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'33 Act File No. 2-73024
'40 Act File No. 811-3213
As filed with the Securities and Exchange Commission on February 12, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. |27|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. |28|
(Check appropriate box or boxes)
NATIONWIDE SEPARATE ACCOUNT TRUST
Total Return Fund
Capital Appreciation Fund
Government Bond Fund
Money Market Fund
Nationwide Small Company Fund
Nationwide Income Fund
Nationwide Strategic Growth Fund
Nationwide Strategic Value Fund
Nationwide Equity Income Fund
Nationwide High Income Bond Fund
Nationwide Balanced Fund
Nationwide Multi Sector Bond Fund
Nationwide Small Cap Value Fund
Nationwide Global Equity Fund
Nationwide Select Advisers Mid Cap Fund
Nationwide Select Advisers Small Cap Growth Fund
(Exact Name of Registrant as Specified in Charter)
Three Nationwide Plaza
Columbus, Ohio 43215
(Address of Principal Executive Office)(Zip Code)
Registrant's Telephone Number, including Area Code: (614) 249-7111
Send Copies of Communications to:
Ms. Elizabeth A. Davin Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza One Nationwide Plaza
Columbus, Ohio 43215 Columbus, Ohio 43215
(Name and Address of Agent for Service)
|X| It is proposed that this filing will become effective 75 days after filing
pursuant to paragraph (a)(2) of Rule 485.
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NATIONWIDE SEPARATE ACCOUNT TRUST
TOTAL RETURN FUND
CAPITAL APPRECIATION FUND
GOVERNMENT BOND FUND
MONEY MARKET FUND
NATIONWIDE SMALL COMPANY FUND
NATIONWIDE INCOME FUND
NATIONWIDE STRATEGIC GROWTH FUND
NATIONWIDE STRATEGIC VALUE FUND
NATIONWIDE EQUITY INCOME FUND
NATIONWIDE HIGH INCOME BOND FUND
NATIONWIDE BALANCED FUND
NATIONWIDE MULTI SECTOR BOND FUND
NATIONWIDE SMALL CAP VALUE FUND
NATIONWIDE GLOBAL EQUITY FUND
NATIONWIDE SELECT ADVISERS MID CAP FUND
NATIONWIDE SELECT ADVISERS SMALL CAP GROWTH FUND
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CROSS REFERENCE SHEET
N-1A Item No. Location
- ---------------------------------------------------------------
PART A
Item 1. Cover Page....................................Cover Page
Item 2. Risk/Return Summary: Investments, Risks
and Performance...............................Objective, Principal
Strategies, Principal
Risks
Item 3. Risk/Return Summary: Fee Table................Fees and Expenses
Item 4. Investment Objectives, Principal
Investment Strategies, and Related Risks......Objective, Principal
Strategies, Principal
Risks
Item 5. Management Discussion of Fund Performance.....*
Item 6 Management, Organization and Capital
Structure.....................................Management
Item 7. Shareholder Information.......................Buying and Selling
Fund Shares
Item 8. Distribution Arrangements.....................*
Item 9. Financial Highlights Information..............*
PART B
Item 10. Cover Page and Table of Contents..............Cover Page and Table of
Contents
Item 11. Fund History..................................General Information
and History
Item 12. Description of the Funds and their
Investment Risks..............................Additional Information
on Portfolio Investments
and Investment Policies
Item 13. Management of the Funds.......................Investment Advisory and
Other Services
Item 14. Control Persons and Principal Holders
of Securities.................................Major Shareholders
Item 15. Investment Advisory and Other Services........Investment Advisory and
Other Services
Item 16. Brokerage Allocation and Other Practices......Brokerage Allocation
Item 17. Capital Stock and Other Securities............Additional Information
Item 18. Purchase, Redemption and Pricing..............Purchase, Redemption and
Pricing of Shares
Item 19. Taxation of the Funds.........................Tax Status, Other Tax
Consequences
Item 20. Underwriters..................................Tax Consequences to
Shareholders
Item 21. Calculation of Performance Data...............Calculating Yield and
Total Return
Item 22. Financial Statements..........................Financial Statements
2
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PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
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* Not applicable or negative answer
3
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The Prospectus and Statement of Additional Information for the Total Return
Fund, Capital Appreciation Fund, Government Bond Fund, Money Market Fund, Small
Company Fund and Income Fund, as well as the Prospectus for the Strategic
Growth Fund, Strategic Value Fund, Equity Income Fund, High Income Bond Fund,
Balanced Fund, Multi Sector Bond Fund, Small Cap Value Fund, Global Equity Fund
and Select Advisers Mid Cap Fund are incorporated by reference into this filing
of Post-Effective Amendment No. 27 to the Registration Statement.
NATIONWIDE SELECT ADVISERS SMALL CAP GROWTH FUND
DATE: MAY 1, 1999
"As with all mutual funds, the Securities and Exchange Commission has not
approved this fund's shares as an investment or determined whether this
prospectus is complete or accurate. To state otherwise is a crime."
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NATIONWIDE SELECT ADVISERS SMALL CAP GROWTH FUND
OBJECTIVE
The investment objective of the Fund is long-term capital appreciation. This
investment objective can be changed by the Fund's Trustees without shareholder
approval.
PRINCIPAL STRATEGIES
The Fund seeks to achieve its investment objective from a broadly diversified
portfolio of equity securities issued by U.S. and foreign companies with market
capitalizations in the range of companies represented by the Russell 2000(R)
Small Stock Index(1) (the "Russell 2000"), known as small cap companies. Under
normal market conditions, the Fund will invest at least 65% of its total assets
in the equity securities of small cap companies. The balance of the Fund's
assets may be invested in equity securities of larger cap companies. The Fund
may also invest in foreign securities and derivatives.
Market capitalization is a common way to measure the size of a company based on
the price of its common stock; it's simply the number of outstanding shares of
the company multiplied by the current share price. The Russell 2000, published
by The Frank Russell Company, is an index consisting of approximately 2000
companies with small market capitalizations relative to the market
capitalizations of other U.S. companies. Currently the market capitalizations
for companies in the Russell 2000(R) range from approximately $222 million to
$1.4 billion.
As part of its responsibilities to the Fund, Nationwide Advisory Services, Inc.
( the "Adviser") initially selects the Fund's subadvisers and monitors their
performance on an ongoing basis. The Adviser has chosen Franklin Advisers, Inc.,
Miller Anderson & Sherrerd, LLP and Neuberger Berman, LLC each to manage a
portion of the Fund. They have been chosen because they approach investing in
small cap securities in different ways, and the Adviser believes that
diversification among securities and styles will increase the potential for
investment return and reduce risk and volatility. The following is a description
of the investment strategies used by each subadviser:
Franklin Advisers, Inc. ("Franklin") is a research driven, "bottom-up"
fundamental investor, examining the fundamentals of individual companies and
pursuing a disciplined "growth at a reasonable price" strategy. Relying on a
team of analysts to provide in-depth industry expertise, Franklin chooses small
cap companies that it believes are positioned for rapid growth in revenues,
earnings or assets, and are selling at reasonable prices. Franklin evaluates
small cap companies for distinct and sustainable competitive advantages, such as
a particular marketing or product niche, proven technology, and industry
leadership - all factors Franklin believes point to strong long-term growth
potential. Franklin diversifies its allocation of the Fund's assets across many
industries, and from time to time, may invest substantially in certain sectors,
including technology and biotechnology. Franklin will sell securities from time
to time as more favorable opportunities are identified.
Miller Anderson & Sherrerd, LLP ("MAS") focuses on companies that demonstrate
high earnings growth rates, growth stability, and rising profitability. In
particular, MAS invests in companies that appear to be capable of producing
earnings that consistently beat market expectations. MAS uses computer analysis
to identify stocks based on earnings' predictions and then conducts extensive
fundamental research into those companies with the most attractive earnings
revisions. Finally, MAS reviews the valuation of these stocks to eliminate the
most overvalued stocks from consideration. MAS also follows a strict sell
discipline and will sell stocks when their earnings revision scores fall to
unacceptable levels, fundamental research uncovers unfavorable trends, or
valuations are excessive relative to the stocks' growth prospects.
Neuberger Berman, LLC's ("Neuberger Berman") growth equity group takes a growth
approach to selecting stocks, looking for new companies that are in the
developmental stage as well as older companies that appear poised to grow
because of new products, markets or management. Factors in identifying these
firms may include financial strength, a strong position relative to competitors
and a stock price that is reasonable in light of its growth rate.
Neuberger Berman follows a disciplined selling strategy, and may sell a stock
when it reaches a target price, fails to perform as expected, or appears
substantially less desirable than another stock.
PRINCIPAL RISKS
There are risks associated with investing in the Fund, including the risk that
you may lose money.
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the overall stock market goes down. The stock market is affected by numerous
factors, including interest rates, the outlook for corporate profits, the health
of the national and world economies, national and world social and political
events, and the fluctuations of other stock markets around the world. The Fund
focuses on a more narrow scope of the overall stock market by investing
primarily in companies with smaller market capitalizations. Therefore, the
impact of these
- --------
(1) The Russell 2000(R) Small Stock Index is a registered service mark of the
Frank Russell Company which does not sponsor and is in no way affiliated with
the Small Cap Growth Fund.
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factors on small companies may affect the Fund more than if the Fund invested
more broadly in the overall stock market. When the value of the Fund's
securities goes down, your investment in the Fund decreases in value.
MID/SMALL CAP RISK. The investments in smaller, newer companies may be riskier
than investments in larger, more established companies. The stock of medium-size
and small cap companies is usually less stable and less liquid than the stock of
larger companies.
FOREIGN RISK. Investments in foreign securities involve risks in addition to
those of investments in U.S. companies. These risks include political and
economic risks, currency fluctuations, higher transaction costs, and delayed
settlement. In addition, the "Euro" began serving as a new common currency for
participating European nations on January 1, 1999. It is unclear whether the
newly created accounting, clearing, settlement, and payment systems for the new
currency will be adequate.
DERIVATIVE VALUE RISK. The Fund invests in securities that are considered to be
derivatives. The value of derivatives (like futures and options) is dependent
upon the performance of underlying assets, securities or indicies. If the
underlying assets, securities or indicies do not perform as expected, the value
of the derivative security and your investment in the Fund declines. Derivatives
may be more volatile and riskier than traditional investments. To the extent the
Fund enters into these transactions, their success will depend upon a
subadviser's ability to predict pertinent market movements.
For more detailed information about the Fund's investments and risks, see "More
About the Fund."
PERFORMANCE
No performance information is provided because the Small Cap Growth Fund will
not begin operations until about May 1, 1999.
FEES AND EXPENSES
Shareholder Fees(1) - (paid
directly from your investment None
Annual Fund Operating Expenses
(deducted from Fund assets) ____%
Management Fees ____%
Other Expenses(2) ____%
- -------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES(3) ____%
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those time periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your cost would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- --------------------------------------------
<S> <C> <C> <C> <C>
$--- $--- $--- $---
</TABLE>
- ----------------
(1) For shares purchased by life insurance company separate accounts as
investment options for variable annuity contracts or variable life policies,
sales charges may be imposed by the contract or policy.
(2) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year.
(3) The Adviser has agreed to waive Management Fees and, if necessary, to
reimburse "Other Expenses" so that Total Annual Fund Operating Expenses will
not exceed ___% until further notice.
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PRINCIPAL RISKS AND INVESTMENT TECHNIQUES. The Fund may use the following
principal investment techniques to increase its return, protect its assets or
diversify its investments, which are subject to certain risks.
SMALL CAP COMPANY RISK. Historically, small cap companies have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of small companies, the lower degree of liquidity in the
markets for such securities, and the greater sensitivity of small cap companies
to changing economic conditions.
In addition, small cap companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, they may be
developing or marketing new products or services for which markets are not yet
established and may never become established, or their products or services may
become quickly obsolete. In particular, small cap companies in the technology
and biotechnology industries may be subject to abrupt or erratic price
movements. Therefore, while small cap companies may offer greater opportunities
for capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
FOREIGN RISK
COUNTRY. General securities market movements in any country where the Fund has
investments are likely to affect the value of the securities the Fund owns that
trade in that country. These movements will affect the Fund's share price and
the Fund's performance.
The political, economic and social structures of some countries the Fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, currency devaluations, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks.
COMPANY. Foreign companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Foreign stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The Fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in foreign
courts than with respect to U.S. companies in U.S. courts.
CURRENCY. Many of the Fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
Fund owns and the Fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars. Devaluation of currency by a
country's government or banking authority also has a significant impact on the
value of any securities denominated in that currency.
OTHER INVESTMENT TECHNIQUES
The Statement of Additional Information ("SAI") contains additional information
about the Fund, including the Fund's other investment techniques. To obtain a
copy of the SAI, see the back cover page.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, the Fund may
invest up to 100% of its assets in cash or money market obligations. Should this
occur, the Fund may not meet its investment objectives.
MANAGEMENT
Investment Manager
Nationwide Advisory Services, Inc. (NAS) (the "Adviser"), Three Nationwide
Plaza, Columbus, Ohio 43215, manages the investment of the assets and supervises
the daily business affairs of the Nationwide Separate Account Trust (the
"Trust"). Subject to the supervision and direction of the Trustees, the Adviser
also determines the allocation of assets of the Fund among the Subadvisers and
evaluates and monitors the performance of the Subadvisers. The Adviser is also
authorized to select and place portfolio investments on behalf of a Fund;
however, the Adviser does not intend to do so at this time. The Adviser and its
predecessors have managed investments since 1965, and as of December 31, 1998,
have approximately $11.3 billion in assets under management.
The Fund pays the Adviser a management fee from which the Adviser pays fees to
the subadvisers. The management fee is based on the Fund's average daily net
assets:
<TABLE>
<CAPTION>
Fund Fee
- -----------------------------------------------
<S> <C>
Small Cap
Growth Fund .60%
</TABLE>
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Multi-Manager Structure
The Adviser and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders. The order also allows the Adviser to revise a subadvisory
agreement with Trustee approval but without shareholder approval. If a new
subadviser is hired, you will receive information about the new subadviser
within 90 days of such change. The order allows the Fund to operate more
efficiently and with greater flexibility.
The Adviser provides the following oversight and evaluation services to the
Fund:
o performing initial due diligence on prospective subadvisers for the Fund
o monitoring the performance of the subadvisers through ongoing analysis, as
well as periodic consultations
o communicating performance expectations and evaluations to the subadvisers
o ultimately recommending to the board of trustees whether a subadviser's
contract should be renewed, modified or terminated
The Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will periodically 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 Fund will obtain favorable results at any given time.
THE SUBADVISERS - Subject to the supervision of the Adviser and the Trustees, a
subadviser will manage a portion of the Fund's assets in accordance with the
Fund's investment objective and strategies. With regard to the portion of the
Fund's assets allocated to it, each subadviser makes investment decisions for
the Fund and in connection with such investment decisions places purchase and
sell orders for securities.
The following are the current subadvisers for the Fund.
Franklin Advisers, Inc. ("Franklin") is located at 777 Mariners Island
Boulevard, P.O. Box 7777, San Mateo, California 94403-7777. Franklin and its
affiliates act as investment manager to numerous other investment companies and
accounts. Together with its affiliates, Franklin managed over $220 billion in
assets as of December 31, 1998.
Portfolio Managers: Edward Jamieson, Senior Vice President, joined the Franklin
Templeton Group in 1987. He also manages the Franklin Small Cap Fund.
Michael McCarthy, Portfolio Manager, joined the Franklin Templeton Group in
1992. He also manages the Franklin Small Cap Fund.
Miller Anderson & Sherrerd, LLP ("MAS") is located at One Tower Bridge, West
Conshohocken, Pennsylvania 19428-0868. MAS is owned by indirect subsidiaries of
Morgan Stanley Dean Witter & Co. ("MSDW") and is a division of Morgan Stanley
Dean Witter Investment Management ("MSDW Investment Management"). MAS provides
investment advisory services to employee benefit plans, endowment funds,
foundations and other institutional investors. As of December 31, 1998, MSDW
Investment Management had in excess of $163 billion in assets under management.
Portfolio Managers: Arden C. Armstrong, Managing Director, Morgan Stanley Dean
Witter & Co., joined MAS in 1986. She joined the MAS management team for the Mid
Cap Growth portfolio in 1990, the Growth portfolio in 1993 and the Equity
portfolio in 1994.
David P. Chu, Vice President, Morgan Stanley Dean Witter & Co., joined MAS in
1998. He served as Senior Equity Analyst from 1992 to 1997 and as Co-Portfolio
Manager in 1997 for NationsBank and its subsidiary, Trade Street Investment
Associates. He joined the MAS management team for the Mid Cap Growth portfolio
in 1998.
Neuberger Berman, LLC ("Neuberger Berman") is located at 605 Third Avenue, New
York, New York 10158. Neuberger Berman and its affiliates and 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 $55
billion of assets as of December 31, 1998. Neuberger Berman is a member firm of
the New York Stock Exchange and other principal exchanges and acts as the Fund's
principal exchanges and acts as the Fund's primary broker in the purchase and
sale of their securities for that portion of the Fund's portfolio managed by
Neuberger Berman.
Portfolio Managers: Michael F. Malouf has been with Neuberger Berman, LLC since
1998 as a portfolio manager. He is also a Vice President of its affiliate,
Neuberger Berman Management Inc. From 1991 to 1998 he served as an analyst, and
then as portfolio manager at Dresdner RCM Global Investors LLC.
Jennifer K. Silver is a principal of Neuberger Berman and a Vice President of
its affiliate, Neuberger Berman Management, Inc. She has been the Director of
the Growth Equity Group since 1997. From 1981 to 1997, she was an analyst and a
portfolio manager at Putnam Investments.
5
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PERFORMANCE ADVERTISING FOR THE FUNDS
The Fund may use its past performance in advertisements, sales literature, and
this prospectus, including calculations 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 sale value at the end of the specific period.
Average annual total return reflects reinvestment of all dividends and
distributions.
The Fund may also advertise its SEC yield. The SEC yield is based on a 30-day
period. This yield takes into account the yield to maturity on all debt
instruments and all dividends accrued on equity securities since equity
securities do not have maturity dates. The SEC yield is computed by dividing the
net investment income per share earned during the 30-day period by the maximum
offering price per share on the last day of the period.
BUYING AND SELLING FUND SHARES
Who Can Buy Shares of The Funds
In this section, "we" and "our" refer to Nationwide Advisory Services ("NAS").
"You" and "your" mean potential investors and current variable annuity contract
and variable life policyholders.
An insurance company may purchase shares of the Fund at the Fund's net asset
value using purchase payments received on variable life insurance policies or
variable annuity contracts issued by life insurance company separate accounts.
Fund of Funds may also purchase shares of the Fund for their portfolios.
Shares of a Fund are currently sold only to separate accounts of Nationwide Life
Insurance Company and its wholly owned subsidiary Nationwide Life and Annuity
Insurance Company to fund the benefits under the Contracts and to affiliated
Fund of Funds, but they may be sold to other insurance companies in the future.
The insurance companies purchase shares of the Fund in accordance with variable
account allocation instructions received from owners of the variable annuity
contracts or variable life insurance policies. The Fund then uses the proceeds
to buy securities for its portfolio. Each Fund of Funds and insurance separate
account, 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 Fund at any time at
net asset value. The address for each of these entities is One Nationwide Plaza,
Columbus, Ohio 43215.
Since the variable annuity contracts or variable life policies may have
different provisions with respect to the timing and method of purchases,
exchanges and redemptions, contract or policy owners should contact their
insurance company directly for details concerning transactions.
PURCHASE PRICE
The purchase or "offering" price of each share of the Fund is its "net asset
value" or NAV. There is no sales charge. Generally, NAV of the Fund's shares is
determined by dividing the total market value of the securities owned by the
Fund, less its liabilities, by the total number of its outstanding shares. NAV
is determined at the close of regular trading on the New York Stock Exchange on
each day the Exchange is open for trading (usually 4 p.m. Eastern Time).
The Adviser does not determine NAV on the following days:
o Christmas Day
o New Year's Day
o Martin Luther King Jr. Day
o Presidents Day
o Good Friday
o Memorial Day
o Independence Day
o Labor Day
o Thanksgiving Day
o other days when the New York Stock Exchange is not open
The Adviser reserves the right not to determine NAV when:
o the Fund has not received any orders to purchase, sell, or exchange shares
o changes in the value of the Fund's portfolios do not affect the NAV
If current prices are not available or if NAS determines a price for a security
does not represent fair value, those investments of the Fund may be valued at
fair market value in accordance with procedures adopted by the Board of
Trustees. For shares purchased by life insurance company separate accounts as
investment options for variable annuity contracts or variable life insurance
policies sales charges may be imposed by the contract or policy.
When you purchase shares, your purchase price will be the offering price or NAV
next determined after your order is received.
SELLING SHARES
You can sell--also known as redeeming--your shares of the Fund at any time,
subject to certain restrictions. The price you will receive when you sell your
shares will be
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<PAGE> 10
the NAV next determined after NAS receives the properly completed order to sell
in its offices in Columbus, Ohio. Of course, the value of the shares sold
depends upon the market value of the investments of the Fund at the time of
sale, and the value may be more or less than you paid for the shares.
RESTRICTIONS ON SALES
You may not be able to sell your shares of the Fund or the Fund may delay paying
you the proceeds from a sale when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or if trading is restricted or if
an emergency exists.
YEAR 2000
NAS has developed a plan to address the Year 2000 issue. The problem is that
many existing computer programs use only two digits to identify a year (for
example, the year 1998 would be represented by the digits "98"). In such
programs, the year 2000 will be represented by "00", which a computer could
interpret as the year 1900. If not corrected, many computer applications could
fail or create erroneous results. Since 1996, NAS has been evaluating its
exposure to this issue by reviewing its operating systems and outside service
provider systems we depend on. NAS expects all system changes and replacements
needed to achieve Year 2000 compliance to be completed by the end of the second
quarter 1999. Compliance testing will be completed in the second quarter 1999.
Outside service providers and business partners will be required to certify
compliance by the end of the second quarter 1999.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTION
Substantially all of the net investment income, if any, of the Fund will be paid
as dividends quarterly in the form of additional shares of the Fund. In those
years in which sales of the Fund's portfolio securities result in net realized
long-term capital gains, these gains will be declared and cause to be paid to
shareholders in December of that year.
TAX STATUS
The Fund's policy is to qualify as a regulated investment company and to meet
the requirements of Subchapter M of the Internal Revenue Code (the "Code"). The
Fund intends to distribute all, or substantially all, its taxable net income and
capital gains to shareholders, and therefore, will not be required to pay any
federal income taxes.
Because the Fund 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 from those of other funds of the Trust for
purposes of determining whether or not the Fund qualifies as a regulated
investment company. The Fund also 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 Contracts.
The tax treatment of payments made under a variable annuity contract or variable
life insurance policy is described in the contract or policy's prospectus.
Generally, owners of variable annuity contracts and variable life insurance
policies are not taxed currently on income or gains realized with respect to
such Contracts. However, some distributions from such Contracts may be taxable
at ordinary income tax rates. In addition, distributions made to an owner who is
younger than 59-1/2 may be subject to a 10% penalty tax. Investors should ask
their own tax advisors for more information on their own tax situation,
including possible state or local taxes.
Please refer to the Statement of Additional Information for more information
regarding the tax treatment of the Fund and its investors. Please refer to the
prospectus of the variable annuity contract or variable life insurance policy
that hold interest in the Fund for a discussion of the tax consequences of the
contracts and policies.
