<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 2000
NATIONWIDE MUTUAL FUNDS
GARTMORE MILLENNIUM GROWTH FUND (FORMERLY THE "NATIONWIDE MID CAP GROWTH FUND")
NATIONWIDE GROWTH FUND
NATIONWIDE 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 S & P 500 INDEX FUND
PRESTIGE LARGE CAP VALUE FUND
PRESTIGE LARGE CAP GROWTH FUND
PRESTIGE BALANCED FUND
PRESTIGE SMALL CAP FUND
PRESTIGE INTERNATIONAL FUND
MORLEY CAPITAL ACCUMULATION FUND
NORTHPOINTE SMALL CAP VALUE FUND
NATIONWIDE GROWTH FOCUS FUND
GARTMORE GLOBAL TECHNOLOGY AND COMMUNICATIONS FUND
NATIONWIDE GLOBAL LIFE SCIENCES FUND
GARTMORE EMERGING MARKETS FUND
GARTMORE INTERNATIONAL GROWTH FUND
GARTMORE GLOBAL LEADERS FUND
GARTMORE EUROPEAN GROWTH FUND
GARTMORE GLOBAL SMALL COMPANIES FUND
Nationwide Mutual Funds (the "Trust") is a registered open-end investment
company consisting of 37 series as of the date hereof. This Statement of
Additional Information relates to 24 series of the Trust which are 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 and should be read in
conjunction with the Prospectuses Gartmore Millennium Growth Fund (formerly the
"Nationwide Mid Cap Growth Fund"), Nationwide Growth Fund, Nationwide Fund,
Nationwide Bond Fund, Nationwide Tax-Free Income Fund, Nationwide Long-Term U.S.
Government Bond Fund, Nationwide Intermediate U.S. Government Bond Fund, and
Nationwide Money Market Fund (Prime Shares) dated March 1, 2000; the Prospectus
for the Nationwide S & P 500 Index Fund dated March 1, 2000; the Prospectus for
the Prestige Adviser Series (containing the Prestige Large Cap Value
i
<PAGE> 2
Fund, Prestige Large Cap Growth Fund, Prestige Balanced Fund, Prestige Small Cap
Fund and Prestige International Fund) dated March 1, 2000; the Prospectus for
the Morley Capital Accumulation Fund dated January 3, 2000 (as amended February
9, 2000); the Prospectus for the NorthPointe Small Cap Value Fund dated July 26,
2000; the Prospectus for the Nationwide Growth Focus Fund, Gartmore Global
Technology and Communications Fund and Nationwide Global Life Sciences Fund
dated September 1, 2000; and/or the Prospectus for the Gartmore Emerging Markets
Fund, Gartmore International Growth Fund, Gartmore Global Leaders Fund, Gartmore
European Growth Fund, and Gartmore Global Small Companies Fund dated September
1, 2000. 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 43216-1492, 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.............................................................................. 1
Additional Information on Portfolio Instruments and Investment Policies...................................... 1
Description of Portfolio Instruments and Investment Policies................................................. 6
Investment Restrictions...................................................................................... 44
Trustees and Officers of the Trust........................................................................... 49
Investment Advisory and Other Services....................................................................... 51
Brokerage Allocation......................................................................................... 73
Additional Information on Purchases and Sales................................................................ 76
Valuation of Shares.......................................................................................... 85
Investor Strategies.......................................................................................... 87
Investor Privileges.......................................................................................... 88
Investor Services............................................................................................ 90
Fund Performance Advertising................................................................................. 92
Additional Information....................................................................................... 96
Additional General Tax Information........................................................................... 97
Major Shareholders........................................................................................... 104
Financial Statements......................................................................................... 117
Appendix A - Bond Ratings.................................................................................... 118
</TABLE>
iii
<PAGE> 4
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 consists of 37 separate
series, each with its own investment objective. Each of the Funds, except for
the S&P 500 Index Fund and the International 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.
This Statement of Additional Information ("SAI") contains additional information
regarding both the principal and non-principal investment strategies of the
Funds. 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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<PAGE> 5
<TABLE>
<CAPTION>
Long-Term Intermediate
Quest Tax U.S. U.S.
(fka "Mid Free Government Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Growth") Growth Nationwide Bond Income Bond Bond
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y
Preferred stocks Y Y Y
Small company stocks Y Y
Special situation companies Y
Illiquid securities Y Y Y Y Y Y Y
Restricted securities Y Y Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y Y Y
Investment companies Y Y Y Y Y Y Y
Real estate investment trusts (REITS)
Securities of foreign issuers Y Y Y Y
Depository receipts Y Y Y
Securities from developing countries/emerging markets
Convertible securities Y Y Y
Long-term debt Y Y Y Y
Short-term debt Y Y Y Y Y Y Y
Floating and variable rate securities Y Y Y Y Y Y Y
Zero coupon securities Y Y Y Y
Pay-in-kind bonds
Deferred payment securities
Non-investment grade debt Y Y
Loan participations and assignments
Sovereign debt (foreign) Y
Foreign commercial paper
Duration Y Y
U.S. Government securities Y Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y Y
Prestige Prestige
S&P Large Large Prestige
Money 500 Cap Cap Prestige Small
TYPE OF INVESTMENT OR TECHNIQUE Market Index Value Growth Balanced Cap
<S> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y Y Y
Preferred stocks Y Y Y
Small company stocks Y Y Y Y
Special situation companies Y Y Y Y Y
Illiquid securities Y Y Y Y
Restricted securities Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y
Investment companies Y Y Y Y Y
Real estate investment trusts (REITS) Y Y Y
Securities of foreign issuers Y Y Y Y Y
Depository receipts Y Y Y Y
Securities from developing countries/emerging markets Y
Convertible securities Y Y Y Y
Long-term debt Y Y Y Y
Short-term debt Y Y Y Y Y Y
Floating and variable rate securities Y Y Y Y Y
Zero coupon securities Y Y Y
Pay-in-kind bonds Y
Deferred payment securities Y Y Y
Non-investment grade debt Y
Loan participations and assignments Y Y Y Y
Sovereign debt (foreign) Y Y Y Y Y
Foreign commercial paper
Duration Y
U.S. Government securities Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y
NorthPointe
Morley Small
Prestige Capital Cap
TYPE OF INVESTMENT OR TECHNIQUE International Accumulation Value
<S> <C> <C> <C>
U.S. common stocks Y
Preferred stocks Y
Small company stocks Y Y
Special situation companies Y Y
Illiquid securities Y Y Y
Restricted securities Y Y Y
When-issued / delayed-delivery securities Y Y Y
Investment companies Y Y
Real estate investment trusts (REITS) Y
Securities of foreign issuers Y Y Y
Depository receipts Y Y
Securities from developing countries/emerging markets Y
Convertible securities Y Y
Long-term debt Y
Short-term debt Y Y Y
Floating and variable rate securities Y Y Y
Zero coupon securities Y
Pay-in-kind bonds
Deferred payment securities Y
Non-investment grade debt
Loan participations and assignments
Sovereign debt (foreign) Y Y
Foreign commercial paper Y
Duration
U.S. Government securities Y Y Y
Money market instruments Y Y Y
</TABLE>
2
<PAGE> 6
<TABLE>
<CAPTION>
Global
Growth Global Life Emerging International Global
TYPE OF INVESTMENT OR TECHNIQUE Focus Technology Sciences Markets Growth Leaders
<S> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y Y
Preferred stocks Y Y Y Y Y
Small company stocks Y Y Y Y Y Y
Special situation companies Y Y Y Y Y
Illiquid securities Y Y Y Y Y Y
Restricted securities Y Y Y Y Y
When-issued / delayed-delivery securities Y Y
Investment companies Y Y Y
Real estate investment trusts (REITS) Y Y Y Y Y Y
Securities of foreign issuers Y Y Y Y Y Y
Depository receipts Y Y Y Y Y
Securities from developing countries/emerging markets Y Y Y Y Y Y
Convertible securities Y Y Y Y Y Y
Long-term debt
Short-term debt Y Y Y Y Y Y
Floating and variable rate securities
Zero coupon securities
Pay-in-kind bonds
Deferred payment securities
Non-investment grade debt
Loan participations and assignments
Sovereign debt (foreign) Y Y Y
Foreign commercial paper Y Y Y
Duration Y Y Y
U.S. Government securities Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y
Global
European Small
TYPE OF INVESTMENT OR TECHNIQUE Growth Companies
<S> <C> <C>
U.S. common stocks Y Y
Preferred stocks Y Y
Small company stocks Y Y
Special situation companies Y Y
Illiquid securities Y Y
Restricted securities Y Y
When-issued / delayed-delivery securities Y Y
Investment companies
Real estate investment trusts (REITS) Y Y
Securities of foreign issuers Y Y
Depository receipts Y Y
Securities from developing countries/emerging markets Y Y
Convertible securities Y Y
Long-term debt
Short-term debt Y Y
Floating and variable rate securities
Zero coupon securities
Pay-in-kind bonds
Deferred payment securities
Non-investment grade debt
Loan participations and assignments
Sovereign debt (foreign) Y Y
Foreign commercial paper Y Y
Duration Y Y
U.S. Government securities Y Y
Money market instruments Y Y
</TABLE>
3
<PAGE> 7
<TABLE>
<CAPTION>
Long-Term Intermediate
Quest Tax U.S. U.S.
(fka "Mid Free Government Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Growth") Growth Nationwide Bond Income Bond Bond
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities Y Y Y
Stripped mortgage securities Y Y Y
Collateralized mortgage obligations Y Y Y
Mortgage dollar rolls
Asset-backed securities Y Y Y Y Y Y Y
Bank obligations Y Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements
Warrants Y Y Y
Futures Y Y Y
Options Y Y Y
Foreign currencies
Forward currency contracts Y Y Y
Borrowing money Y Y Y Y Y Y Y
Lending portfolio securities Y Y Y Y Y Y Y
Short sales
Participation Interests
Swap Agreements
Wrap Contracts
Indexed securities
Prestige Prestige
S&P Large Large Prestige
Money 500 Cap Cap Prestige Small Prestige
TYPE OF INVESTMENT OR TECHNIQUE Market Index Value Growth Balanced Cap International
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities Y Y
Stripped mortgage securities Y Y
Collateralized mortgage obligations Y Y
Mortgage dollar rolls Y Y
Asset-backed securities Y Y Y
Bank obligations Y Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements Y Y
Warrants Y Y Y Y
Futures Y Y Y Y Y
Options Y Y Y Y Y
Foreign currencies Y Y Y Y
Forward currency contracts Y Y Y Y Y Y
Borrowing money Y Y Y Y Y Y Y
Lending portfolio securities Y Y Y Y Y Y Y
Short sales Y Y
Participation Interests Y
Swap Agreements Y Y Y
Wrap Contracts
Indexed securities
NorthPointe
Morley Small
Capital Cap
TYPE OF INVESTMENT OR TECHNIQUE Accumulation Value
<S> <C> <C>
Mortgage-backed securities Y
Stripped mortgage securities
Collateralized mortgage obligations Y
Mortgage dollar rolls Y
Asset-backed securities
Bank obligations Y Y
Repurchase agreements Y Y
Reverse repurchase agreements Y
Warrants Y
Futures Y
Options Y
Foreign currencies Y
Forward currency contracts Y
Borrowing money Y Y
Lending portfolio securities Y Y
Short sales
Participation Interests
Swap Agreements Y
Wrap Contracts Y
Indexed securities
</TABLE>
4
<PAGE> 8
<TABLE>
<CAPTION>
Global
Growth Global Life Emerging International Global
TYPE OF INVESTMENT OR TECHNIQUE Focus Technology Sciences Markets Growth Leaders
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
Stripped mortgage securities
Collateralized mortgage obligations
Mortgage dollar rolls Y
Asset-backed securities
Bank obligations Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y
Reverse repurchase agreements Y Y
Warrants Y Y Y Y
Futures Y Y Y Y Y Y
Options Y Y Y Y Y
Foreign currencies Y Y Y Y Y Y
Forward currency contracts Y Y Y Y Y Y
Borrowing money Y Y Y Y Y Y
Lending portfolio securities Y Y Y Y Y Y
Short sales Y Y Y Y Y
Participation Interests
Swap Agreements
Wrap Contracts
Indexed securities
Global
European Small
TYPE OF INVESTMENT OR TECHNIQUE Growth Companies
<S> <C> <C>
Mortgage-backed securities
Stripped mortgage securities
Collateralized mortgage obligations
Mortgage dollar rolls
Asset-backed securities
Bank obligations Y Y
Repurchase agreements Y Y
Reverse repurchase agreements
Warrants Y Y
Futures Y Y
Options Y Y
Foreign currencies Y Y
Forward currency contracts Y Y
Borrowing money Y Y
Lending portfolio securities Y Y
Short sales Y Y
Participation Interests
Swap Agreements
Wrap Contracts
Indexed securities
</TABLE>
5
<PAGE> 9
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.
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
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<PAGE> 10
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.
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.
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<PAGE> 11
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
Information Services, 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 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
8
<PAGE> 12
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:
- 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.
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<PAGE> 13
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.
The Federal Reserve creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the coupon payments and the
principal payment from an outstanding Treasury security and selling them as
individual securities. To the extent a Fund purchases the principal portion of
the STRIPS, the Fund will not receive regular interest payments. Instead they
are sold at a deep discount from their face value. The Fund will accrue income
on such STRIPS for tax and accounting purposes, in accordance with applicable
law, which income is distributable to shareholders. Because no cash is received
at the time such income is accrued, the Fund may be required to liquidate other
securities to satisfy its distribution obligations. Because the principal
portion of the STRIP does not pay current income, its price can be volatile when
interest rates change. In calculating its dividend, the Fund takes into account
as income a portion of the difference between the principal portion of the
STRIP's purchase price and its face value.
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.
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
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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 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
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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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Other types of securities representing
interests in a pool of mortgage loans are known as real estate mortgage
investment conduits ("REMICs").
Typically, CMOs are collateralized by GNMA, Fannie Mae or Freddie Mac
Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter
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referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. REMICs, which have elected to
be treated as such under the Internal Revenue Code, are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. Unless the context indicates otherwise, all references herein to
CMOs include REMICs and 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.
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
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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, certain
Funds 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. Such Funds 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 "ADDITIONAL GENERAL TAX INFORMATION" in this 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 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
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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.
MUNICIPAL SECURITIES
Municipal securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term municipal securities, ONLY if the interest paid
thereon is exempt from federal taxes.
Other types of municipal securities include short-term General Obligation
Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes, Project Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and
other forms of short-term tax-exempt loans. Such instruments are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues. In addition, the Tax-Free Income Fund may
invest in other types of tax-exempt instruments, such as municipal bonds,
private activity bonds, and pollution control bonds.
Project Notes are issued by a state or local housing agency and are sold
by the Department of Housing and Urban Development. While the issuing agency has
the primary obligation with respect to its Project Notes, they are also secured
by the full faith and credit of the United States through agreements with the
issuing authority which provide that, if required, the federal government will
lend the issuer an amount equal to the principal of and interest on the Project
Notes.
The two principal classifications of municipal securities consist of
"general obligation" and "revenue" issues. The Tax-Free Income Fund may also
acquire "moral obligation" issues, which are normally issued by special purpose
authorities. There are, of course, variations in the quality of municipal
securities, both within a particular classification and between classifications,
and the yields on municipal securities depend upon a variety of factors,
including the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Ratings represent the opinions of an
NRSRO as to the quality of municipal securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality, and
municipal securities with the same maturity, interest rate and rating may have
different yields, while municipal securities of the same maturity and interest
rate with different ratings may have the same yield. Subsequent to purchase, an
issue of municipal securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase. The adviser will consider such
an event in determining whether the Fund should continue to hold the obligation.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or
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ability of an issuer to meet its obligations for the payment of interest on and
principal of its municipal securities may be materially adversely affected by
litigation or other conditions.
