<PAGE> 1
PROSPECTUS
May 1, 1996
Shares of Beneficial Interest
NATIONWIDE SEPARATE ACCOUNT TRUST
- TOTAL RETURN FUND
- CAPITAL APPRECIATION FUND
- GOVERNMENT BOND FUND
- MONEY MARKET FUND
NATIONWIDE SEPARATE ACCOUNT TRUST
One Nationwide Plaza
Columbus, Ohio 43216
For Information and Assistance, Call
(614) 249-5134
Nationwide Separate Account Trust (the "Trust") is a diversified, open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The
Trust offers shares in the five separate mutual funds, each with its own
investment objective. This prospectus relates to the Total Return Fund,
Capital Appreciation Fund, Government Bond Fund and Money Market Fund (each a
"Fund"). The shares of the Trust are sold only to life insurance company
separate accounts to fund the benefits of variable insurance and annuity
policies.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The investment objective of the Total Return Fund is to seek a reasonable,
long term return on invested capital from a flexible combination of current
return and capital gains.
The investment objective of the Capital Appreciation Fund is to provide
long-term growth, primarily through a diversified portfolio of the common stock
of companies which the investment manager determines have a better-than-average
potential for sustained capital growth over the long term.
The investment objective of the Government Bond Fund is to provide as high
a level of income as is consistent with the preservation of capital.
The investment objective of the Money Market Fund is to seek as high a
level of current income as is considered consistent with the preservation of
capital and liquidity.
INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
This Prospectus provides you with the basic information you should know
before investing in the Funds. You should read it and keep it for future
reference. A Statement of Additional Information, dated May 1, 1996, has been
filed with the Securities and Exchange Commission. You can obtain a copy without
charge by calling (614) 249-5134, or writing Nationwide Life Insurance Company,
One Nationwide Plaza, Columbus, Ohio 43216.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 1996,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 2
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
Net
Realized Distributions
Net Gain from Net
Asset (Loss) & Total Dividends Realized
Value Net Unrealized From from Net Gain from Returns
Beginning Investment Appreciation Investment Investment Investment of Total
of Period Income (Depreciation) Operations Income Transaction Capital Distribution
- ----------------------------------------------------------------------------------------------------------
| INCOME FROM | |
| INVESTMENT OPERATIONS | LESS DISTRIBUTIONS |
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 8.02 $.32 $ 1.16 $1.48 $ (.31) $ (.56) $ - $ (.87)
--------------------------------------------------------------------------------------------------
8.63 .32 (.26) .06 (.41) (1.79) - (2.20)
--------------------------------------------------------------------------------------------------
6.49 .28 1.01 1.29 (.27) (.07) - (.34)
--------------------------------------------------------------------------------------------------
7.45 .25 .74 .99 (.23) (.44) - (.67)
--------------------------------------------------------------------------------------------------
TOTAL 7.77 .31 (.94) (.63) (.28) (.12) - (.40)
--------------------------------------------------------------------------------------------------
RETURN 6.74 .22 2.34 2.56 (.23) - - (.23)
--------------------------------------------------------------------------------------------------
FUND 9.07 .25 .48 .73 (.25) (.09) - (.34)
--------------------------------------------------------------------------------------------------
9.46 .23 .79 1.02 (.24) (.14) - (.38)
--------------------------------------------------------------------------------------------------
10.10 .21 (.10) .11 (.28) (.23) - (.51)
--------------------------------------------------------------------------------------------------
9.70 .31 2.49 2.80 (.31) (.65) - (.96)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
CAPITAL $10.00 $.10 $ .48 $ .58 $ (.10) $ (.02) $ - $ (.12)
--------------------------------------------------------------------------------------------------
APPRECI- 10.46 .26 .74 1.00 (.26) - - (.26)
--------------------------------------------------------------------------------------------------
ATION 11.20 .18 (.28) (.10) (.18) - - (.18)
--------------------------------------------------------------------------------------------------
FUND 10.92 .23 2.96 3.19 (.23) (.40) - (.63)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
$10.59 $.91 $ .63 $1.54 $ (.92) $ (.02) $ - $ (.94)
--------------------------------------------------------------------------------------------------
11.19 .87 (.73) .14 (1.10) (.12) (.10) (1.32)
--------------------------------------------------------------------------------------------------
10.01 .89 (.10) .79 ( .89) - - (.89)
--------------------------------------------------------------------------------------------------
GOVERN- 9.91 .95 .38 1.33 ( .93) - - (.93)
--------------------------------------------------------------------------------------------------
MENT 10.31 .88 .06 .94 ( .85) - - (.85)
--------------------------------------------------------------------------------------------------
BOND 10.40 .86 .82 1.68 ( .84) - - (.84)
--------------------------------------------------------------------------------------------------
FUND 11.24 .98 (.14) .84 ( .93) (.23) - (1.16)
--------------------------------------------------------------------------------------------------
10.92 .71 .32 1.03 ( .66) (.03) - (.69)
--------------------------------------------------------------------------------------------------
11.26 .69 (1.06) (.37) ( .69) - - (.69)
--------------------------------------------------------------------------------------------------
10.20 .71 1.16 1.87 ( .71) - - (.71)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
$ 1.00 $.06 $ - $ .06 $ (.06) $ - $ - $ (.06)
--------------------------------------------------------------------------------------------------
1.00 .06 - .06 (.06) - - (.06)
--------------------------------------------------------------------------------------------------
1.00 .07 - .07 (.07) - - (.07)
--------------------------------------------------------------------------------------------------
MONEY 1.00 .09 - .09 (.09) - - (.09)
--------------------------------------------------------------------------------------------------
FUND 1.00 .08 - .08 (.08) - - (.08)
--------------------------------------------------------------------------------------------------
MARKET 1.00 .06 - .06 (.06) - - (.06)
--------------------------------------------------------------------------------------------------
1.00 .03 - .03 (.03) - - (.03)
--------------------------------------------------------------------------------------------------
1.00 .03 - .03 (.03) - - (.03)
--------------------------------------------------------------------------------------------------
1.00 .04 - .04 (.04) - - (.04)
--------------------------------------------------------------------------------------------------
1.00 .06 - .06 (.06) - - (.06)
--------------------------------------------------------------------------------------------------
Net
Net Expenses Investment
Asset to Income to Net Assets
Value Average Average at End of
End of Total Net Net Portfolio Period
Period Return Assets Assets Turnover (000's) Year
-------------------------------------------------------------------- ----
| RATIOS & | NET |
| SUPPLEMENTAL DATA | ASSETS|
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.63 20.23% .55% 3.86% 160.5% $145,822 1986
-------------------------------------------------------------------------
6.49 (.72) .54 3.82 119.3 156,633 1987
-------------------------------------------------------------------------
7.45 20.05 .54 3.91 89.8 155,247 1988
-------------------------------------------------------------------------
7.77 13.22 .56 3.15 51.9 185,674 1989
-------------------------------------------------------------------------
TOTAL (6.74) (8.03) .54 4.31 38.1 162,661 1990
-------------------------------------------------------------------------
RETURN 9.07 38.49 .53 2.74 14.5 250,701 1991
-------------------------------------------------------------------------
FUND 9.46 8.18 .53 2.69 12.5 334,917 1992
-------------------------------------------------------------------------
10.10 10.92 .53 2.51 9.8 456,243 1993
-------------------------------------------------------------------------
9.70 1.07 .52 2.76 12.1 534,821 1994
-------------------------------------------------------------------------
11.54 29.09 .51 2.84 16.1 814,964 1995
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPITAL $10.46 10.92% .69% 1.95% 5.0% $18,800 1992+
-------------------------------------------------------------------------
APPRECI- 11.20 9.61 .59 2.82 16.9 38,926 1993
-------------------------------------------------------------------------
ATION 10.92 (.90) .56 1.76 11.2 60,442 1994
-------------------------------------------------------------------------
FUND 13.48 29.35 .54 1.89 20.3 81,237 1995
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$11.19 15.22% .56% 8.27% 67.9% $ 58,681 1986
-------------------------------------------------------------------------
10.01 1.43 .56 8.29 206.9 63,225 1987
-------------------------------------------------------------------------
9.91 8.06 .55 8.82 113.1 65,962 1988
-------------------------------------------------------------------------
GOVERN- 10.31 13.97 .57 9.18 200.0 83,299 1989
-------------------------------------------------------------------------
MENT 10.40 9.49 .55 8.70 127.8 113,399 1990
-------------------------------------------------------------------------
BOND 11.24 16.70 .55 8.07 77.7 198,769 1991
-------------------------------------------------------------------------
FUND 10.92 7.87 .53 8.75 73.8 301,841 1992
-------------------------------------------------------------------------
11.26 9.52 .53 5.91 175.4 433,584 1993
-------------------------------------------------------------------------
10.20 (3.23) .51 6.46 111.4 391,253 1994
-------------------------------------------------------------------------
11.36 18.74 .51 6.45 97.1 454,016 1995
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 1.00 6.54% .56% 6.33% -% $121,801 1986
-------------------------------------------------------------------------
1.00 6.42 .56 6.30 - 161,707 1987
-------------------------------------------------------------------------
1.00 6.61 .55 7.12 - 181,699 1988
-------------------------------------------------------------------------
MONEY 1.00 9.11 .57 8.73 - 216,498 1989
-------------------------------------------------------------------------
FUND 1.00 8.03 .55 7.74 - 330,586 1990
-------------------------------------------------------------------------
MARKET 1.00 5.84 .54 5.65 - 363,502 1991
-------------------------------------------------------------------------
1.00 3.40 .53 3.36 - 330,011 1992
-------------------------------------------------------------------------
1.00 2.76 .53 2.72 - 351,798 1993
-------------------------------------------------------------------------
1.00 3.88 .54 4.00 - 828,027 1994
-------------------------------------------------------------------------
1.00 5.66 .52 5.51 - 737,408 1995
-------------------------------------------------------------------------
<FN>
+ Period from April 15, 1992 (date of commencement of operations) through
December 31, 1992. Ratio percentages are annualized for periods of less
than twelve months. Total return is not annualized.
</TABLE>
The information in the above tables has been audited by KPMG Peat
Marwick LLP, Independent Auditors, whose report, together with certain
financial information, appears in the Statement of Additional
Information. The Statement of Additional Information and the Annual
Report for the Funds, which contains further information about the
Funds' performance may be obtained free of charge by calling
1-614-249-5134. These Financial Highlights should be read in conjunction
with the audited financial statements for each Fund.
2
<PAGE> 3
SALE OF FUND SHARES
Currently, shares of the Trust are sold only to life insurance company
separate accounts (Accounts) to fund the benefits of variable insurance or
annuity policies (Policies) issued by life insurance companies. The Accounts
purchase shares of the Trust in accordance with variable account allocation
instructions received from owners of the Policies. The Trust then uses the
proceeds to buy securities for its portfolios. The investment adviser manages
the portfolios from day to day to accomplish the Trust's investment objectives.
The kinds of investments and the way they are managed depend on what is
happening in the economy and the financial marketplaces. Each of the Accounts,
as a shareholder, has an ownership in the Trust's investments. The Trust also
offers to buy back (redeem) shares of the Trust from the Accounts at any time at
net asset value.
INVESTMENT OBJECTIVES AND POLICIES
Investments in each Fund are made in many different securities which provide
diversification to minimize risk. While there is careful selection and constant
supervision by a team of professional investment managers, there can be no
guarantee that the Funds' objectives will be achieved. The fundamental policies
of each Fund do not require shareholder approval to change a Fund's investment
objective.
-TOTAL RETURN FUND
The investment objective of this Fund is to obtain a reasonable, long term
total return (i.e. earnings growth plus potential dividend yield) on invested
capital from a flexible combination of current return and capital gains through
investments in common stocks, convertible issues, money market instruments, and
bonds, with a primary emphasis on common stocks.
By investing in securities that are subject to market risk, the Fund is
subject to more fluctuations in its market value and involves the assumption of
a higher degree of risk as compared to a portfolio seeking stability of
principal, such as a money market portfolio or a portfolio investing in
corporate debt securities, United States and Canadian government obligations and
commercial paper.
While it is the Fund's intention to invest in common stocks or in issues
convertible to common stock, there are no restrictive provisions covering the
proportion of one or another class of securities that may be held, other than
those stated in the Statement of Additional Information.
Portfolio Manager: John M. Schaffner, MBA, CFA-is the portfolio manager for
the Total Return Fund. He has been with Nationwide since 1977 and has managed
the Total Return Fund since 1982. He also manages the Nationwide Growth Fund. He
graduated with a Bachelor of Arts in Economics from Occidental College. He
received his Masters of Business Administration degree from the University of
Michigan and is a Chartered Financial Analyst.
-CAPITAL APPRECIATION FUND
The Fund is designed for investors who are interested in long-term growth.
The Fund seeks to meet its objectives primarily through a diversified portfolio
of the common stock of companies which the investment manager determines have a
better-than-average potential for sustained capital growth over the long term.
While it is the Fund's intention to invest in common stocks or in issues
convertible to common stock, there are no restrictive provisions covering the
proportion of one or another class of securities that may be held, other than
those stated in the Statement of Additional Information.
The investment manager will focus mainly on a company's or industry's
potential for long-term growth, with dividend and interest income being
secondary in importance. The manager's evaluation of a company or industry will
be based more on probable future earnings, relative financial strength and
competitive position. The manager believes this approach will provide a greater
return potential over the long run than simply seeking current dividend or
interest income. The Fund's portfolio will not be limited to any particular type
of company or industry.
Portfolio Manager: Charles Bath, MBA, CFA, CPA-is the portfolio manager of
the Capital Appreciation Fund. Charles joined Nationwide as a securities analyst
and has managed the Capital Appreciation Fund since 1992. He has also managed
the Nationwide Fund since 1985. He graduated with a Bachelor of Science in
Accounting from Miami University. He received his Master of Business
Administration degree in Finance from The Ohio State University and is a
Certified Public Accountant and a Chartered Financial Analyst.
-GOVERNMENT BOND FUND
The investment objective of this Fund is to provide as high a level of income
as is consistent with the preservation of capital. It seeks to achieve its
objective by investing in a diversified portfolio of securities issued or backed
by the U.S. Government, its agencies or instrumentalities.
3
<PAGE> 4
These securities are of varying maturities and types. They include direct
obligations of the U.S. Government backed by the full faith and credit of the
United States, such as U.S. Treasury bills, notes and bonds. Bills mature in one
year or less, notes in one to ten years, and bonds in ten years or more.
In addition, the Fund will hold securities issued by U.S.
Government-chartered agencies and instrumentalities. These securities are
usually either guaranteed by the U.S. Treasury or are supported by the issuer's
rights to borrow from the Treasury and backed by the issuer's own credit.
Examples may include (among others): Federal Land Banks, Federal Home Banks,
Government National Mortgage Association, Tennessee Valley Authority, Farmers
Home Association, etc. The Government Bond Fund may invest in zero coupon or
mortgage-related securities issued or backed by the U.S. Government or its
agencies, and in repurchase agreements in any of the securities described above.
While there is minimal credit risk in purchasing U.S. Government guaranteed
securities, there is the normal risk associated with fixed income investments of
market value fluctuations inversely related to changing interest rates.
Portfolio Manager: Wayne Frisbee, CFA-is the portfolio manager of the
Government Bond Fund. Wayne joined Nationwide in 1981 as a securities analyst
and has managed the Government Bond Fund since 1986. He also manages the
Nationwide U.S. Government Income Fund. He received a Bachelor of Science
degree from The Ohio State University and is a Chartered Financial
Analyst.
-MONEY MARKET FUND
The investment objective of the Fund is to seek as high a level of current
income as is considered consistent with the preservation of capital and
liquidity by investing primarily in money market instruments, including U.S.
government securities, obligations of larger banks, prime commercial paper, high
grade, short term corporate obligations (with remaining maturities of 397 days
or less), and securities of foreign issuers and foreign branches of U.S. banks.
Pursuant to its objectives of maintaining a fixed one dollar share price, the
Fund will not purchase securities with a remaining maturity of more that 397
days and will maintain a dollar weighted average portfolio maturity of 90 days
or less.
Yields on such short-term instruments are very sensitive to short-term
lending conditions. The principal value of such instruments tends to decline as
interest rates rise and conversely tends to rise as interest rates decline. In
addition, there is an element of risk in such money market instruments that the
issuer may become insolvent and default in meeting interest and principal
payments.
The Money Market Fund's yield and compound yield for the last seven days of
its most recent fiscal year ended December 31, 1995, was 5.12% and 5.26%
respectively. This yield quotation may be of limited use for comparative
purposes because it does not reflect charges imposed at the Account level which,
if included, would decrease the yield. For the current yield of the Fund, please
call (614) 249-5134.
Portfolio Manager: Karen G. Mader, MBA-is the portfolio manager of the Money
Market Fund. Karen received a Bachelor of Arts degree in Political Science and a
Masters degree in International Business and Political Science, both from The
Ohio State University. She has managed the Money Market Fund since 1987.
MANAGEMENT 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 whereas the officers perform the daily functions of the Trust.
Under the terms of the Investment Advisory Agreement, Nationwide Financial
Services, Inc. (NFS or Adviser), One Nationwide Plaza, Columbus, Ohio 43216,
manages the investment of the assets and, subject to the supervision of the
Trustees, provides various administrative services and supervises the daily
business affairs of the Trust. NFS, an Ohio corporation, is a wholly owned
subsidiary of Nationwide Life Insurance Company, which is wholly owned by
Nationwide Corporation, a holding company in the Nationwide Insurance
Enterprise. The Trust pays to the Adviser fees based on the average daily net
assets at the rate of .5% per annum.
NFS provides the accounting services, including daily valuation of each
Fund's shares, preparation of financial statements, taxes, and regulatory
reports. For these accounting services, NFS receives an annual fee of $48,000
from the Trust.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services,
Inc., (NIS), One Nationwide Plaza, Columbus, Ohio 43216, serves as transfer
agent and dividend disbursing agent for the Trust. NIS is a wholly owned
subsidiary of NFS.
4
<PAGE> 5
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
TOTAL RETURN FUND
The Total Return Fund gained 29.1% in 1995, compared to a gain of 37.5% for
the S&P 500. The stock market was led upwards by technology stocks through much
of the first three quarters. In the final quarter, technology stocks were weak,
but the market as a whole continued upwards, as leadership shifted to companies
with defensive, stable-growth business prospects, such as drug stocks.
The Total Return Fund's performance in 1995 was influenced significantly by
strength in energy stocks, where the Fund had a weighting of about 14% of
assets. Financial stocks, where the Fund had a weighting of about 11%, also
recorded strong year-over-year performance, as did telecommunications, where the
Fund asset weight was about 10%. Several of the stocks the Fund categorizes as
conglomerates, such as Eastman Kodak, Honeywell, Rockwell International and EG&G
also performed well. Holdings in chemicals, especially specialty chemicals,
lagged the market, as did the Fund's holdings in the auto industry, plus
machinery and capital goods. In addition, the Fund was not heavily weighted in
the defensive, stable-growth type stocks that led the market in the final
quarter. The level of cash in the Fund, averaging close to 14% for the year,
also hindered performance with the market up strongly.
Part of the Total Return Fund's strategy is to profit from improved
valuation of its holdings. This results in holding cash when there are not
enough undervalued situations to invest in, and this can often occur during
periods of exceptional market strength, such as in 1995, when valuations,
especially of good-quality companies, are high, then continue to go even higher.
Despite periods when this strategy may contribute to the Total Return Fund's
lagging of the market, we continue to believe that investing in stocks where
there is not a strong possibility for future valuation improvement is an
excessively risky practice that is unlikely to be successful over the long-term.
We believe this to be true even when the companies involved are well positioned
in their business niche, and have strong managements and finances. Therefore,
the Fund is continuing to invest where there is room for valuation improvement,
and has been increasing its holdings in the financial, healthcare and food and
beverage sectors of the market.
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT
IN THE TOTAL RETURN FUND AND THE S&P 500
<TABLE>
<CAPTION>
1/1/86 86 87 88 89 90 91 92 93 94 95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Return Fund $32,352
S&P 500 $40,021
</TABLE>
<TABLE>
<CAPTION>
Total Return Fund
Average Annual Total Return
<S> <C> <C>
1 Year 5 Years 10 Years
29.1% 16.7% 12.5%
</TABLE>
The S&P 500 is a broad based, unmanaged index of securities, and
unlike Fund returns, does not reflect any fees or expenses. Past
performance is not predictive of future performance.
5
<PAGE> 6
CAPITAL APPRECIATION FUND
The total return for the Capital Appreciation Fund for 1995 was 29.4%
compared to 37.5% for the S&P 500. The Capital Appreciation Fund lagged the
performance of the S&P 500 primarily due to the Fund's low weighting in
technology stocks. Technology was one of the market's strongest sectors in 1995.
However, the Capital Appreciation Fund had minimal investments in this market
sector. Technology companies are often characterized by short product cycles and
highly competitive markets. Therefore, due to the Capital Appreciation Fund's
long-term perspective, technology has tended to have only a modest weighting.
The Capital Appreciation Fund benefited from the excellent performance of
the broadcasting sector. CBS was one of the Fund's largest holdings prior to its
acquisition by Westinghouse. Capital Cities/ABC was also a holding prior to the
recent merger with Disney. Disney remains a holding in the Fund due to its
position as the world's dominant entertainment company.
Investments in the Capital Appreciation Fund will continue to be made with
a long-term perspective. Investments made in the first quarter of 1996 will be
important in determining the current year's performance. At the end of the first
quarter Warner-Lambert and IBM were the Fund's two largest holdings. These
companies combine attractive growth opportunities with very reasonable
valuations. These securities are each approximately 5% of the portfolio. While
these are large positions, it is important to invest heavily in securities which
provide unusually attractive opportunities.
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT
IN THE CAPITAL APPRECIATION FUND AND THE S&P
<TABLE>
<CAPTION>
5/1/92* 92 93 94 95
<S> <C> <C> <C> <C> <C>
Capital Apprecition $15,585
S&P 500 $16,338
<FN>
*Initial public offering commenced May 1, 1992
</TABLE>
<TABLE>
<CAPTION>
Capital Appreciation Fund
Average Annual Total Return
<S> <C>
1 Year Since Inception
29.4% 11.8%
</TABLE>
The S&P 500 is a broad based, unmanaged index of securities, and
unlike Fund returns, does not reflect any fees or expenses. Past
performance is not predictive of future performance.
GOVERNMENT BOND FUND
The total return for the Government Bond Fund for 1995 was 18.7%. The
Merrill Lynch Government Master Index, an index designed to reflect the
performance of the broad Government and Agency market, returned 18.3% over the
same period.
During 1995, those bond market investors that stayed invested during a
difficult prior year were rewarded for their patience. Long-term interest rates
dropped by approximately 190 basis points during the year resulting in
significantly higher prices for bonds. Intermediate-term interest rates dropped
even more with rates on the five-
6
<PAGE> 7
year U.S. Treasury note, for example, falling from 7.83% to 5.37%. The
Government Bond Fund participated in this rally by maintaining market
exposure as interest rates declined during the year.
The rally in the fixed-income markets was due to the confluence of several
factors. The most notable of these was the perception of an improving fiscal
policy in the United States and a Federal Reserve that was given credit for
engineering an economy that continued to expand without igniting inflation
concerns. Continuing reports of subdued inflation were interpreted both as signs
of successful Federal Reserve policy and as indications of continued value in
the bond market.
The Government Bond Fund continues to be invested in sectors of the government,
agency and mortgage-backed markets perceived to be undervalued. Positions in the
callable agency market were added selectively during the year as this sector
represented value. Approximately one-third of portfolio assets are invested in
the Collateralized Mortgage Obligation (CMO) market. The additional yield on
these conservatively-structured investments continues to make them attractive
portfolio holdings.
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT IN
THE GOVERNMENT BOND FUND AND THE MERRILL LYNCH GOVERNMENT MASTER INDEX
<TABLE>
<CAPTION>
1/1/86 86 87 88 89 90 91 92 93 94 95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Government Bond Fund
Merrill Lynch Gov't Master Index
</TABLE>
<TABLE>
<CAPTION>
Government Bond Fund
Average Annual Total Return
<S> <C> <C>
1 Year 5 Years 10 Years
18.7% 9.6% 9.6%
</TABLE>
The Merrill Lynch Government Master Index is an index of unmanaged
groups of bonds which unlike Fund returns, does not reflect any
fees or expenses. Past performance is not predictive of future
performance.
MONEY MARKET FUND
Short-term interest rates rose during the first half of 1995. The Federal
Reserve increased rates due to both an expanding economy and concern about
inflation. By early July, expansion and inflation concerns had diminished. The
Federal Reserve lowered the Fed Funds rate in July 1995 to 5.75% and again
lowered rates in December 1995 and January 1996 to 5.50% and 5.25%,
respectively. Additional easing may occur if indicators point to a slowing
economy and low inflation.
The Fund continues to invest in only the highest rated money market
securities. An internal credit review is completed on every company the Fund
invests in.
7
<PAGE> 8
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT IN
THE MONEY MARKET FUND AND THE CONSUMER PRICE INDEX
<TABLE>
<CAPTION>
1/1/86 86 87 88 89 90 91 92 93 94 95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund $17,587
Consumer Price Index $14,081
</TABLE>
Money Market Fund
Average Annual Total Return
1 Year 5 Years 10 Years
5.7% 4.3% 5.8%
The Consumer Price Index is a broad index reflecting price changes in a
market basket of consumer goods, and unlike Fund returns, does not reflect
any fees or expenses. Past performance is not predictive of future
performance.
INVESTMENT IN FUND SHARES
An insurance company purchases the shares of the Funds at their net asset
value using purchase payments received on Policies issued by Accounts. These
Accounts are funded by shares of the Trust. There is no sales charge. All shares
are sold at net asset value.
Shares of the Trust are currently sold only to separate accounts of
Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance
Company, One Nationwide Plaza, Columbus, Ohio 43216, to fund the benefits under
variable insurance or annuity policies.
All investments in the Trust are credited to the shareholder's account in the
form of full and fractional shares of the designated Fund (rounded to the
nearest 1/1000 of a share). The Trust does not issue share certificates. Initial
and subsequent purchase payments allocated to a specific Fund are subject to the
limits applicable to the policies.
SHARE REDEMPTION
An insurance company separate account redeems shares to make benefit or
surrender payments under the terms of its Policies. Redemptions are processed on
any day on which the Trust is open for business and are effected at net asset
value next determined after the redemption order, in proper form, is received by
the Trust's transfer agent, NIS.
The net asset value per share of each Fund is determined once daily, as of
4:00 P.M. on each business day the New York Stock Exchange is open and on such
other days as the Board determines and on any other day during which there is a
sufficient degree of trading in the Fund's portfolio securities that the net
asset value of the Fund is materially affected by changes in the value of
portfolio securities. The Trust will not compute net asset value on customary
national business holidays, including the following: Christmas, New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, and
Thanksgiving. The net asset value per share is calculated by adding the value of
all securities and other assets of a Fund, deducting its liabilities, and
dividing by the number of shares outstanding.
The Trust may suspend the right of redemption only under the
following unusual circumstances:
- when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
8
<PAGE> 9
- when an emergency exists, making disposal of portfolio securities
or the valuation of net assets not reasonably practicable; or
- during any period when the Securities and Exchange Commission has
by order permitted a suspension of redemption for the protection of
shareholders.
NET INCOME AND DISTRIBUTIONS
-TOTAL RETURN FUND, CAPITAL APPRECIATION FUND AND GOVERNMENT BOND FUND
Substantially all of the net investment income, if any, of these Funds will
be paid as dividends in March, June, September, and December. In those years in
which sales of a Fund's portfolio securities result in net realized capital
gains, the Fund will distribute such gains to its shareholders with the December
dividend.
-MONEY MARKET FUND
The net income of the Money Market Fund is determined once daily, as of the
close of the New York Stock Exchange (currently 4:00 P.M., New York time) on
each business day the Exchange is open. All the net income of the Fund, so
determined, is declared in shares as a dividend to shareholders of record at the
time of such determination. (Shares purchased become entitled to dividends
declared as of the first day following the date of investment.) Dividends are
distributed in the form of additional shares of the Fund on the last business
day of each month at the rate of one share (and fraction thereof) of the Fund
for each one dollar (and fraction thereof) of dividend income.