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<PAGE> 11
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents--which you can get free of charge--contain additional
information about the Fund:
o Statement of Additional Information (SAI) (incorporated by reference in this
Prospectus)
o Annual Report
o Semi-Annual Report
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
FOR INFORMATION AND ASSISTANCE:
1-800-848-6331 (toll free, 8 a.m. - 5 p.m. Eastern Time)
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of Fund documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents)
VIA THE INTERNET:
http://www.sec.gov
THE TRUST'S INVESTMENT COMPANY ACT FILE NO.: 811-3213
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<PAGE> 12
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
NATIONWIDE SEPARATE ACCOUNT TRUST
--NATIONWIDE STRATEGIC GROWTH FUND
--NATIONWIDE STRATEGIC VALUE FUND
--NATIONWIDE EQUITY INCOME FUND
--NATIONWIDE HIGH INCOME BOND FUND
--NATIONWIDE BALANCED FUND
--NATIONWIDE MULTI SECTOR BOND FUND
--NATIONWIDE SELECT ADVISERS SMALL CAP VALUE FUND
--NATIONWIDE SMALL CAP GROWTH FUND
--NATIONWIDE GLOBAL EQUITY FUND
--NATIONWIDE SELECT ADVISERS MID CAP FUND
Nationwide Separate Account Trust is a registered open-end investment
company consisting of 16 series. This Statement of Additional Information
relates to the Nationwide Strategic Growth Fund (the "Strategic Growth Fund"),
the Nationwide Strategic Value Fund (the "Strategic Value Fund"), the Nationwide
Equity Income Fund (the "Equity Income Fund"), the Nationwide High Income Bond
Fund (the "High Income Bond Fund"), the Nationwide Balanced Fund (the "Balanced
Fund"), the Nationwide Multi Sector Bond Fund ("Multi Sector Bond Fund"), the
Nationwide Small Cap Value Fund (the "Small Cap Value Fund"), the Nationwide
Small Cap Growth Fund (the "Small Cap Growth Fund"), the Nationwide Global
Equity Fund (the "Global Equity Fund") and the Nationwide Select Advisers Mid
Cap Fund (the "Mid Cap Fund") (each, a "Fund" and collectively, the "Funds").
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, 1999, for Strategic Growth Fund, Strategic Value
Fund, Equity Income Fund, High Income Bond Fund, Balanced Fund, Multi Sector
Bond Fund, Small Cap Value Fund, Small Cap Growth Fund, Global Equity Fund and
Mid Cap Fund. Terms not defined in this Statement of Additional Information have
the meanings assigned to them in the Prospectuses. The Prospectuses may be
obtained from Nationwide Life Insurance Company, One Nationwide Plaza, Columbus,
Ohio 43215, or by calling toll free 1 (800) 848-6331.
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General Information and History......................................................02
Additional Information on Portfolio Instruments and Investment Policies..............02
Investment Restrictions..............................................................30
Major Shareholders...................................................................33
Trustees and Officers of the Trust...................................................33
Calculating Yield and Total Return...................................................36
Investment Adviser and Other Services................................................37
Brokerage Allocations................................................................44
Purchases, Redemptions and Pricing of Shares.........................................47
Additional Information...............................................................48
Tax Status...........................................................................49
Other Tax Consequences...............................................................50
Tax Consequences to Shareholders.....................................................51
Financial Statements.................................................................51
Appendix A - Bond Ratings............................................................52
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GENERAL INFORMATION AND HISTORY
Nationwide Separate Account Trust is an open-end 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 sixteen (16)
separate series, each with its own investment objective.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
DEBT OBLIGATIONS. Each of the Fund may invest in debt obligations. Debt
obligations are subject to the risk of an issuer's inability to meet principal
and interest payments on its obligations ("credit risk") and are subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer, and general market liquidity
("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. Although
the fluctuation in the price of bonds is normally less than that of common
stocks, in the past there have been extended periods of cyclical increases in
interest rates that have caused significant declines in the price of bonds in
general and have caused the effective maturity of securities with prepayment
features to be extended, thus effectively converting short or intermediate
securities (which tend to be less volatile in price) into long term securities
(which tend to be more volatile in price).
Ratings as Investment Criteria. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"). In
general, the ratings of NRSROs represent the opinions of these agencies as to
the quality of securities that they rate. Such ratings, however, are relative
and subjective, and are not absolute standards of quality and do not evaluate
the market value risk of the securities. These ratings are used by a Fund as
initial criteria for the selection of portfolio securities, but the Fund will
also rely upon the independent advice of the Subadvisers to evaluate potential
investments. Among the factors that will be considered are the long-term ability
of the issuer to pay principal and interest and general economic trends. The
Appendix to this Statement of Additional Information contains further
information about the rating categories of NRSROs and their significance.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by such Fund. In addition, it is possible that an NRSRO might not change its
rating of a particular issue to reflect subsequent events. None of these events
generally will require sale of such securities, but a Fund's Subadviser will
consider such events in its determination of whether the Fund should continue to
hold the securities. In addition, to the extent that the ratings change as a
result of changes in such organizations or their rating systems, or due to a
corporate reorganization, the Fund will attempt to use comparable ratings as
standards for its investments in accordance with its investment objective and
policies.
HIGH-YIELD (HIGH-RISK) SECURITIES. The Multi Sector Bond Fund, the Balanced
Fund, the Mid Cap Fund, the Small Cap Value Fund, the Small Cap Growth Fund, the
Equity Income Fund, the High Income Bond Fund, the Strategic Growth Fund and the
Strategic Value Fund each has the authority to invest 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. There is more risk associated with these investments because of
reduced creditworthiness and increased risk of default. Under rating agency
guidelines, lower
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quality securities and comparable unrated securities will likely have some
quality and protective characteristics that are outweighted by large
uncertainties or major risk exposures to adverse conditions. Lower quality
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default or to be in default, to be unlikely to have the capacity to make
required interest payments and repay principal when due in the event of adverse
business, financial or economic conditions, or to be in default or not current
in the payment of interest or principal. They are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with investments in
these securities are discussed below. 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 generally decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount which would result in a lower rate of return to the Fund.
Payment Expectations. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities at a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, a Fund may have to
replace the securities with a lower yielding security, which would result in a
lower return for that Fund.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
These ratings are relative and subject and are not absolute standards of
quality. They also do not evaluate the market value risk of lower-quality
securities. Therefore, they 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 the Adviser's or a Subadviser's credit analysis than would be the
case with investments in
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investment-grade debt securities. The Adviser and 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, the Adviser or each
Subadviser will continually monitor the investments in a 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. A Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities. The Funds
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. As a result, a Fund's asset
value and ability to dispose of particular securities, when necessary to meet
such Fund's liquidity needs or in response to a specific economic event, may be
impacted. The lack of a liquid secondary market for certain securities may also
make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing that Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
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 investors. 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.
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
- - the Federal Home Loan Banks whose securities are supported by the right
of the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation ("FHLMC"), whose securities are supported only by
the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and it agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
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MONEY MARKET INSTRUMENTS. Each Fund may invest in certain types of money market
instruments which may include the following types of instruments:
-- obligations issued or guaranteed as to interest and principal by the
U.S. Government, its agencies, or instrumentalities, or any federally
chartered corporation, and for the Global Equity Fund, obligations of
sovereign foreign governments, their agencies, instrumentalities and
political subdivisions;
-- repurchase agreements;
-- certificates of deposit, time deposits and bankers' acceptances
issued by domestic banks (including their branches located outside the
United States and subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar institutions,
and, for the Global Equity Fund, such obligations issued by foreign
branches of foreign banks and financial institutions;
-- commercial paper, which are short-term unsecured promissory notes
issued by corporations in order to finance their current operations.
Generally the commercial paper will be rated within the top two rating
categories by an NRSRO, or if not rated, is issued and guaranteed as to
payment of principal and interest by companies which at the date of
investment have a high quality outstanding debt issue;
-- high quality short-term (maturity in 397 days or less) corporate
obligations;
MORTGAGE AND ASSET-BACKED SECURITIES. The Balanced Fund, the Mid Cap Fund, the
Multi Sector Bond Fund, the Strategic Growth Fund and the Strategic Value Fund
may purchase mortgage-backed securities. Mortgage-backed securities represent
direct or indirect participation in, or are secured by and payable from,
mortgage loans secured by real property, and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Such securities
may be issued or guaranteed by U.S. Government agencies or instrumentalities by
private issuers, generally originators in mortgage loans, including savings and
loan associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities (collectively, "private lenders"). The purchase of
mortgage-backed securities from private lenders may entail greater risk than
mortgage-backed securities that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities. Mortgage-backed securities issued by private
lenders maybe supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. Government
or one of its agencies or instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement. These credit enhancements may include
letters of credit, reserve funds, over-collateralization, or guarantees by third
parties.
Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit support
falls into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
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<PAGE> 17
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency loss
experience on the underlying pool of assets is better than expected. There can
be no assurance that the private issuers or credit enhancers of mortgage-backed
securities can meet their obligations under the relevant policies or other forms
of credit enhancement.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first-lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property and receivables from credit
card and other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities. The credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement of the securities.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full.
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Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. A Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they cause the current coupon of the underlying adjustable
rate mortgages to exceed any maximum allowable annual or lifetime reset limits
(or "cap rates") for a particular mortgage. In this event, the value of the
adjustable rate mortgage-backed securities in a Fund would likely decrease.
Also, a Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage-backed securities are different than market yields
during interim periods between coupon reset dates or if the timing of changes to
the index upon which the rate for the underlying mortgage is based lags behind
changes in market rates. During periods of declining interest rates, income to a
Fund derived from adjustable rate mortgage securities which remain in a mortgage
pool will decrease in contrast to the income on fixed rate mortgage securities,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to timely payment of
the principal and interest by FNMA. Mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is
a corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or by any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES - The
Multi Sector Bond Fund and the Balanced Fund may invest in collateralized
mortgage obligations ("CMOs"). CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, Fannie Mae or Freddie Mae Certificates, but also may be
collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as "Mortgage Assets"). Multiclass
pass-through securities are interests in a trust composed of Mortgage Assets.
Unless the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
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substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. As
market conditions change, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. Such changes can result in
volatility in the market value, and in some instances reduced liquidity, of the
CMO class.
A Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one PAC Bond to another; a narrower range increases the risk
that prepayments on the PAC Bond will be greater or smaller than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES - The Multi Sector Bond Fund and the Balanced Fund
may purchase stripped mortgage securities which are derivative multiclass
mortgage securities. Stripped mortgage securities may be issued by agencies or
instrumentalities of the U.S. government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Stripped mortgage securities have greater volatility than other
types of mortgage securities. Although stripped mortgage securities are
purchased and sold by institutional investors through several investment banking
firms acting as brokers or dealers, the market for such securities has not yet
been fully developed. Accordingly, stripped mortgage securities are generally
illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.
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In addition to the stripped mortgage securities described above, the
Fund may invest in similar securities such as Super POs and Levered IOs which
are more volatile than POs, IOs and IOettes. Risks associated with instruments
such as Super POs are similar in nature to those risks related to investments in
POs. Risks connected with Levered IOs and IOettes are similar in nature to those
associated with IOs. The Fund may also invest in other similar instruments
developed in the future that are deemed consistent with its investment
objective, policies and restrictions. POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Fund. See "Tax Status" in this Prospectus and "Additional
Information Concerning Taxes" in the Statement of Additional Information.
A Fund may also purchase stripped mortgage-backed securities for
hedging purposes to protect that Fund against interest rate fluctuations. For
example, since an IO will tend to increase in value as interest rates rise, it
may be utilized to hedge against a decrease in value of other fixed-income
securities in a rising interest rate environment. With respect to IOs, if the
underlying mortgage securities experience greater than anticipated prepayments
of principal, the Fund may fail to recoup fully its initial investment in these
securities even if the securities are rated in the highest rating category by an
NRSRO. Stripped mortgage-backed securities may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The market value of the class consisting
entirely of principal payments can be extremely volatile in response to changes
in interest rates. The yields on stripped mortgage-backed securities that
receive all or most of the interest are generally higher than prevailing market
yields on other mortgage-backed obligations because their cash flow patterns are
also volatile and there is a greater risk that the initial investment will not
be fully recouped. The market for CMOs and other stripped mortgage-backed
securities may be less liquid if these securities lose their value as a result
of changes in interest rates; in that case, a Fund may have difficulty in
selling such securities.
REPURCHASE AGREEMENTS. All of the Funds may enter into repurchase agreements
with member banks of the Federal Reserve System or certain non-bank dealers. In
connection with the purchase of a repurchase agreement by a Fund, the Fund's
custodian, or a subcustodian, will have custody of, and will hold in a
segregated account, securities acquired by the Fund under a repurchase
agreement. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Repurchase agreements are considered by the staff of
the Securities and Exchange Commission (the "SEC") to be loans by the Fund.
Repurchase agreements may be entered into with respect to securities of the type
in which it may invest or government securities regardless of their remaining
maturities, and will require that additional securities be deposited with it if
the value of the securities purchased should decrease below resale price.
Repurchase agreements involve certain risks in the event of default or
insolvency by the other party, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities, the risk of a possible
decline in the value of the underlying securities during the period in which a
Fund seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or part of the
income from the repurchase agreement. The Adviser or applicable Subadviser,
acting under the supervision of the Board of Trustees, reviews the
creditworthiness of those banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate these risks.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each of the Funds 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 payment obligation
and the interest rate that will be received on when-issued securities are fixed
at the time the buyer enters into the commitment. Due to fluctuations in the
value of securities purchased or sold on a when-issued or delayed-delivery
basis, the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are actually
delivered to the buyers. The greater a Fund's outstanding commitments
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for these securities, the greater the exposure to potential fluctuations in the
net asset value of a Fund. Purchasing when-issued or delayed-delivery securities
may involve the additional risk that the yield or market price available in the
market when the delivery occurs may be higher or the market price lower than
that obtained at the time of commitment.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of such Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When the Fund engages in when-issued or
delayed-delivery transactions, it relies on the other party to consummate the
trade. Failure of the seller to do so may result in a Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided it receives cash
collateral which at all times is maintained in an amount equal to at least 100%
of the current market value of the securities loaned. By lending its portfolio
securities, the Fund can increase its income through the investment of the cash
collateral. For the purposes of this policy, the Fund considers collateral
consisting of cash, U.S. Government securities or letters of credit issued by
banks whose securities meet the standards for investment by the Fund to be the
equivalent of cash. From time to time, the Fund may return to the borrower or a
third party which is unaffiliated with it, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) a fund must receive at least 100%
cash collateral of the type discussed in the preceding paragraph from the
borrower; (2) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (3) a
fund must be able to terminate the loan at any time; (4) a fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) a fund may pay only reasonable custodian fees in connection with the
loan; and (6) while any voting rights on the loaned securities may pass to the
borrower, a fund's board of directors or trustees must be able to terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modification. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral for
the loan.
SMALL COMPANY AND EMERGING GROWTH STOCKS - The Small Cap Value Fund, the Small
Cap Growth Fund, the Mid Cap Fund, the Strategic Growth Fund, the Strategic
Value Fund and the Global Equity Fund may purchase 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 may be
more volatile than securities of larger, more established companies or the
market averages in general. Because small-sized companies normally have fewer
shares outstanding than larger companies, it may be more difficult for a Fund to
buy or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies may have limited product lines, markets
or financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for larger,
more established ones.
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SPECIAL SITUATION COMPANIES. The Small Cap Value Fund, the Small Cap Growth
Fund, the Mid Cap Fund, the Strategic Growth Fund, the Strategic Value Fund and
the Global Equity Fund may invest in the securities of "special situation
companies," which include those involved in an actual or prospective acquisition
or consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; or litigation which, if resolved
favorably, would improve the value of the company's stock. If the actual or
prospective situation does not materialize as anticipated, the market price of
the securities of a "special situation company" may decline significantly.
Therefore, an investment in a Fund 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. Each Fund believes, however, that if
a Subadviser analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, such Fund may achieve
capital growth. There can be no assurance however, that a special situation that
exists at the time the Fund makes its investment will be consummated under the
terms and within the time period contemplated, if it is consummated at all.
FOREIGN SECURITIES. All of the Funds may directly or indirectly through the use
of depository receipts, invest in foreign securities. Investors in such Funds
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 a Fund may hold securities
and funds in foreign currencies, a Fund may be affected favorably or unfavorably
by changes in currency rates and in exchange control regulations, if any, and
may incur costs in connection with conversions between various currencies. Most
foreign stock markets, while growing in volume of trading activity, have less
volume than the New York Stock Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of comparable
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than in the United States and, at times, volatility of price can be
greater than in the United States. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on United States
exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed companies
in foreign countries than in the United States. In addition, with respect to
certain foreign countries, there is the possibility of exchange control
restrictions, expropriation or confiscatory taxation, and political, economic or
social instability, which could affect investments in those countries. Foreign
securities, such as those purchased by a Fund, may be subject to foreign
government taxes, higher custodian fees and dividend collection fees which could
reduce the yield on such securities.
Foreign economies may differ favorably or unfavorably from the U.S.
economy in various respects, including growth of gross domestic product, rates
of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities. From
time to time, foreign securities may be difficult to liquidate rapidly without
adverse price effects. Certain costs attributable to foreign investing, such as
custody charges and brokerage costs, are higher than those attributable to
domestic investing.
Investments may be made from time to time by the Equity Income Fund,
the Small Cap Growth Fund, the High Income Bond Fund, Balanced Fund and the
Multi Sector Bond 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
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more volatile than the markets of developed countries; however, such markets
have in the past provided the opportunity for higher rates of return to
investors.
The value and liquidity of investments in developing countries may be
affected favorably or unfavorably by political, economic, fiscal, regulatory or
other developments in the particular countries or neighboring regions. The
extent of economic development, political stability and market depth of
different countries varies widely. Certain countries in the Asia region,
including Cambodia, China, Laos, Indonesia, Malaysia, the Philippines, Thailand,
and Vietnam are either comparatively underdeveloped or are in the process of
becoming developed. Such investments typically involve greater potential for
gain or loss than investments in securities of issuers in developed countries.
The securities markets in developing countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares available for investment by a Fund. Similarly, volume and liquidity in
the bond markets in developing countries are less than in the United States and,
at times, price volatility can be greater than in the United States. A limited
number of issuers in developing countries' securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
The limited liquidity of securities markets in developing countries may also
affect the Fund's ability to acquire or dispose of securities at the price and
time it wishes to do so. Accordingly, during periods of rising securities prices
in the more illiquid securities markets, the Fund's ability to participate fully
in such price increases may be limited by its investment policy of investing not
more than 15% of its total net assets in illiquid securities. Conversely, the
Fund's inability to dispose fully and promptly of positions in declining markets
will cause the Fund's net asset value to decline as the value of the unsold
positions is marked to lower prices. In addition, securities markets in
developing countries are susceptible to being influenced by large investors
trading significant blocks of securities.
Political and economic structures in many such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of the United
States. Certain of such countries have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of the
Fund's investments in those countries and the availability to the Fund of
additional investments in those countries.
Economies of developing countries may differ favorably or unfavorably
from the United States' economy in such respects as rate of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As export-driven economies,
the economies of countries in the Asia Region are affected by developments in
the economies of their principal trading partners. Hong Kong, Japan and Taiwan
have limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of price
and supply.
Certain developing countries do not have comprehensive systems of laws,
although substantial changes have occurred in many such countries in this regard
in recent years. Laws regarding fiduciary duties of officers and directors and
the protection of shareholders may not be well developed. Even where adequate
law exists in such developing countries, it may be impossible to obtain swift
and equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction.
Trading in futures contracts on foreign commodity exchanges may be
subject to the same or similar risks as trading in foreign securities.
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Depository Receipts. A Fund may invest in foreign securities by
purchasing depository receipts, including American Depository Receipts ("ADRs")
and European Depository 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 Depository Receipts ("CDRs")), in bearer form,
may be denominated in other currencies and are designed for use in European
securities markets. ADRs are receipts typically issued by a U.S. Bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. For purposes of a 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.
Each Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.
A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities. The
depository usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and thus there may not be a
correlation between such information and the market value of the depository
receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository, and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as dividend
payment fees of the depository), although ADR holders continue to bear certain
other costs (such as deposit and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and
other information to the ADR holders at the request of the issuer of the
deposited securities.
REAL ESTATE SECURITIES - Although the Funds will not invest in real estate
directly, the Strategic Growth Fund, Strategic Value Fund and Small Cap Growth
Fund 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, as a result, such Fund may be subject to certain risks
associated with direct ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines in the
value of real estate; possible lack of availability of mortgage funds; extended
vacancies of properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.
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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
distributed to shareholders provided they comply with several requirements of
Internal Revenue Code, as amended (the "Code").
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into or exchanged for a specified amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities have general
characteristics similar to both debt obligations and equity securities. 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 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.
A convertible security entitles the holder to receive interest normally
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally, the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A convertible
security generally will sell at a premium over its conversion value by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
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A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption, a
Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
Certain Funds may also invest in zero coupon convertible securities.
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations then conventional
convertible securities. Federal income tax law requires the holder of a zero
coupon convertible security to recognize income from the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability of federal income taxes, a Fund will be
required to distribute income accrued from zero coupon convertible securities
which it owns, and may have to sell portfolio securities (perhaps at
disadvantageous times) in order to generate cash to satisfy these distribution
requirements.
WARRANTS. Each 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. Warrants acquired by a Fund in units or attached to securities are
not subject to these restrictions. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
SHORT SELLING OF SECURITIES. The Mid Cap Fund, the Strategic Growth Fund and the
Strategic Value Fund may engage in short sales of securities. In a short sale,
the Fund sells stock which it does not own, making delivery with securities
"borrowed" from a broker. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. This
price may or may not be less than the price at which the security was sold by
the Fund. Until the security is replaced, the Fund is required to pay the lender
any dividends or interest which accrue during the period of the loan. In order
to borrow the security, the Fund may also have to pay a fee which would increase
the cost of the security sold. The proceeds of the short sale will be retained
by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those two dates. The amount of any gain
will be decreased and the amount of any loss will be increased by any interest
the Fund may be required to pay in connection with the short sale.
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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. The Fund must deposit in a segregated account an amount of cash or
liquid assets equal to the difference between (a) the market value of securities
sold short at the time that they were sold short and (b) the value of the
collateral deposited with the broker in connection with the short sale (not
including the proceeds from the short sale). While the short position is open,
the Fund must maintain on a daily basis the segregated account at such a level
that (1) the amount deposited in it plus the amount deposited with the broker as
collateral equals the current market value of the securities sold short and (2)
the amount deposited in it plus the amount deposited with the broker as
collateral is not less than the market value of the securities at the time they
were sold short.
The Mid Cap Fund, the Strategic Growth Fund, and the Strategic Value
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." Each Fund does not intend to engage in short sales against the box for
investment purposes. A Fund may, however, make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or a security convertible or exchangeable
for such security), or when the Fund wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for U.S.
federal income tax purposes and for purposes of satisfying certain tests
applicable to regulated investment companies under the Code. In such case, any
future losses in the Fund's long position should be offset by a gain in the
short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced will depend upon the amount of the security sold short relative to the
amount the Fund owns. There will be certain additional transaction costs
associated with short sales against the box, but the Fund will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. Each Fund may not
invest more than 15% of its net assets, in the aggregate, in illiquid
securities, including repurchase agreements which have a maturity of longer than
seven days, time deposits maturing in more than seven days and securities that
are illiquid because of the absence of a readily available market or legal or
contractual restrictions on resale. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and an
investment company might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. An investment company might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor
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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.