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;
- bank obligations;
- 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 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.
- extendable commercial notes which are obligations underwritten by
Goldman Sachs, which differ from traditional commercial paper because the issuer
can extend the maturity of the note up to 390 days with the option to call the
note any time during the extension period. Because extension will occur when the
issuer does not have other viable options for lending, these notes are
considered illiquid and the Money Market Fund will be limited to holding no more
than 10% of its net assets in these and any other illiquid securities.
WRAP CONTRACTS
The Morley Capital Accumulation Fund purchases wrap contracts for the
purpose of attempting to maintain a constant net asset value ("NAV") of $10.00
per share. A wrap contract is a contract between the Fund and a financial
institution such as a bank, insurance company or other financial
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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 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.
The Fund will pay premiums to wrap providers for wrap contracts, and these
premiums will be an ongoing expense of the Fund. Wrap contracts obligate wrap
providers to make certain payments to the Fund in exchange for payment of
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 on 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 hold 1 to 3 percent of its assets as cash or cash
equivalents which can be sold close to book value to fund redemption requests.
If circumstances arise that require the Fund to liquidate assets other than
cash, and if the fair market value of those other 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 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. Wrap contracts may also
allow providers to terminate their contracts if the Fund changes the investment
objectives, policies and restrictions set forth in the
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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.
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 to
enable it to maintain the price of the Fund at $10.00 per share. 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 determines in good faith the value of each of
the Fund's wrap contracts and has established 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 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 generally cause those assets to be
removed from coverage under wrap contracts, in which event the Fund may
experience a decrease in NAV.
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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.
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 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 reviews the
creditworthiness of those banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate these risks.
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.
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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. BANK OBLIGATIONS MAY BE ISSUED BY DOMESTIC BANKS (INCLUDING THEIR
BRANCHES LOCATED OUTSIDE THE UNITED STATES), DOMESTIC AND FOREIGN BRANCHES OF
FOREIGN BANKS AND SAVINGS AND LOAN ASSOCIATIONS.
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 its adviser or
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 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,
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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.
Indexed Securities The S&P 500 Index Fund 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, the 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 the Fund 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.
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
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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 adviser or
subadviser of such a Fund believes, however, that if it 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.
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
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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.
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
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voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities.
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 for 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.
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 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 maturity will change in proportion to the change (if
any) in the exchange rate between two specified currencies
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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 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.
REAL ESTATE INVESTMENT TRUSTS
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
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
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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.
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 accretes 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
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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 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
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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 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
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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, the Fund's
adviser or 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 lists investment
companies as an accredited investor.
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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 Fund's adviser or subadviser
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 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, forward currency
contracts and swaps, 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.
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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.
(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.
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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 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, Non-Publicly Traded 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.
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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.
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.
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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. 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
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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 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
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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.
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
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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 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
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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 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
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<PAGE> 43
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.
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.
SPDRS. The S & P 500 Index Fund may invest in Standard & Poor's Depository
Receipts ("SPDRs"). SPDRs are interests in unit investment trusts. Such
investment trusts invest in a securities portfolio that includes substantially
all of the common stocks (in substantially the same weights) as the common
stocks included in a particular Standard & Poor's Index such as the S&P 500.
SPDRs are traded on the American Stock Exchange, but may not be redeemed. The
results of SPDRs will not match the performance of the designated S&P Index due
to reductions in the SPDRs' performance attributable to transaction and other
expenses, including fees paid by the SPDR to service providers. SPDRs distribute
dividends on a quarterly basis.
SPDRs are not actively managed. Rather, a SPDR's objective is to track the
performance of a specified index. Therefore, securities may be purchased,
retained and sold by SPDRs at times when an actively managed trust would not do
so. As a result, you can expect greater risk of loss (and a correspondingly
greater prospect of gain) from changes in the value of the securities that are
heavily weighted in the index than would be the case if SPDR was not fully
invested in such securities. Because of this, a SPDRs price can be volatile, the
S & P 500 Index Fund may sustain sudden, and sometimes substantial, fluctuations
in the value of its investment in SPDRs.
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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. 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 or adjustable rate securities
changes at preset times based upon an underlying index. 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.
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 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.
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<PAGE> 45
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 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
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<PAGE> 46
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 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
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<PAGE> 47
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.
Each of the Funds:
- May not (except for the S&P 500 Index Fund and the International Fund)
purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the Fund's total assets
would be invested in such issuer or the Fund would hold more than 10% of
the outstanding voting securities of the issuer, except that 25% or less of
the Fund's total assets may be invested without regard to such limitations.
There is no limit to the percentage of assets that may be invested in U.S.
Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. The Money Market Fund
will be deemed to be in compliance with this restriction so long as it is
in compliance with Rule 2a-7 under the 1940 Act, as such Rule may be
amended from time to time.
- 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 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 or Statement of Additional
Information of such Fund.
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<PAGE> 48
- May not purchase the securities of any issuer if, as a result, 25% or more
than (taken at current value) of the Fund's total assets would be invested
in the securities of issuers, the principal activities of which are in the
same industry. This limitation does not apply to securities issued by the
U.S. Government or its agencies or instrumentalities. The following
industries are considered separate industries for purposes of this
investment restriction: electric, natural gas distribution, natural gas
pipeline, combined electric and natural gas, and telephone utilities,
captive borrowing conduit, equipment finance, premium finance, leasing
finance, consumer finance and other finance. For the Nationwide Tax-Free
Income Fund, this limitation does not apply to obligations issued by state,
county or municipal governments.
In addition, each of Gartmore Millenium Growth Fund (formerly the
"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, Money Market Fund, S&P 500 Index Fund, Morley Capital
Accumulation Fund, Nationwide Growth Focus Fund, Global Technology and
Communications Fund, Global Life Sciences Fund, Large Cap Value Fund, Large Cap
Growth Fund, Balanced Fund, Small Cap Fund, International Fund and NorthPointe
Small Cap Value Fund:
- May not purchase or sell real estate, except that each Fund may (i) acquire
real estate through ownership of securities or instruments and sell any
real estate acquired thereby, (ii) purchase or sell instruments secured by
real estate (including interests therein), and (iii) purchase or sell
securities issued by entities or investment vehicles that own or deal in
real estate (including interests therein).
- May not lend any security or make any other loan, except that each Fund may
in accordance with its investment objective and policies (i) lend portfolio
securities, (ii) purchase and hold debt securities or other debt
instruments, including but not limited to loan participations and
subparticipations, assignments, and structured securities, (iii) make loans
secured by mortgages on real property, (iv) enter into repurchase
agreements, and (v) make time deposits with financial institutions and
invest in instruments issued by financial institutions, and enter into any
other lending arrangement as and to the extent permitted by the Investment
Company Act of 1940 or any rule, order or interpretation thereunder.
The S&P 500 Index Fund and the International Fund:
- May not purchase securities of one issuer, other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, if at
the end of each fiscal quarter, (a) more than 5% of the Fund's total assets
(taken at current value) would be invested in such issuer (except that up
to 50% of the Fund's total assets may be invested without regard to such 5%
limitation), and (b) more than 25% of its total assets (taken at current
value) would be invested in securities of a single issuer. There is no
limit to the percentage of assets that may be invested in U.S. Treasury
bills, notes, or other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
The NorthPointe Small Cap Value Fund:
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- May not borrow money or issue senior securities, except that the Fund may
enter into reverse repurchase agreements and may otherwise borrow money and
issue senior securities as and to the extent permitted by the 1940 Act or
any rule, order or interpretation thereunder.
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%
(10% with respect to the Money Market Fund) of its net assets would be
invested in securities that are illiquid. If any percentage restriction or
requirement described above is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in net
asset value will not constitute of such restriction or requirement.
However, should a change in net asset value or other external events cause
a Fund's investments in illiquid securities including repurchase agreements
with maturities in excess of seven days, to exceed the limit set forth
above for such Fund's investment in illiquid securities, a Fund will act to
cause the aggregate amount such securities to come within such limit as
soon as reasonably practicable. In such event, however, such Fund would not
be required to liquidate any portfolio securities where a Fund would suffer
a loss on the sale of such securities.
- Purchase securities of other investment companies except (a) in connection
with a merger, consolidation, acquisition, reorganization or offer of
exchange, or (b) to the extent permitted by the 1940 Act or any rules or
regulations thereunder or pursuant to any exemptions therefrom.
- 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.
- Purchase securities when bank borrowings exceed 5% such Fund's total
assets.
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.
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The principal occupation of the Trustees and Officers during the last five
years, their ages, their addresses and their affiliations are:
CHARLES E. ALLEN, Age 52
[ Address ]
Mr. Allen is Chairman, Chief Executive Officer and President of the Graimark
family of companies (real estate development, investment and asset management).
PAULA H.J. CHOLMONDELEY, Age 50
[ Address]
Ms. Cholmondeley is Vice President and General Manager of Specialty Products at
Sappi Fire Paper North America. Prior to that, she held various positions with
Owens Corning, including Vice President & General Manager of the Residential
Insulation Division, President of the MIRAFLEX Fibers Division, and Vice
President of Business Development and Global Sourcing.
C. BRENT DEVORE, Trustee, Age 59
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
ROBERT M. DUNCAN, Trustee(1), Age 72
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.
JOSEPH J. GASPER(2), Age 54
One Nationwide Plaza Columbus, Ohio 43215
Mr. Gasper is Director, President and Chief Operating Officer for Nationwide
Life and Annuity Insurance Company and Nationwide Life Insurance Company. Prior
to that, he was Executive Vice President and Senior Vice President for the
Nationwide Insurance Enterprise.
BARBARA HENNIGAR, Age 64
[Address]
Ms. Hennigar is Chairman of OppenheimerFunds Services and Shareholder Services
Inc. Prior to that, she served as President and Chief Executive Officer of
OppenheimerFunds Services.
PAUL J. HONDROS(2), Age 51
[Address]
Mr. Hondros is President and Chief Executive Officer of Villanova Mutual Fund
Capital Trust, Villanova Capital, Inc. and Villanova SA Trust. Prior to that,
Mr. Hondros served as President and Chief Operations Officer of Pilgrim Baxter
and Associates, Ltd., an investment management firm, and its affiliated fixed
income investment management arm, Pilgrim Baxter Value Investors, Inc. and as
Executive Vice President to the PBHG Funds, PBHG Insurance Series Funds and PBHG
Adviser Funds. Prior thereto, he served as President and Chief Executive Officer
of Fidelity Investment Institutional Services Co.
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<PAGE> 51
THOMAS J. KERR, IV, Trustee(1), Age 66
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 44
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.
DIMON R. MCFERSON, Trustee and Chairman(1, 2), Age 62
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is Chairman and Chief Executive Officer of Nationwide Insurance,
Nationwide Advisory Services, Inc., and Villanova Capital, Inc.
ARDEN L. SHISLER, Trustee(2), Age 58
P.O. Box 267, Dalton, Ohio 44618
Mr. Shisler is President and Chief Executive Officer of K&B Transport, Inc., a
trucking firm.
DAVID C. WETMORE, Trustee, Age 51
11495 Sunset Hills Rd - Suite 210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm and Director of Career Builder, Inc. and Walker Interactive Systems, Inc.
JAMES F. LAIRD, JR., Treasurer, Age 43
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor.
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.
-----------------------
(1) 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.
(2) A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.
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. Villanova Mutual Fund Capital Trust ("VMF") and Union
Bond and Trust ("UBT"), each pay a pro rata share for the Funds for which it
acts as investment adviser, reimburse 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 for the fiscal year ended October 31, 1999.
Trust officers receive no compensation from the Trust in their capacity as
officers.
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COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCRUED AS BENEFITS COMPENSATION
FROM PART OF TRUST UPON FROM THE FUND
NAME OF PERSON, POSITION THE TRUST EXPENSES RETIREMENT COMPLEX(1)
------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Charles E. Allen, Trustee(2) --0-- --0-- --0-- --0--
Paula H.J. Cholmondely, Trustee(2) --0-- --0-- --0-- --0--
C. Brent DeVore, Trustee 9,167 --0-- --0-- 18,167
Robert M Duncan, Trustee 9,167 --0-- --0-- 18,167
Joseph J. Gasper, Trustee(2) --0-- --0-- --0-- --0--
Barbara Hennigar, Trustee(2) --0-- --0-- --0-- --0--
Paul J. Hondros, Trustee(2) --0-- --0-- --0-- --0--
Thomas J. Kerr, IV, Trustee 9,167 --0-- --0-- 18,167
Douglas F. Kridler, Trustee 9,167 --0-- --0-- 18,167
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Arden L. Shisler, Trustee(3) --0-- --0-- --0-- --0--
David C. Wetmore, Trustee 9,167 --0-- --0-- 18,167
</TABLE>
--------------------
(1) The Fund Complex includes three trusts comprised of 67 investment company
funds or series.
(2) Mr. Allen, Ms. Cholmondeley, Mr. Gasper, Ms. Hennigar and Mr. Hondros were
elected as Trustees on July 26, 2000.
(3) Mr. Shisler was elected as Trustee on February 9, 2000.
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.
CODE OF ETHICS
Federal law requires the Trust, each of its investment advisers and
sub-advisers, and its principal underwriter to adopt codes of ethics which
govern the personal securities transactions of their respective personnel.
Accordingly, each such entity has adopted a code of ethics pursuant to which
their respective personnel may invest in securities for their personal accounts
(including securities that may be purchased or held by the Funds.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Under the terms of its Investment Advisory Agreement with the Trust,
Villanova Mutual Fund Capital Trust ("VMF") manages the investment of the assets
of the Funds, as well as the other funds of the Trust (except for the Morley
Capital Accumulation Fund, Morley Enhanced Income Fund,
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<PAGE> 53
Nationwide Small Cap Index Fund, Nationwide Mid Cap Market Index Fund,
Nationwide International Index Fund, Nationwide Bond Index Fund (collectively
the four index funds are referred as the "Index Funds"), Gartmore Emerging
Markets Fund, Gartmore International Growth Fund, Gartmore Global Leaders Fund,
Gartmore European Growth Fund and Gartmore Global Small Companies Fund in
accordance with the policies and procedures established by the Trustees. With
respect to the Gartmore Millenium Growth Fund (formerly the "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,
Money Market Fund, High Yield Bond Fund, and each of the Investor Destinations
Series of the Trust, VMF manages the day-to-day investments of the assets of
such Funds (the Focus Fund has not yet begun operations, but will be managed by
VMF when it does). With respect to each of the Prestige Advisor Series of the
Trust, the S&P 500 Index Fund, the Value Opportunities Fund, and the Small Cap
Value Fund, VMF provides investment management evaluation services in 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 officers affiliated with VMF and pays a
pro rata portion of the compensation and expenses of the Trustees affiliated
with VMF or Villanova SA Capital Trust, an affiliated entity. 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 Investment Company Act of 1940. 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
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
50
<PAGE> 54
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,
VGAMT and Union Bond & Trust Company reimburse the Trust for fees and expenses
paid to Trustees who are interested persons of the Trust.
VMF, a Delaware business trust, is a wholly owned subsidiary of Villanova
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 (95.24%) and Nationwide Mutual Fire
Insurance Company (4.76%), 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 Funds. Effective September 1, 1999, the
investment advisory services previously performed for the 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.
