<PAGE> 1
'33 Act File No. 333-40455
'40 Act File No. 811-08495
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 22 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 23 [X]
(CHECK APPROPRIATE BOX OR BOXES)
NATIONWIDE MUTUAL FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (614) 249-7855
SEND COPIES OF COMMUNICATIONS TO:
ELIZABETH A. DAVIN, ESQ.
DIETRICH, REYNOLDS AND KOOGLER
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(NAME AND ADDRESS OF AGENT FOR SERVICE)
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on March 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
Explanatory Note
This Post-Effective Amendment No. 22 to Registrant's Registration Statement on
Form N1-A is filed for the purpose of adding disclosure regarding a new series
of the Registrant to the Registration Statement, NorthPointe Small Cap Value
Fund. Accordingly, this Post-Effective Amendment No. 22 does not relate to the
existing series of the Registrant, disclosure concerning which is hereby
incorporated by reference from the following documents (File Nos. 333-40455,
811-08495): (1) Morley Capital Accumulation Fund Prospectus (Service Class,
Institutional Class and IRA Class Shares) dated March 1, 2000; (2) Morley
Enhanced Income Fund Prospectus (Class A, Institutional Service Class and
Institutional Class Shares) dated January 3, 2000 (as amended February 9, 2000);
(3) Nationwide Family of Funds Prospectus (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) dated
March 1, 2000; (4) Nationwide Combined Index Fund Prospectus (Nationwide Small
Cap Index Fund, Nationwide Mid Cap Market Index Fund, Nationwide International
Index Fund, and Nationwide Bond Index Fund - Class A, Class B and Institutional
Class Shares) dated January 3, 2000 (as amended February 9, 2000); (5)
Nationwide High Yield Bond Fund Prospectus (Class A, Class B and Institutional
Service Class Shares) dated January 3, 2000 (as amended February 9, 2000); (6)
Nationwide Money Market Fund Prospectus (Service Class Shares) dated March 1,
2000; (7) Nationwide S&P 500 Index Fund Prospectus (Class A, Class B and
Institutional Class Shares) dated January 3, 2000 (as amended February 9, 2000);
(8) Nationwide S&P 500 Index Fund Prospectus (Service Class, Institutional
Service Class and Local Fund Shares) dated March 1, 2000; (9) Nationwide Value
Opportunities Fund Prospectus (Class A, Class B and Institutional Service Class
Shares) dated January 3, 2000 (as amended February 9, 2000 and supplemented
March 27, 2000); (10) Prestige Advisor Series Prospectus dated March 1, 2000;
(11) Nationwide Mutual Funds Statement of Additional Information (Nationwide
Value Opportunities Fund, Nationwide High Yield Bond Fund, Nationwide Focus
Fund, and Morley Enhanced Income Fund) dated January 3, 2000 (as amended
February 9, 2000); (12) Nationwide Combined Index Fund Statement of Additional
Information (Nationwide Small Cap Index Fund, Nationwide Mid Cap Market Index
Fund, Nationwide International Index Fund, Nationwide Bond Index Fund and
Investor Destinations Series) dated January 3, 2000 (as amended February 9,
2000); (13) Nationwide S&P 500 Index Fund Statement of Additional Information
(Class A, Class B and Institutional Class Shares) dated January 3, 2000 and (14)
Investor Destinations Series prospectus (Class A, Class B and Institutional
Service Class). This information is contained in previously filed Post-Effective
Amendments to the Registration Statement as filed pursuant to Rule 485 under the
Securities Act of 1933 and filings pursuant to Rule 497 under the Securities Act
of 1933.
<PAGE> 3
NATIONWIDE(R) MUTUAL FUNDS
- - NorthPointe Small Cap Value Fund
July , 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Funds' shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 4
TABLE OF CONTENTS
FUND SUMMARY.................................................................. 2
Objective and Principal Strategies........................................... 2
Principal Risks.............................................................. 2
Performance.................................................................. 3
Fees and Expenses............................................................ 3
MORE ABOUT THE FUND.......................................................... 4
Principal Risks.............................................................. 4
Principal Techniques......................................................... 5
MANAGEMENT................................................................... 7
Investment Adviser........................................................... 7
Subadviser................................................................... 7
Historical Performance of the Portfolio Managers............................. 7
BUYING, SELLING AND EXCHANGING FUND SHARES................................... 8
Buying Shares................................................................ 8
Selling Shares............................................................... 9
Exchanging Shares............................................................ 9
DISTRIBUTIONS AND TAXES...................................................... 10
Distributions of Income Dividends............................................ 10
Distributions of Capital Gains............................................... 10
Reinvesting Distributions.................................................... 10
State and Local Taxes........................................................ 10
Selling Fund Shares.......................................................... 10
Exchanging Fund Shares....................................................... 10
ADDITIONAL INFORMATION................................................BACK COVER
1
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FUND SUMMARY
This prospectus provides information about the NorthPointe Small Cap Value Fund
(the Fund), a series of the Nationwide(R) Mutual Funds. "You" and "your" refers
to potential investors and current shareholders of the Fund.
This section summarizes key information about the Fund. Use the summary to
compare the Fund with other mutual funds. More detailed information about the
risks and investment techniques of the Fund can be found in "More About the
Fund" beginning on page five.
OBJECTIVE AND PRINCIPAL STRATEGIES
The Fund seeks long-term capital appreciation through investment in common
stocks or their equivalents. The Fund's investment objective can be changed
without shareholder approval.
The Fund intends to pursue its investment objective by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
companies whose equity market capitalizations at the time of investment are
similar to the market capitalizations of companies in the Russell 2000 Index,
known as small cap companies. The Russell 2000, published by the Frank Russell
Company, is an index consisting of approximately 2,000 companies with small
market capitalizations relative to the market capitalizations of other U.S.
companies. As of December 31, 1999, the market capitalizations of companies in
the Russell 2000 ranged from $100 million to $13 billion. The market
capitalization range for companies in the Russell 2,000 is updated annually.
[Inset Box]
Market capitalization is a common
way to measure the size of a
company based on the price of its
common stock; it's simply the
number of outstanding shares of
the company multiplied by the
current share price.
[Inset Box]
The Fund invests primarily in
stocks of U.S. and foreign
companies, which it considers to
be "value" companies. These
companies have good earnings
growth potential and the Fund's
subadviser believes that the
market has undervalued them. The
Fund will also invest in
unrecognized stocks and stocks of
special situation companies and
turnarounds (companies that have
experienced significant business
problems but which the subadviser
believes have favorable prospects
for recovery).
Smaller capitalization companies are often undervalued for one of the following
reasons: (1) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly traded companies, are often less
interested in smaller capitalization companies because of the difficulty of
acquiring a meaningful position without purchasing a large percentage of the
company's outstanding equity securities; and (2) such companies may not be
regularly researched by securities analysts, which could result in greater
discrepancies in valuation.
In addition to investing in small cap companies, the Fund may also invest in
larger capitalization companies and in real estate investment trusts (REITs).
PRINCIPAL RISKS
Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases. The value of shares will also be
impacted in part by the subadviser's ability to assess economic conditions and
investment opportunities.
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
SMALL CAP RISK. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more established companies. The stocks of
small capitalization companies are usually less stable in price and less liquid
than the stocks of larger companies.
RISKS RELATED TO INVESTING FOR VALUE. Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the Fund generally focuses on value-style stocks,
the Fund's performance at times may be better or worse than the performance of
stock funds that focus on other types of stocks, or that have a broader
investment style.
FOREIGN RISK. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement.
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For more detailed information about the Fund's investments and risks, see "More
About the Fund" beginning on page five.
PERFORMANCE
No performance information is provided because the Fund did not begin operations
until , 2000. For the performance of a comparable mutual
fund for which the Fund's portfolio managers previously managed, please refer to
"Management" on page seven.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
Institutional
Class
shares
<S> <C> <C> <C>
Shareholder Fees None
(paid directly from your investment)
Annual Fund Operating
Expenses
(deducted from Fund assets)
- --------------------------------------------------------------
<S> <C> <C> <C>
Management Fees 0.85%
..............................................................
Distribution and/or Service None
(12b-1) Fees
..............................................................
Other Expenses 0.55%
- --------------------------------------------------------------
TOTAL ANNUAL FUND 1.40%
OPERATING EXPENSES(1)
</TABLE>
- ---------------
(1) Because the Fund did not begin operations until , 2000, the
management fee is the fee to which the adviser is entitled under its
contract with the Fund. "Other Expenses" are estimates of the other
operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on estimates for the
Fund's first fiscal year ending October 31, 2000. At least through October
31, 2000, the adviser has agreed to waive management fees and, if necessary,
to reimburse "Other Expenses" so that Total Annual Fund Operating Expenses
will not exceed 1.00% for Institutional Class shares. This waiver of
management fees or reimbursement of other expenses is subject to a possible
reimbursement by the Fund within five years of the Fund's commencement of
operations if the reimbursement by the Fund can be implemented within the
annual expense limitations described above.
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses and does not take into
account the fee waiver/expense reimbursement provisions currently in place for
the Fund. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
- ----------------------------------------------------------
<S> <C> <C>
Institutional Class shares $143 $443
</TABLE>
3
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MORE ABOUT THE FUND
PRINCIPAL RISKS AND TECHNIQUES
The Fund may use the principal investment techniques to increase returns,
protect assets or diversify investments. These techniques are subject to certain
risks. For additional information about the Fund's investment strategies and
techniques, see the Statement of Additional Information (SAI).
PRINCIPAL RISKS
SMALL CAP RISK. Historically, the securities of small companies have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of small companies, the lower degree of liquidity in the
markets for such securities, the greater impact caused by changes in investor
perception of value, and the greater sensitivity of small cap companies to
changing economic conditions. In addition, small cap companies may:
- lack depth of management
- lack a proven track record
- be unable to generate funds necessary for growth or development
- be developing or marketing new products or services for which markets are
not yet established and may never become established
- market products or services which may become quickly obsolete.
Small cap companies in the technology and biotechnology industries may be
subject to abrupt or erratic price movements. Therefore, while small cap
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.
FOREIGN RISK
Foreign security investment involves special risks not present in U.S.
investments that can increase the chances that a Fund will lose money.
- COUNTRY. General securities market movements in any country in which a Fund
has investments, are likely to affect the value of a Fund's securities that
trade in that country. These movements will affect a Fund's share price and
a Fund's performance. The political, economic and social structures of some
countries in which a Fund invests may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of the imposition of exchange controls, currency devaluations,
foreign ownership limitations, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes and
certain custody and settlement risks.
- FOREIGN MARKETS. A Fund is subject to the risk that because there are
generally fewer investors in foreign markets and a smaller number of
securities traded each day, it may make it difficult for a Fund to buy and
sell certain securities. In addition, prices of foreign securities may go up
and down more than prices of securities traded in the U.S. Also, brokerage
commissions and other costs of buying and selling securities often are
higher in foreign countries than they are in the United States. This reduces
the amount the Fund can earn on its investments.
- GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS. Foreign
companies are not subject to the same disclosure, accounting, auditing and
financial reporting standards and practices as U.S. companies. A Fund may
have greater difficulty voting proxies, exercising shareholder rights,
pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in U.S.
courts. Many foreign governments supervise and regulate stock exchanges,
brokers and the sale of securities less than the U.S. does. Other countries
may not have laws to protect investors the way that the U.S. securities laws
do. Accounting standards in other countries are not necessarily the same as
in the U.S. If the accounting standards in another country do not require as
much detail as U.S. accounting standards, it may be harder for a Fund's
portfolio manager to completely and accurately determine a company's
financial condition.
- CURRENCY. Some of a Fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what a fund owns and a Fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency. In addition, if
4
<PAGE> 8
the currency in which a Fund receives dividends, interest or other payments
declines in value against the U.S. dollar before such income is distributed
as dividends to shareholders or converted to U.S. dollars, the Fund may have
to sell portfolio securities to obtain sufficient cash to pay such
dividends.
- EUROPEAN ECONOMIC AND MONETARY UNION (EMU). A number of European countries
have entered into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU has
established a single European currency (the euro), which was introduced in
January 1, 1999 and is expected to replace the existing national currencies
of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the
euro. These securities trade and make dividend and other payments only in
euros. Like other investment companies and business organizations, including
the companies in which the Funds invest, the Funds could be adversely
affected:
- If the transition to euro, or EMU as a whole, does not proceed as planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by a Fund's service
providers, or by other entities with which the Fund or its service
providers do business, are not capable of recognizing the euro as a
distinct currency.
PRINCIPAL TECHNIQUES
VALUE STOCKS. Due to their relatively low valuations, value stocks are typically
less volatile than growth stocks and their price may be less directly linked to
market developments than a growth stock's. Accordingly, they might not
participate in upward market movements, but may be less adversely affected in a
down market compared to lower yielding stocks.
Non-Principal Techniques
CONVERTIBLE SECURITIES. Convertible securities -- also known as convertibles
- -- include bonds, debentures, notes, preferred stocks, and other securities.
Convertibles are hybrid securities that have characteristics of both bonds and
stocks. Like bonds, they pay interest. Because they can be converted into common
stock within a set period of time, at a specified price or formula, convertibles
also offer the chance for capital appreciation, like common stocks.
Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as an underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however, may sustain their value better than
common stock because they pay income, which tends to be higher than common stock
dividend yields.
Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," better-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.
Convertibles tend to be more secure than common stock (companies must generally
pay holders of convertibles before they pay holders of common stock), but they
are typically less secure than similar non-convertible securities such as bonds
(bondholders must generally be paid before holders of convertibles and common
stock). Because convertibles are usually subordinate to bonds in terms of
payment priority, convertibles typically are rated below investment grade by a
nationally recognized rating agency, or they are not rated at all.
PREFERRED STOCK. Shareholders of preferred stocks normally have the right to
receive dividends at a fixed rate but do not participate in other amounts
available for distribution by the issuer. Dividends on preferred stock may be
cumulative, and cumulative dividends must be paid before common shareholders
receive any dividends. Because preferred stock dividends usually must be paid
before common stock dividends, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par on stated value,
and are senior in right of payment to common stock. Preferred stocks do not
represent a liability of the issuer and, therefore, do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible securities may be subordinated to other preferred stock of the same
issuer.
WARRANTS. A warrant is a security that gives the holder of the warrant the right
to buy common stock at a specified
5
<PAGE> 9
More About the Fund
price for a specified period of time. Warrants are considered speculative and
have no value if they are not exercised before their expiration date.
REITS. The Fund may invest in real estate investment trusts (REITS). REITS are
pooled investment vehicles which invest primarily in income producing real
estate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily
from the collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive income from the
collection of interest payments. Hybrid REITs combine the investment strategies
of Equity REITs and Mortgage REITs.
REITS involve certain risks that are associated with direct ownership of real
estate and with the real estate industry in general. These risks include, among
others, possible declines in the value of real estate, possible lack of
availability of mortgage funds, and explained vacancies of properties.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, the Fund may
invest up to 100% of its assets in cash or money market obligations. Should this
occur, the Fund will not meet its investment objectives, and may miss potential
market upswings.
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MANAGEMENT
INVESTMENT ADVISER
Villanova Mutual Fund Capital Trust (VMF), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the assets and supervises the daily
business affairs of the Fund. Subject to the supervision and direction of the
Trustees, VMF also monitors the performance of the subadviser. VMF is authorized
to select and place portfolio investments on behalf of the Fund; however, VMF
does not intend to do so at this time. VMF was organized in 1999 and manages
mutual fund assets. As of December 31, 1999, VMF and its affiliates had
approximately $22.5 billion in assets under management.
The Fund pays VMF a management fee of 0.85% of the Fund's average daily net
assets.
SUBADVISER
NorthPointe Capital, LLC (NorthPointe), Columbia Center One, 201 West Beaver
Road, Troy, Michigan 48089 is the Fund's subadviser. Subject to the supervision
of VMF and the Trustees, NorthPointe will manage the Fund's assets in accordance
with the Fund's investment objective and strategies. NorthPointe will make
investment decisions for the Fund and, in connection with such investment
decisions, places purchase and sell orders for securities. NorthPointe was
organized in 1999 and manages the Fund, as well as institutional accounts.
Jeffrey C. Petherick and Mary C. Champagne are co-portfolio managers of the
Fund. Mr. Petherick and Ms. Champagne joined NorthPointe in January 2000, and
since June 1995, have co-managed institutional and retail small cap value equity
investments at Loomis, Sayles & Company, L.P., including the Loomis Sayles Small
Cap Value Fund. Mr. Petherick joined Loomis, Sayles in 1990. Ms. Champagne
joined Loomis, Sayles in 1993.
HISTORICAL PERFORMANCE OF THE PORTFOLIO MANAGERS
As described above, Mr. Petherick and Ms. Champagne previously managed another
mutual fund with investment objectives and strategies that are substantially
similar, but not necessarily identical, to the Fund. That Fund was the Loomis
Sayles Small Cap Value Fund (the "Prior Fund"). They managed the Prior Fund
together beginning in June 1995 through December 1999. Performance for the Prior
Fund follows. This performance for the Prior Fund reflects changes in the share
prices and reinvestment of dividends and distributions, and is net of all fees
and expenses. The Prior Fund's performance is shown for the Institutional Shares
which have been in existence for the longest period of time; the expenses of the
Institutional Shares are lower than the expenses for Institutional Class Shares
of the Fund.
LOOMIS SAYLES SMALL CAP VALUE FUND -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
ANNUALIZED RUSSELL 2000
TOTAL RETURN INDEX
<S> <C> <C>
1 year ending December 31, 1999 0.37% 21.26%
Period from July 1, 1995 until
December 31, 1999 15.61% 15.21%
</TABLE>
Included for comparison are performance figures of the Russell 2000 Index, an
unmanaged index that measures the performance of equity securities which are
similar, but not identical, to those in the Fund's portfolio.
We have included performance information about the Prior Fund for comparison
purposes, BUT THIS MUTUAL FUND IS SEPARATE AND DISTINCT FROM THE FUND. ITS
PERFORMANCE DOES NOT GUARANTEE SIMILAR RESULTS FOR THE FUND AND SHOULD NOT BE
VIEWED AS A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE.
The performance of the Prior Fund when managed by Mr. Petherick and Ms.
Champagne may not be comparable to the performance of the Fund because of the
following differences:
- brokerage commissions and dealer spreads
- expenses (including management fees)
- the size of the investment in a particular security in relation to the
portfolio size
- the timing of purchases and sales (including the affect of market conditions
at that time)
- the timing of cash flows into the portfolio
- the availability of cash flows into the portfolio
Average annual total return represents the average change over a specified
period of time in the value of an investment after reinvesting all income and
capital gains distributions. The historical performance information is based on
information found in Factset. The Fund believes that it is reliable, but the
Fund has not independently verified it.
7
<PAGE> 11
BUYING, SELLING AND EXCHANGING FUND SHARES
BUYING SHARES
The Institutional Class shares are available for purchase only by the following:
- funds of funds offered by NAS or other affiliates of the Trust
- tax-exempt employee benefit plans if no third party administrator for the
plan receives compensation from the Fund
- Institutional advisory accounts of VMF or its affiliates and those having
client relationships with an affiliate of VMF, or its affiliates and their
corporate sponsors, as well as subsidiaries and related employee benefit
plans and rollover individual retirement accounts from such institutional
advisory accounts
- a bank, trust company or similar financial institution investing for its own
account or for the account of its trust customers for whom such financial
institution is exercising investment discretion in purchasing Institutional
Class shares, where the investment is not part of a program that requires
payment to the financial institution of a Rule 12b-1 or administrative
service fee
- registered investment advisers investing on behalf of institutions and high
net-worth individuals entrusted to the adviser for investment purposes, if
the adviser is affiliated or associated with a broker or dealer and derives
compensation for its services exclusively from its clients for such advisory
services
PURCHASE PRICE. The purchase or "offering" price of each share of the Fund is
its "net asset value" (NAV) next determined after the order is received.
Generally, the NAV is based on the market value of the securities owned by the
Fund less its liabilities. NAV is determined at the close of regular trading on
the New York Stock Exchange (usually 4 p.m. Eastern Time) on each day the
Exchange is open for trading.
MINIMUM INVESTMENTS
To open an account $3,000,000
......................................................
Additional investments $50,000
These minimum investment amounts may be waived under
certain circumstances.
The Fund does not calculate NAV on the following days:
- Christmas Day
- New Year's Day
- Martin Luther King, Jr. Day
- Presidents' Day
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- Other days when the New York Stock Exchange is not open.
The Fund reserves the right not to determine an NAV for the Fund when:
- It has not received any orders to purchase, sell or exchange shares;
- Changes in the value of the Fund's portfolio do not affect the NAV.
If current prices are not available, or if Villanova SA Capital Trust (VSA), as
the Fund's administrator or its agent, determines a price does not represent
fair value, the Fund's investments may be valued at fair market value in
accordance with procedures adopted by the Board of Trustees of the Trust. To the
extent that the Fund's investments are traded in markets that are open when the
New York Stock Exchange is closed, the value of the Fund's investments may
change on days when shares cannot be purchased or redeemed.