A 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 a Fund
will be considered illiquid unless the OTC options are sold to qualified dealers
who agree that the Fund may repurchase any OTC option it writes at a maximum
price to be calculated by a formula set forth in the option agreement. The cover
for an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
Each Subadviser will monitor the liquidity of restricted securities in
the portion of a 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).
BORROWING. Each Fund may borrow money from banks, limited by the Fund's
fundamental investment restriction to 33-1/3% of its total assets (including the
amount borrowed), and may engage in mortgage dollar roll and reverse repurchase
agreements which may be considered a form of borrowing. In addition, a Fund may
borrow up to an additional 5% of its total assets from banks for temporary or
emergency purposes. A Fund will not purchase securities when bank borrowings
exceed 5% of such Fund's total assets. Each Fund expects that its borrowings
will be on a secured basis. In such situations, either the custodian will
segregate the pledged assets for the benefit of the lender or arrangements will
be made with a suitable subcustodian, which may include the lender. The Funds
have established a line-of-credit ("LOC") with their custodian by which they may
borrow for temporary or emergency purposes. The Funds intend to use the LOC to
meet large or unexpected redemptions that would otherwise force a Fund to
liquidate securities under circumstances which are unfavorable to a Fund's
remaining shareholders.
DERIVATIVE INSTRUMENTS. As discussed in the Prospectuses, the Adviser and each
of the 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 a
Fund's portfolio or for risk management or for any other permissible purposes
consistent with that Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index.
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 the
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corresponding losses that result from 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 resulting from
changes in the value of the underlying asset. Derivative transactions may
include elements of leverage and, accordingly, the fluctuation of the value of
the derivative transaction in relation to the underlying asset may be magnified.
The use of these instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they may be
traded, and the Commodity Futures Trading Commission ("CFTC"). In addition, a
Fund's ability to use these instruments will be limited by tax considerations.
Special Risks Of Derivative Instruments. The use of derivative
instruments involves special considerations and risks as described below. Risks
pertaining to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the
Adviser's or a Subadviser's ability to predict movements of the overall
securities and currency markets, which requires different skills than predicting
changes in the prices of individual securities. There can be no assurance that
any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged, as well as, how similar the index is
to the portion of the Fund's assets being hedged in terms of securities
composition.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because the Adviser or Subadviser projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the instrument
declined by more than the increase in the price of the security, a Fund could
suffer a loss.
(4) As described below, 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.
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For a discussion of the federal income tax treatment of a Fund's
derivative instruments, see "Tax Status" below.
Options. Each of the Funds may purchase or write put and call options
on securities and indices, and may purchase options on foreign currencies, and
enter into closing transactions with respect to such options to terminate an
existing position. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing put or call options can
enable a Fund to enhance income by reason of the premiums paid by the purchaser
of such options. Writing call options serves as a limited short hedge because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised, and the Fund will be obligated to
sell the security at less than its market value or will be obligated to purchase
the security at a price greater than that at which the security must be sold
under the option. All or a portion of any assets used as cover for OTC options
written by a Fund would be considered illiquid to the extent described under
"Restricted and Illiquid Securities" above. Writing put options serves as a
limited long hedge because increases in the value of the hedged investment would
be offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised, and the Fund
will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration of the
option, the relationship of the exercise price to the market price of the
underlying investment, and general market conditions. Options that expire
unexercised have no value. Options used by the Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
A Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the Fund and the counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counter party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
Each Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Each of the
Funds intends to purchase or write only those exchange-traded options for which
there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although a Fund will enter into OTC options only with counterparties
that are expected to be capable of entering into closing transactions with a
Fund, there is no assurance that such Fund will in fact be able
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to close out an OTC option at a favorable price prior to expiration. In the
event of insolvency of the counter party, a Fund might be unable to close out an
OTC option position at any time prior to its expiration.
If a Fund is unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as a cover for the written option until the option
expires or is exercised.
Each Fund may engage in options transactions on indices in much the
same manner as the options on securities discussed above, except that index
options may serve as a hedge against overall fluctuations in the securities
markets in general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
Transactions using OTC options (other than purchased options) expose a
Fund to counter party risk. To the extent required by SEC guidelines, a Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or (2)
cash and liquid obligations with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. A Fund
will also set aside cash and/or appropriate liquid assets in a segregated
custodial account if required to do so by the SEC and CFTC regulations. Assets
used as cover or held in a segregated account cannot be sold while the position
in the corresponding option or futures contract is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to segregated accounts as a cover could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Spread Transactions. Each Fund may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a Fund
the right to put, or sell, a security that it owns at a fixed dollar spread or
fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to a Fund in purchasing covered
spread options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing transactions
will be available. The purchase of spread options will be used to protect a Fund
against adverse changes in prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality securities.
Such protection is only provided during the life of the spread option.
Futures Contracts. Each 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. A Fund's hedging may
include purchases of futures as an offset against the effect of expected
increases in securities prices or currency exchange rates and sales of futures
as an offset against the effect of expected declines in securities prices or
currency exchange rates. A Fund may write put options on futures contracts while
at the same time purchasing call options on the same futures contracts in order
to create synthetically a long futures contract position. Such options would
have the same strike prices and expiration dates. A Fund will engage in this
strategy only when the Adviser or a Subadviser believes it is more advantageous
to a Fund than is purchasing the futures contract.
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To the extent required by regulatory authorities, a Fund will only
enter into futures contracts that are traded on U.S. or foreign exchanges or
boards of trade approved by the CFTC and are standardized as to maturity date
and underlying financial instrument. These transactions may be entered into for
"bona fide hedging" purposes as defined in CFTC regulations and other
permissible purposes including increasing return and hedging against changes in
the value of portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions. The ability of a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
A Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of a Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could be
used to reduce a Fund's exposure to market, currency, or interest rate
fluctuations, such Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times the difference between the value of
the index at the close of the last trading day of the contract and the price at
which the index futures contract was originally written. Transactions costs are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as the
case may be, of the instrument, the currency, or by payment of the change in the
cash value of the index. More commonly, futures contracts are closed out prior
to delivery by entering into an offsetting transaction in a matching futures
contract. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of those securities is made.
If the offsetting purchase price is less than the original sale price, a Fund
realizes a gain; if it is more, a Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, a Fund realizes
a gain; if it is less, a Fund realizes a loss. The transaction costs must also
be included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, that Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid obligations, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to a Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In
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contrast, when a Fund purchases or sells a futures contract or writes a call or
put option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If a Fund has insufficient
cash to meet daily variation margin requirements, it might need to sell
securities at a time when such sales are disadvantageous. Purchasers and sellers
of futures positions and options on futures can enter into offsetting closing
transactions by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures may
be closed only on an exchange or board of trade on which they were entered into
(or through a linked exchange). Although the Funds intend to enter into futures
transactions only on exchanges or boards of trade where there appears to be an
active market, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin calls
and might be compelled to liquidate futures or options on futures contracts
positions whose prices are moving unfavorably to avoid being subject to further
calls. These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
Swap Agreements. The Funds may enter into interest rate, securities
index, commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with such Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. The Funds 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";
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interest rate floors under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on the Adviser's or 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, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on a Fund by the Code may limit a Fund's ability to use swap agreements.
The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the
Adviser or 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,
a Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
Foreign Currency-Related Derivative Strategies - Special
Considerations. Each of the Funds may use options and futures and options on
futures on foreign currencies and forward currency contracts to hedge against
movements in the values of the foreign currencies in which a Fund's securities
are denominated. A Fund may engage in currency exchange transactions to protect
against uncertainty in the level of future exchange rates and may also engage in
currency transactions to increase income and total return. The Global Equity
Fund may engage in foreign currency exchange transactions to adjust its currency
exposure relative to its benchmark, the MSCI World Equity Index. Such currency
hedges can protect against price movements in a security the Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
A Fund might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, a Fund may hedge against price movements in that currency by
entering into transactions using hedging instruments on another foreign currency
or a basket of currencies, the values of which a Subadviser believes will have a
high degree of positive correlation to the value of the currency being hedged.
The risk that movements in the price of the hedging instrument will not
correlate perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such hedging
instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions
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of less than $1 million) for the underlying foreign currencies at prices that
are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, a Fund will normally purchase OTC options on
foreign currency only when the Adviser or a Subadviser believes a liquid
secondary market will exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS. Each of the Funds may enter into forward currency
contracts. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers.
At or before the maturity of a forward contract, a Fund may either sell
a portfolio security and make delivery of the currency, or retain the security
and fully or partially offset its contractual obligation to deliver the currency
by purchasing a second contract. If a Fund retains the portfolio security and
engages in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward contract prices.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Currency Hedging. While the values of forward currency contracts,
currency options, currency futures and options on futures may be expected to
correlate with exchange rates, they will not reflect other factors that may
affect the value of a Fund's investments. A currency hedge, for example, should
protect a Yen-denominated bond against a decline in the Yen, but will not
protect a Fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of a Fund's investments denominated in foreign
currency will change in response to many factors other than exchange rates, a
currency hedge may not be entirely successful in mitigating changes in the value
of a Fund's investments denominated in that currency over time.
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A decline in the dollar value of a foreign currency in which a Fund's
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. The use of currency
hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. In order to protect against such diminutions in the value of securities
it holds, a Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its securities that otherwise would have resulted. Conversely,
if a rise in the dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of the
securities, a Fund may purchase call options on the particular currency. The
purchase of these options could offset, at least partially, the effects of the
adverse movements in exchange rates. Although currency hedges limit the risk of
loss due to a decline in the value of a hedged currency, at the same time, they
also limit any potential gain that might result should the value of the currency
increase.
A Fund may enter into foreign currency exchange transactions to hedge
its currency exposure in specific transactions or portfolio positions or, in the
case of the Global Equity Fund, to adjust its currency exposure relative to its
benchmark, the MSCI World Equity Index. Transaction hedging is the purchase or
sale of forward currency with respect to specific receivables or payables of a
Fund generally accruing in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency with respect to
portfolio security positions. A Fund may not position hedge to an extent greater
than the aggregate market value (at the time of making such sale) of the hedged
securities.
FOREIGN COMMERCIAL PAPER. A Fund may invest in commercial paper which is indexed
to certain specific foreign currency exchange rates. The terms of such
commercial paper provide that its principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. A Fund will
purchase such commercial paper with the currency in which it is denominated and,
at maturity, will receive interest and principal payments thereon in that
currency, but the amount or principal payable by the issuer at maturity will
change in proportion to the change (if any) in the exchange rate between two
specified currencies 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. A Fund
will purchase such commercial paper for hedging purposes only, not for
speculation. The staff of the SEC is currently considering whether the purchase
of this type of commercial paper would result in the issuance of a "senior
security" within the meaning of the 1940 Act. The Funds believe that such
investments do not involve the creation of such a senior security, but
nevertheless will establish a segregated account with respect to its investments
in this type of commercial paper and to maintain in such account cash not
available for investment or other liquid assets having a value equal to the
aggregate principal amount of outstanding commercial paper of this type.
SECURITIES OF INVESTMENT COMPANIES. As permitted by the 1940 Act, each Fund
reserves the right to invest up to 10% of its total assets, calculated at the
time of investment, in the securities of other open-end or closed-end investment
companies. No more than 5% of a Fund's total assets may be invested in the
securities of any one investment company nor may it acquire more than 3% of the
voting securities of any other investment company. Such Fund will indirectly
bear its proportionate share of any management fees paid by an investment
company in which it invests in addition to the advisory fee paid by the Fund.
Some of the countries in which a Fund may invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or government-authorized
investment vehicles, which may include other investment companies.
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BANK OBLIGATIONS. As stated in a Fund's Prospectus, bank obligations that may be
purchased by a Fund include certificates of deposit, banker's acceptances and
fixed time deposits. A certificate of deposit is a short-term negotiable
certificate issued by a commercial bank against funds deposited in the bank and
is either interest-bearing or purchased on a discount basis. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction. The borrower
is liable for payment as is the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Fixed time deposits are
obligations of branches of U.S. banks or foreign banks which are payable at a
stated maturity date and bear a fixed rate of interest. Although fixed time
deposits do not have a market, there are no contractual restrictions on the
right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS. The Funds may invest in floating and
variable rate instruments. Floating or variable rate obligations bear interest
at rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, or at specified intervals. Certain of the
floating or variable rate obligations that may be purchased by the Funds may
carry a demand feature that would permit the holder to tender them back to the
issuer of the instrument or to a third party at par value prior to maturity.
Some of the demand instruments purchased by a Fund are not traded in a secondary
market and derive their liquidity solely from the ability of the holder to
demand repayment from the issuer or third party providing credit support. If a
demand instrument is not traded in a secondary market, the Fund will nonetheless
treat the instrument as "readily marketable" for the purposes of its investment
restriction limiting investments in illiquid securities unless the demand
feature has a notice period of more than seven days in which case the instrument
will be characterized as "not readily marketable" and therefore illiquid.
Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and to provide for
periodic adjustments in the interest rate. A Fund will limit its purchases of
floating and variable rate obligations to those of the same quality as it is
otherwise allowed to purchase. The Subadviser will monitor on an ongoing basis
the ability of an issuer of a demand instrument to pay principal and interest on
demand.
The Fund's right to obtain payment at par on a demand instrument could
be affected by events occurring between the date the Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer of
the instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than a Fund's custodian subject to a subcustodian agreement
approved by the Fund between that bank and the Fund's custodian.
BRADY BONDS. The Multi Sector Bond Fund and the Balanced Fund, and the other
Funds in accordance with their Prospectuses, may invest in Brady Bonds. Brady
Bonds are debt securities, generally denominated in U.S. dollars, issued under
the framework of the Brady Plan. The Brady Plan is an initiative announced by
former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for
debtor nations to restructure their outstanding external commercial bank
indebtedness. In restructuring its external debt under the Brady Plan framework,
a debtor nation negotiates with its existing bank lenders as well as
multilateral institutions such as the International Bank for Reconstruction and
Development (the "World Bank") and the International Monetary Fund (the "IMF").
The Brady Plan framework, as it has developed, contemplates the exchange of
external commercial bank debt for newly issued bonds known as "Brady Bonds".
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with
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the debt restructuring. The World Bank and/or the IMF support the restructuring
by providing funds pursuant to loan agreements or other arrangements which
enable the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount. Under these arrangements with the World
Bank and/or the IMF, debtor nations have been required to agree to the
implementation of certain domestic monetary and fiscal reforms. Such reforms
have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should also recognize that
the Brady Plan only sets forth general guiding principles for economic reform
and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors. The Subadviser
believes that economic reforms undertaken by countries in connection with the
issuance of Brady Bonds may make the debt of countries which have issued or have
announced plans to issue Brady Bonds an attractive opportunity for investment.
However, there can be no assurance that a Subadviser's expectations with respect
to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only
recently, and accordingly, do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by Standard &
Poor's Corporation ("S&P) or "Ba" or "B" by Moody's Investors Service, Inc.
("Moody's") or, in cases in which a rating by S&P or Moody's has not been
assigned, are generally considered by the Adviser or Subadviser to be of
comparable quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
have generally borne interested computed semi-annually at a rate equal to 13/16
of 1% above the then current six month London Inter-Bank Offered Rate ("LIBOR")
rate. Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
date at maturity (typically 30 years from the date of issuance) by U.S. Treasury
zero coupon bonds with a maturity equal to the final maturity of such Brady
Bonds. Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be collateralized by cash or high-grade securities in amounts
that typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
The applicable Funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and
sold in secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories. A substantial portion of the Brady Bonds and other
sovereign debt securities in which these Funds may invest are likely to be
acquired at a discount, which involves certain considerations discussed below
under "Additional Information Concerning Taxes."
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ZERO COUPON SECURITIES, STEP-COUPON SECURITIES, PAY-IN-KIND BONDS ("PIK BONDS")
AND DEFERRED PAYMENT SECURITIES. Each of the Funds except the Small Cap Value
Fund, the Global Equity Fund and the Strategic Value Fund may invest in zero
coupon securities, PIK bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but
are sold at substantial discounts from their value at maturity. Step-coupon
securities are debt securities that do not make regular cash interest payments
and are sold at a deep discount to their face value. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the expected return on their investment will be. Zero coupon
securities may have conversion features. The Fund also may purchase PIK bonds.
PIK bonds pay all or a portion of their interest in the form of debt or equity
securities. Deferred payment securities are securities that remain zero coupon
securities until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals. Deferred
payment securities are often sold at substantial discounts from their maturity
value.
Zero coupon securities, PIK bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of the Fund's limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon
security, certain PIK bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, the Fund may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS - Certain Funds may invest in Loan
Participations and Assignments. Loan Participations typically will result in a
Fund having a contractual relationship only with the lender, not with the
borrower. A Fund will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender selling the
Participation and only upon receipt by the lender of the payments from the
borrower. In connection with purchasing Loan Participations, a Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and a Fund may not benefit directly from any collateral supporting the
loan in which it has purchased the Participation. As a result, a Fund will
assume the credit risk of both the borrower and the lender that is selling the
Participation. In the event of the insolvency of the lender selling a
Participation, a Fund may be treated as a general creditor of the lender and may
not benefit from any set-off between the lender and the borrower. A Fund will
acquire Loan Participations only if the lender interpositioned between the Fund
and the borrower is determined by the Subadviser to be creditworthy. When a Fund
purchases assignments from lenders, the Fund will acquire direct rights against
the borrower on the loan, except that under certain circumstances such rights
may be more limited than those held by the assigning lender.
A Fund may have difficulty disposing of Assignments and Loan
Participations. Because the market for such instruments is not highly liquid,
the Fund anticipates that such instruments could be sold only to
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a limited number of institutional investors. The lack of a highly liquid
secondary market may have an adverse impact on the value of such instruments and
will have an adverse impact on the Fund's ability to dispose of particular
Assignments or Loan Participations in response to a specific economic event,
such as deterioration in the creditworthiness of the borrower.
The Board of Trustees has adopted policies and procedures for the
purpose of determining whether Assignments and Loan Participations are liquid or
illiquid. Pursuant to those policies and procedures, the Board of Trustees has
delegated to the Subadviser the determination as to whether a particular Loan
Participation or Assignment is liquid or illiquid, requiring that consideration
be given to, among other things, the frequency of quotes, the number of dealers
willing to sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. The Board of Trustees
periodically reviews purchases and sales of Assignments and Loan Participations.
To the extent that liquid Assignments and Loan Participation that A Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of the Fund's assets invested in illiquid assets
would increase. The Subadviser, under the supervision of the Board of Trustees,
monitors Fund investments in Assignments and Loan Participations and will
consider appropriate measures to enable a Fund to maintain sufficient liquidity
for operating purposes and to meet redemption requests.
In valuing a Loan Participation or Assignment held by a Fund for which
a secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, the Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Trustees,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the loan and the lender; (ii) the current interest rate; period
until next rate reset and maturity of the loan; (iii) recent prices in the
market for similar loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Funds may engage in
reverse repurchase agreements to facilitate portfolio liquidity, a practice
common in the mutual fund industry, or for arbitrage transactions discussed
below. In a reverse repurchase agreement, a Fund would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. A Fund generally retains the right to interest and principal payments on
the security. Since a Fund receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing (see "Borrowing"). When required by
guidelines of the SEC, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations to repurchase the security. At the
time a Fund enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing liquid
securities having a value not less than the repurchase price (including accrued
interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which the assets fall below the repurchase price (plus accrued
interest). A Fund's liquidity and ability to manage its assets might be affected
when it sets aside cash or portfolio securities to cover such commitments.
Reverse repurchase agreements involve the risk that the market value of the
securities retained in lieu of sale may decline below the price of the
securities the Fund has sold but is obligated to repurchase. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligation to
repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such determination.
Reverse repurchase agreements are considered to be borrowings under the
Investment Company Act of 1940 (the "1940 Act").
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The Strategic Growth Fund, Strategic Value Fund and the Multi Sector
Bond Fund may also enter into mortgage dollar rolls, in which a Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the initial
sale. A Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time the Fund would enter into a
mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Funds. (See "Borrowing".)
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund will
receive interest on the securities or repurchase agreements in which it invests
the transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature on
or before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Adviser or a Subadviser believes that such arbitrage transactions
do not present the risks to the Funds that are associated with other types of
leverage.
INVESTMENT RESTRICTIONS FOR THE FUNDS
THE FOLLOWING ARE FUNDAMENTAL INVESTMENT RESTRICTIONS FOR EACH OF THE
FUNDS WHICH CANNOT BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
EACH OF THE FUNDS (EXCEPT THE STRATEGIC GROWTH FUND WHOSE RESTRICTIONS ARE
LISTED SEPARATELY BELOW):
May not purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of
the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of the outstanding voting securities of the
issuer, except that 25% or less of the Fund's total assets may be
invested without regard to such limitations. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
May (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.
May not issue senior securities, except as permitted under the 1940
Act.
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May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.
May not purchase or sell 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.
May not purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus of such Fund.
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.
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.
THE STRATEGIC GROWTH FUND:
May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under 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.
May not issue senior securities, except as permitted under the 1940
Act.
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.
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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.
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.
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.
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 non-fundamental operating policies of the Funds which may
be changed by the Board of Trustees of the Trust without shareholder approval:
Each Fund may not:
Sell securities short (except for the Mid Cap Fund), unless the Fund
owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short or unless it covers such short
sales as required by the current rules and positions of the SEC or its
staff, and provided that short positions in forward currency contracts,
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short. The Mid Cap Fund may only sell securities short in accordance
with the description contained in its Prospectus.
Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with options, futures
contracts, options on futures contracts, transactions in currencies or
other derivative instruments shall not constitute purchasing securities
on margin.
Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid.
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.
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.
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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, 1998, separate accounts of Nationwide Life Insurance
Company had shared voting and investment power over 87.6% of the Balanced Fund
shares, 88.3% of the Multi Sector Bond Fund shares, 86.2% of the Small Cap Value
Fund shares, 41.3% of the Global Equity Fund shares, 41.1% of the Select
Advisors Mid Cap Fund shares, 65.5% of the Strategic Growth Fund shares, 77.2%
of the Strategic Value Fund shares, 77.2% of the Equity Income Fund shares, and
52.4% of the High Income Fund shares, respectively. As of March 31, 1998,
Nationwide Life Insurance Company owned beneficially 12.4% of the Balanced Fund
shares, 11.7% of the Multi Sector Bond Fund shares, 13.8% of the Small Cap Value
Fund shares, 58.7% of the Global Equity Fund shares, 58.9% of the Select
Advisors Mid Cap Fund shares, 34.5% of the Strategic Growth Fund shares, 22.8%
of the Strategic Value Fund shares, 22.8% of the Equity Income Fund shares and
47.6% of the High Income Fund shares.
As of March 31, 1998, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the shares of the Trust.
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, Age 63
411 Oak Street - Suite 306
Cincinnati, Ohio
Dr. Bryant is Executive Director of the Cincinnati Youth Collaborative,
a partnership of business, government, schools and social service
agencies to address the educational needs of students. He was formerly
Professor of Education, Wilmington College.