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<PAGE> 55
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 INVESTMENT ADVISORY FEE
<S> <C> <C>
Gartmore Millenium Growth Fund $0 up to $250 million 1.03%
(formerly the "Nationwide Mid Cap $250 million up to $1 billion 1.00%
Growth Fund"), Growth Fund, $1 billion up to $2 billion 0.97%
Nationwide Fund and $2 billion up to $5 billion 0.94%
Focus Fund $5 billion and more 0.91%
Bond Fund, Tax-Free Income $0 up to $250 million 0.50%
Fund, Long-Term U.S. $250 million up to $1 billion 0.475%
Government Bond Fund, and $1 billion up to $2 billion 0.45%
Intermediate U.S. Government $2 billion up to $5 billion 0.425%
Bond Fund $5 billion and more 0.40%
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%
S&P 500 Index Fund $0 up to $1.5 billion 0.13%
$1.5 up to $3 billion 0.12%
$3 billion and more 0.11%
Prestige Large Cap Value Fund up to $100 million 0.75%
and Prestige Balanced Fund $100 million or more 0.70%
Prestige Large Cap Growth up to $150 million 0.80%
$150 million or more 0.70%
Prestige Small Cap up to $100 million 0.95%
$100 million or more 0.80%
Prestige International up to $200 million 0.85%
$200 million or more 0.80%
Value Opportunities $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>
52
<PAGE> 56
<TABLE>
<CAPTION>
FUND ASSETS INVESTMENT ADVISORY FEE
---- ------ -----------------------
<S> <C> <C>
High Yield Bond $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%
Small Cap Value All assets 0.85%
Growth Focus(1) All assets 0.90%
Global Technology All assets 0.98%
Global Life Sciences All assets 0.53%
</TABLE>
-----------------------
(1) The investment advisory fee noted is a base fee and actual fees may be
higher or lower depending on the Fund's performance relative to its
benchmark, the Russell 2000 Growth Index. If the Fund outperforms its
benchmark by a set amount, the Fund will pay higher investment advisory
fees. Conversely, if the Fund underperforms its benchmark by a set amount,
the Fund will pay lower fees.
In the interest of limiting the expenses of the Funds, VMF may from time
to time waive some or all of its investment advisory fee or other fees for any
Fund of the Trust. In this regard, VMF has entered into an expense limitation
agreement with certain of the Funds (each an "Expense Limitation Agreement").
Pursuant to the Expense Limitation Agreements, VMF has agreed to waive or limit
its fees and to assume other expenses (except for Rule 12b-1 and Administrative
Service Fees) to the extent necessary to limit the total annual operating
expenses of each Class of each Fund to the limits described below. Please note
that 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.
VMF may request and receive reimbursement from the Fund of the advisory
fees waived or limited and other expenses reimbursed by VMF pursuant to the
Expense Limitation Agreement 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
below. 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 below; 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 has agreed to waive advisory fees, and if necessary, reimburse
expenses in order to limit annual fund operating expenses for certain of the
funds of the Trust as follows:
- Gartmore Millenium Growth Fund (formerly the "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
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<PAGE> 57
- Long-Term U.S. Government Bond Fund* and 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 Institutional Service Class shares
- Prestige Large Cap Growth Fund to 1.20% for Class A shares, 1.95% for Class
B shares and 1.05% for Institutional Service Class shares
- Prestige Balanced Fund to 1.10% for Class A shares, 1.85% for Class B
shares and 0.95% for Institutional Service Class shares
- Prestige Small Cap Fund to 1.35% for Class A shares, 2.10% for Class B
shares and 1.20% for Institutional Service Class shares
- Prestige Large Cap Value Fund to 1.30% for Class A shares, 2.05% for Class
B shares and 1.25% for Institutional Service Class shares
- S&P 500 Index Fund to 0.63% for Class A shares, 1.23% for Class B shares,
0.48% for Institutional Service Class shares, 0.63% for Service Class
shares, 0.23% for Institutional Class and 0.30% for Local Fund shares
- Focus Fund to 1.20% for Class A shares, 1.70% for Class B shares and 0.75%
for Institutional Service Class shares
- Value Opportunities Fund to 1.35% for Class A shares, 1.95% for Class B
shares and 1.00% for Institutional Service Class shares
- High Yield Bond Fund to 1.95% for Class A shares, 1.70% for Class B shares
and 0.70% for Institutional Service Class shares
- Small Cap Value Fund to 1.00% for Institutional Class shares
- Growth Focus Fund to 1.53% for Class A shares, 2.13% for Class B shares and
1.20% for Institutional Service Class shares
- Global Technology and Communications Fund to 1.73% for Class A shares,
2.33% for Class B shares and 1.40% for Institutional Service Class shares
- Global Life Sciences Fund to 1.23% for Class A shares, 1.83% for Class B
shares and 0.90% for Institutional Service Class shares
-----------------------
* No Expense Limitation Agreement is in place for these Funds.
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<PAGE> 58
During the fiscal years ended October 31, 1999, 1998 and 1997, VMF/NAS(1)
received the following fees for investment advisory services(2):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUND 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Gartmore Millenium Growth Fund (formerly the $66,283 $61,706 $63,883
"Nationwide Mid Cap Growth Fund")
Growth 5,873,926 4,894,110 3,750,599
Nationwide 13,888,390 9,977,231 5,938,011
Bond 674,918 647,809 629,068
Tax-Free Income 1,263,813 1,505,626 1,810,070
Long Term U.S. Government 198,048 254,928 343,259
Intermediate U.S. Government 314,314 266,473 256,016
Money Market 4,709,925 3,857,898(3) 3,519,727(3)
S&P 500 Index 79,372 7,315(4) --
Large Cap Value 62,525(5) -- --
Large Cap Growth 89,668(5) -- --
Balanced 48,069(5) -- --
Small Cap 64,998(5) -- --
International 45,208(5) -- --
</TABLE>
-----------------------
(1) Prior to September 1, 1999, all investment advisory fees were paid to NAS.
After September 1, 1999, these fees were paid to VMF.
(2) As of May 9, 1998, the Gartmore Millenium Growth Fund (formerly the
"Nationwide Mid Cap Growth Fund"), Growth, Nationwide, Bond, Tax-Free
Income, Long Term U.S. Government Bond, Intermediate U.S. Government Bond
and Money Market Funds acquired all of the assets of one or more series of
Nationwide Investing Foundation, Nationwide Investing Foundation II and
Financial Horizons Investment Trust (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").
(3) Net of waivers prior to the Reorganization of $221,174 and $389,150 for the
fiscal years ended October 31, 1998 and 1997, respectively.
(4) The Fund commenced operations July 24, 1998. All such fees were waived by
NAS.
(5) The Fund commenced operations November 2, 1998.
(6) The other funds of the Trust for which VMF serves as investment advisor had
not yet begun operations as of October 31, 1999.
The Subadvisers for certain of the Funds are as follows:
<TABLE>
<CAPTION>
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 Inc. ("INVESCO")
International Lazard Asset Management ("Lazard")
S&P 500 Index Fund Asset Management L.P. ("FAM")
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
<S> <C>
Value Opportunities NorthPointe Capital, LLC ("NorthPointe")
Small Cap Value NorthPointe
</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.
INVESCO 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.
FAM, P.O. Box 9011, Princeton, New Jersey 08543-9011, 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
Investment Company Act of 1940 because of their ownership of its voting
securities or their power to exercise a controlling influence over its
management or policies.
Prior to December 29, 1999, The Dreyfus Corporation ("Dreyfus") served as
subadviser for the S&P 500 Index Fund. Dreyfus, 200 Park Avenue, New York, N.Y.
10166, which was formed in 1947, is registered under the Investment Advisers Act
of 1940. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation.
NorthPointe Capital, LLC is a majority-owned subsidiary of Villanova
Capital, Inc. which is also the parent of VMF. NorthPointe is located at
Columbia Center One, 201 West Big Beaver Road, Troy, M.I. 48084 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:
<TABLE>
<CAPTION>
FUND ASSETS FEE
---- ------ ---
<S> <C> <C>
Large Cap Value up to $100 million 0.35%
$100 million or more 0.30%
</TABLE>
56
<PAGE> 60
<TABLE>
<S> <C> <C>
Large Cap Growth up to $150 million 0.40%
$150 million or more 0.30%
Balanced up to $100 million 0.35%
$100 million or more 0.30%
Small Cap up to $100 million 0.55%
$100 million or more 0.40%
International up to $200 million 0.45%
$200 million or more 0.40%
S&P 500 Index up to $200 million 0.05%
next $800 million 0.04%
$1 billion or more 0.02%
Value Opportunities $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%
Small Cap Value All assets 0.85%
</TABLE>
The following table sets forth the amount NAS/VMF(1) paid to the
Subadvisers for the fiscal periods ended October 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
SUBADVISER 1999 1998
---------- ---- ----
<S> <C> <C>
Brinson Partners $29,182(2) --
GSAM 44,853(2) --
J.P. Morgan 22,437(2) --
INVESCO 37,636(2) --
Lazard 23,934(2) --
Dreyfus 36,609 $3,939(3)
</TABLE>
-----------------------
(1) Prior to September 1, 1999, NAS was responsible for paying all subadvisory
fees. After September 1, 1999, VMF assumed that responsibility.
(2) The Large Cap Value, Large Cap Growth, Balanced, Small Cap, and
International Funds commenced operations November 2, 1998.
(3) The S&P 500 Fund commenced operations July 24, 1998.
VMF and the Trust have received from the SEC 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
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<PAGE> 61
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.
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.
Brinson Partners is Subadviser to the Large Cap Value Fund. The following
tables set forth composite performance data relating to the historical
performance of institutional private accounts managed by UBS Brinson,
Inc./Brinson Partners, Inc. (the Firm), as defined by portfolios managed and
administered from its Chicago, London and New York offices. A list of all Firm
composites is available upon request. The effective date of Firm compliance with
IMR-PPS is January 1, 1993. Investment transactions are accounted for on a trade
date basis. Presented is the asset-weighted dispersion of the portfolios within
the composite. Only portfolios in the composite for each full time period are
included in the dispersion calculation and no dispersion is presented for
composites consisting of only a single portfolio. Results included all actual
fee-paying, discretionary client portfolios including those clients no longer
with the Firm. Portfolios are included in the composite beginning with the first
full month of performance to the present or to the last full month in which they
were fully invested, and no alterations of composites have occurred due to
changes in personnel. The Firm has prepared and presented this report in
compliance with the Performance Presentation Standards of the Association for
Investment Management and Research (AIMR-PPSTM). AIMR has not been involved with
the preparation or review of this report.
The data is provided to illustrate the past performance of UBS Brinson,
Inc./Brinson Partners, Inc. in managing investment portfolios which are
substantially similar to the Large Cap Value Fund. The performance of any such
account that is not a registered investment company might have been less
favorable had the account been subject to regulation under federal law as an
investment company. The total return figures include reinvestment of earnings
and are shown before the deduction of custody fees, but are net of investment
advisory fees calculated at 0.75%, the highest fee charged for accounts of this
type since January 1989. Net of fee returns are calculated by geometrically
deducting the deannualized highest annual management fee from each monthly gross
return and geometrically linking the monthly returns for each period.
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<PAGE> 62
ANNUAL TOTAL RETURN
BRINSON U.S. VALUE EQUITY COMPOSITE
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
Composite Gross -0.25% 2.13%
Composite Net -0.99 1.37
Benchmark 7.33 6.98
</TABLE>
-----------------------
* Inception date for the Composite is June 30, 1998.
COMPOSITE PERFORMANCE: U.S. VALUE EQUITY COMPOSITE
JULY 1, 1998 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
GROSS NET TOTAL ASSETS
ASSET-WEIGHTED ASSET-WEIGHTED # OF END OF PERIOD ASSET-WEIGHTED BENCHMARK % OF FIRM
YEAR RETURN (%) RETURN (%) CLIENTS ($MILLIONS) DISPERSION (%) RETURN (%) ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
1998* 3.46 3.08 5 1,220 0.00 3.10 1.13
1999 -0.25 -0.99 12 1,158 0.09 7.33 1.13
</TABLE>
-----------------------
* Performance presented for July 1998 through December 1998. No statistics are
annualized. The Composite was created on March 31, 1999.
The composite performance information presented above is derived from the
performance of all substantially similar managed portfolios with a U.S. equity
investment mandate managed to a value benchmark. The Brinson U.S. Value Equity
Composite is a composite of accounts that invest in stocks of the largest U.S.
companies with the strongest value characteristics. The benchmark is the Russell
1000 Value Index.
UNION BOND & TRUST COMPANY
Under the terms of the Trust's investment advisory agreement with Union
Bond & Trust Company ("UBT") (the "UBT Advisory Agreement"), UBT manages the
Morley Capital Accumulation Fund and the Morley Enhanced Income Fund, two other
funds of the Trust (the "Morley Funds"), 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 Investment Company Act of 1940, as the same may
from time to time be amended; (ii) manage the Morley Funds in accordance with
the Funds' investment objectives, restrictions and policies; (iii) make
investment decisions for the Morley Funds; and (iv) place purchase and sale
orders for securities and other financial instruments on behalf of the Morley
Funds. Under the terms of the UBT Advisory Agreement, UBT pays the Morley Funds'
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 Morley Funds and
maintaining its investment advisory facilities, and executive and supervisory
personnel for managing the investments and effecting the portfolio transactions
of the Morley Funds.
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<PAGE> 63
As of October 31, 1999, the Morley Capital Accumulation Fund had incurred
investment advisory fees in the amount of $14,495 of which $4,141 was waived by
UBT. The Morley Enhanced Income Fund had not begun operations as of October 31,
1999. UBT has informed the Morley Funds 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 Morley Funds, UBT will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by
the Funds 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 Villanova Capital, Inc.
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.
The UBT 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 Funds, 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 UBT Advisory Agreement will continue in effect for an initial
period of two years and thereafter shall continue automatically for successive
annual periods as to each Morley Fund provided such continuance is specifically
approved at least annually by the Trustees, or by vote of a majority of the
outstanding voting securities of that 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 UBT Advisory Agreement terminates automatically in the event
of its "assignment", as defined under the Investment Company Act of 1940. It may
be terminated as to a Morley 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 UBT Advisory Agreement further provides that UBT may
render similar services to others.
Subject to each Morley Fund's Expense Limitation Agreements as described
below 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,
60
<PAGE> 64
expenses of shareholders' meetings, and expenses relating to the issuance,
registration, and qualification of shares of the Trust.
As compensation for UBT's services, the Morley Capital Accumulation Fund
is obligated to pay UBT a fee computed and accrued daily and paid monthly at an
annual rate of 0.35% of the average daily net assets of the Fund. UBT has agreed
voluntarily to waive 0.10% of that fee until further written notice to
shareholders. In addition, in the interest of 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 0.95% for Institutional Service
Shares, 0.55% for Institutional Class Shares and 0.95% for IRA Shares of the
Fund. Reimbursement by the Morley Capital Accumulation 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,
such 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
Institutional Service Class and 0.45% for Institutional Class shares.
Reimbursement by the Morley Enhanced Income 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.
THE INDEX FUNDS
With respect to the Small Cap Index Fund, the International Index Fund and
the Bond Index Fund, three other funds of the Trust (the "Index Funds"), each
Index Fund invests all of its assets in shares of the corresponding Series of
the Index Master Series Trust. Accordingly, the Index Funds do
61
<PAGE> 65
not invest directly in portfolio securities and do not require investment
advisory services. All portfolio management occurs at the level of the
Quantitative Master Series Trust. Quantitative Master Series Trust has entered
into a management agreement ("Management Agreement") with Fund Asset Management
("FAM").
