<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1997.
REGISTRATION NO. 333-18531
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 6719 31-1486870
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Code Number) Identification Number)
incorporation or
organization)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
-----------
W. SIDNEY DRUEN
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
NATIONWIDE FINANCIAL SERVICES, INC.
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7640
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------
COPIES TO:
ALEXANDER M. DYE/MICHAEL GROLL JEFF LIEBMANN
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. JONATHAN FREEDMAN
125 WEST 55TH STREET DEWEY BALLANTINE
NEW YORK, NEW YORK 10019-5389 1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6092
-----------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 4, 1997
$300,000,000
[LOGO] NATIONWIDE FINANCIAL SERVICES, INC.
% Senior Notes Due 2027
Interest Payable and Due , 2027
--------
The % Senior Notes due 2027 (the "Notes") will be redeemable in whole or in
part, at the option of Nationwide Financial Services, Inc. (the "Company"), at
any time on or after , 2007 and before , 2008 at a redemption
price equal to % of the principal amount thereof plus any accrued and
unpaid interest, if any, to the redemption date, and thereafter at the
declining redemption prices set forth herein plus, in each case, accrued and
unpaid interest, if any, to the redemption date. The Notes will not be
subject to any sinking fund. The Notes will be general unsecured
obligations of the Company and will rank pari passu in right of payment
with all other senior indebtedness of the Company and senior in right of
payment to all subordinated indebtedness of the Company. However, because
the Notes will be unsecured, they will be effectively subordinated to any
secured indebtedness of the Company. The Indenture (as defined herein)
pursuant to which the Notes will be issued does not contain any
provisions which will restrict the Company from incurring, assuming or
becoming liable with respect to any indebtedness or other obligations,
whether secured or unsecured, or from paying dividends or making other
distributions on its capital stock or purchasing or redeeming its
capital stock. Further, the Indenture does not preclude the Company's
subsidiaries from issuing secured or unsecured indebtedness. At
December 31, 1996, the Company and its subsidiaries had no
outstanding indebtedness. Because the Company is a holding company,
the Notes will be effectively subordinated to all existing and
future liabilities and obligations, including obligations to
policyholders, of the Company's subsidiaries, which totalled
approximately $45.6 billion at December 31, 1996. See
"Description of Notes."
The Notes will be represented by one or more Global Securities (as defined
herein) registered in the name of the nominee of The Depository
Trust Company ("DTC"). Except as provided herein, Notes in
definitive form will not be issued. See "Description of Notes."
Prior to the public offering of the Notes (the "Note Offering"), the Company
expects to consummate the sale of shares of its Class A Common Stock, $0.01
par value ("Class A Common Stock"), in concurrent underwritten initial
public offerings (the "Equity Offerings"). Concurrently with the Note
Offering, Nationwide Financial Services Capital Trust, an affiliate of
the Company (the "NFS Trust"), expects to consummate the public offering
of Capital Securities (the "Capital Securities") with an aggregate
liquidation amount of $100 million (the "Capital Securities
Offering"). The Equity Offerings and the Capital Securities Offering
are being made pursuant to separate prospectuses. See "The Equity
Offerings, the Note Offering and the Capital Securities Offering."
The Notes have been approved for listing on the New York Stock Exchange (the
"NYSE"), subject to official notice of issuance.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS"
ON PAGE 11 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THESECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONPASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)(2)
-------- ------------- -------------
<S> <C> <C> <C>
Per Note................................... % % %
Total...................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1997.
(2) Before deduction of expenses payable by the Company estimated at $ .
The Notes are offered by the several Underwriters when, as and if issued by
the Company, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that the Notes will
be ready for delivery in book-entry form only through the facilities of DTC on
or about , 1997, against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON MORGAN STANLEY & CO.
INCORPORATED
MERRILL LYNCH & CO.
Prospectus dated , 1997.
<PAGE>
IN CONNECTION WITH THE NOTE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
----------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") pursuant to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, for the registration of the Notes offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Notes
offered hereby, reference is made to the Registration Statement, including
exhibits thereto and financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any contract or
other document are not necessarily complete. With respect to each such
contract or other document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and
the exhibits and schedules thereto filed by the Company with the Commission
may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the regional offices of the Commission located at Seven World Trade Center,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
As a result of the Equity Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish the holders of the Notes with annual reports containing,
among other information, audited consolidated financial statements reported
upon by an independent public accounting firm and quarterly reports for each
of the first three quarters of each fiscal year containing unaudited condensed
consolidated financial information. The Company also intends to furnish such
other reports as it may determine or as may be required by law.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements
appearing elsewhere in this Prospectus. The Company was formed in November 1996
as a holding company for Nationwide Life Insurance Company and the other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. The information contained in this
Prospectus gives effect to the contribution by Nationwide Corporation to the
Company of Nationwide Life and such other companies described under "Recent
History." Except as otherwise indicated, all financial data and ratios
presented herein have been prepared using generally accepted accounting
principles ("GAAP"). See "Glossary of Selected Insurance Terms" for the
definitions of certain insurance terms used herein.
As used in this Prospectus, the "Company" means Nationwide Financial
Services, Inc. and, unless the context otherwise requires, its subsidiaries;
"Nationwide Life" means Nationwide Life Insurance Company and, unless the
context otherwise requires, Nationwide Life and Annuity Insurance Company;
"Nationwide Corp." means Nationwide Corporation; "Nationwide Mutual" means
Nationwide Mutual Insurance Company; and "Nationwide Insurance Enterprise"
means Nationwide Mutual and its subsidiaries and affiliates. Nationwide(R) is a
registered service mark of Nationwide Mutual, and The Best of America(R) is a
registered service mark of Nationwide Life.
THE COMPANY
OVERVIEW
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers throughout the United States.
The Company offers variable annuities, fixed annuities and life insurance as
well as mutual funds and pension products and administrative services. By
developing and offering a wide variety of products, the Company believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. The Company markets its products through a broad
spectrum of wholesale and retail distribution channels, including financial
planners, pension plan administrators, securities firms, banks and Nationwide
Insurance Enterprise insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the year ended December 31, 1996, the Company was the fourth
largest U.S. writer of individual variable annuity contracts based on sales,
according to The Variable Annuity Research & Data Service ("VARDS"). Its
principal variable annuity series, The Best of America, allows the customer to
choose from 36 investment options, including mutual funds managed by such well-
known firms as American Century, Dreyfus, Fidelity, Janus, Neuberger & Berman,
Oppenheimer, T. Rowe Price, Templeton, Vanguard and Warburg Pincus, as well as
mutual funds managed by the Company.
The Company is a member of the Nationwide Insurance Enterprise, which is
known nationally as a writer of automobile and homeowners' insurance throughout
the United States. The property/casualty insurers within the Nationwide
Insurance Enterprise are the fifth largest property/casualty insurance group in
the United States based on 1995 net premiums written, according to A.M. Best
Company, Inc. ("A.M. Best").
In the mid-1970s, to capitalize on anticipated opportunities in the growing
market for long-term savings and retirement products, the Company embarked on a
specific strategy of broadening its distribution channels and product offerings
beyond selling traditional life insurance to the automobile and homeowner
customers of the Nationwide Insurance Enterprise. Over a 20-year period, the
Company added financial planners, pension plan administrators, securities firms
and banks as new distribution channels. Such distribution channels in the
aggregate accounted for approximately 93.8% of the Company's sales in 1996.
Currently, the Company
3
<PAGE>
administers approximately 15,000 pension plans and has distribution
arrangements with 125 banks and other financial institutions, over 1,000
broker/dealers and over 30,000 registered representatives. The Company has
payroll deduction variable annuity enrollee customers in approximately 6,000
state and local government entities and 1,800 school districts, which have been
obtained principally through sponsorship relationships with the National
Association of Counties and The United States Conference of Mayors and an
exclusive contractual arrangement with The National Education Association of
the United States.
The Company has grown substantially in recent years as a result of its long-
term investment in developing the distribution channels necessary to reach its
target customers and the products required to meet the demands of these
customers. The Company believes its growth has been further enhanced by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the financial
markets, particularly the U.S. stock markets, in recent years. From 1992 to
1996, the Company's assets grew from $20.8 billion to $47.8 billion, a compound
annual growth rate of 23.1%. Asset growth during this period resulted from
sales of the Company's products as well as market appreciation of assets in the
Company's separate accounts and in its general account investment portfolio.
During the same period, the Company's net operating income (i.e., net income
excluding realized gains and losses on investments (net of related federal
income tax), discontinued operations and cumulative effect of accounting
changes) grew from $97.0 million to $211.3 million, a compound annual growth
rate of 21.5%. The Company's sales of variable annuities grew from $1.56
billion in 1992 to $6.50 billion in 1996, a compound annual growth rate of
42.9%. The Company's separate account assets, which are generated by the sale
of variable annuities and variable universal life insurance, grew from 29.3% of
total assets at December 31, 1992 to 56.4% of total assets at December 31,
1996. During this period of substantial growth, the Company controlled its
operating expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology. From 1992 to 1996, the
Company's total assets increased by 130.1% while operating expenses increased
by only 55.1%. As a result, its ratio of operating expenses to total assets
fell from 1.10% in 1992 to 0.74% in 1996.
The Company believes that demographic trends and shifts in attitudes toward
retirement savings will continue to support increased consumer demand for its
products. According to U.S. Census Bureau projections, the number of Americans
between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1
million in 2005, making this "preretirement" age group the fastest growing
segment of the U.S. population. The Company believes that Americans
increasingly are supplementing traditional sources of retirement income, such
as employer-provided defined benefit plans and Social Security, with self-
directed investments. Reflecting this shift, industry sales of individual
variable annuity products grew from $28.5 billion in 1992 to $73.8 billion in
1996, a compound annual growth rate of 26.9%, according to VARDS. During the
same period, industry individual variable annuity assets grew from $212 billion
to $501 billion, a compound annual growth rate of 24.0%, according to VARDS.
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. The Variable Annuities segment, which accounted for $90.3
million (or 27.5%) of the Company's operating income before federal income tax
expense in 1996, consists of annuity contracts that provide the customer with
the opportunity to invest in mutual funds managed by independent investment
managers and the Company, with investment returns accumulating on a tax-
deferred basis. The Fixed Annuities segment, which accounted for $135.4 million
(or 41.2%) of the Company's operating income before federal income tax expense
in 1996, consists of annuity contracts that generate a return for the customer
at a specified interest rate, fixed for a prescribed period, with returns
accumulating on a tax-deferred basis. Such contracts consist of single premium
deferred annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment also includes the fixed option
under the Company's variable annuity contracts, which accounted for 70.5% of
the Company's fixed annuity policy reserves as of December 31, 1996. For the
year ended December 31, 1996, the average crediting rate on contracts
(including the fixed option under the
4
<PAGE>
Company's variable annuity contracts) in the Fixed Annuities segment was 6.3%.
Substantially all of the Company's crediting rates on its fixed annuity
contracts are guaranteed for a period not exceeding 15 months. See "Business--
Product Segments--Fixed Annuities." The Life Insurance segment, which accounted
for $67.2 million (or 20.5%) of the Company's operating income before federal
income tax expense in 1996, consists of insurance products, including variable
life insurance, that provide a death benefit and may also allow the customer to
build cash value on a tax-deferred basis.
BUSINESS STRATEGIES
The Company's objective is to continue its record of profitable growth by
following the strategies set forth below:
Enhance the Company's Leading Position in the Market for Variable
Annuities. The Company believes that the variable annuity business is
attractive because it generates fee income and requires significantly less
capital support than fixed annuities and life insurance. The Company also
believes, based on the aging of the U.S. population and recent increases in
sales of retirement savings products, that variable annuities will continue to
experience high rates of industry sales growth and that the Company possesses
distinct competitive advantages that will allow it to continue to benefit from
this anticipated growth. Some of the Company's most important advantages
include its innovative product offerings and strong relationships with
independent, well-known fund managers. For example, the Company's The Best of
America IV and The Best of America--America's Vision individual variable
annuity contracts allow the customer to choose from 36 investment options,
including mutual funds managed by a variety of well-known fund managers and the
Company. In the aggregate, the Company's group variable annuity products offer
over 100 underlying investment options. The Company works closely with its
investment managers and product distributors to adapt the Company's products
and services to changes in the retail and institutional marketplace.
Capture a Growing Share of Sales in all Distribution Channels. The Company's
broad distribution system permits it to offer its products across a wide range
of markets and customers. The Company continually seeks to gain a larger share
of each of its distributor's sales by offering products that are attractive to
its distributors from both a financial perspective and in helping the
distributor build relationships with its customers. In addition to providing
new products to its distributors, the Company seeks to increase sales in each
of its existing distribution channels by cross-selling those products not
currently offered through such channel. The Company also seeks to add new
distributors to its existing channels and regularly evaluates possible new
distribution channels. While many of the Company's competitors employ a variety
of distribution channels, the Company believes that few of its competitors have
a developed distribution system that is as broad as the Company's and that this
distinguishing characteristic provides the Company with an important
competitive advantage.
Maintain a Diverse Product Portfolio. The Company offers a diverse mix of
variable annuity, fixed annuity, mutual fund and life insurance products. Based
on its experience, the Company believes that demand for, and financial results
of, certain of these products are sensitive to stock market and/or interest
rate environments, while some products are relatively insensitive to such
factors. The Company emphasizes the sale and development of variable annuities,
which tend to experience higher sales growth when interest rates are low, and
fixed annuities, which tend to experience higher sales growth when interest
rates are high. The Company also sells traditional life insurance products
which it believes provide it with a stable source of revenues throughout
changing market conditions. The Company's strategy is to rely on a variety of
products, each of which may perform differently in given stock market and
interest rate environments, so that the Company will be able to grow profitably
in a variety of such environments.
Emphasize Payroll Deduction and Tax-Qualified and Group Annuities. To further
enable it to grow profitably in a variety of stock market and interest rate
environments, the Company concentrates on the sale of annuities through payroll
deductions and the sale of tax-qualified and group annuities. Annuities sold
through payroll deductions are somewhat insulated from charges in market
conditions because of the recurring nature of
5
<PAGE>
their deposits. In 1996, 38.2% of the Company's total annuity statutory
premiums and deposits were attributable to payroll deductions. Group annuities
and tax-qualified annuities are also somewhat insulated from changes in market
conditions because they usually are provided through employers as a voluntary
retirement benefit with a limited number of competing investment options. In
addition, tax-qualified annuities subject the customer to a tax penalty for
early withdrawal. Tax-qualified annuities accounted for 70.3% and group
annuities accounted for 43.6% of the Company's total annuity statutory premiums
and deposits in 1996.
Build on the Company's Brand Strength. The Company believes that the brand
names it uses in connection with its products, such as Nationwide and The Best
of America, are well-known and have a strong reputation in the financial
services market. The Company intends to extend its brand names across markets,
applying The Best of America name across many of its wholesale and retail
distribution channels. The Company believes that, as the numbers of products
and competitors in its markets grow, consumers, distributors, retirement plan
sponsors and other decision makers in the market for long-term savings and
retirement products will continue to emphasize nationally known brand names.
See "Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--Intercompany Agreement."
Continue Commitment to Technological Excellence. The Company has made and is
committed to continue making significant investments in information systems to
enable it to offer innovative products, to more effectively cross-sell products
across distribution channels and to offer high quality service. The information
systems that the Company has developed for its variable products are costly to
replicate. The Company believes that these systems provide it with a
significant competitive advantage and impose a barrier to entry for new
competitors.
PRINCIPAL STOCKHOLDER
Following the Equity Offerings, Nationwide Corp. will be the controlling
stockholder of the Company. Upon completion of the Equity Offerings, Nationwide
Corp. will own all of the outstanding shares of the Class B Common Stock, $0.01
par value, of the Company ("Class B Common Stock" and, together with Class A
Common Stock, the "Common Stock"), representing 83.6% and 98.1% (81.6% and
97.8% if the Underwriters' over-allotment option is exercised in full) of the
total number of shares of Common Stock outstanding and the combined voting
power of the stockholders of the Company, respectively. Nationwide Corp. is a
subsidiary of Nationwide Mutual. Nationwide Mutual and Nationwide Mutual Fire
Insurance Company ("Nationwide Mutual Fire") are mutual companies which are the
controlling entities of the Nationwide Insurance Enterprise. The Nationwide
Insurance Enterprise is an affiliated group of over 100 companies that offers a
wide range of insurance and investment products and services. Nationwide Mutual
and Nationwide Mutual Fire control the companies within the Nationwide
Insurance Enterprise through a variety of means, including security ownership,
management contracts and common directors. The Nationwide Insurance Enterprise
had $68.0 billion in total statutory assets as of December 31, 1996. See "Risk
Factors--Control by and Relationship with the Nationwide Insurance Enterprise;
Conflicts of Interest," "Recent History" and "Certain Relationships and Related
Transactions."
THE EQUITY OFFERINGS, THE NOTE OFFERING AND THE CAPITAL SECURITIES OFFERING
Prior to the Note Offering, the Company expects to consummate the Equity
Offerings, and, concurrently with the Note Offering, the NFS Trust expects to
consummate the Capital Securities Offering. The consummation of the Note
Offering is not conditioned on the completion of the Capital Securities
Offering. There can be no assurance that the Capital Securities Offering will
be consummated. See "Use of Proceeds" and "The Equity Offerings, the Note
Offering and the Capital Securities Offering." The Equity Offerings and the
Capital Securities Offering are being made pursuant to separate prospectuses.
----------------
The Company's executive offices are located at One Nationwide Plaza,
Columbus, Ohio 43215, and its telephone number is (614) 249-7111.
6
<PAGE>
THE NOTE OFFERING
Issue....................... $300 million aggregate principal amount of %
Senior Notes due 2027.
Maturity Date............... , 2027.
Interest Payment Dates...... Interest on the Notes will be payable in cash
semi-annually on and of each
year commencing , 1997.
Optional Redemption......... The Notes will not be redeemable at the option of
the Company at any time prior to , 2007.
Thereafter, the Notes may be redeemed in whole or
in part, at the option of the Company, at the
declining redemption prices set forth herein
plus, in each case, accrued and unpaid interest,
if any, to the redemption date. See "Description
of Notes--Optional Redemption."
Sinking Fund................ The Notes will not be subject to any sinking
fund.
Ranking..................... The Notes will be general unsecured obligations
of the Company and will rank pari passu in right
of payment with all other senior indebtedness of
the Company and senior in right of payment to all
subordinated indebtedness of the Company.
However, because the Notes will be unsecured,
they will be effectively subordinated to any
secured indebtedness of the Company. The
Indenture does not preclude the Company or the
Company's subsidiaries from issuing secured or
unsecured indebtedness. At December 31, 1996, the
Company and its subsidiaries had no outstanding
indebtedness. Because the Company is a holding
company, the Notes will be effectively
subordinated to all existing and future
liabilities and obligations, including
obligations to policyholders, of the Company's
subsidiaries, which totalled approximately $45.6
billion at December 31, 1996.
Listing..................... The Notes have been approved for listing on the
NYSE, subject to official notice of issuance.
Use of Proceeds............. The Company will contribute the $296.3 million
estimated net proceeds from the Note Offering to
the capital of Nationwide Life. Of the $426.6
million estimated net proceeds from the Equity
Offerings, the Company will contribute
approximately $371.6 million to the capital of
Nationwide Life and retain the balance for
general corporate purposes. All of the net
proceeds from the Capital Securities Offering
will be contributed by the Company to the capital
of Nationwide Life. See "Use of Proceeds" and
"The Equity Offerings, the Note Offering and the
Capital Securities Offering."
RISK FACTORS
Potential purchasers of the Notes offered hereby should carefully consider
the risk factors set forth herein under "Risk Factors" commencing on page 11,
as well as other information contained in this Prospectus.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data
for the Company. The consolidated income statement data set forth below for the
years ended December 31, 1992 through 1996 and the consolidated balance sheet
data as of December 31, 1992 through 1996 are derived from the consolidated
financial statements of the Company, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. Segment and Other Data
and Pro Forma Consolidated Balance Sheet Data appearing below are unaudited.
The summary consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto and the other financial information, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Total revenues.......... $ 2,016.6 $ 1,837.0 $ 1,634.1 $ 1,639.3 $ 1,405.6
Total benefits and
expenses............... 1,688.5 1,555.8 1,393.7 1,363.5 1,289.2
--------- --------- --------- --------- ---------
Income from continuing
operations before
federal income tax
expense and cumulative
effect of accounting
changes................ 328.1 281.2 240.4 275.8 116.4
Federal income tax
expense................ 115.8 96.3 82.5 96.7 32.1
--------- --------- --------- --------- ---------
Income from continuing
operations before
cumulative effect of
accounting changes..... 212.3 184.9 157.9 179.1 84.3
Income from discontinued
operations, net of
federal income tax
expense................ 11.3 24.7 20.5 28.6 2.1
--------- --------- --------- --------- ---------
Income before cumulative
effect of accounting
changes................ 223.6 209.6 178.4 207.7 86.4
Cumulative effect of
accounting changes, net
of federal income tax
benefit................ -- -- -- (0.1) --
--------- --------- --------- --------- ---------
Net income.............. $ 223.6 $ 209.6 $ 178.4 $ 207.6 $ 86.4
========= ========= ========= ========= =========
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $20,843.5 $19,915.0 $17,156.2 $15,697.5 $14,674.8
Separate account
assets................. 26,926.7 18,591.1 12,087.1 9,006.4 6,081.4
Total assets............ 47,770.2 38,506.1 29,243.3 24,703.9 20,756.2
Long-term debt.......... -- -- -- -- --
Total liabilities....... 45,638.5 35,889.4 27,382.7 23,094.3 19,358.6
Shareholder's
equity(1).............. 2,131.7 2,616.7 1,860.6 1,609.6 1,397.6
SEGMENT AND OTHER DATA:
Operating income (loss)
before income taxes by
segment(2):
Variable Annuities..... $ 90.3 $ 50.8 $ 24.6 $ 10.4 $ 13.1
Fixed Annuities........ 135.4 137.0 139.0 105.9 95.3
Life Insurance......... 67.2 67.6 53.0 49.7 46.1
Corporate and
Other(1)(3)........... 35.4 27.5 40.3 3.6 (18.7)
Policy reserves by
segment:
Variable Annuities(4).. 24,278.1 16,761.8 10,751.1 7,854.8 5,028.2
Fixed Annuities(4)..... 13,511.8 12,784.0 11,247.0 10,154.1 9,659.8
Life Insurance......... 2,938.9 2,660.5 2,425.2 2,255.0 2,084.8
Corporate and
Other(3).............. 3,302.5 2,644.3 2,252.7 2,103.9 1,823.0
Statutory premiums,
deposits and other
considerations by
product segment(5):
Variable Annuities(6).. 6,500.3 4,399.3 3,821.1 2,414.2 1,561.8
Fixed Annuities(6)..... 1,600.5 1,864.2 1,308.6 1,300.9 1,637.8
Life Insurance......... 439.3 352.4 320.8 279.4 264.7
Corporate and
Other(3).............. 502.6 182.1 148.5 205.3 91.7
Net operating
income(2).............. 211.3 184.8 168.2 109.7 97.0
Ratio of earnings to
fixed charges(7)....... 1.3x 1.3x 1.3x 1.3x 1.1x
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------
(DOLLARS IN MILLIONS)
<S> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA(8):
General account assets.................................. $19,993.5
Separate account assets................................. 26,926.7
Total assets............................................ 46,920.2
Long-term debt.......................................... --
Total liabilities....................................... 45,638.5
Shareholder's equity(1)................................. 1,281.7
</TABLE>
- --------
(1) The Company has received cash capital contributions and declared cash
dividends over the periods presented as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash capital
contributions............ $ -- $ -- $200.0 $100.0 $13.5
Cash dividends............ (52.0) (8.5) (1.0) (10.6) (4.6)
------- ------ ------ ------ -----
Net contributions......... $ (52.0) $ (8.5) $199.0 $ 89.4 $ 8.9
======= ====== ====== ====== =====
</TABLE>
The cash capital contributions and cash dividends and the related increases
and decreases to net investment income are recorded in the Corporate and
Other segment. The cash capital contributions and cash dividends had a
direct impact on the Company's shareholder's equity and the operating income
(loss) before federal income tax expense of the Corporate and Other segment.
(2) Excludes realized gains/(losses) on investments (net of related federal
income tax where applicable), discontinued operations and cumulative effect
of accounting changes.
(3) The Corporate and Other segment includes net investment income on
investments not allocated to the three product segments; all realized
investment gains and losses; investment management fees, other revenues and
operating expenses of Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments;
commissions and other income earned by the marketing and distribution
subsidiaries of the Company; and revenues, benefits and expenses associated
with group annuity contracts issued to Nationwide Insurance Enterprise
employee and agent benefit plans.
(4) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of December 31, 1996,
1995 and 1994, such amounts were $9.52 billion, $8.83 billion and $7.27
billion, respectively.
(5) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(6) Statutory premiums, deposits and other considerations related to the fixed
option under the Company's variable annuity contracts are included in Fixed
Annuities. For the years ended December 31, 1996, 1995 and 1994, such
amounts were $1.24 billion, $1.57 billion and $1.05 billion, respectively.
(7) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and cumulative
effect of accounting changes and fixed charges. Fixed charges consist of
interest expense on debt plus interest credited to policyholder account
balances. There was no interest expense on debt for any of the periods
presented.
(8) Pro forma to give effect to the Special Dividend totalling $850.0 million
as if the Special Dividend had occurred as of December 31, 1996. The
Special Dividend will have been paid by the Company prior to the completion
of the Equity Offerings.
9
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary pro forma consolidated financial data for the Company set forth
below give effect to the Special Dividend (as defined herein), the Equity
Offerings, the Note Offering, the Capital Securities Offering and, with respect
to Consolidated Income Statement Data only, the 1996 Cash Dividend (as defined
herein) as if they had been consummated at the beginning of the period
indicated or, in the case of the balance sheet data, as of the date indicated.
The summary pro forma consolidated financial data do not purport to reflect
what the Company's financial position or results of operations would actually
have been if the Special Dividend, the Equity Offerings, the Note Offering, the
Capital Securities Offering and the 1996 Cash Dividend had in fact occurred on
such dates nor should they be taken as indicative of the future results of
operations of the Company. The summary pro forma consolidated financial data
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto and the other financial information pertaining to
the Company included elsewhere herein. See "Recent History," "Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, 1996
-------------------------------
ACTUAL PRO FORMA(1)
------------- ----------------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Income from continuing operations..... $ 212.3 $ 148.0
Income from continuing operations per
common share(2)...................... 2.03 1.18
CONSOLIDATED BALANCE SHEET DATA:
General account assets................ $ 20,843.5 $ 20,820.1
Separate account assets............... 26,926.7 26,926.7
Total assets.......................... 47,770.2 47,746.8
Long-term debt........................ -- 300.0
Capital Securities(3)................. -- 100.0
Shareholders' equity.................. 2,131.7 1,708.3
Debt/capital ratio(4)................. -- 15.5%
Debt and Capital Securities/capital
ratio(4)............................. -- 20.7%
Book value per common share(2)........ $ 20.35 $ 13.64
Adjusted book value per common
share(2)(4).......................... 18.69 12.25
OTHER DATA:
Ratio of earnings to fixed
charges(5)........................... 1.3x 1.2x
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net proceeds
of $426.6 million from the issuance of 20,540,000 shares of Class A Common
Stock), (ii) the Special Dividend totalling $850.0 million which will have
been paid by the Company prior to the completion of the Equity Offerings,
(iii) the Note Offering and the Capital Securities Offering (assuming net
proceeds of $394.9 million from such offerings) and (iv) with respect to
Consolidated Income Statement Data only, the 1996 Cash Dividend totalling
$50.0 million which was paid by the Company on December 31, 1996. Results
reflect the reduction of $68.2 million of pre-tax net investment income for
the year ended December 31, 1996, as a result of the decrease in invested
assets of the Company from the 1996 Cash Dividend totalling $50.0 million
and the Special Dividend totalling $850.0 million. If this reduction were
partially offset by net investment income on the proceeds from the Equity
Offerings, the Note Offering and the Capital Securities Offering at an
assumed reinvestment rate of 7.5%, the net adjustment would be a reduction
of $6.6 million. The $300 million aggregate principal amount of the Notes
is assumed to bear interest at a rate of 7.5% per annum for the periods
indicated. The $100 million aggregate liquidation amount of the Capital
Securities is assumed to bear a distribution rate of 8.0% per annum for the
periods indicated. There can be no assurance that these will be the actual
rates borne by such instruments. An increase of 1.0% per annum on the
assumed interest rate on the Notes and on the assumed distribution rate on
the Capital Securities would result in an increase of $4.0 million to
interest expense for the year ended December 31, 1996. Interest expense
includes amortization of deferred issuance costs.
(2) Actual is based on 104,745,000 shares of Class B Common Stock outstanding.
Pro forma is based on 125,285,000 shares outstanding, which consists of
104,745,000 shares of Class B Common Stock and 20,540,000 Shares of Class A
Common Stock assumed to be issued in the Equity Offerings.
(3) The Capital Securities will be reflected separately in the Company's
consolidated financial statements as "Company-obligated mandatorily
redeemable capital securities of the Nationwide Financial Services Capital
Trust, holding solely junior subordinated debentures of Nationwide
Financial Services, Inc." with a footnote indicating that all of the Common
Securities of the NFS Trust, which are the only voting securities of the
NFS Trust, are owned by the Company, that the sole assets of the NFS Trust
are the junior subordinated debentures (indicating the principal amount,
interest rate and maturity date thereof) and that the NFS Trust's
obligations with respect to the Capital Securities, through the Company's
Guarantee, the junior subordinated debentures and the indenture with
respect thereto and the Declaration of Trust of the NFS Trust, taken
together, are fully and unconditionally guaranteed by the Company.
(4) Adjusted to exclude net unrealized gains and losses recorded in
shareholder's equity in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115").
(5) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and fixed charges.
Fixed charges consist of interest expense on debt plus interest credited to
policyholder account balances. There was no actual interest expense on debt
for the year ended December 31, 1996.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes offered hereby should consider carefully
the risk factors set forth below, as well as the other information set forth
in this Prospectus.
RANKING; HOLDING COMPANY STRUCTURE
The Notes will be general unsecured obligations of the Company and will rank
pari passu with all other senior indebtedness of the Company and senior to all
subordinated indebtedness of the Company. However, because the Notes will be
unsecured, they will be effectively subordinated to all secured indebtedness
of the Company.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of the creditors of such subsidiary, except to the extent the
Company may itself be recognized as a creditor of such subsidiary.
Accordingly, the Notes will be effectively subordinated to all existing and
future liabilities and obligations, including obligations to policyholders, of
the Company's subsidiaries which totalled approximately $45.6 billion at
December 31, 1996. Further, the Indenture does not preclude the Company's
subsidiaries from issuing secured or unsecured indebtedness. Holders of Notes
should look only to the assets of the Company for payments on the Notes.
LEVEL OF INDEBTEDNESS
Upon the consummation of the Note Offering and the Capital Securities
Offering, the Company will have outstanding $400.0 million of indebtedness. In
addition, the Company may incur additional indebtedness from time to time. The
degree to which the Company is leveraged could have important consequences to
holders of the Notes, including the following: (i) a portion of the Company's
cash flow from operations may be dedicated to the payment of interest on its
indebtedness and would not be available for other purposes; (ii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures or general corporate purposes may be impaired; and (iii)
a significant degree of leverage could make the Company more vulnerable to
changes in general economic conditions.
LIMITED COVENANTS
The Indenture does not contain any provisions specifically intended to
protect holders of the Notes in the event of a future highly leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving the Company. The Indenture does not contain any provision which will
restrict the Company from incurring, assuming or being liable with respect to
any indebtedness or other obligations, whether secured or unsecured, or from
paying dividends or making other distributions on its capital stock or
purchasing or redeeming its capital stock. The Indenture does not contain any
financial ratios or specified levels of net worth or liquidity to which the
Company must adhere. In addition, the Indenture does not contain any provision
which would require that the Company repurchase or redeem or otherwise modify
the terms of any of the Notes upon a change of control or other events
involving the Company which may adversely affect the creditworthiness of the
Notes. See "Description of Notes."
RESTRICTIONS ON DIVIDENDS
As an insurance holding company, the Company's ability to meet debt service
obligations, including payment of principal and interest on the Notes, and pay
operating expenses and dividends depends primarily on the receipt of
sufficient funds from its principal operating subsidiary, Nationwide Life. The
inability of Nationwide Life to pay dividends to the Company in an amount
sufficient to meet debt service obligations and pay operating expenses and
dividends would have a material adverse effect on the Company. The payment of
11
<PAGE>
dividends by Nationwide Life is subject to restrictions set forth in the
insurance laws and regulations of Ohio, its domiciliary state. The Ohio
insurance laws require Ohio-domiciled life insurance companies to seek prior
regulatory approval to pay a dividend or distribution of cash or other
property if the fair market value thereof, together with that of other
dividends or distributions made in the preceding 12 months, exceeds the
greater of (i) 10% of policyholders' surplus as of the prior December 31 or
(ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus. As a
result of the Special Dividend and the dividend by Nationwide Life of the
stock of certain subsidiaries that do not operate in the long-term savings and
retirement market, any dividend paid by Nationwide Life during the 12-month
period immediately following the Special Dividend would be an extraordinary
dividend under Ohio insurance laws. See "Recent History." Accordingly, no such
dividend could be paid without prior regulatory approval. The payment of
dividends by Nationwide Life may also be subject to restrictions set forth in
the insurance laws of New York that limit the amount of statutory profits on
Nationwide Life's participating policies (measured before dividends to
policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and stockholder
dividends and to meet its debt service obligations. The Company can give no
assurance, however, that any dividends will be declared or paid by Nationwide
Life. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--
Regulation--Regulation of Dividends and Other Payments from Insurance
Subsidiaries."
CONTROL BY AND RELATIONSHIP WITH THE NATIONWIDE INSURANCE ENTERPRISE;
CONFLICTS OF INTEREST
Control by Nationwide Corp.
The Company has two classes of common stock with different voting rights
that enable Nationwide Corp. (the holder of all of the outstanding Class B
Common Stock) to control the Company. On all matters submitted to a
stockholder vote, each share of Class A Common Stock is entitled to one vote
per share and each share of Class B Common Stock is entitled to ten votes per
share. Both classes vote together as a single class on all matters, subject to
certain exceptions described under "Description of Capital Stock." Upon any
transfer of shares of Class B Common Stock to a person other than a member of
the Nationwide Insurance Enterprise, such shares will convert automatically
into shares of Class A Common Stock. See "Description of Capital Stock."
Upon completion of the Equity Offerings, Nationwide Corp. will own all of
the outstanding shares of Class B Common Stock representing 83.6% and 98.1%
(81.6% and 97.8% if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock outstanding and the
combined voting power of the stockholders of the Company, respectively. For so
long as Nationwide Corp. and its affiliates (excluding the Company and its
subsidiaries) continue beneficially to own shares of Common Stock representing
more than 50% of the combined voting power of the stockholders of the Company,
Nationwide Corp. will control the Company, will be able to elect all of the
Company's directors and will be able to determine the outcome of corporate
actions requiring stockholder approval, including, among other things, the
adoption of amendments of the Certificate of Incorporation of the Company (the
"Certificate"), the approval of mergers and sales of all or substantially all
of the Company's assets, the incurrence of indebtedness in excess of specified
amounts, the issuance of additional Common Stock or other equity securities
and, with certain specified exceptions, the payment of dividends with respect
to the Common Stock. Pursuant to an intercompany agreement (the "Intercompany
Agreement") among Nationwide Mutual, Nationwide Corp. and the Company, until
such time as Nationwide Corp. and its affiliates no longer own at least 50% of
the combined voting power of the outstanding voting stock of the Company, the
prior written consent of Nationwide Mutual is required in connection with
these and other corporate actions. See "Certain Relationships and Related
Transactions--New Agreements with the Nationwide Insurance Enterprise--
Intercompany Agreement."
Use of Nationwide Insurance Enterprise Insurance Agents
Nationwide Mutual has informed the Company that it currently intends that
the Company will be its principal affiliate in the U.S. offering variable
annuity, fixed annuity and individual universal, variable and
12
<PAGE>
traditional life insurance products. In the Intercompany Agreement, Nationwide
Mutual has agreed that the Company has the exclusive right, subject to certain
limited exceptions, to distribute such products through Nationwide Insurance
Enterprise insurance agents for at least five years following the Equity
Offerings. Thereafter, the Intercompany Agreement provides that Nationwide
Mutual will have the option to terminate such right on one year's notice if
Nationwide Corp. and its affiliates no longer own at least 50% of the combined
voting power of the outstanding voting stock of the Company. The termination
of such right could have an adverse effect on the Company's ability to
distribute certain of its life insurance products. In 1996, 5.8% of the
Company's statutory premiums and deposits were attributable to products sold
by Nationwide Insurance Enterprise insurance agents. See "Certain
Relationships and Related Transactions--New Agreements with the Nationwide
Insurance Enterprise--Intercompany Agreement--Nationwide Insurance Enterprise
Insurance Agents."
Deconsolidation and Control of Tax Matters
Beneficial ownership of at least 80% of the combined voting power and value
of the outstanding capital stock of the Company is required in order for
Nationwide Mutual to continue to include the Company in its consolidated group
for federal income tax purposes. Either a sale by Nationwide Corp. of some of
its shares of Class B Common Stock to persons other than its affiliates or the
Company's issuance of additional shares of voting stock to persons other than
Nationwide Corp. or its affiliates (except the Company and its subsidiaries)
could cause Nationwide Corp.'s ownership of the combined voting power and
value of the outstanding capital stock of the Company to fall below 80%,
resulting in the loss of the ability of the Company and its domestic
subsidiaries to join with Nationwide Mutual and its domestic subsidiaries in
the filing of a consolidated federal income tax return. Under applicable law,
each member of Nationwide Mutual's consolidated tax group, which includes the
Company and its subsidiaries, is jointly and severally liable for the federal
income tax liability of each other member of the group and is also jointly and
severally liable for pension and benefit funding and termination liabilities
of other group members, and certain benefit plan taxes. If the Company were no
longer included in Nationwide Mutual's consolidated tax group for federal tax
purposes, there is no assurance that the Company's tax position would be as
favorable as it is at present. Additionally, deconsolidation would result in
the payment by the Company of approximately $54.0 million of deferred income
taxes. The Company has recorded this amount as a deferred tax liability and
therefore the payment would have no impact on net income or shareholders'
equity. However, the payment would result in a $54.0 million decrease in
Nationwide Life's statutory surplus. See "Certain Relationships and Related
Transactions--New Agreements with the Nationwide Insurance Enterprise--Tax
Sharing Agreement."
By virtue of its control of the Company and the terms of a tax sharing
agreement (the "Tax Sharing Agreement") among Nationwide Mutual and, among
others, the Company, Nationwide Mutual effectively will control all of the
Company's tax decisions. Under the Tax Sharing Agreement, Nationwide Mutual
will have sole authority to respond to and conduct all tax proceedings
(including tax audits) relating to the Company, to file all returns on behalf
of the Company and to determine the amount of the Company's liability to (or
entitlement to payment from) Nationwide Corp. under the Tax Sharing Agreement.
This arrangement may result in conflicts of interest between the Company and
Nationwide Mutual. For example, under the Tax Sharing Agreement, Nationwide
Mutual may choose to contest, compromise or settle any adjustment or
deficiency proposed by the relevant tax authority in a manner that may be
beneficial to Nationwide Mutual and detrimental to the Company. Under the Tax
Sharing Agreement, however, Nationwide Mutual is obligated to act in good
faith with regard to all persons included in the applicable returns. See
"Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--Tax Sharing Agreement."
Use of "Nationwide" Name and Certain Other Service Marks
Pursuant to the Intercompany Agreement, among other things, Nationwide
Mutual has granted to the Company and certain of its subsidiaries a non-
exclusive, non-assignable, revocable license to use the "Nationwide" name and
certain other service marks solely in connection with the Company's annuity,
pension and life insurance businesses and activities related to such
businesses. The Intercompany Agreement provides
13
<PAGE>
that, subject to Nationwide Mutual's right to revoke such license under
certain circumstances, such license will remain in effect for at least five
years following the Equity Offerings. Thereafter, the Intercompany Agreement
provides that, subject to certain exceptions, Nationwide Mutual will have the
option to revoke such license on one year's notice if Nationwide Corp. and its
affiliates no longer own at least 50% of the combined voting power of the
outstanding voting stock of the Company. Upon the revocation of such license,
the Company and any of its subsidiaries shall change their names to exclude
the word "Nationwide" and shall discontinue the use of the other licensed
service marks. The revocation of such license could have a material adverse
effect on the Company's ability to conduct its business. See "Certain
Relationships and Related Transactions--New Agreements with the Nationwide
Insurance Enterprise--Intercompany Agreement--License to Use Nationwide Name
and Service Marks." Nationwide Life owns "The Best of America" service mark
and does not license such mark from Nationwide Mutual.
Common Directors and Officers
The Company's Board of Directors currently consists of ten members, seven of
whom serve concurrently on the boards of directors of other companies within
the Nationwide Insurance Enterprise. In addition, a significant number of
officers of the Company also serve as officers of Nationwide Mutual or other
companies within the Nationwide Insurance Enterprise. Service as a director or
officer of both the Company and another company (other than a subsidiary of
the Company) within the Nationwide Insurance Enterprise could create or appear
to create potential conflicts of interest when the director or officer is
faced with decisions that could have different implications for the Company
and such other company. A conflict of interest could also exist with respect
to allocation of the time and attention of persons who are officers of both
the Company and one or more other companies within the Nationwide Insurance
Enterprise. Under Delaware law, directors and officers have a fiduciary duty
to act in good faith and in what they believe to be in the best interests of
the corporation and its stockholders. Such duties include the duty to refrain
from impermissible self-dealing and to deal fairly with respect to
transactions in which such directors or officers, or other companies with
which they are affiliated, have an interest. See "--Allocation of Corporate
Opportunities."