C. Brent DeVore, Trustee, Age 58
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
Sue Doody, Trustee, Age 64
169 East Beck Street
Columbus, Ohio
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Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is
an active member of the Greater Columbus Area Chamber of Commerce Board
of Trustees.
Robert M. Duncan, Trustee, Age 71
1397 Haddon Road
Columbus, Ohio.
Mr. Duncan is a member of the Ohio Elections Commission. He was
formerly Secretary to the Board of Trustees of the Ohio State
University. Prior to that, he was Vice President and General Counsel of
The Ohio State University.
Joseph J. Gasper, Trustee*, Chairman, Age 54
One Nationwide Plaza
Columbus, Ohio
Mr. Gasper is Director, President and Chief Operating Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life
Insurance Company. Prior to that, he was Executive Vice President and
Senior Vice President for the Nationwide Insurance Enterprise.
Dr. Thomas J. Kerr, IV, Trustee, Age 65
4890 Smoketalk Lane
Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly
President of Grant Hospital Development Foundation.
Douglas F. Kridler, Trustee, Age 43
55 East State Street
Columbus, Ohio
Mr. Kridler is President of Columbus Association for the Performing
Arts.
Robert J. Woodward, Jr., Trustee*, Vice-Chairman, Age 56
One Nationwide Plaza
Columbus, Ohio
Mr. Woodward is Executive Vice President - Chief Investment Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life
Insurance Company.
David C. Wetmore, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture
capital firm.
James F. Laird, Jr., Treasurer, Age 42
Three Nationwide Plaza
Columbus, Ohio
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Mr. Laird is Vice President and General Manager of Nationwide Advisory
Services, Inc., the Distributor and Investment Adviser. He was formerly
Treasurer of Nationwide Advisory Services, Inc.
Elizabeth A. Davin, Secretary, Age 34
One Nationwide Plaza
Columbus, Ohio
Ms. Davin is a member of the Office of General Counsel of the
Nationwide Insurance Enterprise and a partner in Dietrich, Reynolds &
Koogler.
*A Trustee who is an "interested person" of the Trust as defined in the 1940
Act.
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, 1998, and the aggregate compensation paid to
each disinterested Trustee during the year by all twenty nine registered
investment companies to which the Adviser provides investment advisory services
(the "Nationwide Fund Complex").
The Trust does not maintain any pension or retirement plans for the
Officers or Trustees of the Trust.
COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total
Compensation from
Aggregate the Nationwide Fund
Compensation Complex Including the
Disinterested Trustees From the Trust Trust
- --------------------------------------------------------------------------------
<S> <C> <C>
Dr. John C. Bryant $2,500 $21,000
C. Brent DeVore $ $
Sue Doody $750 $12,250
Robert M. Duncan $2,500 $21,000
Dr. Thomas J. Kerr, IV $2,500 $21,000
Douglas F. Kridler $750 $21,000
David C. Wetmore $ $
</TABLE>
35
<PAGE> 47
CALCULATING YIELD AND TOTAL RETURN
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.
The uniformly calculated average annual total returns for the one year period
ended December 31, 1998 are shown below.
<TABLE>
<CAPTION>
Fund Total Return*
---- -------------
<S> <C>
Strategic Growth Fund ___%
Strategic Value Fund ___%
Equity Income Fund ___%
High Income Bond Fund ___%
Balanced Fund ___%
Multi Sector Bond Fund ___%
Small Cap Value Fund ___%
Global Equity Fund ___%
Select Advisers Mid Cap Growth Fund ___%
Small Cap Growth Fund* --
</TABLE>
* Operations for the Small Cap Growth Fund commenced on or around May 1, 1999.
Certain Funds 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 lats day of the period, assuming reinvestment of
all dividends and distributions. This yield formula uses the average number of
share 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
uniformly calculated yields for the 30 day period ended December 31, 1998 were
as follows:
36
<PAGE> 48
<TABLE>
<CAPTION>
Fund 30-day yield
---- ------------
<S> <C>
High Income Bond Fund ___%
Balanced Fund ___%
Multi Sector Bond Fund ___%
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser oversees the management of each of the Funds pursuant
to an Investment Advisory Agreement dated October 31, 1997. Subject to the
supervision and direction of the Trustees, the Adviser will initially identify
and select the Subadvisers and will determine the allocation of assets among
multiple Subadvisers, if applicable. The Adviser will also evaluate and monitor
the performance of Subadvisers. The Adviser will be authorized to select and
place portfolio investments on behalf of the Fund; however, the Adviser
currently does not intend to do so. 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 Adviser pays the compensation of the Trustees 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.
The Investment Advisory 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 for an
initial period of two years with respect to a Fund and thereafter shall continue
automatically for successive annual periods provided such continuance is
specifically approved at least annually by the Trustees, or by vote of a
majority of the outstanding voting securities of the Trust, and in either case,
by a majority of the Trustees who are not parties to the Agreement or interested
persons of any such party. The Agreement terminates automatically 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 less than 60 days written
notice. The Agreements further provide that the Adviser may render services to
others.
The Trust pays the compensation of the 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
37
<PAGE> 49
shares of the Trust, expenses of shareholders' meetings, and expenses relating
to the issuance, registration, and qualification of shares of the Trust.
Subject to the supervision of the Adviser and the Trustees, each
Subadviser manages a Fund's assets in accordance with such Fund's investment
objective and policies. Each Subadviser shall make investment decisions for such
Fund, and in connection with such investment decisions, shall place purchase and
sell orders for securities.
Each Subadviser provides investment advisory services to one or
more Funds pursuant to a Subadvisory Agreement. 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 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 with respect to a Fund and thereafter shall continue
automatically for successive annual periods provided such continuance is
specifically approved at least annually by the Trustees, or by vote of a
majority of the outstanding voting securities of the Fund, and in either case,
by a majority of the Trustees who are not parties to the Subadvisory 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 outstanding voting securities, or by either party, on
not less than 60 days written notice.
EQUITY INCOME FUND
Under the terms of its Investment Advisory Agreement, the Equity
Income Fund pays to the Adviser a fee at the annual rate of 0.80% of the Fund's
average daily net assets. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser waived all advisory fees in
the amount of $1,685.
Federated Investment Counseling ("Federated") is the Subadviser of
the Fund. For the investment management services it provides to the Fund,
Federated receives an annual fee from the Adviser in the amount of 0.40% on
assets up to $50 million, 0.25% on assets of $50 million and more but less than
$250 million, 0.20% on assets of $250 million and more but less than $500
million, and 0.15% on assets of $500 million and more. These fees are calculated
at an annual rate based upon the Fund's average daily net assets. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, the
Adviser paid $842 in fees to the Subadviser.
Federated, a Delaware business trust organized on April 11, 1989
is a registered investment adviser under the Investment Advisers Act of 1940. It
is a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated and other subsidiaries of Federated Investors serve as investment
advisers to an open number of investment companies and private accounts. Certain
other subsidiaries also provide administrative services to a number of
investment companies. With over $139 billion invested across more than 370 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
38
<PAGE> 50
HIGH INCOME BOND FUND
Under the terms of its Investment Advisory Agreement, the High
Income Bond Fund pays to the Adviser a fee at the annual rate of .80% of the
Fund's average daily net assets. For the period October 31, 1997 (commencement
of operations) through December 31, 1997, the Adviser waived all advisory fees
in the amount of $7,374.
Federated Investment Counseling is the Subadviser of the Fund. For
the investment management services it provides to the Fund, Federated receives
an annual fee from the Adviser in the amount of 0.40% on assets up to $50
million, 0.25% on assets of $50 million and more but less than $250 million,
0.20% on assets of $250 million and more but less than $500 million, and 0.15%
on assets of $500 million and more. These fees are calculated at an annual rate
based upon the Fund's average daily net assets. Additional information about
Federated is included above. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser paid $3,687 in fees to the
Subadviser.
GLOBAL EQUITY FUND
Under the terms of its Investment Advisory Agreement the Global
Equity Fund pays to the Adviser a fee at the annual rate of 1.00% of the Fund's
average daily net assets. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser waived all advisory fees in
the amount of $8,799.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") is the
subadviser of the Fund. For the investment management services it provides to
the Fund, J.P. Morgan receives an annual fee from the Adviser in an amount equal
to 0.60% on assets up to $50 million and 0.55% on assets of $50 million and
over. These fees are calculated at an annual rate based on the Fund's average
daily net assets. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, the Adviser paid $5,279 in fees to the Subadviser.
J.P. Morgan is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated, a bank holding company organized under the laws of Delaware. J.P.
Morgan offers a wide range of investment management services and acts as
investment adviser to corporate and institutional clients. J.P. Morgan uses a
sophisticated, disciplined, collaborative process for managing all asset
classes. As of June 30, 1997, J.P. Morgan and its affiliates had assets under
management of approximately $255 billion, including approximately $25 billion in
global equity portfolios.
MID CAP FUND
Under the terms of its Investment Advisory Agreement the Fund
pays to the Adviser a fee at the annual rate of 1.05% of the Fund's average
daily net assets. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, the Adviser waived all advisory fees in the amount of
$5,371.
The Adviser has selected three Subadvisers, each of whom will each
manage part of the Fund's portfolio. Each Subadviser receives an annual fee from
the Adviser in an amount equal to 0.65% on assets up to $50 million managed by
such Subadviser and 0.50% on assets of $50 million and more managed by a
Subadviser. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, the Adviser paid $3,325 in fees to the Subadvisers.
39
<PAGE> 51
The Mid Cap Fund's Subadvisers are:
- First Pacific Advisors, Inc. ("First Pacific")
- Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter")
- Rice, Hall, James & Associates ("Rice Hall")
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 by the Adviser for investment management.
Each of First Pacific, Pilgrim Baxter and Rice Hall is wholly
owned by United Asset Management Corporation ("UAM"), a NYSE-listed holding
company organized to acquire and own firms that provide investment advisory
services primarily for institutional clients. First Pacific is an indirect
wholly-owned subsidiary of UAM. Pilgrim Baxter and Rice Hall are each direct
wholly-owned subsidiaries of UAM. UAM's corporate headquarters are located at
One International Place, Boston 02110.
BALANCED FUND
Under the terms of its Investment Advisory Agreement, the Balanced
Fund pays to the Adviser a fee at the annual rate of 0.75% of the Fund's average
daily net assets. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, the Adviser waived all advisory fees in the amount of
$1,605.
Salomon Brothers Asset Management Inc. ("SBAM") is the Subadviser
of the Fund. For the investment management services it provides to the Fund,
SBAM receives an annual fee from the Adviser in an amount equal to 0.35% on
assets up to $150 million, 0.30% on assets of $150 million and more but less
than $500 million, and 0.25% on assets of $500 million and more. These fees are
calculated as an annual rate based upon the Fund's average daily net assets. For
the period October 31, 1997 (commencement of operations) through December 31,
1997, the Adviser paid $749 in fees to the Subadviser.
SBAM is a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by Salomon Smith Barney Holdings,
Inc. which is, in turn, wholly owned by Travelers Group, Inc. SBAM was
incorporated in 1987 and together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad range of fixed-income and equity investment
advisory services to various individuals and institutional clients located
throughout the world, and serves as investment adviser to various investment
companies. In providing such services, the SBAM has access to Salomon Inc's more
than 400 economists and mortgage, bond, sovereign and equity analysts. As of
March 31, 1998, SBAM and its worldwide investment advisory affiliates managed
approximately $27 billion of assets.
MULTI SECTOR BOND FUND
Under the terms of its Investment Advisory Agreement, the Multi
Sector Bond Fund pays to the Adviser a fee at the annual rate of 0.75% of the
Fund's average daily net assets. For the period October 31, 1997 (commencement
of operations) through December 31, 1997, the Adviser waived all advisory fees
in the amount of $1,724.
40
<PAGE> 52
SBAM is the subadviser of the Fund. For the investment management
services it provides to the Fund, SBAM receives an annual fee from the Adviser
in the amount of 0.35% on assets up to $50 million, 0.30% on assets of $50
million and more but less than $200 million, 0.25% on assets of $200 million and
more but less than $500 million, and 0.20% on assets of $500 million and more.
These fees are calculated at an annual rate based upon the Fund's average daily
net assets. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, the Adviser paid $805 in fees to the Subadviser.
In connection with SBAM's service as investment manager to the
Multi Sector Bond Fund, SBAM has entered into a subadvisory agreement with its
London based affiliate Salomon Brothers Asset Management Limited ("SBAM
Limited") pursuant to which SBAM has delegated to SBAM Limited responsibility
for management of the Fund's investments in non dollar-denominated debt
securities and currency transactions. SBAM Limited is compensated by SBAM at no
additional expense to the Fund. Like SBAM, SBAM Limited is an indirect,
wholly-owned subsidiary of Salomon Inc.
SMALL CAP VALUE FUND
Under the terms of its Investment Advisory Agreement, the Small
Cap Value Fund pays to the Adviser a fee at the annual rate of 0.90% of the
Fund's average daily net assets. For the period October 31, 1997 (commencement
of operations) through December 31, 1997, the Adviser waived all advisory fees
in the amount of $2,029.
The Dreyfus Corporation. For the investment management services it
provides to the Small Cap Value Fund, Dreyfus receives an annual fee from the
Adviser in an amount equal to 0.50% on assets up to $200 million and 0.45% on
assets of $200 million and more. These fees are calculated at an annual rate
based on each Fund's average daily net assets. Dreyfus, located at 200 Park
Avenue, New York, New York 10166, was formed in 1947. Dreyfus is a wholly-owned
subsidiary of Mellon Bank, N.A., which is a wholly-owned subsidiary of Mellon
Bank Corporation ("Mellon"). As of June 30, 1997, Dreyfus managed or
administered approximately $87 billion in assets for approximately 1.7 million
investor accounts nationwide. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser paid $1,127 in fees to the
Subadviser.
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 $305 billion in assets as of March 31,
1997, including approximately $104 billion in mutual fund assets. As of March
31, 1997, various subsidiaries of Mellon provided non-investment services, such
as custodial or administration services, for approximately $1.532 trillion in
assets including approximately $60 billion in mutual fund assets.
SMALL CAP GROWTH FUND
The Fund commenced operations on or around May 1, 1999 and has not
incurred any investment advisory fees prior to this date.
The Adviser has selected three Subadvisers, each of whom will each
manage part of the Fund's portfolio. Each Subadviser receives an annual fee from
the Adviser in an amount equal to 0.60% on
41
<PAGE> 53
assets managed by such Subadviser and has not incurred any subadvisory fees
prior to May 1, 1999.
The Small Cap Growth Fund's Subadvisers are:
-Franklin Advisers, Inc. ("Franklin")
-Miller Anderson & Sherred, LLP ("MAS")
-Neuberger Berman, LLC ("Neuberger Berman")
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 by the Adviser for investment management.
Franklin is a wholly owned subsidiary of Franklin Resources, Inc., one
of the oldest mutual fund organizations in the U.S. Franklin and its affiliates
act as investment manager to numerous other investment companies and accounts.
Together with its affiliates, Franklin manages over $220 billion in assets as of
December 31, 1998.
MAS is wholly owned by subsidiaries of Morgan Stanley Dean Witter & Co.
and is a division of Morgan Stanley Dean Witter Investment Management ("MSDW
Investment Management") and provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
As of December 31, 1998, MSDW Investment Management managed in excess of $163
billion in assets.
Neuberger Berman and its predecessor firms and affiliates have
specialized in the management of no-load mutual funds since 1950. Neuberger
Berman and its affiliates manage securities accounts that had approximately $50
billion of assets as of December 31, 1998. Neuberger Berman is a member 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.
STRATEGIC VALUE FUND AND STRATEGIC GROWTH FUND
Under the terms of the Investment Advisory Agreement, each of the
Strategic Value Fund and Strategic Growth Fund pays to the Adviser a fee at the
annual rate of 0.90% of that Fund's average daily net assets. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, the
Adviser waived all advisory fees for the Strategic Value and Strategic Growth
Fund in the amount of $1,715 and $1,645, respectively.
The Adviser has selected Strong Capital Management, Inc.
("Strong") to be the Subadviser to the Strategic Value Fund and the Strategic
Growth Fund. Strong has subcontracted with Schafer Capital Management, Inc.
("Schafer Capital") to subadviser the Strategic Value Fund. For the investment
management services provided to each Fund, Strong receives an annual fee from
the Adviser in an amount equal to 0.50% on assets of each Fund up to $500
million and 0.45% on assets of each Fund of $500 million and more. These fees
are calculated at an annual rate based on each Fund's average daily net assets.
Pursuant to its subcontract with Schafer Capital, Strong pays Schafer's
subadvisory fees. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, the Adviser paid $953 and $914, respectively for the
Strategic Value and Strategic Growth Funds, in fees to the Subadviser.
42
<PAGE> 54
'
Strong 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 February 28, 1998, Strong had over $29
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.
Schafer Capital's controlling person and sole shareholder is David
K. Schafer. Mr. Schafer has been in the investment management business for more
than 25 years and founded Schafer Capital in 1981.
FUND ADMINISTRATION SERVICES
Under the terms of a Fund Administration Agreement, the Adviser
also provides various administrative and accounting services, including daily
valuation of each Fund's shares and preparation of financial statements, tax
returns and regulatory reports. For these services, each Fund pays the Adviser
an annual fee in the amount of 0.07% of the Fund's first $250 million of average
daily net assets, 0.05% on the next $750 million and 0.04% on assets of more
than $1 billion.
For the year ended December 31, 1998, the Advisor waived all administration fees
as follows:
<TABLE>
<CAPTION>
Fund Administration Fees Waived
---- --------------------------
<S> <C>
Strategic Growth Fund $___
Strategic Value Fund ___
Equity Income Fund ___
High Income Bond Fund ___
Balanced Fund ___
Multi Sector Bond Fund ___
Small Cap Value Fund ___
Global Equity Fund ___
Select Advisers Mid Cap Growth Fund --
</TABLE>
CUSTODIAN
The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza,
Cincinnati, OH 45263, is the Custodian for the Funds and makes all receipts and
disbursements under a Custodian Agreement. Pursuant to the Custodian Agreement,
Fifth Third utilizes the services of the global custody network of State Street
Bank and Trust for foreign custody of the Funds' assets. The Custodian performs
no managerial or policy making functions for the Funds.
43
<PAGE> 55
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc. (NIS) is the Transfer Agent
and Dividend Disbursing Agent for the Funds. NIS is a wholly-owned subsidiary of
Nationwide Advisory Services, Inc. For these services, NIS is paid a fee by each
Fund at the annual rate of 0.01% of that Fund's average daily net assets.
Management believes the charges for the services performed are comparable to
fees charged by other companies performing similar services.
For the year ended December 31, 1998, Nationwide Investor Services waived all
transfer agent fees as follows:
<TABLE>
<CAPTION>
Fund Transfer Agent Fees Waived
---- --------------------------
<S> <C>
Strategic Growth Fund $__
Strategic Value Fund __
Equity Income Fund __
High Income Bond Fund __
Balanced Fund __
Multi Sector Bond Fund __
Small Cap Value Fund __
Global Equity Fund __
Select Advisers Mid Cap Growth Fund __
Small Cap Growth Fund* --
</TABLE>
*Operations for the Small Cap Growth Fund commenced on or around May 1, 1999.
BROKERAGE ALLOCATIONS
The Adviser (or a Subadviser) is responsible for decisions to buy
and sell securities and other investments for the Funds, the selection of
brokers and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. In transactions on stock and commodity exchanges in the
United States, these commissions are negotiated, whereas on foreign stock and
commodity exchanges these commissions are generally fixed and are generally
higher than brokerage commissions in the United States. In the case of
securities traded on the 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 and other
debt 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., prompt and reliable execution at the most favorable
prices and in the most effective manner possible taking into account
44
<PAGE> 56
all considerations discussed below. The Adviser or a Subadviser always attempts
to achieve best price - 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 or a Subadviser 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.
Fund portfolio transactions may be effected with broker-dealers
who have assisted investors in the purchase of Contracts. However, neither such
assistance nor sale of other investment company shares is a qualifying or
disqualifying factor in a broker-dealer's selection, nor is the selection of any
broker-dealer based on the volume of shares sold.
There may be occasions when portfolio transactions for a Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts served by affiliated companies of the
Adviser or a Subadviser and their affiliates. Although such concurrent
authorizations potentially could be either advantageous or disadvantageous to a
Fund, they are effected only when the Adviser or a Subadviser believes that to
do so is in the best interest of the Fund. When such concurrent authorizations
occur, the executions will be allocated in an equitable manner.
The Trustees periodically review the Adviser's and each
Subadviser's performance of its responsibilities in connection with the
placement of portfolio transactions on behalf of the Funds 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 Funds.
In purchasing and selling investments for the Funds, it is the
policy of each of the Subadvisers to obtain best execution at the most favorable
prices through responsible broker-dealers. The determination of what may
constitute best execution in a securities transaction by a broker involves a
number of considerations, including the overall direct net economic result to
the Fund (involving both price paid or received and any commissions and other
costs paid), the efficiency with which the transaction is effected, the ability
to effect the transaction at all when a large block is involved, the
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. These considerations are judgmental and are weighed by the Adviser or
Subadviser in determining the overall reasonableness of securities executions
and commissions paid. 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.
Each Subadviser may cause a Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission that is in excess of
the commission another broker-dealer would have received for executing the
transaction if it is determined 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
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<PAGE> 57
by broker-dealers can be useful to a Subadviser in serving its other clients or
clients of the Subadviser's affiliates. Subject to the policy of the Subadvisers
to obtain best execution at the most favorable prices through responsible
broker-dealers, a Subadviser also may consider the broker-dealer's sale of
shares of any fund for which the Subadviser serves as investment adviser,
subadviser or administrator.
The following table lists the amount of brokerage commissions (excluding
directed brokerage) and the amount of transactions and related commissions paid
to brokers providing research and other services to the subadvisers for the year
ended through December 31, 1998:
<TABLE>
<CAPTION>
Transactions Related to
Brokerage Services
-------------------------
Fund Commission $ Amount Commission
---- ---------- -------- ----------
<S> <C> <C> <C>
Strategic Growth Fund $ ___ $ ___ $ ___
Strategic Value Fund ___ ___ ___
Equity Income Fund ___ ___ ___
High Income Bond Fund ___ ___ ___
Balanced Fund ___ ___ ___
Multi Sector Bond Fund ___ ___ ___
Small Cap Value Fund ___ ___ ___
Global Equity Fund ___ ___ ___
Select Advisers Mid Cap Fund ___ ___ ___
Small Cap Growth Fund * -- -- --
</TABLE>
* Operations for the Small Cap Growth Fund commenced on or around May 1, 1999.
Under the 1940 Act, "affiliated persons" of a Fund are prohibited
from dealing with it as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the SEC.
However, each Fund may purchase securities from underwriting syndicates of which
a Subadviser or any of its affiliates as defined in the 1940 Act, is a member
under certain conditions, in accordance with Rule 10f-3 under the 1940 Act.
The Balanced Fund and the Multi Sector Bond Fund contemplate that,
consistent with the policy of obtaining best results, brokerage transactions by
be conducted through "affiliated broker/dealers," as defined in the 1940 Act.
Under the 1940 Act, commissions paid by a Fund to an "affiliated broker/dealer"
in connection with a purchase or sale of securities offered on a securities
exchange may not exceed the usual and customary broker's commission.