FAM provides the Quantitative Master Series Trust with investment advisory
and management services. Subject to the supervision of the Board of Trustees of
the Quantitative 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 the 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 for the Index Funds, 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>
Master Small Cap Index Series................................................................... 0.08%
Master Mid Cap Index Series..................................................................... 0.01%
Master Aggregate Bond Index Series.............................................................. 0.06%
Master International (Capitalization Weighted) Index Series..................................... 0.01%
</TABLE>
The table below sets forth information about the total investment advisory
fees paid by the Series(1) to FAM, and any amount voluntarily waived by FAM.
<TABLE>
<CAPTION>
SMALL CAP AGGREGATE BOND
INDEX SERIES INDEX SERIES
---------- ------------
<S> <C> <C>
December 31, 1999(1)
Contractual amount....................................... $ $
Amount waived (if applicable)............................ $ $
December 31, 1998
Contractual amount....................................... $61,476 $238,378
</TABLE>
62
<PAGE> 66
<TABLE>
<S> <C> <C>
Amount waived (if applicable)............................ $61,476 $2,537
December 31, 1997(2)
Contractual amount....................................... $36,425 $88,609
Amount waived (if applicable)............................ $36,425 $37,562
</TABLE>
-----------------------
(1) The Master Mid Cap Index Series and Master International Index Series
commenced operations on December 30, 1999.
(2) Period is from commencement of operations (April 9, 1997 for the Master
Small Cap Index Series, and April 3, 1997 for the Master Aggregate Bond
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 Index Master Series Trust connected with investment and
economic research, trading and investment management of the 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 the 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 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.
VILLANOVA GLOBAL ASSET MANAGEMENT TRUST
Villanova Global Asset Management Trust ("VGAMT") oversees the management
of the Gartmore Emerging Markets, Gartmore International Growth, Gartmore Global
Leaders, Gartmore European Growth and Gartmore Global Small Companies Funds
(collectively, the "Gartmore Funds") pursuant to an Investment Advisory
Agreement with the Trust. Pursuant to the Investment Advisory Agreement, VGAMT
either provides portfolio management for the Gartmore Funds directly or hires
63
<PAGE> 67
and monitors subadvisers who are responsible for daily portfolio management.
VGAMT pays the compensation of the Trustees affiliated with VGAMT. The officers
of the Trust receive no compensation from the Trust. VGAMT pays all expenses it
incurs in providing service under the Investment Advisory Agreement, other than
the cost of investments.
The Investment Advisory Agreement also provides that VGAMT shall not be
liable for any act or omission in providing advisory services, or for any loss
arising out of any investment, unless it has acted with willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under the Agreement. After an
initial two-year period, the Investment Advisory Agreement must be approved each
year by the Trust's board of trustees or by shareholders in order to continue.
The Investment Advisory Agreement terminates automatically if it is assigned and
it may be terminated without penalty by vote of a majority of the outstanding
voting securities, or by either party, on not less than 60 days written notice.
VGAMT, a Delaware business trust, is a wholly owned subsidiary of
Nationwide Global Holding, Inc. ("NGH"), a holding company. Nationwide
Corporation owns 100% of the common stock of NGH and as such may control NGH. As
stated previously, Nationwide Mutual Insurance Company and Nationwide Mutual
Fire Insurance Company together own all of the common stock of Nationwide
Corporation.
Subject to the supervision of VGAMT and the Trustees, each subadviser
manages a Fund's assets in accordance with such Fund's investment objective and
policies. Each subadviser shall make investment decisions for such Fund, and in
connection with such investment decisions, shall place purchase and sell orders
for securities.
Each subadviser selected by VGAMT provides investment advisory services to
one or more Funds pursuant to a Subadvisory Agreement. Each of the Subadvisory
Agreements specifically provides that the subadviser 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 such Agreement. After an initial two-year period, each
Subadvisory Agreement must be approved each year by the Trust's board of
trustees or by shareholders in order to continue. Each Subadvisory Agreement
terminates automatically if it is assigned. It may also be terminated without
penalty by vote of a majority of the outstanding voting securities, or by either
party, on not less than 60 days written notice.
Under the terms of the Investment Advisory Agreement between the Trust and
VGAMT, each of the Gartmore Emerging Markets Fund, Gartmore International Growth
Fund, Gartmore Global Leaders Fund, Gartmore European Growth Fund and Gartmore
Global Small Companies Fund pays VGAMT an annual fee equal to 1.15%, 1.00%,
1.00%, 1.00% and 1.15%, respectively, of the Fund's average daily net assets.
Like VMF, VGAMT has agreed to waive advisory fees and, if necessary to
reimburse expenses in order to limit total annual Fund operating expenses as
follows:
- Gartmore Emerging Markets Fund to 2.15% for Class A shares, 2.75% for Class
B shares and 1.82% for Institutional Service Class shares
64
<PAGE> 68
- Gartmore International Growth Fund to 1.85% for Class A shares, 2.45% for
Class B shares and 1.52% for Institutional Service Class shares
- Gartmore Global Leaders Fund to 1.75% for Class A shares, 2.35% for Class B
shares and 1.42% for Institutional Service Class shares
- Gartmore European Growth Fund to 1.80% for Class A shares, 2.40% for Class
B shares and 1.47% for Institutional Service Class shares
- Gartmore Global Small Companies Fund to 2.15% for Class A shares, 2.75% for
Class B shares and 1.82% for Institutional Service Class shares
VGAMT has selected Gartmore Global Partners ("Gartmore") to be the
subadviser to the Gartmore Emerging Markets Fund, Gartmore International Growth
Fund, Gartmore Global Leaders Fund, Gartmore European Growth Fund and Gartmore
Global Small Companies Fund. For the management services provided to each Fund,
Gartmore receives an annual fee from VGAMT in an amount equal to 1.15%, 1.00%,
1.00%, 1.00% and 1.15% respectively. These fees are calculated at an annual rate
based on each Fund's average daily net assts.
Gartmore is a global asset manager dedicated to servicing the needs of
U.S. based investors. Gartmore was formed in 1995 as a registered investment
adviser and manages over $1 billion in assets.
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 29, 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 Investment Company Act of 1940) 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 Investment Company Act of 1940.
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, if any, imposed upon sales of Shares of each of the Funds.
During the fiscal years ended October 31, 1999, 1998 and 1997, NAS
received the following commissions from the sale of shares of the Funds(1):
65
<PAGE> 69
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUNDS 1999 1998 1997
----- ---- ---- ----
<S> <C> <C> <C>
Gartmore Millenium Growth Fund (formerly the $43,017 $20,296 --
"Nationwide Mid Cap Growth Fund")
Growth(1) 707,023 1,058,927 $873,750
Nationwide(1) 2,685,806 3,502,971 2,037,896
Bond(1) 118,837 112,368 123,036
Tax-Free Income 215,544 87,774 --
Long Term U.S. Government 78,652 7,157 --
Intermediate U.S. Government 64,776 25,366 --
S&P 500 Index(2) N/A N/A --
Large Cap Value(3) 8,892 -- --
Large Cap Growth(3) 25,927 -- --
Balanced(3) 17,306 -- --
Small Cap(3) 6,175 -- --
International(3) 1,195 -- --
</TABLE>
-----------------------
(1) This information includes commissions from the sale of shares of the
Acquired Funds prior to the Reorganization.
(2) Sales to the public commenced July 24, 1998.
(3) Sales to the public commenced November 2, 1998.
NAS also receives the proceeds of contingent deferred sales charges
imposed on certain redemptions of shares. During the fiscal years ended October
31, 1999, 1998 and 1997, NAS received the following amounts(1):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUNDS 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Gartmore Millenium Growth Fund (formerly the $1,160 -- $10,832
"Nationwide Mid Cap Growth Fund")(1)
Growth 17,650 -- --
Nationwide 85,844 $254 --
Bond 5,307 6,107 --
Tax-Free Income(1) 15,816 111 202,973
Long Term U.S. Government(1) 4,279 -- 23,417
Intermediate U.S. Government(1) 2,553 -- 31,232
S&P 500 Index(2) -- -- --
Large Cap Value(3) -- -- --
Large Cap Growth(3) 306 -- --
Balanced(3) 60 -- --
Small Cap(3) 5 -- --
International(3) 5 -- --
</TABLE>
-----------------------
(1) This information includes commissions from the redemption of shares of the
Acquired Funds prior to the Reorganization.
(2) Sales to the public commenced July 24, 1998.
(3) Sales to the public commenced November 2, 1998.
66
<PAGE> 70
From such fees, NAS retained $1,455,245, $1,048,391 and $1,603,988 for
1999, 1998, and 1997, respectively, after reallowances to dealer. NAS reallows
to dealers 5.00% of sales charges on Class A shares of the Stock Funds, 4.00% on
Class B shares of the Funds, 4.00% on Class D shares of the Funds, and 4.00% on
Class A of the Bond 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 of each Fund and,
Service Class Shares and IRA Class shares of the Morley Capital
Accumulation Fund;
- 1.00% of the average daily net assets of Class B shares for each of the
Funds other than the Bond, Long-Term U.S. Government Bond, Intermediate
U.S. Government Bond and Tax-Free Funds (the "Bond Funds");
- 0.85% of the average daily net assets of the Class B shares of the Bond
Funds; and
- 0.15% of the average daily net assets of Service Class shares of the Money
Market and S&P 500 Index 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.
During the fiscal year ended October 31, 1999, NAS received the following
distribution fees under the Plan:
<TABLE>
<CAPTION>
LOCAL FUND
FUNDS CLASS A CLASS B SERVICE CLASS SHARES
----- ------- ------- ------------- ------
<S> <C> <C> <C> <C>
Gartmore Millenium Growth Fund $1,752 $5,800 N/A N/A
(formerly the "Nationwide
Mid Cap Growth Fund")
Growth 12,820 38,033 N/A N/A
Nationwide 99,058 306,106 N/A N/A
Bond 6,645 11,218 N/A N/A
Tax-Free Income 3,866 24,020 N/A N/A
Long-Term U.S. Government 3,024 10,541 N/A N/A
Intermediate U.S. Government 22,682 6,469 N/A N/A
Money Market N/A N/A N/A $19,387
S&P 500 Index N/A N/A $38,403 N/A
</TABLE>
67
<PAGE> 71
<TABLE>
<S> <C> <C> <C> <C>
Large Cap Value 13,930 12,165 N/A N/A
Large Cap Growth 17,883 12,247 N/A N/A
Balanced 5,160 18,713 N/A N/A
Small Cap 10,600 8,944 N/A N/A
International 8,068 8,962 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
SERVICE CLASS SHARES IRA CLASS SHARES
-------------------- ----------------
<S> <C> <C>
Morley Capital Accumulation $1,932 $2,138
</TABLE>
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 a 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
broker-dealers and financial institutions, who agree
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<PAGE> 72
to provide certain administrative support services in connection with the Class
A shares of each Fund, Class D, Institutional Service Class and Service Class
shares of the Funds (as applicable), the Prime shares of the Money Market Fund,
and the IRA Class shares of the Morley Capital Accumulation 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 effective July 1, 1999 pursuant to which Nationwide
Financial Services, Inc. ("NFS") has agreed to provide certain administrative
support services in connection with the applicable Fund shares 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 (a) 0.25% of the average daily net assets of the Class A, D or
Institutional Service shares of each Fund (as applicable), Prime shares and
Service Class shares of the Money Market Fund and Institutional Service Class
and Service Class shares of the S&P 500 Index Fund and (b) 0.15% of the average
daily net assets of Service Class and IRA Class shares of the Morley Capital
Accumulation Fund, held by customers of NFS or such other entity.
The Trust has also entered into a Servicing Agreement pursuant to which
Nationwide Investment Services Corporation has agreed to provide certain
administrative support services in connection with Service Class shares of the
Money Market Fund held beneficially by its customers.
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>
Gartmore Millenium Growth Fund $0 up to $250 million 0.07%
(formerly the "Nationwide Mid $250 million up to $1 billion 0.05%
Cap Growth Fund"),Growth Fund, $1 billion and more 0.04%
Bond Fund, Tax-Free Income Fund,
Nationwide Fund, Long-Term U.S.
Government Bond Fund, Intermediate
</TABLE>
69
<PAGE> 73
<TABLE>
<S> <C> <C>
U.S. Government Bond Fund, Money
Market Fund, Morley Capital
Accumulation Fund(1), Growth Focus
Fund, Global Technology Fund and
Global Life Sciences Fund, Emerging
Markets Fund, International Growth Fund,
Global Leaders Funds, European Growth Fund
and Global Small Companies Fund
S&P 500 Index Fund and $0 to $1 billion 0.05%
Fund, Small Cap Value Fund(2) $1 billion or more 0.04%
Large Cap Value, Large $0 up to $250 million 0.10%
Cap Growth, Balanced, $250 million up to $1 billion 0.06%
Small Cap, and International(2) $1 billion or more 0.04%
</TABLE>
-----------------------
(1) Subject to a minimum of $50,000 per year for Morley Capital Accumulation
Fund.
(2) Subject to a minimum of $75,000 per Fund per year.
Prior to September 1, 1999, NAS provided fund administration services to
the Funds. Effective September 1, 1999, the fund administration services
previously performed for the Funds by NAS were transferred to VSA, an affiliate
of NAS and an indirect subsidiary of NFS. In addition, BISYS Fund Services Ohio,
Inc. began performing certain fund administration services pursuant to a
Sub-Administration Agreement also effective September 1, 1999. After these
changes were implemented, there was no change in the fees charged for fund
administration services for each of the Funds.
During the fiscal years ended October 31, 1999 and 1998, NAS/VSA(1)
received fund administration fees from the Funds as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUNDS 1999 1998
----- ---- ----
<S> <C> <C>
Gartmore Millenium Growth Fund (formerly the $7,733 $3,308
"Nationwide Mid Cap Growth Fund")
Growth 553,398 248,049
Nationwide Fund 1,146,258 470,352
Tax-Free Income 175,965 88,596
Bond 94,488 44,441
Long Term U.S. Government 27,727 13,998
Intermediate U.S. Government 44,004 16,351
Money Market 624,729 257,123
S&P 500 Index(2) 30,506 2,814
Large Cap Value(3) 75,000 --
Large Cap Growth(3) 75,000 --
</TABLE>
70
<PAGE> 74
<TABLE>
<S> <C> <C>
Balanced(3) 75,000 --
Small Cap(3) 75,000 --
International(3) 75,000 --
Morley Capital Accumulation(4) 2,899 --
</TABLE>
-----------------------
(1) Prior to September 1, 1999, all fund administration fees were paid to NAS.
After September 1, 1999, these fees were paid to VSA.
(2) The Fund commenced operations July 24, 1998.
(3) The Fund commenced operations November 2, 1998.
(4) The Fund commenced operations February 1, 1999.
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:
<TABLE>
<CAPTION>
FUND FEE
---- ---
<S> <C>
Millenium Growth Fund $16 per account
(formerly the "Nationwide Mid
Cap Growth Fund"), Growth
Fund and Nationwide Fund
Bond Fund, Tax-Free Income $18 per account
Fund, Long-Term U.S.