Intercompany Transactions
The Company has engaged in various transactions, and is party to various
arrangements, with members of the Nationwide Insurance Enterprise, certain of
which will continue after the consummation of the Note Offering. In the
future, the Company may enter into agreements with members of the Nationwide
Insurance Enterprise that will not be the result of arm's-length negotiations
between independent parties. Conflicts of interest could arise with respect to
transactions involving members of the Nationwide Insurance Enterprise, on the
one hand, and the Company, on the other hand. Any such transactions that are
material to the Company will be subject to approval by a vote of disinterested
members of the Company's Board of Directors. In addition, under Ohio insurance
holding company laws, future arrangements and agreements between the Company's
insurance subsidiaries and other members of the Nationwide Insurance
Enterprise must be fair and equitable and may be subject to the approval of
the Superintendent of Insurance of the State of Ohio. Finally, the Company's
credit facility requires that any transaction between the Company and any of
its affiliates be on an arm's-length basis on terms at least as favorable to
the Company as could have been obtained from a third party which is not an
affiliate. See "Business--Regulation," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources," and "Certain Relationships and Related Transactions."
Allocation of Corporate Opportunities
Nationwide Mutual has informed the Company that it currently intends that
the Company will be its principal affiliate in the U.S. offering variable
annuity, fixed annuity and individual universal, variable and traditional life
insurance products. However, conflicts may exist between the Company and other
members of the Nationwide Insurance Enterprise with respect to the allocation
of corporate opportunities among the Company and such other members. The
Certificate provides that members of the Nationwide Insurance
14
<PAGE>
Enterprise have no duty to refrain from engaging in the same or similar lines
of business as the Company. The Certificate further provides that in the event
a member of the Nationwide Insurance Enterprise or a director or officer of
the Company who is also a director or officer of another member of the
Nationwide Insurance Enterprise acquires knowledge of a potential transaction
or other matter that may constitute a corporate opportunity of either or both
the Company and another member of the Nationwide Insurance Enterprise, such
member of the Nationwide Insurance Enterprise, officer or director may
allocate such opportunity among the Company and the other members of the
Nationwide Insurance Enterprise as such member, officer or director deems
appropriate under the circumstances. The Certificate specifies that none of
the foregoing members, officers or directors will be liable to the Company or
any Stockholders of the Company for breach of any fiduciary duty by reason of
such action. These provisions may limit the liability of such persons under
Delaware law. See "Description of Capital Stock--Certain Certificate and Bylaw
Provisions--Certain Provisions Relating to Corporate Opportunities."
INTEREST RATE RISK
The Company's Fixed Annuities segment is subject to several inherent risks
arising from movements in interest rates. Interest rate changes can cause
compression of the Company's net spread between interest earned on investments
and interest credited on customer deposits, thereby adversely affecting the
Company's results. Interest rate changes can also produce an unanticipated
increase in transfers to separate account (variable) options or withdrawals of
the Company's fixed annuity products which may force the Company to sell
investment assets at a loss in order to fund such transfers or withdrawals.
The Company will experience spread compression when it is unable or chooses
not to maintain the same margin between its investment earnings and its
crediting rates. When interest rates rise, the Company may not be able to
replace the assets in its investment portfolio with higher-yielding assets
that will be necessary to fund the higher crediting rates necessary to keep
the products in its Fixed Annuities segment competitive. As a result, the
Company may experience either a decrease in sales and an increase in transfers
to separate account (variable) options or withdrawals (as described below) if
it chooses to maintain its spread by not raising its crediting rates, or
spread compression if it does increase its crediting rates. Conversely, when
interest rates fall, the Company would have to reinvest the cash received from
its investments (i.e., interest and payments of principal upon maturity or
redemption) in the lower-yielding instruments then available. If the Company
were unable (e.g., due to guaranteed minimum or fixed crediting rates or
limitations on the frequency of crediting rate resets) or chose not to reduce
the crediting rate on the products in its Fixed Annuities segment or acquire
relatively higher-risk securities yielding higher rates of return, spread
compression would occur.
If, as a result of interest rate increases, the Company were unable or chose
not to raise its crediting rates to keep them competitive, the Company may
experience an increase in transfers to separate account (variable) options or
withdrawals. If the Company lacked sufficient liquidity, the Company might
have to sell investment securities to fund associated payments. Because the
value of such securities would likely have decreased in response to the
increase in interest rates, the Company would realize a loss on the sales.
Although certain of the Company's products contain market value adjustment
features which approximate and transfer such loss to the customer if the
selected time horizon for the fixed return investment is terminated prior to
maturity, there can be no assurance that the Company would be fully insulated
from realizing any losses on sales of its securities. In addition, regardless
of whether the Company realizes an investment loss, the withdrawals would
produce a decrease in invested assets, with an adverse effect on future
earnings therefrom. Finally, premature withdrawals may also cause the Company
to accelerate amortization of deferred policy acquisition costs and value of
insurance in force which would otherwise be amortized over a longer period,
but the impact of such acceleration generally would be offset to some extent
by surrender charge fees.
INVESTMENT PORTFOLIO EXPOSURE
The Company's general account investment portfolio consists primarily of
investment grade fixed maturity securities. The fair value of these and the
Company's other general account invested assets fluctuates depending
15
<PAGE>
upon general economic and market conditions and the interest rate environment.
In general, the market value of the Company's general account fixed maturity
securities portfolio increases or decreases in inverse relationship with
fluctuations in interest rates. For example, if interest rates rise, the
Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by interest
rate changes. If interest rates decline, net investment income will decrease
if high-yielding fixed maturity investments mature or are sold and the
proceeds therefrom are reinvested in securities yielding a lower rate.
Mortgage backed securities ("MBSs"), including collateralized mortgage
obligations ("CMOs"), are subject to prepayment risks that vary with, among
other things, interest rates. Such securities accounted for approximately 30%
of the carrying value of the Company's general account fixed maturity
securities as of December 31, 1996. During periods of declining interest
rates, MBSs generally prepay faster as the underlying mortgages are prepaid
and refinanced by the borrowers in order to take advantage of the lower rates.
MBSs that have an amortized cost that is greater than par (i.e., purchased at
a premium) may incur a reduction in yield or a loss as a result of such
prepayments. In addition, during such periods, the Company will generally be
unable to reinvest the proceeds of any such prepayment at comparable yields.
Conversely, during periods of rising interest rates, prepayments generally
slow. MBSs that have an amortized value that is less than par (i.e., purchased
at a discount) may incur a decrease in yield or a loss as a result of slower
prepayments.
The Company attempts to mitigate the negative impact of interest rate
changes through asset/liability management, including purchasing non-callable
bonds where practical and investing in private placement bonds, mortgage loans
and mortgage-backed securities which provide prepayment protection. There can
be no assurance, however, that management will be able to manage successfully
the negative impact of interest rate changes. See "Business--Investments."
Additionally, the Company may, from time to time, for business, regulatory or
other reasons, elect or be required to sell certain of its general account
invested assets at a time when their fair values are less than their original
cost, resulting in realized capital losses, which would reduce net income.
The risk of fluctuations in market value of substantially all of the
Company's separate account assets is borne by the policyholders. The Company's
policy charges for administering such separate account assets, however, are
generally set as a percentage of such assets. Accordingly, fluctuations in the
market value of separate account assets may result in fluctuations in the
Company's revenue from policy charges.
REGULATION
The Company's insurance subsidiaries are subject to extensive regulation and
supervision in the jurisdictions in which they do business. Such regulations,
in addition to limiting the amount of dividends and other payments that can be
paid by the Company's insurance subsidiaries without prior approval, impose
restrictions on the amount and type of investments the Company's insurance
subsidiaries may hold. These regulations also affect many other aspects of the
Company's insurance subsidiaries' businesses, including risk-based capital
requirements, the type and amount of required asset valuation reserve accounts
and policy forms. These regulations are primarily intended to protect
policyholders rather than stockholders and other investors. The Company cannot
predict the effect that any proposed or future legislation may have on the
financial condition or results of operations of the Company and its insurance
subsidiaries. See "Business--Regulation."
COMPETITION
The Company competes with a large number of other insurers as well as non-
insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of which have greater financial resources, offer
alternative products and, with respect to other insurers, have higher ratings
than the Company. The Company believes that competition in the Company's lines
of business is based on price, product features, commission structure,
perceived financial strength, claims-paying ratings, service and name
recognition. National banks, with their preexisting customer bases for
financial services products, may pose increasing competition in the future to
insurers who sell annuities, including the Company, as a result of the U.S.
Supreme Court's 1994 decision in
16
<PAGE>
NationsBank of North Carolina v. Variable Annuity Life Insurance Company,
which permits national banks to sell annuity products of life insurance
companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made
by members of Congress and the Clinton Administration. Currently, the Bank
Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not
possible to predict whether any of these proposals will be enacted, or, if
enacted, their potential effect on the Company. See "Business--Competition."
RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive
position of insurance companies. Ratings are important to maintaining public
confidence in the Company and its ability to market its annuity and life
insurance products. Rating organizations continually review the financial
performance and condition of insurers, including the Company. Any lowering of
the Company's ratings could have a material adverse effect on the Company's
ability to market its products and could increase the surrender of the
Company's annuity products. Both of these consequences could, depending upon
the extent thereof, have a material adverse effect on the Company's liquidity
and, under certain circumstances, net income. Nationwide Life is rated "A+"
(Superior) by A.M. Best and its claims-paying ability is rated "Aa2"
(Excellent) by Moody's Investors Service, Inc. ("Moody's") and "AA+"
(Excellent) by Standard & Poor's Corporation ("S&P"). Moody's recently
confirmed and S&P recently affirmed Nationwide Life's claims-paying ability
rating with a negative outlook. Such ratings reflect the rating agency's
opinion of Nationwide Life's financial strength, operating performance and
ability to meet its obligations to policyholders and are not evaluations
directed toward the protection of investors. Such factors are of concern to
policyholders, agents and intermediaries. Such ratings should not be relied
upon when making a decision to invest in the Notes. See "Business--Ratings."
SALES PRACTICE LITIGATION
In recent years, life insurance companies have been named as defendants in
lawsuits, including class actions, relating to life insurance pricing and
sales practices. A number of these lawsuits have resulted in substantial jury
awards or settlements. Nationwide Life has been named in two lawsuits,
including one in which the plaintiff seeks to represent a national class,
related to the sale of whole life policies on a "vanishing premium" basis.
There can be no assurance that any future litigation relating to pricing and
sales practices will not have a material adverse effect on the Company. See
"Business--Legal Proceedings."
FEDERAL INCOME TAX LEGISLATION
Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on the accumulated tax-
deferred earnings when such earnings are actually paid. Congress has, from
time to time, considered possible legislation that would eliminate the
deferral of taxation on the accretion of value within certain annuities and
life insurance products. The 1994 United States Supreme Court ruling in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company that
annuities are not insurance for purposes of the National Bank Act may cause
Congress to consider legislation that would eliminate such tax deferral at
least for certain annuities. Other possible legislation, including a
simplified "flat tax" income tax structure with an exemption from taxation for
investment income, could also adversely affect purchases of annuities and life
insurance if such legislation were to be enacted. There can be no assurance as
to whether legislation will be enacted which would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
See "Business--Regulation--Potential Tax Legislation."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Note Offering (after deduction of
underwriting discounts and commissions and estimated offering expenses payable
by the Company in connection therewith) are estimated to be $296.3 million.
The net proceeds to the Company from the Equity Offerings (after deduction of
underwriting discounts and commissions and estimated offering expenses payable
by the Company in connection therewith) are estimated to be $426.6 million.
The net proceeds to the Company from the sale of the Capital Securities (after
deduction of underwriting discounts and commissions and estimated offering
expenses payable by the Company in connection therewith) are estimated to be
$98.6 million. All of the net proceeds from the Note Offering will be
contributed by the Company to Nationwide Life. Of the $426.6 million estimated
net proceeds to the Company from the Equity Offerings, the Company will
contribute approximately $371.6 million to the capital of Nationwide Life and
retain the balance for general corporate purposes. The Company expects to
contribute all of the net proceeds from the Capital Securities Offering to the
capital of Nationwide Life.
RECENT HISTORY
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. On January 27,
1997, Nationwide Corp. contributed to the Company all of the outstanding
capital stock of Nationwide Life and the other companies within the Nationwide
Insurance Enterprise that offer or distribute long-term savings and retirement
products. The historical financial information contained in this Prospectus
gives effect to such contribution to the Company.
In anticipation of the Equity Offerings, Nationwide Life effected the
following transactions: (i) on September 24, 1996, the Board of Directors of
Nationwide Life declared a dividend to Nationwide Corp. consisting of the
stock of those subsidiaries of Nationwide Life that do not operate in the
long-term savings and retirement market and (ii) effective January 1, 1996,
Nationwide Life reinsured all of its accident and health and group life
insurance business to other members of the Nationwide Insurance Enterprise.
The historical financial information contained in this Prospectus does not
give effect to the dividend of such subsidiaries or such reinsurance. Such
subsidiaries and the accident and health and group life insurance business
have been accounted for herein as discontinued operations.
On December 31, 1996, Nationwide Life paid a $50.0 million cash dividend to
Nationwide Corp. (the "1996 Cash Dividend"). In addition, prior to the
consummation of the Equity Offerings, Nationwide Life will dividend to the
Company, and the Company will subsequently dividend to Nationwide Corp.,
securities having an aggregate market value of $850.0 million (the "Special
Dividend"). The historical financial information contained in this Prospectus
does not give effect to the Special Dividend, except where indicated in pro
forma presentations. See "Certain Relationships and Related Transactions--
Existing Arrangements with the Nationwide Insurance Enterprise--Organization
of the Company" and "--Modified Coinsurance Agreements."
Following the Equity Offerings, Nationwide Corp. will be the controlling
stockholder of the Company. Upon completion of the Equity Offerings,
Nationwide Corp. will own all of the outstanding shares of the Class B Common
Stock, representing 83.6% and 98.1% (81.6% and 97.8% if the Underwriters'
over-allotment option is exercised in full) of the total number of shares of
Common Stock outstanding and the combined voting power of the stockholders of
the Company. Nationwide Corp. is a subsidiary of Nationwide Mutual. Nationwide
Mutual and Nationwide Mutual Fire are mutual companies which are the
controlling entities of the Nationwide Insurance Enterprise. The Nationwide
Insurance Enterprise is an affiliated group of over 100 companies that offers
a wide range of insurance and investment products and services. Nationwide
Mutual and Nationwide Mutual Fire control the companies within the Nationwide
Insurance Enterprise through a variety of means, including security ownership,
management contracts and common directors. The Nationwide Insurance Enterprise
had $68.0 billion in total statutory assets as of December 31, 1996. See "Risk
Factors--Control by and Relationship with the Nationwide Insurance Enterprise;
Conflicts of Interest" and "Certain Relationships and Related Transactions."
18
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the Special Dividend, (iii) the pro forma
capitalization of the Company after giving effect to the Special Dividend and
the Equity Offerings (assuming net proceeds of $426.6 million from the
issuance of 20,540,000 shares of Class A Common Stock), (iv) the pro forma
capitalization of the Company after giving effect to the Special Dividend, the
Equity Offerings and the Note Offering, (v) the pro forma capitalization of
the Company after giving effect to the Special Dividend, the Equity Offerings
and the Capital Securities Offering and (vi) the pro forma capitalization of
the Company after giving effect to the Special Dividend, the Equity Offerings,
the Note Offering and the Capital Securities Offering. This table should be
read in conjunction with the consolidated financial statements of the Company
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------------------------
PRO FORMA
FOR THE
PRO FORMA PRO FORMA SPECIAL
FOR THE FOR THE DIVIDEND,
SPECIAL SPECIAL THE EQUITY
PRO FORMA DIVIDEND, DIVIDEND, OFFERINGS,
FOR THE THE THE EQUITY THE NOTE
SPECIAL EQUITY OFFERINGS OFFERING
PRO FORMA DIVIDEND OFFERINGS AND THE AND THE
FOR THE AND THE AND THE CAPITAL CAPITAL
SPECIAL EQUITY NOTE SECURITIES SECURITIES
ACTUAL DIVIDEND OFFERINGS OFFERING OFFERING OFFERING
-------- --------- --------- --------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Notes................... $ -- $ -- $ -- $ 300.0 $ -- $ 300.0
Company-obligated
mandatorily redeemable
capital securities of
the Nationwide
Financial Services
Capital Trust, holding
solely junior
subordinated debentures
of Nationwide Financial
Services, Inc.(1)...... -- -- -- -- 100.0 100.0
Shareholders' equity:
Preferred stock, $0.01
par value; 50,000,000
shares authorized; no
shares issued and
outstanding.......... -- -- -- -- -- --
Class A Common Stock,
$0.01 par value;
750,000,000 shares
authorized(2)........ -- -- 0.2 0.2 0.2 0.2
Class B Common Stock,
$0.01 par value;
750,000,000 shares
authorized(3) ....... 1.0 1.0 1.0 1.0 1.0 1.0
Additional paid-in
capital.............. 551.5 551.5 977.9 977.9 977.9 977.9
Unrealized gains on
securities available-
for-sale, net........ 173.6 173.6 173.6 173.6 173.6 173.6
Retained earnings..... 1,405.6 555.6 555.6 555.6 555.6 555.6
-------- -------- -------- -------- -------- --------
Total shareholders'
equity............... 2,131.7 1,281.7 1,708.3 1,708.3 1,708.3 1,708.3
-------- -------- -------- -------- -------- --------
Total capitalization.. $2,131.7 $1,281.7 $1,708.3 $2,008.3 $1,808.3 $2,108.3
======== ======== ======== ======== ======== ========
Debt/capital ratio(4)... -- % -- % -- % 16.4% -- % 15.5%
Debt and Capital
Securities/capital
ratio(4)............... -- -- -- 16.4 6.1 20.7
Book value per common
share(2)(3)............ $ 20.35 $ 12.24 $ 13.64 $ 13.64 $ 13.64 $ 13.64
Adjusted book value per
common share(2)(3)(4).. 18.69 10.58 12.25 12.25 12.25 12.25
</TABLE>
- --------
(1) The Capital Securities will be reflected separately in the Company's
consolidated financial statements as "Company-obligated mandatorily
redeemable capital securities of the Nationwide Financial Services Capital
Trust, holding solely junior subordinated debentures of Nationwide
Financial Services, Inc." with a footnote indicating that all of the
Common Securities of the NFS Trust, which are the only voting securities
of the NFS Trust, are owned by the Company, that the sole assets of the
NFS Trust are the junior subordinated debentures (indicating the principal
amount, interest rate and maturity date thereof), and that the NFS Trust's
obligations with respect to the Capital Securities, through the Company's
Guarantee, the junior subordinated debentures and the indenture with
respect thereto and the Declaration of Trust of the NFS Trust, taken
together, are fully and unconditionally guaranteed by the Company.
(2) Based on no shares of Class A Common Stock outstanding for "Actual" and
"Pro Forma for the Special Dividend" columns and 20,540,000 shares of
Class A Common Stock outstanding for all other columns.
(3) Based on 104,745,000 shares of Class B Common Stock outstanding for all
columns.
(4) Adjusted to exclude net unrealized gains on securities available-for-sale
in accordance with SFAS 115.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
for the Company. The consolidated income statement data set forth below for
the years ended December 31, 1992 through 1996 and the consolidated balance
sheet data as of December 31, 1992 through 1996 are derived from the
consolidated financial statements of the Company, which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. Segment and
Other Data and Pro Forma Consolidated Balance Sheet Data appearing below are
unaudited. The selected consolidated financial data set forth below should be
read in conjunction with the consolidated financial statements of the Company
and the notes thereto and the other financial information, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 400.9 $ 286.6 $ 217.2 $ 165.5 $ 131.3
Life insurance
premiums.............. 198.6 199.1 176.7 188.4 200.2
Net investment income.. 1,357.8 1,294.0 1,210.8 1,131.2 1,049.4
Realized gains/(losses)
on investments........ (0.2) (1.7) (16.5) 106.2 (19.4)
Other income........... 59.5 59.0 45.9 48.1 44.1
--------- --------- --------- --------- ---------
Total revenues......... 2,016.6 1,837.0 1,634.1 1,639.3 1,405.6
--------- --------- --------- --------- ---------
Benefits and expenses:
Benefits and claims.... 1,160.6 1,115.4 992.7 982.2 966.3
Policyholder
dividends............. 41.0 39.9 38.8 43.0 45.7
Amortization of
deferred policy
acquisition costs..... 133.4 82.7 85.6 70.2 49.2
Operating expenses..... 353.5 317.8 276.6 268.2 228.0
--------- --------- --------- --------- ---------
Total benefits and ex-
penses................ 1,688.5 1,555.8 1,393.7 1,363.5 1,289.2
--------- --------- --------- --------- ---------
Income from continuing
operations before
federal income tax
expense and cumulative
effect of accounting
changes................ 328.1 281.2 240.4 275.8 116.4
Federal income tax
expense................ 115.8 96.3 82.5 96.7 32.1
--------- --------- --------- --------- ---------
Income from continuing
operations before
cumulative effect of
accounting changes..... 212.3 184.9 157.9 179.1 84.3
Income from discontinued
operations, net of
federal income tax
expense................ 11.3 24.7 20.5 28.6 2.1
--------- --------- --------- --------- ---------
Income before cumulative
effect of accounting
changes................ 223.6 209.6 178.4 207.7 86.4
Cumulative effect of
accounting changes, net
of federal income tax
benefit................ -- -- -- (0.1) --
--------- --------- --------- --------- ---------
Net income............. $ 223.6 $ 209.6 $ 178.4 $ 207.6 $ 86.4
========= ========= ========= ========= =========
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $20,843.5 $19,915.0 $17,156.2 $15,697.5 $14,674.8
Separate account
assets................. 26,926.7 18,591.1 12,087.1 9,006.4 6,081.4
Total assets............ 47,770.2 38,506.1 29,243.3 24,703.9 20,756.2
Long-term debt.......... -- -- -- -- --
Total liabilities....... 45,638.5 35,889.4 27,382.7 23,094.3 19,358.6
Shareholder's
equity(1).............. 2,131.7 2,616.7 1,860.6 1,609.6 1,397.6
SEGMENT AND OTHER DATA:
Operating income (loss)
before federal income
tax expense by
segment(2):
Variable Annuities..... $ 90.3 $ 50.8 $ 24.6 $ 10.4 $ 13.1
Fixed Annuities........ 135.4 137.0 139.0 105.9 95.3
Life Insurance......... 67.2 67.6 53.0 49.7 46.1
Corporate and
Other(1)(3)........... 35.4 27.5 40.3 3.6 (18.7)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Policy reserves by seg-
ment:
Variable Annuities(4).. $24,278.1 $16,761.8 $10,751.1 $ 7,854.8 $5,028.2
Fixed Annuities(4)..... 13,511.8 12,784.0 11,247.0 10,154.1 9,659.8
Life Insurance......... 2,938.9 2,660.5 2,425.2 2,255.0 2,084.8
Corporate and
Other(3).............. 3,302.5 2,644.3 2,252.7 2,103.9 1,823.0
Statutory premiums,
deposits and other
considerations by
product segment(5):
Variable Annuities(6).. 6,500.3 4,399.3 3,821.1 2,414.2 1,561.8
Fixed Annuities(6)..... 1,600.5 1,864.2 1,308.6 1,300.9 1,637.8
Life Insurance......... 439.3 352.4 320.8 279.4 264.7
Corporate and Oth-
er(3)................. 502.6 182.1 148.5 205.3 91.7
Net operating
income(2).............. 211.3 184.8 168.2 109.7 97.0
Ratio of earnings to
fixed charges(7)....... 1.3x 1.3x 1.3x 1.3x 1.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------
(DOLLARS IN MILLIONS)
<S> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA(8):
General account assets.................................. $19,993.5
Separate account assets................................. 26,926.7
Total assets............................................ 46,920.2
Long-term debt.......................................... --
Total liabilities....................................... 45,638.5
Shareholder's equity(1)................................. 1,281.7
</TABLE>
- --------
(1) The Company has received cash capital contributions and declared cash
dividends over the periods presented as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
------ ----- ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash capital contributions.... $ -- $ -- $200.0 $100.0 $13.5
Cash dividends................ (52.0) (8.5) (1.0) (10.6) (4.6)
------ ----- ------ ------ -----
Net contributions............. $(52.0) $(8.5) $199.0 $ 89.4 $ 8.9
====== ===== ====== ====== =====
</TABLE>
The cash capital contributions and cash dividends and the related increases
and decreases to net investment income are recorded in the Corporate and
Other segment. The cash capital contributions and cash dividends had a
direct impact on the Company's shareholder's equity and the operating income
(loss) before federal income tax expense of the Corporate and Other segment.
(2) Excludes realized gains/(losses) on investments (net of related federal
income tax where applicable), discontinued operations and cumulative
effect of accounting changes.
(3) The Corporate and Other segment includes net investment income on
investments not allocated to the three product segments; all realized
investment gains and losses; investment management fees; other revenues
and operating expenses of Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments;
commissions and other income earned by the marketing and distribution
subsidiaries of the Company; and revenues, benefits and expenses
associated with growth annuity contracts issued to Nationwide Insurance
Enterprise employee and agent benefit plans.
(4) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of December 31,
1996, 1995 and 1994, such amounts were $9.52 billion, $8.83 billion and
$7.27 billion, respectively.
(5) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(6) Statutory premiums, deposits and other considerations related to the fixed
option under the Company's variable annuity contracts are included in
Fixed Annuities. For the years ended December 31, 1996, 1995 and 1994,
such amounts were $1.24 billion, $1.57 billion and $1.05 billion,
respectively.
(7) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and cumulative
effect of accounting changes and fixed charges. Fixed charges consist of
interest expense on debt plus interest credited to policyholder account
balances. There was no interest expense on debt for any of the periods
presented.
(8) Pro forma to give effect to the Special Dividend totalling $850.0 million
as if the Special Dividend had occurred as of December 31, 1996. The
Special Dividend will have been paid by the Company prior to the
completion of the Equity Offerings.
21
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The pro forma consolidated financial data for the Company set forth in the
tables below give effect to (i) the Special Dividend, the Equity Offerings,
the Note Offering and the Capital Securities Offering, (ii) the Special
Dividend and the Equity Offerings, (iii) the Special Dividend, the Equity
Offerings and the Note Offering and (iv) the Special Dividend, the Equity
Offerings and the Capital Securities Offering. The Consolidated Income
Statement Data and Other Data set forth in the tables below also give effect
to the 1996 Cash Dividend. The tables below are presented as if each of the
Special Dividend, the Equity Offerings, the Note Offering, the Capital
Securities Offering and the 1996 Cash Dividend, as applicable, had been
consummated at the beginning of the period indicated or, in the case of the
balance sheet data, as of the date indicated. The pro forma financial data do
not purport to reflect what the Company's financial position or results of
operations would actually have been if any or all of the Equity Offerings, the
Special Dividend, the Note Offering, the Capital Securities Offering and the
1996 Cash Dividend had in fact occurred on such dates nor should they be taken
as indicative of the future results of operations of the Company. The pro
forma consolidated financial information should be read in conjunction with
the consolidated financial statements of the Company and the notes thereto and
the other financial information pertaining to the Company included elsewhere
herein. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PRO FORMA FOR THE SPECIAL DIVIDEND, THE EQUITY OFFERINGS, THE NOTE OFFERING,
THE CAPITAL SECURITIES OFFERING AND, WITH RESPECT TO CONSOLIDATED INCOME
STATEMENT DATA AND OTHER DATA ONLY, THE 1996 CASH DIVIDEND
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
-------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Revenues:
Policy charges........................... $ 400.9 $ -- $ 400.9
Life insurance premiums.................. 198.6 -- 198.6
Net investment income.................... 1,357.8 (68)(2) 1,289.6
Realized losses on investments........... (0.2) -- (0.2)
Other income............................. 59.5 -- 59.5
-------- ------- --------
Total revenues.......................... 2,016.6 (68) 1,948.4
-------- ------- --------
Benefits and Expenses:
Benefits and claims...................... 1,160.6 -- 1,160.6
Policyholder dividends................... 41.0 -- 41.0
Amortization of deferred policy acquisi-
tion costs.............................. 133.4 -- 133.4
Operating expenses....................... 353.5 -- 353.5
Interest expense......................... -- 30.7 (3) 30.7
-------- ------- --------
Total benefits and expenses............. 1,688.5 30.7 1,719.2
-------- ------- --------
Income from continuing operations before
federal income tax expense............... 328.1 (98.9) 229.2
Federal income tax expense................ 115.8 (34.6)(4) 81.2
-------- ------- --------
Income from continuing operations..... $ 212.3 $ (64.3) $ 148.0
======== ======= ========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
------------- -------------- ---------------
(DOLLARS IN MILLIONS, EXCEPT PER DATA)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
General account assets....... $ 20,843.5 $ (23.4)(5) $ 20,820.1
Separate account assets...... 26,926.7 -- 26,926.7
Total assets................. 47,770.2 (23.4) 47,746.8
Long-term debt............... -- 300.0 (6) 300.0
Capital Securities........... -- 100.0 (7) 100.0
Shareholders' equity......... 2,131.7 (423.4)(8) 1,708.3
OTHER DATA:
Net operating income (9)..... $ 211.3 $ (64.3) $ 147.0
Realized gains/(losses) on
investments, net of tax..... 1.0 -- 1.0
------------- ---------- -------------
Income from continuing oper-
ations..................... $ 212.3 $ (64.3) $ 148.0
============= ========== =============
Income from continuing oper-
ations per common share
(10)....................... $ 2.03 $ 1.18
============= =============
Ratio of earnings to fixed
charges (11)................ 1.3x 1.2x
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $426.6 million and the issuance of 20,540,000 shares of Class
A Common Stock), (ii) the Special Dividend totalling $850.0 million which
will have been paid by the Company prior to the completion of the Equity
Offerings, (iii) the Note Offering and the Capital Securities Offering
(assuming net proceeds of $394.9 million from such offerings) and (iv)
with respect to Consolidated Income Statement Data and Other Data only,
the 1996 Cash Dividend totalling $50.0 million which was paid by the
Company on December 31, 1996.
(2) Reduction in net investment income on the 1996 Cash Dividend Special
Dividend at an assumed rate of 7.5%. If this reduction were partially
offset by net investment income on the proceeds from the Equity Offerings,
the Note Offering and the Capital Securities Offering at an assumed
reinvestment rate of 7.5%, the net adjustment would be a reduction of $6.6
million, resulting in pro forma net operating income of $187.0 million.
(3) The $300 million aggregate principal amount of Notes is assumed to bear
interest at a rate of 7.5% per annum for the period indicated. The $100
million aggregate liquidation amount of the Capital Securities is assumed
to bear a distribution rate of 8.0% per annum for the period indicated.
There can be no assurance that these will be the actual rates borne by
such instruments. An increase of 1.0% per annum on the assumed interest
rate on the Notes and on the assumed distribution rate on the Capital
Securities would result in an increase of $4.0 million to interest expense
for the year ended December 31, 1996. Interest expense includes
amortization of deferred issuance costs.
(4) Income tax effect of the pro forma adjustments at the statutory rate.
(5) The excess of the Special Dividend over the proceeds from the Equity
Offerings, the Note Offering and the Capital Securities Offering. Also
included are capitalized issuance costs.
(6) Represents aggregate principal amount of Notes.
(7) The Capital Securities will be reflected separately in the Company's
consolidated financial statements as "Company-obligated mandatorily
redeemable capital securities of the Nationwide Financial Services Capital
Trust, holding solely junior subordinated debentures of Nationwide
Financial Services, Inc." with a footnote indicating that all of the
Common Securities of the NFS Trust, which are the only voting securities
of the NFS Trust, are owned by the Company, that the sole assets of the
NFS Trust are the junior subordinated debentures (indicating the principal
amount, interest rate and maturity date thereof) and that the NFS Trust's
obligations with respect to the Capital Securities, through the Company's
Guarantee, the junior subordinated debentures and the indenture with
respect thereto and the Declaration of Trust of the NFS Trust, taken
together are fully and unconditionally guaranteed by the Company.
(8) The excess of the Special Dividend over the proceeds from the Equity
Offerings.
(9) Excludes realized gains/(losses) on investments (net of related federal
income tax) and discontinued operations.
(10) Actual based on 104,745,000 shares of Class B Common Stock outstanding.
Pro forma is based on 125,285,000 shares outstanding, which consists of
104,745,000 shares of Class B Common Stock and 20,540,000 shares of Class
A Common Stock assumed to be issued in the Equity Offerings.
(11) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and fixed
charges. Fixed charges consist of interest expense on debt plus interest
credited to policyholder account balances. There was no actual interest
expense on debt for the year ended December 31, 1996.
23
<PAGE>
PRO FORMA FOR THE SPECIAL DIVIDEND, THE EQUITY OFFERINGS AND, WITH RESPECT TO
CONSOLIDATED INCOME STATEMENT DATA AND OTHER DATA ONLY, THE 1996 CASH DIVIDEND
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, 1996
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 400.9 $ -- $ 400.9
Life insurance premi-
ums................... 198.6 -- 198.6
Net investment income.. 1,357.8 (67.5)(2) 1,290.3
Realized losses on in-
vestments............. (0.2) -- (0.2)
Other income........... 59.5 -- 59.5
--------- ------- ---------
Total revenues........ 2,016.6 (67.5) 1,949.1
--------- ------- ---------
Benefits and Expenses:
Benefits and claims.... 1,160.6 -- 1,160.6
Policyholder divi-
dends................. 41.0 -- 41.0
Amortization of de-
ferred policy acquisi-
tion costs............ 133.4 -- 133.4
Operating expenses..... 353.5 -- 353.5
Interest expense....... -- -- --
--------- ------- ---------
Total benefits and ex-
penses............... 1,688.5 -- 1,688.5
--------- ------- ---------
Income from continuing
operations before fed-
eral income tax ex-
pense.................. 328.1 (67.5) 260.6
Federal income tax ex-
pense.................. 115.8 (23.6)(3) 92.2
--------- ------- ---------
Income from continuing
operations .......... $ 212.3 $ (43.9) $ 168.4
========= ======= =========
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $20,843.5 $(423.4)(4) $20,420.1
Separate account as-
sets................... 26,926.7 -- 26,926.7
Total assets............ 47,770.2 (423.4) 47,346.8
Long-term debt.......... -- -- --
Capital Securities...... -- -- --
Shareholders' equity.... 2,131.7 (423.4)(4) 1,708.3
OTHER DATA:
Net operating income
(5).................... $ 211.3 $ (43.9) $ 167.4
Realized gains/(losses)
on investments, net of
tax.................... 1.0 -- 1.0
--------- ------- ---------
Income from continuing
operations........... $ 212.3 $ (43.9) $ 168.4
========= ======= =========
Income from continuing
operations per common
share (6)............ $ 2.03 $ 1.34
========= =========
Ratio of earnings to
fixed charges (7)...... 1.3x 1.3x
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $426.6 million and the issuance of 20,540,000 shares of Class
A Common Stock), (ii) the Special Dividend totalling $850.0 million which
will have been paid by the Company prior to the completion of the Equity
Offerings and (iii) with respect to Consolidated Income Statement Data and
Other Data only, the 1996 Cash Dividend totalling $50.0 million which was
paid by the Company on December 31, 1996.
(2) Reduction in net investment income on the 1996 Cash Dividend and the
Special Dividend at an assumed rate of 7.5%. If this reduction were
partially offset by net investment income on the proceeds from the Equity
Offerings at an assumed reinvestment rate of 7.5%, the net adjustment
would be a reduction of $35.5 million, resulting in net operating income
of $188.2 million.
(3) Income tax effect of the pro forma adjustments at the statutory rate.
(4) The excess of the Special Dividend over the proceeds from the Equity
Offerings.
(5) Excludes realized gains/(losses) on investments (net of related federal
income tax) and discontinued operations.
(6) Actual is based on 104,745,000 shares of Class B Common Stock outstanding.
Pro forma based on 125,285,000 shares outstanding, which consists of
104,745,000 shares of Class B Common Stock and 20,540,000 shares of Class
A Common Stock assumed to be issued in the Equity Offerings.
(7) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and fixed charges.
Fixed charges consist of interest expense on debt plus interest credited
to policyholder account balances. There was no actual interest expense on
debt for the year ended December 31, 1996.
24
<PAGE>
PRO FORMA FOR THE SPECIAL DIVIDEND, THE EQUITY OFFERINGS, THE NOTE OFFERING
AND, WITH RESPECT TO CONSOLIDATED INCOME STATEMENT DATA AND OTHER DATA ONLY,
THE 1996 CASH DIVIDEND
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------------- ---------------- -----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 400.9 $ -- $ 400.9
Life insurance
premiums.............. 198.6 -- 198.6
Net investment income.. 1,357.8 (68.1)(2) 1,289.7
Realized losses on
investments........... (0.2) -- (0.2)
Other income........... 59.5 -- 59.5
--------------- ------------- ---------------
Total revenues....... 2,016.6 (68.1) 1,948.5
--------------- ------------- ---------------
Benefits and Expenses:
Benefits and claims.... 1,160.6 -- 1,160.6
Policyholder
dividends............. 41.0 -- 41.0
Amortization of
deferred policy
acquisition costs..... 133.4 -- 133.4
Operating expenses..... 353.5 -- 353.5
Interest expense....... -- 22.6 (3) 22.6
--------------- ------------- ---------------
Total benefits and
expenses............ 1,688.5 22.6 1,711.1
--------------- ------------- ---------------
Income from continuing
operations before
federal income tax
expense................ 328.1 (90.7) 37.4
Federal for income tax
expense................ 115.8 (31.7)(4) 84.1
--------------- ------------- ---------------
Income from
continuing
operations.......... $ 212.3 $ (59.0) $ 153.3
=============== ============= ===============
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $ 20,843.5 $ (123.4)(5) $ 20,720.1
Separate accounts
assets................. 26,926.7 -- 26,926.7
Total assets............ 47,770.2 (123.4) 47,646.8
Long-term debt.......... -- 300.0 (6) 300.0
Capital Securities...... -- -- --
Shareholders' equity.... 2,131.7 (423.4)(7) 1,708.3
OTHER DATA:
Net operating income
(8).................... $ 211.3 $ (59.0) $ 152.3
Realized gains/(losses)
on investments, net of
tax.................... 1.0 -- 1.0
--------------- ------------- ---------------
Income from continu-
ing operations...... $ 212.3 $ (59.0) $ 153.3
=============== ============= ===============
Income from
continuing
operations per
common share (9).... $ 2.03 $ 1.22
=============== ===============
Ratio of earnings to
fixed charges (10)..... 1.3x 1.2x
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $426.6 million from the issuance of 20,540,000 shares of
Class A Common Stock), (ii) the Special Dividend totalling $850.0 million
which will have been paid by the Company prior to the completion of the
Equity Offerings, (iii) the Note Offering (assuming net proceeds of
$296.3 million) and (iv) with respect to Consolidated Income Statement
Data and Other Data only, the 1996 Cash Dividend totalling $50.0 million
which was paid by the Company on December 31, 1996.
(2) Reduction in net investment income on the 1996 Cash Dividend and the
Special Dividend at an assumed rate of 7.5%. If this reduction were
partially offset by net investment income on the proceeds from the Equity
Offerings and the Note Offering at an assumed reinvestment rate of 7.5%,
the net adjustment would be a reduction of $13.8 million, resulting in
pro forma net operating income of $187.6 million.
(3) The $300 million aggregate principal amount of the Notes is assumed to
bear interest at a rate of 7.5% per annum for the period indicated. There
can be no assurance that this will be the actual rate borne by the Notes.
An increase of 1.0% per annum in the assumed interest rate on the Notes
would result in an increase of $3.0 million to interest expense for the
year ended December 31, 1996. Interest expense includes amortization of
deferred issuance costs.
(4) Income tax effect of the pro forma adjustments at the statutory rate.
(5) The excess of the Special Dividend over the proceeds from the Equity
Offerings and Note Offering. Also included are capitalized issuance
costs.
(6) Represents aggregate principal amount of Notes
(7) The excess of the Special Dividend over the proceeds from the Equity
Offerings.
(8) Excludes realized gains/(losses) on investments (net of related federal
income tax) and discontinued operations.
(9) Actual is based on 104,745,000 shares of Class B Common Stock
outstanding. Pro forma is based on 125,285,000 shares outstanding, which
consists of 104,745,000 shares of Class B Common Stock and 20,540,000
shares of Class A Common Stock assumed to be issued in the Equity
Offerings.
(10) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and fixed
charges. Fixed charges consist of interest expense on debt plus interest
credited to policyholder account balances. There was no actual interest
expense on debt for the year ended December 31, 1996.
25
<PAGE>
PRO FORMA FOR THE SPECIAL DIVIDEND, THE EQUITY OFFERINGS, THE CAPITAL
SECURITIES OFFERING AND, WITH RESPECT TO CONSOLIDATED INCOME STATEMENT DATA
AND OTHER DATA ONLY, THE 1996 CASH DIVIDEND
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, 1996
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 400.9 $ -- $ 400.9
Life insurance
premiums.............. 198.6 -- 198.6
Net investment income.. 1,357.8 (67.7)(2) 1,290.1
Realized losses on
investments........... (0.2) -- (0.2)
Other income........... 59.5 -- 59.5
--------- ------- ---------
Total revenues........ 2,016.6 (67.7) 1,948.9
--------- ------- ---------
Benefits and Expenses:
Benefits and claims.... 1,160.6 -- 1,160.6
Policyholder
dividends............. 41.0 -- 41.0
Amortization of
deferred policy
acquisition costs..... 133.4 -- 133.4
Operating expenses..... 353.5 -- 353.5
Interest expense....... -- 8.0 (3) 8.0
--------- ------- ---------
Total benefits and
expenses............. 1,688.5 8.0 1,696.5
--------- ------- ---------
Income from continuing
operations before
federal income tax
expense................ 328.1 (75.7) 252.4
Federal income tax
expense................ 115.8 (26.5)(4) 89.3
--------- ------- ---------
Income from continuing
operations........... $ 212.3 $ (49.2) $ 163.1
========= ======= =========
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $20,843.5 $(323.4)(5) $20,520.1
Separate account
assets................. 26,926.7 -- 26,926.7
Total assets............ 47,770.2 (323.4) 47,446.8
Long-term debt.......... -- -- --
Capital securities...... -- 100.0 (6) 100.0
Shareholders' equity.... 2,131.7 (423.4)(7) 1,708.3
OTHER DATA:
Net operating
income(8).............. $ 211.3 $ (49.2) $ 162.1
Realized gains/(losses)
on investments, net of
tax.................... 1.0 -- 1.0
--------- ------- ---------
Income from continuing
operations........... $ 212.3 $ (49.2) $ 163.1
========= ======= =========
Income from continuing
operations per common
share(9)............. $ 2.03 $ 1.30
========= =========
Ratio of earnings to
fixed charges(10)...... 1.3x 1.3x
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $426.6 million from the issuance of 20,540,000 shares of
Class A Common Stock), (ii) the Special Dividend totalling $850.0 million
which will have been paid by the Company prior to the completion of the
Equity Offerings, (iii) the Capital Securities Offering (assuming net
proceeds of $98.6 million) and (iv) with respect to Consolidated Income
Statement Data and Other Data only, the 1996 Cash Dividend totalling
$50.0 million which was paid by the Company on December 31, 1996.