HOW TO PLACE YOUR PURCHASE ORDER
Eligible entities wishing to purchase Institutional Class shares of the Fund
should contact Nationwide Advisory Services, Inc. (NAS), the Fund's underwriter,
at 1-800-848-0920.
Shareholders are entitled to a wide variety of services by contacting:
NAS NOW 1-800-637-0012
Our customized voice-response system, available 24 hours a day, seven days a
week
CUSTOMER SERVICE 1-800-848-0920
Representatives are available to answer questions between 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.)
8
<PAGE> 12
SELLING SHARES
You can sell -- also known as redeeming -- your shares of the Fund at any time,
subject to certain restrictions described below. The price you will receive when
you sell your shares will be the NAV next determined after NAS receives your
properly completed order to sell in its offices in Columbus, Ohio. Of course,
the value of the shares you sell may be worth more or less than their original
purchase price depending upon the market value of the Fund's investments at the
time of sale.
Properly completed orders contain all necessary paperwork to authorize and
complete the transaction. NAS may require all account holder signatures, updated
account registration and bank account information and, depending on
circumstances, a signature guarantee.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Fund or the Fund may delay paying
you the proceeds from a sale when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or if trading is restricted or if
an emergency exists.
HOW TO PLACE YOUR SALE ORDER
You can request the sale of your shares in any of the ways described below.
Shareholders should contact NAS at 1-800-848-0920 for information regarding such
sales.
EXCHANGING SHARES
You can exchange the shares you own for shares of another fund within Nationwide
Mutual Funds (except the Morley Capital Accumulation Fund) as long as they are
the same class of shares, both accounts have the same owner, and your first
purchase in the new fund meets the fund's minimum investment requirement.
[Inset Box]
CAPITAL GAINS TAXES
Exchanging shares is considered a sale and purchase of
shares for federal and state income tax purposes.
Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay federal
and/or state income taxes. For more information, see
"Distributions and Taxes -- Exchanging Fund Shares" on
page 10.
HOW TO PLACE YOUR EXCHANGE ORDER
You should contact NAS at 1-800-848-0920 to get information on how to request an
exchange of shares. Your exchange will be processed on the date NAS receives
your request. If your request is received after 4 p.m. Eastern Time, it will be
processed the next business day. If you fax your request, we reserve the right
to ask for the original. You can automatically request an exchange 24 hours a
day, seven days a week, by calling NAS NOW, our automated voice-response system
or by logging on to our website. The Trust reserves the right to amend or
discontinue these exchange privileges upon 60 days' written notice to
shareholders.
EXCESSIVE TRADING
The Fund reserves the right to reject any exchange request it believes will
increase transaction costs, or otherwise adversely affect other shareholders.
Specifically, exchange activity may be limited to 12 exchanges within a one year
period or 1% of the Fund's NAV. The Fund may delay forwarding redemption
proceeds for up to seven days if the investor redeeming shares is engaged in
excessive trading, or if the amount of the redemption request otherwise would be
disruptive to efficient portfolio management, or would adversely affect the
Fund.
9
<PAGE> 13
DISTRIBUTIONS AND TAXES
The following information is provided to help you understand the income and
capital gains you can earn from owning Fund shares, as well as the federal taxes
you may have to pay on this income. For tax advice regarding your personal tax
situation, please speak with your tax adviser.
DISTRIBUTIONS OF INCOME DIVIDENDS
Every quarter, the Fund distributes any available income dividends to
shareholders. Income dividends are taxable to you as ordinary income for federal
income tax purposes, unless you hold your shares in a qualified tax-deferred
plan or account or are otherwise not subject to federal income tax. The amount
of income dividends distributed to you will be reported in a Form 1099, which we
will send to you during the tax season each year (unless you hold your shares in
a qualified tax-deferred plan or account or are otherwise not subject to federal
income tax). For corporate shareholders, a portion of each year's distributions
may be eligible for the corporate dividend-received deduction.
DISTRIBUTIONS OF CAPITAL GAINS
If the Fund has net realized capital gains at the end of the calendar year
(meaning the gains from sales of securities exceed any losses from sales), it
will distribute this capital gain to shareholders annually. You must pay federal
income taxes on any capital gains distributed to you, unless you hold your
shares in a qualified tax-deferred plan or account or are otherwise not subject
to federal income tax. On Form 1099, we will report the amount of net short-term
capital gains and net long-term capital gains distributed to you during the
year. Currently, for individuals, long-term capital gains are taxed at a maximum
rate of 20%; short-term capital gains are taxed as ordinary income, such as
interest or dividends. For more information regarding capital gains tax rates,
speak with your tax adviser.
REINVESTING DISTRIBUTIONS
All income and capital gains distributions will be reinvested in shares of the
Fund. You may request a payment in cash in
writing. You may be subject to tax on
reinvested distributions. If distribution
checks (1) are returned and marked as
"undeliverable" or (2) remain uncashed
for six months, your account will be
changed automatically so that all future distributions are reinvested in your
account. Checks that remain uncashed for six months will be canceled and the
money reinvested in the Fund as of the cancellation date. No interest is paid
during the time the check is outstanding.
CHANGING YOUR DISTRIBUTION OPTION
If you want to change your distribution option, you
must notify us by the record date for a dividend or
distribution in order for it to be effective for that
dividend or distribution.
You may be subject to federal backup withholding at a rate of 31% of each
distribution unless you certify that the taxpayer identification number you gave
us is correct, and that you are not subject to withholding. (We will, however,
withhold taxes if the Internal Revenue Service notifies us that such
certifications are not accurate, or as may otherwise be required under the
Internal Revenue Code.)
STATE AND LOCAL TAXES
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser.
SELLING FUND SHARES
Selling Fund shares for more than you paid for them gives you a capital gain,
which is subject to federal income tax. The amount of the tax depends on how
long you held your shares. For individuals, long-term capital gains are
currently taxed at a maximum rate of 20%; and short-term capital gains are taxed
as ordinary income, such as interest or dividends. Capital gains from your sale
of Fund shares are not reported on Form 1099; you or your tax adviser should
keep track of your purchases, sales, and any resulting gain or loss. If you do
sell Fund shares for a loss, you may be able to use this capital loss to offset
any capital gains you have.
EXCHANGING FUND SHARES
Exchanging your shares of the Fund is considered a sale for income tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
have capital gains, which are subject to the federal income taxes described
above. If you exchange Fund shares for a loss, you may be able to use this
capital loss to offset any capital gains you have.
10
<PAGE> 14
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<PAGE> 15
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 16
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents contain additional information about the Fund. To obtain
a document free of charge, contact us at the address or number listed below.
- - SAI (incorporated by reference in this Prospectus)
- - Annual Report (as available)
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Advisory Services, Inc.
P.O. Box 1492
Columbus, Ohio 43216-1492
(614) 249-8705 (fax)
FOR INFORMATION, ASSISTANCE AND WIRE ORDERS:
1-800-848-0920 (toll free, 8 a.m. - 5 p.m. Eastern Time (Monday through Friday,
except Thursday, in which case representatives are available between 9:30 a.m.
and 5 p.m. Eastern Time)).
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of the Fund's documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-202-942-8090)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-0102
(The SEC charges a fee to copy any documents.)
ON THE EDGAR DATABASE VIA THE INTERNET:
www.sec.gov
BY ELECTRONIC REQUEST:
[email protected]
INVESTMENT COMPANY ACT FILE NO. 811-08495
HS-1224
<PAGE> 17
STATEMENT OF ADDITIONAL INFORMATION
____, 2000
NATIONWIDE MUTUAL FUNDS
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 Mutual Funds (the "Trust") is a registered open-end investment
company consisting of 29 series as of the date hereof. This Statement of
Additional Information relates to 16 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 dated ____ ____, 2000 and
should be read in conjunction with the Prospectuses. Terms not defined in this
Statement of Additional Information have the meanings assigned to them in the
Prospectuses. The Prospectuses may be obtained from Nationwide Advisory
Services, Inc., P.O. Box 1492, Three Nationwide Plaza, Columbus, Ohio
43216-1492, or by calling toll free 1-800-848-0920.
<PAGE> 18
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History................................................... 1
Additional Information on Portfolio Instruments and Investment Policies........... 1
Description of Portfolio Instruments and Investment Policies...................... 4
Investment Restrictions........................................................... 44
Trustees and Officers of the Trust................................................ 46
Investment Advisory and Other Services............................................ 49
Brokerage Allocation.............................................................. 70
Additional Information on Purchases and Sales..................................... 73
Valuation of Shares............................................................... 81
Investor Strategies............................................................... 83
Investor Privileges............................................................... 84
Investor Services................................................................. 87
Fund Performance Advertising...................................................... 88
Additional Information............................................................ 92
Additional General Tax Information................................................ 95
Major Shareholders................................................................ 101
Financial Statements.............................................................. 115
Appendix A - Bond Ratings......................................................... 116
</TABLE>
[PAGE NUMBERS TO BE REVISED AFTER COMMENTS ARE INCORPORATED.]
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 29 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.
ii
<PAGE> 19
<TABLE>
<CAPTION>
Mid Cap Tax Free
TYPE OF INVESTMENT OR TECHNIQUE Growth Growth Nationwide Bond Income
------------------------------- ------ ------ ---------- ---- ------
<S> <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
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)
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
Short-term debt Y Y Y Y Y
Floating and variable rate securities Y Y Y Y Y
Zero coupon securities 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
U.S. Government securities Y Y Y Y Y
Money market instruments Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>
Long-Term Intermediate Prestige Prestige
U.S. U.S. S & P Large Large
Government Government Money 500 Cap Cap
TYPE OF INVESTMENT OR TECHNIQUE Bond Bond Market Index Value Growth
------------------------------- ---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y
Preferred stocks Y Y
Small company stocks Y Y
Special situation companies 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
Securities of foreign issuers Y Y Y
Depository receipts Y Y
Securities from developing
countries/emerging markets
Convertible securities 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
Deferred payment securities Y Y
Non-investment grade debt
Loan participations and assignments Y Y
Sovereign debt (foreign) Y Y Y
Foreign commercial paper
Duration Y Y
U.S. Government securities Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>
Morley NorthPointe
Prestige Prestige Prestige Capital Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Balanced Small Cap International Accumulation Value
------------------------------- -------- --------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y
Preferred stocks Y Y
Small company stocks Y Y Y Y
Special situation companies Y Y Y Y
Illiquid securities Y 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
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 Y Y
countries/emerging markets
Convertible securities Y Y Y Y
Long-term debt Y Y Y
Short-term debt 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
Non-investment grade debt Y
Loan participations and assignments Y Y
Sovereign debt (foreign) Y Y Y Y
Foreign commercial paper Y
Duration Y
U.S. Government securities Y Y Y Y Y
Money market instruments Y Y Y Y Y
</TABLE>
2
<PAGE> 20
<TABLE>
<CAPTION>
Mid Cap Tax Free
TYPE OF INVESTMENT OR TECHNIQUE Growth Growth Nationwide Bond Income
------------------------------- ------ ------ ---------- ---- ------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities Y
Stripped mortgage securities Y
Collateralized mortgage obligations Y
Mortgage dollar rolls
Asset-backed securities Y Y Y Y Y
Bank obligations Y Y Y Y Y
Repurchase agreements 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
Lending portfolio securities Y Y Y Y Y
Short sales
Participation Interests
Swap Agreements
Wrap Contracts
Indexed securities
</TABLE>
<TABLE>
<CAPTION>
Long-Term Intermediate Prestige Prestige
U.S. U.S. S & P Large Large
Government Government Money 500 Cap Cap
TYPE OF INVESTMENT OR TECHNIQUE Bond Bond Market Index Value Growth
------------------------------- ---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities Y Y
Stripped mortgage securities Y Y
Collateralized mortgage obligations Y Y
Mortgage dollar rolls
Asset-backed securities Y Y Y
Bank obligations Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y
Reverse repurchase agreements
Warrants Y Y
Futures Y Y Y
Options Y Y Y
Foreign currencies Y Y
Forward currency contracts Y Y Y
Borrowing money Y Y Y Y Y Y
Lending portfolio securities Y Y Y Y Y Y
Short sales Y
Participation Interests
Swap Agreements Y
Wrap Contracts
Indexed securities Y
</TABLE>
<TABLE>
<CAPTION>
Morley NorthPointe
Prestige Prestige Prestige Capital Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Balanced Small Cap International Accumulation Value
------------------------------- -------- --------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities Y Y Y
Stripped mortgage securities Y Y
Collateralized mortgage obligations Y Y Y
Mortgage dollar rolls Y Y Y
Asset-backed securities Y Y
Bank obligations Y Y Y Y Y
Repurchase agreements Y Y Y Y Y
Reverse repurchase agreements Y Y Y
Warrants Y Y Y
Futures Y Y Y
Options Y Y Y
Foreign currencies Y Y Y
Forward currency contracts Y Y Y Y
Borrowing money Y Y Y Y Y
Lending portfolio securities Y Y Y Y Y
Short sales Y
Participation Interests Y
Swap Agreements Y Y Y
Wrap Contracts Y
Indexed securities
</TABLE>
3
<PAGE> 21
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
4
<PAGE> 22
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.
5
<PAGE> 23
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
6
<PAGE> 24
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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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 Mae
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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<PAGE> 33
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.
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),
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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, 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
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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
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other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the company's stock. If the actual or prospective situation does not materialize
as anticipated, the market price of the securities of a "special situation
company" may decline significantly. Therefore, an investment in a Fund that
invests a significant portion of its assets in these securities may involve a
greater degree of risk than an investment in other mutual funds that seek
long-term growth of capital by investing in better-known, larger companies. The
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.
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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.
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
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duties of officers and directors and the protection of shareholders may not be
well developed. Even where adequate law exists in such developing countries, it
may be impossible to obtain swift and equitable enforcement of such law, or to
obtain enforcement of the judgment by a court of another jurisdiction.
Trading in futures contracts on foreign commodity exchanges may be subject
to the same or similar risks as trading in foreign securities.
Depository Receipts. A Fund may invest in foreign securities by purchasing
depository receipts, including American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, GDRs, in bearer form, are issued and designed for use
outside the United States and EDRs (also referred to as Continental Depository
Receipts ("CDRs")), in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. Bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. GDRs
are receipts typically issued by non-United States banks and trust companies
that evidence ownership of either foreign or domestic securities. For purposes
of a Fund's investment policies, ADRs, GDRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, GDR or
EDR representing ownership of common stock will be treated as common stock.
A Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.
A depository may establish an unsponsored facility without participation
by (or even necessarily the acquiescence of) the issuer of the deposited
securities, although typically the depository requests a letter of non-objection
from such issuer prior to the establishment of the facility. Holders of
unsponsored ADRs generally bear all the costs of such facilities. The depository
usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and thus there may not be a
correlation between such information and the market value of the depository
receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.
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
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holders continue to bear certain other costs (such as deposit and withdrawal
fees). Under the terms of most sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting instructions, and to
provide shareholder communications and other information to the ADR holders at
the request of the issuer of the deposited securities.
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
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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 between the date the instrument
is issued and the date the instrument matures. While such commercial paper
entails the risk of loss of principal, the potential for realizing gains as a
result of changes in foreign currency exchange rate enables a Fund to hedge or
cross-hedge against a decline in the U.S. dollar value of investments
denominated in foreign currencies while providing an attractive money market
rate of return. A Fund will purchase such commercial paper for hedging purposes
only, not for speculation. The staff of the SEC is currently considering whether
the purchase of this type of commercial paper would result in the issuance of a
"senior security" within the meaning of the Investment Company Act of 1940. The
Funds believe that such investments do not involve the creation of such a senior
security, but nevertheless will establish a segregated account with respect to
its investments in this type of commercial paper and to maintain in such account
cash not available for investment or other liquid assets having a value equal to
the aggregate principal amount of outstanding commercial paper of this type.
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
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with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege) and its "conversion value" (the security's
worth, at market value, if converted into the underlying common stock). The
investment value of a convertible security is influenced by changes in interest
rates, the credit standing of the issuer and other factors. The market value of
convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. The conversion value of
a convertible security is determined by the market price of the underlying
common stock. The market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stock and therefore
will react to variations in the general market for equity securities. If the
conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
A convertible security entitles the holder to receive interest normally
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption, a
Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, generally enjoy seniority in right of payment to all
equity securities, and convertible preferred stock is senior to common stock of
the same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
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.
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Generally, the prices of zero coupon convertible securities may be more
sensitive to market interest rate fluctuations then conventional convertible
securities. Federal income tax law requires the holder of a zero coupon
convertible security to recognize income from the security prior to the receipt
of cash payments. To maintain its qualification as a regulated investment
company and avoid liability of federal income taxes, a Fund will be required to
distribute income accrued from zero coupon convertible securities which it owns,
and may have to sell portfolio securities (perhaps at disadvantageous times) in
order to generate cash to satisfy these distribution requirements.
WARRANTS
Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance), on a specified date,
during a specified period, or perpetually. Warrants may be acquired separately
or in connection with the acquisition of securities. Warrants acquired by a Fund
in units or attached to securities are not subject to these restrictions.
Warrants do not carry with them the right to dividends or voting rights with
respect to the securities that they entitle their holder to purchase, and they
do not represent any rights in the assets of the issuer. As a result, warrants
may be considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.
PREFERRED STOCK
Preferred stocks, like debt obligations, are generally fixed-income
securities. Shareholders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
all cumulative dividends usually must be paid prior to common shareholders
receiving any dividends. Because preferred stock dividends must be paid before
common stock dividends, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and, therefore, do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. Preferred stocks are generally subordinated in right of payment to
all debt obligations and creditors of the 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
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security sold. The proceeds of the short sale will be retained by the broker, to
the extent necessary to meet margin requirements, until the short position is
closed out.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. A Fund will realize a gain if the security
declines in price between those two dates. The amount of any gain will be
decreased and the amount of any loss will be increased by any interest the Fund
may be required to pay in connection with the short sale.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. A Fund must deposit in a segregated account an amount of cash or liquid
assets equal to the difference between (a) the market value of securities sold
short at the time that they were sold short and (b) the value of the collateral
deposited with the broker in connection with the short sale (not including the
proceeds from the short sale). While the short position is open, the Fund must
maintain on a daily basis the segregated account at such a level that (1) the
amount deposited in it plus the amount deposited with the broker as collateral
equals the current market value of the securities sold short and (2) the amount
deposited in it plus the amount deposited with the broker as collateral is not
less than the market value of the securities at the time they were sold short.
A Fund may engage in short sales if at the time of the short sale the Fund
owns or has the right to obtain without additional cost an equal amount of the
security being sold short. This investment technique is known as a short sale
"against the box." The Funds do not intend to engage in short sales against the
box for investment purposes. A Fund may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund (or a security convertible or
exchangeable for such security), or when the Fund wants to sell the security at
an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such case,
any future losses in the Fund's long position should be offset by a gain in the
short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced will depend upon the amount of the security sold short relative to the
amount the Fund owns. There will be certain additional transaction costs
associated with short sales against the 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
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having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and an
investment company might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. An investment company might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers.
Any such restricted securities will be considered to be illiquid for
purposes of a Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, 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
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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.
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
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proportional to the change in value of the underlying asset. In contrast, the
buyer of an option-based derivative generally will benefit from favorable
movements in the price of the underlying asset but is not exposed to the
corresponding losses that result from adverse movements in the value of the
underlying asset. The seller (writer) of an option-based derivative generally
will receive fees or premiums but generally is exposed to losses resulting from
changes in the value of the underlying asset. Derivative transactions may
include elements of leverage and, accordingly, the fluctuation of the value of
the derivative transaction in relation to the underlying asset may be magnified.
The use of these instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they may be traded,
and the Commodity Futures Trading Commission ("CFTC"). In addition, a Fund's
ability to use these instruments will be limited by tax considerations.
Special Risks of Derivative Instruments. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon a Fund's
adviser's or subadviser's ability to predict movements of the overall securities
and currency markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of investments being
hedged. For example, if the value of an instrument used in a short hedge (such
as writing a call option, buying a put option, or selling a futures contract)
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged, as well as, how similar the index is
to the portion of the Fund's assets being hedged in terms of securities
composition.
(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
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the Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to close out a
position in an instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction ("counter party")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price that
is favorable to the Fund.
For a discussion of the federal income tax treatment of a Fund's derivative
instruments, see "ADDITIONAL GENERAL TAX INFORMATION" below.