Government Bond Fund, and
Intermediate U.S. Government
Bond Fund
Money Market Fund - Prime $27 per
Shares Prime Share Account
Money Market Fund - Service Class 0.01% of average daily net
Shares assets of Service Class shares
S&P 500 Index Fund $18 per account for Class A
and Class B shares and 0.01%
of average daily net assets of all
other classes
Morley Capital Accumulation Fund 0.01% of average daily net
assets of each class
</TABLE>
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<PAGE> 75
<TABLE>
<S> <C>
Large Cap Value Fund, Large $18 per account for Class A
Cap Growth Fund, Balanced Fund, and Class B shares
Small Cap Fund, and 0.01% of average daily net
International Fund assets of Institutional Service
Class shares
Small Cap Value Fund 0.01% of average daily net assets of
Institutional Class shares
Growth Focus Fund, Global $18 per account for Class A
Technology Fund and Global and Class B shares
Life Sciences Fund 0.01% of average daily net assets
of Institutional Service Class shares
Emerging Markets Fund, International $18 per account for Class A
Growth Fund, Global Leaders Fund, and Class B shares
European Growth Fund, and 0.01% of average daily net assets
Global Small Companies Fund of Institutional Service Class shares
</TABLE>
During the fiscal years ended October 31, 1999, 1998 and 1997, NISI received the
following transfer agent fees from the Funds(1):
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
FUNDS 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Gartmore Millenium Growth Fund $24,498 $12,379 $11,300
(formerly the "Nationwide Mid
Cap Growth Fund")
Growth 807,251 785,969 729,500
Nationwide Fund 1,349,999 1,018,754 788,500
Bond 145,000 142,149 149,300
Tax-Free Income 136,073 144,397 146,800
Long Term U.S. Government 36,674 34,092 41,500
Intermediate U.S. Government 38,402 38,102 37,599
Money Market Fund 751,908 701,561 664,007
S&P 500 Index(2) 6,101 563
Large Cap Value(3) 1,397 -- --
Large Cap Growth(3) 7,229 -- --
Balanced(3) 1,849 -- --
Small Cap(3) 1,371 -- --
International(3) 736 -- --
Morley Capital Accumulation(4) 415 -- --
</TABLE>
-----------------------
(1) This information includes fees paid to NISI by the Acquired Funds prior to
the Reorganization.
72
<PAGE> 76
(2) The Fund commenced operation July 24, 1998.
(3) The Fund commenced operations November 2, 1998.
(4) The Fund commenced operations February 1, 1999.
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
Stradley, Ronon, Stevens and Young LLP, 2600 Commerce Square,
Philadelphia, Pennsylvania 19103, serves as the Trust's legal counsel.
AUDITORS
KPMG LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as the
independent auditors for the Trust.
OTHERS
The Trust, on behalf of the S&P 500 Index Fund, 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
of the S&P 500 Index to track general stock market performance. S&P's only
relationship to the Fund or VMF 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.
BROKERAGE ALLOCATION
A Fund's adviser (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
73
<PAGE> 77
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, the adviser or a
Subadviser always attempts to achieve best price - best execution, and both the
adviser and the Subadvisers have complete freedom as to the markets in and the
broker-dealers through which they seek this result.
Subject to the requirement of seeking best execution, securities may be
bought from or sold to broker-dealers who have furnished statistical, research,
and other information or services to the adviser or a Subadviser. In placing
orders with such broker-dealers, the adviser or Subadviser will, where possible,
take into account the comparative usefulness of such information. Such
information is useful to the adviser or Subadviser even though its dollar value
may be indeterminable, and its receipt or availability generally does not reduce
the adviser's or 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 concurrent authorizations to purchase or sell the same security for
trusts or other accounts (including other mutual funds) served by the adviser or
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 the adviser or 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.
In purchasing and selling investments for the Funds, it is the policy of
each of the subadvisers to obtain best execution at the most favorable prices
through responsible broker-dealers. The determination of what may constitute
best execution in a securities transaction by a broker involves a number of
considerations, including the overall direct net economic result to the Fund
(involving both price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is effected, the ability to
effect the transaction at all when a large block is involved, the availability
of the broker to stand ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the broker. These
considerations are judgmental and are weighed by VMF or subadviser in
determining the overall reasonableness of securities executions and
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<PAGE> 78
commissions paid. In selecting broker-dealers, the adviser or 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.
VMF, UBT and 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 VMF, UBT or a Subadviser is considered to be in addition to and not in lieu
of services required to be performed by it under its investment advisory or
subadvisory agreement, as the case may be. The fees paid to VMF, UBT and a
Subadviser pursuant to its investment advisory or subadvisory agreement are not
reduced by reason of its receiving any brokerage and research services. The
research services provided by broker-dealers can be useful to VMF, UBT or a
Subadviser in serving its other clients. Subject to the policy of VMF, UBT and
the Subadvisers to obtain best execution at the most favorable prices through
responsible broker-dealers, VMF, UBT and the Subadvisers also may consider the
broker-dealer's sale of shares of any fund for which it serves as investment
adviser, subadviser or administrator.
During the fiscal years ended October 31, 1999, 1998 and 1997, the
following brokerage commissions were paid by the Funds(1):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUND 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Gartmore Millenium Growth Fund $9,962 $10,084 $8,480
(formerly the "Nationwide Mid
Cap Growth Fund")
Growth 570,060 712,200 742,579
Nationwide Fund 1,027,517 934,759 664,395
S&P 500 Index 42,996 8,386(2) --
Large Cap Value 46,392(3) -- --
Large Cap Growth 35,460(3) -- --
Balanced 3,249(3) -- --
Small Cap 60,147(3) -- --
International 21,586(3) -- --
Morley Capital Accumulation None(4) -- --
</TABLE>
-----------------------
(1) This information includes commissions paid by the Acquired Funds prior to
the Reorganization.
(2) The Fund commenced operations July 24, 1998.
(3) The Fund commenced operations November 2, 1998.
(4) The Fund commenced operations February 1, 1999.
75
<PAGE> 79
As of October 31, 1999, the Prestige Balanced Fund, Prestige Large Cap
Growth Fund, S&P 500 Index Fund, Nationwide Fund, Gartmore Millenium Growth Fund
(formerly the "Nationwide Mid Cap Growth Fund") and Money Market Fund held
investments in securities of their regular broker-dealers as follows:
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE VALUE OF ISSUER'S
SECURITIES OWNED BY THE NAME OF
FUND FUND AT OCTOBER 31, 1999 BROKER OR DEALER
---- ------------------------ ----------------
<S> <C> <C>
Balanced $4,000 Bear, Stearns & Co., Inc.
Balanced 23,000 Goldman Sachs & Co.
Balanced 21,000 Merrill Lynch & Co., Inc.
Large Cap Growth 44,000 Morgan Stanley Dean Witter Co.
Money Market 34,635,000 Bear, Stearns & Co., Inc.
Money Market 10,281,000 Morgan Stanley Dean Witter Co.
Money Market 51,303,000 J.P. Morgan & Co.
Money Market 54,104,000 Merrill Lynch & Co., Inc.
S&P 500 Index 651,000 Morgan Stanley Dean Witter Co.
S&P 500 Index 298,000 Merrill Lynch & Co., Inc.
S&P 500 Index 236,000 J.P. Morgan & Co.
S&P 500 Index 88,000 Lehman Brothers Inc.
S&P 500 Index 52,000 Bear, Stearns & Co., Inc.
Nationwide 17,655,000 Merrill Lynch & Co., Inc.
Gartmore Millenium Growth Fund 250,000 Merrill Lynch & Co., Inc.
(formerly the "Nationwide Mid
Cap Growth Fund")
</TABLE>
Under the Investment Company Act of 1940, "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 Investment
Company Act of 1940, is a member under certain conditions, in accordance with
Rule 10f-3 under the Investment Company Act of 1940.
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 Investment Company Act of
1940. Under the Investment Company Act of 1940, 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
the adviser 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
76
<PAGE> 80
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.
77
<PAGE> 81
ADDITIONAL INFORMATION ON PURCHASES AND SALES
CLASS A AND CLASS D SALES CHARGES
The charts below show the Class A and Class D sales charges, which
decrease as the amount of your investment increases.
CLASS A SHARES OF THE FUNDS (OTHER THAN BOND FUNDS)
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED COMMISSION
------------------ ----------------- ------------------ ----------
<S> <C> <C> <C>
less than $50,000 5.75% 6.10% 5.00%
$50,000 to $99,999 4.50 4.71 3.75
$100,000 to $249,999 3.50 3.63 2.75
$250,000 to $499,999 2.50 2.56 1.75
$500,000 to $999,999 2.00 2.04 1.25
$1 million to $24,999,999 0.50 0.50 0.50
$25 million or more 0.25 0.25 0.25
</TABLE>
CLASS A SHARES OF THE BOND FUNDS
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED COMMISSION
------------------ ----------------- ------------------ ----------
<S> <C> <C> <C>
less than $50,000 4.50% 4.71% 4.00%
$50,000 to $99,999 4.00 4.17 3.50
$100,000 to $249,999 3.00 3.09 2.50
$250,000 to $499,999 2.50 2.56 1.75
$500,000 to $999,999 2.00 2.04 1.25
$1 million to $24,999,999 0.50 0.50 0.50
$25 million or more 0.25 0.25 0.25
</TABLE>
In addition to the dealer commissions for Class A shares that are described
above, the Funds are authorized to enter into other special compensation
arrangements with dealers.
CLASS D SHARES OF THE FUNDS
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED COMMISSION
------------------ ----------------- ------------------ ----------
<S> <C> <C> <C>
less than $50,000 4.50% 4.71% 4.00%
$50,000 to $99,999 4.00 4.17 3.50
$100,000 to $249,999 3.00 3.09 2.50
$250,000 to $499,999 2.50 2.56 1.75
$500,000 to $999,999 1.00 1.01 1.25
$1 million to $24,999,999 0.50 0.50 0.50
</TABLE>
78
<PAGE> 82
<TABLE>
<S> <C> <C> <C>
$25 million or more None None 0.25
</TABLE>
NET ASSET VALUE PURCHASE PRIVILEGE (CLASS A AND D SHARES ONLY)
The sales charge applicable to Class A and D 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;
(3) for Class D shares and Class A shares if there are no Class D shares of
a Fund sold:
(a) to Trustees and retired Trustees of the Trust (including its
predecessor Trusts);
(b) to directors, officers, full-time employees, sales representatives
and their employees, and retired directors, officers, employees, and
sale representatives, their spouses, children or immediate relatives
(immediate relatives include mother, father, brothers, sisters,
grandparents, grandchildren, ("Immediate Relatives")), and Immediate
Relatives of deceased employees of any member of the Nationwide
Insurance Enterprise, or any investment advisory clients of VMF and
their affiliates;
(c) to directors, officers, and 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 Enterprise from time to time, which include but
are 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;
(d) to any qualified pension or profit sharing plan established by a
Nationwide sales representative for himself/herself and his/her
employees;
(4) Class A shares sold:
79
<PAGE> 83
(a) to any person purchasing through an account with an unaffiliated
brokerage firm having an agreement with NAS to waive sales charges
for those persons;
(b) 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;
(c) to any person who pays for such shares with the proceeds of a sale
of mutual fund shares 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.
(d) 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.
(e) 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.
(f) 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 Code.
Provision 4(d) applies only to the Gartmore Millenium Growth Fund
(formerly the "Nationwide Mid Cap Growth Fund"), Growth Fund, Nationwide Fund,
Bond Fund, Tax-Free Income Fund, Long-Term U.S. Government Bond Fund and
Intermediate U.S. Government Bond Fund.
CLASS B SHARES OF THE FUNDS AND CDSC
NAS compensates broker-dealers and financial intermediaries for sales of
Class B shares from its own resources at the rate of 4.00% of such sales. 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:
80
<PAGE> 84
<TABLE>
<CAPTION>
CDSC ON SHARES
YEARS OF AFTER PURCHASE BEING SOLD
----------------------- --------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and following 0.00%
</TABLE>
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 SECTION 72(m)(7) OF THE
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
81
<PAGE> 85
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. 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> 86
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 Funds (other
than the Bond 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.
REDEMPTION OF SHARES OF THE MORLEY CAPITAL ACCUMULATION FUND
The Morley Capital Accumulation Fund generally plans to redeem its shares
for cash. However the Fund has elected to redeem shares with respect to any one
shareholder during any 90-day period solely in cash up to the lesser of $250,000
or 1% of the NAV of the Fund at the beginning of the period. In addition, the
Morley Capital Accumulation Fund intends to redeem shares in cash for any
requests of up to $1,000,000.
As described in its Prospectus, however, the Fund reserves the right, in
circumstances where in its sole discretion it determines that cash redemption
payments would be undesirable, to honor any request for redemption by making
payment wholly or partly in securities and in Wrapper Agreements, as the same
may be chosen by UBT in its sole discretion (an "in kind redemption"). The
Trust, on behalf of the Fund, is seeking an exemptive order from the SEC with
respect to redemptions in kind made to shareholders who own 5% or more of the
Fund. Until such time as appropriate regulatory authorization is obtained, the
Fund will not make redemptions in kind to such shareholders.
OTHER REDEMPTION REQUIREMENTS. Redemption requests for Service Class and
Institutional Class Shares from Plans with more than $1,000,000 in the Fund and
which represent a withdrawal of 5% or more of a Plan's assets on any business
day must include or be preceded by the following information: (i) the Plan name;
(ii) a listing of the Plan trustee(s); (iii) copies of Plan documents or
summaries which describe the investment options available to and restrictions
imposed upon Plan participants; (iv) a listing of the allocation of Plan assets
across available investment options; (v) for the three year period immediately
preceding the withdrawal, a monthly summary of cash flow activity for the
investment option in which the Shares are included, detailing contribution and
benefit payment amount and amounts transferred to and from other investment
options; and (vi) in the case of Plans subject to ERISA, identification of a
"Qualified Professional Asset Manager" within the meaning of Department of Labor
Prohibited Transaction Class Exemption 84-14 (March 8, 1984). The Fund may waive
these requirements under some circumstances. For purposes of this paragraph,
"Plans" include employee benefit plans qualified under Section 401(a) of the
Internal Revenue Code, "governmental plans" as defined in Section 414(d) of the
Code, eligible deferred compensation plans as defined in Section 457 of the
Code, and employee benefit plans qualifying under Section 403(b) of the Code.
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<PAGE> 87
REDEMPTION FEES. Generally, redemption requests on all Shares will be
subject to a 2% redemption fee when the Trigger is "active." The redemption fee
will be retained by the Fund to help minimize the impact the redemptions may
have on Fund performance and to support administrative costs associated with
redemptions from the Fund. Additionally, the redemption fee may discourage
market timing by those shareholders initiating redemptions to take advantage of
short-term movements in interest rates.
The Trigger is active on any day that, as of two business days prior, the
"Gross Annual Effective Yield of the Fund" is less than the current yield on the
Dealer Commercial Paper (90-day) Index. Once activated, the Trigger will become
inactive on any day than, as of two business days prior, the Gross Annual
Effective Yield of the Fund is greater than the current yield of the Dealer
Commercial Paper (90-day) Index plus 0.25%. The Fund will rely on the Dealer
Commercial Paper (90-day) Index found daily on the front page of the Money and
Investing section of THE WALL STREET JOURNAL. If the Dealer Commercial Paper
(90-day) Index is not available in THE WALL STREET JOURNAL, the Fund may use
alternative sources of information for 90-day dealer commercial paper rates.
Redemptions of Service Class or Institutional Class Shares by participants
in a Plans and Contract owners for reasons of death, disability, retirement,
employment termination, loans, hardship, and other Plan permitted withdrawals
and investment transfers to non-Competing Funds (each, a "Benefit Responsive
Payment Event") are not subject to a redemption fee. All other redemptions of
Shares are subject to a 2% redemption fee, payable tot he Fund when the Trigger
is active.