For this purpose, the net income of the Money Market Fund (from the time of
the immediately preceding determination thereof) shall consist of: (a) all
interest income accrued on the portfolio assets of the Fund, (b) less all actual
and accrued expenses, and (c) plus or minus net realized gains and losses on the
assets of the Fund determined in accordance with generally accepted accounting
principles. Interest income shall include discount earned (including both
original issue and market discount) on discount paper accrued ratably to the
date of maturity. Securities are valued at market or amortized cost which
approximates market, for purposes of complying with the Investment Company Act
of 1940.
Because the net income of the Fund is declared as a dividend each time the
net income is determined, the net asset value per share (i.e., the value of the
net assets of the Fund divided by the number of shares outstanding) remains at
one dollar per share immediately after each such determination and dividend
declaration.
9
<PAGE> 10
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES--The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of each
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of a Fund represents an equal proportionate interest in that
Fund with each other share. The Trust reserves the right to create and issue a
number of different Funds. In that case, the shares of each Fund would
participate equally in the earnings, dividends, and assets of the particular
Fund, but shares of all Funds would vote together in the election of Trustees.
Upon liquidation of a Fund, its shareholders are entitled to share pro rata in
the net assets of such Fund available for distribution to shareholders.
VOTING RIGHTS--Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. Although the sole shareholders of
the Trust are Nationwide Life insurance Company and Nationwide Life and Annuity
Insurance Company, under current law, the life insurance company shareholders
are required to request voting instructions from policyholders and must vote
Trust shares held in proportion to the voting instructions received. No
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the outstanding shares of the Trust. The Trustees may, however,
amend the Declaration of Trust without the vote or consent of shareholders to:
- designate series of the Trust;
- change the name of the Trust; or
- supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the
Declaration of Trust to the requirements of applicable federal
and state laws or regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable, except as set forth below. In regard to termination, sale of
assets, or changes of investment restrictions, the right to vote is limited to
the holders of shares of the particular Fund affected by the proposal. When a
majority is required, it means the lesser of 67% or more of the shares present
at a meeting when the holders of more than 50% of the outstanding shares are
present or represented by proxy, or more than 50% of the outstanding shares.
PERFORMANCE ADVERTISING FOR THE FUNDS
The Funds may use historical performance in advertisements, sales literature,
and the prospectus. Such figures will include quotations of average total return
for the most recent one, five, and ten year periods (or the life of the Fund if
less). Average annual total return represents the rate required each year for an
initial investment to equal the redeemable value at the end of the specific
period. Average annual total return reflects reinvestment of all distributions.
The Government Bond Fund may advertise yield which is calculated daily
dividing the net investment income per share earned during a 30-day period by
the maximum offering price per share on the last day of the period.
The Money Market Fund may advertise current seven-day yield quotations
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the base period to obtain a base period return and then
multiplying the base period return by (365/7), or (366/7) in a leap year. For
purposes of this calculation, the net change in account value reflects the value
of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares.
The Fund's effective yield represents a compounding on an annualized basis of
the current yield quotation of the Fund.
SHAREHOLDER INQUIRIES--All inquiries regarding the Trust should be directed
to the Trust at the telephone number or address shown on the cover page of this
Prospectus.
TAX STATUS
The Trust's policy is for each Fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Code. Each Fund
intends to distribute all its taxable net investment income and capital gains to
shareholders, and therefore, will not be required to pay any federal income
taxes.
Because each Fund of the Trust is treated as a separate entity for purposes
of the regulated investment company provisions of the Code, the assets, income
and distributions of a Fund are considered separately for purposes of
determining whether or not a Fund qualifies as a regulated investment company.
Each Fund intends to comply with the diversification requirements currently
imposed by the Internal Revenue Service on separate
10
<PAGE> 11
accounts of insurance companies as a condition of maintaining the
tax-deferred status of the Policies. See the Statement of Additional
Information for more specific information.
The tax treatment of payments made by a separate account to a Policy holder
is described in the separate account prospectus.
11
<PAGE> 12
<TABLE>
<CAPTION>
CONTENTS PAGE
-------- ----
<S> <C>
Financial Highlights 2
Sale of Fund Shares 3
Investment Objectives and Policies 3
Management of the Trust 4
Management Discussion of Fund Performance 5
Investment in Fund Shares 8
Share Redemption 8
Net Income and Distributions 9
Additional Information 10
Performance Advertising for the Funds 10
Tax Status 10
INVESTMENT ADVISER
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43216
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Nationwide
Investors Services, Inc.
Box 1492
One Nationwide Plaza
Columbus, Ohio 43216
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Rath & Dietrich
One Nationwide Plaza
Columbus, Ohio 43216
</TABLE>
12
<PAGE> 13
PROSPECTUS
MAY 1, 1996
SHARES OF BENEFICIAL INTEREST
NATIONWIDE SMALL COMPANY FUND
NATIONWIDE SEPARATE ACCOUNT TRUST
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43216
FOR INFORMATION AND ASSISTANCE, CALL
(614) 249-5134
Nationwide Small Company Fund (the "Fund") is a non-diversified portfolio of
the Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
offers shares in five separate mutual funds, each with its own investment
objective. This Prospectus relates only to the Nationwide Small Company Fund.
The shares of the Fund are sold only to life insurance company separate
accounts to fund the benefits of variable insurance and annuity policies.
The Fund seeks long-term growth of capital. The Fund invests primarily in
equity securities of small capitalization companies.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated May 1,1996, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43216.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 1996,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 14
FINANCIAL HIGHLIGHTS
NATIONWIDE SMALL COMPANY FUND
FINANCIAL HIGHLIGHTS OF THE FUND
PERIOD FROM OCTOBER 23, 1995* THROUGH DECEMBER 31, 1995
(SELECTED PER SHARE DATA AND RATIOS FOR A SHARE
OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Net
Realized
Gain and
Unrealized Net Net
Appreciation Investment Investment
Net on Expenses Expenses Income Income
Asset Investments Total Dividends Net Asset to to to to Net Assets
Value-- Net and Foreign from from Net Value-- Average Average Average Average at End of
Beginning Investment Currency Investment Investment End of Total Net Net Net Net Portfolio Period
of Income Transactions Operations Income period Return Assets Assets** Assets Assets** Turnover (000's)
Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.00 $.02 $1.42 $1.44 ($.02) $11.42 14.38% 1.25% 1.74% 1.32% .83% 9.03% $17,155
<FN>
*Initial public offering was October 23, 1995
**Ratios calculated as if no expenses were waived or reimbursed. Waived and
reimbursed expenses per share were $.011.
</TABLE>
Ratios are annualized. Total return and portfolio turnover are not annualized.
The information in the Financial Highlights has been audited by KPMG Peat
Marwick LLP, independent auditors, whose report on the financial statements
appears in the Statement of Additional Information. The Statement of Additional
Information and the Annual Report for the Fund which contains further
information about the Fund's performance may be obtained free of charge by
calling (614) 249-5134. These Financial Highlights should be read in
conjunction with the audited financial statements of the Fund.
2
<PAGE> 15
SALE OF FUND SHARES
Currently, shares of the Fund are sold only to life insurance company
separate accounts ("Accounts") to fund the benefits of variable insurance or
annuity policies ("Policies") issued by life insurance companies. The Accounts
purchase shares of the Fund in accordance with variable account allocation
instructions received from owners of the Policies. The Fund then uses the
proceeds to buy securities for its portfolio. The investment adviser, together
with a group of subadvisers, manages the portfolio from day to day to
accomplish the Fund's investment objective. The types of investments and the
way they are managed depend on what is happening in the economy and the
financial marketplaces. Each of the Accounts, as a shareholder, has an
ownership in the Fund's investments. The Fund also offers to buy back (redeem)
shares of the Fund from the Accounts at any time at net asset value.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Small Company Fund (the "Fund") seeks long-term growth of
capital. The Fund invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Fund
anticipates that under normal market conditions, the Fund will invest at least
65% of its assets in equity securities of domestic and foreign companies with
market capitalizations of less than $1 billion at the time of purchase. The
equity securities in which the Fund may invest include common stocks, preferred
stocks (both convertible and non-convertible), warrants and rights. It is
anticipated that the Fund will invest primarily in companies whose securities
are traded on foreign or domestic stock exchanges or in the over-the-counter
market ("OTC"). The Fund may also invest in securities of emerging growth
companies, some of which may have market capitalizations over $1 billion.
Emerging growth companies are companies which have passed their start-up phase
and which show positive earnings and prospects of achieving significant profit
and gain in a relatively short period of time.
The Fund may purchase an unlimited number of foreign securities,
including securities of companies in emerging markets. The Fund may also invest
in foreign securities indirectly through American Depository Receipts ("ADRs")
and other similar instruments as described below in "INVESTMENT TECHNIQUES,
CONSIDERATIONS AND RISK FACTORS - Foreign Securities and Currencies".
Under normal conditions, the Fund intends to invest primarily in small
company stocks; however, the Fund is also permitted to invest up to 35% of its
assets in equity securities of domestic and foreign issuers with a market
capitalization of more than $1 billion at the time of purchase, debt
obligations and domestic and foreign money market instruments, including
bankers acceptances, certificates of deposit and discount notes of U.S.
Government securities. In addition, for temporary or emergency purposes, the
Fund can invest up to 100% of total assets in cash, cash equivalents, U.S.
Government securities, commercial paper and certain other money market
instruments, as well as repurchase agreements collateralized by these types of
securities.
At various times the Fund may invest in derivative instruments for
hedging or risk management purposes or for any other permissible purpose. See
"INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative
Instruments" below.
While there is careful selection and constant supervision by a group
of professional investment managers, there can be no guarantee that the Fund's
objective will be achieved. The fundamental policies of the Fund do not require
shareholder approval to change the Fund's investment objective.
MANAGEMENT OF THE FUND
Nationwide Financial Services, Inc. (the "Adviser") has employed a
group of subadvisers (each, a "Subadviser") each of which will manage part of
the Fund's portfolio. Although the Adviser reserves the right to allocate and
reallocate the assets among the Subadvisers at any time, it is anticipated that
each of the Subadvisers will receive a substantially equal proportion of the
funds that are invested in the Fund and will generally retain such assets and
any capital appreciation attributable to them. In addition, it is anticipated
that the Adviser will maintain a portion of the Fund's assets in cash or money
market instruments.
The Adviser has chosen the Subadvisers because they utilize a number
of different investment styles when investing in small company stocks. The
Adviser has decided to employ a number of Subadvisers because even successful
investment managers may experience fluctuations in performance which may be
caused by factors or conditions that affect the particular securities
emphasized by that Subadviser or that may impact its particular investment
style. As a result of the diversification among securities and styles, the
Adviser hopes to increase prospects for investment return and to reduce market
risk and volatility.
3
<PAGE> 16
The following is a brief description of the investment strategies for
each of the Subadvisers:
THE DREYFUS CORPORATION ("Dreyfus") primarily seeks out domestic and
foreign small company stocks that have the potential for significant growth.
Dreyfus believes these companies to be characterized by new or innovative
products or services which should enhance prospects for growth in future
earnings. Dreyfus will also make investments based on prospective economic or
political changes and will invest in securities relating to special situations,
such as corporate restructurings, mergers or acquisitions, thereby seeking out
undervalued securities.
NEUBERGER & BERMAN, L.P. ("Neuberger & Berman") tries to enhance the
potential for appreciation and limit the risk of decline in the value of the
small company stocks that it purchases for the Fund by employing a
value-oriented investment approach. Neuberger & Berman seeks securities that
appear to be underpriced and are issued by companies with proven management,
sound finances and strong potential for market growth. It focuses on the
fundamentals of each smaller company, instead of trying to anticipate what
changes might occur in the stock market or in the economy or the political
environment; in doing so, the Fund's securities will be selected in the belief
that they are currently undervalued, based on existing conditions.
STRONG CAPITAL MANAGEMENT, INC. ("Strong") invests in companies whose
earnings are believed to be in a relatively strong growth trend, and, to a
lesser extent, in companies in which significant further growth is not
anticipated but which are perceived to be undervalued. In identifying companies
with favorable growth prospects, Strong considers factors such as prospects for
above-average sales and earnings growth; high return on invested capital;
overall financial strength; competitive advantages, including innovative
products and services; effective research, product development and marketing;
and stable, capable management.
PICTET INTERNATIONAL MANAGEMENT LIMITED ("PIML") AND VAN ECK
ASSOCIATES ("VEAC") together invest internationally in small company stocks.
PIML and VEAC will primarily choose securities of issuers whose individual
market capitalizations would place them at the time of purchase in the same
size range as companies in approximately the lowest 20% by total market
capitalization of companies that have equities listed on major U.S. exchanges
or traded in the NASDAQ system. These companies will typically have individual
market capitalizations below $500 million. Because this policy is applied on an
international basis, the Fund may invest in companies that may rank above the
lowest 20% by total market capitalization in local markets and in some
countries such companies might rank among the largest companies in terms of
capitalization. When considering where assets will be allocated abroad, VEAC
and PIML will assess where opportunities for long-term capital appreciation are
greatest. In making specific stock selections, VEAC and PIML will invest in
quality, growth-oriented smaller companies that are relatively inexpensive.
WARBURG, PINCUS COUNSELLORS, INC. ("Warburg") invests primarily in
domestic small company stocks. Warburg may choose securities of small companies
which may be in the developmental stage, may be older companies that appear to
be entering a new stage of growth owing to factors such as management changes
or development of new technology, products or markets or may be companies
providing products or services with a high unit volume growth rate. Warburg may
also select securities of emerging growth companies, which can be either small-
or medium-sized companies that have passed their start-up phase and that show
positive earnings and prospects of achieving significant profit and gain in a
relatively short period of time. Emerging growth companies generally stand to
benefit from new products or services, technological developments or changes in
management and other factors and include smaller companies experiencing unusual
developments affecting their market value.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
SMALL COMPANY AND EMERGING GROWTH STOCKS
Investing in securities of small-sized and emerging growth companies
may involve greater risks than investing in larger, more established issuers
since these securities may have limited marketability and, thus, they may be
more volatile than securities of larger, more established companies or the
market averages in general. Because small-sized companies normally have fewer
shares outstanding than larger companies, it may be more difficult for the Fund
to buy or sell significant numbers of such shares without an unfavorable impact
on prevailing prices. Small-sized companies may have limited product lines,
markets or financial resources and may lack management depth. In addition,
small-sized companies are typically subject to wider variations in earnings and
business prospects than are larger, more established companies. There is
typically less publicly available information concerning small-sized companies
than for larger, more established ones.
Securities of issuers in "special situations" also may be more
volatile, since the market value of these securities may decline in value if
the anticipated benefits do not materialize. Companies in "special situations"
include, but are not limited to,
4
<PAGE> 17
companies involved in an acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities
or other assets; a tender or exchange offer, a breakup or workout of a
holding company; litigation which, if resolved favorably, would improve the
value of the companies' securities; or a change in corporate control.
Although investing in securities of emerging growth companies or
"special situations" offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Fund 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.
FOREIGN SECURITIES AND CURRENCIES
The Fund may invest in foreign securities, either directly or
indirectly through the use of depositary receipts. Depositary receipts,
including ADRs, European Depository Receipts and American Depository Shares,
are generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. The Fund may also invest in securities of
foreign investment funds or trusts (including passive foreign investment
companies).
Foreign investments involve special risks, including the possibility
of expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in
other countries.
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.
Although the Fund generally invests only in securities that are regularly
traded on recognized exchanges or OTC, from time to time, foreign securities
may be difficult to liquidate rapidly without adverse price effects. Certain
costs attributable to foreign investing, such as custody charges and brokerage
costs, are higher than those attributable to domestic investing.
The Fund may invest a portion of its assets in securities of issuers
in developing or emerging markets and economies. Investing in securities of
issuers in developing or emerging markets involves special risks, including
less social, political, and economic stability; smaller securities markets and
lower trading volume, which may result in a lack of liquidity and greater price
volatility; certain national policies that may restrict the Fund's investment
opportunities, including restrictions on investments in issuers or industries
deemed sensitive to national interests, or expropriation or confiscation of
assets or property, which could result in a Fund's loss of its entire
investment in that market; and less developed legal structures governing
private or foreign investment or allowing for judicial redress for injury to
private property.
In addition, brokerage commissions, custodial services, withholding
taxes, and other costs relating to investment in emerging markets generally are
more expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures negotiated or imposed by the
countries with which they trade.
Because most foreign securities are denominated in non-U.S.
currencies, the investment performance of the Fund could be significantly
affected by changes in foreign currency exchange rates. The value of the Fund's
assets denominated in foreign currencies will increase or decrease in response
to fluctuations in the value of those foreign currencies relative to the U.S.
dollar. Currency exchange rates can be volatile at times in response to supply
and demand in the currency exchange markets, international balances of
payments, governmental intervention, speculation, and other political and
economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and
may engage in forward currency contracts, currency options, and futures
transactions for hedging or risk management purposes. (See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.)
5
<PAGE> 18
WARRANTS
A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date.
CONVERTIBLE SECURITIES
A convertible security is a fixed income security or preferred stock
that may be converted at either a stated price or stated rate into underlying
shares of common stock. Convertible securities have general characteristics
similar to both debt obligations and equity securities. Although to a lesser
extent than with debt obligations generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends
to increase as interest rates decline. In addition, because of the conversion
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stock, and therefore,
also will react to variations in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities
tend to rise as a reflection of the value of the underlying common stock. While
no securities investments are without risk, investments in convertible
securities generally entail less risk than investments in common stock of the
same issuer.
As debt obligations, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all debt obligations, there can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non- convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to
benefit from increases in the market price of the underlying common stock.
There can be no assurance of capital appreciation, however, because the market
value of securities will fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, 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 have lower ratings than similar non-convertible
securities.
DEBT OBLIGATIONS
In General - Debt obligations in which the Fund may invest will be
investment-grade debt obligations, although the Fund may invest up to 5% of its
assets in non-investment-grade debt obligations. The market value of all debt
obligations is affected by changes in the prevailing interest rates. The market
value of such instruments generally reacts inversely to interest rate changes.
If the prevailing interest rates decrease, the market value of debt obligations
generally increases. If the prevailing interest rates increase, the market
value of debt obligations generally decreases. In general, the longer the
maturity of a debt obligation, the greater its sensitivity to changes in
interest rates.
Investment-grade debt obligations include 1) bonds or bank
obligations rated in one of the four highest rating categories by any
nationally recognized statistical rating organization ("NRSRO") (e.g.,
Moody's Investors Service, Inc. or Standard & Poor's Ratings Group
("Standard & Poor's")); 2) U.S. government securities (as described below);
3) commercial paper rated in one of the three highest ratings categories of
any NRSRO; 4) short-term bank obligations that are rated in one of the three
highest categories by any NRSRO, with respect to obligations maturing in one
year or less; 5) repurchase agreements involving investment-grade debt
obligations; or 6) unrated debt obligations which are determined by the Adviser
or a Subadviser to be of comparable quality.
All ratings are determined at the time of investment. Any subsequent
rating downgrade of a debt obligation will be monitored by the Adviser or a
Subadviser to consider what action, if any, the Fund should take consistent
with its investment objective; such event will not automatically require the
sale of the downgraded securities. Securities rated in the fourth highest
category by an NRSRO, although considered investment-grade, have speculative
characteristics and may be subject to greater fluctuations in value than
higher-rated securities. Non-investment-grade debt obligations include 1)
securities rated as low as C by Standard & Poor's or its equivalents; 2)
commercial paper rated as low as C by Standard & Poor's or its equivalents; or
3) unrated debt securities judged to be of comparable quality by the Adviser or
a Subadviser.
6
<PAGE> 19
Repurchase Agreements - The Fund may engage in repurchase agreement
transactions as long as the underlying securities are of the type that the Fund
would be permitted to purchase directly. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for
a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed upon price and time, thereby determining the yield during the
Fund's holding period. The Fund will enter into repurchase agreements with
respect to securities in which it may invest with member banks of the Federal
Reserve System or certain non-bank dealers. Under each repurchase agreement the
selling institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than their repurchase price.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities. The Adviser or a
Subadviser, acting under the supervision of the Board of Trustees, reviews the
creditworthiness of those banks and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate these risks. See "Repurchase Agreements"
in the Statement of Additional Information.
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 government include U.S. Treasury
obligations, such as Treasury bills, notes, and bonds. Securities issued by
government agencies or instrumentalities include, but are not limited to,
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 and the Tennessee Valley Authority, 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 International Bank for
Reconstruction and Development, whose securities are supported only
by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Fund for hedging or risk
management purposes or for any other permissible purposes consistent with the
Fund's investment objective. Derivative instruments are securities or
agreements whose value is based on the value of some underlying asset, for
example, securities, currencies, or reference indices. Options, futures, and
options on futures transactions are considered derivative transactions.
Derivatives generally have investment characteristics that are based upon
either forward contracts (under which one party is obligated to buy and the
other party is obligated to sell an underlying asset at a specific price on a
specified date) or option contracts (under which the holder of the option has
the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to corresponding losses due to
adverse movements in the value of the underlying asset. The seller of an
option-based derivative generally will receive fees or premiums but generally
is exposed to losses due to 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. In addition to options, futures, and options
on futures transactions, derivative transactions may include short sales
against the box, in which the Fund sells a security it owns for delivery at a
future date. Derivative transactions may also include forward currency
contracts and foreign currency exchange-related securities.
Derivative transactions in which the Fund may engage include the
writing of covered put and call options on securities and the purchase of put
and call options thereon, the purchase of put and call options on securities
indexes and exchange-traded options on currencies and the writing of put and
call options on securities indexes. The Fund may enter into spread transactions
and swap agreements. The Fund also may buy and sell financial futures contracts
which may include interest-rate futures, futures on currency exchanges and
stock and bond index futures contracts. The Fund may enter into
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any futures contracts and related options without limit for "bona fide
hedging" purposes (as defined in Commodity Futures Trading Commission
regulations) and for other permissible purposes, provided that aggregate
initial margin and premiums on positions engaged in for purposes other than
"bona fide hedging" will not exceed 5% of its net asset value, after taking
into account unrealized profits and losses on such contracts. The Fund may
also enter into forward currency contracts to purchase or sell foreign
currencies.
Derivative instruments may be exchange-traded or traded in OTC
transactions between private parties. OTC transactions are subject to the
credit risk of the counterparty to the instrument and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. When required by guidelines of the Securities
and Exchange Commission ("SEC"), the Fund will set aside permissible liquid
assets or securities positions that substantially correlate to the market
movements of the derivatives transactions in a segregated account to secure its
obligations under derivative transactions. Segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations. In order to maintain its required cover for a derivative
transaction, the Fund may need to sell portfolio securities at disadvantageous
prices or times since it may not be possible to liquidate a derivative
position.
The successful use of derivative transactions by the Fund is dependent
upon a Subadviser's ability to correctly anticipate trends in the underlying
asset. Hedging transactions are subject to risks; if a Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect
correlation between the Fund's derivative transactions and the instruments
being hedged.
SHORT SALES AGAINST THE BOX
The Fund may also engage in short selling against the box as long
as no more than 15% of the value of the Fund's net assets is in deposits on
short sales against the box at any one time.
HARD ASSET SECURITIES
The Fund may invest in equity securities of issuers which are directly
or indirectly engaged to a significant extent in the exploration, development
or distribution of one or more of the following: precious metals; ferrous and
non-ferrous metals; gas, petroleum, petrochemical and/or other hydrocarbons;
forest products; real estate and other basic non-agricultural commodities
(collectively, "Hard Assets"). The production and marketing of Hard Assets may
be affected by actions and changes in governments. In addition, Hard Asset
securities may be cyclical in nature. During periods of economic or financial
instability, the securities of some Hard Asset companies may be subject to
broad price fluctuations, reflecting the volatility of energy and basic
materials prices and the possible instability of supply of various Hard Assets.
In addition, some Hard Asset companies may also be subject to the risks
generally associated with extraction of natural resources, such as the risks of
mining and oil drilling, and the risks of the hazards associated with natural
resources, such as fire, drought, increased regulatory and environmental costs,
and others. Securities of Hard Asset companies may also experience greater
price fluctuations than the relevant Hard Asset. In periods of rising Hard
Asset prices, such securities may rise at a faster rate, and, conversely, in
time of falling Hard Asset prices, such securities may suffer a greater price
decline.
REAL ESTATE SECURITIES
Although the Fund will not invest in real estate directly, it may
invest in equity securities of real estate investment trusts ("REITs") and
other real estate industry companies or companies with substantial real estate
investments and therefore, the 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. REITs are not taxed on income
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<PAGE> 21
distributed to shareholders provided they comply with several requirements of
Internal Revenue Code, as amended (the "Code").
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that are
illiquid, in that they cannot be expected to be sold within seven days at
approximately the price at which they are valued. Due to the absence of an
active trading market, the Fund may experience difficulty in valuing or
disposing of illiquid securities. Each Subadviser will determine the liquidity
of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, these
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and, therefore, subject to the Fund's 15% limitation on illiquid
securities.
Non-publicly traded securities (including Rule 144A securities) may
involve a high degree of business and financial risk which may result in
substantial losses. The securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Fund. In particular, Rule 144A securities may be resold
only to qualified institutional buyers in accordance with Rule 144A under the
1933 Act. Unregistered securities may also be sold abroad pursuant to
Regulation S under the 1933 Act. Companies whose securities are not publicly
traded are not subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
Acting pursuant to guidelines established by the Trustees of the Trust, some
restricted securities and Rule 144A securities may be considered liquid.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
The Fund may invest without limitation in securities purchased on a
when-issued or delayed delivery basis. Although the payment and interest terms
of these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows the Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when the Fund purchases a when-issued security, it immediately assumes the risk
of ownership, including the risk of price fluctuation until the settlement
date.
The greater the 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 securities may involve the additional risk that
the yield available in the market when the delivery occurs may be higher or the
market price lower than that obtained at the time of commitment. Although the
Fund may be able to sell these securities prior to the delivery date, it will
purchase when-issued securities for the purpose of actually acquiring the
securities, unless after entering into the commitment a sale appears desirable
for investment reasons. When required by SEC guidelines, the Fund will set
aside permissible liquid assets in a segregated account to secure its
outstanding commitments for when-issued securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements with the
same parties with whom it may enter into repurchase agreements. Reverse
repurchase agreements involve the sale of securities held by the Fund pursuant
to its agreement to repurchase them at a mutually agreed upon date, price and
rate of interest. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing cash or liquid high-grade debt 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). The 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
Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision. Reverse repurchase agreements
are considered to be borrowings under the Investment Company Act of 1940 (the
"1940 Act").
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<PAGE> 22
LENDING PORTFOLIO SECURITIES
From time to time, the Fund may lend its portfolio securities to
brokers, dealers and other financial institutions needing to borrow securities
to complete certain transactions. In connection with such loans, the Fund will
receive collateral consisting of cash, U.S. Government securities or
irrevocable letters of credit. Such collateral will be maintained at all times
in an amount equal to at least 100% of the current market value of the loaned
securities. The Fund can increase its income through the investment of such
collateral. The Fund continues to be entitled to payments in amounts equal to
the interest, dividends or other distributions payable on the loaned security
and receives interest on the amount of the loan. Such loans will be terminable
at any time upon specified notice. The Fund might experience risk of loss if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund.
BORROWING MONEY
As a fundamental policy, the Fund is permitted to borrow to the extent
permitted under the 1940 Act. However, the Fund currently intends to borrow
money only for temporary or emergency purposes (but not for leverage or the
purchase of investments, except when entering into reverse repurchase
agreements as described above), in an amount up to 33-1/3% of the value of the
Fund's total assets (including the amount borrowed) valued at the time the
borrowing is made.
