAGE> 28
Fund shares and in the yield on a Fund's portfolio. Borrowing will cost a Fund
interest expense and other fees. The cost of borrowing may reduce a Fund's
return.
Certain securities that a Fund buys may create leverage, including, for example,
when issued securities, forwards commitments and options.
ILLIQUID SECURITIES - Each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
RESTRICTED SECURITIES - Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. A Fund may be unable to sell them on a
short notice or may be able to sell them only at a price below current value. A
Fund may get only limited information about the issuer, so may be less able to
predict a loss. In addition, if Fund management receives material adverse non
public information about the issuer, a Fund will not be able to sell the
security.
RULE 144A SECURITIES - Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market but carry the risk that the
active trading market may not continue.
SECURITIES LENDING - Each Fund may lend securities to financial institutions
that provide cash or government securities as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, a Fund may lose money and there may be a
delay in recovering the loaned securities. A Fund could also lose money if it
does not recover the securities and the value of the collateral falls. These
events could trigger adverse tax consequences to a Fund.
SHORT SALES - A Fund may borrow the security sold short to make delivery to the
buyer. The Fund must then replace the security it has borrowed. If the price of
a security sold short goes up between the time of the short sale and the time
the Fund must deliver the security to the lender, the Fund will incur a loss.
The Fund must also pay the lender any interest accrued during the period of the
loan.
MANAGEMENT
INVESTMENT MANAGER
Fund Asset Management, L.P., P.O. Box 9011, Princeton, New Jersey 08543-9011,
manages the underlying Series' investments and their business operations under
the overall supervision of the
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<PAGE> 29
Board of Trustees of Index Master Series Trust. Fund Asset Management has the
responsibility for making all investment decisions for the Series.
The table below shows the fees payable to Fund Asset Management by each Series:
<TABLE>
<CAPTION>
Series Fee Rate (as a percentage of the Series average net assets)
------ --------
<S> <C>
Small Cap Index Series .08%
International Index Series 0.01%
Aggregate Bond Index Series .06%
</TABLE>
Fund Asset Management has entered into contractual arrangements to provide that
the management fee for each Series, when combined with administrative fees of
certain funds that invest in such Series, will not exceed specified amounts. As
a result of these contractual arrangements, Fund Asset Management currently
receives a management fee of 0.01% from the Small Cap Index Series and the
Aggregate Bond Index Series.
Fund Asset Management is a wholly-owned indirect subsidiary of Merrill Lynch &
Co., Inc. and is part of the Merrill Lynch Asset Management Group, which had
approximately $520 billion in investment company and other portfolio assets
under management as of August 1999. This amount includes assets managed for
Merrill Lynch affiliates.
The Funds do not have an investment adviser since each Fund's assets are
invested in its corresponding Series. The Funds have hired VSA, Three Nationwide
Plaza, Columbus, Ohio 43215, to provide administration services and to monitor
the underlying Series.
The table below shows the fees payable to VSA by each Fund.
<TABLE>
<CAPTION>
Series Assets Fee Rate*
------ ------ --------
<S> <C> <C>
Small Cap Index Fund $0 up to $250 million 0.27%
$250 million and more 0.24%
International Index Fund $0 up to $250 million 0.34%
$250 million and more 0.31%
Bond Index Fund $0 up to $250 million 0.29%
$250 million and more 0.26%
</TABLE>
- ---------------
*Subject to a $_______ minimum annual fee per Fund.
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<PAGE> 30
VSA has retained Fund Asset Management to provide certain sub-administration
services to each Fund, and will compensate Fund Asset Management for providing
such services from the fees paid to VSA by each Fund.
MASTER/FEEDER STRUCTURE
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Funds seek to achieve their investment objectives by
investing all their assets in the corresponding Series of the Index Master
Series Trust. Investors in each Fund will acquire an indirect interest in the
underlying Series.
Other "feeder" funds may also invest in the "master" Series. This structure may
enable the Funds to reduce costs through economies of scale. A larger investment
portfolio may also reduce certain transaction costs to the extent that
contributions to and redemptions from the master from different feeders may
offset each other and produce a lower net cash flow.
A Fund may withdraw from the Series at any time and may invest all of its assets
in another pooled investment vehicle or retain an investment adviser to manage
the Fund's assets directly.
Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than a Fund over the
operations of the Series.
Whenever the Series holds a vote of its feeder funds, a Fund will pass the vote
through to its own shareholders.
BUYING, SELLING AND EXCHANGING FUND SHARES
In this section, "we" and "our" refer to Nationwide Advisory Services, Inc.
("NAS"), as distributor of the Funds' shares. "You" and "your" mean potential
investors and current shareholders.
CHOOSING A SHARE CLASS
As noted in the Fund Summaries, we offer three different share classes to give
investors different price and cost options. Class A and Class B shares of the
Funds are available to all investors; Service Class shares are available to a
limited group of institutional investors, such as certain funds of funds offered
by NAS.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares. With Class B shares, you pay a sales charge (known
as a contingent deferred sales charge or CDSC) if you sell your shares within
six years after purchase. There is no such charge on Service Class shares.
Class A, Class B and Service Class shares pay distribution and/or service fees
under a Distribution Plan. These fees are retained by NAS or paid by NAS to
brokers for distribution and shareholder services. Class A and Class B shares
also pay an administrative service fee.
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<PAGE> 31
These fees are paid to brokers and other entities who provide administrative
support services to the beneficial owners of the shares.
If you want lower annual fund expenses, Class A shares may be right for you,
particularly if you qualify for a reduction or waiver of sales charges. If you
do not want to pay an up-front sales charge, and you anticipate holding your
shares for the long term, Class B shares may be more appropriate. NAS reserves
the right to reject an order in excess of $100,000 for Class B shares and an
order for Class B shares for Individual Retirement Accounts ("IRA accounts") for
shareholders 70 -1/2 years old and older. When choosing a share class, consider
the following:
<TABLE>
<CAPTION>
Class A shares Class B shares
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Front-end sales charge means that a portion No front-end sales charge, so your full
of your initial investment goes toward the sales investment immediately goes toward
charge, and is not invested buying shares
Reductions and waivers of the sales charges No reductions of the contingent deferred
available sales charge available, but waivers
available
Lower expenses than Class B shares means Higher distribution and service fees than
higher dividends per share Class A shares mean lower
dividends per share
Conversion features are not applicable After seven years, Class B shares convert
into Class A shares, which reduces your
future fund expenses
No sales charges when shares are sold Contingent deferred sales charges (CDSC)
back to the Fund* if shares sold within six years: 5% in the
first year, 4% in the second, 3% in the
third and fourth years, 2% in the fifth, and
1% in the sixth year
</TABLE>
- ----------------------------
*A CDSC of up to 1% may be charged on certain redemptions of Class A shares
purchased without a sales charge.
For investors who are eligible to purchase Service Class shares, the
purchase of Service Class shares will be preferable to purchasing Class A or
Class B Shares.
BUYING SHARES
MINIMUM INVESTMENTS - CLASS A AND CLASS B SHARES
<TABLE>
<S> <C>
To open an account (per Fund) $1000
Through the Automatic Asset $ 25
Accumulation plan
per transaction
Additional investments $ 100
(per Fund)
</TABLE>
If you purchase Class A or Class B shares through an account at a broker (other
than NAS), different minimum account requirements may apply. These minimum
investment requirements
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<PAGE> 32
for Class A shares do not apply to certain retirement plans. Call 1-800-848-0920
for more information.
PURCHASE PRICE
The purchase or "offering" price of one share of a Fund is its "net asset value"
or NAV, plus any applicable sales charge. A separate NAV is calculated for each
class of a Fund. The NAV for a class is determined by dividing the total market
value of the securities owned by a Fund, less liabilities allocable to a class
by the total number of that class' outstanding shares. NAV is determined at the
earlier of the close of regular trading on the New York Stock Exchange or 4:15
p.m. Eastern Time on each day the Exchange is open for trading.
To the extent that a Fund's investments are traded in markets that are open when
the New York Stock Exchange is closed, the value of the Fund's investments may
change on days when shares cannot be purchased or redeemed.
The Funds do not calculate NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King, Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - Other days when the New York Stock Exchange is not open.
The Funds reserve the right not to determine an NAV when:
- - We have not received any orders to purchase, sell or exchange shares
- - Changes the value of that Fund's portfolio do not affect the NAV.
Bonds, foreign stocks and other securities owned by a Fund may trade on weekends
or other days when the Fund does not price its shares. As a result, the Fund's
net asset value may change on days when you will not be able to purchase or
redeem the Fund's shares. If an event occurs after the close of a foreign
exchange that is likely to affect significantly the Fund's net asset value,
"fair value" pricing may be used. This means that the Fund may value its foreign
holdings at prices other than their last closing prices, and the Fund's net
asset value will reflect this.
When you purchase shares, your purchase price will be the offering price or NAV
next determined after your order is received, plus any applicable sales load.
CLASS A SALES CHARGES
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<PAGE> 33
The charts below show the Class A sales charges, which decrease as the amount of
your investment increases.
<TABLE>
<CAPTION>
Amount of purchase Sales charge as % Sales charge as %
of offering price of amount invested
- ------------------------------------ ------------------------ -------------------------
<S> <C> <C>
Less than $50,000 5.75% 6.10%
$50,000 to $99,999 4.50 4.71
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
- ------------------------------------ ------------------------ -------------------------
</TABLE>
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate Class A shares' initial sales charge
through one or more of the discounts described below:
- - Increase the amount of your investment. The preceding table shows how
the sales charge decreases as the amount of your investment increases.
- - Family Member Discount. Members of your family who live at the same
address can combine investments, possibly reducing the sales charge.
- - Lifetime Additional Discount. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value
of the shares you are purchasing, which may reduce the applicable sales
charge.
- - Insurance Proceeds or Benefits Discount Privilege. If you use the
proceeds of an insurance policy issued by any member of the Nationwide
Insurance Enterprise to purchase Class A shares, you will pay one-half
of the published sales charge if you make your investment 60 days after
receiving the proceeds.
- - No sales charge on a repurchase. If you sell shares from your
Nationwide account, we allow you a one-time privilege to reinvest some
or all of the proceeds in shares of the same class. You will not pay a
sales charge on Class A shares that you buy within 30 days of selling
Class A shares of an equal or lesser amount if you have already paid a
sales charge. Remember, if you realize a gain or a loss on your sale of
shares, the transaction is taxable and reinvestment will not affect the
amount of capital gains tax that is due. If you realize a loss on your
sale and your reinvest, some or all of the loss may not be allowed as a
tax deduction depending on the amount you reinvest.
- - Letter of Intent Discount. State in writing that during a 13-month
period you or a group of family members who live at the same address
will purchase or hold at least $_____ in Class A shares and your sales
charge will be based on the total amount you intend to invest. The
letter may be backdated up to 90 days to include previous purchases for
determining your
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<PAGE> 34
sales charge. Your Letter of Intent is not a binding obligation to buy
shares of a Fund; it is merely a statement of intent. Call 1-800-0920 for
more information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for purchases made by the following:
- - Any person purchasing through an account with an unaffiliated brokerage
firm that has an agreement with NAS to waive sales charges for those
persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the shares with the proceeds of mutual fund shares
sold from an NAS brokerage account. To qualify, you must have paid an
initial sales charge on the shares sold. You must purchase the Class A
shares within 60 days of the sale, and you must request the waiver when you
purchase the Class A shares (NAS may require evidence that you qualify for
this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code;
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trusts);
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives (including
mother, father, brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of Nationwide
Insurance and Nationwide Financial companies, or any investment advisory
clients of VMF, VSA, NAS and their affiliates;
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with the Nationwide Insurance and
Nationwide Financial companies from time to time, (including but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm Bureau,
Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania Farmers' Association,
Ruralite Services, Inc., and Southern States Cooperative).
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
CONVERSION OF CLASS B SHARES
After you have held your Class B shares for seven years, we will automatically
convert them into Class A shares (without charge), which carry the lower 12b-1
fee. We will also convert any
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<PAGE> 35
Class B shares that you purchased with reinvested dividends and other
distributions for those shares at that time. Remember, because the NAV of Class
A shares is usually higher than the NAV of Class B shares, you may receive fewer
Class A shares than the number of Class B shares converted, but the total dollar
value will be the same. We do the conversion on the first business day of the
month following the seventh anniversary of the date of your purchase.
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<PAGE> 36
HOW TO PLACE YOUR PURCHASE ORDER
BY MAIL - Complete and mail the application with a check or money order made
payable to; Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in U.S. dollars only and
drawn on a U.S. bank. NAS will not accept third-party checks.
BY WIRE - You can request that your bank transmit funds ("federal funds") by
wire to the Fund's custodian bank. In order to use this method, you must call
NAS by 4 p.m. Eastern Standard Time, and the wire must be received by the
custodian bank by the close of business on the day you placed your order or your
order will be cancelled. You may be liable for any loss to the Funds resulting
from the cancellation. Your bank may charge a fee to wire funds. If you choose
this method to open your account, you must call our toll-free number before you
wire your investment, and you must then complete and fax the application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Funds. If you purchase through such a broker, your
order will be priced at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
NAS CUSTOMER SERVICE 1-800-848-0920
Representatives are available to answer questions between 8 a.m. and 5 p.m.
Eastern Standard Time
For additional information on buying shares and shareholder services, call our
customer service number or contact your Nationwide representative.
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<PAGE> 37
SELLING SHARES
You can sell - also known as redeeming - your shares of the Funds at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sell depends upon the market value
of the investments of the Fund at the time of the sale, and the value may be
more or less than you paid for the shares.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for the shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Funds or we may delay paying you
the proceeds from a sale when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or if trading is restricted or if an
emergency exists.
SIGNATURE GUARANTEE
A signature guarantee is required under the following circumstances:
- - if a redemption is over $100,000, or
- - if your account registration has changed within the last 30 days, or
- - if the redemption check is made payable to anyone other than the
registered shareholder, or
- - if the proceeds are sent to a bank account not previously designated, or
- - if the proceeds are mailed to an address other than the address of
record
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A AND CLASS B SHARES
You must pay a CDSC if you sell Class B shares within six years of purchase,
unless you are entitled to a waiver. The sales charge applies if your sale
causes the value of your account to fall below the total amount of all purchases
you made during the preceding six years. The sales charge is applied to your
original purchase price, or the current market value of the shares being sold,
whichever is less. The amount of the sales charge will decrease as illustrated
in the following chart:
<TABLE>
<CAPTION>
Sale within 1 year 2 years 3 years 4 years 5 years 6 years 7 years or more
- ----------- ------ ------- ------- ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Charge 5% 4% 3% 3% 2% 1% 0%
</TABLE>
-30-
<PAGE> 38
All purchases during the month are grouped together and will be treated as if
made on the last day of the preceding month.
We do not impose a CDSC on Class B shares purchased through reinvested dividends
and distributions. If you sell your Class B shares and reinvest the proceeds in
Class B shares within 30 days, NAS will deposit an amount equal to any CDSC you
paid into your account. Also, we will waive the CDSC if you sell shares
following the death or disability of a shareholder, provided the sale occurs
within one year of the shareholder's death or a determination of disability and
for mandatory withdrawals from IRA accounts after age 70 1/2 years. For more
information, see the Statement of Additional Information.
Under certain circumstances, employer-sponsored retirement plans investing
without a sales charge (other than those investing in the Funds through variable
insurance products) may be charged a CDSC if shares are redeemed within three
years after purchase. The CDSC will be 1% for the first year, 0.50% for the
second year and 0.25% for the third year.
Under certain circumstances, employer-sponsored retirement plans investing in
Class A shares without a sales charge (other than those investing in the Funds
through variable insurance products) may be charged a CDSC if shares are
redeemed within three years after purchase. The CDSC will be 1% for the first
year, 0.50% for the second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER
You can request the sale of your shares in any of the following ways:
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a week, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-637-0012 after 7 p.m. Eastern Standard Time to learn the
day's closing share price.
CAPITAL GAINS TAXES
If you sell Fund shares for more than you paid for the, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes - Selling Fund Shares."
CUSTOMER SERVICE LINE - If you have elected to have telephone redemption
privileges, a check payable to the shareholder of record can be mailed to the
address of record, unless you declined the telephone redemption privilege on
your application. NAS can wire the funds directly to your account at a
commercial bank (a voided check must be attached to your application) unless you
declined telephone privileges on your application. (This authorization will
remain in effect until you give NAS written notice of its termination.) You can
sell shares of your IRA by telephone if we receive the proper forms. The
distribution from an IRA will be subject to a mandatory 10%
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<PAGE> 39
federal withholding tax, unless you inform us in writing not to withhold taxes.
For additional information or to request the forms, please call the customer
service line at 1-800-848-0920. The Funds will use procedures to confirm that
telephone instructions are genuine. If the Funds act on instructions it
reasonably believed were genuine, it will not be liable for any loss, injury,
damage or expense that occurs as a result, and the Funds will be held harmless
for any loss, claims or liability arising from its compliance with the
instructions. NAS may record telephone instructions to sell shares. The Funds
reserve the right to revoke this privilege at any time, without notice to
shareholders, and to request the sale in writing, signed by all shareholders on
the account.
BY BANK WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this service. Your financial institution may
also charge you a fee for receiving the wire. Funds sent outside the U.S. may be
subject to a higher fee.
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been received by
NAS. Funds sent through ACH should reach your bank in two business days. There
is no fee for this service. (This authorization will remain in effect until you
give NAS written notice of its termination.)
BY MAIL OR FAX (No minimum) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed on the date NAS receives
your signed letter or fax. If your fax is received after 4 p.m. Eastern Standard
Time, it will be processed the next business day. NAS reserves the right to
require the original document if you fax your letter. A signature guarantee may
be required under certain circumstances. Please refer back to "Signature
Guarantee" on page _____.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Funds. If you have an account with such a broker, your
redemption order will be priced at the NAV next determined after your order has
been accepted by your broker or its designated intermediary.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
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<PAGE> 40
For additional information on selling your shares, call our customer service
line at 1-800-848-0920 or see your Nationwide representative.
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A and Class B
shares, the Trust has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act, which permits the Funds to compensate NAS - as
distributor - for expenses associated with distributing its shares and providing
shareholder services.
Under the Distribution Plan, the Funds pay NAS compensation accrued daily and
paid monthly. Class A shares of each Fund pay an amount not exceeding, on an
annual basis, 0.25% of the Class A shares' average daily net assets. Class B
shares of each Fund pay an amount not exceeding, on an annual basis, 1.00% of
the Class B shares' average daily net assets. Because these fees are paid out of
the Funds' assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
EXCHANGING SHARES
You can exchange the shares you own for shares of another Fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new Fund meets the Fund's minimum investment requirement. You
can't exchange Class A shares for Class B shares.
There is no sales charge for exchanges of Class A shares or Service Class
shares. If you exchange Shares of the Nationwide Money Market Fund into another
Fund, you must pay the applicable sales charge, unless it has already been paid.
If you exchange Class B shares for Prime Shares of the Nationwide Money Market
Fund, the time you hold the shares in the Money Market Fund will not be counted
for purposes of calculating any CDSC. If you then sell your Prime Shares of the
Money Market Fund, you will pay the sales charge that would have been charged if
the shares had been sold at the time they were exchanged into the Money Market
Fund. If you exchange your Prime Shares of the Money Market Fund back into Class
B shares, the time you hold Class B shares prior to the exchange will be counted
for purposes of calculating the CDSC.
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for the, you my have to pay federal and/or state income taxes. For
more information, see "Distribution and Taxes - Exchanging Fund Shares."
-33-
<PAGE> 41
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax or by phone (see
"Buying Shares - How to place your purchase order" or the back cover for contact
information). If you make your request in writing, please be sure your letter is
signed exactly as your account is registered. Your exchange will processed on
the date NAS receives your signed letter or fax. If your fax is received after 4
p.m. Eastern Standard Time, it will be processed the next day. If you fax your
request, we reserve the right to ask for the original. You can automatically
request an exchange 24 hours a day, seven days a week, by calling NAS NOW, our
automated voice-response system. You will have automatic exchange privileges
unless you request not to on your application. The Trust reserves the right to
amend or discontinue these exchange privileges upon 60 days written notice to
shareholders.
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders. A
Fund may delay forwarding redemption proceeds for up to seven days if the
investor redeeming shares is engaged in excessive trading, or if the amount of
the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund.
YEAR 2000
VMF, 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. VMF, 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. VMF, VSA and NAS have also tested each application
for its Year 2000 compliance.
Systems supporting the Funds' infrastructure, such as telecommunications, voice
and networks, have also been tested, renovated or replaced, and are compliant.
VMF's, VSA's and NAS' assessment of Year 2000 issues has included
non-information technology systems with embedded computer chips. VMF's, VSA's
and NAS' building systems such as fire, security, elevators and escalators
supporting facilities in Columbus, Ohio, have been tested and are Year 2000
compliant.
In addition to resolving internal 2000 readiness issues, VMF, VSA and NAS are
surveying significant external organizations (business partners) to assess if
they will be Year 2000 compliant. VMF, VSA, and NAS continue their efforts to
identify external risk factors and have developed contingency plans as part of
their ongoing risk-management strategy.
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<PAGE> 42
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser. In this section, "we" and "our" refer to "NAS". "You" and
"your" mean shareholders and potential investors.
DISTRIBUTIONS OF INCOME DIVIDENDS
The Small Cap Index and International Index Funds distribute any available
income dividends to shareholders at least annually. The Bond Index Fund
distributes any available income dividends to shareholders on a monthly basis.
Income dividends are taxable to you as ordinary income for federal income tax
purposes, unless you hold your shares in a qualified tax-deferred plan or
account, or are otherwise not subject to federal income tax. The amount of
income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account). For corporate shareholders, a portion
of each year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If a Fund has net realized capital gains at the end of the fiscal year (meaning
the gains from sales of securities exceed any losses from sales), it will
distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account. On Form 1099, we will report
the amount of net short-term capital gains and net long-term capital gains
distributed to you during the year. Currently, for individuals, long-term
capital gains are taxed at a maximum rate of 20%; short-term capital gains are
taxed as ordinary income, such as interest or dividends. For the current capital
gains tax rates, speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If the checks sent to you cannot be delivered, or are not cashed,
distributions will be reinvested in shares of the applicable Fund. You are
subject to tax on reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certificates are not accurate, or as may otherwise be required under the
Internal Revenue Code.)
-35-
<PAGE> 43
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your distribution option, you must notify us by the record
date for a dividend or distribution in order for it to be effective for that
dividend or distribution. You will not receive interest on any uncashed
distribution, dividend or redemption checks.
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them give you a capital gain,
which is subject to federal income tax. The amount of tax depends on how long
you held your shares. For individuals, long-term capital gains are taxed at a
maximum rate of 20%; and short-term capital gains are taxed as ordinary income,
such as interest or dividends. Capital gains from your sale of Fund shares is
not reported on Form 1099; you or your tax adviser should keep track of your
purchases, sales, and any resulting gain or loss. If you do sell Fund shares for
a loss, you may be able to sue this capital loss to offset any capital gains you
have.
EXCHANGING FUND SHARES
Exchanging your shares of one Fund for another Fund is considered a sale for
income tax purposes. Therefore, if the shares you exchange are worth more than
you paid for them, you have capital gains, which are subject to the federal
income taxes described above. If you exchange Fund shares for a loss, you may be
able to use this capital loss to offset any capital gains you have.
CERTAIN HISTORICAL PERFORMANCE
The Funds will begin their operations on or about January __, 2000, and
thus have no operating history or performance record of their own as of the date
of this Prospectus. The following performance information relates to the Small
Cap Index Series and the Aggregate Bond Index Series of [Merrill Lynch Index
Trust], in which the Small Cap Index and Bond Index Funds will invest all of
their assets, respectively. THESE SERIES ARE SEPARATE AND DISTINCT FROM THE
FUNDS. THEIR PERFORMANCE IS NOT INDICATIVE OF THE FUTURE PERFORMANCE OF THE
FUNDS AND SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR A FUND'S OWN PERFORMANCE. The
performance information set forth below should not be deemed to be indicative of
future results of the Funds because of such performance does not take into
account the fees and expenses that will be borne at the Fund level. Such fees
and expenses will be in addition to the fees and expenses borne by the Series.
Therefore, had the Fund been invested in their respective Series for the time
periods indicated below, their performance would have been less because of the
additional fees and expenses incurred at the Fund level.
-36-
<PAGE> 44
AVERAGE ANNUAL TOTAL RETURN
SMALL CAP INDEX SERIES
<TABLE>
<CAPTION>
One Year Ended December 31, 1999 Since Inception*
-------------------------------- ----------------
<S> <C>
-----% -----%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
AGGREGATE BOND INDEX SERIES
<TABLE>
<CAPTION>
One Year Ended December 31, 1999 Since Inception*
-------------------------------- ----------------
<S> <C>
-----% -----%
</TABLE>
-37-
<PAGE> 45
[BACK COVER]
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following document contains additional information about the Funds. To
obtain a document free of charge, contact us at the address or number listed
below.
- - Statement of Additional Information (SAI) (incorporated by reference
into this Prospectus)
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, OH 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Standard Time)
FOR 24-HOUR ACCOUNT ACCESS:
1-800-637-0012 (toll free)
Also, visit the Nationwide Advisory Services, Inc. Web site at
www.nationwidefunds.com
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION You can obtain copies of
Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
VIA THE INTERNET:
http://www.sec.gov
Investment Company Act File No. 811-08495
Nationwide Mutual Funds
Three Nationwide Plaza
Columbus, Ohio 43215-2220
G:\khi0706\69942\97004\Prospectus (NIF) 003.doc
10/14/99
-38-
<PAGE> 46
NATIONWIDE(R) MUTUAL FUNDS
December __, 1999
MORLEY ENHANCED INCOME FUND
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved this fund's shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND SUMMARY .......................................
Objectives and Principal Strategies
Principal Risks
Performance
Fees and Expenses
MORE ABOUT THE FUND ................................
Principal Investments and Techniques
Other Investment Techniques
MANAGEMENT .........................................
Investment Manager
Portfolio Manager
BUYING, SELLING AND EXCHANGING FUND SHARES .........
Choosing a Share Class
Buying Shares
Selling Shares
Distribution Plan
Exchanging Shares
Year 2000
DISTRIBUTIONS AND TAXES ............................
Distributions of Income Dividends
Distributions of Capital Gains
Reinvesting Distributions
State and Local Taxes
Selling Fund Shares
Exchanging Fund Shares
ADDITIONAL INFORMATION ............................. BACK COVER
</TABLE>
<PAGE> 48
FUND SUMMARY
This prospectus provides information about the Morley Enhanced Income Fund (the
"Fund"), a series of the Nationwide(R) Mutual Funds. "You" and "your" refers to
potential investors and current shareholders of the Fund.
A QUICK NOTE ABOUT SHARE CLASSES
The Fund has three different share classes--Class A, Class Y and Institutional
Class shares. The fees, sales charges and expenses for each share class are
different, but each share class of the Fund represents an investment in the same
assets of the Fund. Having different share classes simply lets you choose the
cost structure that's right for you.
The fees and expenses for the Fund are set forth in the Fund Summary. For more
information about which share class is right for you, see "Buying, Selling and
Exchanging Fund Shares - Choosing a Share Class."
1
<PAGE> 49
FUND SUMMARY (CONTINUED)
This section summarizes key information about the Fund. Use the summary to
compare the Fund with other mutual funds. More detailed information about the
risks and investment techniques of the Fund can be found in "More About the
Fund."
OBJECTIVES AND PRINCIPAL STRATEGIES
The Fund seeks to provide a high level of current income while preserving
capital and minimizing market fluctuations in your account value. The Fund's
investment objectives can be changed without shareholder approval.
To achieve its goals, under normal conditions, the Fund invests primarily in
high-grade debt securities issued by the U.S. government and its agencies, as
well as by corporations. The Fund also purchases mortgage-backed and
asset-backed securities. The debt securities in which the Fund invests pay
interest on either a fixed-rate or variable-rate basis. The Fund will be managed
so that its duration will be between 0.5 and 2.0 years. Depending on market
conditions, the Fund may also enter into book value maintenance agreements
("wrap contracts") with one or more highly rated financial institutions for the
purpose of maintaining some of the Fund's assets at a stable book value.
DURATION IS THE SENSITIVITY OF THE NET ASSET VALUE OF THE FUND TO CHANGES IN
INTEREST RATES.
When selecting securities for the Fund, the Fund's portfolio managers will
consider expected changes in interest rates and in the price relationships among
various types of securities. They will attempt to identify and purchase
securities offering the best combination of yield, maturity and relative price
performance. The Fund's portfolio managers may elect to sell securities in order
to buy others which they believe will better serve the objectives of the Fund.
The Fund's portfolio managers expect that careful selection of securities,
relatively short portfolio duration, and the potential availability and use of
wrap contracts will enable the Fund to meet its investment objective of limited
fluctuation of the Fund's net asset value, although there can be no guarantee
that the Fund will meet its objective.
PRINCIPAL RISKS
Because the value of the Fund will fluctuate, there is the risk that you will
lose money. Your investment will decline in value if the value of the Fund's
investments decreases. The value of shares will also be impacted in part by the
adviser's ability to assess economic conditions and investment opportunities.
Credit risk. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. In addition, there is a risk that the rating of a debt security may be
lowered if an issuer's financial condition changes, which may lead to a greater
price fluctuation in the Fund. The Fund limits this risk by purchasing high -
grade debt securities.
Interest rate risk. Interest rate risk is the risk that increases in market
interest rates may decrease the value of debt securities held by the Fund. In
general, the prices of debt securities fall when interest rates increase and
rise when interest rates decrease. Typically, the longer the maturity of a debt
security, the more sensitive it is to price shifts as a result of interest rate
changes. Because the Fund invests primarily in fixed-rate debt securities with
short-to-moderate maturities or variable-rate debt securities with frequent
interest rate resets, this risk is lower than for funds with longer maturities.
The Fund may also use wrap contracts to limit the impact of interest rate
changes on the Fund's net asset value.
Prepayment risk. The issuers of mortgage- and asset-backed securities may be
able to repay principal in advance, and are especially likely to do so when
interest rates fall. Changes in prepayment rates can make the price and yield of
mortgage- and asset-backed securities volatile. When mortgage- and asset-backed
securities are prepaid, the Fund may also fail to recover premiums paid for the
securities, resulting in an unexpected capital loss. In addition, rising
interest rates may cause prepayments to occur at a slower than expected rate
thereby effectively lengthening the maturity of the securities and making them
more sensitive to interest rate changes.
Risk of Using Wrap Contracts. If the Fund elects to use wrap contracts, it will
incur certain additional risks associated with these contracts and their
providers. The credit standing of certain wrap providers may deteriorate over
time, impairing the value of their contracts, and the Fund may not be able to
renegotiate, replace, or provide for successor contracts in a timely or
economical manner.
2
<PAGE> 50
FUND SUMMARY (CONTINUED)
If either or both of these events were to occur, the duration of the Fund could
be affected, and the net asset value of the Fund could be subject to increased
fluctuation.
Liquidity risk. Liquidity risk is the risk that a security cannot be sold, or
cannot be sold quickly, at an acceptable price. The Fund will limit liquidity
risk by investing primarily in relatively short, high-grade securities, and by
maintaining a reasonable cash balance to redemptions and investment purchase
opportunities.
For more detailed information about the Fund's investment and risks, see "More
About the Funds."
PERFORMANCE
No performance information is provided because the Fund will not begin
operations until about December ___, 1999.
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY WHEN BUYING AND
SELLING SHARES OF THE FUND.
<TABLE>
<CAPTION>
Institu-
Shareholder Fees(1) tional
(paid directly from your Class A Class Class Y
investment) shares shares shares
- ---------------------------- -------- -------- ----------
<S> <C> <C> <C>
Maximum Sales Charge 4.50%(2) None None
(Load) imposed on
purchases (as a percentage
of offering price)
- ---------------------------- -------- -------- ----------
Maximum Deferred Sales None(3) None None
Charge (Load) imposed on
redemptions (as a
percentage of original
purchase price or sale
proceeds, as applicable)
</TABLE>
<TABLE>
<CAPTION>
Institu-
Annual Fund Operating tional
Expenses (deducted from Class A Class Class Y
fund assets) shares shares shares
- ---------------------------- -------- -------- ----------
<S> <C> <C> <C>
Management Fees 0.35% 0.35% 0.35%
- ---------------------------- -------- -------- ----------
Distribution and/or 0.25% None None
Service (12b-1) Fees
- ---------------------------- -------- -------- ----------
Other Expenses 0.55% 0.33% 0.58%
- ---------------------------- -------- -------- ----------
TOTAL ANNUAL FUND 1.15% 0.68% 0.93%
OPERATING EXPENSES(4)
</TABLE>
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
- ---------------- --------- ---------
<S> <C> <C>
Class A shares $562 $799
- ---------------- --------- ---------
Institutional $ 69 $218
Class shares
- ---------------- --------- ---------
Class Y shares $ 78 $243
</TABLE>
- -------------------------
1 If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
2 As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "Buying,
Selling and Exchanging Fund Shares - Buying Shares - Class A sales
charges."
3 A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
4 Because the Fund was established on December __, 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled
under its contract with the Fund, and any applicable distribution and
service fees are the maximum rates that can be charged under the
Distribution and Service Plan. "Other Expenses" are estimates of the other
operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on estimates for the
Fund's first fiscal year ending October 31, 2000. At least through October
31, 2000, the Adviser has agreed to waive management fees and, if
necessary, to reimburse "Other Expense" so that Total Annual Fund Operating
Expenses will not exceed 0.90% for Class A, 0.70% for Institutional Service
Class and 0.45% for the Institutional Class shares. This waiver of
management fees or reimbursement of other expenses is subject to a possible
reimbursement by the Fund within 5 years of the Fund's commencement of
operations if the reimbursement by the Fund can implemented within the
annual expense limitations described above.
3
<PAGE> 51
MORE ABOUT THE FUND
PRINCIPAL INVESTMENTS AND TECHNIQUES
The Fund may use the following investments and techniques to increase its
returns, protect its assets or diversify its investments.
U.S. GOVERNMENT SECURITIES. These securities include Treasury bills, notes and
bonds issued or guaranteed by the U.S. government and securities issued by U.S.
government agencies, including:
- - The Federal Housing Administration, the Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, which are backed by the full faith and credit of
the United States government
- - The Federal Home Loan Banks
- - The Federal National Mortgage Association ("FNMA")
- - The Student Loan Marketing Association and Federal Home Loan Mortgage
Corporation ("FHLMC")
- - The Federal Farm Credit Banks
Although there is virtually no credit risk with these U.S. government
securities, neither the U.S. government nor its agencies guarantee the market
value of their securities. Interest rate changes, prepayment and other factors
may affect the value of these securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. U.S. Government mortgage- backed
securities are securities that are secured by and paid from a pool of mortgage
loans on real property and issued or guaranteed by the U.S. Government or one of
its agencies. Mortgage-backed securities may also be issued by private issuers.
Collateralized mortgage obligations (CMOs) are securities that have mortgage
loans or mortgage pass-through securities, such as GNMA, FNMA or FHLMC
certificates, as their collateral. CMOs can be issued by the U.S.
Government or its agencies or by private lenders.
These securities are subject to interest rate risk and credit risk if they are
issued by private issuers. CMOs and other mortgage-backed securities are also
subject to prepayment risk. With respect to prepayment risk, when interest rates
fall, homeowners may refinance their loans and mortgage-backed securities will
be paid off sooner than anticipated. Reinvesting the returned principal in a
lower interest rate market would reduce the Fund's income. Mortgage-backed
securities are also subject to extension risk if rates increase and prepayments
slow, and the possibility of losing principal as a result of faster than
anticipated prepayment of securities purchased at a premium.
Asset-backed securities are securities that are secured by and paid from a pool
of underlying assets, such as automobile installment sales contracts, home
equity loans, property leases and credit card receivables. Asset-backed
securities are generally issued by private issuers.
FLOATING AND VARIABLE RATE SECURITIES. Floating- and variable-rate securities
are securities that do not have fixed interest rates; the rates change
periodically. The interest rate on floating-rate securities varies with changes
in the underlying index (such as the Treasury bill rate), while the interest
rate on variable-rate securities change at preset times based upon an underlying
index. Some of the floating- or variable- rate securities will be callable by
the issuer, which means they can be paid off before their maturity date.
These securities are subject to interest rate risk like other securities. They
are also subject to basis risk, which is the risk that the value of the security
may deteriorate relative to the underlying index. In addition, because they may
be callable, these securities are also subject to the risk that they will be
repaid prior to their stated maturity and that the repaid principal will be
reinvested in a lower interest rate market, reducing the Fund's income. The Fund
will only purchase floating- and variable-rate securities of the same quality as
the securities it would otherwise purchase.
WRAP CONTRACTS. Wrap contracts cover certain assets of the Fund and reduce the
volatility of the Fund's net asset value. A wrap contract is an agreement
between the Fund and a financial institution, typically a highly-rated bank or
insurance company (a "wrap provider"), to maintain certain Fund assets at their
purchase price plus accrued interest. Under normal circumstances, the value of a
wrap contract is the difference between the aggregate book value and the current
market value of covered assets. A wrap contract therefore gains value when the
market price of covered assets declines, and decreases in value when the market
price of the covered assets increases. The Fund expects to pay an annual premium
of between 0.08% and 0.15% on the book value of any assets in the Fund, which
are covered by wrap contracts. The Fund does not anticipate
4
<PAGE> 52
purchasing contracts on more than 50% of total Fund assets.
Wrap contracts are considered illiquid assets of the Fund. In addition to
liquidity risk, wrap contracts are subject to the credit risk of the wrap
provider, and also to the risk that the Fund may be unable to replace a wrap
contract that is maturing or subject to termination. Although wrap contracts are
designed to reduce the volatility of the Fund's net asset value, they may not
always be able to do so.
DERIVATIVES. A derivative is a contract whose value is based on the performance
of an underlying financial asset, index or other investment. For example, an
option is a derivative because its value changes in relation to the performance
of an underlying stock. The value of an option on a futures contract varies with
the value of the underlying futures contract, which in turn varies with the
value of the underlying commodity or security. Derivatives are available based
on the performance of assets, interest rates, currency exchange rates, and
various domestic foreign indexes. The Fund may use derivatives to hedge its
portfolio.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, the Fund may
invest up to 100% of its assets in cash or money market obligations. Should this
occur, the Fund will not meet its investment objectives, and may miss potential
market upswings.
OTHER INVESTMENT TECHNIQUES
The Statement of Additional Information (SAI) contains additional information
about the Fund, including the Fund's other investment techniques. To obtain a
copy of the SAI, see the back cover.
5
<PAGE> 53
MANAGEMENT
INVESTMENT MANAGER
Union Bond & Trust Company ("UBT"), 5665 S.W. Meadows Road, Lake Oswego, OR
97035, manages the investment of the assets and supervises the daily business
affairs of the Fund. UBT is a state bank and trust company chartered in 1913 and
reorganized in 1992 under the laws of the state of Oregon. UBT provides a range
of investment and fiduciary services to institutional clients. UBT maintains and
manages common and pooled trust funds invested primarily in fixed income assets
whose principal value is believed to be relatively stable. As of December ___,
1999, UBT and its affiliates has approximately $_____billion in assets under
management.
The Fund pays UBT an annual management fee of 0.35% for its investment advisory
services. The management fee is based on the Fund's average daily net assets.
PORTFOLIO MANAGERS
Taylor E. Drake and Thomas F. Mitchell co-manage the Fund.
Mr. Drake, Vice President and Portfolio Manager, joined Morley Capital
Management, Inc. ("MCM"), an affiliate of UBT, in 1995 and has managed corporate
stable value portfolios beginning in 1995 and the Morley Capital Accumulation
Fund since February 1999 when it began operations. Prior to joining 1995, he was
Associate Director of Investment Banking at US Bancorp.
Mr. Mitchell, Senior Portfolio Manager, joined MCM in 1999. He began managing
the Morley Capital Accumulation Fund in February 1999 when the fund began
operations. Mr. Mitchell has over twenty years' experience with taxable and
tax-exempt securities. From 1978 to 1996 he managed investment portfolios for
commercial bank affiliates of First Interstate Bancorp. In 1997 and 1998,
following First Interstate's merger with Wells Fargo & Co., he was a fixed
income trader with Wells Fargo's Institutional Securities Sales and Trading
Division
6
<PAGE> 54
BUYING, SELLING AND EXCHANGING FUND SHARES
CHOOSING A SHARE CLASS
As noted in the Fund Summary, the Fund offers different share classes to give
investors different price and cost options. Class A shares are available to all
investors; Institutional Class and Class Y shares are available to a limited
group of investors as described below.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares. Class A shares also pay distribution and/or
service fees under a Distribution Plan. These fees are either retained by NAS or
paid by NAS to brokers for distribution and shareholder services. Class A and
Class Y shares may pay administrative service fees. These fees are paid to
brokers and other entities that provide administrative support services to the
beneficial owners of the shares.
WHO CAN BUY CLASS Y SHARES
The Class Y shares are available for purchase by the following:
- - retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business
and rollover individual retirement accounts from such plans
- - tax-exempt employee benefit plans for which third party administrators
provide recordkeeping services and are compensated by the Fund for such
services
- - a bank, trust company or similar financial institution investing for
its own account or for the account of its trust customers for whom such
financial institution is exercising investment discretion in purchasing
Class Y shares, where the investment is part of a program that collects
an Administrative Service fee
- - registered investment advisers investing on behalf of institutions and
high net-worth individuals where the adviser is compensated by the Fund
for services it provides
- - life insurance separate accounts to fund the benefits of variable life
insurance policies and variable annuity contracts
WHO CAN BUY INSTITUTIONAL CLASS SHARES
The Institutional Class shares are available for purchase by the following:
- - fund of funds offered by NAS or other affiliate of the Trust
- - tax-exempt employee benefit plans if no third party administrator for
the plan receives compensation from the Fund
- - institutional advisory accounts of UBT, or its affiliates and those
having client relationships with an affiliate of VMF, or its affiliates
and their corporate sponsors, as well as subsidiaries and related
employee benefit plans and rollover individual retirement accounts from
such institutional advisory accounts
- - a bank, trust company or similar financial institution investing for
its own account or for the account of its trust customers for whom such
financial institution is exercising investment discretion in purchasing
Institutional Class shares, except where the investment is part of a
program that requires payment to the financial institution of a
Administrative Service or Rule 12b-1 Plan fee
- - registered investment advisers investing on behalf of institutions and
high net-worth individuals, but only if the adviser is not affiliated
or associated with a broker or dealer and derives compensation for its
services exclusively from its clients for such advisory services
BUYING SHARES
PURCHASE PRICE
The purchase or "offering" price of one share of the Fund is its "net asset
value" or NAV next determined after the order is received, plus any applicable
sales charge. A separate NAV is calculated for each class of shares of the Fund.
Generally, NAV is based on the market value of the securities owned by the Fund
less its liabilities. The NAV for a class is determined by dividing the total
market value of the securities owned by the Fund, less the liabilities allocable
to that class, by the total number of that
7
<PAGE> 55
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
class' outstanding shares. NAV is determined at the close of regular trading on
the New York Stock Exchange (usually 4 p.m. Eastern Standard Time) on each day
the Exchange is open for trading.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS - CLASS A SHARES
<S> <C>
To open an account $1000
Through the Automatic Asset Accumulation plan
(per transaction) $ 25
Additional investments $ 100
</TABLE>
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS - INSTITUTIONAL CLASS AND CLASS Y
SHARES
<S> <C>
To open an account $____
Additional investments $____
</TABLE>
These minimum investment requirements do not apply to certain retirement plans.
Call 1-800-848-0920 for more information. If you purchase shares through an
account at a broker (other than NAS), different minimum account requirements may
apply.
The Fund does not calculate NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King, Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - other days when the New York Stock Exchange is not open.
The Fund reserves the right not to determine an NAV for the Fund when:
- - It has not received any orders to purchase, sell or exchange shares
- - Changes in the value of the Fund's portfolio do not affect the NAV
If current prices are not available, or if Villanova SA Capital Trust ("VSA "),
the Fund's administrator or its agent, determines a price does not represent
fair value, the Fund's investments may be valued at fair market value in
accordance with procedures adopted by the Board of Trustees. To the extent that
the Fund's investments are traded in markets that are open when the New York
Stock Exchange is closed, the value of the Fund's investments may change on days
when shares cannot be purchased or redeemed.
When you purchase Class A shares, your purchase price will be the offering price
or NAV next determined after your order is received, plus any applicable sales
load.
CLASS A SALES CHARGES
The chart below shows the Class A sales charges, which decrease as the amount of
your investment increases.
CLASS A SHARES
<TABLE>
<CAPTION>
Sales Sales charge
charge as % as % of
of offering amount
Amount of purchase price invested
- ---------------------------- ------------- --------------
<S> <C> <C>
less than $50,000 4.50% 4.71%
- ---------------------------- ------------- --------------
$50,000 to $99,999 4.00 4.17
- ---------------------------- ------------- --------------
$100,000 to $249,999 3.00 3.09
- ---------------------------- ------------- --------------
$250,000 to $499,999 2.50 2.56
- ---------------------------- ------------- --------------
$500,000 to $999,999 2.00 2.04
- ---------------------------- ------------- --------------
$1 million to $24,999,999 0.50 0.50
- ---------------------------- ------------- --------------
$25 million or more 0.25 0.25
</TABLE>
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate the Class A initial sales charge through
one or more of the discounts described below:
- - Increase the amount of your investment. The preceding table shows how the
sales charge decreases as the amount of your investment increases.
- - Family Member Discount. Members of your family who live at the same address
can combine investments, possibly reducing the sales charge.
- - Lifetime Additional Discount. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value of
the shares you are purchasing, which may reduce the applicable sales
charge.
- - Insurance Proceeds or Benefits Discount Privilege. If you use the proceeds
of an insurance policy issued by
8
<PAGE> 56
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
any member of the Nationwide Insurance Enterprise to purchase Class A
shares, you will pay one-half of the published sales charge if you make
your investment 60 days after receiving the proceeds.
- - No sales charge on a repurchase. If you sell shares from your Nationwide
account, we allow you a one-time privilege to reinvest some or all of the
proceeds in shares of the same class. You will not pay a sales charge on
Class A shares that you buy within 30 days of selling Class A shares of an
equal or lesser amount if you have already paid a sales charge. Remember,
if you realize a gain or a loss on your sale of shares, the transaction is
taxable and reinvestment will not affect the amount of capital gains tax
that is due. If you realize a loss on your sale and you reinvest, some or
all of the loss may not be allowed as a tax deduction depending on the
amount you reinvest.
- - Letter of Intent Discount. State in writing that during a 13-month period
you or a group of family members who live at the same address will purchase
or hold at least $50,000 in Class A shares and your sales charge will be
based on the total amount you intend to invest. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy shares of
the Fund; it is merely a statement of intent. Call 1-800-848-0920 for more
information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for the following purchases:
Class A shares sold to:
- - Any person purchasing through an account with a unaffiliated brokerage firm
that has an agreement with NAS to waive sales charges for those persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the share with proceeds of mutual fund shares sold
from an NAS brokerage account. To qualify, you must have paid an initial
sales charge or CDSC on the shares sold. You must purchase the Class A
shares within 60 days of the sale, and you must request the waiver when you
purchase the Class A shares (NAS may require evidence that you qualify for
this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code.
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trust).
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives (including
mother, father, brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of Nationwide
Insurance and Nationwide Financial companies, or any investment advisory
clients of VMF, VSA, NAS and their affiliates.
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with Nationwide Insurance and
Nationwide Financial companies from time to time, (including, but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm Bureau,
Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania Farmers' Association,
Ruralite Services, Inc., and Southern States Cooperative.
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
HOW TO PLACE YOUR PURCHASE ORDER
If you wish to purchase Class A shares, you may purchase the shares using one of
the methods below. Eligible entities wishing to purchase Institutional Class or
Class Y shares should contact Nationwide Advisory Services, Inc. at
1-800-848-0920 for information regarding such purchases.
9
<PAGE> 57
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
BY MAIL - Complete and mail the application with a check or money order made
payable to: Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in U.S. dollars only and
drawn on a U.S. bank. NAS will not accept third-party checks.
BY WIRE - You can request that your bank transmits funds ("federal funds") by
wire to the Fund's custodian bank. In order to use this method, you must call
NAS by 4 p.m. Eastern Standard Time, and the wire must be received by the
custodian bank by the close of business on the day you placed your order or your
order will be cancelled. You may be liable for any loss to the Fund resulting
from the cancellation. Your bank may charge a fee to wire the funds. If you
choose this method to open your account, you must call our toll-free number
before you wire your investment, and you must then complete and fax the
application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear Fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you purchase through such a broker, your
order will be priced at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
- --------------------------------------------------------------------------------
NATIONWIDE CUSTOMER SERVICE 1-800-848-0920
Representatives are available to answer questions between 8 a.m. and 5 p.m.
Eastern Standard Time
For additional information on buying shares and shareholder services, call the
customer service number listed above or contact your Nationwide representative.
SELLING SHARES
You can sell - also known as redeeming - your shares of the Fund at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sold may be more or less than their
original purchase price depending upon the market value of the Fund's
investments at the time of sale.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Fund or the Fund may delay paying
you the proceeds from a sale when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or if trading is restricted or if
an emergency exists.
SIGNATURE GUARANTEE - CLASS A SHARES
A signature guarantee is required under the following circumstances:
- - if a redemption is over $100,000, or
- - if your account registration has changed within the last 30 days, or
- - if the redemption check is made payable to anyone other than the
registered shareholder, or
- - if the proceeds are sent back to a bank account not previously
designated, or
- - if the proceeds are mailed to an address other than the address of
record.
10
<PAGE> 58
BUYING, SELLING AND EXCHANGING FUND SHARE (CONTINUED)
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A SHARES
Under certain circumstances, employer-sponsored retirement plans investing in
Class A shares without a sales charge (other than those investing in the Fund
through variable insurance products) may be charged a CDSC if shares are
redeemed within three years after purchase. The CDSC will be 1% for the first
year, 0.50% for the second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER - CLASS A SHARES
You can request the sale of your shares in any of the following ways:
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a weeks, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-637-0012 after 7 p.m. Eastern Standard Time to learn the
day's closing share price.
CAPITAL GAINS TAXES
If you sell Fund shares for more than you paid for them, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes - Selling Fund Shares."
CUSTOMER SERVICE LINE - If you have elected to have telephone redemption
privileges, a check payable to the shareholder of record can be mailed to the
address of record, unless you declined the telephone redemption privilege on
your application. NAS can wire the funds directly to your account at a
commercial bank (a voided check must be attached to your applications) unless
you declined telephone privileges on your application. (This authorization will
remain in effect until you give NAS written notice of its termination.) You can
sell shares of your IRA by telephone if we receive the proper forms. The
distribution from an IRA will be subject to a mandatory 10% federal withholding
tax, unless you inform us in writing not to withhold taxes. For additional
information or to request the forms, please call the customer service line at
1-800-848-0920. The Fund will use procedures to confirm that telephone
instructions are genuine. If the Fund acts on instructions it reasonably
believed were genuine, it will not be liable for any loss, injury, damage or
expense that occurs as a result, and the Fund will be held harmless for any
loss, claims, or liability arising from its compliance with the instructions.
NAS may record telephone instructions to sell shares. The Fund reserves the
right to revoke this privilege at any time, without notice to shareholders, and
to request the sale in writing, signed by all shareholders on the account.
BANK BY WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this service. Your financial institution may
also charge you a fee for receiving the wire. Funds sent outside the U.S. may be
subject to a higher fee.
11
<PAGE> 59
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been reviewed by
NAS. Funds sent through ACH should reach your bank in two business days. There
is no fee for this service. (This authorization will remain in effect until you
give NAS written notice of its termination.)
BY MAIL OR FAX (No minimum) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed the next business day. NAS
reserves the right to require the original document if you fax your letter. A
signature guarantee may be required under certain circumstances. Please refer
back to "Signature Guarantee - Class A shares" on page __.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you have an account with such a broker, your
redemption order will be priced at the NAV next determined after your order has
been accepted by your broker or its designated intermediary. Your broker may
charge a fee for this service.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
For additional information concerning your ability to sell your shares, call our
customer service line at 1-800-848-0920 or see your Nationwide representative.
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A shares, the Trust
has adopted a Distribution Plan under Rule 12b-1 of the Investment Company Act,
which permits the Fund to compensate NAS - as distributor - for expenses
associated with distributing its shares and providing shareholder services.
DISTRIBUTION AND SERVICE FEES
Under the Distribution Plan, the Fund pays NAS compensation accrued daily and
paid monthly. The Fund shall pay amounts not exceeding an annual amount of:
<TABLE>
<CAPTION>
Fund/Class As a % of daily net assets
- -----------------------------------------------------
<S> <C>
Class A shares 0.25% (distribution or service fee)
- -------------- -----------------------------------
</TABLE>
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
EXCHANGING SHARES - CLASS A SHARES
You can exchange the shares you own for shares of another fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new fund meets the fund's minimum investment requirement. You
cannot exchange Class A shares for shares of another class.
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal and/or state income taxes.
For more information, see ""Distribution and Taxes - Exchanging Fund
Shares-Class A Shares."
12
<PAGE> 60
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
If your exchange involves certain Class A shares, you may have to pay the
difference between the sales charges if a higher sales charge applies.
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax or by phone (see
"Buying Shares - How to place your purchase order" or the back cover for contact
information). If you make your request in writing, please be sure your letter is
signed exactly as your account is registered. Your exchange will be processed on
the date NAS receives your signed letter or fax. If your fax is received after 4
p.m. Eastern Standard Time, it will be processed the next day. If you fax your
request, we reserve the right to ask for the original. You can automatically
request an exchange 24 hours a day, seven days a week, by calling NAS NOW, our
automated voice-response system. You will have automatic exchange privileges
unless you request not to on your application. The Trust reserves the right to
amend or discontinue these exchange privileges upon 60 days written notice to
shareholders
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders.
The Fund may delay forwarding redemption proceeds for up to seven days if the
investor redeeming shares is engaged in excessive trading, or if the amount of
the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund.
YEAR 2000
VMF, 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. VMF, 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. VMF, VSA and NAS have also tested each application
for their 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.
VMF, VSA and NAS' assessment of Year 2000 issues has included non-information
technology systems with embedded computer chips. VMF, VSA and NAS' building
systems such as fire, security, elevators and escalators supporting facilities
in Columbus, Ohio, have been tested and are Year 2000 compliant.
In addition to resolving internal Year 2000 readiness issues, VMF, VSA and NAS
are surveying significant external organizations (business partners) to assess
if they will be Year 2000 compliant. VMF, VSA and NAS continue their efforts to
identify external risk factors and have developed contingency plans as part of
its ongoing risk-management strategy.
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<PAGE> 61
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser.
DISTRIBUTIONS OF INCOME DIVIDENDS
The Fund declares dividends daily and distributes them monthly. Income dividends
are taxable to you as ordinary income for federal income tax purposes, unless
you hold your shares in a qualified tax-deferred plan or account, or are
otherwise not subject to federal income tax. The amount of income dividends
distributed to you will be reported in a Form 1099, which we will send to you
during the tax season each year (unless you hold your shares in a qualified
tax-deferred plan or account). For corporate shareholders, a portion of each
year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If the Fund has net realized capital gains at the end of the fiscal year
(meaning the gains from sale of securities exceed any losses from sales), it
will distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account. On Form 1099, we will report
the amount of net short-term capital gains and net long-term capital gains
distributed to you during the year. Currently, for individuals, long-term
capital gains are taxed at a maximum rate of 20%; short-term capital gains are
taxed as ordinary income, such as interest or dividends. For the current capital
gains tax rates, speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If the checks sent to you cannot be delivered, or are not cashed,
distributions will be reinvested in shares of the Fund. You are subject to tax
on reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certifications are not accurate, or as may otherwise be required under the
Internal Revenue Code.
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your option, you must notify us by the record date for a
dividend or distribution in order for it to be effective for that dividend or
distribution. You will not receive interest on any uncashed distribution,
dividend or redemption checks.
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of the tax depends on how
long you held your shares. For individuals, long-term capital gains are taxed as
ordinary income, such as interest or dividends. Capital gains from your sale of
Fund shares is not reported on Form 1099; you or your tax adviser should keep
track of your purchases, sales, and any resulting gain or loss. If you do sell
Fund shares for a loss, you may be able to use this capital loss to offset any
capital gains you have.
EXCHANGING FUND SHARES - CLASS A SHARES
Exchanging your shares of the Fund is considered a sale for income tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
have capital gains, which are subject to the federal income taxes described
above. If you exchange Fund shares for a loss, you may be able to use this
capital loss to offset any capital gains you have.
14
<PAGE> 62
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents contain additional information about the Fund. To obtain
a document free of charge, contact us at the address or number listed below.
- - Statement of Additional Information (SAI) (incorporated by reference in
this Prospectus)
- - Annual Report (which contains a discussion of the market conditions and
investment strategies that significantly affect the Fund's performance)
- - Semi-Annual Report
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Standard Time)
FOR 24-HOUR ACCOUNT ACCESS:
1-800-637-0012 (toll free)
Also, visit the Nationwide Advisory Services, Inc. Web Site at
[www.nationwidefunds.com].
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of the Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
VIA THE INTERNET:
http://www.sec.gov
Investment Company Act File No. 811-08495
15
<PAGE> 63
NATIONWIDE(R) MUTUAL FUNDS
LIFE STRATEGY SERIES
- The Aggressive Fund
- The Moderately Aggressive Fund
- The Moderate Fund
- The Moderately Conservative Fund
- The Conservative Fund
PROSPECTUS
DECEMBER , 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Funds' shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 64
<TABLE>
<CAPTION>
TABLE OF CONTENTS
FUND SUMMARIES
<S> <C>
LIFESTRATEGY SERIES..................................................................... 3
Investment Objective
Principal Strategies
THE AGGRESSIVE FUND..................................................................... 3
THE MODERATELY AGGRESSIVE FUND.......................................................... 3
THE MODERATE FUND....................................................................... 4
THE MODERATELY CONSERVATIVE FUND........................................................ 4
THE CONSERVATIVE FUND................................................................... 4
Principal Risks
Fund Risk
Underlying Funds Risks
MORE ABOUT THE FUNDS.................................................................... 6
Principal Investment Techniques Underlying Funds
The Nationwide Contract
Other Investment Techniques
Temporary Defensive Positions
MANAGEMENT.............................................................................. 8
Investment Manager
BUYING, SELLING AND EXCHANGING FUND SHARES.............................................. 11
Who Can Buy Shares of the Funds
Purchase Price Selling Shares
Restrictions on Sales
Year 2000
Dividends and Distributions
Tax Status
FINANCIAL HIGHLIGHTS.................................................................... 13
ADDITIONAL INFORMATION.................................................................. BACK COVER
</TABLE>
2
<PAGE> 65
FUND SUMMARIES
THIS PROSPECTUS PROVIDES INFORMATION ABOUT THE LIFE STRATEGY SERIES OFFERED BY
NATIONWIDE MUTUAL FUNDS.
LIFE STRATEGY SERIES
- - The Aggressive Fund
- - The Moderately Aggressive Fund
- - The Moderate Fund
- - The Moderately Conservative Fund
- - The Conservative Fund
INVESTMENT OBJECTIVE
The investment objective of each Fund is to maximize total investment return
(i.e., capital growth and income). This investment objective is nonfundamental
and can be changed without shareholder approval.
PRINCIPAL STRATEGIES
Each Fund in the Life Strategy Series is a "fund of funds", which means that
each Fund invests primarily in other mutual funds ("Underlying Funds").
Underlying Funds invest, either directly or indirectly, in stocks, bonds, or
other securities with the goal of matching a specific stock or bond index and
reflect varying amounts of potential investment risk and reward. Underlying
Funds are mutual funds that are a series of the Nationwide Mutual Funds (the
"Nationwide funds"). Several of the Nationwide funds invest directly in stocks
or bonds and are advised by Villanova Mutual Fund Capital Trust (the "Adviser")
or its affiliate Union Bond & Trust Company ("UBT"). Other Nationwide funds in
turn invest in different series of the Merrill Lynch Index Trust which
correspond to the investment strategy of the appropriate Nationwide fund. This
structure is sometimes called a "master/feeder" structure. Each of the different
series of the Merrill Lynch Index Trust is advised by Fund Asset Management,
L.P. Each Fund allocates its assets among different Underlying Funds and--except
for The Aggressive Fund--the Nationwide Contract. Periodically, each Fund, based
on advice of the Adviser, will adjust its asset allocation within predetermined
ranges to ensure broad diversification and to adjust to changes in market
conditions. However, as a general matter, there will not be large, sudden
changes in a Fund's asset allocation.