Accordingly, it is the Funds' policy that the commissions to be paid to an
affiliated broker-dealer must, in 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 such broker/dealer on comparable transactions for its most
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<PAGE> 58
favored unaffiliated customers, except for accounts for which the affiliated
broker/dealer acts as a clearing broker for another brokerage firm and customers
of an affiliated broker/dealer 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, consideration regularly is given to information concerning
the prevailing level of commissions charged on comparable transactions by other
brokers during comparable periods of time.
PURCHASES, REDEMPTIONS AND PRICING OF SHARES
An insurance company purchases shares of the Funds at their net
asset value using purchase payments received on Contracts issued by Accounts.
These Accounts are funded by shares of the Funds. For certain of the Funds,
shares may also be sold to affiliated Funds of Funds.
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 regular trading on the New York Stock Exchange
(generally 4 P.M. Eastern Time) on each business day the New York Stock Exchange
is open for regular trading (and on such other 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 Trust will not
compute net asset value for the Funds on customary national business holidays,
including the following: Christmas Day, New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day and
Thanksgiving Day. 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 regular trading
on the Exchange. For orders placed after the close of regular trading on 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 Funds listed on national exchanges are valued at the last sales price on the
principal exchange, or if there is no sale on that day, the securities are
valued at the prior day's closing prices as provided by an independent pricing
organization. Securities traded in the over-the-counter market are valued at the
last quoted sale price, or if there is no sale on that day, the quoted bid price
as provided by an independent pricing organization. Other portfolio securities
are valued at the quoted prices obtained from an independent pricing
organization which employs a combination of methods, including among others, the
obtaining and comparison of market valuations from dealers who make markets and
deal in such securities and the comparison of valuations with those of other
comparable securities in a matrix of such securities. The pricing service
activities and results are reviewed by an officer of the Trust. Securities and
other assets, for which such market prices are unavailable or for which an
independent pricing organization does not provide a value or provides a value
that does not
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<PAGE> 59
represent fair value in the judgement of the Adviser, are valued at fair value
in accordance with procedures authorized by the Trustees.
The Accounts redeem shares to make benefit or surrender payments
under the terms of its Contracts. 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 SEC 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 different funds and currently has
authorized 15 separate funds. Shares of each fund would participate equally in
the earnings, dividends, and assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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
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, when
issued, are fully paid and nonassessable. 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. However,
shares of all funds vote together, and not by fund, in the election of Trustees.
If an issue must be approved by a majority as defined in the 1940 Act., a
"majority of the outstanding voting securities" means the lesser of (i) 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 (ii) more than 50% of
the outstanding shares. For the election of Trustees only a plurality is
required.
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.
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TAX STATUS
Each Fund is treated as a separate entity for purpose of the
regulated investment company provisions of the Internal Revenue Code (the
"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 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, and (iii) 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's 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 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
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<PAGE> 61
have to change the investment goal or investment policies of a Fund. The Board
of Trustees 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.
OTHER TAX CONSEQUENCES
Foreign Transactions. Dividends and interest received by a 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.
A 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 hyper inflationary currency rules. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require a 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. A 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.
Investment in Passive Foreign Investment Companies. If a Fund
purchases shares in certain foreign entities classified under the Code as
"passive foreign investment companies" ("PFICs"), such 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 Contracts. 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
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 were published providing a mark-to-market election for shares in certain
PFICs held by regulated investment companies. If the Fund
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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 a 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 a 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 regulated investment
company.
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 Contracts. For information concerning the Federal
income tax consequences to such holders, see the Prospectuses for such
Contracts.
FINANCIAL STATEMENTS
The Report of Independent Auditors and Financial Statements of the
Funds for the period ended December 31, 1998 are incorporated by reference to
the Trust's Annual Report. Copies of the Annual Report are available without
charge upon request by writing the Trust or by calling toll free 1 (800)
848-6331.
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APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
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.
Nature of and provisions of the obligation.
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.
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BB - Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The 'CCC' rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest
is being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grade period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective 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
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of time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH/IBCA INVESTORS SERVICE, INC. BOND RATINGS
Fitch/IBCA 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.
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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 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.
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 capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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, and should be valued on the basis of their
& D ultimate recovery value in liquidation or reorganization of the
obligor. `DDD' represents the highest potential for recovery of these
bonds, and 'D' represents the lowest potential for recovery.
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DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture restrictions
is important to the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
RATING
SCALE DEFINITION
- ----- ----------
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent investment.
BBB- Considerable variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
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
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or preferred dividends. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. the 'D' rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grade period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.
The following criteria will be used in making the assessment:
/ /. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
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/ /. Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be considered a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions on the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term debt obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (I)
leading market positions in well established industries, (II) high rates of
return on funds employed, (III) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (IV) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (V) well established access to a range of financial markets and assured
sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There
is present strong protection by established cash
flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not
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<PAGE> 70
so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality.
All security elements are accounted for but there is
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to
be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality.
Protection commonly regarded as required of an
investment security is present and although not
distinctly or predominantly speculative, there is
specific risk.
SG This designation denotes speculative quality. Debt
instruments in this category lack margins of
protection.
FITCH/IBCA SHORT-TERM RATINGS
Fitch/IBCA 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.
B Speculative. 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.
C High default risk. Default is a real possibility, Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
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D Default. Issues assigned this rating are in actual or imminent payment
default.
DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
RATING SCALE DEFINITION
- ------------ ----------
High Grade
- ----------
D-1+ Highest certainty of timely payment. short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
- ----------
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
- ------------------
D-3 Satisfactory liquidity and other protection factors qualify issue
as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
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Non-investment Grade
- --------------------
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of
variation.
Default
- -------
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to
specific debt instruments of the rated entities with a maturity of one year or
less. Thomson short-term ratings are intended to assess the likelihood of an
untimely or incomplete payments of principal or interest.
TBW-1 the highest category, indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 the second highest category, while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
TBW-3 the lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 the lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(b) Exhibits
(a) Amended Declaration of Trust - previously filed with
Post-Effective Amendment and hereby incorporated by
reference.
(b) Bylaws - previously filed with Post-Effective Amendment
and hereby incorporated by reference.
(c) Not applicable.
(d) (1) Investment Advisory Agreement for the funds (except
the Small Company Fund) previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(2) Investment Advisory Agreement for the Small Company
Fund. - previously filed with Post-Effective
Amendment to the Registration Statement, and herein
incorporated by reference.
(3) Subadvisory Agreements for the Small Company Fund.
(a) Subadvisory Agreement with The Dreyfus
Corporation. - previously filed with Post-
Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(b) Subadvisory Agreement with Neuberger Berman LLC
- previously filed with Post-Effective
Amendment to the Registration Statement, and
herein incorporated by reference.
(c) Subadvisory Agreement with Strong Capital
Management, Inc. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(d) Subadvisory Agreement with Lazard Asset
Management to be filed by subsequent
Post-Effective Amendment.
(e) Subadvisory Agreement with Warburg, Pincus
Counsellors, Inc. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(4) Subadvisory Agreements for the Income Fund
(a) Subadvisory Agreement with NCM Capital
Management Group, Inc. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(b) Subadvisory Agreement with Smith Graham & Co.
Asset Managers, L.P. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(5) Subadvisory Agreements for the Subadvised Funds.
(a) Subadvisory Agreement with Salomon Brothers
Asset Management, Inc. for the Balanced Fund and
Multi Sector Bond Fund previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(b) Subadvisory Agreement with Strong Capital
Management, Inc. for the Strategic Growth Fund
and Strategic Value Fund previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(c) Subadvisory Agreement with Federated Investment
Counseling for the Equity Income Fund and High
Income Bond Fund previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(d) Subadvisory Agreement with The Dreyfus
Corporation for the Small Cap Value Fund
previously filed with Post-Effective Amendment
to the Registration Statement, and herein
incorporated by reference.
(e) Subadvisory Agreement with J.P. Morgan
Investment Management Inc. for the Global Equity
Fund previously filed with Post-Effective
Amendment to the Registration Statement, and
herein incorporated by reference.
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(f) Subadvisory Agreement with First Pacific
Advisors, Inc. for the Select Advisers Mid Cap
Fund previously filed with Post-Effective
Amendment to the Registration Statement, and
herein incorporated by reference.
(g) Subadvisory Agreement with Pilgrim Baxter &
Associates for the Select Advisers Mid Cap Fund
previously filed with Post-Effective Amendment
to the Registration Statement, and herein
incorporated by reference.
(h) Subadvisory Agreement with Rice, Hall, James &
Associates for the Select Advisers Mid Cap Fund
previously filed with Post-Effective Amendment
to the Registration Statement, and herein
incorporated by reference.
(i) Subadvisory Agreements with Franklin Advisers,
Inc., Miller Anderson & Sherred and Neuberger
Berman, LLC for the Nationwide Select Advisers
Small Cap Growth Fund.
(e) Not Applicable
(f) Not applicable.
(g) Custody Agreement - previously filed with Registration
Statement and Post-Effective Amendment, and herein
incorporated by reference.
(h) (1) Fund Administration Agreement for the Funds
(except the Small Company Fund) previously filed with
Post-Effective Amendment to the Registration
Statement and herein incorporated by reference.
(i) Opinion and consent of counsel.
(j) Auditor's Consent to be filed by subsequent Post-Effective
Amendment.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Financial Data Schedules to be filed by subsequent
Post-Effective Amendment.
(o) Not Applicable.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
No person is presently controlled by or under common control with
Registrant.
ITEM 25. INDEMNIFICATION
Indemnification provisions for officers, directors and employees of
Registrant are set forth in Article X, Section 2 of the Declaration
of Trust. See Item 24(b)1 above.
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ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Nationwide Advisory Services, Inc. (NAS), the investment adviser
of the Trust, also serves as investment adviser to the Nationwide
Separate Account Trust, and Nationwide Asset Allocation Trust and
serves as general distributor to the Nationwide Multi-Flex
Variable Account, Nationwide Variable Account, Nationwide
Variable Account-II, Nationwide Variable Account-5, Nationwide
Variable Account-6, Nationwide Variable Account-8, Nationwide
Variable Account-9, Nationwide VA Separate Account-A, Nationwide
VA Separate Account-B, Nationwide VA Separate Account-C,
Nationwide VLI Separate Account-2, Nationwide VLI Separate
Account-3, Nationwide VL Separate Account-A, Nationwide VL
Separate Account-B, Nationwide VL Separate Account-C, and
Nationwide VL Separate Account-D, separate accounts of Nationwide
Life Insurance Company, or its subsidiary Nationwide Life and
Annuity Insurance Company, registered as unit investment trusts
under the Investment Company Act of 1940.
<TABLE>
<S> <C>
Joseph J. Gasper Director and President and Chief Operating Officer
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Director and Chairman of the Board
Nationwide Investment Services Corporation
Director and Vice Chairman
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Nationwide Global Holdings, Inc.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
Nationwide Retirement Solutions, Inc.
Director and President
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Nationwide Financial Services (Bermuda) Ltd.
Director
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
Morley Financial Services, Inc.
Nationwide Indemnity Company
Trustee and Chairman
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
</TABLE>
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<TABLE>
<S> <C>
Trustee and President
Nationwide Insurance Golf Charities, Inc.
Board of Manager
Nationwide Insurance Enterprise Services, Ltd.
Dennis W. Click Vice President and Secretary
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Life Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Nationwide Insurance Enterprise Services, Ltd.
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
Nationwide Financial Institution Distributors Agency, Inc.
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Information Systems, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial County Mutual Insurance Company
California Cash Management Company
Colonial Insurance Company of Wisconsin
Gates McDonald & Company
GatesMcDonald Health Plus Inc.
Nationwide Global Holdings, Inc.
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Community Urban Redevelopment Corporation
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
Farmland Mutual Insurance Company
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Employers Insurance of Wausau A Mutual Company
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Corporation
</TABLE>
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<TABLE>
<S> <C>
Nationwide Insurance Enterprise Foundation
Nationwide Investment Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Underwriters Insurance Company
Wausau Service Corporation
Wausau Business Insurance Company
Wausau General Insurance Company
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
NEA Valuebuilder Investor Services of Alabama, Inc.
NEA Valuebuilder Investor Services of Montana, Inc.
NEA Valuebuilder Investor Services of Nevada, Inc.
NEA Valuebuilder Investor Services of Ohio, Inc.
NEA Valuebuilder Investor Services of Oklahoma, Inc.
NEA Valuebuilder Investor Services of Wyoming, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
MRM Investments, Inc.
NWE, Inc.
National Premium and Benefit Administration Company
Nationwide Insurance Company of America
Morley Financial Services, Inc.
Assistant Secretary
Pension Associates of Wausau, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of California
Companies Agency of Georgia, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Wausau (Bermuda) Ltd.
Wausau International Underwriters
Vice President and Assistant Secretary
National Casualty Company
Secretary
The Beak and Wire Company
Vice President and Clerk
Healthcare First, Inc.
</TABLE>
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<TABLE>
<S> <C>
Clerk
NEA Valuebuilder Services Insurance Agency, Inc.
Assistant Clerk
Companies Agency of Massachusetts, Inc.
Dimon R. McFerson Chairman and Chief Executive Officer-Nationwide Insurance
Enterprise and Director
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
ALLIED Group, Inc.
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
Colonial Insurance Company of Wisconsin
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Investment Services Corporation
California Cash Management Company
Nationwide Cash Management Company
Employers Insurance of Wausau A Mutual Company
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Service Corporation
Wausau General Insurance Company
Wausau Business Insurance Company
Wausau Underwriters Insurance Company
Chairman and Chief Executive Officer - Nationwide Insurance
Enterprise, President and Director
Nationwide Corporation
Chairman of the Board, Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise and Director
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Information Systems, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Mortgage Company
ALLIED Property and Casualty Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
</TABLE>
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<TABLE>
<S> <C>
Premier Agency, Inc.
Western Heritage Insurance Company
American Marine Underwriters, Inc.
Gates, McDonald and Company
Gates McDonald Health Plus, Inc.
Nationwide Investor Services, Inc.
Nationwide Retirement Solutions, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of California
Companies Agency of Georgia, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Financial Institution Distributors Agency, Inc.
Nationwide Insurance Enterprise Services, Ltd.
Nationwide Insurance Company of America
Wausau International Underwriters
Wausau Preferred Health Insurance Company
Trustee and Chairman
Financial Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investing Foundation III
Chairman of the Board
Nationwide Insurance Golf Charities, Inc.
Chairman of the Board and Director
Lone Star General Agency, Inc.
Nationwide Community Urban Redevelopment Corporation
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc
Colonial County Mutual Insurance Company
Director
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York
Healthcare First, Inc.
Morley Financial Services, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
Chairman of the Board, Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise and Trustee
Nationwide Insurance Enterprise Foundation
</TABLE>
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<TABLE>
<S> <C>
Member-Board of Managers, Chairman of the Board,
Chairman and Chief Executive Officer-Nationwide Insurance
Enterprise
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Insurance Enterprise Services, Ltd.
Chairman and Chief Executive Officer-Nationwide Insurance
Enterprise
Nationwide Insurance Company of Florida
Robert A. Oakley Executive Vice President-Chief Financial Officer
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
ALLIED Group. Inc.
ALLIED Life Financial Corporation
American Marine Underwriters, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency of Georgia, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Employers Life Insurance Company of Wausau
National Casualty Company
National Premium and Benefit Administration Company
The Beak and Wire Corporation
Employers Insurance of Wausau A Mutual Company
Farmland Mutual Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Corporation
Nationwide Financial Services, Inc.
Nationwide Investment Services Corporation
Nationwide Investor Services, Inc.
Nationwide Insurance Enterprise Foundation
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
Colonial County Mutual Insurance Company
Pension Associates of Wausau, Inc.
Nationwide Retirement Solutions, Inc.
</TABLE>
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<TABLE>
<S> <C>
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
Director, Chairman of the Board
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
Executive Vice President-Chief Financial Officer and
Director
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Information Systems, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial Insurance Company of Wisconsin
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment Corporation
Nationwide Global Holdings, Inc.
Nationwide Insurance Enterprise Services, Ltd.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Executive Vice President
Companies Agency Insurance Services of California
Wausau International Underwriters
Director and Vice Chairman
Leben Direkt Insurance Company
Neckura General Insurance Company
Auto Direkt Insurance Company
Director
NWE, Inc.
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Healthcare First, Inc.
Morley Financial Services, Inc.
</TABLE>
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<TABLE>
<S> <C>
Board of Managers, Executive Vice President-Chief Financial
Officer
Nationwide Insurance Enterprise Services, Ltd.
Susan A. Wolken Senior Vice President - Life Company Operations
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Director
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
Nationwide Advisory Services, Inc.
Nationwide Investment Services Corporation
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Alabama, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
NEA Valuebuilder Investor Services of Montana, Inc.
NEA Valuebuilder Investor Services of Nevada, Inc.
NEA Valuebuilder Investor Services of Ohio, Inc.
NEA Valuebuilder Investor Services of Oklahoma, Inc.
NEA Valuebuilder Investor Services of Wyoming, Inc.
NEA Valuebuilder Services Insurance Agency, Inc.
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions, Inc. of Massachusetts
Nationwide Retirement Solutions, Inc. of Alabama
Nationwide Retirement Solutions, Inc. of Arkansas
Nationwide Retirement Solutions, Inc. of Montana
Nationwide Retirement Solutions, Inc. of New Mexico
Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Information Systems, Inc.
ALLIED Group Insurance Marketing Company
</TABLE>
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<TABLE>
<S> <C>
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of Wisconsin
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
Lone Star General Agency, Inc.
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Insurance Company of America
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Insurance Enterprise Services, Ltd.
Nationwide Investment Services Corporation
Pension Associates of Wausau, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
Director
Morley Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Investors Services, Inc.
Member-Board of Managers and Vice Chairman
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Director and President
California Cash Management Company
MRM Investments, Inc.
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment Corporation
NWE, Inc.
</TABLE>
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<TABLE>
<S> <C>
Director, Executive Vice President-Chief Investment Officer
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
Nationwide Insurance Company of America
Director, Vice Chairman and Executive Vice President-Chief
Investment Officer
ALLIED Group Mortgage Company
Trustee and Vice Chairman
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
James F. Laird, Jr. Vice President and General Manager
Nationwide Advisory Services, Inc.
Vice President and General Manager and Director
Nationwide Investors Services, Inc.
Treasurer
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
Nationwide Investing Foundation III
Christopher A. Cray Treasurer
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Assistant Treasurer
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation III
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
Elizabeth A. Davin Secretary
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Nationwide Investing Foundation III
Assistant Secretary
Nationwide Advisory Services, Inc.
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investors Services, Inc.
</TABLE>
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<TABLE>
<S> <C>
David E. Simaitis Secretary
Nationwide Investing Foundation
Nationwide Investing Foundation II
Assistant Secretary
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Patricia J. Smith Assistant Secretary
Nationwide Advisory Services, Inc.
Nationwide Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investing Foundation III
Nationwide Investors Services, Inc.
Nationwide Separate Account Trust
Nationwide Asset Allocation Trust
Edwin P. McCausland, Jr. Sr. Vice President - Fixed Income Securities
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Advisory Services, Inc.
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Information Systems, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial Insurance Company of Wisconsin
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Insurance Enterprise Foundation
Morley Financial Services, Inc.
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
</TABLE>
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<TABLE>
<S> <C>
National Casualty Company
Nationwide Agribusiness Insurance Company
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Nationwide Insurance Company of America
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
Assistant Treasurer
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investing Foundation III
Nationwide Separate Account Trust
Joseph P. Rath Vice President - Product and Market Compliance
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Vice President-Compliance
Nationwide Advisory Services, Inc.
Nationwide Investment Services Corporation
Vice President-Chief Compliance Officer
Nationwide Financial Services, Inc.
William G. Goslee Vice President
Nationwide Advisory Services, Inc.
</TABLE>
Except as otherwise noted, the principal business address of any company with
which any person specified above is connected in the capacity of director,
officer, employee, partner or trustee is One Nationwide Plaza, Columbus, Ohio
43215, except for the following companies:
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
Colonial Insurance Company of Wisconsin
5525 Park Center Circle
Dublin, Ohio 43017
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Employers Insurance of Wausau A Mutual Company
2000 Westwood Drive
Wausau, Wisconsin 54401-7881
Scottsdale Insurance Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
P.O. Box 4110
Scottsdale, Arizona 85261-4110
Lone Star General Agency, Inc.
P.O. Box 14700
Austin, Texas 78761
Auto Direkt Insurance Company
Columbus Insurance Brokerage and Service, GMBH
Leben Direkt Insurance Company
Neckura General Insurance Company
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Public Employees Benefit Services Corporation
Two Nationwide Plaza
Columbus, Ohio 43215
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Three Nationwide Plaza,
Columbus, Ohio 43215
Morley Financial Services, Inc.
5665 S.W. Meadows Rd., Suite 400
Lake Oswego, Oregon 97035
(b) Information for the Subadvisers
(1) The Dreyfus Corporation
The Dreyfus Corporation ("Dreyfus") acts as subadviser to the Small
Company Fund and the Small Cap Value Fund and as adviser or
subadviser to a number of other registered investment companies. The
list required by this Item 26 of officers and directors of Dreyfus,
together with information as to their other business, profession,
vocation or employment of a substantial nature during the past two
years, is incorporated by reference to Schedule A and D of Form ADV
filed by Dreyfus (SEC File No. 801-8147).
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(2) Neuberger Berman, LLC
Neuberger Berman, LLC ("Neuberger Berman") acts as subadviser to the
Small Company Fund and the Select Advisors Small Cap Growth Fund of
the Registrant and investment adviser or subadviser to a number of
other registered investment companies. The list required by this Item
26 of officers and directors of Neuberger Berman, together with
information as to their other business, profession, vocation or
employment of a substantial nature during the past two years, is
incorporated by reference to Schedules A and D of Form ADV filed by
Neuberger Berman (SEC File No. 801-3908).
(3) Strong Capital Management, Inc.
Strong Capital Management, Inc. ("Strong"), acts as subadviser to the
Small Company Fund, the Strategic Growth Fund and the Strategic Value
Fund and investment adviser or subadviser to a number of other
registered investment companies. The list required by this Item 26 of
officers and directors of Strong, together with information as to
their other business, profession, vocation or employment of a
substantial nature during the past two years, is incorporated by
reference to Schedules A and D of Form ADV filed by Strong (SEC File
No. 801-10724).
(4) Warburg, Pincus Asset Management, Inc.
Warburg, Pincus Asset Management, Inc. ("Warburg") acts as subadviser
to the Small Company Fund and investment adviser to a number of other
registered investment companies. Warburg renders investment advice to
a wide variety of individual and institutional investors. The list
required by this Item 26 of officers and directors of Warburg,
together with information as to their other business, profession,
vocation or employment of a substantial nature during the past two
years, is incorporated by reference to Schedules A and D of Form ADV
filed by Warburg (SEC File No. 801-07321).
(5) Lazard Asset Management
Lazard Asset Management ("Lazard") acts as subadviser to the Small
Company Fund and investment adviser to a number of other registered
investment companies. Lazard renders investment advice to a wide
variety of individual and institutional investors. The list required
by this Item 26 of officers and directors of Lazard, together with
information as to their other business, profession, vocation or
employment of a substantial nature during the past two years, is
incorporated by reference to Schedules A and D of Form ADV filed by
Lazard (SEC File No. 801-6568).
(6) NCM Capital Management Group, Inc.