Options. A Fund may purchase or write put and call options on securities
and indices, and may purchase options on foreign currencies, and enter into
closing transactions with respect to such options to terminate an existing
position. The purchase of call options serves as a long hedge, and the purchase
of put options serves as a short hedge. Writing put or call options can enable a
Fund to enhance income by reason of the premiums paid by the purchaser of such
options. Writing call options serves as a limited short hedge because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates to
a price higher than the exercise price of the call option, it can be expected
that the option will be exercised, and the Fund will be obligated to sell the
security at less than its market value or will be obligated to purchase the
security at a price greater than that at which the security 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
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on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. OTC options are contracts between the Fund
and the counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC option,
it relies on the counter party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter party to do so
would result in the loss of any premium paid by the fund as well as the loss of
any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. A Fund intends to purchase
or write only those exchange-traded options for which there appears to be a
liquid secondary market. However, there can be no assurance that such a market
will exist at any particular time. Closing transactions can be made for OTC
options only by negotiating directly with the counterparty, or by a transaction
in the secondary market if any such market exists. Although a Fund will enter
into OTC options only with counterparties that are expected to be capable of
entering into closing transactions with a Fund, there is no assurance that such
Fund will in fact be able to close out an OTC option at a favorable price prior
to expiration. In the event of insolvency of the counter party, a Fund might be
unable to close out an OTC option position at any time prior to its expiration.
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
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a benchmark. The risk to a Fund in purchasing covered spread options is the cost
of the premium paid for the spread option and any transaction costs. In
addition, there is no assurance that closing transactions will be available. The
purchase of spread options will be used to protect a Fund against adverse
changes in prevailing credit quality spreads, i.e., the yield spread between
high quality and lower quality securities. Such protection is only provided
during the life of the spread option.
Futures Contracts. Certain Funds may enter into futures contracts,
including interest rate, index, and currency futures and purchase and write
(sell) related options. The purchase of futures or call options thereon can
serve as a long hedge, and the sale of futures or the purchase of put options
thereon can serve as a short hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, and writing covered put options on
futures contracts can serve as a limited long hedge, using a strategy similar to
that used for writing covered options in securities. 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,
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or by payment of the change in the cash value of the index. More commonly,
futures contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching futures contract. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase price
is less than the original sale price, a Fund realizes a gain; if it is more, a
Fund realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, a Fund realizes a gain; if it is less, a Fund realizes
a loss. The transaction costs must also be included in these calculations. There
can be no assurance, however, that a Fund will be able to enter into an
offsetting transaction with respect to a particular futures contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
that Fund will continue to be required to maintain the margin deposits on the
futures contract.
No price is paid by a Fund upon entering into a futures contract. Instead,
at the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, "initial margin" consisting of cash, U.S.
Government securities or other liquid obligations, in an amount generally equal
to 10% or less of the contract value. Margin must also be deposited when writing
a call or put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature of
a performance bond or good-faith deposit that is returned to a Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If a Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only on an 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
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losses, because it would continue to be subject to market risk with respect to
the position. In addition, except in the case of purchased options, the Fund
would continue to be required to make daily variation margin payments and might
be required to maintain the position being hedged by the future or option or to
maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
Swap Agreements. 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
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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
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.
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The interbank market in foreign currencies is a global, round-the-clock market.
To the extent the U.S. options or futures markets are closed while the markets
for the underlying currencies remain open, significant price and rate movements
might take place in the underlying markets that cannot be reflected in the
markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, a Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Permissible foreign currency options will include options traded primarily
in the OTC market. Although options on foreign currencies are traded primarily
in the OTC market, a Fund will normally purchase OTC options on foreign currency
only when a Fund's adviser or subadviser believes a liquid secondary market will
exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS
A Fund may enter into forward currency contracts. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are entered into in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers.
At or before the maturity of a forward contract, a Fund may either sell a
portfolio security and make delivery of the currency, or retain the security and
fully or partially offset its contractual obligation to deliver the currency by
purchasing a second contract. If a Fund retains the portfolio security and
engages in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward contract prices.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Currency Hedging. While the values of forward currency contracts, currency
options, currency futures and options on futures may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of a Fund's investments. A currency hedge, for 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
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exchange rates, a currency hedge may not be entirely successful in mitigating
changes in the value of a Fund's investments denominated in that currency over
time.
A decline in the dollar value of a foreign currency in which a Fund's
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. The use of currency
hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. In order to protect against such diminutions in the value of securities
it holds, a Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its securities that otherwise would have resulted. Conversely,
if a rise in the dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of the
securities, a Fund may purchase call options on the particular currency. The
purchase of these options could offset, at least partially, the effects of the
adverse movements in exchange rates. Although currency hedges limit the risk of
loss due to a decline in the value of a hedged currency, at the same time, they
also limit any potential gain that might result should the value of the currency
increase.
A Fund may enter into foreign currency exchange transactions to hedge its
currency exposure in specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of a Fund generally accruing in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions. A Fund may not
position hedge to an extent greater than the aggregate market value (at the time
of making such sale) of the hedged securities.
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.
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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.
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
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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.
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
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may have an adverse impact on the value of such instruments and will have an
adverse impact on the Fund's ability to dispose of particular Assignments or
Loan Participations in response to a specific economic event, such as
deterioration in the creditworthiness of the borrower.
In valuing a Loan Participation or Assignment held by a Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, the Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Trustees,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the loan and the lender; (ii) the current interest rate; period
until next rate reset and maturity of the loan; (iii) recent prices in the
market for similar loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions discussed below. In a reverse repurchase agreement, a Fund would
sell a security and enter into an agreement to repurchase the security at a
specified future date and price. A Fund generally retains the right to interest
and principal payments on the security. Since a Fund receives cash upon entering
into a reverse repurchase agreement, it may be considered a borrowing (see
"Borrowing"). When required by guidelines of the SEC, a Fund will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security. At the time a Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing liquid securities having a value not less than the
repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). A Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940.
Mortgage dollar rolls are arrangements in which a Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by 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
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forward commitment to buy mortgage-backed securities. Mortgage dollar roll
transactions may be considered a borrowing by the Funds. (See "Borrowing")
Mortgage dollar rolls and reverse repurchase agreements may be used as
arbitrage transactions in which a Fund will maintain an offsetting position in
investment grade debt obligations or repurchase agreements that mature on or
before the settlement date on the related mortgage dollar roll or reverse
repurchase agreements. Since a Fund will receive interest on the securities or
repurchase agreements in which it invests the transaction proceeds, such
transactions may involve leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or before the settlement date
of the mortgage dollar roll or reverse repurchase agreement, the Fund's adviser
or subadviser believes that such arbitrage transactions do not present the risks
to the Funds that are associated with other types of leverage.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, each Fund,
except the Tax-Free Income Fund, may invest up to 100% of its assets in cash or
money market obligations. The Tax-Free Income Fund may as a temporary defensive
position invest up to 20% of its assets in cash and taxable money market
instruments. In addition, a Fund may have, from time to time, significant cash
positions until suitable investment opportunities are available.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of each Fund which
cannot be changed without the authorization of the majority of the outstanding
shares of the Fund for which a change is proposed. The vote of the majority of
the outstanding securities means the vote of (A) 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy or (B) a
majority of the outstanding securities, whichever is less.
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. In addition, each
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of the Large Cap Value, Large Cap Growth, Balanced, Small Cap and
International Funds may enter into mortgage dollar roll transactions.
- - 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 of such Fund.
- - May not purchase the securities of any issuer if, as a result, 25% or more
than (taken at current value) of the Fund's total assets would be invested
in the securities of issuers, the principal activities of which are in the
same industry. 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 dose not apply to obligations issued by state,
county or municipal governments.
In addition, each of 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
and Morley Capital Accumulation Fund:
- - May not purchase or sell real estate, except that each Fund may acquire
real estate through ownership of securities or instruments and may purchase
or sell securities issued by entities or investment vehicles that own or
deal in real estate (including interests therein) or instruments secured by
real estate (including interests therein).
- - May not lend any security or make any other loan, except that each Fund may
purchase or hold debt securities and lend portfolio securities in
accordance with its investment objective and policies, make time deposits
with financial institutions and enter into repurchase agreements.
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.
Each of the Large Cap Value Fund, Large Cap Growth Fund, Balanced Fund,
Small Cap Fund and International Fund:
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- - 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 objectives and policies, (i) lend
portfolio securities, (ii) purchase 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.
NorthPointe Small Cap Value Fund may not:
- - 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.
- - 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 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 Investment
Company Act of 1940 or any rule, order or interpretation thereunder.
- - May not purchase or sell commodities or commodities contracts, except to
the extent disclosed in the current prospectus or Statement of Additional
Information of the Fund.
- - May not 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.
- - 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 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.
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.
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- - Concentrate its investments (invest 25% or more of its total assets) in the
securities of one or more issuers conducting their principal business in a
particular industry or group of industries. This does not include
obligations issued or guaranteed by the U.S. government or its agencies and
instrumentalities and repurchase agreements involving such securities.
- - 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.
The principal occupation of the Trustees and Officers during the last five
years, their ages, their addresses and their affiliations are:
JOHN C. BRYANT, Trustee 1, 3, Age 64
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.
C. BRENT DEVORE, Trustee, Age 59
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
SUE A. DOODY, Trustee 3, Age 65
169 East Beck Street, Columbus, Ohio
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.
ROBERT M. DUNCAN, Trustee 1, 3, 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.
THOMAS J. KERR, IV, Trustee 1, 3, 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 3, 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
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One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise and is Chairman and Chief Executive Officer of Nationwide
Advisory Services, Inc.
ARDEN L. SHISLER, Trustee 2, 3, 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 3, Age 51
11495 Sunset Hills Rd - Suite 210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.
JAMES F. LAIRD, JR., Treasurer 3, 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 3, age 35
Three Nationwide Plaza, Columbus, Ohio
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.
- ----------
[FN]
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.
3 Bryant, DeVore, Doody, Duncan, Kerr, Kridler, Shisler and Wetmore are also
Trustees, and Laird and Davin are also Officers of Nationwide Separate
Account Trust and Nationwide Asset Allocation Trust, registered investment
companies in the Nationwide Fund Complex.
</FN>
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
46
<PAGE> 64
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.
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>
John C. Bryant, Trustee $9,167 --0-- --0-- $18,167
C. Brent DeVore, Trustee 9,167 --0-- --0-- 18,167
Sue A. Doody, Trustee 9,167 --0-- --0-- 18,167
Robert M Duncan, Trustee 9,167 --0-- --0-- 18,167
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, Trustee2 --0-- --0-- --0-- --0--
David C. Wetmore, Trustee 9,167 --0-- --0-- 18,167
</TABLE>
1 The Fund Complex includes three trusts comprised of ____ investment company
funds or series.
2 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 the Investment Advisory Agreement dated May 9, 1998 as
amended as of __________, 2000, 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
47
<PAGE> 65
Capital Accumulation Fund, Morley Enhanced Income Fund and the Nationwide Small
Cap Index Fund, Nationwide Mid Cap Market Index Fund, Nationwide International
Index Fund and Nationwide Bond Index Fund (collectively these four index funds
are referred as the "Index Funds") in accordance with the policies and
procedures established by the Trustees. With respect to the Mid Cap Growth Fund,
Growth Fund, Nationwide Fund, Bond Fund, Tax-Free Income Fund, Long-Term U.S.
Government Bond Fund, Intermediate U.S. Government Bond Fund, Money Market Fund,
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 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
48
<PAGE> 66
qualification of shares of the Trust. VMF 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 (95.3%) and Nationwide Mutual Fire Insurance
Company (4.7%), each of which is a mutual company owned by its policyholders.
Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the 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.
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>
Mid Cap Growth, Growth $0 up to $250 million 0.60%
, Nationwide and $250 million up to $1 billion 0.575%
Focus $1 billion up to $2 billion 0.55%
$2 billion up to $5 billion 0.525%
$5 billion and more 0.50%
Bond, Tax-Free Income $0 up to $250 million 0.50%
, Long-Term U.S. $250 million up to $1 billion 0.475%
Government Bond, and $1 billion up to $2 billion 0.45%
Intermediate U.S. Government $2 billion up to $5 billion 0.425%
Bond $5 billion and more 0.40%
Money Market $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 $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 and up to $100 million 0.75%
Prestige Balanced $100 million or more 0.70%
</TABLE>
49
<PAGE> 67
<TABLE>
<CAPTION>
FUND ASSETS INVESTMENT ADVISORY FEE
---- ------ -----------------------
<S> <C> <C>
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%
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%
Investor Destinations Aggressive All assets 0.13%
Investor Destinations Moderately
Aggressive
Investor Destinations Moderate
Investor Destinations Moderately
Conservative
Investor Destinations Conservative
(collectively, "Investor Destinations
Series")
</TABLE>
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.
50
<PAGE> 68
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:
- - Mid Cap Growth Fund* to 1.25% for Class A shares, 2.00% for Class B shares
and 1.00% for Class D shares
- - 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
- - Each Investor Destinations Series to 0.71% for Class A shares, 1.31% for
Class B shares and 0.61% for Service Class shares.
- ----------
[FN]
* No Expense Limitation Agreement is in place for these Funds.
</FN>
During the fiscal years ended October 31, 1999, 1998 and 1997, VMF/NAS1
received the following fees for investment advisory services2:
51
<PAGE> 69
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUND 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Mid Cap Growth $ 66,283 $ 61,706 $ 63,883
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 62,5255 -- --
Large Cap Growth 89,6685 -- --
Balanced 48,0695 -- --
Small Cap 64,9985 -- --
International 45,2085 -- --
</TABLE>
- ----------
[FN]
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 Mid Cap Growth, 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.
</FN>
The Subadvisers for certain of the Funds are as follows:
<TABLE>
<CAPTION>
FUND SUBADVISER
- ---- ----------
<S> <C>
Large Cap Value Brinson Partners, Inc. ("Brinson Partners")
Large Cap Growth Goldman Sachs Asset Management ("GSAM")
Balanced J.P. Morgan Investment Management, Inc. ("J.P. Morgan")
Small Cap INVESCO Inc. ("INVESCO")
International Lazard Asset Management ("Lazard")
S&P 500 Index Fund Asset Management L.P. ("FAM")
Value Opportunities NorthPointe Capital, LLC ("NorthPointe")
Small Cap Value NorthPointe Capital, LLC ("NorthPointe")
</TABLE>
52
<PAGE> 70
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, MI 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%
Large Cap Growth up to $150 million 0.40%
$150 million or more 0.30%
</TABLE>
53
<PAGE> 71
<TABLE>
<CAPTION>
FUND ASSETS FEE
---- ------ ---
<S> <C> <C>
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/VMF1 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 $ 29,1822 --
GSAM 44,8532 --
J.P. Morgan 22,4372 --
INVESCO 37,6362 --
Lazard 23,9342 --
Dreyfus 36,609 $3,9393
</TABLE>
- ----------
[FN]
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.
</FN>
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
54
<PAGE> 72
days of such changes, and all changes will be approved by the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust or VMF. The order is intended to facilitate the efficient operation of
the Funds and afford the Trust increased management flexibility.
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 o 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-PPS(TM)). 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.
55
<PAGE> 73
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>
- ----------
[FN]
* Inception date for the Composite is June 30, 1998.
</FN>
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>
- ----------
[FN]
* Performance presented for July 1998 through December 1998. No statistics
are annualized. The Composite was created on March 31, 1999.
</FN>
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.
56
<PAGE> 74
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,
57
<PAGE> 75
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
58
<PAGE> 76
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 Series1 to FAM, and any amount voluntarily waived by FAM.
<TABLE>
<CAPTION>
SMALL CAP AGGREGATE BOND
INDEX SERIES INDEX SERIES
---------- ------------
<S> <C> <C>
December 31, 19991
Contractual amount....................................... $ $
Amount waived (if applicable)............................ $ $
December 31, 1998
Contractual amount....................................... $ 61,476 $ 238,378
</TABLE>
- ----------
[FN]
1 The Mid Cap Index commenced operations on December 30, 1999. The
International Index commenced operations on
</FN>
59
<PAGE> 77
<TABLE>
<CAPTION>
SMALL CAP AGGREGATE BOND
INDEX SERIES INDEX SERIES
---------- ------------
<S> <C> <C>
Amount waived ........................................... $ 61,476 $ 2,537
December 31, 1997 2
Contractual amount....................................... $ 36,425 $ 88,609
Amount waived ........................................... $ 36,425 $ 37,562
</TABLE>
- ----------
[FN]
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).
</FN>
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.
60
<PAGE> 78
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 Funds1:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUNDS 1999 1998 1997
----- ---- ---- ----
<S> <C> <C> <C>
Mid Cap Growth $ 43,017 $ 20,296 --
Growth1 707,023 1,058,927 $ 873,750
Nationwide 1 2,685,806 3,502,971 2,037,896
Bond1 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>
- ----------
[FN]
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.
</FN>
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 amounts1:
61
<PAGE> 79
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUNDS 1999 1998 1997
----- ---- ---- ----
<S> <C> <C> <C>
Mid Cap Growth1 $ 1,160 -- $ 10,832
Growth 17,650 -- --
Nationwide 85,844 $ 254 --
Bond 5,307 6,107 --
Tax-Free Income1 15,816 111 202,973
Long Term U.S. Government1 4,279 -- 23,417
Intermediate U.S. Government1 2,553 -- 31,232
S&P 500 Index2 -- -- --
Large Cap Value3 -- -- --
Large Cap Growth3 306 -- --
Balanced3 60 -- --
Small Cap3 5 -- --
International3 5 -- --
</TABLE>
- ----------
[FN]
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.
</FN>
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.
62
<PAGE> 80
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>
Mid Cap Growth $ 1,752 $ 5,800 N/A N/A
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
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>
[pages 64-68 were deleted]
63
<PAGE> 81
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 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
69
<PAGE> 82
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>
Mid Cap Growth, $0 up to $250 million 0.07%
Growth, Nationwide, Bond, $250 million up to $1 billion 0.05%
Tax-Free Income, $1 billion and more 0.04%
Long-Term U.S. Government
Bond, Intermediate
U.S. Government Bond, Money Market
and Morley Capital Accumulation 1
S&P 500 Index Small Cap Value 2 $0 to $1 billion 0.05%
$1 billion or more 0.04%
Large Cap Value, Large $0 up to $250 million 0.10%
</TABLE>
70
<PAGE> 83
<TABLE>
<S> <C> <C>
Cap Growth, Balanced, $250 million up to $1 billion 0.06%
Small Cap, and International 2 $1 billion or more 0.04%
Small Cap Value All assets 0.0 %
</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/VSA1 received
fund administration fees from the Funds as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
FUNDS 1999 1998
- ---- --- ---
<S> <C> <C>
Mid Cap Growth $7,733 $3,308
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 --
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 VMF.
2 The Fund commenced operations July 24, 1998.
3 The Fund commenced operations November 2, 1998.
4 The Fund commenced operations February 1, 1999.
71
<PAGE> 84
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>
Mid Cap Growth, Growth, $16 per account
and Nationwide
Bond, Tax-Free Income, $18 per account
Long-Term U.S.
Government Bond, and
Intermediate U.S. Government
Bond
Money Market - Prime $27 per
Shares Prime Share Account
Money Market - Service Class 0.01% of average daily net
Shares assets of Service Class shares
S&P 500 Index $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 0.01% of average daily net
assets of each class
Large Cap Value, Large $18 per account for Class A
Cap Growth Fund, Balanced, and Class B shares
Small Cap, and 0.01% of average daily net
International assets of Institutional Service
Class shares
Small Cap Value 0.01% of average daily net assets of
Institutional Class shares
</TABLE>
72
<PAGE> 85
During the fiscal years ended October 31, 1999, 1998 and 1997, NISI received the
following transfer agent fees from the Funds1:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------
FUNDS 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Mid Cap Growth $24,498 $12,379 $11,300
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.
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.
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<PAGE> 86
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 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.
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<PAGE> 87
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 judgemental and are weighed by VMF or subadviser in
determining the overall reasonableness of securities executions and 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 by 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
75
<PAGE> 88
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 Funds1:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------
FUND 1999 1998 1997
----- ----- ----- -----
<S> <C> <C> <C>
Mid Cap Growth $9,962 $10,084 $8,480
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.
As of October 31, 1999, the Prestige Balanced Fund, Prestige Large Cap
Growth Fund, S&P 500 Index Fund, Nationwide Fund, 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 FUND AT NAME OF
FUND 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.
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE VALUE OF ISSUER'S
SECURITIES OWNED BY THE FUND AT NAME OF
FUND OCTOBER 31, 1999 BROKER OR DEALER
- ---- --------------------------------------- ----------------
<S> <C> <C>
Nationwide 17,655,000 Merrill Lynch & Co., Inc.
Mid Cap Growth 250,000 Merrill Lynch & Co., Inc.
</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 broker's or dealer's most
favored unaffiliated customers, except for accounts for which the affiliated
broker or dealer acts as a clearing broker for another brokerage firm and
customers of an affiliated broker or dealer that, in the opinion of a majority
of the independent trustees, are not comparable to the Fund. The Funds do not
deem it practicable or in their best interests to solicit competitive bids for
commissions on each transaction. However, consideration regularly is given to
information concerning the prevailing level of commissions charged on comparable
transactions by other brokers during comparable periods of time.