NON-DIVERSIFIED STATUS
The Fund is classified as non-diversified under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in securities of a single issuer. The Fund's
investments will be limited, however, in order to qualify as a "regulated
investment company" for purposes of the Code. To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (a) not more than 25% of the market
value of its total assets will be invested in the securities of a single
issuer, and (b) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer. Being non-diversified
means that the Fund may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, its
return may fluctuate to a greater extent than that of a diversified company as
a result of changes in the financial condition or in the market's assessment of
the issuers.
PORTFOLIO TURNOVER
The Fund will attempt to purchase securities with the intent of
holding them for investment but may purchase and sell portfolio securities
whenever the Adviser or a Subadviser believes it to be in the best interests of
the Fund. The Fund will not consider portfolio turnover rate a limiting factor
in making investment decisions consistent with its investment objective and
policies.
The portfolio turnover rate for the Fund is not expected to exceed
150%. Higher turnover rates will generally result in higher transaction costs
to the Fund, as well as higher brokerage expenses and higher levels of capital
gains. The portfolio turnover rates for the Fund may vary greatly from year to
year and within a particular year.
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MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction
of its Board of Trustees.
The Board of Trustees sets and reviews policies regarding the
operation of the Trust whereas the officers perform the daily functions of the
Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement,
Nationwide Financial Services, Inc., One Nationwide Plaza, Columbus, Ohio
43216, oversees the investment of the assets and, subject to the supervision of
the Trustees, provides various administrative services and supervises the daily
business affairs of the Fund.
Subject to the supervision and direction of the Trustees, the Adviser
also determines the allocation of assets among the Subadvisers and evaluates
and monitors the performance of Subadvisers. The Adviser is also authorized to
select and place portfolio investments on behalf of the Fund; however, the
Adviser generally intends to limit its direct portfolio management to the
investment of a portion of the Fund's assets in cash or money market
instruments.
The Adviser provides to the Fund investment management evaluation
services principally by performing initial due diligence on prospective
Subadvisers for the Fund and thereafter monitoring the performance of the
Subadvisers through quantitative and qualitative analysis as well as periodic
in-person, telephonic and written consultations with the Subadvisers. The
Adviser has responsibility for communicating performance expectations and
evaluations to the Subadvisers and ultimately recommending to the Trust's Board
of Trustees whether a Subadviser's contract should be renewed, modified or
terminated; however, the Adviser does not expect to recommend frequent changes
of Subadvisers. The Adviser will regularly provide written reports to the Board
of Trustees regarding the results of its evaluation and monitoring functions.
Although the Adviser will monitor the performance of the Subadvisers, there is
no certainty that any Subadviser or the Fund will obtain favorable results at
any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of
Nationwide Life Insurance Company, which is wholly owned by Nationwide
Corporation, a holding company in the Nationwide Insurance Enterprise. The Fund
pays to the Adviser a fee at the annual rate of 1.00% of the Fund's average
daily net assets. The Adviser has voluntarily agreed to waive all or part of
its fees in order to limit the Fund's total operating expenses to not more than
1.25% of the Fund's average daily net assets on an annual basis. These fee
waivers are voluntary and may be terminated at any time.
THE SUBADVISERS - Subject to the supervision of the Adviser and the
Trustees, the Subadvisers each manage separate portions of the Fund's assets in
accordance with the Fund's investment objective and policies. With regard to
the portion of the Fund's assets allocated to it, each Subadviser shall make
investment decisions for the Fund and in connection with such investment
decisions shall place purchase and sell orders for securities. No Subadviser
shall have any investment responsibility for any portion of the Fund's assets
not allocated to it for investment management. For the investment management
services they provide to the Fund, each Subadviser receives a fee from the
Adviser at the annual rate of .60% of the average daily net assets of the
portion of the Fund managed by that Subadviser.
Below is a brief description of each of the subadvisers.
THE DREYFUS CORPORATION. Dreyfus, located at 200 Park Avenue, New
York, New York 10166, was formed in 1947 and serves as one of the Fund's
Subadvisers. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which
is a wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of
February 29,1996, Dreyfus managed or administered approximately $85 billion in
assets for approximately 1.7 million investor accounts nationwide.
Mellon is a publicly owned multibank holding company incorporated
under Pennsylvania law in 1971 and registered under the Federal Bank Holding
Company Act of 1956, as amended. Mellon provides a comprehensive range of
financial products and services in domestic and selected international markets.
Mellon is among the twenty-five largest bank holding companies in the United
States based on total assets. Mellon's principal wholly-owned subsidiaries are
Mellon Bank, N.A., Mellon Bank (DE) National Association, Mellon Bank (MD), The
Boston Company, Inc. AFCO Credit Corporation and a number of companies known as
Mellon Financial Services Corporations. Through its subsidiaries, including
Dreyfus, Mellon managed approximately $233 billion in assets as of December 31,
1995, including approximately $81 billion in proprietary mutual fund assets. As
of December 31, 1995, various subsidiaries of Mellon provided non-investment
services, such as
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<PAGE> 24
custodial or administration services, for approximately $786 billion in assets
including approximately $60 billion in mutual fund assets.
The primary portfolio manager of the portion of the Fund's
portfolio managed by Dreyfus is Thomas A. Frank. Mr. Frank joined Dreyfus
in June 1985 and currently serves as Senior Portfolio Manager and Director
of Equity Research responsible for directing all equity research
functions. Mr. Frank also serves as Portfolio Manager for various investment
companies advised or administered by Dreyfus, including Dreyfus New Leaders
Fund, Inc.
Prior to joining Dreyfus, Mr. Frank served for twelve years at A.G.
Becker and Company, beginning in 1969 as a securities analyst, and eventually
becoming a shareholder and senior line officer in that firm's institutional
department. From 1981 through 1984, Mr. Frank served as Vice President, Special
Equities Group, at Chase Investors Management Corporation, an affiliate of The
Chase Manhattan Bank, N.A., where he shared management responsibility for
investment in smaller capitalization securities for pension, profit sharing and
foundation accounts totalling approximately $1 billion. From 1984 through 1985,
Mr. Frank was a portfolio manager at Neuberger & Berman, with primary
responsibility for overseeing that firm's internal research effort. Mr. Frank
received a B.A. from Williams College and attended the Columbia University
Graduate School of Business Administration.
NEUBERGER & BERMAN L.P. Neuberger & Berman also serves as a
sub-adviser to the Fund. Neuberger & Berman and its predecessor firms have
specialized in the management of no-load mutual funds since 1950.
Neuberger & Berman and its affiliates manage securities accounts that
had approximately $40 billion of assets as of December 31, 1995. Neuberger &
Berman is a member firm of the NYSE and other principal exchanges and acts as
the Fund's principal broker in the purchase and sale of their securities for
that portion of the Fund's portfolio managed by Neuberger & Berman.
Stephen E. Milman, who is a Vice President of Neuberger & Berman
Management, Inc. ("N&B Management", an affiliate of Neuberger & Berman) and a
general partner of Neuberger & Berman, is the Manager of the Small Cap Group of
Neuberger & Berman. He has overall responsibility for activities of the Small
Cap Group, providing guidance and reviewing portfolio strategy and structure.
Judith M. Vale, who has been a member of the Small Cap Group since 1992 and a
Vice President of N&B Management since November 1994, is primarily responsible
for the day-to-day management of Neuberger & Berman's advisory activities for
the Fund. Ms. Vale also has primary responsibility for day-to-day management of
the Neuberger & Berman Genesis Fund. Ms. Vale was a portfolio manager for
another investment management group from 1990 to 1992, and was a senior fund
analyst at another prominent investment adviser from 1987 to 1990.
STRONG CAPITAL MANAGEMENT, INC. Strong, which also serves as one of
the Subadvisers for the Fund, began conducting business in 1974. Since then,
its principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and
profit-sharing plans. Strong also acts as investment advisor for each of the
mutual funds within the Strong Family of Funds. As of March 31, 1996, Strong
had over $18 billion under management. Strong's principal mailing address is
P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong is the
controlling shareholder of Strong.
Ronald C. Ognar is responsible for Strong's portfolio management
activities for the Fund. Mr. Ognar, a Chartered Financial Analyst with more
than 25 years of investment experience, joined Strong in April 1993 after two
years as a principal and portfolio manager with RCM Capital Management. For
approximately three years prior to that, he was a portfolio manager at Kemper
Financial Services in Chicago. Mr. Ognar began his investment career in 1968 at
LaSalle National Bank in Chicago after serving two years in the U.S. Army. He
received his bachelor's degree in accounting from the University of Illinois in
1968. In addition to his portfolio management duties for the Fund, he also
manages the Strong Growth Fund and co-manages the Strong Total Return Fund.
PICTET INTERNATIONAL MANAGEMENT LIMITED AND VAN ECK ASSOCIATES
CORPORATION. VEAC and PIML will together manage a portion of the Fund. VEAC is
located at 99 Park Avenue, New York, New York 10016. PIML is located at Cutlers
Gardens, 5 Devonshire Square, London, United Kingdom EC2M 4LD. PIML is
primarily responsible for managing the portion of the Fund's assets allocated
to the PIML and VEAC. PIML determines which securities are to be bought and
sold. VEAC, however, makes recommendations to PIML regarding Hard Asset
securities. VEAC will also make recommendations regarding the allocation among
each of the Hard Asset sectors. PIML is not obligated to act on VEAC's
recommendation's and the amount, if any, allocated to Hard Assets will be
determined by PIML. VEAC will also assist PIML on issues regarding determining
the liquidity of securities, portfolio diversification and matters involving
United States federal securities and tax law as they apply to management of the
Fund.
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PIML is an affiliate of Pictet & Cie ("Pictet"). Pictet was founded in
1805 and is the largest Private Swiss Bank as well as the leading specialist
investment bank domiciled in Europe. Pictet has a worldwide network of offices
employing over 200 investment professionals in Geneva, London, Zurich,
Luxembourg, Hong Kong, Tokyo, Montreal and Nassau. PIML has access to all of
Pictet's investment infrastructure. As of March 31, 1996, total assets under
management by Pictet and its affiliates, including PIML, on behalf of all
clients, was in excess of $40 billion.
In performing its investment management duties, PIML assigns a team of
managers led by a Chief Investment Officer. The primary portfolio managers for
the Fund are listed below. This team also performs similar functions for the
Van Eck Worldwide Insurance Trust, Worldwide Small Cap Fund and the Van Eck
Funds Global Small Cap Fund.
Nicholas Johnson is the Chief Investment Officer and Chief Investment
Officer for the portion of the Fund managed by PIML. Mr. Johnson is responsible
for all aspects of the investment process including global asset allocation.
Prior to joining PIML in 1993, Mr. Johnson specialized in Japanese and Asian
investments at Invesco MIM, where he had been head of international investment
responsible for investment operations outside of North America.
Jonathan Neill is a Senior Investment Manager for the portion of the
Fund managed by PIML. Mr. Neill is jointly responsible for worldwide small
companies and emerging markets. Prior to joining PIML in 1990, Mr. Neill worked
for two years with Mercury Asset Management as an investment manager
responsible for specialist international funds.
Douglas Polunin is also a Senior Investment Manager for the portion of
the Fund managed by PIML. Mr. Polunin joined PIML in 1989 and is jointly
responsible for worldwide small companies and emerging markets. Prior to
joining PIML, Mr. Polunin spent two and a half years with the Union Bank of
Switzerland in London where he was in charge of the Discretionary Portfolio
Management section. Before that, he spent four years as an equity analyst with
UBS in Switzerland.
Richard Yarlott is a Senior Investment Manager within the small
companies and emerging markets team and for the portion of the Fund managed by
PIML. His main responsibilities currently include asset allocation and
securities analysis on an international basis. Prior to joining PIML in 1994,
Mr. Yarlott worked for over ten years in banking, strategic consulting and
private investment. In 1985 he joined JP Morgan where he worked in structured
finance and merger and acquisition roles until 1990. He spent two years as a
principal for a private investment company, and subsequently worked for Marakom
Associates, a value-based consulting firm.
For VEAC, Derek van Eck assists PIML regarding the Hard Asset sector.
He is an Analyst and is Director of Global Investments and Executive Vice
President of VEAC. Mr. van Eck is also an officer and portfolio manager of
other mutual funds advised by VEAC, including Worldwide Hard Assets Fund.
WARBURG, PINCUS COUNSELLORS, INC. The Fund also employs Warburg as
a Subadviser to the Fund. Warburg is a professional investment counselling
firm which provides investment services to investment endowment funds,
foundations and other institutions and individuals. As of February 29,
1996, Warburg managed approximately $13.5 billion of assets including
approximately $7.5 billion of assets of twenty-six mutual funds.
Incorporated in 1970, Warburg is a wholly owned subsidiary of Warburg, Pincus
Counsellors G.P. ("Warburg G.P."), a New York general partnership. E.M.
Warburg, Pincus & Co., Inc. ("EMW") controls Warburg through its ownership
of a class of voting preferred stock of Warburg. Warburg G.P. has no
business other than being a holding company of Warburg and its subsidiaries.
Warburg's address is 466 Lexington Avenue, New York, New York 10017-3147.
The portfolio managers for Warburg's portion of the Fund are
Elizabeth B. Dater and Stephen J. Lurito. Ms. Dater and Mr. Lurito are also
co-portfolio managers of Warburg, Pincus Emerging Growth Fund and Warburg,
Pincus Small Company Growth Portfolio, a portfolio of Warburg, Pincus Trust.
Ms. Dater is a managing director of EMW and has been a portfolio manager of
Warburg since 1978. Mr. Lurito is a managing director of EMW and has been
with Warburg since 1987, before which time he was a research analyst at
Sanford C. Bernstein & Company, Inc.
OTHER SERVICES
NFS provides the accounting services, including daily valuation of
each Fund's shares, preparation of financial statements, taxes, and regulatory
reports.
The Transfer and Dividend Disbursing Agent, Nationwide Investors
Services, Inc., ("NIS"), One Nationwide Plaza, Columbus, Ohio 43216, serves as
transfer agent and dividend disbursing agent for the Trust. NIS is a wholly
owned subsidiary of NFS.
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INVESTMENT IN FUND SHARES
An insurance company purchases the shares of the Fund at the Fund's
net asset value using purchase payments received on Policies issued by
Accounts. These Accounts are funded by shares of the Fund. There is no sales
charge. All shares are sold at net asset value.
Shares of the Fund are currently sold only to separate accounts of
Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance
Company, One Nationwide Plaza, Columbus, Ohio 43216, to fund the benefits under
variable insurance or annuity policies.
All investments in the Fund are credited to the shareholder's account
in the form of full and fractional shares of the Fund (rounded to the nearest
1/1000 of a share). The Trust does not issue share certificates. Initial and
subsequent purchase payments allocated to the Fund are subject to the limits
applicable to the policies.
SHARE REDEMPTION
An insurance company separate account redeems shares to make benefit
or surrender payments under the terms of its Policies. Redemptions are
processed on any day on which the Trust is open for business and are effected
at net asset value next determined after the redemption order, in proper form,
is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as
of 4:00 P.M. on each business day the New York Stock Exchange is open and on
such other days as the Board determines and on any other day during which there
is a sufficient degree of trading in the Fund's portfolio securities that the
net asset value of the Fund is materially affected by changes in the value of
portfolio securities. The Trust will not compute net asset value on customary
national business holidays, including the following: Christmas, New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, and
Thanksgiving. The net asset value per share is calculated by adding the value
of all securities and other assets of a Fund, deducting its liabilities, and
dividing by the number of shares outstanding.
The Trust may suspend the right of redemption only under the following
unusual circumstances:
- when the New York Stock Exchange is closed (other than
weekends and holidays) or trading is restricted;
- when an emergency exists, making disposal of portfolio
securities or the valuation of net assets not reasonably
practicable; or
- during any period when the Securities and Exchange
Commission has by order permitted a suspension of
redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Funds
will be paid as dividends in March, June, September, and December. In those
years in which sales of the Fund's portfolio securities result in net realized
capital gains, the Fund will distribute such gains to its shareholders with the
December dividend.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest of the Fund and to divide or combine such shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in the Trust. Each share of the Fund represents an equal
proportionate interest in that Fund with each other share. The Trust reserves
the right to create and issue a number of different Funds. In that case, the
shares of each Fund would participate equally in the earnings, dividends, and
assets of the particular Fund, but shares of all Funds would vote together in
the election of Trustees. Upon liquidation of a Fund, its shareholders are
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share
held. Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. Although the sole shareholders
of the Trust are Nationwide Life Insurance Company and Nationwide Life and
Annuity Insurance Company, under current law, the life insurance company
shareholders are required to request voting instructions from policyholders and
must vote Trust shares
14
<PAGE> 27
held in proportion to the voting instructions received. No amendment may be
made to the Declaration of Trust without the affirmative vote of a majority of
the outstanding shares of the Trust. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- designate series of the Trust;
- change the name of the Trust; or
- supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid
and nonassessable, except as set forth below. In regard to termination, sale of
assets, or changes of investment restrictions, the right to vote is limited to
the holders of shares of the particular Fund affected by the proposal. When a
majority is required, it means the lesser of 67% or more of the shares present
at a meeting when the holders of more than 50% of the outstanding shares are
present or represented by proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be
directed to the Trust at the telephone number or address shown on the cover
page of this Prospectus.
ADVERTISING PERFORMANCE FOR THE FUND
The Fund may use historical performance in advertisements, sales
literature, and the prospectus. Such figures will include quotations of average
annual total return for the most recent one, five, and ten year periods (or the
life of the Fund if less). Average annual total return represents the rate
required each year for an initial investment to equal the redeemable value at
the end of the specific period. Average annual total return reflects
reinvestment of all distributions. The total return (not annualized) for the
period from October 23, 1995 (inception) through December 31, 1995 was 14.4%.
TAX STATUS
The Trust's policy is to qualify as a regulated investment company and
to meet the requirements of Subchapter M of the Code. The Fund intends to
distribute all its taxable net investment income and capital gains to
shareholders, and therefore, will not be required to pay any federal income
taxes.
Because each Fund of the Trust is treated as a separate entity for
purposes of the regulated investment company provisions of the Code, the
assets, income, and distributions of the Fund are considered separately for
purposes of determining whether or not the Fund qualifies as a regulated
investment company. The Fund intends to comply with the diversification
requirements currently imposed by the Internal Revenue Service on separate
accounts of insurance companies as a condition of maintaining the tax-deferred
status of the Policies. See the Statement of Additional Information for more
specific information.
Dividends and interest received by the Fund may be subject to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Policy holders will bear the cost of foreign tax
withholding in the form of increased expenses to the Fund, but generally will
not be able to claim a foreign tax credit or deduction for foreign taxes paid
by the Fund by reason of the tax-deferred status of the Policies.
The tax treatment of payments made by a separate account to a Policy
holder is described in the separate account prospectus.
15
<PAGE> 28
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Financial Highlights 2
Sale of Fund Shares 3
Investment Objective and Policies 3
Investment Techniques, Considerations and Risk Factors 4
Management of the Trust 11
Investment in Fund Shares 14
Share Redemption 14
Net Income and Distributions 14
Additional Information 14
Advertising Performance for the Fund 15
Tax Status 15
INVESTMENT ADVISER
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43216
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
One Nationwide Plaza
Columbus, Ohio 43216
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Rath & Dietrich
One Nationwide Plaza
Columbus, Ohio 43216
</TABLE>
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<PAGE> 29
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
NATIONWIDE SEPARATE ACCOUNT TRUST
--TOTAL RETURN FUND
--CAPITAL APPRECIATION FUND
--GOVERNMENT BOND FUND
--MONEY MARKET FUND
--SMALL COMPANY FUND
This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than that set forth in the
Prospectuses for the Funds and should be read in conjunction with the
Prospectuses, dated May 1, 1996. The Prospectuses may be obtained from
Nationwide Life Insurance Company, One Nationwide Plaza, Columbus, Ohio 43216,
or by calling (614) 249-5134.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- --------------------------------------------------------------------------------
<S> <C>
General Information and History 1
Investment Objectives and Policies 1
Investment Restrictions 19
Major Shareholders 22
Trustees and Officers of the Trust 23
Calculating Yield - The Money Market Fund 24
Calculating Yield and Total Return-Non-Money Market Funds 24
Investment Adviser and Other Services 25
Brokerage Allocations 28
Purchases, Redemptions and Pricing of Shares 30
Additional Information 31
Tax Status 32
Tax Consequences for the Small Company Fund 33
Tax Consequences to Shareholders 34
Appendix A - Bond Ratings 35
Independent Auditors' Report 44
Financial Statements 45
</TABLE>
GENERAL INFORMATION AND HISTORY
Nationwide Separate Accounts Trust is an open-end investment company
organized under the laws of Massachusetts, by a Declaration of Trust, dated June
30, 1981, as amended October 22, 1981, September 3, 1982, April 16, 1987, May 1,
1992, August 9, 1995 and November 3, 1995. The Trust offers shares in five
separate mutual funds, each with its own investment objective.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds'
investment objectives and policies discussed in the Prospectuses.
The investment policies and types of permitted investments described
here may be changed without prior approval by, or notice to, the shareholders.
There is no guarantee that the objectives will be realized.
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<PAGE> 30
- --TOTAL RETURN FUND
This Fund's investment objective is to obtain a reasonable, long term
total return on invested capital from a flexible combination of dividend return
and capital gains. The Fund seeks to achieve its objective through investments
in common stocks, convertible issues, money market instruments, and bonds, with
a primary emphasis on common stocks.
While it is the intention of the Fund to invest in common stocks or in
issues convertible to common stock, there are no restrictive provisions covering
the proportion of one or another class of securities that may be held, or other
restriction, other than those stated in the investment restrictions.
- --CAPITAL APPRECIATION FUND
The Fund is designed for investors who are interested in long-term
growth. The Fund seeks to meet its objectives primarily through a diversified
portfolio of the common stock of companies which the investment manager
determines have a better-than-average potential for sustained capital growth
over the long term.
While it is the intention of the Fund to invest in common stocks or in
issues convertible to common stock, there are no restrictive provisions covering
the proportion of one or another class of securities that may be held, or other
restriction, other than those stated in the investment restrictions.
The investment manager will focus mainly on a company's or industry's
potential for long term growth, with dividend and interest income being
secondary in importance. The manager's evaluation of a company or industry will
be based more on probable future earnings, relative financial strength and
competitive position. The manager believes this approach will provide a greater
return potential over the long run than simply seeking current dividend or
interest income. The Fund's portfolio will not be limited to any particular type
of company or industry.
- --GOVERNMENT BOND FUND
The investment objective of the Government Bond Fund is to provide as
high a level of income as is consistent with the preservation of capital. It
seeks to achieve its objective by investing in a diversified portfolio of
securities issued or backed by the U.S. Government, it agencies or
instrumentalities.
These securities are of varying types which include but are not limited
to:
* Treasury Notes And Bonds - These are direct obligations of the
U.S. Government. New issues of notes mature in one to ten years
while bonds generally have a maturity of ten years or more.
* Treasury Bills - These are direct obligations of the U.S.
Government backed by the full faith and credit of the United
States and mature in one year or less.
* Securities Issued By Instrumentalities of the U.S. Government -
These securities are issued by federally-chartered
instrumentalities. Some of these securities are guaranteed by the
United States Treasury or are supported by the issuer's right to
borrow from the Treasury and are backed by the credit of the
Federal instrumentality itself. Some of these instrumentalities
(listed for example purposes only) are:
* Bank for Cooperatives (COOP)
* Federal Home Loan Banks (FHLB)
* Federal National Mortgage Association (FNMA)
* Government National Mortgage Association (GNMA)
* Tennessee Valley Authority (TVA)
* Farmers Home Administration (FHA)
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<PAGE> 31
The Government Bond Fund will normally invest at least 65% of its
assets in bonds issued by the U.S. Government, and its agencies and
instrumentalities. These bonds pay interest at regular intervals, usually
semi-annually, and pay principal at maturity.
The Government Bond Fund may invest up to 35% of its assets in zero
coupon securities or mortgage-related securities and up to 20% of its assets in
securities purchased on a "when-issued" or on a "forward delivery" basis,
provided those securities are issued or backed by the U.S. Government, its
agencies or instrumentalities. The Government Bond Fund may also enter into
repurchase agreements in any of the securities described above.
The Government Bond Fund will normally invest no more than 20% of its
assets in repurchase agreements or in U.S. Government Securities maturing in
less than one year. For temporary defensive purposes, however the Fund may
invest up to 100% of its assets in these securities.
There is a minimal risk involved in the purchase of U.S. Government or
U.S. Government guaranteed securities. Securities issued by U.S. Government
agencies or instrumentalities, while perhaps having the implicit backing of the
U.S. Government, may not have an explicit guarantee of the payment of principal
and interest.
The value of shares of the Government Bond Fund will vary inversely
with changes in interest rates. As with any fixed income investment, interest
rate risk does exist; i.e., when interest rates decline, the market value of a
portfolio can be expected to rise; conversely, when interest rates rise, the
market value of the portfolio can be expected to fall. While the Government Bond
Fund will engage in portfolio trading to manage this risk (i.e., shortening the
average maturity of the portfolio in anticipation of a rise in interest rates so
as to minimize depreciation of principal, or lengthening the portfolio in
anticipation of a decline in interest rates so as to maximize appreciation of
capital) there is no assurance that capital will be preserved. Thus, the
Government Bond Fund is designed for those willing to accept market fluctuations
to obtain income.
- --MONEY MARKET FUND
The investment objective of this Fund is to seek as high a level of
current income as it considered consistent with the preservation of capital and
liquidity through investments in a portfolio of money market instruments with
remaining maturities of 397 days or less. The Fund seeks to achieve its
objective by investing primarily in instruments receiving a rating in one of the
two highest categories by the following six nationally recognized statistical
rating organizations ("NRSROs"): Duff and Phelps, Inc. ("D&P"), Fitch Investors
Services, Inc. ("Fitch"), Moody's Investors Service Inc. ("Moody's"), Standard &
Poor's Ratings Group ("Standard & Poor's"), IBCA Limited and its affiliate, IBCA
Inc. ("IBCA"), and Thomson Bank Watch ("Thomson"). See Appendix A for a further
description of the NRSRO ratings.
The Fund may invest in the following instruments:
* obligations issued or guaranteed as to interest and principal by
the U.S. government, its agencies, or instrumentalities, or any
federally chartered corporation.
* repurchase agreements, subject to the restrictions set forth under
"Investment Restrictions." Potential risks associated with
investment in repurchase agreements are twofold: (a) in the event
of default of an issuer and a decrease in the value of the
underlying securities below the repurchase price, the Fund could
suffer a loss, and (b) in the event of an issuer's bankruptcy, the
Fund's ability to dispose of underlying securities could be
delayed.
* obligations of banks which at the date of investment are rated A2
or better by IBCA or TBW1 by Thomson. Obligations of savings and
loan associations (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital,
surplus, and undivided profits (as of the date of their most
recently published financial statements) in excess of $100
million; and obligations of other banks or savings and loan
associations if such obligations are insured by the
3
<PAGE> 32
Federal Deposit Insurance Corporation, provided that not more than
10% of the Fund's total assets shall be invested in such insured
obligations.
* commercial paper which at the date of investment is rated Duff 1
or Duff 2, by D&F, F-1 or F-2 by Fitch, P-1 or P-2 by Moody's, or
A-1 or A-2 by Standard & Poor's, or if not rated, is issued and
guaranteed as to payment of principal and interest by companies
which at the date of investment have an outstanding debt issue
rated AA or better by D&F, AA or better by Fitch, Aa or better by
Moody's, or AA or better by Standard & Poor's.
* up to 5% of its total assets in commercial paper which at the date
of investment is rated F-2 by Fitch, Duff 2 by D&P, P-2 by
Moody's, or A-2 by Standard and Poor's. However, the Fund is
limited as to the amount it may invest in the commercial paper of
a single issuer to the greater of 1% of the Fund's total assets or
$1 million.
* short-term (maturity in 397 days or less) corporate obligations
which at the date of investment are rated AA or better by D&F, AA
or better by Fitch, Aa or better by Moody's, or AA or better by
Standard & Poor's.