(2) Reduction in net investment income on the 1996 Cash Dividend and the
Special Dividend at an assumed rate of 7.5%. If this reduction were
partially offset by net investment income on the proceeds from the Equity
Offerings and the Capital Securities Offering at an assumed reinvestment
rate of 7.5%, the net adjustment would be a reduction of $28.3 million,
resulting in pro forma net operating income of $187.7 million.
(3) The $100 million aggregate liquidation amount of the Capital Securities
is assumed to bear a distribution rate of 8.0% per annum for the period
indicated. There can be no assurance that this will be the actual rate
borne by the Capital Securities. An increase of 1.0% per annum on the
assumed distribution rate on the Capital Securities would result in an
increase of $1.0 million to interest expense for the year ended December
31, 1996. Interest expense includes amortization of deferred issuance
costs.
(4) Income tax effect of the pro forma adjustments at the statutory rate.
(5) The excess of the Special Dividend over the proceeds from the Equity
Offerings and Capital Securities Offering. Also included are capitalized
issuance costs.
(6) The Capital Securities will be reflected separately in the Company's
consolidated financial statements as "Company-obligated mandatorily
redeemable capital securities of the Nationwide Financial Services
Capital Trust, holding solely junior subordinated debentures of
Nationwide Financial Services, Inc." with a footnote indicating that all
of the Common Securities of the NFS Trust, which are the only voting
securities of the NFS Trust, are owned by the Company, that the sole
assets of the NFS Trust are the junior subordinated debentures (including
the principal amount, interest rate and maturity date thereof), and that
the NFS Trust's obligations with respect to the Capital Securities,
through the Company's Guarantee, the junior subordinated debentures and
the indenture with respect thereto and the Declaration of Trust of the
NFS Trust, taken together, are fully and unconditionally guaranteed by
the Company.
(7) The excess of the Special Dividend over the proceeds from the Equity
Offerings.
(8) Excludes realized gains/(losses) on investments (net of related federal
income tax) and discontinued operations.
(9) Actual is based on 104,745,000 shares of Class B Common Stock
outstanding. Pro forma is based on 125,285,000 shares outstanding, which
consists of 104,745,000 shares of Class B Common Stock and 20,540,000
shares of Class A Common Stock assumed to be issued in the Equity
Offerings.
(10) For purposes of this computation, earnings consist of income from
continuing operations before federal income tax expense and fixed
charges. Fixed charges consist of interest expense on debt plus interest
credited to policyholder account balances. There was no actual interest
expense on debt for the year ended December 31, 1996.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of consolidated results of operations and financial
condition of the Company should be read in conjunction with "Selected
Consolidated Financial Data," "Pro Forma Consolidated Financial Data" and the
Consolidated Financial Statements and related footnotes included elsewhere in
this Prospectus.
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. The
consolidated financial information discussed below includes the results of
operations of Nationwide Life and the related marketing and distribution
companies as though they had been consolidated with the Company for all
periods presented. See "Recent History," "Certain Relationships and Related
Transactions--Existing Arrangements with the Nationwide Insurance Enterprise--
Organization of the Company" and "--Modified Coinsurance Agreements."
RESULTS OF OPERATIONS
Policy Charges. Policy charges include asset fees, which are primarily
earned from separate account assets generated from sales of variable
annuities; administration fees, which include fees charged per contract on a
variety of the Company's products and premium loads on universal life
insurance products; surrender fees, which are charged as a percentage of
assets withdrawn during a specified period (usually the first seven years) of
annuity and certain life insurance contracts; and cost-of-insurance ("COI")
charges earned on universal life insurance products. For 1996, policy charges
were $400.9 million, a 39.9% increase from $286.6 million in 1995. Policy
charges increased 32.0% in 1995 from $217.2 million in 1994. Increases in
policy charges have resulted primarily from increases in separate account
assets and the resulting higher levels of asset fees, as well as a moderate
increase in all of the fees discussed above due to the growth in customer
accounts.
Life Insurance Premiums. Life insurance premiums are earned primarily from
traditional life insurance in the Life Insurance segment, but are also earned
from the sale of life-contingent immediate annuities in the Fixed Annuities
segment. Life insurance premiums from traditional life insurance policies are
recognized as revenue when due from the policyholder. For life-contingent
immediate annuities, net premium (i.e., the portion of the premium which
covers benefits and expenses) is recognized as revenue when received. Any
premium received in excess of the net premium is deferred and recognized as
revenue over the expected benefit period. Traditional life insurance products
accounted for 87.9%, 83.5% and 88.6% of the total life insurance premiums in
1996, 1995 and 1994, respectively. Life insurance premiums were $198.6 million
for 1996, a 0.3% decrease from $199.1 million for 1995. The slight decrease in
1996 was due to an $8.7 million decrease in sales of life-contingent immediate
annuities offset by an $8.3 million increase in traditional life insurance
premiums. Life insurance premiums increased 12.7% in 1995 from $176.7 million
in 1994. The 1995 increase in life insurance premiums resulted from an
increase in traditional life insurance in-force in the Life Insurance segment
and growth in the Fixed Annuities segment.
Net Investment Income. Net investment income includes the gross investment
income earned on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general account
invested assets which are not allocated to product segments. Net investment
income was $1.36 billion in 1996, $1.29 billion in 1995 and $1.21 billion in
1994. Net investment income has increased as a result of growth in the
Company's general account invested assets. General account invested assets
were $18.32 billion, $17.83 billion and $15.23 billion as of December 31,
1996, 1995 and 1994, respectively.
Realized Gains/(Losses) on Investments. Realized gains on investments are
not considered by the Company to be a recurring source of earnings. The
Company makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. All realized gains and
losses are reported in
27
<PAGE>
the Corporate and Other segment. Net realized losses on investments were $0.2
million in 1996, $1.7 million in 1995 and $16.5 million in 1994.
Other Income. Other income consists of investment management fees earned by
a subsidiary of the Company from the management of Nationwide mutual funds, as
well as commission and other income earned by the Company's marketing and
distribution subsidiaries. Net investment management fees earned on Nationwide
mutual fund assets selected as investment options for variable annuity
products and variable life insurance products are reported in the Variable
Annuities segment and Life Insurance segment, respectively. The Company also
sells its mutual fund products separately, and investment management fees from
these assets are included in the Corporate and Other segment. Other income was
$59.5 million in 1996, a 0.8% increase from 1995. Other income increased 28.8%
to $59.0 million in 1995 from $45.9 million in 1994. The increase in other
income in 1996 and 1995 resulted primarily from an increase in commission
income.
Benefits and Claims. Benefits and claims consist primarily of interest
credited on fixed annuity products and life insurance benefits in the Life
Insurance segment. Benefits and claims increased 4.0% to $1.16 billion in 1996
from 1995. Benefits and claims increased 12.4% to $1.12 billion in 1995 from
$992.7 million in 1994. The changes in benefits and claims from year to year
are primarily attributable to the changes in interest credited which are
discussed in the Fixed Annuities segment results below. Life insurance
benefits have remained consistent over the periods.
Policyholder Dividends. Policyholder dividends are paid on certain
participating policies, primarily in the Life Insurance segment. Policyholder
dividends were $41.0 million in 1996, a 2.8% increase over 1995. Policyholder
dividends increased 2.8% to $39.9 million in 1995 from $38.8 million in 1994.
Amortization of DAC. Amortization of deferred policy acquisition costs
("DAC") results from the capitalization of commissions and other costs of
acquiring new contracts and the amortization of these costs over the estimated
life of the contract. Amortization of DAC was $133.4 million in 1996, a 61.3%
increase over 1995. Amortization of DAC decreased 3.4% to $82.7 million in
1995 from $85.6 million in 1994. The increase in 1996 was primarily
attributable to growth in all product segments while the decrease in 1995
resulted from a decrease in the amortization rate for variable and fixed
individual annuities due to lower than anticipated lapse rates and strong
separate account asset performance.
Operating Expenses. Operating expenses were $353.5 million in 1996, an 11.3%
increase from 1995. Operating expenses increased 14.9% to $317.8 million in
1995 from $276.6 million in 1994. These increases were primarily due to the
increasing number of individual and group annuity contracts in-force and the
related increase in administrative processing costs. The Company has
controlled its operating expenses by taking advantage of economies of scale
and by increasing productivity through investments in technology. As a result,
the ratio of operating expenses to total assets declined to 0.74% in 1996 from
0.83% in 1995 and 0.95% in 1994.
Federal Income Tax Expense. Federal income tax expense was $115.8 million,
$96.3 million and $82.5 million, representing effective tax rates of 35.3%,
34.3% and 34.3%, for 1996, 1995 and 1994, respectively. The increase in the
1996 effective tax rate is the result of greater benefits in 1995 and 1994
from charitable donations of appreciated securities.
Net Operating Income. Net operating income is net income, excluding realized
gains and losses on investments (net of related federal income tax) and
discontinued operations. Net operating income for 1996 was $211.3 million, a
14.3% increase from 1995. The Company's net operating income increased 9.9% to
$184.8 million in 1995 from $168.2 million in 1994.
Discontinued Operations. Discontinued operations include the results of (i)
the three Nationwide Life subsidiaries whose outstanding capital stock, on
September 24, 1996, was declared as a dividend to Nationwide Corp. and (ii)
all of the Company's accident and health and group life business which was
ceded to affiliates effective January 1, 1996. The Company did not recognize
any gain or loss on the disposal of these subsidiaries or discontinuance of
the accident and health and group life insurance business. Income from
discontinued operations was $11.3 million in 1996, a 54.3% decrease from $24.7
million in 1995. The decrease is attributable
28
<PAGE>
to losses incurred on group accident and health business, which are due to
increases in the volume of claims and medical costs. Income from discontinued
operations was $24.7 million in 1995, a 20.5% increase from $20.5 million in
1994. The increase is attributable to the income reported by Employers Life
Insurance Company of Wausau ("Employers Life"), which the Company acquired
effective December 31, 1994.
EFFECT OF SPECIAL DIVIDEND, THE NOTE OFFERING AND THE CAPITAL SECURITIES
OFFERING
Prior to the Note Offering, the Company expects to consummate the Equity
Offerings, and, concurrently with the Note Offering, the NFS Trust expects to
consummate the Capital Securities Offering. The consummation of the Note
Offering is not conditioned on the completion of the Capital Securities
Offering. There can be no assurance that the Capital Securities Offering will
be consummated. See "Use of Proceeds," "Recent History" and "The Equity
Offerings, the Note Offering and the Capital Securities Offering." The Equity
Offerings and the Capital Securities Offering are being made pursuant to
separate prospectuses.
The proceeds from the Capital Securities Offering will be used by the NFS
Trust to purchase junior subordinated debentures of the Company (the
"Debentures"). The proceeds received by the Company from the sale of the
Debentures, together with proceeds from the Note Offering, will be contributed
to the capital of Nationwide Life. Prior to the consummation of the Equity
Offerings, Nationwide Life will dividend to the Company, and the Company will
subsequently dividend to Nationwide Corp., securities having an aggregate
market value of $850.0 million. Together with the effect of the proceeds of
the Equity Offerings, these transactions are expected to result in a net
decrease in invested assets of the Company of $28.5 million, which is expected
to result in a slight decrease in net investment income in the future.
Interest expense generated by the securities sold in the Note Offering and the
Capital Securities Offering is expected to be approximately $30.7 million per
year. See Note 3 to "Pro Forma Consolidated Financial Data--Pro Forma for the
Special Dividend, the Equity Offerings, the Note Offering, the Capital
Securities Offering and, with respect to Consolidated Income Statement Data
and Other Data only, the 1996 Cash Dividend."
The Debentures are expected to mature approximately 40 years from the date
of issuance, with interest payable semi-annually. Interest on the Debentures
will be deferrable, from time to time, for up to 10 consecutive semi-annual
periods, during which time the Company may not pay dividends on its Common
Stock or make other specified payments. Interest on the Debentures will be
cumulative. The Debentures are expected to be optionally redeemable, in whole
or in part, by the Company at any time at a redemption price equal to the
aggregate principal amount plus accrued and unpaid interest plus a premium
based on the value of future interest discounted at a rate based on prevailing
Treasury security rates. The Debentures will not require any sinking fund
payments. The Company will issue a guarantee covering the obligations of the
NFS Trust (to the extent of funds held by the NFS Trust) under the Capital
Securities. Through the guarantee and certain back-up obligations, consisting
of obligations of the Company to provide certain indemnities in respect of,
and pay and be responsible for, certain expenses, costs, liabilities and debts
of the NFS Trust, taken together, the Company will fully and unconditionally
guarantee all of the NFS Trust's obligations under the Capital Securities.
29
<PAGE>
RESULTS OF OPERATIONS BY PRODUCT SEGMENT
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. In addition, the Company reports corporate income and
expenses and investments and related investment income supporting capital not
specifically allocated to its product segments in a Corporate and Other
segment. All information set forth below relating to the Company's Variable
Annuities segment excludes the fixed option under the Company's variable
annuity contracts. Such information is included in the Company's Fixed
Annuities segment.
The table below presents summary financial data for the Company by segment.
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES:
Variable Annuities(1)......................... $ 284.6 $ 189.0 $ 132.7
Fixed Annuities(1)............................ 1,092.6 1,052.0 939.9
Life Insurance................................ 435.6 409.1 383.1
Corporate and Other........................... 204.0 188.6 194.9
--------- --------- ---------
Total operating revenues.................... 2,016.8 1,838.7 1,650.6
Realized losses on investments................ (0.2) (1.7) (16.5)
--------- --------- ---------
Total revenues.............................. $ 2,016.6 $ 1,837.0 $ 1,634.1
========= ========= =========
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAX EXPENSE:
Variable Annuities............................ $ 90.3 $ 50.8 $ 24.6
Fixed Annuities............................... 135.4 137.0 139.0
Life Insurance................................ 67.2 67.6 53.0
Corporate and Other........................... 35.4 27.5 40.3
--------- --------- ---------
Total operating income...................... 328.3 282.9 256.9
Realized losses on investments................ (0.2) (1.7) (16.5)
--------- --------- ---------
Total income from continuing operations
before federal income tax expense.......... $ 328.1 $ 281.2 $ 240.4
========= ========= =========
POLICY RESERVES:
Variable Annuities(2)......................... $24,278.1 $16,761.8 $10,751.1
Fixed Annuities(2)............................ 13,511.8 12,784.0 11,247.0
Life Insurance................................ 2,938.9 2,660.5 2,425.2
Corporate and Other........................... 3,302.5 2,644.3 2,252.7
--------- --------- ---------
Total policy reserves(3).................... $44,031.3 $34,850.6 $26,676.0
========= ========= =========
</TABLE>
- --------
(1) Revenues related to the fixed option under the Company's variable annuity
contracts are included in Fixed Annuities.
(2) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of December 31,
1996, 1995 and 1994, such policy reserves represented $9.52 billion, $8.83
billion and $7.27 billion, respectively.
(3) Total policy reserves as presented here differ from the amounts set forth
in the Company's financial statements because the presented amounts
exclude (i) accident and health and group life insurance business ceded to
other members of the Nationwide Insurance Enterprise and (ii) the fixed
annuity policy reserves ceded to Franklin Life Insurance Company
("Franklin Life"). See "Business--Reinsurance" and "Certain Relationships
and Related Transactions--Existing Arrangements with the Nationwide
Insurance Enterprise--Modified Coinsurance Agreements."
30
<PAGE>
Variable Annuities
Revenues. Revenues in the Variable Annuities segment consist of policy
charges and other income. Policy charges consist of asset fees, which are
generally a percentage of separate account assets deposited for the purchase
of variable annuities; administration fees, which are generally a specific
dollar amount per contract; and surrender fees, which are charged against
assets withdrawn during a specified period (generally the first seven years)
of variable annuity contracts. The separate account assets generated by the
Variable Annuities segment do not contribute to net investment income of the
Company because the customer receives the investment benefit and bears the
investment risk of these assets. Other income includes net investment
management fees earned on separate account assets held in mutual funds managed
by a subsidiary of the Company.
Revenues were $284.6 million in 1996, a 50.6% increase from 1995. Revenues
increased 42.4% to $189.0 million in 1995 from $132.7 million in 1994.
Revenues have increased primarily as a result of growth in separate account
assets related to this segment and the corresponding growth in asset fees,
which were $261.8 million, $172.8 million and $120.4 million in 1996, 1995
and 1994, respectively. Asset fees as a percentage of variable annuity
separate account assets have remained relatively stable during the periods
presented, reflecting minimal changes in the levels of asset fees charged on
most variable annuity products.
Income from Continuing Operations Before Federal Income Tax Expense. Income
from continuing operations before federal income tax expense was $90.3 million
in 1996, a 77.8% increase from 1995. Income from continuing operations before
federal income tax expense increased 106.5% to $50.8 million in 1995 from
$24.6 million in 1994. Increases have primarily resulted from growth in
variable annuity separate account assets and the corresponding increases in
asset fees combined with expense levels which have decreased as a percentage
of revenues. Total expenses were $189.7 million, $135.4 million and $105.8
million, or 66.7%, 71.6% and 79.7% of total revenues, for 1996, 1995 and 1994,
respectively. During the period, the Company has controlled its operating
expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology.
Policy Reserves. Variable annuity policy reserves increased 44.9% from
$16.76 billion as of December 31, 1995 to $24.28 billion as of December 31,
1996. Of this increase, $2.72 billion was due to market appreciation of
separate account assets, while $6.50 billion of statutory premiums and
deposits offset by $1.70 billion of withdrawals and policy charges resulted in
the remainder of the increase. Variable annuity policy reserves increased
55.9% to $16.76 billion as of December 31, 1995 from $10.75 billion as of
December 31, 1994, which was a 36.8% increase from $7.86 billion as of
December 31, 1993. Market appreciation accounted for $2.93 billion of the
increase in 1995 while market depreciation accounted for an $84.0 million
decrease in 1994. Statutory premiums and deposits were $4.40 billion and $3.82
billion, while withdrawals and policy charges were $1.32 billion and
$840.0 million, in 1995 and 1994, respectively.
Fixed Annuities
Revenues. Revenues in the Fixed Annuities segment consist mainly of net
investment income, which is earned on invested assets allocated to support
fixed annuity policy reserves and shareholders' equity allocated to such
segment. Total revenues were $1.09 billion, $1.05 billion and $939.9 million
in 1996, 1995 and 1994, respectively. Net investment income was $1.05 billion,
$1.00 billion and $903.7 million, representing average pre-tax yields on the
assets supporting this segment of 8.22%, 8.50% and 8.59%, in 1996, 1995 and
1994, respectively. The increase in net investment income for each period
presented is the result of the increases in policy reserves discussed below
and the corresponding increase in invested assets.
Interest Credited. Interest credited on account balances was $805.0 million,
$775.7 million and $680.9 million, representing crediting rates of 6.30%,
6.58% and 6.47%, for 1996, 1995 and 1994, respectively. The differential
between net investment income and interest credited on account balances
resulted in spreads of $245.6 million, $227.1 million and $222.8 million, or
1.92%, 1.92% and 2.12%, in 1996, 1995 and 1994, respectively. Spreads vary
depending on crediting rates offered by competitors, performance of the
investment portfolio and other factors. The higher spread in 1994 is primarily
the result of declining interest rates in late 1993 and early 1994 which
resulted in lower crediting rates.
31
<PAGE>
Income from Continuing Operations Before Federal Income Tax Expense. Income
from continuing operations before federal income tax expense was $135.4
million in 1996, a 1.2% decrease from 1995. Income from continuing operations
before federal income tax expense decreased 1.4% to $137.0 million in 1995
from $139.0 million in 1994. Narrowing spreads, offset by asset growth, caused
1996 and 1995 earnings to decline from 1994.
Policy Reserves. Fixed annuity policy reserves increased 5.7% to $13.51
billion as of December 31, 1996, from $12.78 billion as of December 31, 1995.
Statutory premiums and deposits of $1.60 billion and interest credited of
$805.0 million were offset by $1.68 billion of withdrawals, annuity benefits
and policy charges. Policy reserves increased 13.6% to $12.78 billion as of
December 31, 1995 from $11.25 billion as of December 31, 1994. Statutory
premiums and deposits were $1.86 billion and $1.31 billion, while interest
credited was $775.7 million and $680.9 million in 1995 and 1994, respectively.
Withdrawals and policy charges were $1.10 billion and $895.0 million in 1995
and 1994, respectively.
Life Insurance
Revenues. Revenues in the Life Insurance segment consist of the life
insurance premiums and policy charges, as well as net investment income. Total
revenues were $435.6 million, $409.1 million and $383.1 million for 1996, 1995
and 1994, respectively. The increases are attributed to increases in life
insurance in-force with the majority of the growth coming from the variable
universal life product.
Income from Continuing Operations Before Federal Income Tax Expense. Income
from continuing operations before federal income tax expense was $67.2 million
in 1996, a 0.6% decrease from $67.6 million for 1995. The decrease is
attributable to the increased amount of amortization of DAC due to increased
volume and higher general expenses due to increased sales offset by an
increase in revenues from the variable universal product. Income from
continuing operations before federal income tax expense increased 27.5% to
$67.6 million in 1995 from $53.0 million in 1994. The increase is due to
growth in insurance in-force, particularly variable universal life, combined
with only minimal increases in expenses.
Life Insurance In-Force. Life insurance in-force was $37.72 billion, $33.41
billion and $30.13 billion as of December 31, 1996, 1995 and 1994,
respectively. Nearly two-thirds of the growth of life insurance in-force is in
variable universal life and term insurance policies.
Corporate and Other
Revenues. Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three product
segments, all realized investment gains and losses, investment management fees
and other revenues earned from Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments, commissions
and other income earned by the marketing and distribution subsidiaries of the
Company and net investment income and policy charges from group annuity
contracts issued to Nationwide Insurance Enterprise employee and agent benefit
plans. Total revenues excluding realized gains and losses were $204.0 million
for 1996, an 8.2% increase from 1995. The increase in 1996 is the result of an
increase in investment income, investment management fees and commissions
earned. Total revenues excluding realized gains and losses were $188.6 million
and $194.9 million in 1995 and 1994, respectively. The decrease is a result of
a reduction of $155.0 million of invested assets discussed below. Effective
December 31, 1994, the Company transferred $155.0 million of invested assets
from the Corporate and Other segment for the purchase of Employers Life.
Realized losses on investments were $0.2 million, $1.7 million and $16.5
million in 1996, 1995 and 1994, respectively.
Income from Continuing Operations Before Federal Income Tax Expense. Income
from continuing operations before federal income tax expense excluding
realized gains and losses was $35.4 million, $27.5 million and $40.3 million
in 1996, 1995 and 1994, respectively. The changes between years are primarily
attributed to the changes in revenues discussed above. Interest expense
related to the Note Offering and the Capital Securities Offering will be
recorded in the Corporate and Other segment which will reduce income from
continuing operations before federal income tax expense for the Corporate and
Other segment in periods after the completion of such offerings.
32
<PAGE>
INTERCOMPANY AGREEMENTS
The Company has existing arrangements with Nationwide Mutual and other
affiliates that address the sharing of federal income taxes, the leasing of
office space and the sharing of certain operational and administrative
services. These arrangements have been in effect for all periods for which
financial data is presented herein. See "Certain Relationships and Related
Transactions--Existing Arrangements with the Nationwide Insurance Enterprise."
The Company does not believe that expenses recognized under the intercompany
arrangements are materially different from expenses that would have been
recognized had the Company operated on a stand-alone basis.
Nationwide Mutual and its U.S. subsidiaries, including the Company and its
subsidiaries, file a consolidated federal income tax return. The members of
the consolidated group currently have a tax sharing arrangement which provides
for each member to bear essentially the same federal income tax liability as
if separate tax returns were filed. For the years ended December 31, 1996,
1995 and 1994, the Company made federal income tax payments under the tax
sharing arrangement of $117.3 million, $58.1 million and $84.9 million,
respectively. See "Certain Relationships and Related Transactions--Existing
Arrangements with the Nationwide Insurance Enterprise--Federal Income Taxes."
The Company leases 512,000 square feet of office space at a current market
rate of $19.53 per square foot, with limited exceptions, from Nationwide
Mutual and certain of its subsidiaries. For the years ended December 31, 1996,
1995 and 1994, the Company made lease payments to Nationwide Mutual and its
subsidiaries of $10.0 million, $9.9 million and $9.0 million, respectively.
See "Certain Relationships and Related Transactions--Existing Arrangements
with the Nationwide Insurance Enterprise--Lease."
Pursuant to a cost sharing agreement among Nationwide Mutual and certain of
its direct and indirect subsidiaries, including the Company, Nationwide Mutual
provides certain operational and administrative services, such as sales
support, advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to allocation
among Nationwide Mutual and such subsidiaries. Amounts allocated to the
Company were $101.6 million, $107.1 million and $100.6 million for the years
ended December 31, 1996, 1995 and 1994, respectively. Under the cost sharing
agreement, expenses are allocated in accordance with NAIC guidelines and are
based on standard allocation techniques and procedures acceptable under
general cost accounting practices. Measures used to allocate expenses include
individual employee estimates of time spent, special cost studies, salary
expense, commissions expense and other measures that are agreed to by the
participating companies and are within regulatory and industry guidelines and
practices. The cost sharing agreement will remain in effect following the
Equity Offerings until terminated upon the consent of both Nationwide Mutual
and the Company. See "Certain Relationships and Related Transactions--Existing
Arrangements with the Nationwide Insurance Enterprise--Cost Sharing
Agreement."
Upon consummation of the Equity Offerings, certain other intercompany
agreements will become effective, including the revised Tax Sharing Agreement,
a lease agreement (the "Lease Agreement") and the Intercompany Agreement. The
Company will be subject to the Tax Sharing Agreement until such time as
Nationwide Mutual no longer beneficially owns at least 80% of the combined
voting power and value of the outstanding capital stock of the Company. The
initial term of the Lease Agreement is for 12 months and automatically renews
upon the same terms and conditions unless either Nationwide Mutual or the
Company gives 30 days' written notice to the other party prior to the end of
such 12-month period. Neither the Tax Sharing Agreement nor the Lease
Agreement may be amended without the prior written consent of the Company. See
"Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise."
The Intercompany Agreement will govern, among other things, the use by the
Company of certain trade names and service marks owned by Nationwide Mutual,
Nationwide Mutual's approval of certain extraordinary transactions involving
the Company, Nationwide Corp.'s preemptive and registration rights, certain
indemnification matters and the use by the Company of Nationwide Insurance
Enterprise insurance agents. The Intercompany Agreement may not be amended
without the prior written consent of the Company and certain material
provisions thereof may not be amended without the approval of a majority of
the directors of the
33
<PAGE>
Company who are not officers or directors of members of the Nationwide
Insurance Enterprise other than the Company and its subsidiaries. See "Certain
Relationships and Related Transactions--New Agreements with the Nationwide
Insurance Enterprise--Intercompany Agreement."
The Company does not believe its results of operations will be materially
adversely affected as a result of any of the new intercompany agreements that
will become effective upon the consummation of the Equity Offerings.
REINSURANCE
The Company follows the customary industry practice of reinsuring ("ceding")
a portion of its life insurance and annuity risks with other companies in
order to reduce net liability on individual risks, to provide protection
against large losses and to obtain greater diversification of risks. The
ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. The Company has entered into a reinsurance
contract to cede a portion of its general account individual annuity reserves
to Franklin Life. Total recoveries due from Franklin Life were $240.5 million
and $245.3 million as of December 31, 1996 and 1995, respectively. Under the
terms of the contract, Franklin Life has established a trust as collateral for
the recoveries. The trust assets are invested in investment grade securities,
the market value of which must at all times be greater than or equal to 102%
of the reinsured reserves. The Company has no other material reinsurance
arrangements with unaffiliated reinsurers.
The only material reinsurance agreements which the Company has with
affiliates are the modified coinsurance agreements pursuant to which
Nationwide Life reinsured all of its accident and health and group life
insurance business to Employers Life and Nationwide Mutual. See "Certain
Relationships and Related Transactions--Existing Arrangements with the
Nationwide Insurance Enterprise--Modified Coinsurance Agreements." Nationwide
Life entered into these reinsurance agreements because its accident and health
and group life insurance business was unrelated to the Company's long-term
savings and retirement products. Accordingly, all accident and health and
group life insurance business is accounted for as discontinued operations.
Under the modified coinsurance agreements, invested assets are retained by the
ceding company and investment earnings are paid to the reinsurer. Under the
terms of such agreements, the investment risk associated with changes in
interest rates is borne by Employers Life or Nationwide Mutual, as the case
may be. Risk of asset default is retained by the Company, although a fee is
paid by Employers Life or Nationwide Mutual, as the case may be, to the
Company for the Company's retention of such risk. The contracts will remain in
force until all policy obligations are settled. However, with respect to the
agreement between Nationwide Life and Nationwide Mutual, either party may
terminate the contract on January 1 of any year with prior notice. The Company
believes that the terms of such modified coinsurance agreements are consistent
in all material respects with what the Company could have obtained with
unaffiliated parties.
Total premiums ceded under the intercompany reinsurance agreements were
$321.6 million during 1996. The effect of the reinsurance agreements was an
increase in the Company's income from discontinued operations before federal
income tax expense of $4.5 million during 1996. The Company does not expect
the intercompany reinsurance agreements to have any material adverse effect on
the Company's future operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
common stock of Nationwide Life. The principal sources of funds for the
Company to pay principal, interest, dividends and operating expenses are
dividends from Nationwide Life and other subsidiaries and payments from
Nationwide Life under the Tax Sharing Agreement.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of certain prescribed limitations without
prior approval. The ability of Nationwide Life to pay dividends is subject to
restrictions set forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require life insurance companies to
seek prior regulatory approval to pay a dividend or distribution of cash or
other property if the fair market value thereof, together with that of other
dividends or distributions made in
34
<PAGE>
the preceding 12 months, exceeds the greater of (i) 10% of policyholders'
surplus as of the prior December 31 or (ii) the net income of the insurer for
the 12-month period ending as of the prior December 31. The Ohio insurance
laws also require insurers to seek prior regulatory approval for any dividend
paid from other than earned surplus. The payment of dividends by Nationwide
Life may also be subject to restrictions set forth in the insurance laws of
New York that limit the amount of statutory profits on Nationwide Life's
participating policies (measured before dividends to policyholders) that can
inure to the benefit of the Company and its stockholders. The Company
currently does not expect such regulatory requirements to impair its ability
to pay operating expenses and dividends in the future. However, the Company
can give no assurance that dividends will be declared or paid by the Company.
As a result of the Special Dividend and the dividend by Nationwide Life of
the stock of certain subsidiaries that do not operate in the long-term savings
and retirement market, any dividend paid by Nationwide Life during the 12-
month period immediately following the Special Dividend would be an
extraordinary dividend under Ohio insurance laws. See "Recent History."
Accordingly, no such dividend could be paid without prior regulatory approval.
The Company has no reason to believe that any reasonably forseeable dividend
to be paid by Nationwide Life would not receive the required approval.
However, in order to increase liquidity at the holding company level, the
Company will retain approximately $55.0 million from the net proceeds of the
Equity Offerings. The $55.0 million, which will be invested in short-term
interest-bearing securities, will be available initially to pay interest
associated with the Note Offering and the Capital Securities Offering,
stockholder dividends, and expenses.
Nationwide Life's statutory capital and surplus was $1.00 billion at
December 31, 1996. Nationwide Life will pay the Special Dividend of $850.0
million prior to the consummation of the Equity Offerings. The Company will
contribute to Nationwide Life approximately $371.6 million of the net proceeds
from the Equity Offerings. The Company believes that after the Special
Dividend and such contribution of the proceeds from the Equity Offerings,
Nationwide Life will have adequate statutory capital and surplus to satisfy
all regulatory requirements and to support its growth over the following year.
In addition, any proceeds from the Note Offering and the Capital Securities
Offering will be contributed to Nationwide Life, providing it with additional
capital resources.
Nationwide Life will pay the Special Dividend by transferring primarily
fixed maturity investments with an aggregate market value on the date of
transfer of $850.0 million from the Corporate and Other segment. The Company
may recognize a gain or loss on the transfer of the securities. The related
tax impact of any gain or loss would be recognized but would not be paid as
long as the securities are held by Nationwide Mutual and the Company remains
within the consolidated federal tax return of Nationwide Mutual.
Nationwide Life's principal sources of funds are premiums and other
considerations paid, contract charges earned, net investment income received
and proceeds from investments called, redeemed or sold. The principal uses of
these funds are the payment of benefits on annuity contracts and life
insurance policies, operating expenses and the purchase of investments. Net
cash provided by operating activities (reflecting principally (i) premiums and
contract charges collected, less (ii) benefits paid on life insurance
products, plus (iii) income collected on invested assets, less (iv)
commissions and other general expenses paid) was $341.6 million, $192.8
million and $77.9 million for the years ended December 31, 1996, 1995 and
1994, respectively. Net cash used by investing activities (principally
reflecting investments purchased less investments called, redeemed or sold)
was $765.9 million, $1.73 billion and $1.43 billion in the years ended
December 31, 1996, 1995 and 1994, respectively. Net cash provided by financing
activities (principally reflecting deposits to investment product and
universal life insurance product account balances less withdrawals from such
account balances and capital contributions less dividends paid) was $457.5
million, $1.54 billion and $1.33 billion for the years ended December 31,
1996, 1995 and 1994, respectively.
A primary liquidity concern with respect to life insurance and annuity
products is the risk of early policyholder and contractholder withdrawal. The
Company closely evaluates and manages this risk. The
35
<PAGE>
following table summarizes the Company's annuity policy reserves as of
December 31, 1996 and 1995 by the contractholder's ability to withdraw funds.
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------
POLICY POLICY
RESERVES % RESERVES %
------------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Not subject to discretionary
withdrawal........................ $ 1,139.5 2.8% $ 1,087.2 3.4%
Subject to discretionary withdrawal
with adjustment:
With market value adjustment..... 35,463.2 86.3 27,312.1 84.8
At contract value, less surrender
charge of 5% or more............ 1,046.6 2.5 992.1 3.1
------------- ---------- ---------- -------
37,649.3 91.6 29,391.4 91.3
Subject to discretionary withdrawal
at contract value with no
surrender charge or surrender
charge less than 5%............... 3,443.2 8.4 2,798.7 8.7
------------- ---------- ---------- -------
Total annuity policy reserves.. $ 41,092.5 100.0% $32,190.1 100.0%
============= ========== ========== =======
</TABLE>
Life insurance policies are also subject to withdrawal. However, they are
less susceptible to withdrawal than are annuity contracts because
policyholders may incur surrender charges and undergo a new underwriting
process in order to obtain a new insurance policy.
Nationwide Life's principal sources of liquidity to meet unexpected cash
outflows are its portfolio of liquid assets and its net operating cash flow.
See "Business--Investments."
The short- and long-term liquidity requirements of the Company are monitored
regularly to match cash inflows with cash requirements. The Company
periodically reviews its short- and long-term projected sources and uses of
funds and the asset/liability, investment and cash flow assumptions underlying
these projections. Adjustments are made periodically with respect to the
Company's investment policies to reflect changes in the Company's short- and
long-term cash needs and changing business and economic conditions.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its product lines. The Company's general
account investment assets are primarily managed in a number of pools that are
separated by weighted average maturity of the assets acquired by the pools. On
bonds and mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms of the asset. For mortgage backed
securities, repayments are determined using the current rate of repayment of
the underlying pool of mortgages and the terms of the securities. Each product
line has an investment strategy based on the specific characteristics of such
product line. The strategy establishes asset duration, quality and other
guidelines. The Company's actuaries determine the amount of new investments
needed for each line to arrive at the amount of new investments needed for
each pool by month. The investments acquired for each pool are shared on a
proportional basis by each of the lines requesting investments in the pool
based on their actual investment needs. See "Business--Investments."
For all business having future benefits which cannot be changed at the
option of the policyholder, the underlying assets are managed in a separate
pool. The duration of assets and liabilities in this pool are kept as close
together as possible. For assets, the repayment cash flows, plus anticipated
coupon payments, are used in calculating asset duration. Future benefits and
expenses are used for liabilities. On December 31, 1996, the average duration
of assets in this pool was 6.80 years and the average duration of the
liabilities was 7.44 years. Policy reserves on this business were $1.11
billion as of December 31, 1996.
Because the timing of the payment of future benefits on the majority of the
Company's business can be changed by the policyholder, the Company employs
cash flow testing techniques as a final step in its asset/liability management
process. Annually, the Company's annuity and insurance business is analyzed to
determine the adequacy of the reserves supporting such business. This analysis
is accomplished by projecting under a number of possible future interest rate
scenarios the anticipated cash flows from such business and the assets
required to support such business. The first seven of these scenarios are
required by state insurance laws. Projections are also made using 13
additional scenarios which involve more extreme fluctuations in future
interest rates. Finally, to get a statistical analysis of possible results and
to minimize any bias in the 20 predetermined scenarios, additional projections
are made using 200 randomly generated interest rate scenarios. For the
Company's 1996 cash flow testing process, interest rates for 90-day treasury
bills ranged from 0.4% to 11.5% under the 20 predetermined scenarios and 0.8%
to 25.3% under the 200 random scenarios. Interest rates
36
<PAGE>
for longer maturity treasury securities had comparable ranges. The values
produced by each projection are used to determine future gains or losses from
the Company's annuity and insurance business, which, in turn, are used to
quantify the adequacy of the Company's reserves over the entire projection
period. The results of the Company's cash flow testing for year end 1996 (the
most recent year for which results are available) indicated that the Company's
reserves were adequate at December 31, 1996.
The Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of the Company's
fixed maturity portfolio increases or decreases in inverse relationship with
fluctuations in interest rates. For example, if interest rates rise, the
Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by interest
rate changes. If interest rates decline, net investment income will decrease
if high-yielding fixed maturity investments mature or are sold and the
proceeds therefrom are reinvested in securities yielding a lower rate.
On August 12, 1996, Nationwide Life and Nationwide Mutual entered into a
Credit Facility (the "Credit Facility") which provides for a $600.0 million
loan over a five-year term on a fully revolving basis with a group of banks
led by Morgan Guaranty Trust Company of New York. The Credit Facility provides
for several and not joint liability with respect to any amount drawn by either
Nationwide Life or Nationwide Mutual. To date, neither Nationwide Life nor
Nationwide Mutual has drawn down any amount under the Credit Facility. The
Credit Facility provides for several borrowing options including interest at a
spread over LIBOR, money market auction, CD or base rate. The Credit Facility
also provides covenants, including, but not limited to, restrictions on
decreases in the statutory surplus of Nationwide Mutual below $2.75 billion,
mergers and sales of assets if a default has occurred and is continuing,
transactions with affiliates (which must be on an arm's-length basis on terms
at least as favorable to Nationwide Life or Nationwide Mutual as could have
been obtained from a third party who was not affiliated with Nationwide Life
or Nationwide Mutual) and restrictions on the creation, assumption or
suffering to exist of liens. In addition, the Credit Facility provides for
customary representations, warranties and events of default. Pursuant to the
terms of the Credit Facility, Nationwide Life may not declare or pay a
dividend if it is, or if the payment thereof would cause it to be, in default
under such facility. Events of default under the Credit Facility include,
among others, the failure of Nationwide Mutual and its affiliates to maintain
beneficial ownership of more than 50% of the combined voting power of
Nationwide Life's outstanding voting stock and the failure of Nationwide Life
to maintain statutory surplus in excess of $875.0 million. Amounts borrowed
under the Credit Facility may be used for, among other things, general
corporate purposes.
Given the Company's historic cash flow and current financial results,
management of the Company believes that the cash flow from the operating
activities of the Company over the next year will provide sufficient liquidity
for the operations of the Company, as well as provide sufficient funds to
enable the Company to make dividend payments, satisfy debt service obligations
and pay other operating expenses. Although the Company currently anticipates
that it will be able to make dividend payments and pay other operating and
capital expenses for the foreseeable future, the Company can give no
assurances as to whether the net cash provided primarily by dividends from
Nationwide Life and its other subsidiaries will provide sufficient funds for
the Company to do so.
INFLATION
Many of the Company's assets and liabilities are monetary in nature and
sensitive to the interest rate environment which can be affected by inflation.
The Company is exposed to the risk of a reduction in interest spread or profit
margins when interest rates fluctuate. Bond calls, mortgage prepayments,
contract surrenders and withdrawals of annuities and life insurance policies
are influenced by the interest rate environment. In general, the fair value of
the Company's fixed maturities portfolio increases or decreases inversely with
fluctuations in interest rates. For example, if interest rates rise, the
Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by interest
rate changes. If interest rates decline, net investment income will decrease
if high-yielding fixed maturity investments mature or are sold and the
proceeds therefrom are reinvested in securities yielding a lower rate.
Management attempts to mitigate the negative impact of interest rate changes
through asset/liability management, product design, management of crediting
rates, relatively high surrender charges and management of mortality charges
and dividend scales with respect to its in-force life insurance policies, but
there can be no assurance that such attempts will be completely successful.
Extreme changes in the interest rate environment could cause net interest
margins to fluctuate from historical levels.
37
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers throughout the United States.
The Company offers variable annuities, fixed annuities and life insurance as
well as mutual funds and pension products and administrative services. By
developing and offering a wide variety of products, the Company believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. The Company markets its products through a broad
spectrum of wholesale and retail distribution channels, including financial
planners, pension plan administrators, securities firms, banks and Nationwide
Insurance Enterprise insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the year ended December 31, 1996, the Company was the fourth
largest U.S. writer of individual variable annuity contracts based on sales,
according to VARDS. Its principal variable annuity series, The Best of
America, allows the customer to choose from 36 investment options, including
mutual funds managed by such well-known firms as American Century, Dreyfus,
Fidelity, Janus, Neuberger & Berman, Oppenheimer, T. Rowe Price, Templeton,
Vanguard and Warburg Pincus, as well as mutual funds managed by the Company.