THE AGGRESSIVE FUND
The Aggressive Fund seeks to maximize total investment return through growth of
capital. It will invest in Underlying Funds as described below, primarily equity
index funds ("Equity Funds") but also a bond index fund. The Aggressive Fund is
generally appropriate for investors who are seeking higher returns over an
investment time horizon of at least 15 years and who have a higher tolerance for
market fluctuations. The Aggressive Fund expects to allocate its assets among
the Underlying Funds as follows:
TARGET
UNDERLYING INVESTMENTS ALLOCATION(a)
- ---------------------- -------------
Equity Funds:
International Index Fund 35%
Small Cap Index Fund 15%
S&P 500 Index Fund 45%
Bond Fund:
3
<PAGE> 66
Bond Index Fund 5%
------
TOTAL ALLOCATION 100%
======
(a) The portfolio manager monitors the Fund's holdings and cash flow and
although over shorter periods of time the actual allocation may vary from
the target allocation, the investment strategy should approximate the target
allocations over longer investment periods.
THE MODERATELY AGGRESSIVE FUND
The Moderately Aggressive Fund also seeks to maximize total investment return
through growth of capital. It will invest primarily in Equity Funds, but will
attempt to reduce its volatility by also investing in Nationwide funds that
invest primarily in fixed income securities ("Bond Funds") and the Nationwide
Contract. The Moderately Aggressive Fund is generally appropriate for moderate
investors who are seeking high returns over an investment time horizon of at
least 15 years or for aggressive investors with an investment time horizon of 10
to 15 years. The Moderately Aggressive Fund expects to allocate its assets among
the Underlying Funds and the Nationwide Contract as follows:
TARGET
UNDERLYING INVESTMENTS ALLOCATION(a)
- ---------------------- -------------
Equity Funds:
International Index Fund 30%
Small Cap Index Fund 10%
S&P500 Index Fund 40%
Bond Funds:
Bond Index Fund 15%
Enhanced Income Fund 2.5%
Nationwide Money Market Fund 0%
Nationwide Contract: 2.5%
------
TOTAL ALLOCATION 100%
====
(a) The portfolio manager monitors the Fund's holdings and cash flow and
although over shorter periods of time the actual allocation may vary from
the target allocation, the investment strategy should approximate the target
allocations over longer investment periods.
THE MODERATE FUND
The Moderate Fund seeks to maximize total investment return through growth of
capital and income. It will invest primarily in Equity Funds, but will also
invest a significant percentage of its assets in Bond Funds and the Nationwide
Contract. The Moderate Fund is generally appropriate for moderate investors who
are seeking moderate returns over an investment time horizon of between 10 and
15 years. The Moderate Fund
4
<PAGE> 67
is also appropriate for more conservative investors who have an investment time
horizon of at least 15 years and for more aggressive investors whose investment
time horizon is between 5 to 10 years. The Moderate Fund expects to allocate its
assets among the Underlying Funds and the Nationwide Contract as follows:
TARGET
UNDERLYING INVESTMENTS ALLOCATION(a)
- ---------------------- -------------
Equity Funds:
International Index Fund 15%
Small Cap Index Fund 10%
S&P 500 Index Fund 35%
Bond Funds:
Bond Index Fund 25%
Enhanced Income Fund 7.5%
Nationwide Money Market Fund 0%
Nationwide Contract: 7.5%
----
TOTAL ALLOCATION 100%
====
(a) The portfolio manager monitors the Fund's holdings and cash flow and
although over shorter periods of time the actual allocation may vary from
the target allocation, the investment strategy should approximate the target
allocations over longer investment periods.
THE MODERATELY CONSERVATIVE FUND
The Moderately Conservative Fund seeks to maximize total investment return
through income and, secondarily, through long term growth of capital. It will
invest generally 40% of its assets in Equity Funds and 60% of its assets in Bond
Funds and the Nationwide Contract. The Moderately Conservative Fund is generally
appropriate for moderate investors who are seeking generally lower fluctuations
in principal combined with some of the upside potential of equity investments
over an investment time horizon of between 5 and 10 years. The Moderately
Conservative Fund is also appropriate for more conservative investors who have
an investment time horizon of between 10 and 15 years and for more aggressive
investors whose investment time horizon is less than 5 years. The Moderately
Conservative Fund expects to allocate its assets among the Underlying Funds and
the Nationwide Contract as follows:
TARGET
UNDERLYING INVESTMENTS ALLOCATION(a)
- ---------------------- -------------
Equity Funds:
International Index Fund 10%
Small Cap Index Fund 5%
S&P 500 Index Fund 25%
Bond Funds:
Bond Index Fund 35%
Enhanced Income Fund 12.5%
Nationwide Money Market Fund 0%
5
<PAGE> 68
Nationwide Contract: 12.5%
-------
TOTAL ALLOCATION 100%
====
(a) The portfolio manager monitors the Fund's holdings and cash flow and
although over shorter periods of time the actual allocation may vary from
the target allocation, the investment strategy should approximate the target
allocations over longer investment periods.
THE CONSERVATIVE FUND
The Conservative Fund also seeks to maximize total investment return through
income and, secondarily, through long term growth of capital. It will invest
primarily in a combination of Bond Funds and the Nationwide Contract, with a
smaller investment in Equity Funds. The Conservative Fund is generally
appropriate for investors who are seeking low fluctuations in principal over an
investment time horizon of less than 5 years. The Conservative Fund is also
appropriate for more conservative investors who have an investment time horizon
of between 5 and 10 years. The Conservative Fund expects to allocate its assets
among the Underlying Funds and the Nationwide Contract as follows:
TARGET
UNDERLYING INVESTMENTS ALLOCATION(a)
- ---------------------- -------------
Equity Funds:
International Index Fund 5%
S&P 500 Index Fund 15%
Bond Funds:
Bond Index Fund 35%
Enhanced Income Fund 22.5%
Nationwide Money Market Fund 0%
Nationwide Contract: 22.5%
-----
TOTAL ALLOCATION 100%
=====
(a) The portfolio manager monitors the Fund's holdings and cash flow and
although over shorter periods of time the actual allocation may vary from
the target allocation, the investment strategy should approximate the target
allocations over longer investment periods.
6
<PAGE> 69
PRINCIPAL RISKS
Because the value of an investment in a Fund will fluctuate, there is the risk
that a shareholder will lose money. An investment will decline in value if the
value of a Fund's investments decreases.
FUND RISK
PERFORMANCE RISK. The assets of each Fund are invested primarily in Underlying
Funds, which means that the investment performance of each Fund is directly
related to the investment performance of the Underlying Funds held by the Fund.
The ability of a Fund to meet its investment objective depends upon the
allocation of the Fund's assets among the Underlying Funds and the ability of
the Underlying Funds to meet their own investment objectives. It is possible
that an Underlying Fund's Fund manager will fail to execute the Underlying
Fund's investment strategies effectively. As a result, an Underlying Fund may
not meet its investment objective, which would affect a Fund's investment
performance. There can be no assurance that the investment objective of any Fund
or any Underlying Fund will be achieved.
UNDERLYING FUNDS RISKS
Like any investment program, an investment in a Fund entails certain risks. The
Funds, however, are designed to help spread risk and reduce swings in
performance through a comprehensive allocation program of investing in several
Underlying Funds and, for certain Funds, the Nationwide Contract. The Funds
invest primarily or exclusively in Underlying Funds, which are index funds.
Index funds employ a passive management approach which is expected to result in
performance which is approximately the same as that of the index. Because the
Underlying Funds as a group invest in different combinations of equities, debt
securities and money market instruments, the Funds are subject to different
levels and combinations of risk, including, depending on the particular Fund,
stock market risk, bond market risk (primarily interest rate risk and credit
risk), selection risk, the risk of inflation and foreign risk.
STOCK MARKET RISK. Stock market risk is the risk that a Fund could lose value if
the individual stocks in which the Underlying Funds have invested or the overall
stock market goes down. Individual stocks and the overall stock market may
experience short-term volatility as well as extended periods of decline or
little growth. Individual stocks are affected by factors such as corporate
earnings, production, management and sales. Individual stocks may also be
affected by the demand for a particular type of stock, such as growth stocks or
the stocks of companies with a particular market capitalization. The stock
market as a whole is affected by numerous factors, including interest rates, the
outlook for corporate profits, the health of the national and world economies,
national and world social and political events, and the fluctuations of other
stock markets around the world.
INTEREST RATE RISK. Interest rate risk is the risk that increases in market
interest rates may decrease the value of debt securities held by an Underlying
Fund. In general, the prices of debt securities fall when interest rates
increase and rise when interest rates decrease. Typically, the longer the
maturity of a debt security, the more sensitive it is to price shifts as a
result of interest rate changes.
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. In addition, there is a risk that the rating of a debt security may be
lowered if the issuer's financial condition changes. This could lead to a
greater fluctuation in the value of an Underlying Fund, which could affect the
value of a Fund.
INFLATION RISK. There is also inflation risk, which affects the value of
fixed-rate investments such as debt securities. If an Underlying Fund buys debt
securities when inflation and interest rates are low, the value of these debt
securities could fall as inflation rises. This could happen as investors find
debt securities with lower interest rates less attractive than debt securities
that pay higher interest rates. Underlying Funds may be also subject to
liquidity risk, which is the risk that a security cannot be sold, or cannot be
sold quickly, at an acceptable price.
7
<PAGE> 70
SELECTION RISK. Selection risk is the risk that an index fund's investments,
which may not fully replicate the index, may perform differently from securities
in the index.
FOREIGN RISK. Foreign risk includes the risk of investing in foreign equity
securities of companies whose primary trading markets are located outside of the
United States, including the possibility of substantial volatility due to
adverse political, economic or other developments. Foreign equity securities may
be less liquid and harder to value than U.S. securities. In addition, the equity
securities in which the International Index Fund invests are subject to
significant changes in value due to exchange rate fluctuations.
PERFORMANCE
No performance information is provided because each Fund had been in operation
for less than a year as of December 31, 1999.
8
<PAGE> 71
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUNDS.
Fee Table
Class A Shares
--------------
<TABLE>
<CAPTION>
Moderately Moderately
Aggressive Aggressive Moderate Conservative Conservative
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Shareholder Fees/1/ (fees paid directly from your investment)
Maximum Sales Charge
(Load) Imposed on
Purchases/2/ (as a
percentage of offering
price) 5.75% 5.75% 5.75% 5.75% 5.75%
- ----------------------------------------------------------------------------------------------------
Maximum Deferred Sales
Charge
(Load) (as a
percentage
of offering or sale
price, whichever is None/3/ None/3/ None/3/ None/3/ None/3/
less)
- ----------------------------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that
are deducted from Fund
assets)
Management Fees/4/ 0.13% 0.13% 0.13% 0.13% 0.13%
- ----------------------------------------------------------------------------------------------------
Distribution [and/or
Service] (12b-1) Fees .10% .10% .10% .10% .10%
- ----------------------------------------------------------------------------------------------------
Other Expenses/4/ 0.84% 0.84% 0.84% 0.84% 0.84%
- ----------------------------------------------------------------------------------------------------
Total Annual Fund
Operating
Expenses/5/ 1.07% 1.07% 1.07% 1.07% 1.07%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
/1/ If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
/2/.As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "Buying, Selling
and Exchanging Fund Shares - Buying Shares - Class A sales charge."
/3/ A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without sales charges."
/4/ Because the Funds are new and do not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year.
9
<PAGE> 72
/5/ Because the Fund was established on December , 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with the Fund, and any applicable distribution and service fees are
the maximum rates that can be charged under the Distribution and Service Plan.
"Other Expenses" are estimates of the other operating expenses (without taking
into account any expense limitation arrangement between the Adviser and the
Fund) based on estimates for the Fund's first fiscal year ending October 31,
2000. At least through October 31, 2000, the Adviser has agreed to waive
management fees and, if necessary, to reimburse "Other Expenses" so that Total
Annual Fund Operating Expenses will not exceed 0.56% for Class A shares. This
waiver of management fees or reimbursement of other expenses is subject to a
possible reimbursement by the Fund within five years of the Fund's commencement
of operations if the reimbursement by the Fund can be implemented within the
annual expense limitation described above.
Fee Table
Class B Shares
--------------
<TABLE>
<CAPTION>
Moderately Moderately
Aggressive Aggressive Moderate Conservative Conservative
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of offering
price) None None None None None
- ----------------------------------------------------------------------------------------------------
Maximum Deferred Sales
Charge
(Load) (as a
percentage
of offering or sale
price, whichever is 5.00%/1/ 5.00%/1/ 5.00%/1/ 5.00%/1/ 5.00%/1/
less)
- ----------------------------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that
are deducted from Fund
assets)
Management Fees 0.13% 0.13% 0.13% 0.13% 0.13%
- ----------------------------------------------------------------------------------------------------
Distribution and/or
Service (12b-1) Fees 0.85% 0.85% 0.85% 0.85% 0.85%
- ----------------------------------------------------------------------------------------------------
Other Expenses/2/ 0.84% 0.84% 0.84% 0.84% 0.84%
- ----------------------------------------------------------------------------------------------------
Total Annual Fund
Operating
Expenses/3/ 1.82% 1.82% 1.82% 1.82% 1.82%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 73
/1/ ACDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A shares
after you have held them for seven years. See "Buying, Selling and Exchanging
Shares - Buying Shares - Contingent deferred sales charge (CDSC) on Class B
shares."
/2/ Because the Funds are new and do not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year.
/3/ Because the Fund was established on December , 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with the Fund, and any applicable distribution and service fees are
the maximum rates that can be charged under the Distribution and Service Plan.
"Other Expenses" are estimates of the other operating expenses (without taking
into account any expense limitation arrangement between the Adviser and the
Fund) based on estimates for the Fund's first fiscal year ending October 31,
2000. At least through October 31, 2000, the Advisor has agreed to waive
management fees and, if necessary, to reimburse "Other Expenses" so that Total
Annual Fund Operating Expenses will not exceed 1.31% for Class B shares. This
waiver of management fees or reimbursement of other expenses is subject to a
possible reimbursement by the Fund within five years of the Fund's commencement
of operations if the reimbursement by the Fund can be implemented within the
annual expense limitation described above.
<TABLE>
<CAPTION>
Service Class
-----------------------------------------------------------------
Moderately Moderately
Aggressive Aggressive Moderate Conservative Conservative
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of offering
price) None None None None None
- -----------------------------------------------------------------------------------------------------
Maximum Deferred Sales
Charge
(Load) (as a
percentage
of offering or sale
price, whichever is
less None None None None None
- -----------------------------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that
are deducted from Fund
assets)
Management Fees/1/ 0.13% 0.13% 0.13% 0.13% 0.13%
- -----------------------------------------------------------------------------------------------------
Distribution and/or
Service (12b-1) Fees None None None None None
- -----------------------------------------------------------------------------------------------------
Other Expenses/2/ 0.74% 0.74% 0.74% 0.74% 0.74%
- -----------------------------------------------------------------------------------------------------
Total Annual Fund
Operating
Expenses/1/ 0.87% 0.87% 0.87% 0.87% 0.87%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 74
/1/ Because the Fund was established on December , 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with the Fund. "Other Expenses" are estimates of the other
operating expenses (without taking into account any expense limitation
arrangement between the Adviser and the Fund) based on estimates for the Fund's
first fiscal year ending October 31, 2000. At least through October 31, 2000,
the Advisor has agreed to waive management fees and, if necessary, to reimburse
"Other Expenses" so that Total Annual Fund Operating Expenses will not exceed
0.36% for Service Class shares. This waiver of management fees or reimbursement
of other expenses is subject to a possible reimbursement by the Fund within five
years of the Fund's commencement of operations if the reimbursement by the Fund
can be implemented within the annual expense limitation described above.
/2/ Because the Funds are new and do not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year.
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of a Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
Aggressive Fund
Class A $678 $896
Class B $685 $873
Service Class $ 89 $278
- --------------------------------------------------------------------------------
Moderately Aggressive Fund
Class A $678 $896
Class B $685 $873
Service Class $ 89 $278
- --------------------------------------------------------------------------------
Moderate Fund
Class A $678 $896
Class $685 $873
Service Class $ 89 $278
- --------------------------------------------------------------------------------
Moderately Conservative Fund
Class A $678 $896
Class B $685 $873
Service Class $ 89 $278
- --------------------------------------------------------------------------------
Conservative Fund
Class A $678 $896
Class B $685 $873
Service Class $ 89 $278
You would pay the following expenses on the same investment if you did not sell
your shares:
1 Year 3 Years
Aggressive Fund - Class B $185 $573
Moderately Aggressive Fund - Class B $185 $573
Moderate Fund - Class B $185 $573
Moderately Conservative Fund - Class B $185 $573
Conservative Fund - Class B $185 $573
12
<PAGE> 75
MORE ABOUT THE FUNDS
PURPOSE OF THE LIFE STRATEGY SERIES
The Funds are designed:
- - To help achieve an investor's retirement savings objectives through asset
allocation
- - To maximize long-term total returns at an acceptable level of risk
- - To allow for easy asset allocation by reducing the need to monitor ongoing
allocation of assets.
In selecting a Fund, investors should consider their personal objectives,
investment time horizons, risk tolerances, and financial circumstances. Through
exchanges among the Funds, investors can adjust their investment strategies when
one or more of these factors change. Most investors will move into progressively
more conservatively managed Funds as they near retirement or other investment
goals.
PRINCIPAL INVESTMENT TECHNIQUES
The following investment techniques may be used to increase return, protect
assets or diversify investments.
UNDERLYING FUNDS
Each Fund invests primarily, or in the case of The Aggressive Fund completely,
in other mutual funds representing different combinations of Equity Funds and
Bond Funds. The Equity Funds include:
NATIONWIDE INTERNATIONAL INDEX FUND
The Nationwide International Index Fund seeks to match the performance of the
Morgan Stanley Capital International EAFE Capitalization Weighted Index (the
"EAFE Index") as closely as possible before the deduction of Fund expenses. The
EAFE Index is composed of equity securities of companies from various industrial
sectors whose primary trading markets are located outside the United States.
Companies included in the EAFE index are selected from among the larger
capitalization companies in these markets. The weighting of the EAFE index is
based on the market capitalization of each of the countries in the index. The
International Index Fund invests in a statistically selected sample of equity
securities included in the EAFE Index and in derivative instruments linked to
the EAFE Index. The International Index Fund may not invest in all of the
countries, or all of the companies within a country, represented in the EAFE
Index, or in the same weightings as in the EAFE Index. The International Index
Fund will choose investments so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks and derivative
instruments chosen are similar to the EAFE Index as a whole. The International
Index Fund may also engage in securities lending.
As a feeder fund, Nationwide International Index Fund invests in a master fund
of the [Merrill Lynch Index Trust] with the characteristics described above.
NATIONWIDE SMALL CAP INDEX FUND
The Nationwide Small Cap Index Fund seeks to match the performance of the
Russell 2000 Index (the Russell 2000") as closely as possible before the
deduction of Fund expenses. The Russell 2000 is a market-weighted index composed
of approximately 2,000 common stocks issued by smaller-capitalization U.S.
companies in a wide range of businesses. The Small Cap Index Fund invests in a
statistically selected sample of stocks included in the Russell 2000 and in
derivative instruments linked to the Russell 2000. The Small Cap Index Fund may
not invest in all of the common stocks in the Russell 2000, or in the same
weightings as in the Russell 2000. The Small Cap Index Fund chooses investments
so that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative
13
<PAGE> 76
instruments chosen are similar to the Russell 2000 as a whole. The Small Cap
Index Fund may also engage in securities lending.
As a feeder fund, Nationwide Small Cap Index Fund invests in a master fund of
the [Merrill Lynch Index Trust] with the characteristics described above.
NATIONWIDE S&P 500 INDEX FUND
The Nationwide S&P 500 Index 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 S&P 500 Index 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 S&P 500 Index 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 S&P 500
Index 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 S&P 500 Index 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. 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 December ___, 1999,
approximately ___% of the Index was composed of the 50 largest companies. The
S&P 500 Index 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 S&P 500 Index 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.
The Bond Funds include:
NATIONWIDE BOND INDEX FUND
The Nationwide Bond Index Fund seeks to match the performance of the Lehman
Brothers Aggregate Bond Index (the "Aggregate Bond Index") as closely as
possible before the deduction of Bond Index Fund expenses. The Aggregate Bond
Index is composed primarily of dollar-denominated investment grade bonds of
different types. The Bond Index Fund invests in a statistically selected sample
of bonds that are included in or correlated with the Aggregate Bond Index, and
in derivative instruments linked to the Aggregate Bond Index. The Bond Index
Fund may not invest in all of the bonds in the Aggregate Bond Index, or in the
same weightings as in the Aggregate Bond Index. The Bond Index Fund may invest
in bonds not included in the index, but which are selected to reflect
characteristics such as maturity, duration, or credit quality similar to bonds
in the index. This may result in different levels of interest rate, credit or
prepayment risks from the levels of risks in the Aggregate Bond Index. The
Aggregate Bond Index is composed of a variety of dollar-denominated investment
grade bonds, including bonds issued by the U.S. Government and foreign
governments and their agencies, and bonds issued by the U.S. or foreign
companies, among others. The Bond Index Fund may also engage in securities
lending.
As a feeder fund, Nationwide Bond Index Fund invests in a master fund of the
[Merrill Lynch Index Trust] with the characteristics described above.
- --------
*** Standard & Poor's, "S&P", "S&P 500", "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.
14
<PAGE> 77
NATIONWIDE ENHANCED INCOME FUND
The Nationwide Enhanced Income Fund seeks to provide a high level of current
income while preserving capital and minimizing market fluctuations in an
investor's account value. To achieve its goals, under normal market conditions,
the Enhanced Income Fund invests primarily in high-grade debt securities issued
by the U.S. government and its agencies, as well as by corporations. The
Enhanced Income Fund also purchases mortgage-backed and asset-backed securities.
The debt securities in which the Enhanced Income Fund invests pay interest on
either a fixed-rate or variable-rate basis. The Enhanced Income Fund will be
managed so that its duration will be between 0.5 and 2.0 years. Depending on
market conditions, the Enhanced Income Fund may also enter into book value
maintenance agreements ("wrap contracts") with one or more highly rated
financial institutions for the purpose of maintaining some of the Enhanced
Income Fund's assets at a stable book value. The Enhanced Income Fund's
portfolio managers expect that careful selection of securities, relatively short
portfolio duration, and the potential availability and use of wrap contracts
will enable the Enhanced Income Fund to meet its investment objective of limited
fluctuation of the Enhanced Income Fund's net asset value, although there can be
no guarantee that the Fund will meet its objectives.
NATIONWIDE(R) MONEY MARKET FUND
Nationwide Money Market Fund seeks as high a level of current income as is
consistent with the preservation of capital and maintenance of liquidity. It
seeks to achieve this objective by investing in high-quality money market
obligations maturing in 397 days or less, including corporate obligations, U.S.
government and agency bonds, bills and notes, the obligations of foreign
governments, and the obligations of U.S. banks and U.S. branches of foreign
banks if they are denominated in U.S. dollars. The Nationwide Money Market Fund
may also invest in floating-and adjustable-rate obligations and asset-backed
commercial paper. Typically, the Nationwide Money Market Fund's dollar-weighted
average maturity will be 90 days or less.
The Nationwide Money Market Fund invests in securities which the portfolio
manager believes to have the best return potential. Because the Nationwide Money
Market Fund invests in short-term securities, it will generally sell securities
only to meet liquidity needs to maintain target allocations and to take
advantage of more favorable opportunities.
The Underlying Funds present varying degrees of potential investment risks and
rewards based upon their own investment objectives and strategies. Depending on
the investment objectives and strategies of an Underlying Fund, additional risks
may be created by a Fund's investment in the Underlying Fund. Some, but not all,
of the investment strategies used by the Underlying Funds and the risks of the
Underlying Funds are described in the Statement of Additional Information. The
Funds may also invest in other Nationwide funds in the future.
Because a all of the assets of each Fund will be invested in the Nationwide
funds and the Nationwide contract. The Adviser is subject to various conflicts
of interest because each of the Funds is a "fund of funds" and because either
the Adviser or UBT is the investment adviser to both the Funds and certain
Nationwide funds.
Underlying Funds may also include mutual funds advised by other investment
advisers ("Unaffiliated Funds"). Unaffiliated Funds would be chosen to
complement the Nationwide funds and to further diversify each Fund; however the
Fund will not initially invest in Unaffiliated Funds.
An investor generally could invest in an Underlying Fund directly. Because an
investor is investing in the Underlying Funds indirectly through the
LifeStrategy Series, he or she will pay a proportionate share of the expenses of
the Underlying Funds (including management, administration, distribution, and
custodian fees) as well as the expenses of the Fund. The Underlying Funds will
not charge any sales load when selling shares to the Funds.
15
<PAGE> 78
THE NATIONWIDE CONTRACT
Each of the Funds (except The Aggressive Fund) will invest in the Nationwide
Contract. The Nationwide Contract is a fixed interest contract issued and
guaranteed by Nationwide Life Insurance Company ("Nationwide"). This contract
has a stable principal value and will pay each Fund holding contracts a fixed
rate of interest. The fixed interest rate must be at least 3.50%, but may be
higher and will be reset quarterly. Nationwide will calculate the interest rate
in the same way that it calculates guaranteed interest rates for similar
contracts. Because of the guaranteed nature of the contract, the Funds holding a
contract will not directly participate in the actual experience of the assets
underlying the contract. Although under certain market conditions a Fund's
performance may be hurt by its investment in the Nationwide Contract, the
Adviser believes that the stable nature of the Nationwide Contract should reduce
a Fund's volatility and overall risk, especially when the bond and stock markets
decline simultaneously.
OTHER INVESTMENT TECHNIQUES
The Statement of Additional Information contains additional information about
the Funds and the Underlying Funds, including other investment techniques. To
obtain a copy of the Statement of Additional Information, see the back cover
page of the Prospectus.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, each Underlying
Fund may invest up to 100% of its assets in cash or money market obligations.
Should this occur, an Underlying Fund may not meet its investment objectives and
may miss potential market upswings.
MANAGEMENT
INVESTMENT MANAGER
Villanova Mutual Fund Capital Trust (the "Adviser"), Three Nationwide Plaza,
Columbus, Ohio 43215, manages the investment of the assets and supervises the
daily business affairs of the Funds, each of which is a series of Nationwide
Mutual Funds (the "Trust"). The Adviser was organized in 1999 and provides
investment advisory services to both the Trust and Nationwide Separate Account
Trust. As of September 30, 1999, the Adviser had approximately $ ___ billion in
assets under management.
The Adviser initially allocates each Fund's assets among the Underlying Funds
and the Nationwide Contract as described above. The Adviser monitors these
allocations and the assumptions upon which they were made. The Adviser also
monitors market conditions and other factors that could influence these
allocations.
The annual management fee payable by the Funds to the Adviser, expressed as a
percentage of the Funds' average daily net assets, is as follows:
FUND FEE
- --------- -----
The Aggressive Fund 0.13%
The Moderately Aggressive Fund 0.13%
The Moderate Fund 0.13%
The Moderately Conservative Fund 0.13%
The Conservative Fund 0.13%
The Adviser has agreed to be responsible for all expenses of each Fund (except
for extraordinary expenses such as litigation or extraordinary audit expenses)
in exchange for this fee.
16
<PAGE> 79
Each Fund, as a shareholder of the Underlying Funds, indirectly bears its
proportionate share of any investment management fees and other expenses of the
Underlying Funds. The Adviser believes, and the Board of Trustees has
determined, that the management fees paid by the Funds are for services that are
in addition to -- not duplicative of -- the services provided to the Underlying
Funds. These services include the asset allocation and monitoring functions
provided by the Adviser.
Fund Manager: The primary person responsible for the investment management of
the Funds is ______________________.
BUYING, SELLING AND EXCHANGING FUND SHARES
CHOOSING A SHARE CLASS
Shares of the Funds are distributed by Nationwide Advisory Services, Inc.
("NAS"). As noted in the Fund Summary, the Fund offers different share classes
to give investors different price and cost options. Class A and Class B Shares
of the Funds are available to all investors; Service Class shares are available
to a limited group of institutional investors.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares; and with Class B shares you pay a sales charge
(known as a contingent deferred sales charge or CDSC) if you sell your shares
within six years after purchase. Sales charges are paid to NAS.
Class A, Class B and Service Class shares pay distribution and/or service fees
under a Distribution Plan. These fees are either retained by NAS or paid by NAS
to brokers for distribution and shareholder services. Class A shares also pay an
administrative service fee. These fees are paid to brokers and other entities
who provide administrative support services to the beneficial owners of the
shares.
If you want lower annual fund expenses, Class A shares (and Service Class shares
if you are eligible to purchase them) may be right for you, particularly if you
qualify for a reduction or waiver of sales charges. If you do not want to pay an
up-front sales charge, and you anticipate holding your shares for the long term,
Class B shares may be more appropriate. As the Fund's principal distributor,
Nationwide Advisory Services, Inc. ("NAS") reserves the right to reject an order
in excess of $100,000 for Class B shares and an order for Class B shares for
Individual Retirement Accounts ("IRA accounts") for shareholders 70 1/2 years
old and older. When choosing a share class, consider the following:
<TABLE>
<CAPTION>
Class A shares Class B shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Front-end sales charge means that a portion No front-end sales charge, so your full
of your initial investment goes toward the sales investment immediately goes toward
charge, and is not invested buying shares
- -------------------------------------------------------------------------------------------------------------------------
Reductions and waivers of the sales charges No reductions of the contingent deferred
available sales charge available, but waivers
available
- -------------------------------------------------------------------------------------------------------------------------
Lower expenses than Class B shares means Higher distribution and service fees than
higher dividends per share Class A and Service Class mean lower
dividends per share
- -------------------------------------------------------------------------------------------------------------------------
Conversion features are not applicable After seven years, Class B shares convert
into Class A shares, which reduces your
future fund expenses
- -------------------------------------------------------------------------------------------------------------------------
No sales charges when shares are sold Contingent deferred sales charges (CDSC)
back to the Fund if shares sold within six years: 5% in the
first year, 4% in the second, 3% in the
third and fourth years, 2% in the fifth, and
1% in the sixth year
</TABLE>
17
<PAGE> 80
Service Class shares are currently offered to tax deferred retirement plans
either directly or through a group annuity contract.
BUYING SHARES
MINIMUM INVESTMENTS - CLASS A AND CLASS B SHARES
To open an account (per Fund) $1000
Through the Automatic Asset $ 25
Accumulation plan per transaction
Additional investments $ 100
(Per Fund)
If you purchase shares through an account at a broker (other than NAS),
different minimum account requirements may apply.
MINIMUM INVESTMENTS - SERVICE CLASS SHARES
To open an account (per Fund) $_____
Additional investments (per Fund) $_____
These minimum investment requirements for Service Class shares do not apply to
certain retirement plans. Call 1-800-848-0920 for more information.
PURCHASE PRICE
The purchase or "offering price" price of each share of a Fund is its "net asset
value" (or NAV) next determined after the order is received plus any applicable
sales charges. A separate NAV is calculated for each class of shares of a Fund.
Generally, NAV for a class of shares is determined by dividing the total market
value of the securities owned by a Fund, less its liabilities, by the total
number of that class' outstanding shares. NAV is determined at the close of
regular trading on the New York Stock Exchange (usually 4 p.m. Eastern Time) on
each day the Exchange is open for trading.
The Funds do not determine NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - other days when the New York Stock Exchange is not open
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<PAGE> 81
The Funds reserve the right not to determine NAV when:
- - a Fund has not received any orders to purchase, sell, or exchange shares
- - changes in the value of a Fund's assets do not affect the NAV
If market quotations are not available, or if Villanova SA Capital Trust ("VSA")
as the Fund's administrator or its agent determines that the price of a security
does not represent its fair value, these assets are valued at fair value in
accordance with procedures adopted by the Board of Trustees. To the extent that
a Fund's or an Underlying Fund's investments are traded in markets that are open
when the New York Stock Exchange is closed, the value of the Fund's investments
may change on days when shares cannot be purchased or redeemed.
When you purchase shares, your purchase price will be the offering price or NAV
next determined after your order is received, plus any applicable sales load.
CLASS A SALES CHARGES
The charts below show the Class A sales charges, which decrease as the amount of
your investment increases.
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- -----------------------------------
Amount of Purchase Sales Charge as % of Offering Sales Charge as % of Net Amount
Price Invested
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Less than $50,000 5.75% 6.10%
- ------------------------------------- ----------------------------------- -----------------------------------
$50,000 to $99,999 4.50 4.71
- ------------------------------------- ----------------------------------- -----------------------------------
$100,000 to $249,999 3.50 3.63
- ------------------------------------- ----------------------------------- -----------------------------------
$250,000 to $499,999 2.50 2.56
- ------------------------------------- ----------------------------------- -----------------------------------
$500,000 to $999,999 2.00 2.04
- ------------------------------------- ----------------------------------- -----------------------------------
$1 million to $24, 999,999 0.50 0.50
- ------------------------------------- ----------------------------------- -----------------------------------
$25 million or more 0.25 0.25
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate Class A shares' initial sales charge
through one or more of the discounts described below:
- - INCREASE THE AMOUNT OF YOUR INVESTMENT. The preceding table shows how the
sales charge decreases as the amount of your investment increases.
- - FAMILY MEMBER DISCOUNT. Members of your family who live at the same address
can combine investments, possibly reducing the sales charge.
- - LIFETIME ADDITIONAL DISCOUNT. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value of
the shares you are purchasing, which may reduce the applicable sales
charge.
- - INSURANCE PROCEEDS OR BENEFITS DISCOUNT PRIVILEGE. If you use the proceeds
of an insurance policy issued by any member of the Nationwide Insurance
Enterprise to purchase Class A shares, you will pay one-half of the
published sales charge if you make your investment 60 days after receiving
the proceeds.
- - NO SALES CHARGE ON A REPURCHASE. If you sell shares from your Nationwide
account, we allow you a one-time privilege to reinvest some or all of the
proceeds in shares of the same class. You will not pay a sales charge on
Class A shares that you buy within 30 days of selling Class A shares of an
equal or lesser amount if you have already paid a sales charge. Remember,
if you realize a gain or a loss on
19
<PAGE> 82
your sale of shares, the transaction is taxable and reinvestment will not
affect the amount of capital gains tax that is due. If you realize a loss
on your sale and your reinvest, some or all of the loss may not be allowed
as a tax deduction depending on the amount you reinvest.
- - LETTER OF INTENT DISCOUNT. State in writing that during a 13-month period
you or a group of family members who live at the same address will purchase
or hold at least $_____in Class A shares and your sales charge will be
based on the total amount you intend to invest. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy shares of
a Fund; it is merely a statement of intent. Call 0-000-000-0000 for more
information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for purchases made by the following:
- - Any person purchasing through an account with an unaffiliated brokerage
firm that has an agreement with NAS to waive sales charges for those
persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the shares with the proceeds of mutual fund shares
sold from an NAS brokerage account. To qualify, you must have paid an
initial sales charge on the shares sold. You must purchase the Class A
shares within 60 days of the sale, and you must request the waiver when you
purchase the Class A shares (NAS may require evidence that you qualify for
this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code.
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trusts);
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives (including
mother, father, brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of Nationwide
Insurance and Nationwide Financial companies, or any investment advisory
clients of the Adviser, VSA, NAS and their affiliates;
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with the Nationwide Insurance and
Nationwide Financial companies from time to time, (including but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm Bureau,
Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania Farmers' Association,
Ruralite Services, Inc., and Southern States Cooperative).
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
CONVERSION OF CLASS B SHARES
After you have held your Class B shares for seven years, we will automatically
convert them into Class A shares (without charge), which carry the lower 12b-1
fee. We will also convert any Class B shares that you purchased with reinvested
dividends and other distributions for those shares at that time. Remember,
because the NAV of Class A shares is usually higher than the NAV of Class B
shares, you may receive fewer Class A shares than the number of Class B shares
converted, but the total dollar value will be the same. We do the conversion on
the first business day of the month following the seventh anniversary of the
date of your purchase.
20
<PAGE> 83
HOW TO PLACE YOUR PURCHASE ORDER
BY MAIL - Complete and mail the application with a check or money order made
payable to: Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in U.S. dollars only and
drawn on a U.S. bank. NAS will not accept third-party checks.
BY WIRE - You can request that your bank transmit funds ("federal funds") by
wire to the Fund's custodian bank. In order to use this method, you must call
NAS by 11 a.m. Eastern Standard Time, and the wire must be received by the
custodian bank by 2 p.m. Eastern Standard Time. NAS must receive federal funds
for your order within 3 business days or your order will be cancelled. You may
be liable for any loss to the Funds. Your bank may charge a fee to wire funds.
If you choose this method to open your account, you must call our toll-free
number before you wire your investment, and you must then complete and mail the
application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Funds. If you purchase through such a broker, your
order will be placed at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system,
available 24 hours a day, seven days a week
NAS CUSTOMER SERVICE 1-800-848-0920
Representatives are available to answer
questions between 8 a.m. and 5 p.m.
Eastern Standard Time
For additional information on buying shares and shareholder services, call our
customer service number or contact your Nationwide representative.
SELLING SHARES
You can sell -- also known as redeeming -- your shares of the Funds at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sell depends upon the market value
of the investments of the Fund at the time of sale, and the value may be more or
less than you paid for the shares.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for the shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
21
<PAGE> 84
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Funds or we may delay paying you
the proceeds from a sale when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or if trading is restricted or if any
emergency exists. For your protection, for accounts in which we have received
address or bank account changes within the past seven calendar days, we will
process, but not send the redemption amount, for seven days.
SIGNATURE GUARANTEE
A signature guarantee is required under the following circumstances:
- - if a redemption is over $100,000,n or
- - if your account registration has changed within the last 30 days, or
- - if the redemption check is made payable to anyone other than he registered
shareholder, or
- - if the proceeds are sent to a bank account not previously designated, or
- - if the proceeds are mailed to an address other than the address of record.
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A AND CLASS B SHARES
You must pay a CDSC if you sell Class B shares within six years of purchase,
unless you are entitled to a waiver. The sales charge applies if your sale
causes the value of your account to fall below the total amount of all purchases
you made during the preceding six years. The sales charge is applied to your
original purchase price, or the current market value of the shares being sold,
whichever is less. The amount of the sales charge will decrease as illustrated
in the following chart:
Sale within 1 year 2 years 3 years 4 years 5 years 6 years 7 years or more
- --------------------------------------------------------------------------------
Sales Charge 5% 4% 3% 3% 2% 1% 0%
All purchases during the month are grouped together and will be treated as if
made on the last day of the preceding month.
We do not impose a CDSC on Class B shares purchased through reinvested dividends
and distributions. If you sell your Class B shares and reinvest the proceeds in
Class B shares within 30 days, NAS will deposit an amount equal to any CDSC you
paid into your account. Also, we will waive the CDSC if you sell shares
following the death or disability of a shareholder, provided the sale occurs
within one year of the shareholder's death or a determination of disability and
for mandatory withdrawals from IRA accounts after age 70 1/2 years. For more
information, see the Statement of Additional Information.
Under certain circumstances, employer-sponsored retirement plans investing in
Class A shares without a sales charge (other than those investing in the Funds
through variable insurance products) may be charged a CDSC if shares are
redeemed within three years after purchase. The CDSC will be 1% for the first
year, 0.50% for the second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER
You can request the sale of your shares in any of the following ways:
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a week, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-848-0920 at 4 p.m. Eastern Standard Time to learn the day's
closing share price.
22
<PAGE> 85
Side Bar Text:
Capital gains taxes
If you sell Fund shares for more than you paid for them, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes -- Selling Fund Shares."
CUSTOMER SERVICE LINE - If you have elected to have telephone redemption
privileges, a check payable to the shareholder of record can be mailed to the
address of record, unless you declined the telephone redemption privilege on
your application. NAS can wire the funds directly to your account at a
commercial bank (a voided check must be attached to your application), unless
you declined telephone privileges on your application. (This authorization will
remain in effect until you give NAS written notice of its termination.) You can
sell shares of your IRA by telephone if we receive the proper forms. The
distribution from an IRA will be subject to a mandatory 10% federal withholding
tax, unless you inform us not to withhold taxes. For additional information or
to request the forms, please call the customer service line at 1-800-848-0920.
The Funds will use procedures to confirm that telephone instructions are
genuine. If the Funds act on instructions it reasonably believed were genuine,
it will not be liable for any loss, injury, damage or expense that occurs as a
result, and the Funds will be held harmless for any loss, claims or liability
arising from its compliance with the instructions. NAS may record telephone
instructions to sell shares. The Funds reserve the right to revoke this
privilege at any time, without notice to shareholders, and to request the sale
in writing, signed by all shareholders on the account.
BY BANK WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this service. Your financial institution may
also charge you a fee for receiving the wire. (This authorization will remain in
effect until you give NAS written notice of its termination.) Funds sent outside
the U.S. may be subject to a higher fee.
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been received by
NAS. Funds sent through ACH should reach your bank in two business days. There
is no fee for this service. (This authorization will remain in effect until you
give NAS written notice of its termination.)
BY MAIL OR FAX (NO MINIMUM) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed on the date NAS receives
your signed letter or fax. If your fax is received after 4 p.m. Eastern Standard
Time, it will be processed the next business day. NAS reserves the right to
require the original document if you fax your letter. A signature guarantee may
be required under certain circumstances. Please refer to "Signature Guarantee"
below.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Funds. If you have an account with such a broker, your
redemption order will be priced at the NAV next determined after your order has
been accepted by your broker or its designated intermediary.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
23
<PAGE> 86
For additional information on selling your shares, call our customer service
line at 1-800-848-0920 or see your Nationwide representative.
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A and Class B
shares, the Trust has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act, which permits the Funds to compensate NAS as distributor
for expenses associated with distributing its shares and providing shareholder
services.
DISTRIBUTION AND SERVICE FEES
Under the Distribution Plan, the Funds pay NAS compensation accrued daily and
paid monthly. The Funds shall pay amounts not exceeding an annual amount of:
Fund/Class As a % of daily net assets
- ----------------------------------------------------------------------
Class A shares 0.10% (distribution or service fee)
Class B shares 0.85% (.10% service fee)
Service shares pay no 12b-1 fees
Because these fees are paid out of the Funds' assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
EXCHANGING SHARES
You can exchange the shares you own for shares of another Fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new Fund meets the Fund's minimum investment requirement. You
cannot exchange Class A shares for Class B shares.
There is no sales charges for exchanges of Class B shares. However, if your
exchange involves certain Class A shares, you may have to pay the difference
between the sales charges if a higher sales charge applies.
Side Bar Text:
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal and/or state income taxes.
For more information, see "Distribution and Taxes -- Exchanging Fund Shares"
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax or by phone (see
"Buying Shares -- How to place your purchase order" or the back cover for
contact information). If you make your request in writing, please be sure your
letter is signed exactly as your account is registered. Your exchange will be
processed on the date NAS receives your signed letter or fax. If your fax is
received after 4 p.m. Eastern Standard Time, it will be processed the next day.
If you fax your request, we reserve the right to ask for the original. You can
automatically request an exchange 24 hours a day, seven days a week, by calling
NAS NOW, our automated voice-response system. You will have automatic exchange
privileges unless you request not to on your application. The Trust reserves the
right to amend or discontinue these exchange privileges upon 60 days written
notice to shareholders.
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders. A
Fund may delay forwarding redemption proceeds for up to
24
<PAGE> 87
seven days if the investor redeeming shares is engaged in excessive trading, or
if the amount of the redemption request otherwise would be disruptive to
efficient portfolio management, or would adversely affect the Fund.
YEAR 2000
The Adviser, 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. The
Adviser, 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. The Adviser, VSA and NAS have also
tested each application for their 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.
The Adviser, VSA and NAS' assessment of Year 2000 issues has also included
non-information technology systems with embedded computer chips. The Adviser,
VSA and NAS' building systems such as fire, security, elevators and escalators
supporting facilities in Columbus, Ohio, have been tested and are Year 2000
compliant.
In addition to resolving internal Year 2000 readiness issues, The Adviser, VSA
and NAS are surveying significant external organizations (business partners) to
assess if they will be Year 2000 compliant. The Adviser, VSA and NAS continue
their efforts to identify external risk factors and has developed contingency
plans as part of its ongoing risk-management strategy.
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn when owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser. In this section, "we" and "our" refer to Nationwide Advisory
Services, Inc. "You" and "your" mean shareholders and potential investors.
DISTRIBUTIONS OF INCOME DIVIDENDS
Every quarter, the Funds distribute any available income dividends to
shareholders. Income dividends are taxable to you as ordinary income for federal
income tax purposes, unless you hold your shares in a qualified tax-deferred
plan or account, or are otherwise not subject to federal income tax. The amount
of income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account). For corporate shareholders, a portion
of each year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If a Fund has net realized capital gains at the end of the year (meaning the
gains from sales of securities exceed any losses from sales), it will distribute
this capital gain to shareholders in December. You must pay federal income taxes
on any capital gains distributed to you, unless you hold your shares in a
qualified tax-deferred plan or account. On Form 1099, we will report the amount
of net short-term capital gains and net long-term capital gains distributed to
you during the year. Currently, for individuals, long-term capital gains are
taxed at a maximum rate of 20%; short-term capital gains are taxed as ordinary
income, such as interest or dividends. For the current capital gains tax rates,
speak with your tax adviser.
25
<PAGE> 88
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If the checks sent to you cannot be delivered, or are not cashed,
distributions will be reinvested in shares of the applicable Fund. You are
subject to tax on reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certifications are not accurate, or as may otherwise be required under the
Internal Revenue Code.)
Side Bar Text:
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your distribution option, you must notify us by the record
date for a dividend or distribution in order for it to be effective for that
dividend or distribution. You will not receive interest on any uncashed
distribution, dividend or redemption checks.
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of the tax depends on how
long you held your shares. For individuals, long-term capital gains are taxed at
a maximum rate of 20%; and short-term capital gains are taxed as ordinary
income, such as interest or dividends. Capital gains from your sale of Fund
shares is not reported on Form 1099; you or your tax adviser should keep track
of your purchases, sales, and any resulting gain or loss. If you do sell Fund
shares for a loss, you may be able to use this capital loss to offset any
capital gains you have.
EXCHANGING FUND SHARES
Exchanging your shares of one Fund for another Fund is considered a sale for
income tax purposes. Therefore, if the shares you exchange are worth more than
you paid for them, you have capital gains, which are subject to the federal
income taxes described above. If you exchange Fund shares for a loss, you may be
able to use this capital loss to offset any capital gains you have.
Please refer to the Statement of Additional Information for more information
regarding the tax treatment of the Funds.
26
<PAGE> 89
INFORMATION FROM NATIONWIDE
Please read this Prospectus before investing. The following documents -- which
may be obtained free of charge -- contain additional information about the
Funds:
- - Statement of Additional Information (SAI) (incorporated by reference into this
Prospectus)
- - Annual Report
- - Semi-Annual Report
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION AND ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Time)
FOR 24-HOUR ACCOUNT ACCESS;
1-800-637-0012 (toll free)
Also visit the Nationwide Funds Website at www.nationwidefunds.com
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
Copies of Fund documents may be obtained from the Securities and Exchange
Commission as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission Public Reference Section Washington, D.C.
20549-6009
(The Securities and Exchange Commission charges a fee to copy any documents.)
VIA THE INTERNET:
http://www.sec.gov
THE TRUST'S INVESTMENT COMPANY ACT FILE NO. 811-3213
DC-3088-A
27
<PAGE> 90
NATIONWIDE(R) MUTUAL FUNDS December ___, 1999
NATIONWIDE HIGH YIELD BOND FUND As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved this
fund's shares as an investment or
determined whether this prospectus is
complete or accurate. To state
otherwise is a crime.
<PAGE> 91
TABLE OF CONTENTS
FUND SUMMARY .......................................
Objectives and Principal Strategies
Principal Risks
Performance
Fees and Expenses
MORE ABOUT THE FUND ................................
Principal Risks
Principal Techniques
MANAGEMENT .........................................
Investment Manager
Portfolio Manager
Historical Performance of the Portfolio Manager
BUYING, SELLING AND EXCHANGING FUND SHARES .........
Choosing a Share Class
Buying Shares
Selling Shares
Distribution Plan
Exchanging Shares
Year 2000
DISTRIBUTIONS AND TAXES ............................
Distributions of Income Dividends
Distributions of Capital Gains
Reinvesting Distributions
State and Local Taxes
Selling Fund Shares
Exchanging Fund Shares
ADDITIONAL INFORMATION ...................BACK COVER
<PAGE> 92
FUND SUMMARY
This prospectus provides information about the Nationwide High Yield Bond Fund
(the "Fund"), a series of the Nationwide(R) Mutual Funds. "You" and "your"
refers to potential investors and current shareholders of the Fund.
A QUICK NOTE ABOUT SHARE CLASSES
The Fund has three different share classes--Class A, Class B and Institutional
Class shares. The fees, sales charges and expenses for each share class are
different, but each share class of the Fund represents an investment in the same
assets of the Fund. Having different share classes simply lets you choose the
cost structure that's right for you.
The fees and expenses for the Fund are set forth in the Fund Summary. For more
information about which share class is right for you, see "Buying, Selling and
Exchanging Fund Shares - Choosing a Share Class."
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FUND SUMMARY
This section summarizes key information about the Fund. Use the summary to
compare the Fund with other mutual funds. More detailed information about the
risks and investment techniques of the Fund can be found in "More About the
Fund."
OBJECTIVES AND PRINCIPAL STRATEGIES
The Fund seeks high current income with capital appreciation as a secondary
objective. The Fund's investment objectives can be changed without shareholder
approval.
To achieve its objective, the Fund invests primarily in U.S. dollar-denominated
high yield bonds of domestic and foreign issuers. Under normal market
conditions, the Fund will invest at least 65% of its total assets in U.S.
dollar-denominated domestic and foreign bonds that are below investment grade.
Such bonds are commonly known as junk bonds. These bonds may be of any credit
quality and may include securities which currently are not paying interest,
pay-in-kind securities, zero coupon bonds and securities that are in default.
In order to maintain liquidity, or in the event that the portfolio manager
determines there are no securities currently available in the market that meet
the Fund's investment objectives, the Fund may invest up to 35% of its total
assets in cash or money market instruments.
The Fund's portfolio manager generally uses a "top-down" approach when selecting
securities. This approach focuses on neutral yield curve distribution, careful
cash flow and total return analysis, and broad diversification among countries,
sectors, industries and individual issuers in an effort to provide higher income
and manage risk. The portfolio manager uses an active process that emphasizes
relative value in a global environment, managing on a total return basis, and
using intensive research to identify stable to improving credit situations that
may provide yield compensation for the risk of investing in junk bonds.
"TOP-DOWN" APPROACH
- - ECONOMIC ANALYSIS. The portfolio manager analyzes economic conditions for
improving or undervalued sectors and industries.
- - CREDIT RESEARCH. The Fund uses independent credit research and on-site
management visits to evaluate debt service, growth rate, and both downside
and upgrade potential for each individual issue.
- - STRONG LONG-TERM FUNDAMENTALS. The Fund seeks issues within attractive
industry sectors and with strong long-term fundamentals and improving
credits.
- - NEW ISSUES. The Fund assesses new issues versus secondary market
opportunities.
The Fund intends to maintain a dollar weighted effective average portfolio
maturity of five to ten years. The Fund's average portfolio maturity may be
shortened by Fund securities that have floating or variable interest rates or
that include put features which provide the Fund with the right to sell the
security at face value prior to maturity.
PRINCIPAL RISKS
Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases. The value of shares will also be
impacted in part by the adviser's ability to assess economic conditions and
investment opportunities.
Interest rate risk. Interest rate risk is the risk that increases in market
interest rates may decrease the value of debt securities held by the Fund. In
general, the prices of debt securities fall when interest rates increase and
rise when interest rates decrease. Typically, the longer the maturity of a debt
security, the more sensitive it is to price shifts as a result of interest rate
changes.
Credit risk. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. In addition, there is a risk that the rating of a debt security may be
lowered if an issuer's financial condition changes, which may lead to a greater
price fluctuation in the Fund. These risks are particularly strong for junk
bonds and other lower-rated securities.
Maturity Risk. The price of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Lower-rated securities risk. Investment in junk bonds and other lower-rated or
high yield securities involves substantial risk of loss. These securities are
considered speculative with respect to the issuer's ability to pay interest and
principal when due and are susceptible to default or decline in market value due
to adverse economic and business developments. The market values of high yield
securities tend to be very
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FUND SUMMARY (CONTINUED)
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons an investment in the Fund is subject to the
following specific risks:
- - Increased price sensitivity to changing interest rates and to adverse
economic and business developments
- - Greater risk of loss due to default or declining credit quality
- - Greater likelihood that adverse economic or company specific events will
make the issuer unable to make interest and/or principal payments when due
- - Negative market sentiments toward high yield securities may depress their
price and liquidity. If this occurs, it may become difficult to price or
dispose of a particular security in the Fund.
Foreign Risk. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement. In
addition, the "Euro" began serving as a new common currency for participating
European nations on January 1, 1999. It is unclear whether the newly created
accounting, clearing, settlement and payment systems for the new currency will
be adequate.
For more detailed information about the Fund's investments and risks, see "More
About the Funds."
PERFORMANCE
No performance information is provided because the Fund will not begin
operations until or about December __, 1999. For the performance of a comparable
mutual fund for which the Fund's portfolio manager previously acted as portfolio
manager, please refer to "Management" on page ___.
FEES AND EXPENSES
This table describes fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees(1)
(paid directly from your Class A Class B Institutional
investment) shares shares Class shares
- ----------------------------------- --------- --------- ------------
Maximum Sales Charge (Load) 4.50%(2) None None
imposed on purchases (as a
percentage of offering price)
- ----------------------------------- --------- --------- ------------
None(3) 5.00%(4) None
Maximum Deferred Sales Charge (Load)
imposed on redemptions (as a
percentage of original purchase
price or sale proceeds, as
applicable)
Annual Fund Operating Expenses Class A Class B Institutional
(deducted from Fund assets) shares shares Class shares
- ----------------------------------- --------- --------- ------------
Management Fees 0.55% 0.55% 0.55%
- ----------------------------------- --------- --------- ------------
Distribution and/or Service 0.25% 1.00% None
(12b-1) Fees
- ----------------------------------- --------- --------- ------------
Other Expenses 0.90% 0.75% 0.82%
- ----------------------------------- --------- --------- ------------
TOTAL ANNUAL FUND OPERATING 1.70% 2.30% 1.37%
EXPENSES(5)
- --------
(1) If you buy and sell shares through a broker or agent, they may
also charge you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on
the purchase of Class A shares decreases. For more information, see
"Buying, Selling and Exchanging Fund Shares - Buying Shares - Class A
sales charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares
within the first six years of purchase. Class B shares are converted to
Class A shares after you have held them for seven years. See "Buying,
Selling and Exchanging Fund Shares - Buying Shares - Contingent deferred
sales charge (CDSC) on Class B shares."
(5) Because the Fund was established on December __, 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled
under its contract with the Fund, and any applicable distribution and
service fees are the maximum rates that can be charged under the
Distribution and Service Plan. "Other Expenses" are estimates of the other
operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on estimates for the
Fund's first fiscal year ending October 31, 2000. At least through October
31, 2000, the adviser has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Fund
Operating Expenses will not exceed 1.20% for Class A, 1.80% for Class B
and 0.85% for Institutional Class shares. This waiver of management fees
or reimbursement of other expenses is subject to a possible reimbursement
by the Fund within five years of the Fund's commencement of operations if
the reimbursement by the Fund can be implemented within the annual expense
limitations described above.
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FUND SUMMARY (CONTINUED)
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years
- --------------------- --------- --------
Class A shares $738 $1,080
- --------------------- --------- --------
Class B shares $733 $1,018
- --------------------- --------- --------
Institutional Class $139 $ 434
shares
You would pay the following expenses on the same investment if you did not sell
your shares:
1 year 3 years
- ---------------- --------- ---------
Class B shares $233 $245
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MORE ABOUT THE FUND
PRINCIPAL RISKS AND TECHNIQUES
The Fund may use the principal investment techniques to increase returns,
protect assets or diversify investments. These techniques are subject to certain
risks. For additional information about the Fund's investment strategies and
techniques, see the Statement of Additional Information.
PRINCIPAL RISKS
FOREIGN RISK
- - COUNTRY. General securities market movements in any country in which the
Fund has investments are likely to affect the value of the Fund's
securities that trade in that country. These movements will affect the
Fund's share price and the Fund's performance. The political, economic and
social structures of some countries in which the Fund invests may be less
stable and more volatile than those in the U.S. The risks of investing in
these countries include the possibility of the imposition of exchange
controls, currency devaluations, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and
settlement risks.
- - COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as
U.S. companies and their securities may not be as liquid as securities of
similar U.S. companies. Foreign stock exchanges, trading systems, brokers
and companies generally have less government supervision and regulation
than in the U.S. A Fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to U.S. companies in U.S. courts. Generally, the Fund can decrease
in value when the individual stocks and other assets it owns decrease in
value. A company's stock can lose value for various reasons, including poor
profits, weakened finances, changes in management, a downturn in the
economy, or any other reason that leads investors to lose faith in that
stock.
- - CURRENCY. Some of the Fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the
value of what the Fund owns and the Fund's share price. Generally, when the
U.S. rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency.
DERIVATIVES RISK. An investment in derivative contracts can have an impact on
stock market, currency and interest rate exposure. Therefore, using derivatives
can disproportionately increase losses and reduce opportunities for gains when
stock prices, currency rates or interest rates are changing. Counterparties to
the over-the-counter derivative contracts present the same types of default risk
as issuers of fixed income securities. Derivatives can also make the Fund less
liquid and harder to value, especially in declining markets. Also, the Fund may
suffer disproportionately heavy losses and relative to the amount of its
investments in derivative contracts. Lastly, changes in the value of derivative
contracts or other hedging instruments may not match or fully offset changes in
the value of the hedged portfolio securities.
PREPAYMENT RISK AND EXTENSION RISK. Prepayments of principal on mortgage- and
asset-backed securities affect the average life of a pool of such securities.
Prepayments are affected by the level of interest rates and other factors. In
periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage- and asset-backed securities.
In periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage- and asset-backed securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds from
prepayments at lower rates. Extension risk is the risk that anticipated payments
on principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of rapidly
rising interest rates, the anticipated maturity of a security may be extended
past what the portfolio manager anticipated, affecting the maturity and
volatility of a Fund.
CALL RISK. Call risk is the possibility that an issuer may redeem a debt
security before maturity ("call"). An increase in the likelihood of a call may
reduce the security's price. If a debt security is called, the Fund may have to
reinvest the proceeds in other debt securities with lower interest rates, higher
credit risks, or other less favorable characteristics.
LIQUIDITY RISK. Liquidity risk is the risk that a security cannot be sold, or
cannot be sold quickly, at an acceptable price.
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MORE ABOUT THE FUND (CONTINUED)
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
PRINCIPAL TECHNIQUES
The Fund may use the following investment techniques to increase its returns,
protect its assets or diversify its investments.
CONVERTIBLE SECURITIES. In addition to investing in bonds, the Fund may invest
in convertible securities--also known as convertibles--include bonds,
debentures, notes, preferreD stocks, and other securities. Convertibles are
hybrid securities that have characteristics of both bonds and stocks. Like
bonds, they pay interest. Because they can be converted into common stock within
a set period of time, at a specified price or formula, convertibles also offer
the chance for capital appreciation, like common stocks.
Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as an underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however, may sustain their value better than the
common stock because they pay income, which tends to be higher than common stock
dividend yields.
Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," better-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.
Convertibles tend to be more secure than common stock (companies must generally
pay holders of convertibles before they pay holders of common stock), but they
are typically less secure than similar non-convertible securities such as bonds
(bondholders must generally be paid before holders of convertibles and common
stock). Because convertibles are usually subordinate to bonds in terms of
payment priority, convertibles typically are rated below investment grade by a
nationally recognized rating agency, or they are not rated at all.
WHEN-ISSUED SECURITIES. When the Fund purchases securities on a "when-issued"
basis, it enters into a commitment to buy the security before the security has
been issued. The Fund's payment obligation and the interest rate on the security
are determined when the Fund enters into the commitment. The security is
typically delivered to the Fund [15 TO 120] days later. No interest accrues on
the security between the time the Fund enters into the commitment and the time
the security is delivered. If the value of the security being purchased falls
between the time a Fund commits to buy it and the payment date, the Fund may
sustain a loss. In addition, when the Fund buts a security on a when-issued
basis, it is subject to the risk that market rates of interest will increase
before the time the security is delivered, with the result that the yield on the
security delivered to the Fund may be lower than the yield available on other,
comparable securities at the time of delivery.
ZERO COUPON SECURITIES. Zero coupon securities pay no interest during the life
of the security, and are issued by a wide variety of corporate and governmental
issuers. Certain zero coupon securities are sold at a deep discount.