ADDITIONAL INFORMATION ON PURCHASES AND SALES
CLASS A 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
</TABLE>
77
<PAGE> 90
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED COMMISSION
- ---------------- ----------------- ------------------ ----------
<C> <C> <C> <C>
$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>
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
$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;
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<PAGE> 91
(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:
(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
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<PAGE> 92
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 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:
<TABLE>
<CAPTION>
YEARS OF AFTER PURCHASE CDSC ON SHARES
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.
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<PAGE> 93
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:
o 1.00% for sales of the Funds of $1 million up to $3 million
o 0.50% for sales of the Funds of $3 million up to $50 million
o 0.25% for sales of the Funds of $50 million or more
The finder's fee is paid on the aggregate assets of all Funds held at the
plan sponsor level.
CONVERSION FEATURES FOR CLASS B SHARES
Class B shares which have been outstanding for seven years will
automatically convert to Class A shares on the first business day of the next
month following the seventh anniversary of the date on which such Class B shares
were purchased. Such conversion will be on the basis of the relative net asset
values of the two classes, without the imposition of a sales charge or other
charge except that the lower 12b-1 fee applicable to Class A shares shall
thereafter be applied to such converted shares. 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.
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<PAGE> 94
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.
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.
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<PAGE> 95
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.
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.
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<PAGE> 96
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 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
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<PAGE> 97
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 D 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 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
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<PAGE> 98
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 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.
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<PAGE> 99
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, 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.
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<PAGE> 100
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.
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
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<PAGE> 101
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 information, mailing and wiring instructions as well
as other mutual fund information. You must call our toll free number by
the Valuation Time to receive that day's closing share price. The
Valuation Time is the close of regular trading of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern Time.
CUSTOMER SERVICE LINE - By calling 1-800-848-0920, you may exchange shares
by telephone. Requests may be made only by the account owner(s). You must
call our toll free number by the Valuation Time to receive that day's
closing share price. The Valuation Time is the close of regular trading of
the New York Stock Exchange, which is usually 4:00 p.m. Eastern Time.
NAS may record all instructions to exchange shares. NAS reserves the right
at any time without prior notice to suspend, limit or terminate the
telephone exchange privilege or its use in any manner by any person or
class.
The Funds will employ the same procedure described under "Buying, Selling
and Exchanging Fund Shares" in the Prospectus to confirm that the
instructions are genuine.
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<PAGE> 102
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 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
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<PAGE> 103
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 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
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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.
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
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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>
Mid Cap Growth 2 6.48% 7.33% 8.21% 15.05% 15.90% 15.34% 12.43% 15.34% 12.57%
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>
- -----------------------
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
------------- ------- ----- ------------- ------- -----
<C> <C> <C> <C> <C> <C> <C>
500 Index 1 N/A N/A 24.85% 24.64% 24.27% 16.21%
</TABLE>
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<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 Capital3 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.
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>
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<PAGE> 107
<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-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,
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<PAGE> 108
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; 28 of these
series are the Funds:
<TABLE>
<CAPTION>
SERIES SHARE CLASSES
- ----- ------------
<S> <C>
Mid Cap Growth Class A, Class B, Class D
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
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
Focus Class A, Class B, Institutional Service Class
Value Opportunities Class A, Class B, Institutional Service Class
</TABLE>
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<PAGE> 109
<TABLE>
<CAPTION>
SERIES SHARE CLASSES
- ------ ------------
<S> <C>
High Yield Bond Class A, Class B, Institutional Service Class
Small Cap Value Institutional Class
</TABLE>
You have an interest only in the assets of the shares of the Fund which
you own. Shares of a particular class are equal in all respects to the other
shares of that class. In the event of liquidation of a Fund, shares of the same
class will share pro rata in the distribution of the net assets of such Fund
with all other shares of that class. All shares are without par value and when
issued and paid for, are fully paid and nonassessable by the Trust. Shares may
be exchanged or converted as described in this Statement of Additional
Information and in the Prospectus but will have no other preference, conversion,
exchange or preemptive rights.
VOTING RIGHTS
Shareholders of each class of shares have one vote for each share held and
a proportionate fractional vote for any fractional share held. An annual or
special meeting of shareholders to conduct necessary business is not required by
the Declaration of Trust, the 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.
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
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<PAGE> 110
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.
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.
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<PAGE> 111
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 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.
99
<PAGE> 112
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 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.
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<PAGE> 113
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 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
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<PAGE> 114
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 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
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<PAGE> 115
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.
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
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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 May ____, 2000, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the shares of the Trust.
As of May ____, 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>
U.S. GOVERNMENT INCOME - CLASS D
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
GROWTH - CLASS D
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
NATIONWIDE - CLASS D
Nationwide Life Insurance Co. 26,398,837.2120 %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
BOND - CLASS D
Nationwide Life Insurance Co. %
</TABLE>
104
<PAGE> 117
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Joan C. Edwards
114 Hunter Pkwy %
Cuyahoga Fls, Ohio 4223-3750
BOND - CLASS A
NAS as Custodian For IRA Plan %
Lacy E. Jones
Rollover Account
581 Moores Landing Rd
Hampstead, NC 2844-8619
I Know I Can Fund Of the Columbus Foundation %
1234 E. Broad St
Columbus, Ohio 43205-1405
Glenna G. Hurt %
904 Poplar St.
Kenova, WV 25530-1429
MONEY MARKET - SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
MONEY MARKET - PRIME SHARES
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Trust Company, FSB
c/o IPO Portfolio Accounting %
P.O. Box 182029
Columbus, Ohio 43218-2029
Roseanne C. Smerling %
3065 Bellaire Ln
Oshkosh, WI 54904-1002
NAS as Custodian for IRA Plan %
Paula J. Bales
6477 Mary Esther Ln
</TABLE>
105
<PAGE> 118
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
Mechanicsville, VA 23111-5030
NAS as Custodian for IRA Plan %
R. Duane Gross
662 Brookland Rd
Coudersport, PA 16915-8028
NAS as Custodian for IRA Plan %
Loree W. Sowell
Rollover Account
6708 Lovington Dr
Dallas, TX 75252-2545
NAS as Custodian for IRA Plan %
Claude D. Johnson, Jr.
NC 69 Box 1340
Bigfoot, TX 78005-9303
Richard E. Marshall %
352 Harris Hill Rd
Williamsville, NY 14221-7407
SMALL CAP INDEX - CLASS A
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
SMALL CAP INDEX - INSTITUTIONAL
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
INTERNATIONAL INDEX - CLASS A
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
INTERNATIONAL INDEX - CLASS B
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
INTERNATIONAL INDEX- INSTITUTIONAL
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
</TABLE>
106
<PAGE> 119
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
BOND INDEX - CLASS A
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
BOND INDEX - INSTITUTIONAL
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
MID CAP MKT INDEX - CLASS A
c/o Mona Jewell 01-32-05 %
PO Box 182029
Columbus, OH 43218-2029
MID CAP MARKET INDEX - INSTITUTIONAL
c/o Mona Jewell 01-32-05 %
PO Box 182029
Columbus, OH 43218-2029
S&P 500 INDEX - CLASS A
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
S&P 500 INDEX - CLASS B
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
S&P 500 INDEX - SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
S&P 500 INDEX - INSTITUTIONAL
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
S&P 500 INDEX - LOCAL SHARES
Nationwide Life Co. %
Attn: Gary Berndt
</TABLE>
107
<PAGE> 120
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
1 Nationwide Plaza
Columbus, OH 43215-2239
Nationwide Asset Allocation Trust %
c/o Nationwide Advisory
Services Inc 3-26-04
Moderately Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
Nationwide Asset Allocation Trust %
c/o Nationwide Advisory
Services Inc 3-26-04
Moderately Aggressive Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
Nationwide Asset Allocation Trust %
c/o Nationwide Advisory
Services Inc 3-26-04
Aggressive Portfolio
3 Nationwide Plaza
Columbus, OH 43215-2410
MORLEY ENHANCED INCOME - CLASS A
Morley Capital Management %
5665 SW Meadows Rd., Ste. 400
Lake Oswego, OR 97035-3193
MORLEY ENHANCED INCOME - INSTITUTIONAL SERVICE CLASS
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #1
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #2
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #3
One Nationwide Plaza
Columbus, Ohio 43215-2239
</TABLE>
108
<PAGE> 121
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
VALUE OPPORTUNITIES - CLASS A
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
VALUE OPPORTUNITIES - CLASS B
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
VALUE OPPORTUNITIES - INSTITUTIONAL
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
HIGH YIELD BOND - CLASS A
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
HIGH YIELD BOND - CLASS B
Villanova Mutual Fund Capital Trust %
1200 River Road
Conshohocken, PA 19428-2436
HIGH YIELD BOND - INSTITUTIONAL
Nationwide Life Insurance Co. %
Attn: Pam Smith
Investment Accounting
Nationwide Plaza 1, 32nd Floor
Columbus, OH 43218
INTERMEDIATE U.S. GOVERNMENT BOND - CLASS A
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #1
One Nationwide Plaza
Columbus, OH 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #2
One Nationwide Plaza
Columbus, OH 43215-2239
Nationwide Pensions Managed %
Variable Account
</TABLE>
109
<PAGE> 122
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
Personal Portfolio Series #3
One Nationwide Plaza
Columbus, OH 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, OH 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, OH 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, OH 43215-2239
INTERMEDIATE U.S. GOVERNMENT BOND - CLASS B
Wanda Fay Whitley %
51 Lakeshore Ln
Chattanooga, TN 37415-7015
Vernie M. Weaver %
T/O/D
3708 Cyrus Creek Rd
Darrdoursville, WV 25504
Norma Louise Bugg %
T/O/D
RR 4 Box 51
Tangier, IN 47952-9019
TAX-FREE INCOME - CLASS A
Geraldine H. Zerphey %
T/O/D
232 N. Locust St
Elizabethtown, PA 17022-1929
Larry K. Brinton and %
Garry L. Brinton JTWROS
T/O/D
9 Nelson Manor LN
</TABLE>
110
<PAGE> 123
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
Middletown, PA 17057-4905
Mary M. Dais & %
William F. Dais JT WROS
910 Buckeye St.
Genoa, OH 43430-1523
Richard C. Stansbury %
T/O/D
201 St Mark Way, Apt.404
Westminster, MD 21158-4195
LONG-TERM U.S. GOVERNMENT BOND - CLASS A
Dora Smith %
20 Lafayette Cir.
Hurricane, WV 25526-9242
LONG-TERM U.S. GOVERNMENT BOND - CLASS B
Nationwide Life Ins. %
Attn: Pamela Smith
1-35-05
One Nationwide Plaza
Columbus, OH 43215-2239
MID CAP GROWTH - CLASS D
Nationwide Life Ins Co %
Attn: Pamela Smith
1/32/05
One Nationwide Plaza
Columbus, Ohio 43215-2239
MORLEY CAPITAL ACCUMULATION -SERVICE CLASS
Nationwide Life Ins. Co. %
c/o IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
Nationwide Life Ins. Co. %
Attn: Pam Smith
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Trust Company FSB %
c/o IPO Portfolio Accounting
</TABLE>
111
<PAGE> 124
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
PO Box 182029
Columbus, OH 43218-2029
MORLEY CAPITAL ACCUMULATION -INSTITUTIONAL CLASS
Morley Capital Management %
5665 SW Meadows Rd, Ste. 400
Lake Oswego, OR 97035-3193
Nationwide Life Ins. Co. %
Attn: Pam Smith
One Nationwide Plaza
Columbus, Ohio 43215-2239
MORLEY CAPITAL ACCUMULATION -IRA CLASS
Nationwide Life Co. %
Attn: Pam Smith
1 Nationwide Plaza
Columbus, Ohio 43215-2239
NAS As Cust for IRA Plan
Harold N. Morley
Rollover Account %
18016 Skyland Cir
Lake Oswego, OR 97034-6452
PRESTIGE LARGE CAP VALUE - CLASS A
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #1
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #3
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #5
</TABLE>
112
<PAGE> 125
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE LARGE CAP VALUE - CLASS B
NAS as Cust for IRA Plan %
Jeffrey V. Medema
Rollover Account
1728 Kilgore Road
Dayton, TX 77520-3923
NAS as Cust for IRA Plan %
Jean F. Hambrick
Rollover Account
2900 White Road NE
Conyers, GA 30012-2624
Doug L. Brown & %
Jackie Lynn Brown JT WROS
1839 Prospect Road
Lawrenceville, GA 30043-2758
Mary R. Brown %
1869 Prospect Road
Lawrenceville, GA 30043-2758
PRESTIGE LARGE CAP VALUE - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
PRESTIGE LARGE CAP GROWTH - CLASS A
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #2
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #3
</TABLE>
113
<PAGE> 126
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE LARGE CAP GROWTH - CLASS B
Ron Finnell %
T/O/D
P.O. Box 141
Sedalia, MD 65302-0141
PRESTIGE LARGE CAP GROWTH - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
PRESTIGE BALANCED - CLASS A
Nationwide Life Insurance Co. %
QPVA
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Co. %
Attn: Pam Smith
1 Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE BALANCED - CLASS B
Nationwide Life Co. %
</TABLE>
114
<PAGE> 127
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
Attn: Pam Smith
1 Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE BALANCED - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
PRESTIGE SMALL CAP- CLASS A
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #3
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE SMALL CAP - CLASS B
NAS as Custodian for IRA Plan %
James L. Stingle
Sep IRA
HC 1 Box 100
Pelkie, MI 49958-9431
Doug L. Brown & %
Jackie Lynn Brown JT WROS
1839 Prospect Road
Lawrenceville, GA 30043-2753
NAS as Cust of IRA Plan %
</TABLE>
115
<PAGE> 128
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
John F. Carlin
694 Jenney Mill Ct
Marietta, GA 30068-2221
PRESTIGE SMALL CAP - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
PRESTIGE INTERNATIONAL - CLASS A
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #4
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #5
One Nationwide Plaza
Columbus, Ohio 43215-2239
Nationwide Pensions Managed %
Variable Account
Personal Portfolio Series #6
One Nationwide Plaza
Columbus, Ohio 43215-2239
PRESTIGE INTERNATIONAL - CLASS B
Scott William Stilwell %
10471 Manoning Ave.
Brooksville, Fl 34614-3078
NAS as Custodian for IRA Plan %
James L. Stingle
Sep IRA
HC 1 Box 100
Pelkie, MI 49958-9431
NAS as Cust for IRA Plan %
Jeffrey V. Medema
Rollover Account
1728 Kilgore Road
Daytown, TX 77520-3923
John S. Uzzo %
T/O/D
</TABLE>
116
<PAGE> 129
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND/CLASS NO. OF SHARES FUND'S TOTAL ASSETS
----------- ------------- -------------------
<S> <C> <C>
12744 Forrest Dr.
Edinboro, PA 16412-1282
NAS as Cust for IRA Plan %
Richard Dean Cira
Rollover Account
10 Little Acorn Circle
Pittsford, NY 14534-3312
NAS as Cust for IRA Plan %
Kenneth M. McElhaney
Rollover Account
30798 Humes Road
Cambridge Spgs, PA 16403-7220
Debra A. Merijohn %
12623 S 69th Court
Palds Heights, IL 60463-1692
NAS as Cust for IRA Plan %
Elizabeth M. Hudson
1321 Kenwood Drive
CPE Girardeau, MO 63701-2148
PRESTIGE INTERNATIONAL - INSTITUTIONAL SERVICE CLASS
Nationwide Life Insurance Co. %
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
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 (95.3%)
and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a mutual
company owned by its policyholders.
117
<PAGE> 130
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.
118
<PAGE> 131
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.
119
<PAGE> 132
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
120
<PAGE> 133
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.
121
<PAGE> 134
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> 135
BBB Bonds considered to be in the lowest investment grade and
indicates that there is currently low expectation of credit risk.
The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in economic conditions
and circumstances are more likely to impair this capacity.
BB Bonds are considered speculative. This rating indicates that
there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Bonds are considered highly speculative. This rating indicates
that significant credit risk is present, but a limited margin of
safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC, CC Bonds are considered a high default risk. Default is a real
and C possibility. Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic
developments. A `CC' rating indicates that default of some kind
appears probable. `C' rating signal imminent default.
DDD, DD Bonds are in default. Such bonds are not meeting current
and D obligations and are extremely speculative. `DDD' designates the
highest potential for recovery of amounts outstanding on any
securities involved and `D' represents the lowest potential for
recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security, (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and 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> 136
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 and
A- 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> 137
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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<PAGE> 138
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> 139
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> 140
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.
<PAGE> 141
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Amended Declaration of Trust previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(b) Amended Bylaws previously filed with the Trust's Registration
Statement on August 7, 1998, and is hereby incorporated by reference.
(c) Certificates for shares are not issued. Articles V, VI, VII, and VIII
of the Declaration of Trust, incorporated by reference to Exhibit (1)
hereto, define rights of holders of shares.
(d)(1)(a) Investment Advisory Agreement previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(b) Amendment to Investment Advisory Agreement previously filed with the
Trust's Registration Statement on December 29, 1999, and is hereby
incorporated by reference.
(c) Amended Exhibit A to the Investment Advisory Agreement previously
filed with the Trust's Registration Statement on December 29, 1999,
and is hereby incorporated by reference.
(2)(a) Investment Advisory Agreement for the Morley Capital Accumulation Fund
previously filed with the Trust's Registration Statement on January 5,
1999, and is hereby incorporated by reference.
(b) Amended Exhibit A to the Investment Advisory Agreement for the Morley
Capital Accumulation Fund and the Morley Enhanced Income Fund
previously filed with the Trust's Registration Statement on December
29, 1999, and is hereby incorporated by reference.
(3) Subadvisory Agreements.
(a)Subadvisory Agreement with Fund Asset Management, L.P. for
S & P 500 Index Fund, previously filed with the Trust's
Registration Statement on October 29, 1999, and is hereby
incorporated by reference.
(b)(1) Subadvisory Agreement for the Prestige Large Cap Value Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(c)(1) Subadvisory Agreement for the Prestige Large Cap Growth Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(d)(1) Subadvisory Agreement for the Prestige Small Cap Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(e)(1) Subadvisory Agreement for the Prestige International Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(f)(1) Subadvisory Agreement for the Prestige Balanced Fund
previously filed with the Trust's Registration Statement on
January 5, 1999, and is hereby incorporated by reference.
(2) Amendment to Subadvisory Agreement.
(e)(1) Underwriting Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(2) Model Dealer Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(f) Not applicable.
(g) Custody Agreement previously filed with the Trust's original
Registration Statement on November 18, 1997, and is hereby incorporated
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by reference.
(h)(1)(a) Fund Administration Agreement previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(b) Amendment to Fund Administration Agreement previously filed with the
Trust's Registration Statement on December 29, 1999, and is hereby
incorporated by reference.
(c) Proposed Amended Exhibit A to Fund Administration Agreement.
(2) Transfer and Dividend Disbursing Agent. previously filed with the
Trust's Registration Statement on January 5, 1999, and is hereby
incorporated by reference.
(3) Agreement and Plan of Reorganization between Nationwide Investing
Foundation and the Trust previously filed with the Trust's
Registration Statement on form N-14 ('33 Act File No. 333-41175) on
November 24, 1997, and is hereby incorporated by reference.
(4) Agreement and Plan of Reorganization between Nationwide Investing
Foundation II and the Trust Previously filed with the Trust's
Registration Statement on Form N-14 ('33 Act File No. 333-41175) on
November 24, 1997, and is hereby incorporated by reference.
(5) Agreement and Plan of Reorganization between Financial Horizons
Investment Trust and the Trust previously filed with the Trust's
Registration Statement on Form N-14 ('33 Act File No. 333-41175) on
November 24, 1997 and is hereby incorporated by reference.
(6) Administrative Services Plan and Services Agreement previously filed
on January 5, 1999, and is hereby incorporated by reference.
(i) Opinion of Counsel previously filed and is hereby incorporated by
reference.
(j) Consent of KMPG LLP, Independent Auditors previously filed and is
hereby incorporated by reference.
(k) Not applicable.
(l) Purchase Agreement previously filed with Trust's Registration
Statement on January 2, 1998, and hereby incorporated by reference.
(m)(1) Amended Distribution Plan previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(2) Dealer Agreement (see Exhibit 6(b)) previously filed with the Trust's
Registration Statement on January 5, 1999, and is hereby incorporated
by reference.
(3) Rule 12b-1 Agreement previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
(n) Amended 18f-3 Plan previously filed with the Trust's Registration
Statement on January 5, 1999, and is hereby incorporated by reference.
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(o) Not applicable.
(p)(1) Code of Ethics for Nationwide Family of Funds (filed herewith).
(2) Code of Ethics for Villanova Mutual Fund Capital Trust and Villanova
SA Capital Trust (filed herewith).
(3) Code of Ethics for Nationwide Advisory Services, Inc. (filed
herewith).
(q)(1) Power of Attorney dated November 7, 1997 previously filed in the
Trust's Pre-Effective Amendment and is hereby incorporated by
reference.