The Company has grown substantially in recent years as a result of its long-
term investment in developing the distribution channels necessary to reach its
target customers and the products required to meet the demands of these
customers. The Company believes its growth has been enhanced further by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the financial
markets, particularly the U.S. stock markets, in recent years. From 1992 to
1996, the Company's assets grew from $20.8 billion to $47.8 billion, a
compound annual growth rate of 23.1%. During the same period, the Company's
net operating income grew from $97.0 million to $211.3 million, a compound
annual growth rate of 21.5%. Asset growth during this period resulted from
sales of the Company's products as well as market appreciation of assets in
the Company's separate accounts and in its general account investment
portfolio. The Company's sales of variable annuities grew from $1.56 billion
in 1992 to $6.50 billion in 1996, a compound annual growth rate of 42.9%. The
Company's separate account assets, which are generated by the sale of variable
annuities and variable universal life insurance, grew from 29.3% of total
assets at December 31, 1992 to 56.4% of total assets at December 31, 1996.
During this period of substantial growth, the Company controlled its operating
expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology. From 1992 to 1996, the
Company's total assets increased by 130.1% while operating expenses increased
by only 55.1%. As a result, its ratio of operating expenses to total assets
fell from 1.10% in 1992 to 0.74% in 1996.
The Company believes that demographic trends and shifts in attitudes toward
retirement savings will continue to support increased consumer demand for its
products. According to U.S. Census Bureau projections, the number of Americans
between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1
million in 2005, making this "preretirement" age group the fastest growing
segment of the U.S. population. The Company believes that Americans
increasingly are supplementing traditional sources of retirement income, such
as employer-provided defined benefit plans and Social Security, with self-
directed investments. Reflecting this shift, industry sales of individual
variable annuity products grew from $28.5 billion in 1992 to $73.8 billion in
1996, a compound annual growth rate of 26.9%, according to VARDS. During the
same period, industry individual variable annuity assets grew from $212
billion to $501 billion, a compound annual growth rate of 24.0%, according to
VARDS.
PRODUCT SEGMENTS
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. The Variable Annuities segment, which accounted for $90.3
million (or 27.5%) of the Company's operating income
38
<PAGE>
before federal income tax expense for 1996, consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds managed by
independent investment managers and the Company, with investment returns
accumulating on a tax-deferred basis. The Fixed Annuities segment, which
accounted for $135.4 million (or 41.2%) of the Company's operating income
before federal income tax expense for 1996, consists of annuity contracts that
generate a return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred basis. Such
contracts consist of single premium deferred annuities, flexible premium
deferred annuities and single premium immediate annuities. The Fixed Annuities
segment also includes the fixed option under the Company's variable annuity
contracts, which accounted for 70.5% of the Company's fixed annuity policy
reserves as of December 31, 1996. For the year ended December 31, 1996, the
average crediting rate on contracts (including the fixed option under the
Company's variable contracts) in the Fixed Annuities segment was 6.3%.
Substantially all of the Company's crediting rates on its fixed annuity
contracts are guaranteed for a period not exceeding 15 months. See "--Product
Segments--Fixed Annuities." The Life Insurance segment, which accounted for
$67.2 million (or 20.5%) of the Company's operating income before federal
income tax expense for 1996, consists of insurance products, including
variable life insurance products, that provide a death benefit and may also
allow the customer to build cash value on a tax-deferred basis. In addition,
the Company reports corporate income and expenses not specifically allocated
to its product segments in a Corporate and Other segment, which accounted for
$35.4 million (or 10.7%) of the Company's operating income before federal
income tax expense for 1996. After giving pro forma effect to the 1996 Cash
Dividend, the Special Dividend, the Equity Offerings, the Note Offering and
the Capital Securities Offering as if each had been consummated at January 1,
1996, and assuming the aggregate proceeds of the Equity Offerings, the Note
Offering and the Capital Securities Offering had been invested to earn a
return of 7.5%, the Variable Annuities, Fixed Annuities, Life Insurance and
Corporate and Other segments would have represented 31.0%, 46.5%, 23.1% and
(0.6%), respectively, of the Company's operating income (loss) before federal
income tax expense for 1996. See "Pro Forma Consolidated Financial Data."
Variable Annuities
The Company is one of the leaders in the development and sale of individual
and group variable annuity products. For the year ended December 31, 1996, the
Company was the fourth largest U.S. writer of individual variable annuity
contracts based on sales, according to VARDS. The Company believes that
demographic trends and shifts in attitudes toward retirement savings will
continue to support increased consumer demand for its variable annuity
products.
The Company believes that it possesses distinct competitive advantages in
the market for variable annuities. Some of the Company's most important
advantages include its innovative product offerings and strong relationships
with independent, well-known fund managers. For example, the Company's The
Best of America IV and The Best of America--America's Vision individual
variable annuity contracts allow the customer to choose from 36 investment
options, including mutual funds managed by a variety of well-known fund
managers and the Company. In the aggregate, the Company's group variable
annuity products offer over 100 underlying investment options.
The Company markets its variable annuity products through a broad spectrum
of channels, including broker/dealers, financial planners, banks and
Nationwide Insurance Enterprise insurance agents. See "--Marketing and
Distribution." The Company seeks to capture a growing share of variable
annuity sales in these channels by working closely with its investment
managers and product distributors to adapt the Company's products and services
to changes in the retail and institutional marketplace in order to enhance its
leading position in the market for variable annuities. The Company is
following a strategy of extending The Best of America brand name to more of
its products and distribution channels in an effort to build upon its brand
name recognition.
39
<PAGE>
The wide array of investment options available under the Company's variable
annuity contracts include mutual funds managed by the nationally recognized
money managers set forth below:
AIM Advisors, Inc. Neuberger & Berman Management
American Century Investors Incorporated
Research Corporation Oppenheimer Management Corporation
Banc One Investment Advisers Phoenix Investment Counsel, Inc.
Corporation Putnam Investment Management, Inc.
Capital Research and Management SEI Financial Management
Company Corporation
Davis Selected Advisors, L.P. Smith Barney Advisers, Inc.
Delaware Management Company, Smith Barney Mutual Funds
Inc. Management, Inc.
Evergreen Asset Management Corp. Strong Capital Management, Inc.
Federated Advisers T. Rowe Price-Flemington
Fidelity Management & Research International, Inc.
Company Templeton Global Advisors Limited
INVESCO Funds Group, Inc. Templeton Investment Counsel, Inc.
J&W Seligman & Co. Incorporated Tiffany Capital Advisors, Inc. (The
Janus Capital Corporation Dreyfus Socially Responsible
Lexington Management Corporation Growth Fund, Inc.)
Massachusetts Financial Service Van Eck Associates Corporation
Company (MFS(R) Variable Van Kampen American Capital Asset
Insurance Trust) Management, Inc.
Mellon Equity Associates The Vanguard Group, Inc.
(Dreyfus Stock Index Fund, Warburg Pincus Counsellors, Inc.
Inc.) Weiss, Peck & Greer, L.L.C.
Miller Anderson & Sherrerd
The Company believes that the variable annuity business is attractive
because it generates fee income. In addition, because the investment risk on
variable annuities is borne principally by the customer and not the Company,
the variable annuity business requires significantly less capital support than
fixed annuity and traditional life insurance businesses. The Company receives
income from variable annuity contracts primarily in the form of asset and
administration fees. In addition, most of the Company's variable annuity
products provide for a contingent deferred sales charge, also known as a
"surrender charge" or "back-end load," that is assessed against customer
withdrawals in excess of specified amounts made during a specified period,
usually the first seven years of the contract. Surrender charges are intended
to protect the Company from withdrawals early in the contract period, before
the Company has had the opportunity to recover its sales expenses. Generally,
surrender charges on variable annuity products are 7% of premiums withdrawn
during the first year, scaling ratably to 0% for the eighth year and each year
thereafter.
The Company's variable annuity products consist almost entirely of flexible
premium deferred variable annuity ("FPVA") contracts. FPVA contracts are
distributed through broker/dealers, financial planners, banks, pension plan
administrators and Nationwide Insurance Enterprise insurance agents. Such
contracts are savings vehicles in which the customer makes a single deposit or
a series of deposits. The customer has the flexibility to invest in mutual
funds managed by independent investment managers and the Company. Deposits may
be made at regular or irregular intervals and in regular or irregular amounts.
The value of the annuity fluctuates in accordance with the investment
experience of the mutual funds chosen by the customer. The customer is
permitted to withdraw all or part of the accumulated value of the annuity,
less a surrender charge for withdrawals during an initial penalty period of
generally seven years. As specified in the FPVA contract, the customer
generally can elect from a number of payment options that provide either fixed
or variable benefit payments.
40
<PAGE>
The following table summarizes certain selected unaudited financial data for
the Company's Variable Annuities segment for the periods indicated.
VARIABLE ANNUITIES SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Policy charges................................... $ 293.5 $ 196.8 $ 137.9
Net investment income and other income(2)........ (8.9) (7.8) (5.2)
-------- -------- --------
Total revenues................................. 284.6 189.0 132.7
-------- -------- --------
Benefits and claims.............................. 4.6 2.9 2.3
Amortization of deferred policy acquisition
costs........................................... 57.4 26.3 22.1
Operating expenses............................... 132.3 109.0 83.7
-------- -------- --------
Total benefits and expenses.................... 194.3 138.2 108.1
-------- -------- --------
Operating income before federal income tax
expense..................................... $ 90.3 $ 50.8 $ 24.6
======== ======== ========
OTHER DATA:
Statutory premiums, deposits and other
considerations(3)............................... $6,500.3 $4,399.3 $3,821.1
Withdrawals...................................... 1,697.3 1,071.6 684.8
Policy reserves at period end.................... 24,278.1 16,761.8 10,751.1
Ratio of policy charges/average policy reserves.. 1.43% 1.44% 1.48%
</TABLE>
- --------
(1) Excludes the fixed option under the Company's variable annuity contracts
which is reported in the Company's Fixed Annuities segment.
(2) The Company's method of allocating net investment income results in a
charge (negative net investment income) to this segment which is
recognized as net investment income in the Corporate and Other segment.
The charge relates to non-invested assets which support this segment on a
statutory basis.
(3) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
The Company offers individual variable annuities under The Best of America
brand name. In addition to The Best of America individual variable annuities,
the Company markets employer-sponsored variable annuities to both public
sector employees and teachers for use in connection with plans described under
Sections 457 and 403(b) of the Internal Revenue Code (the "IRC"), and to
private sector employees for use in connection with IRC Section 401(k) plans.
These employer-sponsored variable annuities are marketed under several brand
names, including Group Best of America. The Company also markets variable
annuities as "private label" products. Such products are offered through banks
and are also offered to members of The National Education Association of the
United States (the "NEA") under The NEA Valuebuilder brand name.
The Best of America. The Company's principal FPVA contracts are sold under
the brand names The Best of America--America's Vision and The Best of America
IV. These two brand name variable annuities accounted for $3.50 billion (or
53.8%) of the Company's variable annuity sales in 1996, and $13.97 billion (or
57.5%) of the Company's variable annuity policy reserves as of December 31,
1996. The Company's The Best of America--America's Vision product is intended
to appeal to distributors in the market for large initial deposits. The
contract requires a minimum initial deposit of $15,000. The Company's The Best
of America IV product is intended primarily for the tax-qualified, payroll
deduction market, where initial deposits are often smaller. The Best of
America IV generally pays a lower up-front commission to distributors but
requires only $1,500 as an initial deposit. Both products generate an annual
asset fee and annual administration fees for the Company.
41
<PAGE>
Group Best of America. These group variable annuity products accounted for
$1.62 billion (or 25.0%) of the Company's variable annuity sales in 1996, and
$4.37 billion (or 18.0%) of the Company's variable annuity policy reserves as
of December 31, 1996. Group Best of America products are typically offered
only on a tax-qualified basis. These products may be structured with a variety
of features which may be arranged in over 600 combinations of front-end loads,
back-end loads and asset-based fees.
Section 457 Contracts. These products accounted for $799.3 million (or
12.3%) of the Company's variable annuity sales in 1996, and $4.10 billion (or
16.9%) of the Company's variable annuity policy reserves as of December 31,
1996. The Company offers a variety of group variable annuity contracts that
are designed primarily for use in conjunction with plans described under IRC
Section 457. Section 457 permits employees of state and local governments to
defer a certain portion of their yearly income and invest such income on a
tax-deferred basis. These contracts typically generate an annual asset fee and
may also generate annual administration fees for the Company.
Private Label Variable Annuities. These products accounted for $487.8
million (or 7.5%) of the Company's variable annuity sales in 1996, and $1.65
billion (or 6.8%) of the Company's variable annuity policy reserves as of
December 31, 1996. The Company has developed several private label variable
annuity products in conjunction with other financial intermediaries, including
Bank One, Fidelity Asset Management Corporation and First Union Bank. These
products allow financial intermediaries to market products with substantially
the same features as The Best of America IV to their own customer bases under
their own brand names. The Company believes these private label products
strengthen the Company's ties to certain significant distributors of the
Company's products. These contracts generate an annual asset fee and may also
generate annual administration fees for the Company.
The NEA Valuebuilder. This product accounted for $89.5 million (or 1.4%) of
the Company's variable annuity sales in 1996, and $196.8 million (or 0.8%) of
the Company's variable annuity account balances as of December 31, 1996. The
Company offers individual variable annuity contracts to the Teacher Market
under Section 403(b) of the IRC. Section 403(b) permits teachers and other
employees of educational organizations to defer a certain portion of their
yearly income and invest such income on a tax-deferred basis. These contracts
generate an annual asset fee and may also generate annual administration fees
for the Company.
Fixed Annuities
The Company has sought to maintain its ability to grow profitably in a
variety of market environments. The Company believes that periods of rising
interest rates, that tend to cause lower sales growth in its Variable
Annuities segment, make its fixed annuity products more attractive to
consumers. In addition to providing balance to the Company's variable annuity
business, its fixed annuity business allows the Company to offer a
comprehensive portfolio of savings alternatives to its customers and
distributors as the Company seeks to capture a growing share of sales in all
distribution channels. The Fixed Annuities segment includes the fixed option
under the Company's variable annuity products. Customers who purchase variable
annuities are able to designate some or all of their deposits to fixed options
which, like the Company's fixed annuity contracts, offer a guarantee of
principal and a guaranteed interest rate for a specified period of time. The
Company includes such business in its Fixed Annuities segment because of its
similar characteristics. The fixed option under the Company's variable annuity
products accounted for $1.24 billion (or 77.3%) of the Company's fixed annuity
sales in 1996, and $9.52 billion (or 70.5%) of the Company's fixed annuity
policy reserves as of December 31, 1996.
Fixed annuity products are marketed to individuals who choose to allocate
long-term savings to products that provide a guarantee of principal, a stable
net asset value and a guarantee of the interest rate to be credited to the
principal amount for some period of time. The Company's fixed annuity products
are offered both to individuals and as group products to employers for use in
employee benefit programs. The Company's individual fixed annuity products are
distributed through its wholesale and retail channels and include single
premium deferred annuity contracts, flexible premium deferred annuity
contracts and single premium immediate annuity contracts. The Company's group
fixed annuity contracts are also distributed through its wholesale and retail
42
<PAGE>
channels. The Company invests fixed annuity customer deposits in its general
account investment portfolio. See "--Investments." Unlike variable annuity
assets that are held in the Company's separate account, the Company bears the
investment risk on assets held in its general account. The Company attempts to
earn a spread by investing a customer's deposits for higher yields than the
interest rate it credits to the customer's fixed annuity contract.
For the year ended December 31, 1996, the average crediting rate on
contracts (including the fixed option under the Company's variable contracts)
in the Fixed Annuities segment was 6.3%. Substantially all of the Company's
crediting rates on the Company's fixed annuity contracts are guaranteed for a
period not exceeding 15 months.
The following table summarizes certain selected unaudited financial data for
the Company's Fixed Annuities segment for the periods indicated.
FIXED ANNUITIES SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Policy charges.......................... $ 18.0 $ 16.4 $ 16.1
Life insurance premiums................. 24.0 32.8 20.1
Net investment income................... 1,050.6 1,002.8 903.7
--------- --------- ---------
Total revenues........................ 1,092.6 1,052.0 939.9
--------- --------- ---------
Benefits and claims..................... 838.5 805.0 702.1
Policyholder dividends.................. 0.3 0.2 (1.0)
Amortization of deferred policy
acquisition costs...................... 38.6 29.5 29.9
Operating expenses...................... 79.8 80.3 69.9
--------- --------- ---------
Total benefits and expenses........... 957.2 915.0 800.9
--------- --------- ---------
Operating income before federal
income tax expense................. $ 135.4 $ 137.0 $ 139.0
========= ========= =========
OTHER DATA:
Statutory premiums, deposits and other
considerations(2)...................... $ 1,600.5 $ 1,864.2 $ 1,308.6
Interest credited....................... 805.0 775.7 680.9
Withdrawals and benefits................ 1,375.4 1,151.6 906.8
Policy reserves at period end........... 13,511.8 12,784.0 11,247.0
Net spread earned (basis points)........ 192 192 212
</TABLE>
- --------
(1) Includes the fixed option under the Company's variable annuity contracts.
(2) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
Fixed Option Under Variable Annuity Contracts. Fixed options under variable
annuity contracts accounted for $1.24 billion (or 77.3%) of the Company's
fixed annuity sales in 1996, and $9.52 billion (or 70.5%) of the Company's
fixed annuity policy reserves as of December 31, 1996. Fixed options are
available to customers who purchase certain of the Company's variable
annuities by designation of some or all of their deposits to such options. A
fixed option offers the customer a guarantee of principal and a guaranteed
interest rate for a specified period of time. Substantially all crediting
rates on fixed options under variable annuity contracts are guaranteed for a
period not exceeding 15 months. Such contracts have no maturity date and
remain in force until the customer elects to take the proceeds of the annuity
as a single payment or as a specified income for life or for a fixed number of
years. The Company reports its fixed option business in its Fixed Annuities
segment because the characteristics of such business are similar to those of
its fixed annuity business. Although the customer may elect, subject to
limitations for certain products, to transfer balances from the fixed option
to other investment options, it is the Company's experience that historically
few have made such election.
43
<PAGE>
Single Premium Deferred Annuity ("SPDA") Contracts. SPDA contracts accounted
for $211.0 million (or 13.2%) of the Company's fixed annuity sales in 1996,
and $1.74 billion (or 12.9%) of the Company's fixed annuity policy reserves as
of December 31, 1996. SPDA contracts are distributed through broker/dealers,
financial planners, banks and Nationwide Insurance Enterprise insurance
agents. An SPDA contract is a savings vehicle in which the customer makes a
single deposit with the Company. The Company guarantees the customer's
principal and credits the customer's account with earnings at an interest rate
that is stated and fixed for an initial period, typically at least one year.
Thereafter, the Company resets, typically annually, the interest rate credited
to the contract based upon market and other conditions. SPDA contracts have no
maturity date and remain in force until the customer elects to take the
proceeds of the annuity as a single payment or as a specified income for life
or for a fixed number of years. No front-end sales charges are imposed for the
Company's SPDA contracts. All such contracts, however, provide for the
imposition of certain surrender charges, which are assessed against
withdrawals in excess of specified amounts and which occur during the
surrender charge period. The surrender charges are typically set within the
range of 7% and 0% and typically decline from year to year, disappearing after
seven contract years.
Flexible Premium Deferred Annuity ("FPDA") Contracts. FPDA contracts
accounted for $96.8 million (or 6.0%) of the Company's fixed annuity sales for
1996, and $1.22 billion (or 9.0%) of the Company's fixed annuity policy
reserves as of December 31, 1996. FPDA contracts are distributed through
broker/dealers, financial planners, banks and Nationwide Insurance Enterprise
insurance agents. FPDA contracts are typically marketed to teachers and
employees of tax-exempt organizations as tax-qualified retirement programs.
Under these contracts, the Company accepts a single deposit or a series of
deposits. Deposits may be paid at intervals which are either regular or
irregular. FPDA contracts contain substantially the same guarantee of
principal and interest rate terms included in the Company's SPDA contracts.
Surrender charges are typically set within the range of 7% and 0% and
typically decline from year to year, disappearing after seven contract years.
Single Premium Immediate Annuity ("SPIA") Contracts. SPIA contracts
accounted for $55.3 million (or 3.5%) of the Company's fixed annuity sales for
1996, and $1.03 billion (or 7.6%) of the Company's fixed annuity policy
reserves as of December 31, 1996. The Company's SPIA contracts are offered
through its retail and wholesale distribution channels and are offered as
either direct purchases or as fixed annuity options under the Company's
various individual and group annuity contracts. An SPIA is an annuity that
requires a one-time deposit in exchange for guaranteed, periodic annuity
benefit payments, often for the contract holder's lifetime. SPIA contracts are
often purchased by persons at or near retirement age who desire a steady
stream of future income.
The following table sets forth policy reserves as of December 31, 1996 for
the Company's fixed annuity contracts by crediting rates in effect on such
date. Substantially all of the Company's fixed annuity contracts are
guaranteed for a period not exceeding 15 months.
FIXED ANNUITY POLICY RESERVES BY CREDITING RATES
<TABLE>
<CAPTION>
AMOUNT OF
CREDITING RATES POLICY RESERVES(1)
- --------------- ---------------------
(DOLLARS IN MILLIONS)
<S> <C>
up to 4.75%............................................... $ 257.0
4.76 to 5.75%............................................. 4,136.2
5.76 to 6.75%............................................. 5,196.3
6.76 to 7.75%............................................. 2,982.0
7.76 to 8.75%............................................. 23.7
8.76 to 9.75%............................................. 5.9
greater than 9.75%........................................ 910.7
---------
Total Policy Reserves................................... $13,511.8
=========
</TABLE>
- --------
(1) Policy reserves are net of reinsurance of $240.5 million.
44
<PAGE>
Life Insurance
The Company's Life Insurance segment is composed of a wide range of whole
life, universal life, term life and variable universal life products. In
recent years, the Company has placed particular emphasis within this segment
on the sale of variable life insurance products that offer multiple investment
options. From 1992 to 1996, first year premiums related to the Company's
variable universal life insurance products grew from $16.5 million to $140.7
million, a compound annual growth rate of 70.9%. The Company distributes its
variable universal life insurance products through its wholesale distribution
channels as well as through Nationwide Insurance Enterprise insurance agents.
The Company's target markets for its life insurance products include the
holders of personal automobile and homeowners' insurance policies issued by
members of the Nationwide Insurance Enterprise and select customers to whom
the accumulation of cash values is of paramount importance. As of December 31,
1996, approximately 10% of the Nationwide Insurance Enterprise's 7.7 million
property/casualty policyholders also owned at least one of the Company's life
insurance products. The Company distributes its traditional and universal life
insurance products through Nationwide Insurance Enterprise insurance agents.
See "Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--Intercompany Agreement--Nationwide Insurance
Enterprise Insurance Agents." During 1996, approximately 24.9% of first year
premiums were provided by Nationwide Insurance Enterprise insurance agents and
approximately 75.1% were provided by the Company's wholesale distribution
channels.
The following table summarizes certain selected unaudited financial data for
the Company's Life Insurance segment for the periods indicated.
LIFE INSURANCE SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Policy charges.................................... $ 86.6 $ 71.3 $ 60.2
Life insurance premiums........................... 174.6 166.3 156.6
Net investment income............................. 174.0 171.3 166.3
Other income...................................... 0.4 0.2 --
--------- --------- ---------
Total revenues.................................. 435.6 409.1 383.1
--------- --------- ---------
Benefits and claims............................... 211.4 202.0 191.0
Policyholder dividends............................ 40.7 39.7 39.8
Amortization of deferred policy acquisition
costs............................................ 37.4 31.0 29.5
Operating expenses................................ 78.9 68.8 69.8
--------- --------- ---------
Total benefits and expenses..................... 368.4 341.5 330.1
--------- --------- ---------
Operating income before federal income tax
expense...................................... $ 67.2 $ 67.6 $ 53.0
========= ========= =========
OTHER DATA:
First year premiums (sales):
Traditional life................................. $ 35.1 $ 31.9 $ 32.1
Universal life/variable universal life........... 149.1 95.4 87.2
Life insurance in force:
Traditional life................................. 19,098.5 17,657.9 16,381.6
Universal life/variable universal life........... 18,621.1 15,748.5 13,745.9
</TABLE>
Traditional Life Insurance Products. The Company offers whole life and term
life insurance. Whole life insurance combines a death benefit with a savings
plan that increases gradually in amount over a period of years. The customer
pays a level premium over the customer's expected lifetime. The customer may
borrow against the savings and also has the option of surrendering the policy
and receiving the accumulated cash value rather
45
<PAGE>
than the death benefit. Term life insurance provides only a death benefit
without any savings component. These traditional life insurance products are
distributed on a retail basis by Nationwide Insurance Enterprise insurance
agents.
Universal Life and Variable Universal Life Insurance Products. The Company
offers universal life and variable universal life insurance products including
both flexible premium and single premium designs. These products provide life
insurance under which the benefits payable upon death or surrender depend upon
the policyholder's account value. Universal life insurance provides whole life
insurance with flexible premiums and adjustable death benefits. For universal
life, the policyholder's account value is credited based on an adjustable rate
of return set by the Company relating to current interest rates. For variable
universal life, the policyholder's account value is credited with the
investment experience of the mutual funds chosen by the customer. The variable
universal life products also typically include a general account guaranteed
interest investment option. All of the Company's variable universal life
insurance products are marketed under the Company's The Best of America--Life
Planning Series brand name and have the same wide range of investment options
as the Company's variable annuity products. These products are distributed on
a retail basis by Nationwide Insurance Enterprise insurance agents as well as
through wholesale distribution channels by broker/dealers, financial planners
and banks.
MARKETING AND DISTRIBUTION
The Company defines wholesale channels of distribution as channels in which
an unaffiliated company, such as a securities broker/dealer, pension plan
administrator, bank or other financial institution, sells the Company's
products to its own customer base. The Company defines retail channels as
those in which the Company's representatives, such as Nationwide Insurance
Enterprise insurance agents, agents of the Company's sales subsidiaries and
affiliates or individual financial planners, market products directly to a
customer base identified by the Company. The Company provides, through both
its retail and wholesale channels, the means for employers sponsoring tax-
favored retirement plans (such as those described in IRC Sections 401(k),
403(b) and 457) to allow their employees to make contributions to such plans
through payroll deductions. Typically, the Company receives the right from an
employer to market products to employees and arrange to deduct periodic
deposits from the employees' regular paychecks. The Company believes that the
payroll deduction market is characterized by more predictable levels of sales
than other markets because these customers are less likely, even in times of
market volatility, to stop making annuity deposits than customers in other
markets. In addition, the Company believes that payroll deduction access to
customers provides significant insulation from competition by providing the
customer with a convenient, planned method of periodic saving. In both the
Pension Market, where the Company's products are distributed primarily on a
wholesale basis, and in the Public Sector and Teacher Markets, where the
Company's products are distributed primarily on a retail basis, payroll
deduction is the primary method used for collecting premiums and deposits.
46
<PAGE>
The following table summarizes certain selected unaudited financial data for
the Company's distribution channels.
STATUTORY PREMIUMS, DEPOSITS AND OTHER CONSIDERATIONS
BY DISTRIBUTION CHANNEL(1)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Wholesale channels:
Investment dealers..... $3,627.2 40.1% $2,835.4 41.7% $2,279.0 40.7%
Pension market......... 1,911.2 21.1 1,573.7 23.1 1,366.5 24.4
Financial
institutions.......... 947.2 10.5 515.4 7.6 324.3 5.8
-------- ----- -------- ----- -------- -----
Total wholesale
channels............. 6,486.6 71.7 4,924.5 72.4 3,969.8 70.9
-------- ----- -------- ----- -------- -----
Retail channels:
Public sector and
teacher markets....... 1,528.0 16.9 1,244.9 18.3 1,104.4 19.8
Nationwide Insurance
Enterprise insurance
agents................ 525.5 5.8 446.5 6.6 376.3 6.7
-------- ----- -------- ----- -------- -----
Total retail
channels............. 2,053.5 22.7 1,691.4 24.9 1,480.7 26.5
-------- ----- -------- ----- -------- -----
Other(2)................ 502.5 5.6 182.1 2.7 148.5 2.6
-------- ----- -------- ----- -------- -----
Total statutory
premiums, deposits and
other considerations.. $9,042.6 100.0% $6,798.0 100.0% $5,599.0 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- --------
(1) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(2) Statutory premiums, deposits and other considerations from Nationwide
Insurance Enterprise employee and agent benefit plans.
Wholesale Channels
Investment Dealers. The Company sells individual and group variable
annuities, fixed annuities and variable life insurance through broker/dealers
in all 50 states and the District of Columbia. The Company has access to over
1,000 broker/dealers and over 30,000 registered representatives. Target
markets include retirement planning for individuals, retirement planning for
institutions of higher education and 501(c)(3) hospitals, participant-directed
401(k) plans covering less than 1,000 lives, small business life insurance
(fewer than 500 employees) and IRA rollovers and tax-sheltered annuity
transfers. The Company historically has focused on distributing through mid-
sized regional broker/dealers and financial planning firms. The Company
believes that it has strong broker/dealer relationships based on its diverse
product mix, large selection of fund options and administrative technology. In
addition to such relationships, the Company believes its financial strength
and The Best of America brand name are competitive advantages in this
distribution channel. The Company regularly seeks to add new broker/dealers to
its distribution network.
Pension Market. The Company defines the Pension Market as defined
contribution plans pursuant to Section 401 of the IRC sponsored by employers
as part of employee retirement programs. The Company markets group variable
annuities, group fixed annuities and record-keeping services to these plan
sponsors primarily through over 200 regional pension plan administrators
located in 45 states. The Company targets employers having between 25 and
2,000 employees because it believes that these plan sponsors tend to require
more extensive record-keeping services from pension plan administrators and
therefore tend to become long-term customers. As of December 31, 1996, 401(k)
plans administered by the Company included over 280,000 participants. These
participants generally make deposits through payroll deductions. The Company
believes, based on industry survey data, that it is the third largest
administrator of 401(k) plans based on total number of plans.
47
<PAGE>
Financial Institutions. The Company markets individual variable annuities
(under its brand names and on a private-label basis), individual fixed
annuities and variable universal life insurance through financial
institutions, consisting primarily of banks and their subsidiaries. The
Company seeks to establish marketing relationships with financial institutions
having assets of $500.0 million or more. From January 1, 1991 to December 31,
1996, the number of financial institutions through which the Company
distributes its products increased from 7 to 125. The Company is actively
seeking to increase the number of financial institutions with which it has
distribution arrangements. The Company believes that its expertise in training
financial institution personnel to sell annuities, its breadth of product
offerings, its financial strength and the Nationwide and The Best of America
brand names are competitive advantages in this distribution channel. See
"Certain Relationships and Related Transactions--New Agreement with the
Nationwide Insurance Enterprise--Intercompany Agreement--License to Use
Nationwide Name and Service Marks."
Retail Channels
Public Sector and Teacher Markets. The Company markets various products and
services on a retail basis through several subsidiary sales organizations to
both the Public Sector and Teacher Markets. With respect to the Public Sector
Market, the Company markets group variable annuities and fixed annuities to
state and local governments for use in their IRC Section 457 retirement
programs. Section 457 permits employees of state and local government entities
and certain tax-exempt organizations to defer receipt of up to 33% of their
taxable income, not to exceed $7,500 per year, and have such amounts
accumulate on a tax-deferred basis until received. The Company currently
markets such products to, and administers Section 457 retirement programs for,
approximately 6,000 state and local government entities in 48 states. The
Company believes that its existing relationships with state and local
government entities and the Company's sponsorship by such entities as the
National Association of Counties ("NACO") and The United States Conference of
Mayors ("USCM") provide it with distinct competitive advantages in this
market. NACO sponsorship, which began in 1980 and has been renewed three
times, expires on December 31, 2005, and USCM sponsorship, which began in 1979
and has been renewed twice, expires on December 31, 2004.
With respect to the Teacher Market, the Company has an exclusive contractual
arrangement with the NEA to offer and sell certain products to its 2.2 million
members. Under The NEA Valuebuilder brand name, the Company markets both
qualified and non-qualified (under IRC Section 403(b)) individual variable
annuity contracts. The Company also offers IRAs in this market. The Teacher
Market is primarily serviced by the Company's network of approximately 140
representatives known as Valuebuilder Investment Professionals. As of December
31, 1996, the Company administers plans for over 1,800 school districts in 48
states. Section 403(b) permits teachers and employees of certain tax-exempt
organizations to defer receipt of a portion of their taxable income, not to
exceed $9,500 per year, and invest the amount deferred in tax-deferred annuity
products. The Company's marketing approach to these customers emphasizes
educational seminars and other targeted communication channels such as direct
mail. The NEA exclusive contractual arrangement, which began in 1990,
automatically renewed on July 26, 1995 for an additional 5-year period.
Nationwide Insurance Enterprise Insurance Agents. The Company sells
traditional life, universal life and variable universal life insurance
products and individual annuities through approximately 4,500 licensed
Nationwide Insurance Enterprise insurance agents who primarily target the
holders of personal automobile and homeowners' insurance policies issued by
the Nationwide Insurance Enterprise. As of December 31, 1996, approximately
10% of the Nationwide Insurance Enterprise's 7.7 million property/casualty
policyholders also owned at least one of the Company's life insurance
products. The Nationwide Insurance Enterprise insurance agents sell
exclusively Nationwide Insurance Enterprise products and may not offer
products which compete with those of the Company. See "Certain Relationships
and Related Transactions--New Agreements with Nationwide Insurance
Enterprise--Intercompany Agreement--Nationwide Insurance Enterprise Insurance
Agents."
Mutual Funds
Nationwide Mutual Funds. In addition to including Company-managed mutual
funds among the investment options for its variable products, the Company
markets 10 public, open-end mutual funds through Nationwide
48
<PAGE>
Insurance Enterprise insurance agents and directly to Nationwide Insurance
Enterprise employees and their families. These products employ the existing
investment management, shareholder services, accounting and administrative
capabilities developed by the Company to support its variable annuity
products. As of December 31, 1996, these mutual funds had $6.0 billion of
assets under management, of which $3.9 billion related to variable annuities
and variable life insurance and $2.1 billion related to retail mutual fund
customers.
CORPORATE AND OTHER SEGMENT
The Corporate and Other segment includes net investment income on
investments not allocated to the three product segments; all realized
investment gains and losses; investment management fees, other revenues and
operating expenses of Nationwide mutual funds other than the portion allocated
to the Variable Annuities and Life Insurance segments; commissions and other
income earned by the marketing and distribution subsidiaries of the Company;
and revenues, benefits and expenses associated with group annuity contracts
issued to Nationwide Insurance Enterprise employee and agent benefit plans.
The following table summarizes certain selected unaudited financial data for
the Company's Corporate and Other segment for the periods indicated.
CORPORATE AND OTHER SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net investment income........................ $ 154.7 $ 137.6 $ 154.2
Other income................................. 49.3 51.0 40.7
-------- -------- --------
Total revenues............................. 204.0 188.6 194.9
-------- -------- --------
Interest credited............................ 106.1 105.6 97.3
Operating expenses........................... 62.5 55.5 57.3
-------- -------- --------
Total benefits and expenses................ 168.6 161.1 154.6
-------- -------- --------
Operating income before federal income
tax expense(1).......................... $ 35.4 $ 27.5 $ 40.3
======== ======== ========
OTHER DATA(2):
Nationwide mutual fund assets................ $2,136.2 $2,113.9 $1,665.6
</TABLE>
- --------
(1) Excludes realized gains (losses) on investments and discontinued
operations.
(2) Excludes mutual funds selected as investment options under the Company's
variable annuity and variable universal life insurance contracts and
mutual funds selected as investment options under Nationwide Insurance
Enterprise employee and agent benefit plans.
Interest expense related to the Note Offering and the Capital Securities
Offering will be recorded in the Corporate and Other segment which will reduce
income before taxes for the Corporate and Other segment in periods after the
completion of such offerings.
LIFE INSURANCE UNDERWRITING
Life insurance policies are individually underwritten based on standardized
underwriting guidelines and procedures. After initial processing, each file is
reviewed and additional information (such as medical examinations, doctors'
statements and special medical tests) is obtained to make an underwriting
decision. The Company follows detailed, uniform underwriting procedures
designed to assess and quantify insurance risks before issuing life insurance
policies to individuals.
49
<PAGE>
LIFE INSURANCE AND ANNUITY RESERVES
In accordance with applicable insurance regulations, the Company records in
its statutory financial statements actuarially determined reserves that are
calculated to meet future obligations under outstanding insurance contracts.
The reserves are based on statutorily recognized methods using prescribed
morbidity and mortality tables and interest rates. Reserves include unearned
premiums, premium deposits, claims that have been reported but are not yet
paid, claims that have been incurred but have not been reported and claims in
the process of settlement. The Company's reserves satisfy applicable statutory
requirements.
The reserves reflected in the consolidated financial statements of the
Company are calculated based on GAAP. These reserves are based upon the
Company's best estimates of mortality, persistency, expenses and investment
income with appropriate provisions for adverse statistical deviation and the
use of the net level premium method for all non-interest-sensitive products
and the retrospective deposit method for interest-sensitive products. GAAP
reserves differ from statutory reserves due to the use of different
assumptions regarding mortality and interest rates and the introduction of
lapse assumptions into the GAAP reserve calculation.
REINSURANCE
The Company follows the customary industry practice of reinsuring a portion
of its life insurance and annuity risks with other companies in order to
reduce net liability on individual risks, to provide protection against large
losses and to obtain greater diversification of risks. The maximum amount of
individual ordinary life insurance retained by the Company on any one life is
$500,000, which amount will increase to $1.0 million effective April 1, 1997.
The Company cedes insurance primarily on an automatic basis, under which risks
are ceded to a reinsurer on specific blocks of business where the underlying
risks meet certain predetermined criteria, and on a facultative basis, under
which the reinsurer's prior approval is required for each risk reinsured. The
Company also cedes insurance on a case-by-case basis particularly where the
Company may be writing new risks or is unwilling to retain the full costs
associated with new lines of business. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder. The
Company has entered into a reinsurance contract to cede a portion of its
general account individual annuity reserves to Franklin Life. Total recoveries
due from Franklin Life were $240.5 million and $245.3 million as of December
31, 1996 and 1995, respectively. Under the terms of the contract, Franklin
Life has established a trust as collateral for the recoveries. The trust
assets are invested in investment grade securities, the market value of which
must at all times be greater than or equal to 102% of the reinsured reserves.
The Company has no other material reinsurance arrangements with unaffiliated
reinsurers. The only material reinsurance agreements the Company has with
affiliates are the modified coinsurance agreements pursuant to which
Nationwide Life reinsured all of its accident and health and group life
insurance business to other members of the Nationwide Insurance Enterprise.
See "Certain Relationships and Related Transactions--Existing Arrangements
with Nationwide Insurance Enterprise--Modified Coinsurance Agreements."
Premiums and policy reserves ceded to unaffiliated reinsurers were 0.3% of
statutory premiums and considerations in 1996 and 0.8% of policy reserves as
of December 31, 1996. The Company's principal unaffiliated reinsurers of
individual life insurance and annuity policies at December 31, 1995 (and their
corresponding A.M. Best ratings) were: American United Life Insurance Company
(A+), Reinsurance Group of America (A+), Lincoln National Life Insurance
Company (A+), Franklin Life (A+), and Indianapolis Life Insurance Company
(A+). See "--Ratings."
INVESTMENTS
General
The Company's assets are divided between separate account and general
account assets. As of December 31, 1996, $26.9 billion (or 56%) of the
Company's total assets were held in separate accounts and $20.8 billion (or
44%) were held in the Company's general account, including $18.3 billion of
general account investments. Separate account assets consist primarily of
deposits from the Company's variable annuity business. Most separate account
assets are invested in various mutual fund options available within the
variable annuity products sold by the Company. All of the investment risk in
the Company's separate account assets is borne by the Company's customers,
with the exception of $280.2 million of policy reserves as of December 31,
1996 ($205.7
50
<PAGE>
million as of December 31, 1995) for which the Company bears the investment
risk. General account assets consist mainly of investments generated by
premiums on life insurance products and deposits in the Company's Fixed
Annuities segment. The Company generates profits on these products, in part,
based on the spread between the yield on general account invested assets and
crediting rates on these products.
The Company's general account investment policies emphasize high credit
quality, diversification across asset classes and individual investment risks,
and a buy and hold strategy. As noted in the table below, the Company's
general account assets are invested primarily in fixed maturity securities and
commercial mortgage loans. The Company has a general policy of diversifying
investments within asset categories. Additionally, the Company's investment
policy provides that fixed maturity investments are limited to purchases of
investment grade securities or unrated securities which, in the opinion of the
Company, should qualify for such rating. The Company monitors its exposure to
individual borrowers, credit risks, industries or property types and
geographic locations. The Company's investments are subject to suitability and
diversification requirements under applicable insurance laws. See "Business--
Regulation." The Investment Committee of the Board of Directors of Nationwide
Life, which is comprised of the Chairman and five outside directors, meets ten
times a year. Such committee approves investment policy and strategy, approves
all mortgage loans and large private placements and reviews and ratifies all
other investments. In relation to the life insurers reporting to the American
Council of Life Insurance ("ACLI"), the Company's general account investment
portfolio has achieved (i) higher net investment yields, (ii) lower bond
default rates and (iii) lower mortgage delinquency rates, in each case in each
of the five years ended December 31, 1995 (with ACLI data not yet available
for the year ended December 31, 1996).
The following table summarizes the Company's consolidated invested assets by
asset category as of December 31, 1996 and December 31, 1995.