EXAMPLE
An IRA Class shareholder decides to redeem shares in the amount of $5,000
from the Fund on October 15th. Assume that as of October 13th the current yield
on the Dealer Commercial Paper (90-day) Index is 7.2% and the Gross Annual
Effective Yield of the Fund is 7.0%. Because the Gross Annual Effective Yield of
the Fund is less than the current yield on the Dealer Commercial Paper (90-day)
Index the Trigger is active, and the shareholder will receive net proceeds of
$4,900 for the redemption. The Trigger will remain active until two business
days after the Gross Annual Effective Yield of the Fund exceeds the current
yield on the Dealer Commercial Paper (90-day) Index by 0.25%.
The "Gross Annual Effective Yield of the Fund" is a measure of one day's
investment income (before deduction for fees and expenses) expressed as an
annual compounded yield. It is calculated on each business day based on the
dividend declared for the previous day as follows:
[((1 + Previous Day's Gross Dividend Factor) 365) -1]/[NAV per Share]
Information on the Trigger and the Gross Annual Effective Yield of the
Fund can be obtained by calling 1-800-848-0920.
The Fund reserves the right to modify its redemption fee and waiver policy
in whole or in part for certain shareholders upon 30 days written notice to such
shareholders.
REDEMPTION IN KIND. In certain circumstances, the Fund reserves the right
to honor a redemption request by making payment in whole or in part in
securities or securities and wrap contracts, selected
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<PAGE> 88
solely at the discretion of UBT. The Fund will always redeem shares in cash for
redemption requests up to the lesser of $250,000 or 1% of the net asset value of
the Fund pursuant to an election made by the Fund and filed with the SEC. In
addition, the Fund does not intend to do an in-kind redemption for any
redemption requests of less than $1,000,000. The Fund does not anticipate
exercising its right to redeem in-kind except in extraordinary circumstances as
determined by the Fund and never if a request for redemption is received in
connection with a Benefit Responsive Payment Event or for redemption of IRA
Class Shares.
To the extent a payment in kind is made with securities, you may incur
transaction expenses in holding and disposing of the securities. Therefore, in
receiving securities you may incur costs that may exceed your share of the
operating expenses incurred by the Fund. In addition, wrap contracts assigned to
you as a payment in kind are illiquid and will require you to pay fees directly
to the Wrap Provider rather than through the Fund. Further, a wrap contract may
contain restrictions on the securities subject to such Agreement, including, but
not limited to the types, maturities, duration and credit quality of each
security. Therefore, to obtain the benefits of a wrap contract, you may not be
able to freely trade the securities underlying the Agreement. Also, wrap
contracts assigned to you will not provide protection against the credit risk
associated with the issuer of any Underlying Assets (see "Specific Risks of Wrap
Contracts").
To the extent that any such payment in kind includes a wrap contract, the
Fund will assign a portion of one or more wrap contracts to you. The economic
terms and conditions of each assigned wrap contract will be substantially
similar to the wrap contracts held by the Fund. By purchasing shares in the
Fund, you agree to accept an assignment of a wrap contract as part of an in-kind
redemption, provided that at the time of the redemption payment such assignment
would not violate applicable law.
A Wrap Provider, prior to the assignment of a wrap contract to a Service
Class or Institutional Class shareholder, may require you to represent and
warrant that such assignment does not violate any applicable laws. Moreover, the
Wrap Provider may require you to obtain at your own expense the services of a
qualified professional asset manager acceptable to the Wrap Provider to manage
the securities distributed in kind in conformity with the wrap contract
provisions. In the event a wrap contract cannot be assigned to you, the Fund in
its discretion may satisfy the redemption request through (a) a cash payment,
(b) a redemption in-kind consisting entirely of securities, or (c) a combination
of cash and securities.
In the event a redemption is made in kind with a wrap contract, the Fund
will incur costs in obtaining such wrap contract and assigning it the
shareholder. The Fund will examine the costs and benefits of obtaining a wrap
contract in making a determination to incur such costs. Typically, these costs
should not exceed $5,000 per issuance.
SIGNATURE GUARANTEE (CLASS A, CLASS B AND CLASS C SHARES)
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, or if the proceeds are sent to a bank account not previously
designated or changed within the past 30 days or if proceeds are mailed to an
address other than the
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<PAGE> 89
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
earlier of the close of regular trading on the New York Stock Exchange or 4 p.m.
Eastern Time on 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 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 Investment Company Act
of 1940, 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 the
adviser 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 Investment Company Act of 1940. This involves valuing a security at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in
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<PAGE> 90
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
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.
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,
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<PAGE> 91
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.
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.
AUTOMATIC ASSET TRANSFER - This systematic investment plan allows you to
transfer $25 or more to one 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.
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.
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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.
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 charge is applicable.
Exchanges within Class B or Class D 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 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 FOUR 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 on 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
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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.
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.
BY ON LINE ACCESS - Log on to our website www.nationwidefunds.com 24 hours
a day, seven days a week, for easy access to your mutual fund accounts.
Once you have reached the website, you will be instructed on how to select
a password and perform transactions. You can choose to receive information
on all of our funds as well as your own personal accounts. You may also
perform transactions, such as purchases, redemptions and exchanges. The
Funds may terminate the ability to buy Fund shares on its website at any
time, in which case you may continue to exchange shares by mail, wire or
telephone pursuant to the Prospectus.
FREE CHECKING WRITING PRIVILEGE (PRIME SHARES OF THE MONEY MARKET FUND
ONLY) - You may request a supply of free checks for your personal use and
there is no monthly service fee. You may use them to make withdrawals of
$500 or more from your account at any time. Your account will continue to
earn daily income dividends until your check clears your account. There
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is no limit on the number of checks you may write. Cancelled checks will
not be returned to you. However, your monthly statement will provide the
check number, date and amount of each check written. You will also be able
to obtain copies of cancelled checks, the first five free and $2.00 per
copy thereafter, by contacting one of our service representatives at
1-800-848-0920.
INVESTOR SERVICES
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.
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 (Monday through
Friday, except Thursday, in which case representatives are available
between 9:30 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.
RETIREMENT PLANS (NOT AVAILABLE WITH THE TAX-FREE INCOME FUND) - 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.
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.
CONSOLIDATED STATEMENTS - Shareholders of the Funds, other than the Bond
Funds and the Money Market Fund, 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.
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
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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.
SHAREHOLDER REPORTS - All shareholders will receive reports semi-annually
detailing the financial operations of the funds.
PROSPECTUSES - Updated prospectuses will be mailed to you annually.
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
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 the various Classes of the Funds, the net yields and total returns on
such class shares can be expected, at any given time, to differ from class to
class for the same period.
CALCULATING MONEY MARKET FUND YIELD
Any current Money Market Fund yield quotations, subject to Rule 482 under
the Securities Act, shall consist of a seven calendar day historical yield for
each class, carried at least to the nearest hundredth of a percent. The yield
shall be calculated by determining the change, excluding realized and unrealized
gains and losses, in the value of a hypothetical pre-existing account in each
class having a balance of one share at the beginning of the period, dividing the
net change in account value by the value of the account at the beginning of the
base period to obtain the base period return, and multiplying the base period
return by 365/7 (or 366/7 during a leap year). For purposes of this calculation
, the net change in account value reflects the value of additional shares
purchased with dividends declared on both the original share and any such
additional shares. The Fund's effective yield represents an annualization of the
current seven day return with all dividends reinvested. The yields for each
class will differ due to different fees and expenses charged on the class. As of
October 31, 1999, the seven day current and effective yields for the Prime
Shares of the Money Market Fund were 4.94% and 5.06%, respectively, and for the
Service Class shares, were 4.80% and 4.92%, respectively.
The Money Market Fund's yields will fluctuate daily. Actual yields will
depend on factors such as the type of instruments in the Money Market Fund's
portfolio, portfolio quality and average maturity, changes in interest rates,
and the Money Market Fund's expenses.
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Although the Fund determines its yield for each class on the basis of a
seven calendar day period, it may use a different time span on occasion.
There is no assurance that the yields quoted on any given occasion will
remain in effect for any period of time and there is no guarantee that the net
asset values will remain constant. It should be noted that a shareholder's
investment in the Fund is not guaranteed or insured. Yields of other money
market funds may not be comparable if a different base period or another method
of calculation is used.
CALCULATING YIELD AND TOTAL RETURN - NON-MONEY MARKET FUNDS
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 and Class D 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.
The uniformly calculated average annual (compound) total returns for each
class of shares for the periods ended October 31, 1999 were as follows:
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR OR LIFE
------------------------- -------------------------- --------------------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A(1) B(1) D A(1) B(1) D A(1) B(1) D
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gartmore Millenium Growth 6.48% 7.33% 8.21% 15.05% 15.90% 15.34% 12.43% 15.34% 12.57%
Fund(2) (formerly the
"Nationwide Mid Cap
Growth Fund")
Growth 10.13% 11.12% 11.80% 18.06% 19.06% 18.42% 14.01% 18.42% 14.18%
Nationwide Fund 3.72% 4.22% 5.31% 22.43% 23.39% 22.78% 15.49% 16.03% 15.66%
Bond -6.01% 6.72% -5.68% 6.99% 7.52% 7.11% 6.85% 7.26% 6.91%
Tax-Free -7.61% 8.61% -7.56% 5.13% 5.58% 5.19% 5.64% 6.03% 5.67%
Long Term U.S. Govt.(3) -7.01% 7.77% -6.78% 6.61% 7.09% 6.68% 7.19% 7.59% 7.23%
Intermediate U.S. Govt.(3) -5.51% 6.25% -5.39% 6.54% 7.03% 6.61% 5.49% 6.00% 5.54%
</TABLE>
-----------------------
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<PAGE> 97
(1) These returns include performance based on the Funds' predecessors, which
was achieved prior to the creation of the class (May 11, 1998), and which
is the same as the performance shown for Class D shares through May 11,
1998. The returns have been restated for sales charges but not for fees
applicable to Class A and B. Had Class A or B been in existence for the
time periods presented, the performance would have been lower as a result
of their additional expenses.
(2) The life of the Fund is since December 19, 1988.
(3) The life of the Fund is since February 10, 1992.
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
----------------------------------------- ----------------------------------------
INSTITUTIONAL SERVICE LOCAL INSTITUTIONAL SERVICE LOCAL
SERVICE CLASS CLASS FUND SERVICE CLASS CLASS FUND
------------- ------- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
500 Index(1) N/A N/A 24.85% 24.64% 24.27% 16.21%
</TABLE>
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
----------------------------------------- ----------------------------------------
INSTITUTIONAL INSTITUTIONAL
CLASS A CLASS B SERVICE CLASS CLASS A CLASS B SERVICE CLASS
------- ------ ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value(2) N/A N/A N/A -2.11% -2.50% 4.05%
Large Cap Growth(2) N/A N/A N/A 27.99% 30.00% 36.00%
Balanced(2) N/A N/A N/A 6.95% 7.54% 13.62%
Small Cap(2) N/A N/A N/A 5.73% 6.70% 12.36%
International(2) N/A N/A N/A 10.58% 11.58% 17.57%
</TABLE>
-----------------------
(1) The Fund commenced operations July 24, 1998
(2) The Fund commenced operations November 2, 1998
<TABLE>
<CAPTION>
SINCE INCEPTION SINCE INCEPTION
------------------------------------------ ---------------------------------------------
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
SERVICE CLASS CLASS IRA CLASS SERVICE CLASS CLASS IRA CLASS
------------ ----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Morley Capital(3) N/A N/A N/A 3.60% 3.91% 3.60%
Accumulation
</TABLE>
-----------------------
(3) The Fund commenced operations February 1, 1999
The Nationwide Bond Fund, Nationwide Tax-Free Income Fund, Nationwide
Intermediate U.S. Government Bond Fund, Nationwide Long-Term U.S. Government
Bond Fund and Morley Capital Accumulation 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.
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<PAGE> 98
The following are the yields for the 30-day period ended October 31, 1999:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
------- ------- -------
<S> <C> <C> <C>
Tax-Free Income 4.34% 3.94% 4.58%
Long Term U.S. Government 5.34% 5.03% 5.56%
Intermediate U.S. Government 5.21% 4.81% 5.36%
</TABLE>
<TABLE>
<CAPTION>
SERVICE INSTITUTIONAL
CLASS CLASS IRA CLASS
------- -------------- ---------
<S> <C> <C> <C>
Morley Capital Accumulation 5.07% 5.49% 5.09%
</TABLE>
The Tax-Free Income Fund may also advertise a tax equivalent yield
computed by dividing that portion of the uniformly calculated yield which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield that is not tax-exempt. Assuming a tax rate of
36%, the tax equivalent yields for the Tax-Free Income Fund for the 30-day
period ended October 31, 1999 were 4.34% for Class A shares, 3.94% for Class B
shares, and 4.58% for Class D shares.
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.
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-
95
<PAGE> 99
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, INVESTOR'S BUSINESS DAILY, STANDARD & POOR'S OUTLOOK
and, COLUMBUS DISPATCH.
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; 37 of these
series are the Funds:
<TABLE>
<CAPTION>
SERIES SHARE CLASSES
----- -------------
<S> <C>
Gartmore Millenium Growth Fund (formerly the Class A, Class B, Class D
"Nationwide Mid Cap Growth Fund")
Growth Class A, Class B, Class D
Nationwide Class A, Class B, Class D
Bond Class A, Class B, Class D
Tax-Free Income Class A, Class B, Class D
Long-Term U.S. Government Bond Class A, Class B, Class D
Intermediate U.S. Government Bond Class A, Class B, Class D
Money Market Service Class, Prime Shares
S&P 500 Index Class A, Class B, Service Class,
Institutional Service Class, Local
Fund Shares, Institutional Class
Morley Capital Accumulation Service Class, Institutional Class, IRA Class
Morley Enhanced Income Fund Class A, Institutional Service Class,
Institutional Class
Prestige Large Cap Value Class A, Class B, Institutional Service Class
Prestige Large Cap Growth Class A, Class B, Institutional Service Class
Prestige Small Cap Class A, Class B, Institutional Service Class
Prestige Balanced Class A, Class B, Institutional Service Class
Prestige International Class A, Class B, Institutional Service Class
Small Cap Index Class A, Class B, Institutional Class
International Index Class A, Class B, Institutional Class
Bond Index Class A, Class B, Institutional Class
Mid Cap Market Index Class A, Class B, Institutional Class
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
<S> <C>
Investor Destinations Aggressive Class A, Class B, Service Class
Investor Destinations Moderately Aggressive Class A, Class B, Service Class
Investor Destinations Moderate Class A, Class B, Service Class
Investor Destinations Moderately Conservative Class A, Class B, Service Class
Investor Destinations Conservative Class A, Class B, Service Class
</TABLE>
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<PAGE> 101
<TABLE>
<CAPTION>
SERIES SHARE CLASSES
------ -------------
<S> <C>
Focus Class A, Class B, Institutional Service Class
Value Opportunities Class A, Class B, Institutional Service Class
High Yield Bond Class A, Class B, Institutional Service Class
Small Cap Value Institutional Class
Growth Focus Class A, Class B, Institutional Service Class
Global Technology and Communications Class A, Class B, Institutional Service Class
Global Life Sciences Class A, Class B, Institutional Service Class
Emerging Markets Class A, Class B, Institutional Service Class
International Growth Class A, Class B, Institutional Service Class
Global Leaders Class A, Class B, Institutional Service Class
European Growth Class A, Class B, Institutional Service Class
Global Small Companies Class A, Class B, Institutional Service 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 Investment Company Act of 1940 or other authority
except, under certain circumstances, to amend the Declaration of Trust, the
Investment Advisory Agreement, fundamental investment objectives, investment
policies and investment restrictions, to elect and remove Trustees, to
reorganize the Trust or any series or class thereof and to act upon certain
other business matters. In regard to termination, sale of assets, the change of
investment objectives, policies and restrictions or the approval of an
Investment Advisory Agreement, the right to vote is limited to the holders of
shares of the particular 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 Investment Company Act of
1940. 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.