Zero coupon securities may be subject to greater price changes as a result of
changing interests than bonds that make regular interest payments. Their value
tends to grow during periods of falling interest rates and, conversely, tends to
fall more during periods of rising interest rates than bonds that make regular
interest payments. Although they are not traded on a national securities
exchange, they are widely traded by brokers and dealers, and are considered
liquid. Investors in zero coupon securities are required by federal income tax
laws to pay interest on the payments they would have received had a payment been
made. So, to avoid federal income tax liability, the Fund may be required to
make distributions to shareholders and may have to sell some of its assets at
inappropriate times in order to generate cash to make distributions.
FLOATING AND VARIABLE RATE SECURITIES. Floating- and variable-rate securities
are securities that do not have fixed interest rates; the rates change
periodically. The interest rate on floating-rate securities varies with changes
in the underlying index (such as the Treasury bill rate), while the
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MORE ABOUT THE FUND (CONTINUED)
interest rate on variable-rate securities change at preset times based upon an
underlying index. Some of the floating- or variable- rate securities will be
callable by the issuer, which means they can be paid off before their maturity
date.
These securities are subject to interest rate risk like other securities. In
addition, because they may be callable, these securities are also subject to the
risk that they will be repaid prior to their stated maturity and that the repaid
principal will be reinvested in a lower interest rate market, reducing the
Fund's income. The Fund will only purchase floating- and variable-rate
securities of the same quality as the securities it would otherwise purchase.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. U.S. Government mortgage- backed
securities are securities that are secured by and paid from a pool of mortgage
loans on real property and issued or guaranteed by the U.S. Government or one of
its agencies. Mortgage-backed securities may also be issued by private issuers.
Collateralized mortgage obligations (CMOs) are securities that have mortgage
loans or mortgage pass-through securities, such as GNMA, FNMA or FHLMC
certificates, as their collateral. CMOs can be issued by the U.S.
Government or its agencies or by private lenders.
These securities are subject to interest rate risk and credit risk if they are
issued by private issuers. CMOs and other mortgage-backed securities are also
subject to prepayment risk. With respect to prepayment risk, when interest rates
fall, homeowners may refinance their loans and the mortgage-backed security will
be paid off sooner than the portfolio manager anticipated. Reinvesting the
returned principal in a lower interest rate market reduces the Fund's income.
Mortgage-backed securities are also subject to extension risk and the
possibility of losing principal as a result of prepayments.
Asset-backed securities are securities that are secured by and paid from a pool
of underlying assets, such as automobile installment sales contracts, home
equity loans, property leases and credit card receivables.
Asset-backed securities are generally issued by private issuers.
DERIVATIVES. A derivative is a contract whose value is based on the performance
of an underlying financial asset, index or other investment. For example, an
option is a derivative because its value changes in relation to the performance
of an underlying stock. The value of an option on a futures contract varies with
the value of the underlying futures contract, which in turn varies with the
value of the underlying commodity or security. Derivatives are available based
on the performance of assets, interest rates, currency exchange rates, and
various domestic foreign indexes.
The Fund may use derivatives for any of the following purposes:
- - To hedge against adverse changes in the market value of securities held by
or to be bought for the Fund. These changes may be caused by changing
interest rates, stock market prices or currency exchange rates.
- - As a substitute for purchasing or selling securities or foreign currencies.
- - To shorten or lengthen the effective maturity or duration of the Fund's
fixed income portfolio.
- - In non-hedging situations, to attempt to profit from anticipated market
developments.
TEMPORARY DEFENSIVE POSITIONS. In response to economic, political or unusual
market conditions, the Fund may invest up to 100% of its assets in cash or money
market obligations. Should this occur, the Fund will not meet its investment
objectives, and may miss potential market upswings.
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MANAGEMENT
INVESTMENT MANAGER
Villanova Mutual Fund Capital Trust ("VMF"), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the Fund's assets and supervises the daily
business affairs of the Fund. VMF was organized in 1999. As of _____, 1999, it
had approximately ______ billion in assets under management for the mutual funds
it advises.
The Fund pays VMF a management fee as set forth below. The management fee is
based on the Fund's average daily net assets and includes breakpoints so fees
decrease as assets increase:
Assets Fee
- ----------------------------- ---------------------------
up to $250 million 0.55%
$250 million - $1 billion 0.525%
$1 billion - $2 billion 0.50%
$2 billion - $5 billion 0.475%
$5 billion + 0.45%
PORTFOLIO MANAGER
__________________ manages the Fund. _____________ managed the _______________
Fund (the "Prior Fund") , an investment portfolio offered by ______________ from
__________ to ____________. Average annual returns for the entire period during
which he managed the Prior Fund compared with the performance of the
______________ Index for the same periods were as follows.
INSERT PERFORMANCE FIGURES
HISTORICAL PERFORMANCE OF THE PORTFOLIO MANAGER
Although the Fund has been operating for only a limited time, the portfolio
manager managed [a] similar mutual fund[s] previously. [These/This] other mutual
fund[s] [have/had] investment objectives and strategies that are substantially
similar, but not necessarily identical, to those of the Fund. We have included
performance information about [these/this] other mutual fund[s] for comparison
purposes, BUT THESE OTHER MUTUAL FUNDS AND INSTITUTIONAL ACCOUNTS ARE SEPARATE
AND DISTINCT FROM THE FUND. [THEIR/ITS] PERFORMANCE DOES NOT GUARANTEE SIMILAR
RESULTS FOR THE FUND AND SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR THE FUND'S OWN
PERFORMANCE.
The performance of [the] similar mutual fund[s] previously managed by the
portfolio manager may not be comparable to the performance of the Fund because
of the following differences:
- brokerage commissions and dealer spreads
- expenses (including management fees)
- the size of the investment in a particular security in relation to the
portfolio size
- the timing of purchases and sales (including the affect of market
conditions at that time)
- the timing of cash flows into the portfolio
- the availability of cash for new investments.
[If the historical performance relates only to institutional accounts (including
institutional accounts that are included in composite performance), the
performance may not be comparable to the performance of the Funds because,
unlike the Funds, the institutional accounts may not be required to do the
following:
- redeem shares upon request
- meet the same diversification requirements as mutual funds
- follow the same tax restrictions and investment limitations as mutual
funds.
In some instances the performance of the institutional accounts is calculated by
combining the performance of all similarly managed accounts into a composite.
Depending on the subadviser, the composite may or may not also contain
registered mutual funds. If the accounts within each composite had been subject
to all Fund expenses, their performance may have been lower. As indicated below,
the composite performance may be prepared in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
("AIMR Standards"), which are different from the performance methodology used by
registered investment companies like the Fund. AIMR has not been involved with
the preparation or review of this information.]
Average annual total return represents the average change over a specified
period of time in the value of an investment after reinvesting all income and
capital gains distributions.
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MANAGEMENT (CONTINUED)
The historical performance information has been provided by _________. The Fund
believes that it is reliable, but the Fund has not independently verified it.
The historical investment performance of the _________ reflects the deduction of
total annual operating expenses of ____% as of December __, 1999, which are
[lower\higher] than the total operating expenses of the ______ before fee
waivers.
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BUYING, SELLING AND EXCHANGING FUND SHARES
CHOOSING A SHARE CLASS
As noted in the Fund Summary, the Fund offers different share classes to give
investors different price and cost options. Class A and Class B shares are
available to all investors; Institutional Class shares are available to a
limited group of investors.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares; and with Class B shares you pay a sales charge
(known as a contingent deferred sales charge, or CDSC) if you sell your shares
within six years after purchase.
Class A and Class B shares both pay distribution and/or service fees under a
Distribution Plan. These fees are either retained by NAS or paid by NAS to
brokers for distribution and shareholder services. Class A shares may pay
administrative service fees. These fees are paid to brokers and other entities
who provide administrative support services to the beneficial owners of the
shares.
If you want to lower annual fund expenses, Class A shares may be right for you,
particularly if you qualify for a reduction or waiver of sales charges. If you
do not want to pay an up-front sales charge, and you anticipate holding your
shares for the long term, Class B shares may be more appropriate. As the Fund's
principal distributor, Nationwide Advisory Services, Inc. ("NAS") reserves the
right to reject an order in excess of $100,000 for Class B shares and an order
for Class B shares for Individual Retirement Accounts ("IRA accounts") for
shareholders 70 1/2 years and older. When choosing a share class, consider the
following:
Class A shares Class B shares
- -------------------------- ------------------------------
Front-end sales charge No front-end sales charge, so
means that a portion of your full investment
your initial investment immediately goes toward
goes toward the sales buying shares
charge, and is not
invested
- -------------------------- ------------------------------
Reductions and waivers No reductions of the
of the sales charge contingent deferred sales
available charge available, but
waivers available
- -------------------------- ------------------------------
Lower expenses than Higher distribution and
Class B shares mean service fees than Class A
higher dividends per shares mean lower dividends
share per share
- -------------------------- ------------------------------
Conversion features are After seven years, Class B
not applicable shares convert into Class A
shares, which reduces your
future Fund expenses
- -------------------------- ------------------------------
No sales charge when Contingent deferred sales
shares are sold back to charge (CDSC) if shares sold
the Fund within six years: 5% in the
first year, 4% in the
second, 3% in the third and
fourth years, 2% in the
fifth, and 1% in the sixth
year
WHO CAN BUY INSTITUTIONAL CLASS SHARES
The Institutional Class shares are available for purchase only by the following:
- - retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business and
rollover individual retirement accounts from such plans
- - tax-exempt employee benefit plans of VMF, the Fund's investment manager, or
its affiliates and securities dealer firms with selling agreements with NAS
- - institutional advisory accounts of VMF, or its affiliates and those having
client relationships with an affiliate of VMF, or its affiliates and their
corporate sponsors, as well as subsidiaries and related employee benefit
plans and rollover individual retirement accounts from such institutional
advisory accounts
- - a bank, trust company or similar financial institution investing for its
own account or for the account of its trust customers for whom such
financial institution is exercising investment discretion in purchasing
Institutional Class shares, except where the investment is part of a
program that requires payment to the financial institution of a Rule 12b-1
Plan or Administrative Service fee
- - registered investment advisers investing on behalf of institutions and high
net-worth individuals entrusted to the adviser for investment purposes, but
only if the adviser is not affiliated or associated with a broker or dealer
and derives compensation for its services exclusively from its clients for
such advisory services
- - investments of at least $___________________
BUYING SHARES
PURCHASE PRICE
The purchase or "offering" price of one share of the Fund is its "net asset
value" or NAV next determined after the order is received, plus any applicable
sales charge. A separate NAV is calculated for each class of the Fund.
Generally, NAV is based on the market value of the securities owned by the Fund
less its liabilities. The NAV for a class is determined by dividing the total
market value of the securities owned by the Fund, less the liabilities allocable
to that class,
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
by the total number of that class' outstanding shares. NAV is determined at the
close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern
Standard Time) on each day the Exchange is open for trading.
MINIMUM INVESTMENTS
To open an account $1000
Through the Automatic Asset Accumulation plan
(per transaction) $25
Additional investments $100
MINIMUM INVESTMENTS - INSTITUTIONAL CLASS SHARES
To open an account $____
Additional investments $____
These minimum investment requirements do not apply to certain retirement plans.
Call 1-800-848-0920 for more information. If you purchase shares through an
account at a broker (other than NAS), different minimum account requirements may
apply.
The Fund does not calculate NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King, Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - other days when the New York Stock Exchange is not open.
The Fund reserves the right not to determine an NAV for the Fund when:
- - It has not received any orders to purchase, sell or exchange shares
- - Changes in the value of the Fund's portfolio do not affect the NAV
If current prices are not available, or if Villanova SA Capital Trust ("VSA") as
the Fund's administrator or its agent determines a price does not represent fair
value, the Fund's investments may be valued at fair market value in accordance
with procedures adopted by the Board of Trustees. To the extent that the Fund's
investments are traded in markets that are open when the New York Stock Exchange
is closed, the value of the Fund's investments may change on days when shares
cannot be purchased or redeemed.
When you purchase shares, your purchase price will be the offering price or NAV
next determined after your order is received, plus any applicable sales load.
CLASS A SALES CHARGES
The chart below shows the Class A sales charges, which decrease as the amount of
your investment increases.
CLASS A SHARES
Sales Sales charge
charge as % as % of
of offering amount
Amount of purchase price invested
- ---------------------------- ------------- --------------
less than $50,000 4.50% 4.71%
- ---------------------------- ------------- --------------
$50,000 to $99,999 4.00 4.17
- ---------------------------- ------------- --------------
$100,000 to $249,999 3.00 3.09
- ---------------------------- ------------- --------------
$250,000 to $499,999 2.50 2.56
- ---------------------------- ------------- --------------
$500,000 to $999,999 2.00 2.04
- ---------------------------- ------------- --------------
$1 million to $24,999,999 0.50 0.50
- ---------------------------- ------------- --------------
$25 million or more 0.25 0.25
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate the Class A initial sales charge through
one or more of the discounts described below:
- - INCREASE THE AMOUNT OF YOUR INVESTMENT. The preceding table shows how the
sales charge decreases as the amount of your investment increases.
- - FAMILY MEMBER DISCOUNT. Members of your family who live at the same address
can combine investments, possibly reducing the sales charge.
- - LIFETIME ADDITIONAL DISCOUNT. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value of
the shares you are purchasing, which may reduce the applicable sales
charge.
- - INSURANCE PROCEEDS OR BENEFITS DISCOUNT PRIVILEGE. If you use the proceeds
of an insurance policy issued by any member of the Nationwide Insurance
Enterprise to purchase Class A shares, you will pay one-half of the
published sales charge if you make your investment 60 days after receiving
the proceeds.
- - NO SALES CHARGE ON A REPURCHASE. If you sell shares from your Nationwide
account, we allow you a one-time privilege to reinvest some or all of the
proceeds in shares of the same class. You will not pay a sales
11
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
charge on Class A shares that you buy within 30 days of selling Class A
shares of an equal or lesser amount if you have already paid a sales
charge. Remember, if you realize a gain or a loss on your sale of shares,
the transaction is taxable and reinvestment will not affect the amount of
capital gains tax that is due. If you realize a loss on your sale and you
reinvest, some or all of the loss may not be allowed as a tax deduction
depending on the amount you reinvest.
- - LETTER OF INTENT DISCOUNT. State in writing that during a 13-month period
you or a group of family members who live at the same address will purchase
or hold at least $50,000 in Class A shares and your sales charge will be
based on the total amount you intend to invest. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy shares of
the Fund; it is merely a statement of intent. Call 1-800-848-0920 for more
information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for the following purchases:
Class A shares sold to:
- - Any person purchasing through an account with a unaffiliated brokerage firm
that has an agreement with NAS to waive sales charges for those persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the share with proceeds of mutual fund shares sold
from an NAS brokerage account. To qualify, you must have paid an initial
sales charge or CDSC on the shares sold. You must purchase the Class A
shares within 60 days of the sale, and you must request the waiver when you
purchase the Class A shares (NAS may require evidence that you qualify for
this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code.
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trusts);
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives (including
mother, father, brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of Nationwide
Insurance and Nationwide Financial companies, or any investment advisory
clients of VMF, VSA, NAS and their affiliates;
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with Nationwide Insurance and
Nationwide Financial companies from time to time, (including but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm Bureau,
Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania Farmers' Association,
Ruralite Services, Inc., and Southern States Cooperative).
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
CONVERSION OF CLASS B SHARES
After you have held your Class B shares for seven years, we will automatically
convert them into Class A shares (without charge), which carry the lower 12b-1
fee. We will also convert any Class B shares that you purchased with reinvested
dividends and other distributions for those shares at that time. Remember,
because the NAV of Class A shares is usually higher than the NAV of Class B
shares, you may receive fewer Class A shares than the number of Class B shares
converted, but the total dollar value will be the same. We do the conversion on
the first business day of the month following the seventh anniversary of the
date of your purchase.
HOW TO PLACE YOUR PURCHASE ORDER
If you wish to purchase shares, you may purchase the shares using one of the
methods below. Eligible entities wishing to purchase Institutional Class shares
should contact Nationwide Advisory Services, Inc. at 1-800-848-0920 for
information regarding such purchases.
BY MAIL - Complete and mail the application with a check or money order made
payable to: Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in
12
<PAGE> 104
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
U.S. dollars only and drawn on a U.S. bank. NAS will not accept third-party
checks.
BY WIRE - You can request that your bank transmits funds ("federal funds") by
wire to the Fund's custodian bank. In order to use this method, you must call
NAS by 4 p.m. Eastern Standard Time, and the wire must be received by the
custodian bank by the close of business on the day you placed your order or your
order will be cancelled. You may be liable for any loss to the Fund resulting
from the cancellation. Your bank may charge a fee to wire the funds. If you
choose this method to open your account, you must call our toll-free number
before you wire your investment, and you must then complete and fax the
application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear Fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you purchase through such a broker, your
order will be priced at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
- --------------------------------------------------------------------------------
NAS CUSTOMER SERVICE 1-800-848-0920
Representatives are available to answer questions between 8 a.m. and 5 p.m.
Eastern Standard Time
For additional information on buying shares and shareholder services, call the
customer service number listed above or contact your Nationwide representative.
SELLING SHARES
You can sell - also known as redeeming - your shares of the Fund at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sold may be more or less than their
original purchase price depending upon the market value of the Fund's
investments at the time of sale.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for the shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Fund or the Fund may delay paying
you the proceeds from a sale when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or if trading is restricted or if
an emergency exists.
SIGNATURE GUARANTEE
A signature guarantee is required under the following circumstances:
- - if a redemption is over $100,000, or
- - if your account registration has changed within the last 30 days, or
- - if the redemption check is made payable to anyone other than the
registered shareholder, or
- - if the proceeds are sent back to a bank account not previously
designated, or
- - if the proceeds are mailed to an address other than the address of
record.
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
13
<PAGE> 105
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A AND CLASS B SHARES
You must pay a CDSC if you sell Class B shares within six years of purchase,
unless you are entitled to waiver. The sales charge applies if your sale causes
the value of your account to fall below the total amount of all purchases you
made during the preceding six years. The sales charge is applied to your
original purchase price, or the current market value of the shares being sold,
whichever is less. The amount of the sales charge will decrease as illustrated
in the following chart:
Sale within 1 year 2 years 3 years 4 years 5 years 6 years 7 years or more
- --------------------------------------------------------------------------------
Sales charge 5% 4% 3% 3% 2% 1% 0%
All purchases during the month are grouped together and will be treated as if
made on the last day during the preceding month.
We do not impose a CDSC on Class B shares purchased through reinvested dividends
and distributions. If you sell your Class B shares and reinvest the proceeds in
Class B shares within 30 days, NAS will deposit an amount equal to any CDSC you
paid into your account. Also, we will waive the CDSC if you sell your shares
following the death or disability of a shareholder, provided the sale occurs
within one year of the shareholder's death or determination of disability and
for mandatory withdrawals from IRA accounts after age 70 1/2 years. For more
information, see the Statement of Additional Information.
Under certain circumstances, employer-sponsored retirement plans investing
without a sales charge (other than those investing in the Fund through variable
insurance products) may be charged a CDSC if shares are redeemed within three
years after purchase. The CDSC will be 1% for the first year, 0.50% for the
second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER
You can request the sale of your shares in any of the following ways:
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a weeks, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-637-0012 after 7 p.m. Eastern Standard Time to learn the
day's closing share price.
CAPITAL GAINS TAXES
If you sell Fund shares for more than you paid for them, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes - Selling Fund Shares."
CUSTOMER SERVICE LINE - If you have elected to have telephone redemption
privileges, a check payable to the shareholder of record can be mailed to the
address of record, unless you declined the telephone redemption privilege on
your application. NAS can wire the funds directly to your account at a
commercial bank (a voided check must be attached to your applications), unless
you declined telephone privileges on your application. (This authorization will
remain in effect until you give NAS written notice of its termination.) You can
sell shares of your IRA by telephone if we receive the proper forms. The
distribution from an IRA will be subject to a mandatory 10% federal withholding
tax, unless you inform us in writing not to withhold taxes. For additional
information or to request the forms, please call the customer service line at
1-800-848-0920. The Fund will use procedures to confirm that telephone
instructions are genuine. If the Fund acts on instructions it reasonably
believed were genuine, it will not be liable for any loss, injury, damage or
expense that occurs as a result, and the Fund will be held harmless for any
loss, claims, or liability arising from its compliance with the instructions.
NAS may record telephone instructions to sell shares. The Fund reserves the
right to revoke this privilege at any time, without notice to shareholders, and
to request the sale in writing, signed by all shareholders on the account.
BANK BY WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this service. Your financial institution may
also charge you a fee for receiving the wire. Funds sent outside the U.S. may be
subject to a higher fee.
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been reviewed by
NAS. Funds sent through ACH should reach your bank in two business days. There
is no fee for this service. (This authorization will remain in effect until you
give NAS written notice of its termination.)
14
<PAGE> 106
BUYING, SELLING AND EXCHANGING FUND SHARE (CONTINUED)
BY MAIL OR FAX (No minimum) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed the next business day. NAS
reserves the right to require the original document if you fax your letter. A
signature guarantee may be required under certain circumstances. Please refer
back to "Signature Guarantee" on page __.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you have an account with such a broker, your
redemption order will be priced at the NAV next determined after your order has
been accepted by your broker or its designated intermediary. Your broker may
charge a fee for this service.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
For additional information concerning your ability to sell your shares, call our
customer service line at 1-800-848-0920 or see your Nationwide representative.
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A and Class B
shares, the Trust has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act , which permits the Fund to compensate NAS - as
distributor - for expenses associated with distributing its shares and providing
shareholder services.
DISTRIBUTION AND SERVICE FEES
Under the Distribution Plan, the Fund pays NAS compensation accrued daily and
paid monthly. The Fund shall pay amounts not exceeding an annual amount of:
Fund/Class As a % of daily net assets
- ---------------------------------------------------------
Class A shares 0.25% (distribution or service fee)
- ---------------------------------------------------------
Class B shares 1.00% (.25% service fee)
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
EXCHANGING SHARES - CLASS A AND CLASS B SHARES
You can exchange the shares you own for shares of another fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new fund meets the fund's minimum investment requirement. You
cannot exchange Class A shares for Class B shares.
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal and/or state income taxes.
For more information, see ""Distribution and Taxes - Exchanging Fund Shares."
There is no sales charge for exchanges of Class B shares. However, if your
exchange involves certain Class A shares, you may have to pay the difference
between the sales charges if a higher sales charge applies.
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax or by phone (see
"Buying Shares - How to place your purchase order" or the back cover for contact
information). If you make your request in writing, please be sure your letter is
signed exactly as your account is registered. Your exchange will be processed on
the date NAS receives your signed letter or fax. If your fax is received after 4
p.m. Eastern Standard Time, it will be processed the next day. If you fax your
request, we reserve the right to ask for the original. You can automatically
request an exchange 24 hours a day, seven days a week, by calling NAS NOW, our
automated voice-response system. You will have automatic exchange privileges
unless you request not to on your application. The Trust reserves the right to
amend or discontinue these exchange privileges upon 60 days written notice to
shareholders.
15
<PAGE> 107
BUYING, SELLING AND EXCHANGING FUND SHARE (CONTINUED)
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders.
The Fund may delay forwarding redemption proceeds for up to seven days if the
investor redeeming shares is engaged in excessive trading, or if the amount of
the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund.
YEAR 2000
VMF, 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. VMF, 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. VMF, VSA and NAS have also tested each application
for their 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.
VMF, VSA and NAS' assessment of Year 2000 issues has included non-information
technology systems with embedded computer chips. VMF, VSA and NAS' building
systems such as fire, security, elevators and escalators supporting facilities
in Columbus, Ohio, have been tested and are Year 2000 compliant.
In addition to resolving internal Year 2000 readiness issues, VMF, VSA and NAS
are surveying significant external organizations (business partners) to assess
if they will be Year 2000 compliant. VMF, VSA and NAS continue their efforts to
identify external risk factors and has developed contingency plans as part of
its ongoing risk-management strategy.
16
<PAGE> 108
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser.
DISTRIBUTIONS OF INCOME DIVIDENDS
Every quarter, the Fund distributes any available income dividends to
shareholders. Income dividends are taxable to you as ordinary income for federal
income tax purposes, unless you hold your shares in a qualified tax-deferred
plan or account, or are otherwise not subject to federal income tax. The amount
of income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account). For corporate shareholders, a portion
of each year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If the Fund has net realized capital gains at the end of the fiscal year
(meaning the gains from sale of securities exceed any losses from sales), it
will distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account. On Form 1099, we will report
the amount of net short-term capital gains and net long-term capital gains
distributed to you during the year. Currently, for individuals, long-term
capital gains are taxed at a maximum rate of 20%; short-term capital gains are
taxed as ordinary income, such as interest or dividends. For the current capital
gains tax rates, speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If the checks sent to you cannot be delivered, or are not cashed,
distributions will be reinvested in shares of the Fund. You are subject to tax
on reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certifications are not accurate, or as may otherwise be required under the
Internal Revenue Code.
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your option, you must notify us by the record date for a
dividend or distribution in order for it to be effective for that dividend or
distribution. You will not receive interest on any uncashed distribution,
dividend or redemption checks.
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of the tax depends on how
long you held your shares. For individuals, long-term capital gains are taxed as
ordinary income, such as interest or dividends. Capital gains from your sale of
Fund shares is not reported on Form 1099; you or your tax adviser should keep
track of your purchases, sales, and any resulting gain or loss. If you do sell
Fund shares for a loss, you may be able to use this capital loss to offset any
capital gains you have.
EXCHANGING FUND SHARES - CLASS A AND CLASS B SHARES
Exchanging your shares of the Fund is considered a sale for income tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
have capital gains, which are subject to the federal income taxes described
above. If you exchange Fund shares for a loss, you may be able to use this
capital loss to offset any capital gains you have.
17
<PAGE> 109
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents contain additional information about the Fund. To obtain
a document free of charge, contact us at the address or number listed below.
- - Statement of Additional Information (SAI) (incorporated by reference in this
Prospectus)
- - Annual Report (which contains a discussion of the market conditions and
investment strategies that significantly affect the Fund's performance)
- - Semi-Annual Report
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Standard Time)
FOR 24-HOUR ACCOUNT ACCESS:
1-800-637-0012 (toll free)
Also, visit the Nationwide Funds WebSite at www.nationwidefunds.com.
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of the Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
VIA THE INTERNET:
http://www.sec.gov
Investment Company Act File No. 811-08495
18
<PAGE> 110
NATIONWIDE(R) MUTUAL FUNDS December __, 1999
NATIONWIDE FOCUS FUND As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved this
fund's shares as an investment or
determined whether this prospectus is
complete or accurate. To state
otherwise is a crime.
<PAGE> 111
TABLE OF CONTENTS
FUND SUMMARY .......................................
Objectives and Principal Strategies
Principal Risks
Performance
Fees and Expenses
MORE ABOUT THE FUND ................................
Principal Risks
Principal Techniques
MANAGEMENT .........................................
Investment Manager
Portfolio Manager
BUYING, SELLING AND EXCHANGING FUND SHARES .........
Choosing a Share Class
Buying Shares
Selling Shares
Distribution Plan
Exchanging Shares
Year 2000
DISTRIBUTIONS AND TAXES ............................
Distributions of Income Dividends
Distributions of Capital Gains
Reinvesting Distributions
State and Local Taxes
Selling Fund Shares
Exchanging Fund Shares
ADDITIONAL INFORMATION ...................BACK COVER
<PAGE> 112
FUND SUMMARY
This prospectus provides information about the Nationwide Focus Fund (the
"Fund"), a series of the Nationwide(R) Mutual Funds. "You" and "your" refers to
potential investors and current shareholders of the Fund.
A QUICK NOTE ABOUT SHARE CLASSES
The Fund has three different share classes--Class A, Class B and Institutional
Class shares. The fees, sales charges and expenses for each share class are
different, but each share class of the Fund represents an investment in the same
assets of the Fund. Having different share classes simply lets you choose the
cost structure that's right for you.
The fees and expenses for the Fund are set forth in the Fund Summary. For more
information about which share class is right for you, see "Buying, Selling and
Exchanging Fund Shares - Choosing a Share Class."
<PAGE> 113
FUND SUMMARY
This section summarizes key information about the Fund. Use the summary to
compare the Fund with other mutual funds. More detailed information about the
risks and investment techniques of the Fund can be found in "More About the
Fund."
OBJECTIVES AND PRINCIPAL STRATEGIES
The Fund seeks long term capital appreciation with current income as a secondary
objective. The Fund's investment objectives may be changed without shareholder
approval.
To achieve its objectives, the Fund invests primarily in common stock and
convertible securities of companies that demonstrate growth potential. The
portfolio manager generally intends to be fully invested in these securities.
The Fund looks for companies whose earnings are expected to consistently grow
faster than other companies in the market. The Fund typically concentrates its
investments in a core group of 20 to 30 common stocks. It usually will sell
portfolio securities if
- - the price of the security is overvalued
- - the company's earnings are consistently lower than expected
- - more favorable opportunities are identified.
TOTAL RETURN
Generally having objectives of both income and capital appreciation means that a
Fund is seeking total return from the portfolio. In other words, the Fund looks
for stocks and other securities that pay dividends and other income, instead of
relying solely on the security's prospects for increasing in value. Because, in
most cases, a stock is more certain to pay its scheduled dividends than increase
in value, a total return approach can help the Fund achieve more stable,
dependable returns.
PRINCIPAL RISKS
The Nationwide Focus Fund is subject to the risk that individual stocks - or the
stock market - could lose value. The Fund seeks to minimize risk by investing in
securities that produce income; these securities tend to be the stock of larger,
more stable companies.
In addition, the Fund is non-diversified. In other words, it may hold larger
positions in a smaller number of securities than a diversified fund. Since the
Fund normally concentrates in a core portfolio of 20 to 30 stocks, this risk may
be increased. As a result, a single security's increase or decrease in value may
have a greater impact on the Fund's net asset value and total return.
PERFORMANCE
No performance information is provided because the Fund will not begin
operations until about December ___, 1999.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees(1) Class Class Institutional
(paid directly from your A B Class
investment) shares shares shares
- -------------------------------- -------- -------- -----------
Maximum Sales Charge (Load) 5.75%(2) None None
imposed on purchases (as a
percentage of offering price)
- -------------------------------- -------- -------- -----------
Maximum Deferred Sales Charge None(3) 5.00%(4) None
(Load) imposed on redemptions
(as a percentage of original
purchase price or sale proceeds,
as applicable)
Class Class Institutional
Annual Fund Operating Expenses A B Class
(deducted from Fund assets) shares shares shares
- -------------------------------- -------- -------- -----------
Management Fees 0.60% 0.60% 0.60%
- -------------------------------- -------- -------- -----------
Distribution and/or Service 0.25% 1.00% None
(12b-1) Fees
- -------------------------------- -------- -------- -----------
Other Expenses 0.87% 0.72% 0.79%
- -------------------------------- -------- -------- -----------
TOTAL ANNUAL FUND OPERATING 1.72% 2.32% 1.39%
EXPENSES(5)
- --------
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "Buying,
Selling and Exchanging Fund Shares - Buying Shares - Class A sales
charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A
shares after you have held them for seven years. See "Buying, Selling and
Exchanging Fund Shares - Buying Shares - Contingent deferred sales charge
(CDSC) on Class B shares."
(5) Because the Fund was established on December _, 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled
under its contract with the Fund, and any applicable distribution and
service fees are the maximum rates that can be charged under the
Distribution and Service Plan. "Other Expenses" are estimates of the other
operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on estimates for the
Fund's first fiscal year ending October 31, 2000. At least through October
31, 2000, the adviser has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Fund
Operating Expenses will not exceed 1.20% for Class A, 1.70% for Class B and
0.75% for Institutional Class shares. This waiver of management fees or
reimbursement of other expenses is subject to a possible reimbursement by
the Fund within five years of the Fund's commencement of operations if the
reimbursement by the Fund can be implemented within the annual expense
limitations described above.
2
<PAGE> 114
FUND SUMMARY (CONTINUED)
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years
- --------------------- --------- ---------
Class A shares $740 $1,086
- --------------------- --------- ---------
Class B shares $735 $1,024
- --------------------- --------- ---------
Institutional Class $142 $ 440
shares
You would pay the following expenses on the same investment if you did not sell
your shares:
1 year 3 years
- ---------------- --------- ---------
Class B shares $235 $248
3
<PAGE> 115
MORE ABOUT THE FUND
PRINCIPAL RISKS AND TECHNIQUES
The Fund may use the principal investment technique to increase returns, protect
assets or diversify investments. This technique is subject to certain risks. For
additional information about the Fund's investment strategies and techniques,
see the Statement of Additional Information.
PRINCIPAL RISKS
Generally, the Fund can decrease in value when the individual stocks and other
assets it owns decrease in value. A company's stock can lose value for various
reasons, including poor profits, weakened finances, changes in management, a
downturn in the economy, or any other reason that leads investors to lose faith
in that stock.
The Fund can also lose value if the overall stock market goes down. The stock
market is affected by numerous factors, including interest rates, the outlook
for corporate profits, the health of the U.S. and global economies, national and
world social and political events, and the fluctuations of other stock markets
around the world.
There is also risk when investing in smaller capitalization or newer companies.
The stock prices of these companies may be more volatile than the stock of
larger companies for a variety of reasons, including less domination in their
markets, fewer financial resources, and less-experienced management. In other
words, they tend to be less "seasoned" than larger companies. The stock of small
capitalization and newer companies may have more limited trading markets than
the markets for larger or more established issuers and, therefore, are usually
less stable and less liquid than the stock of larger and more established
companies.
NON-DIVERSIFICATION
As a non-diversified fund, the Fund has the ability to invest a larger portion
of its assets in a smaller number of issuers. Because the appreciation or
depreciation of a single stock may have a greater impact on the NAV of the Fund,
its share price can be expected to fluctuate more than a comparable diversified
fund. This fluctuation, if significant, may affect the performance of the Fund.
With regard to the Fund, such risks are increased because the Fund normally
concentrates its investments in a core group of twenty to thirty common stocks.
For additional information about the Fund's investment strategies and
techniques, see the Statement of Additional Information.
PRINCIPAL TECHNIQUE
The Fund may use the following investment technique to increase its returns,
protect its assets or diversify its investments.
CONVERTIBLE SECURITIES
In addition to investing in common stock, the Fund may invest in convertible
securities - also known as convertibles - including bonds, debentures, notes,
preferred stocks and other securities. Convertibles are a hybrid bond/stock
security. Like bonds, they pay interest. Because they can be converted into
common stock (within a set period of time, at a specified price or formula),
convertibles also offer the chance for capital appreciation, like common stock.
Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as the underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however may sustain their value better than
common stock because they pay income, which tends to be higher than common stock
dividend yields.
Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," better-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.
Convertibles tend to be more secure than common stock (generally companies must
pay holders of convertibles before they pay common stock shareholders), but they
are generally less secure than similar non-convertible securities such as bonds
(bondholders generally must be paid before holders of convertibles and common
stock shareholders). Because they are subordinate to bonds in terms of payment
priority, convertibles typically are rated below investment grade by a NRSRO, or
they are not rated at all.
TEMPORARY DEFENSIVE POSITIONS. In response to economic, political or unusual
market conditions, the Fund may invest up to 100% of its assets in cash or money
market obligations. Should this occur, the Fund will not meet its investment
objectives, and may miss potential market upswings.
4
<PAGE> 116
MANAGEMENT
INVESTMENT MANAGER
Villanova Mutual Fund Capital Trust ("VMF"), Three Nationwide Plaza, Columbus,
OH 43215, manages the investment of the assets and supervises the daily business
affairs of the Fund. VMF was organized in 1999. As of ____________, 1999, it had
approximately $___ billion in assets under management for the mutual funds it
advises.
The Fund pays VMF a management fee as set forth below. The management fee is
based on the Fund's average daily net assets and includes breakpoints so fees
decrease as assets increase:
Assets Fee
- ----------------------------- ---------------------------
up to $250 million 0.60%
$250 million - $1 billion 0.575%
$1 billion - $2 billion 0.55%
$2 billion - $5 billion 0.525%
$5 billion + 0.50%
PORTFOLIO MANAGER
Charles Bath manages the Fund. As portfolio manager, Mr. Bath is responsible for
the day to day management of the Fund and the selection of the Fund's
investments. In addition to managing the Fund, he has managed the Nationwide
Fund and its predecessor, another investment portfolio offered by the Trust,
since 1985.
5
<PAGE> 117
BUYING, SELLING AND EXCHANGING FUND SHARES
CHOOSING A SHARE CLASS
As noted in the Fund Summary, the Fund offers different share classes to give
investors different price and cost options. Class A and Class B shares are
available to all investors; Institutional Class shares are available to a
limited group of investors.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares; and with Class B shares you pay a sales charge
(known as a contingent deferred sales charge, or CDSC) if you sell your shares
within six years after purchase.
Class A and Class B shares both pay distribution and/or service fees under a
Distribution Plan. These fees are either retained by NAS or paid by NAS to
brokers for distribution and shareholder services. Class A shares may pay
administrative service fees. These fees are paid to brokers and other entities
who provide administrative support services to the beneficial owners of the
shares.
If you want to lower annual fund expenses, Class A shares may be right for you,
particularly if you qualify for a reduction or waiver of sales charges. If you
do not want to pay an up-front sales charge, and you anticipate holding your
shares for the long term, Class B shares may be more appropriate. As the Fund's
principal distributor, Nationwide Advisory Services, Inc. ("NAS") reserves the
right to reject an order in excess of $100,000 for Class B shares and an order
for Class B shares for Individual Retirement Accounts ("IRA accounts") for
shareholders 70 1/2 years and older.
When choosing a share class, consider the following:
Class A shares Class B shares
- -------------------------- ------------------------------
Front-end sales charge No front-end sales charge, so
means that a portion of your full investment
your initial investment immediately goes toward
goes toward the sales buying shares
charge, and is not
invested
- -------------------------- ------------------------------
Reductions and waivers No reductions of the
of the sales charge contingent deferred sales
available charge available, but
waivers available
- -------------------------- ------------------------------
Lower expenses than Higher distribution and
Class B shares mean service fees than Class A
higher dividends per shares mean lower dividends
share per share
- -------------------------- ------------------------------
Conversion features are After seven years, Class B
not applicable shares convert into Class A
shares, which reduces your
future Fund expenses
- -------------------------- ------------------------------
No sales charge when Contingent deferred sales
shares are sold back to charge (CDSC) if shares sold
the Fund within six years: 5% in the
first year, 4% in the
second, 3% in the third and
fourth years, 2% in the
fifth, and 1% in the sixth
year
WHO CAN BUY INSTITUTIONAL CLASS SHARES
The Institutional Class shares are available for purchase only by the following:
- - retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business and
rollover individual retirement accounts from such plans
- - tax-exempt employee benefit plans of VMF, the Fund's investment manager,
or its affiliates and securities dealer firms with selling agreements
with NAS
- - institutional advisory accounts of VMF, or its affiliates and those
having client relationships with an affiliate of VMF, or its affiliates
and their corporate sponsors, as well as subsidiaries and related
employee benefit plans and rollover individual retirement accounts from
such institutional advisory accounts
- - a bank, trust company or similar financial institution investing for its
own account or for the account of its trust customers for whom such
financial institution is exercising investment discretion in purchasing
Institutional Class shares, except where the investment is part of a
program that requires payment to the financial institution of a Rule
12b-1 Plan or Administrative Service fee
- - registered investment advisers investing on behalf of institutions and
high net-worth individuals entrusted to the adviser for investment
purposes, but only if the adviser is not affiliated or associated with a
broker or dealer and derives compensation for its services exclusively
from its clients for such advisory services
- - investments of at least $__________
BUYING SHARES
PURCHASE PRICE
The purchase or "offering" price of one share of the Fund is its "net asset
value" or NAV next determined after the order is received, plus any applicable
sales charge. A separate NAV is calculated for each class of the Fund.
Generally, NAV is based on the market value of the securities owned by the Fund
less its liabilities. The NAV for a class is determined by dividing the total
market value of the securities owned by the Fund, less the liabilities allocable
to that class,
6
<PAGE> 118
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
by the total number of that class' outstanding shares. NAV is determined at the
close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern
Standard Time) on each day the Exchange is open for trading.
MINIMUM INVESTMENTS - CLASS A & B SHARES
To open an account $1000
Through the Automatic Asset Accumulation
plan (per transaction) $ 25
Additional investments $ 100
MINIMUM INVESTMENTS - INSTITUTIONAL CLASS SHARES
To open an account $____
Additional investments $____
These minimum investment requirements do not apply to certain retirement plans.
Call 1-800-848-0920 for more information. If you purchase shares through an
account at a broker (other than NAS), different minimum account requirements may
apply. The Fund does not calculate NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King, Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - other days when the New York Stock Exchange is not open.
The Fund reserves the right not to determine an NAV for the Fund when:
- - It has not received any orders to purchase, sell or exchange shares
- - Changes in the value of the Fund's portfolio do not affect the NAV
If current prices are not available, or if Villanova SA Capital Trust ("VSA") as
the Fund's administrator or its agent determines a price does not represent fair
value, the Fund's investments may be valued at fair market value in accordance
with procedures adopted by the Board of Trustees. To the extent that the Fund's
investments are traded in markets that are open when the New York Stock Exchange
is closed, the value of the Fund's investments may change on days when shares
cannot be purchased or redeemed.
When you initially purchase Class A or Class B shares, your purchase price will
be the offering price or NAV next determined after your order is received, plus
any applicable sales load.
CLASS A SALES CHARGES
The chart below shows the Class A sales charges, which decrease as the amount of
your investment increases.
CLASS A SHARES
Sales Sales charge
charge as % as % of
of offering amount
Amount of purchase price invested
- ---------------------------- ------------- --------------
less than $50,000 5.75% 6.10%
- ---------------------------- ------------- --------------
$50,000 to $99,999 4.50 4.71
- ---------------------------- ------------- --------------
$100,000 to $249,999 3.50 3.63
- ---------------------------- ------------- --------------
$250,000 to $499,999 2.50 2.56
- ---------------------------- ------------- --------------
$500,000 to $999,999 2.00 2.04
- ---------------------------- ------------- --------------
$1 million to $24,999,999 0.50 0.50
- ---------------------------- ------------- --------------
$25 million or more 0.25 0.25
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate the Class A initial sales charge through
one or more of the discounts described below:
- - INCREASE THE AMOUNT OF YOUR INVESTMENT. The preceding table shows how the
sales charge decreases as the amount of your investment increases.
- - FAMILY MEMBER DISCOUNT. Members of your family who live at the same
address can combine investments, possibly reducing the sales charge.
- - LIFETIME ADDITIONAL DISCOUNT. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value of
the shares you are purchasing, which may reduce the applicable sales
charge.
- - INSURANCE PROCEEDS OR BENEFITS DISCOUNT PRIVILEGE. If you use the proceeds
of an insurance policy issued by any member of the Nationwide Insurance
Enterprise to purchase Class A shares, you will pay one-half of the
published sales charge if you make your investment 60 days after receiving
the proceeds.
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<PAGE> 119
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
- - NO SALES CHARGE ON A REPURCHASE. If you sell shares from your Nationwide
account, we allow you a one-time privilege to reinvest some or all of the
proceeds in shares of the same class. You will not pay a sales charge on
Class A shares that you buy within 30 days of selling Class A shares of an
equal or lesser amount if you have already paid a sales charge. Remember,
if you realize a gain or a loss on your sale of shares, the transaction is
taxable and reinvestment will not affect the amount of capital gains tax
that is due. If you realize a loss on your sale and you reinvest, some or
all of the loss may not be allowed as a tax deduction depending on the
amount you reinvest.
- - LETTER OF INTENT DISCOUNT. State in writing that during a 13-month period
you or a group of family members who live at the same address will purchase
or hold at least $50,000 in Class A shares and your sales charge will be
based on the total amount you intend to invest. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy shares of
the Fund; it is merely a statement of intent. Call 1-800-848-0920 for more
information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for the following purchases:
Class A shares sold to:
- - Any person purchasing through an account with a unaffiliated brokerage firm
that has an agreement with NAS to waive sales charges for those persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the share with proceeds of mutual fund shares sold
from an NAS brokerage account. To qualify, you must have paid an initial
sales charge or CDSC on the shares sold. You must purchase the Class A
shares within 60 days of the sale, and you must request the waiver when you
purchase the Class A shares (NAS may require evidence that you qualify for
this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code.
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trusts).
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives (including
mother, father, brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of Nationwide
Insurance and Nationwide Financial companies, or any investment advisory
clients of VMF, VSA, NAS and their affiliates.
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with Nationwide Insurance and
Nationwide Financial companies from time to time, (including, but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm Bureau,
Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania Farmers' Association,
Ruralite Services, Inc., and Southern States Cooperative.
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
CONVERSION OF CLASS B SHARES
After you have held your Class B shares for seven years, we will automatically
convert them into Class A shares (without charge), which carry the lower 12b-1
fee. We will also convert any Class B shares that you purchased with reinvested
dividends and other distributions for those shares at that time. Remember,
because the NAV of Class A shares is usually higher than the NAV of Class B
shares, you may receive fewer Class A shares than the number of Class B shares
converted, but the total dollar value will be the same. We do the conversion on
the first business day of the month following the seventh anniversary of the
date of your purchase.
HOW TO PLACE YOUR PURCHASE ORDER
If you wish to purchase Class A or Class B shares, you may purchase the shares
using one of the methods below. Eligible entities wishing to purchase
Institutional Class shares should contact Nationwide Advisory Services, Inc. at
1-800-848-0920 for information regarding such purchases.
8
<PAGE> 120
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
BY MAIL - Complete and mail the application with a check or money order made
payable to: Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in U.S. dollars only and
drawn on a U.S. bank. NAS will not accept third-party checks.
BY WIRE - You can request that your bank transmits funds ("federal funds") by
wire to the Fund's custodian bank. In order to use this method, you must call
NAS by 4 p.m. Eastern Standard Time, and the wire must be received by the
custodian bank by the close of business on the day you placed your order or your
order will be cancelled. You may be liable for any loss to the Fund resulting
from the cancellation. Your bank may charge a fee to wire the funds. If you
choose this method to open your account, you must call our toll-free number
before you wire your investment, and you must then complete and fax the
application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear Fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you purchase through such a broker, your
order will be priced at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
NAS CUSTOMER SERVICE 1-800-848-0920
Representatives are available to
answer questions between 8 a.m.
and 5 p.m. Eastern Standard Time
For additional information on buying shares and shareholder services, call the
customer service number listed above or contact your Nationwide representative.
SELLING SHARES
You can sell - also known as redeeming - your shares of the Fund at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sold may be more or less than their
original purchase price depending upon the market value of the Fund's
investments at the time of sale.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Fund or the Fund may delay paying
you the proceeds from a sale when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or if trading is restricted or if
an emergency exists.
SIGNATURE GUARANTEE - CLASS A AND CLASS B SHARES
A signature guarantee is required under the following circumstances:
- - if a redemption is over $100,000, or
- - if your account registration has changed within the last 30 days, or
- - if the redemption check is made payable to anyone other than the
registered shareholder, or
- - if the proceeds are sent back to a bank account not previously
designated, or
- - if the proceeds are mailed to an address other than the address of
record.
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<PAGE> 121
BUYING, SELLING AND EXCHANGING FUND SHARE (CONTINUED)
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A AND CLASS B SHARES
You must pay a CDSC if you sell Class B shares within six years of purchase,
unless you are entitled to waiver. The sales charge applies if your sale causes
the value of your account to fall below the total amount of all purchases you
made during the preceding six years. The sales charge is applied to your
original purchase price, or the current market value of the shares being sold,
whichever is less. The amount of the sales charge will decrease as illustrated
in the following chart:
Sale within 1 year 2 years 3 years 4 years 5 years 6 years 7 years or more
- --------------------------------------------------------------------------------
Sales charge 5% 4% 3% 3% 2% 1% 0%
All purchases during the month are grouped together and will be treated as if
made on the last day during the preceding month.
We do not impose a CDSC on Class B shares purchased through reinvested dividends
and distributions. If you sell your Class B shares and reinvest the proceeds in
Class B shares within 30 days, NAS will deposit an amount equal to any CDSC you
paid into your account. Also, we will waive the CDSC if you sell your shares
following the death or disability of a shareholder, provided the sale occurs
within one year of the shareholder's death or determination of disability and
for mandatory withdrawals from IRA accounts after age 70 1/2 years. For more
information, see the Statement of Additional Information.
Under certain circumstances, employer-sponsored retirement plans investing
without a sales charge (other than those investing in the Fund through variable
insurance products) may be charged a CDSC if shares are redeemed within three
years after purchase. The CDSC will be 1% for the first year, 0.50% for the
second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER - CLASS A AND CLASS B SHARES
You can request the sale of your shares in any of the following ways:
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a weeks, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-637-0012 after 7 p.m. Eastern Standard Time to learn the
day's closing share price.
CAPITAL GAINS TAXES
If you sell Fund shares for more than you paid for them, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes - Selling Fund Shares."
CUSTOMER SERVICE LINE - If you have elected to have telephone redemption
privileges, a check payable to the shareholder of record can be mailed to the
address of record, unless you declined the telephone redemption privilege on
your application. NAS can wire the funds directly to your account at a
commercial bank (a voided check must be attached to your applications), unless
you declined telephone privileges on your application. (This authorization will
remain in effect until you give NAS written notice of its termination.) You can
sell shares of your IRA by telephone if we receive the proper forms. The
distribution from an IRA will be subject to a mandatory 10% federal withholding
tax, unless you inform us in writing not to withhold taxes. For additional
information or to request the forms, please call the customer service line at
1-800-848-0920. The Fund will use procedures to confirm that telephone
instructions are genuine. If the Fund acts on instructions it reasonably
believed were genuine, it will not be liable for any loss, injury, damage or
expense that occurs as a result, and the Fund will be held harmless for any
loss, claims, or liability arising from its compliance with the instructions.
NAS may record telephone instructions to sell shares. The Fund reserves the
right to revoke this privilege at any time, without notice to shareholders, and
to request the sale in writing, signed by all shareholders on the account.
BANK BY WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this service. Your financial institution may
also charge you a fee for receiving the wire. Funds sent outside the U.S. may be
subject to a higher fee.
10
<PAGE> 122
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been reviewed by
NAS. Funds sent through ACH should reach your bank in two business days. There
is no fee for this service. (This authorization will remain in effect until you
give NAS written notice of its termination.)
BY MAIL OR FAX (No minimum) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed the next business day. NAS
reserves the right to require the original document if you fax your letter. A
signature guarantee may be required under certain circumstances. Please refer
back to "Signature Guarantee - Class A and Class B shares" on page __.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you have an account with such a broker, your
redemption order will be priced at the NAV next determined after your order has
been accepted by your broker or its designated intermediary. Your broker may
charge a fee for this service.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
For additional information concerning your ability to sell your shares, call our
customer service line at 1-800-848-0920 or see your Nationwide representative.
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A and Class B
shares, the Trust has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act, which permits the Fund to compensate NAS - as
distributor - for expenses associated with distributing its shares and providing
shareholder services.
DISTRIBUTION AND SERVICE FEES
Under the Distribution Plan, the Fund pays NAS compensation accrued daily and
paid monthly. The Fund shall pay amounts not exceeding an annual amount of:
Fund/Class As a % of daily net assets
- ---------------------------------------------------------
Class A shares 0.25% (distribution or service fee)
- ---------------------------------------------------------
Class B shares 1.00% (.25% service fee)
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
EXCHANGING SHARES - CLASS A AND CLASS B SHARES
You can exchange the shares you own for shares of another fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new fund meets the fund's minimum investment requirement. You
cannot exchange Class A shares for Class B shares.
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal and/or state income taxes.
For more information, see ""Distribution and Taxes - Exchanging Fund
Shares-Class A and Class B Shares."
There is no sales charge for exchanges of Class B shares. However, if your
exchange involves certain Class A shares, you may have to pay the difference
between the sales charges if a higher sales charge applies.
11
<PAGE> 123
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax or by phone (see
"Buying Shares - How to place your purchase order" or the back cover for contact
information). If you make your request in writing, please be sure your letter is
signed exactly as your account is registered. Your exchange will be processed on
the date NAS receives your signed letter or fax. If your fax is received after 4
p.m. Eastern Standard Time, it will be processed the next day. If you fax your
request, we reserve the right to ask for the original. You can automatically
request an exchange 24 hours a day, seven days a week, by calling NAS NOW, our
automated voice-response system. You will have automatic exchange privileges
unless you request not to on your application. The Trust reserves the right to
amend or discontinue these exchange privileges upon 60 days written notice to
shareholders
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders.
The Fund may delay forwarding redemption proceeds for up to seven days if the
investor redeeming shares is engaged in excessive trading, or if the amount of
the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund.
YEAR 2000
VMF, 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. VMF, 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. VMF, VSA and NAS have also tested each application
for their 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.
VMF, VSA and NAS' assessment of Year 2000 issues has included non-information
technology systems with embedded computer chips. VMF, VSA and NAS' building
systems such as fire, security, elevators and escalators supporting facilities
in Columbus, Ohio, have been tested and are Year 2000 compliant.
In addition to resolving internal Year 2000 readiness issues, VMF, VSA and NAS
are surveying significant external organizations (business partners) to assess
if they will be Year 2000 compliant. VMF, VSA and NAS continue their efforts to
identify external risk factors and has developed contingency plans as part of
its ongoing risk-management strategy.
12
<PAGE> 124
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser.
DISTRIBUTIONS OF INCOME DIVIDENDS
Every quarter, the Fund distributes any available income dividends to
shareholders. Income dividends are taxable to you as ordinary income for federal
income tax purposes, unless you hold your shares in a qualified tax-deferred
plan or account, or are otherwise not subject to federal income tax. The amount
of income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account). For corporate shareholders, a portion
of each year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If the Fund has net realized capital gains at the end of the fiscal year
(meaning the gains from sale of securities exceed any losses from sales), it
will distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account. On Form 1099, we will report
the amount of net short-term capital gains and net long-term capital gains
distributed to you during the year. Currently, for individuals, long-term
capital gains are taxed at a maximum rate of 20%; short-term capital gains are
taxed as ordinary income, such as interest or dividends. For the current capital
gains tax rates, speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If the checks sent to you cannot be delivered, or are not cashed,
distributions will be reinvested in shares of the Fund. You are subject to tax
on reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certifications are not accurate, or as may otherwise be required under the
Internal Revenue Code.
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your option, you must notify us by the record date for a
dividend or distribution in order for it to be effective for that dividend or
distribution. You will not receive interest on any uncashed distribution,
dividend or redemption checks.
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of the tax depends on how
long you held your shares. For individuals, long-term capital gains are taxed as
ordinary income, such as interest or dividends. Capital gains from your sale of
Fund shares is not reported on Form 1099; you or your tax adviser should keep
track of your purchases, sales, and any resulting gain or loss. If you do sell
Fund shares for a loss, you may be able to use this capital loss to offset any
capital gains you have.
EXCHANGING FUND SHARES - CLASS A AND CLASS B SHARES
Exchanging your shares of the Fund is considered a sale for income tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
have capital gains, which are subject to the federal income taxes described
above. If you exchange Fund shares for a loss, you may be able to use this
capital loss to offset any capital gains you have.
13
<PAGE> 125
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents contain additional information about the Fund. To obtain
a document free of charge, contact us at the address or number listed below.
- - Statement of Additional Information (SAI) (incorporated by reference in this
Prospectus)
- - Annual Report (which contains a discussion of the market conditions and
investment strategies that significantly affect the Fund's performance)
- - Semi-Annual Report
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Standard Time)
FOR 24-HOUR ACCOUNT ACCESS:
1-800-637-0012 (toll free)
Also, visit the Nationwide Funds Web Site at www.nationwidefunds.com.
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of the Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
VIA THE INTERNET:
http://www.sec.gov
Investment Company Act File No. 811-08495
14
<PAGE> 126
NATIONWIDE(R) MUTUAL FUNDS December __, 1999
NATIONWIDE SMALL CAP VALUE FUND II As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved this
fund's shares as an investment or
determined whether this prospectus is
complete or accurate. To state
otherwise is a crime.
<PAGE> 127
TABLE OF CONTENTS
FUND SUMMARY .......................................
Objective and Principal Strategies
Principal Risks
Performance
Fees and Expenses
MORE ABOUT THE FUND ................................
Principal Risks
Principal Techniques
MANAGEMENT .........................................
Investment Manager
Subadviser
Historical Performance of the Portfolio Manager
BUYING, SELLING AND EXCHANGING FUND SHARES .........
Choosing a Share Class
Buying Shares
Selling Shares
Distribution Plan
Exchanging Shares
Year 2000
DISTRIBUTIONS AND TAXES ............................
Distributions of Income Dividends
Distributions of Capital Gains
Reinvesting Distributions
State and Local Taxes
Selling Fund Shares
Exchanging Fund Shares
ADDITIONAL INFORMATION ...................BACK COVER
<PAGE> 128
FUND SUMMARY
This prospectus provides information about the Nationwide Small Cap Value Fund
II (the "Fund"), a series of the Nationwide(R) Mutual Funds. "You" and "your"
refers to potential investors and current shareholders of the Fund.
A QUICK NOTE ABOUT SHARE CLASSES
The Fund has three different share classes--Class A, Class B and Institutional
Class shares. The fees, sales charges and expenses for each share class are
different, but each share class of the Fund represents an investment in the same
assets of the Fund. Having different share classes simply lets you choose the
cost structure that's right for you.
The fees and expenses for the Fund are set forth in the Fund Summary. For more
information about which share class is right for you, see "Buying, Selling and
Exchanging Fund Shares - Choosing a Share Class."
<PAGE> 129
FUND SUMMARY
This section summarizes key information about the Fund. Use the summary to
compare the Fund with other mutual funds. More detailed information about the
risks and investment techniques of the Fund can be found in "More About the
Fund."
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks long-term capital appreciation through investment in common
stocks or their equivalent. The Fund's investment objective can be changed
without shareholder approval.
The Fund intends to pursue its investment objective by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
companies whose equity market capitalizations at the time of investment are
similar to the market capitalizations of companies in the Russell 2000 Index,
known as small cap companies. The Russell 2000, published by the Frank Russell
Company, is an index consisting of approximately 2000 companies with small
market capitalizations relative to the market capitalizations of other U.S.
companies. As of the last update of the index, the market capitalizations of
companies in the Russell 2000 range from $178.2 million to $1,350 million. The
market capitalization range for companies in the Russell 2000 is updated
annually.
WHAT IS MARKET CAPITALIZATION?
Market capitalization is a common way to measure the size of a company based on
the price of its common stock; it's simply the number of outstanding shares of
the company multiplied by the current share price.
The Fund may invest up to 35% of its total assets in larger capitalization
companies. The Fund may invest in securities of foreign issuers regardless of
the issuer's size. [THE FUND MAY ALSO ENGAGE IN CURRENCY HEDGING TRANSACTIONS,
REITS AND RULE 144A SECURITIES. CONFIRM AMOUNTS.]
WHAT IS THE FUND'S VALUE APPROACH?
The Fund invests primarily in stocks of U.S. and foreign companies, which it
considers to be "value" companies. These companies have good earnings growth
potential and the Fund's subadviser believes that the market has undervalued
them. The core of the Fund's portfolio will consist of stocks of solid companies
with reasonable growth prospects when the stocks are attractively priced in
relation to the company's earnings. The Fund will also invest in unrecognized
stocks and stocks of special situation companies and turnarounds (companies that
have experienced significant business problems but which the subadviser believes
have favorable prospects for recovery).
Smaller capitalization companies are often undervalued for one of the following
reasons: (1) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly traded companies, are often less
interested in smaller capitalization companies because of the difficulty of
acquiring a meaningful position without purchasing a large percentage of the
company's outstanding equity securities; and (2) such companies may not be
regularly researched by securities analysts, which could result in greater
discrepancies in valuation.
PRINCIPAL RISKS
The Fund is subject to the risk that individual stocks or the stock market could
lose value.
Stock market risk. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
Small cap risk. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more established companies. The stocks of
small capitalization companies are usually less stable in price and less liquid
than the stocks of larger companies.
Risks related to investing for value. Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the Fund generally focuses on value-style stocks,
the Fund's performance at times may be better or worse than the performance of
stock funds that focus on other types of stocks, or that have a broader
investment style.
2
<PAGE> 130
FUND SUMMARY (CONTINUED)
Foreign risk. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement. In
addition, the "Euro" began serving as a new common currency for participating
European nations on January 1, 1999. It is unclear whether the newly created
accounting, clearing, settlement and payment systems for the new currency will
be adequate.
For more detailed information about the Fund's investments and risks, see "More
About the Funds."