CONSOLIDATED INVESTED ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
% OF % OF
CARRYING GENERAL ACCOUNT CARRYING GENERAL ACCOUNT
VALUE INVESTED ASSETS VALUE INVESTED ASSETS
--------- --------------- --------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities(1):
Public.................... $ 8,395.6 45.8% $ 8,609.8 48.3%
Private................... 3,914.9 21.4 3,891.8 21.8
Mortgage loans, net:
Commercial................ 5,269.4 28.8 4,624.3 25.9
Residential............... 2.7 -- 3.1 --
Real estate, net........... 265.8 1.5 229.4 1.3
Policy loans............... 371.8 2.0 336.4 1.9
Equity securities(1)....... 59.1 0.3 37.5 0.2
Other long-term
investments............... 28.7 0.2 62.0 0.4
Short-term investments..... 9.3 -- 42.7 0.2
--------- ----- --------- -----
Total general account
invested assets......... $18,317.3 100.0% $17,837.0 100.0%
========= ===== ========= =====
Total separate account
assets.................. $26,926.7 $18,591.1
========= =========
</TABLE>
- --------
(1) As of December 31, 1996, all fixed maturities and equity securities are
classified as available-for-sale and are carried at fair value.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its product lines. The Company's general
account investment assets are primarily managed in a number of pools that are
separated by weighted average maturity of the assets acquired by the pools. On
bonds and mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms
51
<PAGE>
of the asset. For mortgage backed securities, repayments are determined using
the current rate of repayment of the underlying pool of mortgages and the
terms of the securities. Each product line has an investment strategy based on
the specific characteristics of such product line. The strategy establishes
asset duration, quality and other guidelines. The Company's actuaries
determine the amount of new investments needed for each line to arrive at the
amount of new investments needed for each pool by month. The investments
acquired for each pool are shared on a proportional basis by each of the lines
requesting investments in the pool based on their actual investment needs.
For all business having future benefits which cannot be changed at the
option of the policyholder, the underlying assets are managed in a separate
pool. The duration of assets and liabilities in this pool are kept as close
together as possible. For assets, the repayment cash flows, plus anticipated
coupon payments, are used in calculating asset duration. Future benefits and
expenses are used for liabilities. On December 31, 1996, the average duration
of assets in this pool was 6.80 years and the average duration of the
liabilities was 7.44 years. Policy reserves on this business were $1.11
billion as of December 31, 1996.
Because the timing of the payment of future benefits on the majority of the
Company's business can be changed by the policyholder, the Company employs
cash flow testing techniques as a final step in its asset/liability management
process. Annually, the Company's annuity and insurance business is analyzed to
determine the adequacy of the reserves supporting such business. This analysis
is accomplished by projecting under a number of possible future interest rate
scenarios the anticipated cash flows from such business and the assets
required to support such business. The first seven of these scenarios are
required by state insurance laws. Projections are also made using 13
additional scenarios which involve more extreme fluctuations in future
interest rates. Finally, to get a statistical analysis of possible results and
to minimize any bias in the 20 predetermined scenarios, additional projections
are made using 200 randomly generated interest rate scenarios. For the
Company's 1996 cash flow testing process, interest rates for 90-day treasury
bills ranged from 0.4% to 11.5% under the 20 predetermined scenarios and 0.8%
to 25.3% under the 200 random scenarios. Interest rates for longer maturity
treasury securities had comparable ranges. The values produced by each
projection are used to determine future gains or losses from the Company's
annuity and insurance business, which, in turn, are used to quantify the
adequacy of the Company's reserves over the entire projection period. The
results of the Company's cash flow testing for year end 1996 (the most recent
year for which results are available) indicated that the Company's reserves
were adequate at December 31, 1996.
The Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of the Company's
fixed maturity portfolio increases or decreases in inverse relationship with
fluctuations in interest rates. For example, if interest rates rise, the
Company's fixed maturity investments will generally decrease in value.
Additionally, the Company's net investment income may be affected by interest
rate changes. If interest rates decline, net investment income will decrease
if high-yielding fixed maturity investments mature or are sold and the
proceeds therefrom are reinvested in securities yielding a lower rate.
The following table summarizes the net investment yield of the Company's
general account invested assets relative to that of the life insurers
reporting to the ACLI.
NET INVESTMENT YIELD
<TABLE>
<CAPTION>
THE BASIS POINT
YEAR COMPANY ACLI(1) DIFFERENCE
- ---- ------- ------- -----------
<S> <C> <C> <C>
1991................................................ 9.34% 9.09% 25
1992................................................ 8.93 8.58 35
1993................................................ 8.57 8.07 50
1994................................................ 8.37 7.63 74
1995................................................ 8.21 7.90 31
1996................................................ 8.00 -- --
</TABLE>
- --------
(1) Source: ACLI Statistical Bulletin #97-1 (January 8, 1997) entitled
"Revised Rate of Investment Income of U.S. Legal Reserve Life Insurance
Companies." ACLI data for the year ended December 31, 1996 are not yet
available.
52
<PAGE>
Fixed Maturity Securities
As of December 31, 1996, general account fixed maturity securities were
$12.3 billion (or 67.2%) of the carrying value of consolidated general account
invested assets. As of such date, public and private fixed maturity securities
constituted $8.4 billion (or 68.3%) and $3.9 billion (or 31.7%), respectively,
of total general account fixed maturity securities. The Company's general
account fixed maturity securities portfolio consists primarily of investment
grade corporate fixed maturity securities, high-quality mortgage-backed
securities and U.S. government and agency obligations.
The following table summarizes the composition of the Company's general
account fixed maturity securities by category as of December 31, 1996.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- COMPOSITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
CARRYING
VALUE % OF TOTAL
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
U.S. government/agencies............................ $ 285.0 2.3%
Foreign governments................................. 102.0 0.9
State and political subdivisions.................... 6.6 --
Mortgage-backed securities:
U.S. government/agencies........................... 3,665.3 29.8
Non-government/agencies............................ -- --
Corporate........................................... 8,251.6 67.0
------------- ---------
Total............................................. $ 12,310.5 100.0%
============= =========
</TABLE>
The following table sets forth scheduled maturities for the Company's
general account fixed maturity securities as of December 31, 1996.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- SCHEDULED MATURITIES(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
CARRYING
VALUE % OF TOTAL
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Due in one year or less............................. $ 444.2 3.6%
Due after one year through five years............... 4,059.1 33.0
Due after five years through 10 years............... 2,871.8 23.3
Due after 10 years.................................. 1,270.1 10.3
Mortgage-backed securities.......................... 3,665.3 29.8
------------- ---------
Total fixed maturity securities................... $ 12,310.5 100.0%
============= =========
</TABLE>
- --------
(1) General account fixed maturity securities with call dates are classified
on their earliest call date.
The average duration and average maturity of the Company's general account
fixed maturity securities as of December 31, 1996 were approximately 3.75 and
7.97 years, respectively. As a result, the market value of the Company's
general account investments may fluctuate significantly in response to changes
in interest rates. In addition, the Company may also be likely to experience
investment losses to the extent its liquidity needs require the disposition of
general account fixed maturity securities in unfavorable interest rate
environments.
The Company's portfolio of general account investment grade fixed maturity
securities is diversified by number and type of issuer. As of December 31,
1996, general account investment grade fixed maturity securities included the
securities of over 548 issuers, with no issuer, other than the U.S. government
or its agencies,
53
<PAGE>
representing more than 0.6% of the carrying value of general account
investment grade fixed maturity securities. As of December 31, 1996, one
investment with a value of $0.5 million had been restructured and is currently
performing.
Below investment grade fixed maturity securities in the Company's general
account as of December 31, 1996 included the securities of 23 issuers
representing approximately 1.8% of the carrying value of total fixed maturity
securities. The Company's investment policy provides that fixed maturity
investments are limited to purchases of investment grade securities or unrated
securities which, in the opinion of the Company, should qualify for such
rating. All of the below grade fixed maturity securities held in the Company's
general account as of December 31, 1996 were investment grade securities when
purchased by the Company.
The NAIC assigns securities quality ratings and uniform valuations called
"NAIC Designations" which are used by insurers when preparing their annual
statements. The NAIC assigns designations to publicly traded as well as
privately placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a designation in class 1 being of the highest
quality. Of the Company's general account fixed maturity securities, 98.2% by
the carrying value were in the highest two NAIC Designations as of December
31, 1996.
The following tables set forth an analysis of the credit quality, as
determined by NAIC Designation, of the Company's general account fixed
maturity securities portfolio and general account public fixed maturity
securities portfolio as of December 31, 1996 and December 31, 1995.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
-------------------------- --------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------- ------------ ------------- ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A.. $ 8,453.4 68.7% $ 8,659.9 69.3%
2 Baa....... 3,629.9 29.5 3,562.9 28.5
3 Ba........ 166.6 1.3 224.1 1.8
4 B......... 49.7 0.4 44.9 0.4
Caa and
5 lower..... 10.9 0.1 2.8 --
In or near
6 default... -- -- 7.0 --
Redeemable preferred stock and other..... -- -- -- --
------------- ---------- ------------- ----------
Total................................. $ 12,310.5 100.0% $ 12,501.6 100.0%
============= ========== ============= ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of December 31, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
54
<PAGE>
GENERAL ACCOUNT PUBLIC FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A... $ 6,540.4 77.9% $ 6,730.2 78.2%
2 Baa........ 1,776.6 21.2 1,811.0 21.0
3 Ba......... 52.7 0.6 49.0 0.6
4 B.......... 25.9 0.3 19.6 0.2
Caa and
5 lower...... -- -- -- --
In or near
6 default.... -- -- -- --
Redeemable preferred stock and other..... -- -- -- --
------------ ---------- ------------ ----------
Total................................. $ 8,395.6 100.0% $ 8,609.8 100.0%
============ ========== ============ ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of December 31, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
The Company invests in private fixed maturity securities because of the (i)
generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business
covenants available in private fixed maturity security loan agreements and
(iii) stronger prepayment protection. Although private fixed maturity
securities are not registered with the Commission and generally are less
liquid than public fixed maturity securities, restrictive financial and
business covenants included in private fixed maturity security loan agreements
generally are designed to compensate for the impact of increased liquidity
risk. A significant majority of the private fixed maturity securities that the
Company holds are participations in issues that are also owned by other
investors. In addition, some of the private fixed maturity securities are
rated by nationally recognized rating agencies and substantially all have been
assigned a rating designation by the NAIC.
The following table sets forth an analysis of the credit quality, as
determined by NAIC Designation, of the Company's general account private fixed
maturity securities portfolio as of December 31, 1996 and December 31, 1995.
GENERAL ACCOUNT PRIVATE FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
-------------------------- --------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------- ------------ ------------- ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A.. $ 1,913.0 48.9% $ 1,929.7 49.6%
2 Baa....... 1,853.4 47.3 1,751.9 45.0
3 Ba........ 113.9 2.9 175.1 4.5
4 B......... 23.7 0.6 25.3 0.6
Caa and
5 lower..... 10.9 0.3 2.8 0.1
In or near
6 default... -- -- 7.0 0.2
Redeemable preferred stock and other..... -- -- -- --
------------- ---------- ------------- ----------
Total................................. $ 3,914.9 100.0% $ 3,891.8 100.0%
============= ========== ============= ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of December 31, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
55
<PAGE>
The following table sets forth the bond default rates for the Company and
the life insurers reporting to the ACLI for the periods indicated.
COMPANY AND LIFE INDUSTRY
BOND DEFAULT RATES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Company................................. 0.00% 0.04% 0.03% 0.01% 0.03%
ACLI(1)................................. -- 0.09 0.19 0.28 0.60
</TABLE>
- --------
(1) Source: ACLI Statistical Bulletins entitled "Quality Distribution of Bond
Holdings of U.S. Legal Reserve Life Insurance Companies:" Bulletin #'s 96-
2, 95-7, 94-5 and 93-5, dated May 15, 1996, July 24, 1995, July 28, 1994
and August 3, 1993, respectively. ACLI data for the year ended December
31, 1996 are not yet available.
The Company maintains significant general account investments in MBSs. The
Company's general account MBS investments include residential MBSs and
commercial MBSs. As of December 31, 1996, MBSs were $3.67 billion (or 29.8%)
of the carrying value of the general account fixed maturity securities, all of
which were guaranteed by the U.S. government or an agency of the U.S.
government.
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to its general
account fixed maturity securities portfolio. The objective of the Company's
general account MBS investments is to provide reasonable cash flow stability
and increased yield. General account MBS investments include CMOs and
mortgage-backed pass- through securities. The Company's general account MBS
investments do not include interest-only securities or principal-only
securities or other MBSs which may exhibit extreme market value volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the degree of
prepayment risk is particular to the type of MBS held. The Company limits its
exposure to prepayments by purchasing less volatile types of MBSs. As of
December 31, 1996, $2.97 billion (or 81.0%) of the carrying value of the
general account MBS portfolio was invested in planned amortization class CMOs
("PACs"). PACs are securities whose cash flows are designed to remain constant
over a variety of mortgage prepayment environments. Other classes in the CMO
security are structured to accept the volatility of mortgage prepayment
changes, thereby insulating the PAC class. Of the remaining general account
MBS portfolio, $2.5 million (or 0.1%) was invested in mortgage-backed pass-
throughs or sequential CMOs. Pass-throughs are securities in which the monthly
cash flows of principal and interest (both scheduled and prepayments)
generated by the underlying mortgages are distributed on a pro rata basis to
the holders of securities. A sequential MBS is structured to divide the CMO
security into sequentially ordered classes. Receipt of principal payments are
made currently on all classes. While these securities are more sensitive to
prepayment risk than PACs, the Company does not consider them highly volatile
securities.
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio as of December 31, 1996.
GENERAL ACCOUNT MORTGAGE-BACKED SECURITIES -- INVESTMENT TYPE(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
CARRYING
VALUE % OF TOTAL
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accrual............................................ $ 41.4 1.1%
PAC................................................ 2,970.6 81.0
Sequential......................................... 2.5 0.1
Scheduled.......................................... 167.2 4.6
TAC................................................ 87.7 2.4
VADM............................................... 395.9 10.8
------------- ----------
Total............................................ $ 3,665.3 100.0%
============= ==========
</TABLE>
- --------
(1) All general account mortgage-backed securities are agency-backed.
56
<PAGE>
Pursuant to the Company's investment policies, the Company does not invest
in derivative securities other than MBSs.
Mortgage Loans
As of December 31, 1996, general account mortgage loans were $5.27 billion
(or 28.8%) of the carrying value of consolidated general account invested
assets. As of such date, commercial mortgage loans constituted substantially
all (99.9%) of total general account mortgage loans with the remainder being
76 residual residential loans originated prior to 1981 with a principal
balance of $2.7 million. These mortgages, substantially all of which are made
on a non-recourse basis, consist primarily of fixed rate mortgages on existing
income-producing properties. As of December 31, 1996, there were two second
mortgages totaling $2.6 million and no construction loans, participating or
convertible mortgages or land development loans. Commitments to fund mortgage
loans of $327.5 million extending into 1997 were outstanding as of December
31, 1996.
The following tables set forth the distribution by property type and region
of the Company's commercial mortgages as of December 31, 1996 and December 31,
1995.
GENERAL ACCOUNT COMMERCIAL MORTGAGE
LOAN PORTFOLIO -- PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Property Type(1):
Apartment......... 192 $1,216.0 22.8% 159 $ 995.8 21.3%
Retail............ 426 2,337.6 43.9 396 2,237.3 47.8
Office............ 153 891.0 16.7 131 785.8 16.8
Industrial........ 190 864.3 16.2 159 660.9 14.1
Hotel/motel....... 5 18.6 0.4 2 1.5 --
Other............. 2 0.3 -- 3 0.9 --
--- -------- ----- --- -------- -----
Total........... 968 $5,327.8 100.0% 850 $4,682.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
- --------
(1) As defined by the ACLI.
57
<PAGE>
GENERAL ACCOUNT COMMERCIAL MORTGAGE
LOAN PORTFOLIO -- REGION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Region(1):
New England............ 35 $ 238.9 4.5% 30 $ 197.5 4.2%
Middle Atlantic........ 62 362.5 6.8 57 350.0 7.5
East North Central..... 180 1,022.2 19.2 160 930.9 19.9
West North Central..... 33 244.5 4.6 36 262.4 5.6
South Atlantic......... 225 1,103.4 20.7 187 901.4 19.3
East South Central..... 65 319.1 6.0 63 307.1 6.5
West South Central..... 105 725.7 13.6 91 618.4 13.2
Mountain............... 51 247.5 4.6 45 203.8 4.4
Pacific and other...... 212 1,064.0 20.0 181 910.7 19.4
--- -------- ----- --- -------- -----
Total................ 968 $5,327.8 100.0% 850 $4,682.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
- --------
(1) The ACLI defines each of the regions set forth above as follows: (i) New
England includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont; (ii) Middle Atlantic includes New York, New Jersey and
Pennsylvania; (iii) East North Central includes Illinois, Indiana,
Michigan, Ohio and Wisconsin; (iv) West North Central includes Iowa,
Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota; (v)
South Atlantic includes Delaware, District of Columbia, Florida, Georgia,
Maryland, North Carolina, South Carolina, Virginia and West Virginia; (vi)
East South Central includes Alabama, Kentucky, Mississippi and Tennessee;
(vii) West South Central includes Arkansas, Louisiana, Oklahoma and Texas;
(viii) Mountain includes Arizona, Colorado, Idaho, Montana, Nevada, New
Mexico, Utah and Wyoming; and (ix) Pacific and other includes Alaska,
California, Hawaii, Oregon, Washington, Puerto Rico, U.S. Territories and
Possessions, Canada, and other foreign jurisdictions.
As of December 31, 1996, the Company's largest mortgage loan exposure to any
borrowing group was $95.7 million, or 1.8% of the Company's general account
mortgage portfolio.
58
<PAGE>
The following table sets forth the composition of the Company's general
account commercial mortgage loan portfolio by loan size as of December 31,
1996 and December 31, 1995.
GENERAL ACCOUNT COMMERCIAL MORTGAGE LOAN PORTFOLIO -- LOAN SIZE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
SIZE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
---- -------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Under $5 million........ 559 $1,393.4 26.1% 482 $1,195.4 25.5%
$5 million to $9.9
million................ 273 1,911.7 35.9 251 1,771.3 37.9
$10 million to $19.9
million................ 121 1,582.0 29.7 106 1,387.5 29.6
$20 million to $29.9
million................ 10 238.8 4.5 7 168.4 3.6
Over $30 million........ 5 201.9 3.8 4 159.6 3.4
--- -------- ----- --- -------- -----
Total................. 968 $5,327.8 100.0% 850 $4,682.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
The Company's investment policy with regard to the origination of new
mortgage loans involves a review of the economics of the property being
financed, adherence to guidelines that provide for diversification of the
mortgage portfolio by property type and location, a review of industry lending
practices prevailing from time to time and diversification of the Company's
total general account investment portfolio. Guidelines for new mortgage loans
generally require a loan-to-value ratio of not greater than 75% at the time of
origination.
Substantially all of the general account commercial mortgage loans were
originated by the Company and not purchased from third parties. The Company
originates general account commercial mortgage loans through a national
network of mortgage banking correspondent companies which represent the
Company in many of the major metropolitan areas of the United States.
Typically, a correspondent company is an independent business which has a
staff of experienced specialists in property finance who are highly
knowledgeable about the real estate market in the company's local or regional
area. The correspondent company is an expert in the appraisal, underwriting
and servicing of commercial mortgage loans. Typically, the correspondent
company is the Company's one representative through which all mortgage
investment opportunities in the particular market must originate. The
correspondent company presents commercial mortgage loan opportunities to the
Company on property types and with respect to borrowers that meet the
Company's stringent underwriting requirements. After a mortgage loan is made,
the correspondent company services the loans for the Company by, among other
things, collecting all mortgage payments as well as amounts escrowed for the
payment of any taxes and insurance premiums. For its services, the
correspondent company receives from the Company an annual fee generally
ranging between .0625% and .125% of the mortgage balance.
Currently, the Company is represented by 24 correspondent companies that
originate commercial mortgage investment opportunities and service the general
account mortgage loans. In addition, the Company is represented by another 10
companies that service general account mortgage loans but do not originate
mortgage loan investment opportunities.
The general account commercial mortgage loan portfolio includes both
amortizing and balloon loans. The Company defines balloon loans to be
mortgages with periodic installments of principal and interest that do not
fully amortize the loan. The balance is due at a specified date in the future
which represents the end of the loan term.
59
<PAGE>
The following table sets forth the maturity and principal repayment schedule
for the Company's general account mortgage loan portfolio as of December 31,
1996 and December 31, 1995.
GENERAL ACCOUNT MORTGAGE LOAN PORTFOLIO -- SCHEDULED MATURITIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
--------------------------------- ---------------------------------
AGGREGATE AGGREGATE
PRINCIPAL BALANCE % OF PRINCIPAL BALANCE % OF
OF MORTGAGE TOTAL PRINCIPAL OF MORTGAGE TOTAL PRINCIPAL
LOANS MATURING BALANCE LOANS MATURING BALANCE
----------------- --------------- ----------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1996.................... $ -- 0.0% $ 254.9 5.4%
1997.................... 162.0 3.0 210.4 4.5
1998.................... 210.2 3.9 230.2 4.9
1999.................... 349.3 6.6 347.3 7.4
2000.................... 519.5 9.7 564.6 12.1
2001.................... 357.1 6.7 367.1 7.8
2002.................... 429.8 8.1 439.1 9.4
2003.................... 490.0 9.2 303.5 6.5
2004.................... 378.5 7.1 369.4 7.9
2005.................... 686.7 12.9 694.6 14.8
2006.................... 453.5 8.5 103.3 2.2
After 2006.............. 1,293.9 24.3 800.9 17.1
-------- ------ -------- ------
$5,330.5 100.0% $4,685.3 100.0%
======== ====== ======== ======
</TABLE>
The Company monitors all of the mortgage loans in its general account
mortgage loan portfolio on an ongoing basis and identifies mortgage loans
that, because of certain objective or subjective characteristics, cause
management to conclude that such loans require additional investigation. Among
criteria that cause a loan to be so identified are (i) borrower bankruptcies,
(ii) bankruptcies of major tenants of mortgaged properties, (iii) requests
from borrowers for loan restructuring or relief, (iv) known or suspected cash
flow deficiencies, (v) lateness of payments, (vi) noncompliance with
covenants, (vii) known or suspected loan-to-value imbalances, (viii) lease
rollovers affecting debt service coverage or property value, (ix) property
vacancy rates, (x) maturing loans identified as potential refinancing risks
and (xi) other subjective factors relating to the borrower or the mortgaged
property.
60
<PAGE>
The Company and the ACLI define problem mortgage loans as loans which are 60
or more days delinquent and/or are in foreclosure. The following tables set
forth as of December 31, 1996 and 1995 the distribution by property type and
region of the Company's commercial mortgage loans that were delinquent or in
the process of foreclosure as compared to the life insurers reporting to the
ACLI.
COMMERCIAL MORTGAGE LOANS DELINQUENT OR IN THE
PROCESS OF FORECLOSURE BY PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
---------------------------------------- ----------------------------------------
COMPANY ACLI(1) COMPANY ACLI(2)
---------------------------- ----------- ---------------------------- -----------
DELINQUENCY DELINQUENCY DELINQUENCY DELINQUENCY
NUMBER AND AND NUMBER AND AND
OF PRINCIPAL FORECLOSURE FORECLOSURE OF PRINCIPAL FORECLOSURE FORECLOSURE
LOANS BALANCE RATE(3) RATE LOANS BALANCE RATE(3) RATE
------ --------- ----------- ----------- ------ --------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Type(4):
Apartment.............. -- $ -- -- % -- % -- $ -- -- % 0.23%
Retail................. 4 26.3 0.49 -- 5 29.5 0.63 0.43
Office................. 3 15.8 0.30 -- -- -- -- 1.20
Industrial............. -- -- -- -- -- -- -- 0.21
Hotel/motel............ -- -- -- -- -- -- -- 0.14
Mixed Use.............. -- -- -- -- -- -- -- 0.01
Other Commercial
Property.............. -- -- -- -- -- -- -- 0.13
--- ----- ---- --- --- ----- ---- ----
Total................. 7 $42.1 0.79% -- % 5 $29.5 0.63% 2.35%
=== ===== ==== === === ===== ==== ====
</TABLE>
- --------
(1) ACLI data as of December 31, 1996 are not yet available.
(2) Source: ACLI Investment Bulletin entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," Number 1326, dated February 28,
1996.
(3) Reflects, by individual property types, commercial mortgage loans that are
delinquent 60 days or more or in the process of foreclosure as a
percentage of composite total loans.
(4) As defined by the ACLI.
61
<PAGE>
COMMERCIAL MORTGAGE LOANS DELINQUENT OR IN THE
PROCESS OF FORECLOSURE BY REGION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
---------------------------------------- ----------------------------------------
COMPANY ACLI(1) COMPANY ACLI(2)
---------------------------- ----------- ---------------------------- -----------
DELINQUENCY DELINQUENCY DELINQUENCY DELINQUENCY
NUMBER AND AND NUMBER AND AND
OF PRINCIPAL FORECLOSURE FORECLOSURE OF PRINCIPAL FORECLOSURE FORECLOSURE
LOANS BALANCE RATE(3) RATE LOANS BALANCE RATE(3) RATE
------ --------- ----------- ----------- ------ --------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Region(4):
New England............ 2 $14.6 0.27% -- % 2 $14.8 0.32% 0.17%
Middle Atlantic........ 1 10.5 0.20 -- -- -- -- 0.51
East North Central..... 2 9.5 0.18 -- -- -- -- 0.36
West North Central..... -- -- -- -- -- -- -- 0.04
South Atlantic......... 1 3.1 0.06 -- 2 9.1 0.19 0.34
East South Central..... -- -- -- -- -- -- -- 0.05
West South Central..... -- -- -- -- -- -- -- 0.14
Mountain............... -- -- -- -- -- -- -- 0.06
Pacific................ 1 4.4 0.08 -- 1 5.6 0.12 0.60
Other.................. -- -- -- -- -- -- -- 0.08
--- ----- ---- --- --- ----- ----- -----
Total................. 7 $42.1 0.79% -- % 5 $29.5 0.63% 2.35%
=== ===== ==== === === ===== ===== =====
</TABLE>
- --------
(1) ACLI data as of December 31, 1996 are not yet available.
(2) Source: ACLI Investment Bulletin entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," Number 1326, dated February 28,
1996.
(3) Reflects, by region, commercial mortgage loans that are delinquent 60 days
or more or in the process of foreclosure as a percentage of composite
total loans.
(4) The ACLI defines each of the regions set forth above as follows: (i) New
England includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont; (ii) Middle Atlantic includes New York, New Jersey and
Pennsylvania; (iii) East North Central includes Illinois, Indiana,
Michigan, Ohio and Wisconsin; (iv) West North Central includes Iowa,
Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota; (v)
South Atlantic includes Delaware, District of Columbia, Florida, Georgia,
Maryland, North Carolina, South Carolina, Virginia and West Virginia; (vi)
East South Central includes Alabama, Kentucky, Mississippi and Tennessee;
(vii) West South Central includes Arkansas, Louisiana, Oklahoma and Texas;
(viii) Mountain includes Arizona, Colorado, Idaho, Montana, Nevada, New
Mexico, Utah and Wyoming; (ix) Pacific includes Alaska, California,
Hawaii, Oregon and Washington and (x) Other includes Puerto Rico, U.S.
Territories and Possessions, Canada and other foreign jurisdictions.
In certain situations delinquent mortgages may be restructured or modified.
As of December 31, 1996, the amortized cost of restructured mortgages totaled
$57.5 million, as compared with $66.0 million and $77.0 million as of December
31, 1995 and 1994, respectively.
The Company aggressively seeks to manage and resolve its troubled commercial
mortgage loans. Commercial mortgage loans are placed into default by the
Company immediately following the Company failing to receive a payment when
due. With respect to a delinquent mortgage loan, the Company seeks to enforce
the assignment of rents clause in order to gain control of the rental income
from the property shortly following the default in payment. The foreclosure
process with respect to a delinquent mortgage loan is generally initiated by
the Company prior to the second mortgage payment becoming delinquent. Over the
last five years, the Company has recovered approximately 74% of the unpaid
principal of all of its mortgage loans in default.
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The following table sets forth the delinquency, foreclosure and restructured
commercial mortgage loan experience for the Company and for the life insurers
reporting to the ACLI for the periods indicated.
THE COMPANY AND LIFE INSURANCE INDUSTRY
PROBLEM LOAN COMPARISON
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------- ------------------- ------------------- ------------------- -------------------
COMPANY ACLI(1) COMPANY ACLI(2) COMPANY ACLI(2) COMPANY ACLI(2) COMPANY ACLI(2)
---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquent(3)...... 0.79% --% 0.63% 2.35% 0.48% 3.38% 0.80% 4.54% 1.41% 6.62%
In foreclosure(4).. 0.79 -- 0.63 1.45 0.48 1.80 0.80 2.17 1.41 3.16
Restructured(5).... 1.11 -- 1.48 8.27 1.95 9.58 1.87 9.35 1.25 7.44
---------- -------- -------- --------- -------- --------- -------- --------- -------- ---------
Subtotal.......... 1.90 -- 2.11 10.62 2.43 12.96 2.67 13.89 2.66 14.06
Foreclosed--year to
date.............. 0.35 -- 0.74 1.75 1.18 2.52 1.48 3.21 3.33 3.31
---------- -------- -------- --------- -------- --------- -------- --------- -------- ---------
Total............. 2.25% --% 2.85% 12.37% 3.61% 15.48% 4.15% 17.10% 5.99% 17.37%
========== ======== ======== ========= ======== ========= ======== ========= ======== =========
</TABLE>
- --------
(1) ACLI data for the year ended December 31, 1996 are not yet available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," numbers 1326, 1289, 1253 and 1213,
dated February 28, 1996, March 9, 1995, March 1, 1994 and March 2, 1993,
respectively.
(3) Commercial mortgage loans are classified by the Company and the ACLI as
delinquent when they are 60 days or more past due.
(4) Delinquent includes loans in foreclosure; therefore, subtotal and total
lines exclude "In foreclosure" amounts.
(5) Commercial mortgage loans are classified by the Company and the ACLI as
restructured when they are in good standing, but the basic terms have been
modified as a result of an actual or anticipated delinquency.
The following table shows credit-related realized and unrealized gains and
losses before taxes on the Company's general account commercial mortgage loans
for the periods indicated. Realized losses on general account commercial
mortgage loans are generally a result of delinquent loans 30 days or more past
due. The following table focuses on credit losses and does not reflect gains
from prepayment penalties of $4.5 million, $3.2 million, $6.4 million, $5.2
million and $1.3 million in 1996, 1995, 1994, 1993 and 1992, respectively.
GENERAL ACCOUNT COMMERCIAL MORTGAGE LOAN
CREDIT-RELATED LOSSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Realized losses......................... $ 4.1 $ 7.1 $ 20.4 $ 28.2 $ 36.1
Unrealized losses....................... -- -- -- -- --
----- ----- ------ ------ ------
Total................................. $ 4.1 $ 7.1 $ 20.4 $ 28.2 $ 36.1
===== ===== ====== ====== ======
Percentage of beginning of year
portfolio.............................. 0.09% 0.17% 0.53% 0.79% 1.12%
</TABLE>
Real Estate
As of December 31, 1996, equity real estate assets were $265.8 million, or
1.5% of the carrying value of general account invested assets. The equity real
estate category consists of retail, office, industrial and other properties.
Retail properties constitute the largest component of the category and are
primarily grocery store-anchored neighborhood shopping centers.
Policy Loans
The Company held $371.8 million of general account policy loans as of
December 31, 1996. Of such policy loans, 56.6% were on traditional life
policies and 43.4% were on universal life policies and annuities. Policy
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<PAGE>
loans are permitted to the extent of a policy's contractual limits and are
collateralized fully by policy cash values. Loan rates are fixed in the
contracts and range from 5% to 8%. For policies with variable rate provisions,
the loan interest rates were tied to external indices. The weighted average
policy loan interest rate was 7.39% as of December 31, 1996.
Equity Securities
As of December 31, 1996, the Company held general account equity securities
of $59.1 million, or 0.3% of general account consolidated invested assets. The
Company's general account equity security investments consist of a diversified
portfolio primarily of publicly traded common stocks.
Other Long-Term Investments
As of December 31, 1996, other long-term investments were $28.7 million, or
0.2% of the carrying value of general account invested assets. Such
investments primarily consist of joint ventures and limited partnership
interests in real estate.
Short-Term Investments
As of December 31, 1996, short-term investments were $9.3 million, or 0.05%
of the carrying value of general account invested assets. Such short-term
investments comprised cash and cash equivalents. The Company invests in U.S.
Treasury bills, commercial paper and certificates of deposit.
RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive
position of insurance companies. Ratings are important to maintaining public
confidence in the Company and its ability to market its annuity and life
insurance products. Rating organizations continually review the financial
performance and condition of insurers, including the Company. Any lowering of
the Company's ratings could have a material adverse effect on the Company's
ability to market its products and could increase the surrender of the
Company's annuity products. Both of these consequences could, depending upon
the extent thereof, have a material adverse effect on the Company's liquidity
and, under certain circumstances, net income. Nationwide Life is rated "A+"
(Superior) by A.M. Best and its claims-paying ability is rated "Aa2"
(Excellent) by Moody's and "AA+" (Excellent) by S&P. Moody's recently
confirmed and S&P recently affirmed Nationwide Life's claims-paying ability
rating with a negative outlook.
A.M. Best's ratings for insurance companies currently range from "A++" to
"F," and some companies are not rated. A.M. Best publications indicate that
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have achieved superior overall performance when compared to the norms
of the life insurance industry and generally have demonstrated a strong
ability to meet their policyholder and other contractual obligations.
Moody's rating for insurance companies currently range from "Aaa" to "Caa."
S&P ratings for insurance companies range from "AAA" to "CCCq." In evaluating
a company's financial and operating performance, Moody's and S&P review its
profitability, leverage and liquidity as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its policy reserves and the experience
and competency of its management.
The foregoing ratings reflect each rating agency's opinion of Nationwide
Life's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed toward the
protection of investors. Such factors are of concern to policyholders, agents
and intermediaries. Such ratings should not be relied upon when making a
decision to invest in the Notes.
COMPETITION
The Company competes with a large number of other insurers as well as non-
insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer
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<PAGE>
alternative products and, with respect to other insurers, have higher ratings
than the Company. The Company believes that competition in the Company's lines
of business is based on price, product features, commission structure,
perceived financial strength, claims paying ratings, service and name
recognition. National banks, with their preexisting customer bases for
financial services products, may pose increasing competition in the future to
insurers who sell annuities, including the Company, as a result of the U.S.
Supreme Court's 1994 decision in NationsBank of North Carolina v. Variable
Annuity Life Insurance Company, which permits national banks to sell annuity
products of life insurance companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made
by members of Congress and the Clinton administration. Currently, the Bank
Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not
possible to predict whether any of these proposals will be enacted, or if
enacted, their potential effect on the Company.
REGULATION
General Regulation at State Level
As an insurance holding company, the Company is subject to regulation by the
states in which its insurance subsidiaries are domiciled and/or transact
business. Most states have enacted legislation that requires each insurance
holding company and each insurance company in an insurance holding company
system to register with the insurance regulatory authority of the insurance
company's state of domicile and, annually, to furnish financial and other
information concerning the operations of companies within the holding company
system that may materially affect the operations, management or financial
condition of the insurers within such system. The Company is subject to the
insurance holding company laws in Ohio. Under such laws, all transactions
within an insurance holding company system affecting insurers must be fair and
equitable and each insurer's policyholder surplus following any such
transaction must be both reasonable in relation to its outstanding liabilities
and adequate for its needs. The Ohio insurance holding company laws also
require prior notice or regulatory approval of the change of control of an
insurer or its holding company and of material intercorporate transfers of
assets within the holding company structure. Generally, under such laws, a
state insurance authority must approve in advance the direct or indirect
acquisition of 10% or more of the voting securities of an insurance company
domiciled in its state.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to approve policy forms, grant and revoke
licenses to transact business, regulate trade practices, license agents,
require statutory financial statements and prescribe the type and amount of
investments permitted. In recent years, a number of life and annuity insurers
have been the subject of regulatory proceedings and litigation relating to
alleged improper life insurance pricing and sales practices. Some of these
insurers have incurred or paid substantial amounts in connection with the
resolution of such matters. In addition, state insurance regulatory
authorities regularly make inquiries, hold investigations and administer
market conduct examinations with respect to insurers' compliance with
applicable insurance laws and regulations. None of the Company's insurance
subsidiaries is the subject of any such investigation by any regulatory
authority or any such market conduct examination in any state at this time.
The Company's subsidiaries continuously monitor sales, marketing and
advertising practices and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance
with applicable insurance laws and regulations.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
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<PAGE>
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the NAIC. Nationwide Life's last examination occurred during
1993 for the three-year period ended December 31, 1992. Final reports of these
examinations have been issued by each of the Ohio, California and Delaware
insurance departments, and none of such reports raised any significant issues
or adjustments.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
As an insurance holding company, the Company's ability to meet debt service
obligations and pay operating expenses and dividends depends primarily on the
receipt of sufficient funds from its primary operating subsidiary, Nationwide
Life. The inability of Nationwide Life to pay dividends to the Company in an
amount sufficient to meet debt service obligations and pay operating expenses
and dividends would have a material adverse effect on the Company. The payment
of dividends by Nationwide Life is subject to restrictions set forth in the
insurance laws and regulations of Ohio, its domiciliary state. The Ohio
insurance laws require Ohio-domiciled life insurance companies to seek prior
regulatory approval to pay a dividend or distribution of cash or other
property if the fair market value thereof, together with that of other
dividends or distributions made in the preceding 12 months, exceeds the
greater of (i) 10% of policyholders' surplus as of the prior December 31 or
(ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus.
Earned surplus is defined under the Ohio insurance laws as the amount equal to
the Company's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. As a result of
the Special Dividend and the dividend by Nationwide Life of the stock of
certain subsidiaries that do not operate in the long-term savings and
retirement market, any dividend paid by Nationwide Life during the 12-month
period immediately following the Special Dividend would be an extraordinary
dividend under Ohio insurance laws. See "Recent History." Accordingly, no such
dividend could be paid without prior regulatory approval. The payment of
dividends by Nationwide Life may also be subject to restrictions set forth in
the insurance laws of New York that limit the amount of statutory profits on
Nationwide Life's participating policies (measured before dividends to
policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends and
to meet its debt service obligations in the future.
NAIC IRIS Ratios
In the 1970s, the NAIC developed a set of financial relationships or "tests"
known as the Insurance Regulatory Information System ("IRIS") that was
designed for early identification of companies which may require special
attention by insurance regulatory authorities. There are separate but similar
tests for property/casualty companies and life and health companies. Insurance
companies submit data annually to the NAIC, which in turn analyzes the data by
utilizing, in the case of life insurance companies, 13 ratios, each with
defined "usual ranges." An insurance company may fall out of the usual range
for one or more ratios because of specific transactions that are in themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to regulatory scrutiny if it falls outside the
usual ranges of four or more of the ratios, and regulators may then act, if
the company has insufficient capital, to constrain the company's underwriting
capacity. No ratios for the Company's insurance subsidiaries currently fall
outside the usual range for any of the ratios.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted
a model law to implement risk-based capital ("RBC") requirements for life
insurance companies. The requirements are designed to
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<PAGE>
monitor capital adequacy and to raise the level of protection that statutory
surplus provides for policyholders. The model law measures four major areas of
risk facing life insurers: (i) the risk of loss from asset defaults and asset
value fluctuation; (ii) the risk of loss from adverse mortality and morbidity
experience; (iii) the risk of loss from mismatching of asset and liability
cash flow due to changing interest rates and (iv) business risks. Insurers
having less statutory surplus than required by the RBC model formula will be
subject to varying degrees of regulatory action depending on the level of
capital inadequacy.
The RBC formula provides a mechanism for the calculation of an insurance
company's Authorized Control Level RBC and its total adjusted capital. The
model law sets forth the points at which a superintendent of insurance is
authorized and expected to take regulatory action. The first level is known as
the Company Action Level RBC, which is set at twice the Authorized Control
Level RBC. The second level is the Regulatory Action Level RBC, set at 1.5
times the Authorized Control Level RBC. The third is the Authorized Control
Level RBC, and the fourth is the Mandatory Control Level RBC, set at 70
percent of the Authorized Control Level RBC.
If an insurance company's adjusted capital is higher than the Regulatory
Action Level but below the Company Action Level, the insurance company must
submit to its superintendent of insurance a comprehensive financial plan. If
an insurance company's adjusted capital is higher than the Authorized Control
Level but lower than the Regulatory Action Level, the superintendent of
insurance shall perform such examination or analysis as he or she deems
necessary of the insurer's business and operations and issue any appropriate
corrective orders to address the insurance company's financial problems. If an
insurer's adjusted capital is higher than the Mandatory Control Level but
lower than the Authorized Control Level, the superintendent may place the
insurer under regulatory control. If the insurance company's adjusted capital
falls below the Mandatory Control Level, the superintendent will be required
to place the insurer under regulatory control. Based on the formula adopted by
the NAIC, Nationwide Life exceeded the Company Action Level by a substantial
amount as of December 31, 1995. After giving pro forma effect to the Special
Dividend and the contribution to Nationwide Life by the Company of $766.5
million of proceeds from the Equity Offerings, the Note Offering and the
Capital Securities Offering, Nationwide Life exceeded the Company Action Level
by a substantial amount as of December 31, 1996. See "Use of Proceeds,"
"Recent History" and "The Equity Offerings, the Note Offering and the Capital
Securities Offering."
Assessments Against Insurers
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these
jurisdictions can be assessed for policyholder losses incurred by insolvent
insurance companies. The amount and timing of any future assessment on the
Company's insurance subsidiaries under these laws cannot be reasonably
estimated and are beyond the control of the Company and its insurance
subsidiaries. Recent regulatory actions against certain large life insurers
encountering financial difficulty have prompted the various state insurance
guaranty associations to begin assessing life insurance companies for the
deemed loss. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's solvency and further
provide for annual limits on such assessments. A large part of the assessments
paid by the Company's insurance subsidiaries pursuant to these laws may be
used as credits for a portion of the Company's insurance subsidiaries' premium
taxes. Based on the best information presently available, the Company believes
the total assessments will not be material to its operating results or
financial position. For the years ended December 31, 1996, 1995 and 1994, the
Company paid $4.5 million, $7.5 million and $5.3 million, respectively, in
assessments pursuant to state insurance guaranty association laws.