NCM Capital Management Group, Inc. ("NCM") is a registered investment
adviser which provides investment advisory services to individuals
and institutional clients, including acting as subadviser to the
Income Fund. NCM also serves as subadviser to other investment
companies registered under the Investment Company of 1940; these
investment companies are unaffiliated with NCM except as a result of
these subadvisory relationships. The list required by Item 26 of
Officers and directors of NCM, together with information as to their
other business, profession, vocation or employment of a substantial
nature during the past two years is incorporated by reference to
Schedule A and D of Form ADV filed by NCM (SEC File No. 801-28196).
(7) Smith Graham & Co. Asset Managers, L.P.
Smith Graham & Co. Asset Managers, L.P. ("Smith Graham") acts as
subadviser to the Income Fund and is a registered investment adviser
which offers investment advisory services to corporations, pension
and profit sharing plans, as well as foundations, Taft Hartley plans,
banks, thrift institutions, trust, estates and/or charitable
organizations and individuals. Smith Graham also serves as subadviser
to the American Odyssey Short-Term Bond Fund, an investment company
registered under the Investment Company of 1940; this
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<PAGE> 89
investment company is unaffiliated with Smith Graham except as a
result of this subadvisory relationship. The list required by Item 26
of Officers and directors of Smith Graham together with information
as to their other business, profession, vocation or employment of a
substantial nature during the past two years is incorporated by
reference to Schedule A and D of Form ADV filed by Smith Graham (SEC
File No. 801-36485).
(8) Schafer Capital Management, Inc.
Schafer Capital Management, Inc., acts as subadviser to the Strategic
Value Fund and as investment adviser to certain other clients. David
K. Schafer, a director and officer of Schafer Capital Management,
Inc., is also Chairman of the Board of Schafer Cullen Capital
Management, Inc., 645 Fifth Ave, New York, New York 10022.
James D. Cullen, an officer of Schafer Capital Management Inc., is
also President of Schafer Cullen Capital Management, Inc.
Schafer Cullen Capital Management, Inc. is a registered investment
adviser under the Investment Advisers Act of 1940, as amended.
(9) Federated Investment Counseling
Federated Investment Counseling, the Subadviser to Equity Income Fund
and High Income Bond Fund, is a registered investment adviser under
the Investment Advisers Act of 1940. It is a subsidiary to Federated
Investors. The Subadviser serves as investment adviser to a number of
investment companies and private accounts. Total assets under
management or administered by the Subadviser and other subsidiaries
of Federated Investors is approximately $110 billion. The list
required by Item 26 of Officers and directors of Federated Investment
Counseling, together with information as to their other business,
profession, vocation or employment of a substantial nature during the
past two years is incorporated by reference to Schedule A and D of
Form ADV filed by Federated Investment Counseling (SEC File No.
801-34611).
(10) Salomon Brothers Asset Management, Inc.
Salomon Brothers Asset Management, Inc. acts as subadviser to the
Balanced Fund and the Multi Sector Bond Fund. The list required by
this Item 26 of officers and directors of Salomon Brothers Asset
Management, Inc.("SBAM"), together with information as to any other
business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years
is incorporated by reference to Schedules A and D of Form ADV filed
by SBAM and SBAM Limited pursuant to the Investment Advisers Act of
1940 (SEC File No. 801-32046 and 801-43335.)
(11) J.P. Morgan Investment Management, Inc. ("JPMIM"), a registered
investment adviser, is subadviser to the Global Equity Fund, a wholly
owned subsidiary of J. P. Morgan & Co. Incorporated. JPMIM manages
employee benefit plans for corporations and unions. JPMIM also
provides investment management services for a broad spectrum of other
institutional investors, including foundations, endowments, sovereign
governments, and insurance companies.
To the knowledge of the Registrant, none of the directors or
executive officers of JPMIM is or has been in the past two fiscal
years engaged in any other business or profession, vocation or
employment of a substantial nature, except that certain officers and
directors of JPMIM also hold various positions with, and engage in
business for, J.P. Morgan & Co. Incorporated or Morgan Guaranty Trust
Company of New York, a New York trust company which is also a wholly
owned subsidiary of J.P. Morgan & Co. Incorporated.
(12) Pilgrim Baxter & Associates, Ltd. is subadviser to the Select
Advisers Mid Cap Fund. The list required by Item 26 of officers and
directors of Pilgrim Baxter & Associates, Ltd., together with
information as to their other business, profession, vocation or
employment of a substantial nature during the past two years is
incorporated by reference to Schedule A and D of Form ADV filed by
Pilgrim Baxter & Associates Ltd. (SEC File No. 801-48872).
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(13) First Pacific Advisers, Inc. is subadviser to the Select Advisers Mid
Cap Fund. During the last two fiscal years, First Pacific Advisors,
Inc., the investment subadviser to Registrant ("Subadviser"), has not
engaged in any other business in a substantial nature except as
investment adviser to Source Capital, Inc. ("Source"), a registered
closed-end investment company; as investment adviser to FPA Capital
Fund, Inc. ("Capital"), FPA New Income, Inc. ("New Income"), FPA
Paramount Fund, Inc. ("Paramount"), FPA Perennial Fund, Inc.
("Perennial"), and UAM/FPA Crescent Portfolio, each a registered
open-end investment company; and as investment adviser to
institutional accounts. The list required by Item 26 of Officers and
directors of First Pacific Advisers, Inc., together with information
as to their other business, profession, vocation or employment of a
substantial nature during the past two years is incorporated by
reference to Schedule A and D of Form ADV filed by First Pacific
Advisers, Inc. (SEC File No. 801-39512).
(14) Rice, Hall, James & Associates is subadviser to the Select Advisers
Mid Cap Fund. The list required by Item 26 of officers and directors
of Rice, Hall, James & Associates together with information as to
their other business, profession, vocation or employment of a
substantial nature during the past two years is incorporated by
reference to Schedule A and D of Form ADV filed by Rice, Hall James &
Associates (SEC File No. 801-30441).
(15) Franklin Advisers, Inc. is subadviser to the Select Advisers Small
Cap Growth Fund. The list required by this Item 26 of the officers
and directors of Franklin Advisers, Inc.("Franklin"), together
with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and
directors during the past two years is incorporated by reference
to Schedule A and D of Form ADV filed by Franklin pursuant to the
Investment Company Act of 1940 (SEC File No. 801-26292).
(16) Miller, Anderson & Sherrerd, LLP is subadviser to the Select
Advisers Small Cap Growth Fund. The list required by this Item 26
of the officers and directors of Miller, Anderson & Sherred, LLP
("MAS"), together with information as to any other business,
profession, vocation or employment of a substantial nature engaged
in by such officers and directors during the past two years is
incorporated by reference to Schedule A and D of Form ADV filed by
MAS pursuant to the Investment Company Act of 1940 (SEC File No.
801-10437).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
James F. Laird, Jr.
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
ITEM 29. UNDERTAKINGS
(a) Not applicable.
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<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 27 to this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Columbus, and State
of Ohio, on this twelveth day of February 1999.
NATIONWIDE SEPARATE ACCOUNT TRUST
By: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Treasurer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE
AMENDMENT NO. 27 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE TWELVETH DAY OF
FEBRUARY 1999.
Signature & Title
- -----------------
Principal Executive Officer
JOSEPH J. GASPER*
- -------------------------
Joseph J. Gasper, Trustee and Chairman
ROBERT J. WOODWARD, JR.*
- -------------------------
Robert J. Woodward, Jr., Trustee and Vice Chairman
Principal Accounting and Financial Officer
JAMES F. LAIRD, JR.
- -------------------------
James F. Laird, Jr., Treasurer
JOHN C. BRYANT*
- -------------------------
John C. Bryant, Trustee
C. BRENT DEVORE*
- -------------------------
C. Brent DeVore, Trustee
ROBERT M. DUNCAN*
- -------------------------
Robert M. Duncan, Trustee
THOMAS J. KERR, IV*
- -------------------------
Thomas J. Kerr, IV, Trustee
DOUGLAS F. KRIDLER*
- -------------------------
Douglas F. Kridler, Trustee
SUE DOODY*
- -------------------------
Sue Doody, Trustee
DAVID C. WETMORE*
- -------------------------
David C. Wetmore, Trustee
*By: JAMES F. LAIRD, JR.
-------------------------
James F. Laird, Jr., Attorney-In-Fact
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Exhibit 5i
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this _____ day of
_____________, among Nationwide Separate Account Trust, a Massachusetts business
trust (the "Trust"), Nationwide Advisory Services, Inc. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and Neuberger Berman, LLC, a Delaware Limited Liability
Company (the "Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the
Trust dated as of November 1, 19997 ("Advisory Agreement"), been retained to act
as investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain
of its duties under the Advisory Agreement to other investment advisers, subject
to the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of the Trust's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and the Subadviser is willing to render such services subject to the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser
to act as investment adviser for and to manage the Subadviser Assets subject to
the supervision of the Adviser and the Board of Trustees of the Trust and
subject to the terms of this Agreement; and the Subadviser hereby accepts such
employment. In such capacity, the Subadviser shall be responsible for the
investment management of the Subadviser Assets. It is recognized that the
Subadviser and certain of its affiliates now act, and that from time to time
hereafter may act, as investment adviser to one or more other investment
companies and to fiduciary or other managed accounts and that the Adviser and
the Trust have no objection to such activities.
1
<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and
directed and hereby agrees, subject to the stated investment policies
and restrictions of a Fund as set forth in the Funds' prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Trust's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets and to monitor on a continuous
basis the performance of the Subadviser Assets. In providing these
services, the Subadviser will conduct a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser
with such assistance as may be reasonably requested by the Subadviser
in connection with the Subadviser's activities under this Agreement,
including, without limitation, information concerning the Funds, their
funds available, or to become available, for investment and generally
as to the conditions of the Subadviser Assets.
(b) Compliance with Applicable Laws and Governing Documents.
In the performance of its duties and obligations under this Agreement,
the Subadviser shall act in conformity with the Trust's Declaration of
Trust and By-Laws and the Prospectus, but only to the extent the
Subadviser receives copies of such documents, and with the instructions
and directions received in writing from the Adviser or the Trustees of
the Trust and will conform to and comply with the requirements of the
1940 Act, the Internal Revenue Code of 1986, as amended (the "Code"),
and all other applicable federal and state laws and regulations.
Notwithstanding the foregoing, the Adviser shall remain responsible for
ensuring each Fund's overall compliance with the 1940 Act and the Code
and the Subadviser is only obligated to comply with this subsection (b)
with respect to the Subadviser Assets. The Adviser will provide the
Subadviser with a copy of the minutes of the meetings of the Board of
Trustees of the Trust to the extent they may affect the Funds or the
duties of the Subadviser, and with copies of any financial statements
or reports made by the Funds to their shareholders, and any further
materials or information which the Subadviser may reasonably request to
enable it to perform its functions under this Agreement.
The Adviser will also provide the Subadviser with reasonable
advance notice of any change in a Fund's investment objectives,
policies and restrictions as stated in the Prospectus, and the
Subadviser shall, in the performance of its duties and obligations
under this Agreement, manage the Subadviser Assets consistent with such
changes, provided the Subadviser has received prompt notice of the
effectiveness of such changes from the Trust or the Adviser. In
addition to such notice, the Adviser shall provide to the Subadviser a
copy of a modified Prospectus reflecting such changes. The Adviser
represents, acknowledges and agrees that the Prospectus will at all
times be in compliance with all disclosure requirements under all
applicable federal and state laws and regulations relating to the Trust
or the Funds, including, without limitation, the 1940 Act, and the
rules and regulations
2
<PAGE> 3
thereunder, and that the Subadviser shall have no liability in
connection therewith, except as to the accuracy of material information
furnished by the Subadviser to the Trust or to the Adviser specifically
for inclusion in the Prospectus. The Subadviser hereby agrees to
provide to the Adviser in a timely manner such information relating to
the Subadviser and its relationship to, and actions for, the Trust as
may be required to be contained in the Prospectus or in the Trust's
registration statement on Form N-1A.
(c) Voting of Proxies. The Subadviser shall have the power to
vote, either in person or by proxy, all securities in which the
Subadviser Assets may be invested from time to time, and shall not be
required to seek or take instructions from the Adviser, a Fund or the
Trust or take any action with respect thereto. If both the Subadviser
and another entity managing assets of a Fund have invested in the same
security, the Subadviser and such other entity will each have the power
to vote in its sole discretion its pro rata share of the security.
(d) Agent. Subject to any other written instructions of the
Adviser or the Trust, the Subadviser is hereby appointed the Adviser's
and the Trust's agent and attorney-in-fact for the limited purposes of
opening accounts and executing account documentation, agreements,
contracts and other documents as the Subadviser shall be requested by
brokers, dealers, counterparties and other persons in connection with
its management of the Subadviser Assets. The Subadviser agrees to
provide the Adviser and the Trust with copies of any such agreements
executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to
establish and maintain accounts on behalf of a Fund with, and place
orders for the purchase and sale of the Subadviser Assets with or
through, such persons, brokers (including, to the extent permitted by
applicable law, any broker affiliated with the Subadviser) or dealers
("brokers") as the Subadviser may elect and negotiate commissions to be
paid on such transactions. The Subadviser, however, is not required to
obtain the consent of the Adviser or the Trust's Board of Trustees
prior to establishing any such brokerage account. The Subadviser shall
place all orders for the purchase and sale of portfolio investments for
a Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the
Subadviser shall seek to obtain for each Fund the most favorable price
and execution available, except to the extent it may be permitted to
pay higher brokerage commissions for brokerage and research services,
as provided below. In using its reasonable efforts to obtain for a Fund
the most favorable price and execution available, the Subadviser,
bearing in mind the best interests of each Fund at all times, shall
consider all factors it deems relevant, including price, the size of
the transaction, the breadth and nature of the market for the security,
the difficulty of the execution, the amount of the commission, if any,
the timing of the transaction, market prices and trends, the
reputation, experience and financial stability of the broker involved,
and the quality of service rendered by the broker in other
transactions. Subject to such policies as the Trustees may determine,
or as may be mutually agreed to by
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<PAGE> 4
the Adviser and the Subadviser, the Subadviser shall not be deemed to
have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused a Fund to
pay a broker that provides brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to the
Subadviser an amount of commission for effecting a Fund investment
transaction that is in excess of the amount of commission that another
broker would have charged for effecting that transaction if, but only
if, the Subadviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer viewed in terms of either
that particular transaction or the overall responsibility of the
Subadviser with respect to the accounts as to which it exercises
investment discretion.
It is recognized that the services provided by such brokers
may be useful to the Subadviser in connection with the Subadviser's
services to other clients. On occasions when the Subadviser deems the
purchase or sale of a security to be in the best interests of a Fund as
well as other clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased. In
such event, allocation of securities so sold or purchased, as well as
the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations to each Fund
and to such other clients. It is recognized that in some cases, this
procedure may adversely affect the price paid or received by a Fund or
the size of the position obtainable for, or disposed of by, a Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other
instruments from or sell securities or other instruments to a Fund;
provided, however, the Subadviser and any affiliated person of the
Subadviser may purchase securities or other instruments from or sell
securities or other instruments to a Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and the Subadviser's Code of Ethics (which shall
comply in all material respects with Rule 17j-1), as the same may be
amended from time to time. On a quarterly basis, the Subadviser will
either (i) certify to the Adviser that the Subadviser and its Access
Persons have complied in all material respects with the Subadviser's
Code of Ethics with respect to the Subadviser Assets or (ii) identify
any material violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets as
required under applicable law (the
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<PAGE> 5
"Subadviser Records"), including, without limitation, brokerage and
other records of all securities transactions. The Subadviser
acknowledges that the Subadviser Records are property of the Trust. The
Subadviser Records (relating to the Subadviser Assets) shall be
available to the Adviser at any time upon reasonable request during
normal business hours and shall be available for prompt telecopying to
the Adviser during any day that a Fund is open for business. The
Subadviser shall have no responsibility for maintaining Fund or Trust
records except insofar as is directly related to the services provided
by the Subadviser to the Fund pursuant to the Agreement.
(h) Information Concerning Subadviser Assets and Subadviser.
From time to time as the Adviser or the Trust may request, the
Subadviser will furnish the requesting party reports on portfolio
transactions and reports on Subadviser Assets held in the portfolio,
all in such detail as the Adviser or the Trust may reasonably request.
The Subadviser will also inform the Adviser in a timely manner of
material changes in portfolio managers responsible for Subadviser
Assets, any material changes in the ownership or management of the
Subadviser, or of material changes in the control of the Subadviser.
Upon reasonable request, the Subadviser will make available its
officers and employees to meet with the Trust's Board of Trustees to
review the Subadviser Assets.
The Subadviser will also provide such information or perform
such additional acts as are customarily performed by a subadviser and
may be required for the Trust or the Adviser to comply with their
respective obligations under applicable laws, including, without
limitation, the Code, the 1940 Act, the Advisers Act, and the
Securities Act of 1933, as amended (the "Securities Act"), and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each
business day provide the Adviser and the Trust's custodian such
information as the Adviser and the Trust's custodian may reasonably
request relating to all transactions concerning the Subadviser Assets.
3. Independent Contractor. In the performance of its duties hereunder,
the Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or the Adviser in any way or
otherwise be deemed an agent of the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for each
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, a Fund's or Adviser's expenses, which shall
include, but not be limited to, organizational and offering expenses (which
5
<PAGE> 6
include out-of-pocket expenses, but not overhead or employee costs of the
Subadviser); expenses for legal, accounting and auditing services; taxes and
governmental fees; dues and expenses incurred in connection with membership in
investment company organizations; costs of printing and distributing shareholder
reports, proxy materials, prospectuses, stock certificates and distribution of
dividends; charges of the Funds' custodians and sub-custodians, administrators
and sub-administrators, registrars, transfer agents, dividend disbursing agents
and dividend reinvestment plan agents; payment for portfolio pricing services to
a pricing agent, if any; registration and filing fees of the Securities and
Exchange Commission (the "SEC"); expenses of registering or qualifying
securities of the Funds for sale in the various states; freight and other
charges in connection with the shipment of the Funds' portfolio securities; fees
and expenses of non-interested Trustees; salaries of shareholder relations
personnel; costs of shareholders meetings; insurance; interest; brokerage costs;
and litigation and other extraordinary or non-recurring expenses. The Trust or
the Adviser, as the case may be, shall reimburse the Subadviser for any expenses
of the Funds or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Funds or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed
with respect to the Funds and the Subadviser Assets pursuant to this Agreement,
the Subadviser will be entitled to the fee listed for each Fund on Exhibit A.
Such fees will be computed daily and payable no later than the seventh (7th)
business day following the end of each month, from the Adviser or the Trust,
calculated at an annual rate based on the Subadviser Assets' average daily net
assets.
The method of determining net assets of a Fund for purposes hereof
shall be the same as the method of determining net assets for purposes of
establishing the offering and redemption price of the shares of that Fund as
described in the Funds' Prospectus. If this Agreement shall be effective for
only a portion of a month, the aforesaid fee shall be prorated for the portion
of such month during which this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser
represents and warrants to the Adviser and the Trust as follows:
(a) The Subadviser is registered as an investment adviser
under the Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to
Rule 4.14 under the Commodity Exchange Act (the "CEA") with the
Commodity Futures Trading Commission (the "CFTC") and the National
Futures Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a limited liability company duly
organized and validly existing under the laws of the State of Delaware
with the power to own and possess its assets and carry on its business
as it is now being conducted;
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<PAGE> 7
(d) The execution, delivery and performance by the Subadviser
of this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action and no action by or in respect of,
or filing with, any governmental body, agency or official is required
on the part of the Subadviser for the execution, delivery and
performance by the Subadviser of this Agreement, and the execution,
delivery and performance by the Subadviser of this Agreement do not
contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Subadviser's governing
instruments, or (iii) any agreement, judgment, injunction, order,
decree or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete
in all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents
and warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under
the Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to
Section 4.14 under the CEA with the CFTC and the National Futures
Association;
(c) The Adviser is a corporation duly organized and validly
existing under the laws of the State of Ohio with the power to own and
possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Adviser of
this Agreement are within the Adviser's powers and have been duly
authorized by all necessary action on the part of its shareholders or
directors, and no action by or in respect of, or filing with, any
governmental body, agency or official is required on the part of the
Adviser for the execution, delivery and performance by the Adviser of
this Agreement, and the execution, delivery and performance by the
Adviser of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii) the
Adviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC
and the information contained therein is accurate and complete in all
material respects and does not omit to state any material fact
7
<PAGE> 8
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the
Advisory Agreement pursuant to which the Trust authorized the Adviser
to enter into this Agreement.
8. Representations and Warranties of the Trust. The Trust represents
and warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is
now being conducted;
(b) The Trust is registered as an investment company under the
1940 Act and the each Fund's shares are registered under the Securities
Act; and
(c) The execution, delivery and performance by the Trust of
this Agreement are within the Trust's powers and have been duly
authorized by all necessary action on the part of the Trust and its
Board of Trustees, and no action by or in respect of, or filing with,
any governmental body, agency or official is required on the part of
the Trust for the execution, delivery and performance by the Adviser of
this Agreement, and the execution, delivery and performance by the
Trust of this Agreement do not contravene or constitute a default under
(i) any provision of applicable law, rule or regulation, (ii) the
Trust's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update
Information. All representations and warranties made by the Subadviser, the
Adviser and the Trust pursuant to Sections 6, 7 and 8, respectively, shall
survive for the duration of this Agreement and the parties hereto shall promptly
notify each other in writing upon becoming aware that any of the foregoing
representations and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. The Subadviser shall exercise its best judgment
in rendering the services in accordance with the terms of this
Agreement. In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Subadviser or a reckless disregard of its
duties hereunder, the Subadviser, each of its affiliates and all
respective partners, officers, directors and employees ("Affiliates")
and each person, if any, who within
8
<PAGE> 9
the meaning of the Securities Act controls the Subadviser ("Controlling
Persons") shall not be liable for any error of judgment or mistake of
law and shall not be subject to any expenses or liability to the
Adviser, the Trust or the Funds or any of the Funds' shareholders, in
connection with the matters to which this Agreement relates. In the
absence of willful misfeasance, bad faith or gross negligence on the
part of the Adviser or a reckless disregard of its duties hereunder,
the Adviser, any of its Affiliates and each of the Adviser's
Controlling Persons, if any, shall not be subject to any liability to
the Subadviser, for any act or omission in the case of, or connected
with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of Subadviser Assets;
provided, however, that nothing herein shall relieve the Adviser and
the Subadviser from any of their obligations under applicable law,
including, without limitation, the federal and state securities laws
and the CEA.
(b) Indemnification. The Subadviser shall indemnify the
Adviser, the Trust, and the Fund, and their respective Affiliates and
Controlling Persons for any liability and expenses, including
reasonable attorneys' fees, which the Adviser, the Trust, and the Fund,
and their respective Affiliates and Controlling Persons may sustain
which are sustained as a result of the Subadviser's willful
misfeasance, bad faith, gross negligence, reckless disregard of its
duties hereunder or violation of applicable law, including, without
limitation, the federal and state securities laws or the CEA.
The Adviser shall indemnify the Subadviser, its Affiliates and
its Controlling Persons, for any liability and expenses, including
reasonable attorneys' fees, which may be sustained as a result of the
Adviser's willful misfeasance, bad faith, gross negligence, reckless
disregard of its duties hereunder or violation of applicable law,
including, without limitation, the federal and state securities laws or
the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until May ___, 2001, and thereafter shall continue
automatically as to each Fund for successive annual periods, provided
such continuance is specifically approved at least annually by the
Trust's Board of Trustees or, if required by the 1940 Act, vote of the
lesser of (a) 67% of the shares of the respective Funds represented at
a meeting if holders of more than 50% of the outstanding shares of that
Funds are present in person or by proxy or (b) more than 50% of the
outstanding shares of the respective Funds; provided that in either
event its continuance also is approved by a majority of the Trust's
Trustees who are not "interested persons" (as defined in the 1940 Act)
of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval.