PERFORMANCE
No performance information is provided because the Fund will not begin
operations until about December ___, 1999.
For the performance of a comparable mutual fund for which the Fund's portfolio
manager previously noted as portfolio manager, please refer to "Management" on
page __.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees(1) Class Class Institutional
(paid directly from your A B Class
investment) shares shares shares
- ---------------------------- -------- -------- ----------
Maximum Sales Charge
(Load) imposed on
purchases (as a percentage 5.75%(2) None None
of offering price)
- ---------------------------- -------- -------- ----------
Maximum Deferred Sales
Charge (Load) imposed on
redemptions (as a
percentage of original None(3) 5.00%(4) None
purchase price or sale
proceeds, as applicable)
Annual Fund Operating Class Class Institutional
Expenses (deducted from A B Class
Fund assets) shares shares shares
- ---------------------------- -------- -------- ----------
Management Fees 0.70% 0.70% 0.70%
- ---------------------------- -------- -------- ----------
Distribution and/or 0.25% 1.00% None
Service (12b-1) Fees
- ---------------------------- -------- -------- ----------
Other Expenses 0.90% 0.75% 0.82%
- ---------------------------- -------- -------- ----------
TOTAL ANNUAL FUND 1.85% 2.45% 1.52%
OPERATING EXPENSES(5)
- --------
(1) If you buy and sell shares through a broker or agent, they may also charge
you a transaction fee.
(2) As the amount of your investment increases, the sales charge imposed on the
purchase of Class A shares decreases. For more information, see "Buying,
Selling and Exchanging Fund Shares - Buying Shares - Class A sales
charges."
(3) A contingent deferred sales charge (CDSC) of up to 1% may be imposed on
certain redemptions of Class A shares purchased without a sales charge.
(4) A CDSC ranging from 5% to 1% is charged when you sell Class B shares within
the first six years of purchase. Class B shares are converted to Class A
shares after you have held them for seven years. See "Buying, Selling and
Exchanging Fund Shares - Buying Shares - Contingent deferred sales charge
(CDSC) on Class B shares."
(5) Because the Fund was established on December __, 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled
under its contract with the Fund, and any applicable distribution and
service fees are the maximum rates that can be charged under the
Distribution and Service Plan. "Other Expenses" are estimates of the other
operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on estimates for the
Fund's first fiscal year ending October 31, 2000. At least through October
31, 2000, the adviser has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Fund
Operating Expenses will not exceed 1.35% for Class A shares, 1.85% for
Class B shares and 1.00% for Institutional Class shares. This waiver of
management fees or reimbursement of other expenses is subject to a possible
reimbursement by the Fund within five years of the Fund's commencement of
operations if the reimbursement by the Fund can be implemented within the
annual expense limitations described above.
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years
- ----------------------- --------- ---------
Class A shares $752 $1,123
- ----------------------- --------- ---------
Class B shares $748 $1,064
- ----------------------- --------- ---------
Institutional Class $155 $ 480
shares
You would pay the following expenses on the same investment if you did not sell
your shares:
1 year 3 years
- ----------------------- --------- ---------
Class B shares $248 $261
3
<PAGE> 131
MORE ABOUT THE FUND
PRINCIPAL RISKS AND TECHNIQUES
The Fund may use the principal investment techniques to increase returns,
protect assets or diversify investments. These techniques are subject to certain
risks. For additional information about the Fund's investment strategies and
techniques, see the Statement of Additional Information.
PRINCIPAL RISKS
SMALL CAP RISK. Historically, the securities of small companies have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of small companies, the lower degree of liquidity in the
markets for such securities, the greater impact caused by changes in investor
perception of value, and the greater sensitivity of small cap companies to
changing economic conditions. In addition, small cap companies may:
- lack depth of management
- be unable to generate funds necessary for growth or development
- be developing or marketing new products or services for which markets
are not yet established and may never become established
- market products or services which may become quickly obsolete
Small cap companies in the technology and biotechnology industries may be
subject to abrupt or erratic price movements. Therefore, while small cap
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.
FOREIGN RISK
- COUNTRY. General securities market movements in any country in which
the Fund has investments are likely to affect the value of the Fund's
securities that trade in that country. These movements will affect the
Fund's share price and the Fund's performance. The political, economic
and social structures of some countries in which the Fund invests may
be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition
of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, punitive taxes and certain
custody and settlement risks.
- COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices
as U.S. companies and their securities may not be as liquid as
securities of similar U.S. companies. Foreign stock exchanges, trading
systems, brokers and companies generally have less government
supervision and regulation than in the U.S. The Fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in
U.S. courts. Generally, the Fund can decrease in value when the
individual stocks and other assets it owns decrease in value. A
company's stock can lose value for various reasons, including poor
profits, weakened finances, changes in management, a downturn in the
economy, or any other reason that leads investors to lose faith in
that stock.
- CURRENCY. Some of the Fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the
value of what the Fund owns and the Fund's share price. Generally,
when the U.S. rises in value against a foreign currency, an investment
in that country loses value because that currency is worth fewer U.S.
dollars. Devaluation of currency by a country's government or banking
authority also has a significant impact on the value of any securities
denominated in that currency.
PRINCIPAL TECHNIQUES
The Fund may use the following investment techniques to increase its returns,
protect its assets or diversify its investments.
VALUE STOCKS. Due to their relatively low valuations, value stocks are typically
less volatile than growth stocks and their price may be less directly linked to
market developments than a growth stock's. Value stocks also depend less on
price changes, and more on dividend yields, for returns than do growth funds.
Accordingly, they might not participate in upward market movements, but may be
less adversely
4
<PAGE> 132
MORE ABOUT THE FUND (CONTINUED)
affected in a down market compared to lower yielding stocks.
CONVERTIBLE SECURITIES. Convertible securities--also known as
convertibles--include bonds, debentures, notes, preferred
stocks, and other securities. Convertibles are hybrid securities that have
characteristics of both bonds and stocks. Like bonds, they pay interest. Because
they can be converted into common stock within a set period of time, at a
specified price or formula, convertibles also offer the chance for capital
appreciation, like common stocks.
Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as an underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however, may sustain their value better than the
common stock because they pay income, which tends to be higher than common stock
dividend yields.
Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," better-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.
Convertibles tend to be more secure than common stock (companies must generally
pay holders of convertibles before they pay holders of common stock), but they
are typically less secure than similar non-convertible securities such as bonds
(bondholders must generally be paid before holders of convertibles and common
stock). Because convertibles are usually subordinate to bonds in terms of
payment priority, convertibles typically are rated below investment grade by a
nationally recognized rating agency, or they are not rated at all.
PREFERRED STOCK. Shareholders of preferred stocks normally have the right to
receive dividends at a fixed rate but do not participate in other amounts
available for distribution by the issuer. Dividends on preferred stock may be
cumulative, and cumulative dividends must be paid before common shareholders
receive any dividends. Because preferred stock dividends usually must be paid
before common stock dividends, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par on stated value,
and are senior in right of payment to common stock. Preferred stocks do not
represent a liability of the issuer and, therefore, do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible securities may be subordinated to other preferred stock of the same
issuer.
WARRANTS. A warrant is a security that gives the holder of the warrant the right
to buy common stock at a specified price for a specified period of time.
Warrants are considered speculative and have no value if they are not exercised
before their expiration date.
REITS. The Fund may invest in real estate investment trusts ("reits"). REITS are
pooled investment vehicles which invest primarily in income producing real
estate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily
from the collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive income from the
collection of interest payments. Hybrid REITs combine the investment strategies
of Equity REITs and Mortgage REITs.
REITS involve certain risks that are associated with direct ownership of real
estate and with the real estate industry in general. These risks include, among
others, possible declines in the value of real estate, possible lack of
availability of mortgage funds, and explained vacancies of properties.
RULE 144A SECURITIES. Rule 144A securities are privately offered securities that
can be resold only to qualified institutional buyers. Rule 144A securities are
treated as illiquid, unless the Fund has determined, under guidelines
established by the Trust's trustees, that the particular issue is liquid.
FOREIGN CURRENCY HEDGING TRANSACTIONS. The Fund may engage in foreign currency
exchange transactions to protect the value of specific portfolio positions or in
anticipation of changes in relative values of currencies in which Fund portfolio
holdings are denominated. For example, to protect against a change in the
foreign currency exchange rate between the date on which the Fund contracts to
purchase or sell a security and the settlement date for the purchase or sale,
5
<PAGE> 133
MORE ABOUT THE FUND (CONTINUED)
or to "lock in" the equivalent of a dividend or interest payment in another
currency, the Fund might purchase or sell a foreign currency on a spot (cash)
basis at the prevailing spot rate. If conditions warrant, the Fund may also
enter into private contracts to purchase or sell foreign currencies at a future
date and/or purchase exchange-listed and over-the-counter call and put options
on foreign currencies. Over-the-counter currency options are generally less
liquid than exchange-listed options, and will be treated as illiquid assets. The
Fund may not be able to dispose of over-the-counter options quickly.
TEMPORARY DEFENSIVE POSITIONS. In response to economic, political or unusual
market conditions, the Fund may invest up to 100% of its assets in cash or money
market obligations. Should this occur, the Fund will not meet its investment
objectives, and may miss potential market upswings.
6
<PAGE> 134
MANAGEMENT
INVESTMENT MANAGER
Villanova Mutual Fund Capital Trust ("VMF"), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the assets and supervises the daily
business affairs of the Fund. Subject to the supervision and direction of the
Trustees, VMF also monitors the performance of the subadviser. VMF is authorized
to select and place portfolio investments on behalf of the Fund; however, VMF
does not intend to do so at this time. VMF was organized in 1999 and manages
mutual fund assets. As of ______, 1999, it had approximately ___ billion in
assets under management.
The Fund pays VMF a management fee as set forth below. The management fee is
based on the Fund's average daily net assets and includes breakpoints, so fees
decrease as assets increase.
Assets Fee
- ----------------------------- ---------------------------
up to $250 million 0.70%
$250 million - $1 billion 0.675%
$1 billion - $2 billion 0.65%
$2 billion - $5 billion 0.625%
$5 billion + 0.60%
SUBADVISER
Villanova Value Investors, LLC ("VVI"), ________, _____, is the Fund's
subadviser. Subject to the supervision of VMF and the Trustees, VVI will manage
the Fund's assets in accordance with the Fund's investment objective and
strategies. VVI will make investment decisions for the Fund and, in connection
with such investment decisions, places purchase and sell orders for securities.
VVI was organized in 1999 and manages the Fund, [as well as institutional
accounts].
HISTORICAL PERFORMANCE OF THE PORTFOLIO MANAGERS
The Fund is managed by a management team. Prior to managing the Fund, the team
managed the ______ Fund (the "Prior Fund") from ________ to ________. Average
annual returns for the entire period during which the team managed the Prior
Fund compared with the performance of the ______ Index for the same periods,
were as follows:
INSERT PERFORMANCE FIGURES
Although the Fund has been operating for only a limited time, the portfolio
managers of the subadviser managed similar mutual funds [or institutional
accounts] previously. These other mutual funds [or institutional accounts] have
investment objectives and strategies that are substantially similar, but not
necessarily identical, to those of the Fund. We have included performance
information about these other mutual funds [or institutional accounts] for
comparison purposes, BUT THESE OTHER MUTUAL FUNDS [AND INSTITUTIONAL ACCOUNTS]
ARE SEPARATE AND DISTINCT FROM THE FUND. THEIR PERFORMANCE DOES NOT GUARANTEE
SIMILAR RESULTS FOR THE FUND AND SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR THE
FUND'S OWN PERFORMANCE.
The performance of similar mutual funds [or institutional accounts] previously
managed by the portfolio managers may not be comparable to the performance of
the Fund because of the following differences:
- brokerage commissions and dealer spreads
- expenses (including management fees)
- the size of the investment in a particular security in relation to the
portfolio size
- the timing of purchases and sales (including the affect of market
conditions at that time)
- the timing of cash flows into the portfolio
- the availability of cash for new investments.
[If the historical performance relates only to institutional accounts (including
institutional accounts that are included in composite performance), the
performance may not be comparable to the performance of the Funds because,
unlike the Funds, the institutional accounts may not be required to do the
following:
- redeem shares upon request
- meet the same diversification requirements as mutual funds
- follow the same tax restrictions and investment limitations as mutual
funds.
In some instances the performance of the institutional accounts is calculated by
combining the performance of all similarly managed accounts into a composite.
Depending on
7
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MANAGEMENT (CONTINUED)
the subadviser, the composite may or may not also contain registered mutual
funds. If the accounts within each composite had been subject to all Fund
expenses, their performance may have been lower. As indicated below, the
composite performance may be prepared in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
("AIMR Standards"), which are different from the performance methodology used by
registered investment companies like the Fund. AIMR has not been involved with
the preparation or review of this information.]
Average annual total return represents the average change over a specified
period of time in the value of an investment after reinvesting all income and
capital gains distributions.
The historical performance information has been provided by _________. The Fund
believes that it is reliable, but the Fund has not independently verified it.
The historical investment performance of the _________ reflects the deduction of
total annual operating expenses of ____% as of December 31, 1999, which are
lower than the total operating expenses of the Fund before fee waivers.
8
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BUYING, SELLING AND EXCHANGING FUND SHARES
CHOOSING A SHARE CLASS
As noted in the Fund Summary, the Fund offers different share classes to give
investors different price and cost options. Class A and Class B shares are
available to all investors; Institutional Class shares are available to a
limited group of investors.
With Class A shares, you pay a sales charge (known as a front-end sales charge)
when you purchase the shares; and with Class B shares you pay a sales charge
(known as a contingent deferred sales charge, or CDSC) if you sell your shares
within six years after purchase.
Class A and Class B shares both pay distribution and/or service fees under a
Distribution Plan. These fees are either retained by NAS or paid by NAS to
brokers for distribution and shareholder services. Class A shares may pay
administrative service fees. These fees are paid to brokers and other entities
who provide administrative support services to the beneficial owners of the
shares.
If you want to lower annual fund expenses, Class A shares may be right for you,
particularly if you qualify for a reduction or waiver of sales charges. If you
do not want to pay an up-front sales charge, and you anticipate holding your
shares for the long term, Class B shares may be more appropriate. As the Fund's
principal distributor, Nationwide Advisory Services, Inc. ("NAS") reserves the
right to reject an order in excess of $100,000 for Class B shares and an order
for Class B shares for Individual Retirement Accounts ("IRA accounts") for
shareholders 70 1/2 years and older. When choosing a share class, consider the
following:
Class A shares Class B shares
- -------------------------- ------------------------------
Front-end sales charge No front-end sales charge, so
means that a portion of your full investment
your initial investment immediately goes toward
goes toward the sales buying shares
charge, and is not
invested
- -------------------------- ------------------------------
Reductions and waivers No reductions of the
of the sales charge contingent deferred sales
available charge available, but
waivers available
- -------------------------- ------------------------------
Lower expenses than Higher distribution and
Class B shares mean service fees than Class A
higher dividends per shares mean lower dividends
share per share
- -------------------------- ------------------------------
Conversion features are After seven years, Class B
not applicable shares convert into Class A
shares, which reduces your
future Fund expenses
- -------------------------- ------------------------------
No sales charge when Contingent deferred sales
shares are sold back to charge (CDSC) if shares sold
the Fund within six years: 5% in the
first year, 4% in the
second, 3% in the third and
fourth years, 2% in the
fifth, and 1% in the sixth
year
WHO CAN BUY INSTITUTIONAL CLASS SHARES
The Institutional Class shares are available for purchase only by the following:
- - retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business and
rollover individual retirement accounts from such plans
- - tax-exempt employee benefit plans of VMF, the Fund's investment manager,
or its affiliates and securities dealer firms with selling agreements
with NAS
- - institutional advisory accounts of VMF, or its affiliates and those
having client relationships with an affiliate of VMF, or its affiliates
and their corporate sponsors, as well as subsidiaries and related
employee benefit plans and rollover individual retirement accounts from
such institutional advisory accounts
- - a bank, trust company or similar financial institution investing for its
own account or for the account of its trust customers for whom such
financial institution is exercising investment discretion in purchasing
Institutional Class shares, except where the investment is part of a
program that requires payment to the financial institution of a Rule
12b-1 Plan or Administrative Service fee
- - registered investment advisers investing on behalf of institutions and
high net-worth individuals entrusted to the adviser for investment
purposes, but only if the adviser is not affiliated or associated with a
broker or dealer and derives compensation for its services exclusively
from its clients for such advisory services
- - investments of at least $__________
BUYING SHARES
PURCHASE PRICE
The purchase or "offering" price of one share of the Fund is its "net asset
value" or NAV next determined after the order is received, plus any applicable
sales charge. A separate NAV is calculated for each class of the Fund.
Generally, NAV is based on the market value of the securities owned by the Fund
less its liabilities. The NAV for a class is determined by dividing the total
market value of the securities owned by the Fund, less the liabilities allocable
to that class,
9
<PAGE> 137
BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
by the total number of that class' outstanding shares. NAV is determined at the
close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern
Standard Time) on each day the Exchange is open for trading.
MINIMUM INVESTMENTS--CLASS A AND B SHARES
To open an account $1000
Through the Automatic Asset Accumulation plan
(per transaction) $25
Additional investments $100
MINIMUM INVESTMENTS - INSTITUTIONAL CLASS SHARES
To open an account $____
Additional investments $____
These minimum investment requirements do not apply to certain retirement plans.
Call 1-800-848-0920 for more information. If you purchase shares through an
account at a broker (other than NAS), different minimum account requirements may
apply.
The Fund does not calculate NAV on the following days:
- - Christmas Day
- - New Year's Day
- - Martin Luther King, Jr. Day
- - Presidents' Day
- - Good Friday
- - Memorial Day
- - Independence Day
- - Labor Day
- - Thanksgiving Day
- - other days when the New York Stock Exchange is not open.
The Fund reserves the right not to determine an NAV for the Fund when:
- - It has not received any orders to purchase, sell or exchange shares;
Changes in the value of the Fund's portfolio do not affect the NAV. If current
prices are not available, or if Villanova SA Capital Trust ("VSA"), as the
Fund's administrator or its agent, determines a price does not represent fair
value, the Fund's investments may be valued at fair market value in accordance
with procedures adopted by the Board of Trustees. To the extent that the Fund's
investments are traded in markets that are open when the New York Stock Exchange
is closed, the value of the Fund's investments may change on days when shares
cannot be purchased or redeemed.
When you purchase shares, your purchase price will be the offering price or NAV
next determined after your order is received, plus any applicable sales load.
CLASS A SALES CHARGES
The chart below shows the Class A sales charges, which decrease as the amount of
your investment increases.
CLASS A SHARES
Sales Sales charge
charge as % as % of
of offering amount
Amount of purchase price invested
- ---------------------------- ------------- --------------
less than $50,000 5.75% 6.10%
- ---------------------------- ------------- --------------
$50,000 to $99,999 4.50 4.71
- ---------------------------- ------------- --------------
$100,000 to $249,999 3.50 3.63
- ---------------------------- ------------- --------------
$250,000 to $499,999 2.50 2.56
- ---------------------------- ------------- --------------
$500,000 to $999,999 2.00 2.04
- ---------------------------- ------------- --------------
$1 million to $24,999,999 0.50 0.50
- ---------------------------- ------------- --------------
$25 million or more 0.25 0.25
REDUCTION AND WAIVER OF CLASS A SALES CHARGES
Shareholders can reduce or eliminate the Class A initial sales charge through
one or more of the discounts described below:
- - INCREASE THE AMOUNT OF YOUR INVESTMENT. The preceding table shows how the
sales charge decreases as the amount of your investment increases.
- - FAMILY MEMBER DISCOUNT. Members of your family who live at the same
address can combine investments, possibly reducing the sales charge.
- - LIFETIME ADDITIONAL DISCOUNT. You can add the value of any of the
Nationwide Mutual Funds Class A shares you already own with the value of
the shares you are purchasing, which may reduce the applicable sales
charge.
- - INSURANCE PROCEEDS OR BENEFITS DISCOUNT PRIVILEGE. If you use the proceeds
of an insurance policy issued by any member of the Nationwide Insurance
Enterprise to purchase Class A shares, you will pay one-half of the
published sales charge if you make your investment 60 days after receiving
the proceeds.
- - NO SALES CHARGE ON A REPURCHASE. If you sell shares from your Nationwide
account, we allow you a one-time privilege to reinvest some or all of the
proceeds in
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
shares of the same class. You will not pay a sales charge on Class A shares
that you buy within 30 days of selling Class A shares of an equal or lesser
amount if you have already paid a sales charge. Remember, if you realize a
gain or a loss on your sale of shares, the transaction is taxable and
reinvestment will not affect the amount of capital gains tax that is due.
If you realize a loss on your sale and you reinvest, some or all of the
loss may not be allowed as a tax deduction depending on the amount you
reinvest.
- - LETTER OF INTENT DISCOUNT. State in writing that during a 13-month period
you or a group of family members who live at the same address will purchase
or hold at least $50,000 in Class A shares and your sales charge will be
based on the total amount you intend to invest. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy shares of
the Fund; it is merely a statement of intent. Call 1-800-848-0920 for more
information.
WAIVER OF CLASS A SALES CHARGES
The Class A sales charges will be waived for the following purchases:
Class A shares sold to:
- - Any person purchasing through an account with a unaffiliated brokerage firm
that has an agreement with NAS to waive sales charges for those persons;
- - Directors, officers, full-time employees, sales representatives and their
employees or any investment advisory clients of a broker-dealer having a
dealer/selling agreement with NAS;
- - Any person who pays for the share with proceeds of mutual fund shares
sold from an NAS brokerage account. To qualify, you must have paid an
initial sales charge or CDSC on the shares sold. You must purchase the
Class A shares within 60 days of the sale, and you must request the
waiver when you purchase the Class A shares (NAS may require evidence
that you qualify for this waiver);
- - Employer-sponsored retirement plans, including pension, profit sharing or
deferred compensation plans which are qualified under sections 401(a),
403(b) or 457 of the Internal Revenue Code;
- - Trustees and retired Trustees of Nationwide Mutual Funds (including its
predecessor Trusts);
- - Directors, officers, full-time employees, sales representatives and their
employees, and retired directors, officers, employees, and sales
representatives, their spouses, children or immediate relatives
(including mother, father, brothers, sisters, grandparents and
grandchildren) and immediate relatives of deceased employees of any
member of Nationwide Insurance and Nationwide Financial companies, or any
investment advisory clients of VMF, VSA, NAS and their affiliates;
- - Directors, officers, full-time employees, their spouses, children or
immediate relatives and immediate relatives of deceased employees of any
sponsor group which may be affiliated with Nationwide Insurance and
Nationwide Financial companies from time to time, (including but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm Bureau,
Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania Farmers'
Association, Ruralite Services, Inc., and Southern States Cooperative).
Additional investors eligible for sales charge waivers may be found in the
Statement of Additional Information.
CONVERSION OF CLASS B SHARES
After you have held your Class B shares for seven years, we will automatically
convert them into Class A shares (without charge), which carry the lower 12b-1
fee. We will also convert any Class B shares that you purchased with reinvested
dividends and other distributions for those shares at that time. Remember,
because the NAV of Class A shares is usually higher than the NAV of Class B
shares, you may receive fewer Class A shares than the number of Class B shares
converted, but the total dollar value will be the same. We do the conversion on
the first business day of the month following the seventh anniversary of the
date of your purchase.
HOW TO PLACE YOUR PURCHASE ORDER
If you wish to purchase shares, you may purchase the shares using one of the
methods below. Eligible entities wishing to purchase Institutional Class shares
should contact Nationwide Advisory Services, Inc. at 1-800-848-0920 for
information regarding such purchases.
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
BY MAIL - Complete and mail the application with a check or money order made
payable to: Nationwide Advisory Services, Inc., Three Nationwide Plaza, P.O. Box
1492, Columbus, Ohio 43216-1492. Payment must be made in U.S. dollars only and
drawn on a U.S. bank. NAS will not accept third-party checks.
BY WIRE - You can request that your bank transmits funds ("federal funds") by
wire to the Fund's custodian bank. In order to use this method, you must call
NAS by 4 p.m. Eastern Standard Time, and the wire must be received by the
custodian bank by the close of business on the day you placed your order or your
order will be cancelled. You may be liable for any loss to the Fund resulting
from the cancellation. Your bank may charge a fee to wire the funds. If you
choose this method to open your account, you must call our toll-free number
before you wire your investment, and you must then complete and fax the
application.
BY TELEPHONE (NAS NOW) - Call 1-800-637-0012, our automated voice-response
system, 24 hours a day, seven days a week, for easy access to mutual fund
information. You can choose from a menu of choices to conduct transactions and
hear Fund price information, mailing and wiring instructions and other mutual
fund information. You must complete the appropriate section of the application
to use NAS NOW to make purchases.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you purchase through such a broker, your
order will be priced at the NAV next determined after your broker or its
designated intermediary accepts it. Contact your broker to determine whether it
has an established relationship with NAS.
ADDITIONAL SHAREHOLDER SERVICES
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
NAS CUSTOMER SERVICE 1-800-848-0920
Representatives are available to
answer questions between 8 a.m.
and 5 p.m. Eastern Standard Time.
For additional information on buying shares and shareholder services, call the
customer service number listed above or contact your Nationwide representative.
SELLING SHARES
You can sell - also known as redeeming - your shares of the Fund at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be the NAV (less any applicable sales charges) next determined after
NAS receives your properly completed order to sell in its offices in Columbus,
Ohio. Of course, the value of the shares you sold may be more or less than their
original purchase price depending upon the market value of the Fund's
investments at the time of sale.
Your order to sell shares can be made in writing or by telephone (if you
authorized telephone transactions on your application). Generally, we will pay
you for the shares that you sell within three days after receiving your order to
sell. Payment for shares you recently purchased by check may be delayed until
the check clears, which may take up to 12 calendar days from the date of your
purchase.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Fund or the Fund may delay paying
you the proceeds from a sale when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or if trading is restricted or if
an emergency exists.
SIGNATURE GUARANTEE
A signature guarantee is required under the following circumstances:
- if a redemption is over $100,000, or
- if your account registration has changed within the last 30 days, or
- if the redemption check is made payable to anyone other than the
registered shareholder, or
- if the proceeds are sent back to a bank account not previously
designated, or
- if the proceeds are mailed to an address other than the address of
record.
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
NAS reserves the right to require a signature guarantee in other circumstances,
without notice.
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON CLASS A AND CLASS B SHARES
You must pay a CDSC if you sell Class B shares within six years of purchase,
unless you are entitled to waiver. The sales charge applies if your sale causes
the value of your account to fall below the total amount of all purchases you
made during the preceding six years. The sales charge is applied to your
original purchase price, or the current market value of the shares being sold,
whichever is less. The amount of the sales charge will decrease as illustrated
in the following chart:
Sale within 1 year 2 years 3 years 4 years 5 years 6 years 7 years or more
- --------------------------------------------------------------------------------
Sales charge 5% 4% 3% 3% 2% 1% 0%
All purchases during the month are grouped together and will be treated as if
made on the last day during the preceding month.
We do not impose a CDSC on Class B shares purchased through reinvested dividends
and distributions. If you sell your Class B shares and reinvest the proceeds in
Class B shares within 30 days, NAS will deposit an amount equal to any CDSC you
paid into your account. Also, we will waive the CDSC if you sell your shares
following the death or disability of a shareholder, provided the sale occurs
within one year of the shareholder's death or determination of disability and
for mandatory withdrawals from IRA accounts after age 70 1/2 years. For more
information, see the Statement of Additional Information.
Under certain circumstances, employer-sponsored retirement plans investing
without a sales charge (other than those investing in the Fund through variable
insurance products) may be charged a CDSC if shares are redeemed within three
years after purchase. The CDSC will be 1% for the first year, 0.50% for the
second year and 0.25% for the third year.
HOW TO PLACE YOUR SALE ORDER
You can request the sale of your shares in any of the following ways:
BY TELEPHONE (NAS NOW) - Calling 1-800-637-0012 connects you to our automated
voice-response system, available 24 hours a day, seven days a weeks, for easy
access to mutual fund information. You can sell shares and have the check mailed
to your address of record, unless you declined this option on your application.
Only the following types of accounts can use NAS NOW to sell shares: Individual,
Joint, Transfer on Death, Trust, and Uniform Gift/Transfer to Minor accounts.
You can call 1-800-637-0012 after 7 p.m. Eastern Standard Time to learn the
day's closing share price.
CAPITAL GAINS TAXES
If you sell Fund shares for more than you paid for them, you may have capital
gains, which are subject to federal (and in some cases, state) income tax. For
more information, see "Distributions and Taxes - Selling Fund Shares."
CUSTOMER SERVICE LINE - If you have elected to have telephone redemption
privileges, a check payable to the shareholder of record can be mailed to the
address of record, unless you declined the telephone redemption privilege on
your application. NAS can wire the funds directly to your account at a
commercial bank (a voided check must be attached to your applications), unless
you declined telephone privileges on your application. (This authorization will
remain in effect until you give NAS written notice of its termination.) You can
sell shares of your IRA by telephone if we receive the proper forms. The
distribution from an IRA will be subject to a mandatory 10% federal withholding
tax, unless you inform us in writing not to withhold taxes. For additional
information or to request the forms, please call the customer service line at
1-800-848-0920. The Fund will use procedures to confirm that telephone
instructions are genuine. If the Fund acts on instructions it reasonably
believed were genuine, it will not be liable for any loss, injury, damage or
expense that occurs as a result, and the Fund will be held harmless for any
loss, claims, or liability arising from its compliance with the instructions.
NAS may record telephone instructions to sell shares. The Fund reserves the
right to revoke this privilege at any time, without notice to shareholders, and
to request the sale in writing, signed by all shareholders on the account.
BANK BY WIRE - Your funds will be wired to your bank on the next business day
after your order to sell shares has been processed. We will deduct a $20 fee
from the proceeds of your sale for this service. Your financial institution may
also charge you a fee for receiving the wire. Funds sent outside the U.S. may be
subject to a higher fee.
BY AUTOMATED CLEARING HOUSE ("ACH") - Your funds can be sent to your bank via
ACH on the second business day after your order to sell has been reviewed by
NAS.
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
Funds sent through ACH should reach your bank in two business days. There is no
fee for this service. (This authorization will remain in effect until you give
NAS written notice of its termination.)
BY MAIL OR FAX (No minimum) - Write a letter to Nationwide Advisory Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax it
to 614-249-8705. Please be sure your letter is signed by all account owners. Be
sure to include your account number and the Fund from which you wish to make a
redemption. For a distribution from an IRA, you must include your date of birth
and indicate whether or not you want NAS to withhold federal income tax from
your proceeds. Your sale of shares will be processed the next business day. NAS
reserves the right to require the original document if you fax your letter. A
signature guarantee may be required under certain circumstances. Please refer
back to "Signature Guarantee" on page __.
THROUGH AN AUTHORIZED BROKER - NAS has relationships with certain brokers who
are authorized to accept, or designate intermediaries to accept, purchase and
redemption orders for the Fund. If you have an account with such a broker, your
redemption order will be priced at the NAV next determined after your order has
been accepted by your broker or its designated intermediary. Your broker may
charge a fee for this service.
ACCOUNTS WITH LOW BALANCES
We may sell the rest of your shares and close your account if you make a sale
that reduces the value of your account to less than $250. Before the account is
closed, we will give you notice and allow you 90 days to purchase additional
shares to avoid this action. We do this because of the high cost of maintaining
small accounts. This does not apply to Automatic Asset Accumulation accounts.
For additional information concerning your ability to sell your shares, call our
customer service line at 1-800-848-0920 or see your Nationwide representative.
DISTRIBUTION PLAN
In addition to the sales charges which you may pay for Class A and Class B
shares, the Trust has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act , which permits the Fund to compensate NAS - as
distributor - for expenses associated with distributing its shares and providing
shareholder services.
DISTRIBUTION AND SERVICE FEES
Under the Distribution Plan, the Fund pays NAS compensation accrued daily and
paid monthly. The Fund shall pay amounts not exceeding an annual amount of:
Fund/Class As a % of daily net assets
- ---------------------------------------------------------
Class A shares 0.25% (distribution or
service fee)
- ---------------------------------------------------------
Class B shares 1.00% (.25% service fee)
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
EXCHANGING SHARES - CLASS A AND CLASS B SHARES
You can exchange the shares you own for shares of another fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new fund meets the fund's minimum investment requirement. You
cannot exchange Class A shares for Class B shares.
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of shares for federal and
state income tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal and/or state income taxes.
For more information, see ""Distribution and Taxes - Exchanging Fund
Shares-Class A and Class B Shares."
There is no sales charge for exchanges of Class B shares. However, if your
exchange involves certain Class A shares, you may have to pay the difference
between the sales charges if a higher sales charge applies.
HOW TO PLACE YOUR EXCHANGE ORDER
You can request an exchange of shares in writing, by fax or by phone (see
"Buying Shares - How to place your purchase order" or the back cover for contact
information). If you make your request in writing, please be sure your letter is
signed exactly as your account is registered. Your exchange
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BUYING, SELLING AND EXCHANGING FUND SHARES (CONTINUED)
will be processed on the date NAS receives your signed letter or fax. If your
fax is received after 4 p.m. Eastern Standard Time, it will be processed the
next day. If you fax your request, we reserve the right to ask for the original.
You can automatically request an exchange 24 hours a day, seven days a week, by
calling NAS NOW, our automated voice-response system. You will have automatic
exchange privileges unless you request not to on your application. The Trust
reserves the right to amend or discontinue these exchange privileges upon 60
days' written notice to shareholders.
EXCESSIVE TRADING
The Trust reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders.
The Fund may delay forwarding redemption proceeds for up to seven days if the
investor redeeming shares is engaged in excessive trading, or if the amount of
the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund.
YEAR 2000
VMF, 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. VMF, 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. VMF, VSA and NAS have also tested each application
for their 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.
VMF, VSA and NAS' assessment of Year 2000 issues has included non-information
technology systems with embedded computer chips. VMF, VSA and NAS' building
systems such as fire, security, elevators and escalators supporting facilities
in Columbus, Ohio, have been tested and are Year 2000 compliant.
In addition to resolving internal Year 2000 readiness issues, VMF, VSA and NAS
are surveying significant external organizations (business partners) to assess
if they will be Year 2000 compliant. VMF, VSA and NAS continue their efforts to
identify external risk factors and has developed contingency plans as part of
its ongoing risk-management strategy.
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<PAGE> 143
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For up-to-date tax advice, please speak with
your tax adviser.
DISTRIBUTIONS OF INCOME DIVIDENDS
Every quarter, the Fund distributes any available income dividends to
shareholders. Income dividends are taxable to you as ordinary income for federal
income tax purposes, unless you hold your shares in a qualified tax-deferred
plan or account, or are otherwise not subject to federal income tax. The amount
of income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account). For corporate shareholders, a portion
of each year's distributions may be eligible for the corporate dividend-received
deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If the Fund has net realized capital gains at the end of the fiscal year
(meaning the gains from sale of securities exceed any losses from sales), it
will distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account. On Form 1099, we will report
the amount of net short-term capital gains and net long-term capital gains
distributed to you during the year. Currently, for individuals, long-term
capital gains are taxed at a maximum rate of 20%; short-term capital gains are
taxed as ordinary income, such as interest or dividends. For the current capital
gains tax rates, speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in writing if distributions are in
excess of $5. If the checks sent to you cannot be delivered, or are not cashed,
distributions will be reinvested in shares of the Fund. You are subject to tax
on reinvested distributions.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certifications are not accurate, or as may otherwise be required under the
Internal Revenue Code.
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your option, you must notify us by the record date for a
dividend or distribution in order for it to be effective for that dividend or
distribution. You will not receive interest on any uncashed distribution,
dividend or redemption checks.
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of the tax depends on how
long you held your shares. For individuals, long-term capital gains are taxed as
ordinary income, such as interest or dividends. Capital gains from your sale of
Fund shares is not reported on Form 1099; you or your tax adviser should keep
track of your purchases, sales, and any resulting gain or loss. If you do sell
Fund shares for a loss, you may be able to use this capital loss to offset any
capital gains you have.
EXCHANGING FUND SHARES - CLASS A AND CLASS B SHARES
Exchanging your shares of the Fund is considered a sale for income tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
have capital gains, which are subject to the federal income taxes described
above. If you exchange Fund shares for a loss, you may be able to use this
capital loss to offset any capital gains you have.
16
<PAGE> 144
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents contain additional information about the Fund. To obtain
a document free of charge, contact us at the address or number listed below.
- - Statement of Additional Information (SAI) (incorporated by reference in this
Prospectus)
- - Annual Report (which contains a discussion of the market conditions and
investment strategies that significantly affect the Fund's performance)
- - Semi-Annual Report
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Standard Time)
FOR 24-HOUR ACCOUNT ACCESS:
1-800-637-0012 (toll free)
Also, visit the Nationwide Funds Web Site at www.nationwidefunds.com.
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of the Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
VIA THE INTERNET:
http://www.sec.gov
Investment Company Act File No. 811-08495
17
<PAGE> 145
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER __, 1999
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SMALL CAP INDEX FUND
NATIONWIDE INTERNATIONAL INDEX FUND
NATIONWIDE BOND INDEX FUND
(COLLECTIVELY, THE "INDEX FUNDS")
THE AGGRESSIVE FUND
THE MODERATELY AGGRESSIVE FUND
THE MODERATE FUND
THE MODERATELY CONSERVATIVE FUND
THE CONSERVATIVE FUND
(COLLECTIVELY, THE "LIFE STRATEGY SERIES")
Nationwide Mutual Funds (the "Trust") is a registered open-end
investment company consisting of ____ series as of the date hereof. This
Statement of Additional Information relates to eight series of the Trust,
consisting of the Index Funds and the Life Strategy Series (each, a "Fund" and
collectively, the "Funds").
This Statement of Additional Information is not a prospectus but the
Statement of Additional Information is incorporated by reference into the
Prospectuses for the Funds. It contains information in addition to and more
detailed than that set forth in the Prospectuses dated December __, 1999, and
should be read in conjunction with the Prospectuses. Terms not defined in this
Statement of Additional Information have the meanings assigned to them in the
Prospectuses. The Prospectuses may be obtained from Nationwide Advisory
Services, Inc., P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio 43215, or
by calling toll free 1-800-848-0920.
<PAGE> 146
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
General Information and History......................................................... __
Additional Information on Portfolio Instruments and Investment Policies................. __
Description of Portfolio Investments and Investment Policies............................ __
Investment Restrictions................................................................. __
Trustees and Officers of the Trust...................................................... __
Investment Advisory and Other Services.................................................. __
Brokerage Allocation.................................................................... __
Additional Information on Purchases and Sales........................................... __
Valuation of Shares..................................................................... __
Investor Strategies..................................................................... __
Investor Privileges..................................................................... __
Investor Services....................................................................... __
Fund Performance Advertising............................................................ __
Additional Information.................................................................. __
Additional General Tax Information...................................................... __
Major Shareholders...................................................................... __
Appendix A - Bond Ratings............................................................... __
</TABLE>
i
<PAGE> 147
GENERAL INFORMATION AND HISTORY
Nationwide Mutual Funds (the "Trust"), formerly Nationwide Investing
Foundation III (NIF III), is an open-end management investment company organized
under the laws of Ohio by a Declaration of Trust, dated as of October 30, 1997,
as subsequently amended. The Trust currently offers shares in ____________(____)
separate series, each with its own investment objective. Each of the eight Funds
discussed in this Statement of Additional Information is a non-diversified fund
as defined in the Investment Company Act of 1940.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
THE INDEX FUNDS
Each Index Fund's investment objective is to provide investment results
that, before expenses, seek to replicate the total return (i.e., the combination
of capital changes and income) of a specified securities index. Each Fund will
seek to achieve its objective by investing all of its assets in the series
(collectively, the "Series," and each, a "Series") of Index Master Series Trust
that has the same investment objective as the Fund. Each Fund's investment
experience will correspond directly to the investment experience of the
respective Series in which it invests. There can be no assurance that the
investment objectives of the Funds will be achieved.
All investments will be made at the level of the Series. There can be
no assurance that the investment objectives of the Funds will be achieved.
The Funds' investment objectives are not fundamental policies and may
be changed by the Board of Trustees of the Trust without shareholder approval.
The Trustees may also change the target index of any Index Fund if they consider
that a different index would facilitate the management of the Fund in a manner
which better enables the Fund to seek to replicate the total return of the
market segment represented by the current index.
Small Cap Index Fund. The investment objective of the Small Cap Index
Fund is to match the performance of the Russell 2000(R) Index (the "Russell
2000") as closely as possible before the deduction of Fund expenses. There can
be no assurance that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective by investing all of
its assets in the Merrill Lynch Small Cap Index Series of Index Master Series
Trust ("Small Cap Index Series"), which has the same investment objective as the
Fund.
Bond Index Fund. The investment objective of the Bond Index Fund is to
match the performance of the Lehman Brothers Aggregate Bond Index (the
"Aggregate Bond Index") as closely as possible before the deduction of Fund
expenses. There can be no assurance that the investment objective of the Fund
will be achieved.
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<PAGE> 148
The Fund seeks to achieve its investment objective by investing all of
its assets in the Merrill Lynch Aggregate Bond Index Series of Index Master
Series Trust ("Aggregate Bond Index Series"), which has the same investment
objective as the Fund. The following supplements the information contained in
the Prospectus regarding the investment policies of the Bond Index Fund.
The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade bonds in the following classes: U.S. Treasury and agency
securities, U.S. corporate bonds, foreign corporate bonds, foreign sovereign
debt (debt securities issued or guaranteed by foreign governments and
governmental agencies), supranational debt (debt securities issued by entities,
such as the World Bank, constituted by the governments of several countries to
promote economic development) and mortgage-backed securities with maturities
greater than one year. Corporate bonds contained in the Aggregate Bond Index
represent issuers from various industrial sectors.
The Bond Index Fund may invest in U.S. Treasury bills, notes and bonds
and other "full faith and credit" obligations of the U.S. Government. The Bond
Index Fund may also invest in U.S. Government agency securities, which are debt
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. "Agency" securities may not be backed by the "full faith and credit"
of the U.S. Government. U.S. Government agencies may include the Federal Farm
Credit Bank, the Resolution Trust Corporation and the Government National
Mortgage Association. "Agency" obligations are not explicitly guaranteed by the
U.S. Government and so are perceived as somewhat riskier than comparable
Treasury bonds.
Because the Aggregate Bond Index is composed of investment grade bonds,
the Bond Index Fund will invest in corporate bonds rated investment grade i.e.,
those rated at least Baa3 by Moody's Investors Service, Inc. ("Moody's") or BBB
by Standard & Poor's Ratings Group ("S&P"), the equivalent by another nationally
recognized statistical rating organization ("NRSRO") or, if unrated, of equal
quality in the opinion of Fund Asset Management, L.P. as the investment adviser
to the Series ("FAM"). Corporate bonds ranked in the fourth highest rating
category, while considered "investment grade", have more speculative
characteristics and are more likely to be downgraded than securities rated in
the three highest ratings categories. In the event that the rating of a security
in the Bond Index Fund is lowered below Baa or BBB, the Bond Index Fund may
continue to hold the security. Such securities rated below investment grade are
considered to be speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Descriptions of the ratings of bonds are contained in the Appendix.
The Bond Index Fund may also invest in other instruments that "pass
through" payments on such obligations, such as collateralized mortgage
obligations ("CMOs").
International Index Fund. The investment objective of the International
Index Fund is to match the performance of the Morgan Stanley Capital
International EAFE(R) GDP Weighted Index (the "EAFE Index") as closely as
possible before the deduction of Fund expenses. There can be no assurance that
the investment objective of the Fund will be achieved.
2
<PAGE> 149
The Fund seeks to achieve its investment objective by investing all of
its assets in the Merrill Lynch International Index Series of Index Master
Series Trust ("International Index Series"), which has the same investment
objective as the Fund.
About Indexing. The Index Funds are not managed according to
traditional methods of "active" investment management, which involve the buying
and selling of securities based upon economic, financial, and market analyses
and investment judgment. Instead, each Index Fund, utilizing essentially a
"passive" or "indexing" investment approach, seeks to replicate, before each
Fund's expenses (which can be expected to reduce the total return of the Fund),
the total return of its respective index.
Indexing and Managing the Funds. Each Index Fund will be substantially
invested in securities in the applicable index, and will invest at least 80% of
its assets in securities or other financial instruments which are contained in
or correlated with securities in the applicable index (equity securities, in the
case of the Small Cap Index Fund and International Index Fund, and fixed-income
securities in the case of the Bond Index Fund ).
Because each Index Fund seeks to replicate the total return of its
respective index, generally FAM will not attempt to judge the merits of any
particular security as an investment but will seek only to replicate the total
return of the securities in the relevant index. However, FAM may omit or remove
a security which is included in an index from the portfolio of an Index Fund if,
following objective criteria, FAM judges the security to be insufficiently
liquid or believes the merit of the investment has been substantially impaired
by extraordinary events or financial conditions.
FAM may acquire certain financial instruments based upon individual
securities or based upon or consisting of one or more baskets of securities
(which basket may be based upon a target index). Certain of these instruments
may represent an indirect ownership interest in such securities or baskets.
Others may provide for the payment to an Index Fund or by an Index Fund of
amounts based upon the performance (positive, negative or both) of a particular
security or basket. FAM will select such instruments when it believes that the
use of the instrument will correlate substantially with the expected total
return of a target security or index. In connection with the use of such
instruments, FAM may enter into short sales in an effort to adjust the
weightings of particular securities represented in the basket to more accurately
reflect such securities, weightings in the target index.
The ability of each Index Fund to satisfy its investment objective
depends to some extent on FAM's ability to manage cash flow (primarily from
purchases and redemptions and distributions from the Fund's investments). FAM
will make investment changes to an Index Fund's portfolio to accommodate cash
flow while continuing to seek to replicate the total return of the Series'
target index. Investors should also be aware that the investment performance of
each index is a hypothetical number which does not take into account brokerage
commissions and other transaction costs, custody and other costs of investing,
and any incremental operating costs (e.g., transfer agency, accounting) that
will be borne by the Funds. Finally, since each Index Fund seeks to replicate
the total return of its target index, FAM generally will not attempt to judge
the merits of any particular security as an investment.
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<PAGE> 150
Each Index Fund's ability to replicate the total return of its
respective index may be affected by, among other things, transaction costs,
administration and other expenses incurred by the Fund, taxes (including foreign
withholding taxes, which will affect the International Index Fund and the Bond
Index Fund due to foreign tax withholding practices), changes in either the
composition of the index or the assets of a Fund, and the timing and amount of
Series investor contributions and withdrawals, if any. In addition, each Index
Fund's total return will be affected by incremental operating costs (e.g.,
transfer agency, accounting) that will be borne by the Fund. Under normal
circumstances, it is anticipated that each Index Fund's total return over
periods of one year and longer will, on a gross basis and before taking into
account expenses (incurred at either the Series or the Fund level) be within 100
basis points (a basis point is one one-hundredth of one percent (0.01%)) for the
Small Cap Index Fund, 150 basis points for the International Index Fund, and 50
basis points for the Bond Index Fund, of the total return of the applicable
indices. There can be no assurance, however, that these levels of correlation
will be achieved. In the event that this correlation is not achieved over time,
the Trustees will consider alternative strategies for the Funds. Information
regarding correlation of an Index Fund's performance to that of a target index
will be reported in the Funds' annual report.
THE LIFE STRATEGY SERIES
The Prospectus for the Life Strategy Series discusses the investment
objectives and strategies for each Series and explains the types of underlying
mutual funds (the "Underlying Funds") that each Series may invest in. Each of
the Life Strategy Series is a "fund of funds," which means that each Fund
invests primarily in other mutual funds. Underlying Funds invest in stocks,
bonds and other securities and reflect varying amounts of potential investment
risk and reward. Each of the Life Strategy Series allocates its assets among the
different Underlying Funds and - except for The Aggressive Fund, the Nationwide
contract. Periodically, each Fund will adjust its asset allocation within
predetermined ranges to ensure broad diversification and to adjust to changes in
market conditions. However, as a general mater, there will not be large, sudden
changes in a Fund's asset allocation.
The following is a list of the mutual funds that are part of the
Nationwide group of funds (the "Nationwide funds") that the Series may currently
invest in. This list may be updated from time to time. Villanova Mutual Fund
Capital Trust ("VMF"), is the investment adviser to each of the Nationwide
funds, except for Morely Enhanced Income Fund which is advised by Union Bond &
Trust Company, an affiliated company of VMF. As described below, VMF has
employed a subadviser to serve as investment adviser to the Nationwide S&P 500
Index Fund.
- - Nationwide International Index Fund
- - Nationwide Small Cap Index Fund
- - Nationwide S&P 500 Index Fund
- - Nationwide Bond Index Fund
- - Morley Enhanced Income Fund
- - Nationwide Money Market Fund
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<PAGE> 151
Nationwide Small Cap Index Fund, Nationwide International Index Fund
and Nationwide Bond Index Fund are further described in this Statement of
Additional Information and in their Prospectus. The following is a brief
description of Nationwide S&P 500 Index Fund, Nationwide Money Market Fund and
Morley Enhanced Income Fund, three other series of the Trust:
Nationwide S&P 500 Index Fund. Nationwide S&P Index Fund seeks to
provide investment results that correspond to the price and yield performance of
publicly traded common stocks, as represented by the Standard & Poor's Composite
Stock Price Index.1 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 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 time in the stocks that
comprise the Index and stock index futures.
Morley Enhanced Income Fund. The Nationwide Enhanced Income Fund seeks
to provide a high level of current income while preserving capital and
minimizing market fluctuations in an investor's account value. To achieve its
goals, under normal market conditions, the Enhanced Income Fund invests
primarily in high-grade debt securities issued by the U.S. government and its
agencies, as well as by corporations. The Enhanced Income Fund also purchases
mortgage-backed and asset-backed securities. The debt securities in which the
Enhanced Income Fund invests pay interest on either a fixed-rate or
variable-rate basis. The Enhanced Income Fund will be managed so that its
duration will be between 0.5 and 2.0 years. Depending upon market conditions,
the Enhanced Income Fund may also enter into book value maintenance agreements
("wrap contracts") with one or more highly rated financial institutions for the
purpose of maintaining some of the Enhanced Income Fund's assets at a stable
book value. The Enhanced Income Fund's portfolio managers expect that careful
selection of securities, relatively short portfolio duration, and the potential
availability and use of wrap contracts will enable the Enhanced Income Fund to
meet its investment objective of limited fluctuation of the Enhanced Income
Fund's net asset value, although there can be no guarantee that the Fund will
achieve its objectives.
Nationwide Money Market Fund. The Nationwide Money Market Fund seeks as
high a level of current income as is consistent with the preservation of capital
and the maintenance of liquidity. It seeks to achieve this objective by
investing in high-quality money market obligations maturing in 397 days or less,
including corporate obligations, U.S. Government and agency bonds, bills and
notes, the obligations of foreign governments, and the obligations of U.S. banks
and U.S. branches of foreign banks if they are denominated in U.S. dollars. The
Fund may also invest in floating and adjustable-rate obligations and
asset-backed commercial paper. Typically, the Fund's dollar-weighted average
maturity will be 90 days or less.
The Fund invests in securities which the portfolio manager believes to
have the best return potential. Because the Fund invests in short-term
securities, it will generally sell securities only to
- --------
(1) "Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500" and "500" are
trademarks of The McGraw-Hill companies, Inc. and have been licensed for use by
Nationwide S&P 500 Index 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. See " " herein for more
information.
5
<PAGE> 152
meet liquidity needs, to maintain target allocations and to take advantage of
more favorable opportunities.
GENERALLY
For simplicity, with respect to investment objective and policies of
each Fund, this Statement of Additional Information, like the Prospectus for the
Index Funds, uses the term "Fund" to include the underlying Series or Underlying
Funds in which the Fund invests. Please review the discussions in the
Prospectuses for further information regarding the investment objectives and
policies of each Fund, including their respective underlying Series or Fund.
The Funds invest in a variety of securities and employ a number of
investment techniques that involve certain risks. The Prospectuses for the Funds
highlight the principal investment strategies, investment techniques and risks.
The following table sets forth additional information concerning permissible
investments and techniques for each of the Funds (including their respective
underlying Series and Underlying Fund). A "Y" in the table indicates that the
Fund may invest in or follow the corresponding instrument or technique. An empty
box indicates that the Fund does not intend to invest in or follow the
corresponding instrument or technique.
6
<PAGE> 153
<TABLE>
<CAPTION>
Small Cap International Bond Index Aggressive
TYPE OF INVESTMENT OR TECHNIQUE Index Fund Index Fund Fund Fund
- ------------------------------------------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
U.S. common stocks Y Y
Small company stocks Y Y
Special situation companies Y Y
Illiquid securities Y Y Y Y
Restricted securities Y Y Y Y
When-issued / delayed-delivery securities Y Y
Investment companies Y
Securities of foreign issuers Y Y Y
Long-term debt Y Y
Short-term debt Y Y Y Y
Sovereign debt (foreign) Y Y
U.S. Government securities Y Y Y Y
Money market instruments Y Y Y Y
Mortgage-backed securities Y Y
</TABLE>
<TABLE>
<CAPTION>
Moderately Moderately
Aggressive Moderate Conservative Conservative
TYPE OF INVESTMENT OR TECHNIQUE Fund Fund Fund Fund
- ------------------------------------------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. common stocks Y Y Y Y
Small company stocks Y Y Y
Special situation companies Y Y Y Y
Illiquid securities Y Y Y Y
Restricted securities Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y
Investment companies Y Y Y Y
Securities of foreign issuers Y Y Y Y
Long-term debt Y Y Y Y
Short-term debt Y Y Y Y
Sovereign debt (foreign) Y Y Y Y
U.S. Government securities Y Y Y Y
Money market instruments Y Y Y Y
Mortgage-backed securities Y Y Y Y
</TABLE>
6
<PAGE> 154
<TABLE>
<CAPTION>
Small Cap International Bond Index Aggressive
TYPE OF INVESTMENT OR TECHNIQUE Index Fund Index Fund Fund Fund
- ------------------------------------------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations Y Y
Dollar rolls Y Y
Bank obligations Y Y Y Y
Repurchase agreements Y Y Y Y
Futures Y Y Y Y
Options Y Y Y Y
Foreign currencies Y Y
Forward currency contracts Y Y
Borrowing money Y Y Y Y
Lending of portfolio securities Y Y Y Y
Short sales Y Y Y Y
Swap Agreements Y Y Y Y
Nationwide Contract
</TABLE>
<TABLE>
<CAPTION>
Moderately Moderately
Aggressive Moderate Conservative Conservative
TYPE OF INVESTMENT OR TECHNIQUE Fund Fund Fund Fund
- ------------------------------------------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations Y Y Y Y
Dollar rolls Y Y Y Y
Bank obligations Y Y Y Y
Repurchase agreements Y Y Y Y
Futures Y Y Y Y
Options Y Y Y Y
Foreign currencies Y Y Y Y
Forward currency contracts Y Y Y Y
Borrowing money Y Y Y Y
Lending of portfolio securities Y Y Y Y
Short sales Y Y Y Y
Swap Agreements Y Y Y Y
Nationwide Contract Y Y Y Y
</TABLE>
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<PAGE> 155
DESCRIPTIONS OF PORTFOLIO INVESTMENTS AND INVESTMENT POLICIES
THE NATIONWIDE CONTRACT
Each of the Funds (except The Aggressive Fund) will invest in the Nationwide
Contract. The Nationwide Contract is a fixed interest contract issued and
guaranteed by Nationwide Life Insurance Company ("Nationwide"). This contract
has a stable principal value and will pay each Fund a fixed rate of interest.
The fixed interest rate must be at least 3.50%, but may be higher. Nationwide
will calculate the interest rate in the same way that it calculates guaranteed
interest rates for similar contracts. Because of the guaranteed nature of the
contract, the Funds will not directly participate in the actual experience of
the assets underlying the contract. Although under certain market conditions a
Fund's performance may be hurt by its investment in the Nationwide Contract, VMF
believes that the stable nature of the Nationwide Contract should reduce a
Fund's volatility and overall risk, especially when the bond and stock markets
decline simultaneously.
DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to
meet principal and interest payments on its obligations ("credit risk") and are
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer, and general market
liquidity. Lower-rated securities are more likely to react to developments
affecting these risks than are more highly rated securities, which react
primarily to movements in the general level of interest rates. Although the
fluctuation in the price of debt securities is normally less than that of common
stocks, in the past there have been extended periods of cyclical increases in
interest rates that have caused significant declines in the price of debt
securities in general and have caused the effective maturity of securities with
prepayment features to be extended, thus effectively converting short or
intermediate securities (which tend to be less volatile in price) into long term
securities (which tend to be more volatile in price).
Ratings as Investment Criteria. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"),
such as Standard & Poor's Rating Group ("Standard & Poor's") or Moody's Investor
Services ("Moody's"). In general, the ratings of NRSROs represent the opinions
of these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings are
used by a Fund as initial criteria for the selection of portfolio securities,
but the Fund also relies upon the independent advice of a Fund's adviser or
subadviser(s) to evaluate potential investments. This is particularly important
for lower-quality securities. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends, as well as an issuer's capital structure, existing debt and
earnings history. The Appendix to this Statement of Additional Information
contains further information about the rating categories of NRSROs and their
significance.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by such Fund. In addition, it is possible
8
<PAGE> 156
that an NRSRO might not change its rating of a particular issue to reflect
subsequent events. None of these events generally will require sale of such
securities, but a Fund's adviser or subadviser will consider such events in its
determination of whether the Fund should continue to hold the securities. In
addition, to the extent that the ratings change as a result of changes in such
organizations or their rating systems, or due to a corporate reorganization, the
Fund will attempt to use comparable ratings as standards for its investments in
accordance with its investment objective and policies.
Medium-Quality Securities. Certain Funds anticipate investing in
medium-quality obligations, which are obligations rated in the fourth highest
rating category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than issues of higher-rated securities.
U.S. Government Securities. U.S. government securities are issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
Securities issued by the U.S. government include U.S. Treasury obligations, such
as Treasury bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
- - the Federal Home Loan Banks whose securities are supported by the right
of the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation ("FHLMC"), whose securities are supported only by
the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participation in, or are secured by and payable from, mortgage loans
secured by real property, and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Such securities may be
issued or guaranteed by U.S. Government agencies or instrumentalities by private
issuers, generally originators in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities (collectively, "private lenders"). The purchase of
mortgage-backed securities from private lenders may entail greater risk than
mortgage-backed securities that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities. Mortgage-backed securities issued by private
lenders maybe supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by
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the U.S. Government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of non-governmental credit enhancement. These credit enhancements
may include letters of credit, reserve funds, overcollateralization, or
guarantees by third parties.
Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit enhancement
falls into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency loss
experience on the underlying pool of assets is better than expected. There can
be no assurance that the private issuers or credit enhancers of mortgage-backed
securities can meet their obligations under the relevant policies or other forms
of credit enhancement.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
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The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full.
Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. A Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they cause the current coupon of the underlying adjustable
rate mortgages to exceed any maximum allowable annual or lifetime reset limits
(or "cap rates") for a particular mortgage. In this event, the value of the
adjustable rate mortgage-backed securities in a Fund would likely decrease.
Also, a Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage-backed securities are different than market yields
during interim periods between coupon reset dates or if the timing of changes to
the index upon which the rate for the underlying mortgage is based lags behind
changes in market rates. During periods of declining interest rates, income to a
Fund derived from adjustable rate mortgage securities which remain in a mortgage
pool will decrease in contrast to the income on fixed rate mortgage securities,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to timely payment of
the principal and interest by FNMA. Mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is
a corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or by any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the
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underlying mortgage loans. When the FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
Fannie Mae or Freddie Mae Certificates, but also may be collateralized by whole
loans or private pass-throughs (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities. Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specified fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. As market conditions change, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. Such
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
A Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one
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PAC Bond to another; a narrower range increases the risk that prepayments on the
PAC Bond will be greater or smaller than predicted. Because of these features,
PAC Bonds generally are less subject to the risks of prepayment than are other
types of mortgage-backed securities.
MONEY MARKET INSTRUMENTS
Generally, FAM will employ futures and options on futures to provide
liquidity necessary to meet anticipated redemptions or for day-to-day operating
purposes of the Index Funds. However, if considered appropriate in the opinion
of FAM, a portion of an Index Fund's assets may be invested in certain types of
money market instruments with remaining maturities of 397 days or less for
liquidity purposes.
Money market instruments may include the following types of
instruments:
-- obligations issued or guaranteed as to interest and principal by the
U.S. Government, its agencies, or instrumentalities, or any federally
chartered corporation, with remaining maturities of 397 days or less;
-- repurchase agreements;
-- 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 (Yankee dollars), savings and loan
associations and similar institutions, and such obligations issued by
foreign branches of foreign banks and financial institutions;
-- commercial paper (including asset-backed 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 a high
quality outstanding debt issue;
-- high quality short-term (maturity in 397 days or less) corporate
obligations, these obligations will be rated within the top two rating
categories by an NRSRO or if not rated, of comparable quality.