General Regulation at Federal Level
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures that may
significantly affect the insurance business include limitations on antitrust
immunity, minimum solvency requirements and the removal of barriers
restricting banks from engaging in the insurance and mutual fund business.
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<PAGE>
Securities Laws
Certain of the Company's insurance subsidiaries and certain policies and
contracts offered by them are subject to regulation under the federal
securities laws administered by the Commission and under certain state
securities laws. Certain separate accounts of the Company's insurance
subsidiaries are registered as investment companies under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). Separate
account interests under certain variable annuity contracts and variable
insurance policies issued by the Company's insurance subsidiaries are also
registered under the Securities Act. Certain other subsidiaries of the Company
are registered as broker/dealers under the Exchange Act and are members of,
and subject to regulation by, the National Association of Securities Dealers.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment
companies managed by such subsidiaries are registered with the Commission
under the Investment Company Act and the shares of certain of these entities
are qualified for sale in certain states in the United States and the District
of Columbia. A subsidiary of the Company is registered with the Commission as
a transfer agent. Certain subsidiaries of the Company are also subject to the
Commission's net capital rules.
All aspects of the Company's subsidiaries' investment advisory activities
are subject to various federal and state laws and regulations in jurisdictions
in which they conduct business. These laws and regulations are primarily
intended to benefit investment advisory clients and investment company
shareholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business
for failure to comply with such laws and regulations. In such event, the
possible sanctions which may be imposed include the suspension of individual
employees, limitations on the activities in which the investment advisor may
engage, suspension or revocation of the investment advisor's registration as
an advisor, censure and fines.
ERISA Considerations
On December 13, 1993, the United States Supreme Court issued its opinion in
John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank
holding that certain assets in excess of amounts necessary to satisfy
guaranteed obligations held by John Hancock in its general account under a
participating group annuity contract are "plan assets" and therefore subject
to certain fiduciary obligations under the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which specify that fiduciaries must perform
their duties solely in the interest of ERISA plan participants and
beneficiaries. The Court limited the imposition of ERISA fiduciary obligations
in these instances to assets in an insurer's general account that were not
reserved to pay benefits of guaranteed benefit policies (i.e., benefits whose
value would not fluctuate in accordance with the insurer's investment
experience). The Secretary of Labor is required to issue proposed regulations
not later than June 30, 1997, providing guidance for the purpose of
determining, in cases where an insurer issues one or more policies backed by
the insurer's general account to or for the benefit of an employee benefit
plan, which assets of the insurer constitute plan assets for purposes of ERISA
and the IRC. Final regulations, after a notice and comment period, must be
issued by December 31, 1997. The regulations will apply only with respect to a
policy issued by an insurer on or before December 31, 1998. In the case of
such a policy, the regulations will take effect at the end of the 18-month
period following the date such regulations become final. Generally, no person
will be liable under ERISA or the IRC for conduct occurring prior to the end
of such 18-month period, where the basis of a claim is that insurance company
general account assets constitute plan assets. New policies issued after
December 31, 1998, which are not guaranteed benefit policies will be subject
to the fiduciary obligations under ERISA.
The regulations should indicate the requirements that must be met in order
to satisfy ERISA's fiduciary standards. A review of Nationwide Life's
procedures with respect to its general account contracts will be required to
ensure compliance with the regulations.
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Potential Tax Legislation
Congress has, from time to time, considered possible legislation that would
eliminate the deferral of taxation on the accretion of value within certain
annuities and life insurance products. The 1994 United States Supreme Court
ruling in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company that annuities are not insurance for purposes of the National Bank Act
may cause Congress to consider legislation that would eliminate such tax
deferral at least for certain annuities. Other possible legislation, including
a simplified "flat tax" income tax structure with an exemption from taxation
for investment income, could also adversely affect purchases of annuities and
life insurance if such legislation were to be enacted. There can be no
assurance as to whether legislation will be enacted which would contain
provisions with possible adverse effects on the Company's annuity and life
insurance products.
PROPERTIES
The Company's principal executive offices are located in Columbus, Ohio. The
Company leases its home office complex, consisting of approximately 512,000
square feet, from Nationwide Mutual and its subsidiaries at One Nationwide
Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus, Ohio. See
"Certain Relationships and Related Transactions."
The Company believes that its present facilities are adequate for the
anticipated needs of the Company.
LEGAL PROCEEDINGS
From time to time the Company is a party to litigation and arbitration
proceedings in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements. In October 1996, a policyholder of Nationwide Life
filed a complaint in Alabama state court against Nationwide Life and an agent
of Nationwide Life (Wayne M. King v. Nationwide Life Insurance Company and
Danny Nix) related to the sale of a whole life policy on a "vanishing premium"
basis and seeking unspecified compensatory and punitive damages. In February
1997, Nationwide Life was named as a defendant in a lawsuit filed in New York
Supreme Court also related to the sale of whole life policies on a "vanishing
premium" basis (John H. Snyder v. Nationwide Mutual Insurance Company,
Nationwide Mutual Insurance Co. and Nationwide Life Insurance Co.). The
plaintiff in such lawsuit seeks to represent a national class of Nationwide
Life policyholders and claims unspecified compensatory and punitive damages.
This lawsuit is in an early stage and has not been certified as a class
action. Nationwide Life intends to defend these lawsuits vigorously. There can
be no assurance that any future litigation relating to pricing and sales
practices will not have a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1996, the Company had approximately 3,550 employees. None
of the employees of the Company is covered by a collective bargaining
agreement, and the Company believes that its employee relations are
satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information regarding the executive officers
and directors of the Company. Of such executive officers, Messrs. Gasper,
Brock, Galloway, Karas, B. Barnes and Easley work exclusively for the Company.
The other executive officers perform duties for the Company and other members
of the Nationwide Insurance Enterprise.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<C> <C> <S>
Dimon Richard McFerson(1)........ 59 Chairman and Chief Executive Officer--
Nationwide Insurance Enterprise and
Director
Joseph J. Gasper................. 53 President and Chief Operating Officer and
Director
Galen R. Barnes.................. 49 Executive Vice President
Richard D. Crabtree.............. 56 Executive Vice President
Gordon E. McCutchan.............. 61 Executive Vice President--Law and
Corporate Services and Secretary
Robert A. Oakley................. 50 Executive Vice President--Chief Financial
Officer
Robert J. Woodward, Jr........... 55 Executive Vice President--Chief
Investment Officer
James E. Brock................... 49 Senior Vice President--Company Operations
W. Sidney Druen.................. 54 Senior Vice President and General Counsel
Harvey S. Galloway, Jr........... 63 Senior Vice President--Chief Actuary--
Life and Annuities
Richard A. Karas................. 54 Senior Vice President--Sales--Financial
Services
Bruce C. Barnes.................. 49 Vice President--Information Systems
Dennis W. Click.................. 58 Vice President and Assistant Secretary
David A. Diamond................. 41 Vice President--Controller
Matthew S. Easley................ 40 Vice President--Marketing and
Administrative Services
Mark R. Thresher................. 40 Vice President--Finance and Treasurer
Charles L. Fuellgraf, Jr.(1)(2).. 65 Director
Henry S. Holloway(1)............. 64 Director
Lydia Micheaux Marshall(3)....... 48 Director
Donald L. McWhorter(2)(3)........ 61 Director
David O. Miller(1)(2)............ 58 Director
James F. Patterson(1)............ 55 Director
Gerald D. Prothro(3)............. 54 Director
Arden L. Shisler(1).............. 55 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Biographical information for each of the individuals listed in the above
table is set forth below.
DIMON RICHARD MCFERSON has been Chief Executive Officer of the Nationwide
Insurance Enterprise since December 1992. He has been Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise of the Company since
December 1996 and a director of the Company since November 1996. Mr. McFerson
has been a director of Nationwide Life and Nationwide Mutual since April 1988
and Chairman and Chief Executive Officer--Nationwide Insurance Enterprise of
Nationwide Life and Nationwide Mutual since April 1996. Previously he was
elected Chief Executive Officer of Nationwide Life in December 1992, and
President and Chief Executive Officer--Nationwide Insurance Enterprise of
Nationwide Life in December 1993. He was President and General Manager of
Nationwide Mutual from April 1988 to April 1991; President and Chief Operating
Officer of Nationwide Mutual from April 1991 to December 1992; and President
and Chief Executive Officer of Nationwide Mutual from December 1992 to April
1996. Mr. McFerson has been with the Nationwide Insurance Enterprise for 17
years.
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JOSEPH J. GASPER has been President and Chief Operating Officer of the
Company since December 1996 and a director of the Company since November 1996.
Mr. Gasper has been President and Chief Operating Officer of Nationwide Life
since April 1996. Previously, he was Executive Vice President--
Property/Casualty Operations of Nationwide Mutual from April 1995 to April
1996. He was Senior Vice President--Property/Casualty Operations of Nationwide
Mutual from September 1993 to April 1995. Prior to that time, Mr. Gasper held
numerous positions within the Nationwide Insurance Enterprise. Mr. Gasper has
been with the Nationwide Insurance Enterprise for 30 years.
GALEN R. BARNES has been Executive Vice President of the Company since
December 1996. Mr. Barnes has been President of the Nationwide Insurance
Enterprise since April 1996. Previously, he was President and Chief Operating
Officer of the Wausau Insurance Companies, members of the Nationwide Insurance
Enterprise, from May 1993 to September 1996 and was Senior Vice President of
the Nationwide Insurance Enterprise from May 1993 to April 1996. Prior to that
time, Mr. Barnes held several positions within the Nationwide Insurance
Enterprise. Mr. Barnes has been with the Nationwide Insurance Enterprise for
21 years.
RICHARD D. CRABTREE has been Executive Vice President of the Company since
December 1996. Mr. Crabtree has been a director and President and Chief
Operating Officer of Nationwide Mutual, Nationwide Mutual Fire and Nationwide
Property and Casualty Insurance Company since April 1996. Previously, he was
Executive Vice President--Property/Casualty Operations of the Nationwide
Insurance Enterprise from April 1995 to April 1996. Prior to that time, Mr.
Crabtree held various positions within the Nationwide Insurance Enterprise.
Mr. Crabtree has been with the Nationwide Insurance Enterprise for 31 years.
GORDON E. MCCUTCHAN has been Executive Vice President--Law and Corporate
Services and Secretary of the Company since December 1996. Mr. McCutchan has
been Executive Vice President--Law and Corporate Services and Secretary of the
Nationwide Insurance Enterprise since September 1994. Previously, he was
Executive Vice President, General Counsel and Secretary of the Nationwide
Insurance Enterprise from November 1989 to September 1994. Prior to that time,
Mr. McCutchan held several positions within the Nationwide Insurance
Enterprise. Mr. McCutchan has been with the Nationwide Insurance Enterprise
for 33 years.
ROBERT A. OAKLEY has been Executive Vice President--Chief Financial Officer
of the Company since December 1996. Mr. Oakley has been Executive Vice
President--Chief Financial Officer of the Nationwide Insurance Enterprise
since April 1995. Previously, he was Senior Vice President--Chief Financial
Officer of the Nationwide Insurance Enterprise from October 1993 to April
1995. Prior to that time, Mr. Oakley held several positions within the
Nationwide Insurance Enterprise. Mr. Oakley has been with the Nationwide
Insurance Enterprise for 21 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President--Chief Investment
Officer of the Company since December 1996. Mr. Woodward has been Executive
Vice President--Chief Investment Officer of the Nationwide Insurance
Enterprise since August 1995. Previously, he was Senior Vice President--Fixed
Income Investments of the Nationwide Insurance Enterprise from March 1991 to
August 1995. Prior to that time, Mr. Woodward held several positions within
the Nationwide Insurance Enterprise. Mr. Woodward has been with the Nationwide
Insurance Enterprise for 32 years.
JAMES E. BROCK has been Senior Vice President--Company Operations of the
Company since December 1996. Mr. Brock has been Senior Vice President--Life
Company Operations of Nationwide Life since April 1996. Previously, he was
Senior Vice President--Investment Product Operations of Nationwide Life from
November 1990 to April 1996. Prior to that time, Mr. Brock held several
positions within the Nationwide Insurance Enterprise. Mr. Brock has been with
the Nationwide Insurance Enterprise for 27 years.
W. SIDNEY DRUEN has been Senior Vice President and General Counsel of the
Company since December 1996. Mr. Druen has been Senior Vice President and
General Counsel and Assistant Secretary of the Nationwide Insurance Enterprise
since September 1994. Previously, he was Vice President, Deputy General
Counsel and Assistant Secretary of the Nationwide Insurance Enterprise from
October 1989 to September 1994. Prior to that time, Mr. Druen held several
positions within the Nationwide Insurance Enterprise. Mr. Druen has been with
the Nationwide Insurance Enterprise for 27 years.
71
<PAGE>
HARVEY S. GALLOWAY, JR. has been Senior Vice President--Chief Actuary--Life
and Annuities of the Company since December 1996. Mr. Galloway has been Senior
Vice President--Chief Actuary--Life, Health and Annuities of the Nationwide
Insurance Enterprise since April 1993. Previously, he was Senior Vice
President and Chief Actuary of the Nationwide Insurance Enterprise from
January 1983 to April 1993. Prior to that time, Mr. Galloway held several
positions within the Nationwide Insurance Enterprise. Mr. Galloway has been
with the Nationwide Insurance Enterprise for 27 years.
RICHARD A. KARAS has been Senior Vice President--Sales--Financial Services
of the Company since December 1996. Mr. Karas has been Senior Vice President--
Sales--Financial Services of the Nationwide Insurance Enterprise since March
1993. Previously, he was Vice President--Sales--Financial Services of the
Nationwide Insurance Enterprise from February 1989 to March 1993. Prior to
that time, Mr. Karas held several positions within the Nationwide Insurance
Enterprise. Mr. Karas has been with the Nationwide Insurance Enterprise for 32
years.
BRUCE C. BARNES has been Vice President--Information Systems of the Company
since February 1997. Mr. Barnes has been Vice President--Life Systems of the
Nationwide Insurance Enterprise since May 1996. Previously, he was Vice
President--Investment Product Systems of the Nationwide Insurance Enterprise
from April 1995 to May 1996. Prior to that time, Mr. Barnes was Vice
President--Individual Investment Products/Common Systems of the Nationwide
Insurance Enterprise from May 1994 to April 1995 and Associate Vice
President--Individual Investment Products/Common Systems of Nationwide Life
from May 1992 to May 1994. Mr. Barnes was Vice President--Information Services
of PHP Benefits Systems, Inc. from January 1987 to January 1992. Mr. Barnes
has been with the Nationwide Insurance Enterprise for 5 years.
DENNIS W. CLICK has been Vice President and Assistant Secretary of the
Company since December 1996. Mr. Click has been Vice President and Assistant
Secretary of the Nationwide Insurance Enterprise since August 1994.
Previously, he was Associate Vice President and Assistant Secretary of the
Nationwide Insurance Enterprise from August 1989 to August 1994. Prior to that
time, he held several positions within the Nationwide Insurance Enterprise.
Mr. Click has been with the Nationwide Insurance Enterprise for 36 years.
DAVID A. DIAMOND has been Vice President--Controller of the Company since
December 1996. Mr. Diamond has been Vice President--Enterprise Controller of
the Nationwide Insurance Enterprise since August 1996. Previously, he was Vice
President--Controller of Nationwide Life from October 1993 to August 1996.
Prior to that time, Mr. Diamond held several positions within the Nationwide
Insurance Enterprise. Mr. Diamond has been with the Nationwide Insurance
Enterprise for 8 years.
MATTHEW S. EASLEY has been Vice President--Marketing and Administrative
Services of the Company since December 1996. Mr. Easley has been Vice
President--Life Marketing and Administrative Services of the Nationwide
Insurance Enterprise since May 1996. Previously, he was Vice President--
Annuity and Pension Actuarial of the Nationwide Insurance Enterprise from
August 1989 to May 1996. Prior to that time, Mr. Easley held several positions
within the Nationwide Insurance Enterprise. Mr. Easley has been with the
Nationwide Insurance Enterprise for 14 years.
MARK R. THRESHER has been Vice President--Finance and Treasurer of the
Company since February 1997. Mr. Thresher has been Vice President--Controller
of Nationwide Life since August 1996. He was Vice President and Treasurer of
the Company from November 1996 to February 1997. Previously, he was Vice
President and Treasurer of the Nationwide Insurance Enterprise from June 1996
to August 1996. Prior to joining the Nationwide Insurance Enterprise, Mr.
Thresher served as a partner with KPMG Peat Marwick LLP since July 1988.
CHARLES L. FUELLGRAF, JR. has been a director of the Company since November
1996. Mr. Fuellgraf has been Chief Executive Officer of Fuellgraf Electric
Company, an electrical contractor, of Butler, Pennsylvania, and Nashville,
Tennessee, since 1986. He is Chairman of the Board of Nationwide
Communications Inc. and serves on the board of directors of several members of
the Nationwide Insurance Enterprise.
72
<PAGE>
HENRY S. HOLLOWAY has been a director of the Company since November 1996.
Mr. Holloway has been a farm owner and operator in Darlington, Maryland, since
1959. He is Chairman of the Board of Nationwide Life, Nationwide Life and
Annuity Insurance Company and Nationwide Corp. and serves on the board of
directors of several members of the Nationwide Insurance Enterprise. He is
also a director of the National Cooperative Business Association and the
Forest Hill State Bank.
LYDIA MICHEAUX MARSHALL has been a director of the Company since February
1997. Mrs. Marshall has been Executive Vice President, Marketing of the
Student Loan Marketing Association ("Sallie Mae"), in Washington D.C., since
November 1993. Previously, she was Senior Vice President, Marketing of Sallie
Mae from January 1991 to November 1993. Prior to that time, Mrs. Marshall held
several positions with Sallie Mae. She is Chair of the Board of CARE
(Cooperative for American Relief Everywhere) and a trustee of the Greater
Washington Board of Trade's Greater Washington Initiative.
DONALD L. MCWHORTER has been a director of the Company since February 1997.
Mr. McWhorter retired from Banc One Corporation in April 1995, after serving
as President and Chief Operating Officer of Banc One Corporation since April
1992. Previously, he was Chairman and Chief Executive Officer of Banc One Ohio
from July 1989 to April 1992. Prior to that time, Mr. McWhorter held several
positions with Banc One Corporation.
DAVID O. MILLER has been a director of the Company since November 1996. Mr.
Miller has been a farm owner and land developer since 1962. He is the
President of the Owen Potato Farm Inc., the owner of The Berry Barn and is a
partner of M&M Enterprises in Licking County, Ohio. He is Chairman of the
Board of the Wausau Insurance Companies and serves on the board of directors
of several members of the Nationwide Insurance Enterprise. He is also a
director of the National Cooperative Business Association.
JAMES F. PATTERSON has been a director of the Company since November 1996.
Mr. Patterson has operated the Patterson Fruit Farm in Chesterland, Ohio,
since 1964 and has been the President of Patterson Farms, Inc. since December
1991. He is Chairman of the Board of Nationwide Mutual Fire Insurance Company
and serves on the board of directors of several members of the Nationwide
Insurance Enterprise. He is also a trustee of The Ohio State University and
serves on the board of directors of the University Hospitals Health System in
Cleveland, Ohio, and Geauga Hospital, Inc. in Chardon, Ohio.
GERALD D. PROTHRO has been a director of the Company since February 1997.
Mr. Prothro has been Vice President and IBM Chief Information Officer of
International Business Machines Corporation since April 1994. Previously, he
was IBM Vice President, Information and Telecommunications Systems of
International Business Machines Corporation from June 1992 to April 1994.
Prior to that time, Mr. Prothro held several positions with International
Business Machines Corporation. He is a director of National Technological
University and a member of the Review and Priority Board of Lehigh
University/Iacocca Institute. He is also a trustee of Howard University.
ARDEN L. SHISLER has been a director of the Company since November 1996. Mr.
Shisler has been President and Chief Executive Officer of K & B Transport,
Inc., a trucking firm in Dalton, Ohio, since January 1992. Previously, he was
Chief Operating Officer of K&B Transport, Inc. from April 1986 to January
1992. Prior to that time, Mr. Shisler held several positions with K&B
Transport, Inc. He is Chairman of the Board of Nationwide Mutual Insurance
Company and serves on the board of directors of several members of the
Nationwide Insurance Enterprise. He is also a director of the National
Cooperative Business Association.
The Company's Board of Directors currently consists of ten directors,
divided into three classes. The initial term of the first class will expire at
the annual meeting of stockholders to be held in 1998, the initial term of the
second class will expire at the annual meeting of stockholders in 1999 and the
initial term of the third class will expire at the annual meeting of
stockholders in 2000. Messrs. Holloway, Patterson and Prothro are members of
the first class, Messrs. Fuellgraf, McFerson, McWhorter and Shisler are
members of the second class and Messrs. Gasper and Miller and Ms. Marshall are
members of the third class. At each annual meeting of stockholders, directors
will be elected for a three-year term to succeed the directors whose terms are
then to expire. Officers of the Company are elected annually and serve until
their retirement, resignation or removal.
73
<PAGE>
The Company's Board of Directors has an Audit Committee currently consisting
of three directors, none of whom is an officer or employee of the Company. Ms.
Marshall and Messrs. McWhorter and Prothro are the members of such committee.
The Audit Committee recommends to the Board of Directors the selection of
independent certified public accountants to audit annually the books and
records of the Company, reviews the activities and the reports of the
independent certified public accountants and reports the results of such
review to the Board of Directors. The Audit Committee also considers the
adequacy of the Company's internal controls and internal auditing methods and
procedures. The Board of Directors has a Compensation Committee currently
consisting of three directors, none of whom is an officer or employee of the
Company, which, as authorized by the Board of Directors, makes determinations
with respect to non-cash compensation to officers, directors and employees of
the Company, including grants, option and awards under the Company's 1996
Long-Term Equity Compensation Plan. Messrs. Fuellgraf, McWhorter and Miller
are the members of such committee. The Board of Directors has an Executive
Committee currently consisting of six directors, which, to the extent
authorized by the Board of Directors, exercises all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Company. Messrs. Fuellgraf, Holloway, McFerson, Miller, Paterson and Shisler
are the members of such committee.
DIRECTOR COMPENSATION
Directors of the Company who are not employees of the Company or its
affiliates will receive an annual retainer of $50,000. Pursuant to the
Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee
Directors, the annual retainer will be paid (i) $25,000 in cash and (ii) in
shares of Class A Common Stock having an aggregate market value of $25,000 as
of the date of payment. In addition, the Company will reimburse directors for
reasonable travel expenses incurred in attending meetings of the Board of
Directors and committees thereof.
In addition, directors of the Company who are not employees of the Company
or its affiliates also receive compensation for service on the boards of
directors of Nationwide Life and Nationwide Life and Annuity Insurance
Company. For the fiscal year ended December 31, 1996, Messrs. Fuellgraf,
Holloway, Miller, Patterson and Shisler received $8,820, $14,059, $13,783,
$10,949 and $13,621, respectively, for service to such companies.
Directors' Deferred Compensation Program
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain a deferred compensation program applicable to
nonemployee members of their boards of directors (the "Directors' Deferred
Compensation Program"). Each director who has been elected to the board of
directors at least twice and has served for at least 3 years on the board of
directors of a participating company is entitled to monthly payments,
following termination of his or her service on the board of directors, of a
monthly amount equal to the monthly director's fee being received by that
director at the time of his or her retirement from the board of directors. The
number of monthly payments will equal the number of months the individual
served on the board of directors (other than months in which he or she was
also a salaried officer of the participating company). Messrs. Fuellgraf,
Holloway, Miller, Patterson and Shisler, the nonemployee members of the Board
of Directors of the Company, are also nonemployee members of the board of
directors of Nationwide Life.
Directors' Stock Retainer Plan
The Company has established the Nationwide Financial Services, Inc. Stock
Retainer Plan for Non-Employee Directors. As a means of solidifying the common
interests of the Company and its directors, pursuant to such plan, each
director of the Company will be paid half of the annual retainer fee in cash
and the other half in the form of shares of Class A Common Stock having an
equivalent fair market value as of the date of payment.
EXECUTIVE COMPENSATION
The Company was incorporated in November 1996. Pursuant to a cost sharing
agreement, the salaries and benefits of certain of the officers and employees
of the Company and its subsidiaries, including the Named Executive Officers
(as defined below), will be paid by Nationwide Mutual and reimbursed in
accordance with the terms of such agreement. See "Certain Relations and
Related Transactions--Existing Arrangements with the Nationwide Insurance
Enterprise--Cost Sharing Agreement."
74
<PAGE>
The following summary compensation table sets forth information regarding
the compensation of the Chief Executive Officer and the other five most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ended December 31, 1996 solely for
services rendered to the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION PAYOUTS COMPENSATION
- --------------------------- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Dimon Richard
McFerson(1)............. $324,790 $80,058(2) $ -- (3) $149,803(4) $13,363(5)
Chairman and Chief
Executive
Officer--Nationwide
Insurance Enterprise
Joseph J. Gasper(6)...... 232,959 -- (2) -- (3) -- (4) 10,650(5)
President and Chief
Operating Officer
Harvey S. Galloway, Jr... 247,520 69,901(2) -- (3) 74,100(4) 11,973(5)
Senior Vice President--
Chief Actuary--Life and
Annuities
Robert J. Woodward,
Jr.(1).................. 222,784 59,399(2) -- (3) 64,698(4) 10,610(5)
Executive Vice
President--Chief
Investment Officer
James E. Brock........... 217,520 59,620(2) -- (3) 65,100(4) 10,492(5)
Senior Vice President--
Company Operations
Richard A. Karas......... 216,905 52,312(2) -- (3) 57,750(4) 10,059(5)
Senior Vice President--
Sales--Financial
Services
</TABLE>
- --------
(1) Figures in the table represent compensation received by such person solely
for his services rendered to the Company and its subsidiaries as allocated
pursuant to a cost sharing agreement. See "Certain Relationships and
Related Transactions--Existing Arrangements with the Nationwide Insurance
Enterprise--Cost Sharing Agreement."
(2) Represents the amount received by the Named Executive Officer under the
Management Incentive Plan in 1996 for the 1995 award year. See "--
Incentive Plans--Management Incentive Plan." Payout under such plan for
the 1996 award year is not available as of the date of this Prospectus.
(3) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(4) Represents the amount received by the Named Executive Officer under the
Executive Incentive Plan in 1996 for the award period 1993 to 1995. See
"--Incentive Plans--Executive Incentive Plan." No payouts were made in
1996 under the Sustained Performance Incentive Plan. See "--Incentive
Plans--Sustained Performance Incentive Plan."
(5) Represents contributions made or credited by the Company in 1996 under the
Savings Plan (as defined herein) and the DC Supplemental Plan (as defined
herein). See "--Savings Plans."
(6) Represents compensation received by Mr. Gasper solely for his services
rendered to the Company in 1996 as allocated pursuant to a cost sharing
agreement. Prior to April 1996, Mr. Gasper was the Executive Vice
President--Property/Casualty Operations of Nationwide Mutual and received
compensation from Nationwide Mutual and its property/casualty insurance
subsidiaries for services rendered to such companies. Such compensation is
not reflected in the table.
75
<PAGE>
INCENTIVE PLANS
Sustained Performance Incentive Plan
Prior to 1997, Nationwide Mutual and certain of its subsidiaries and
affiliates, including Nationwide Life, maintained the Sustained Performance
Incentive Plan (the "SPIP"). Under the SPIP, payments were made to the Named
Executive Officers and other senior officers of the participating companies in
each odd numbered calendar year based on the achievement of measures tied to
the performance of the Nationwide Insurance Enterprise over the preceding four
years. Performance measures were based on profitability, growth and strategic
objectives for the Nationwide Insurance Enterprise which were established in
advance by the boards of directors of the participating companies. Under the
SPIP, participants were granted target incentive amounts that represented a
percentage (10% to 20% depending on the participant's position within the
participating company) of the sum of the participant's base salary for the
last two years of the performance cycle. The actual amount received by the
participant ranged from zero to twice the target incentive amount, depending
solely on the achievement of the performance measures.
Nationwide Mutual and the participating subsidiaries and affiliates
terminated the SPIP at the close of calendar year 1996. If a payment under the
SPIP is made in 1997, covering performance measured for the period from 1993
to 1996, such payment will be made in cash as provided in the SPIP. To
facilitate the termination of the SPIP, the performance measurement period for
1995 to 1998 was closed at the end of calendar 1996. Payments made in 1997 for
such performance measurement period will be made in shares of restricted stock
of the Company under the Company's 1996 Long-Term Equity Compensation Plan.
Messrs. McFerson, Gasper, Galloway, Woodward, Brock and Karas will receive
23,602, 6,875, 4,282, 2,944, and 3,128 shares of restricted stock,
respectively.
Executive Incentive Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Executive Incentive Plan (the "EIP"). Under the
EIP, annual payments are made to the Named Executive Officers and certain
other officers of the participating companies based on the achievement of
measures tied to the performance of the Nationwide Insurance Enterprise and
the relevant operating company over the preceding three years. Performance
measures are based on profitability and growth objectives which are
established in advance by the Board of Directors of the participating company.
Under the EIP, the participant will be granted a target incentive amount that
represents a percentage (from 5% to 25% depending on the participant's
position within the participating company) of the participant's base salary.
The actual amount received by the participant will range from zero to twice
the target incentive amount, depending solely on the achievement of the
performance measures.
Management Incentive Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Management Incentive Plan (the "MIP"). Under the
MIP, annual payments are made to the Named Executive Officers and certain
other management employees of the participating companies based on the
achievement of measures tied to the performance of the Nationwide Insurance
Enterprise, the relevant operating company, the relevant business unit and the
individual participant over the preceding year. Performance measures are based
on profitability, growth, expense management and key strategic objectives
which are established in advance. Under the MIP, the participant will be
granted a target incentive amount that represents a percentage (from 5% to 15%
depending on the participant's position within the participating company) of
the participant's base salary. The actual amount received by the participant
under the MIP will range from zero to twice the target incentive amount,
depending solely on the achievement of the performance measures.
76
<PAGE>
PENSION PLANS
Retirement Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain a qualified defined benefit plan, the Nationwide
Insurance Enterprise Retirement Plan (the "Retirement Plan"). In general, a
participant's annual retirement benefit under the Retirement Plan will be
equal to the sum of (i) 1.25% of the participant's Final Average Compensation
times years of service (to a maximum of 35 years) and (ii) 0.50% of the
participant's Final Average Compensation in excess of Social Security Covered
Compensation times years of service (to a maximum of 35 years). Final Average
Compensation, for the portion of the participant's benefit which is
attributable to service on or after January 1, 1996, is the average of the
highest five consecutive covered compensation amounts of the participant in
the participant's last 10 years of service. For the portion of a participant's
benefit attributable to service prior to January 1, 1996, Final Average
Compensation is the average of the highest 3 consecutive covered compensation
amounts of the participant in the participant's last 10 years of service.
Covered compensation, for purposes of determining Final Average Compensation
under either method, is calculated on a calendar year basis and includes
compensation from any member of the Nationwide Insurance Enterprise. With
respect to Messrs. Gasper, Galloway, Brock and Karas, because each such
officer's compensation is allocated solely to the Company and its
subsidiaries, covered compensation includes the compensation listed under the
headings Salary, Bonus and LTIP Payouts and a portion of the compensation that
is included under the heading Other Annual Compensation shown in the Summary
Compensation Table. Covered compensation for Messrs. McFerson and Woodward
includes the amounts set forth under such headings and additional compensation
amounts received for services rendered to other members of the Nationwide
Insurance Enterprise. Social Security Covered Compensation means the average
of the social security wage bases in effect during the 35 year period ending
with the last day of the year the participant attains social security
retirement age. The portion of a participant's benefit attributable to years
of service credited prior to 1996 is also subject to post-retirement increases
following the commencement of benefits or the participant's attainment of age
65, whichever is later.
A participant becomes fully vested after the completion of five years of
vesting service. The Retirement Plan generally provides for payments to or on
behalf of each vested participant upon such participant's retirement on his or
her normal retirement date or later, although provision is made for payment of
early retirement benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62 for those
with 5 or more years of vesting service. The normal retirement date under the
Retirement Plan is the later of the date the participant attains age 65 or
completes five years of vesting service. Death benefits are payable to a
participant's spouse or, under certain circumstances, the named beneficiary of
a participant who dies with a vested benefit under the Retirement Plan or
while an employee. The Retirement Plan also provides for the funding of
retiree medical benefits under Section 401(h) of the IRC.
Excess and Supplemental Plans
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain an unfunded, nonqualified defined benefit excess
benefit plan, the Nationwide Insurance Enterprise Excess Benefit Plan (the
"Excess Plan") and an unfunded, nonqualified defined benefit supplemental
benefit plan pursuant to which certain participants may receive a supplemental
retirement benefit, the Nationwide Insurance Enterprise Supplemental
Retirement Plan (the "Supplemental Plan"). Any participant whose benefits are
limited under the Retirement Plan by reason of limitations under Section 415
of the IRC on the maximum benefit that may be paid under the Retirement Plan
will receive, under the Excess Plan, that portion of the benefit that he or
she would have been entitled to receive under the Retirement Plan in the
absence of such limitations. Officers who earn in excess of $160,000 annually,
have at least 5 years of vesting service and whose benefits under the
Retirement Plan are limited by reason of other certain limitations under the
IRC, may receive benefits under the Supplemental Plan. Benefits under the
Supplemental Plan will be the sum of (i) 1.25% of the participant's Final
Average Compensation times years of service (up to a maximum of 40 years) and
(ii) 0.75% of the participant's Final Average Compensation in excess of Social
Security Covered Compensation times years of service (up to a maximum of 40
years) reduced by benefits accrued under the Retirement Plan and the Excess
Plan. The benefits under the Excess and Supplemental Plans vest at the same
time as benefits vest under the Retirement Plan.
77
<PAGE>
The chart below indicates the estimated maximum annual retirement benefits
that a hypothetical participant would be entitled to receive under the
Retirement Plan (including payments made under the Excess and Supplemental
Plans as a result of limitations imposed by the IRC) computed on a straight-
life annuity basis, if retirement occurred at age 65 and the number of
credited years of service and Final Average Compensation equaled the amounts
indicated. For purposes of the chart, it is assumed that the Final Average
Compensation is the same whether measured over the three-year averaging period
that applies to service accumulated prior to 1996 or the five-year period that
applies to service accumulated after 1995. In actual operation, the total
benefit received under the Retirement Plan (including payments made under the
Excess and Supplemental Plans) would be the total of the benefit determined
based on years of service earned under each method.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000........................... $ 30,744 $ 40,992 $ 51,241 $ 61,489 $ 71,737
150,000........................... 41,898 55,864 69,830 83,795 97,761
175,000........................... 49,398 65,864 82,330 98,795 115,261
200,000........................... 56,898 75,864 94,830 113,795 132,761
225,000........................... 64,398 85,864 107,330 128,795 150,261
250,000........................... 71,898 95,864 119,830 143,795 167,761
300,000........................... 86,898 115,864 144,830 173,795 202,761
400,000........................... 116,898 155,864 194,830 233,795 272,761
450,000........................... 131,898 175,864 219,830 263,795 307,761
500,000........................... 146,898 194,864 244,830 293,795 342,761
</TABLE>
All Named Executive Officers have a portion of their benefit calculated
based on the post-1995 definition of Final Average Compensation. As of
December 31, 1995, the number of credited years of service under the
Retirement Plan for Messrs. McFerson, Gasper, Woodward, Galloway, Brock and
Karas was 23 years, 29.5 years, 32.7 years, 26.5 years, 26.5 years and 31.5
years, respectively. Mr. McFerson's credited years of service include,
pursuant to an agreement with Nationwide Mutual, 8.17 years in excess of those
actually earned through employment by the Nationwide Insurance Enterprise. The
benefit attributable to those additional years will be paid by Nationwide
Mutual (not the Retirement Plan) and is reduced by the benefit payable under
the retirement plan of Mr. McFerson's previous employer. Each of the Named
Executive Officers earned an additional year of service in 1996 and their
benefit for such year and all future years will be calculated under the new
definition of Final Average Compensation. Covered compensation paid by the
Company for the fiscal year ended December 31, 1996 for Messrs. McFerson,
Gasper, Woodward, Galloway, Brock and Karas was $444,217, $349,412, $348,003
$392,313, $343,167 and $328,513, respectively.
SAVINGS PLANS
Savings Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Nationwide Insurance Enterprise Savings Plan
(the "Savings Plan"), a qualified profit sharing plan including a qualified
cash or deferred arrangement covering eligible employees of participating
companies within the Nationwide Insurance Enterprise. Under the Savings Plan,
participants who are not residents of Puerto Rico may elect to contribute
between 1% and 16% of their compensation to accounts established on their
behalf under the Savings Plan in the form of voluntary salary reductions on a
pre-tax basis and participants who are residents of Puerto Rico may make
contributions on an after-tax basis. The participating companies are obligated
to make matching employer contributions, for the benefit of their
participating employees, at the rate of 70% of the first 2% of compensation
deferred or contributed to the Savings Plan by each employee, and 40% of the
next 4% of compensation deferred or contributed by each employee to the
Savings Plan. All amounts contributed to the Savings Plan are held in a
separate account for each participant and are invested in one or more funds
made available under the Savings Plan and selected by the participant.
Normally, a participant receives the value of
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his or her account upon termination of employment, although a participant may
withdraw all or a part of the amounts credited to his or her accounts during
employment under certain circumstances including attainment of age 59 1/2 or
receive a loan of a portion of his or her account balance. Under the Savings
Plan, a participant is immediately vested in all amounts credited to his or
her account as a result of salary deferrals (and earnings on those deferrals)
or after-tax contributions (and earnings on those contributions), as
applicable. A participant is vested in amounts attributable to employer
matching contributions and earnings on those contributions over a period of
five years.
Supplemental Defined Contribution Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain an unfunded, nonqualified defined contribution
supplemental benefit plan, the Nationwide Insurance Enterprise Supplemental
Defined Contribution Plan (the "DC Supplemental Plan"), which provides
benefits, equal to employer matching contributions that would have been made
under the Savings Plan for the participants, in the absence of the IRC
limitations on compensation that can be considered and amounts that can be
deferred under the Savings Plan less actual matching contributions to the
Savings Plan in the absence of the limitations under IRC Sections 401(a)(17)
and 402(g), reduced by actual employer contributions made to the Savings Plan.
Participants are limited to those officers earning in excess of $160,000
annually. Benefits under the DC Supplemental Plan vest at the same time as
employer matching contributions vest under the Savings Plan.
DEFERRED COMPENSATION PROGRAM
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain a deferred compensation program (the "Officers'
Deferred Compensation Program") pursuant to which officers of participating
companies may elect to defer payment of amounts otherwise payable to them. In
addition, participants receive credit for employer matching contributions
which were not made under the Savings Plan or DC Supplemental Plan and any
reduction in benefits under the Retirement Plan, Supplemental Plan or Excess
Plan as a result of salary or other deferrals under the Deferred Compensation
Program. An eligible officer is permitted to enter into a deferral agreement
pursuant to which such officer may annually elect to defer a portion of his or
her salary or his or her incentive compensation earned under the Management
Incentive Plan or Executive Incentive Plan during the following year. Any such
election is effective prospectively. Amounts deferred under the Officers'
Deferred Compensation Program will generally be payable in annual installments
beginning in January of the calendar year following the calendar year in which
the officer terminates employment. Amounts deferred under the Officers'
Deferred Compensation Program are credited with interest. The interest rate is
based on the fixed rate option in the Savings Plan.
SEVERANCE PAY PLAN
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Nationwide Salaried Employees Severance Pay Plan
(the "Severance Plan"), an unfunded plan which provides severance benefits to
employees whose employment is involuntarily terminated due to unsatisfactory
job performance or job elimination without an offer of replacement employment
within the Nationwide Insurance Enterprise or with a successor employer.
Employees will not be entitled to benefits, if their employment is terminated
as a result of theft, absenteeism, insubordination and other similar problems.
The benefit provided is a lump sum payment determined on the basis of years of
service completed (a minimum of 6 months of service is required) and salary,
with a maximum benefit of 8 weeks of salary plus an additional week of salary
for each full or partial year of service in excess of 11.
LONG-TERM EQUITY COMPENSATION PLAN
General
The Board of Directors of the Company has adopted, and Nationwide Corp., as
the sole stockholder of the Company, has approved, the Nationwide Financial
Services, Inc. 1996 Long-Term Equity Compensation Plan
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(the "LTEP"). The purpose of the LTEP is to benefit the stockholders of the
Company by encouraging high levels of performance by selected officers,
directors and employees of the Company and certain of its affiliates,
attracting and retaining the services of such individuals and aligning the
interests of such individuals with those of the stockholders.
The LTEP grants the Compensation Committee of the Board of Directors of the
Company, which will administer the LTEP, flexibility in creating the terms and
restrictions deemed appropriate for particular awards as facts and
circumstances warrant. The LTEP is intended to constitute a nonqualified,
unfunded, unsecured plan for incentive and deferred compensation and is not
intended to be subject to any requirements of ERISA. The LTEP is intended to
satisfy the requirements of Section 16b-3 of the Exchange Act, and awards
under the LTEP which are performance-based are intended to qualify as
"performance-based compensation" for purposes of Section 162(m) of the IRC.
Types of Awards
The LTEP provides for the grant of any or all of the following types of
awards: (i) stock options, including incentive stock options and non-qualified
stock options, for shares of Class A Common Stock; (ii) stock appreciation
rights ("SARs"), either in tandem with stock options or freestanding; (iii)
restricted stock; and (iv) performance awards. Any stock option granted in the
form of an incentive stock option must satisfy the applicable requirements of
Section 422 of the IRC. Awards may be made to the same person on more than one
occasion and may be granted singly, in combination or in tandem as determined
by the Compensation Committee.
Term
The LTEP was effective as of December 11, 1996. No awards may be granted
under the LTEP after December 11, 2006, and the LTEP may be terminated by the
Board of Directors of the Company prior to such date. In the event of
expiration or earlier termination of the LTEP, the LTEP will remain in effect
until such time as all awards granted thereunder have been satisfied or have
expired. No new awards may by made under the LTEP after its expiration or
termination.
Administration
The LTEP will be administered by the Compensation Committee of the Board of
Directors of the Company. The Company intends that each member of the
Compensation Committee shall be a "nonemployee director" within the meaning
and for purposes of Rule 16b-3 under the Exchange Act and an "outside
director" within the meaning and for purposes of Section 162(m) of the IRC.