(2) Power of Attorney dated February 9, 2000 previously filed with the
Trust's Registration Statement on February 10, 2000 and is hereby
incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
No person is presently controlled by or under common control with
Registrant.
ITEM 25. INDEMNIFICATION
Indemnification provisions for officers, directors and employees of
Registrant are set forth in Article V, Section 5.2 of the Declaration
of Trust. In addition, Section 1743.13 of the Ohio Revised Code
provides that no liability to third persons for any act, omission or
obligation shall attach to the trustees, officers, employees or
agents of a business trust organized under Ohio statutes. The
trustees are also covered by an errors and omissions policy provided
by the Trust covering actions taken by the trustees in their capacity
as trustee. See Item 23(a)1 above.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Villanova Mutual Fund Capital Trust, ("VMF"), the investment
adviser of the Trust, also serves as investment adviser to the
Nationwide Separate Account Trust.
The Directors of Villanova Capital, Inc., VMF's managing unitholder
and the officers of VMF are as follows:
Joseph J. Gasper Director and President and Chief Operating Officer
--------------------------------------------------
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
Nationwide Financial Services, Inc.
Director and Chairman of the Board
----------------------------------
National Deferred Compensation, Inc.
Nationwide Investment Services Corp
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<PAGE> 144
Director and Vice Chairman
--------------------------
ALLIED Group Merchant Banking Corp
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Global Holdings, Inc.
Nationwide Retirement Solutions, Inc.
Neckura Life Insurance Company
NFS Distributors, Inc.
Pension Associates, Inc.
Director and President
----------------------
Employers Life Insurance Company of
Wausau
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Nationwide Financial Services (Bermuda)
Ltd.
Director
--------
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency
Of Alabama, Inc.
Financial Horizons Distributors Agency
of Ohio, Inc.
Financial Horizons Distributors Agency
of Oklahoma, Inc.
Financial Horizons Securities,
Corp.,Inc
Landmark Financial Services of New
York,
Leben Direkt Insurance Company
Morley Financial Services, Inc.
Nationwide Indemnity Company
Neckura Holding Company
NGH Luxembourg, S.A.
PanEurolife
Villanova Capital, Inc.
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<PAGE> 145
Trustee and Chairman
--------------------
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Trustee and President
---------------------
Nationwide Insurance Golf Charities,
Inc.
Board of Managers
-----------------
Nationwide Services Company, LLC.
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<PAGE> 146
Paul J. Hondros Director
--------
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
President and Chief Executive Officer
--------------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Dimon R. McFerson NorthPointe Capital, LLC
Chairman and Chief Executive Officer and
Director
----------------------------------------
ALLIED Group, Inc.
ALLIED Life Financial Corporation
Farmland Mutual Insurance Company
GatesMcDonald Health Plus, Inc.
Nationwide Agribusiness Insurance
Company
National Casualty Company
Nationwide Financial Services, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
Colonial Insurance Company of Wisconsin
National Deferred Compensation, Inc.
Nationwide Cash Management Company
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Investment Services
Corporation
Chairman and Chief Executive Officer,
President and Director
-------------------------------------
Nationwide Corporation
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<PAGE> 147
Chairman of the Board, Chairman and
Chief Executive
-----------------------------------
Officer and Director
--------------------
American Marine Underwriters, Inc.
Employers Life Insurance Company of
Wausau
Nationwide Advisory Services, Inc.
Nationwide Financial Institution
Distributors Agency, Inc
Nationwide International Underwriters
Nationwide Investor Services, Inc.
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking
Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty
Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Gates, McDonald and Company
Nationwide Retirement Solutions, Inc.
Nationwide Insurance Enterprise
Services, Ltd.
Villanova Capital, Inc.
Trustee and Chairman
--------------------
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<PAGE> 148
Nationwide Mutual Funds
Chairman of the Board
---------------------
Nationwide Insurance Golf Charities,
Inc.
Chairman of the Board and Director
----------------------------------
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Lone Star General Agency, Inc.
Nationwide Community Urban
Redevelopment Corporation
Colonial County Mutual Insurance Company
Director
--------
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York
Healthcare First, Inc.
MRM Investments, Inc.
Morley Financial Services, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
Nevada Independent Companies-
Construction
Nevada Independent Companies-Health
and Nonprofit
Nevada Independent Companies-
Hospitality and Entertainment
Nevada Independent Companies-
Manufacturing,
Transportation and Distribution
PanEurolife
Chairman of the Board, Chairman and
Chief Executive
-----------------------------------
Officer and Trustee
-------------------
Nationwide Insurance Enterprise
Foundation
Member-Board of Managers, Chairman of
the Board,
-------------------------------------
Chairman and Chief Executive Officer
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<PAGE> 149
------------------------------------
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Services Company, LLC.
Chairman and Chief Executive Officer
------------------------------------
Nationwide Insurance Company of
Florida
Robert A. Oakley
Executive Vice President-Chief Financial
Officer
----------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance
Company
Nationwide General Insurance Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity
Insurance Company
ALLIED Group. Inc.
ALLIED Life Financial Corporation
CalFarm Insurance Company
Employers Life Insurance Company
of Wausau
National Casualty Company
National Premium and Benefit
Administration Company
Farmland Mutual Insurance Company
Nationwide Financial Institution
Distributors Agency, Inc.
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance
Company
Nationwide Corporation
Nationwide Financial Services, Inc.
Nationwide Investment Services
Corporation
Nationwide Investor Services, Inc.
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<PAGE> 150
Nationwide Insurance Enterprise
Foundation
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Retirement Solutions, Inc.
Colonial County Mutual Insurance
Company
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance
Company
Director and Chairman of the Board
----------------------------------
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
Executive Vice President-Chief
Financial Officer and
------------------------------
Director
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing
Company
ALLIED Group Merchant Banking
Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty
Insurance Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial Insurance Company of
Wisconsin
Nationwide Cash Management Company
Nationwide Community Urban
Redevelopment Corporation
National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
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Nationwide Services Company, LLC.
NFS Distributors, Inc.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of
America
Nationwide Insurance Company of
Florida
Nationwide International Underwriters
Director and Vice Chairman
--------------------------
Leben Direkt Insurance Company
Neckura General Insurance Company
Auto Direkt Insurance Company
Director
--------
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Healthcare First, Inc.
Morley Financial Services, Inc.
NGH Luxembourg, S.A.
PanEurolife
Villanova Capital, Inc.
Board of Managers, Executive Vice
Pres.-Chief Financial Officer
---------------------------------
Nationwide Insurance Enterprise
Services, Ltd.
Susan A. Wolken
Senior Vice President - Life Company
Operations
------------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
Nationwide Financial Services, Inc.
Senior Vice President - Life Company
Operations and Director
------------------------------------
Nationwide Financial Services
(Bermuda) Ltd.
Chairman of the Board and Director
----------------------------------
Nationwide Trust Company, FSB
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<PAGE> 152
Senior Vice President and Director
----------------------------------
Employers Life Insurance Company of
Wausau
Pension Associates, Inc.
Wausau Preferred Health Insurance
Company
Director
--------
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors
Agency of Alabama, Inc.
Financial Horizons Distributors
Agency of Ohio, Inc.
Financial Horizons Distributors Agency
of Oklahoma, Inc.
Financial Horizons Securities
Corporation
Landmark Financial Services of New
York, Inc.
Nationwide Advisory Services, Inc.
----------------------------------
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Investment Services
Corporation
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions
Insurance Agency, Inc.
Nationwide Retirement Solutions, Inc.
of Alabama
Nationwide Retirement Solutions, Inc.
of Arizona
Nationwide Retirement Solutions, Inc.
of Arkansas
Nationwide Retirement Solutions, Inc.
of Montana
Nationwide Retirement Solutions, Inc.
of Nevada
Nationwide Retirement Solutions, Inc.
of New Mexico
Nationwide Retirement Solutions, Inc.
of Ohio
Nationwide Retirement Solutions, Inc.
of Oklahoma
Nationwide Retirement Solutions, Inc.
of South Dakota
Nationwide Retirement Solutions, Inc.
of Wyoming
C-12
<PAGE> 153
Villanova Capital, Inc.
Robert J. Woodward, Jr. Executive Vice President-Chief
Investment Officer
------------------------------
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance
Company
Nationwide General Insurance
Company
Nationwide Property and Casualty
Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing
Company
ALLIED Group Merchant Banking Corp.
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty
Insurance Company
AMCO Insurance Company
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial County Mutual Insurance
Company
Colonial Insurance Company of Wisconsin
Employers Insurance of Wausau A Mutual
Company
Employers Life Insurance Company of
Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
Lone Star General Agency, Inc.
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Financial Services (Bermuda)
Ltd.
Nationwide Agribusiness Insurance
Company
Nationwide Insurance Company of
America
Nationwide Insurance Company of Florida
Nationwide Corporation
Nationwide Insurance Enterprise
Foundation
C-13
<PAGE> 154
Nationwide Insurance Enterprise Serv Ltd
Nationwide Investment Services
Corporation
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance
Company
Wausau Preferred Health Insurance
Company
Director
--------
Healthcare First, Inc.
Morley Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Investors Services, Inc.
Villanova Capital, Inc.
Member-Board of Managers and Vice Chairman
------------------------------------------
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Member-Board of Managers and Executive
Vice President-Chief
-----------------------------------------
Investment Officer
------------------
Nationwide Services Company, LLC.
Director and President
----------------------
MRM Investments, Inc.
Nationwide Cash Management Company
Nationwide Community Urban
Redevelopment Corporation
Director and Executive Vice President-
Chief Investment Officer
----------------------------------------
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
National Deferred Compensation, Inc.
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
C-14
<PAGE> 155
Director, Vice Chairman and Executive Vice
President-Chief
--------------------------------------
Investment Officer
------------------
ALLIED Group Mortgage Company
Trustee and Vice Chairman
-------------------------
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
James R. Donatell Executive Vice President-Sales and Distribution
-----------------------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Gregory J. Nowak Executive Vice President-Mergers
and Acquisitions
--------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Dilip Kulkarni Senior Vice President and Chief
Technology Officer
---------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
James F. Laird, Jr. Senior Vice President-Product Development
-----------------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Vice President and General Manager
----------------------------------
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Treasurer
---------
Nationwide Mutual Funds
Nationwide Separate Account Trust
Nationwide Asset Allocation Trust
William H. Miller Senior Vice President-Chief Investment Officer
----------------------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Caroline Churchill Vice President-Marketing
------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Kevin S. Crossett Vice President-Associate General Counsel
----------------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Christopher P. Donigan Vice President-Human Resources
------------------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Judy L. Howard Vice President-Chief Financial Officer
--------------------------------------
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Vice President-Finance Officer
------------------------------
Villanova Capital, Inc.
Glenn W. Soden Associate Vice President and Secretary
--------------------------------------
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Assistant Secretary
--------------------
Villanova Capital, Inc.
Carol L. Dove Assistant Treasurer
-------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Michael D. Maier Assistant Treasurer
-------------------
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Except as otherwise noted, the principal business address of any company with
which any person specified above is connected in the capacity of director,
officer, employee, partner or trustee is One Nationwide Plaza, Columbus, Ohio
43215, except for the following companies:
NorthPointe Capital, LLC
Columbia Center One
10th Floor, Suite 1000
201 West Big Beaver Road
Troy, Michigan 48084
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
Colonial Insurance Company of Wisconsin
One Nationwide Plaza
Columbus, Ohio 43215
Scottsdale Insurance Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
P.O. Box 4110
Scottsdale, Arizona 85261-4110
Lone Star General Agency, Inc.
P.O. Box 14700
Austin, Texas 78761
C-15
<PAGE> 156
Auto Direkt Insurance Company
Columbus Insurance Brokerage and Service, GMBH
Leben Direkt Insurance Company
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Nationwide Retirement Solutions, Inc.
Two Nationwide Plaza
Columbus, Ohio 43215
Morley Financial Services, Inc.
5665 S. W. Meadows Rd. , Suite 400
Lake Oswego, Oregon 97035
(b) UBT serves as investment adviser to the Morley Capital
Accumulation Fund. UBT, a trust company organized under the laws
of the State of Oregon, is a wholly owned subsidiary of
Nationwide Life Insurance Company. UBT conducts a variety of
trust activities.
To the knowledge of the Trust, none of the directors or officers
of UBT, except as set forth below, is or has been at any time
during the past two fiscal years engaged in any other business,
profession, vocation or employment of a substantial nature,
except that certain directors and officers also hold various
positions with and engage in business for Morley Financial
Services, Inc. The directors except as noted below may be
contacted C/O UBT, 5665 SW Meadows Rd., Suite 400, Lake Oswego,
Oregon 97035.
Donald C. Burdick, 434 Ridgeway Road, Lake Oswego, OR 97034 Mr.
Burdick has been an independent consultant and investor for the
past 10 years. Prior to that he was President of Investcorp
Financial Services.
Harold H. Morley, President, CEO and Director of UBT. Mr. Morley
is Chairman and Chief Executive Officer of Morley Financial
Services, Inc.
Joan K. Hall, Senior Vice President, Corporate Secretary,
Financial Officer and Director of UBT. Ms. Hall is Senior Vice
President and Financial Officer of Morley Financial Services.
Greg E. Ellis, Senior Vice President/ Managing Director. Mr.
Ellis is also Senior Vice President/ Managing Director of Morley
Capital Management, Inc.
C-16
<PAGE> 157
Peter DeGraff, Vice President and Assistant General Manager.
Taylor E. Drake, Vice President.
Frederick F. Fletcher VI, Vice President and Corporate
Controller.
Barbara Salisbury, Vice President.
(c) Information for the Subadviser of the S&P 500 Index Fund
(1) Fund Asset Management, L.P.
Fund Asset Management, L.P. ("FAM") acts as subadviser to
the S&P 500 Index Fund and as adviser or subadviser to a
number of other registered investment companies. The list
required by this Item 26 of officers and directors of FAM,
together with information as to their other business,
profession, vocation or employment of a substantial nature
during the past two fiscal years, is incorporated by
reference to Schedule A and D of Form ADV filed by FAM (SEC
file No. 801-12485).
(d) Information for the Subadviser of the Prestige Large Cap Value
Fund
(1) Brinson Partners, Inc.
Brinson Partners, Inc. ("Brinson") acts as a subadviser to
the Prestige Large Cap Value Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 26 of officers
and directors of Brinson, together with information as to
their other business, profession, vocation or employment of
a substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by Brinson (SEC file No. 801-34910.)
(e) Information for the Subadviser of the Prestige Large Cap Growth
Fund
(1) Goldman Sachs Asset Management
Goldman Sachs Asset Management ("Goldman") acts as a
subadviser to the Large Cap Growth Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 26 of officers and
C-17
<PAGE> 158
directors of Goldman, together with information as to their
other business, profession, vocation or employment of a
substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by Goldman (SEC file No. 801-16048.)
(f) Information for the Subadviser of the Prestige Balanced Fund
(1) J. P. Morgan Investment Management
J. P. Morgan Investment Management, Inc. ("JPMIM"), a
registered investment adviser, is a wholly owned subsidiary
of J. P. Morgan & Co. Incorporated. JPMIM manages employee
benefit plans for corporations and unions. JPMIM also
provides investment management services for a broad spectrum
of other institutional investors, including foundations,
endowments, sovereign governments, and insurance companies.
To the knowledge of the Registrant, none of the directors or
executive officers of JPMIM is or has been in the past two
fiscal years engaged in any other business or profession,
vocation or employment of a substantial nature, except that
certain officers and directors of JPMIM also hold various
positions with, and engage in business for, J.P. Morgan &
Co. Incorporated or Morgan Guaranty Trust Company of New
York, a New York trust company which is also a wholly owned
subsidiary of J. P. Morgan & Co. Incorporated.
(g) Information for the Subadviser of the Prestige Small Cap Fund
(1) Invesco Management & Research, Inc.
Invesco Management & Research, Inc. ("INVESCO") acts as a
subadviser to the Small Cap Fund and as adviser or
subadviser to a number of other registered investment
companies. The list required by this Item 26 of officers and
directors of INVESCO, together with information as to their
other business, profession, vocation or employment of a
substantial nature during the past two fiscal years, is
incorporated by reference to Schedule A and D of Form ADV
filed by INVESCO (SEC file No. 801-01596.)
(h) Information for the Subadviser of the Prestige International Fund
(1) Lazard Asset Management
Lazard Asset Management ("Lazard") acts as subadviser to the
International Fund and as adviser or subadviser to a number
of other registered investment companies as well as to
separate institutional investors. The list required by this
Item 26 of officers and directors of Lazard, together with
information as to their other business, profession, vocation
or employment of a substantial nature during the past 2
years, is incorporated by reference to Schedules A and D of
Form ADV filed by Lazard (SEC File No. 801-6568).
C-18
<PAGE> 159
(i) Information for the Subadviser of the Nationwide Value
Opportunities Fund and NorthPointe Small Cap Value Fund
(1) NorthPointe Capital LLC (NorthPointe) acts as subadviser to
the Value Opportunities Fund and separate institutional
investors. The list required by this Item 26 of officers and
directors of VVI, together with information as to their
other business, profession, vocation or employment of a
substantial nature during the past 2 years, is incorporated
by reference to Schedules A and D of Form ADV filed by VVI
(SEC File No. 801-57064).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) See Item 26 above.
(b) Nationwide Advisory Services, Inc.
<TABLE>
<CAPTION>
Position with Position with
Name Business Address Underwriter Registrant
- ---- -------------- -------------- -------------
<S> <C> <C> <C>
Dimon R. McFerson One Nationwide Plaza Chairman and CEO Chairman of Board of
Columbus OH 43215 Trustees
Joseph J. Gasper One Nationwide Plaza President and Director N/A
Columbus OH 43215
Robert A. Oakley One Nationwide Plaza Exec. VP - Chief Financial N/A
Columbus OH 43215 Officer and Director
Robert J. Woodward, Jr. One Nationwide Plaza Exec. VP - Chief Investment N/A
Columbus OH 43215 Officer and Director
James F. Laird, Jr. Three Nationwide Plaza VP - General Manager Treasurer
Columbus OH 43215
Edwin P. McCausland One Nationwide Plaza Senior VP - Fixed Income Assistant Treasurer
Columbus OH 43215 Securities
William G. Goslee One Nationwide Plaza Vice President N/A
Columbus OH 43215
Susan A. Wolken Three Nationwide Plaza Director N/A
Columbus OH 43215
Patricia J. Smith Three Nationwide Plaza Assistant Secretary Assistant Secretary
Columbus OH 43215
Elizabeth A. Davin One Nationwide Plaza Assistant Secretary Assistant Secretary
Columbus OH 43215
</TABLE>
C-19
<PAGE> 160
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
James F. Laird, Jr.
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable
C-20
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment No. 22 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, and State of Ohio, on this twelfth day of May, 2000.
NATIONWIDE MUTUAL FUNDS
By: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Treasurer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THE REGISTRATION
STATEMENT OF NATIONWIDE MUTUAL FUNDS HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON THE TWELFTH DAY OF MAY, 2000.
Signature & Title
- - -----------------
Principal Executive Officer
DIMON R. MCFERSON*
- -------------------
Dimon R. McFerson, Trustee and Chairman
Principal Accounting and Financial Officer
JAMES F. LAIRD, JR.
- --------------------
James F. Laird, Jr., Treasurer
JOHN C. BRYANT*
- ----------------
John C. Bryant, Trustee
C. BRENT DEVORE*
- ----------------
C. Brent Devore, Trustee
SUE A. DOODY*
- --------------
Sue A. Doody, Trustee
ROBERT M. DUNCAN*
- ------------------
Robert M. Duncan, Trustee
THOMAS J. KERR, IV*
- --------------------
Thomas J. Kerr, IV, Trustee
DOUGLAS F. KRIDLER*
- --------------------
Douglas F. Kridler, Trustee
ARDEN L. SHISLER*
- -----------------
Arden L. Shisler, Trustee
DAVID C. WETMORE*
- ------------------
David C. Wetmore, Trustee
*BY: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Attorney-In Fact
<PAGE> 162
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit Letter Name of Exhibit
- -------------- ---------------
<S> <C>
(p)(1) Code of Ethics for Nationwide Family of Funds
(p)(2) Code of Ethics for Villanova Mutual Fund Capital Trust and
Villanova SA Capital Trust
(p)(3) Code of Ethics for Nationwide Advisory Services, Inc.
</TABLE>
<PAGE> 1
Exhibit (p)(1)
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
The Board of Trustees (each, a "Board" and collectively, the "Boards")
of each of Nationwide Separate Account Trust, Nationwide Asset Allocation Trust
and Nationwide Mutual Funds (each, a "Trust" and collectively, the "Trusts")
have adopted this Code of Ethics, in accordance with Rule 17j-1 (the "Rule")
under the Investment Company Act of 1940, as amended (the "Act"). The Rule makes
it unlawful for certain employees of the Trusts, in connection with the purchase
or sale by such persons of securities held or to be acquired by the Trusts:
(1) to employ any device, scheme or artifice to defraud a Trust;
(2) to make to a Trust any untrue statement of a material fact or omit
to state to a Trust a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) to engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon a Trust; or
(4) to engage in a manipulative practice with respect to a Trust.