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<PAGE> 10
(b) Termination. Notwithstanding whatever may be provided
herein to the contrary, this Agreement may be terminated at any time as
to each Fund, without payment of any penalty:
(i) By vote of a majority of the Trust's Board of
Trustees, or by vote of a majority of the outstanding voting
securities of the respective Fund, or by the Adviser, in each
case, upon at least 60 days' written notice to the Subadviser;
(ii) By any party hereto immediately upon written
notice to the other parties in the event of a material breach
of any provision of this Agreement by either of the other
parties; or
(iii) By the Subadviser upon at least 60 days'
written notice to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the
1940 Act) and shall terminate automatically in the event of its
assignment or upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Trust pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Trust.
13. Reference to Adviser and Subadviser.
(a) Neither the Adviser nor any Affiliate or agent of it shall
make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the
identity of and services provided by the Subadviser to the Fund, which
references shall not differ in substance from those included in the
Prospectus and this Agreement, in any advertising or promotional
materials without the prior approval of Subadviser, which approval
shall not be unreasonably withheld or delayed. The Adviser hereby
agrees to make all reasonable efforts to cause any Affiliate thereof to
satisfy the foregoing obligation.
(b) Neither the Subadviser nor any Affiliate or agent of it
shall make reference to or use the name of Adviser of any of its
Affiliates, or any of their clients, except references concerning the
identity of, relationship with, and services provided by the Adviser to
the Fund or to the Subadviser, which shall not differ in substance from
those included in the Prospectus and this Agreement, in any advertising
or promotional materials without the prior approval of Subadviser,
which approval shall not be unreasonably withheld or delayed. The
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<PAGE> 11
Subadviser hereby agrees to make all reasonable efforts to cause any
Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended as to each Fund by mutual
consent of the parties, provided that the terms of any material amendment shall
be approved by: a) the Trust's Board of Trustees or by a vote of a majority of
the outstanding voting securities of each respective Fund (as required by the
1940 Act) and b) the vote of a majority of those Trustees of the Trust who are
not "interested persons" of any party to this Agreement cast in person at a
meeting called for the purpose of voting on such approval, if such approval is
required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Trust
and the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to
each other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158
Attention: Ellen Metzger, Deputy General Counsel
Facsimile: (212) 476-8946
(b) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
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<PAGE> 12
(c) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
17. Jurisdiction. This Agreement shall be governed by and construed to
be consistent with the Advisory Agreement and in accordance with substantive
laws of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
19. Certain Definitions. For the purposes of this Agreement and except
as otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions and interpretations as may be granted by
the SEC and its staff.
20. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
21. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force and
effect.
22. Trust and its Trustees. The terms "Nationwide Separate Account
Trust" and the "Trustees of Nationwide Separate Account Trust" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of June 30, 1981, as has been or may be amended from time to
time, and to which reference is hereby made and a copy of which is on file at
the office of the Secretary of State of the Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of the Trust entered into in the name or on
behalf thereof by any of Nationwide Separate Account Trust's Trustees,
employees, representatives or agents are not made individually, but only in
their capacities with respect to the Trust. Such obligations are not binding
upon any of the Trustees, shareholders, or representatives of the Trust
personally, but bind only the assets of the Trust. All persons dealing with any
series of Shares of
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<PAGE> 13
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first written above.
TRUST
Nationwide Separate Account Trust
By:___________________________________
Name: James F. Laird, Jr.
Title: Treasurer
ADVISER
Nationwide Advisory Services, Inc.
By:___________________________________
Name: Christopher A. Cray
Title: Treasurer
SUBADVISER
Neuberger Berman, LLC
By:___________________________________
Name:_________________________________
Title:________________________________
13
<PAGE> 14
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN
NATIONWIDE ADVISORY SERVICES, INC.,
NATIONWIDE SEPARATE ACCOUNT TRUST
AND NEUBERGER BERMAN, LLC
EFFECTIVE _______________
<TABLE>
<CAPTION>
Fund of the Trust Advisory Fees
- ----------------- -------------
<S> <C>
Nationwide Small Cap Growth Fund 0.60% of the average daily net assets of the
Subadviser Assets
</TABLE>
14
<PAGE> 15
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this day of ,
among Nationwide Separate Account Trust, a Massachusetts business trust (the
"Trust"), Nationwide Advisory Services, Inc. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and Franklin Advisers, Inc., a California corporation (the
"Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the
Trust dated as of November 1, 1999 ("Advisory Agreement"), been retained to act
as investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain
of its duties under the Advisory Agreement to other investment advisers, subject
to the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of the Trust's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser
to act as investment adviser for and to manage the Subadviser Assets subject to
the supervision of the Adviser and the Board of Trustees of the Trust and
subject to the terms of this Agreement; and the Subadviser hereby accepts such
employment. In such capacity, the Subadviser shall be responsible for the
investment management of the Subadviser Assets. It is recognized that the
Subadviser and certain of its affiliates now act, and that from time to time
hereafter may act, as investment adviser to one or more other investment
companies and to fiduciary or other managed accounts and that the Adviser and
the Trust have no objection to such activities. Nothing in this Agreement shall
impose upon the Subadviser any obligation to purchase or sell or to recommend
for purchase or sale, with respect to the Trust, any security which the
Subadviser, or its shareholders, directors, officers,
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<PAGE> 16
employees or affiliates may purchase or sell for its or their own account(s) or
for the account of any other client.
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and
directed and hereby agrees, subject to the stated investment policies
and restrictions of a Fund as set forth in the Funds' prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Trust's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets and to monitor on a continuous
basis the performance of the Subadviser Assets. In providing these
services, the Subadviser will conduct a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser
with such assistance as may be reasonably requested by the Subadviser
in connection with the Subadviser's activities under this Agreement,
including, without limitation, information concerning the Funds, their
funds available, or to become available, for investment and generally
as to the conditions of a Funds' or Trust's affairs.
(b) Compliance with Applicable Laws and Governing Documents.
In the performance of its duties and obligations under this Agreement,
the Subadviser shall act in conformity with the Trust's Declaration of
Trust and By-Laws and the Prospectus and with the instructions and
directions received in writing from the Adviser or the Trustees of the
Trust and will conform to and comply with the requirements of the 1940
Act, the Internal Revenue Code of 1986, as amended (the "Code"), and
all other applicable federal and state laws and regulations.
Notwithstanding the foregoing, the Adviser shall remain responsible for
ensuring each Fund's overall compliance with the 1940 Act and the Code
and the Subadviser is only obligated to comply with this subsection (b)
with respect to the Subadviser Assets. The Adviser will provide the
Subadviser with a copy of the minutes of the meetings of the Board of
Trustees of the Trust to the extent they may affect the Funds or the
duties of the Subadviser, and with copies of any financial statements
or reports made by the Funds to their shareholders, and any further
materials or information which the Subadviser may reasonably request to
enable it to perform its functions under this Agreement.
Prior to the effectiveness of this Agreement, Adviser shall
provide Subadviser with a copy of the Funds' current Prospectus and the
Trust's Declaration of Trust and By-Laws; thereafter, Adviser shall
promptly deliver to Subadviser any amendments or supplements to such
documents. The Adviser will also provide the Subadviser with reasonable
advance notice of any change in a Fund's investment objectives,
policies and restrictions as stated in the Prospectus, and the
Subadviser shall, in the performance of its duties and obligations
under this Agreement, manage the Subadviser Assets consistent with such
changes, provided
2
<PAGE> 17
the Subadviser has received prompt notice of the effectiveness of such
changes from the Trust or the Adviser. The Adviser acknowledges and
agrees that the Prospectus will at all times be in compliance with all
disclosure requirements under all applicable federal and state laws and
regulations relating to the Trust or the Funds, including, without
limitation, the 1940 Act, and the rules and regulations thereunder, and
that the Subadviser shall have no liability in connection therewith,
except as to the accuracy of material information furnished by the
Subadviser to the Trust or to the Adviser specifically for inclusion in
the Prospectus. The Subadviser hereby agrees to provide to the Adviser
in a timely manner such information relating to the Subadviser and its
relationship to, and actions for, the Trust as may be required to be
contained in the Prospectus or in the Trust's registration on Form
N-1A.
(c) Transactions Related to Underlying Securities. The
Subadviser shall have the power to vote, either in person or by proxy,
all securities in which the Subadviser Assets may be invested from time
to time, and shall not be required to seek or take instructions from
the Adviser, a Fund or the Trust or take any action with respect
thereto. If both the Subadviser and another entity managing assets of a
Fund have invested in the same security, the Subadviser and such other
entity will each have the power to vote its pro rata share of the
security.
The subadviser shall not be expected or required to take any
action other than the rendering of investment-related advice with
respect to lawsuits involving securities presently or formerly held in
the Account, or the issuers thereof, including actions involving
bankruptcy. Should the Subadviser undertake litigation against an
issuer on behalf of accounts which it manages that are shareholders of
such issuer, the Trust agrees to pay its portion of any applicable
legal fees associated with the action or to forfeit any claim to any
assets the Subadviser may recover and, in such case, agrees to hold
Subadviser harmless for excluding the Trust from such action.
Subadviser shall receive reimbursement from the Trust for the Trust's
portion of the cost of any proxy voting service that Subadviser may
subscribe to and use in the performance of its duties hereunder.
(d) Agent. Subject to any other written instructions of the
Adviser or the Trust, the Subadviser is hereby appointed the Adviser's
and the Trust's agent and attorney-in-fact for the limited purposes of
executing account documentation, agreements, contracts and other
documents as the Subadviser shall be requested by brokers, dealers,
counterparties and other persons in connection with its management of
the Subadviser Assets. The Subadviser agrees to provide the Adviser and
the Trust with copies of any such agreements executed on behalf of the
Adviser or the Trust upon request.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to
establish and maintain accounts on behalf of a Fund with, and place
orders for the purchase and sale of the Subadviser Assets with or
through, such persons, brokers (including, to the extent permitted by
applicable law, any
3
<PAGE> 18
broker affiliated with the Subadviser) or dealers ("brokers") as the
Subadviser may elect and negotiate commissions to be paid on such
transactions. The Subadviser, however, is not required to obtain the
consent of the Adviser or the Trust's Board of Trustees prior to
establishing any such brokerage account. The Subadviser shall place all
orders for the purchase and sale of portfolio investments for a Fund's
account with brokers selected by the Subadviser. In the selection of
such brokers and the placing of such orders, the Subadviser shall seek
to obtain for each Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for a Fund the most
favorable price and execution available, the Subadviser, bearing in
mind the best interests of each Fund at all times, shall consider all
factors it deems relevant, including price, the size of the
transaction, the breadth and nature of the market for the security, the
difficulty of the execution, the amount of the commission, if any, the
timing of the transaction, market prices and trends, the reputation,
experience and financial stability of the broker involved, and the
quality of service rendered by the broker in other transactions.
Subject to such policies as the Trustees may determine, or as may be
mutually agreed to by the Adviser and the Subadviser, the Subadviser
shall not be deemed to have acted unlawfully or to have breached any
duty created by this Agreement or otherwise solely by reason of its
having caused a Fund to pay a broker that provides brokerage and
research services (within the meaning of Section 28(e) of the
Securities Exchange Act of 1934) to the Subadviser an amount of
commission for effecting a Fund investment transaction that is in
excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of either that particular
transaction or the overall responsibility of the Subadviser with
respect to the accounts as to which it exercises investment discretion.
It is recognized that the services provided by such brokers
may be useful to the Subadviser in connection with the Subadviser's
services to other clients. On occasions when the Subadviser deems the
purchase or sale of a security to be in the best interests of a Fund as
well as other clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased. In
such event, allocation of securities so sold or purchased, as well as
the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations to each Fund
and to such other clients. It is recognized that in some cases, this
procedure may adversely affect the price paid or received by a Fund or
the size of the position obtainable for, or disposed of by, a Fund.
With respect to the allocation of trades, the Subadviser shall not
favor any account over any other. However, the Subadviser or its
affiliates may, based upon their trading strategies or clients' cash
positions, investment objectives or investment restrictions, restrict
to certain accounts purchases and
4
<PAGE> 19
sales of securities acquired in initial public offerings, including
those that trade or are expected to trade at a premium in the secondary
market.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other
instruments from or sell securities or other instruments to a Fund;
provided, however, the Subadviser and any affiliated person of the
Subadviser may purchase securities or other instruments from or sell
securities or other instruments to a Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and the Subadviser's Code of Ethics (which shall
comply in all material respects with Rule 17j-1), as the same may be
amended from time to time.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets
(the "Fund Records"), including, without limitation, brokerage and
other records of all securities transactions. The Fund Records
(relating to the Subadviser Assets) shall be available to the Trust and
the Adviser at any time upon reasonable request during normal business
hours and shall be available for telecopying without delay to the
Adviser during any day that a Fund is open for business and shall
remain available upon reasonable request after the termination of this
Agreement if so required for regulatory purposes.
(h) Information Concerning Subadviser Assets and Subadviser.
From time to time as the Adviser or the Trust may reasonably request,
the Subadviser will furnish the requesting party reports on portfolio
transactions and reports on Subadviser Assets held in the portfolio,
all in such detail as the Adviser or the Trust may reasonably request.
The Subadviser will also inform the Adviser in a timely manner of
material changes in portfolio managers responsible for Subadviser
Assets or of material changes in the control, ownership or management
of the Subadviser. Upon reasonable request, the Subadviser will make
available its officers and employees to meet with the Trust's Board of
Trustees to review the Subadviser Assets.
Upon mutual consent by the parties, the may perform such
additional acts as are customarily performed by a subadviser. The
Subadviser will also provide such information which may be required for
the Trust or the Adviser to comply with their respective obligations
under applicable laws, including, without limitation, the Code, the
1940 Act, the Advisers Act, and the Securities Act of 1933, as amended
(the "Securities Act"), and any rule or regulation thereunder.
5
<PAGE> 20
(i) Custody Arrangements. The Subadviser shall on each
business day provide the Adviser and the Trust's custodian such
information as the Adviser and the Trust's custodian may reasonably
request relating to all transactions concerning the Subadviser Assets.
3. Independent Contractor. In the performance of its duties hereunder,
the Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or the Adviser in any way or
otherwise be deemed an agent of the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for each
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, a Fund's or Adviser's expenses, which shall
include, but not be limited to, organizational and offering expenses (which
include out-of-pocket expenses, but not overhead or employee costs of the
Subadviser); expenses for legal, accounting and auditing services; taxes and
governmental fees; dues and expenses incurred in connection with membership in
investment company organizations; costs of printing and distributing shareholder
reports, proxy materials, prospectuses, stock certificates and distribution of
dividends; charges of the Funds' custodians and sub-custodians, administrators
and sub-administrators, registrars, transfer agents, dividend disbursing agents
and dividend reinvestment plan agents; payment for portfolio pricing services to
a pricing agent, if any; payment for proxy voting services, registration and
filing fees of the Securities and Exchange Commission (the "SEC"); expenses of
registering or qualifying securities of the Funds for sale in the various
states; freight and other charges in connection with the shipment of the Funds'
portfolio securities; fees and expenses of non-interested Trustees; salaries of
shareholder relations personnel; costs of shareholders meetings; insurance;
interest; brokerage costs; and litigation and other extraordinary or
non-recurring expenses. The Trust or the Adviser, as the case may be, shall
reimburse the Subadviser for any expenses of the Funds or the Adviser as may be
reasonably incurred by such Subadviser on behalf of the Funds or the Adviser.
The Subadviser shall keep and supply to the Trust and the Adviser reasonable
records of all such expenses.
5. Compensation. For the services provided and the expenses assumed
with respect to the Funds and the Subadviser Assets pursuant to this Agreement,
the Subadviser will be entitled to the fee listed for each Fund on Exhibit A.
Such fees will be computed daily and payable no later than the seventh (7th)
business day following the end of each month, from the Adviser or the Trust,
calculated at an annual rate based on the Subadviser Assets' average daily net
assets.
The method of determining net assets of a Fund for purposes hereof
shall be the same as the method of determining net assets for purposes of
establishing the offering and redemption price of
6
<PAGE> 21
the shares of that Fund as described in the Funds' Prospectus. If this Agreement
shall be effective for only a portion of a month, the aforesaid fee shall be
prorated for the portion of such month during which this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser
represents and warrants to the Adviser and the Trust as follows:
(a) The Subadviser is registered as an investment adviser
under the Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to
Rule 4.14 under the Commodity Exchange Act (the "CEA") with the
Commodity Futures Trading Commission (the "CFTC") and the National
Futures Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of California with the power to
own and possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Subadviser
of this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action and no action by or in respect of,
or filing with, any governmental body, agency or official is required
on the part of the Subadviser for the execution, delivery and
performance by the Subadviser of this Agreement, and the execution,
delivery and performance by the Subadviser of this Agreement do not
contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Subadviser's governing
instruments, or (iii) any agreement, judgment, injunction, order,
decree or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete
in all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents
and warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under
the Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to
Section 4.14 under the CEA with the CFTC and the National Futures
Association;
7
<PAGE> 22
(c) The Adviser is a corporation duly organized and validly
existing under the laws of the State of Ohio with the power to own and
possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Adviser of
this Agreement are within the Adviser's powers and have been duly
authorized by all necessary action on the part of its shareholders or
directors, and no action by or in respect of, or filing with, any
governmental body, agency or official is required on the part of the
Adviser for the execution, delivery and performance by the Adviser of
this Agreement, and the execution, delivery and performance by the
Adviser of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii) the
Adviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC
and the information contained therein is accurate and complete in all
material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the
Advisory Agreement pursuant to which the Trust authorized the Adviser
to enter into this Agreement.
8. Representations and Warranties of the Trust. The Trust represents
and warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is
now being conducted;
(b) The Trust is registered as an investment company under the
1940 Act and the Fund's shares are registered under the Securities Act;
and
(c) The execution, delivery and performance by the Trust of
this Agreement are within the Trust's powers and have been duly
authorized by all necessary action on the part of the Trust and its
Board of Trustees, and no action by or in respect of, or filing with,
any governmental body, agency or official is required on the part of
the Trust for the execution, delivery and performance by the Adviser of
this Agreement, and the execution, delivery and performance by the
Trust of this Agreement do not contravene or constitute a default under
8
<PAGE> 23
(i) any provision of applicable law, rule or regulation, (ii) the
Trust's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update
Information. All representations and warranties made by the Subadviser, the
Adviser and the Trust pursuant to Sections 6, 7 and 8, respectively, shall
survive for the duration of this Agreement and the parties hereto shall promptly
notify each other in writing upon becoming aware that any of the foregoing
representations and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. The Subadviser shall exercise its best judgment
in rendering the services in accordance with the terms of this
Agreement. In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Subadviser or a reckless disregard of its
duties hereunder, the Subadviser, each of its affiliates and all
respective partners, officers, directors and employees ("Affiliates")
and each person, if any, who within the meaning of the Securities Act
controls the Subadviser ("Controlling Persons") shall not be liable for
any error of judgment or mistake of law and shall not be subject to any
expenses or liability to the Adviser, the Trust or the Funds or any of
the Funds' shareholders, in connection with the matters to which this
Agreement relates. In the absence of willful misfeasance, bad faith or
gross negligence on the part of the Adviser or a reckless disregard of
its duties hereunder, the Adviser, any of its Affiliates and each of
the Adviser's Controlling Persons, if any, shall not be subject to any
liability to the Subadviser, for any act or omission in the case of, or
connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of Subadviser Assets;
provided, however, that nothing herein shall relieve the Adviser and
the Subadviser from any of their obligations under applicable law,
including, without limitation, the federal and state securities laws
and the CEA.
(b) Indemnification. The Subadviser shall indemnify the
Adviser, the Trust, and the Fund, and their respective Affiliates and
Controlling Persons for any liability and expenses, including
reasonable attorneys' fees, which the Adviser, the Trust, and the Fund,
and their respective Affiliates and Controlling Persons may sustain
which are the direct result of the Subadviser's willful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder
or violation of applicable law, including, without limitation, the
federal and state securities laws or the CEA.
The Adviser shall indemnify the Subadviser, its Affiliates and
its Controlling Persons, for any liability and expenses, including
reasonable attorneys' fees, which may be sustained as a result of the
Adviser's willful misfeasance, bad faith, gross negligence,
9
<PAGE> 24
reckless disregard of its duties hereunder or violation of applicable
law, including, without limitation, the federal and state securities
laws or the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until May ___, 2001, and thereafter shall continue
automatically for successive annual periods, provided such continuance
is specifically approved at least annually by the Trust's Board of
Trustees or vote of the security holders of the Funds as required under
the 1940 Act, provided that its continuance also is approved by a
majority of the Trust's Trustees who are not "interested persons" (as
defined in the 1940 Act) of any party to this Agreement, by vote cast
in person at a meeting called for the purpose of voting on such
approval.
(b) Termination. Notwithstanding whatever may be provided
herein to the contrary, this Agreement may be terminated at any time,
without payment of any penalty:
(i) By vote of a majority of the Trust's Board of
Trustees, or by vote of a majority of the outstanding voting
securities of a Fund, or by the Adviser, in each case, upon at
least 60 days' written notice to the Subadviser;
(ii) By any party hereto immediately upon written
notice to the other parties in the event of a breach of any
provision of this Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days'
written notice to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the
1940 Act) and shall terminate automatically in the event of its
assignment or upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Trust pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Trust.
13. Reference to Adviser and Subadviser.
(a) Neither the Adviser nor any Affiliate or agent of it shall
make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the
identity of and services provided by the Subadviser to the Fund, which
10
<PAGE> 25
references shall not differ in substance from those included in the
Prospectus and this Agreement, in any advertising or promotional
materials without the prior approval of Subadviser, which approval
shall not be unreasonably withheld or delayed. The Adviser hereby
agrees to make all reasonable efforts to cause a Fund and any Affiliate
thereof to satisfy the foregoing obligation.
(b) Neither the Subadviser nor any Affiliate or agent of it
shall make reference to or use the name of Adviser of any of its
Affiliates, or any of their clients, except references concerning the
identity of, relationship with, and services provided by the Adviser to
the Fund or to the Subadviser, which shall not differ in substance from
those included in the Prospectus and this Agreement, in any advertising
or promotional materials without the prior approval of Subadviser,
which approval shall not be unreasonably withheld or delayed.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Funds (as required by the 1940 Act) and b) the vote of
a majority of those Trustees of the Trust who are not "interested persons" of
any party to this Agreement cast in person at a meeting called for the purpose
of voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Trust
and the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential and shall not disclose to third parties any and all
information and recommendations pertaining to the Fund and the actions of the
Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to
each other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Franklin Advisers, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Deborah Gatzek
Facsimile: 650-312-2804
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<PAGE> 26
(b) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
(c) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
17. Jurisdiction. This Agreement shall be governed by and construed to
be consistent with the Advisory Agreement and in accordance with substantive
laws of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
19. Certain Definitions. For the purposes of this Agreement and except
as otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
20. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
21. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force and
effect.