* bank loan participation agreements representing corporations and
banks having a short-term rating, at the date of investment, of
F-1 or F-2 by Fitch, Duff 1 or Duff 2 by D&P, P-1 or P-2 by
Moody's or A-1 or A-2 by Standard & Poor's, 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.
All the assets of the Fund will be invested in obligations with stated
remaining maturities of 397 days or less and which will be held to maturity. The
Fund will, to the extent feasible, make portfolio investments primarily in
anticipation of, or in response to, changing economic and financial conditions.
The Fund will attempt to maximize the return on its investments through careful
analysis of a wide range of investments available and different yield
relationships existing among various sectors of the market. The average dollar
weighted maturity of the Fund's investments may not exceed 90 days. There can be
no assurance that the Fund's investment objective will be achieved.
The Fund may invest in the securities of foreign corporate issuers and
in the securities of foreign branches of U.S. banks, such as negotiable
certificates of deposit (Eurodollars) in U.S. dollar denominations which at the
date of investment are rated A1 or A2 by IBCA or TBW1 by Thomson. Because of
this, investment in the Fund involves risks that are different in some respects
from an investment in a fund which invests only in debt obligations of U.S.
domestic issuers. Such risks may include future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities held in the portfolio, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on securities in the
portfolio.
SMALL COMPANY FUND
The Small Company Fund seeks long-term growth of capital. It seeks to
achieve this objective by investing primarily in equity securities of both
domestic and foreign small market capitalization companies ("small company
stocks"). To attempt to achieve this objective, the Adviser has hired a number
of subadvisers to direct the day-to-day management of the Small Company Fund.
The following information supplements the discussion of the Fund's objectives,
policies and techniques that are described in the Fund's prospectus under
"INVESTMENT OBJECTIVES AND POLICIES" and "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS."
Special Situation Companies. The Small Company Fund may invest in the
securities of "special situation companies," which include those involved in an
actual or prospective acquisition or consolidation; reorganization;
4
<PAGE> 33
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the company's stock. If the actual or prospective situation does not materialize
as anticipated, the market price of the securities of a "special situation
company" may decline significantly. The Fund believes, however, that if a
Subadviser analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, the Fund may achieve
capital growth. There can be no assurance however, that a special situation that
exists at the time the Fund makes its investment will be consummated under the
terms and within the time period contemplated.
Foreign Securities. Investors in the Small Company Fund should
recognize that investing in foreign securities 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 the Fund may hold securities
and funds in foreign currencies, the 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 the Fund endeavors to achieve the most favorable net
results on their 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 the Fund may be subject to foreign
government taxes, higher custodian fees and dividend collection fees which could
reduce the yield on such securities.
Investments may be made from time to time by the Small Company Fund in
companies in developing countries as well as in developed countries. Although
there is no universally accepted definition, a developing country is generally
considered to be a country which is in the initial stages of industrialization.
Shareholders should be aware that investing in the equity and fixed income
markets of developing countries involves exposure to unstable governments,
economies based on only a few industries, and securities markets which trade a
small number of securities. Securities markets of developing countries tend to
be more volatile than the markets of developed countries; however, such markets
have in the past provided the opportunity for higher rates of return to
investors.
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 the 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
5
<PAGE> 34
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 of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of the United
States. Certain of such countries have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of the
Fund's investments in those countries and the availability to the fund of
additional investments in those countries.
Economies of developing countries may differ favorably or unfavorably
from the United States economy in such respects as rate of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As export-driven economies,
the economies of countries in the Asia Region are affected by developments in
the economies of their principal trading partners. Hong Kong, Japan and Taiwan
have limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of price
and supply.
Certain developing countries do not have comprehensive systems of laws,
although substantial changes have occurred in many such countries in this regard
in recent years. Laws regarding fiduciary duties of officers and directors and
the protection of shareholders may not be well developed. Even where adequate
law exists in such developing countries, it may be impossible to obtain swift
and equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction.
Trading in futures contracts traded on foreign commodity exchanges may
be subject to the same or similar risks as trading in foreign securities.
Depositary Receipts. As indicated in the Fund's prospectus, the Small
Company Fund may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs") 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, while EDRs (also referred to as Continental
Depositary 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. For purposes of the Fund's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership of common stock will be
treated as common stock.
The Small Company Fund may invest in depositary receipts through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security. Holders of unsponsored depositary receipts
generally bear all the costs of such facilities and the depositary of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities.
Debt Obligations. While the emphasis of the Small Company Fund's
investment is on common stocks and other equity securities (including preferred
stocks and securities convertible into or exchangeable for common stocks), it
may also invest in money market instruments, U.S. Government or Agency
securities, and corporate bonds and debentures receiving one of the four highest
ratings from a nationally recognized statistical rating organization ("NRSRO"),
or if not rated by any NRSRO, deemed comparable by a Subadviser to such rated
6
<PAGE> 35
securities ("Comparable Unrated Securities"). The ratings of an NRSRO represent
its opinion as to the quality of securities it undertakes to rate. Ratings are
not absolute standards of quality; consequently, securities with the same
maturity, coupon, and rating may have different yields. The ratings assigned by
the NRSROS are described in Appendix A to this Statement of Additional
Information.
Fixed income securities 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 ("market risk"). Lower-rated securities are more likely
to react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. Subsequent to its purchase by the Fund, an issue of securities
may cease to be rated or its rating may be reduced, so that the securities would
not be eligible for purchase by the Fund. In such a case, the Subadviser will
evaluate whether the downgraded security should be disposed of.
HIGH-YIELD (HIGH-RISK) SECURITIES -- IN GENERAL. The Fund has the
authority to invest up to 5% of its net assets in non-investment grade debt
securities. Non-investment grade debt securities (hereinafter referred to as
"lower-quality securities") include (i) bonds rated as low as C by Moody's,
Standard & Poor's, or 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. 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. Refer to Appendix A of this Statement of Additional Information for a
discussion of securities ratings.
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 decrease in a rising interest rate market, and accordingly
so will the Fund's net asst value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Fund's asset base over which
expenses could be allocated and could result in a reduced rate of return for 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
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able to refinance the securities, or otherwise redeem them, the Fund may have to
replace the securities with a lower yielding security, which would result in a
lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in lower-quality and
comparable unrated securities will be more dependent on a Subadviser's credit
analysis than would be the case with investments in investment-grade debt
securities. Each Subadviser will employ its own credit research and analysis,
which includes a study of existing debt, capital structure, ability to service
debt and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. When investing in
lower-quality securities, each Subadviser will continually monitor the
investments in the Fund's portfolio and carefully evaluate whether to dispose of
or to retain lower-quality and comparable unrated securities whose credit
ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. The 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 is no
established retail secondary market for many of these securities. The Fund
anticipates 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, the Fund's
asset value and ability to dispose of particular securities, when necessary to
meet the 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 the Fund to obtain accurate market quotations
for purposes of valuing the 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.
PROPOSED LEGISLATION. From time to time proposals have been discussed,
regarding new legislation designed to limit the use of certain lower-quality and
comparable unrated securities by certain issuers. However, it is possible that
if legislation is enacted or proposed, it could have a material affect on the
value of these securities and the existence of a secondary trading market for
the securities.
Convertible Securities. Convertible securities in which the Fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. Like bonds, the value of convertible securities fluctuates in
relation to changes in interest rates and, in addition, also fluctuates in
relation to the underlying common stock.
Warrants. The Small Company Fund may acquire 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. The Fund may purchase warrants, valued at the lower
of cost or market value, of up to 5% of the Fund's net assets. Included in that
amount, but not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on any recognized U.S. or foreign stock exchange. Warrants acquired
by the 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
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<PAGE> 37
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.
Repurchase Agreements. The Small Company Fund's custodian or a
sub-custodian 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. In an attempt to reduce the risk
of incurring a loss on the repurchase agreement, the Fund will enter into
repurchase agreements with certain banks and non-bank dealers, all of whose use
has been approved by the Board of Trustees. 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. Each Subadviser will monitor on an
ongoing basis the value of the collateral to assure that it always equals or
exceeds the repurchase price. The Fund will consider on an ongoing basis the
creditworthiness of the institutions with which the Fund enters into repurchase
agreements. Repurchase agreements involve certain risks in the event of default
or insolvency by the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities.
Short Sales "Against The Box". In a short sale, the Small Company Fund
sells a borrowed security and has a corresponding obligation to the lender to
return the identical security. The 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."
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. If the Fund engages in a short sale, the collateral for the short
position will be maintained by the Fund's custodian or qualified sub-custodian.
While the short sale is open, the Fund will maintain in a segregated account an
amount of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Fund's long position. Not more than 15% of the
Fund's net assets (taken at current value) may be held as collateral for such
short sales at any one time.
The Fund does not intend to engage in short sales against the box for
investment purposes. The 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. The Small
Company Fund may not invest more than 15% of its net assets, in the aggregate,
in illiquid securities, including repurchase agreements which have a maturity of
longer than seven days, time deposits maturing in more than seven days and
securities that are illiquid because of the absence of a readily available
market or legal or contractual restrictions on resale. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than
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seven days. Securities which have not been registered under the Securities Act
are referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Investment companies do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities, and 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. It is anticipated that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this regulation and use of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Fund 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 the
Fund will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.
Each Subadviser will monitor the liquidity of restricted securities in
the portion of the Fund it manages under the supervision of the Board and the
Adviser. In reaching liquidity decisions, each Subadviser may consider the
following factors: (A) the unregistered nature of the security; (B) the
frequency of trades and quotes for the security; (C) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (D) dealer undertakings to make a market in the security and (E) the
nature of the security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
When-Issued Securities And Delayed-Delivery Transactions. The Small
Company Fund may invest without limitation in securities purchased on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occurs beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 45 days. The Fund
will enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage, but may sell the securities
before the settlement date if a Subadviser which purchased such security deems
it advantageous to do so. 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.
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations equal to the amount of the commitment
in a segregated account. Normally, the custodian will set aside portfolio
securities to satisfy a
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purchase commitment, and in such a case the 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 the 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. 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 the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
Lending Portfolio Securities. The Small Company 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 the Fund,
and which is acting as a "placing broker," a part of the interest earned from
the investment of collateral received for securities loaned. The SEC currently
requires that the following conditions must be met whenever portfolio securities
are loaned: (1) the Fund must receive at least 100% cash collateral of the type
discussed in the preceding paragraph from the borrower; (2) the borrower must
increase such collateral whenever the market value of the securities loaned
rises above the level of such collateral; (3) the Fund must be able to terminate
the loan at any time; (4) the Fund must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions payable on the loaned
securities, and any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) while any voting
rights on the loaned securities may pass to the borrower, the Trust's 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.
Borrowing. The Small Company Fund may borrow money from banks, limited
by the Fund's fundamental investment restriction to 33-1/3% of its total assets,
and may engage in reverse repurchase agreements which may be considered a form
of borrowing. (See "INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS -
Reverse Repurchase Agreements" in the Small Company Fund's Prospectus.) In
addition, the Fund may borrow up to an additional 5% of its total assets from
banks for temporary or emergency purposes. The Fund will not purchase securities
when bank borrowings exceed 5% of the Fund's total assets. The Fund expects that
some of its borrowings may 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.
Derivative Instruments. As discussed in its Prospectus, each of the
Small Company Fund's Subadvisers may use a variety of derivative instruments,
including options, futures contracts (sometimes referred to as "futures"),
options on futures contracts, stock index options and forward currency contracts
to hedge the Fund's portfolio or for risk management.
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, the Commodity Futures Trading Commission ("CFTC") and various state
regulatory authorities. In addition, the 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
Subadviser's ability to predict movements of the overall securities and currency
markets, which requires different skills than predicting changes
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in the prices of individual securities. While each Subadviser is experienced in
the use of these instruments, 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.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because a Subadviser projected a decline in the price of a security
in the Fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the instrument. Moreover, if the price of the instrument declined by
more than the increase in the price of the security, the Fund could suffer a
loss.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("counter party") to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
For a discussion of the federal income tax treatment of the Fund's
derivative instruments, see "Tax Status" below.
OPTIONS. The Small Company Fund may purchase or write put and call
options on securities and indices, and may purchase options on foreign currency,
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 the Fund to enhance income by reason of the premiums paid by the
purchaser of such options. Writing call options serves as a limited short hedge
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised, and the Fund will be obligated to
sell the security at less than its market value or will be obligated to purchase
the security at a price greater than that at which the security must be sold
under the option. All or a portion of any assets used as cover for OTC options
written by a Fund would be considered illiquid to the extent described under
"Restricted and Illiquid Securities" above. Writing put options serves as a
limited long hedge because increases in the value of the hedged investment would
be offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised, and the Fund
will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market
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conditions. Options that expire unexercised have no value. Options used by the
Fund may include European-style options, which are only exercisable at
expiration. This is in contrast to American-style options which are exercisable
at any time prior to the expiration date of the option.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the fund to
realize the profit or limit the loss on an option position prior to its exercise
or expiration.
The Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the fund and the counter party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counter party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid 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 counter party, or by
a transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with counter parties that are expected to
be capable of entering into closing transactions with the fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the counter
party, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as a cover for the written option until the
option expires or is exercised.
The Fund may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except that index options
may serve as a hedge against overall fluctuations in the securities markets in
general.
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 options (other than purchased options) expose the
Fund to counter party risk. To the extent required by sec guidelines, the Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or (2)
cash and liquid high grade debt obligations with a value sufficient at all times
to cover its potential obligations to the extent not covered as provided in (1)
above. The Fund will also set aside cash and/or appropriate liquid assets in a
segregated custodial account if required to do so by the SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option or futures contract is open,
unless they are replaced with similar assets. As a result, the commitment of a
large portion of the Fund's assets to segregated accounts as a cover could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
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SPREAD TRANSACTIONS. The Small Company 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 the
Fund the right to put, or sell, a security that it owns at a fixed dollar spread
or fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Fund in purchasing
covered spread options it 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 the 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. The Small Company Fund 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. The Fund's
hedging may include purchases of futures as an offset against the effect of
expected increases in securities prices or currency exchange rates and sales of
futures as an offset against the effect of expected declines in securities
prices or currency exchange rates. The Fund may write put options on futures
contracts while at the same time purchasing call options on the same futures
contracts in order to create synthetically a long futures contract position.
Such options would have the same strike prices and expiration dates. The Fund
will engage in this strategy only when a Subadviser believes it is more
advantageous to the Fund than is purchasing the futures contract.
The Fund will only enter into futures contracts that are traded on U.S.
or foreign exchanges or boards of trade approved by the CFTC and are
standardized as to maturity date and underlying financial instrument. These
transactions may be entered into for "bona fide hedging" purposes as defined in
CFTC regulations and other permissible purposes including increasing return and
hedging against changes in the value of portfolio securities due to anticipated
changes in interest rates, currency values and/or market conditions. The ability
of the Fund to trade in futures contracts may be limited by the requirements of
the code applicable to a regulated investment company.
The Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of the Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could be
used to reduce the Fund's exposure to market, currency, or interest rate
fluctuations, the Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times the difference between the value of
the index at the close of the last trading day of the contract and the price at
which the index futures contract was originally written. Transactions costs are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as the
case may be, of the instrument, the currency, or by payment of the change in the
cash value of the index. More commonly, futures contracts are closed out prior
to delivery by entering into an offsetting transaction in a matching futures
contract. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of those securities is made.
If the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting
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<PAGE> 43
transaction with respect to a particular futures contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high grade debt obligations, in an
amount generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the Fund at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When the fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions and
options on futures can enter into offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade on which they were entered into (or through a linked
exchange). Although the Fund intends to enter into futures transactions only on
exchanges or boards of trade where there appears to be an active market, there
can be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund 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.
15
<PAGE> 44
SWAP AGREEMENTS. The Small Company Fund may enter into interest rate,
securities index, commodity, or security and currency exchange rate swap
agreements for any lawful purpose consistent with the 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. The 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 the Fund, the
obligations of the parties would be exchanged on a "net basis." Consequently,
the 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"). The Fund's obligation under a swap agreement will be accrued daily
(offset against amounts owed to the Fund) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the maintenance of a segregate
account consisting of cash, or liquid high grade debt obligations.
Whether the Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on a 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, the 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 the Fund by the Internal Revenue Code may limit the Fund's ability to
use swap agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that a
Subadviser reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, the
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES - SPECIAL
CONSIDERATIONS. The Small Company Fund may use options and futures on foreign
currencies and forward currency contracts to hedge against movements in the
values of the foreign currencies in which the Fund's securities are denominated.
The 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.
The 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, the 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
16
<PAGE> 45
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, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, the Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
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, the Fund will normally purchase OTC options on
foreign currency only when a Subadviser believes a liquid secondary market will
exist for a particular option at any specific time.
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, the Small Company Fund
may either sell a portfolio security and make delivery of the currency, or
retain the security and fully or partially offset its contractual obligation to
deliver the currency by purchasing a second contract. If the Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices.
The 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 the Small Company Fund's investments. A currency hedge, for
example, should protect a Yen-denominated bond against a decline in the Yen, but
will not protect the Fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of the Fund's investments denominated in foreign
currency will change in response to many factors other than exchange rates, a
currency hedge may not be entirely successful in mitigating changes in the value
of the Fund's investments denominated in that currency over time.
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<PAGE> 46
A decline in the dollar value of a foreign currency in which the 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, the 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, the 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.
The Fund's currency hedging will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the 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. The 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 Other Investment Companies. Some of the countries in
which the Small Company 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. Investing through such vehicles may
involve frequent or layered fees or expenses and may also be subject to
limitation under the 1940 act. Under the 1940 Act, a Fund may invest up to 10%
of its assets in shares of investment companies and up to 5% of its assets in
any one investment company as long as the investment does not represent more
than 3% of the voting stock of the acquired investment company.
Commercial Paper. The Small Company 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. The Fund will
purchase such commercial paper with the currency in which it is denominated and,
at maturity, will receive interest and principal payments thereon in that
currency, but the amount or principal payable by the issuer at maturity will
change in proportion to the change (if any) in the exchange rate between two
specified currencies 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 the 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. The 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 1940 Act. The Fund believes 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 U.S. Government securities or other liquid high
quality debt securities having a value equal to the aggregate principal amount
of outstanding commercial paper of this type.
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<PAGE> 47
INVESTMENT RESTRICTIONS
The following policies, which cannot be changed without the approval of
the holders of a majority of the shares of the Fund for which the change is
proposed, apply to all of the Funds of the Trust (except the Small Company Fund,
whose restrictions are listed separately below), unless otherwise stated.
The Trust may not:
1. borrow money, except an amount equal to no more than 5% of the value of
each of the Fund's total assets (calculated when the loan is made) for
temporary, emergency purposes or for the clearance of transactions.
This limited borrowing authority will not be used to leverage the Funds
or to borrow for extended periods of time. This authority is intended
to provide the investment manager additional flexibility in the
execution of routine daily transactions, and allow for more efficient
cash management.
2. purchase securities on margin, but the Trust may obtain such credits as
may be necessary for the clearance of purchases and sales of
securities.
3. make short sales of securities.
4. write or purchase any put or call options.
5. make loans to other persons, except by the purchase of obligations in
which the Trust is authorized to invest. The Trust may, however, enter
into repurchase agreements, but a Fund will not enter into repurchase
agreements if, as a result thereof, more than 10% of the Fund's total
assets (taken at current value) would be subject to repurchase
agreements maturing in more than 7 days.
6. purchase voting securities of any issuer or purchase the securities of
any issuer if, as a result thereof: (a) more than 5% of a Fund's total
assets (taken at current value) would be invested in the securities of
such issuer (except that the Money Market Fund may invest up to 10% of
its total assets in the highest rated securities of a single issuer for
a period of up to three business days thereafter, provided that the
Money Market Fund does not make more than one such investment at any
one time), (b) a Fund would hold more than 10% of the voting securities
of such issuer, or (c) more than 25% of a Fund's total assets (taken at
current value) would be concentrated in any one industry. There is,
however no limitation on investments in obligations issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
The Money Market Fund only may invest up to 75% of its assets in all
finance companies as a group, all banks and bank holding companies as a
group, and all utility companies as a group, when in the opinion of
management, yield differentials and money market conditions suggest,
and when cash is available for such investment and instruments are
available for purchase which fulfill the Money Market Fund's objective
in terms of quality and marketability.
7. invest in securities which are restricted as to disposition under
federal securities law, or securities with other legal or contractual
restrictions on resale (except for repurchase agreements).
8. purchase securities issued by any registered investment company, except
by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation. The
Trust shall not, however, purchase the securities of any registered
investment companies if such purchase at the time thereof would cause
more than 10% of the total assets of a Fund, taken at current value, to
be invested in the securities of such issuers. Further, the Trust shall
not purchase securities issued by any open-end investment company.
9. invest more than 5% of a Fund's total assets (taken at current value)
in companies which, including predecessors, have a record of less than
three years continuous operation.
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<PAGE> 48
10. purchase or retain securities of any issuer, any of whose officers,
directors, or securityholders is a trustee, director, or officer of the
Trust, or of the Adviser, if or so long as, one or more of such persons
owns beneficially more than 1/2% of any class of securities, taken at
market value, of such issuer, and such persons owning more than 1/2% of
such securities together own beneficially more than 5% of any class of
securities of such issuer, taken at market value.
11. act as an underwriter, except as it may technically be deemed an
underwriter under the Securities Act of 1933 in selling a portfolio
security.
12. invest in companies for the purpose of exercising control or
management.
13. purchase or retain real estate (including limited partnership
interests, but excluding securities of companies which deal in real
estate or interests therein), mineral leases, commodities, or commodity
contracts.
14. issue securities except as permitted by the Investment Company Act of
1940.
INVESTMENT RESTRICTIONS FOR THE SMALL COMPANY FUND -- The following are the
Small Company Fund's fundamental investment limitations which cannot be changed
without shareholder approval:
THE SMALL COMPANY FUND:
1. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33-1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Fund may
also borrow money from other persons to the extent permitted by
applicable law. For purposes of this restriction, short sales, the
entry into currency transactions, options, futures contracts, options
on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the
segregation of assets in connection with any of the foregoing) shall
not constitute borrowing.
2. May not issue senior securities, except as permitted under the 1940
Act.
3. 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.
4. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities.
5. May not lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets (taken at current value) would be lent
to other parties, except in accordance with its investment objective,
policies and limitations through (i) purchase of debt securities or
other debt instruments, including loan participations, assignments and
structured securities, or (ii) by engaging in repurchase agreements.
6. May not purchase the securities of any issuer if, as a result, more
than 25% (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.
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<PAGE> 49
7. May not purchase or sell real estate unless acquired as a result of
ownership of securities or instruments, but this restriction shall not
prohibit the Fund from purchasing or selling securities issued by
entities or investment vehicles that own or deal in real estate or
interests therein or instruments secured by real estate or interests
therein.
The following are the Fund's non-fundamental operating policies which may be
changed by the Board of Trustees of the Trust without shareholder approval:
The Fund may not:
1. 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 sale 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.
2. 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.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.
Illiquid securities include securities that cannot be sold within seven
days in the ordinary course of business for approximately the amount at
which the Fund has valued the securities, such as repurchase agreements
maturing in more than seven days.
4. Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
5. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its total assets would be
invested in the securities of issuers that, including predecessor or
unconditional guarantors, have a record of less than three years of
continuous operation. This policy does not apply to securities of
pooled investment vehicles or mortgage or asset-backed securities.
6. Invest in direct interests in oil, gas, or other mineral exploration or
development programs or leases, except that the Fund may invest in
securities of companies that invest in, engage in, or sponsor oil, gas
or mineral exploration or development programs or leases.
7. Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the time of the
borrowing or investment.
8. Purchase or retain the securities of any issuer if, to the knowledge of
the Fund, any officer or trustee of the Fund, or one or more of the
officers, directors or partners of the adviser or of the subadviser
responsible for the investment beneficially owns more than 1/2 of 1% of
the outstanding securities of such issuer and together own beneficially
more than 5% of the securities of such issuer.
9. Invest in the securities of a company for the purpose of exercising
management or control, but the Fund will vote the securities it owns as
a shareholder in accordance with its views.
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<PAGE> 50
10. Invest in warrants (other than warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets.
INSURANCE LAW RESTRICTIONS - In connection with the Trust's agreement
to sell shares to the Accounts, the Adviser and the insurance companies may
enter into agreements, required by certain state insurance departments, under
which the Adviser may agree to use its best efforts to assure and to permit
insurance companies to monitor that each Fund of the Trust complies with the
investment restrictions and limitations prescribed by state insurance laws and
regulations applicable to the investment of separate account assets in shares of
mutual funds. If a Fund failed to comply with such restrictions or limitations,
the Accounts would take appropriate action which might include ceasing to make
investments in the Fund or withdrawing from the state imposing the limitation.
Such restrictions and limitations are not expected to have a significant impact
on the Trust's operations.
MAJOR SHAREHOLDERS
As of March 31, 1996, separate accounts of Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company had shared voting and
investment power of 92.9% and 7.1% of the shares of the Total Return Fund, 91.5%
and 8.5% of the shares of Government Bond Fund, 99.1% and 0.9% of the shares of
Money Market Fund, and 95.1% and 4.9% of the shares of Capital Appreciation
Fund, respectively. As of March 31, 1996, Nationwide Life Insurance Company
owned beneficially 16.7% and had shared voting and investment power for 83.3% of
the shares of the Small Company Fund.
As of March 31, 1996, the Trustees and Officers of the Trust as a group
owned less than 1% of the shares of the Funds.
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<PAGE> 51
TRUSTEES AND OFFICERS OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and Officers during the last
five years and their affiliations are:
Dr. John C. Bryant, Trustee.
44 Faculty Place, Wilmington, Ohio.
Dr. Bryant is Executive Director of the Cincinnati Youth Collaborative.
He was formerly Professor of Education, Wilmington College.
Robert M. Duncan, Trustee.
378 Bricker Hall, 190 North Oval Mall, Columbus, Ohio.
Mr. Duncan is Vice President-General Counsel of the Ohio State
University. He was formerly a partner in the law firm of Jones, Day,
Reavis & Pogue in Columbus, Ohio. He was formerly U.S. District Court
Judge, Southern District of Ohio.
Dr. Thomas J. Kerr, IV, Trustee
1223-A Central Street, Evanston, Illinois.
Dr. Kerr is President of Kendall College. He was formerly President of
Grant Hospital Development Foundation.
D. Richard McFerson, Trustee*, Chairman.
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is Chairman and Chief Executive Officer of the Nationwide
Insurance Enterprise.
James F. Laird, Jr., Treasurer.
One Nationwide Plaza, Columbus, Ohio.
Mr. Laird is Vice President and General Manager of Nationwide Financial
Services, Inc., the Distributor and Investment Adviser. He was formerly
Treasurer of Nationwide Financial Services, Inc.
Rae I. Mercer, Secretary.
One Nationwide Plaza, Columbus, Ohio.
Mrs. Mercer is Corporate Secretary of Nationwide Financial Services,
Inc., the Distributor and Investment Adviser.
*A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
The Funds do not pay any fees to Officers or to Trustees who are
considered "interested persons" of the Trust. The table below lists the
aggregate compensation paid by the Trust to each disinterested Trustee during
the fiscal year ended December 31, 1995, and the aggregate compensation paid to
each disinterested Trustee during the year by all registered investment
companies to which the Adviser provides investment advisory services (the
"Nationwide Fund Complex").
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<PAGE> 52
The Trust does not maintain any pension or retirement plans for the
Officers or Trustees of the Trust.
FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM THE
AGGREGATE NATIONWIDE FUND
COMPENSATION COMPLEX INCLUDING
FROM THE TRUST THE TRUST
-------------- ---------
<S> <C> <C>
Dr. John C. Bryant $1,000 $12,500
Robert M. Duncan $1,000 $12,500
Dr. Thomas J. Kerr IV $1,000 $12,500
</TABLE>
CALCULATING YIELD - THE MONEY MARKET FUND
Any current Fund yield quotations, subject to Rule 482 under the
Securities Act of 1933, shall consist of a seven calendar day historical yield,
carried at least to the nearest hundredth of a percent. The yield shall be
calculated by determining the net change, excluding realized and unrealized
gains and losses, in the value of a hypothetical pre-existing account 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 from the original share, and dividends declared on both the original
share and any such additional shares. As of December 31, 1995, the Fund's
seven-day current yield was 5.12%. The Fund's effective yield represents an
annualization of the current seven day return with all dividends reinvested, and
for the period ended December 31, 1995 was 5.26%.