While affirming its confidence in the integrity and good faith of all
of its officers and trustees, each Trust recognizes that certain personnel have
or may have knowledge of present or future portfolio transactions and, in
certain instances, the power to influence portfolio transactions made by the
Trust. Furthermore, if such individuals engage in personal Covered Securities
transactions, these individuals could be in a position where their personal
interests may conflict with the interests of the Trusts. Accordingly, this Code
is designed to prevent conduct that could create an actual or potential conflict
of interest with the Trusts.
A. DEFINITIONS
(1) "Access Person" means any trustee, officer or Advisory Person
(defined immediately below) of the Trust.
(2) "Advisory Person" means (a) any employee of the Trust (or of any
company in a control relationship to the Trust) who, in connection with his or
her regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of Covered Securities by the Trust, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (b) any natural person in a control relationship to the
Trust who obtains information concerning recommendations made to the Trust with
regard to the purchase or sale of Covered Securities by the Trust.
<PAGE> 2
(3) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is considered a "beneficial owner"
as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended, which generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit from the ownership
of the Covered Security. A person is normally regarded as the beneficial owner
of Covered Securities held in the name of his or her spouse or minor children
living in his or her household.
(4) "Control" shall have the same meaning as set forth in Section
2(a)(9) of the Act.
(5) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include direct obligations of the
United States government, bankers' acceptances, bank certificates of deposit,
commercial paper, high quality short-term debt instruments (including repurchase
agreements) and shares of registered open-end investment companies.
(6) "Disinterested Trustee" means a trustee of a Trust who is not an
"interested person" of the Trust within the meaning of Section 2(a)(19) of the
Act.
(7) "Investment Personnel" means (a) any Portfolio Managers who are
employees of the Trust as well as any other person such as a securities analyst
and/or trader who is an employee of the Trust (or of any company in a control
relationship to the Trust) who, in connection with his or her regular functions
or duties, makes or participates in the making of recommendations regarding the
Trust's purchase or sale of securities (including providing information and
advice to Portfolio Managers or helping with the execution of a Portfolio
Managers' decisions) or (b) any natural person who controls a Trust and who
obtains information concerning recommendations to a Trust regarding the purchase
or sale of securities by a Trust.
(8) "Portfolio Managers" means those individuals who, in connection
with his or her regular duties, are entrusted with the direct responsibility and
authority to make investment decisions affecting a Trust.
(9) "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired" by the Trust means any Covered
Security which, within the most recent 15 days, (a) is or has been held by a
Trust; (b) is being or has been considered by a Trust or its investment adviser
for purchase by the Trust; and (c) any option to purchase or sell, and any
Covered Security which is convertible into or exchangeable for a Covered
Security described in subparts (a) and (b) of this definition.
B. STATEMENT OF GENERAL PRINCIPLES
It is the duty of all trustees and officers to place the interests of
each Trust and its shareholders, first at all times. Consistent with that duty,
all Access Persons and Investment Personnel of each Trust must (1) conduct all
personal Covered Securities transactions in a manner that is consistent with
this Code of Ethics; (2) avoid any actual or potential conflict of personal
interest with the interests of a Trust and its shareholders; and (3) adhere to
the
2
<PAGE> 3
fundamental standard that they should not take inappropriate advantage of their
positions of trust and responsibility.
THIS CODE OF ETHICS APPLIES TO TRANSACTIONS IN COVERED SECURITIES FOR
THE PERSONAL ACCOUNTS OF ALL TRUSTEES, OFFICERS AND ADVISORY PERSONS OF THE
TRUSTS AND ANY OTHER ACCOUNTS IN WHICH THEY HAVE ANY BENEFICIAL OWNERSHIP. IT
IMPOSES CERTAIN INVESTMENT RESTRICTIONS AND PROHIBITIONS AND REQUIRES THE
REPORTS SET FORTH BELOW. IF TRUSTEES AND OFFICERS OF A TRUST BECOME AWARE OF
MATERIAL NON-PUBLIC INFORMATION, OR IF A TRUST IS ACTIVE IN A GIVEN COVERED
SECURITY, SOME PERSONNEL MAY FIND THEMSELVES "FROZEN" IN A POSITION. NO TRUST
WILL BEAR ANY LOSSES IN PERSONAL ACCOUNTS RESULTING FROM THE IMPLEMENTATION OF
ANY PORTION OF THE CODE OF ETHICS.
This Code of Ethics does not apply to any Access Person or Investment
Personnel employed by any investment adviser, sub-adviser or principal
underwriter of the Trust. Those individuals are covered by the Codes of Ethics
which have been adopted by those entities in accordance with the provisions of
the Rule.
C. GENERAL PROHIBITIONS
(1) All trustees and officers of the Trusts shall keep all information
pertaining to the Trusts' portfolio transactions confidential. No person with
access to Covered Securities holdings, recommendations or pending transactions
should disclose this information to any person, unless such disclosure is made
in connection with his or her regular functions or duties. Special care should
be taken to avoid discussing confidential information in circumstances which
would disclose this information to anyone who would not have access to such
information in the normal course of events.
(2) No Access Person shall utilize information concerning prospective
or actual portfolio transactions in any manner which might prove detrimental to
the interests of a Trust.
(3) No Access Person shall use his or her position for his or her
personal benefit or attempt to cause a Trust to purchase, sell or hold a
particular Covered Security when that action may reasonably be expected to
create a personal benefit for the Access Person.
(4) No Access Person shall engage in any act, practice or course of
conduct, which would violate the provisions of the Rule set forth above.
D. PERSONAL TRADING RESTRICTIONS
(1) PRE-CLEARANCE
Access Persons are required to pre-clear personal Covered Securities
transactions (excluding those exempted under Section D(8)) with the designated
compliance personnel. Requests for pre-clearance must be made in writing on the
Pre-clearance Request Form provided by the compliance officer. Transactions
should not be placed for execution until pre-clearance approval has been
received. Pre-clearance approval is good only for the day received; therefore,
orders should be placed as market or day limit orders. If for any reason the
trade is not executed on the day on which pre-clearance approval is received,
the Access Person must submit a new
3
<PAGE> 4
request and receive approval prior to placing any subsequent order. For purposes
of this requirement, any Disinterested Trustee who does not know that the Trust,
during a 15 day period before or after the proposed trade in a Covered Security
by the Disinterested Trustee, purchased or sold, or considered purchasing or
selling, such Covered Security has no obligation to pre-clear or report the
trade.
(2) INITIAL PUBLIC OFFERINGS ("IPOS")
Investment Personnel are prohibited from acquiring any Covered Security
in an IPO. Investment Personnel may, however, request and receive approval to
participate in a conversion offering (as described in NASD's Freeriding and
Withholding Interpretations ("NASD Rules")). In approving any such request, the
onus for substantiating and documenting compliance with the NASD Rules rests on
the individual seeking approval. Also, notwithstanding proof of compliance with
the NASD Rules, approval may be withheld if the reviewing compliance personnel
believes that an actual or potential conflict of interest exists with respect to
a Trust.
(3) PRIVATE PLACEMENTS
Investment Personnel must obtain prior approval from the appropriate
compliance officer before acquiring Covered Securities in a private placement.
In determining whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment opportunity should
be reserved for a Trust and its shareholders, and whether the opportunity is
being offered to the individual by virtue of his or her position with a Trust.
Any Investment Personnel who has been authorized to acquire Covered Securities
in a private placement, must disclose that investment when he or she is involved
in any subsequent consideration of an investment by a Trust in that issuer. In
such circumstances, Investment Personnel with no personal interest in the
particular issuer shall independently review a Trust's decision to purchase that
issuer's Covered Securities.
(4) 60 DAY HOLDING PERIOD
Investment Personnel shall not profit from the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy should be unwound,
if possible. In the event such trades cannot be unwound, any profits realized on
such short-term trades shall be subject to disgorgement to a Trust.
(5) BLACKOUT PERIOD
(a) SAME DAY
Access Persons are prohibited from executing any personal
Covered Securities transaction on a day on when a Trust has a pending
buy or sell order in that same Covered Security. This prohibition shall
be lifted once the Trust executes or withdraws its order for the
Covered Security in question. However, trustees who are not officers of
a Trust's investment adviser or any of its affiliates and who, on the
day they execute a personal Covered Securities transaction have no
knowledge of what a Trust is trading on that day, are not subject to
this Same Day Blackout Period.
4
<PAGE> 5
(b) SEVEN DAY
All Portfolio Managers are prohibited from executing any
personal Covered Securities transactions within seven (7) calendar days
before or after the day any series of a Trust managed by such person
trades in that Covered Security.
(c) Trades made in violation of these blackout periods should
be unwound, if possible. Otherwise, any profits realized on such
short-term trades shall be subject to disgorgement to a Trust.
(6) GIFTS
No Investment Personnel shall seek or accept anything of more than de
minimis value, either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment Personnel, do business
or might do business with a Trust. For purposes of this provision, the following
gifts will not be considered to be in violation of this section: (a) an
occasional meal; (b) an occasional ticket to a sporting event, the theater or
comparable entertainment; and (c) other gifts of nominal cost.
(7) EXEMPTED TRANSACTIONS
The prohibitions of Section (D)(4)-(5) of this Code of Ethics shall not
apply to:
(a) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect
influence or control;
(b) purchases or sales which are nonvolitional(1) on the part
of the Access Person, Investment Personnel or a Trust;
(c) purchases which are part of an automatic dividend
reinvestment plan; or
(d) purchases effected upon the exercise of rights issued by
an issuer pro-rata to all holders of a class of its Covered Securities,
to the extent such rights were acquired from such issuer, and sales of
such rights so acquired.
(8) Access Persons are generally required to obtain pre-clearance
before executing any trade. However, in certain instances an Access Person is
relieved from obtaining pre-clearance, but must report the transaction. In other
instances, the Access Person is relieved of both of the duty to obtain
pre-clearance and to report the transaction.
(a) Access Persons do not have to pre-clear the following
transactions, but must report them:
- -------------------------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the trustee or
officer. For example, shares received or disposed of by Access Persons or
Investment Personnel in a merger, recapitalization or similar transaction are
considered nonvolitional.
5
<PAGE> 6
(i) Stocks when the total purchase/sale of the
particular issuer is 500 shares or fewer in a calendar
quarter.
(ii) Option contracts on stock when the total
purchase/sale of the contract is 500 shares or fewer of a
particular issuer in any calendar quarter.
(iii) Corporate debt Covered Securities(2) rated in
the highest grades by any Nationally Rated Statistical Rating
Organization if the purchase/sale is $25,000.00 or less per
issue in any calendar quarter.
(iv) Municipal bonds if the purchase/sale is
$25,000.00 or less per issue in any calendar quarter.
*PROVISION (8)(a) AND ITS SUB-PARTS DO NOT RELIEVE
ACCESS PERSONS OF THEIR DUTY TO REPORT THE TRANSACTIONS
DESCRIBED THEREIN. FURTHERMORE, THIS PROVISION DOES NOT APPLY
TO TRANSACTIONS COVERED UNDER SECTIONS D(2) AND D(3).
For purposes of this requirement, any Disinterested
Trustee who does not know that the Trust, during a 15 day
period before or after the proposed trade in a Covered
Security by the Disinterested Trustee, purchased or sold, or
considered purchasing or selling, such Covered Security has no
obligation to pre-clear or report the trade.
(b) The following transactions are exempt from the
prohibitions contained in this Code of Ethics, do not require prior
clearance and do not have to be reported (securities which do not
qualify as Covered Securities under this Code of Ethics are also exempt
from these reporting requirements):
(i) Variable annuities.
(ii) Oil, gas or other mineral leases.
(iii) Commodities, commodity contracts or futures
contracts.
(9) Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization by the
appropriate compliance officer. Such authorization should be based upon a
determination that the board service would be consistent with the interests of
the Trust and its shareholders. Where service on a board of directors is
authorized, Investment Personnel serving as directors should be isolated from
those making investment decisions regarding the company through "Chinese Wall"
procedures.
- -----------------------------
(2) Corporate debt Covered Securities which are rated in the highest grades have
an extremely strong capacity to pay principal and interest. The following
Corporate debt Covered Securities are considered to have the highest ratings:
(a) bonds rated AA or higher by Standard & Poor's Corporation; (b) bonds rated
Aa or higher by Moody's Investors Service, Inc.; and (c) bonds rated A or higher
by Fitch or Duff.
6
<PAGE> 7
E. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) INITIAL HOLDINGS REPORTS
All Access Persons (excluding any Disinterested Trustee who would be
required to make a report solely by reason of being a trustee) shall disclose
all personal Covered Securities holdings to the appropriate compliance officer.
The Initial Report shall be made on the form attached as Exhibit A and shall
contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Securities
were held for the direct or indirect benefit of the Access Person as of
the date the person became an Access Person; and
(c) the date that the report is submitted by the Access
Person.
All Access Persons currently employed by a Trust shall submit an
Initial Report to the appropriate compliance officer within ten days of the date
of this Code of Ethics. All other Initial Reports shall be made no later than 10
days after the person becomes an Access Person.
(2) QUARTERLY REPORTS
(a) All Access Persons shall report to the appropriate
compliance officer, the information described below in Sub-paragraph
(2)(c) of this Section with respect to transactions in any Covered
Security in which such person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership in the Covered
Security.
(b) Each Disinterested Trustee who would be required to make a
report solely by reason of being a trustee, need only submit a
Quarterly Report if such trustee knew or, in the ordinary course of
fulfilling his or her official duties as a trustee, should have known
that during the 15-day period immediately before or after the trustee's
transaction in a Covered Security, that the Trust purchased or sold the
Covered Security, or the Trust or its investment adviser considered
purchasing or selling the Covered Security.
(c) Reports required to be made under this Paragraph (2) shall
be made not later than 10 days after the end of the calendar quarter in
which the transaction to which the report relates was effected. All
Access Persons shall be required to submit a report for all periods,
including those periods in which no Covered Securities transactions
were effected. A report shall be made on the form attached hereto as
Exhibit B or on any other form containing the following information:
(i) the date of the transaction, the title of the
Covered Security, the interest rate and maturity date (if
applicable), the number of shares, and the principal amount of
each Covered Security involved;
7
<PAGE> 8
(ii) the nature of the transaction (i.e., purchase,
sale or any other type of acquisition or disposition);
(iii) the price at which the transaction was
effected;
(iv) the name of the broker, dealer or bank with or
through whom the transaction was effected; and
(v) the date the report is submitted.
(d) Any such report may contain a statement that the report
shall not be construed as an admission by the person making such report
that he or she has any direct or indirect beneficial ownership in the
Covered Security to which the report relates.
(e) All Access Persons shall direct their brokers to supply
duplicate copies of all monthly brokerage statements (excluding
confirmations) for all Covered Securities accounts maintained by the
Access Person to the appropriate compliance officer, on a timely basis.
In addition, with respect to any account established by the Access
Person in which any Covered Securities were held during the quarter for
the direct or indirect benefit of the Access Person, the Access Person
shall report the following information:
(i) the name of the broker, dealer or bank with whom
the Access Person established the account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) ANNUAL HOLDINGS REPORTS
All Access Persons (excluding any Disinterested Trustee who would be
required to make a report solely by reason of being a trustee) shall disclose
all personal Covered Securities holdings on an annual basis on the Form attached
as Exhibit C within 30 days after the end of the calendar year. All Annual
Reports shall provide information on personal Covered Securities holdings that
is current as of a date no more than 30 days before the Annual Report is
submitted. Such Annual Reports shall contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the
Access Person maintains an account in which any Covered Securities are
held for the direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access
Person.
8
<PAGE> 9
(4) CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS
All Access Persons shall certify annually that:
(a) they have read and understand the Code of Ethics and
recognize that they are subject to its provisions;
(b) they have complied with the requirements of the Code of
Ethics; and
(c) they have reported all personal Covered Securities
transactions required to be reported pursuant to the requirements of
the Code of Ethics.
(5) PERSONAL BROKERAGE ACCOUNTS
No trustee or officer of a Trust, other than a Disinterested Trustee,
shall open a personal brokerage account directly or indirectly without obtaining
prior authorization from the appropriate compliance officer. In addition, all
trustees and officers of a Trust, other than a Disinterested Trustee, shall
provide compliance personnel with a listing of all brokerage accounts in which
the trustees or officers have a direct or indirect interest upon commencing
employment and on an annual basis thereafter. These reports may be made using
Exhibits A or C, as applicable.
(6) REVIEW OF REPORTS AND NOTIFICATION
Each Trust will appoint compliance personnel to review all brokerage
account statements and Quarterly, Initial and Annual Reports to detect conflicts
of interest and abusive practices. In addition, the appropriate compliance
officer shall notify each Access Person that he or she is subject to the
reporting requirements provided under this Code of Ethics and shall deliver a
copy of this Code of Ethics to each person upon request.
F. REPORTING OF VIOLATIONS TO THE BOARD
Any person, including the compliance officer, shall promptly report all
violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the Board of the appropriate Trust.
G. BOARD APPROVAL
Upon its adoption, the compliance officer shall submit a copy of the
Code of Ethics to the Board for approval no later than September 1, 2000. The
compliance officer is further required to obtain board approval for any material
changes to this Code within six (6) months of any such change.
H. ANNUAL REPORTING TO THE BOARD
Each Trust (or a Trust's investment adviser on behalf of the Trust) and
its principal underwriter shall prepare a written annual report relating to its
Code of Ethics to the Board of the Trust. Such annual report shall:
9
<PAGE> 10
(1) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(2) identify any material violations requiring significant remedial
action during the past year;
(3) identify any recommended changes in the existing restrictions or
procedures based upon experience under its Code of Ethics, evolving industry
practices or developments in applicable laws or regulations; and
(4) certify that the Trust or the principal underwriter, as applicable,
has adopted procedures reasonably necessary to prevent Access Persons from
violating its Code of Ethics.
I. ANNUAL REPORTING OF INVESTMENT ADVISERS TO THE BOARD
Any investment adviser or sub-adviser to the Trust shall also prepare a
written annual report, such as the annual report described in Section H of this
Code of Ethics, relating to its particular Code of Ethics to the Board.
J. SANCTIONS
Upon discovering a violation of this Code, a Board may impose such
sanctions as it deems appropriate, including, among other things, issuing a
letter of censure or suspension or terminating the employment of the violator or
referring the matter to the appropriate regulatory or governmental authority.
K. RETENTION OF RECORDS
Each of the Trusts shall, at its principal place of business, maintain
records in the manner and to the extent set out below and must make these
records available to the U.S. Securities and Exchange Commission ("SEC") or any
representative of the SEC at any time and from time to time for reasonable
periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
10
<PAGE> 11
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of Covered Securities, in a
private placement, as described in Section D(3) of this Code of Ethics, for at
least five (5) years after the end of the fiscal year in which the approval is
granted.
(6) A copy of each annual report required under Section H for at least
five (5) years after the end of the fiscal year in which it is made, the first
two in an accessible place.
Date: March 2, 2000
11
<PAGE> 12
EXHIBIT A
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of the Trust:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for the
Trust.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Trust, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by the Trust or any of its series.
4. As of the date below I had a direct or indirect beneficial ownership
in the following Covered Securities:
<TABLE>
<CAPTION>
Dollar Amount Type of Interest
Title of Security Number of Shares of Transaction (Direct or Indirect)
----------------- ---------------- -------------- --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain account(s) as of the
date this report is submitted in which Covered Securities are held for my direct
or indirect benefit with the brokers, dealers or banks listed below.
12
<PAGE> 13
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
---------------------------
Title:
-------------------------
Date Report Submitted:
------------------
13
<PAGE> 14
EXHIBIT B
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended: _________
To the Compliance Officer of the Trust:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by the Trust.
<TABLE>
<CAPTION>
=================================================================================================================================
INTEREST RATE DOLLAR NATURE OF BROKER/
TITLE OF DATE OF NO. OF AND MATURITY AMOUNT OF TRANSACTION PRICE DEALER
SECURITY TRANSACTION SHARES DATE (if TRANSACTION (Purchase, Sale, OR BANK THROUGH
applicable) Other) WHOM EFFECTED
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit. I further understand that in compliance with
the Code I must have copies of my monthly brokerage statements sent to the
compliance officer.
14
<PAGE> 15
Name of Broker, Dealer or Bank with Whom
Account Established Date Established
------------------- ----------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve the Trust, such as the existence of any economic relationship
between my transactions and Covered Securities held or to be acquired by the
Trust or any of its series.
Name:
----------------------------------
Title:
--------------------------------
Date Report Submitted:
-----------------
15
<PAGE> 16
EXHIBIT C
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of the Trust:
1. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 200__, I
have complied with the requirements of the Code and I have reported all Covered
Securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Trust, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by the Trust or any of its series.