22. Trust and its Trustees. The terms "Nationwide Separate Account
Trust" and the "Trustees of Nationwide Separate Account Trust" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of June 30, 1981, as has been or may be amended from time to
time, and to which
12
<PAGE> 27
reference is hereby made and a copy of which is on file at the office of the
Secretary of State of the Commonwealth of Massachusetts and elsewhere as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of the Trust entered into in the name or on behalf
thereof by any of Nationwide Separate Account Trust's Trustees, employees,
representatives or agents are not made individually, but only in their
capacities with respect to the Trust. Such obligations are not binding upon any
of the Trustees, shareholders, or representatives of the Trust personally, but
bind only the assets of the Trust. All persons dealing with any series of Shares
of the Trust must look solely to the assets of the Trust belonging to such
series for the enforcement of any claims against the Trust.
13
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first written above.
TRUST
Nationwide Separate Account Trust
By:_______________________________
Name: James F. Laird, Jr.
Title: Treasurer
ADVISER
Nationwide Advisory Services, Inc.
By:_______________________________
Name: Christopher A. Cray
Title: Treasurer
SUBADVISER
Franklin Advisers, Inc.
By:_______________________________
Name:_____________________________
Title:____________________________
14
<PAGE> 29
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN
NATIONWIDE ADVISORY SERVICES, INC.,
NATIONWIDE SEPARATE ACCOUNT TRUST
AND FRANKLIN ADVISERS, INC.
EFFECTIVE __________________________
<TABLE>
<CAPTION>
Fund of the Trust Advisory Fees
- ----------------- -------------
<S> <C>
Nationwide Small Cap Growth Fund 0.60% of the average daily net assets of the
Subadviser Assets
</TABLE>
15
<PAGE> 30
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this ___ day of
________________, among Nationwide Separate Account Trust, a Massachusetts
business trust (the "Trust"), Nationwide Advisory Services, Inc. (the
"Adviser"), an Ohio corporation registered under the Investment Advisers Act of
1940, as amended (the "Advisers Act"), and Miller Anderson & Sherrerd, LLP, a
Pennsylvania Limited Liability Partnership (the "Subadviser"), also registered
under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the
Trust dated as of November 1, 1997 ("Advisory Agreement"), been retained to act
as investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain
of its duties under the Advisory Agreement to other investment advisers, subject
to the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of the Trust's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser
to act as investment adviser for and to manage the Subadviser Assets subject to
the supervision of the Adviser and the Board of Trustees of the Trust and
subject to the terms of this Agreement; and the Subadviser hereby accepts such
employment. In such capacity, the Subadviser shall be responsible for the
investment management of the Subadviser Assets. It is recognized that the
Subadviser and certain of its affiliates now act, and that from time to time
hereafter may act, as investment adviser to one or more other investment
companies and to fiduciary or other managed accounts and that the Adviser and
the Trust have no objection to such activities.
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2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and
directed and hereby agrees, subject to the stated investment policies
and restrictions of a Fund as set forth in the Funds' prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Trust's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets and to monitor on a continuous
basis the performance of the Subadviser Assets. In providing these
services, the Subadviser will conduct a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser
with such assistance as may be reasonably requested by the Subadviser
in connection with the Subadviser's activities under this Agreement,
including, without limitation, information concerning the Funds, their
funds available, or to become available, for investment and generally
as to the conditions of a Funds' or Trust's affairs.
(b) Compliance with Applicable Laws and Governing Documents.
In the performance of its duties and obligations under this Agreement,
the Subadviser shall act in conformity with the Trust's Declaration of
Trust and By-Laws and the Prospectus and with the instructions and
directions received in writing from the Adviser or the Trustees of the
Trust and will conform to and comply with the requirements of the 1940
Act, the Internal Revenue Code of 1986, as amended (the "Code"), and
all other applicable federal and state laws and regulations.
Notwithstanding the foregoing, the Adviser shall remain responsible for
ensuring each Fund's overall compliance with the 1940 Act and the Code
and the Subadviser is only obligated to comply with this subsection (b)
with respect to the Subadviser Assets. The Adviser will provide the
Subadviser with a copy of the minutes of the meetings of the Board of
Trustees of the Trust to the extent they may affect the Funds or the
duties of the Subadviser, and with copies of any financial statements
or reports made by the Funds to their shareholders, and any further
materials or information which the Subadviser may reasonably request to
enable it to perform its functions under this Agreement.
The Adviser will also provide the Subadviser with reasonable
advance notice of any change in a Fund's investment objectives,
policies and restrictions as stated in the Prospectus, and the
Subadviser shall, in the performance of its duties and obligations
under this Agreement, manage the Subadviser Assets consistent with such
changes, provided the Subadviser has received prompt notice of the
effectiveness of such changes from the Trust or the Adviser. In
addition to such notice, the Adviser shall provide to the Subadviser a
copy of a modified Prospectus reflecting such changes. The Adviser
acknowledges and agrees that the Prospectus will at all times be in
compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the
Funds, including, without limitation, the 1940 Act, and the rules and
regulations thereunder, and that
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<PAGE> 32
the Subadviser shall have no liability in connection therewith, except
as to the accuracy of material information furnished by the Subadviser
to the Trust or to the Adviser specifically for inclusion in the
Prospectus. The Subadviser hereby agrees to provide to the Adviser in a
timely manner such information relating to the Subadviser and its
relationship to, and actions for, the Trust as may be required to be
contained in the Prospectus or in the Trust's registration on Form
N-1A.
(c) Voting of Proxies. The Subadviser shall have the power to
vote, either in person or by proxy, all securities in which the
Subadviser Assets may be invested from time to time, and shall not be
required to seek or take instructions from the Adviser, a Fund or the
Trust or take any action with respect thereto. If both the Subadviser
and another entity managing assets of a Fund have invested in the same
security, the Subadviser and such other entity will each have the power
to vote its pro rata share of the security.
(d) Agent. Subject to any other written instructions of the
Adviser or the Trust, the Subadviser is hereby appointed the Adviser's
and the Trust's agent and attorney-in-fact for the limited purposes of
executing account documentation, agreements, contracts and other
documents as the Subadviser shall be requested by brokers, dealers,
counterparties and other persons in connection with its management of
the Subadviser Assets. The Subadviser agrees to provide the Adviser and
the Trust with copies of any such agreements executed on behalf of the
Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to
establish and maintain accounts on behalf of a Fund with, and place
orders for the purchase and sale of the Subadviser Assets with or
through, such persons, brokers (including, to the extent permitted by
applicable law, any broker affiliated with the Subadviser) or dealers
("brokers") as the Subadviser may elect and negotiate commissions to be
paid on such transactions. The Subadviser, however, is not required to
obtain the consent of the Adviser or the Trust's Board of Trustees
prior to establishing any such brokerage account. The Subadviser shall
place all orders for the purchase and sale of portfolio investments for
a Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the
Subadviser shall seek to obtain for each Fund the most favorable price
and execution available, except to the extent it may be permitted to
pay higher brokerage commissions for brokerage and research services,
as provided below. In using its reasonable efforts to obtain for a Fund
the most favorable price and execution available, the Subadviser,
bearing in mind the best interests of each Fund at all times, shall
consider all factors it deems relevant, including price, the size of
the transaction, the breadth and nature of the market for the security,
the difficulty of the execution, the amount of the commission, if any,
the timing of the transaction, market prices and trends, the
reputation, experience and financial stability of the broker involved,
and the quality of service rendered by the broker in other
transactions. Subject to such policies as the Trustees may determine,
or as may be mutually agreed to by
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the Adviser and the Subadviser, the Subadviser shall not be deemed to
have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused a Fund to
pay a broker that provides brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to the
Subadviser an amount of commission for effecting a Fund investment
transaction that is in excess of the amount of commission that another
broker would have charged for effecting that transaction if, but only
if, the Subadviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer viewed in terms of either
that particular transaction or the overall responsibility of the
Subadviser with respect to the accounts as to which it exercises
investment discretion.
It is recognized that the services provided by such brokers
may be useful to the Subadviser in connection with the Subadviser's
services to other clients. On occasions when the Subadviser deems the
purchase or sale of a security to be in the best interests of a Fund as
well as other clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased. In
such event, allocation of securities so sold or purchased, as well as
the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations to each Fund
and to such other clients. It is recognized that in some cases, this
procedure may adversely affect the price paid or received by a Fund or
the size of the position obtainable for, or disposed of by, a Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other
instruments from or sell securities or other instruments to a Fund;
provided, however, the Subadviser and any affiliated person of the
Subadviser may purchase securities or other instruments from or sell
securities or other instruments to a Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and the Subadviser's Code of Ethics (which shall
comply in all material respects with Rule 17j-1), as the same may be
amended from time to time. On a quarterly basis, the Subadviser will
either (i) certify to the Adviser that the Subadviser and its Access
Persons have complied with the Subadviser's Code of Ethics with respect
to the Subadviser Assets or (ii) identify any violations which have
occurred with respect to the Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets
(the "Fund Records"), including, without limitation, brokerage and
other records of all securities transactions. The Subadviser
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<PAGE> 34
acknowledges that the Fund Records are property of the Trust. The Fund
Records (relating to the Subadviser Assets) shall be available to the
Adviser at any time upon reasonable request during normal business
hours and shall be available for telecopying without delay to the
Adviser during any day that a Fund is open for business.
(h) Information Concerning Subadviser Assets and Subadviser.
From time to time as the Adviser or the Trust may reasonably request,
the Subadviser will furnish the requesting party reports on portfolio
transactions and reports on Subadviser Assets held in the portfolio,
all in such detail as the Adviser or the Trust may reasonably request.
The Subadviser will also inform the Adviser in a timely manner of
material changes in portfolio managers responsible for Subadviser
Assets, any changes in the ownership or management of the Subadviser,
or of material changes in the control of the Subadviser. Upon
reasonable request, the Subadviser will make available its officers and
employees to meet with the Trust's Board of Trustees to review the
Subadviser Assets.
The Subadviser will also provide such information or perform
such additional acts as are customarily performed by a subadviser and
may be required for the Trust or the Adviser to comply with their
respective obligations under applicable laws, including, without
limitation, the Code, the 1940 Act, the Advisers Act, and the
Securities Act of 1933, as amended (the "Securities Act"), and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each
business day provide the Adviser and the Trust's custodian such
information as the Adviser and the Trust's custodian may reasonably
request relating to all transactions concerning the Subadviser Assets.
3. Independent Contractor. In the performance of its duties hereunder,
the Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or the Adviser in any way or
otherwise be deemed an agent of the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions, investment related expenses and other transaction
charges, if any) purchased for each Fund. The Subadviser shall, at its sole
expense, employ or associate itself with such persons as it believes to be
particularly fitted to assist it in the execution of its duties under this
Agreement. The Subadviser shall not be responsible for the Trust's, a Fund's or
Adviser's expenses, which shall include, but not be limited to, organizational
and offering expenses (which include out-of-pocket expenses, but not overhead or
employee costs of the Subadviser); expenses for legal, accounting and auditing
services; taxes and governmental fees; dues and expenses incurred in connection
with membership in investment company organizations; costs of printing and
distributing shareholder reports, proxy materials, prospectuses,
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<PAGE> 35
stock certificates and distribution of dividends; charges of the Funds'
custodians and sub-custodians, administrators and sub-administrators,
registrars, transfer agents, dividend disbursing agents and dividend
reinvestment plan agents; payment for portfolio pricing services to a pricing
agent, if any; registration and filing fees of the Securities and Exchange
Commission (the "SEC"); expenses of registering or qualifying securities of the
Funds for sale in the various states; freight and other charges in connection
with the shipment of the Funds' portfolio securities; fees and expenses of
non-interested Trustees; salaries of shareholder relations personnel; costs of
shareholders meetings; insurance; interest; brokerage costs; and litigation and
other extraordinary or non-recurring expenses. The Trust or the Adviser, as the
case may be, shall reimburse the Subadviser for any expenses of the Funds or the
Adviser as may be reasonably incurred by such Subadviser on behalf of the Funds
or the Adviser. The Subadviser shall keep and supply to the Trust and the
Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed
with respect to the Funds and the Subadviser Assets pursuant to this Agreement,
the Subadviser will be entitled to the fee listed for each Fund on Exhibit A.
Such fees will be computed daily and payable no later than the seventh (7th)
business day following the end of each month, from the Adviser or the Trust,
calculated at an annual rate based on the Subadviser Assets' average daily net
assets.
The method of determining net assets of a Fund for purposes hereof
shall be the same as the method of determining net assets for purposes of
establishing the offering and redemption price of the shares of that Fund as
described in the Funds' Prospectus. If this Agreement shall be effective for
only a portion of a month, the aforesaid fee shall be prorated for the portion
of such month during which this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser
represents and warrants to the Adviser and the Trust as follows:
(a) The Subadviser is registered as an investment adviser
under the Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to
Rule 4.14 under the Commodity Exchange Act (the "CEA") with the
Commodity Futures Trading Commission (the "CFTC") and the National
Futures Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a Limited Liability Partnership duly
organized and properly registered and operating under the laws of the
Commonwealth of Pennsylvania with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Subadviser
of this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action and
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<PAGE> 36
no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Subadviser for the
execution, delivery and performance by the Subadviser of this
Agreement, and the execution, delivery and performance by the
Subadviser of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii) the
Subadviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the
Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete
in all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents
and warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under
the Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to
Section 4.14 under the CEA with the CFTC and the National Futures
Association;
(c) The Adviser is a corporation duly organized and validly
existing under the laws of the State of Ohio with the power to own and
possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Adviser of
this Agreement are within the Adviser's powers and have been duly
authorized by all necessary action on the part of its shareholders or
directors, and no action by or in respect of, or filing with, any
governmental body, agency or official is required on the part of the
Adviser for the execution, delivery and performance by the Adviser of
this Agreement, and the execution, delivery and performance by the
Adviser of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii) the
Adviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC
and the information contained therein is accurate and complete in all
material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading;
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<PAGE> 37
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the
Advisory Agreement pursuant to which the Trust authorized the Adviser
to enter into this Agreement.
8. Representations and Warranties of the Trust. The Trust represents
and warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is
now being conducted;
(b) The Trust is registered as an investment company under the
1940 Act and the Fund's shares are registered under the Securities Act;
and
(c) The execution, delivery and performance by the Trust of
this Agreement are within the Trust's powers and have been duly
authorized by all necessary action on the part of the Trust and its
Board of Trustees, and no action by or in respect of, or filing with,
any governmental body, agency or official is required on the part of
the Trust for the execution, delivery and performance by the Adviser of
this Agreement, and the execution, delivery and performance by the
Trust of this Agreement do not contravene or constitute a default under
(i) any provision of applicable law, rule or regulation, (ii) the
Trust's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update
Information. All representations and warranties made by the Subadviser, the
Adviser and the Trust pursuant to Sections 6, 7 and 8, respectively, shall
survive for the duration of this Agreement and the parties hereto shall promptly
notify each other in writing upon becoming aware that any of the foregoing
representations and warranties are no longer true.
10. Liability and Indemnification.
(a) The Subadviser shall exercise its best judgment in
rendering the services in accordance with the terms of this Agreement.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Subadviser or a reckless disregard of its duties
hereunder, the Subadviser, each of its affiliates and all respective
partners, officers, directors and employees ("Affiliates") and each
person, if any, who within the meaning of the Securities Act controls
the Subadviser ("Controlling Persons") shall not be liable for any
error of judgment or mistake of law and shall not be subject to any
expenses or liability to the Adviser, any other subadviser to the Fund,
the Trust or the Funds or any of the Funds'
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<PAGE> 38
shareholders, in connection with the matters to which this Agreement
relates. Except as set forth in (c) below, the absence of willful
misfeasance, bad faith or gross negligence on the part of the Adviser
or a reckless disregard of its duties hereunder, the Adviser, any of
its Affiliates and each of the Adviser's Controlling Persons, if any,
shall not be subject to any liability to the Subadviser, for any act or
omission in the case of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase,
holding or sale of Subadviser Assets; provided, however, that nothing
herein shall relieve the Adviser and the Subadviser from any of their
obligations under applicable law, including, without limitation, the
federal and state securities laws and the CEA.
(b) The Subadviser shall indemnify the Adviser, the Trust, and
the Fund, and their respective Affiliates and Controlling Persons for
any liability and expenses, including reasonable attorneys' fees, which
the Adviser, the Trust, and the Fund, and their respective Affiliates
and Controlling Persons may sustain which are proximately caused by the
Subadviser's willful misfeasance, bad faith, gross negligence, reckless
disregard of its duties hereunder or violation of applicable law,
including, without limitation, the federal and state securities laws or
the CEA.
The Adviser shall indemnify the Subadviser, its Affiliates and
its Controlling Persons, for any liability and expenses, including
reasonable attorneys' fees, which may be sustained as a result of the
Adviser's willful misfeasance, bad faith, gross negligence, reckless
disregard of its duties hereunder or violation of applicable law,
including, without limitation, the federal and state securities laws or
the CEA.
(c) The Subadviser shall not be liable to the Adviser for (i)
any acts of the Adviser or any other subadviser to the Fund with
respect to the portion of the assets of the Fund not managed by
Subadviser or (ii) acts of the Subadviser which result from acts of the
Adviser, including, but not limited to, a failure of the Adviser to
provide accurate and current information with respect to any records
maintained by Adviser or any other subadviser to the Fund, which
records are not also maintained by or otherwise available to the
Subadviser upon reasonable request. The Adviser agrees that Subadviser
shall manage the Subadviser Assets as if they were a separate operating
Fund as set forth in Section 2(b) of this Agreement. The Adviser shall
indemnify the Subadviser, its Affiliates and Controlling persons from
any liability arising from the conduct of the Adviser and any other
subadviser with respect to the portion of the Fund's assets not
allocated to the Subadviser.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until May ___, 2001, and thereafter shall continue
automatically for successive annual periods, provided such continuance
is specifically approved at least annually by the Trust's Board of
Trustees or vote of the lesser of (a) 67% of the shares of the Fund
represented at a meeting
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<PAGE> 39
if holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy or (b) more than 50% of the outstanding
shares of the Fund; provided that in either event its continuance also
is approved by a majority of the Trust's Trustees who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval.
(b) Termination. Notwithstanding whatever may be provided
herein to the contrary, this Agreement may be terminated at any time,
without payment of any penalty:
(i) By vote of a majority of the Trust's Board of
Trustees, or by vote of a majority of the outstanding voting
securities of a Fund, or by the Adviser, in each case, upon at
least 60 days' written notice to the Subadviser;
(ii) By any party hereto immediately upon written
notice to the other parties in the event of a breach of any
provision of this Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days'
written notice to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the
1940 Act) and shall terminate automatically in the event of its
assignment or upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Trust pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Trust.
13. Reference to Adviser and Subadviser.
(a) Neither the Adviser nor any Affiliate or agent of it shall
make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the
identity of and services provided by the Subadviser to the Fund, which
references shall not differ in substance from those included in the
Prospectus and this Agreement, in any advertising or promotional
materials without the prior approval of Subadviser, which approval
shall not be unreasonably withheld or delayed. The Adviser hereby
agrees to make all reasonable efforts to cause a Fund and any Affiliate
thereof to satisfy the foregoing obligation.
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(b) Neither the Subadviser nor any Affiliate or agent of it
shall make reference to or use the name of Adviser of any of its
Affiliates, or any of their clients, except references concerning the
identity of, relationship with, and services provided by the Adviser to
the Fund or to the Subadviser, which shall not differ in substance from
those included in the Prospectus and this Agreement, in any advertising
or promotional materials without the prior approval of Subadviser,
which approval shall not be unreasonably withheld or delayed. The
Subadviser hereby agrees to make all reasonable efforts to cause a Fund
and any Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Funds (as required by the 1940 Act) and b) the vote of
a majority of those Trustees of the Trust who are not "interested persons" of
any party to this Agreement cast in person at a meeting called for the purpose
of voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Trust
and the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to
each other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Miller Anderson & Sherrerd, LLP
One Towerbridge
West Conshohocken, PA 19428
Attention: ___________
Facsimile: ___________
(b) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
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<PAGE> 41
(c) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
17. Jurisdiction. This Agreement shall be governed by and construed to
be consistent with the Advisory Agreement and in accordance with substantive
laws of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
19. Certain Definitions. For the purposes of this Agreement and except
as otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
20. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
21. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force and
effect.
22. Trust and its Trustees. The terms "Nationwide Separate Account
Trust" and the "Trustees of Nationwide Separate Account Trust" refer
respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of June 30, 1981, as has been or may be amended from time to
time, and to which reference is hereby made and a copy of which is on file at
the office of the Secretary of State of the Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of the Trust entered into in the name or on
behalf thereof by any of Nationwide Separate Account Trust's Trustees,
employees, representatives or agents are not made individually, but only in
their capacities with respect to the Trust. Such obligations are not binding
upon any of the Trustees, shareholders, or representatives of the Trust
personally, but bind only the assets of the Trust. All persons dealing with any
series of Shares of
12
<PAGE> 42
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first written above.
TRUST
Nationwide Separate Account Trust
By:_________________________________
Name: James F. Laird, Jr.
Title: Treasurer
ADVISER
Nationwide Advisory Services, Inc.
By:_________________________________
Name: Christopher A. Cray
Title: Treasurer
SUBADVISER
Miller Anderson & Sherrerd, LLP
By:_________________________________
Name:_______________________________
Title:______________________________
13
<PAGE> 43
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN
NATIONWIDE ADVISORY SERVICES, INC.,
NATIONWIDE SEPARATE ACCOUNT TRUST
AND MILLER ANDERSON & SHERRERD, LLP
EFFECTIVE
<TABLE>
<CAPTION>
Fund of the Trust Advisory Fees
- ----------------- -------------
<S> <C>
Nationwide Small Cap Growth Fund 0.60% of the average daily net assets of the
Subadviser Assets
</TABLE>
<PAGE> 1
Exhibit 9
[DIETRICH, REYNOLDS & KOOGLER, LLP LETTERHEAD]
February 12, 1999
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, Ohio 43215
Re: Nationwide Separate Account Trust
Post-Effective Amendment No. 27
SEC File Nos. 2-73024, 811-3213
Ladies and Gentlemen:
In connection with the filing of Post-Effective Amendment No. 27 to the
Registration Statement for Nationwide Separate Account Trust (the "Amendment"),
it is our opinion that, upon the effectiveness of the Amendment, the indefinite
number of units of beneficial interest of each class of shares of the funds
listed below, when issued for the consideration described in the Amendment, will
be legally issued, fully paid and nonassessable.
Series Name
- -----------
Total Return Fund
Capital Appreciation Fund
Government Bond Fund
Money Market Fund
Nationwide Small Company Fund
Nationwide Income Fund
Nationwide Strategic Growth Fund
Nationwide Strategic Value Fund
Nationwide Equity Income Fund
Nationwide High Income Bond Fund
<PAGE> 2
Nationwide Separate Account Trust
February 12, 1999
Page 2
Nationwide Balanced Fund
Nationwide Multi Sector Bond Fund
Nationwide Small Cap Value Fund
Nationwide Global Equity Fund
Nationwide Select Advisers Mid Cap Fund
Nationwide Select Advisers Small Cap Growth Fund
We hereby consent to the filing of this opinion as an exhibit to the Amendment.
Very truly yours,
/s/ Dietrich, Reynolds & Koogler, LLP
- ---------------------------------------
DIETRICH, REYNOLDS & KOOGLER, LLP