The Fund's yield will fluctuate daily. Actual yields will depend on
factors such as the type of instruments in the Fund's portfolio, portfolio
quality and average maturity, changes in interest rates, and the Fund's
expenses. There is no assurance that the yield quoted on any given occasion will
remain in effect for any period of time and there is no guarantee that the net
asset value 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 of 1933. An investor should keep in
mind that any return or yield quoted represents past performance and is not a
guarantee of future results. The investment return and principal value of
investments will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
All performance advertisements shall include average annual 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 total return represents the rate required each year for an
initial investment to equal the 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 for a specified period of
time, by the amount of the initial payment, assuming reinvestment of all
dividends and distributions. 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.
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<PAGE> 53
The uniformly calculated average annual total returns for the one year,
five year, and ten year periods for the Total Return and Government Bond Funds,
ended December 31, 1995 are shown below.
<TABLE>
<CAPTION>
Total Government
Return Bond
------ ----------
<S> <C> <C>
1 Year 29.1% 18.7%
5 Years 16.7% 9.6%
10 Years 12.5% 9.6%
</TABLE>
The Capital Appreciation Fund began operations on May 1, 1992. Its
annualized average annual total return for one year ended December 31, 1995 and
for the three years and eight months from May 1, 1992 through December 31, 1995
was 29.4% and 11.8%, respectively. The Small Company Fund began operations on
October 23, 1995. It's average total return (not annualized) for the period from
October 23, 1995 through December 31, 1995 was 14.4%.
The Government Bond 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 Government Bond Fund yield for the 30-day period ended December 31,
1995, was 6.07%.
INVESTMENT ADVISER AND OTHER SERVICES
The Adviser manages the Funds (except the Small Company Fund) pursuant
to an Investment Advisory Agreement (the "Agreement") dated October 22, 1981.
This Agreement was assigned on May 1, 1984 to the Adviser by the former Adviser,
Nationwide Annuity Advisers, Inc., with the consent of the Trust and
ratification by the Trust's shareholders. The Adviser provides the Trust with
overall investment advisory and administrative services, and general office
facilities. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Trust. For these services and facilities, the
Adviser receives a fee computed and paid monthly at the annual rate equal to .5%
of the average daily net assets of each Fund of the Trust (except for the Small
Company Fund).
The Trust pays the compensation of the three Trustees who are not
affiliated with the Adviser and all expenses (other than those assumed by the
Adviser), including governmental fees, interest charges, taxes, membership dues
in the Investment Company Institute allocable to the Trust; fees and expenses of
independent certified public accountants, legal counsel, and any transfer agent,
registrar, and dividend disbursing agent of the Trust; expenses of preparing,
printing, and mailing shareholders' reports, notices, proxy statements, and
reports to governmental offices and commissions; expenses connected with the
execution, recording, and settlement of portfolio security transactions,
insurance premiums, fees and expenses of the custodian for all services to the
Trust; and expenses of calculating the net asset value of shares of the Trust,
expenses of shareholders' meetings, and expenses relating to the issuance,
registration, and qualification of shares of the Trust.
For the years ended December 31, 1995, 1994 and 1993, the Adviser
received fees in the following amounts: Total Return Fund $3,406,571, $2,556,765
and $1,999,186, respectively; Government Bond Fund $2,088,523, $1,997,185 and
$1,915,951, respectively; Money Market Fund $3,574,486, $3,269,449 and
$1,564,076, respectively; and Capital Appreciation Fund $326,158, $237,838 and
$139,873, respectively.
The Adviser pays the compensation of the Trustee affiliated with the
Adviser. The officers of the Trust receive no compensation from the Trust. The
Adviser also furnishes, at its own expense, all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of the Trust and maintaining its organization, investment advisory
facilities, and executive and supervisory personnel for managing the investments
and effecting the portfolio transactions of the Trust.
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<PAGE> 54
The Agreement also specifically provides that the Adviser, including
its directors, officers, and employees, shall not be liable for any error of
judgment, or mistake of law, or for any loss arising out of any investment, or
for any act or omission in the execution and management of the Trust, except for
willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties under
the Agreement. The Agreement will continue in effect only if its 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 if it is
assigned. It may be terminated without penalty by vote of a majority of the out
standing voting securities, or by either party, on not more than 60 days nor
less than 30 days written notice. The Agreement further provides that the
Adviser may render services to others.
ADVISORY SERVICES FOR THE SMALL COMPANY FUND
The Adviser oversees the management of the Small Company Fund pursuant
to an Investment Advisory Agreement dated October 20, 1995. Subject to the
supervision and direction of the Trustees, the Adviser determines the allocation
of assets among the Subadvisers and evaluates and monitors the performance of
subadvisers. The Adviser is also authorized to select and place portfolio
investments on behalf of the Fund; however, the Adviser generally intends to
limit its direct portfolio management to the investment of a portion of the
Fund's assets in cash or money market instruments. The Adviser has
responsibility for communicating performance expectations and evaluations to the
Subadvisers and ultimately recommending to the Trust's Board of Trustees whether
a Subadviser's contract should be renewed, modified or terminated; however, the
Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. The Advisory
Agreement of the Small Company Fund contains termination and indemnification
provisions similar to those in the Agreement as described above.
The Fund pays to the Adviser a fee at the annual rate of 1.00% of the
Fund's average daily net assets. The Adviser has voluntarily agreed to waive all
or part of its fees in order to limit the Fund's total operating expenses to not
more than 1.25% of the Fund's average daily net assets on an annual basis. These
fees are voluntary and may be terminated at any time. During the period from
October 23, 1995 (date of commencement of operations) through December 31, 1995,
the adviser received advisory fees in the amount of $11,003 and waived fees and
reimbursed expenses in the amount of $10,495.
The Subadvisers - Pursuant to Subadvisory Agreements between each of
the Subadvisers and the Adviser, each of which are dated October 20, 1995, the
Subadvisers each manage a portion of the Fund's assets in accordance with the
Fund's investment objective and policies. With regard to the portion of the
Fund's assets allocated to it, each Subadviser shall make investment decisions
for the Fund and in connection with such decisions place purchase and sell
orders for the securities in the Fund. For the investment management services
they provide to the Fund, each Subadviser, or PIML and VEAC together, receives a
fee from the Adviser at the annual rate of .60% of the average daily net assets
of the portion of the Fund managed by that subadviser or group of Subadvisers.
During the period from October 23 (date of commencement of operations)
through December 31, 1995, the Adviser paid $11,394 in fees to the subadvisers.
Each of the Subadvisory Agreements specifically provides that the
Subadviser, including its directors, officers, partners 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 Small Company Fund, except for willful misfeasance, bad faith,
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties under such Agreement. Each Subadvisory
Agreement will continue in effect for an initial period of two years and
thereafter shall continue automatically for successive annual periods provided
such continuance is specifically approved at least annually by the Trustees, or
by vote of a majority of the outstanding voting securities of the Fund, and in
either case, by a majority of the Trustees who are
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<PAGE> 55
not parties to the Agreement or interested persons of any such party. Each
Subadvisory Agreement terminates automatically if it is assigned. It may also be
terminated without penalty by vote of a majority of the out standing voting
securities, or by either party, on not more than 60 days nor less than 30 days
written notice.
Below is a brief description of each of the subadvisers.
The Dreyfus Corporation. Dreyfus, located at 200 Park Avenue, New York,
New York 10166, was formed in 1947 and serves as one of the Fund's Subadvisers.
Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of February
29, 1996, Dreyfus managed or administered approximately $85 billion in assets
for approximately 1.7 million investor accounts nationwide.
Mellon is a publicly owned multibank holding company incorporated under
Pennsylvania law in 1971 and registered under the Federal Bank Holding Company
Act of 1956, as amended. Mellon provides a comprehensive range of financial
products and services in domestic and selected international markets. Mellon is
among the twenty-five largest bank holding companies in the United States based
on total assets. Mellon's principal wholly-owned subsidiaries are Mellon Bank,
N.A., Mellon Bank (DE) National Association, Mellon Bank (MD), The Boston
Company, Inc. AFCO Credit Corporation and a number of companies known as Mellon
Financial Services Corporations. Through its subsidiaries, including Dreyfus,
Mellon managed approximately $233 billion in assets as of December 31, 1995,
including approximately $81 billion in mutual fund assets. As of December 31,
1995, various subsidiaries of Mellon provided non-investment services, such as
custodial or administration services, for approximately $786 billion in assets
including approximately $60 billion in mutual fund assets.
Neuberger & Berman L.P. Neuberger & Berman, also serves as a
sub-adviser to the Fund. Neuberger & Berman and its predecessor firms have
specialized in the management of no-load mutual funds since 1950. Neuberger &
Berman and its affiliates manage securities accounts that had approximately $40
billion of assets as of December 31, 1995. Neuberger & Berman is a member firm
of the NYSE and other principal exchanges and acts as the Fund's principal
broker in the purchase and sale of their securities for that portion of the
Fund's portfolio managed by Neuberger & Berman.
Strong Capital Management, Inc. Strong, which also serves as one of the
Subadvisers for the Fund, began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans. Strong also acts as investment advisor for each of the mutual funds
within the Strong Family of Funds. As of March 31, 1996, Strong had over $18
billion under management. Strong's principal mailing address is P.O. Box 2936,
Milwaukee, Wisconsin 53201. Mr. Richard S. Strong is the controlling shareholder
of Strong.
Pictet International Management Limited and Van Eck Associates
Corporation. PIML and VEAC will together manage a portion of the Fund. VEAC is
located at 99 Park Avenue, New York, New York 10016. PIML is located at Cutlers
Gardens, 5 Devonshire Square, London, United Kingdom EC2M 4LD. PIML is primarily
responsible for managing the portion of the Fund's assets allocated to the PIML
and VEAC. PIML determines which securities are to be bought and sold. VEAC,
however, makes recommendations to PIML regarding Hard Asset securities. VEAC
will also make recommendations regarding the allocation among each of the Hard
Asset sectors. PIML is not obligated to act on VEAC'S recommendation's and the
amount, if any, allocated to Hard Assets will be determined by PIML. VEAC will
also assist PIML on issues regarding determining the liquidity of securities,
portfolio diversification and matters involving United States federal securities
and tax law as they apply to management of the Fund.
PIML is an operating company of Pictet (London) Limited, an affiliate
of Pictet & Cie ("Pictet"). Pictet was founded in 1805 and is the largest
private Swiss Bank, as well as the leading specialist investment bank domicied
in Europe. Pictet has a worldwide network of offices employing over 200
investment professionals in Geneva, London, Zurich, Luxembourg, Hong Kong,
Tokyo, Montreal and Nassau. PIML has access to all of Pictet's investment
infrastructure. As of March 31, 1996, total assets under management by Pictet
and its affiliates, including PIML, on behalf of all clients, was in excess of
$40 billion.
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<PAGE> 56
Warburg, Pincus Counsellors, Inc. The Fund also employs Warburg as a
Subadviser to the Fund. Warburg is a professional investment counselling firm
which provides investment services to endowment funds, foundations and other
institutions and individuals. As of February 29, 1996, Warburg managed
approximately $13.5 billion of assets including approximately $7.5 billion of
assets of twenty-six mutual funds. Incorporated in 1970, Warburg is a wholly
owned subsidiary of Warburg, Pincus Counsellors G.P. ("Warburg G.P."), a New
York general partnership. E.M. Warburg, Pincus & Co., Inc. ("EMW") controls
Warburg through its ownership of a class of voting preferred stock of Warburg.
Warburg G.P. has no business other than being a holding company of Warburg and
its subsidiaries. Warburg address is 466 Lexington Avenue, New York, New York
10017-3147.
CUSTODIAN
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, OH 45263,
is the Custodian for the Funds and makes all receipts and disbursements under a
Custodian Agreement. The Custodian performs no managerial or policymaking
functions for the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSEMENT
Nationwide Investors Services, Inc. (NIS) is the Transfer and Dividend
Disbursing Agent for the Funds. NIS is a wholly-owned subsidiary of Nationwide
Financial Services, Inc. Management believes the charges for the esrvices
performed are comparable to fees charged by other companies performing similar
services.
BROKERAGE ALLOCATIONS
IN GENERAL. During the fiscal years ended December 31, 1995, 1994, and
1993, the Total Return Fund, paid brokerage commissions of $377,463, $258,714
and $177,675, respectively, and the Capital Appreciation Fund paid brokerage
commissions of $36,471, $52,032 and $42,439, all to firms rendering statistical
services. The Money Market Fund and Government Bond Fund paid no brokerage
commissions during the periods covered by the financial statements.
The Adviser (or a Sub-Adviser) 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 OTC markets, there is generally no commission, but the
price includes a spread between the dealer's purchase and sale price which makes
up 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. 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.
A dealer's profit, if any, is the difference, or spread, between the dealer's
purchase and sale price for the obligation.
The primary consideration in portfolio security transactions is "best
execution," i.e., execution at the most favorable prices and in the most
effective manner possible. The Adviser always attempts to achieve best
execution, and it has complete freedom as to the markets in and the
broker-dealers through which it seeks this result. Subject to the requirement of
seeking best execution, securities may be bought from or sold to broker-dealers
who have furnished statistical, research, and other information or services to
the Adviser or a Subadviser. In placing orders with such broker-dealers, the
Adviser will, where possible, take into account the comparative usefulness of
such information. Such information is useful to the Adviser or a Subadviser even
though its dollar value may be indeterminable, and its receipt or availability
generally does not reduce the Adviser's or a Subadviser's normal research
activities or expenses.
Trust portfolio transactions may be effected with broker-dealers who
have assisted investors in the purchase of Policies. However, neither such
assistance nor sale of other investment company shares is a
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<PAGE> 57
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 the Trust are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts served by affiliated companies of the
Adviser or a Subadviser. Although such concurrent authorizations potentially
could be either advantageous or disadvantageous to the Trust, they are effected
only when the Adviser or a Subadviser believes that to do so is in the interest
of the Trust. When such concurrent authorizations occur, the executions will be
allocated in an equitable manner.
SPECIAL BROKERAGE ALLOCATION CONSIDERATIONS RELATING TO THE SMALL
COMPANY FUND. In purchasing and selling the Small Company Fund's portfolio
investments, it is the policy of each of the Subadvisers to obtain best
execution at the most favorable prices through responsible broker-dealers. In
selecting broker-dealers, each Subadviser will consider various relevant
factors, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security or asset to be
purchased or sold; the execution efficiency, settlement capability, and
financial condition of the broker-dealer's firm; the broker-dealer's execution
services, rendered on a continuing basis; and the reasonableness of any
commissions. During the period ended December 31, 1995, the Small Company Fund
paid brokerage commissions of $27,100.
Each Subadviser may cause the 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 that such commission is reasonable in relation
to the value of the brokerage and/or research services as defined in Section
28(e) of the Securities Exchange Act of 1934 which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to a Subadviser is considered to be in addition to and not in lieu of services
required to be performed by the Subadviser under its subadvisory agreement with
the Adviser. The fees to each of the Subadvisers pursuant to its subadvisory
agreement with the Adviser is not reduced by reason of its receiving any
brokerage and research services. The research services provided by
broker-dealers can be useful to a Subadviser in serving its other clients or
clients of the Subadviser's affiliates. Subject to the policy of the Subadvisers
to obtain best execution at the most favorable prices through responsible
broker-dealers, a Subadviser also may consider the broker-dealer's sale of
shares of any fund for which the Subadviser serves as investment adviser,
sub-adviser or administrator.
Neuberger & Berman will act as the principal broker in the purchase and
sale of portfolio securities for the portion of the Fund advised by Neuberger &
Berman and in connection with the writing of covered call options on their
securities. Transactions in portfolio securities for which Neuberger & Berman
serves as broker will be affected in accordance with Rule 17e-1 under the 1940
Act.
The Fund will continue to use Neuberger & Berman as its principal
broker for the portion of the Fund advised by Neuberger & Berman where, in the
judgment of Neuberger & Berman, the firm is able to obtain a price and execution
at least as favorable as that provided by other qualified brokers. To the Fund's
knowledge, however, no affiliate of Neuberger & Berman receives give-ups or
reciprocal business in connection with their securities transactions.
Under the 1940 Act, commissions paid by the Fund to Neuberger & Berman
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 Fund's policy that the commissions to be paid to
Neuberger & Berman must, in its judgment, 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
Neuberger & Berman on comparable transactions for its most favored unaffiliated
customers, except for accounts for which Neuberger & Berman acts as a clearing
broker for another brokerage firm and customers of Neuberger & Berman considered
by a majority of the independent trustees not to be comparable to the Fund. The
Fund does not deem it practicable and in its best interests to solicit
competitive bids for commissions on each transaction. However,
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<PAGE> 58
consideration regularly is given to information concerning the prevailing level
of commissions charged on comparable transactions by other brokers during
comparable periods of time. The 1940 Act generally prohibits Neuberger & Berman
from acting as principal in the purchase or sale of securities for the Fund's
account, unless an appropriate exemption is available.
During the period ended December 31, 1995, the Small Company Fund paid
brokerage commissions to Neuberger & Berman in the amount of $4,434 representing
16.4% of the total commissions paid by the Fund. The aggregate dollar amount of
transactions involving the payment of commissions to Neuberger & Berman
represented 20.2% of total transactions on which commissions were paid by the
Fund during the period ended December 31, 1995.
The Trustees periodically review each Subadviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the commissions paid by the Fund over
representative periods of time to determine if they are reasonable in relation
to the benefits to the Fund.
PURCHASES, REDEMPTIONS AND PRICING OF SHARES
An insurance company purchases shares of the Funds at their net asset
value using purchase payments received on Policies issued by Accounts. These
Accounts are funded by shares of the Trust.
All investments in the Trust are credited to the shareholder's account
in the form of full and fractional shares of the designated Fund (rounded to the
nearest 1/1000 of a share). The Trust does not issue share certificates.
The net asset value per share of the Funds is determined once daily, as
of the close of the New York Stock Exchange (currently 4 P.M. eastern time) on
each business day the New York Stock Exchange is open and on such days as the
Board determines and on any other day during which there is a sufficient degree
of trading in each Fund's portfolio securities that the net asset value of the
Fund is materially affected by changes in the value of portfolio securities. The
Fund will not compute net asset value on customary national business holidays,
including the following: Christmas, New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day and Thanksgiving. The net
asset value per share is calculated by adding the value of all securities and
other assets of a Fund, deducting its liabilities, and dividing by the number of
shares outstanding.
The offering price for orders placed before the close of the New York
Stock Exchange, on each business day the Exchange is open for trading, will be
based upon calculation of the net asset value at the close of the Exchange. For
orders placed after the close of the Exchange, or on a day on which the Exchange
is not open for trading, the offering price is based upon net asset value at the
close of the Exchange on the next day thereafter on which the Exchange is open
for trading. The net asset value of a share of each Fund on which offering and
redemption prices are based is the net asset value of that Fund, divided by the
number of shares outstanding, the result being adjusted to the nearer cent. The
net asset value of each Fund is determined by subtracting the liabilities of the
Fund from the value of its assets (chiefly composed of investment securities).
Securities of the Fund listed on national exchanges are valued at the last sales
price on the principal exchange, or if there is no sale on that day, or if the
securities are traded only in the over-the-counter market, at the quoted bid
prices. Securities and other assets, for which such market prices are
unavailable, are valued at fair value as determined by the Trustees. For the
Total Return Fund, Capital Appreciation Fund, Government Bond Fund and Small
Company Fund, short-term notes and bank certificates of deposit are valued at
amortized cost, which approximates market. For the Money Market Fund, securities
are valued at amortized cost, which approximates market value, in accordance
with Rule 2a-7 of the Investment Company Act of 1940.
The net income of the Money Market Fund is determined once daily, as of
the close of the New York Stock Exchange (currently 4:00 P.M., New York time) on
each business day on which such Exchange is open. All the net income of the
Fund, so determined, is declared in shares as a dividend to shareholders of
record at the time of such determination. (Shares purchased become entitled to
dividends declared as of the first day following the date of investment.)
Dividends are distributed in the form of additional shares of the Fund on the
last business
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<PAGE> 59
day of each month at the rate of one share (and fraction thereof) of the Fund
for each one dollar (and fraction thereof) of dividend income.
For this purpose, the net income of the Money Market Fund (from the
time of the immediately preceding determination thereof) shall consist of: (a)
all interest income accrued on the portfolio assets of the Fund, (b) less all
actual and accrued expenses and (c) plus or minus net realized gains and losses
on the assets of the Fund determined in accordance with generally accepted
accounting principles. Interest income shall include discount earned (including
both original issue and market discount) on discount paper accrued ratably to
the date of maturity. Securities are valued at market or amortized cost which
approximates market, which the Trustees have determined in good faith
constitutes fair value for the purposes of complying with the Investment Company
Act of 1940.
Because the net income of the Money Market Fund is declared as a
dividend each time the net income is determined, the net asset value per share
(i.e., the value of the net assets of the Fund divided by the number of shares
outstanding) remains at one dollar per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment in the Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares of the Fund in its
account.
Pursuant to its objective of maintaining a fixed one dollar share
price, the Fund will not purchase securities with a remaining maturity of more
than 397 days and will maintain a dollar weighted average portfolio maturity of
90 days or less.
An insurance company separate account redeems shares to make benefit or
surrender payments under the terms of its Policies. Redemptions are processed on
any day on which the Trust is open for business and are effected at net asset
value next determined after the redemption order, in proper form, is received by
the Trust's transfer agent, NIS.
The Trust may suspend the right of redemption for such periods as are
permitted under the 1940 Act and under the following unusual circumstances: (a)
when the New York Stock Exchange is closed (other than weekends and holidays) or
trading is restricted; (b) when an emergency exists, making disposal of
portfolio securities or the valuation of net assets not reasonably practicable;
or (c) during any period when the Securities and Exchange Commission has by
order permitted a suspension of redemption for the protection of shareholders.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest of each Fund and to divide or combine such shares into a greater or
lesser number of shares without thereby exchanging the proportionate beneficial
interests in the Trust. Each share of a Fund represents an equal proportionate
interest in that Fund with each other share. The Trust reserves the right to
create and issue a number of series of shares. In that case, the shares of each
series would participate equally in the earnings, dividends, and assets of the
particular series, but shares of all series would vote together in the election
of Trustees. Upon liquidation of a Fund, shareholders are entitled to share pro
rata in the election of Trustees. Upon liquidation of a Fund, shareholders are
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share
held. Shareholders may vote in the election of Trustees and on other matters
submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
* designate series of the Trust; or
* change the name of the Trust; or
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<PAGE> 60
* supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid
and nonassessable, except as set forth below. In regard to termination, sale of
assets, or change of investment restrictions, the right to vote is limited to
the holders of shares of the particular Fund affected by the proposal. When a
majority is required, it means the lesser of 67% or more of the shares present
at a meeting when the holders of more than 50% of the outstanding shares are
present or represented by proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Trust should be
directed to the Trust at the telephone number or address shown on the cover page
of this Prospectus.
TAX STATUS
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance are the sole shareholders of record of the Trust. Each Fund of the
Trust is treated as a separate entity for purpose of the regulated investment
company provisions of the Internal Revenue Code, and, therefore, the assets,
income, and distributions of each Fund are considered separately for purposes of
determining whether or not the Fund qualifies as a regulated investment company.
Each Fund of the Trust intends to qualify as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, a Fund will pay no federal income taxes on its taxable net
investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to shareholders.
To qualify under Subchapter M, a Fund must, among other things: (i) distribute
to its shareholders at least 90% of its taxable net investment income (for this
purpose consisting of taxable net investment income and net realized short-term
capital gains); (ii) derive at least 90% of its gross income from dividends,
interest, payments with respect to loans of securities, gains from the sale or
other disposition of securities, or other income (including, but not limited to,
gains from options, futures, and forward contracts) derived with respect to its
business of investing in securities; (iii) derive less than 30% of its annual
gross income from the sale or other disposition of securities, options, futures
or forward contracts held for less than three months; and (iv) diversify its
holdings so that, at the end of each fiscal quarter of the Fund (a) at least 50%
of the market value of the Fund assets is represented by cash, U.S. government
securities and other securities, with those other securities limited, with
respect to any one issuer, to an amount no greater in value than 5% of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer, and (b) not more than 25% of the market value of the
Fund's assets is invested in the securities of any one issuer (other than U.S.
government securities or securities of other regulated investment companies) or
of two or more issuers that the Fund controls and that are determined to be in
the same or similar trades or businesses or related trades or businesses. In
meeting these requirements, a Fund may be restricted in the selling of
securities held by the Fund for less than three months and in the utilization of
certain of the investment techniques described above and in the respective
Fund's Prospectus. As a regulated investment company, a Fund will be subject to
a 4% non-deductible excise tax measured with respect to certain undistributed
amounts of ordinary income and capital gain required to be but not distributed
under a prescribed formula. The formula requires payment to shareholders during
a calendar year of distributions representing at least 98% of the Fund's taxable
ordinary income for the calendar year and at least 98% of the excess of its
capital gains over capital losses realized during the one-year period ending
October 31 during such year, together with any undistributed, untaxed amounts of
ordinary income and capital gains from the previous calendar year. The Funds
expect to pay the dividends and make the distributions necessary to avoid the
application of this excise tax.
In addition, each Fund intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status of
insurance company separate accounts. To comply with regulations under Section
817(h) of the code, each Fund will be required to diversify its investments so
that on the last day of each calendar quarter no more than 55% of the value of
its assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three investments
and
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no more than 90% is represented by any four investments. Generally, all
securities of the same issuer are treated as a single investment. For the
purposes of Section 817(h), obligations of the United States Treasury and each
U.S. government instrumentality are treated as securities of separate issuers.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a Policy owner's control of the
investments of a separate account may cause the Policy owner, rather than the
participating insurance company, to be treated as the owner of the assets held
by the separate account. If the Policy owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the Policy owner's gross income. It is
not known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued. In the event that rules or regulations
are adopted, there can be no assurance that the Funds will be able to operate as
currently described, or that the Trust will not have to change the investment
goal or investment policies of a Fund. The board reserves the right to modify
the investment policies of a Fund as necessary to prevent any such prospective
rules and regulations from causing a Policy owner to be considered the owner of
the shares of the Fund underlying the separate account.
TAX CONSEQUENCES FOR THE SMALL COMPANY FUND
Foreign Transactions. Dividends and interest received by the Small
Company Fund may be subject to income, withholding, or other taxes imposed by
foreign countries and U.S. possessions that would reduce the yield on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors. Policy holders will bear the cost of foreign tax withholding in the
form of increased expenses to the Fund but generally will not be able to claim a
foreign tax credit or deduction for foreign taxes paid by the Fund by reason of
the tax-deferred status of the policies.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses and
cause the fund to be subject to hyperinflationary currency rules. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require the Fund to mark-to-market
certain types of its positions (i.e., treat them as if they were closed out) and
(b) may cause the fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions, will make the appropriate tax elections and will make
the appropriate entries in its books and records when it acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (i) neither the Fund nor its shareholders will be treated as receiving a
materially greater amount of capital gains or distributions than actually
realized or received, (ii) the Fund will be able to use substantially all of its
losses for the fiscal years in which the losses actually occur, and (iii) the
Fund will continue to qualify as a regulated investment company.
As described in the Prospectus, because shares of the Fund may only be
purchased through Policies, it is anticipated that dividends and distributions
will be exempt from current taxation if left to accumulate within the Policies.