4. As of December 31, 200__, I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest Broker/Dealer or Bank
Title of Security Number of Shares of Securities Sold (Direct or Indirect) Through Whom Effected
----------------- ---------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain the account(s) listed below in
which Covered Securities are held for my direct or indirect benefit with the
brokers, dealers or banks listed below.
16
<PAGE> 1
Exhibit (p)(2)
VILLANOVA
CODE OF ETHICS
The Board of Directors (each, a "Board," and collectively, the
"Boards") of the Managing Unitholder of Villanova Mutual Fund Capital Trust,
Villanova SA Capital Trust, Villanova Value Investors LLC, Morely Capital
Management, Inc. and Union Bond & Trust Company (each, an "Adviser" and
collectively, "Villanova") have adopted this Code of Ethics, in accordance with
Rule 17j-1 (the "Rule") under the Investment Company Act of 1940, as amended,
(the "Act"). The Rule makes it unlawful for certain employees of Villanova, in
connection with the purchase or sale by such persons of securities held or to be
acquired by any Client (defined below):
(1) to employ a device, scheme or artifice to defraud a Client;
(2) to make to a Client any untrue statement of a material fact or omit
to state to a Client a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) to engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon a Client; or
(4) to engage in a manipulative practice with respect to a Client.
While affirming its confidence in the integrity and good faith of all
of its employees, officers and directors or trustees, Villanova recognizes that
certain personnel have or may have knowledge of present or future portfolio
transactions and, in certain instances, the power to influence portfolio
transactions made by or for its Clients. Furthermore, if such individuals engage
in personal securities transactions, these individuals could be in a position
where their personal interests may conflict with the interests of Clients.
Accordingly, this Code is designed to prevent conduct that could create an
actual or potential conflict of interest with any Villanova Client.
A. DEFINITIONS
(1) "Access Person" means any director/trustee (excluding any trustee
or director who is not also an officer of Villanova or its affiliates), officer,
or Advisory Person (defined immediately below) of an Adviser.
(2) "Advisory Person" means (a) any employee of an Adviser (or of any
company in a control relationship to an Adviser) who, in connection with his or
her regular functions or duties, normally makes, participates in, or obtains
current information regarding the purchase or sale of a Covered Security by a
Client, or whose functions relate to the making of any recommendations with
respect to such purchases or sales; and (b) any natural person in a control
relationship to an Adviser who regularly obtains current information concerning
recommendations made to a Client with regard to the purchase or sale of a
Covered Security by the Client.
<PAGE> 2
(3) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is considered a "beneficial owner"
as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended, which generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit from the ownership
of the Covered Security. A person is normally regarded as the beneficial owner
of Covered Securities held in the name of his or her spouse or minor children
living in his or her household. Also, for purposes of this Code of Ethics, the
determination of direct or indirect beneficial ownership shall apply to all
Covered Securities that an Access Person has or acquires.
(4) "Client" means (a) any investment company registered under the Act
or any series of a registered investment company for whom an Adviser(s) acts as
investment adviser or sub-adviser or (b) any separately managed investment
account which is advised by an Adviser (or Advisers).
(5) "Control" shall have the same meaning as set forth in Section
2(a)(9) of the Act.
(6) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include direct obligations of the
United States government, bankers' acceptances, bank certificates of deposit,
commercial paper, high quality short-term debt instruments (including repurchase
agreements) and shares of registered open-end investment companies.
(7) "Investment Personnel" means (a) Portfolio Managers as well as any
other person such as a securities analyst and/or trader of an Adviser (or of any
company in a control relationship to the Adviser) who, in connection with his or
her regular functions or duties, makes or participates in the making of
recommendations regarding a Client's purchase or sale of securities (including
providing information and advice to Portfolio Managers or helping with the
execution of a Portfolio Managers' decisions) or (b) any natural person who
controls an Adviser and who obtains information concerning recommendations to a
Client regarding the purchase or sale of Covered Securities by a Client.
(8) "Portfolio Managers" means those individuals entrusted with the
direct responsibility and authority to make investment decisions affecting any
Client.
(9) "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired" by a Client means any Covered
Security which, within the most recent 15 days, (a) is or has been held by a
Client; (b) is being or has been considered for purchase by a Client or
Villanova for purchase by a Client; and (c) any option to purchase or sell, and
any Covered Security which is convertible into or exchangeable for a Covered
Security described in subparts (a) and (b) of this definition.
B. STATEMENT OF GENERAL PRINCIPLES
It is the duty of each Villanova employee to place the interests of
Villanova Clients and their shareholders, first at all times. Consistent with
that duty, all Access Persons and Investment Personnel of Villanova must (1)
conduct all personal Covered Securities transactions in a manner that
2
<PAGE> 3
is consistent with this Code of Ethics; (2) avoid any actual or potential
conflict of personal interest with the interests of Villanova's Clients or their
shareholders; and (3) adhere to the fundamental standard that they should not
take inappropriate advantage of their positions of trust and responsibility.
THIS CODE OF ETHICS APPLIES TO TRANSACTIONS IN COVERED SECURITIES FOR
PERSONAL ACCOUNTS OF ALL VILLANOVA EMPLOYEES AND ANY OTHER ACCOUNTS IN WHICH
THEY HAVE ANY BENEFICIAL OWNERSHIP. IF ANY EMPLOYEE OF VILLANOVA BECOMES AWARE
OF MATERIAL NON-PUBLIC INFORMATION, OR IF A CLIENT IS ACTIVE IN A GIVEN COVERED
SECURITY, SOME PERSONNEL MAY FIND THEMSELVES "FROZEN" IN A POSITION. VILLANOVA
WILL NOT BEAR ANY LOSSES IN PERSONAL ACCOUNTS RESULTING FROM THE IMPLEMENTATION
OF ANY PORTION OF THE CODE OF ETHICS.
C. GENERAL PROHIBITIONS
(1) It is the policy of each Villanova employee to keep all information
pertaining to Clients' portfolio transactions confidential. No person with
access to Covered Securities holdings, recommendations or pending transactions
should disclose this information to any person, unless such disclosure is made
in connection with his or her regular functions or duties. Special care should
be taken to avoid discussing confidential information in circumstances which
would disclose this information to anyone who would not have access to such
information in the normal course of events.
(2) No Access Person shall utilize information concerning prospective
or actual portfolio transactions in any manner which might prove detrimental to
the interests of a Client.
(3) No Access Person shall use his or her position for his or her
personal benefit or attempt to cause a Client to purchase, sell or hold a
particular Covered Security when that action may reasonably be expected to
create a personal benefit for the Access Person.
(4) No Access Person shall engage in any act, practice or course of
conduct, which would violate the provisions of the Rule set forth above.
D. PERSONAL TRADING RESTRICTIONS
(1) Pre-clearance
-------------
Access Persons are required to pre-clear personal Covered Securities
transactions (excluding those exempted under Section D(7) below) with the
designated compliance personnel. Requests for pre-clearance must be made in
writing on the Pre-clearance Request Form supplied by the designated compliance
personnel. Transactions should not be placed for execution until pre-clearance
approval has been received. Pre-clearance approval is good only for the day
received; therefore, orders should be placed as market or day limit orders. If
for any reason the trade is not executed on the day on which pre-clearance
approval is received, the Access Person must submit a new request and receive
approval prior to placing any subsequent order.
(2) Initial Public Offerings ("IPOs")
---------------------------------
3
<PAGE> 4
Investment Personnel are prohibited from acquiring any Covered Security
in an IPO. Investment Personnel may, however, request and receive approval to
participate in a conversion offering (as described in paragraph (m) of the
NASD's Freeriding and Withholding Interpretation). In approving any such
request, the onus for substantiating and documenting compliance with the
provisions of paragraph (m) rests on the individual seeking approval. Also,
notwithstanding proof of compliance with paragraph (m), approval may be withheld
if the reviewing compliance personnel believes that an actual or potential
conflict of interest exists with respect to any Client.
(3) Private Placements
------------------
Investment Personnel must obtain approval from the appropriate
compliance officer before acquiring Covered Securities in a private placement.
In determining whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment opportunity should
be reserved for a Client(s), and whether the opportunity is being offered to the
individual by virtue of his or her relationship with any Client. Investment
Personnel who have been authorized to acquire Covered Securities in a private
placement, must disclose that investment whenever he or she is involved in any
subsequent consideration of an investment by or on behalf of a Client in such
issuer. In such circumstances, Investment Personnel with no personal interest in
the particular issuer shall independently review the Client's decision to
purchase that issuer's Covered Securities.
(4) 60 Day Holding Period
---------------------
Investment Personnel shall not profit from the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy should be unwound,
if possible. In the event such trades cannot be unwound, any profits realized on
such short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of the appropriate Adviser.
(5) Blackout Period
---------------
(a) Same Day
--------
Access Persons are prohibited from executing any personal Covered
Securities transaction on a day when a Client has a pending buy or sell
order in that same Covered Security. This prohibition shall be lifted
once the Client executes or withdraws its order for the Covered
Security in question. However, directors or trustees of Villanova who
are not officers of an Adviser or any of its affiliates and who, on the
day they execute a personal Covered Securities transaction, have no
knowledge of what a Client is trading on that day, are not subject to
the Same Day Blackout Period.
(b) Seven Day
---------
All Portfolio Managers are prohibited from executing any personal
Covered Securities transactions within seven (7) calendar days before
or after the day any Client advised by such person, or a committee or
team, which includes such person, trades in that Covered Security.
4
<PAGE> 5
(c) Trades made in violation of these blackout periods should be
unwound, if possible. Otherwise, any profits realized on such
short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of the appropriate Adviser.
(6) Gifts
-----
No Investment Personnel shall seek or accept anything of more than de
minimis value, either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment Personnel, do business
or might do business with a Client or Villanova. For purposes of this provision,
the following gifts will not be considered to be in violation of this section:
(a) an occasional meal; (b) an occasional ticket to a sporting event, the
theater or comparable entertainment, for which the employee will reimburse the
host; and (c) other gifts of nominal cost.
(7) Exempted Transactions
---------------------
The prohibitions of Section (D)(4)-(5) of this Code of Ethics shall not
apply to:
(a) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect
influence or control;
(b) purchases or sales which are nonvolitional(1) on the part of
the Access Person, Investment Personnel or a Client;
(c) purchases which are part of an automatic dividend reinvestment
plan;
(d) purchases effected upon the exercise of rights issued by an
issuer pro-rata to all holders of a class of its Covered Securities, to
the extent such rights were acquired from such issuer, and sales of
such rights so acquired; or
(8) Access Persons are generally required to obtain pre-clearance
before executing any trade. However, in certain instances an Access Person is
relieved from obtaining pre-clearance, but still must report the transaction. In
other instances, the Access Person is relieved of both of the duty to obtain
pre-clearance and to report the transaction.
(a) Access Persons do not have to pre-clear the following
transactions:
(i) Stocks when the total purchase/sale of the particular
issuer is 1,000 shares or fewer in a calendar quarter.
(ii) Option contracts on stock when the total purchase/sale
of the contract is 1,000 shares or fewer of a particular issuer
in any calendar quarter.
- --------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the employee. For
example, shares received or disposed of by Access Persons or Investment
Personnel in a merger, recapitalization or similar transaction are considered
nonvolitional.
5
<PAGE> 6
(iii) Corporate debt Covered Securities(2) rated in the
highest grades by any Nationally Rated Statistical Rating
Organization if the purchase/sale is $25,000.00 or less per
issue in any calendar quarter.
(iv) Municipal bonds if the purchase/sale is $25,000.00 or
less per issue in any calendar quarter.
*PROVISION (8)(a) AND ITS SUB-PARTS DO NOT RELIEVE ACCESS
PERSONS OF THEIR DUTY TO REPORT THE TRANSACTIONS DESCRIBED
THEREIN. FURTHERMORE, THIS PROVISION DOES NOT APPLY TO
TRANSACTIONS COVERED UNDER SECTIONS D(2) AND D(3).
(b) The following transactions are exempt from the
prohibitions contained in this Code of Ethics, do not require prior
clearance and do not have to be reported (securities which do not
qualify as Covered Securities under this Code of Ethics are also exempt
from these reporting requirements):
(i) Variable annuities.
(ii) Oil, gas or other mineral leases.
(iii) Commodities, commodity contracts or futures
contracts.
(9) Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization by the
appropriate compliance officer. Such authorization should be based upon a
determination that the board service would be consistent with the interests of
Clients advised by the employee (or a team or committee which includes the
employee). Where service on a board of directors is authorized, Investment
Personnel serving as directors should be isolated from those making investment
decisions regarding the company through "Chinese Wall" procedures.
E. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) Initial Holdings Reports
------------------------
All Access Persons shall disclose all personal Covered Securities
holdings to the appropriate compliance officer upon commencing employment. The
Initial Report shall be made on the form attached as Exhibit A and shall contain
the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
- --------
(2) Corporate debt Covered Securities which are rated in the highest grades have
an extremely strong capacity to pay principal and interest. The following
Corporate debt Covered Securities are considered to have the highest ratings:
(a) bonds rated AA or higher by Standard & Poor's Corporation; (b) bonds rated
Aa or higher by Moody's Investors Service, Inc.; and bonds rated A or higher by
Fitch or Duff.
6
<PAGE> 7
(b) the name of any broker, dealer or bank with whom the Access
Person maintained an account in which any Covered Securities were held
for the direct or indirect benefit of the Access Person as of the date
the person became an Access Person; and
(c) the date that the report is submitted by the Access Person.
All Access Persons currently employed by Villanova shall submit an
Initial Report to the appropriate compliance officer within ten days of the date
of this Code of Ethics. All other Initial Reports shall be made no later than 10
days after the person becomes an Access Person.
(2) Quarterly Reports
-----------------
(a) All Access Persons shall report to the appropriate compliance
officer, the information described in Sub-paragraph (2)(c) of this
Section with respect to transactions in any Covered Security in which
such person has, or by reason of such transaction acquires, any direct
or indirect beneficial ownership in the Covered Security; provided,
however, that all Access Persons shall not be required to make a report
with respect to transactions effected for any account over which such
person does not have any direct or indirect influence or Covered
Security transactions which are not eligible for purchase or sale by a
Client.
(b) Notwithstanding Section 2(a), an Access Person need not make a
Quarterly Transaction Report if the information would duplicate
information required to be reported under Rule 204(a)(12) under the
Investment Advisers Act of 1940, as amended, or information contained
in brokerage statements submitted by the Access Person to Villanova (if
all of the information required by the Quarterly Report is contained in
the brokerage statement).
(c) Reports required to be made under this Paragraph (2) shall be
made not later than 10 days after the end of the calendar quarter in
which the transaction to which the report relates was effected. All
Access Persons shall be required to submit a report for all periods,
including those periods in which no Covered Securities transactions
were effected on the form attached hereto as Exhibit B or on any other
form containing the following information:
(i) the date of the transaction, the title of the Covered
Security, the interest rate and maturity date (if applicable), the
number of shares, and the principal amount of each Covered Security
involved;
(ii) the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank with or through
whom the transaction was effected; and
7
<PAGE> 8
(v) the date the report is submitted.
(d) Any such report may contain a statement that the report shall
not be construed as an admission by the person making such report that
he or she has any direct or indirect beneficial ownership in the
Covered Security to which the report relates.
(e) All Access Persons shall direct their brokers to supply
duplicate copies of all monthly brokerage statements (excluding
confirmations) for all securities accounts maintained by the Access
Person to the appropriate compliance officer, on a timely basis. In
addition, with respect to any account established by the Access Person
in which any Covered Securities were held during the quarter for the
direct or indirect benefit of the Access Person, the Access Person
shall report the following information:
(i) the name of the broker, dealer or bank with whom the
Access Person established the account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) Annual Holdings Reports
-----------------------
All Access Persons shall disclose all personal Covered Securities
holdings on an annual basis on the Form attached as Exhibit C within 30 days
after the end of the calendar year. All Annual Reports shall provide information
on personal Covered Securities holdings that is current as of a date no more
than 30 days before the Annual Report is submitted. Such Annual Reports shall
contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the Access
Person maintains an account in which any Covered Securities are held for the
direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access Person.
(4) Certification of Compliance with Code of Ethics
-----------------------------------------------
All Access Persons shall certify annually that:
(a) they have read and understand the Code of Ethics and recognize
that they are subject to its provisions;
(b) they have complied with the requirements of the Code of Ethics;
and
(c) they have reported all personal Covered Securities transactions
required to be reported pursuant to the requirements of the Code of
Ethics.
8
<PAGE> 9
(5) Personal Brokerage Accounts
---------------------------
No employee shall open a personal brokerage account directly or
indirectly without obtaining prior authorization from the appropriate compliance
officer. In addition, all employees shall provide compliance personnel with a
listing of all brokerage accounts in which the employee has a direct or indirect
interest upon commencing employment and on an annual basis thereafter. These
reports may be made using Exhibits A or C, as applicable.
(6) Review of Reports and Notification
----------------------------------
Villanova will appoint compliance personnel to review all brokerage
account statements and Quarterly, Initial and Annual Reports to detect conflicts
of interest and abusive practices. In addition, the appropriate compliance
officer of each Adviser shall notify each Access Person that he or she is
subject to the reporting requirements provided under this Code of Ethics and
shall deliver a copy of this Code of Ethics to each person upon request.
F. REPORTING OF VIOLATIONS TO THE BOARDS
Any person, including the compliance officer, shall promptly report all
violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the appropriate Board.
G. BOARD APPROVAL
(1) Upon the adoption of this Code of Ethics, compliance personnel for
each Adviser shall submit a copy of the Code of Ethics to the board of each
investment company Client for which an Adviser serves as investment adviser or
sub-adviser for approval no later than September 1, 2000.
(2) Each Adviser is further required to obtain approval from each
investment company Client for any material changes to this Code of Ethics within
six (6) months of any such change.
H. ANNUAL REPORTING OF VILLANOVA TO INVESTMENT COMPANY CLIENTS
Each Adviser shall prepare an annual report relating to this Code of
Ethics to the board of each investment company Client for which it acts as
investment adviser or sub-adviser. Such annual report shall:
(1) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(2) identify any material violations requiring significant remedial
action during the past year;
9
<PAGE> 10
(3) identify any recommended changes in the existing restrictions or
procedures based upon experience under this Code of Ethics, evolving industry
practices or developments in applicable laws or regulations; and
(4) certify that the Adviser has adopted procedures reasonably
necessary to prevent Access Persons from violating this Code of Ethics.
I. SANCTIONS
Upon discovering a violation of this Code, the Boards may impose such
sanctions as they deem appropriate, including, among other things, issuing a
letter of censure or suspension or terminating the employment of the violator or
referring the matter to the appropriate regulatory or governmental authority.
J. RETENTION OF RECORDS
Each Adviser, must, at its principal place of business, maintain
records in the manner and to the extent set out below and must make these
records available to the U.S. Securities and Exchange Commission ("SEC") or any
representative of the SEC at any time and from time to time for reasonable
periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of securities in a private
placement, as described in Section D(3) of this Code of Ethics, for at least
five years after the end of the fiscal year in which the approval is granted;
and
(6) A copy of each annual report required under Section H for at least
five (5) years after the end of the fiscal year in which it is made, the first
two in an accessible place.
Date:
10
<PAGE> 11
EXHIBIT A
VILLANOVA
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of Villanova:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for
Villanova.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve any Client, such as any economic relationship between my transactions
and securities held or to be acquired by any such Client.
4. As of the date below I had a direct or indirect beneficial ownership
in the following securities:
<TABLE>
<CAPTION>
Dollar Amount Type of Interest
Title of Security Number of Shares of Transaction (Direct or Indirect)
----------------- ---------------- -------------- --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain account(s) as of the date this
report is submitted in which Covered Securities are held for my direct or
indirect benefit with the brokers, dealers or banks listed below.
11
<PAGE> 12
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
----------------------------
Title:
---------------------------
Date Report Submitted:
-----------
12
<PAGE> 13
EXHIBIT B
VILLANOVA
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended: _________
To the Compliance Officer of Villanova:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by Villanova.
<TABLE>
<CAPTION>
=================================================================================================================
NATURE OF BROKER/
INTEREST RATE AND DOLLAR TRANSACTION DEALER
TITLE OF DATE OF NO. OF MATURITY DATE (if AMOUNT OF (Purchase, Sale, OR BANK THROUGH
SECURITY TRANSACTION SHARES applicable) TRANSACTION Other) PRICE WHOM EFFECTED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
==================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit. I further understand that in compliance with
the Code I must have copies of my monthly brokerage statements sent to the
compliance officer.
13
<PAGE> 14
Name of Broker, Dealer or Bank with
Whom Account Established Date Established
------------------------ ----------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve any Client, such as the existence of any economic relationship
between my transactions and Covered Securities held or to be acquired by any
Client.