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<PAGE> 102
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 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 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.
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<PAGE> 103
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.
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
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<PAGE> 104
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.
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
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<PAGE> 105
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.
Information as to the federal income tax status of all distributions will
be mailed annually to each shareholder.
ADDITIONAL TAX INFORMATION WITH RESPECT TO THE TAX-FREE INCOME FUND
The Tax-Free Income Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Free Income Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans, and individual retirement
accounts, since such plans and accounts are generally tax-exempt and, therefore,
would not gain any additional benefit from all or a portion of the Tax-Free
Income Fund's dividends being tax-exempt and such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Tax-Free
Income Fund may not be an appropriate investment for entities which are
"substantial users," or "related persons" thereof, of facilities financed by
private activity bonds held by the Tax-Free Income Fund.
The Code permits a regulated investment company which invests in municipal
securities to pay to its shareholders "exempt-interest dividends," which are
excluded from gross income for federal income tax purposes, if at the close of
each quarter of its taxable year at least 50% of its total assets consist of
municipal securities.
An exempt-interest dividend is any dividend or part thereof (other than a
capital gain dividend) paid by the Tax-Free Income Fund that is derived from
interest received by the Tax-Free Income Fund that is excluded from gross income
for federal income tax purposes, net of certain deductions, provided the
dividend is designated as an exempt-interest dividend in a written notice mailed
to shareholders not later than sixty days after the close of the Tax-Free Income
Fund's taxable year. The percentage of the total dividends paid by the Tax-Free
Income Fund during any taxable year that qualifies as exempt-interest dividends
will be the same for all shareholders of the Tax-Free Income Fund receiving
dividends during such year. Exempt-interest dividends shall be treated by the
Tax-Free Income Fund's shareholders as items of interest excludable from their
gross income for Federal
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<PAGE> 106
income tax purposes under Section 103(a) of the Code. However, a shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain the exclusion under Section 103(a) of the Code
if such shareholder is a "substantial user" or a "related person" to such user
under Section 147(a) of the Code with respect to any of the municipal securities
held by the Tax-Free Income Fund. If a shareholder receives an exempt-interest
dividend with respect to any share and such share is held by the shareholder for
six months or less, any loss on the sale or exchange of such share shall be
disallowed to the extent of the amount of such exempt-interest dividend.
In general, interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares is not deductible for federal income tax
purposes if the Tax-Free Income Fund distributes exempt-interest dividends
during the shareholder's taxable year. A shareholder of the Tax-Free Income Fund
that is a financial institution may not deduct interest expense attributable to
indebtedness incurred or continued to purchase or carry shares of the Tax-Free
Income Fund if the Tax-Free Income Fund distributes exempt-interest dividends
during the shareholder's taxable year. Certain federal income tax deductions of
property and casualty insurance companies holding shares of the Tax-Free Income
Fund and receiving exempt-interest dividends may also be adversely affected. In
certain limited instances, the portion of Social Security benefits received by a
shareholder which may be subject to federal income tax may be affected by the
amount of tax-exempt interest income, including exempt-interest dividends
received by shareholders of the Tax-Free Income Fund.
In the event the Tax-Free Income Fund realizes long-term capital gains,
the Tax-Free Income Fund intends to distribute any realized net long-term
capital gains annually. If the Tax-Free Income Fund distributes such gains, the
Tax-Free Income Fund will have no tax liability with respect to such gains, and
the distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held their shares. Any such
distributions will be designated as a capital gain dividend in a written notice
mailed by the Tax-Free Income Fund to the shareholders not later than sixty days
after the close of the Tax-Free Income Fund's taxable year. It should be noted,
however, that long-term capital gains of individuals are subject to a maximum
tax rate of 20% (or 10% for individuals in the 15% ordinary income tax bracket).
Any net short-term capital gains are taxed at ordinary income tax rates. If a
shareholder receives a capital gain dividend with respect to any share and then
sells the share before he has held it for more than six months, any loss on the
sale of the share is treated as long-term capital loss to the extent of the
capital gain dividend received.
Interest earned on certain municipal obligations issued on or after August
8, 1986, to finance certain private activities will be treated as a tax
preference item in computing the alternative minimum tax. Since the Tax-Free
Income Fund may invest up to 20% of its net assets in municipal securities the
interest on which may be treated as a tax preference item, a portion of the
exempt-interest dividends received by shareholders from the Tax-Free Income Fund
may be treated as tax preference items in computing the alternative minimum tax
to the extent that distributions by the Tax-Free Income Fund are attributable to
such obligations. Also, a portion of all other interest excluded from gross
income for federal income tax purposes earned by a corporation may be subject to
the alternative minimum tax as a result of the inclusion in alternative minimum
taxable income of 75% of the excess of adjusted current earnings and profits
over pre-book alternative minimum taxable income. Adjusted current earnings and
profits would include exempt-interest dividends distributed by the Tax-Free
Income Fund to corporate shareholders. For individuals the alternative minimum
tax rate is 26% on alternative minimum taxable income in excess of the
applicable exemption amount up to $175,000
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<PAGE> 107
and 28% on the excess of $175,000; for corporations the alternative minimum tax
rate is 20% on alternative minimum taxable income in excess of $40,000.
For taxable years of corporations beginning before 1996, the Superfund
Revenue Act of 1986 imposes an additional tax (which is deductible for federal
income tax purposes) on a corporation at a rate of 0.12 of one percent on the
excess over $2,000,000 of such corporation's "modified alternative minimum
taxable income", which would include a portion of the exempt-interest dividends
distributed by the Tax-Free Income Fund to such corporation. In addition,
exempt-interest dividends distributed to certain foreign corporations doing
business in the United States could be subject to a branch profits tax imposed
by Section 884 of the Code.
Distributions of exempt-interest dividends by the Tax-Free Income Fund may
be subject to state and local taxes even though a substantial portion of such
distributions may be derived from interest on obligations which, if received
directly, would be exempt from such taxes. The Tax-Free Income Fund will report
to its shareholders annually after the close of its taxable year the percentage
and source, on a state-by-state basis, of interest income earned on municipal
obligations held by the Tax-Free Income Fund during the preceding year.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes.
The Tax-Free Income Fund may acquire rights regarding specified portfolio
securities under puts. The policy of the Tax-Free Income Fund is to limit its
acquisition of puts to those under which it will be treated for federal income
tax purposes as the owner of the municipal securities acquired subject to the
put and the interest on the municipal securities will be tax-exempt to it.
Although the Internal Revenue Service has issued a published ruling that
provides some guidance regarding the tax consequences of the purchase of puts,
there is currently no guidance available from the Internal Revenue Service that
definitively establishes the tax consequences of many of the types of puts that
the Tax-Free Income Fund could acquire under the Investment Company Act of 1940.
Therefore, although the Tax-Free Income Fund will only acquire a put after
concluding that it will have the tax consequences described above, the Internal
Revenue Service could reach a different conclusion.
Under Section 1256 of the Code, gain or loss realized by the Tax-Free
Income Fund from certain financial futures and options transactions will be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Gain or loss will arise upon exercise or lapse of such futures and options
as well as from closing transactions. In addition, any such futures and options
remaining unexercised at the end of the Tax-Free Income Fund's taxable year will
be treated as sold for their then fair market value, resulting in additional
gain or loss to the Tax-Free Income Fund characterized in the manner described
above.
Offsetting positions held by the Tax-Free Income 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.
104
<PAGE> 108
If the Tax-Free Income Fund were treated as entering into straddles by
reason of its engaging in futures or options transactions, such straddles would
be characterized as "mixed straddles" if the futures or options comprising a
part of such straddles were governed by Section 1256 of the Code. The Tax-Free
Income Fund may make one or more elections with respect to mixed straddles. If
no election is made, to the extent the straddle rules apply to positions
established by the Tax-Free Income Fund, losses realized by the Tax-Free Income
Fund will be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle and conversion transaction
rules, short-term capital losses on straddle positions may be recharacterized as
long-term capital losses and long-term capital gains may be recharacterized as
short-term capital gain or ordinary income.
Investment by the Tax-Free Income Fund in securities issued at a discount
or providing for deferred interest or for payment of interest in the form of
additional obligations could, under special tax rules, affect the amount, timing
and character of distributions to shareholders. For example, the Tax-Free Income
Fund could be required to take into account annually a portion of the discount
(or deemed discount) at which such securities were issued and to distribute such
portion in order to maintain its qualification as a regulated investment
company. In that case, the Tax-Free Income 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.
Income itself exempt from Federal income taxation may be considered in
addition to taxable income when determining whether Social Security payments
received by a shareholder are subject to federal income taxation.
MAJOR SHAREHOLDERS
As of August 25, 2000, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the shares of the Trust.
As of August 25, 2000, the following shareholders held five percent or
greater of shares of the Funds:
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
NATIONWIDE U.S. GOVERNMENT INCOME FUND - CLASS D
Nationwide Life Insurance Co. 2,356,731 43.34%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
GROWTH FUND - CLASS D
Nationwide Life Insurance Co. 15,603,476 27.48%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE FUND - CLASS D
Nationwide Life Insurance Co. 20,972,228 30.37%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE BOND FUND - CLASS D
Nationwide Life Insurance Co. 3,616,324 28.86%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE BOND FUND - CLASS B 22,795 11.27%
Joan C. Edwards
114 Hunter Pkwy
Cuyahoga Falls, Ohio 4223-3750
NATIONWIDE BOND FUND - CLASS A
Nationwide Trust Company, FSB 40,997 10.59%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
35,057 9.05%
I Know I Can Fund Of the Columbus Foundation
1234 E. Broad St
Columbus, Ohio 43205-1405
</TABLE>
105
<PAGE> 109
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Thomas Jilek 26,360 6.81%
6543 Highland Road
Mayfield Villiage, OH 44043
NATIONWIDE MONEY MARKET - CLASS D
Nationwide Life Insurance Co. 726,667,907 62.82%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE MONEY MARKET FUND - SERVICE CLASS
Nationwide Life Insurance Co. 126,233,140 51.11%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Trust Company, FSB 120,322,861 48.72%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE MONEY MARKET FUND - CLASS B 29,041 5.91%
Roseanne C. Smerling
3065 Bellaire Ln
Oshkosh, WI 54904-1002
NAS as Custodian for IRA Plan 36,890 7.51%
Paula J. Bales
6477 Mary Esther Ln
Mechanicsville, VA 23111-5030
32,219 6.55%
Arlene Freeman
1366 Yardley Newtown Road
Yardley, PA 19067
45,978 9.35%
Barry Freeman
1099 Houston Road
Yardley, PA 19067
NAS as Custodian for IRA Plan 27,264 5.55%
Claude D. Johnson, Jr.
NC 69 Box 1340
Bigfoot, TX 78005-9303
45,446 9.24%
Broadus Cobb
1721 Country Club Road
Rocky Mount, NC 27804
</TABLE>
106
<PAGE> 110
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Joseph Yielding 28,968 5.89%
Karla Yielding
1814 Park Maple Drive
Katy, TX 77450
Robert Sangrey 39,068 7.95%
Rose Sangrey
3 Hiawatha Dr
Leola, PA 17540
NATIONWIDE SMALL CAP INDEX - CLASS A 1,004 76.77%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428-2436
FTC & Co. 304 23.23%
PO Box 173736
Denver, CO 80217
NATIONWIDE SMALL CAP INDEX - INSTITUTIONAL
Villanova Mutual Fund Capital Trust 157,894 98.08%
1200 River Road
Conshohocken, PA 19428-2436
NATIONWIDE INTERNATIONAL INDEX - CLASS A
J. Dan Bourchillon & 7,527 32.12%
Sherry Bouchillon
1102 Rugby Court
Louisville, Kentucky 40222
Nationwide Advisory Services
as Custodian for IRA Plan 5,442 23.22%
Eugene J Williams
9566 Neowash Road
Waterville, Ohio 43566
1,419 6.05%
Ulrich Holzinger
PO Box 575
White River Junction, Vermont 05001
NATIONWIDE INTERNATIONAL INDEX - CLASS B 1003 18.58%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428-2436
</TABLE>
107
<PAGE> 111
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Daniel L Carl 209 5.73%
Darlene Carl
213 S. Goodspring
Hegins, Pennsylvania
542 10.04%
Max Ducharme
PO Box 295
South Barre, Vermont 05670
371 6.87%
Marsha Cooper
3800 Mahonia Way
Arlington, Texas 76014
670 12.42%
Frank Conover Account
5510 Pecanwood Drive
Arlington, Texas 76001
INTERNATIONAL INDEX - INSTITUTIONAL
Nationwide Life Insurance Co. 223,759 95.12%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE BOND INDEX - CLASS A 1,030 100.00%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428-2436
NATIONWIDE BOND INDEX - INSTITUTIONAL
Nationwide Life Insurance Co. 242,971 95.03%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE MID CAP MARKET INDEX - CLASS A
Nationwide Life Insurance Co. 251,113 99.89%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
MID CAP MARKET INDEX - INSTITUTIONAL
Nationwide Life Insurance Co. 464,433 100.00%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
108
<PAGE> 112
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
NATIONWIDE S&P 500 INDEX FUND - CLASS A 8,189 5.40%
Eugene J. Williams
9566 Neowash Road
Waterville, OH 43566
NATIONWIDE S&P 500 INDEX FUND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 2,373,891 98.26%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
NW S&P 500 INDEX - SERVICE CLASS
Nationwide Life Insurance Co. 13,052,588 94.71%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
NW S&P 500 INDEX FUND - INSTITUTIONAL CLASS
Nationwide Life Insurance Co. 7,379,922 99.84%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
NATIONWIDE S&P 500 INDEX FUND - LOCAL FUND SHARES
Nationwide Asset Allocation Trust
c/o Nationwide Advisory
Services Inc 3-26-04 87,580 11.35%
Moderately Conservative Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
Nationwide Asset Allocation Trust
c/o Nationwide Advisory
Services Inc 3-26-04 244,442 31.67%
Moderate Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
Nationwide Asset Allocation Trust
c/o Nationwide Advisory
Services Inc 3-26-04 193,900 25.12%
Moderately Aggressive Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
</TABLE>
109
<PAGE> 113
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Asset Allocation Trust
c/o Nationwide Advisory
Services Inc 3-26-04 200,653 26.00%
Aggressive Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
NATIONWIDE VALUE OPPORTUNITIES - CLASS A 33,483 21.33%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428-2436
10,839 6.90%
Thomas Rossman Plan
2041 William Flynn Highway
Butler, PA 16001
Charles Schwab & Co Inc. 43,501 27.71%
Special Custody - The Exclusive Benefit of Customers
101 Montgomery St
San Francisco, CA 94104
NATIONWIDE VALUE OPPORTUNITIES - CLASS B 33,302 64.76%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428-2436
NATIONWIDE VALUE OPPORTUNITIES - INSTITUTIONAL SERVICE 33,415 11.55%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428-2436