Investment in Passive Foreign Investment Companies. If the Fund
purchases shares in certain foreign entities classified under the Code as
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
federal income tax on a portion of an "excess distribution" or gain from the
disposition of the shares, even though the income may have to be distributed by
the Fund to its shareholders, the Policies. In addition, gain on the disposition
of shares in a PFIC generally is treated as ordinary income even though the
shares are capital assets in the hands of the Fund. Certain interest charges may
be imposed on the Fund with respect to any taxes arising from excess
distributions or gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
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<PAGE> 62
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did not
make the election. In addition, information required to make such an election
may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue Service
(the "IRS") were published providing a mark-to-market election for shares in
certain PFICs held by regulated investment companies. If the Fund is able to
make the foregoing election in the first year in which it is permitted to do so,
it may be able to avoid the interest charge (but not the ordinary income
treatment) on disposition of the PFIC stock by each year marking-to-market the
stock (that is, by treating it as if it were sold for fair market value on the
last day of the year). Such an election could also result in acceleration of
income to the Fund.
Derivative Instruments. The use of derivatives strategies, such as
purchasing and selling (writing) options and futures and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Small Company Fund realizes in connection therewith. Gains from the disposition
of foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures, and
forward currency contracts derived by the Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income. However, income from the disposition of options and futures (other than
those on foreign currencies) will be subject to a 30% limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign currencies,
that are not directly related to the Fund's principal business of investing in
securities (or options and futures with respect to securities) also will be
subject to a 30% limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) for the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% limitation on the gross income that can be derived from the sale or other
disposition of securities or derivative instruments that were held for less than
three months. Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that limitation. The Fund intends that,
when it engages in hedging strategies, the hedging transactions will qualify for
this treatment, but at the present time it is not clear whether this treatment
will be available for all of the Fund's hedging transactions. To the extent this
treatment is not available or is not elected by the Fund, it may be forced to
defer the closing out of certain options, futures, or forward currency contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to continue to qualify as a RIC.
TAX CONSEQUENCES TO SHAREHOLDERS
Since shareholders of the Funds will be the Accounts, no discussion is
included herein as to the Federal income tax consequences at the level of the
holders of the Policies. For information concerning the Federal income tax
consequences to such holders, see the Prospectuses for such Policies.
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APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The 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.
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.
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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 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
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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.
FITCH'S 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 of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of the
issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair
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timely payment. The likelihood that the ratings of these bonds will
fall below investment grade is higher than for bonds with higher
ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
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.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, Bonds are in default on interest and/or principal payments. Such bonds
DD are extremely speculative should be valued on the basis of their
and ultimate recovery value in liquidation or reorganization of the
D obligor. `DDD' represents the highest potential for recovery of these
bonds, and 'D' represents the lowest potential for recovery.
DUFF & PHELPS' 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.
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The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
<TABLE>
<CAPTION>
RATING
SCALE DEFINITION
- ----- ----------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury Debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent Changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest
or preferred dividends. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments. Preferred stock with
dividend arrearages.
</TABLE>
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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. Factors such as liquidity of the issuer, long-term debt ratings,
reliability and quality of management, and earning and cost flows are considered
by Standard & Poor's when assigning these ratings.
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.
MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the 1933 Act.
Moody's commercial paper ratings are opinions on the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's does not represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. 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 related supporting institutions) have a
superior capacity for repayment of short-term promissory 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 related 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 relates 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 the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
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FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally 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.
F-3 (Fair credit quality) issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S (Weak credit quality) issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D (Default) issues assigned this rating are in actual or
imminent payment default.
LOC The symbol loc indicates that the rating is based on a letter
of credit issued by a commercial bank.
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 as defined is not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
RATING SCALE DEFINITION
- ------------ ----------
Duff 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.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
41
<PAGE> 70
RATING SCALE DEFINITION
- ------------ ----------
Good Grade
Duff 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
Duff 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
Duff 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
Duff 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
unsubordinated instruments of the rated entities with a maturity of one year or
less, including deposits, bank notes, bankers' acceptances, federal funds,
letters of credit, commercial paper and other obligations comparable in priority
and security to those specifically listed herein. These ratings do not consider
any collateral or security as the basis for the rating, although some of the
securities may in fact have collateral. Further, these ratings do not
incorporate consideration of the possible sovereign risk associated with a
foreign deposit (defined as a deposit taken in a branch outside the country in
which the rated entity is headquartered) of the rated entity. 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.
IBCA SHORT-TERM RATINGS
IBCA short-term ratings assess the borrowing characteristics of banks
and corporations, and the capacity for timely repayment of debt obligations. The
short-term ratings relate to debt which has a maturity of less than one year.
IBCA issues ratings and reports on the largest U.S. and international
bank holding companies, as well as major investment banks. IBCA's short-term
rating system utilizes a dual system--Individual Ratings and Legal Ratings. The
Individual Rating addresses 1) the current strength of consolidated banking
companies and their principal bank subsidiaries. A consolidated bank holding
company/bank with an "A" rating has a strong balance sheet, and a favorable
credit profile without significant problems. A "B" rating indicates sound credit
profile without significant problems. Performance is generally in line with or
better than that of its peers. The legal rating addresses the question of
whether an institution would receive support if it ran into difficulties. Issues
rated "A-1"
42
<PAGE> 71
are obligations supported by a very strong capacity for timely repayment. Issues
rated "A-2" have a very strong capacity for timely repayment although such
capacity may be susceptible to adverse changes in business, economic or
financial conditions.
A1+ Obligations supported by the highest capacity for timely
repayment and possess a particularly strong credit feature.
A1 Obligations supported by the highest capacity for timely
repayment.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
D Obligations which are currently in default.
43
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees of
Nationwide Separate Account Trust:
We have audited the accompanying statements of assets and liabilities,
including the statements of investments, of Nationwide Separate Account Trust
(comprised of the Small Company Fund, Capital Appreciation Fund, Total Return
Fund, Government Bond Fund, and Money Market Fund), as of December 31, 1995, and
the related statements of operations, statements of changes in net assets and
the financial highlights for each of the periods indicated herein. These
financial statements and the financial highlights are the responsibility of
Nationwide Separate Account Trust's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
December 31, 1995 by confirmation with the custodian and other appropriate audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the aforementioned funds comprising Nationwide Separate Account Trust as
of December 31, 1995, the results of their operations, the changes in their net
assets and the financial highlights for each of the periods indicated herein, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 23, 1996
<PAGE> 73
SMALL COMPANY FUND
Statement of Investments - December 31, 1995
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
COMMON STOCK (83.3%)
AGRICULTURAL PRODUCTS (0.3%)
1,333 Delta & Pine Ld Co. $49,000
-------
AIRLINE (0.2%)
1,200 Midwest Express Holding 33,300
-------
AUTO & AUTO PARTS (1.0%)
1,200 Donaldson Inc. 30,150
1,000 Exide Corp. 45,875
5,000 Meiwa Industry Co. (Japanese Yen) 26,417
1,500 Motorcar Parts & Accessories* 19,688
1,500 Reynolds & Reynolds Co., 58,313
-------
180,443
-------
BANK/SAVINGS & LOAN (1.7%)
1,200 Banco Latino Amer.
Exportaciones SA CIE 55,800
1,700 Charter One Financial Inc. 52,063
1,100 Cullen Frost Bankers Inc. 55,000
500 Fifth Third Bancorp. 36,625
700 First Commerce Corp 22,400
1,000 TCF Financial Corp. 33,125
1,400 Webster Financial Corp. 41,300
-------
296,313
-------
BROKERS-DEALERS (0.3%)
1,800 Donaldson Lufkin & Jenrette* 56,250
-------
BUILDING MATERIALS (0.6%)
7,780 Bellway Plc ORD (British Pounds) 31,652
14,170 Keller Group ORD (British Pounds) 31,684
2,000 Komatsu Wall Industry Co. 42,656
(Japanese Yen) -------
105,992
-------
CHEMICALS & FERTILIZER (1.4%)
27,170 Amberley Group (British Pounds) 28,267
3,000 Kaigen (Japanese Yen) 28,444
3,000 Lawter Intl Inc. 34,875
2,500 Lilly Industries Inc 31,875
4,300 McWhorter Technologies Inc.* 63,425
3,000 Osaka Organic Chemical 34,900
(Japanese Yen)
2,000 Teikoku Hormone (Japanese Yen) 29,083
-------
250,869
-------
COMMERCIAL SERVICES (4.1%)
1,200 Accustaff Inc.* 52,800
900 Catalina Marketing Corp.* 56,475
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
4,000 Corestaff Inc.* $146,000
3,000 Danka Business 111,000
1,500 Data Broadcasting 18,563
1,000 Fritz Companies Inc.* 41,500
1,000 Fujitsu Business
Systems (Japanese Yen) 26,369
1,800 On Assignment Inc. * 58,950
1,500 QuickResponse
Services Inc.* 27,563
21,740 Shanks & McEwan Grp 29,707
(British Pounds)
1,150 Solectron Corp.* 50,744
1,950 Viking Office Prods Inc.* 90,675
-------
710,346
-------
COMMUNICATIONS & MEDIA (4.4%)
2,100 Allen Group Inc. 46,988
1,500 Aspect Telecomm 50,250
420 Bantex (Danish Krone)* 30,315
2,000 Central European Media
Enterprises LTD* 41,000
2,250 Harte-Hanks 44,438
4,200 K-III Communications Inc.* 50,925
7,000 Metromedia
International Group* 98,000
2,000 Nitto Electric Works 28,696
(Japanese Yen)
2,200 Paging Network Inc.* 53,625
1,500 Picturetel Corporation* 64,688
5,000 Spelling Entertainment 62,500
3,000 Tonichi Cable Ltd 26,379
(Japanese Yen)
6,000 Westell Technologies* 150,750
-------
748,554
-------
COMPUTER EQUIPMENT (5.2%)
2,000 Arbor Software Corp.* 94,500
3,000 Casino Data System* 75,000
2,600 Cognex Corp.* 90,350
1,500 Continuum Inc.* 59,250
1,500 D H Technology Inc.* 36,750
3,400 Davidson & Associates Inc.* 74,800
1,100 FileNet Corp.* 51,700
2,500 Manugistics Group Inc.* 36,875
5,000 Network Appliance Inc.* 200,625
3,000 Platinum Technology* 55,125
(Continued)
<PAGE> 74
SMALL COMPANY FUND
Statement of Investments - December 31, 1995, Continued
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
COMPUTER EQUIPMENT (CONTINUED)
1,000 Shared Medical Systems Corp. $54,375
1,500 Synopsys Inc.* 57,000
-------
886,350
-------
COMPUTER SERVICE (0.7%)
3,400 DST Systems Inc.* 96,900
500 Uunet Technologies* 31,500
-------
128,400
-------
COMPUTER SOFTWARE (4.0%)
1,200 Ascend Commun. Inc.* 97,350
1,200 CBT Group PLC ADR* 63,600
2,000 Clarify Inc.* 60,000
1,500 HNC Software Inc.* 71,625
1,500 Hyperion Software Corp.* 31,875
3,600 Madge Networks N V* 161,100
200 Mcafee Associates* 8,775
2,250 System Software Associates Inc. 48,938
2,200 Transaction System Architects 74,250
2,500 Visio Corp.* 70,625
-------
688,138
-------
CONGLOMERATES (0.4%)
350 Crown Van Gelder
(Netherlands Guilders) 28,059
1,000 Fujix Ltd (Japanese Yen) 9,355
3,000 Morito Co. (Japanese Yen) 31,701
-------
69,115
-------
CONSUMER GOODS & SERVICES (2.3%)
5,500 Cairn Energy USA Inc.* 77,000
1,000 Chofu Seisakusho (Japanese Yen) 26,854
1,900 Devry Inc.* 51,300
7,000 Mentor Corp. 161,000
1,000 Sangetsu Co. (Japanese Yen) 25,206
1,500 Stewart Enterprises Inc., Class A 55,500
-------
396,860
-------
CONTAINERS (0.5%)
2,000 Alltrista Corp.* 36,000
1,800 Libbey Inc. 40,500
-------
76,500
-------
ELECTRICAL EQUIPMENT (0.8%)
4,600 Continental Circuits Corp.* 74,750
2,550 Holophane Corp.* 55,463
-------
130,213
-------
ELECTRONICS (5.7%)
270 Batenburg Beheer
(Netherlands Guilders) 32,004
1,900 Burr-Brown Corp.* 48,450
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
5,150 Chemring Grp Plc ORD $30,628
(British Pounds)
4,000 Dallas Semiconductor Corp. 83,000
400 Eriks Holdings 31,193
(Netherlands Guilders)
900 Glenayre Technologies Inc.* 56,025
2,000 Jastec (Japanese Yen) 30,053
7,000 Lernout & Hauspie
Speech Products* 196,000
7,890 MMT Comptng PLC
ORD (British Pounds) 29,771
1,400 Maxim Integrated
Products Inc.* 53,900
45,520 Neotronics Technology
ORD (British Pounds) 33,928
3,600 Oak Industries Inc.* 67,500
5,200 Pioneer Standard
Electronics Inc. 68,900
2,000 Ross Technology* 19,500
1,000 Ryoyo Electric 22,879
(Japanese Yen)
14,600 Sanderson Electronic
PLC (British Pounds) 31,739
2,000 Seiwa Electric Manufacturing
Co. (Japanese Yen) 25,400
910 Twentsche Kabel Holdings 31,338
(Netherlands Guilders)
1,200 Uniphase Corporation* 42,900
1,100 Watkins Johnson Co. 48,125
-------
983,233
-------
ENGINEERING & CONSTRUCTION (0.3%)
2,000 Jacobs Engineering
Group Inc.* 50,000
-------
ENVIRONMENTAL SERVICES (0.3%)
1,500 Sanifill Inc.* 50,063
-------
FINANCIAL SERVICES (3.1%)
5,000 Duff & Phelps Credit 71,875
3,500 Enhance Financial
Services Group 93,188
1,000 Gartner Group Inc.* 47,875
3,500 Investors Financial Services 72,625
15,000 Reliance Group
Holdings Inc. 129,375
(Continued)
<PAGE> 75
SMALL COMPANY FUND
Statement of Investments - December 31, 1995, Continued
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
FINANCIAL SERVICES (CONTINUED)
900 T. Rowe Price Associates Inc. $44,325
1,300 United Companies Financial Corp. 34,288
800 Vesta Insurance Group Inc. 43,600
---------
537,151
---------
FOOD & BEVERAGE (1.3%)
3,000 B-R 31 Ice Cream (Japanese Yen) 31,410
1,000 Bush Boake Allen Inc.* 27,375
3,500 Canandaigua Wine Inc.* 114,188
2,000 Hokkaido Coca-Cola Bottling 24,236
(Japanese Yen)
6,000 Soken Co. Ltd (Japanese Yen) 30,189
---------
227,398
---------
HEALTHCARE (7.4%)
2,200 Alpharma Inc. Class A 57,475
1,000 American Oncology
Resources Inc.* 48,625
5,000 Ballard Medical Products 89,375
500 Biochem Pharama Inc.* 20,063
3,000 Biofermin Pharmaceuticals
(Japanese Yen) 33,737
1,200 Biovail Corp. International* 92,700
2,000 Corvita Corporation* 20,750
510 Ecco Travail Temporaire
(French Francs) 29,670
2,000 EmCare Holdings* 48,000
800 Genzyme Corp.* 49,900
3,000 Gilead Sciences Inc.* 96,000
1,200 Healthsouth Corp.* 34,950
2,000 INCYTE Pharmaceuticals 50,000
3,200 Kinetic Concepts Inc. 38,400
6,100 Molecular Devices Corporation* 64,050
5,300 Neuromedical Systems* 106,475
3,000 Norland Medical Systems Inc.* 69,750
1,500 Ostex International Inc.* 28,875
2,500 Parexel International Corp.* 83,125
500 Phycor Inc.* 25,281
1,000 Physician Sales & Service Inc.* 28,500
1,000 Physio Control Holding Corp.* 17,875
4,000 Quest Medical Inc.* 41,500
3,000 Total Renal Care* 88,500
---------
1,263,576
---------
HOUSING (1.5%)
2,000 Alinco (Japanese Yen) 22,685
200 Dyckerhoff & Widmann
(German Marks) 33,259
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
3,000 Nissei Industries $31,992
(Japanese Yen)
1,400 Oakwood Homes Corp. 53,725
3,000 Tanabe Industries 29,374
(Japanese Yen)
1,600 Texas Industries Inc. 84,800
---------
255,835
---------
INDUSTRIAL MISC. (2.7%)
2,600 Adac Labs 31,525
4,400 BMC Industries Inc. 102,300
2,400 Brady WH Co. 64,800
1,300 Harmon Industries Inc. 20,475
3,000 Material Sciences* 44,625
1,000 Pentair Inc. 49,750
1,900 SCI Systems Inc.* 58,900
3,900 Varlen Corp. 83,850
---------
456,225
---------
LEISURE SERVICE (1.6%)
6,000 Bally Entertainment Corp.* 84,000
500 HFS Inc.* 40,875
80,650 Kunick (British Pounds) 29,743
3,000 Regal Cinemas Inc.* 89,250
3,000 Shingakukai Co. Ltd 25,826
(Japanese Yen) ---------
269,694
---------
LODGING (1.7%)
2,400 Doubletree Corp.* 63,000
2,000 Marcus Corp. 54,750
6,200 Prime Hospitality Corp.* 62,000
2,400 Renaissance Hotel Group * 61,200
2,000 Studio Plus Hotels * 51,500
---------
292,450
---------
MACHINERY & CAPITAL GOODS (4.8%)
3,000 Alamo Group Inc. 54,000
11,510 Ashtead Group ORD 30,384
(British Pounds)
6,090 Carclo Engineering Group
ORD (British Pounds) 29,504
3,000 Danto Corp. (Japanese Yen) 37,227
3,000 Denkyosha Co. 27,484
(Japanese Yen)
400 Dionex Corp.* 22,700
410 Fives-Lille (Compagnie DE) 30,853
French Francs)
(French Francs)
(Continued)
<PAGE> 76
SMALL COMPANY FUND
Statement of Investments - December 31, 1995, Continued
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
MACHINERY & CAPITAL GOODS (CONTINUED)
2,500 Graco Inc. $76,250
1,000 IDEX Corp. 40,750
1,400 Kaydon Corp. 42,525
3,000 Koito Industries (Japanese Yen) 36,063
2,500 Lincoln Electric Co., Class A 60,000
2,000 Nihon Decoluxe (Japanese Yen) 28,696
3,000 Nikko Co. (Japanese Yen) 28,938
400 Reesink (Netherlands Guilders) 30,944
1,000 Ricoh Elemex (Japanese Yen) 14,445
4,000 Uehara Sei Shoji (Japanese Yen) 31,837
800 Watts Industries Inc. 18,600
4,700 Wolverine Tube Co.* 176,250
-------
817,450
-------
MANUFACTURING-SHOES & APPAREL (1.3%)
5,200 Donnkenny Inc.* 94,250
2,400 Gucci Group* 93,300
800 Nautica Enterprises* 35,000
-------
222,550
-------
MATERIALS & PROCESSING (1.9%)
2,000 Cambrex Corp. 82,750
7,000 International Specialty Products* 76,125
2,500 Mineral Technologies Inc. 91,250
7,800 Stratosphere* 77,025
-------
327,150
-------
METAL PRODUCT & FABRICATION (0.3%)
1,500 NN Ball & Roller Inc. 26,250
2,000 Osaka Steel (Japanese Yen) 30,635
-------
56,885
-------
MISCELLANEOUS (0.5%)
7,000 Willis Corroon Group 81,375
-------
NONFERROUS METALS (0.7%)
2,000 Allied Products Corp. 48,000
1,400 Alumax, Inc.* 42,875
2,000 Commonwealth Alum Corp. 31,000
-------
121,875
-------
OIL & GAS/ENERGY (3.9%)
3,600 Barrett Resources Corp.* 105,750
2,000 Brown (Tom) Inc.* 29,250
1,000 Camco International Inc. 28,000
1,100 Input/Output Inc.* 63,525
6,200 Nabors Industries Inc.* 68,975
6,000 Offshore Logistics Inc.* 75,750
2,700 Petroleum Geo Services ADR* 67,500
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
6,600 Smith International Inc.* $155,100
3,300 Tejas Power Corp.* 30,113
3,700 Texas Meridian 50,413
-------
674,376
-------
PRODUCER DURABLES (1.2%)
5,000 Huntco Inc. 76,875
5,000 Rohr Inc.* 71,875
5,000 Vista 2000 Inc.* 49,375
-------
198,125
-------
PUBLISHING (1.7%)
700 Central Newspapers Inc. 21,963
1,000 Houghton Mifflin Co. 43,000
1,500 McClatchy Newspaper,
Class A 34,313
1,900 Pulitzer Publishg Co. 90,725
800 Scholastic Corp.* 62,200
1,000 Waverly Inc. 45,750
-------
297,951
-------
REAL ESTATE (0.4%)
3,400 NHP Inc.* 62,900
-------
RESTAURANTS (1.1%)
2,800 Boston Chicken Inc.* 89,950
1,000 Outback Steakhouse Inc.* 35,875
6,100 Schlotzsky's Inc.* 62,525
-------
188,350
-------
RETAILING & DISTRIBUTORS (0.6%)
3,000 Monro Muffler Brake Inc.* 41,625
2,600 Richfood Holdngs Inc. 69,550
-------
111,175
-------
RETAIL STORES (3.6%)
2,600 Borders Group Inc.* 48,100
3,000 Circle K Corporation* 76,125
2,000 Corporate Express* 60,250
700 Fastenal Company 29,575
260 Guilbert SA (French Francs) 30,571
2,000 Henry Schein Inc.* 59,000
1,500 Just For Feet Inc.* 53,625
750 Men's Warehouse Inc.* 19,313
1,000 Micro Warehouse Inc.* 43,250
4,300 Neostar Retail Group Inc.* 31,713
1,200 Petsmart Inc.* 37,200
2,500 Talbots Inc. 71,875
1,100 Tiffany & Co. 55,413
-------
616,010
-------
(Continued)
<PAGE> 77
SMALL COMPANY FUND
Statement of Investments - December 31, 1995, Continued
- -----------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- -----------------------------------------------------------------
TECHNOLOGY (4.9%)
8,300 Auspex Systems Inc.* $151,475
2,500 Cheyenne Software Inc.* 65,313
5,000 P-COM Inc.* 100,000
1,700 Pixar* 49,088
1,500 Safeguard Scientifics Inc.* 74,250
3,000 Sierra On-Line Inc.* 86,250
2,000 Sync Research Inc.* 90,500
2,500 Thiokol Corp. 84,688
3,000 Visioneer* 66,750
5,000 Wyman Gordon Co.* 68,750
----------
837,064
----------
TELEPHONE (0.4%)
2,000 Cinncinnati Bell Inc. 69,500
----------
TEXTILE/APPAREL (1.6%)
420 Bazar DE LHotel DE Ville 31,974
(French Francs)
2,000 Charle Co. (Japanese Yen) 29,277
390 Devanlay SA (French Francs) 32,123
6,320 Hicking Pentecost PLC ORD 30,913
(British Pounds)
4,000 Isamu Paint Co. Ltd 28,075
(Japanese Yen)
3,000 Sotoh (Japanese Yen) 29,665
1,600 St John Knits Inc. 85,000
----------
267,027
----------
TOBACCO & GROCERY (0.3%)
1,000 First Brands Corp. 47,625
----------
TRANSPORTATION (0.6%)
2,000 Finnlines (Finnish Marks) 32,704
5,000 Isewan Terminal Services 31,507
(Japanese Yen)
4,000 Tokyo Kisen (Japanese Yen) 31,759
----------
95,970
----------
Total common stock 14,285,626
(cost $12,776,835) ----------
PRINCIPAL
---------
REPURCHASE AGREEMENTS (16.7%)
$2,371,000 Fifth Third Bank
5.35%, 01/02/96, collaterallized by
$2,387,000 FNARM Pool #3300040 and
#3300046, 6.397%, due 11/01/25, and
6.844%, due 11/01/25
market value - $2,419,098 $2,371,000
- -----------------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- -----------------------------------------------------------------
$487,000 State Street Bank
5.40%, 01/02/96, collateralized
by $487,000 U.S. Treasury Note
6.00%, due 8/31/97, market
value - $500,428 $ 487,000
------------
Total repurchase
agreements 2,858,000
(cost $2,858,000) ------------
SHORT-TERM DEBT (3.2%)
552,000 Florida Power Corp. 551,911
------------
5.80%, due 01/02/96
(cost $551,911)
U.S. GOVERNMENT
OBLIGATIONS (3.3%)
568,000 U.S. Treasury Bills 564,217
------------
5.33% through 4.84%,
due 1/11/96 through
3/7/96 (cost $564,217)
Total investments $18,259,754
(cost $16,750,963) ============
(Continued)
<PAGE> 78
SMALL COMPANY FUND
Statement of Investments - December 31, 1995, Continued
FORWARD CURRENCY PURCHASE CONTRACTS
<TABLE>
<CAPTION>
Net
U.S. Dollar Unrealized
Cost Value Appreciation
---- ----- ------------
<S> <C> <C> <C>
Netherlands Guilders, delivery
date 1/2/96 $153,870 $154,263 $393
</TABLE>
* Denotes a non-income producing security. Securities denominated in
foreign currencies are shown at their U.S. dollar cost and value. Cost
for Federal income tax purposes: $16,763,912 Portfolio holding
percentages represent market value as a percentage of net assets. See
accompanying notes to financial statements.