REPURCHASE AGREEMENTS
In connection with the purchase of a repurchase agreement from member
banks of the Federal Reserve System or certain non-bank dealers by a 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
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Commission (the "SEC") to be loans by the Fund. Repurchase agreements may be
entered into with respect to securities of the type in which it may invest or
government securities regardless of their remaining maturities, and will require
that additional securities be deposited with it 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 a 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 a Fund seeks to assert its
rights to them, 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. A Fund's adviser or subadviser, acting under the supervision of the
Board of Trustees, reviews the creditworthiness of those banks and non-bank
dealers with which the Funds enter into repurchase agreements to evaluate these
risks.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
When securities are purchased on a "when-issued" basis or purchased for
delayed delivery, then payment and delivery occur beyond the normal settlement
date at a stated price and yield. When-issued transactions normally settle
within 45 days. The payment obligation and the interest rate that will be
received on when-issued securities are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on the
dates when the investments are actually delivered to the buyers. The greater a
Fund's outstanding commitments for these securities, the greater the exposure to
potential fluctuations in the net asset value of a Fund. Purchasing when-issued
or delayed-delivery securities may involve the additional risk that the yield or
market price available in the market when the delivery occurs may be higher or
the market price lower than that obtained at the time of commitment.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of such Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. In addition, because the Fund will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described above, such Fund's liquidity and the ability of VMF to manage it might
be affected in the event its commitments to purchase "when-issued" securities
ever exceed 25% of the value of its total assets. Under normal market
conditions, however, a Fund's commitment to purchase "when-issued" or
"delayed-delivery" securities will not exceed 25% of the value of its total
assets. When the Fund engages in when-issued or delayed-delivery transactions,
it relies on the other party to consummate the trade. Failure of the seller to
do so may result in a Fund incurring a loss or missing an opportunity to obtain
a price considered to be advantageous.
STANDBY COMMITMENT AGREEMENTS
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The Bond Index Fund may enter into standby commitment agreements. These
agreements commit the Bond Index Fund, for a stated period of time, to purchase
a stated amount of fixed income securities that may be issued and sold to the
Fund at the option of the issuer. The price and coupon of the security is fixed
at the time of the commitment. At the time of entering into the agreement the
Bond Index Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. The Bond Index Fund will enter into such
agreements for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Fund. The
Bond Index Fund will not enter into a standby commitment with a remaining term
in excess of 90 days and will limit its investment in such commitments so that
the aggregate purchase price of securities subject to such commitments, together
with the value of all other illiquid securities, will not exceed 15% of its net
assets taken at the time of the commitment. The Bond Index Fund will maintain a
segregated account with its custodian of cash, cash equivalents, U.S. Government
securities or other liquid securities in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Bond
Index Fund may bear the risk of a decline in the value of such security and may
not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will thereafter be reflected in the calculation of the Bond Index Fund's net
asset value. The cost basis of the security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
INDEXED SECURITIES
The Index Funds may invest in securities the potential return of which
is based on the change in particular measurements of value or rate (an "index").
As an illustration, a Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities. If a Series invests in such securities, it may be subject
to reduced or eliminated interest payments or loss of principal in the event of
an adverse movement in the relevant index.
LENDING PORTFOLIO SECURITIES
A 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 collateral consisting of cash, U.S.
Government securities or letters of
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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) a Fund must receive at least 100%
cash collateral of the type discussed in the preceding paragraph from the
borrower; (2) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (3) a
Fund must be able to terminate the loan at any time; (4) a 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) a 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, a Fund'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.
SMALL COMPANY STOCKS
Investing in securities of small-sized companies may involve greater
risks than investing in the stocks of larger, more established companies since
these securities may have limited marketability and thus may be more volatile
than securities of larger, more established companies or the market averages in
general. Because small-sized companies normally have fewer shares outstanding
than larger companies, it may be more difficult for a Fund to buy or sell
significant numbers of such shares without an unfavorable impact on prevailing
prices. Small-sized companies may have limited product lines, markets or
financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for larger,
more established ones.
SPECIAL SITUATION COMPANIES
"Special situation companies" include those involved in an actual or
prospective acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or distribution of cash, securities or other assets; a
tender or exchange offer; a breakup or workout of a holding company; or
litigation which, if resolved favorably, would improve the value of the
company's stock. If the actual or prospective situation does not materialize as
anticipated, the market price of the securities of a "special situation company"
may decline significantly. Therefore, an investment in a Fund that invests a
significant portion of its assets in these securities may involve a greater
degree of risk than an investment in other mutual funds that seek long-term
growth of capital by investing in better-known, larger companies. The
subadvisers of such Funds believe, however, that if a subadviser analyzes
"special situation companies" carefully and invests in the securities of these
companies at the appropriate time, the Fund may achieve capital growth. There
can be no assurance however, that
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a special situation that exists at the time the Fund makes its investment will
be consummated under the terms and within the time period contemplated, if it is
consummated at all.
FOREIGN SECURITIES
Investing in foreign securities (including through the use of
depository receipts) involves certain special considerations which are not
typically associated with investing in United States securities. Since
investments in foreign companies will frequently involve currencies of foreign
countries, and since a Fund may hold securities and funds in foreign currencies,
a Fund may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, if any, and may incur costs in connection with
conversions between various currencies. Most foreign stock markets, while
growing in volume of trading activity, have less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than in the United States and,
at times, volatility of price can be greater than in the United States. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund endeavors to achieve
the most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of securities exchanges, brokers and
listed companies in foreign countries than in the United States. In addition,
with respect to certain foreign countries, there is the possibility of exchange
control restrictions, expropriation or confiscatory taxation, and political,
economic or social instability, which could affect investments in those
countries. Foreign securities, such as those purchased by a Fund, may be subject
to foreign government taxes, higher custodian fees, higher brokerage costs and
dividend collection fees which could reduce the yield on such securities.
Foreign economies may differ favorably or unfavorably from the U.S.
economy in various respects, including growth of gross domestic product, rates
of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities. From
time to time, foreign securities may be difficult to liquidate rapidly without
adverse price effects.
[Depository Receipts. A Fund may invest in foreign securities by
purchasing depository receipts, including American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets, GDRs, in bearer form, are issued and designed for use
outside the United States and EDRs (also referred to as Continental Depository
Receipts ("CDRs")), in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. Bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. GDRs
are receipts typically issued by non-United States banks and trust companies
that evidence ownership of either foreign or domestic securities. For purposes
of a Fund's investment policies, ADRs, GDRs and EDRs are deemed to
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have the same classification as the underlying securities they represent. Thus,
an ADR, GDR or EDR representing ownership of common stock will be treated as
common stock.
A Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.
A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities. The
depository usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and thus there may not be a
correlation between such information and the market value of the depository
receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository, and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as dividend
payment fees of the depository), although ADR holders continue to bear certain
other costs (such as deposit and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and
other information to the ADR holders at the request of the issuer of the
deposited securities.]
Eurodollar and Yankee Obligations. Eurodollar bank obligations are
dollar-denominated certificates of deposit and time deposits issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign banks.
Yankee bank obligations are dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurodollar and Yankee bank obligations are subject to the same risks
that pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee) bank
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across their borders. Other risks include: adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign issues.
However, Eurodollar and Yankee bank obligations held in a Fund will undergo the
same credit analysis as domestic issues
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in which the Fund invests, and will have at least the same financial strength as
the domestic issuers approved for the Fund.
Foreign Sovereign Debt. Certain Funds may invest in sovereign debt
obligations issued by foreign governments. To the extent that a Fund invests in
obligations issued by developing or emerging markets, these investments involve
additional risks. Sovereign obligors in developing and emerging market countries
are among the world's largest debtors to commercial banks, other governments,
international financial organizations and other financial institutions. These
obligors have in the past experienced substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiation new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the foreign sovereign debt securities in which a Fund may invest
will not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
SHORT SELLING OF SECURITIES
In a short sale of securities, a Fund sells stock which it does not
own, making delivery with securities "borrowed" from a broker. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. This price may or may not be less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay the lender any dividends or interest which accrue during
the period of the loan. In order to borrow the security, the Fund may also have
to pay a fee which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
Such transactions will be used only in an effort to adjust the
weightings of particular securities represented in the basket to reflect such
securities' weightings in the target index. FAM will not employ short sales in
reflection of FAM's outlook for the securities markets or for the performance of
the securities sold short.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those two dates. The amount of any gain will
be decreased and the amount of any loss will be increased by any interest the
Fund may be required to pay in connection with the short sale.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. A Fund must deposit in a segregated
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account an amount of cash or liquid assets equal to the difference between (a)
the market value of securities sold short at the time that they were sold short
and (b) the value of the collateral deposited with the broker in connection with
the short sale (not including the proceeds from the short sale). While the short
position is open, the Fund must maintain on a daily basis the segregated account
at such a level that (1) the amount deposited in it plus the amount deposited
with the broker as collateral equals the current market value of the securities
sold short and (2) the amount deposited in it plus the amount deposited with the
broker as collateral is not less than the market value of the securities at the
time they were sold short.
A Fund may engage in short sales if at the time of the short sale the
Fund owns or has the right to obtain without additional cost an equal amount of
the security being sold short. This investment technique is known as a short
sale "against the box." There will be certain additional transaction costs
associated with short sales against the box, but the Fund will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
A 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. 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. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. 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 an
investment company 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. An investment company 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 repurchase agreements, commercial paper, 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
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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 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.
Any such restricted securities will be considered to be illiquid for
purposes of a Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, VMF or the
subadviser 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.]
Some Funds may 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 a 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.
The applicable subadviser or adviser will monitor the liquidity of
restricted securities in the portion of a Fund it manages. In reaching liquidity
decisions, the following factors are considered: (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).
Private Placement Commercial Paper. Commercial paper eligible for
resale under Section 4(2) of the Securities Act is offered only to accredited
investors. Rule 506 of Regulation D in the Securities Act of 1933 lists
investment companies as an accredited investor.
Section 4(2) paper not eligible for resale under Rule 144A under the
Securities Act shall be deemed liquid if (1) the Section 4(2) paper is not
traded flat or in default as to principal and interest; (2) the Section 4(2)
paper is rated in one of the two highest rating categories by at least two
NRSROs, or if only NRSRO rates the security, it is rated in one of the two
highest categories by that NRSRO; and (3) the Adviser believes that, based on
the trading markets for such security, such security can be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the security.
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BORROWING
A Fund may borrow money from banks, limited by each Fund's fundamental
investment restriction to 33-1/3% of its total assets (including the amount
borrowed), and may engage in mortgage dollar roll and reverse repurchase
agreements which may be considered a form of borrowing. In addition, a Fund may
borrow up to an additional 5% of its total assets from banks for temporary or
emergency purposes. A Fund will not purchase securities when bank borrowings
exceed 5% of such Fund's total assets.
Each 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 Funds have established a line-of-credit
("LOC") with their custodian by which they may borrow for temporary or emergency
purposes. The Funds intend to use the LOC to meet large or unexpected
redemptions that would otherwise force a Fund to liquidate securities under
circumstances which are unfavorable to a Fund's remaining shareholders.
Leverage and the Index Funds. The use of leverage by an Index Fund
creates an opportunity for greater total return, but, at the same time, creates
special risks. For example, leveraging may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowings are outstanding. Borrowings will create interest
expenses for the Fund which can exceed the income from the assets purchased with
the borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest a Fund will have
to pay on the borrowings, the Fund's return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to a Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, FAM in
its best judgment nevertheless may determine to maintain a Fund's leveraged
position if it expects that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Certain types of borrowings by a Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede FAM from managing a Fund's portfolio
in accordance with the Fund's investment objectives and policies. However, a
breach of any such covenants not cured within the specified cure period may
result in acceleration of outstanding indebtedness and require a Fund to dispose
of portfolio investments at a time when it may be disadvantageous to do so.
A Fund at times may borrow from affiliates of FAM, provided that the
terms of such borrowings are no less favorable than those available from
comparable sources of funds in the marketplace.
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DERIVATIVE INSTRUMENTS
A Fund's adviser or 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 provide liquidity or to act as a proxy for a direct
investment in securities underlying a Fund's index. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security, currency or index) or the level of a reference index.
Derivatives generally have investment characteristics that are based
upon 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
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 from adverse movements in the value of the underlying asset. The
seller (writer) of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses resulting from 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.
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"). In addition, a
Fund's ability to use these instruments will be limited by tax considerations.
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 a Fund's
adviser's or subadviser'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.]
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[(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 a Fund entered into a short
hedge because a Fund's adviser or 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, a Fund could
suffer a loss.]
(4) As described below, a 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 a Fund's
derivative instruments, see ADDITIONAL GENERAL TAX INFORMATION below.
Purchasing Options. Each Index Fund is authorized to purchase put
options on securities held in its portfolio or securities indices the
performance of which is substantially correlated with securities held in its
portfolio. When a Fund purchases a put option, in consideration for an upfront
payment (the "option premium") the Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified price (the "exercise
price") on or before a specified date (the "expiration date"), in the case of an
option on securities, or to receive from another party a payment based on the
amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities index. The
purchase of a put option limits the Fund's risk of loss in the event of a
decline in the market value of the portfolio holdings underlying the put option
prior to the option's expiration date. If the market value of the portfolio
holdings associated with the put option increases rather than decreases,
however, the Fund will lose the option premium and will consequently realize a
lower return on the portfolio holdings than would have been realized without the
purchase of the put.
Each Index Fund is also authorized to purchase call options on
securities it intends to purchase or securities indices. When a Fund purchases a
call option, in consideration for the option premium the Fund acquires the right
to purchase from another party specified securities at the exercise price on or
before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified securities
index increases beyond a
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specified level on or before the expiration date, in the case of an option on a
securities index. The purchase of a call option may protect the Fund from having
to pay more for a security as a consequence of increases in the market value for
the security during a period when the Fund is contemplating its purchase, in the
case of an option on a security, or attempting to maintain exposure to an index
prior to purchasing the underlying securities, in the case of an option on an
index (an "anticipatory hedge"). In the event a Fund determines not to purchase
a security underlying a call option, however, the Fund may lose the entire
option premium.
Each Index Fund is also authorized to purchase put or call options in
connection with closing out put or call options it has previously sold.
Writing Options. Each Index Fund is authorized to write (i.e., sell)
call options on securities held in its portfolio or securities indices, the
performance of which is substantially correlated to securities held in its
portfolio. When a Fund writes a call option, in return for an option premium the
Fund gives another party the right to buy specified securities owned by the Fund
at the exercise price on or before the expiration date, in the case of an option
on securities, or agrees to pay to another party an amount based on any gain in
a specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. In the event
the party to which a Fund has written an option fails to exercise its rights
under the option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, a Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
Each Index Fund may also write put options on securities or securities
indices. When a Fund writes a put option, in return for an option premium the
Fund gives another party the right to sell to the Fund a specified security at
the exercise price on or before the expiration date, in the case of an option on
a security, or agrees to pay to another party an amount based on any decline in
a specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. In the event the party to
which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, a Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. A Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options--for example, the sale and purchase of options
on the same security or index but different expiration dates or exercise prices
(a technique called a "spread").
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Each Index Fund is also authorized to sell call or put options in
connection with closing out call or put options it has previously purchased.
Other than with respect to closing transactions, an Index Fund will
only write call or put options that are "covered." A put option will be
considered covered if a Fund has segregated assets with respect to such option
in the manner described in "Special Risks of Derivative Instruments" above. A
call option will be considered covered if a Fund owns the securities it would be
required to deliver upon exercise of the option (or, in the case of option on a
securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
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 a 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.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a 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, a 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.
Types of Options. A 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.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid 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 a Fund will enter into OTC options only with
counterparties that are expected to be capable of entering into closing
transactions with a Fund, there is no assurance that such Fund will in fact be
able to close out an OTC option at a favorable price prior to expiration. In the
event of
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insolvency of the counter party, a Fund might be unable to close out an OTC
option position at any time prior to its expiration.
If a 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 a 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.
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.
Transactions using OTC options (other than purchased options) expose a
Fund to counter party risk. To the extent required by SEC guidelines, a 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. A 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.
Futures Contracts. The Index Funds may enter into futures contracts,
including interest rate, index, and currency futures and purchase and write
(sell) related options.
To the extent required by regulatory authorities, a 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 a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
A 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 a 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 a Fund's exposure to market, currency, or interest rate
fluctuations, such Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
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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, a Fund
realizes a gain; if it is more, a Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, a Fund realizes
a gain; if it is less, a Fund realizes a loss. The transaction costs must also
be included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, that Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a 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 a Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
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 a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a 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 a 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
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exchange or board of trade on which they were entered into (or through a linked
exchange). Although the Funds intend 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 a 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 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.
Swap Agreements. Each Index Fund may enter into equity swap agreements
for any lawful purpose consistent with such Fund's investment objective, such as
for the purpose of attempting to obtain or preserve a particular desired return
or spread at a lower cost to the Fund than if the Fund had invested directly in
an instrument that yielded that desired return or spread. A Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular "basket" of securities representing a
particular index.
29
<PAGE> 177
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on a Fund's adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. Certain restrictions imposed on a
Fund by the Internal Revenue Code may limit a Fund's ability to use swap
agreements. The swaps market is largely unregulated.
A Fund will enter swap agreements only with counterparties that a
Fund's adviser reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
Foreign Currency-Related Derivative Strategies - Special
Considerations. The International Index Fund may use futures on foreign
currencies and forward currency contracts in connection with transactions or
anticipated transactions in securities denominated in foreign currencies.
Specifically, the International Index Fund may purchase or sell a currency to
settle a security transaction or sell a currency in which the Fund has received
or anticipates receiving a dividend or distribution.
A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by purchasing a second contract. If the Fund retains the portfolio
security and engages in an offsetting transaction, the Fund, at the time of
execution of the offsetting transaction, will incur a gain or a loss to the
extent that movement has occurred in forward contract prices.
The value of derivative instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of
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<PAGE> 178
such hedging instruments, a Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, the Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
BANK OBLIGATIONS
Bank obligations that may be purchased by a Fund include certificates
of deposit, banker's acceptances and fixed time deposits. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or purchased
on a discount basis. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of U.S. banks or foreign
banks which are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
DOLLAR ROLLS
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<PAGE> 179
The Bond Index Fund may enter into dollar rolls which are arrangements
in which the Fund would sell securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest paid
on the securities during the roll period, the Fund would be compensated by the
difference between the current sales price and the lower price for the future
purchase as well as by any interest earned on the proceeds of the initial sale.
The Bond Index Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time the Fund would enter into a
mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
securities. Dollar roll transactions may be considered a borrowing by the Fund.
(See "Borrowing")
Dollar rolls involve the risk that the market value of the securities
subject to the Bond Index Fund's forward purchase commitment may decline below
the price of the securities the Bond Index Fund has sold. In the event the buyer
of the securities files for bankruptcy or becomes insolvent, the Bond Index
Fund's use of the proceeds of the current sale portion of the transaction may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Bond Index Fund's obligation to purchase the
similar securities in the forward transaction. Dollar rolls are speculative
techniques which can be deemed to involve leverage. The Bond Index Fund will
engage in dollar roll transactions to enhance return and not for the purpose of
borrowing. Each dollar roll transaction is accounted for as a sale of a
portfolio security and a subsequent purchase of a substantially similar security
in the forward market.
ADDITIONAL INFORMATION CONCERNING THE INDICES
Russell 2000. The Small Cap Index Fund and the Small Cap Index Series
are not promoted, sponsored or endorsed by, not in any way affiliated with Frank
Russell Company. Frank Russell Company is not responsible for and has not
reviewed the Small Cap Index Fund or the Small Cap Index Series nor any
associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change the Russell 2000(R) Index. Frank
Russell Company has no obligation to take the needs of any particular fund or
its participants or any other product or person into consideration in
determining, composing or calculating the Index.
Frank Russell Company's publication of the Russell 2000(R) Index in no way
suggests or implies an opinion by Frank Russell Company as to the attractiveness
or appropriateness of investment in any or all securities upon which the Russell
2000 is based. Frank Russell Company makes no representation, warranty, or
guarantee as to the accuracy, completeness, reliability, or otherwise of the
Russell 2000 or any data included in the Russell 2000. Frank Russell Company
makes no representation or warranty regarding the use, or the results of use, of
the Russell 2000 or any data included therein, or any security (or combination
thereof) comprising the Russell 2000. Frank Russell Company makes no other
express or implied warranty, and expressly disclaims any warranty, or any kind,
including, without means of limitation, any warranty of merchantability or
32
<PAGE> 180
fitness for a particular purpose with respect to the Russell 2000 or any data or
any security (or combination thereof) included therein.
EAFE Index. The EAFE Index is the exclusive property of Morgan Stanley
& Co. Incorporated ("Morgan Stanley"). The EAFE Index is a service mark of
Morgan Stanley Group Inc. and has been licensed for use by the Investment
Adviser and its affiliates.
The International Index Fund and the International Index Series are not
sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no
representation or warranty, express or implied, to the owners of shares of the
International Index Fund and the International Index Series or any member of the
public regarding the advisability of investing in securities generally or in the
International Index Fund and the International Index Series particularly or the
ability of the EAFE Index to track general stock market performance. Morgan
Stanley is the licensor of certain trademarks, service marks and trade names of
Morgan Stanley and of the EAFE Index. Morgan Stanley has no obligation to take
the needs of the International Index Fund and the International Index Series or
the owners of shares of the International Index Fund and the International Index
Series into consideration in determining, composing or calculating the EAFE
Index. Morgan Stanley is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of shares of the
International Index Fund and the International index Series to be issued or in
the determination or calculation of the equation by which the shares of the
International Index Fund and the International Index Series is redeemable for
cash. Morgan Stanley has no obligation or liability to owners of shares of the
International Index Fund and the International Index Series in connection with
the administration, marketing or trading of the International Index Fund and the
International Index Series.
Although Morgan Stanley shall obtain information for inclusion in or
for use in the calculation of the EAFE Index from sources which Morgan Stanley
considers reliable, Morgan Stanley does not guarantee the accuracy and/or the
completeness of the EAFE Index or any data included therein. Morgan Stanley
makes no warranty, express or implied, as to results to be obtained by licensee,
licensee's customers and counterparties, owners of shares of the International
Index Fund and the International Index Series, or any other person or entity
from the use of the EAFE Index or any data included therein in connection with
the rights licensed hereunder or for any other use. Morgan Stanley makes no
express or implied warranties, and hereby expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the EAFE
Index or any data included therein. Without limiting any of the foregoing, in no
event shall Morgan Stanley have any liability for any direct, indirect, special,
punitive, consequential or any other damages (including lost profits) even if
notified of the possibility of such damages.
S&P 500 Index. The Trust, on behalf of the S&P 500 Fund, one of the
Underlying Funds, has entered into a licensing agreement which authorizes the
Fund to use the trademarks of the McGraw-Hill Companies, Inc. 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
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<PAGE> 181
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 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.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of each Fund
which cannot be changed without the authorization of the majority of the
outstanding shares of the Fund for which a change is proposed. The vote of the
majority of the outstanding securities means the vote of (A) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy or (B) a
majority of the outstanding securities, whichever is less. None of the following
restrictions will prevent a Fund from investing all of its assets in shares of
one or more other registered investment companies.
Each of the Index Funds and the Life Strategy Series:
- - May not borrow money or issue senior securities, except that each 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.
- - May not purchase or sell real estate, except that each 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).
- - May not lend any security or make any other loan, except that each 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.
- - 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.
- - May not purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus and Statement of
Additional Information of such Fund.
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<PAGE> 182
- - 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; provided, that in replicating the
weightings of a particular industry in its target index, a Series or
Fund may invest more than 25% of its total assets in securities of
issuers in that industry.
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:
Each Fund may not:
- - 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.
- - 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.
- - Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid.
- - 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
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, and directs the officers to perform the
daily functions of the Trust.
The principal occupation of the Trustees and Officers during the last
five years, their ages, their addresses and their affiliations are:
JOHN C. BRYANT, Trustee*, Age 63
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.
C. BRENT DEVORE, Trustee, Age 58
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<PAGE> 183
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
SUE A. DOODY, Trustee, Age 64
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.
ROBERT M. DUNCAN, Trustee*, Age 71
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.
THOMAS J. KERR, IV, Trustee*, Age 65
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 43
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 and is Chairman and Chief Executive Officer of Nationwide
Advisory Services, Inc.
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.
DAVID C. WETMORE, Trustee, Age 50
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, Age 42
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.
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<PAGE> 184
CHRISTOPHER A. CRAY, Assistant Treasurer, age 40
Three Nationwide Plaza, Columbus, Ohio
Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser and
Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.
ELIZABETH A. DAVIN, Secretary, age 35
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.
+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.
*Members of the Executive Committee. Mr. McFerson is Chairman. The Executive
Committee has the authority to act for the Board of Trustees except as provided
by law and except as specified in the Trust's Bylaws.
Bryant, Doody, DeVore, Duncan, Kerr, Kridler and Wetmore are also Trustees, and
Laird, Cray and Davin are also Officers of Nationwide Separate Account Trust and
Nationwide Asset Allocation Trust, registered investment companies in the
Nationwide Fund Complex.
All Trustees and Officers of the Trust own less than 1% of its
outstanding shares.
The Trustees receive fees and reimbursement for expenses of attending
board meetings from the Trust. VMF 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 ended October 31, 1999. 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, 1999. 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 TRUST UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ ______ --0-- --0-- $______
C. Brent DeVore, Trustee ______ --0-- --0-- ______
Sue A. Doody, Trustee ______ --0-- --0-- ______
Robert M Duncan, Trustee ______ --0-- --0-- ______
Thomas J. Kerr, IV, Trustee ______ --0-- --0-- ______
</TABLE>
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<PAGE> 185
<TABLE>
<S> <C> <C> <C> <C>
Douglas F. Kridler, Trustee ______ --0-- --0-- ______
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee ______ --0-- --0-- ______
David C. Wetmore, Trustee ______ --0-- --0-- ______
</TABLE>
**The Fund Complex includes three trusts comprised of ______ investment company
funds or series.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Under the terms of the Investment Advisory Agreement dated May 9, 1998
as amended as of December ___, 1999, Villanova Mutual Fund Capital Trust ("VMF")
manages the investment of the assets of the funds of the Trust, other than the
Index Funds and Morley Capital Accumulation Fund, in accordance with the
policies and procedures established by the Trustees. With respect to Nationwide
Mid Cap Growth Fund, Growth Fund, Nationwide Fund, Bond Fund, Tax-Free Income
Fund, Long-Term U.S. Government Bond Fund, Intermediate U.S. Government Bond
Fund, and Money Market Fund and each of the Life Strategy Series, VMF manages
the day-to-day investments of the assets of such Funds. With respect to each of
the other funds of the Trust, VMF provides investment management evaluation
services in initially selecting and monitoring on an ongoing basis the
performance of the subadvisers to such Funds, who each manage the investment
portfolio of a particular fund. VMF is also authorized to select and place
portfolio investments on behalf of the funds which engage subadvisers; however
VMF does not intend to do so at this time.
VMF pays the compensation of the Trustees and officers affiliated with
VMF. VMF 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 VMF,
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 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 a 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 VMF may render similar services to others.
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<PAGE> 186
The Trust pays the compensation of the Trustees who are not interested
[affiliated][check agreement] persons of VMF and all expenses (other than those
assumed by VMF), 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; 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. VMF reimburses the Trust
for fees and expenses paid to Trustees who are interested [affiliated] persons
of the Trust.
VMF, a Delaware business trust, is a wholly owned subsidiary of
Villonova Capital, Inc., 97% of the common stock of which is held 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. All of the Common Stock of Nationwide Corporation is held
by Nationwide Mutual Insurance Company (95.3%) and Nationwide Mutual Fire
Insurance Company (4.7%), each of which is a mutual company owned by its
policyholders.
Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the then current funds of the Trust (except
for Morley Capital Accumulation Fund). Effective September 1, 1999, the
investment advisory services previously performed for such funds by NAS were
transferred to VMF, an affiliate of NAS and an indirect subsidiary of NFS. After
the transfer, there was no change in the fees charged for investment advisory
services to each of the Funds.
For services provided under the Investment Advisory Agreement, VMF
receives an annual fee paid monthly based on average daily net assets of each
Fund according to the following schedule:
<TABLE>
<CAPTION>
FUND ASSETS FEE
---- ------ ---
<S> <C> <C>
Nationwide Mid Cap Growth Fund, $0 up to $250 million 0.60%
Nationwide Growth Fund, Nationwide $250 million up to $1 billion 0.575%
Fund and Nationwide Focus Fund $1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 Billion and more 0.50%
Nationwide Bond Fund, $0 up to $250 million 0.50%
Nationwide Tax-Free Income Fund, $250 million up to $1 billion 0.475%
Nationwide Long-Term U.S. Government $1 billion up to $2 billion 0.45%
Bond Fund, and $2 billion up to $5 billion 0.425%
Nationwide Intermediate
U.S. Government Bond Fund
</TABLE>
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<PAGE> 187
<TABLE>
<CAPTION>
FUND ASSETS FEE
---- ------ ---
<S> <C> <C>
$250 million up to $1 billion 0.475%
$1 billion up to $2 billion 0.45%
$2 billion up to $5 billion 0.425%
$5 Billion and more 0.40%
Nationwide Money Market Fund $0 up to $1 billion 0.40%
$1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 billion and more 0.34%
Nationwide S&P 500 Index Fund all assets 0.13%
Prestige Large Cap Value up to $100 million 0.75%
$100 million or more 0.70%
Prestige Large Cap Growth Fund up to $150 million 0.80%
$150 million or more 0.70%
Prestige Balanced Fund up to $100 million 0.75%
$100 million or more 0.70%
Prestige Small Cap Fund up to $100 million 0.95%
$100 million or more 0.80%
Prestige International Fund up to $200 million 0.85%
$200 million or more 0.80%
The Aggressive Fund all assets 0.13%
The Moderately Aggressive Fund all assets 0.13%
The Moderate Fund all assets 0.13%
The Moderately Conservative Fund all assets 0.13%
The Conservative Fund all assets 0.13%
Nationwide Small Cap $0 up to $250 million 0.70%
Value Fund II $250 million up to $1 billion 0.675%
$1 billion up to $2 billion 0.65%
$2 billion up to $5 billion 0.625%
$5 billion and more 0.60%
Nationwide High Yield Bond Fund $0 up to $250 million 0.55%
</TABLE>
40
<PAGE> 188
<TABLE>
<S> <C> <C>
$250 million up to $1 billion 0.525%
$1 billion up to $2 billion 0.50%
$2 billion up to $5 billion 0.475%
$5 billion and more 0.45%
</TABLE>
VMF has also agreed to waive advisory fees, and if necessary, reimburse
expenses in order to limit annual Fund operating expenses for certain of the
Funds as follows:
- - Nationwide Mid Cap Growth Fund to 1.25% for Class A shares, 2.00% for
Class B shares and 1.00% for Class D shares
- - Nationwide Long-Term U.S. Government Bond Fund and Nationwide
Intermediate U.S. Government Bond Fund to 1.04% for Class A shares,
1.64% for Class B shares and 0.79% for Class D shares
- - Prestige Large Cap Value Fund to 1.15% for Class A shares, 1.90% for
Class B shares and 1.00% for Class Y shares
- - Prestige Large Cap Growth Fund to 1.20% for Class A shares, 1.95% for
Class B shares and 1.05% for Class Y shares
- - Prestige Balanced Fund to 1.10% for Class A shares, 1.85% for Class B
shares and 0.95% for Class Y shares
- - Prestige Small Cap Fund to 1.35% for Class A shares, 2.10% for Class B
shares and 1.20% for Class Y shares
- - Prestige Large Cap Value Fund to 1.30% for Class A shares, 2.05% for
Class B shares and 1.25% for Class Y shares
- - Nationwide S&P 500 Index Fund to 0.48% for Class Y shares, 0.63% for
Class R shares and 0.35% for Local Fund shares
- - each of the Life Strategy Series to 0.56% for Class A shares, 1.31% for
Class B shares and 0.36% for Service Class shares
- - Nationwide Focus Fund to 1.20% for Class A shares, 1.70% for Class B
shares and 0.75% for Institutional Class shares
- - Nationwide Small Cap Value Fund II to 1.35% for Class A shares, 1.85%
for Class B shares and 1.00% for Institutional Class shares
- - Nationwide High Yield Bond Fund to 1.20% for Class A shares, 1.80% for
Class B shares and 0.85% for Institutional Class shares
In the interest of limiting the expenses of each of the Funds listed
above (except the Nationwide MidCap Growth Fund, the Nationwide Long-Term U.S.
Government Bond Fund, the Nationwide Intermediate U.S. Government Bond Fund and
the Nationwide S&P 500 Index Fund, VMF has entered into an expense limitation
agreement with the Fund ("Expense Limitation Agreement"). Pursuant to the
Expense Limitation Agreement, UBT has agreed to waive or limit its fees and to
assume other expenses (except for Rule 12b-1 Fees and Administrative Service
Fees) to the extent necessary to limit the total annual operating expenses of
each Class of the Fund to the limits described above. Reimbursement by the Fund
of the advisory fees waived or limited and other expenses reimbursed by VMF
pursuant to the Expense Limitation Agreement may be made at a later date when
the Fund has reached a sufficient asset size to permit reimbursement to be made
without causing the total annual operating expense ratio of the Fund to exceed
the limits set forth above. No
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<PAGE> 189
reimbursement will be made unless: (i) the Fund's assets exceed $100 million;
(ii) the total annual expense ratio of the Class making such reimbursement is
less than the limit set forth above; and (iii) the payment of such reimbursement
is approved by the Board of Trustees on a quarterly basis. Except as provided
for in the Expense Limitation Agreement, reimbursement of amounts previously
waived or assumed by VMF is not permitted.
VMF may from time to time waive some or all of its investment advisory
fee or other fees for any of the fund of the Trust. The waiver of such fees will
cause the total return and yield of a fund to be higher than they would
otherwise be in the absence of such a waiver.
During the fiscal years ended October 31, 1999, 1998 and 1997, VMF/NAS
received the following fees for investment advisory services*:
<TABLE>
<CAPTION>
Years Ended October 31,
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Mid Cap Growth $ $ 61,706 $ 63,883
Growth $ 4,894,110 3,750,599
Nationwide Fund $ 9,977,231 5,938,011
Bond $ 647,809 629,068
Tax-Free Income
$ 1,505,626 1,810,070
LT U.S. Govt. $ 254,928 343,259
Intermediate U.S. Govt. $ 266,473 256,016
Money Market**
$ 3,857,898 3,519,727
Nationwide S&P 500 Index Fund
$ ---------- ---------
Prestige Large Cap Value Fund
$ ---------- ---------
Prestige Large Growth Fund $ ---------- ---------
Prestige Balanced Fund $ ---------- ---------
Prestige Small Cap Fund $ ---------- ---------
Prestige International Fund $ ---------- ---------
</TABLE>
* As of May 9, 1998, Nationwide Mid Cap Growth, Growth, Fund, Bond, Tax-Free
Income, Long-Term U.S. Government Bond, Intermediate U.S. Government Bond and
Morley Market Funds
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<PAGE> 190
acquired all of the assets of one or more series of Nationwide Investing
Foundation ("NIF"), Nationwide Investing Foundation II ("NIF II") and Financial
Horizons Investment Trust ("FHIT") (collectively, the "Acquired Funds"), in
exchange for the assumption of the stated liabilities of the Acquired Funds and
a number of full and fractional Class D shares of the applicable Fund (the Money
Market Fund issued shares without class designation) having an aggregate net
asset value equal to the net assets of the Acquired Funds as applicable (the
"Reorganization").
** Net of waivers prior to the Reorganization of $221,174 and $389,150 for the
fiscal years ended October 31, 1998 and 1997, respectively.
During the period from July 24, 1998 (date of commencement of
operations) through October 31, 1998, NAS waived advisory fees for the S&P 500
Index Fund in the amount of $7,315. The Prestige Large Cap Value, Large Cap
Growth, Balanced, Small Cap and International Funds did not begin operations
until November 2, 1998.
The subadvisers for the certain of the funds are as follows:
<TABLE>
<CAPTION>
FUND SUBADVISER
---- ----------
<S> <C>
Prestige Large Cap Value Brinson Partners, Inc. ("Brinson Partners")
Prestige Large Cap Growth Goldman Sachs Asset Management ("GSAM")
Prestige Balanced J.P. Morgan Investment Management, Inc. (J.P. Morgan")
Prestige Small Cap INVESCO Management & Research, Inc. ("IMR")
Prestige International Lazard Asset Management ("Lazard")
Nationwide S&P 500 Index The Dreyfus Corporation
</TABLE>
Brinson Partners, a Delaware corporation and an investment management
firm, is an indirect wholly-owned subsidiary of UBS AG, an internationally
diversified organization headquartered in Zurich, Switzerland, with operations
in many aspects of the financial services industry. GSAM is a separate operating
division of Goldman Sachs & Co., an investment banking firm whose headquarters
are in New York, New York. J.P. Morgan is a directly wholly owned subsidiary of
J.P. Morgan & Co. Incorporated, a bank holding company organized under the laws
of Delaware. J.P. Morgan offers a wide range investment management services and
acts as investment adviser to corporate and institutional clients. IMR is part
of a global investment organization, AMVESCAP plc. AMVESCAP plc is a
publicly-traded holding company that, through its subsidiaries, engages in the
business of investment management on an international basis. Lazard is a New
York-based division of Lazard Freres & Co. LLC, a limited liability company
registered as an investment adviser and providing investment management services
to client discretionary accounts. 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
43
<PAGE> 191
Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation.
Subject to the supervision of the VMF and the Trustees, each of the
Subadvisers manages the assets of the Fund listed above in accordance with the
Fund's investment objectives and policies. Each Subadviser makes investment
decisions for the Fund and in connection with such investment decisions places
purchase and sell orders for securities. For the investment management services
they provide to the Funds, the Subadvisers receive annual fees from VMF,
calculated at an annual rate based on the average daily net assets of the Funds,
in the following amounts:
<TABLE>
<CAPTION>
FUND ASSETS FEE
---- ------ ---
<S> <C> <C>
Large Cap Value Fund up to $100 million 0.35%
$100 million or more 0.30%
Large Cap Growth Fund up to $150 million 0.40%
$150 million or more 0.30%
Balanced Fund up to $100 million 0.35%
$100 million or more 0.30%
Small Cap Fund up to $100 million 0.55%
$100 million or more 0.40%
International Fund up to $200 million 0.45%
S&P 500 Index Fund
$200 million or more 0.40%
up to $250 million 0.07%
next $250 million 0.06%
next $500 million 0.05%
$1 billion or more 0.04%
</TABLE>
During the period from July 24, 1998 (date of commencement of
operations) through October 31, 1998, NAS paid $3,939 in subadvisory fees to
Dreyfus with respect to the S & P 500 Index Fund.
VMF and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows VMF
to hire, replace or terminate subadvisers without the approval of shareholders;
the order also allows VMF 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 VMF. The order is intended to facilitate the
efficient operation of the Funds and afford the Trust increased management
flexibility.
44
<PAGE> 192
VMF provides to the Funds 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. VMF 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, VMF
does not expect to recommend frequent changes of subadvisers. VMF will regularly
provide written reports to the Trust's Board of Trustees regarding the results
of its evaluation and monitoring functions. Although VMF 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 INDEX FUNDS
With respect to the Index Funds, each Index Fund invests all of its
assets in shares of the corresponding Series of Index Master Series Trust.
Accordingly, the Index Funds do not invest directly in portfolio securities and
do not require investment advisory services. All portfolio management occurs at
the level of Index Master Series Trust. Index Master Series Trust has entered
into a management agreement ("Management Agreement") with Fund Asset Management
("FAM").
FAM provides Index Master Series Trust with investment advisory and
management services. Subject to the supervision of the Board of Trustees of
Index Master Series Trust, FAM is responsible for the actual management of each
Series' portfolio and constantly reviews the Series' holdings in light of its
own research analysis and that from other relevant sources. The responsibility
for making decisions to buy, sell or hold a particular security rests with FAM.
FAM performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Series.
Securities held by the Series of Index Master Series Trust may also be
held by, or be appropriate investments for, other funds or investment advisory
clients for which FAM or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by FAM for the Series or other funds for which it acts as
investment adviser or for its advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of FAM or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold there may be an adverse
effect on price.
As discussed in the Prospectus, FAM receives for its services to the
Series monthly compensation at the annual rates of the average daily net assets
of each Series as follows:
<TABLE>
<CAPTION>
Name of Series Management Fee
-------------- --------------
<S> <C>
Merrill Lynch Small Cap Index Series................................ 0.08%
</TABLE>
45
<PAGE> 193
<TABLE>
<S> <C>
Merrill Lynch Aggregate Bond Index Series........................... 0.06%
Merrill Lynch International Index Series............................ 0.11%
</TABLE>
The table below sets forth information about the total investment
advisory fees paid by the Series to FAM, and any amount voluntarily waived by
FAM.
<TABLE>
<CAPTION>
Small Cap Aggregate Bond International
Index Series Index Series Index Series
------------ ------------ ------------
<S> <C> <C> <C>
December 31, 1997*
Contractual amount.............................. $ 36,425 $ 88,609 $ 100,102
Amount waived (if applicable)................... $ 36,425 $ 37,562 $ 35,546
December 31, 1998
Contractual amount.............................. $ 61,476 $ 238,378 $ 142,489
Amount waived (if applicable)................... $ 61,476 $ 2,537 $ 87,182
</TABLE>
* Period is from commencement of operations (April 3, 1997 for the
Aggregate Bond Index Series, and April 9, 1997 for the Small Cap Index
Series and the International Index Series).
The Management Agreement obligates FAM to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of FAM Index Trust connected with investment and economic
research, trading and investment management of Index Master Series Trust, as
well as the fees of all Trustees who are affiliated persons of FAM or any of
their affiliates. Each Series pays all other expenses incurred in the operation
of the Series (except to the extent paid by Merrill Lynch Funds Distributor),
including, among other things, taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder reports, copies of
the registration statements, charges of the custodian, any sub-custodian and
transfer agent, expenses of portfolio transactions, expenses of redemption of
shares, Securities and Exchange Commission fees, expenses of registering the
shares under federal, state or foreign laws, fees and out-of-pocket expenses of
unaffiliated Trustees, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by Index Master Series Trust or the Series. Merrill Lynch Funds
Distributor will pay certain of the expenses of Index Master Series Trust
incurred in connection with the offering of its shares of beneficial interest of
each of the Series.
FAM is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons" of
FAM as defined under the 1940 Act because of their ownership of its voting
securities or their power to exercise a controlling influence over its
management or policies.
Unless earlier terminated as described below, the Management Agreement
will remain in effect from year to year with respect to each Series if approved
annually (a) by the Board of Trustees or by a majority of the outstanding shares
of the Series and (b) by a majority of the Trustees who are not parties to such
contract or interested persons (as defined in the 1940 Act) of any such party.
Such
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<PAGE> 194
contract is not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of the
shareholders of the Series.
MORLEY CAPITAL ACCUMULATION AND MORLEY ENHANCED INCOME FUND
Under the terms of the Trust's investment advisory agreement with UBT
(the "UBT Advisory Agreement"), UBT manages the Morley Capital Accumulation Fund
and Morley Enhanced Income Fund, subject to the supervision and direction of the
Board of Trustees. UBT will: (i) act in strict conformity with the Declaration
of Trust and the 1940 Act, as the same may from time to time be amended; (ii)
manage the Fund in accordance with the Fund's investment objectives,
restrictions and policies; (iii) make investment decisions for the Fund; and
(iv) place purchase and sale orders for securities and other financial
instruments on behalf of the Fund.
UBT has informed the Fund that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Fund, UBT will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Fund is a customer of UBT, its
parent or its affiliates and, in dealing with its customers, UBT, its parent and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by UBT or any such affiliate.
Morley Financial Services, Inc. ("MFS") owns 100% of the issued and
outstanding voting securities of UBT. MFS, an Oregon corporation, is a wholly
owned subsidiary of NFS.
UBT is a state bank and trust company chartered in 1913 and reorganized
under the laws of the state of Oregon in 1992. UBT provides a range of
investment and fiduciary services to institutional clients. UBT maintains and
manages common and pooled trust funds invested primarily in fixed income assets
whose principal value is relatively stable. UBT currently has approximately $1.0
billion under management. UBT also acts as custodian with respect to similar
fixed income assets.
Under the terms of the Investment Advisory Agreement dated February 1,
1999, as amended, UBT manages the investment of the assets of the Morley Capital
Accumulation Fund and Morley Enhanced Income Fund in accordance with the
policies and procedures established by the Trustees. UBT pays the Fund's pro
rata share of the compensation of the Trustees who are interested persons of the
Trust and officers and employees of UBT. UBT also furnishes, at its own expense,
all necessary administrative services, office space, equipment, and clerical
personnel for servicing the investments of the Fund and maintaining its
investment advisory facilities, and executive and supervisory personnel for
managing the investments and effecting the portfolio transactions of the Fund.
The Investment Advisory Agreement also specifically provides that UBT,
including its directors, officers, and employees, shall not be liable for any
error of judgment, or mistake of law, or for any loss arising out of any
investment, or for any act or omission in the execution and management of the
Fund, except for willful misfeasance, bad faith, or gross negligence in the
47
<PAGE> 195
performance of its duties, or by reason of reckless disregard of its obligations
and duties under the Agreement. The Agreement will continue in effect for an
initial period of two years and thereafter shall continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by the Trustees, or by vote of a majority of the outstanding
voting securities of the Fund, and, in either case, by a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party. The Agreement terminates automatically in the event of its "assignment",
as defined under the 1940 Act. It may be terminated as to the Fund without
penalty by vote of a majority of the outstanding voting securities of the Fund,
or by either party, on not less than 60 days written notice. The Agreement
further provides that UBT may render similar services to others.
Subject to the Fund's Expense Limitation Agreement the Trust pays the
compensation of the Trustees who are not interested persons of the Trust and all
expenses (other than those assumed by UBT), including governmental fees,
interest charges, taxes, membership dues in the Investment Company Institute
allocable to the Trust; fees under the Trust's Fund Administration Agreement;
fees and expenses of independent certified public accountants, legal counsel,
and any transfer agent, registrar, and dividend disbursing agent of the Trust;
expenses of preparing, printing, and mailing shareholders' reports, notices,
proxy statements, and reports to governmental offices and commissions; expenses
connected with the execution, recording, and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the custodian for all
services to the Trust; and expenses of calculating the net asset value of shares
of the Trust, expenses of shareholders' meetings, and expenses relating to the
issuance, registration, and qualification of shares of the Trust.
As compensation for UBT's services to the Morley Capital Accumulation
Fund, the Fund is obligated to pay UBT a fee computed and accrued daily and paid
monthly at an annual rate of 0.35% of the average daily net assets of the Fund.
As of October 31, 1999, the Fund had incurred investment advisory fees in the
amount of $___________. In the interest of limiting the expenses of the Fund,
UBT has entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement"). Pursuant to the Expense Limitation Agreement, UBT has
agreed to waive or limit its fees and to assume other expenses (except for Rule
12b-1 Fees) to the extent necessary to limit the total annual operating expenses
of each Class of the Fund (expressed as a percentage of average daily net assets
and excluding Rule 12b-1 Fees) to no more than 0.70% for ISC Shares 0.55% for IC
Shares and 0.70% for IRA Shares. Reimbursement by the Fund of the advisory fees
waived or limited and other expenses reimbursed by UBT pursuant to the Expense
Limitation Agreement may be made at a later date when the Fund has reached a
sufficient asset size to permit reimbursement to be made without causing the
total annual operating expense ratio of the Fund to exceed the limits set forth
above. No reimbursement will be made unless: (i) the Fund's assets exceed $50
million; (ii) the total annual expense ratio of the Class making such
reimbursement is less than the limit set forth above; and (iii) the payment of
such reimbursement is approved by the Board of Trustees on a quarterly basis.
Except as provided for in the Expense Limitation Agreement, reimbursement of
amounts previously waived or assumed by UBT is not permitted.
As compensation for UBT's services to the Morley Enhanced Income Fund,
the Fund is obligated to pay UBT a fee computed and accrued daily and paid
monthly at an annual rate of 0.35%
48
<PAGE> 196
of the average daily net assets of the Fund. In the interest of limiting the
expenses of the Fund, UBT has entered into an expense limitation agreement with
the Fund ("Expense Limitation Agreement"). Pursuant to the Expense Limitation
Agreement, UBT has agreed to waive or limit its fees and to assume other
expenses (except for Rule 12b-1 Fees and Administrative Service Fees) to the
extent necessary to limit the total annual operating expenses of each Class of
the Fund to ___% for Class A, ___% for Class Y and ____% for Institutional Class
shares. Reimbursement by the Fund of the advisory fees waived or limited and
other expenses reimbursed by UBT pursuant to the Expense Limitation Agreement
may be made at a later date when the Fund has reached a sufficient asset size to
permit reimbursement to be made without causing the total annual operating
expense ratio of the Fund to exceed the limits set forth above. No reimbursement
will be made unless: (i) the Fund's assets exceed $100 million; (ii) the total
annual expense ratio of the Class making such reimbursement is less than the
limit set forth above; and (iii) the payment of such reimbursement is approved
by the Board of Trustees on a quarterly basis. Except as provided for in the
Expense Limitation Agreement, reimbursement of amounts previously waived or
assumed by UBT is not permitted.
DISTRIBUTOR
NAS serves as underwriter for each of the Funds in the continuous
distribution of its shares pursuant to a Underwriting Agreement dated as of May
9, 1998, as amended as of December ____, 1999 (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 the Funds.
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") under Rule
12b-1 of the 1940 Act. The Plan permits the Funds to compensate NAS, as the
Funds' Distributor, for expenses associated with the distribution of shares of
the Funds. Although actual distribution expenses may be more or less, under the
Plan the Funds pay NAS an annual fee in an amount that will not exceed the
following amounts:
- - 0.25% of the average daily net assets of Class A shares;
- - 1.00% of the average daily net assets of Class B shares for the Index
Funds and 0.85% for the Class B shares of each Life Strategy Series and
49
<PAGE> 197
- - 0.25% of the average daily net assets of Service Class shares .
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 well as
payments to broker-dealers for shareholder services.
As required by Rule 12b-1, the Plan was approved by the Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Funds and who have no direct or indirect financial interest in the operation
of the Plan (the "Independent Trustees"). The Plan was initially approved by the
Board of Trustees on November ____, 1999, with respect to the Funds. The Plan
may be terminated as to a Class of a Fund by vote of a majority of the
Independent Trustees, or by vote of majority of the outstanding shares of that
Class. Any change in the Plan that would materially increase the distribution
cost to a Class 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 vote of the Trustees including a majority
of the 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 applicable Class. 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 as to a Fund must determine that
there is a reasonable likelihood that the Plan will benefit such Fund and its
shareholders.
The Board of Trustees of the Trust believes that the Plan is in the
best interests of the Funds since it encourages Fund growth and maintenance of
Fund assets. As the Funds grow in size, certain expenses, and therefore total
expenses per share, may be reduced and overall performance per share may be
improved.
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 a Fund's shares including, but not limited
to, those discussed above.
ADMINISTRATIVE SERVICES PLAN
Under the terms of an Administrative Services Plan, a Fund is permitted
to enter into Servicing Agreements with servicing organizations, such as NAS,
who agree to provide certain administrative support services in connection with
the Class A shares of the Funds Such administrative support services include but
are not limited to the following: establishing and
50
<PAGE> 198
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder sub-accounting,
answering inquiries regarding the Funds, providing periodic statements showing
the account balance for beneficial owners or for plan participants or contract
holders of insurance company separate accounts, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding to the Trust executed proxies and obtaining such other information
and performing such other services as may reasonably be required.
As authorized by the Administrative Services Plan, the Trust has
entered into a Servicing Agreement effective December ____, 1999, pursuant to
which Nationwide Financial Services, Inc. has agreed to provide certain
administrative support services in connection with Class A shares of each Fund
held beneficially by its customers. In consideration for providing
administrative support services, NFS and other entities with which the Trust may
enter into Servicing Agreements (which may include NAS) will receive a fee,
computed at the annual rate of up to 0.25% of the average daily net assets of
the Class A shares of each Fund, held by customers of NFS or such other entity.
FUND ADMINISTRATION
Under the terms of a Fund Administration Agreement, Villanova SA
Capital Trust ("VSA"), a wholly owned subsidiary of Villanova Capital, Inc.,
provides for various administrative and accounting services, including daily
valuation of the Funds' shares, preparation of financial statements, tax
returns, and regulatory reports, and presentation of quarterly reports to the
Board of Trustees. For these services, each Fund pays VSA an annual fee based on
each Fund's average daily net assets at the following rates (with an annual
minimum fee of $75,000 per Fund):
FUND ASSETS FEE
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<PAGE> 199
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
The Aggressive, The Moderately $0 up to $250 million 0.07%
Aggressive, The Moderate, The $250 million up to $1 billion 0.05%
Moderately Conservative and $1 billion and more 0.04%
The Conservative Funds
Small Cap Index Fund $0 up to $250 million 0.27%
$250 million and more 0.24%
International Index Fund $0 up to $250 million 0.34%
$250 million and more 0.31%
Bond Index Fund $0 up to $250 million 0.29%
$250 million and more 0.26%
</TABLE>
SUB-ADMINISTRATORS
VSA has entered into a Sub-Administration Agreement with BISYS Fund
Services Ohio, Inc. ("BISYS") to provide certain fund administration services
for each of the Funds. For these services, VSA pays BISYS a fee equal to the
greater of $50,000 of an annual fee at the following rates based on the average
daily net assets of the aggregate of all the funds [of the Trust] that BISYS is
providing such services for:
<TABLE>
<CAPTION>
ASSETS FEE
<S> <C>
$0 up to $13 million 0.045%
$13 million up to $25 million 0.02%
$25 million up to $50 million 0.015%
$50 million and more 0.01%
</TABLE>
VSA has also entered into a Sub-Administration Agreement with Fund
Asset Management, L.P. that covers the fund accounting, custody and other
administrative expenses at the Series level with respect to the Index Funds
only. For these services, VSA pays Fund Asset Management, L.P. an annual fee
based on the average daily net assets as follows: 0.07% for the Small Cap Index
Fund, 0.14% for the International Index Fund and 0.09% for the Bond Index Fund.
TRANSFER AGENT
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Nationwide Investors Services, Inc. ("NISI"), a wholly owned subsidiary
of VSA, Three Nationwide Plaza, Columbus, Ohio 43215, serves as transfer agent
and dividend disbursing agent for each of the Funds. For these services, NISI
receives an annual fee of ______ from each of the Funds.
CUSTODIAN
The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza,
Cincinnati, OH 45263, is the custodian for the Funds and makes all receipts and
disbursements under a Custody Agreement. Fifth Third performs no managerial or
policy-making functions for the Funds.
LEGAL COUNSEL
Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus, OH 43215,
serves as the Trust's legal counsel.
AUDITORS
KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the
independent auditors for the Trust.
BROKERAGE ALLOCATION
THE INDEX FUNDS
Because the Index Funds will invest exclusively in shares of their
corresponding Series, it is expected that all transactions in portfolio
securities will be entered into by the Series. Subject to policies established
by the Board of Trustees of Index Master Series Trust, FAM is primarily
responsible for the execution of the Series' portfolio transactions and the
allocation of brokerage. Index Master Series Trust has no obligation to deal
with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Series. Where possible, Index Master Series Trust
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of Index Master Series Trust to obtain the best
results in conducting portfolio transactions for the Series, taking into account
such factors as price (including the applicable dealer spread or commission),
the size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. The portfolio securities of the Series generally are traded
on a principal basis and normally do not involve either brokerage commissions or
transfer taxes. The cost of portfolio securities transactions of the Series
primarily consists of dealer or underwriter spreads. While reasonable
competitive spreads or commissions are sought, Index Master Series Trust will
not necessarily be paying the lowest spread or commission available.
Transactions with respect to the securities of small and emerging growth
companies in which the Series may invest may involve specialized services on the
part of the broker or dealer and thereby entail higher commissions or spreads
than would be the case with transactions involving more widely trading
securities.
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Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as quantitative and modeling
information assessments and analyses of the business or prospects of a company,
industry or economic sector) to FAM may receive orders for transactions by Index
Master Series Trust. Information so received will be in addition to and not in
lieu of the services required to be performed by FAM under its Management
Agreement and the expense of FAM will not necessarily be reduced as a result of
the receipt of such supplemental information. If in the judgment of FAM, Index
Master Series Trust will be benefited by supplemental research services, FAM is
authorized to pay brokerage commissions to a broker-dealer furnishing such
services which are in excess of commissions which another broker-dealer may have
charged for effecting the same transaction. Supplemental investment research
obtained from such broker-dealers might be used by FAM in servicing all of its
accounts and all such research might not be used by FAM in connection with the
Series.
For the fiscal period April 3, 1997 (commencement of operations) to
December 31, 1997, the Series paid brokerage commissions of $0 for the Aggregate
Bond Index Series. For the fiscal period April 9, 1997 (commencement of
operations) to December 31, 1997, the Series paid brokerage commissions of
$60,361 and $146,336 for the Small Cap Index Series and the International Index
Series, respectively. The Series paid no commissions to Merrill Lynch, Pierce,
Fenner & Smith, Incorporated ("Merrill Lynch"). For the fiscal year ended
December 31, 1998, the following table shows the amount of brokerage commissions
paid by each Series to FAM, the percentage of each Series brokerage commissions
paid to Merrill Lynch, the percentage of each Series aggregate dollar amount of
transactions involving the payment of commissions effected through Merrill Lynch
and aggregate brokerage commissions paid by each Series:
<TABLE>
<CAPTION>
Small Cap Aggregate Bond International
Index Series Index Series Index Series
<S> <C> <C> <C>
Aggregate brokerage commissions
paid to Merrill Lynch....................... $ 0 $ 0 $ 1,299
% of Fund's aggregate brokerage
commissions paid to
Merrill Lynch............................... 0.00% 0.00% 1.75%
% of Fund's aggregate dollar amount
of transactions effected through
the broker.................................. 0.00% 0.00% 0.20%
Aggregate brokerage
Commissions paid............................ $ 50,264 $ 0 $ 74,373
</TABLE>
Under the 1940 Act, persons affiliated with Index Master Series Trust
and persons who are affiliated with such persons are prohibited from dealing
with Index Master Series Trust as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own accounts, affiliated
persons of Index Master Series Trust, including Merrill Lynch and any of its
affiliates, will not serve as Index Master Series Trust's dealer in such
transactions. However, affiliated persons of Index Master Series Trust may serve
as its
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broker in listed or OTC transactions conducted on an agency basis
provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, Index Master Series Trust may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of Trustees
of Index Master Series Trust that either comply with rules adopted by the
Commission or with interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to recapture underwriting and dealer spreads from affiliated entities. The
Trustees of Index Master Series Trust have considered all factors deemed
relevant and have made a determination not to seek such recapture at this time.
The Trustees will reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the
U.S. national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for Index
Master Series Trust in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from Index Master Series Trust and annual statements as to aggregate
compensation will be provided to Index Master Series Trust. Securities may be
held by, or be appropriate investments for, the Series as well as other funds or
investment advisory clients of FAM.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of FAM or an affiliate when one or more
clients of FAM or an affiliate are selling the same security. If purchases or
sales of securities arise for consideration at or about the same time that would
involve Index Master Series Trust or other clients or funds for which FAM or an
affiliate acts as manager, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of FAM
or an affiliate during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse
effect on price.
LIFE STRATEGY SERIES
Because the Life Strategy Series will invest exclusively in shares of
the Underlying Funds, it is expected that all transactions in portfolio
securities will be entered into by the Underlying Funds. And as described above,
for the Underlying Funds which are the Index Funds the transactions in portfolio
securities will be entered into at the Series level. For those Underlying Funds
which are not Index Funds, the following discussion describes their brokerage
allocation policies.
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VMF (or a Subadviser) is responsible for decisions to buy and sell
securities and other investments for the Funds, the selection of brokers and
dealers to effect the transactions and the negotiation of brokerage commissions,
if any. In transactions on stock and commodity exchanges in the United States,
these commissions are negotiated, whereas on foreign stock and commodity
exchanges these commissions are generally fixed and are generally higher than
brokerage commissions in the United States. In the case of securities traded on
the over-the-counter markets or for securities traded on a principal basis,
there is generally no commission, but the price includes a spread between the
dealer's purchase and sale price. This spread is the dealer's profit. In
underwritten offerings, the price includes a disclosed, fixed commission or
discount. Most short term obligations are normally traded on a "principal"
rather than agency basis. This may be done through a dealer (e.g., a securities
firm or bank) who buys or sells for its own account rather than as an agent for
another client, or directly with the issuer.