State Street Bank & Trust Company
Herzon Heine Gedult Inc. 18,636 6.44%
Brain Emond Specialized Trust Division
200 Newport Avenue JQB7
North Quincy, MA 02171
State Street Bank & Trust Company
Herzon Heine Gedult Inc. 19,997 6.91%
Brain Emond Specialized Trust Division
200 Newport Avenue JQB7
North Quincy, MA 02171
Washtenaw County VEBA 106,920 36.95%
220 North Main St.
PO Box 8645
Ann Arbor, MI 48107
</TABLE>
110
<PAGE> 114
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Life Insurance Co. 110,415 38.16%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE HIGH YIELD BOND - CLASS A
Charles Schwab & Co Inc. 269,773 85.94%
Special Custody - The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
NATIONWIDE HIGH YIELD BOND - CLASS B
Villanova Mutual Fund Capital Trust 1,063 6.89%
1200 River Road
Conshohocken, PA 19428-2436
Allen Hatter 1,775 11.52%
RR 1 Box 101A
Pitman, PA 17964
Cheryl Jones 3,387 21.96%
5639 Old Chapel Hill Rd 1108
Durham, NC 27707
Linda Lisboa 6,593 42.78%
2553 Willowspring Court
Cincinnati, OH 45231
Cecil Johnson 2,130 13.82%
3609 Kelvin Ave.
Fort Worth, TX 76133
HIGH YIELD BOND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 10,754,968 99.99%
Attn: Pam Smith
Investment Accounting
Nationwide Plaza 1, 32nd Floor
Columbus, OH 43218
NATIONWIDE INTERMEDIATE U.S. GOVERNMENT BOND - CLASS A
Nationwide Pensions Managed 404,542 7.197%
Variable Account
Personal Portfolio Series #1
3435 Stelzer Road
Columbus, OH 43219
</TABLE>
111
<PAGE> 115
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Pensions Managed 597,484 10.63%
Variable Account
Personal Portfolio Series #2
3435 Stelzer Road
Columbus, OH 43219
Nationwide Pensions Managed 1,187,487 21.13%
Variable Account
Personal Portfolio Series #3
3435 Stelzer Road
Columbus, OH 43219
Nationwide Pensions Managed 1,568,776 27.91%
Variable Account
Personal Portfolio Series #4
3435 Stelzer Road
Columbus, OH 43219
Nationwide Pensions Managed 1,308,826 23.28%
Variable Account
Personal Portfolio Series #5
3435 Stelzer Road
Columbus, OH 43219
Nationwide Pensions Managed 360,062 6.45%
Variable Account
Personal Portfolio Series #6
3435 Stelzer Road
Columbus, OH 43219
NATIONWIDE INTERMEDIATE U.S. GOVERNMENT BOND - CLASS B
Wanda Fay Whitley 9,291 8.45%
51 Lakeshore Ln
Chattanooga, TN 37415-7015
Vernie M. Weaver 6,894 6.29%
T/O/D
3708 Cyrus Creek Rd
Darrdoursville, WV 25504
Norma Louise Bugg 7,683 6.99%
T/O/D
RR 4 Box 51
Tangier, IN 47952-9019
</TABLE>
112
<PAGE> 116
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
NATIONWIDE TAX-FREE INCOME - CLASS A
Geraldine H. Zerphey 18,934 7.04%
T/O/D
232 N. Locust St
Elizabethtown, PA 17022-1929
Larura Gordy 29,183 10.85%
11602 Primrose Court
Ijamsville, MD 21754
Mary M. Dais & 36,866 13.71%
William F. Dais JT WROS
910 Buckeye St.
Genoa, OH 43430-1523
Richard C. Stansbury 20,304 7.55%
T/O/D
201 St Mark Way, Apt.404
Westminster, MD 21158-4195
NATIONWIDE TAX-FREE INCOME - CLASS B
Elsie Adkins 41,179 9.95%
4315 Dickinson Ave. Ext
Greenville, NC 27834
NATIONWIDE LONG-TERM U.S. GOVERNMENT BOND - CLASS D
Nationwide Life Ins. 149,169 5.89%
Attn: Pamela Smith
1-35-05
One Nationwide Plaza
Columbus, OH 43215-2239
NATIONWIDE MILLENNIUM GROWTH FUND (FORMERLY THE "MID CAP GROWTH
FUND") - CLASS A 129,975 31.97%
Batrus and Co
Church St. Station
New York, NY 10008
MORLEY CAPITAL ACCUMULATION FUND - SERVICE CLASS
Nationwide Life Ins. Co. 518,530 60.01%
c/o IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
Nationwide Life Ins. Co. 107,748 12.47%
Attn: Pam Smith
One Nationwide Plaza
Columbus, Ohio 43215-2239
</TABLE>
113
<PAGE> 117
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Trust Company FSB 212,643 24.61%
c/o IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
MORLEY CAPITAL ACCUMULATION FUND INSTITUTIONAL CLASS
Morley Capital Management 210,003 25.21%
5665 SW Meadows Rd, Ste. 400
Lake Oswego, OR 97035-3193
Nationwide Life Ins. Co. 325,160 39.03%
Attn: Pam Smith
One Nationwide Plaza
Columbus, Ohio 43215-2239
Sterling Trust Company Cust 73,944 8.88%
Danis Building Construction Company 401K PSP
1380 Lawrence St. Ste 1410
Denver, CO 80204
Circle Trust Company Custodian 198,321 23.80%
Metro Center
One Station Place
Stamford, CT 06902
MORLEY CAPITAL ACCUMULATION FUND IRA CLASS
Nationwide Life Co. 107,740 58.27%
Attn: Pam Smith
1 Nationwide Plaza
Columbus, Ohio 43215-2239
NAS As Cust for IRA Plan 73,200 39.59%
Harold N. Morley
Rollover Account
18016 Skyland Cir
Lake Oswego, OR 97034-6452
PRESTIGE LARGE CAP VALUE FUND - CLASS A
Nationwide Pensions Managed 218,984 7.89%
Variable Account
Personal Portfolio Series
3435 Stelzer Road
Columbus, OH 43219
</TABLE>
114
<PAGE> 118
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Pensions Managed 723,761 26.08%
Variable Account
Personal Portfolio Series
3435 Stelzer Road
Columbus, OH 43219
Nationwide Pensions Managed 805,072 29.01%
Variable Account
Personal Portfolio Series
3435 Stelzer Road
Columbus, OH 43219
Nationwide Pensions Managed 664,549 23.95%
Variable Account
Personal Portfolio Series
3435 Stelzer Road
Columbus, OH 43219
PRESTIGE LARGE CAP VALUE FUND - CLASS B
Doug L. Brown & 2,003 5.30%
Jackie Lynn Brown JT WROS
1839 Prospect Road
Lawrenceville, GA 30043-2758
Thomas Walters Account 2,526 6.68%
4614 Carmel Circlue
Pasadena, TX 77505
PRESTIGE LARGE CAP VALUE FUND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 134,800 93.92%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
National Deferred Compensation - NRSA 8,727 6.08%
P.O. Box 20629
Columbus, OH 43220
PRESTIGE LARGE CAP GROWTH FUND - CLASS A
Nationwide Pensions Managed 148,697 5.83%
Variable Account
Personal Portfolio Series #2
One Nationwide Plaza
Columbus, Ohio 43215-2239
</TABLE>
115
<PAGE> 119
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Pensions Managed 295,317 11.57%
Variable Account
Personal Portfolio Series #3
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 487,991 19.12%
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 542,636 21.26%
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 671,733 26.32%
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE LARGE CAP GROWTH FUND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 546,339 81.87%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
National Deferred Compensation - NRSA 93,743 14.05%
P.O. Box 20629
Columbus, OH 43220
PRESTIGE BALANCED FUND - CLASS A
Nationwide Life Insurance Co. 77,080 24.67%
QPVA
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Co. 175,976 56.32%
Attn: Pam Smith
1 Nationwide Plaza
Columbus, Ohio 43215-2239
</TABLE>
116
<PAGE> 120
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
PRESTIGE BALANCED FUND - CLASS B
Nationwide Life Co. 172,433 82.19%
Attn: Pam Smith
1 Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE BALANCED FUND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 348,085 97.30%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
PRESTIGE SMALL CAP FUND - CLASS A
Nationwide Pensions Managed 170,138 9.79%
Variable Account
Personal Portfolio Series #3
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 281,147 16.17%
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 625,702 35.99%
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 516,515 29.71%
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE SMALL CAP FUND - CLASS B
NAS as Cust of IRA Plan 3,372 6.45%
John F. Carlin
694 Jenney Mill Ct
Marietta, GA 30068-2221
PRESTIGE SMALL CAP FUND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 278,494 91.96%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
117
<PAGE> 121
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
National Deferred Compensation - NRSA 20,146 6.65%
P.O. Box 20629
Columbus, OH 43220
PRESTIGE INTERNATIONAL FUND - CLASS A
Nationwide Pensions Managed 306,260 24.40%
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 341,223 27.19%
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed 563,546 44.90%
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE INTERNATIONAL FUND - CLASS B
Phyllis Claus 806 5.37%
Roger Claus
33310 Christman Ridge Road
Lewisville, OH 43754
NAS as Cust for IRA Plan 888 5.92%
Kenneth M. McElhaney
Rollover Account
30798 Humes Road
Cambridge Spgs, PA 16403-7220
Debra A. Merijohn 828 5.51%
12623 S 69th Court
Palds Heights, IL 60463-1692
PRESTIGE INTERNATIONAL FUND - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. 91,557 91.52%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
118
<PAGE> 122
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
INVESTOR DESTINATIONS AGGRESSIVE FUND - CLASS A
Villanova Mutual Fund Capital Trust 1,000 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS AGGRESSIVE FUND - CLASS B
Villanova Mutual Fund Capital Trust 1,000 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS AGGRESSIVE FUND - SERVICE CLASS
Villanova Mutual Fund Capital Trust 1,000 100.00%
1200 River Road
Conshohocken, PA 19428
Nationwide Life Insurance Co. 3,420 56.84%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Trust Company, FSB 1,597 26.54%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
INVESTOR DESTINATIONS MODERATELY AGGRESSIVE FUND - CLASS A
Villanova Mutual Fund Capital Trust 1,000 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS MODERATELY AGGRESSIVE FUND - CLASS B
Villanova Mutual Fund Capital Trust 1,000 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS MODERATELY AGGRESSIVE FUND - SERVICE CLASS
Villanova Mutual Fund Capital Trust 1,000 100.00%
1200 River Road
Conshohocken, PA 19428
Nationwide Trust Company, FSB 17,067 91.84%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
119
<PAGE> 123
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
INVESTOR DESTINATIONS MODERATE FUND - CLASS A
Villanova Mutual Fund Capital Trust 1,004 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS MODERATE FUND - CLASS B
Villanova Mutual Fund Capital Trust 1,002 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS AGGRESSIVE FUND - SERVICE CLASS
Villanova Mutual Fund Capital Trust 1,004 27.48%
1200 River Road
Conshohocken, PA 19428
Nationwide Life Insurance Co. 470 12.85%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Trust Company, FSB 2,181 59.66%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
INVESTOR DESTINATIONS MODERATELY CONSERVATIVE FUND - CLASS A
Villanova Mutual Fund Capital Trust 1,007 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS MODERATELY CONSERVATIVE FUND - CLASS B
Villanova Mutual Fund Capital Trust 1,005 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS MODERATELY CONSERVATIVE FUND - SERVICE CLASS
Villanova Mutual Fund Capital Trust 1,007 29.08%
1200 River Road
Conshohocken, PA 19428
Nationwide Life Insurance Co. 1,102 31.83%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
120
<PAGE> 124
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
Nationwide Trust Company, FSB 1,354 39.09%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
INVESTOR DESTINATIONS CONSERVATIVE FUND - CLASS A
Villanova Mutual Fund Capital Trust 1,009 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS CONSERVATIVE FUND - CLASS B
Villanova Mutual Fund Capital Trust 1,007 100.00%
1200 River Road
Conshohocken, PA 19428
INVESTOR DESTINATIONS CONSERVATIVE FUND - SERVICE CLASS
Villanova Mutual Fund Capital Trust 1,009 40.68%
1200 River Road
Conshohocken, PA 19428
Nationwide Trust Company, FSB 1,357 54.73%
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
GARTMORE GLOBAL TECHNOLOGY AND COMMUNICATIONS FUND - CLASS A
Villanova Mutual Fund Capital Trust 166,667 100.00%
1200 River Road
Conshohocken, PA 19428
GARTMORE GLOBAL TECHNOLOGY AND COMMUNICATIONS FUND - INSTITUTIONAL
CLASS 166,667 100.00%
Villanova Mutual Fund Capital Trust
1200 River Road
Conshohocken, PA 19428
GARTMORE GROWTH 20 FUND - CLASS A
Villanova Mutual Fund Capital Trust 66,667 100.00%
1200 River Road
Conshohocken, PA 19428
GARTMORE GROWTH 20 FUND - CLASS B
Villanova Mutual Fund Capital Trust 66,667 100.00%
1200 River Road
Conshohocken, PA 19428
</TABLE>
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<PAGE> 125
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
<S> <C> <C>
GARTMORE GROWTH 20 FUND - INSTITUTIONAL CLASS
Villanova Mutual Fund Capital Trust 66,667 100.00%
1200 River Road
Conshohocken, PA 19428
NORTHPOINTE SMALL CAP VALUE FUND - INSTITUTIONAL CLASS
Hudson Webber Foundation 983,284 45.01%
333 W Fort St, Suite 1310
Detroit, Michigan 48226
International Association of Machinist 139,991 6.41%
And Aerospace Workers Local 2848
30700 Telegraph, Suite 4601 PO Box 3039
Birmingham, Michigan 48012
International Association of Machinist 229,873 10.52%
And Aerospace Workers Local 2848
30700 Telegraph, Suite 4601 PO Box 3039
Birmingham, Michigan 48012
Garrett Evangelical Theological Seminary 368,905 16.89%
2121 Sheridan Road
Evanston, Illinois 60201
Community Health Partners of Ohio 462,629 21.18%
Defined Benefit Pension
3700 Kolbe Road
Lorain, Ohio 44053
</TABLE>
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<PAGE> 126
To the extent, Nationwide Life Insurance Company and its affiliates
directly or indirectly owned, controlled and held power to vote 25% or more of
the outstanding shares of the Funds above, it is deemed to have "control" over
matters which are subject a vote of the Fund's shares.
Nationwide Life Insurance Company, One Nationwide Plaza, Columbus, Ohio
43215 is wholly-owned by Nationwide Financial Services, Inc. (NFS). NFS, a
holding company, has two classes of common stock outstanding with different
voting rights enabling Nationwide Corporation (the holder of all 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 (95.24%)
and Nationwide Mutual Fire Insurance Company (4.76%), each of which is a mutual
company owned by its policyholders.
FINANCIAL STATEMENTS
The Report of Independent Auditors and Financial Statements of the Funds
for the period ended October 31, 1999 are incorporated by reference to the
Trust's Annual Reports. Copies of the Annual Report are available without charge
upon request by writing the Trust or by calling toll free 1-800-848-0920.
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<PAGE> 127
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 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.
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<PAGE> 128
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
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
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<PAGE> 129
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.
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.
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<PAGE> 130
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 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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<PAGE> 131
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 possibility. Capacity for C 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 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.
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<PAGE> 132
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
AA- slightly from time to time because of
economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable
A- and greater in periods of economic stress.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in
risk during economic cycles.
BB+ Below investment grade but deemed likely to
BB meet obligations when due. Present or
BB- prospective financial protection factors
fluctuate according to industry conditions
or company fortunes. Overall quality may
move up or down frequently within this
category.
B+ Below investment grade and possessing risk
B that obligations will not be met when due.
B- Financial protection factors will fluctuate
widely according to economic cycles,
industry conditions and/or company fortunes.
Potential exists for frequent Changes in
the rating within this category or into a
higher or lower rating grade.
C-
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.
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.
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<PAGE> 133
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 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.
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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 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.
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<PAGE> 135
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.
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.
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.
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<PAGE> 136
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
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.
133