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS BY CURRENCY % OF PORTFOLIO
<S> <C>
United States Dollars 90.3%
Japanese Yen 5.6%
British Pounds 2.0%
French Francs 0.8%
Netherlands Guilders 0.7%
German Marks 0.2%
Finnish Marks 0.2%
Danish Krone 0.2%
</TABLE>
<PAGE> 79
CAPITAL APPRECIATION FUND
Statement of Investments - December 31, 1995
- ----------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- ----------------------------------------------------------------
COMMON STOCKS (91.0%)
AUTO & AUTO PARTS
(4.4%)
36,100 Chrysler Corp. $1,999,037
55,400 Ford Motor Company 1,606,600
-----------
3,605,637
-----------
BROADCASTING
(1.1%)
3,600 Capital Cities/ABC, Inc. 444,150
4,125 Tel Com-Liberty Media, Group A 110,859
16,500 Tele-Communications Inc.,
Group A* 327,938
-----------
882,947
-----------
BUILDING (4.4%)
57,700 Masco Corp. 1,810,337
14,600 USG Corp.* 438,000
22,800 Vulcan Materials Co. 1,313,850
-----------
3,562,187
-----------
CHEMICALS (12.5%)
28,900 Georgia Gulf Corp. 888,675
52,500 IMC Global, Inc. 2,145,938
51,800 Morton International Inc. 1,858,325
59,700 OM Group, Inc. 1,977,562
58,310 Raychem Corp. 3,316,381
-----------
10,186,881
-----------
COMPUTER EQUIPMENT (3.0%)
26,200 International Business
Machines Corp. 2,403,850
-----------
DRUGS (11.5%)
53,700 Allergan Inc. 1,745,250
6,400 American Home Products Corp. 620,800
59,900 Schering-Plough Corp. 3,279,525
38,400 Warner-Lambert Co. 3,729,600
-----------
9,375,175
-----------
ELECTRONICS (0.6%)
13,200 AMP, Inc. 506,550
-----------
ENTERTAINMENT (2.3%)
32,000 Disney, (Walt) Co. 1,888,000
-----------
FINANCIAL (10.9%)
15,000 Barnett Banks, Inc. 885,000
24,000 Charter One Financial Inc. 735,000
13,000 Chubb Corp. 1,257,750
6,100 CoreStates Financial Corp. 231,038
5,835 Fund American Enterprises* 434,707
88,900 Horace Mann Educators Corp. 2,778,125
31,300 Mellon Bank Corp. 1,682,375
24,334 U S Bancorp 818,231
-----------
8,822,226
-----------
- ----------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- ----------------------------------------------------------------
FOOD & BEVERAGES (11.6%)
14,500 Anheuser-Busch Companies, Inc. $969,688
75,000 Morningstar Group Inc. 600,000
51,500 PepsiCo, Inc. 2,877,562
4,800 Philip Morris Companies, Inc. 434,400
28,300 Quaker Oats Company 976,350
75,333 Ralcorp Holdings Inc.* 1,826,825
27,500 Ralston-Ralston Purina Group 1,715,313
-----------
9,400,138
-----------
FOREST PRODUCTS (0.7%)
11,000 Bowater Inc. 390,500
3,100 Champion International Corp. 130,200
1,100 Georgia-Pacific Corp. 75,488
-----------
596,188
-----------
HOTELS - MOTELS (0.4%)
21,700 Host Marriott Corp. 317,905
-----------
HOUSEHOLD PRODUCTS (4.9%)
19,300 Avon Products, Inc. 1,454,738
42,100 Dial Corp. (The) 1,247,212
7,000 Gillette Company (The) 364,875
29,500 Helene Curtis Industries, Inc. 932,937
-----------
3,999,762
-----------
LEISURE PRODUCTS (3.2%)
107,200 Brunswick Corp. 2,572,800
-----------
MACHINERY (1.6%)
33,800 Johnstown America Industries, Inc.* 169,000
12,200 PACCAR, Inc. 513,925
20,200 Trinity Industries, Inc. 636,300
-----------
1,319,225
-----------
NONFERROUS METALS (0.7%)
18,850 Alumax Inc.* 577,281
-----------
OIL & GAS (5.6%)
31,200 Texaco Inc. 2,449,200
71,800 Unocal Corp. 2,091,175
-----------
4,540,375
-----------
PRINTING & PUBLISHING (5.8%)
51,200 American Greetings Corp.,
Class A 1,414,400
22,800 Dun & Bradstreet Corp. 1,476,300
3,800 Gannett Company, Inc. 233,225
30,500 Gibson Greetings, Inc.* 488,000
4,900 Tribune Co. 299,513
2,800 Washington Post Company
(The), Class B 789,600
-----------
4,701,038
-----------
(Continued)
<PAGE> 80
CAPITAL APPRECIATION FUND
Statement of Investments - December 31, 1995, Continued
- ------------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- ------------------------------------------------------------------
TELECOMMUNICATIONS (2.7%)
10,000 Airtouch Communications Inc. $282,500
73,200 MCI Communications Corp. 1,912,350
----------
2,194,850
----------
TOYS (3.1%)
81,388 Mattel, Inc. 2,502,681
----------
Total common stocks 73,955,696
(cost $58,073,043) ----------
PRINCIPAL
---------
CONVERTIBLE BONDS (0.6%)
$1,494,000 Consorcio G. Grupo Dina, 8.00%,
2004 526,635
(cost $1,380,790) ----------
COMMERCIAL PAPER (9.2%)
514,000 Heinz (H.J.) Company
5.75%, due 01/26/96 511,948
1,967,000 Koch Industries, Inc.
5.62%, due 01/19/96 1,961,473
320,000 Monsanto Co.
5.72%, due 01/16/96 319,237
997,000 PHH Corp.
5.76%, due 01/09/96 995,724
2,705,000 Pitney Bowes Credit Corp.
5.57%, due 01/25/96 2,694,955
352,000 Sysco Corp.
5.55%, due 02/01/96 350,318
631,000 Transamercia Finance Group Inc.
5.81%, due 01/03/96 630,796
----------
Total commercial paper 7,464,451
(cost $7,464,451) ----------
- ------------------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ------------------------------------------------------------------
REPURCHASE AGREEMENT (0.5%)
$403,000 Merrill Lynch & Co., Inc.,
5.35%, due 01/02/96, Collateralized
by $528,558 FNMA Pool #221091, 7.00%,
due 07/01/08, market value - $411,181
(cost $403,000) $ 403,000
----------
Total investments $82,349,782
(cost $67,321,284) ==========
* Denotes a non-income producing security.
Cost also represents cost for federal income tax purposes.
Portfolio holding percentages represent market value as a percentage of net
assets.
See accompanying notes to financial statements.
<PAGE> 81
TOTAL RETURN FUND
Statement of Investments - December 31, 1995
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
COMMON STOCKS (87.1%)
AEROSPACE/DEFENSE (1.3%)
140,000 The Boeing Company $10,972,500
-----------
AUTOMOBILES (4.7%)
230,000 General Motors Corp. 12,161,250
266,400 Magna International Inc. 11,521,800
350,800 Genuine Parts Co. 14,382,800
-----------
38,065,850
-----------
BUSINESS SERVICES (0.8%)
157,500 (The) Olsten Corp. 6,221,250
-----------
CHEMICALS (4.3%)
110,000 Air Products & Chemicals Inc. 5,802,500
400,500 Crompton & Knowles Corp. 5,306,625
150,000 Dupont (E.I.) DeNemours & Co. 10,481,250
100,000 Eastman Chemical Co. 6,262,500
268,400 Lawter International, Inc. 3,120,150
150,000 Lubrizol Corp. 4,181,250
-----------
35,154,275
-----------
COMPUTER EQUIPMENT (3.8%)
100,000 Hewlett-Packard Co. 8,375,000
250,000 International Business Machines 22,937,500
-----------
31,312,500
-----------
COMPUTER SOFTWARE & SERVICES (0.9%)
93,500 Automatic Data Processing, Inc 6,942,375
43,100 SCS/COMPUTE Inc.* 288,231
-----------
7,230,606
-----------
CONGLOMERATE (9.2%)
200,000 EG&G, Inc. 4,850,000
311,000 Eastman Kodak Co. 20,837,000
1,500,000 Hanson Plc 22,875,000
305,300 Honeywell Inc. 14,845,213
200,000 Rockwell International Corp. 10,575,000
45,000 U.S. Industries Inc. 826,875
-----------
74,809,088
-----------
CONSUMER GOODS (0.9%)
153,900 Premark International Inc. 7,791,188
-----------
- --------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------
DRUGS (3.3%)
90,000 Bristol-Meyers Squibb Co. $7,728,750
80,000 Schering-Plough Corp. 4,380,000
150,000 Warner-Lambert Co. 14,568,750
-----------
26,677,500
-----------
ELECTRONICS (3.7%)
127,300 AMP, Inc. 4,885,138
380,000 Intel Corp. 21,565,000
139,800 Richardson Electronic Ltd. 1,502,850
177,000 Woodhead Industries, Inc. 2,522,250
-----------
30,475,238
-----------
FINANCIAL (12.1%)
500,000 Allstate Corp. 20,562,500
130,000 Bankers Trust NY Corp. 8,645,000
578,812 Bear Stearns Companies, Inc. 11,503,889
700,000 Equitable Companies, Inc. 16,800,000
200,000 First Chicago NBD 7,900,000
350,000 Merrill Lynch & Co., Inc. 17,850,000
140,000 Morgan J.P. & Co., Inc. 11,235,000
50,000 Morgan Stanley Group Inc. 4,031,250
-----------
98,527,639
-----------
FOOD & BEVERAGES (4.4%)
2,000,000 Grand Metropolitan Plc 14,408,000
176,700 Grand Metropolitan ADR 5,080,125
283,500 Heinz (H.J.) Co. 9,390,938
100,100 International Flavor
& Fragrance Inc. 4,804,800
54,100 Universal Foods Corp. 2,170,763
-----------
35,854,626
-----------
FOOD - GRAIN & AGRICULTURE (1.9%)
849,509 Archer-Daniels Midland Co. 15,291,162
-----------
HEALTHCARE SERVICES (2.7%)
434,000 Columbia/HCA Healthcare Corp. 22,025,500
-----------
MACHINERY & CAPITAL GOODS (2.0%)
155,000 Cooper Industries, Inc. 5,696,250
56,000 Duriron Inc. 1,302,000
(Continued)
<PAGE> 82
TOTAL RETURN FUND
Statement of Investments - December 31, 1995, Continued
- -----------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- -----------------------------------------------------------------
MACHINERY & CAPITAL GOODS (CONTINUED)
60,000 Emerson Electric Co. $4,905,000
40,000 Ingersoll-Rand Company 1,405,000
50,000 Nordson Corporation 2,812,500
------------
16,120,750
------------
OIL & GAS (13.7%)
180,000 Amoco Corporation 12,937,500
130,000 Exxon Corporation 10,416,250
308,900 Mobil Corp. 34,596,800
110,000 Royal Dutch Petroleum Co. 15,523,750
81,300 Sonat, Inc. 2,896,313
225,000 Texaco, Inc. 17,662,500
400,000 The Williams Companies, Inc. 17,550,000
------------
111,583,113
------------
PAPER & FOREST PRODUCTS (0.5%)
40,000 Georgia-Pacific Corp. 2,745,000
62,400 Glatfelter (P.H.) Company 1,068,600
------------
3,813,600
------------
POLLUTION CONTROL (1.3%)
350,000 WMX Technologies, Inc. 10,456,250
------------
PRINTING & PUBLISHING (3.4%)
275,000 Dun & Bradstreet Corp. 17,806,250
217,600 Reader's Digest Assoc.,Inc.,
Class B 10,281,600
------------
28,087,850
------------
REAL ESTATE (0.1%)
58,000 Sec Cap Pac Trust 1,145,500
------------
RESTAURANTS (0.1%)
185,000 Pancho's Mexican Buffet, Inc. 531,875
------------
RETAIL (0.6%)
149,000 Supervalu Inc. 4,693,500
------------
TELECOMMUNICATIONS (9.9%)
564,300 AT&T Corp. 36,538,425
300,000 MCI Communications Corp. 7,837,500
- -----------------------------------------------------------------
VALUE
SHARES SECURITY (NOTE 1)
- -----------------------------------------------------------------
901,800 Sprint Corporation $35,959,272
------------
80,335,197
------------
TRANSPORTATION (1.5%)
193,000 Union Pacific Corp. 12,738,000
------------
Total common stocks 709,914,557
(cost $543,458,996) ------------
PRINCIPAL
- ---------
REPURCHASE AGREEMENT (0.3%)
$ 2,490,000 Merrill Lynch & Co., Inc.,
5.35%, due 01/02/96, Collateralized
by $809,090 FNRM CL207W RT92-207,
8.00%, due 11/25/22 and $25,591,569
FNMA Series 132 Stripped, 9.00%, due
4/25/22 - market value - $2,540,547
(cost $2,490,000) 2,490,000
-------------
U.S. GOVERNMENT AGENCY
SHORT-TERM OBLIGATIONS (9.9%)
24,610,000 Federal Home Loan Mortage Corp.
Discount Notes, 5.56% through 5.35%,
due 1/29/96 through 5/10/96 24,507,947
57,220,000 Federal National Mortgage Association
Discount Notes, 5.55% through 5.14%,
due 1/24/96 through 6/20/96 56,489,896
-------------
Total U.S. government agency short-term
obligations (cost $80,997,843) 80,997,843
-------------
U.S. TREASURY BILLS (2.1%)
17,035,000 5.63% through 5.20%,
due 2/8/96 through 5/16/96
(cost $16,760,799) 16,760,799
-------------
Total investments $810,163,199
(cost $643,707,638) =============
* Denotes a non-income producing security.
Cost also represents cost for federal income tax purposes.
Portfolio holding percentages represent market value as a percentage of net
assets.
See accompanying notes to financial statements.
<PAGE> 83
GOVERNMENT BOND FUND
Statement of Investments - December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL SECURITY VALUE (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE BACKED SECURITIES (34.1%)
Federal Home Loan Mortgage Corp., REMIC
$13,000,000 Series 1344-D, 6.00%, due 8/15/07 $12,521,197
20,000,000 Series 1415-N, 6.75%, due 11/15/07 20,282,380
9,454,271 Series 31-E, 7.55%, due 5/15/20 9,775,612
10,000,000 Series 94-E, 8.95%, due 11/15/20 10,223,690
19,117,132 Series 1143-Z, 7.50%, due 10/15/21 19,527,749
3,861,576 Series 190-D, 9.20%, due 10/15/21 4,044,380
Federal National Mortgage Association Debentures, REMIC
6,500,000 Series 68-E, 8.35%, due 10/25/03 6,614,849
9,761,911 Series 94-100-M, 5.50%, due 09/25/09 9,671,213
5,000,000 Series 34-E, 9.85%, due 08/25/14 5,239,745
2,619,508 Series 88-25-B, 9.25%, due 10/25/18 2,766,407
14,000,000 Series 16-D, 9.00%, due 03/25/20 14,853,146
8,000,253 Series 67-Z, 9.00%, due 06/25/20 8,434,499
4,851,469 Series 73-A, 8.00%, due 07/25/21 5,013,212
8,127,628 Series 81-Z, 8.50%, due 04/25/22 8,861,545
17,000,000 Series 203-PJ, 6.50%, due10/25/23 17,180,183
-----------
Total mortgage backed securities 155,009,807
(cost $147,587,504) -----------
U.S. GOVERNMENT AGENCY LONG-TERM OBLIGATIONS (51.5%)
Federal Home Loan Banks
10,000,000 7.75%, due 4/25/96 10,072,210
20,435,000 5.78%, due 2/16/01 20,577,248
12,000,000 6.36%, due 3/21/01 12,390,132
15,800,000 7.44%, due 8/10/01 17,141,404
Federal Home Loan Mortgage Corporation
20,000,000 6.31%, due 2/23/04 19,860,120
8,710,000 7.97%, due 7/07/04 8,957,207
Federal National Mortgage Association
16,000,000 7.05%, due 9/05/00 16,155,824
22,000,000 8.25%, due 10/12/04 23,725,636
Private Export Funding Corporation
34,000,000 6.86%, due 4/30/04 35,203,430
</TABLE>
(Continued)
<PAGE> 84
GOVERNMENT BOND FUND
Statement of Investments - December 31, 1995, Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL SECURITY VALUE (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY LONG-TERM OBLIGATIONS (CONTINUED)
Resolution Funding Corporation, STRIPS
$54,000,000 0.00%, due 4/15/06 $29,685,905
25,000,000 0.00%, due 4/15/08 12,055,725
58,000,000 0.00%, due 7/15/13 19,523,902
40,000,000 0.00%, due 7/15/20 8,425,960
------------
Total U.S. government agency long-term obligations 233,774,703
(cost $215,815,186) ------------
REPURCHASE AGREEMENTS (13.1%)
59,674,000 Merrill Lynch & Co., Inc.
5.50%, due 01/02/96, Collateralized by
$59,895,000 U.S. Treasury Note, 5.625%, due 10/31/97 -
market value $60,905,728 59,674,000
(cost $59,674,000) ------------
Total investments (cost $423,076,690) $448,458,510
============
</TABLE>
Cost also represents cost for federal income tax purposes.
Portfolio holding percentages represent market value as a percentage of net
assets.
See accompanying notes to financial statements.
<PAGE> 85
MONEY MARKET FUND
Statement of Investments - December 31, 1995
- ----------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ----------------------------------------------------------
CANADIAN GOVERNMENT OBLIGATIONS (8.7%)
British Columbia, Province of
$5,000,000 5.69%, due 01/04/96 $4,997,629
2,000,000 5.60%, due 02/05/96 1,989,111
5,000,000 5.62%, due 02/12/96 4,967,217
5,000,000 5.56%, due 02/12/96 4,967,566
5,000,000 5.60%, due 02/26/96 4,956,445
Canadian Wheat Board
3,000,000 5.60%, due 02/07/96 2,982,734
4,000,000 5.64%, due 02/13/96 3,973,054
6,000,000 5.62%, due 02/13/96 5,959,723
5,000,000 5.63%, due 02/15/96 4,964,812
5,000,000 5.63%, due 02/21/96 4,960,121
Export Development
9,850,000 5.74%, due 01/03/96 9,846,859
9,815,000 5.72%, due 01/05/96 9,808,762
----------
Total Canadian government
obligations (cost $64,374,033) 64,374,033
----------
COMMERCIAL PAPER (90.0%)
AGRICULTURE/FINANCE (2.7%)
Deere, (John) Capital
1,000,000 5.65%, due 02/05/96 994,507
10,000,000 5.62%, due 03/08/96 9,895,406
5,000,000 5.53%, due 04/10/96 4,923,195
4,000,000 5.54%, due 04/19/96 3,932,905
----------
19,746,013
----------
AUTO/FINANCE (2.0%)
Ford Motor Credit Co.
966,000 5.70%, due 01/04/96 965,541
2,000,000 5.70%, due 01/19/96 1,994,300
12,000,000 5.64%, due 02/23/96 11,900,360
----------
14,860,201
----------
BANKS (7.9%)
Banc One Corp.
7,000,000 5.65%, due 02/07/96 6,959,351
CoreStates Capital Corp.
4,005,000 5.67%, due 01/17/96 3,994,907
First Union Corp.
10,000,000 5.71%, due 01/29/96 9,955,589
13,500,000 5.71%, due 02/09/96 13,416,491
- ----------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ----------------------------------------------------------
National City Credit Corp.
$8,210,000 5.55%, due 02/14/96 $8,154,309
6,160,000 5.68%, due 02/21/96 6,110,433
9,590,000 5.50%, due 02/22/96 9,513,813
----------
58,104,893
----------
BROKER-DEALERS (10.0%)
Bear Stearns Companies, Inc.
6,000,000 5.74%, due 01/31/96 5,971,300
6,000,000 5.72%, due 02/02/96 5,969,493
4,000,000 5.70%, due 02/09/96 3,975,300
2,000,000 5.64%, due 02/29/96 1,981,513
3,000,000 5.65%, due 03/01/96 2,971,750
Dean Witter Discover & Co.
7,000,000 5.68%, due 01/18/96 6,981,224
5,000,000 5.72%, due 01/24/96 4,981,728
4,000,000 5.72%, due 01/26/96 3,984,111
1,820,000 5.70%, due 01/26/96 1,812,796
1,000,000 5.68%, due 01/26/96 996,056
4,000,000 5.68%, due 01/31/96 3,981,067
3,000,000 5.70%, due 02/01/96 2,985,275
Merrill Lynch & Co., Inc.
10,000,000 5.62%, due 02/23/96 9,917,261
Smith Barney, Inc.
5,000,000 5.75%, due 01/10/96 4,992,812
7,000,000 5.73%, due 01/12/96 6,987,744
5,000,000 5.70%, due 01/24/96 4,981,792
----------
73,471,222
----------
CHEMICALS (4.2%)
Great Lakes Chemical Corp.
4,000,000 5.75%, due 01/30/96 3,981,472
9,000,000 5.50%, due 02/16/96 8,936,750
Monsanto Co.
9,000,000 5.75%, due 01/22/96 8,969,813
9,000,000 5.72%, due 01/23/96 8,968,540
----------
30,856,575
----------
CONSUMER PRODUCTS (3.5%)
Gillette Co.
4,387,000 5.80%, due 01/05/96 4,384,173
9,500,000 5.70%, due 01/05/96 9,493,983
3,000,000 5.68%, due 02/02/96 2,984,853
(Continued)
<PAGE> 86
MONEY MARKET FUND
Statement of Investments - December 31, 1995, Continued
- ----------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ----------------------------------------------------------
Gillette Co. (continued)
$9,000,000 5.60%, due 02/16/96 $8,935,600
----------
25,798,609
----------
CONSUMER SALES FINANCE (7.7%)
American Express Credit Corp.
8,000,000 5.63%, due 02/12/96 7,947,453
Associates Corp. of North America
6,000,000 5.62%, due 02/07/96 5,965,344
Avco Financial Services, Inc.
3,770,000 5.75%, due 01/17/96 3,760,366
7,000,000 5.73%, due 01/25/96 6,973,260
6,360,000 5.77%, due 01/31/96 6,329,419
5,000,000 5.66%, due 02/12/96 4,966,983
Commercial Credit Co.
9,000,000 5.79%, due 01/23/96 8,968,155
Norwest Financial, Inc.
9,000,000 5.79%, due 01/18/96 8,975,393
3,000,000 5.69%, due 02/28/96 2,972,498
----------
56,858,871
----------
CORPORATE CREDIT UNIONS (3.2%)
U.S. Central Credit Union
7,075,000 5.72%, due 01/08/96 7,067,131
6,000,000 5.77%, due 01/18/96 5,983,652
10,392,000 5.68%, due 01/19/96 10,362,487
----------
23,413,270
----------
DIVERSIFIED FINANCE (6.4%)
General Electric Capital Corp.
5,000,000 5.57%, due 02/21/96 4,960,546
2,500,000 5.62%, due 02/23/96 2,479,315
5,000,000 5.52%, due 03/18/96 4,940,967
3,000,000 5.55%, due 04/12/96 2,952,825
4,000,000 5.57%, due 04/16/96 3,934,398
2,000,000 5.52%, due 04/24/96 1,965,040
3,000,000 5.58%, due 05/01/96 2,943,735
Transamerica Finance Corp.
7,306,000 5.76%, due 01/02/96 7,304,831
5,000,000 5.77%, due 01/10/96 4,992,788
5,000,000 5.69%, due 01/29/96 4,977,872
4,815,000 5.71%, due 02/05/96 4,788,270
1,300,000 5.56%, due 02/16/96 1,290,764
----------
47,531,351
----------
- ----------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ----------------------------------------------------------
DRUGS & COSMETICS (3.0%)
Abbott Laboratories
$6,000,000 5.70%, due 01/04/96 $5,997,150
7,000,000 5.63%, due 01/08/96 6,992,337
9,000,000 5.63%, due 01/22/96 8,970,443
----------
21,959,930
----------
FINANCE (0.8%)
Nestle Capital Corp.
6,000,000 5.70%, due 01/11/96 5,990,500
----------
FINANCIAL SERVICES/UTILITIES (3.5%)
National Rural Utilities Cooperative
10,000,000 5.60%, due 02/06/96 9,944,000
5,000,000 5.65%, due 02/13/96 4,966,257
2,990,000 5.62%, due 02/20/96 2,966,661
8,000,000 5.65%, due 02/26/96 7,929,689
----------
25,806,607
----------
FOOD & BEVERAGES (8.5%)
CPC International Inc.
2,500,000 5.70%, due 01/24/96 2,490,896
7,200,000 5.60%, due 03/11/96 7,121,600
Campbell Soup Co.
9,000,000 5.77%, due 01/03/96 8,997,115
973,000 5.75%, due 01/10/96 971,601
1,000,000 5.67%, due 01/10/96 998,583
Heinz "HJ" Company
5,000,000 5.70%, due 01/16/96 4,988,125
9,000,000 5.70%, due 01/24/96 8,967,225
4,000,000 5.72%, due 01/26/96 3,984,111
6,000,000 5.75%, due 01/29/96 5,973,167
Sysco Corp.
3,268,000 5.72%, due 01/09/96 3,263,846
10,000,000 5.55%, due 02/09/96 9,939,875
5,000,000 5.63%, due 02/15/96 4,964,812
----------
62,660,956
----------
INSURANCE (6.9%)
American General Corp.
6,642,000 5.58%, due 01/11/96 6,631,705
13,145,000 5.55%, due 01/17/96 13,112,576
Marsh & McLennan Co.
400,000 5.95%, due 01/04/96 399,802
(Continued)
<PAGE> 87
MONEY MARKET FUND
Statement of Investments - December 31, 1995, Continued
- ----------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ----------------------------------------------------------
INSURANCE (CONTINUED)
MetLife Funding Inc.
$4,895,000 5.72%, due 01/11/96 $4,887,222
5,933,000 5.57%, due 02/02/96 5,903,625
Old Republic Capital Corp.
3,000,000 5.63%, due 01/09/96 2,996,247
1,000,000 5.62%, due 01/09/96 998,751
5,000,000 5.68%, due 02/01/96 4,975,545
3,000,000 5.63%, due 03/05/96 2,969,973
8,000,000 5.50%, due 04/11/96 7,876,555
------------
50,752,001
------------
LEASE FINANCING (3.3%)
PHH Corp.
5,000,000 5.74%, due 01/19/96 4,985,650
5,000,000 5.67%, due 01/25/96 4,981,100
6,840,000 5.73%, due 01/30/96 6,808,428
5,000,000 5.55%, due 02/15/96 4,965,312
3,478,000 5.55%, due 02/23/96 3,449,582
------------
25,190,072
------------
MANUFACTURING (2.5%)
Illinois Tool Works
8,000,000 5.72%, due 01/04/96 7,996,187
10,640,000 5.72%, due 01/09/96 10,626,475
------------
18,622,662
------------
OFFICE EQUIPMENT (0.7%)
5,000,000 Pitney Bowes Credit Corp. 4,965,778
5.60%, due 02/14/96 ------------
OIL & GAS (0.8%)
Koch Industries, Inc.
5,985,000 5.63%, due 01/18/96 5,969,088
------------
OIL & GAS: EQUIPMENT (2.0%)
Chevron Transport Corp.
5,636,000 5.72% due 01/08/96 5,629,732
9,000,000 5.73% due 01/30/96 8,958,457
------------
14,588,189
------------
PAPER AND FOREST PRODUCTS (1.6%)
Sonoco Products Co.
8,000,000 5.70%, due 01/10/96 7,988,600
4,000,000 5.70%, due 01/11/96 3,993,667
------------
11,982,267
------------
- ----------------------------------------------------------
VALUE
PRINCIPAL SECURITY (NOTE 1)
- ----------------------------------------------------------
PHARMACEUTICALS/HEALTHCARE (2.6%)
Schering Corp.
$10,000,000 5.69%, due 01/16/96 $9,976,292
4,000,000 5.63%, due 02/06/96 3,977,480
5,000,000 5.65%, due 03/27/96 4,932,514
------------
18,886,286
------------
PREMIUM FINANCE (2.8%)
A.I. Credit Corp.
4,294,000 5.55%, due 01/08/96 4,289,366
16,555,000 5.67%, due 01/12/96 16,526,318
------------
20,815,684
------------
RAILROADS (3.4%)
Norfolk & Southern
8,000,000 5.65%, due 01/16/96 7,981,167
7,150,000 5.70%, due 01/25/96 7,122,830
10,000,000 5.65%, due 01/26/96 9,960,762
------------
25,064,759
------------
Total commercial paper 663,895,784
(cost $663,895,784) ------------
CORPORATE NOTE (0.7%)
Morgan Guaranty Trust
5,000,000 6.07%, due 10/03/96 5,000,000
(cost $5,000,000) ------------
U.S. GOVERNMENT AGENCY
SHORT-TERM OBLIGATIONS (0.7%)
FNMA Medium-term Note
5,000,000 5.71%, due 06/10/96 4,999,273
(cost $4,999,273) ------------
Total investments $738,269,090
(cost $738,269,090) ============
Cost also represents cost for federal income tax purposes.
Portfolio holding percentages represent market value as a percentage of net
assets.
See accompanying notes to financial statements.