Name:
----------------------------------
Title:
---------------------------------
Date Report Submitted:
-----------------
14
<PAGE> 15
EXHIBIT C
VILLANOVA
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of Villanova:
1. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 200__, I
have complied with the requirements of the Code and I have reported all Covered
Securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve a Client, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by a Client.
4. As of December 31, 200__, I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest
Title of Security Number of Shares of Securities Sold (Direct or Indirect)
----------------- ---------------- ------------------ --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain the account(s) listed below in
which Covered Securities are held for my direct or indirect benefit with the
brokers, dealers or banks listed below.
15
<PAGE> 16
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
-------------------------------------
Title:
------------------------------------
Date Report Submitted:
--------------------
16
<PAGE> 1
EXHIBIT (p)(3)
NATIONWIDE ADVISORY SERVICES, INC.
CODE OF ETHICS
The Board of Directors (the "Board") of Nationwide Advisory Services,
Inc. (the "Adviser" or "NAS") has adopted this Code of Ethics, in accordance
with Rule 17j-1 (the "Rule") under the Investment Company Act of 1940, as
amended, (the "Act"). The Rule makes it unlawful for certain employees of NAS,
in connection with the purchase or sale by such persons of securities held or to
be acquired by any Client (defined below):
(1) to employ a device, scheme or artifice to defraud a Client;
(2) to make to a Client any untrue statement of a material fact or omit
to state to a Client a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) to engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon a Client; or
(4) to engage in a manipulative practice with respect to a Client.
While affirming its confidence in the integrity and good faith of all
of its employees, officers and directors, NAS recognizes that certain personnel
have or may have knowledge of present or future portfolio transactions and, in
certain instances, the power to influence portfolio transactions made by the
Clients. Furthermore, if such individuals engage in personal Covered Securities
transactions, these individuals could be in a position where their personal
interests may conflict with the interests of the Clients. Accordingly, this Code
is designed to prevent conduct that could create an actual or potential conflict
of interest with any NAS Client.
A. DEFINITIONS
(1) "Access Person" means any director (excluding any director who is
not also an officer of NAS or its affiliates), officer or Advisory Person of NAS
(defined immediately below). With regard to investment company Clients for whom
NAS acts only as principal underwriter, the term "Access Person" shall include
any director or officer who, in the ordinary course of business, makes,
participates in or obtains information regarding the purchase or sale of Covered
Securities by the investment company Client, or whose regular functions or
duties relate to the making of any recommendation to an investment company
Client regarding the purchase or sale of Covered Securities.
(2) "Advisory person" means (a) any employee of NAS (or of any company
in a control relationship to NAS) who, in connection with his or her regular
functions or duties, normally makes, participates in, or obtains current
information regarding the purchase or sale of Covered Securities by a Client, or
whose functions relate to the making of any recommendations with respect to such
purchases or sales; and (b) any natural person in a control relationship to NAS
who obtains current information concerning recommendations made to a Client with
regard to the purchase or sale of a Covered Security by a Client.
<PAGE> 2
(3) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is considered a "beneficial owner"
as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended, which generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit from the ownership
of the Covered Security. A person is normally regarded as the beneficial owner
of Covered Securities held in the name of his or her spouse or minor children
living in his or her household. Also, for purposes of this Code of Ethics, the
determination of direct or indirect beneficial ownership shall apply to all
Covered Securities that an Access Person has or acquires.
(4) "Client" means (a) any investment company registered under the Act
or any series of a registered investment company for whom NAS acts as investment
adviser, sub-adviser or principal underwriter or (b) any separately managed
investment account which is advised by NAS.
(5) "Control" shall have the same meaning as set forth in Section
2(a)(9) of the Act.
(6) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include direct obligations of the
United States government, bankers' acceptances, bank certificates of deposit,
commercial paper, high quality short-term debt instruments (including repurchase
agreements) and shares of registered open-end investment companies.
(7) "Investment Personnel" means (a) Portfolio Managers who are
employees of NAS as well as any other person such as a securities analyst and/or
trader who is an employee of NAS (or of any company in a control relationship to
NAS) who, in connection with his or her regular functions or duties, makes or
participates in the making of recommendations regarding a Client's purchase or
sale of Covered Securities (including providing information and advice to
Portfolio Managers or helping with the execution of a Portfolio Managers'
decisions) or (b) any natural person who controls a NAS and who obtains
information concerning recommendations to a Client regarding the purchase or
sale of Covered Securities by a Client.
(8) "Portfolio Managers" means those individuals entrusted with the
direct responsibility and authority to make investment decisions affecting any
Client.
(9) "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired" by the a Client means any
Covered Security which, within the most recent 15 days, (a) is or has been held
by a Client; (b) is being or has been considered for purchase by a Client or NAS
for purchase by a Client; and (c) any option to purchase or sell, and any
Covered Security which is convertible into or exchangeable for a Covered
Security described in subparts (a) and (b) of this definition.
B. STATEMENT OF GENERAL PRINCIPLES
It is the duty of all directors, officers and employees to place the
interests of NAS' Clients and their shareholders, first at all times. Consistent
with that duty, all Access Persons and Investment Personnel of NAS must (1)
conduct all personal Covered Securities transactions in a manner that is
-2-
<PAGE> 3
consistent with this Code of Ethics; (2) avoid any actual or potential conflict
of personal interest with the interests of NAS' Clients; and (3) adhere to the
fundamental standard that they should not take inappropriate advantage of their
positions of trust and responsibility.
THIS CODE OF ETHICS APPLIES TO TRANSACTIONS IN COVERED SECURITIES FOR
YOUR PERSONAL ACCOUNTS OF ALL DIRECTORS, OFFICERS AND EMPLOYEES AND ADVISORY
PERSONS OF NAS AND ANY OTHER ACCOUNTS IN WHICH THEY HAVE ANY BENEFICIAL
OWNERSHIP. IF DIRECTORS, OFFICERS OR EMPLOYEES OF NAS BECOME AWARE OF MATERIAL
NON-PUBLIC INFORMATION, OR IF A CLIENT IS ACTIVE IN A GIVEN COVERED SECURITY,
SOME PERSONNEL MAY FIND THEMSELVES "FROZEN" IN A POSITION. NAS WILL NOT BEAR ANY
LOSSES IN PERSONAL ACCOUNTS RESULTING FROM THE IMPLEMENTATION OF ANY PORTION OF
THE CODE OF ETHICS.
C. GENERAL PROHIBITIONS
(1) All directors, officers and employees of NAS shall keep all
information pertaining to Clients' portfolio transactions confidential. No
person with access to Covered Securities holdings, recommendations or pending
transactions should disclose this information to any person, unless such
disclosure is made in connection with his or her regular functions or duties.
Special care should be taken to avoid discussing confidential information in
circumstances which would disclose this information to anyone who would not have
access to such information in the normal course of events.
(2) No Access Person shall utilize information concerning prospective
or actual portfolio transactions in any manner which might prove detrimental to
the interests of a Client.
(3) No Access Person shall use his or her position for his or her
personal benefit or attempt to cause a Client to purchase, sell or hold a
particular Covered Security when that action may reasonably be expected to
create a personal benefit for the Access Person.
(4) No Access Person shall engage in any act, practice or course of
conduct, which would violate the provisions of the Rule set forth above.
D. PERSONAL TRADING RESTRICTIONS
(1) Pre-clearance
-------------
Access Persons are required to pre-clear personal Covered Securities
transactions (excluding those exempted under Section D(8)) with the designated
compliance personnel. Requests for pre-clearance must be made in writing on the
Pre-clearance Request Form provided by the compliance officer. Transactions
should not be placed for execution until pre-clearance approval has been
received. Pre-clearance approval is good only for the day received; therefore,
orders should be placed as market or day limit orders. If for any reason the
trade is not executed on the day on which pre-clearance approval is received,
the Access Person must submit a new request and receive approval prior to
placing any subsequent order.
(2) Initial Public Offerings ("IPOs")
---------------------------------
-3-
<PAGE> 4
Investment Personnel are prohibited from acquiring any Covered Security
in an IPO. Investment Personnel may, however, request and receive approval to
participate in a conversion offering (as described in paragraph (m) of the
NASD's Freeriding and Withholding Interpretation). In approving any such
request, the onus for substantiating and documenting compliance with the
provisions of paragraph (m) rests on the individual seeking approval. Also,
notwithstanding proof of compliance with paragraph (m), approval may be withheld
if the reviewing compliance personnel believes that an actual or potential
conflict of interest exists with respect to any Client.
(3) Private Placements
------------------
Investment Personnel must obtain prior approval from the appropriate
compliance officer before acquiring Covered Securities in a private placement.
In determining whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment opportunity should
be reserved for Client(s), and whether the opportunity is being offered to the
individual by virtue of his or her relationship with any Client. Any Investment
Personnel who have been authorized to acquire Covered Securities in a private
placement, must disclose that investment when he or she is involved in any
subsequent consideration of an investment by or on behalf of a Client in such
issuer. In such circumstances, Investment Personnel with no personal interest in
the particular issuer shall independently review the Client's decision to
purchase that issuer's Covered Securities.
(4) 60 Day Holding Period
---------------------
Investment Personnel shall not profit from the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy should be unwound,
if possible. In the event such trades cannot be unwound, any profits realized on
such short-term trades shall be subject to disgorgement to the appropriate
Client account or account of NAS.
(5) Blackout Period
---------------
(a) Same Day
--------
Access Persons are prohibited from executing any personal Covered
Securities transaction on a day on when a Client has a pending buy or
sell order in that same Covered Security. This prohibition shall be
lifted once the Client executes or withdraws its order for the Covered
Security in question. However, directors of NAS who are not officers of
NAS or any of its affiliates and who, on the day they execute a
personal Covered Securities transaction, have no knowledge of what a
Client is trading on that day, are not subject to the Same Day Blackout
Period.
(b) Seven Day
---------
All Portfolio Managers are prohibited from executing any personal
Covered Securities transactions within seven (7) calendar days before
or after the day any Client advised by such person trades in that
Covered Security.
-4-
<PAGE> 5
(c) Trades made in violation of these blackout periods should be
unwound, if possible. Otherwise, any profits realized on such
short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of NAS.
(6) Gifts
-----
No Investment Personnel shall seek or accept anything of more than de
minimis value, either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment Personnel, do business
or might do business with a Client or NAS. For purposes of this provision, the
following gifts will not be considered to be in violation of this section: (a)
an occasional meal; (b) an occasional ticket to a sporting event, the theater or
comparable entertainment, for which the employee will reimburse the host; and
(c) other gifts of nominal cost.
(7) Exempted Transactions
---------------------
The prohibitions of Section (D)(4)-(5) of this Code of Ethics shall not
apply to:
(a) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect
influence or control;
(b) purchases or sales which are nonvolitional(1) on the part of
the Access Person, Investment Personnel or a Client;
(c) purchases which are part of an automatic dividend reinvestment
plan;
(d) purchases effected upon the exercise of rights issued by an
issuer pro-rata to all holders of a class of its Covered Securities, to
the extent such rights were acquired from such issuer, and sales of
such rights so acquired;
(8) Access Persons are generally required to obtain pre-clearance
before executing any trade. However, in certain instances an Access Person is
relieved from obtaining pre-clearance, but must report the transaction. In other
instances, the Access Person is relieved of both of the duty to obtain
pre-clearance and to report the transaction.
(a) Access Persons, do not have to pre-clear the following
transactions, but must report them:
(i) Stocks when the total purchase/sale of the particular
issuer is 1,000 shares or fewer in a calendar quarter.
(ii) Option contracts on stock when the total purchase/sale of
the contract is 1,000 shares or fewer of a particular issuer in any
calendar quarter.
- --------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the director, officer
or employee. For example, shares received or disposed of by Access Persons or
Investment Personnel in a merger, recapitalization or similar transaction are
considered nonvolitional.
-5-
<PAGE> 6
(iii) Corporate debt Covered Securities(2) rated in the highest
grades by any Nationally Rated Statistical Rating Organization if
the purchase/sale is $25,000.00 or less per issue in any calendar
quarter.
(iv) Municipal bonds if the purchase/sale is $25,000.00 or
less per issue in any calendar quarter.
*PROVISION (8)(a) AND ITS SUB-PARTS DO NOT RELIEVE ACCESS
PERSONS OF THEIR DUTY TO REPORT THE TRANSACTIONS DESCRIBED THEREIN.
FURTHERMORE, THIS PROVISION DOES NOT APPLY TO TRANSACTIONS COVERED
UNDER SECTIONS D(2) AND D(3).
(b) The following transactions are exempt from the
prohibitions contained in this Code of Ethics, do not require prior
clearance and do not have to be reported (securities which do not
qualify as Covered Securities under this Code of Ethics are also exempt
from these reporting requirements):
(i) Variable annuities.
(iii) Oil, gas or other mineral leases.
(iv) Commodities, commodity contracts or futures
contracts.
(9) Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization by the
appropriate compliance officer. Such authorization should be based upon a
determination that the board service would be consistent with the interests of
Clients. Where service on a board of directors is authorized, Investment
Personnel serving as directors should be isolated from those making investment
decisions regarding the company through "Chinese Wall" procedures.
E. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) Initial Holdings Reports
------------------------
All Access Persons shall disclose all personal Covered Securities
holdings to the appropriate compliance officer upon commencing employment. The
Initial Report shall be made on the form attached as Exhibit A and shall contain
the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Securities
were held for the direct or
- ----------
(2) Corporate debt Covered Securities which are rated in the highest grades have
an extremely strong capacity to pay principal and interest. The following
Corporate debt Covered Securities are considered to have the highest ratings:
(a) bonds rated AA or higher by Standard & Poor's Corporation; (b) bonds rated
Aa or higher by Moody's Investors Service, Inc.; and bonds rated A or higher by
Fitch or Duff.
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<PAGE> 7
indirect benefit of the Access Person as of the date the person
became an Access Person; and
(c) the date that the report is submitted by the Access
Person.
All Access Persons currently employed by NAS shall submit an Initial
Report to the appropriate compliance officer within ten days of the date of this
Code of Ethics. All other Initial Reports shall be made no later than 10 days
after the person becomes an Access Person.
(2) Quarterly Reports
-----------------
(a) All Access Persons shall report to the appropriate
compliance officer, the information described below in Sub-paragraph
(2)(c) of this Section with respect to transactions in any Covered
Security in which such person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership in the Covered
Security; provided, however, that all Access Persons shall not be
required to make a report with respect to transactions effected for any
account over which such person does not have any direct or indirect
influence or Covered Security transactions which are not eligible for
purchase or sale by a Trust.
(b) Notwithstanding Section 2(a), an Access Person need not
make a Quarterly Transaction Report if the information would duplicate
information required to be reported under Rule 204(a)(12) under the
Investment Advisers Act of 1940, as amended, or information contained
in brokerage statements submitted by the Access Person to NAS (if all
of the information required by the Quarterly Report is contained in the
brokerage statement).
(c) Reports required to be made under this Paragraph (2) shall
be made not later than 10 days after the end of the calendar quarter in
which the transaction to which the report relates was effected. All
Access Persons shall be required to submit a report for all periods,
including those periods in which no Covered Securities transactions
were effected. A report shall be made on the form attached hereto as
Exhibit B or on any other form containing the following information:
(i) the date of the transaction, the title of the
Covered Security, the interest rate and maturity date
(if applicable), the number of shares, and the principal
amount of each Covered Security involved;
(ii) the nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition);
(iii) the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank with or
through whom the transaction was effected; and
(v) the date the report is submitted.
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<PAGE> 8
(d) Any such report may contain a statement that the report
shall not be construed as an admission by the person making such report
that he or she has any direct or indirect beneficial ownership in the
Covered Security to which the report relates.
(e) All Access Persons shall direct their brokers to supply
duplicate copies of all monthly brokerage statements (excluding
confirmations) for all Covered Securities accounts maintained by the
Access Person to the appropriate compliance officer, on a timely basis.
In addition, with respect to any account established by the Access
Person in which any Covered Securities were held during the quarter for
the direct or indirect benefit of the Access Person, the Access Person
shall report the following information:
(i) the name of the broker, dealer or bank with whom the
Access Person established the account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) Annual Holdings Reports
-----------------------
All Access Persons shall disclose all personal Covered Securities
holdings on an annual basis on the Form attached as Exhibit C within 30 days
after the end of the calendar year. All Annual Reports shall provide information
on personal Covered Securities holdings that is current as of a date no more
than 30 days before the Annual Report is submitted. Such Annual Reports shall
contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the
Access Person maintains an account in which any Covered Securities are
held for the direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access
Person.
(4) Certification of Compliance with Code of Ethics
-----------------------------------------------
All Access Persons shall certify annually that:
(a) they have read and understand the Code of Ethics and
recognize that they are subject to its provisions;
(b) they have complied with the requirements of the Code of
Ethics; and
(c) they have reported all personal Covered Securities
transactions required to be reported pursuant to the requirements of
the Code of Ethics.
(5) Personal Brokerage Accounts
---------------------------
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<PAGE> 9
No director, officer or employee shall open a personal brokerage
account directly or indirectly without obtaining prior authorization from the
appropriate compliance officer. In addition, all directors, officers and
employees of NAS shall provide compliance personnel with a listing of all
brokerage accounts in which the director, officer or employee has a direct or
indirect interest upon commencing employment and on an annual basis thereafter.
These reports may be made using Exhibits A or C, as applicable.
(6) Review of Reports and Notification
----------------------------------
NAS will appoint compliance personnel to review all brokerage account
statements and Quarterly, Initial and Annual Reports to detect conflicts of
interest and abusive practices. In addition, the appropriate compliance officer
of NAS shall notify each Access Person that he or she is subject to the
reporting requirements provided under this Code of Ethics and shall deliver a
copy of this Code of Ethics to each person upon request.
F. REPORTING OF VIOLATIONS TO THE BOARDS
Any person, including the compliance officer, shall promptly report all
violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the Board of the appropriate Trust.
G. BOARD APPROVAL
(1) Upon its adoption, the compliance officer shall submit a copy of
the Code of Ethics to the Board of each investment company Client for which NAS
serves as investment adviser, sub-adviser or principal underwriter for approval
no later than September 1, 2000.
(2) NAS is further required to obtain approval from each investment
company Client for any material changes to this Code of Ethics within six (6)
months of any such change.
H. ANNUAL REPORTING OF NAS TO INVESTMENT COMPANY CLIENTS
NAS shall prepare a written annual report relating to this Code of
Ethics to the board of each investment company Client for which it acts as
investment adviser, sub-adviser or principal underwriter. Such annual report
shall:
(1) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(2) identify any material violations requiring significant remedial
action during the past year;
(3) identify any recommended changes in the existing restrictions or
procedures based upon experience under its Code of Ethics, evolving industry
practices or developments in applicable laws or regulations; and
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<PAGE> 10
(4) certify that NAS has adopted procedures reasonably necessary to
prevent Access Persons from violating this Code of Ethics.
I. SANCTIONS
---------
Upon discovering a violation of this Code, a Board may impose such
sanctions as it deems appropriate, including, among other things, issuing a
letter of censure or suspension or terminating the employment of the violator or
referring the matter to the appropriate regulatory or governmental authority.
J. RETENTION OF RECORDS
--------------------
The Adviser must, at its principal place of business, maintain records
in the manner and to the extent set out below and must make these records
available to the U.S. Securities and Exchange Commission ("SEC") or any
representative of the SEC at any time and from time to time for reasonable
periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of Covered Securities, in a
private placement, as described in Section D(3) of this Code of Ethics, for at
least five (5) years after the end of the fiscal year in which the approval is
granted; and
(6) A copy of each annual report required under Section H for at least
five (5) years after the end of the fiscal year in which it is made, the first
two in an accessible place.
Date: March 23, 2000
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<PAGE> 11
EXHIBIT A
NAS
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of the NAS:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for the
NAS.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve any Client, such as any economic relationship between my transactions
and Covered Securities held or to be acquired by any such Client.
4. As of the date below I had a direct or indirect beneficial ownership
in the following Covered Securities:
<TABLE>
<CAPTION>
Dollar Amount Type of Interest
Title of Security Number of Shares of Transaction (Direct or Indirect)
----------------- ---------------- -------------- --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain account(s) as of the
date this report is submitted in which Covered Securities are held for my direct
or indirect benefit with the brokers, dealers or banks listed below.
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<PAGE> 12
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
--------------------------------
Title:
-------------------------------
Date Report Submitted:
---------------
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<PAGE> 13
EXHIBIT B
NAS
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended: _________
To the Compliance Officer of the NAS:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by NAS.
<TABLE>
<CAPTION>
=======================================================================================================================
INTEREST RATE DOLLAR NATURE OF BROKER/
TITLE OF DATE OF NO. OF AND MATURITY AMOUNT OF TRANSACTION PRICE DEALER
SECURITY TRANSACTION SHARES DATE (if TRANSACTION (Purchase, Sale, OR BANK THROUGH
applicable) Other) WHOM EFFECTED
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
=======================================================================================================================
</TABLE>
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