The primary consideration in portfolio security transactions is "best
price - best execution," i.e., execution at the most favorable prices and in the
most effective manner possible. Except as described below, VMF or a Subadviser
always attempts to achieve best price - best execution, and both VMF and the
Subadvisers have complete freedom as to the markets in and the broker-dealers
through which they seek this result. In selecting broker-dealers, VMF and each
Subadviser will consider various relevant factors, including but not limited to
the size and type of the transaction, the nature and character of the markets
for the security or asset to be purchased or sold, the execution efficiency,
settlement capability, and financial condition of the broker-dealer's firm, the
broker-dealer's execution services (rendered on a continuing basis), and the
reasonableness of any commissions. In allocating orders among brokers for
execution on an [agency][agency only?] basis, in addition to price and execution
considerations, the usefuless 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.
Subject to the requirement of seeking best execution, securities may be
bought from or sold to broker-dealers who have furnished statistical, research,
and other information or services to VMF or a Subadviser. In placing orders with
such broker-dealers, VMF or a Subadviser will, where possible, take into account
the comparative usefulness of such information. Such information is useful to
VMF or a Subadviser even though its dollar value may be indeterminable, and its
receipt or availability generally does not reduce VMF's or a Subadviser's normal
research activities or expenses.
Fund portfolio transactions may be effected with broker-dealers who
have assisted investors in the purchase of variable annuity contracts or
variable insurance policies issued by Nationwide Life Insurance Company or
Nationwide Life & Annuity Insurance Company. However, neither such assistance
nor sale of other investment company shares is a qualifying or disqualifying
factor in a broker-dealer's selection, nor is the selection of any broker-dealer
based on the volume of shares sold.
There may be occasions when portfolio transactions for a Fund are
executed as part of
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concurrent authorizations to purchase or sell the same security for trusts or
other accounts (including other mutual funds) served by VMF or a Subadviser or
by an affiliated company thereof. Although such concurrent authorizations
potentially could be either advantageous or disadvantageous to a Fund, they are
effected only when VMF or a Subadviser believes that to do so is in the interest
of the Fund. When such concurrent authorizations occur, the executions will be
allocated in an equitable manner.
The Trustees periodically review VMF's and each Subadviser's
performance of their responsibilities in connection with the placement of
portfolio transactions on behalf of the Funds and review the commissions paid by
the Funds over representative periods of time to determine if they are
reasonable in relation to the benefits to the Funds.
Each Subadviser may cause a Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission that is in excess of the
commission another broker-dealer would have received for executing the
transaction if it is determined, pursuant to the requirements of Section 28(e)
of the Securities Exchange Act of 1934, that such commission is reasonable in
relation to the value of the brokerage and/or research services provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to a Subadviser is considered to be in addition to and not in lieu of services
required to be performed by the Subadviser under its subadvisory agreement with
VMF. The fees paid to each of the Subadvisers pursuant to its subadvisory
agreement with VMF are not reduced by reason of its receiving any brokerage and
research services. The research services provided by broker-dealers can be
useful to a Subadviser in serving its other clients or clients of the
Subadviser's affiliates. Subject to the policy of the Subadvisers to obtain best
execution at the most favorable prices through responsible broker-dealers, a
Subadviser also may consider the broker-dealer's sale of shares of any fund for
which the Subadviser serves as investment adviser, subadviser or administrator.
Under the 1940 Act, "affiliated persons" of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each Fund may purchase securities from underwriting syndicates of which a
Subadviser or any of its affiliates, as defined in the 1940 Act, is a member
under certain conditions, in accordance with Rule 10f-3 under the 1940 Act.
Each of the Funds contemplate that, consistent with the policy of
obtaining best results, brokerage transactions may be conducted through
"affiliated brokers or dealers," as defined in the 1940 Act. Under the 1940 Act,
commissions paid by a Fund to an "affiliated broker or dealer" in connection
with a purchase or sale of securities offered on a securities exchange may not
exceed the usual and customary broker's commission. Accordingly, it is the
Funds' policy that the commissions to be paid to an affiliated broker-dealer
must, in the judgment of VMF or the appropriate Subadviser, be (1) at least as
favorable as those that would be charged by other brokers having comparable
execution capability and (2) at least as favorable as commissions
contemporaneously charged by such broker or dealer on comparable transactions
for the broker's or dealer's most favored unaffiliated customers, except for
accounts for which the affiliated broker
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or dealer acts as a clearing broker for another brokerage firm and customers of
an affiliated broker or dealer that, in the opinion of a majority of the
independent trustees, are not comparable to the Fund. The Funds do not deem it
practicable or in their best interests to solicit competitive bids for
commissions on each transaction. However, consideration regularly is given to
information concerning the prevailing level of commissions charged on comparable
transactions by other brokers during comparable periods of time.
ADDITIONAL INFORMATION ON PURCHASES AND SALES
CLASS A SALES CHARGES
The chart below shows the Class A sales charges, which decrease as the amount of
your investment increases.
CLASS A SHARES
<TABLE>
<CAPTION>
Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------
<S> <C> <C>
Less than $50,000 5.75% 6.10%
$50,000 to $99,999 4.50 4.71
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
</TABLE>
NET ASSET VALUE PURCHASE PRIVILEGE (CLASS A SHARES ONLY).--THE SALES CHARGE
APPLICABLE TO CLASS A SHARES MAY BE WAIVED FOR THE FOLLOWING PURCHASES DUE TO
THE REDUCED MARKETING EFFORT REQUIRED BY NAS:
(1) shares sold to other registered investment companies affiliated with
VMF,
(2) shares sold:
(a) to any pension, profit sharing, or other employee benefit plan
for the employees of VMF, any of its affiliated companies, or
investment advisory clients and their affiliates;
(b) to any endowment or non-profit organization;
(c) to any pension, profit sharing, or deferred compensation plan
which is qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code of 1986 as amended, dealing directly
with NAS with no sales representative involved upon written
assurance of the purchaser that the shares are acquired for
investment purposes and will not be resold except to the
Trust;
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(d) to any life insurance company separate account registered as a
unit investment trust;
(e) to any person purchasing through an account with an
unaffiliated brokerage firm having an agreement with NAS to
waive sales charges for those persons;
(f) to any directors, officers, full-time employees, sales
representatives and their employees or any investment advisory
clients of a broker-dealer having a dealer/selling agreement
with NAS;
(g) to any person who pays for such shares with the proceeds of
mutual fund shares redeemed from an NAS brokerage account; to
qualify, the person must have paid an initial sales charge or
CDSC on the redeemed shares and the purchase of Class A shares
must be made within 60 days of the redemption. This waiver
must be requested when the purchase order is placed, and NAS
may require evidence of qualification for this waiver;
(h) to any Class Member of Snyder vs. Nationwide Mutual Insurance
Company and Nationwide Life Insurance Company on the initial
purchase of shares for an amount no less than $5,000 and no
more than $100,000. To be eligible for this waiver, the
purchase of Class A shares must come from a source other than
the surrender of, withdrawal from, or loan against any
existing policy, mutual fund or annuity issued by Nationwide
Mutual Insurance Company or its affiliates;
(i) to any person who pays for such shares with the proceeds of
mutual funds shares redeemed from an account in the NEA
Valuebuilder Mutual Fund Program. This waiver is only
available for the initial purchase if shares were made with
such proceeds. NAS may require evidence of qualification for
such waiver; and
(j) to certain employer-sponsored retirement plan including
pension, profit sharing or deferred compensation plans which
are qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code.
(j) Trustees and retired Trustees of Nationwide Mutual Funds
(including its predecessor Trusts);
(k) Directors, officers, full-time employees, sales
representatives and their employees, and retired directors,
officers, employees, and sales representatives, their spouses,
children or immediate relatives (including mother, father,
brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of
Nationwide Insurance and Nationwide Financial companies, or
any investment advisory clients of VMF, VSA, NAS and their
affiliates; and
(l) Directors, officers, full-time employees, their spouses,
children or immediate relatives and immediate relatives of
deceased employees of any sponsor group which may be
affiliated with the Nationwide Insurance and Nationwide
Financial companies from
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time to time, (including but not limited to, Farmland
Insurance Industries, Inc., Maryland Farm Bureau, Inc., Ohio
Farm Bureau Federation, Inc., Pennsylvania Farmers'
Association, Ruralite Services, Inc., and Southern States
Cooperative).
CDSC APPLICABLE FOR CLASS A SHARES
Employer sponsored retirement plans which purchase Class A shares at
net asset value (other than those investing in Funds through a variable
insurance product) are subject to a CDSC, payable to NAS, of 1.00% if a finder's
fee (as described below) was paid on the purchase of the shares and the shares
are redeemed within the first year after purchase, 0.50% if redeemed within the
second year and 0.25% if redeemed within the third year. The sales charge is
applied to the original purchase price, or the current market value of the
shares being sold, whichever is less. A CDSC will be charged on redemptions of
$1 million or more within a 12 month period.
NAS will pay a finder's fee at the plan sponsor level at the time of purchase to
the dealer of record at the time of purchase at the following rates:
1.00% for sales of the Funds of $1 million up to $3 million
0.50% for sales of the Funds of $ 3 million up to $50 million
0.25% for sales of the Funds of $50 million or more
The finder's fee is paid on the aggregate assets of all Funds held at the plan
sponsor level.
SIGNATURE GUARANTEE
A signature guarantee is required if the redemption is over $100,000,
or if your account registration has changed within the last 30 days, if the
redemption check is made payable to anyone other than the registered
shareholder, if the proceeds are sent to a bank account not previously
designated, or if are mailed to an address other than the address of record. NAS
reserves the right to require a signature guarantee in other circumstances,
without notice. Based on the circumstances of each transaction, NAS reserves the
right to require that your signature be guaranteed by an authorized agent of an
"eligible guarantor institution," which includes, but is not limited to, certain
banks, credit unions, savings associations, and member firms of national
securities exchanges. A signature guarantee is designed to protect the
shareholder by helping to prevent an unauthorized person from redeeming shares
and obtaining the proceeds. A notary public is not an acceptable guarantor. In
certain special cases (such as corporate or fiduciary registrations), additional
legal documents may be required to ensure proper authorizations. If NAS decides
to require signature guarantees in all circumstances, shareholders will be
notified in writing prior to implementation of the policy.
VALUATION OF SHARES
The net asset value per share for each of the Funds is determined 15
minutes after the close of regular trading on the New York Stock Exchange
(usually 4 P.M. Eastern Time), each day that the Exchange is open. The time at
which a Fund's net asset value per share is calculated is referred to as the
"Valuation Time."
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The Funds will not compute net asset value on customary business
holidays, including Christmas, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day and
Thanksgiving.
The net asset value per share of a class is computed by adding the
value of all securities and other assets in a Fund's portfolio allocable to such
class, deducting any liabilities allocable to such class and any other
liabilities charged directly to that class and dividing by the number of shares
outstanding in such class.
THE INDEX FUNDS
The principal assets of each Index Fund will normally be its interest
in the underlying Series, which will be valued at its net asset value. Portfolio
securities that are traded on stock exchanges are valued at the last sale price
(regular way) on the exchange on which such securities are traded as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions and at the last
available ask price for short positions. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the Trustees of Index Master Series Trust as the
primary market. Long positions in securities traded in the OTC market are valued
at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Short positions in securities traded in the OTC market are valued at the
last available ask price in the OTC market prior to the time of valuation. When
the Series writes an option, the amount of the premium received is recorded on
the books of the Series as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Series are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Trustees of Index
Master Series Trust, including valuations furnished by a pricing service
retained by Index Master Series Trust. Such valuations and procedures will be
reviewed periodically by the Trustees.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the Exchange. The values of such
securities used in computing the net asset value of a Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the Exchange. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
Exchange that will not be reflected in the computation of a Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Trustees of Index Master Series Trust.
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Each investor in Index Master Series Trust may add to or reduce its
investment in any Series on each day the Exchange is open. The value of each
investor's (including the respective Index Funds') interest in a Series will be
determined as of 15 minutes after the close of business on the Exchange
(generally 4:00 p.m., New York Time) by multiplying the net asset value of the
Series by the percentage, effective for that day, that represents that
investor's share of the aggregate interests in such Series. Any additions or
withdrawals, which are to be effected on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in a Series will
then be recomputed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Series as of the time or
determination on such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor's investment in the Series
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Series as of such time on such day plus or minus, as the case
may be, the amount of the net additions to or withdrawals from the aggregate
investments in the Series by all investors in the Series. The percentage so
determined will then be applied to determine the value of the investor's
interest in such Series as of 15 minutes after the close of business of the
Exchange on the next day the Exchange is open.
LIFE STRATEGIES SERIES
Shares of the Underlying Funds are valued at their respective net asset
values as reported to VSA. Other assets of the Funds are valued at their current
market value if market quotations are readily available. If market quotations
are not available, or if VSA determines that the price of a security does not
represent its fair value, these assets are valued at fair value in accordance
with procedures adopted by the Board of Trustees.
INVESTOR STRATEGIES
1 AUTOMATIC ASSET ACCUMULATION--This is a systematic investment strategy
which combines automatic monthly transfers from your personal checking account
to your mutual fund account with the concept of Dollar Cost Averaging. With this
strategy, you invest a fixed amount monthly over an extended period of time,
during both market highs and lows. Dollar Cost Averaging can allow you to
achieve a favorable average share cost over time since your fixed monthly
investment buys more shares when share prices fall during low markets, and fewer
shares at higher prices during market highs. Although no formula can assure a
profit or protect against loss in a declining market, systematic investing has
proven a valuable investment strategy in the past.
You can get started with Automatic Asset Accumulation for as little as
$25 a month in a Fund.
2 AUTOMATIC ASSET TRANSFER--This systematic investment plan allows you to
transfer $25 or more to a Fund from another Fund systematically, monthly or
quarterly, after Fund minimums have been met. The money is transferred on the
25th day of the month as selected or on the preceding business day. Dividends of
any amount can be moved automatically from one Fund to another at the
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time they are paid. This strategy can provide investors with the benefits of
Dollar Cost Averaging through an opportunity to achieve a favorable average
share cost over time. With this plan, your fixed monthly or quarterly transfer
from the Fund to any other Fund you select buys more shares when share prices
fall during low markets and fewer shares at higher prices during market highs.
Although no formula can assure a profit or protect against loss in a declining
market, systematic investing has proven a valuable investment strategy in the
past.
3 AUTOMATIC WITHDRAWAL PLAN ($50 OR MORE)--You may have checks for any
fixed amount of $50 or more automatically sent bi-monthly, monthly, quarterly,
three times/year, semi-annually or annually, to you (or anyone you designate)
from your account.
NOTE: If you are withdrawing more shares than your account receives in
dividends, you will be decreasing your total shares owned, which will reduce
your future dividend potential.
INVESTOR PRIVILEGES
The Funds offer the following privileges to shareholders. Additional
information may be obtained by calling NAS toll-free at 1-800-848-0920.
1 NO SALES CHARGE ON REINVESTMENTS--All dividends and capital gains will
be automatically reinvested free of charge in the form of additional shares
within the same Fund and class or another specifically requested Fund (but the
same class) unless you have chosen to receive them in cash on your application.
Unless requested in writing by the shareholder, the Trust will not mail checks
for dividends and capital gains of less than $5 but instead they will
automatically be reinvested in the form of additional shares, and you will
receive a confirmation.
2 EXCHANGE PRIVILEGE--The exchange privilege is a convenient way to
exchange shares from one Fund to another Fund in order to respond to changes in
your goals or in market conditions. HOWEVER, AN EXCHANGE IS A SALE AND PURCHASE
OF SHARES AND, FOR FEDERAL AND STATE INCOME TAX PURPOSES, MAY RESULT IN A
CAPITAL GAIN OR LOSS. The registration of the account to which you are making an
exchange must be exactly the same as that of the Fund account from which the
exchange is made, and the amount you exchange must meet the applicable minimum
investment of the Fund being purchased.
EXCHANGES AMONG FUNDS
Exchanges may be made among any of the Funds within the same class or
among any class in any of the Funds and Prime Shares of the Nationwide Money
Market Fund. For certain exchanges of Class A shares among the Funds, you may
pay the difference between the sales charges, if a higher sales charge is
applicable. Exchanges within Service Class shares may be made without incurring
a sales charge.
An exchange from the Prime Shares of the Nationwide Money Market Fund
into another Fund will be subject to the applicable sales charge unless already
paid.
There is no administrative fee or exchange fee. The Trust reserves the
right to reject any
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exchange request it believes will result in excessive transaction costs, or
otherwise adversely affect other shareholders. The Trust reserves the right to
change the exchange privilege upon at least 60 days' written notice to
shareholders.
EXCHANGES MAY BE MADE THREE CONVENIENT WAYS:
BY TELEPHONE
NAS NOW--You can automatically process exchanges by calling
1-800-637-0012, 24 hours a day, seven days a week. However, if you
declined the option in the application, you will not have this
automatic exchange privilege. NAS NOW also gives you quick, easy access
to mutual fund information. Select from a menu of choices to conduct
transactions and hear fund price information, mailing and wiring
instructions as well as other mutual fund information. You must call
our toll-free number by the Valuation Time to receive that day's
closing share price. See "VALUATION OF SHARES" above information as to
when a Fund's Valuation Time is.
CUSTOMER SERVICE LINE--By calling 1-800-848-0920, you may exchange
shares by telephone. Requests may be made only by the account owner(s).
You must call our toll-free number by the Valuation Time to receive
that day's closing share price.
NAS may record all instructions to exchange shares. NAS reserves the
right at any time without prior notice to suspend, limit or terminate
the telephone exchange privilege or its use in any manner by any person
or class.
The Funds will employ the same procedure described under "Buying,
Selling and Exchanging Fund Shares" in the Prospectus to confirm that
the instructions are genuine.
The Funds will not be liable for any loss, injury, damage, or expense
as a result of acting upon instructions communicated by telephone
reasonably believed to be genuine, and the Funds will be held harmless
from any loss, claims or liability arising from its compliance with
such instructions. These options are subject to the terms and
conditions set forth in the Prospectus and all telephone transaction
calls may be tape recorded. The Funds reserve the right to revoke this
privilege at any time without notice to shareholders and request the
redemption in writing, signed by all shareholders.
BY MAIL OR FAX-- Write or fax to Nationwide Advisory Services, Inc., Three
Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or FAX (614)
249-8705. Please be sure that your letter or facsimile is signed exactly as your
account is registered and that your account number and the Fund from which you
wish to make the exchange are included. For example, if your account is
registered "John Doe and Mary Doe", "Joint Tenants With Right of Survivorship,'
then both John and Mary must sign the exchange request. The exchange will be
processed effective the date the signed letter or fax is received. Fax requests
received after 4 P.M. Eastern Time will be processed as of the next business
day. NAS reserves the right to require the original document if you use the fax
method.
3 NO SALES CHARGE ON A REPURCHASE--If you redeem all or part of your
Class A shares on which
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you paid a front-end sales charge, you have a one-time privilege to reinvest all
or part of the redemption proceeds in any shares of the same class, without a
sales charge, within 30 days after the effective date of the redemption.
If you realize a gain on your redemption, the transaction is taxable,
and reinvestment will not alter any capital gains tax payable. If you realize a
loss and you use the reinstatement privilege, some or all of the loss will not
be allowed as a tax deduction depending upon the amount reinvested.
INVESTOR SERVICES
1 NAS NOW AUTOMATED VOICE RESPONSE SYSTEM--Our toll-free number
1-800-637-0012 will connect you 24 hours a day, seven days a week to NAS NOW.
Through a selection of menu options, you can conduct transactions, hear fund
price information, mailing and wiring instructions and other mutual fund
information.
2 TOLL-FREE INFORMATION AND ASSISTANCE--Customer service representatives
are available to answer questions regarding the Funds and your account(s)
between the hours of 8 A.M. and 5 P.M. Eastern Time. Call toll-free:
1-800-848-0920 or contact NAS at our FAX telephone number (614) 249-8705.
3 RETIREMENT PLANS --Shares of the Funds may be purchased for
Self-Employed Retirement Plans, Individual Retirement Accounts (IRAs), Roth
IRAs, Educational IRAs, Simplified Employee Pension Plans, Corporate Pension
Plans, Profit Sharing Plans and Money Purchase Plans. For a free information
kit, call 1-800-848-0920.
4 SHAREHOLDER CONFIRMATIONS--You will receive a confirmation statement
each time a requested transaction is processed. However, no confirmations are
mailed on certain pre-authorized, systematic transactions. Instead, these will
appear on your next consolidated statement.
5 CONSOLIDATED STATEMENTS--Shareholders of the Funds receive statements
as of the end of [March, June, September and December]. Please review your
statement carefully and notify us immediately if there is a discrepancy or error
in your account.
For shareholders with multiple accounts, your consolidated statement
will reflect all your current holdings in the Funds. Your accounts are
consolidated by social security number and zip code. Accounts in your household
under other social security numbers may be added to your statement at your
request. Depending on which Funds you own, your consolidated statement will be
sent either monthly or quarterly. Only transactions during the reporting period
will be reflected on the statements. An annual summary statement reflecting all
calendar-year transactions in all your Funds will be sent after year-end.
6 AVERAGE COST STATEMENT--This statement may aid you in preparing your
tax return and in reporting capital gains and losses to the IRS. If you redeemed
any shares during the calendar year, a statement reflecting your taxable gain or
loss for the calendar year (based on the average cost you paid for the redeemed
shares) will be mailed to you following each year-end. Average cost can only be
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calculated on accounts opened on or after January 1, 1984. Fiduciary accounts
and accounts with shares acquired by gift, inheritance, transfer, or by any
means other than a purchase cannot be calculated.
Average cost is one of the IRS approved methods available to compute
gains or losses. You may wish to consult a tax advisor on the other methods
available. The average cost information will not be provided to the IRS. If you
have any questions, contact one of our service representatives at
1-800-848-0920.
7 SHAREHOLDER REPORTS--All shareholders will receive reports
semi-annually detailing the financial operations of the funds.
8 PROSPECTUSES--Updated prospectuses will be mailed to you annually.
9 UNDELIVERABLE MAIL--If mail from NAS to a shareholder is returned as
undeliverable on three or more consecutive occasions, NAS will not send any
future mail to the shareholder unless it receives notification of a correct
mailing address for the shareholder. Any dividends that would be payable by
check to such shareholders will be reinvested in the shareholder's account until
NAS receives notification of the shareholder's correct mailing address.
FUND PERFORMANCE ADVERTISING
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 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 a 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 for Class A shares, 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.
Standardized yield and total return quotations will be compared
separately for Class A and Service Class shares. Because of differences in the
fees and/or expenses borne by Class A and Service Class shares of the Funds, the
net yields and total returns on Class A and Service Class shares can be
expected, at any given time, to differ from class to class for the same period.
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Each of the Funds, other than the ___________ Fund, may also from time
to time advertise a uniformly calculated yield quotation. This yield is
calculated by dividing the net investment income per share earned during a
30-day base period by the maximum offering price per share on the last day of
the period, assuming reinvestment of all dividends and distributions. This yield
formula uses the average number of shares entitled to receive dividends,
provides for semi-annual compounding of interest, and includes a modified market
value method for determining amortization. The yield will fluctuate, and there
is no assurance that the yield quoted on any given occasion will remain in
effect for any period of time. The effect of sales charges are not reflected in
the calculation of the yields, therefore, a shareholders actual yield may be
less.
NONSTANDARD RETURNS
The Funds 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.
RANKINGS AND RATINGS IN FINANCIAL PUBLICATIONS
The Funds may report their performance relative to other mutual funds
or investments. The performance comparisons are made to: other mutual funds with
similar objectives; other mutual funds with different objectives; or, to other
sectors of the economy. Other investments which the Funds may be compared to
include, but are not limited to: precious metals; real estate; stocks and bonds;
closed-end funds; market indexes; fixed-rate, insured bank CDs, bank money
market deposit accounts and passbook savings; and the Consumer Price Index.
Normally these rankings and ratings are published by independent
tracking services and publications of general interest including, but not
limited to: Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar,
Donoghue's, Schabaker Investment Management, Kanon Bloch Carre & Co.; magazines
such as Money, Fortune, Forbes, Kiplinger's Personal Finance Magazine, Smart
Money, Mutual Funds, Worth, Financial World, Consumer Reports, Business Week,
Time, Newsweek, U.S. News and World Report; and other publications such as the
Wall Street Journal, Barron's, Columbus Dispatch, Investor's Business Daily, and
Standard & Poor's Outlook.
The rankings may or may not include the effects of sales charges.
ADDITIONAL INFORMATION
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DESCRIPTION OF SHARES
The Trust presently offers the following series of shares of beneficial
interest, without par value and with the various classes listed; eight of these
series are the Funds:
<TABLE>
<CAPTION>
Series Share Classes
- ------ -------------
<S> <C>
Nationwide Mid Cap Growth Fund Class A, Class B, Class D
Nationwide Growth Fund Class A, Class B, Class D
Nationwide Fund Class A, Class B, Class D
Nationwide Bond Fund Class A, Class B, Class D
Nationwide Tax-Free Income Fund Class A, Class B, Class D
Nationwide Long-Term U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Intermediate U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Money Market Fund Class R, Prime Shares
Nationwide S&P 500 Index Fund Class R, Class Y,
Local Fund Shares
Morley Capital Accumulation Fund ISC Shares, IC Shares,
IRA Shares
Prestige Large Cap Value Fund Class A, Class B, Class Y
Prestige Large Cap Growth Fund Class A, Class B, Class Y
Prestige Small Cap Fund Class A, Class B, Class Y
Prestige Balanced Fund Class A, Class B, Class Y
Prestige International Fund Class A, Class B, Class Y
Nationwide Small Cap Index Fund Class A, Class B, Service Class
Nationwide International Index Fund Class A, Class B, Service Class
Nationwide Bond Index Fund Class A, Class B, Service Class
The Aggressive Fund Class A, Class B, Service Class
The Moderately Aggressive Fund Class A, Class B, Service Class
The Moderate Fund Class A, Class B, Service Class
The Moderately Conservative Fund Class A, Class B, Service Class
The Conservative Fund Class A, Class B, Service Class
Nationwide Focus Fund Class A, Class B,
Institutional Class
Nationwide Small Cap Value Fund II Class A, Class B,
Institutional Class
Nationwide High Yield Bond Fund Class A, Class B,
Institutional Class
Morley Enhanced Income Fund Class A, Class Y,
Institutional Class
</TABLE>
You have an interest only in the assets of the shares of the Fund which
you own. Shares of a particular class are equal in all respects to the other
shares of that class. In the event of liquidation of a Fund, shares of the same
class will share pro rata in the distribution of the net assets of such Fund
with all other shares of that class. All shares are without par value and when
issued and paid for, are
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fully paid and nonassessable by the Trust. Shares may be exchanged or converted
as described in this Statement of Additional Information and in the Prospectus
but will have no other preference, conversion, exchange or preemptive rights.
VOTING RIGHTS
Shareholders of each class of shares have one vote for each share held
and a proportionate fractional vote for any fractional 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 fundamental investment
objectives, policies and restrictions or the approval of an Investment Advisory
Agreement, the right to vote is limited to the holders of shares of the
particular fund affected by the proposal. In addition, holders of Class A shares
or Service Class shares will vote as a class and not with holders of any other
class with respect to the approval of the Distribution Plan.
To the extent that such a meeting is not required, the Trust does not
intend to have an annual or special meeting of shareholders. The Trust has
represented to the Commission that 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 Funds 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, a
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. In addition, to utilize the tax provisions specially applicable to
regulated investment companies, a 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
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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, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a 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.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss, if any, is taxable to shareholders as long-term
capital gain, 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).
Capital losses may be used to offset capital gains. In addition, individuals may
deduct up to $3,000 of net capital loss each year to offset ordinary income.
Excess net capital loss may be carried forward and deducted in future years. The
holding period for long-term capital gains is more than one year.
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
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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 Bond Index 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 Fund will qualify for the 70% dividends received
deduction.]
Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of each Fund's assets to be invested in various countries is not known.
If less than 50% in value of any Fund's total assets at the end of its
fiscal year are 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 a 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 a Fund's taxable year will be
treated as sold for their then fair market value, resulting in additional gain
or loss to such Fund characterized in the manner described above.
If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the Fund may elect to "pass through" to its shareholders the amount of foreign
income taxes paid by the Fund. Pursuant to such election, shareholders would be
required (i) to include in gross income, even though not actually received,
their respective pro rata share of the foreign taxes paid by the Fund, (ii) to
treat their income from the Fund as being from foreign sources to the extent
that the Fund's income is from foreign sources, and (iii) to either deduct their
pro rata share of foreign taxes in computing their taxable income or use it as a
foreign tax credit against federal income (but not both). No deduction for
foreign taxes could be claimed by a shareholder who does not itemize deductions.
It is anticipated that the International Fund will be operated so as to
meet the requirements of the Code to "pass through" to its shareholders credits
for foreign taxes paid, although there can be no assurance that these
requirements will be met. Each shareholder will be notified within 45 days after
the close of the International Fund's taxable year whether the foreign taxes
paid by the International Fund will "pass through" for that year and, if so, the
amount of each shareholder's pro rata share of (i) the foreign taxes paid, and
(ii) the International Fund's gross income from foreign sources. Of course,
shareholders who are not liable for federal income taxes, such as retirement
plans qualified under Section 401 of the Code, will not be affected by any such
"pass through" of
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foreign tax credits.
If a Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the operation of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. In addition, gain realized from the
sale, other disposition, or marking-to-market of PFIC securities may be treated
as ordinary income under Section 1291 or Section 1296 of the Code.
Offsetting positions held by a 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 a 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. A 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 a 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 a 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, a 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
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of shares of a Fund are urged to consult their tax advisers with specific
reference to their own tax situation. In addition, the tax discussion in the
Prospectus and 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.
MAJOR SHAREHOLDERS
As of December ____, 1999, there were no outstanding shares of the
Funds. Immediately prior to the public offering of shares of the Funds, ____
owned all of the issued and outstanding shares of each Fund. It is anticipated
that upon the public offering of shares of the Funds, NAS' holdings will be
reduced below 5% of the outstanding shares of each Fund.
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APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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FITCH IBCA INFORMATION SERVICES, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The ratings represent
Fitch's assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and represent the
lowest expectation of credit risk. The obligor has an
exceptionally strong capacity for timely payment of financial
commitments, a capacity that is highly unlikely to be
adversely affected by foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. This rating indicates a very strong capacity
for timely payment of financial commitments, a capacity that
is not significantly vulnerable to foreseeable events.
A Bonds considered to be investment grade and represent a low
expectation of credit risk. This rating indicates a strong
capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in
economic conditions or circumstances than long term debt with
higher ratings.
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BBB Bonds considered to be in the lowest investment grade and
indicates that there is currently low expectation of credit
risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in economic
conditions and circumstances are more likely to impair this
capacity.
BB Bonds are considered speculative. This rating indicates that
there is a possibility of credit risk developing, particularly
as the result of adverse economic changes over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Bonds are considered highly speculative. This rating indicates
that significant credit risk is present, but a limited margin
of safety remains. Financial commitments are currently being
met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC Bonds are considered a high default risk. Default is a real
and C possibility. Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' rating signal imminent default.
DDD, DD Bonds are in default. Such bonds are not meeting current
and D obligations and are extremely speculative. 'DDD' designates
the highest potential for recovery of amounts outstanding on
any securities involved and 'D' represents the lowest
potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security, (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and
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financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING SCALE DEFINITION
- ------------ ----------
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
BBB+ Below average protection factors but still considered sufficient
BBB for prudent investment. Considerable variability in risk during
BBB- economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or
company fortunes. Potential exists for
frequent changes in the rating within this
category or into a higher or lower rating
grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and
risk can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or interest
payments.
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DP Preferred stock with dividend arrearages.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with doubtful capacity
for payment.
D Debt rated 'D' is in payment default. the 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grade period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
The following criteria will be used in making the assessment:
1. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
2. Source of payment - the more the issue depends on the market for
its refinancing, the
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more likely it is to be considered a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions on the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior capacity for
repayment of senior short-term debt obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: (I) leading market
positions in well established industries, (II) high rates of return on funds
employed, (III) conservative capitalization structures with moderate reliance on
debt and ample asset protection, (IV) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (V) well
established access to a range of financial markets and assured sources of
alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by
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established cash flows, superior liquidity support or demonstrated broad based
access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin of
safety is not as great as for issues assigned F-1+ and F-1 ratings.
DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
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Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
RATING SCALE DEFINITION
HIGH GRADE
D-1+ Highest certainty of timely payment. short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
SATISFACTORY GRADE
D-3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DEFAULT
D-5 Issuer failed to meet scheduled principal and/or interest
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payments.
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. Thomson
short-term ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 the highest category, indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 the second highest category, while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 the lowest investment-grade category; indicates that while the obligation
is more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4 the lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
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STATEMENT OF ADDITIONAL INFORMATION
__________________, 2000
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SMALL CAP VALUE FUND II
NATIONWIDE HIGH YIELD BOND FUND
NATIONWIDE FOCUS FUND
MORLEY ENHANCED INCOME FUND
Nationwide Mutual Funds (the "Trust") is a registered open-end
investment company consisting of ____ series as of the date hereof. This
Statement of Additional Information relates to four series of the Trust listed
above (each, a "Fund" and collectively, the "Funds").
This Statement of Additional Information is not a prospectus but the
Statement of Additional Information is incorporated by reference into the
Prospectuses for the Funds. It contains information in addition to and more
detailed than that set forth in the Prospectuses dated _______________, 2000 and
should be read in conjunction with the Prospectuses. Terms not defined in this
Statement of Additional Information have the meanings assigned to them in the
Prospectuses. The Prospectuses may be obtained from Nationwide Advisory
Services, Inc., P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio 43215, or
by calling toll free 1-800-848-0920.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
General Information and History ....................................... 3
Additional Information on Portfolio Instruments and Investment Policies 4
Investment Restrictions ............................................... 35
Major Shareholders .................................................... 40
Trustees and Officers of the Trust .................................... 40
Calculating Yield and Total Return .................................... 43
Investment Advisory and Other Services ................................ 45
Brokerage Allocations ................................................. 56
Purchases, Redemptions and Pricing of Shares .......................... 61
Additional Information ................................................ 62
Tax Status ............................................................ 63
Other Tax Consequences ................................................ 64
Tax Consequences to Shareholders ...................................... 65
Financial Statements .................................................. 65
Appendix A - Bond Ratings ............................................. 66
</TABLE>
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GENERAL INFORMATION AND HISTORY
Nationwide Mutual Funds (the "Trust"), formerly Nationwide Investing
Foundation III ("NIF III"), is an open-end management investment company
organized under the laws of Ohio by a Declaration of Trust, dated as of October
30, 1997, as subsequently amended. The Trust currently offers shares in
____________(____) separate series, each with its own investment objective. Each
of the Funds, except the Nationwide Focus Fund, is a diversified fund as defined
in the Investment Company Act of 1940.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The Funds invest in a variety of securities and employ a number of
investment techniques that involve certain risks. The Prospectuses for the Funds
highlight the principal investment strategies, investment techniques and risks.
The following table sets forth additional information concerning permissible
investments and techniques for each of the Funds. A "Y" in the table indicates
that the Fund may invest in or follow the corresponding instrument or technique.
An empty box indicates that the Fund does not intend to invest in or follow the
corresponding instrument or technique.
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<TABLE>
<CAPTION>
Enhanced
Small Cap High Yield Focus Income
TYPE OF INVESTMENT OR TECHNIQUE Value Fund II Bond Fund Fund Fund
------------------------------- ------------- --------- ---- ----
<S> <C> <C> <C> <C>
U.S. common stocks Y Y Y
Preferred stocks Y Y
Small company stocks Y
Special situation companies Y Y
Illiquid securities Y Y Y Y
Restricted securities Y Y Y Y
When issued / delayed delivery securities Y Y Y Y
Investment companies Y Y Y Y
Real estate investment trusts (REITS) Y Y
Securities of foreign issuers Y Y Y Y
Depository receipts Y Y Y
Wrap Contracts Y
</TABLE>
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<PAGE> 236
<TABLE>
<CAPTION>
Enhanced
Small Cap High Yield Focus Income
TYPE OF INVESTMENT OR TECHNIQUE Value Fund II Bond Fund Fund Fund
------------------------------- ------------- --------- ---- ----
<S> <C> <C> <C> <C>
Convertible securities Y Y Y
Long term debt Y Y
Short term debt Y Y Y Y
Floating and variable rate securities Y Y Y Y
Zero coupon securities Y Y
Pay in kind bonds Y
Deferred payment securities Y
Non investment grade debt Y
Loan participations and assignments Y
Sovereign debt (foreign) Y Y
Foreign commercial paper Y
Duration Y
U.S. Government securities Y Y Y Y
Money market instruments Y Y Y Y
</TABLE>
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<TABLE>
<CAPTION>
Enhanced
Small Cap High Yield Focus Income
TYPE OF INVESTMENT OR TECHNIQUE Value Fund II Bond Fund Fund Fund
------------------------------- ------------- --------- ---- ----
<S> <C> <C> <C> <C>
Mortgage backed securities Y Y
Stripped mortgage backed securities Y Y
Collateralized mortgage obligations Y Y
Mortgage dollar rolls Y
Asset backed securities Y Y
Bank obligations Y Y Y Y
Repurchase agreements Y Y Y Y
Reverse repurchase agreements Y
Warrants Y Y Y
Futures Y Y Y Y
Options Y Y Y Y
Foreign currencies Y
Forward currency contracts Y Y Y
Borrowing money Y Y Y Y
</TABLE>
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<TABLE>
<CAPTION>
Enhanced
Small Cap High Yield Focus Income
TYPE OF INVESTMENT OR TECHNIQUE Value Fund II Bond Fund Fund Fund
------------------------------- ------------- --------- ---- ----
<S> <C> <C> <C> <C>
Lending of portfolio securities Y Y Y Y
Strip Bonds Y
Participation Interests Y
Swap Agreements Y
Put Bonds Y
Private Activity and Industrial
Development Bonds Y
Custodial Receipts Y
</TABLE>
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<PAGE> 239
DESCRIPTION OF PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
INFORMATION CONCERNING DURATION
Duration is a measure of the average life of a fixed-income security
that was developed as a more precise alternative to the concepts of "term to
maturity" or "average dollar weighted maturity" as measures of "volatility" or
"risk" associated with changes in interest rates. Duration incorporates a
security's yield, coupon interest payments, final maturity and call features
into one measure.
Most debt obligations provide interest ("coupon") payments in addition
to final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments and the nature
of the call provisions, the market values of debt obligations may respond
differently to changes in interest rates.
Traditionally, a debt security's "term-to-maturity" has been used as a
measure of the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term-to-maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Average dollar weighted maturity is calculated by averaging the
terms of maturity of each debt security held with each maturity "weighted"
according to the percentage of assets that it represents. Duration is a measure
of the expected life of a debt security on a present value basis and reflects
both principal and interest payments. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable security, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any debt security with interest payments
occurring prior to the payment of principal, duration is ordinarily less than
maturity. In general, all other factors being the same, the lower the stated or
coupon rate of interest of a debt security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a debt
security, the shorter the duration of the security.
There are some situations where the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, a Fund's investment adviser or subadviser
will use more sophisticated analytical techniques to project the economic life
of a security and estimate its interest rate exposure. Since the computation of
duration is based on predictions of future events rather than known factors,
there can be no assurance that a Fund will at all times achieve its targeted
portfolio duration.
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The change in market value of U.S. Government fixed-income securities
is largely a function of changes in the prevailing level of interest rates. When
interest rates are falling, a portfolio with a shorter duration generally will
not generate as high a level of total return as a portfolio with a longer
duration. When interest rates are stable, shorter duration portfolios generally
will not generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case.) When interest rates are rising, a portfolio with a
shorter duration will generally outperform longer duration portfolios. With
respect to the composition of a fixed-income portfolio, the longer the duration
of the portfolio, generally, the greater the anticipated potential for total
return, with, however, greater attendant interest rate risk and price volatility
than for a portfolio with a shorter duration.
DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to
meet principal and interest payments on its obligations ("credit risk") and are
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer, and general market
liquidity. Lower-rated securities are more likely to react to developments
affecting these risks than are more highly rated securities, which react
primarily to movements in the general level of interest rates. Although the
fluctuation in the price of debt securities is normally less than that of common
stocks, in the past there have been extended periods of cyclical increases in
interest rates that have caused significant declines in the price of debt
securities in general and have caused the effective maturity of securities with
prepayment features to be extended, thus effectively converting short or
intermediate securities (which tend to be less volatile in price) into long term
securities (which tend to be more volatile in price).
Ratings as Investment Criteria. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"),
such as Standard & Poor's Rating Group ("Standard & Poor's") or Moody's Investor
Services ("Moody's"). In general, the ratings of NRSROs represent the opinions
of these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings are
used by a Fund as initial criteria for the selection of portfolio securities,
but the Fund also relies upon the independent advice of a Fund's adviser or
subadviser(s) to evaluate potential investments. This is particularly important
for lower-quality securities. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends, as well as an issuer's capital structure, existing debt and
earnings history. The Appendix to this Statement of Additional Information
contains further information about the rating categories of NRSROs and their
significance.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by such Fund. In addition, it is possible that an NRSRO might not change its
rating of a particular issue to reflect subsequent events. None of these events
generally will require sale of such securities, but a Fund's adviser or
subadviser will consider such events in its determination of whether the Fund
should continue to hold the securities.
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In addition, to the extent that the ratings change as a result of changes in
such organizations or their rating systems, or due to a corporate
reorganization, the Fund will attempt to use comparable ratings as standards for
its investments in accordance with its investment objective and policies.
Medium-Quality Securities. Certain Funds anticipate investing in
medium-quality obligations, which are obligations rated in the fourth highest
rating category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than issues of higher-rated securities.
Lower Quality (High-Risk) Securities. Non-investment grade debt or
lower quality/rated securities (hereinafter referred to as "lower-quality
securities") include (i) bonds rated as low as C by Moody's, Standard & Poor's,
or Fitch/IBCA Investors Service, Inc. ("Fitch"), or CCC by D&P; (ii) commercial
paper rated as low as C by Standard & Poor's, Not Prime by Moody's or Fitch 4 by
Fitch; and (iii) unrated debt securities of comparable quality. Lower-quality
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. There is more risk associated with these
investments because of reduced creditworthiness and increased risk of default.
Under NRSRO guidelines, lower quality securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighted by large uncertainties or major risk exposures to adverse
conditions. Lower quality securities are considered to have extremely poor
prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest payments and repay principal when
due in the event of adverse business, financial or economic conditions, or to be
in default or not current in the payment of interest or principal. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with investments in these securities are discussed below.
Effect of Interest Rates And Economic Changes. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-quality and
comparable unrated securities tend to reflect individual corporate developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable unrated
security defaulted, the Fund might
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incur additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased volatility in the market prices
of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable
unrated security will generally decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount which would result in a lower rate of return to the Fund.
Payment Expectations. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities at a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, a Fund may have to
replace the securities with a lower yielding security, which would result in a
lower return for that Fund.
Liquidity And Valuation. A Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there may be no
established retail secondary market for many of these securities. The Funds
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. As a result, a Fund's asset
value and ability to dispose of particular securities, when necessary to meet
such Fund's liquidity needs or in response to a specific economic event, may be
impacted. The lack of a liquid secondary market for certain securities may also
make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing that Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
U.S. Government Securities. U.S. government securities are issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
Securities issued by the U.S. government include U.S. Treasury obligations, such
as Treasury bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include obligations of the following:
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- - the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
- - the Federal Home Loan Banks whose securities are supported by the right
of the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation ("FHLMC"), whose securities are supported only by
the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
Mortgage and Asset-Backed Securities. Mortgage-backed securities
represent direct or indirect participation in, or are secured by and payable
from, mortgage loans secured by real property, and include single- and
multi-class pass-through securities and collateralized mortgage obligations.
Such securities may be issued or guaranteed by U.S. Government agencies or
instrumentalities by private issuers, generally originators in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers, and special purpose entities (collectively, "private
lenders"). The purchase of mortgage-backed securities from private lenders may
entail greater risk than mortgage-backed securities that are issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Mortgage-backed securities issued by private lenders maybe supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed, directly
or indirectly, by the U.S. Government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement. These credit enhancements may include letters of credit, reserve
funds, overcollateralization, or guarantees by third parties.
Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit enhancement
falls into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
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The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency loss
experience on the underlying pool of assets is better than expected. There can
be no assurance that the private issuers or credit enhancers of mortgage-backed
securities can meet their obligations under the relevant policies or other forms
of credit enhancement.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full.
Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. A Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they
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cause the current coupon of the underlying adjustable rate mortgages to exceed
any maximum allowable annual or lifetime reset limits (or "cap rates") for a
particular mortgage. In this event, the value of the adjustable rate
mortgage-backed securities in a Fund would likely decrease. Also, a Fund's net
asset value could vary to the extent that current yields on adjustable rate
mortgage-backed securities are different than market yields during interim
periods between coupon reset dates or if the timing of changes to the index upon
which the rate for the underlying mortgage is based lags behind changes in
market rates. During periods of declining interest rates, income to a Fund
derived from adjustable rate mortgage securities which remain in a mortgage pool
will decrease in contrast to the income on fixed rate mortgage securities, which
will remain constant. Adjustable rate mortgages also have less potential for
appreciation in value as interest rates decline than do fixed rate investments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to timely payment of
the principal and interest by FNMA. Mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is
a corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or by any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first-lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property and receivables from credit
card and other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities. The credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement of the securities.
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Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
Fannie Mae or Freddie Mae Certificates, but also may be collateralized by whole
loans or private pass-throughs (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities. Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specified fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. As market conditions change, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. Such
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
A Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one PAC Bond to another; a narrower range increases the risk
that prepayments on the PAC Bond will be greater or smaller than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-backed securities.
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Stripped Mortgage Securities. Stripped mortgage securities are
derivative multiclass mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.
In addition to the stripped mortgage securities described above, the
Fund may invest in similar securities such as Super POs and Levered IOs which
are more volatile than POs, IOs and IOettes. Risks associated with instruments
such as Super POs are similar in nature to those risks related to investments in
POs. IOettes represent the right to receive interest payments on an underlying
pool of mortgages with similar risks as those associated with IOs. Unlike IOs,
the owner also has the right to receive a very small portion of the principal.
Risks connected with Levered IOs and IOettes are similar in nature to those
associated with IOs. The Fund may also invest in other similar instruments
developed in the future that are deemed consistent with its investment
objective, policies and restrictions. POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Fund. See "Tax Status" in the Prospectus and "Additional
Information Concerning Taxes" in the Statement of Additional Information.
A Fund may also purchase stripped mortgage-backed securities for
hedging purposes to protect that Fund against interest rate fluctuations. For
example, since an IO will tend to increase in value as interest rates rise, it
may be utilized to hedge against a decrease in value of other fixed-income
securities in a rising interest rate environment. With respect to IOs, if the
underlying mortgage securities experience greater than anticipated prepayments
of principal, the Fund may fail
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to recoup fully its initial investment in these securities even if the
securities are rated in the highest rating category by an NRSRO. Stripped
mortgage-backed securities may exhibit greater price volatility than ordinary
debt securities because of the manner in which their principal and interest are
returned to investors. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in interest
rates. The yields on stripped mortgage-backed securities that receive all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a greater risk that the initial investment will not be fully
recouped. The market for CMOs and other stripped mortgage-backed securities may
be less liquid if these securities lose their value as a result of changes in
interest rates; in that case, a Fund may have difficulty in selling such
securities.
Private Activity and Industrial Development Bonds. Private activity and
industrial development bonds are obligations issued by or on behalf of public
authorities to raise money to finance various privately owned or operated
facilities for business and manufacturing, housing, sports, and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports, parking, and sewage and solid waste
disposal facilities, as well as certain other facilities or projects. The
payment of the principal and interest on such bonds is generally dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment.
Put Bonds. "Put" bonds are tax exempt securities (including securities
with variable interest rates) that may be sold back to the issuer of the
security at face value at the option of the holder prior to their stated
maturity. The Adviser or (a subadviser) intends to purchase only those put bonds
for which the put option is an integral part of the security as originally
issued. The option to "put" the bond back to the issuer prior to the stated
final maturity can cushion the price decline of the bond in a rising interest
rate environment. However, the premium paid, if any, for an option to put will
have the effect of reducing the yield otherwise payable on the underlying
security. For the purpose of determining the "maturity" of securities purchased
subject to an option to put, and for the purpose of determining the dollar
weighted average maturity of a Fund holding such securities, the Fund will
consider "maturity" to be the first date on which it has the right to demand
payment from the issuer.
WRAP CONTRACTS
Why Wrap Contracts May Be Purchased. A wrap contract is a contract
between the Fund and a financial institution such as a bank, insurance company
or other financial institution (a "wrap provider"), under which the wrap
provider agrees to make payments to the Fund upon the occurrence of certain
events. By purchasing wrap contracts, the Fund expects to reduce fluctuations in
NAV per share because, under normal circumstances, the value of the Fund's wrap
contracts will vary inversely with the value of Fund assets covered by the
contracts ("covered assets"). For example, when the market value of covered
assets falls below "book value" (essentially the purchase price of covered
assets plus any accrued net income thereon), wrap contracts will be assets of
the Fund with a value equal to the difference between the book and market
values. Similarly, when the market value of covered assets is greater than their
book
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value, wrap contracts will become a liability of the Fund equal to the amount by
which the market value of covered assets exceeds their book value. In this
manner, under normal conditions, wrap contracts are expected to reduce the
impact of interest rate risk on covered assets and, hence, the market price
variability of the Fund.
How Wrap Contracts Work. The Fund will pay premiums to wrap providers
if and when it purchases wrap contracts, and these premiums will be an expense
of the Fund. Wrap contracts obligate wrap providers to make certain payments to
the Fund in exchange for annual premiums. Payments made by wrap providers as
provided by wrap contracts are intended to enable the Fund to make redemption
payments at the current book value of covered assets rather than at the current
market price. Wrap contract payments may be made when assets are sold to fund
redemption of shares, upon termination of wrap contracts, or both. Payments are
based on the book value of wrap contracts, and are normally equal to the sum of
(i) the accrued or amortized purchase price of covered assets, minus (ii) the
sale price of covered assets liquidated to fund share redemptions, plus (iii)
interest accrued at a crediting rate, computation of which is specified in the
wrap contracts. The crediting rate is the yield on the covered assets, adjusted
to amortize the difference between market value and book value over the duration
of the covered assets, less wrap contract premiums and Fund expenses. Wrap
contracts typically provide for periodic reset of crediting rates. Crediting
rates reflect the amortization of realized and unrealized gains and losses on
covered assets and, in consequence, may not reflect the actual returns achieved
the wrapped assets. From time to time crediting rates may be significantly
greater or less than current market interest rates, although wrap contracts
generally provide that crediting rates may not fall below zero.
The Fund will normally liquidate assets not covered by wrap contracts prior to
liquidating covered assets to meet redemption requests. If circumstances arise
that require the Fund to liquidate wrapped assets, and if the fair market value
of covered assets is less than their book value, a wrap contract will, under
normal circumstances, obligate the wrap provider to pay the Fund all or some of
the difference. However, if the market value of covered assets being liquidated
exceeds the corresponding book value, the Fund would be obligated to pay all or
some of the difference to the wrap provider. Generally, wrap contract payments
will be made within one day after the Fund requests a payment. If more than one
wrap contract applies to covered assets which have been liquidated, payment
requests will be allocated among wrap contracts as specified in each wrap
contract.
Wrap contracts may require that covered assets be limited as to duration or
maturity, consist of specified types of securities, and/or be at or above a
specified credit quality. Wrap contracts purchased by the Fund will be
consistent with the Fund's investment objectives and policies as set forth in
the Prospectus and this SAI, although in some cases wrap contracts may require
more restrictive investment objectives and policies than do the Prospectus and
SAI. Wrap contracts may also allow providers to terminate their contracts if the
Fund changes the investment objectives, policies and restrictions set forth in
the Prospectus and this SAI without having obtained the consent of the wrap
providers. In the event of termination by a wrap provider, the Fund may not be
able successfully to replace contract coverage with another provider.
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Wrap contracts may mature on specified dates and may be terminable upon notice
by the Fund or in the event of a default by either the Fund or the wrap
provider. "Evergreen" wrap contracts specify no maturity date. They allow either
the Fund or a provider to terminate the wrap contract through a fixed maturity
conversion. Under a fixed maturity conversion the wrap contract will terminate
on a future date which is generally determined by adding the duration of covered
assets to a date elected by the party seeking to terminate the contract. For
example, if the date elected is January 1,2002 and the duration of covered
assets is 3 years, the wrap contract will terminate as of January 1.2005. In
addition, during the conversion period, the Fund may be required to comply with
certain restrictions on covered assets, such as limitation of their duration to
the remaining term of the conversion period.
Generally, at termination of a wrap contract, the wrap provider will be
obligated to pay the Fund any excess of book value over market value of covered
assets. However, if a wrap contract terminates because of a default by the Fund
or upon election by the Fund (other than through a fixed maturity conversion),
no such payment is made.
Risks Associated with Wrap Contracts. The Fund expects wrap contracts,
if and to the extent utilized, to reduce the per share price volatility of the
Fund. However, there are certain risks associated with the use of wrap contracts
that could impair the Fund's ability to achieve this objective.
If a wrap contract matures or terminates, the Fund may be unable to obtain a
replacement wrap contract or a wrap contract with terms substantially similar
those of the maturing or terminating agreement. If at the time the market value
of covered assets is less than their book value, the Fund may be required to
reduce its NAV accordingly. Likewise, if the market value of the covered assets
is greater than their book value, the Fund's NAV may increase. In either case,
Fund shareholders may experience unexpected fluctuations in the value of their
shares. Further, if new wrap contracts are negotiated on less favorable terms
than those of the contracts being replaced, such as higher wrap premiums, the
net returns of the Fund may be negatively affected.
The Fund's Board of Trustees shall in good faith determine the value of each of
the Fund's wrap contracts and shall establish policies and procedures governing
valuation of these instruments. Other fair and reasonable valuation
methodologies may be utilized in certain circumstances including, but not
limited to, (1) default by a wrap provider under a wrap contract or other
agreement; (2) insolvency of a wrap provider; (3) reduction of the credit rating
of a wrap provider; or (4) any other situation in which the Board of Trustees
determines that a wrap provider may no longer be able to satisfy its obligations
under a wrap contract. In any such case, the fair value of any wrap contract may
be determined to be less than the difference between book value and the market
value of covered assets. In these situations the Fund may experience greater
variability in its NAV per share.
Wrap contracts do not protect the Fund from the credit risk of covered assets.
Defaults by issuers of covered assets or downgrades in their credit rating to
below investment grade status will
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generally cause those assets to be removed from coverage under wrap contracts,
in which event the Fund may experience a decrease in NAV.
Currently, there is no active trading market for wrap contracts, and none is
expected to develop. The Fund may therefore be unable to liquidate wrap
contracts within seven days at fair market value, in which case the wrap
contracts will be considered illiquid. At the time of their purchase, the fair
market value of the Fund's wrap contracts, plus the fair market value of all
other illiquid assets in the Fund, may not exceed fifteen percent (15%) of the
fair market value of the Fund's net assets. If the fair market value of illiquid
assets including wrap contracts later rises above 15% of the fair market value
of the Fund's net assets, the price volatility of the Fund's shares may increase
as the Fund acts to reduce the percentage of illiquid assets to a level that
does not exceed 15% of the Fund.
MONEY MARKET INSTRUMENTS
Money market instruments may include the following types of
instruments:
-- obligations issued or guaranteed as to interest and principal by the
U.S. Government, its agencies, or instrumentalities, or any federally
chartered corporation, with remaining maturities of 397 days or less;
-- obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions, with remaining maturities
of 397 days or less;
-- asset-backed commercial paper whose own rating or the rating of any
guarantor is in one of the two highest categories of any NRSRO;
-- repurchase agreements;
-- 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 (Yankee dollars), savings and loan
associations and similar institutions, and such obligations issued by
foreign branches of foreign banks and financial institutions;
-- commercial paper (including asset-backed 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 a high
quality outstanding debt issue;
-- 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
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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.
-- high quality short-term (maturity in 397 days or less) corporate
obligations, these obligations will be rated within the top two rating
categories by an NRSRO or if not rated, of comparable quality.
CUSTODIAL RECEIPTS
Certain Funds may acquire U.S. Government securities and their unmatured
interest coupons that have been separated ("stripped") by their holder,
typically a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
securities, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRs") and "Certificate of Accrual on Treasury Securities"
("CATS"). The stripped coupons are sold separately from the underlying
principal, which is usually sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. The underlying U.S.
Treasury bonds and notes themselves are generally held in book-entry form at a
Federal Reserve Bank. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government securities for federal tax
and securities purposes. In the case of CATS and TIGRS, the Internal Revenue
Service ("IRS") has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies such
as the Funds. CATS and TIGRS are not considered U.S. Government securities by
the Staff of the Commission, however. Further, the IRS conclusion is contained
only in a general counsel memorandum, which is an internal document of no
precedential value or binding effect, and a private letter ruling, which also
may not be relied upon by the Funds. The Trust is not aware of any binding
legislative, judicial or administrative authority on this issue.
REPURCHASE AGREEMENTS
In connection with the purchase of a repurchase agreement from member
banks of the Federal Reserve System or certain non-bank dealers by a 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 it may invest or government securities regardless of their remaining
maturities, and will require that additional securities be deposited with it 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 a
Fund's ability to dispose of the underlying securities, the risk of a possible
decline in the
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value of the underlying securities during the period in which a Fund seeks to
assert its rights to them, 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. A Fund's adviser or subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Funds enter into repurchase agreements
to evaluate these risks.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
When securities are purchased on a "when-issued" basis or purchased for
delayed delivery, then payment and delivery occur beyond the normal settlement
date at a stated price and yield. When-issued transactions normally settle
within 45 days. The payment obligation and the interest rate that will be
received on when-issued securities are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on the
dates when the investments are actually delivered to the buyers. The greater a
Fund's outstanding commitments for these securities, the greater the exposure to
potential fluctuations in the net asset value of a Fund. Purchasing when-issued
or delayed-delivery securities may involve the additional risk that the yield or
market price available in the market when the delivery occurs may be higher or
the market price lower than that obtained at the time of commitment.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of such Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. In addition, because the Fund will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described above, such Fund's liquidity and the ability of VMF or a subadviser to
manage it might be affected in the event its commitments to purchase
"when-issued" securities ever exceed 25% of the value of its total assets. Under
normal market conditions, however, a Fund's commitment to purchase "when-issued"
or "delayed-delivery" securities will not exceed 25% of the value of its total
assets. When the Fund engages in when-issued or delayed-delivery transactions,
it relies on the other party to consummate the trade. Failure of the seller to
do so may result in a Fund incurring a loss or missing an opportunity to obtain
a price considered to be advantageous.
LENDING PORTFOLIO SECURITIES
A 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
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policy, the Fund considers collateral consisting of cash, 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) a Fund must receive at least 100%
cash collateral of the type discussed in the preceding paragraph from the
borrower; (2) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (3) a
Fund must be able to terminate the loan at any time; (4) a 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) a 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, a Fund'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.
SMALL COMPANY AND EMERGING GROWTH STOCKS
Investing in securities of small-sized and emerging growth companies
may involve greater risks than investing in the stocks of larger, more
established companies since these securities may have limited marketability and
thus may be more volatile than securities of larger, more established companies
or the market averages in general. Because small-sized and emerging growth
companies normally have fewer shares outstanding than larger companies, it may
be more difficult for a Fund to buy or sell significant numbers of such shares
without an unfavorable impact on prevailing prices. Small-sized and emerging
growth companies may have limited product lines, markets or financial resources
and may lack management depth. In addition, small-sized and emerging growth
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized and emerging growth
companies than for larger, more established ones.
SPECIAL SITUATION COMPANIES
"Special situation companies" include those involved in an actual or
prospective acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or distribution of cash, securities or other assets; a
tender or exchange offer; a breakup or workout of a holding company; or
litigation which, if resolved favorably, would improve the value of the
company's stock. If the actual or prospective situation does not materialize as
anticipated, the market price of the securities of a "special situation company"
may decline significantly. Therefore, an investment in a Fund that invests a
significant portion of its assets in these securities may involve a greater
degree of risk than an investment in other mutual funds that seek long-term
growth of capital by investing in better-
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known, larger companies. The subadvisers of such Funds believe, however, that if
a subadviser analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, the Fund may achieve
capital growth. There can be no assurance however, that a special situation that
exists at the time the Fund makes its investment will be consummated under the
terms and within the time period contemplated, if it is consummated at all.