<PAGE> 88
NATIONWIDE SEPARATE ACCOUNT TRUST
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
Capital
Small Company Appreciation Total Return
Fund Fund Fund
------------ ----------- ------------
<S> <C> <C> <C>
Assets
------
Investments in securities, at value
(cost $16,750,963, $67,321,284, and $ 18,259,754 82,349,782 810,163,199
$643,707,638, respectively)
Cash -- 2,702 --
Accrued interest and dividends receivable 8,407 142,109 1,605,501
Receivable for investment securities sold 140,360 225 3,571,881
Receivable from advisor (note 2) 10,495 -- --
Net receivable for foreign currency contracts purchased (note 1) 393 -- --
Deferred organization expenses (note 2) 8,775 -- --
Other assets -- -- 1,083
------------ ----------- ------------
Total assets 18,428,184 82,494,818 815,341,664
------------ ----------- ------------
Liabilities
-----------
Payable for investment securities purchased 1,230,782 1,218,673 --
Payable for fund shares redeemed 2,231 -- 16,102
Accrued management fees (note 2) 15,262 35,516 341,691
Other accrued expenses 24,437 3,618 19,399
------------ ----------- ------------
Total liabilities 1,272,712 1,257,807 377,192
------------ ----------- ------------
NET ASSETS 17,155,472 81,237,011 814,964,472
------------ ----------- ------------
Represented by:
Capital 15,746,917 66,188,734 648,374,493
Net unrealized appreciation on investments and trans-
lation of assets and liabilities in foreign currencies 1,509,184 15,028,498 166,455,561
Undistributed net realized loss from investments and
foreign currency transactions (103,052) -- --
Distributions in excess of net realized gains from investments -- (1,329) (227,335)
Undistributed net investment income 2,423 21,108 361,753
------------ ----------- ------------
NET ASSETS $ 17,155,472 81,237,011 814,964,472
============ =========== ============
Shares outstanding (unlimited number of 1,502,078 6,028,094 70,638,277
shares authorized) ============ =========== ============
Net asset, offering and redemption price per share $ 11.42 $ 13.48 $ 11.54
============ =========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 89
NATIONWIDE SEPARATE ACCOUNT TRUST
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
Government Bond Money Market
Fund Fund
------------- ------------
<S> <C> <C>
Assets
------
Investments in securities, at value
(cost $363,402,690 and $738,269,090, $ 388,784,510 738,269,090
respectively)
Repurchase agreement (cost $59,674,000) 59,674,000 --
Accrued interest and dividends receivable 4,261,011 92,529
Receivable for investment securities sold 25,646,041 --
Other assets 474 386
------------- ------------
Total assets 478,366,036 738,362,005
------------- ------------
Liabilities
-----------
Payable for investment securities purchased 24,132,396 --
Payable for fund shares redeemed 9,244 577,547
Accrued management fees (note 2) 186,523 331,100
Distribution payable -- 29,427
Other accrued expenses 21,816 16,125
------------- ------------
Total liabilities 24,349,979 954,199
------------- ------------
NET ASSETS $ 454,016,057 737,407,806
------------- ------------
Represented by:
Capital 437,362,491 737,411,256
Net unrealized appreciation on investments 25,381,820 --
Undistributed net realized loss from investments (8,772,912) (5,864)
Undistributed net investment income 44,658 2,414
------------- ------------
NET ASSETS $ 454,016,057 737,407,806
============= ============
Shares outstanding (unlimited number of 39,968,359 737,411,142
shares authorized) ============= ============
Net asset, offering and redemption price per share $ 11.36 $ 1.00
============= ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 90
NATIONWIDE SEPARATE ACCOUNT TRUST
Statements of Operations
<TABLE>
<CAPTION>
Period from
October 23, 1995
(commencement of
operations) through
December 31, 1995
(note 1) Year Ended December 31, 1995
------------------- ----------------------------
Capital
Small Company Appreciation Total Return
Fund Fund Fund
----------- ---------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 45,862 341,053 5,818,208
Dividends 9,528 1,243,728 17,023,101
Less foreign tax withheld (235) -- --
----------- ---------- -----------
Total income 55,155 1,584,781 22,841,309
----------- ---------- -----------
Expenses (note 2):
Investment management fees 21,498 326,158 3,406,571
Custodian fees 10,004 13,210 22,300
Professional services 104 3,102 35,088
Trustees fees and expenses 2 130 1,377
Share registration fees 1,724 -- --
Other 4,035 9,245 27,588
----------- ---------- -----------
Total expenses 37,367 351,845 3,492,924
Less waived fees and reimbursed expenses (10,495) -- --
----------- ---------- -----------
Net expenses 26,872 351,845 3,492,924
----------- ---------- -----------
Net investment income 28,283 1,232,936 19,348,385
----------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (note 4):
Net realized gain (loss) on investments
and foreign currency transactions (103,052) 2,523,674 42,991,075
----------- ---------- -----------
Net change in unrealized appreciation
on investments and translation
of assets and liabilities in foreign currencies 1,509,184 13,171,765 108,350,477
----------- ---------- -----------
Net realized and unrealized gain
on investments and
foreign currency 1,406,132 15,695,439 151,341,552
----------- ---------- -----------
Net increase in net assets
from operations $ 1,434,415 16,928,375 170,689,937
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 91
NATIONWIDE SEPARATE ACCOUNT TRUST
Statements of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Government Bond Money
Fund Market
------------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 29,097,304 43,049,609
------------- -------------
Expenses (note 2):
Investment management fees 2,088,523 3,574,486
Custodian fees 16,500 37,156
Professional services 19,158 38,148
Trustees fees and expenses 815 1,403
Share registration fees -- 9,977
Other 21,963 26,551
------------- -------------
Total expenses 2,146,959 3,687,721
------------- -------------
Net investment income 26,950,345 39,361,888
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (note 4):
Net realized gain (loss) on investments 813,537 (5,864)
Net change in unrealized appreciation
on investments 43,487,386 --
------------- -------------
Net realized and unrealized gain
(loss) on investments 44,300,923 (5,864)
------------- -------------
Net increase in net assets
from operations $ 71,251,268 39,356,024
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 92
NATIONWIDE SEPARATE ACCOUNT TRUST
Small Company Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period from October 23, 1995
(commencement of operations)
through
December 31, 1995
-----------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 28,283
Net realized loss on investments and foreign currency transactions (103,052)
Net change in unrealized appreciation on investments
and translation of assets and liabilities in foreign currencies 1,509,184
------------
Net increase in net assets resulting
from operations 1,434,415
------------
Dividends to shareholders from net
investment income (25,860)
------------
Capital share transactions:
Net proceeds from sale of shares 18,935,596
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 25,860
Cost of shares redeemed (3,214,539)
Net increase in net assets derived ------------
from capital share transactions
15,746,917
------------
NET INCREASE IN NET ASSETS 17,155,472
NET ASSETS - BEGINNING OF PERIOD (note 1) --
------------
NET ASSETS - END OF PERIOD $ 17,155,472
============
Undistributed net realized loss on investments and foreign
currency transactions included in net assets at end of period $ (103,052)
============
Undistributed net investment income included
in net assets at end of period $ 2,423
============
Shares sold 1,796,171
Shares issued to shareholders from reinvestment of
dividends and distributions 2,265
Shares redeemed (296,358)
------------
Net increase in number of shares 1,502,078
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 93
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,232,936 837,482
Net realized gain on investments 2,523,674 346,937
Net change in unrealized appreciation or 13,171,765 (1,498,651)
depreciation on investments ----------------- -----------------
Net increase (decrease) in net assets
resulting from operations 16,928,375 (314,232)
----------------- -----------------
Dividends to shareholders from:
Net investment income (1,213,046) (849,394)
Net realized gain on investments (2,302,021) --
In excess of net realized gains on investments (1,329) --
----------------- -----------------
Net decrease in net assets from distributions
to shareholders (3,516,396) (849,394)
----------------- -----------------
Capital share transactions:
Net proceeds from sale of shares 26,980,755 30,484,829
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 3,863,870 501,921
Cost of shares redeemed (23,461,693) (8,306,890)
----------------- -----------------
Net increase in net assets derived
from capital share transactions 7,382,932 22,679,860
----------------- -----------------
NET INCREASE IN NET ASSETS 20,794,911 21,516,234
NET ASSETS - BEGINNING OF PERIOD 60,442,100 38,925,866
----------------- -----------------
NET ASSETS - END OF PERIOD $ 81,237,011 60,442,100
================= =================
Undistributed net realized gain (loss) on investments
included in net assets at end of period $ -- (221,653)
================= =================
Distributions in excess of net realized gains on investments
included in net assets at end of period $ (1,329) --
================= =================
Undistributed net investment income included
in net assets at end of period $ 21,108 1,218
================= =================
Shares sold 2,172,400 2,762,464
Shares issued to shareholders from reinvestment of
dividends and distributions 299,746 46,200
Shares redeemed (1,977,044) (752,522)
----------------- -----------------
Net increase in number of shares 495,102 2,056,142
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 94
NATIONWIDE SEPARATE ACCOUNT TRUST
Total Return Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 19,348,385 14,106,978
Net realized gain on investments 42,991,075 12,868,879
Net change in unrealized appreciation or depreciation 108,350,477 (22,354,876)
on investments ----------------- -----------------
Net increase in net assets resulting
from operations 170,689,937 4,620,981
----------------- -----------------
Dividends to shareholders from:
Net investment income (19,011,213) (14,258,556)
Net realized gain on investments (42,991,075) (12,868,879)
In excess of net realized gain on investments (227,335) --
----------------- -----------------
Net decrease in net assets from
distributions to shareholders (62,229,623) (27,127,435)
----------------- -----------------
Capital share transactions:
Net proceeds from sale of shares 145,723,309 118,067,999
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 79,264,509 10,092,549
Cost of shares redeemed (53,304,608) (27,076,015)
----------------- -----------------
Net increase in net assets derived
from capital share transactions 171,683,210 101,084,533
----------------- -----------------
NET INCREASE IN NET ASSETS 280,143,524 78,578,079
NET ASSETS - BEGINNING OF PERIOD 534,820,948 456,242,869
----------------- -----------------
NET ASSETS - END OF PERIOD $ 814,964,472 534,820,948
================= =================
Undistributed (distribution in excess of) net realized gain
on investments included in net assets at end of period $ (227,335) --
================= =================
Undistributed net investment income included
in net assets at end of period $ 361,753 24,581
================= =================
Shares sold 13,111,420 11,644,751
Shares issued to shareholders from reinvestment of
dividends and distributions 7,198,362 1,006,173
Shares redeemed (4,821,628) (2,679,189)
----------------- -----------------
Net increase in number of shares 15,488,154 9,971,735
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 95
NATIONWIDE SEPARATE ACCOUNT TRUST
Government Bond Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 26,950,345 25,873,023
Net realized gain on investments 813,537 (9,586,449)
Net change in unrealized appreciation or depreciation
on investments 43,487,386 (30,390,066)
----------------- -----------------
Net increase (decrease) in net assets
resulting from operations 71,251,268 (14,103,492)
----------------- -----------------
Dividends to shareholders from net investment income (26,924,228) (25,947,244)
----------------- -----------------
Capital share transactions:
Net proceeds from sale of shares 90,606,931 65,517,795
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 33,834,038 19,037,434
Cost of shares redeemed (106,004,873) (86,835,833)
----------------- -----------------
Net increase (decrease) in net assets derived
from capital share transactions 18,436,096 (2,280,604)
----------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS 62,763,136 (42,331,340)
NET ASSETS - BEGINNING OF PERIOD 391,252,921 433,584,261
----------------- -----------------
NET ASSETS - END OF PERIOD $ 454,016,057 391,252,921
================= =================
Undistributed net realized loss on investments
included in net assets at end of period $ (8,772,912) (9,586,449)
================= =================
Undistributed net investment income included
in net assets at end of period $ 44,658 18,541
================= =================
Shares sold 8,275,783 6,207,952
Shares issued to shareholders from reinvestment of
dividends and distributions 3,126,554 1,808,620
Shares redeemed (9,801,205) (8,140,889)
----------------- -----------------
Net increase (decrease) in number of shares 1,601,132 (124,317)
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 96
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 39,361,888 26,149,226
Net realized gain (loss) on investments (5,864) 1,195
----------------- -----------------
Net increase in net assets resulting
from operations 39,356,024 26,150,421
----------------- -----------------
Dividends to shareholders from:
Net investment income (39,360,095) (26,148,730)
Net realized gain on investments -- (548)
----------------- -----------------
Net decrease in net assets from
distribution to shareholders (39,360,095) (26,149,278)
----------------- -----------------
Capital share transactions:
Net proceeds from sale of shares 971,797,511 1,245,852,351
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 43,287,489 22,191,860
Cost of shares redeemed (1,105,699,769) (791,816,873)
----------------- -----------------
Net increase (decrease) in net assets
derived from capital share transactions (90,614,769) 476,227,338
----------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS (90,618,840) 476,228,481
NET ASSETS - BEGINNING OF PERIOD 828,026,646 351,798,165
----------------- -----------------
NET ASSETS - END OF PERIOD $ 737,407,806 828,026,646
================= =================
Undistributed net realized loss on investments
included in net assets at end of period $ (5,864) --
================= =================
Undistributed net investment income included
in net assets at end of period $ 2,414 621
================= =================
Shares sold 971,797,397 1,245,852,351
Shares issued to shareholders from reinvestment of
dividends and distributions 43,287,489 22,191,860
Shares redeemed (1,105,699,769) (791,816,873)
----------------- -----------------
Net increase (decrease) in number of shares (90,614,883) 476,227,338
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 97
NATIONWIDE SEPARATE ACCOUNT TRUST
Small Company Fund
Financial Highlights
Selected data for each share of capital stock
outstanding throughout the period
<TABLE>
<CAPTION>
Period from October 23, 1995
(commencement of operations)
through
December 31, 1995
-----------------
<S> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD (note 1) $ 10.00
Net investment income 0.02
Net realized gain and unrealized appreciation
on investments and translation
of assets and liabilities in foreign currencies 1.42
-------------
Total from investment operations 1.44
-------------
Dividends from net investment income (0.02)
-------------
Net increase in net asset value 1.42
-------------
NET ASSET VALUE -
END OF PERIOD $ 11.42
=============
Total Return* 14.38%
Ratio of expenses to average net assets* 1.25%
Ratio of expenses to average net assets** 1.74%
Ratio of net investment income to
average net assets* 1.32%
Ratio of net investment income to
average net assets** .83%
Portfolio turnover 9.03%
Net Assets, end of period (000) $ 17,155
<FN>
* Ratios for partial years are annualized. Total return is not annualized.
**Ratios calculated as if no fees were waived or expenses reimbursed.
</TABLE>
See accompanying notes to financial statements.
<PAGE> 98
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund
Financial Highlights
Selected data for each share of capital stock
outstanding throughout each period
<TABLE>
<CAPTION>
Period from
April 15, 1992
Years Ended (commencement
December 31, operations) through
1995 1994 1993 December 31, 1992
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $ 10.92 11.20 10.46 10.00
Net investment income 0.23 0.18 0.26 0.10
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments 2.96 (0.28) 0.74 0.48
---------- ---------- ---------- ---------
Total from investment operations 3.19 (0.10) 1.00 0.58
---------- ---------- ---------- ---------
Dividends from net investment income (0.23) (0.18) (0.26) (0.10)
Distributions from net realized gain
from investment transactions (0.40) -- -- (0.02)
---------- ---------- ---------- ---------
Total distributions (0.63) (0.18) (0.26) (0.12)
---------- ---------- ---------- ---------
Net increase (decrease) in net asset value 2.56 (0.28) 0.74 0.46
---------- ---------- ---------- ---------
NET ASSET VALUE -
END OF PERIOD $ 13.48 10.92 11.20 10.46
========== ========== ========== =========
Total Return* 29.35% (0.90)% 9.61% 10.92%
Ratio of expenses to average net assets* .54% .56% .59% .69%
Ratio of net investment income to
average net assets* 1.89% 1.76% 2.82% 1.95%
Portfolio turnover 20.28% 11.21% 16.87% 5.01%
Net Assets, end of period (000) $ 81,237 60,442 38,926 18,800
<FN>
*Ratios for partial years are annualized. Total return is not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE> 99
NATIONWIDE SEPARATE ACCOUNT TRUST
Total Return Fund
Financial Highlights
Selected data for each share of capital stock
outstanding throughout each period
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $ 9.70 10.10 9.46 9.07 6.74
Net investment income 0.31 0.21 0.23 0.25 0.22
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments 2.49 (0.10) 0.79 0.48 2.34
----------- ----------- ----------- ----------- -----------
Total from investment operations 2.80 0.11 1.02 0.73 2.56
----------- ----------- ----------- ----------- -----------
Dividends from net investment income (0.31) (0.28) (0.24) (0.25) (0.23)
Distributions from net realized gain
from investment transactions (0.65) (0.23) (0.14) (0.09) --
----------- ----------- ----------- ----------- -----------
Total distributions (0.96) (0.51) (0.38) (0.34) (0.23)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net asset value 1.84 (0.40) 0.64 0.39 2.33
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE -
END OF PERIOD $ 11.54 9.70 10.10 9.46 9.07
=========== =========== =========== =========== ===========
Total Return 29.09% 1.07% 10.92% 8.18% 38.49%
Ratio of expenses to average net assets .51% .52% .53% .53% .53%
Ratio of net investment income to
average net assets 2.84% 2.76% 2.51% 2.69% 2.74%
Portfolio turnover 16.12% 12.06% 9.79% 12.48% 14.50%
Net Assets, end of period (000) $ 814,964 534,821 456,243 334,917 250,701
</TABLE>
See accompanying notes to financial statements.
<PAGE> 100
NATIONWIDE SEPARATE ACCOUNT TRUST
Government Bond Fund
Financial Highlights
Selected data for each share of capital stock
outstanding throughout each period
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $ 10.20 11.26 10.92 11.24 10.40
Net investment income 0.71 0.69 0.71 0.98 0.86
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments 1.16 (1.06) 0.32 (0.14) 0.82
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.87 (0.37) 1.03 0.84 1.68
----------- ----------- ----------- ----------- -----------
Dividends from net investment income (0.71) (0.69) (0.66) (0.93) (0.84)
Distributions from net realized gain
from investment transactions -- -- (0.03) (0.23) --
----------- ----------- ----------- ----------- -----------
Total distributions (0.71) (0.69) (0.69) (1.16) (0.84)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net asset value 1.16 (1.06) 0.34 (0.32) 0.84
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE -
END OF PERIOD $ 11.36 10.20 11.26 10.92 11.24
=========== =========== =========== =========== ===========
Total Return 18.74% (3.23)% 9.52% 7.87% 16.70%
Ratio of expenses to average net assets .51% .51% .53% .53% .55%
Ratio of net investment income to
average net assets 6.45% 6.46% 5.91% 8.75% 8.07%
Portfolio turnover 97.05% 111.40% 175.37% 73.75% 77.70%
Net Assets, end of period (000) $ 454,016 391,253 433,584 301,841 198,769
</TABLE>
See accompanying notes to financial statements.
<PAGE> 101
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund
Financial Highlights
Selected data for each share of capital stock
outstanding throughout each period
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $ 1.00 1.00 1.00 1.00 1.00
Net investment income 0.06 0.04 0.03 0.03 0.06
Dividends from net investment income (0.06) (0.04) (0.03) (0.03) (0.06)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net asset value -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE -
END OF PERIOD $ 1.00 1.00 1.00 1.00 1.00
=========== =========== =========== =========== ===========
Total Return 5.66% 3.88% 2.76% 3.40% 5.84%
Ratio of expenses to average net assets .52% .54% .53% .53% .54%
Ratio of net investment income to
average net assets 5.51% 4.00% 2.72% 3.36% 5.65%
Net Assets, end of period (000) $ 737,408 828,027 351,798 330,011 363,502
</TABLE>
See accompanying notes to financial statements.
<PAGE> 102
NATIONWIDE SEPARATE ACCOUNT TRUST
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
------------------------------------------
Nationwide Separate Account Trust (Trust) is a diversified, open-end
investment company registered under the Investment Company Act of 1940,
as amended. The Trust offers shares only to life insurance company
separate accounts to fund the benefits under variable insurance or
annuity policies issued by life insurance companies. The Trust was
organized as a Massachusetts Trust effective June 30, 1981. To date,
only separate accounts of Nationwide Life Insurance Company and
Nationwide Life and Annuity Insurance Company (formerly Financial
Horizons Life Insurance Company), which are affiliated companies, have
purchased shares.
The Trust offers shares in five series: Small Company Fund, Capital
Appreciation Fund, Total Return Fund, Government Bond Fund and Money
Market Fund. The Trust was amended in 1995 to create the Small Company
Fund. On October 23, 1995, the Small Company Fund was capitalized
through the sale of capital stock to Nationwide Life Insurance Company
in the amount of $5,000,000, the Fund became effective and sales of
shares commenced.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The following summarizes the significant
accounting policies:
Security Valuation
------------------
a) Small Company, Capital Appreciation, Total Return and Government
----------------------------------------------------------------
Bond
----
Securities are valued at the last sales price on the securities
exchange on which such securities are primarily traded. Listed
securities for which no sale was reported on the valuation date
are valued at quoted bid prices. Securities not listed on an
exchange or for which there were no transactions are valued at
their most recent bid price, or where no prices are available, at
fair market value determined by the Board of Trustees. Short-term
notes and bank certificates of deposit are valued at amortized
cost, which approximates market. Investments denominated in
foreign currencies are translated to U.S. dollars at prevailing
exchange rates. Forward currency exchange contracts are also
valued at the prevailing exchange rates.
The value of a repurchase agreement generally equals the purchase
price paid by the Fund (cost) plus the interest accrued to date.
The seller, under the repurchase agreement, is required to
maintain the market value of the underlying collateral at not less
than the value of the repurchase agreement. Securities subject to
repurchase agreements are held by the Federal Reserve/Treasury
book-entry system or by the Fund's custodian.
1
(Continued)
<PAGE> 103
NATIONWIDE SEPARATE ACCOUNT TRUST
Notes to Financial Statements, Continued
b) Money Market
------------
Securities are valued at amortized cost, which approximates market
value, in accordance with Rule 2a-7 of the Investment Company Act
of 1940.
Foreign Currency Transactions (Small Company Fund)
--------------------------------------------------
Fluctuation in the value of investments resulting from changes in
foreign exchange rates are included with net realized and unrealized
gain or loss from investments.
Net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized on security
transactions and the difference between the amounts of dividends,
interest and foreign withholding taxes recorded on the Fund's books,
and the U.S. dollar equivalent of amounts actually received or paid.
Net unrealized foreign exchange gains or losses arise from changes in
the value of assets and liabilities resulting from changes in exchange
rates.
The Fund enters into forward currency exchange contracts which are
obligations to purchase or sell a foreign currency at a specified rate
on a certain date in the future. A net realized gain or loss would be
incurred if the value of the contract increases or decreases between
the date the contract is opened and the date it is closed. Forward
currency contracts are marked to market daily and this change in value
is reflected in the Statement of Assets and Liabilities as a net
receivable for foreign currency contracts purchased.
At or before the closing of a forward contract, the Small Company Fund
may either sell a portfolio security and make delivery of the currency,
or retain the security and fully or partially offset its contractual
obligation to deliver the currency by purchasing a second contract. If
the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or 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 difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Federal Income Taxes
--------------------
The Trust's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and
to distribute all its taxable income to its shareholders. Therefore, no
federal income tax provision is required. To the extent net realized
gains are offset through the application of a capital loss carryover,
they will
2
(Continued)
<PAGE> 104
NATIONWIDE SEPARATE ACCOUNT TRUST
Notes to Financial Statements, Continued
Federal Income Taxes (continued)
--------------------------------
not be distributed to shareholders but will be retained by the Trust.
Each Fund is treated as a separate taxable entity.
As of December 31, 1995, the Government Bond and Money Market Funds had
net capital loss carry forwards in the amounts of $8,772,911 and
$5,864, respectively, The Government Bond Fund carry forward will
expire within 7 years and the Money Market Fund carry forward will
expire within 8 years.
The Small Company Fund intends to elect for Federal income tax purposes
to treat approximately $101,807 of net capital losses that arose during
the period ended December 31, 1995 as if such losses arose on January
1, 1996. As of December 31, 1995, the Fund had a net capital loss
carryforward in the amount of $1,245 which will expire within 8 years.
Organization Expenses
---------------------
Initial organization expenses of the Small Company Fund were paid by
the advisor and will be reimbursed by the Fund. Such organization costs
have been deferred and will be amortized ratably over a period of sixty
months from the commencement of operations. If any of the initial
shares are redeemed before the end of the amortization period, the
proceeds of the redemption will be reduced by the pro rata share of the
unamortized organization costs.
Security Transactions and Investment Income
-------------------------------------------
Security transactions are recorded on the trade date. Dividend income
is recorded on the ex-dividend date; interest income is recorded on an
accrual basis and includes, where applicable, the pro rata or constant
yield amortization of premium or discount.
Expenses
--------
Expenses directly attributed to each Fund are charged to that Fund.
Expenses applicable to all funds in the Trust are allocated based on
average net assets.
Dividends to Shareholders
-------------------------
a) Small Company, Capital Appreciation, Total Return and Government
----------------------------------------------------------------
Bond
----
Dividend income is recorded on the ex-dividend date. Dividends
from net investment income are paid quarterly.
b) Money Market
------------
Dividends from net investment income are declared daily and paid
monthly.
3
(Continued)
<PAGE> 105
NATIONWIDE SEPARATE ACCOUNT TRUST
Notes to Financial Statements, Continued
Dividends to Shareholders (continued)
-------------------------------------
c) All Funds
---------
Net realized gains, if any, are declared and distributed at least
annually.
Dividends and distributions to shareholders are determined in
accordance with Federal income tax regulations which may differ from
generally accepted accounting principles. These "book/tax" differences
are considered either permanent or temporary in nature. In accordance
with AICPA Statement of Position 93-2, permanent differences are
reclassified within the capital accounts based on their nature for
Federal income tax purposes; temporary differences do not require
reclassification. Dividends and distributions that exceed net invested
income and net realized gains for financial reporting purposes, but not
for tax purposes, are reported as dividends in excess of net investment
income and net realized gains. To the extent distributions exceed
current and accumulated earnings and profits for Federal income tax
purposes, they are reported as distributions of paid-in capital.
2. Transactions with Affiliates
----------------------------
As investment manager for the Trust, Nationwide Financial Services,
Inc. (NFS), an affiliated company, is allowed an annual management fee
of .5% based on the average daily net assets of the Capital
Appreciation Fund, Total Return Fund, Government Bond Fund and Money
Market Fund; this fee would not be payable in full if the effect of
such payment would increase total expense (excluding taxes other than
payroll taxes and brokerage commissions on portfolio transactions) to
an amount exceeding 1% of average daily net assets for any fiscal year.
Such limitations on total expenses did not effect management fees
during the periods covered by the financial statements.
As investment manager for the Small Company Fund, NFS receives an
annual management fee of 1.00% of average daily net assets. From such
fees pursuant to sub-investment advisory agreements, NFS pays
subadvisory fees to The Dreyfus Corporation, Neuberger and Berman,
L.P., Pictet International Management Limited, Strong Capital
Management, Inc., Van Eck Associates Corporation and Warburg, Pincus
Consellors, Inc. based on average daily net assets of the portion of
the Small Company Fund under their management. During the period from
October 23, 1995 (date of commencement of operations) through December
31, 1995, NFS paid $11,394 in fees to the sub-investment advisors and
reimbursed the Fund $10,495 in order to hold total Small Company Fund
expenses to 1.25% of average daily net assets.
A subsidiary of NFS (Nationwide Investors Services, Inc.) acts as
Transfer and Dividend Disbursing Agent for the Trust.
3. Bank Loans
----------
The Trust has an unsecured bank line of credit of $25,000,000.
Borrowing under this arrangement bears interest at the Federal Funds
rate plus .50%. No compensating balances are required. There were no
outstanding balances at December 31, 1995.
4
(Continued)
<PAGE> 106
NATIONWIDE SEPARATE ACCOUNT TRUST
Notes to Financial Statements, Continued
4. Investment Transactions
-----------------------
Purchases and sales of securities (excluding short-term securities and
forward currency exchange contracts) and U.S. government obligations
for the period ended December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Long-term securities U.S. government obligations
Purchases Sales Purchases Sales
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Small Company Fund $ 13,665,049 $ 758,224 $ 2,610,519 $ 2,052,256
Cap. Apprec. Fund 22,271,349 12,483,690 -- 4,095,808
Total Return Fund 195,685,954 93,538,896 332,396,780 334,603,161
Govt. Bond Fund 21,241,539 7,290,025 368,929,141 429,391,580
Money Market Fund -- -- 5,358,620 52,365,000
</TABLE>
Realized gains and losses have been computed on the first-in, first-out
basis. Included in net unrealized appreciation at December 31, 1995,
based on cost for Federal income tax purposes, excluding forward
currency contracts for the Small Company Fund, are the following
components:
<TABLE>
<CAPTION>
Net
Unrealized Unrealized unrealized
gains losses appreciation
----- ------ ------------
<S> <C> <C> <C>
Small Company Fund $ 1,734,988 $ (238,753) $ 1,496,235
Capital Appreciation Fund 17,157,675 (2,129,177) 15,028,498
Total Return Fund 171,997,809 (5,542,248) 166,455,561
Government Bond Fund 25,698,045 (316,225) 25,381,820
</TABLE>