Under the LTEP, the Compensation Committee will have authority (i) to select
the employees, officers and directors of the Company and its affiliates to
receive awards; (ii) to determine the timing, form, amount or value and terms
of grants and awards, and the terms and conditions, if any, subject to which
grants and awards will be made and become payable under the LTEP, (iii) to
construe the LTEP and to prescribe rules and regulations with respect to the
administration of the LTEP and (iv) to make such other determinations
authorized under the LTEP as the Compensation Committee deems necessary or
appropriate.
Eligibility
All employees, officers and directors of the Nationwide Insurance Enterprise
are eligible to participate.
Shares Subject to the LTEP
The number of shares of Class A Common Stock which may be issued under the
LTEP, or as to which SARs or other awards may be granted, may not exceed 2.6
million.
In the event of any increases or decreases in the number of issued and
outstanding shares of Class A Common Stock pursuant to stock splits, mergers,
reorganizations, recapitalizations, stock dividends or other
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events described under the terms of the LTEP, the Compensation Committee shall
make appropriate adjustments to the aggregate number of shares available for
issuance under the LTEP and the number of shares subject to outstanding grants
or awards, to the exercise price per share of outstanding stock options and to
the number or kinds of shares which may be distributed under the LTEP. The
terms of stock options, SARs, restricted stock and performance awards may also
be subject to adjustments by the Compensation Committee to reflect changes in
the Company's capitalization.
Stock Options
The Compensation Committee may grant awards in the form of options to
purchase shares of Class A Common Stock. The Compensation Committee shall,
with regard to each stock option, determine the number of shares subject to
the option and the manner and time of the option's exercise; provided,
however, that the maximum number of shares of Class A Common Stock that may be
subject to stock options granted under the LTEP to an individual optionee
during any calendar year cannot exceed 100,000 shares (subject to appropriate
adjustment in the event of stock dividends, stock splits and certain other
events). The exercise price of a stock option may not be less than the fair
market value of the Class A Common Stock on the date the option is granted.
The Committee will designate each option as a non-qualified or an incentive
stock option. The option price upon exercise may, at the discretion of the
Committee, be paid by a participant in cash, shares of Class A Common Stock, a
"cashless exercise" or a combination thereof.
Prior to the consummation of the Equity Offerings, stock options will be
granted under the LTEP to the following Named Executive Officers at an
exercise price equal to the initial public offering price in the following
amounts:
<TABLE>
<CAPTION>
NAMED NUMBER OF SHARES
EXECUTIVE OFFICER SUBJECT TO OPTION
----------------- -----------------
<S> <C>
Dimon Richard McFerson 40,000
Joseph J. Gasper 30,000
Robert J. Woodward, Jr. 10,000
Richard A. Karas 10,000
Harvey S. Galloway, Jr. 7,500
James E. Brock 7,500
</TABLE>
Additionally, 196,500 and 26,000 stock options will be granted in the
aggregate under the LTEP to other officers and directors, respectively, of the
Company and its subsidiaries.
Stock Appreciation Rights
The LTEP also authorizes the Compensation Committee to grant SARs either
independent of, or in connection with, a stock option. If granted with a stock
option, exercise of the SAR will result in the surrender of the right to
purchase the shares under the option to which the SAR was exercised. Upon
exercising an SAR, the holder receives for each share with respect as to which
the SAR is exercised, an amount equal to the difference between the exercise
price and the fair market value of Class A Common Stock on the date of
exercise. Payment of such amount may be made in shares of Class A Common
Stock, cash, or a combination thereof, as determined by the Compensation
Committee. The maximum number of shares of Class A Common Stock that may be
subject to SARs granted under the LTEP to an individual grantee during any
calendar year cannot exceed 100,000 shares (subject to appropriate adjustment
in the event of stock dividends, stock splits and certain other events).
Restricted Stock
The LTEP provides that shares of Class A Common Stock subject to certain
restrictions including restrictions on transferability may be awarded from
time to time as determined by the Compensation Committee. The Compensation
Committee will determine the nature and extent of the restrictions on such
shares, the duration
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of such restrictions and any circumstance under which restricted shares will
be forfeited by the participant. Subject to such restrictions as the
Compensation Committee shall determine, participants holding shares of
restricted stock may exercise full voting rights with respect to such shares
and may receive dividends payable to holders of such shares. The maximum
number of shares of Class A Common Stock that may be granted in the form of
restricted shares to an individual grantee during any calendar year cannot
exceed 100,000 shares (subject to appropriate adjustment in the event of stock
dividends, stock splits and certain other events).
Prior to the consummation of the Equity Offerings, restricted stock will be
granted under the LTEP to the following officers of the Company in the
following amounts:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF RESTRICTED STOCK
EXECUTIVE OFFICER (3 YEAR RESTRICTION)
----------------- --------------------
<S> <C>
Dimon Richard McFerson 15,000
Joseph J. Gasper 10,000
Richard A. Karas 4,000
Robert J. Woodward, Jr. 3,500
Harvey S. Galloway, Jr. 3,000
James E. Brock 3,000
</TABLE>
Additionally, 69,750 and 8,000 shares of restricted stock will be granted in
the aggregate under the LTEP to other officers and directors, respectively, of
the Company and its subsidiaries.
Performance Awards
The LTEP provides for the Compensation Committee to grant performance
awards, consisting of performance units and/or performance shares to eligible
persons under the LTEP from time to time. The beginning value of performance
units is set by the Compensation Committee at the time of grant, while the
beginning value of performance shares is equal to the fair market value of the
shares of the Class A Common Stock at the time of grant. A performance award
will be contingent upon future performance by the Company or any subsidiary,
division or department thereof. The Compensation Committee shall establish at
the time of grant the relevant performance criteria. Performance periods may
overlap and participants may be awarded performance units and performance
shares having different performance criteria. Unless the Compensation
Committee otherwise determines, in the event of a participant's termination as
an employee or director before the end of any relevant performance period
(other than due to death, disability or retirement), the participant will not
be entitled to any performance award related to such period. Subject to the
discretion of the Compensation Committee, participants who have earned shares
of Class A Common Stock in connection with grants of performance awards may
exercise full voting rights with respect to such shares and may receive
dividends payable to holders of such shares. Payment of a performance award
may be made in cash, Class A Common Stock or a combination thereof, as
determined by the Committee. The benefit to the grantee of a performance award
is the difference between its beginning value and its value at the end of the
performance period. The maximum performance award that may be granted to an
individual grantee during any calendar year cannot exceed the value of 100,000
shares of Class A Common Stock (subject to appropriate adjustment in the event
of stock dividends, stock splits and certain other events).
Award Agreements
Each award under the LTEP will be evidenced by an agreement in such form and
containing such provisions consistent with the provisions of the LTEP as the
Compensation Committee from time to time approves. In applicable situations,
such agreements may include provisions to qualify as an incentive stock
option, or providing for the payment of the option price, in whole or in part,
by the delivery of a number of shares of Class A Common Stock (plus cash if
necessary) having a fair market value equal to the option price. Such
agreements may also include provisions relating to (i) vesting, (ii) tax
matters (including provisions covering any applicable employee wage
withholding requirements), and (iii) any other matters not inconsistent with
the terms and
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provisions of the LTEP that the Compensation Committee in its sole discretion
determines. The terms and conditions of award agreements need not to be
identical.
Amendment
The Board of Directors of the Company may at any time terminate or amend the
LTEP in any respect; provided, however, that no amendment which requires
stockholder approval in order for the LTEP to comply with Rule 16b-3 under the
Exchange Act shall be effective unless such amendment is approved by the
requisite number of stockholders of the Company entitled to vote thereon. No
amendment or termination of the LTEP shall, without the consent of the
optionee or participant in the LTEP, alter or impair the rights of such person
under any options or other awards theretofore granted under the LTEP.
Change of Control
Upon the occurrence of a Change in Control (as defined in the LTEP), (i) the
exercisability and vesting of stock appreciation rights and stock options
shall be accelerated, (ii) the restrictions and limitations applicable to any
restricted stock shall lapse, (iii) the target payout opportunities attainable
under all outstanding awards of restricted stock, performance units and
performance shares shall be deemed to have been fully earned for the entire
performance period, (iv) the vesting of restricted stock and performance
awards denominated in shares of Class A Common Stock will be accelerated and
(v) within 30 days following the effective date of the Change in Control, a
pro rata amount of any outstanding performance awards will be paid in cash to
participants, based upon an assumed achievement of all relevant performance
goals and upon the portion of the performance period which has elapsed prior
to the Change in Control.
OWNERSHIP OF CAPITAL STOCK
Prior to the consummation of the Equity Offerings, all of the outstanding
shares of Common Stock of the Company will be owned by Nationwide Corp. After
the Equity Offerings, Nationwide Corp. will own all of the outstanding shares
of the Class B Common Stock and none of the outstanding shares of the Class A
Common Stock. Such shares of the Class B Common Stock will represent 83.6% and
98.1% (81.6% and 97.8% if the Underwriters' over-allotment option is exercised
in full) of the total number of shares of Common Stock outstanding and the
combined voting power of the stockholders of the Company, respectively,
following the Equity Offerings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXISTING ARRANGEMENTS WITH THE NATIONWIDE INSURANCE ENTERPRISE
Organization of the Company
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. On September
24, 1996, Nationwide Life declared a dividend to Nationwide Corp. consisting
of the stock of those subsidiaries of Nationwide Life that do not operate in
the long-term savings and retirement market. On January 27, 1997, Nationwide
Corp. contributed to the Company all of the outstanding capital stock of
Nationwide Life and the other companies within the Nationwide Insurance
Enterprise that offer or distribute long-term savings and retirement products.
On December 31, 1996, Nationwide Life paid a $50.0 million cash dividend to
Nationwide Corp. In addition, prior to the consummation of the Equity
Offerings, Nationwide Life will dividend to the Company, and the Company will
subsequently dividend to Nationwide Corp., securities having an aggregate
market value of $850.0 million.
Effective as of January 1, 1996, Nationwide Life entered into a 100%
modified coinsurance agreement with Employers Life pursuant to which all of
Nationwide Life's nonvariable group and wholesale life insurance business and
group and franchise health insurance business was reinsured by Employers Life.
Nationwide Life also entered into a 100% modified coinsurance agreement with
Nationwide Mutual effective as of January 1, 1996, pursuant to which all of
Nationwide Life's individual accident and health insurance business was
reinsured by Nationwide Mutual. See "--Modified Coinsurance Agreements."
Following the Equity Offerings, Nationwide Corp. will be the controlling
stockholder of the Company. Upon completion of the Equity Offerings,
Nationwide Corp. will own all of the outstanding shares of the Class B Common
Stock representing 83.6% and 98.1% (81.6% and 97.8% if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of Common
Stock outstanding and the combined voting power of the stockholders of the
Company.
Federal Income Taxes
Nationwide Mutual and its U.S. subsidiaries, including the Company and its
subsidiaries, file a consolidated federal income tax return. The members of
the consolidated group currently have a tax sharing arrangement which
provides, in effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed. For the years
ended December 31, 1996 and 1995, the Company made federal income tax payments
under the tax sharing arrangement of $117.3 million and $58.1 million,
respectively.
Legal Services
The attorneys in the Office of General Counsel of Nationwide Mutual also
operate as the law firm of Druen, Rath & Dietrich. Pursuant to a partnership
agreement, the firm limits its representation to the members of the Nationwide
Insurance Enterprise. The partnership was formed to assure compliance with
Ohio law that prohibits corporations from practicing law. Through a retainer
arrangement, an annual retainer fee is paid by each member of the Nationwide
Insurance Enterprise based upon an estimate of time spent by each attorney
working on legal matters related to the respective member during the previous
year. W. Sidney Druen, Senior Vice President and General Counsel of the
Company, is the senior partner in such firm, and all attorneys and other
employees of the firm are salaried employees of Nationwide Mutual. The firm
applies all of its retainer fees toward office overhead under a rental and
office expense agreement with Nationwide Mutual. For the years ended December
31, 1996 and 1995, the Company paid the firm $2.0 million and $1.7 million,
respectively, for legal services rendered to the Company which amounts were
immediately remitted to Nationwide Mutual.
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Lease
Pursuant to an arrangement between Nationwide Mutual and certain of its
subsidiaries, the Company leases approximately 512,000 square feet of office
space at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide
Plaza, Columbus, Ohio, at a current market rate of $19.53 per square foot,
with limited exceptions. Under the arrangement, the Company determines the
amount of office space necessary to conduct its operations and leases such
space from Nationwide Mutual, subject to availability. For the years ended
December 31, 1996 and 1995, the Company made payments to Nationwide Mutual and
its subsidiaries totaling $10.0 million and $9.9 million, respectively, under
such arrangement.
Modified Coinsurance Agreements
Effective as of January 1, 1996, Nationwide Life entered into a 100%
modified coinsurance agreement with Employers Life. Under the agreement,
Nationwide Life cedes to Employers Life, and Employers Life assumes,
Nationwide Life's nonvariable group and wholesale life insurance business and
group and franchise health insurance business and any ceded or assumed
reinsurance applicable to such group business. For the year ended December 31,
1996, Nationwide Life ceded $224.3 million of premium to Employers Life.
Effective as of January 1, 1996, Nationwide Life also entered into a 100%
modified coinsurance agreement with Nationwide Mutual. Under the agreement,
Nationwide Life cedes to Nationwide Mutual, and Nationwide Mutual assumes,
Nationwide Life's individual accident and health insurance business and any
ceded or assumed reinsurance applicable to such business. For the year ended
December 31, 1996, Nationwide Life ceded $97.3 million of premium to
Nationwide Mutual.
Nationwide Life entered into these reinsurance agreements because the
accident and health and group life insurance business was unrelated to the
Company's long-term savings and retirement products. Under the modified
coinsurance agreements, invested assets are retained by the ceding company and
investment earnings are paid to the reinsurer. Under the terms of such
agreements, the investment risk associated with changes in interest rates is
borne by Employers Life or Nationwide Mutual, as the case may be. Risk of
asset default is retained by the Company, although a fee is paid by Employers
Life or Nationwide Mutual, as the case may be, to the Company for the
Company's retention of such risk. The contracts will remain in force until all
policy obligations are settled. However, with respect to the agreement between
Nationwide Life and Nationwide Mutual, either party may terminate the contract
on January 1 of any year with prior notice. The Company believes that the
terms of such modified coinsurance contracts are consistent in all material
respects with what the Company could have obtained with unaffiliated parties.
Total premiums ceded under the reinsurance agreements were $321.6 million,
during 1996. The effect of the reinsurance agreements was an increase in the
Company's income before federal income tax expense of $4.5 million during
1996.
Cost Sharing Agreement
Pursuant to a cost sharing agreement among Nationwide Mutual and certain of
its direct and indirect subsidiaries, including the Company, Nationwide Mutual
provides certain operational and administrative services, such as sales
support, advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to allocation
among Nationwide Mutual and such subsidiaries. Under such agreement, for the
years ended December 31, 1996 and 1995, the Company made payments to
Nationwide Mutual totaling $101.6 million and $107.1 million, respectively.
Under the cost sharing agreement, expenses are allocated in accordance with
NAIC guidelines and are based on standard allocation techniques and procedures
acceptable under general cost accounting practices. Measures used to allocate
expenses include individual employee estimates of time spent, special cost
studies, salary expense, commissions expense and other measures that are
agreed to by the participating companies and are within regulatory and
industry guidelines and practices. The cost sharing agreement will remain in
effect following the Equity Offerings until terminated upon the consent of
both Nationwide Mutual and the Company.
Cash Management Agreements
Nationwide Mutual has entered into separate Investment Agency Agreements
with California Cash Management Company ("CCMC") and Nationwide Cash
Management Company ("NCMC"), each an affiliate
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of the Company. Pursuant to the terms of such agreements, CCMC and NCMC make,
hold and administer short-term investments (those maturing in one year or
less) for Nationwide Mutual and certain of its affiliates, including
Nationwide Life and certain of the Company's other subsidiaries. Under each
agreement, expenses of CCMC or NCMC, as the case may be, are allocated pro
rata among the participants based upon the participant's ownership percentage
of total assets held by CCMC or NCMC. For the years ended December 31, 1996
and 1995, the Company paid CCMC and NCMC fees and expenses totaling $0.5
million and $0.5 million, respectively, under such agreements.
Benefit Plans
The Company participates in the common employee benefit programs with
Nationwide Mutual and its subsidiaries. Included in these programs are
accident and health benefits, disability income benefits and life insurance
benefits. The Company ultimately pays for all benefits provided to its
employees under the benefit program plus an administrative processing fee,
reduced by employee contributions. The administrative processing fee paid by
the Company approximated $1.0 million and $0.7 million for the years ended
December 31, 1996 and 1995, respectively.
The Company also participates, along with Nationwide Mutual and its
subsidiaries and affiliates, in life insurance and health care benefit plans
for qualifying retirees. Such plans are funded in amounts determined at the
discretion of management of the Company based on current and anticipated
future costs. Contributions to the plan by the participating companies are
primarily invested in group annuity contracts of Nationwide Life.
Contributions by the Company approximated $1.6 million and $1.4 million for
the years ended December 31, 1996 and 1995, respectively.
Repurchase Agreement
Nationwide Life and certain of the Company's other subsidiaries are party to
a master repurchase agreement pursuant to which securities or other financial
instruments are transferred between parties against the transfer of funds by
the transferee for a period of time ending on a specific date or upon the
demand of the transferor.
NEW AGREEMENTS WITH THE NATIONWIDE INSURANCE ENTERPRISE
Set forth below are descriptions of certain agreements between the Company
and other members of the Nationwide Insurance Enterprise that will become
effective upon the consummation of the Equity Offerings.
Tax Sharing Agreement
The Company is, and after the Note Offering will continue to be, included in
the consolidated United States federal income tax return for which Nationwide
Mutual is the common parent and the Company's tax liability will be included
in the consolidated federal income tax liability of Nationwide Mutual. The
Company also may be included in certain state and local tax returns of
Nationwide Mutual or its subsidiaries.
The Company will enter into the Tax Sharing Agreement with Nationwide Mutual
which will become effective for 1996 and subsequent years, as long as the
Company is included in Nationwide Mutual's consolidated federal income tax
return. It will also be effective for any year in which the Company is
included in a consolidated or combined state or local tax return. Under the
Tax Sharing Agreement, Nationwide Mutual will compute its federal tax on a
consolidated basis, and its state and/or local taxes on a combined basis (in
those states or other jurisdictions in which Nationwide Mutual files a
combined return for such year). Each corporation that is included in the
consolidated and/or combined return shall compute its federal, state, and/or
local tax liability on a separate basis, and the federal, state, and/or local
tax liability of each corporation shall be determined by applying the
Percentage Method for allocating tax liability, all as set forth in Treas.
Reg. 1.1502-33(d)(3), using a fixed percentage of 100%. Pursuant to that
regulation, each corporation's federal income tax liability will be equal to
the consolidated federal income tax liability (including any amounts
determined to be due as a result of a redetermination of the tax liability of
the consolidated group of which Nationwide Mutual is the common parent,
whether arising from any audit or otherwise, but in all instances without
regard to the
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alternative minimum tax) of Nationwide Mutual times a fraction, the numerator
of which is the federal tax liability of such corporation determined on a
separate basis, and the denominator of which is the aggregated federal tax
liability of all corporations in the consolidated group, determined on a
separate basis. Any corporation that has no federal income tax liability when
computed on a separate basis is ignored for purposes of allocating the
consolidated tax liability. The state and local tax liability, in those states
or other jurisdictions in which a combined return is filed, shall be
determined in a manner consistent with the foregoing description. The Company
will pay its tax liability, as computed above, to Nationwide Mutual. The
Company will be responsible for all taxes, including assessments, if any, for
prior years with respect to all other taxes payable by the Company or any of
its subsidiaries, and for all other federal, state and local taxes that may be
imposed upon the Company and that are not addressed in the Tax Sharing
Agreement.
By virtue of its control of the Company and the terms of the Tax Sharing
Agreement, Nationwide Mutual effectively will control all of the Company's tax
decisions. Under the Tax Sharing Agreement, Nationwide Mutual will have sole
authority to respond to and conduct all tax proceedings (including tax audits)
relating to the Company, to file all returns on behalf of the Company and to
determine the amount of the Company's liability to (or entitlement to payment
from) Nationwide Corp. under the Tax Sharing Agreement. This arrangement may
result in conflicts of interest between the Company and Nationwide Mutual. For
example, under the Tax Sharing Agreement, Nationwide Mutual may choose to
contest, compromise or settle any adjustment or deficiency proposed by the
relevant tax authority in a manner that may be beneficial to Nationwide Mutual
and detrimental to the Company. Under the Tax Sharing Agreement, however,
Nationwide Mutual is obligated to act in good faith with regard to all persons
included in the applicable returns.
The Tax Allocation Agreement may not be amended without the prior written
consent of the Company.
Intercompany Agreement
The Company, Nationwide Mutual and Nationwide Corp. will enter into the
Intercompany Agreement, certain provisions of which are summarized below. As
used herein, "Nationwide Mutual" means Nationwide Mutual collectively with its
subsidiaries and affiliates (other than the Company and its subsidiaries).
Nationwide Mutual Consent to Certain Events. The Intercompany Agreement will
provide that until Nationwide Mutual and its affiliates cease to control at
least 50% of the combined voting power of the outstanding voting stock of the
Company, the prior written consent of Nationwide Mutual will be required for:
(i) any consolidation or merger of the Company or any of its subsidiaries with
any person (other than with a wholly owned subsidiary); (ii) any sale, lease,
exchange or other disposition or acquisition of assets by the Company or any
of its subsidiaries (other than transactions to which the Company and its
subsidiaries are the only parties), or any series of related dispositions or
acquisitions, involving consideration in excess of $250 million; (iii) any
change in the authorized capital stock of the Company or the creation of any
additional class or series of capital stock of the Company; (iv) any issuance
by the Company or any subsidiary of the Company of any equity securities or
rights, warrants or options to purchase such equity securities, except (a) up
to 2.6 million shares of Class A Common Stock pursuant to employee and
director stock option, profit sharing and other benefit plans of the Company
and its subsidiaries and any options exercisable therefor, (b) shares of Class
A Common Stock issued upon the conversion of any Class B Common Stock, (c) the
issuance of shares of capital stock of a wholly owned subsidiary of the
Company to the Company or another wholly owned subsidiary of the Company and
(d) in the Equity Offerings; (v) the dissolution, liquidation or winding up of
the Company; (vi) the amendment of the Certificate and certain provisions of
the Bylaws affecting corporate governance; (vii) the election, removal or
filling of a vacancy in the office of the Chairman or Chief Executive Officer
or President of the Company; (viii) the declaration of dividends on any class
or series of capital stock of the Company, except dividends not in excess of
the most recent regular cash dividend or any dividend per share not in excess
of 15% of the then current per share market price of the Class A Common Stock;
(ix) capital expenditures or series of related capital expenditures of the
Company or any of its subsidiaries in excess of $250 million during any period
of 12 consecutive months; (x) the creation, incurrence or guaranty by the
Company or any of its subsidiaries of indebtedness for borrowed money in
excess of $100 million, except the Note Offering and the Capital Securities
Offering; and (xi) any change in the number of directors on the Board of
Directors of the Company, the
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determination of members of the Board of Directors or any committee thereof
and the filling of newly created memberships and vacancies on the Board of
Directors or any committee thereof.
License to Use Nationwide Name and Service Marks. Pursuant to the
Intercompany Agreement, Nationwide Mutual will grant to the Company and
certain of its subsidiaries a non-exclusive, non-assignable, revocable license
to use the "Nationwide" trade name and certain other service marks
specifically identified in the Intercompany Agreement (collectively, the
"Service Marks") solely for the purpose of identifying and advertising the
Company's long-term savings and retirement business and activities related to
such business. The Intercompany Agreement will provide, among other things,
that, subject to Nationwide Mutual's ability to revoke such license in the
circumstances described below, such license will remain in effect for at least
five years following the Equity Offerings. Thereafter, the Intercompany
Agreement provides that, subject to certain exceptions, Nationwide Mutual will
only have the option to revoke such license on one year's notice if Nationwide
Corp. and its affiliates no longer own at least 50% of the combined voting
power of the outstanding capital stock of the Company. Upon revocation of such
license, the Company and its subsidiaries will be required to discontinue use
of the Service Marks and to change the Company's name to exclude the word
"Nationwide." In addition, the Intercompany Agreement will provide that the
Company and its subsidiaries will not, without the prior written consent of
Nationwide Mutual, take any action with respect to (i) any litigation or
proceeding involving the Service Marks, (ii) any change in the Company's
names, logos and other identifications that might reasonably be expected to
adversely affect the Service Marks or (iii) any advertising campaigns or
strategies that use the Service Marks or that refer to any member of the
Nationwide Insurance Enterprise that are inconsistent with Nationwide Mutual's
guidelines and standards. Nationwide Mutual has the right to revoke the
license under certain circumstances relating to advertising, promotion or use
of the Service Marks in a manner contrary to Nationwide Mutual guidelines and
standards. In addition, Nationwide Mutual can revoke any of the Company's
subsidiaries' use of the Service Marks if there is a change of control of any
such subsidiary of the Company that is licensed to use the Service Marks. A
revocation by Nationwide Mutual of the license to use the Service Marks could
have a material adverse effect on the Company.
Equity Purchase Rights. The Company will agree that, to the extent permitted
by the NYSE and so long as Nationwide Mutual controls at least 50% of the
combined voting power of the outstanding voting stock of the Company,
Nationwide Corp. may purchase its pro rata share (based on its then current
percentage voting interest in the Company) of any voting equity securities to
be issued by the Company (excluding any such securities offered pursuant to
employee stock options or other benefit plans, divided reinvestment plans and
other offerings other than for cash) (the "Equity Purchase Rights").
Registration Rights. The Company will grant to Nationwide Corp. certain
demand and "piggyback" registration rights with respect to shares of Common
Stock owned by it. Nationwide Corp. has the right to request up to two demand
registrations in each calendar year, but not more than four in any five-year
period. Nationwide Corp. will also have the right, which it may exercise at
any time and from time to time, to include the shares of Common Stock held by
it in any registration of common equity securities of the Company initiated by
the Company on its own behalf or on behalf of any other stockholders of the
Company. These rights will be subject to certain "blackout" provisions. Such
registration rights will be transferable by Nationwide Corp. The Company will
agree to pay all costs and expenses in connection with each such registration,
except underwriting discounts and commissions applicable to the shares of
Common Stock sold by Nationwide Corp. The Intercompany Agreement will contain
customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification granted by
parties thereunder in connection with the registration of Common Stock on
behalf of Nationwide Mutual.
Indemnification. The Intercompany Agreement will provide that the Company
will indemnify Nationwide Mutual and its respective officers, directors,
employees and agents (collectively, the "Indemnitees") against losses based
on, arising out of or resulting from (i) the use of the Service Marks and (ii)
any acts or omissions arising out of performances of the Intercompany
Agreement by the Company and its subsidiaries. In addition, the Company will
agree to indemnify the Indemnitees against certain civil liabilities,
including liabilities under the Securities Act, relating to misstatements in
or omissions from the Registration Statement of which this
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Prospectus forms a part and any other registration statement that the Company
files under the Securities Act (other than misstatements or omissions made in
reliance on information relating to and furnished by any member of Nationwide
Mutual for use in the preparation thereof, against which Nationwide Mutual has
agreed to indemnify the Company). Nationwide Mutual also will agree to
indemnify the Company and its subsidiaries and each of their respective
officers, directors, employees and agents against losses based on, arising out
of or resulting from any breach by Nationwide Corp. or Nationwide Mutual of
the Intercompany Agreement and certain other specifically identified matters.
Nationwide Insurance Enterprise Insurance Agents. In the Intercompany
Agreement, Nationwide Mutual will agree to allow the Company to distribute its
variable annuity, fixed annuity and individual universal, variable and
traditional life insurance products through Nationwide Insurance Enterprise
insurance agents. Such right is exclusive to the Company, subject to the
limited right of certain other members of the Nationwide Insurance Enterprise
to sell such products through the agency force, for at least five years
following the Equity Offerings. Thereafter, the Intercompany Agreement
provides that Nationwide Mutual will only have the option to terminate the
Company's right to distribute products through Nationwide Insurance Enterprise
insurance agents on one year's notice if Nationwide Corp. and its affiliates
no longer own at least 50% of the combined voting power of the outstanding
voting stock of the Company. The termination of such right could have an
adverse effect on the Company's ability to distribute certain of its products.
In 1996, 5.8% of the Company's statutory premiums and deposits were
attributable to products sold by Nationwide Insurance Enterprise insurance
agents.
Amendment. The Intercompany Agreement may not be amended without the prior
written consent of the Company and certain material provisions thereof may not
be amended without the approval of a majority of the directors of the Company
who are not officers or directors of members of the Nationwide Insurance
Enterprise other than the Company and its subsidiaries.
Lease Agreement
The Company will enter into a Lease Agreement with Nationwide Mutual which
will provide that Nationwide Mutual will continue to lease to the Company the
premises currently occupied by the Company on terms consistent with prior
allocation practices. See "--Existing Arrangements with the Nationwide
Insurance Enterprise--Lease." The initial term of the Lease Agreement is for
12 months and automatically renews upon the same terms and conditions unless
either Nationwide Mutual or the Company gives 30 days' written notice to the
other party prior to the end of such 12-month period. The Lease Agreement may
not be amended without the prior written consent of the Company.
FUTURE TRANSACTIONS WITH THE NATIONWIDE INSURANCE ENTERPRISE
In the future, the Company may enter into agreements with members of the
Nationwide Insurance Enterprise that will not be the result of arm's-length
negotiations between independent parties. Conflicts of interest could arise in
the future with respect to transactions involving members of the Nationwide
Insurance Enterprise, on the one hand, and the Company, on the other hand. Any
such transactions that are material to the Company will be subject to approval
by a vote of disinterested members of the Company's Board of Directors. In
addition, under the Ohio insurance holding company laws, arrangements and
agreements between the Company's insurance subsidiaries and other members of
the Nationwide Insurance Enterprise must be fair and equitable and may be
subject to the approval of the Superintendent of Insurance of the State of
Ohio. The Credit Facility requires that any transaction between the Company
and any of its affiliates be on an arm's-length basis on terms at least as
favorable to the Company as could have been obtained from a third party which
is not an affiliate. See "Business--Regulation."
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DESCRIPTION OF NOTES
GENERAL
The following description sets forth material terms and provisions of the
Notes. The Notes are to be issued under an Indenture, dated as of ,
1997 (the "Indenture"), between the Company and Wilmington Trust Company, as
Trustee (the "Trustee"), the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The statements
under this caption are brief summaries of the material provisions of the
Indenture and do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Indenture, including the definitions therein of certain terms. Section and
article references used under this caption are references to sections and
articles of the Indenture. Whenever particular sections, articles or defined
terms of the Indenture are referred to, it is intended that such sections,
articles or defined terms shall be incorporated herein by reference.
Capitalized terms used under this caption and not otherwise defined in this
Prospectus shall have the respective meanings ascribed thereto in the
Indenture.
PRINCIPAL AMOUNT, MATURITY AND INTEREST
The Notes offered hereby will mature on , 2027 and will be limited
to $300 million aggregate principal amount, which represents the total amount
that may be offered pursuant to the terms of the Indenture. The Notes will
bear interest at the rate of % per annum from , or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, payable semiannually in arrears on and of
each year, commencing , 1997, to the Persons in whose names the Notes
(or any predecessor Notes) are registered at the close of business on the
or , as the case may be, next preceding such Interest Payment
Date. Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months. Except with respect to a Global Note (as defined below),
principal of and interest on the Notes will be payable, and the Notes will be
exchangeable and transfers thereof will be registrable, at the office or
agency of Wilmington Trust Company in the Borough of Manhattan, the City of
New York, except that, at the option of the Company, interest may be paid by
mailing a check to the Person entitled thereto at the address for such Person
as it appears in the Security Register. (Sections 301, 305, 307 and 310).
The Notes will be issued only in registered form without coupons and in
denominations of $1,000 and integral multiples thereof. (Section 302). No
service charge will be made for any registration of transfer or exchange of
the Notes, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. (Section
305). The Company has initially appointed the Trustee as the Security
Registrar and paying agent for the Notes and has designated the offices of the
Trustee in New York, New York as the office or agency where notices and
demands to or upon the Company may be served.
RANKING
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all other senior indebtedness of the
Company and senior in right of payment to all subordinated indebtedness of the
Company. However, because the Notes will be unsecured, they will be
effectively subordinated to any secured indebtedness of the Company. The
Indenture does not preclude the Company or the Company's subsidiaries from
issuing secured or unsecured indebtedness. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of the subsidiary,
except to the extent the Company may itself be recognized as a creditor of
that subsidiary. Accordingly, the Notes will be effectively subordinated to
all existing and future liabilities and obligations, including obligations to
policyholders, of the Company's subsidiaries, which totalled approximately
$45.6 billion at December 31, 1996. Holders of Notes should look only to the
assets of the Company for payments on the Notes.
As a holding company, the Company's principal source of liquidity to pay its
obligations (including the Notes) is distributions from its subsidiaries. The
rights of the Company to participate in any distribution of
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earnings or assets of any of its subsidiaries (and thus the ability of the
Company to use earnings and assets of its subsidiaries to pay principal and
interest on the Notes) are subject to state insurance regulatory and other
statutory restrictions, including limitations on the amount of dividends that
may be paid by the Company's insurance subsidiaries in any year without the
prior approval of the state regulatory authorities, as more fully described
above under "Business--Regulation--Regulation of Dividends and Other Payments
from Insurance Subsidiaries."
OPTIONAL REDEMPTION
The Notes are not subject to redemption by the Company prior to ,
2007. Thereafter, the Notes will be redeemable in whole or in part, at the
option of the Company at any time on or after , 2007 at the following
redemption prices (expressed as a percentage of the principal amount thereof)
if redeemed during the 12-month period ending of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2008........................................................... %
2009...........................................................
2010...........................................................
2011...........................................................
2012...........................................................
2013...........................................................
2014...........................................................
2015...........................................................
2016...........................................................
2017...........................................................
</TABLE>
and, thereafter, at 100% of the principal amount thereof plus, in each case,
accrued and unpaid interest thereon, if any, to the redemption date.
Holders of Notes that are being redeemed by the Company will receive notice
thereof by first-class mail sent to their registered address at least 20 and
not more than 60 days prior to the date fixed for such redemption.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
optional redemption of the Notes or any related offers by the Company to
acquire Notes.
SINKING FUND
There will be no sinking fund payments for the Notes.
GLOBAL NOTES: FORM, EXCHANGE AND TRANSFER
The Notes will be represented by one or more permanent global notes (each, a
"Global Note") deposited with, or on behalf of, the Depositary and registered
in the name of the Depositary's nominee. Except as set forth below, (i) owners
of beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Notes in definitive form except as
provided below and will not be considered the owners or Holders thereof under
the Indenture and (ii) each Global Note may be transferred, in whole and not
in part, only to another nominee of the Depositary or to a successor of the
Depositary or its nominee. Accordingly, beneficial interests in the Notes will
be shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. The laws of some states
require certain purchasers of securities to take physical delivery thereof in
definitive form. The depositary arrangements described above and such laws may
preclude such purchasers from acquiring beneficial interests in a Global Note.
Owners of beneficial interests in any Global Note will not be entitled to
receive Notes in definitive form and will not be considered Holders of Notes
unless (1) the Depositary
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notifies the Company that it is unwilling or unable to continue as Depositary
for such Global Note or if at any time the Depositary ceases to be a clearing
agency registered under the Exchange Act or any other applicable statute or
regulation and a successor Depositary is not appointed by the Company within
90 days, (2) the Company determines that individual Notes issued in the form
of one or more Global Notes will no longer be represented by such Global Note
or Global Notes or (3) the Depositary surrenders a Global Note in exchange in
whole or in part for individual Notes on such terms as are acceptable to the
Company and the Depositary. In such circumstances, upon surrender by the
Depositary or a successor depositary of any Global Note, Notes in definitive
form will be issued to each person that the Depositary or a successor
depositary identifies as the beneficial owner of the related Notes. Upon such
issuance, the Trustee is required to register such Notes in the name of, and
cause such Notes to be delivered to, such person or persons (or nominees
thereof). Such Notes would be issued in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof. (Sections
302 and 305).
The Depositary has advised the Company and the Underwriters as follows: The
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of section 17A of the
Exchange Act. The Depositary was created to hold securities for its
participants ("Participants") and to facilitate the clearance and settlement
of securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the Participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's direct Participants include securities brokers and dealers
(including the Underwriters), banks, trust companies, clearing corporations,
and certain other organizations, some of whom (and/or their representatives)
own the Depositary. Access to the Depositary's book-entry system is also
available to others ("Indirect Participants"), such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. The Depositary agrees with
and represents to its Participants that it will administer its book-entry
system in accordance with its rules and by-laws and requirements of law.
Principal and interest payments on Notes registered in the name of or held
by the Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the registered owner of the Global Note
representing such Notes. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes are registered as the
Holders of such Notes for the purpose of receiving payment of principal and
interest on such Notes and for all other purposes whatsoever. Therefore,
neither the Company, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal of or interest on the
Notes to owners of beneficial interests in any Global Note. The Depositary has
advised the Company and the Trustee that its current practice is to credit the
accounts of Participants with payments of principal or interest on the date
payable in amounts proportionate to their respective holdings in principal
amount of beneficial interests in a Global Note as shown in the records of the
Depositary, unless the Depositary has reason to believe that it will not
receive payment on such date. Payments by Participants and Indirect
Participants to owners of beneficial interests in a Global Note will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or
registered in "street name" and will be the responsibility of the Participants
and Indirect Participants.
The Depositary has advised the Company that it will take any action
permitted to be taken by an owner or Holder of Notes only at the direction of
one or more Participants to whose account with the Depositary such Holder's
Notes are credited. Additionally, the Depositary has advised the Company that
it will take such actions with respect to any percentage of the beneficial
interest of Holders who hold Notes through Participants only at the direction
of and on behalf of Participants whose account Holders include undivided
interests that satisfy any such percentage. The Depositary may take
conflicting actions with respect to other undivided interests to the extent
that such actions are taken on behalf of Participants whose account Holders
include such undivided interests.
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PAYMENT
All payments of principal and interest will be made by the Company to the
registered Holders of the Notes in immediately available funds. For
information regarding the payment of principal of or interest on the Notes to
owners of beneficial interests in any Global Note, see "--Global Notes: Form,
Exchange and Transfer."
CERTAIN COVENANTS OF THE COMPANY
The Indenture contains, among others, the following covenants:
Limitation on Liens. The Company has agreed that it will not, and will
not permit any Subsidiary to, incur, issue, assume or guaranty any
indebtedness if such indebtedness is secured by a pledge of, lien on, or
security interest in any shares of Voting Stock of any Significant
Subsidiary, whether such Voting Stock is now owned or is hereafter
acquired, without providing that the Notes (together with, if the Company
shall so determine, any other indebtedness or obligations of the Company or
any Subsidiary ranking equally with such Notes and then existing or
thereafter created) shall be secured equally and ratably with such
indebtedness. The foregoing limitation shall not apply to (i) indebtedness
secured by a pledge of, lien on or security interest in any shares of
Voting Stock of any corporation if such pledge, lien or security interest
is made or granted prior to or at the time such corporation becomes a
Significant Subsidiary, (ii) liens or security interests securing
indebtedness of a Significant Subsidiary to the Company or another
Significant Subsidiary or (iii) the extension, renewal or replacement (or
successive extensions, renewals or replacements), in whole or in part, of
any lien or security interest referred to in the foregoing clauses (i) and
(ii) but only if the principal amount of indebtedness secured by the liens
or security interests immediately prior thereto is not increased and the
lien or security interest is not extended to other property. (Section
1009).
Limitation on Mergers and Sales of Assets. The Company has agreed that it
will not enter into a merger or consolidation with another corporation or
sell other than for cash or lease all or substantially all its assets to
another corporation, or purchase all or substantially all the assets of
another corporation unless (i) either the Company is the continuing
corporation, or the successor corporation (if other than the Company)
expressly assumes by supplemental indenture the obligations evidenced by
the Notes (in which case, except in the case of such a lease, the Company
will be discharged therefrom), and (ii) immediately thereafter, the Company
or the successor corporation (if other than the Company) would not be in
default in the performance of any covenant or condition of the Indenture.
(Sections 801).
Under the laws of the State of New York, which govern the Indenture,
there is no established meaning of the phrase "all or substantially all"
with regard to a company's assets or property, and the interpretation of
such phrase is very fact-intensive. Due to such uncertainty, it may be
difficult for Holders of the Notes to ascertain whether a viable claim
exists under the Indenture with respect to any given transaction.
Limitations on Disposition of Stock of Significant Subsidiaries. The
Indenture provides that the Company will not, and will not permit any
Subsidiary to, sell, transfer or otherwise dispose of any shares of capital
stock of any Significant Subsidiary (or of any Subsidiary having direct or
indirect control of any Significant Subsidiary) except for, subject to the
covenant relating to mergers and sales of assets described in the
immediately preceding paragraph, (i) a sale, transfer or other disposition
of any capital stock of any Significant Subsidiary (or of any Subsidiary
having direct or indirect control of any Significant Subsidiary) to a
wholly owned Subsidiary of the Company or (ii) a sale, transfer or other
disposition of any capital stock of any Significant Subsidiary (or of any
Subsidiary having direct or indirect control of any Significant Subsidiary)
held by the Company and its Subsidiaries for at least fair value (as
determined by the Board of Directors of the Company acting in good faith).
(Section 1010).
The Company is not required pursuant to the Indenture to repurchase the
Notes, in whole or in part, with the proceeds of any sale, transfer or other
disposition of any shares of capital stock of any Subsidiary (or of any
Subsidiary having direct or indirect control of any other Subsidiary).
Furthermore, the Indenture does not provide for any restrictions on the
Company's use of any such proceeds.