FOREIGN SECURITIES
Investing in foreign securities (including through the use of
depository receipts) involves certain special considerations which are not
typically associated with investing in United States securities. Since
investments in foreign companies will frequently involve currencies of foreign
countries, and since a Fund may hold securities and funds in foreign currencies,
a Fund may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, if any, and may incur costs in connection with
conversions between various currencies. Most foreign stock markets, while
growing in volume of trading activity, have less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than in the United States and,
at times, volatility of price can be greater than in the United States. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund endeavors to achieve
the most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of securities exchanges, brokers and
listed companies in foreign countries than in the United States. In addition,
with respect to certain foreign countries, there is the possibility of exchange
control restrictions, expropriation or confiscatory taxation, and political,
economic or social instability, which could affect investments in those
countries. Foreign securities, such as those purchased by a Fund, may be subject
to foreign government taxes, higher custodian fees, higher brokerage costs and
dividend collection fees which could reduce the yield on such securities.
Foreign economies may differ favorably or unfavorably from the U.S.
economy in various respects, including growth of gross domestic product, rates
of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities. From
time to time, foreign securities may be difficult to liquidate rapidly without
adverse price effects.
Investment in Companies in Developing Countries. Investments may be
made from time to time in companies in developing countries as well as in
developed countries. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of industrialization. Shareholders should be aware that investing
in the equity and fixed income markets of developing countries involves exposure
to unstable governments, economies based on only a few industries, and
securities markets which trade a small number of securities. Securities markets
of developing countries tend to be more volatile than the markets of developed
countries; however, such markets have in the past provided the opportunity for
higher rates of return to investors.
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The value and liquidity of investments in developing countries may be
affected favorably or unfavorably by political, economic, fiscal, regulatory or
other developments in the particular countries or neighboring regions. The
extent of economic development, political stability and market depth of
different countries varies widely. Certain countries in the Asia region,
including Cambodia, China, Laos, Indonesia, Malaysia, the Philippines, Thailand,
and Vietnam are either comparatively underdeveloped or are in the process of
becoming developed. Such investments typically involve greater potential for
gain or loss than investments in securities of issuers in developed countries.
The securities markets in developing countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares available for investment by a Fund. Similarly, volume and liquidity in
the bond markets in developing countries are less than in the United States and,
at times, price volatility can be greater than in the United States. A limited
number of issuers in developing countries' securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
The limited liquidity of securities markets in developing countries may also
affect the Fund's ability to acquire or dispose of securities at the price and
time it wishes to do so. Accordingly, during periods of rising securities prices
in the more illiquid securities markets, the Fund's ability to participate fully
in such price increases may be limited by its investment policy of investing not
more than 15% of its total net assets in illiquid securities. Conversely, the
Fund's inability to dispose fully and promptly of positions in declining markets
will cause the Fund's net asset value to decline as the value of the unsold
positions is marked to lower prices. In addition, securities markets in
developing countries are susceptible to being influenced by large investors
trading significant blocks of securities.
Political and economic structures in many such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of the United
States. Certain of such countries have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of the
Fund's investments in those countries and the availability to the Fund of
additional investments in those countries.
Economies of developing countries may differ favorably or unfavorably
from the United States' economy in such respects as rate of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As export-driven economies,
the economies of countries in the Asia Region are affected by developments in
the economies of their principal trading partners. Hong Kong, Japan and Taiwan
have limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of price
and supply.
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Certain developing countries do not have comprehensive systems of laws,
although substantial changes have occurred in many such countries in this regard
in recent years. Laws regarding fiduciary duties of officers and directors and
the protection of shareholders may not be well developed. Even where adequate
law exists in such developing countries, it may be impossible to obtain swift
and equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction.
Trading in futures contracts on foreign commodity exchanges may be
subject to the same or similar risks as trading in foreign securities.
Depository Receipts. A Fund may invest in foreign securities by
purchasing depository receipts, including American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets, GDRs, in bearer form, are issued and designed for use
outside the United States and EDRs (also referred to as Continental Depository
Receipts ("CDRs")), in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. Bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. GDRs
are receipts typically issued by non-United States banks and trust companies
that evidence ownership of either foreign or domestic securities. For purposes
of a Fund's investment policies, ADRs, GDRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, GDR or
EDR representing ownership of common stock will be treated as common stock.
A Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.
A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities. The
depository usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and thus there may not be a
correlation between such information and the market value of the depository
receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.
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Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository, and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as dividend
payment fees of the depository), although ADR holders continue to bear certain
other costs (such as deposit and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and
other information to the ADR holders at the request of the issuer of the
deposited securities.
Eurodollar and Yankee Obligations. Eurodollar bank obligations are
dollar-denominated certificates of deposit and time deposits issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign banks.
Yankee bank obligations are dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurodollar and Yankee bank obligations are subject to the same risks
that pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee) bank
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across their borders. Other risks include: adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign issues.
However, Eurodollar and Yankee bank obligations held in a Fund will undergo the
same credit analysis as domestic issues in which the Fund invests, and will have
at least the same financial strength as the domestic issuers approved for the
Fund.
Foreign Sovereign Debt. Certain Funds may invest in sovereign debt
obligations issued by foreign governments. To the extent that a Fund invests in
obligations issued by developing or emerging markets, these investments involve
additional risks. Sovereign obligors in developing and emerging market countries
are among the world's largest debtors to commercial banks, other governments,
international financial organizations and other financial institutions. These
obligors have in the past experienced substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiation new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit fo finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the foreign sovereign debt securities in which a Fund may invest
will not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
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BRADY BONDS. Brady Bonds are debt securities, generally denominated in U.S.
dollars, issued under the framework of the Brady Plan. The Brady Plan is an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989
as a mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the Brady
Plan framework, a debtor nation negotiates with its existing bank lenders as
well as multilateral institutions such as the International Bank for
Reconstruction and Development (the "World Bank") and the International Monetary
Fund (the "IMF"). The Brady Plan framework, as it has developed, contemplates
the exchange of external commercial bank debt for newly issued bonds known as
"Brady Bonds". Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and/or the IMF support the restructuring by providing funds pursuant
to loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements with the World Bank and/or the IMF, debtor
nations have been required to agree to the implementation of certain domestic
monetary and fiscal reforms. Such reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs seek to promote the debtor country's economic growth and development.
Investors should also recognize that the Brady Plan only sets forth general
guiding principles for economic reform and debt reduction, emphasizing that
solutions must be negotiated on a case-by-case basis between debtor nations and
their creditors. A Fund's adviser or subadviser may believe that economic
reforms undertaken by countries in connection with the issuance of Brady Bonds
may make the debt of countries which have issued or have announced plans to
issue Brady Bonds an attractive opportunity for investment. However, there can
be no assurance that the adviser or the subadviser's expectations with respect
to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only
recently, and accordingly, do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by Standard &
Poor's or "Ba" or "B" by Moody's or, in cases in which a rating by S&P or
Moody's has not been assigned, are generally considered by the Fund's adviser or
subadviser to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
have generally borne interested computed semi-annually at a rate equal to 13/16
of 1% above the then current six month London Inter-Bank Offered Rate ("LIBOR")
rate. Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
date at maturity (typically 30 years from the date of issuance) by U.S. Treasury
zero coupon bonds with a maturity equal to the final maturity of such Brady
Bonds. Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be collateralized by cash or high-grade securities in amounts
that typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized. In
the event of a default with respect to
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collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the fact
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course. Based upon current market
conditions, the Fund would not intend to purchase Brady Bonds which, at the time
of investment, are in default as to payments. However, in light of the risidual
risk of the Brady Bonds and, among other factors, the history of default with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds are considered speculative. A
Fund may purchase Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets
through U.S. securities dealers and other financial institutions and are
generally maintained through European transnational securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which a Fund may invest are likely to be acquired at a discount, which involves
certain considerations discussed below under "Additional Information Concerning
Taxes."
REAL ESTATE SECURITIES
Although no Fund will invest in real estate directly, certain Funds may
invest in securities of real estate investment trusts ("REITs") and other real
estate industry companies or companies with substantial real estate investments
and, as a result, such Fund may be subject to certain risks associated with
direct ownership of real estate and with the real estate industry in general.
These risks include, among others: possible declines in the value of real
estate; possible lack of availability of mortgage funds; extended vacancies of
properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Hybrid REITs combine the
investment strategies of Equity REITs and Mortgage REITs. REITs are not taxed on
income distributed to shareholders provided they comply with several
requirements of Internal Revenue Code, as amended (the "Code").
CONVERTIBLE SECURITIES
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Convertible securities are bonds, debentures, notes, preferred stocks,
or other securities that may be converted into or exchanged for a specified
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. Convertible securities have
general characteristics similar to both debt obligations and equity securities.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, the credit standing of the issuer and
other factors. The market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. The conversion value of a convertible security is determined by the
market price of the underlying common stock. The market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stock and therefore will react to variations in the general market for
equity securities. If the conversion value is low relative to the investment
value, the price of the convertible security is governed principally by its
investment value. Generally, the conversion value decreases as the convertible
security approaches maturity. To the extent the market price of the underlying
common stock approaches or exceeds the conversion price, the price of the
convertible security will be increasingly influenced by its conversion value. A
convertible security generally will sell at a premium over its conversion value
by the extent to which investors place value on the right to acquire the
underlying common stock while holding a fixed income security. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
A convertible security entitles the holder to receive interest normally
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption, a
Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, generally enjoy seniority in right of payment to all
equity securities, and convertible preferred stock is senior to common stock of
the same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
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Certain Funds may also invest in zero coupon convertible securities.
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities acretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the securities back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations then conventional
convertible securities. Federal income tax law requires the holder of a zero
coupon convertible security to recognize income from the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability of federal income taxes, a Fund will be
required to distribute income accrued from zero coupon convertible securities
which it owns, and may have to sell portfolio securities (perhaps at
disadvantageous times) in order to generate cash to satisfy these distribution
requirements.
WARRANTS
Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance), on a specified date,
during a specified period, or perpetually. Warrants may be acquired separately
or in connection with the acquisition of securities. Warrants acquired by a Fund
in units or attached to securities are not subject to these restrictions.
Warrants do not carry with them the right to dividends or voting rights with
respect to the securities that they entitle their holder to purchase, and they
do not represent any rights in the assets of the issuer. As a result, warrants
may be considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.
PREFERRED STOCK
Preferred stocks, like debt obligations, are generally fixed-income
securities. Shareholders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
all cumulative dividends usually must be paid prior to common shareholders
receiving any dividends. Because preferred stock dividends must be paid before
common stock dividends, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and, therefore, do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. Preferred stocks are generally subordinated in right of payment to
all debt obligations and creditors of the
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issuer, and convertible preferred stocks may be subordinated to other preferred
stock of the same issuer.
SHORT SELLING OF SECURITIES
In a short sale of securities, a Fund sells stock which it does not
own, making delivery with securities "borrowed" from a broker. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. This price may or may not be less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay the lender any dividends or interest which accrue during
the period of the loan. In order to borrow the security, the Fund may also have
to pay a fee which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those two dates. The amount of any gain will
be decreased and the amount of any loss will be increased by any interest the
Fund may be required to pay in connection with the short sale.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. A Fund must deposit in a segregated account an amount of cash or liquid
assets equal to the difference between (a) the market value of securities sold
short at the time that they were sold short and (b) the value of the collateral
deposited with the broker in connection with the short sale (not including the
proceeds from the short sale). While the short position is open, the Fund must
maintain on a daily basis the segregated account at such a level that (1) the
amount deposited in it plus the amount deposited with the broker as collateral
equals the current market value of the securities sold short and (2) the amount
deposited in it plus the amount deposited with the broker as collateral is not
less than the market value of the securities at the time they were sold short.
A Fund may engage in short sales if at the time of the short sale the
Fund owns or has the right to obtain without additional cost an equal amount of
the security being sold short. This investment technique is known as a short
sale "against the box." The Funds do not intend to engage in short sales against
the box for investment purposes. A Fund may, however, make a short sale as a
hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Fund (or a security convertible
or exchangeable for such security), or when the Fund wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such case,
any future losses in the Fund's long position should be offset by a gain in the
short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced will depend upon the amount of the security sold short relative to the
amount the Fund owns. There will be certain additional transaction costs
associated with short sales against the
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box, but the Fund will endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
A Fund may not invest more than 15% (10% for the Money Market Fund) 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. 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. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. 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 an
investment company 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. An investment company 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 repurchase agreements, commercial paper, 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 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.
Any such restricted securities will be considered to be illiquid for
purposes of a Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, VMF or the
subadviser has determined such securities to be liquid because
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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.
Some Funds may 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 a 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.
The applicable subadviser or adviser will monitor the liquidity of
restricted securities in the portion of a Fund it manages. In reaching liquidity
decisions, the following factors are considered: (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).
Private Placement Commercial Paper. Commercial paper eligible for
resale under Section 4(2) of the Securities Act is offered only to accredited
investors. Rule 506 of Regulation D in the Securities Act of 1933 lists
investment companies as an accredited investor.
Section 4(2) paper not eligible for resale under Rule 144A under the
Securities Act shall be deemed liquid if (1) the Section 4(2) paper is not
traded flat or in default as to principal and interest; (2) the Section 4(2)
paper is rated in one of the two highest rating categories by at least two
NRSROs, or if only NRSRO rates the security, it is rated in one of the two
highest categories by that NRSRO; and (3) the Adviser believes that, based on
the trading markets for such security, such security can be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the security.
BORROWING
A Fund may borrow money from banks, limited by each Fund's fundamental
investment restriction to 33-1/3% of its total assets (including the amount
borrowed), and may engage in mortgage dollar roll and reverse repurchase
agreements which may be considered a form of borrowing. In addition, a Fund may
borrow up to an additional 5% of its total assets from banks for temporary or
emergency purposes. A Fund will not purchase securities when bank borrowings
exceed 5% of such Fund's total assets.
Each 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 Funds have established a
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line-of-credit ("LOC") with their custodian by which they may borrow for
temporary or emergency purposes. The Funds intend to use the LOC to meet large
or unexpected redemptions that would otherwise force a Fund to liquidate
securities under circumstances which are unfavorable to a Fund's remaining
shareholders.
DERIVATIVE INSTRUMENTS
A Fund's adviser or 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 a Fund's portfolio or for risk management or for any
other permissible purposes consistent with that Fund's investment objective.
Derivative instruments are securities or agreements whose value is based on the
value of some underlying asset (e.g., a security, currency or index) or the
level of a reference index.
Derivatives generally have investment characteristics that are based
upon 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
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 from adverse movements in the value of the underlying asset. The
seller (writer) of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses resulting from 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.
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"). In addition, a
Fund's ability to use these instruments will be limited by tax considerations.
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 a Fund's
adviser's or subadviser'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
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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 a Fund entered into a short
hedge because a Fund's adviser or 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, a Fund could
suffer a loss.
(4) As described below, a 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 a Fund's
derivative instruments, see "ADDITIONAL GENERAL TAX INFORMATION" below.
Options. A 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. 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 a 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
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must be sold under the option. All or a portion of any assets used as cover for
OTC options written by a 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 a 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.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a 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, a 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.
A 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.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. A Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid 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 a Fund
will enter into OTC options only with counterparties that are expected to be
capable of entering into closing transactions with a Fund, there is no assurance
that such 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, a
Fund might be unable to close out an OTC option position at any time prior to
its expiration.
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If a 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 a 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.
A 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.
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.
Transactions using OTC options (other than purchased options) expose a
Fund to counter party risk. To the extent required by SEC guidelines, a 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. A 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.
[Spread Transactions. A Fund may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a Fund
the right to put, or sell, a security that it owns at a fixed dollar spread or
fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to a Fund in purchasing covered
spread options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing transactions
will be available. The purchase of spread options will be used to protect a Fund
against adverse changes in prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality securities.
Such protection is only provided during the life of the spread option.]
Futures Contracts. Certain Funds may enter into futures contracts,
including interest rate, index, and currency futures and purchase and write
(sell) related 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.
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A 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. A 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. A
Fund will engage in this strategy only when a Fund's adviser or a subadviser
believes it is more advantageous to a Fund than is purchasing the futures
contract.
To the extent required by regulatory authorities, a 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 a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
A 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 a 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 a Fund's exposure to market, currency, or interest rate
fluctuations, such 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, a Fund
realizes a gain; if it is more, a Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, a Fund realizes
a gain; if it is less, a Fund realizes a loss. The transaction costs must also
be included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to enter
into an offsetting
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transaction, that Fund will continue to be required to maintain the margin
deposits on the futures contract.
No price is paid by a 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 a Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
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 a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a 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 a 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 Funds intend 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 a 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.
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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 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.
Swap Agreements. A Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any lawful
purpose consistent with such Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. A Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Swap
agreements may include interest rate caps, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap"; interest rate floors under which, in return
for a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor, or vice versa,
in an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid assets.
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Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on a Fund's adviser's
or subadviser's ability to predict correctly whether certain types of
investments are likely to produce greater returns than other investments. Swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. Certain
restrictions imposed on a Fund by the Internal Revenue Code may limit a Fund's
ability to use swap agreements. The swaps market is largely unregulated.
A Fund will enter swap agreements only with counterparties that a
Fund's adviser or subadviser reasonably believes are capable of performing under
the swap agreements. If there is a default by the other party to such a
transaction, a Fund will have to rely on its contractual remedies (which may be
limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
Foreign Currency-Related Derivative Strategies - Special
Considerations. A Fund may use options and futures and options on futures on
foreign currencies and forward currency contracts to hedge against movements in
the values of the foreign currencies in which a Fund's securities are
denominated. A Fund may engage in currency exchange transactions to protect
against uncertainty in the level of future exchange rates and may also engage in
currency transactions to increase income and total return. Such currency hedges
can protect against price movements in a security the Fund owns or intends to
acquire that are attributable to changes in the value of the currency in which
it is denominated. Such hedges do not, however, protect against price movements
in the securities that are attributable to other causes.
A Fund might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, a Fund may hedge against price movements in that currency by
entering into transactions using hedging instruments on another foreign currency
or a basket of currencies, the values of which a subadviser believes will have a
high degree of positive correlation to the value of the currency being hedged.
The risk that movements in the price of the hedging instrument will not
correlate perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such hedging
instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions
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in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, a Fund will normally purchase OTC options on
foreign currency only when a Fund's adviser or subadviser believes a liquid
secondary market will exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS
A Fund may enter into forward currency contracts. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are entered into in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers.
At or before the maturity of a forward contract, a Fund may either sell
a portfolio security and make delivery of the currency, or retain the security
and fully or partially offset its contractual obligation to deliver the currency
by purchasing a second contract. If a Fund retains the portfolio security and
engages in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward contract prices.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Currency Hedging. While the values of forward currency contracts,
currency options, currency futures and options on futures may be expected to
correlate with exchange rates, they will not reflect other factors that may
affect the value of a Fund's investments. A currency hedge, for
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example, should protect a Yen-denominated bond against a decline in the Yen, but
will not protect a Fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of a Fund's investments denominated in foreign
currency will change in response to many factors other than exchange rates, a
currency hedge may not be entirely successful in mitigating changes in the value
of a Fund's investments denominated in that currency over time.
A decline in the dollar value of a foreign currency in which a Fund's
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. The use of currency
hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. In order to protect against such diminutions in the value of securities
it holds, a Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its securities that otherwise would have resulted. Conversely,
if a rise in the dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of the
securities, a Fund may purchase call options on the particular currency. The
purchase of these options could offset, at least partially, the effects of the
adverse movements in exchange rates. Although currency hedges limit the risk of
loss due to a decline in the value of a hedged currency, at the same time, they
also limit any potential gain that might result should the value of the currency
increase.
A Fund may enter into foreign currency exchange transactions to hedge
its currency exposure in specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of a Fund generally accruing in connection with
the purchase or sale of its portfolio securities. Position hedging is the sale
of forward currency with respect to portfolio security positions. A Fund may not
position hedge to an extent greater than the aggregate market value (at the time
of making such sale) of the hedged securities.
Cross Hedging. At the discretion of the Adviser, each of the Funds may
employ the currency hedging strategy known as "cross-hedging" by using forward
currency contracts, currency options or a combination of both. When engaging in
cross-hedging, a Fund seeks to protect against a decline in the value of a
foreign currency in which certain of its portfolio securities are denominated by
selling that currency forward into a different foreign currency for the purpose
of diversifying the Fund's total currency exposure or gaining exposure to a
foreign currency that is expected to appreciate.
FOREIGN COMMERCIAL PAPER
A Fund may invest in commercial paper which is indexed to certain
specific foreign currency exchange rates. The terms of such commercial paper
provide that its principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect changes in the exchange rate between two
currencies while the obligation is outstanding. A Fund will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount or principal payable by the issuer at
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maturity will change in proportion to the change (if any) in the exchange rate
between two specified currencies between the date the instrument is issued and
the date the instrument matures. While such commercial paper entails the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rate enables a Fund to hedge or cross-hedge against a
decline in the U.S. dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return. A Fund
will purchase such commercial paper for hedging purposes only, not for
speculation. The staff of the SEC is currently considering whether the purchase
of this type of commercial paper would result in the issuance of a "senior
security" within the meaning of the Investment Company Act of 1940. The Funds
believe that such investments do not involve the creation of such a senior
security, but nevertheless will establish a segregated account with respect to
its investments in this type of commercial paper and to maintain in such account
cash not available for investment or other liquid assets having a value equal to
the aggregate principal amount of outstanding commercial paper of this type.
SECURITIES OF INVESTMENT COMPANIES
As permitted by the Investment Company Act of 1940, a Fund may invest
up to 10% of its total assets, calculated at the time of investment, in the
securities of other open-end or closed-end investment companies. No more than 5%
of a Fund's total assets may be invested in the securities of any one investment
company nor may it acquire more than 3% of the voting securities of any other
investment company. A Fund will indirectly bear its proportionate share of any
management fees paid by an investment company in which it invests in addition to
the advisory fee paid by the Fund. Some of the countries in which a Fund may
invest may not permit direct investment by outside investors. Investments in
such countries may only be permitted through foreign government-approved or
government-authorized investment vehicles, which may include other investment
companies.
BANK OBLIGATIONS
Bank obligations that may be purchased by a Fund include certificates
of deposit, banker's acceptances and fixed time deposits. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or purchased
on a discount basis. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of U.S. banks or foreign
banks which are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
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FLOATING AND VARIABLE RATE INSTRUMENTS
Floating or variable rate obligations bear interest at rates that are
not fixed, but vary with changes in specified market rates or indices, such as
the prime rate, or at specified intervals. Certain of the floating or variable
rate obligations that may be purchased by the Funds may carry a demand feature
that would permit the holder to tender them back to the issuer of the instrument
or to a third party at par value prior to maturity.
Some of the demand instruments purchased by a Fund may not be traded in
a secondary market and derive their liquidity solely from the ability of the
holder to demand repayment from the issuer or third party providing credit
support. If a demand instrument is not traded in a secondary market, the Fund
will nonetheless treat the instrument as "readily marketable" for the purposes
of its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days in which case the
instrument will be characterized as "not readily marketable" and therefore
illiquid.
Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and to provide for
periodic adjustments in the interest rate. A Fund will limit its purchases of
floating and variable rate obligations to those of the same quality as it is
otherwise allowed to purchase. A Fund's adviser or subadviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date the Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than a Fund's custodian subject to a subcustodian agreement
approved by the Fund between that bank and the Fund's custodian.
Inverse Floating Instruments. Certain Funds may invest up to 5% of
their net assets in inverse floating rate securities. The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS ("PIK BONDS") AND DEFERRED PAYMENT
SECURITIES
Zero coupon securities are debt securities that pay no cash income but
are sold at substantial discounts from their value at maturity. When a zero
coupon security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that
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investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Zero
coupon securities may have conversion features. PIK bonds pay all or a portion
of their interest in the form of debt or equity securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Deferred payment securities are
often sold at substantial discounts from their maturity value.
Zero coupon securities, PIK bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of a Fund's limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon
security, certain PIK bonds, deferred payment securities and certain other
securities acquired at a discount to accrue income with respect to these
securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, a Fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Loan Participations typically will result in a Fund having a
contractual relationship only with the lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the lender selling the Participation and only
upon receipt by the lender of the payments from the borrower. In connection with
purchasing Loan Participations, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan, nor any rights of set-off against the borrower, and a Fund may not benefit
directly from any collateral supporting the loan in which it has purchased the
Participation. As a result, a Fund will assume the credit risk of both the
borrower and the lender that is selling the Participation. In the event of the
insolvency of the lender selling a Participation, a Fund may be treated as a
general creditor of the lender and may not benefit from any set-off between the
lender and the borrower. A Fund will acquire Loan Participations only if the
lender interpositioned between the Fund and the borrower is determined by the
applicable subadviser to be creditworthy. When a Fund purchases Assignments from
lenders, the Fund will acquire direct rights against the borrower on the loan,
except that under certain circumstances such rights may be more limited than
those held by the assigning lender.
A Fund may have difficulty disposing of Assignments and Loan
Participations. Because the
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market for such instruments is not highly liquid, the Fund anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market may have an adverse impact on the
value of such instruments and will have an adverse impact on the Fund's ability
to dispose of particular Assignments or Loan Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower.
In valuing a Loan Participation or Assignment held by a Fund for which
a secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, the Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Trustees,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the loan and the lender; (ii) the current interest rate; period
until next rate reset and maturity of the loan; (iii) recent prices in the
market for similar loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Fund may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, a
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. A Fund generally retains the
right to interest and principal payments on the security. Since a Fund receives
cash upon entering into a reverse repurchase agreement, it may be considered a
borrowing (see "Borrowing"). When required by guidelines of the SEC, a Fund will
set aside permissible liquid assets in a segregated account to secure its
obligations to repurchase the security. At the time a Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). A Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940.
Mortgage dollar rolls are arrangements in which a Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by
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any interest earned on the proceeds of the initial sale. A Fund also could be
compensated through the receipt of fee income equivalent to a lower forward
price. At the time the Fund would enter into a mortgage dollar roll, it would
set aside permissible liquid assets in a segregated account to secure its
obligation for the forward commitment to buy mortgage-backed securities.
Mortgage dollar roll transactions may be considered a borrowing by the Funds.
(See "Borrowing")
Mortgage dollar rolls and reverse repurchase agreements may be used as
arbitrage transactions in which a Fund will maintain an offsetting position in
investment grade debt obligations or repurchase agreements that mature on or
before the settlement date on the related mortgage dollar roll or reverse
repurchase agreements. Since a Fund will receive interest on the securities or
repurchase agreements in which it invests the transaction proceeds, such
transactions may involve leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or before the settlement date
of the mortgage dollar roll or reverse repurchase agreement, the Fund's adviser
or subadviser believes that such arbitrage transactions do not present the risks
to the Funds that are associated with other types of leverage.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, each
Fund, except the Tax-Free Income Fund, may invest up to 100% of its assets in
cash or money market obligations. The Tax-Free Income Fund may as a temporary
defensive position invest up to 20% of its assets in cash and taxable money
market instruments. In addition, a Fund may have, from time to time, significant
cash positions until suitable investment opportunities are available.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of each Fund
which cannot be changed without the authorization of the majority of the
outstanding shares of the Fund for which a change is proposed. The vote of the
majority of the outstanding securities means the vote of (A) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy or (B) a
majority of the outstanding securities, whichever is less. None of the following
restrictions will prevent a Fund from investing all of its assets in shares of
one or more other registered investment companies.
Each of the Funds:
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- - May not borrow money or issue senior securities, except that each 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.
- - May not purchase or sell real estate, except that each 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).
- - May not lend any security or make any other loan, except that each 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.
- - 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.
- - May not purchase or sell commodities or commodities contracts, except to
the extent disclosed in the current Prospectus and Statement of Additional
Information of such Fund.
- - 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; provided, that in replicating the weightings of a particular
industry in its target index, a Series or Fund may invest more than 25% of
its total assets in securities of issuers in that industry.
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:
Each Fund may not:
- - 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.
- - 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.
- - Purchase or otherwise acquire any security if, as a result, more than 15%
of its net assets would be
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invested in securities that are illiquid.
- - 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
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, and directs the officers to perform the
daily functions of the Trust.
The principal occupation of the Trustees and Officers during the last
five years, their ages, their addresses and their affiliations are:
JOHN C. BRYANT, Trustee*, Age 63
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.
C. BRENT DEVORE, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
SUE A. DOODY, Trustee, Age 64
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.
ROBERT M. DUNCAN, Trustee*, Age 71
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.
THOMAS J. KERR, IV, Trustee*, Age 65
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 43
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.
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DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise and is Chairman and Chief Executive Officer of Nationwide
Advisory Services, Inc.
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.
DAVID C. WETMORE, Trustee, Age 50
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, Age 42
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.
CHRISTOPHER A. CRAY, Assistant Treasurer, age 40
Three Nationwide Plaza, Columbus, Ohio
Mr. Cray is Treasurer of Villanova Mutual Fund Capital Trust, the adviser and
Nationwide Advisory Services, Inc., the Distributor. Prior to that he was
Director - Corporate Accounting of Nationwide Insurance Enterprise.
ELIZABETH A. DAVIN, Secretary, age 35
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.
+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.
*Members of the Executive Committee. Mr. McFerson is Chairman. The Executive
Committee has the authority to act for the Board of Trustees except as provided
by law and except as specified in the Trust's Bylaws.
Bryant, Doody, DeVore, Duncan, Kerr, Kridler and Wetmore are also Trustees, and
Laird, Cray and Davin are also Officers of Nationwide Separate Account Trust and
Nationwide Asset Allocation Trust, registered investment companies in the
Nationwide Fund Complex.
All Trustees and Officers of the Trust own less than 1% of its
outstanding shares.
The Trustees receive fees and reimbursement for expenses of attending
board meetings from the Trust. VMF reimburses the Trust for fees and expenses
paid to Trustees who are interested persons
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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 ended 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 TRUST UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $ 10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee 10,000 --0-- --0-- 12,250
Sue A. Doody, Trustee 10,000 --0-- --0-- 21,000
Robert M Duncan, Trustee 10,000 --0-- --0-- 21,000
Thomas J. Kerr, IV, Trustee 10,000 --0-- --0-- 21,000
Douglas F. Kridler, Trustee 10,000 --0-- --0-- 21,000
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee 10,000 --0-- --0-- 10,000
David C. Wetmore, Trustee 10,000 --0-- --0-- 12,250
</TABLE>
**The Fund Complex includes three trusts comprised of ______ investment company
funds or series.
Each of the Trustees and officers and their families are eligible to
purchase Class D shares of the Funds which offer such Class and generally charge
a front-end sales charge, at net asset value without a sales charge. This is
permitted because there are few marketing expenses associated with these sales.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Under the terms of the Investment Advisory Agreement dated May 9, 1998
as amended as of December __, 1999, Villanova Mutual Fund Capital Trust ("VMF")
manages the investment of the assets of the Funds in accordance with the
policies and procedures established by the Trustees. With respect to the Mid Cap
Growth Fund, Growth Fund, Nationwide Fund, Bond Fund, Tax-Free Income Fund,
Long-Term U.S. Government Bond Fund, Intermediate U.S. Government Bond Fund,
Money Market Fund, the Nationwide Focus Fund, Nationwide High Yield Bond Fund,
the Aggressive Fund, the Moderately Aggressive Fund, the Moderate Fund, the
Moderately Conservative Fund and the Conservative Fund, VMF manages the
day-to-day investments of the assets of such Funds. With respect to each of the
other Funds (except the Nationwide Index Funds), VMF provides investment
management evaluation services in
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initially selecting and monitoring on an ongoing basis the performance of the
Subadvisers, who each manage the investment portfolio of a particular Fund. VMF
is also authorized to select and place portfolio investments on behalf of the
Funds which engage Subadvisers; however VMF does not intend to do so at this
time.
VMF pays the compensation of the Trustees and officers affiliated with
VMF. VMF 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 VMF,
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 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 a 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 VMF may render similar services to others.
The Trust pays the compensation of the Trustees who are not interested
[affiliated][check agreement] persons of VMF and all expenses (other than those
assumed by VMF), 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; 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. VMF reimburses the Trust
for fees and expenses paid to Trustees who are interested [affiliated] persons
of the Trust.
VMF, a Delaware business trust, is a wholly owned subsidiary of
Villonova Capital, Inc., 97% of the common stock of which is held 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. All of the
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Common Stock of Nationwide Corporation is held by Nationwide Mutual Insurance
Company (95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of
which is a mutual company owned by its policyholders.
For services provided under the Investment Advisory Agreement, VMF
receives an annual fee paid monthly based on average daily net assets of each
Fund according to the following schedule:
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
Nationwide Mid Cap Growth Fund, $0 up to $250 million 0.60%
Nationwide Growth Fund, Nationwide Fund $250 million up to $1 billion 0.575%
and Nationwide Focus Fund $1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 Billion and more 0.50%
Nationwide Bond Fund, $0 up to $250 million 0.50%
Nationwide Tax-Free Income Fund, $250 million up to $1 billion 0.475%
Nationwide Long-Term U.S. Government $1 billion up to $2 billion 0.45%
Bond Fund, and Nationwide Intermediate $2 billion up to $5 billion 0.425%
U.S. Government Bond Fund $5 Billion and more 0.40%
Nationwide Money Market Fund $0 up to $1 billion 0.40%
$1 billion up to $2 billion 0.38%
$2 billion up to $5 billion 0.36%
$5 billion and more 0.34%
Nationwide S&P 500 Index Fund all assets 0.13%
Prestige Large Cap Value Fund up to $100 million 0.75%
$100 million or more 0.70%
Prestige Large Cap Growth Fund up to $150 million 0.80%
$150 million or more 0.70%
Prestige Balanced Fund up to $100 million 0.75%
$100 million or more 0.70%
Prestige Small Cap Fund up to $100 million 0.95%
$100 million or more 0.80%
Prestige International Fund up to $200 million 0.85%
</TABLE>
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<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
$200 million or more 0.80%
The Aggressive Fund all assets 0.13%
The Moderately Aggressive Fund all assets 0.13%
The Moderate Fund all assets 0.13%
The Moderately Conservative Fund all assets 0.13%
The Conservative Fund all assets 0.13%
Nationwide Small Cap $0 up to $250 million 0.70%
Value Fund II $250 million up to $1 billion 0.675%
$1 billion up to $2 billion 0.65%
$2 billion up to $5 billion 0.625%
$5 billion and more 0.60%
Nationwide High Yield Bond Fund $0 up to $250 million 0.55%
$250 million up to $1 billion 0.525%
$1 billion up to $2 billion 0.50%
$2 billion up to $5 billion 0.475%
$5 billion and more 0.45%
</TABLE>
VMF has also agreed to waive advisory fees, and if necessary, reimburse
expenses in order to limit annual Fund operating expenses for certain of the
Funds as follows:
- - Nationwide Mid Cap Growth Fund to 1.25% for Class A shares, 2.00% for Class
B shares and 1.00% for Class D shares
- - Nationwide Long-Term U.S. Government Bond Fund and Nationwide Intermediate
U.S. Government Bond Fund to 1.04% for Class A shares, 1.64% for Class B
shares and 0.79% for Class D shares
- - Prestige Large Cap Value Fund to 1.15% for Class A shares, 1.90% for Class
B shares and 1.00% for Class Y shares
- - Prestige Large Cap Growth Fund to 1.20% for Class A shares, 1.95% for Class
B shares and 1.05% for Class Y shares
- - Prestige Balanced Fund to 1.10% for Class A shares, 1.85% for Class B
shares and 0.95% for Class Y shares
- - Prestige Small Cap Fund to 1.35% for Class A shares, 2.10% for Class B
shares and 1.20% for Class Y shares
- - Prestige Large Cap Value Fund to 1.30% for Class A shares, 2.05% for Class
B shares and
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1.25% for Class Y shares
- - Nationwide S&P 500 Index Fund to 0.48% for Class Y shares, 0.63% for Class
R shares and 0.35% for Local Fund shares
- - each of the Life Strategy Series to 0.56% for Class A shares, 1.31% for
Class B shares and 0.36% for Service Class shares
- - Nationwide Focus Fund to 1.20% for Class A shares, 1.70% for Class B shares
and 0.75% for Institutional Class shares
- - Nationwide Small Cap Value Fund II to 1.35% for Class A shares, 1.85% for
Class B shares and 1.00% for Institutional Class shares
- - Nationwide High Yield Bond Fund to 1.20% for Class A shares, 1.80% for
Class B shares and 0.85% for Institutional Class shares
In the interest of limiting the expenses of each of the Funds listed
above (except the Nationwide MidCap Growth Fund, the Nationwide Long-Term U.S.
Government Bond Fund, the Nationwide Intermediate U.S. Government Bond Fund and
the Nationwide S&P 500 Index Fund, VMF has entered into an expense limitation
agreement with the Fund ("Expense Limitation Agreement"). Pursuant to the
Expense Limitation Agreement, UBT has agreed to waive or limit its fees and to
assume other expenses (except for Rule 12b-1 Fees and Administrative Service
Fees) to the extent necessary to limit the total annual operating expenses of
each Class of the Fund to the limits described above. Reimbursement by the Fund
of the advisory fees waived or limited and other expenses reimbursed by VMF
pursuant to the Expense Limitation Agreement may be made at a later date when
the Fund has reached a sufficient asset size to permit reimbursement to be made
without causing the total annual operating expense ratio of the Fund to exceed
the limits set forth above. No reimbursement will be made unless: (i) the Fund's
assets exceed $100 million; (ii) the total annual expense ratio of the Class
making such reimbursement is less than the limit set forth above; and (iii) the
payment of such reimbursement is approved by the Board of Trustees on a
quarterly basis. Except as provided for in the Expense Limitation Agreement,
reimbursement of amounts previously waived or assumed by VMF is not permitted.
VMF may from time to time waive some or all of its investment advisory
fee or other fees for any of the fund of the Trust. The waiver of such fees will
cause the total return and yield of a fund to be higher than they would
otherwise be in the absence of such a waiver.
During the fiscal years ended October 31, 1998, 1997 and 1996, NAS
received the following fees for investment advisory services*:
<TABLE>
<CAPTION>
Acquired Years Ended October 31,
Fund Fund* 1998 1997 1996
---- ----- ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Growth Growth of FHIT $ 61,706 $ 63,883 $ 54,053
Growth Growth of NIF 4,894,110 3,750,599 3,212,196
Nationwide Fund Nationwide Fund of NIF 9,977,231 5,938,011 4,425,921
Bond Bond of NIF 647,809 629,068 663,545
Tax-Free Income Tax-Free Income of NIF II and
Municipal Bond of FHIT 1,505,626 1,810,070 1,855,962
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
LT U.S. Govt. Government of FHIT 254,928 343,259 414,415
Intermediate U.S. Govt. U.S. Govt. of NIF II 266,473 256,016 255,149
Money Market**
Money Market of NIF and 3,857,898 3,519,727 2,969,392
Cash Reserve of FHIT
</TABLE>
* As of May 9, 1998, the Funds acquired all of the assets of one or more series
of Nationwide Investing Foundation ("NIF"), Nationwide Investing Foundation II
("NIF II") and Financial Horizons Investment Trust ("FHIT") (collectively, the
"Acquired Funds"), as described above, in exchange for the assumption of the
stated liabilities of the Acquired Funds and a number of full and fractional
Class D shares of the applicable Fund (the Money Market Fund issued shares
without class designation) having an aggregate net asset value equal to the net
assets of the Acquired Funds as applicable (the "Reorganization").
** Net of waivers prior to the Reorganization of $221,174, $389,150 and $328,076
for the fiscal year ended October 31, 1998, 1997, and 1996, respectively.
During the period from July 24, 1998 (date of commencement of
operations) through October 31, 1998, NAS waived advisory fees for the S&P 500
Index Fund in the amount of $7,315. The Large Cap Value, Large Cap Growth,
Balanced, Small Cap and International Funds did not begin operations until
November 2, 1998.
The Subadvisers for the Funds are as follows:
<TABLE>
<CAPTION>
FUND SUBADVISER
<S> <C>
Large Cap Value Brinson Partners, Inc. ("Brinson Partners")
Large Cap Growth Goldman Sachs Asset Management ("GSAM")
Balanced J.P. Morgan Investment Management, Inc. ("J.P. Morgan")
Small Cap INVESCO Management & Research, Inc. ("IMR")
International Lazard Asset Management ("Lazard")
S&P 500 Index The Dreyfus Corporation
Small Cap Value II Villanova Value Investors, Inc. ("VVI")
</TABLE>
Brinson Partners, a Delaware corporation and an investment management
firm, is an indirect wholly-owned subsidiary of UBS AG, an internationally
diversified organization headquartered in Zurich, Switzerland, with operations
in many aspects of the financial services industry. GSAM is a separate operating
division of Goldman Sachs & Co., an investment banking firm whose headquarters
are in New York, New York. J.P. Morgan is a directly wholly owned subsidiary of
J.P. Morgan & Co. Incorporated, a bank holding company organized under the laws
of Delaware. J.P. Morgan offers a wide range investment management services and
acts as investment adviser to
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corporate and institutional clients. IMR is part of a global investment
organization, AMVESCAP plc. AMVESCAP plc is a publicly-traded holding company
that, through its subsidiaries, engages in the business of investment management
on an international basis. Lazard is a New York-based division of Lazard Freres
& Co. LLC, a limited liability company registered as an investment adviser and
providing investment management services to client discretionary accounts. 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.
Villanova Value Investors, Inc. is a subsidiary of Villanova Capital, Inc. which
is also the parent of VMF. VVI is located at __________________ and was formed
in 1999.
Subject to the supervision of the VMF and the Trustees, each of the
Subadvisers manages the assets of the Fund listed above in accordance with the
Fund's investment objectives and policies. Each Subadviser makes investment
decisions for the Fund and in connection with such investment decisions places
purchase and sell orders for securities. For the investment management services
they provide to the Funds, the Subadvisers receive annual fees from VMF,
calculated at an annual rate based on the average daily net assets of the Funds,
in the following amounts:
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<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
Large Cap Value Fund up to $100 million 0.35%
$100 million or more 0.30%
Large Cap Growth Fund up to $150 million 0.40%
$150 million or more 0.30%
Balanced Fund up to $100 million 0.35%
$100 million or more 0.30%
Small Cap Fund up to $100 million 0.55%
$100 million or more 0.40%
International Fund up to $200 million 0.45%
$200 million or more 0.40%
S&P 500 Index Fund up to $250 million 0.07%
next $250 million 0.06%
next $500 million 0.05%
$1 billion or more 0.04%
Nationwide Small Cap Value Fund II $0 up to $250 million 0.70%
$250 million up to $1 billion 0.675%
$1 billion up to $2 billion 0.65%
$2 billion up to $5 billion 0.625%
$5 billion and more 0.60%
</TABLE>
During the period from July 24, 1998 (date of commencement of
operations) through October 31, 1998, NAS paid $3,939 in subadvisory fees to
Dreyfus with respect to the S & P 500 Index Fund.
VMF and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows VMF
to hire, replace or terminate subadvisers without the approval of shareholders;
the order also allows VMF 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 VMF. The order is intended to facilitate the
efficient operation of the Funds and afford the Trust increased management
flexibility.
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VMF provides to the Funds 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. VMF 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, VMF
does not expect to recommend frequent changes of subadvisers. VMF will regularly
provide written reports to the Trust's Board of Trustees regarding the results
of its evaluation and monitoring functions. Although VMF 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.
MORLEY CAPITAL ACCUMULATION AND MORLEY ENHANCED INCOME FUND
Under the terms of the Trust's investment advisory agreement with UBT
(the "UBT Advisory Agreement"), UBT manages the Morley Capital Accumulation Fund
and Morley Enhanced Income Fund, subject to the supervision and direction of the
Board of Trustees. UBT will: (i) act in strict conformity with the Declaration
of Trust and the 1940 Act, as the same may from time to time be amended; (ii)
manage the Fund in accordance with the Fund's investment objectives,
restrictions and policies; (iii) make investment decisions for the Fund; and
(iv) place purchase and sale orders for securities and other financial
instruments on behalf of the Fund.
UBT has informed the Fund that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Fund, UBT will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Fund is a customer of UBT, its
parent or its affiliates and, in dealing with its customers, UBT, its parent and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by UBT or any such affiliate.
Morley Financial Services, Inc. ("MFS") owns 100% of the issued and
outstanding voting securities of UBT. MFS, an Oregon corporation, is a wholly
owned subsidiary of NFS.
UBT is a state bank and trust company chartered in 1913 and reorganized
under the laws of the state of Oregon in 1992. UBT provides a range of
investment and fiduciary services to institutional clients. UBT maintains and
manages common and pooled trust funds invested primarily in fixed income assets
whose principal value is relatively stable. UBT currently has approximately $1.0
billion under management. UBT also acts as custodian with respect to similar
fixed income assets.
Under the terms of the Investment Advisory Agreement dated February 1,
1999, as amended, UBT manages the investment of the assets of the Morley Capital
Accumulation Fund and Morley Enhanced Income Fund in accordance with the
policies and procedures established by the Trustees. UBT pays the Fund's pro
rata share of the compensation of the Trustees who are interested persons of the
Trust and officers and employees of UBT. UBT also furnishes, at its own expense,
all
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necessary administrative services, office space, equipment, and clerical
personnel for servicing the investments of the Fund and maintaining its
investment advisory facilities, and executive and supervisory personnel for
managing the investments and effecting the portfolio transactions of the Fund.
The Investment Advisory Agreement also specifically provides that UBT,
including its directors, officers, and employees, shall not be liable for any
error of judgment, or mistake of law, or for any loss arising out of any
investment, or for any act or omission in the execution and management of the
Fund, except for willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of reckless disregard of its obligations
and duties under the Agreement. The Agreement will continue in effect for an
initial period of two years and thereafter shall continue automatically for
successive annual periods provided such continuance is specifically approved at
least annually by the Trustees, or by vote of a majority of the outstanding
voting securities of the Fund, and, in either case, by a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party. The Agreement terminates automatically in the event of its "assignment",
as defined under the 1940 Act. It may be terminated as to the Fund without
penalty by vote of a majority of the outstanding voting securities of the Fund,
or by either party, on not less than 60 days written notice. The Agreement
further provides that UBT may render similar services to others.
Subject to the Fund's Expense Limitation Agreement the Trust pays the
compensation of the Trustees who are not interested persons of the Trust and all
expenses (other than those assumed by UBT), including governmental fees,
interest charges, taxes, membership dues in the Investment Company Institute
allocable to the Trust; fees under the Trust's Fund Administration Agreement;
fees and expenses of independent certified public accountants, legal counsel,
and any transfer agent, registrar, and dividend disbursing agent of the Trust;
expenses of preparing, printing, and mailing shareholders' reports, notices,
proxy statements, and reports to governmental offices and commissions; expenses
connected with the execution, recording, and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the custodian for all
services to the Trust; and expenses of calculating the net asset value of shares
of the Trust, expenses of shareholders' meetings, and expenses relating to the
issuance, registration, and qualification of shares of the Trust.
As compensation for UBT's services to the Morley Capital Accumulation Fund, the
Fund is obligated to pay UBT a fee computed and accrued daily and paid monthly
at an annual rate of 0.35% of the average daily net assets of the Fund. As of
October 31, 1999, the Fund had incurred investment advisory fees in the amount
of $___________. In the interest of limiting the expenses of the Fund, UBT has
entered into an expense limitation agreement with the Fund ("Expense Limitation
Agreement"). Pursuant to the Expense Limitation Agreement, UBT has agreed to
waive or limit its fees and to assume other expenses (except for Rule 12b-1
Fees) to the extent necessary to limit the total annual operating expenses of
each Class of the Fund (expressed as a percentage of average daily net assets
and excluding Rule 12b-1 Fees) to no more than 0.70% for ISC Shares 0.55% for IC
Shares and 0.70% for IRA Shares. Reimbursement by the Fund of the advisory fees
waived or limited and other expenses reimbursed by UBT pursuant to the Expense
Limitation Agreement may be made at a later date when the Fund has reached a
sufficient asset size to permit
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<PAGE> 294
reimbursement to be made without causing the total annual operating expense
ratio of the Fund to exceed the limits set forth above. No reimbursement will be
made unless: (i) the Fund's assets exceed $50 million; (ii) the total annual
expense ratio of the Class making such reimbursement is less than the limit set
forth above; and (iii) the payment of such reimbursement is approved by the
Board of Trustees on a quarterly basis. Except as provided for in the Expense
Limitation Agreement, reimbursement of amounts previously waived or assumed by
UBT is not permitted.
As compensation for UBT's services to the Morley Enhanced Income Fund,
the Fund is obligated to pay UBT a fee computed and accrued daily and paid
monthly at an annual rate of 0.35% of the average daily net assets of the Fund.
In the interest of limiting the expenses of the Fund, UBT has entered into an
expense limitation agreement with the Fund ("Expense Limitation Agreement").
Pursuant to the Expense Limitation Agreement, UBT has agreed to waive or limit
its fees and to assume other expenses (except for Rule 12b-1 Fees and
Administrative Service Fees) to the extent necessary to limit the total annual
operating expenses of each Class of the Fund to 0.90% for Class A, 0.70% for
Class Y and 0.45% for Institutional Class shares. Reimbursement by the Fund of
the advisory fees waived or limited and other expenses reimbursed by UBT
pursuant to the Expense Limitation Agreement may be made at a later date when
the Fund has reached a sufficient asset size to permit reimbursement to be made
without causing the total annual operating expense ratio of the Fund to exceed
the limits set forth above. No reimbursement will be made unless: (i) the Fund's
assets exceed $100 million; (ii) the total annual expense ratio of the Class
making such reimbursement is less than the limit set forth above; and (iii) the
payment of such reimbursement is approved by the Board of Trustees on a
quarterly basis. Except as provided for in the Expense Limitation Agreement,
reimbursement of amounts previously waived or assumed by UBT is not permitted.
DISTRIBUTOR
NAS serves as underwriter for each of the Funds in the continuous
distribution of its shares pursuant to a Underwriting Agreement dated as of May
9, 1998, as amended as of November 2, 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.
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<PAGE> 295
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") under Rule
12b-1 of the 1940 Act. The Plan permits the Funds to compensate NAS, as the
Funds' Distributor, for expenses associated with the distribution of shares of
the Funds. Although actual distribution expenses may be more or less, under the
Plan the Funds pay NAS an annual fee in an amount that will not exceed the
following amounts:
- - 0.25% of the average daily net assets of Class A shares; and
- - 1.00% of the average daily net assets of Class B shares for each of the
Funds
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 well as
payments to broker-dealers for shareholder services.
As required by Rule 12b-1, the Plan was approved by the Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Funds and who have no direct or indirect financial interest in the operation
of the Plan (the "Independent Trustees"). The Plan was initially approved by the
Board of Trustees on March 5, 1998, and is amended from time to time upon
approval by the Board of Trustees. The Plan may be terminated as to a Class of a
Fund by vote of a majority of the Independent Trustees, or by vote of majority
of the outstanding shares of that Class. Any change in the Plan that would
materially increase the distribution cost to a Class 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
vote of the Trustees including a majority of the 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 applicable Class. 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 as to a Fund must determine that there is a reasonable likelihood that
the Plan will benefit such Fund and its Shareholders.
The Board of Trustees of the Trust believes that the Plan is in the
best interests of the Funds since it encourages Fund growth and maintenance of
Fund assets. As the Funds grow in size, certain expenses, and therefore total
expenses per Share, may be reduced and overall performance per Share may be
improved.
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<PAGE> 296
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 a Fund's Shares including, but not limited
to, those discussed above.
ADMINISTRATIVE SERVICES PLAN
Under the terms of an Administrative Services Plan, a Fund is permitted
to enter into Servicing Agreements with servicing organizations, such as NAS,
who agree to provide certain administrative support services in connection with
the Class A, Class D and Class Y shares of the Funds and the Prime shares and
Class R shares of the Money Market Fund and the S&P 500 Index Fund. Such
administrative support services include but are not limited to the following:
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
sub-accounting, answering inquiries regarding the Funds, providing periodic
statements showing the account balance for beneficial owners or for plan
participants or contract holders of insurance company separate accounts,
transmitting proxy statements, periodic reports, updated prospectuses and other
communications to shareholders and, with respect to meetings of shareholders,
collecting, tabulating and forwarding to the Trust executed proxies and
obtaining such other information and performing such other services as may
reasonably be required.
As authorized by the Administrative Services Plan, the Trust has
entered into a Servicing Agreement pursuant to which Nationwide Financial
Services, Inc. has agreed to provide certain administrative support services in
connection with Class A of each Fund held beneficially by its customers. In
consideration for providing administrative support services, NFS and other
entities with which the Trust may enter into Servicing Agreements (which may
include NAS) will receive a fee, computed at the annual rate of up to 0.25% of
the average daily net assets of the Class A shares of each Fund held by
customers of NFS or such other entity.
FUND ADMINISTRATION
Under the terms of a Fund Administration Agreement, Villanova SA
Capital Trust ("VSA"), a wholly owned subsidiary of Villanova Capital, Inc.,
provides for various administrative and accounting services, including daily
valuation of the Funds' shares, preparation of financial statements, tax
returns, and regulatory reports, and presentation of quarterly reports to the
Board of Trustees. For these services, each Fund pays VSA an annual fee based on
each Fund's average daily net assets according to the following schedule:
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
Nationwide Small Cap Value Fund II, $0 up to $250 million 0.07%
Nationwide High Yield Bond Fund, $250 million up to $1 billion 0.05%
Nationwide Focus Fund, Morley Enhanced $1 billion and more 0.04%
Income Fund
</TABLE>
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<PAGE> 297
<TABLE>
<CAPTION>
FUND ASSETS FEE
<S> <C> <C>
</TABLE>
SUB-ADMINISTRATORS
VSA has entered into a Sub-Administration Agreement with BISYS Fund
Services Ohio, Inc. ("BISYS") to provide certain fund administration services
for each of the Funds. For these services, VSA pays BISYS a fee equal to the
greater of $50,000 of an annual fee at the following rates based on the average
daily net assets of the aggregate of all the funds [of the Trust] that BISYS is
providing such services for:
<TABLE>
<CAPTION>
ASSETS FEE
<S> <C>
$0 up to $13 million 0.045%
$13 million up to $25 million 0.02%
$25 million up to $50 million 0.015%
$50 million and more 0.01%
</TABLE>
TRANSFER AGENT
Nationwide Investors Services, Inc. ("NISI"), a wholly owned subsidiary
of VSA, Three Nationwide Plaza, Columbus, Ohio 43215, serves as transfer agent
and dividend disbursing agent for each of the Funds. For these services, NISI
receives an annual fee from each of the Funds according to the following
schedule:
CUSTODIAN
The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza,
Cincinnati, OH 45263, is the custodian for the Funds and makes all receipts and
disbursements under a Custody Agreement. Fifth Third performs no managerial or
policy-making functions for the Funds.
LEGAL COUNSEL
Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus, OH 43215,
serves as the Trust's legal counsel.
AUDITORS
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KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the
independent auditors for the Trust.
BROKERAGE ALLOCATION
VMF (or a Subadviser) is responsible for decisions to buy and sell
securities and other investments for the Funds, the selection of brokers and
dealers to effect the transactions and the negotiation of brokerage commissions,
if any. In transactions on stock and commodity exchanges in the United States,
these commissions are negotiated, whereas on foreign stock and commodity
exchanges these commissions are generally fixed and are generally higher than
brokerage commissions in the United States. In the case of securities traded on
the over-the-counter markets or for securities traded on a principal basis,
there is generally no commission, but the price includes a spread between the
dealer's purchase and sale price. This spread is the dealer's profit. In
underwritten offerings, the price includes a disclosed, fixed commission or
discount. Most short term obligations are normally traded on a "principal"
rather than agency basis. This may be done through a dealer (e.g., a securities
firm or bank) who buys or sells for its own account rather than as an agent for
another client, or directly with the issuer.
The primary consideration in portfolio security transactions is "best
price - best execution," i.e., execution at the most favorable prices and in the
most effective manner possible. Except as described below, VMF or a Subadviser
always attempts to achieve best price - best execution, and both VMF and the
Subadvisers have complete freedom as to the markets in and the broker-dealers
through which they seek this result. In selecting broker-dealers, VMF and each
Subadviser will consider various relevant factors, including but not limited to
the size and type of the transaction, the nature and character of the markets
for the security or asset to be purchased or sold, the execution efficiency,
settlement capability, and financial condition of the broker-dealer's firm, the
broker-dealer's execution services (rendered on a continuing basis), and the
reasonableness of any commissions. In allocating orders among brokers for
execution on an [agency][agency only?] basis, in addition to price and execution
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.
Subject to the requirement of seeking best execution, securities may be
bought from or sold to broker-dealers who have furnished statistical, research,
and other information or services to VMF or a Subadviser. In placing orders with
such broker-dealers, VMF or a Subadviser will, where possible, take into account
the comparative usefulness of such information. Such information is useful to
VMF or a Subadviser even though its dollar value may be indeterminable, and its
receipt or availability generally does not reduce VMF's or a Subadviser's normal
research activities or expenses.
Fund portfolio transactions may be effected with broker-dealers who
have assisted investors in the purchase of variable annuity contracts or
variable insurance policies issued by Nationwide Life
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Insurance Company or Nationwide Life & Annuity Insurance Company. However,
neither such assistance nor sale of other investment company shares is a
qualifying or disqualifying factor in a broker-dealer's selection, nor is the
selection of any broker-dealer based on the volume of shares sold.
There may be occasions when portfolio transactions for a Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts (including other mutual funds) served by
VMF or a Subadviser or by an affiliated company thereof. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to a Fund, they are effected only when VMF or a Subadviser
believes that to do so is in the interest of the Fund. When such concurrent
authorizations occur, the executions will be allocated in an equitable manner.
The Trustees periodically review VMF's and each Subadviser's
performance of their responsibilities in connection with the placement of
portfolio transactions on behalf of the Funds and review the commissions paid by
the Funds over representative periods of time to determine if they are
reasonable in relation to the benefits to the Funds.
Each Subadviser may cause a Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission that is in excess of the
commission another broker-dealer would have received for executing the
transaction if it is determined, pursuant to the requirements of Section 28(e)
of the Securities Exchange Act of 1934, that such commission is reasonable in
relation to the value of the brokerage and/or research services provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to a Subadviser is considered to be in addition to and not in lieu of services
required to be performed by the Subadviser under its subadvisory agreement with
VMF. The fees paid to each of the Subadvisers pursuant to its subadvisory
agreement with VMF are not reduced by reason of its receiving any brokerage and
research services. The research services provided by broker-dealers can be
useful to a Subadviser in serving its other clients or clients of the
Subadviser's affiliates. Subject to the policy of the Subadvisers to obtain best
execution at the most favorable prices through responsible broker-dealers, a
Subadviser also may consider the broker-dealer's sale of shares of any fund for
which the Subadviser serves as investment adviser, subadviser or administrator.
Under the 1940 Act, "affiliated persons" of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each Fund may purchase securities from underwriting syndicates of which a
Subadviser or any of its affiliates, as defined in the 1940 Act, is a member
under certain conditions, in accordance with Rule 10f-3 under the 1940 Act.
Each of the Funds contemplate that, consistent with the policy of
obtaining best results, brokerage transactions may be conducted through
"affiliated brokers or dealers," as defined in the 1940 Act. Under the 1940 Act,
commissions paid by a Fund to an "affiliated broker or dealer" in connection
with a purchase or sale of securities offered on a securities exchange may not
exceed the
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usual and customary broker's commission. Accordingly, it is the Funds' policy
that the commissions to be paid to an affiliated broker-dealer must, in the
judgment of VMF or the appropriate Subadviser, be (1) at least as favorable as
those that would be charged by other brokers having comparable execution
capability and (2) at least as favorable as commissions contemporaneously
charged by such broker or dealer on comparable transactions for the broker's or
dealer's most favored unaffiliated customers, except for accounts for which the
affiliated broker or dealer acts as a clearing broker for another brokerage firm
and customers of an affiliated broker or dealer that, in the opinion of a
majority of the independent trustees, are not comparable to the Fund. The Funds
do not deem it practicable or in their best interests to solicit competitive
bids for commissions on each transaction. However, consideration regularly is
given to information concerning the prevailing level of commissions charged on
comparable transactions by other brokers during comparable periods of time.
ADDITIONAL INFORMATION ON PURCHASES AND SALES
CLASS A SALES CHARGES
The charts below show the Class A sales charges, which decrease as the
amount of your investment increases.
CLASS A SHARES OF THE FOCUS FUND AND SMALL CAP VALUE FUND II
<TABLE>
<CAPTION>
Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------
<S> <C> <C>
less than $50,000 5.75% 6.10%
$50,000 to $99,999 4.50 4.71
$100,000 to $249,999 3.50 3.63
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
</TABLE>
CLASS A SHARES OF THE HIGH YIELD BOND AND ENHANCE INCOME FUNDS
<TABLE>
<CAPTION>
Sales charge as % Sales charge as %
Amount of purchase of offering price of amount invested
- ------------------ ----------------- ------------------
<S> <C> <C>
less than $50,000 4.50% 4.71%
$50,000 to $99,999 4.00 4.17
$100,000 to $249,999 3.00 3.09
$250,000 to $499,999 2.50 2.56
$500,000 to $999,999 2.00 2.04
</TABLE>
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<PAGE> 301
<TABLE>
<S> <C> <C>
$1 million to $24,999,999 0.50 0.50
$25 million or more 0.25 0.25
</TABLE>
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<PAGE> 302
NET ASSET VALUE PURCHASE PRIVILEGE (CLASS A SHARES ONLY).--THE SALES CHARGE
APPLICABLE TO CLASS A SHARES MAY BE WAIVED FOR THE FOLLOWING PURCHASES DUE TO
THE REDUCED MARKETING EFFORT REQUIRED BY NAS:
(1) shares sold to other registered investment companies affiliated with
VMF,
(2) shares sold:
(a) to any pension, profit sharing, or other employee benefit plan
for the employees of VMF, any of its affiliated companies, or
investment advisory clients and their affiliates;
(b) to any endowment or non-profit organization;
(c) to any pension, profit sharing, or deferred compensation plan
which is qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code of 1986 as amended, dealing directly
with NAS with no sales representative involved upon written
assurance of the purchaser that the shares are acquired for
investment purposes and will not be resold except to the
Trust;
(d) to any life insurance company separate account registered as a
unit investment trust;
(e) to any person purchasing through an account with an
unaffiliated brokerage firm having an agreement with NAS to
waive sales charges for those persons;
(f) to any directors, officers, full-time employees, sales
representatives and their employees or any investment advisory
clients of a broker-dealer having a dealer/selling agreement
with NAS;
(g) to any person who pays for such shares with the proceeds of
mutual fund shares redeemed from an NAS brokerage account; to
qualify, the person must have paid an initial sales charge or
CDSC on the redeemed shares and the purchase of Class A shares
must be made within 60 days of the redemption. This waiver
must be requested when the purchase order is placed, and NAS
may require evidence of qualification for this waiver;
(h) to any Class Member of Snyder vs. Nationwide Mutual Insurance
Company and Nationwide Life Insurance Company on the initial
purchase of shares for an amount no less than $5,000 and no
more than $100,000. To be eligible for this waiver, the
purchase of Class A shares must come from a source other than
the surrender of, withdrawal from, or loan against any
existing policy, mutual fund or annuity issued by Nationwide
Mutual Insurance Company or its affiliates;
(i) to any person who pays for such shares with the proceeds of
mutual funds shares redeemed from an account in the NEA
Valuebuilder Mutual Fund Program. This
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waiver is only available for the initial purchase if shares
were made with such proceeds. NAS may require evidence of
qualification for such waiver; and
(j) to certain employer-sponsored retirement plan including
pension, profit sharing or deferred compensation plans which
are qualified under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code.
(k) Trustees and retired Trustees of Nationwide Mutual Funds
(including its predecessor Trusts);
(l) Directors, officers, full-time employees, sales
representatives and their employees, and retired directors,
officers, employees, and sales representatives, their spouses,
children or immediate relatives (including mother, father,
brothers, sisters, grandparents and grandchildren) and
immediate relatives of deceased employees of any member of
Nationwide Insurance and Nationwide Financial companies, or
any investment advisory clients of VMF, VSA, NAS and their
affiliates; and
(m) Directors, officers, full-time employees, their spouses,
children or immediate relatives and immediate relatives of
deceased employees of any sponsor group which may be
affiliated with the Nationwide Insurance and Nationwide
Financial companies from time to time, (including but not
limited to, Farmland Insurance Industries, Inc., Maryland Farm
Bureau, Inc., Ohio Farm Bureau Federation, Inc., Pennsylvania
Farmers' Association, Ruralite Services, Inc., and Southern
States Cooperative).
CLASS B SHARES OF THE FUNDS AND CDSC
A CDSC, payable to NAS, will be imposed on any redemption of Class B
shares which causes the current value of your account to fall below the total
amount of all purchases made during the preceding six years. THE CDSC IS NEVER
IMPOSED ON DIVIDENDS, WHETHER PAID IN CASH OR REINVESTED, OR ON APPRECIATION
OVER THE INITIAL PURCHASE PRICE. The CDSC applies only to the lesser of the
original investment or current market value.
Where the CDSC is imposed, the amount of the CDSC will depend on the
number of years since you made the purchase payment from which an amount is
being redeemed, according to the following table:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
- -------------- ------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 3.00%
</TABLE>
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Fifth 2.00%
Sixth 1.00%
Seventh and following 0.00%
For purposes of calculating the CDSC, it is assumed that the oldest
Class B shares remaining in your account will be sold first. All payments during
a month will be aggregated and deemed to have been made on the last day of the
preceding month.
For the Bonds Funds your money will earn daily dividends through the
date of liquidation. If you redeem all of your shares in one of the Bond Funds,
you will receive a check representing the value of your account, less any
applicable CDSC calculated as of the date of your withdrawal, plus all daily
dividends credited to your account through the date of withdrawal.
THE CDSC WILL BE WAIVED IN THE CASE OF A TOTAL OR PARTIAL REDEMPTION
FOLLOWING THE DEATH OR DISABILITY (WITHIN THE MEANING OF CODE SECTION 72(m)(7)
OF THE INTERNAL REVENUE CODE) OF A SHAREHOLDER (ACCOUNTS OWNED BY AN INDIVIDUAL
OR AN INDIVIDUAL JOINTLY WITH SPOUSE) IF REDEMPTION OCCURS WITHIN ONE YEAR OF
DEATH OR INITIAL DETERMINATION OF DISABILITY.
CDSC APPLICABLE FOR CLASS A SHARES
Employer sponsored retirement plans which purchase Class A shares at
net asset value (other than those investing in Funds through a variable
insurance product) are subject to a CDSC, payable to NAS, of 1.00% if a finder's
fee (as described below) was paid on the purchase of the shares and the shares
are redeemed within the first year after purchase, 0.50% if redeemed within the
second year and 0.25% if redeemed within the third year. The sales charge is
applied to the original purchase price, or the current market value of the
shares being sold, whichever is less. A CDSC will be charged on redemptions of
$1 million or more within a 12 month period.
NAS will pay a finder's fee at the plan sponsor level at the time of
purchase to the dealer of record at the time of purchase at the following rates:
1.00% for sales of the Funds of $1 million up to $3 million
0.50% for sales of the Funds of $ 3 million up to $50 million
0.25% for sales of the Funds of $50 million or more
The finder's fee is paid on the aggregate assets of all Funds held at
the plan sponsor level.
CONVERSION FEATURES FOR CLASS B SHARES
Class B shares which have been outstanding for seven years will
automatically convert to Class A shares on the first business day of the next
month following the seventh anniversary of the date on which such Class B shares
were purchased. Such conversion will be on the basis of the relative net asset
values of the two classes, without the imposition of a sales charge or other
charge except that the lower 12b-1 fee applicable to Class A shares shall
thereafter be applied to such converted shares.
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<PAGE> 305
Because the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of the conversion, a shareholder may
receive fewer Class A shares than the number of Class B shares converted,
although the dollar value of the amount converted will be the same.
Reinvestments of dividends and distributions in Class B shares will not be
considered a new purchase for purposes of the conversion feature and will
convert to Class A shares in the same proportion as the number of the
shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and
distributions.
If you effect one or more exchanges among Class B shares of the Funds
during the seven-year period, the holding period for shares so exchanged will be
counted toward such period. If you exchange Class B shares into the Prime Shares
of the Money Market Fund for a period of time, the conversion aging period will
be stopped during the time period when shares are exchanged into the Money
Market Fund.
FACTORS TO CONSIDER WHEN CHOOSING A CLASS OF SHARES
Before purchasing Class A shares or Class B shares of a Fund, investors
should consider whether, during the anticipated life of their investment in a
Fund, the accumulated 12b-1 fee and potential CDSC on Class B shares prior to
conversion (as described above) would be less than the initial sales charge and
accumulated 12b-1 fee on Class A shares purchased at the same time, and to what
extent such differential would be offset by the higher yield of Class A shares
as a result of the lower expenses. In this regard, to the extent that the sales
charge for the Class A shares is waived or reduced investments in Class A shares
become more desirable. NAS may refuse a purchase order for Class B shares of
over $100,000.
Although Class A shares are subject to a 12b-1 fee, they are not
subject to the higher 12b-1 fee applicable to Class B shares. For this reason,
Class A shares can be expected to pay correspondingly higher dividends per
shares. However, because initial sales charges are deducted at the time of
purchase, purchasers of Class A shares who do not qualify for waivers of or
reductions in the initial sales charge would have less of their purchase price
initially invested in the Fund than purchasers of Class B shares.
As described above, purchasers of Class B shares will have more of
their initial purchase price invested. Any positive investment return on this
additional invested amount may partially or wholly offset the expected higher
annual expenses borne by Class B shares. Because a Fund's future returns cannot
be predicted, there can be no assurance that this will be the case. Investors in
Class B shares would, however, own shares that are subject to higher annual
expenses and, for a six-year period, such shares would be subject to a CDSC
ranging from 5.00% to 1.00% upon redemption. Investors expecting to redeem
during this six-year period should compare the cost of the CDSC plus the
aggregate annual Class B shares' 12b-1 fees to the cost of the initial sales
charge and 12b-1 fee on the Class A shares. Over time the expense of the annual
12b-1 fee on the Class B shares may be equal to or exceed the initial sales
charge and annual 12b-1 fee applicable to Class A shares.
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<PAGE> 306
For example, if a Fund's net asset value remains constant and assuming
no waiver of any 12b-1 fees, the aggregate 12b-1 fee with respect to Class B
shares of a Fund would equal or exceed the initial sales charge and aggregate
12b-1 fee of Class A shares approximately eight years after the purchase. In
order to reduce such fees for Class B Shareholders, Class B shares will be
automatically converted to Class A shares, as described above, at the end of a
seven-year period. This example assumes that the initial purchase of Class A
shares would be subject to the maximum initial sales charge of 5.75% for the
Stock Funds and 4.50% for the Bond Funds. This example does not take into
account the time value of money which reduces the impact of the Class B shares'
12b-1 fee on the investment, the benefit of having the additional initial
purchase price invested during the period before it is effectively paid out as a
12b-1 fee, fluctuations in net asset value, any waiver of 12b-1 fees or the
effect of different performance assumptions. For investors who are eligible to
purchase Class D shares, the purchase of Class D shares will usually be
preferable to purchasing Class A or Class B shares.
SIGNATURE GUARANTEE
A signature guarantee is required if the redemption is over $100,000,
or if your account registration has changed within the last 30 days, or if the
redemption check is made payable to anyone other than the registered
shareholder, or if the proceeds are sent to a bank account not previously
designated, or are mailed to an address other than the address of record. NAS
reserves the right to require a signature guarantee in other circumstances,
without notice. Based on the circumstances of each transaction, NAS reserves the
right to require that your signature be guaranteed by an authorized agent of an
"eligible guarantor institution," which includes, but is not limited to, certain
banks, credit unions, savings associations, and member firms of national
securities exchanges. A signature guarantee is designed to protect the
shareholder by helping to prevent an unauthorized person from redeeming shares
and obtaining the proceeds. A notary public is not an acceptable guarantor. In
certain special cases (such as corporate or fiduciary registrations), additional
legal documents may be required to ensure proper authorizations. If NAS decides
to require signature guarantees in all circumstances, shareholders will be
notified in writing prior to implementation of the policy.
VALUATION OF SHARES
The net asset value per share for each Fund is determined as of the
close of regular trading on the New York Stock Exchange (usually 4 P.M. Eastern
Time), each day that the Exchange is open and on such other days as the Board of
Trustees determines and on days in which there is sufficient trading in
portfolio securities of a Fund to materially affect the net asset value of that
Fund (the "Valuation Time").
The Funds will not compute net asset value on customary business
holidays, including Christmas, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day and
Thanksgiving.
The net asset value per share of a class is computed by adding the
value of all securities and other assets in a Fund's portfolio allocable to such
class, deducting any liabilities allocable to such class
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and any other liabilities charged directly to that class and dividing by the
number of shares outstanding in such class.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last quoted sale price on the principal exchange, or
if there is no sale on that day at the quoted bid price, or if the securities
are traded in the over-the-counter market, at the last quoted sale price, or if
no sale price, at the quoted bid prices; U.S. Government securities are valued
at the quoted bid price; all prices obtained from an independent pricing
organization. Money market obligations with remaining maturities of 10 days or
less purchased by a non-money market fund are valued at amortized cost in
accordance with provisions contained in Rule 2a-7 of the 1940 Act, as described
below. Securities for which 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 judgment of VMF or its designee are valued at
fair value in accordance with procedures adopted by the Board of Trustees.
The value of portfolio securities in the Money Market Fund is
determined on the basis of the amortized cost method of valuation in accordance
with Rule 2a-7 of the 1940 Act. This involves valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
The Trustees have adopted procedures whereby the extent of deviation,
if any, of the current net asset value per share calculated using available
market quotations from the Money Market Fund's amortized cost price per share,
will be determined at such intervals as the Trustees deem appropriate and are
reasonable in light of current market conditions. In the event such deviation
from the Money Market Fund's amortized cost price per share exceeds 1/2 of 1
percent, the Trustees will consider appropriate action which might include
withholding dividends or a revaluation of all or an appropriate portion of the
Money Market Fund's assets based upon current market factors.
The Trustees, in supervising the Money Market Fund's operations and
delegating special responsibilities involving portfolio management to VMF, have
undertaken as a particular responsibility within their overall duty of care owed
to the Money Market Fund's shareholders to assure to the extent reasonably
practicable, taking into account current market conditions affecting the Fund's
investment objectives, that the Money Market Fund's net asset value per share
will not deviate from $1.
Pursuant to its objective of maintaining a stable net asset value per
share, the Money Market Fund will only purchase investments with a remaining
maturity of 397 days or less and will maintain a dollar weighted average
portfolio maturity of 90 days or less.
INVESTOR STRATEGIES
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1 MONEY MARKET PLUS GROWTH--This strategy provides the security of
principal that the Money Market Fund offers plus the opportunity for
greater long-term capital appreciation through reinvestment of
dividends in one of the Stock Funds.
An initial investment of $5,000 or more is made in the Prime Shares of
the Money Market Fund, and monthly dividends are then automatically invested
into one or more of the Stock Funds chosen by you at such Stock Fund's current
offering price. Money Market Plus Growth gives investors stability of principal
through the Money Market Fund's stable share price, and its portfolio of high
quality, short-term money market investments. And the Money Market Fund offers
fast liquidity through unlimited free checking ($500 minimum), telephone
redemption, or NAS NOW. NOTE: Money Market Fund dividends reinvested into one of
the Stock Funds are subject to applicable sales charges.
2 MONEY MARKET PLUS INCOME--This strategy provides the security of principal
that the Money Market Fund offers plus the opportunity for greater income by
reinvesting dividends into one or more of the Bond Funds.
An initial investment of $5,000 or more is made in the Prime Shares of
the Money Market Fund and monthly dividends are then reinvested into one of the
Bond Funds chosen by you at such Fund's current offering price.
When short-term interest rates increase, Money Market Fund dividends
usually also rise. At the same time, share prices of the Bond Funds generally
decrease. So, with Money Market Plus Income, when you earn higher Money Market
Fund dividends, you can generally purchase more shares of one of the Bond Funds
at lower prices. Conversely, when interest rates and Money Market Fund dividends
decrease, the share prices of the Bond Funds usually increase--you will
automatically buy fewer shares of one of the Bond Funds at higher prices. The
Prime Shares of the Money Market Fund provides investors with stability of
principal, fast liquidity through unlimited free checking ($500 minimum),
telephone redemption, or NAS NOW. NOTE: Money Market Fund dividends reinvested
into one of the Bond Funds are subject to applicable sales charges.
3 AUTOMATIC ASSET ACCUMULATION--This is a systematic investment strategy which
combines automatic monthly transfers from your personal checking account to your
mutual fund account with the concept of Dollar Cost Averaging. With this
strategy, you invest a fixed amount monthly over an extended period of time,
during both market highs and lows. Dollar Cost Averaging can allow you to
achieve a favorable average share cost over time since your fixed monthly
investment buys more shares when share prices fall during low markets, and fewer
shares at higher prices during market highs. Although no formula can assure a
profit or protect against loss in a declining market, systematic investing has
proven a valuable investment strategy in the past.
You can get started with Automatic Asset Accumulation for as little as
$25 a month in a Fund. Another way to take advantage of the benefits that Dollar
Cost Averaging can offer is through the Money Market Plus Growth or Money Market
Plus Income investor strategies.
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4 AUTOMATIC ASSET TRANSFER--This systematic investment plan allows you to
transfer $25 or more to a Stock or Bond Fund from another Fund systematically,
monthly or quarterly, after Fund minimums have been met. The money is
transferred on the 25th day of the month as selected or on the preceding
business day. Dividends of any amount can be moved automatically from one Fund
to another at the time they are paid. This strategy can provide investors with
the benefits of Dollar Cost Averaging through an opportunity to achieve a
favorable average share cost over time. With this plan, your fixed monthly or
quarterly transfer from the Fund to any other Fund you select buys more shares
when share prices fall during low markets and fewer shares at higher prices
during market highs. Although no formula can assure a profit or protect against
loss in a declining market, systematic investing has proven a valuable
investment strategy in the past. For transfers from the Prime Shares of the
Money Market Fund to another Fund, sales charges may apply if not already paid.
5 AUTOMATIC WITHDRAWAL PLAN ($50 OR MORE)--You may have checks for any fixed
amount of $50 or more automatically sent bi-monthly, monthly, quarterly, three
times/year, semi-annually or annually, to you (or anyone you designate) from
your account.
NOTE: If you are withdrawing more shares than your account receives in
dividends, you will be decreasing your total shares owned, which will reduce
your future dividend potential. In addition, an Automatic Withdrawal Plan for
Class B shares will be subject to the applicable CDSC.
INVESTOR PRIVILEGES
The Funds offer the following privileges to shareholders. Additional
information may be obtained by calling NAS toll-free at 1-800-848-0920.
1 NO SALES CHARGE ON REINVESTMENTS--All dividends and capital gains will be
automatically reinvested free of charge in the form of additional shares within
the same Fund and class or another specifically requested Fund (but the same
class) unless you have chosen to receive them in cash on your application.
Unless requested in writing by the shareholder, the Trust will not mail checks
for dividends and capital gains of less than $5 but instead they will
automatically be reinvested in the form of additional shares, and you will
receive a confirmation.
2 EXCHANGE PRIVILEGE--The exchange privilege is a convenient way to exchange
shares from one Fund to another Fund in order to respond to changes in your
goals or in market conditions. HOWEVER, AN EXCHANGE IS A SALE AND PURCHASE OF
SHARES AND, FOR FEDERAL AND STATE INCOME TAX PURPOSES, MAY RESULT IN A CAPITAL
GAIN OR LOSS. The registration of the account to which you are making an
exchange must be exactly the same as that of the Fund account from which the
exchange is made, and the amount you exchange must meet the applicable minimum
investment of the Fund being purchased.
Exchanges Among Funds
Exchanges may be made among any of the Funds within the same class or
among any class in any of the Funds and Prime Shares of the Money Market Fund.
For certain exchanges of Class A shares among the Funds, you may pay the
difference between the sales charges, if a higher sales
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charge is applicable. Exchanges within Class B or Service Class shares may be
made without incurring a sales charge.
An exchange from the Prime Shares of the Money Market Fund into another
Fund will be subject to the applicable sales charge unless already paid. For an
exchange into the Prime Shares of the Money Market Fund, the CDSC aging period
for Class B shares will be stopped during the time period such Money Market Fund
shares are held. If the Money Market Fund shares are subsequently sold, a CDSC
will be charged at the level that would have been charged had the shares been
sold at the time when they were exchanged into the Money Market Fund. If the
Money Market Fund shares are exchanged back into Class B shares, the CDSC aging
period will continue from the point in time when the shares were originally
exchanged into the Money Market Fund.
There is no administrative fee or exchange fee. The Trust reserves the
right to reject any exchange request it believes will result in excessive
transaction costs, or otherwise adversely affect other shareholders. For a
description of CDSC see "Class B Shares of the Stock and Bond Funds and CDSC."
The Trust reserves the right to change the exchange privilege upon at least 60
days' written notice to shareholders.
EXCHANGES MAY BE MADE THREE CONVENIENT WAYS:
BY TELEPHONE
NAS NOW--You can automatically process exchanges by calling
1-800-637-0012, 24 hours a day, seven days a week. However, if you
declined the option in the application, you will not have this
automatic exchange privilege. NAS NOW also gives you quick, easy access
to mutual fund information. Select from a menu of choices to conduct
transactions and hear fund price information, mailing and wiring
instructions as well as other mutual fund information. You must call
our toll-free number by the Valuation Time to receive that day's
closing share price. The Valuation Time is the close of regular trading
of the New York Stock Exchange, which is usually 4:00 p.m. Eastern
Time.
CUSTOMER SERVICE LINE--By calling 1-800-848-0920, you may exchange
shares by telephone. Requests may be made only by the account owner(s).
You must call our toll-free number by the Valuation Time to receive
that day's closing share price. The Valuation Time is the close of
regular trading of the New York Stock Exchange, which is usually 4:00
p.m. Eastern Time.
NAS may record all instructions to exchange shares. NAS reserves the
right at any time without prior notice to suspend, limit or terminate
the telephone exchange privilege or its use in any manner by any person
or class.
The Funds will employ the same procedure described under "Buying,
Selling and Exchanging Fund Shares" in the Prospectus to confirm that
the instructions are genuine.
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The Funds will not be liable for any loss, injury, damage, or expense
as a result of acting upon instructions communicated by telephone
reasonably believed to be genuine, and the Funds will be held harmless
from any loss, claims or liability arising from its compliance with
such instructions. These options are subject to the terms and
conditions set forth in the Prospectus and all telephone transaction
calls may be tape recorded. The Funds reserve the right to revoke this
privilege at any time without notice to shareholders and request the
redemption in writing, signed by all shareholders.
BY MAIL OR FAX-- Write or fax to Nationwide Advisory Services, Inc.,
Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or FAX (614)
249-8705. Please be sure that your letter or facsimile is signed exactly as your
account is registered and that your account number and the Fund from which you
wish to make the exchange are included. For example, if your account is
registered "John Doe and Mary Doe", "Joint Tenants With Right of Survivorship,'
then both John and Mary must sign the exchange request. The exchange will be
processed effective the date the signed letter or fax is received. Fax requests
received after 4 P.M. Eastern Time will be processed as of the next business
day. NAS reserves the right to require the original document if you use the fax
method.
3 NO SALES CHARGE ON A REPURCHASE--If you redeem all or part of your Class A or
D shares on which you paid a front-end sales charge, you have a one-time
privilege to reinvest all or part of the redemption proceeds in any shares of
the same class, without a sales charge, within 30 days after the effective date
of the redemption. If you redeem Class B shares, and then reinvest the proceeds
in Class B shares within 30 days, NAS will reinvest an amount equal to any CDSC
you paid on redemption.
If you realize a gain on your redemption, the transaction is taxable,
and reinvestment will not alter any capital gains tax payable. If you realize a
loss and you use the reinstatement privilege, some or all of the loss will not
be allowed as a tax deduction depending upon the amount reinvested.
INVESTOR SERVICES
1 NAS NOW AUTOMATED VOICE RESPONSE SYSTEM--Our toll-free number 1-800-637-0012
will connect you 24 hours a day, seven days a week to NAS NOW. Through a
selection of menu options, you can conduct transactions, hear fund price
information, mailing and wiring instructions and other mutual fund information.
2 TOLL-FREE INFORMATION AND ASSISTANCE--Customer service representatives are
available to answer questions regarding the Funds and your account(s) between
the hours of 8 A.M. and 5 P.M. Eastern Time. Call toll-free:
1-800-848-0920 or contact NAS at our FAX telephone number (614) 249-8705.
3 RETIREMENT PLANS Shares of the Funds may be purchased for Self-Employed
Retirement Plans, Individual Retirement Accounts (IRAs), Roth IRAs, Educational
IRAs, Simplified Employee Pension
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Plans, Corporate Pension Plans, Profit Sharing Plans and Money Purchase Plans.
For a free information kit, call 1-800-848-0920.
4 SHAREHOLDER CONFIRMATIONS--You will receive a confirmation statement each time
a requested transaction is processed. However, no confirmations are mailed on
certain pre-authorized, systematic transactions. Instead, these will appear on
your next consolidated statement.
5 CONSOLIDATED STATEMENTS--Shareholders of the Stock Funds receive quarterly
statements as of the end of March, June, September and December. Shareholders of
the Bond and Money Market Funds receive monthly statements. Please review your
statement carefully and notify us immediately if there is a discrepancy or error
in your account.
For shareholders with multiple accounts, your consolidated statement
will reflect all your current holdings in the Funds. Your accounts are
consolidated by social security number and zip code. Accounts in your household
under other social security numbers may be added to your statement at your
request. Depending on which Funds you own, your consolidated statement will be
sent either monthly or quarterly. Only transactions during the reporting period
will be reflected on the statements. An annual summary statement reflecting all
calendar-year transactions in all your Funds will be sent after year-end.
6 AVERAGE COST STATEMENT--This statement may aid you in preparing your tax
return and in reporting capital gains and losses to the IRS. If you redeemed any
shares during the calendar year, a statement reflecting your taxable gain or
loss for the calendar year (based on the average cost you paid for the redeemed
shares) will be mailed to you following each year-end. Average cost can only be
calculated on accounts opened on or after January 1, 1984. Fiduciary accounts
and accounts with shares acquired by gift, inheritance, transfer, or by any
means other than a purchase cannot be calculated.
Average cost is one of the IRS approved methods available to compute
gains or losses. You may wish to consult a tax advisor on the other methods
available. The average cost information will not be provided to the IRS. If you
have any questions, contact one of our service representatives at
1-800-848-0920.
7 SHAREHOLDER REPORTS--All shareholders will receive reports semi-annually
detailing the financial operations of the funds.
8 PROSPECTUSES--Updated prospectuses will be mailed to you annually.
9 UNDELIVERABLE MAIL--If mail from NAS to a shareholder is returned as
undeliverable on three or more consecutive occasions, NAS will not send any
future mail to the shareholder unless it receives notification of a correct
mailing address for the shareholder. Any dividends that would be payable by
check to such shareholders will be reinvested in the shareholder's account until
NAS receives notification of the shareholder's correct mailing address.
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FUND PERFORMANCE ADVERTISING
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 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 a 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 for Class A shares, the current maximum
applicable sales charge is deducted from the initial investment. For Class B
shares, the payment of the applicable CDSC is applied to the investment result
for the period shown. 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.
Standardized yield and total return quotations will be compared
separately for each class of shares. Because of differences in the fees and/or
expenses borne by each class of shares of the Funds, the net yields and total
returns on each class can be expected, at any given time, to differ from class
to class for the same period.
The Nationwide High Yield Bond Fund and the Morley Enhanced Income may
also from time to time advertise a uniformly calculated yield quotation. This
yield is calculated by dividing the net investment income per share earned
during a 30-day base period by the maximum offering price per share on the last
day of the period, assuming reinvestment of all dividends and distributions.
This yield formula uses the average number of shares entitled to receive
dividends, provides for semi-annual compounding of interest, and includes a
modified market value method for determining amortization. The yield will
fluctuate, and there is no assurance that the yield quoted on any given occasion
will remain in effect for any period of time. The effect of sales charges are
not reflected in the calculation of the yields, therefore, a shareholders actual
yield may be less.
NONSTANDARD RETURNS
The Funds 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.
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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.
The Balanced Fund may also from time to time advertise a uniformly
calculated yield quotation. This yield is calculated by dividing the net
investment income per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period, assuming reinvestment of
all dividends and distributions. This yield formula uses the average number of
shares entitled to receive dividends, provides for semi-annual compounding of
interest, and includes a modified market value method for determining
amortization. The yield will fluctuate, and there is no assurance that the yield
quoted on any given occasion will remain in effect for any period of time.
RANKINGS AND RATINGS IN FINANCIAL PUBLICATIONS
The Funds may report their performance relative to other mutual funds
or investments. The performance comparisons are made to: other mutual funds with
similar objectives; other mutual funds with different objectives; or, to other
sectors of the economy. Other investments which the Funds may be compared to
include, but are not limited to: precious metals; real estate; stocks and bonds;
closed-end funds; market indexes; fixed-rate, insured bank CDs, bank money
market deposit accounts and passbook savings; and the Consumer Price Index.
Normally these rankings and ratings are published by independent
tracking services and publications of general interest including, but not
limited to: Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar,
Donoghue's, Schabaker Investment Management, Kanon Bloch Carre & Co.; magazines
such as Money, Fortune, Forbes, Kiplinger's Personal Finance Magazine, Smart
Money, Mutual Funds, Worth, Financial World, Consumer Reports, Business Week,
Time, Newsweek, U.S. News and World Report; and other publications such as the
Wall Street Journal, Barron's, Columbus Dispatch, Investor's Business Daily, and
Standard & Poor's Outlook.
The rankings may or may not include the effects of sales charges.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Trust presently offers the following series of shares of beneficial
interest, without par value and with the various classes listed; four of these
series are the Funds:
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<TABLE>
<CAPTION>
Series Share Classes
- ------ -------------
<S> <C>
Nationwide Mid Cap Growth Fund Class A, Class B, Class D
Nationwide Growth Fund Class A, Class B, Class D
Nationwide Fund Class A, Class B, Class D
Nationwide Bond Fund Class A, Class B, Class D
Nationwide Tax-Free Income Fund Class A, Class B, Class D
Nationwide Long-Term U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Intermediate U.S. Government Bond Fund Class A, Class B, Class D
Nationwide Money Market Fund Class R, Prime Shares
Nationwide S&P 500 Index Fund Class R, Class Y,
Local Fund Shares
Morley Capital Accumulation Fund ISC Shares, IC Shares,
IRA Shares
Prestige Large Cap Value Fund Class A, Class B, Class Y
Prestige Large Cap Growth Fund Class A, Class B, Class Y
Prestige Small Cap Fund Class A, Class B, Class Y
Prestige Balanced Fund Class A, Class B, Class Y
Prestige International Fund Class A, Class B, Class Y
Nationwide Focus Fund Class A, Class B,
Institutional Class
Nationwide Small Cap Value Fund II Class A, Class B,
Institutional Class
Nationwide High Yield Bond Fund Class A, Class B,
Institutional Class
Morley Enhanced Income Fund Class A, Class Y,
Institutional Class
</TABLE>
You have an interest only in the assets of the shares of the Fund which
you own. Shares of a particular class are equal in all respects to the other
shares of that class. In the event of liquidation of a Fund, shares of the same
class will share pro rata in the distribution of the net assets of such Fund
with all other shares of that class. All shares are without par value and when
issued and paid for, are fully paid and nonassessable by the Trust. Shares may
be exchanged or converted as described in this Statement of Additional
Information and in the Prospectus but will have no other preference, conversion,
exchange or preemptive rights.
VOTING RIGHTS
Shareholders of each class of shares have one vote for each share held
and a proportionate fractional vote for any fractional 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
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investment objectives, policies and restrictions or the approval of an
Investment Advisory Agreement, the right to vote is limited to the holders of
shares of the particular fund affected by the proposal. In addition, holders of
Class A shares, Class B shares or Prime shares will vote as a class and not with
holders of any other class with respect to the approval of the Distribution
Plan.
To the extent that such a meeting is not required, the Trust does not
intend to have an annual or special meeting of shareholders. The Trust has
represented to the Commission that 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 Funds 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, a
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. In addition, to utilize the tax provisions specially applicable to
regulated investment companies, a 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, a Fund
may be subject to the tax laws of such states or localities. In addition, if for
any taxable year a 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
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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.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss, if any, is taxable to shareholders as long-term
capital gain, 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).
Capital losses may be used to offset capital gains. In addition, individuals may
deduct up to $3,000 of net capital loss each year to offset ordinary income.
Excess net capital loss may be carried forward and deducted in future years. The
holding period for long-term capital gains is more than one year.
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.
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Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of each Fund's assets to be invested in various countries is not known.
If less than 50% in value of any Fund's total assets at the end of its
fiscal year are 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 a 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 a Fund's taxable year will be
treated as sold for their then fair market value, resulting in additional gain
or loss to such Fund characterized in the manner described above.
If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the Fund may elect to "pass through" to its shareholders the amount of foreign
income taxes paid by the Fund. Pursuant to such election, shareholders would be
required (i) to include in gross income, even though not actually received,
their respective pro rata share of the foreign taxes paid by the Fund, (ii) to
treat their income from the Fund as being from foreign sources to the extent
that the Fund's income is from foreign sources, and (iii) to either deduct their
pro rata share of foreign taxes in computing their taxable income or use it as a
foreign tax credit against federal income (but not both). No deduction for
foreign taxes could be claimed by a shareholder who does not itemize deductions.
It is anticipated that the International Fund will be operated so as to
meet the requirements of the Code to "pass through" to its shareholders credits
for foreign taxes paid, although there can be no assurance that these
requirements will be met. Each shareholder will be notified within 45 days after
the close of the International Fund's taxable year whether the foreign taxes
paid by the International Fund will "pass through" for that year and, if so, the
amount of each shareholder's pro rata share of (i) the foreign taxes paid, and
(ii) the International Fund's gross income from foreign sources. Of course,
shareholders who are not liable for federal income taxes, such as retirement
plans qualified under Section 401 of the Code, will not be affected by any such
"pass through" of foreign tax credits.
If a Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the operation of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. In addition, gain realized from the
sale, other disposition, or marking-to-market of PFIC securities may be treated
as ordinary income under Section 1291 or Section 1296 of the Code.
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Offsetting positions held by a 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 a 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. A 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 a 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 a 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, a 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 a Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
In addition, the tax discussion in the Prospectus and 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.
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Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.
MAJOR SHAREHOLDERS
As of December ____, 1999, there were no outstanding shares of the
Funds. Immediately prior to the public offering of shares of the Funds, ____
owned all of the issued and outstanding shares of each Fund. It is anticipated
that upon the public offering of shares of the Funds, NAS' holdings will be
reduced below 5% of the outstanding shares of each Fund.
FINANCIAL STATEMENTS
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APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions
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or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
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Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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STATE AND MUNICIPAL NOTES
Excerpts from Moody's Investors Service, Inc., description of state and
municipal note ratings:
MIG-1--Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing from
established and board-based access to the market for refinancing, or both.
MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
MIG-3--Notes bearing this designation are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding grade.
Market access for refinancing, in particular, is likely to be less well
established.
FITCH IBCA INFORMATION SERVICES, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The ratings represent
Fitch's assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and represent the
lowest expectation of credit risk. The obligor has an
exceptionally strong capacity for timely
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payment of financial commitments, a capacity that is highly
unlikely to be adversely affected by foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. This rating indicates a very strong capacity
for timely payment of financial commitments, a capacity that
is not significantly vulnerable to foreseeable events.
A Bonds considered to be investment grade and represent a low
expectation of credit risk. This rating indicates a strong
capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in
economic conditions or circumstances than long term debt with
higher ratings.
BBB Bonds considered to be in the lowest investment grade and
indicates that there is currently low expectation of credit
risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in economic
conditions and circumstances are more likely to impair this
capacity.
BB Bonds are considered speculative. This rating indicates that
there is a possibility of credit risk developing, particularly
as the result of adverse economic changes over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Bonds are considered highly speculative. This rating indicates
that significant credit risk is present, but a limited margin
of safety remains. Financial commitments are currently being
met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC Bonds are considered a high default risk. Default is a real
and C possibility. Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' rating signal imminent default.
DDD, DD Bonds are in default. Such bonds are not meeting current
and D obligations and are extremely speculative. 'DDD' designates
the highest potential for recovery of amounts outstanding on
any securities involved and 'D' represents the lowest
potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
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These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security, (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
- ------------ ----------
<S> <C>
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent investment.
BBB- Considerable variability in risk during economic
cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
</TABLE>
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<TABLE>
<S> <C>
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or
company fortunes. Potential exists for
frequent Changes in the rating within this
category or into a higher or lower rating
grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and
risk can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or interest
payments.
DP Preferred stock with dividend arrearages.
</TABLE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with doubtful capacity
for payment.
D Debt rated 'D' is in payment default. the 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grade period.
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STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
The following criteria will be used in making the assessment:
1. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
2. Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be considered a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions on the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior capacity for
repayment of senior short-term debt obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: (I) leading market
positions in well established industries, (II) high rates of return on funds
employed, (III) conservative capitalization structures with moderate reliance on
debt and ample asset protection, (IV) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (V) well
established access to a range of financial markets and assured sources of
alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
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variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely
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payment only slightly less in degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin of
safety is not as great as for issues assigned F-1+ and F-1 ratings.
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DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
RATING SCALE DEFINITION
HIGH GRADE
D-1+ Highest certainty of timely payment. short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
SATISFACTORY GRADE
D-3 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE
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D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DEFAULT
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. Thomson
short-term ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 the highest category, indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 the second highest category, while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 the lowest investment-grade category; indicates that while the obligation
is more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4 the lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Amended Declaration of Trust previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(b) Amended Bylaws previously filed with the Trust's Registration Statement
on August 7, 1998, and is hereby incorporated by reference.
(c) Certificates for shares are not issued. Articles V, VI, VII, and VIII
of the Declaration of Trust, incorporated
by reference to Exhibit (1) hereto, define rights of holders of shares.
(d) (1) Investment Advisory Agreement (except for the Morley Capital
Accumulation Fund) previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(2) Investment Advisory Agreement for the Morley Capital Accumulation Fund
previously filed with the Trust's Registration Statement on January 5,
1999, and is hereby incorporated by reference.
(3) Subadvisory Agreements.
(a) Subadvisory Agreement with the Dreyfus Corporation for S & P
500 Index fund previously filed with the Trust's original
Registration Statement on November 18, 1997, and is hereby
incorporated by reference.
(b) Subadvisory Agreement for the Prestige Large Cap Value Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(c) Subadvisory Agreement for the Prestige Large Cap Growth Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(d) Subadvisory Agreement for the Prestige Small Cap Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(e) Subadvisory Agreement for the Prestige International Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(f) Subadvisory Agreement for the Prestige Balanced Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(e) (1) Underwriting Agreement previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(2) Model Dealer Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(f) Not applicable.
(g) Custody Agreement previously filed with the Trust's original
Registration Statement on November 18, 1997, and is hereby
incorporated by reference.
(h) (1) Fund Administration Agreement previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(2) Transfer and Dividend Disbursing Agent. previously filed with the
Trust's Registration Statement on January 5, 1999, and is hereby
incorporated by reference.
(3) Agreement and Plan of Reorganization between Nationwide Investing
Foundation and the Trust previously filed with the Trust's
Registration Statement on form N-14 ('33 Act File No. 333-41175) on
November 24, 1997, and is hereby incorporated by reference.
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(4) Agreement and Plan of Reorganization between Nationwide Investing
Foundation II and the Trust Previously filed with the Trust's
Registration Statement on Form N-14 ('33 Act File No. 333-41175) on
November 24, 1997, and is hereby incorporated by reference.
(5) Agreement and Plan of Reorganization between Financial Horizons
Investment Trust and the Trust previously filed with the Trust's
Registration Statement on Form N-14 ('33 Act File No. 333-41175) on
November 24, 1997 and is hereby incorporated by reference.
(6) Administrative Services Plan and Services Agreement previously filed
on January 5, 1999, and is hereby incorporated by reference.
(i) Opinion of Counsel filed previously and incorporated herein by
reference.
(j) Consent of KPMG LLP, Independent Auditors filed previously and is
hereby incorporated by reference.
(k) Not applicable.
(l) Purchase Agreement previously filed with Trust's Registration
Statement on January 2, 1998, and hereby incorporated by reference.
(m) (1) Amended Distribution Plan previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(2) Dealer Agreement (see Exhibit 6(b)) previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(3) Rule 12b-1 Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by
reference.
(n) Not applicable.
(o) Amended 18f-3 Plan previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
Power of Attorney dated November 7, 1997 previously filed in the Trust's
Pre-Effective Amendment and is hereby incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
No person is presently controlled by or under common control with
Registrant.
ITEM 25. INDEMNIFICATION
Indemnification provisions for officers, directors and employees of
Registrant are set forth in Article V, Section 5.2 of the Declaration
of Trust. In addition, Section 1743.13 of the Ohio Revised Code
provides that no liability to third persons for any act, omission or
obligation shall attach to the trustees, officers, employees or
agents of a business trust organized under Ohio statutes. The
trustees are also covered by an errors and omissions policy provided
by the Trust covering actions taken by the trustees in their capacity
as trustee. See Item 24(b)1 above.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Villanova Mutual Fund Capital Trust, ("VMF"), the investment
adviser of the Trust, also serves as investment adviser to
the Nationwide Separate Account Trust.
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The Directors of Villanova Capital, Inc., VMF's managing unitholder
and the officers of VMF are as follows:
<TABLE>
<S> <C>
Joseph J. Gasper Director and President and Chief Operating Officer
---------------------------------------------------
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Director and Chairman of the Board
----------------------------------
National Deferred
Compensation, Inc.
Nationwide Investment Services Corporation
Director and Vice Chairman
--------------------------
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Global Holdings, Inc.
Nationwide Retirement Solutions, Inc.
Neckura Life Insurance Company
NFS Distributors, Inc.
Pension Associates, Inc.
Villanova Capital, Inc.
Vice Chairman
-------------
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Director and President
----------------------
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Nationwide Financial Services (Bermuda) Ltd.
Wausau Preferred Health Insurance Company
Director
--------
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
Leben Direkt Insurance Company
Morley Financial Services, Inc.
Nationwide Indemnity Company
Neckura Holding Company
NGH Luxembourg, S.A.
PanEurolife
Trustee and Chairman
--------------------
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Trustee and President
---------------------
</TABLE>
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<TABLE>
<S> <C>
Nationwide Insurance Golf Charities, Inc.
Board of Managers
-----------------
Nationwide Services Company, LLC.
Dennis W. Click Vice President and Secretary
----------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Nationwide Services Company, LLC.
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Financial Institution Distributors Agency, Inc.
Nationwide International Underwriters
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of Wisconsin
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Gates McDonald & Company
GatesMcDonald Health Plus Inc.
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
National Casualty Company
National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Community Urban Redevelopment Corporation
Nevada Independent Companies-Construction
Nevada Independent Companies-Health and Nonprofit
Nevada Independent Companies-Hospitality and
Entertainment
Nevada Independent Companies-Manufacturing,
Transportation and Distribution
NFS Distributors, Inc.
Farmland Mutual Insurance Company
</TABLE>
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<TABLE>
<S> <C>
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Investment Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions, Inc. of Alabama
Nationwide Retirement Solutions, Inc. of Arizona
Nationwide Retirement Solutions, Inc. of Arkansas
Nationwide Retirement Solutions, Inc. of Montana
Nationwide Retirement Solutions, Inc. of Nevada
Nationwide Retirement Solutions, Inc. of New Mexico
Nationwide Retirement Solutions, Inc. of Ohio
Nationwide Retirement Solutions, Inc. of Oklahoma
Nationwide Retirement Solutions, Inc. of South Dakota
Nationwide Retirement Solutions, Inc. of Wyoming
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
MRM Investments, Inc.
National Premium and Benefit Administration Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Morley Financial Services, Inc.
Pension Associates, Inc.
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance Company
Assistant Secretary
-------------------
Nationwide Financial Services (Bermuda) Ltd.
Vice President and Assistant Secretary
--------------------------------------
ALLIED Group Merchant Banking Corporation
Vice President and Clerk
------------------------
Healthcare First, Inc.
Nationwide Retirement Solutions Insurance Agency, Inc.
Paul J. Hondros Director
--------
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
</TABLE>
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<TABLE>
<S> <C>
President and Chief Executive Officer
-------------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Dimon R. McFerson Chairman and Chief Executive Officer-Nationwide Insurance
---------------------------------------------------------
Enterprise and Director
-----------------------
ALLIED Group, Inc.
ALLIED Life Financial Corporation
Farmland Mutual Insurance Company
GatesMcDonald Health Plus, Inc.
Nationwide Agribusiness Insurance Company
National Casualty Company
Nationwide Financial Services, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Chairman and Chief Executive Officer and Director
-------------------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Colonial Insurance Company of Wisconsin
National Deferred Compensation, Inc.
Nationwide Cash Management Company
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Investment Services Corporation
Chairman and Chief Executive Officer, President and Director
------------------------------------------------------------
Nationwide Corporation
Chairman of the Board, Chairman and Chief Executive Officer
-----------------------------------------------------------
and Director
------------
American Marine Underwriters, Inc.
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Financial Institution Distributors Agency, Inc
Nationwide International Underwriters
Nationwide Investor Services, Inc.
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Wausau Preferred Health Insurance Company
Chairman of the Board, Chairman and Chief Executive
---------------------------------------------------
Officer-Nationwide Insurance Enterprise and Director
----------------------------------------------------
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing Company
</TABLE>
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<TABLE>
<S> <C>
ALLIED Group Merchant Banking Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Gates, McDonald and Company
Nationwide Retirement Solutions, Inc.
Nationwide Insurance Enterprise Services, Ltd.
Villanova Capital, Inc.
Trustee and Chairman
--------------------
Financial Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Mutual Funds
Chairman of the Board
---------------------
Nationwide Insurance Golf Charities, Inc.
Chairman of the Board and Director
----------------------------------
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Lone Star General Agency, Inc.
Nationwide Community Urban Redevelopment Corporation
Colonial County Mutual Insurance Company
Director
--------
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York
Healthcare First, Inc.
MRM Investments, Inc.
Morley Financial Services, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
Nevada Independent Companies-Construction
Nevada Independent Companies-Health and Nonprofit
Nevada Independent Companies-Hospitality and
Entertainment
Nevada Independent Companies-Manufacturing,
Transportation and Distribution
PanEurolife
Chairman of the Board, Chairman and Chief Executive
---------------------------------------------------
Officer and Trustee
-------------------
Nationwide Insurance Enterprise Foundation
Member-Board of Managers, Chairman of the Board,
------------------------------------------------
Chairman and Chief Executive Officer
------------------------------------
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
</TABLE>
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<TABLE>
<S> <C>
Nationwide Services Company, LLC.
Chairman and Chief Executive Officer
------------------------------------
Nationwide Insurance Company of Florida
Chairman and Chief Executive Officer-Nationwide Insurance
---------------------------------------------------------
Enterprise
----------
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Robert A. Oakley Executive Vice President-Chief Financial Officer
------------------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
ALLIED Group. Inc.
ALLIED Life Financial Corporation
CalFarm Insurance Company
Employers Life Insurance Company of Wausau
National Casualty Company
National Premium and Benefit Administration Company
Farmland Mutual Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Corporation
Nationwide Financial Services, Inc.
Nationwide Investment Services Corporation
Nationwide Investor Services, Inc.
Nationwide Insurance Enterprise Foundation
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Retirement Solutions, Inc.
Colonial County Mutual Insurance Company
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance Company
Director and Chairman of the Board
----------------------------------
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
Executive Vice President-Chief Financial Officer and
----------------------------------------------------
Director
--------
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Group Mortgage Company
</TABLE>
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<TABLE>
<S> <C>
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial Insurance Company of Wisconsin
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment Corporation
National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
Nationwide Services Company, LLC.
NFS Distributors, Inc.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Nationwide International Underwriters
Villanova Capital, Inc.
Director and Vice Chairman
--------------------------
Leben Direkt Insurance Company
Neckura General Insurance Company
Auto Direkt Insurance Company
Director
--------
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Healthcare First, Inc.
Morley Financial Services, Inc.
NGH Luxembourg, S.A.
PanEurolife
Board of Managers, Executive Vice President-Chief Financial
-----------------------------------------------------------
Officer
-------
Nationwide Insurance Enterprise Services, Ltd.
Susan A. Wolken Senior Vice President - Life Company Operations
-----------------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Senior Vice President - Life Company Operations and Director
------------------------------------------------------------
Nationwide Financial Services (Bermuda) Ltd.
Chairman of the Board and Director
----------------------------------
</TABLE>
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<TABLE>
<S> <C>
Nationwide Trust Company, FSB
Senior Vice President and Director
----------------------------------
Employers Life Insurance Company of Wausau
Pension Associates, Inc.
Wausau Preferred Health Insurance Company
Director
--------
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
Nationwide Advisory Services, Inc.
----------------------------------
Nationwide Financial Institution Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Investment Services Corporation
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions Insurance Agency, Inc.
Nationwide Retirement Solutions, Inc. of Alabama
Nationwide Retirement Solutions, Inc. of Arizona
Nationwide Retirement Solutions, Inc. of Arkansas
Nationwide Retirement Solutions, Inc. of Montana
Nationwide Retirement Solutions, Inc. of Nevada
Nationwide Retirement Solutions, Inc. of New Mexico
Nationwide Retirement Solutions, Inc. of Ohio
Nationwide Retirement Solutions, Inc. of Oklahoma
Nationwide Retirement Solutions, Inc. of South Dakota
Nationwide Retirement Solutions, Inc. of Wyoming
Villanova Capital, Inc.
Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer
-------------------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
</TABLE>
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<TABLE>
<S> <C>
Western Heritage Insurance Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of Wisconsin
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
Lone Star General Agency, Inc.
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Financial Services (Bermuda) Ltd.
Nationwide Agribusiness Insurance Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Insurance Enterprise Services, Ltd.
Nationwide Investment Services Corporation
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance Company
Director
--------
Healthcare First, Inc.
Morley Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Investors Services, Inc.
Member-Board of Managers and Vice Chairman
------------------------------------------
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Member-Board of Managers and Executive Vice President
-----------------------------------------------------
Chief Investment Officer
------------------------
Nationwide Services Company, LLC.
Director and President
----------------------
MRM Investments, Inc.
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment Corporation
Director and Executive Vice President-Chief Investment
------------------------------------------------------
Officer
-------
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
National Deferred Compensation, Inc.
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
Villanova Capital, Inc.
</TABLE>
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<TABLE>
<S> <C>
Director, Vice Chairman and Executive Vice President-Chief
----------------------------------------------------------
Investment Officer
------------------
ALLIED Group Mortgage Company
Trustee and Vice Chairman
-------------------------
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Christopher A. Cray Treasurer
---------
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Assistant Treasurer
-------------------
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
Nationwide Mutual Funds
</TABLE>
Except as otherwise noted, the principal business address of any company with
which any person specified above is connected in the capacity of director,
officer, employee, partner or trustee is One Nationwide Plaza, Columbus, Ohio
43215, except for the following companies:
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
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Colonial Insurance Company of Wisconsin
One Nationwide Plaza
Columbus, Ohio 43215
Scottsdale Insurance Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
P.O. Box 4110
Scottsdale, Arizona 85261-4110
Lone Star General Agency, Inc.
P.O. Box 14700
Austin, Texas 78761
Auto Direkt Insurance Company
Columbus Insurance Brokerage and Service, GMBH
Leben Direkt Insurance Company
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Nationwide Retirement Solutions, Inc.
Two Nationwide Plaza
Columbus, Ohio 43215
Morley Financial Services, Inc.
5665 S. W. Meadows Rd. , Suite 400
Lake Oswego, Oregon 97035
(b) UBT serves as investment adviser to the Morley Capital
Accumulation Fund. UBT, a trust company organized under the laws
of the State of Oregon, is a wholly owned subsidiary of
Nationwide Life Insurance Company. UBT conducts a variety of
trust activities.
To the knowledge of the Trust, none of the directors or officers
of UBT, except as set forth below, is or has been at any time
during the past two fiscal years engaged in any other business,
profession, vocation or employment of a substantial nature,
except that certain directors and officers also hold various
positions with and engage in business for Morley Financial
Services, Inc. The directors except as noted below may be
contacted C/O UBT, 5665 SW Meadows Rd., Suite 400, Lake Oswego,
Oregon 97035.
Donald C. Burdick, 434 Ridgeway Road, Lake Oswego, OR 97034
Mr. Burdick has been an independent consultant and investor
for the past 10 years. Prior to that he was President of
Investcorp Financial Services.
Harold H. Morley, President, CEO and Director of UBT. Mr. Morley
is Chairman and Chief Executive Officer of Morley Financial
Services, Inc.
Joan K. Hall, Senior Vice President, Corporate Secretary,
Financial Officer and Director of UBT. Ms. Hall is Senior Vice
President and Financial Officer of Morley Financial Services.
Greg E. Ellis, Senior Vice President/ Managing Director. Mr.
Ellis is also Senior Vice President/ Managing Director of Morley
Capital Management, Inc.
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Peter DeGraff, Vice President and Assistant General Manager.
Taylor E. Drake, Vice President.
Frederick F. Fletcher VI, Vice President and Corporate
Controller.
Barbara Salisbury, Vice President.
(c) Information for the Subadviser of the S&P 500 Index Fund
(1) The Dreyfus Corporation
The Dreyfus Corporation ("Dreyfus") acts as subadviser to
the S&P 500 Index Fund and as adviser or subadviser to a
number of other registered investment companies. The list
required by this Item 28 of officers and directors of
Dreyfus, together with information as to their other
business, profession, vocation or employment of a
substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by Dreyfus (SEC file No. 801-8147).
(d) Information for the Subadviser of the Prestige Large Cap Value
Fund
(1) Brinson Partners, Inc.
Brinson Partners, Inc. ("Brinson") acts as a subadviser
to the Prestige Large Cap Value Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 28 of
officers and directors of Brinson, together with
information as to their other business, profession,
vocation or employment of a substantial nature during
the past two fiscal years, is incorporated by reference
to Schedule A and D of Form ADV filed by Brinson (SEC
file No. 801-34910.)
(e) Information for the Subadviser of the Prestige Large Cap Growth Fund
(1) Goldman Sachs Asset Management
Goldman Sachs Asset Management ("Goldman") acts as a
subadviser to the Large Cap Growth Fund and as adviser
or subadviser to a number of other registered
investment companies. The list required by this Item 28
of officers and directors of Goldman, together with
information as to their other business, profession,
vocation or employment of a substantial nature during
the past two fiscal years, is incorporated by reference
to Schedule A and D of Form ADV filed by Goldman (SEC
file No. 801-16048.)
(f) Information for the Subadviser of the Prestige Balanced Fund
(1) J. P. Morgan Investment Management
J. P. Morgan Investment Management, Inc. ("JPMIM"), a
registered investment adviser, is a wholly owned
subsidiary of J. P. Morgan & Co. Incorporated. JPMIM
manages employee benefit plans for corporations and
unions. JPMIM also provides investment management
services for a broad spectrum of other institutional
investors, including foundations, endowments,
sovereign governments, and insurance companies.
To the knowledge of the Registrant, none of the
directors or executive officers of JPMIM is or has been
in the past two fiscal years engaged in any other
business or profession, vocation or employment of a
substantial nature, except that certain officers and
directors of JPMIM also hold various positions with,
and engage in business for, J.P. Morgan & Co.
Incorporated or Morgan Guaranty Trust Company of New
York, a New York trust company which is also a wholly
owned subsidiary of J. P. Morgan & Co. Incorporated.
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<PAGE> 347
(g) Information for the Subadviser of the Prestige Small Cap Fund
(1) Invesco Management & Research, Inc.
Invesco Management & Research, Inc. ("INVESCO") acts as a
subadviser to the Small Cap Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 28 of officers
and directors of INVESCO, together with information as to
their other business, profession, vocation or employment of
a substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by INVESCO (SEC file No. 801-01596.)
(h) Information for the Subadviser of the Prestige International Fund
(1) Lazard Asset Management
Lazard Asset Management ("Lazard") acts as subadviser to
the International Fund and as adviser or subadviser to a
number of other registered investment companies as well as
to separate institutional investors. The list required by
this Item 26 of officers and directors of Lazard, together
with information as to their other business, profession,
vocation or employment of a substantial nature during the
past 2 years, is incorporated by reference to Schedules A
and D of Form ADV filed by Lazard (SEC File No. 801-6568).
(i) Information for the Subadviser of the Nationwide Small Cap Value Fund
II
(1) Villanova Value Investors, LLC is in the process of being
formed. Information required by this item will be added in
a subsequent post-effective amendment.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) See Item 26 above.
(b) Nationwide Advisory Services, Inc.
<TABLE>
<CAPTION>
Position with Position
Name Business Address Underwriter with Registrant
---- ---------------- ----------- ---------------
<S> <C> <C> <C>
Dimon R. McFerson One Nationwide Plaza Chairman and CEO Chairman of Board of
Columbus OH 43215 Trustees
Joseph J. Gasper One Nationwide Plaza President and Director Vice Chairman of
Board
Columbus OH 43215 of Trustees
Robert A. Oakley One Nationwide Plaza Exec. VP - Chief Financial N/A
Columbus OH 43215 Officer and Director
Robert J. Woodward, Jr. One Nationwide Plaza Exec. VP - Chief Investment Trustee
Columbus OH 43215 Officer and Director
James F. Laird, Jr. Three Nationwide Plaza VP - General Manager Treasurer
Columbus OH 43215
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Edwin P. McCausland One Nationwide Plaza Senior VP - Fixed Income Assistant Treasurer
Columbus OH 43215 Securities
Joseph P. Rath One Nationwide Plaza VP - Compliance N/A
Columbus OH 43215
William G. Goslee One Nationwide Plaza Vice President N/A
Columbus OH 43215
Christopher A. Cray Three Nationwide Plaza Treasurer Assistant Treasurer
Columbus OH 43215
Susan A. Wolken Three Nationwide Plaza Director N/A
Columbus OH 43215
Dennis W. Click One Nationwide Plaza Vice President and Secretary N/A
Columbus OH 43215
Patricia J. Smith Three Nationwide Plaza Assistant Secretary Assistant Secretary
Columbus OH 43215
Elizabeth A. Davin One Nationwide Plaza Assistant Secretary Assistant Secretary
Columbus OH 43215
</TABLE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Christopher A. Cray
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable
C-16
<PAGE> 349
SIGNATURES
Pursuant to the requirements of the Securities Act 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 13 to this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Columbus, and State
of Ohio, on this fifteenth day of October 1999.
NATIONWIDE MUTUAL FUNDS
By: JAMES F. LAIRD, JR.
--------------------
James F. Laird, Jr., Treasurer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THE REGISTRATION
STATEMENT OF NATIONWIDE MUTUAL FUNDS HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON THE FIFTEENTH DAY OF OCTOBER 1999.
Signature & Title
- -----------------
Principal Executive Officer
DIMON R. MCFERSON*
- ------------------
Dimon R. McFerson, Trustee and Chairman
Principal Accounting and Financial Officer
JAMES F. LAIRD, JR.
- -------------------
James F. Laird, Jr., Treasurer
JOHN C. BRYANT*
- ---------------
John C. Bryant, Trustee
C. BRENT DEVORE
- ---------------
C. Brent Devore, Trustee
SUE A. DOODY*
- -------------
Sue A. Doody, Trustee
ROBERT M. DUNCAN*
- -----------------
Robert M. Duncan, Trustee
THOMAS J. KERR, IV*
- -------------------
Thomas J. Kerr, IV, Trustee
DOUGLAS F. KRIDLER*
- -------------------
Douglas F. Kridler, Trustee
NANCY C. THOMAS*
- ----------------
Nancy C. Thomas, Trustee
DAVID C. WETMORE*
- -----------------
David C. Wetmore, Trustee
*BY: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Attorney-In Fact
C-17
<PAGE> 350
SIGNATURES
Merrill Lynch Index Trust has duly caused this Post-Effective Amendment to the
Registration Statement of Nationwide Mutual Funds to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Plainsboro, and
State of New Jersey, on the fifteenth day of October, 1999.
MERRILL LYNCH INDEX TRUST
By: TERRY K. GLENN
--------------
Terry K. Glenn, President
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THE REGISTRATION
STATEMENT OF NATIONWIDE MUTUAL FUNDS HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON THE FIFTEENTH DAY OF OCTOBER 1999.
Signature and Title
- -------------------
Principal Executive Officer
TERRY K. GLENN
- --------------
Terry K Glenn, Trustee and President
Principal Accounting and Financial Officer
DONALD C. BURKE*
- ----------------
Donald C. Burke, Trustee and Treasurer
JACK B. SUNDERLAND*
- -------------------
Jack B. Sunderland, Trustee
STEPHEN B. SWENSRUD*
- --------------------
Stephen B. Swensrud, Trustee
J. THOMAS TOUCHTON*
- -------------------
J. Thomas Touchton, Trustee
*BY: TERRY K. GLENN
--------------
Terry K. Glenn, Attorney-In-Fact
C-18