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The Indenture does not contain any provisions specifically intended to
protect holders of the Notes in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company. The Indenture does not contain any provisions which will restrict the
Company from incurring, assuming or becoming liable with respect to any
indebtedness or other obligations, whether secured or unsecured, or from
paying dividends or making other distributions on its capital stock or
purchasing or redeeming its capital stock. The Indenture does not contain any
financial ratios or specified levels of net worth or liquidity to which the
Company must adhere. In addition, the Indenture does not contain any provision
which would require that the Company repurchase or redeem or otherwise modify
the terms of any of the Notes upon a change in control or other events
involving the Company which may adversely affect the creditworthiness of the
Notes.
Certain Definitions
"Significant Subsidiary" means a Subsidiary, including its Subsidiaries,
which meets any of the following conditions (in each case determined in
accordance with generally accepted accounting principles): (i) the Company's
and its other Subsidiaries' investment in and advances to the Subsidiary
exceed 10% of the total assets of the Company and its Subsidiaries
consolidated as of the end of the most recently completed fiscal year; (ii)
the Company's and its other Subsidiaries' proportion share of the total assets
(after intercompany eliminations) of the Subsidiary exceeds 10% of the total
assets of the Company and its Subsidiaries consolidated as of the end of the
most recently completed fiscal year; or (iii) the Company's and its other
Subsidiaries' equity interest in the income from continuing operations before
income taxes, extraordinary items and cumulative effect of a change in
accounting principles of the Subsidiary exceed ten percent of such income of
the Company and its Subsidiaries consolidated for the most recently completed
fiscal year.
"Subsidiary" means a corporation more than 50% of the outstanding Voting
Stock of which is owned, directly or indirectly, by the Company, one or more
Subsidiaries, or the Company and one or more Subsidiaries.
"Voting Stock" means capital stock the holders of which have general voting
power under ordinary circumstances to elect at least a majority of the board
of directors of a corporation; provided that, for the purposes of such
definition, capital stock which carries only the right to vote conditioned on
the happening of an event shall not be considered voting stock whether or not
such event shall have happened. (Section 101).
MODIFICATION AND WAIVERS
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of a majority in principal amount of the Notes
at the time outstanding, by executing supplemental indentures, to modify the
rights of Holders of the Notes, amend or eliminate any of the provisions of
the Indenture, provided that no such modification, amendment or elimination
will, without the consent of the Holders of each outstanding Note affected
thereby, (i) change the stated maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal amount of, or
the rate of interest on, or any premium payable upon redemption of, any Note,
(iii) change the currency of payment of principal of, or premium, if any, or
interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to any Note on or after the
stated maturity or redemption date in the case of redemption of any Note, (v)
reduce the percentage of outstanding Notes necessary to modify or amend the
Indenture or (vi) reduce the aggregate principal amount of outstanding Notes
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults. (Sections 513, 902 and 1011).
EVENTS OF DEFAULT
The Indenture provides that events of default with respect to the Notes will
be (i) default for 30 days in payment of interest upon any Note; (ii) default
in payment of principal or premium, if any, on any Note; (iii) default in
performance, or breach, of any other covenant or warranty in the Indenture for
90 days after notice; (iv) (A) failure by the Company or any Subsidiary to pay
indebtedness in an aggregate principal amount exceeding $50 million at the
later of final maturity or upon expiration of any applicable period of grace
with
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respect to such principal amount, or (B) acceleration of the maturity of any
indebtedness of the Company or any Subsidiary, in excess of $50 million, if
such failure to pay is not discharged or such acceleration is not annulled
within 10 days after due notice; and (v) certain events of bankruptcy or
insolvency. (Section 501). If an event of default with respect to the Notes
should occur and be continuing (other than an event of default resulting from
certain events in bankruptcy or insolvency involving the Company or any
Significant Subsidiary), either the Trustee or the Holders of at least 25% in
the principal amount of outstanding Notes may declare the principal amount of
each Note due and payable. If an event of default results from certain events
in bankruptcy or insolvency involving the Company or any Significant
Subsidiary, the Notes shall become due and payable without any declaration or
other act on the part of the Trustee or any Holder. (Section 502). The Company
is required to file annually with the Trustee a statement of an officer as to
whether the Company is in default with respect to any of its obligations under
the Indenture. (Section 1004).
Holders of a majority in principal amount of the outstanding Notes will be
entitled to control certain actions of the Trustee under the Indenture and to
waive certain past defaults. (Sections 512 and 513). Subject to the provisions
of the Indenture relating to the duties of the Trustee, the Trustee will not
be under any obligation to exercise any of the rights or powers vested in it
by the Indenture at the request, order or direction of any of the Holders of
Notes, unless one or more of such Holders of Notes shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred by the Trustee in connection with its
compliance with such request, order or direction. (Sections 601 and 603).
If an event of default occurs and is continuing with respect to the Notes,
any sums held or received by the Trustee under the Indenture may be applied to
reimburse the Trustee for its reasonable compensation and expenses incurred
prior to any payments to Holders of the Notes. (Section 506).
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or a trustee,
or for any other remedy thereunder, unless (i) such Holder shall have
previously given to the Trustee written notice of a continuing Event of
Default with respect to the Notes, (ii) the Holders of not less than 25% in
aggregate principal amount of the Notes at the time outstanding shall have
made written request to the Trustee to institute proceedings as Trustee, (iii)
such Holder or Holders shall have offered to the Trustee reasonable indemnity,
(iv) the Trustee shall have failed to institute such proceeding within 60 days
thereafter and (iv) the Trustee shall not have received from the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding a
direction inconsistent with such request. (Section 507). However, such
limitations do not apply to a suit instituted by a Holder of a Note for the
enforcement of payment of the principal of and premium, if any, or interest on
such Note or after the applicable due date specified in such Note. (Section
508).
DEFEASANCE AND DISCHARGE OF THE INDENTURE
The Indenture provides that the Company (a) will be deemed to have been
discharged from its obligations with respect to all outstanding Notes
("defeasance") or (b) will be released from its obligations (other than, among
other things, to pay when due the principal of, premium, if any, and interest
of such Notes) with respect to the Notes ("covenant defeasance"), at any time
prior to maturity, when the Company has irrevocably deposited with the
Trustee, in trust for the benefit of the Holders, money and/or U.S. Government
Obligations that, through the payment of principal and interest in accordance
with their terms, will provide money, in an amount sufficient to pay the
principal of and premium, if any, and interest on the Notes on the dates such
payments are due in accordance with the terms of the Notes. Such a trust may
be established with respect to the Notes only upon the satisfaction of certain
conditions specified in the Indenture. Upon defeasance and discharge, the
Indenture will cease to be of further effect with respect to the Notes and the
Holders of the Notes shall look only to the deposited funds or obligations for
payment. Upon covenant defeasance, however, the Company will not be relieved
of its obligation to pay when due principal of, premium, if any, and interest
on the Notes if not otherwise paid from such deposited funds or obligations.
Notwithstanding the foregoing, certain obligations and rights under the
Indenture with respect to compensation, reimbursement and indemnification of
the Trustee, optional redemption, registration of transfer and exchange of the
Notes, replacement of mutilated, destroyed, lost or stolen Notes and certain
other administrative provisions will survive defeasance and discharge and
covenant defeasance. (Sections 1202, 1203 and 1204).
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Under current U.S. federal income tax law, there is a substantial risk that
the defeasance and discharge contemplated in the preceding paragraph could be
treated as a taxable exchange of the Notes for an interest in the trust. As a
consequence, each Holder of the Notes would recognize gain or loss equal to
the difference between the value of the Holder's interest in the trust and the
Holder's tax basis for the securities deemed exchanged. Thereafter, each
Holder would be required to include in income his share of any income, gain
and loss recognized by the trust. Although a Holder could be subject to U.S.
federal income tax on the deemed exchange of the defeased Notes for an
interest in the trust, such Holder would not receive any cash until the
maturity of the Notes. Prospective investors are urged to consult their own
tax advisors as to the specific consequences of a defeasance and discharge,
including the applicability and effect of tax laws other than U.S. federal
income tax law.
CONCERNING THE TRUSTEE
Wilmington Trust Company is the Trustee under the Indenture. The Company has
and may from time to time in the future have banking relationships with the
Trustee in the ordinary course of business. Wilmington Trust Company is also
acting as Property Trustee and Delaware Trustee under the Capital Securities.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in accordance
with, the laws of the State of New York without giving effect to the conflicts
of laws provisions thereof. (Section 112).
LISTING
The Notes have been approved for listing on the NYSE, subject to official
notice of issuance.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The following statements are subject to and qualified in their entirety by
reference to detailed provisions of the Company's Certificate and Bylaws
(copies of which have been incorporated by reference as exhibits to the
Registration Statement of which this Prospectus forms a part).
The Company is currently authorized to issue 750 million shares of Class A
Common Stock, 750 million shares of Class B Common Stock and 50 million shares
of Preferred Stock. The shares of Class A Common Stock and Class B Common
Stock are identical in all respects except for voting rights and certain
conversion rights and transfer restrictions regarding the shares of Class B
Common Stock as described below.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
Voting
All outstanding shares of Common Stock are fully paid and nonassessable.
Except for the Equity Purchase Rights, holders of Common Stock do not have any
preemptive rights to subscribe for or purchase any additional securities
issued by the Company. No redemption or sinking fund provisions are associated
with the Common Stock. Cumulative voting is not permitted by holders of Common
Stock.
The holders of Class B Common Stock are entitled to ten votes per share. The
holders of Class A Common Stock are entitled to one vote per share. Proposals
submitted to a vote of stockholders will be voted on by holders of Class A
Common Stock and Class B Common Stock voting together as a single class. At
all meetings of the stockholders of the Company, the holders of record
entitled to exercise at least a majority of the voting power of the Company,
represented in person or by proxy, shall constitute a quorum for the
transaction of business; and the affirmative vote of the holders represented
in person or by proxy of a majority of the Common Stock present at a meeting
at which a quorum is in existence shall be the act of the stockholders of the
Company. The superior voting rights of the Class B Common Stock might
discourage unsolicited merger proposals and unfriendly tender offers.
Transfer
The Certificate does not contain any restrictions on the transfer of shares
of Class A Common Stock. Upon any sale or other transfer of shares of Class B
Common Stock to any person or persons other than a member of the Nationwide
Insurance Enterprise such shares of Class B Common Stock will be converted
into an equal number of shares of Class A Common Stock.
Conversion
Class A Common Stock has no conversion rights. Class B Common Stock is
convertible into Class A Common Stock, in whole or in part, at any time and
from time to time at the option of the holder, on the basis of one share of
Class A Common Stock for each share of Class B Common Stock converted. If at
any time after the initial issuance of shares of Class A Common Stock the
number of outstanding shares of Class B Common Stock falls below 5% of the
aggregate number of issued and outstanding shares of Common Stock, then each
outstanding share of Class B Common Stock shall automatically convert into one
share of Class A Common Stock. In the event of any sale or transfer of shares
of Class B Common Stock to any person or persons other than a member of the
Nationwide Insurance Enterprises such shares of Class B Common Stock so
transferred shall be automatically converted into an equal number of shares of
Class A Common Stock.
Dividends
Holders of Common Stock are entitled to receive cash dividends pro rata on a
per share basis if and when such dividends are declared by the Board of
Directors of the Company from funds legally available therefor. In the case of
any dividend paid other than in cash or Common Stock (or securities
convertible into or exchangeable
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for Common Stock), holders of Class A Common Stock and Class B Common Stock
are entitled to receive such dividend pro rata on a per share basis. Dividends
paid in Common Stock (or securities convertible into or exchangeable for
Common Stock) may be paid in shares of Class A Common Stock (or securities
convertible into or exchangeable for Class A Common Stock) on the Class A
Common Stock and in shares of Class B Common Stock (or securities convertible
into or exchangeable for Class B Common Stock) on the Class B Common Stock.
Liquidation, Merger or Consolidation
Holders of Class A Common Stock and Class B Common Stock share with each
other on a ratable basis as a single class in the net assets of the Company
available for distribution in respect of the Common Stock in the event of
liquidation or any payments made on the Common Stock in the event of a merger
or consolidation of the Company.
PREFERRED STOCK
Under the Certificate, the Company has authority to issue 50 million shares
of Preferred Stock. Preferred Stock may be issued from time to time in one or
more classes with such full, special, limited or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights, and qualifications and limitations or restrictions thereof, as
shall be stated in any resolution adopted by the Board of Directors of the
Company establishing any class of Preferred Stock. The Board of Directors of
the Company has the authority to issue shares of Preferred Stock without
further action of the stockholders. The ability of the Board of Directors to
issue Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. No
shares of Preferred Stock have been issued or are outstanding.
CERTAIN CERTIFICATE AND BYLAW PROVISIONS
Certain provisions of the Company's Certificate and Bylaws, summarized in
the following paragraphs, may be considered to have an anti-takeover effect
and may delay, deter or prevent a tender offer, proxy contest or other
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including such an attempt as might result in payment of a
premium over the market price for shares held by stockholders.
Classified Board of Directors
The Certificate provides for the Board of Directors of the Company to be
divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year at
the annual meeting of stockholders. The Board of Directors believes that a
classified board of directors will help to assure the continuity and stability
of the Board of Directors and the business strategies and policies of the
Company as determined by the Board of Directors because continuity and
stability in the composition of the Board of Directors and in the policies
formulated by it will be enhanced by the staggered three-year terms.
The classified board provisions could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain
control of the Company, even though such an attempt might be beneficial to the
Company and its stockholders. In addition, the classified board provisions
could delay stockholders who do not like the policies of the Board of
Directors from removing a majority of the Board of Directors for two years.
Number of Directors; Removal; Filling Vacancies
The Certificate provides that the Board of Directors will consist of one to
fifteen members, the exact number to be fixed from time to time by resolution
adopted by a majority of the entire Board of Directors assuming no vacancies.
The Board of Directors currently consists of ten directors. Further, subject
to the rights of the
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holders of any series of Preferred Stock then outstanding, the Certificate
authorizes the Board of Directors to fill newly created directorships.
Accordingly, this provision could prevent a stockholder from obtaining
majority representation on the Board of Directors by permitting the Board of
Directors to enlarge the Board of Directors and fill the new directorships
with its own nominees. A director so elected by the Board of Directors holds
office until the next election of the class for which such director has been
chosen and until his successor is elected and qualified. Subject to the rights
of the holders of any series of Preferred Stock then outstanding, the
Certificate also provides that directors may be removed only for cause and
only by the affirmative vote of holders of a majority of the outstanding
voting power of the Company. The effect of these provisions is to preclude a
stockholder from removing incumbent directors without cause and simultaneously
gaining control of the Board of Directors by filling the vacancies created by
such removal with its own nominees.
Special Meetings of Stockholders
The Bylaws provide that special meetings of stockholders may be called by
the Chairman of the Board of Directors, the Chairman and Chief Executive
Officer--Nationwide Insurance Enterprise or the President and Chief Operating
Officer and shall be called by the Secretary at the request in writing of a
majority of the Board of Directors. Stockholders are not permitted to call
special meetings of stockholders.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Company's Bylaws provide that in order to properly submit any business
to, or to nominate any person for election to the Board of Directors at, an
annual meeting of stockholders, a stockholder must provide timely notice
thereof in writing to the Secretary of the Company. To be considered timely, a
stockholder's notice must be delivered to, or mailed and received at, the
principal executive offices of the Company, (i) not less than 60 days nor more
than 90 days before the first anniversary date of the Company's proxy
statement in connection with the last annual meeting of stockholders or (ii)
if no annual meeting was held in the previous year or the date of the
applicable annual meeting has been changed by more then 30 days from the date
contemplated at the time of the previous year's proxy statement, not less than
a reasonable time, as determined by the Board of Directors, prior to the date
of the applicable annual meeting. The Bylaws also specify certain requirements
pertaining to the form and substance of a stockholder's notice. These
provisions may preclude some stockholders from making nominations for
directors at an annual or special meeting or from bringing other matters
before the stockholders at a meeting.
Class B Common Stock
The superior voting rights of the Class B Common Stock might discourage
unsolicited merger proposals and unfriendly tender offers.
No Action by Written Consent of the Stockholders
The Certificate does not allow the stockholders of the Company to take
action by written consent in lieu of a meeting.
Delaware Takeover Statute
The Company is subject to the provisions of Section 203 of the DGCL. Section
203 prohibits a Delaware corporation from engaging in any "business
combination" with any "interested stockholder" for a period of three years
following the time that such stockholder became an interested stockholder
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; or (ii) upon the
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation, as defined in Section 203; or (iii) at or
subsequent to such time, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. For
these purposes, the term "business combination" includes, but is not limited
to, mergers, asset or stock sales and other similar transactions with an
"interested
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stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, within the prior three years, did own)
15% or more of the corporation's voting stock.
Limitation on Liability
The Company's Certificate contains a provision that is designed to limit the
directors' liability to the extent permitted by the DGCL and any amendments
thereto. Specifically, directors will not be held liable to the Company or its
stockholders for an act or omission in such capacity as a director, except for
liability as a result of (i) a breach of the duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper repurchase of the Company's stock under Section
174 of the DGCL, or (iv) actions or omissions pursuant to which the director
received an improper personal benefit. The principal effect of the limitation
on liability provision is that a stockholder is unable to prosecute an action
for monetary damages against a director of the Company unless the stockholder
can demonstrate one of the specified bases for liability. This provision,
however, does not eliminate or limit director liability arising in connection
with causes of action brought under the federal securities laws. The Company's
Certificate does not eliminate its directors' duty of care. The inclusion of
this provision in the Company's Certificate may, however, discourage or deter
stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise have benefited the Company and its stockholders. This
provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
Indemnification
The Company's Bylaws also provide that the Company will indemnify its
directors and officers to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, settlements, legal fees and other expenses incurred in
connection with pending or threatened legal proceedings because of the
director's or officer's position with the Company or another entity that the
director or officer serves at the Company's request, subject to certain
conditions, and to advance funds to its directors and officers to enable them
to defend against such proceedings. To receive indemnification, the director
or officer must have been successful in the legal proceeding or acted in good
faith and in what was reasonably believed to be a lawful manner in the
Company's best interest.
Certificate Provisions Relating to Corporate Opportunities
The Certificate provides that except as Nationwide Mutual (or its successors
or assigns) may otherwise agree in writing and except as set forth in the
Intercompany Agreement:
(i) no member of the Nationwide Insurance Enterprise shall have a duty to
refrain from engaging directly or indirectly in the same or similar
business activities or lines of business as the Company; and
(ii) no member of the Nationwide Insurance Enterprise, nor any director,
officer, employee, agent or any member of Nationwide Mutual (except as
provided below), will be liable to the Company or to its stockholders for
breach of any fiduciary duty by reason of any such activities of such
members or of such person's participation thereon.
The Certificate also provides that in the event that any member of the
Nationwide Insurance Enterprise (other than the Company) acquires knowledge of
a potential transaction or matter which may be a corporate opportunity both
for a member of the Nationwide Insurance Enterprise and the Company, no member
of the Nationwide Insurance Enterprise shall have any duty to communicate or
offer such corporate opportunity to the Company nor shall any such member be
liable to the Company or its stockholders for breach of any fiduciary duty as
a stockholder of the Company or controlling person of a stockholder by reason
of the fact that any such member of the Nationwide Insurance Enterprise
pursues or acquires such opportunity for itself, directs such corporate
opportunity to another person or entity or does not communicate information
regarding, or offer, such corporate opportunity to the Company.
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Further, the Certificate provides that in the event that a director,
officer, employee or agent of the Company who is also a director, officer,
employee or agent of any member of the Nationwide Insurance Enterprise
acquires knowledge of a potential transaction or matter that may be a
corporate opportunity for the Company or any member of Nationwide Insurance
Enterprise (whether such potential transaction or matter is proposed by a
third party or is conceived of by such director, officer, employee or agent of
the Company), such director, officer, employee or agent shall be entitled to
offer such corporate opportunity to the Company or such member of the
Nationwide Insurance Enterprise as such director, officer, employee or agent
deems appropriate under the circumstances in his or her sole discretion, and
no such director, officer, employee or agent shall be liable to the Company or
its stockholders for breach of any fiduciary duty or duty of loyalty or
failure to act in (or not opposed to) the best interests of the Company or the
derivation of any improper personal benefit by reason of the fact that (i)
such director, officer, employee or agent offered such corporate opportunity
to such member of the Nationwide Insurance Enterprise (rather than the
Company) or did not communicate information regarding such corporate
opportunity to the Company or (ii) such member of the Nationwide Insurance
Enterprise pursues or acquires such corporate opportunity for itself or
directs such corporate opportunity to another person or does not communicate
information regarding such corporate opportunity to the Company. The
enforceability of the provisions discussed above under the DGCL has not been
established and counsel to the Company has not delivered an opinion as to the
enforceability of such provisions. These provisions of the Certificate may
eliminate certain rights that might have been available to stockholders under
the DGCL had such provisions not been included in the Certificate.
The Company's Board of Directors currently consists of ten members, seven of
whom serve concurrently on the boards of directors of other companies within
the Nationwide Insurance Enterprise. In addition, a significant number of
officers of the Company will also be officers of other companies within the
Nationwide Insurance Enterprise.
The foregoing provisions of the Certificate shall expire on the date that
the members of the Nationwide Insurance Enterprise cease to beneficially own
(directly or indirectly) in the aggregate Common Stock representing at least
50% of the voting power of the outstanding shares of Common Stock.
LISTINGS
The Class A Common Stock has been approved for listing on the NYSE under the
symbol "NFS", subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York will serve as transfer agent and
registrar for the Class A Common Stock.
THE EQUITY OFFERINGS, THE NOTE OFFERING AND THE CAPITAL SECURITIES OFFERING
Prior to the Note Offering, the Company expects to consummate the public
offering of 16,432,000 shares of Class A Common Stock in the United States and
Canada and 4,108,000 shares of Class A Common Stock outside the United States
and Canada, and, concurrently with the Note Offering, an affiliate of the
Company expects to consummate the public offering of Capital Securities with
an aggregate liquidation amount of $100 million. The Capital Securities will
be issued by the NFS Trust, all of whose common trust securities, which are
the only voting securities of the NFS Trust, will be held by the Company. The
sole asset of such trust will be the junior subordinated debentures to be
issued by the Company. See "Capitalization."
The consummation of the Note Offering is not conditioned on the completion
of the Capital Securities Offering. There can be no assurance that the Capital
Securities Offering will be consummated.
The Equity Offerings and the Capital Securities Offering are being made
pursuant to separate prospectuses.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement, dated , 1997 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company the following respective principal amount of the Notes:
<TABLE>
<CAPTION>
Principal
Underwriter Amount
----------- ------------
<S> <C>
Credit Suisse First Boston Corporation......................... $
Morgan Stanley & Co. Incorporated..............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
------------
Total........................................................ $300,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Notes, if any are purchased. The Underwriting
Agreement provides that, in the event of a default by an Underwriter, in
certain circumstances the purchase commitments of non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Notes to the public initially at the public offering
price set forth on the cover page of this Prospectus and, through the
Representatives, to certain dealers at such price less a concession of % of
the principal amount per Note, and the Underwriters and such dealers may allow
a discount of % of such principal amount per Note on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
The Notes have been approved for listing on the NYSE, subject to official
notice of issuance.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in
respect thereof.
From time to time, Credit Suisse First Boston Corporation has provided
investment banking services to the Company, Nationwide Life and other members
of the Nationwide Insurance Enterprise, for which it has received customary
compensation. It is expected that Credit Suisse First Boston Corporation will
continue to provide such services in the future. The Representatives also are
acting as representatives of the underwriters of the Equity Offerings and the
Capital Securities Offering.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file
a prospectus with the securities regulatory authorities in each province where
trades of the Notes are effected. Accordingly, any resale of Notes in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Notes in Canada who receives a purchase confirmation
will be deemed to represent to the Company and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Notes without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Company or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of the Notes to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file within the British
Columbia Securities Commission a report within ten days of the sale of any
Notes acquired by such purchaser pursuant to this offering. Such report must
be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Notes acquired on the same date and
under the same prospectus exemption.
LEGAL MATTERS
The validity of the issuance of the Notes offered hereby will be passed upon
for the Company by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability
partnership including professional corporations, New York, New York. Certain
other legal matters will be passed upon for the Company by W. Sidney Druen,
Esq., Senior Vice President and General Counsel. Certain legal matters
relating to the Note Offering will be passed upon for the Underwriters by
Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996 included
herein and elsewhere in this Registration Statement have been included herein
and elsewhere in this Registration Statement in reliance on the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
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GLOSSARY OF SELECTED INSURANCE TERMS
ANNUITY.......................... A contract that provides for a fixed or
variable periodic payment made from a
stated or contingent date and continued for
a specific period, such as for a number of
years (certain period) or for life (life
contingent), either immediately or after a
stated accumulation period.
ASSET VALUATION RESERVE; AVR..... The asset valuation reserve adopted by the
NAIC in 1991. AVR appears as a liability on
a life insurer's statutory financial
statements. AVR establishes statutory
reserves for debt securities, common
stocks, preferred stocks, mortgage loans,
equity real estate, joint ventures and
other invested assets. AVR generally
captures all realized and unrealized gains
and losses on such assets, other than those
resulting from changes in interest rates.
AVR has no effect on financial statements
prepared in conformity with GAAP.
CASH VALUE....................... The amount of cash that may be realized by
the owner of a life insurance policy or
annuity contract with a life insurance
company upon lapse or surrender of the
policy or contract prior to its maturity.
CEDE, CEDING COMPANY............. When a company reinsures all or a portion
of its risk with another, it "cedes"
business and is referred to as the "ceding
company."
COINSURANCE...................... A form of indemnity reinsurance under which
the reserves and supporting assets as well
as the risk are transferred to the
reinsurer.
CREDITING RATES.................. Interest rates applied to life insurance
policies and annuity contracts, whether
contractually guaranteed or currently
declared for a specified period.
DEFERRED ANNUITY................. An annuity that (i) can be paid either with
a single premium or a series of
installments and (ii) includes a schedule
of periodic income benefit to commence
after an accumulation period.
DEFERRED POLICY ACQUISITION
COSTS............................ Commissions and other selling expenses that
vary with and are directly related to the
production of business. These acquisition
costs are deferred and amortized in
conformity with GAAP.
FIXED OPTION UNDER THE COMPANY'S
VARIABLE ANNUITY CONTRACTS.......
Includes an investment option under the
Company's individual variable annuity
contracts which provides the contractholder
a return at a specified interest rate,
fixed for a prescribed period. Also
included are the Company's fixed group
annuity contracts offered as companion
contracts with variable group annuity
contracts. A fixed group annuity contract
which is
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companioned with a variable group annuity
contract would operate in a manner which is
indistinguishable from the fixed option of
a variable annuity. For example,
companioned fixed group annuity contracts
have the same surrender charge schedules
and deposit commission scales as the
variable contract with which they are
companioned. In addition, monies can be
moved between the fixed group annuity
contract and the variable contract, subject
to certain limitations, without incurring a
surrender charge.
GENERAL ACCOUNT.................. All an insurer's assets other than those
allocated to a separate account. The
insurer bears the investment risk on the
invested assets of the general account.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES; GAAP................. United States generally accepted accounting
principles as defined by the American
Institute of Certified Public Accountants
and the Financial Accounting Standards
Board.
IMMEDIATE ANNUITY................ An annuity that begins payment immediately
after issuance.
IN FORCE......................... The total face amount of insurance coverage
under contracts that have not expired.
INSURANCE GUARANTY
ASSOCIATIONS..................... Associations created in all states, the
District of Columbia and Puerto Rico by
law, to cover funding shortfalls in paying
claims of insolvent life insurance
companies. These associations obtain funds
by post-insolvency assessments of life
insurance companies operating in a
particular state in proportion to their
business written in that state.
INSURANCE PREMIUM................ The amount paid by a policyholder under the
terms of the contract. The insurance
company assumes the risks of the insured
(length of life, state of health or
liability exposure) in exchange for a
premium payment. Premiums are calculated by
combining expectation of loss and expense
and profit loadings.
MODIFIED COINSURANCE............. Indemnity reinsurance that differs from
coinsurance only in that the reserves and
related assets are held by the ceding
company while the risk remains with the
reinsurer. The ceding company pays interest
to the reinsurer to replace what would have
been earned by the reinsurer if it had held
the assets.
MORBIDITY RATE................... The relative incidence of sickness or
disability due to disease or physical
impairment.
MORTALITY RATE................... The relative incidence of death of life
insureds or annuitants.
105
<PAGE>
NAIC............................. The National Association of Insurance
Commissioners, an association of the chief
insurance supervisory officials of each
state, territory and possession of the
United States.
PERSISTENCY...................... Percentage of life insurance policies or
annuity contracts remaining in force until
completion of the term for which the policy
or contract was written.
POLICY ACQUISITION COSTS......... Agents' and brokers' commissions, premiums,
taxes, marketing, underwriting and other
direct expenses related to the production
of business. Such costs that vary with and
are primarily related to the production of
business are deferred and amortized to
achieve a matching of revenues and expenses
when reported in financial statements
prepared in conformity with GAAP.
POLICY RESERVES; RESERVES........ Liabilities established by insurers to
reflect the present value of claims
payments and the related expenses that the
insurer will ultimately be required to pay
in respect of insurance it has written.
REINSURANCE...................... The practice whereby one party, called the
reinsurer or assuming company, in
consideration of a premium paid to such
party, agrees to indemnify another party,
called the ceding company. Reinsurance
provides a primary insurer with three major
benefits: it reduces net liability on
individual risks; it helps to protect
against catastrophic losses; and it helps
to maintain acceptable surplus and reserve
ratios. Reinsurance provides a primary
insurer with additional underwriting
capacity in that the primary insurer can
accept larger risks and can expand the
volume of business it writes without
increasing its capital base. Reinsurance
may be on an assumption or indemnity basis.
Assumption reinsurance is the permanent
transfer of insurance liabilities from the
ceding to the assuming company. Under
indemnity reinsurance, the ceding company
cedes some or all risks but retains its
liability to and its contractual
relationship with the insured. The two
forms of indemnity reinsurance are
proportional, where the amount ceded is
defined at the time the contract is entered
into, and stop loss, where the reinsurer is
responsible for losses in excess of a
predetermined dollar amount.
RISK-BASED CAPITAL
REQUIREMENTS..................... Regulatory and rating agency targeted
surplus based on the relationship of
statutory capital and surplus, with certain
adjustments, to the sum of stated
percentages of each element of a specified
list of Company risk exposures.
SEPARATE ACCOUNTS................ Investment accounts maintained by an
insurer to which funds have been allocated
for certain policies under provisions of
relevant state insurance law. The
investments in each separate account are
maintained separately from those in other
separate
106
<PAGE>
accounts and the general account. The
investment results of the separate account
assets are passed through directly to the
separate account policyholders, so that an
insurer derives management and other fees
from, but bears no investment risk on,
these assets, except the risk on a small
number of products that returns on separate
account assets will not meet the relatively
low minimum rate guaranteed on these
products.
SINGLE PREMIUM DEFERRED
ANNUITIES; SPDA'S................ Annuities that require a one-time lump sum
payment of consideration upon the issuance
of the contract with benefit payments
commencing at some future date following an
accumulation period.
STATUTORY ACCOUNTING PRACTICES... Those accounting practices prescribed or
permitted by an insurer's domiciliary state
insurance regulator for purposes of
financial reporting to regulators.
SURRENDERS AND WITHDRAWALS....... Surrenders of life insurance policies and
annuity contracts for their entire net cash
surrender values and withdrawals of a
portion of such values.
TERM LIFE INSURANCE.............. Life insurance offering protection during a
certain number of years, but expiring
without policy cash value if the insured
survives the stated period. Most term
policies provide for guaranteed
continuation of coverage for life at
increased premium rates.
UNIVERSAL LIFE INSURANCE......... Life insurance under which (i) premiums are
generally flexible, (ii) the level of death
benefits may be adjusted and (iii)
mortality, expense and other charges may
vary. This policy is sometimes referred to
as unbundled life insurance because its
three basic elements (investment earnings,
cost of protection and expense charges) are
separately identified both in the policy
and in an annual report to the
policyholder.
VARIABLE ANNUITY................. An annuity in which values and benefits may
vary. The value of a unit fluctuates in
accordance with the investment experience
of a separate account; variable annuity
contracts typically include a general
account guaranteed interest investment
option. At the time of the payment of
benefits to the annuitant, the annuitant
can generally elect from a number of
payment options which provide either fixed
or variable benefit payments.
VARIABLE LIFE INSURANCE.......... Life insurance under which the benefits
payable upon death or surrender typically
varies to reflect the investment experience
of the separate account supporting such
policies; variable life insurance policies
typically include a general account
guaranteed interest investment option.
WHOLE LIFE INSURANCE............. Insurance which is guaranteed for the life
of the insured.
107
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994........................................................... F-4
Consolidated Statements of Shareholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Nationwide
Financial Services, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholder's equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nationwide
Financial Services, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
was formed in November 1996 as a holding company for Nationwide Life Insurance
Company and the other companies within the Nationwide Insurance Enterprise
that offer or distribute long-term savings and retirement products. The
consolidated financial statements are presented as if these companies were
consolidated for all periods presented.
In 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
KPMG Peat Marwick LLP
Columbus, Ohio
January 31, 1997
F-2
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
($000'S OMITTED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Investments (notes 6, 9 and 10):
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $11,970,878 in 1996;
$11,872,870 in 1995)................................ $12,304,639 12,495,878
Equity securities (cost $43,890 in 1996; $31,234 in
1995)............................................... 59,131 37,570
Fixed maturity securities held-to-maturity, at
amortized cost (fair value $5,944 in 1996; $5,989 in
1995)................................................. 5,877 5,720
Mortgage loans on real estate, net..................... 5,272,119 4,627,387
Real estate, net....................................... 265,759 229,442
Policy loans........................................... 371,816 336,356
Other long-term investments............................ 28,668 61,989
Short-term investments (note 14)....................... 9,261 42,671
----------- ----------
18,317,270 17,837,013
----------- ----------
Cash..................................................... 43,183 10,055
Accrued investment income................................ 210,182 212,963
Deferred policy acquisition costs........................ 1,366,509 1,020,356
Investment in subsidiaries classified as discontinued
operations (notes 1 and 3).............................. 485,707 506,677
Other assets (note 7).................................... 420,685 327,916
Assets held in Separate Accounts (note 9)................ 26,926,702 18,591,108
----------- ----------
$47,770,238 38,506,088
=========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims (notes 7 and 9)........ $17,179,060 16,358,614
Policyholders' dividend accumulations.................... 361,401 348,027
Other policyholder funds................................. 60,073 65,297
Accrued federal income tax (note 8):
Current................................................ 29,201 36,980
Deferred............................................... 158,896 237,247
----------- ----------
188,097 274,227
----------- ----------
Dividend payable to shareholder (notes 1 and 3).......... 485,707 --
Other liabilities........................................ 437,465 252,085
Liabilities related to Separate Accounts (note 9)........ 26,926,702 18,591,108
----------- ----------
45,638,505 35,889,358
----------- ----------
Commitments and contingencies (notes 10 and 16)
Shareholder's equity (notes 2, 4, 5, 6, 13 and 14):
Class A common shares, $.01 par value. Authorized
750,000,000 shares, no shares issued and outstanding.. -- --
Class B common shares, $.01 par value. Authorized
750,000,000 shares, 104,745,000 shares issued and
outstanding........................................... 1,047 1,047
Additional paid-in capital............................. 551,422 680,690
Retained earnings...................................... 1,405,672 1,550,689
Unrealized gains on securities available-for-sale,
net................................................... 173,592 384,304
----------- ----------
2,131,733 2,616,730
----------- ----------
$47,770,238 38,506,088
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
($000'S OMITTED, EXCEPT PER COMMON SHARE INFORMATION)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues (note 17):
Investment product and universal life
insurance product policy charges........ $ 400,902 286,534 217,245
Traditional life insurance premiums...... 198,642 199,106 176,658
Net investment income (note 6)........... 1,357,759 1,294,033 1,210,811
Realized losses on investments (note 6).. (208) (1,724) (16,527)
Other income............................. 59,505 59,089 45,897
---------- ---------- ----------
2,016,600 1,837,038 1,634,084
---------- ---------- ----------
Benefits and expenses:
Benefits and claims...................... 1,160,580 1,115,493 992,667
Provision for policyholders' dividends
on participating policies (note 13)..... 40,973 39,937 38,754
Amortization of deferred policy
acquisition costs....................... 133,394 82,695 85,568
Other operating expenses (note 14)....... 353,565 317,743 276,632
---------- ---------- ----------
1,688,512 1,555,868 1,393,621
---------- ---------- ----------
Income from continuing operations
before federal income tax expense..... 328,088 281,170 240,463
---------- ---------- ----------
Federal income tax expense (benefit) (note
8):
Current.................................. 116,021 89,400 77,009
Deferred................................. (211) 6,914 5,507
---------- ---------- ----------
115,810 96,314 82,516
---------- ---------- ----------
Income from continuing operations...... 212,278 184,856 157,947
Income from discontinued operations (less
federal income tax expense of $4,453,
$7,446 and $10,915 in 1996, 1995 and 1994,
respectively) (note 3).................... 11,324 24,714 20,459
---------- ---------- ----------
Net income............................. $ 223,602 209,570 178,406
========== ========== ==========
Pro forma results per common share (note
4):
Income from continuing operations........ $ 1.69
Net income............................... $ 1.78
Pro forma weighted average number of common
shares
outstanding for calculation using income
from continuing operations (in thousands)
(note 4).................................. 25,285
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
CLASS A CLASS B ADDITIONAL ON SECURITIES TOTAL
COMMON COMMON PAID-IN RETAINED AVAILABLE-FOR- SHAREHOLDER'S
SHARES SHARES CAPITAL EARNINGS SALE, NET EQUITY
------- ------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1994:
Balance, beginning of
year................. $-- 1,047 429,661 1,172,163 6,745 1,609,616
Capital contribution.. -- -- 200,000 -- -- 200,000
Dividends to
shareholder.......... -- -- -- (1,000) -- (1,000)
Net income............ -- -- -- 178,406 -- 178,406
Adjustment for change
in accounting for
certain investments
in debt and equity
securities, net (note
5)................... -- -- -- -- 212,553 212,553
Unrealized losses on
securities available-
for-sale, net........ -- -- -- -- (338,971) (338,971)
---- ----- -------- --------- -------- ---------
Balance, end of year.. $-- 1,047 629,661 1,349,569 (119,673) 1,860,604
==== ===== ======== ========= ======== =========
1995:
Balance, beginning of
year................. -- 1,047 629,661 1,349,569 (119,673) 1,860,604
Capital contribution.. -- -- 51,029 -- (4,111) 46,918
Dividends to
shareholder.......... -- -- -- (8,450) -- (8,450)
Net income............ -- -- -- 209,570 -- 209,570
Unrealized gains on
securities available-
for-sale, net........ -- -- -- -- 508,088 508,088
---- ----- -------- --------- -------- ---------
Balance, end of year.. $-- 1,047 680,690 1,550,689 384,304 2,616,730
==== ===== ======== ========= ======== =========
1996:
Balance, beginning of
year................. -- 1,047 680,690 1,550,689 384,304 2,616,730
Issuance of common
shares............... -- -- 1 -- -- 1
Dividends to
shareholder (notes 1
and 3)............... -- -- (129,269) (368,619) (39,819) (537,707)
Net income............ -- -- -- 223,602 -- 223,602
Unrealized losses on
securities available-
for-sale, net........ -- -- -- -- (170,893) (170,893)
---- ----- -------- --------- -------- ---------
Balance, end of year.. $-- 1,047 551,422 1,405,672 173,592 2,131,733
==== ===== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 223,602 209,570 178,406
Adjustments to reconcile net income to
net cash provided by operating
activities:
Capitalization of deferred policy
acquisition costs.................. (422,572) (321,327) (242,431)
Amortization of deferred policy
acquisition costs.................. 133,394 82,695 85,568
Amortization and depreciation....... 7,307 13,189 5,383
Realized (gains) losses on invested
assets, net........................ (633) 3,250 16,094
Deferred federal income tax
(benefit) expense.................. (173) 5,305 6,190
Decrease (increase) in accrued
investment income.................. 2,781 (16,889) (12,918)
(Increase) decrease in other
assets............................. (93,575) 25,844 (72,268)
Increase in policy liabilities...... 305,755 135,937 118,361
Increase in policyholders' dividend
accumulations...................... 13,374 12,639 15,298
(Decrease) increase in accrued
federal income tax payable......... (7,779) 32,579 (3,927)
Increase in other liabilities....... 185,380 31,966 6,856
Other, net.......................... (5,281) (21,970) (22,760)
----------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 341,580 192,788 77,852
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturity of securities
available-for-sale................... 1,162,766 634,553 544,843
Proceeds from sale of securities
available-for-sale................... 299,558 150,453 268,987
Proceeds from maturity of fixed
maturity securities
held-to-maturity..................... -- 564,450 491,862
Proceeds from repayments of mortgage
loans on real estate................. 309,050 207,832 190,574
Proceeds from sale of real estate..... 18,519 48,331 46,713
Proceeds from repayments of policy
loans and sale of other invested
assets............................... 22,795 53,587 120,506
Cost of securities available-for-sale
acquired............................. (1,573,640) (1,998,165) (1,858,036)
Cost of fixed maturity securities
held-to-maturity acquired............ -- (599,356) (410,379)
Cost of mortgage loans on real estate
acquired............................. (972,776) (796,026) (497,349)
Cost of real estate acquired.......... (7,862) (10,928) (6,385)
Policy loans issued and other invested
assets acquired...................... (57,740) (75,910) (65,302)
Short-term investments, net........... 33,410 91,659 (98,541)
Purchase of affiliate (note 14)....... -- -- (155,000)
----------- ----------- -----------
Net cash used in investing activi-
ties............................. (765,920) (1,729,520) (1,427,507)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
shares............................... 1 -- --
Proceeds from capital contributions... -- -- 200,000
Dividends paid to shareholder......... (52,000) (8,450) (1,000)
Increase in investment product and
universal life insurance product
account balances..................... 2,293,933 2,809,385 3,547,976
Decrease in investment product and
universal life insurance product
account balances..................... (1,784,466) (1,258,758) (2,412,595)
----------- ----------- -----------
Net cash provided by financing ac-
tivities......................... 457,468 1,542,177 1,334,381
----------- ----------- -----------
Net increase (decrease) in cash......... 33,128 5,445 (15,274)
Cash, beginning of year................. 10,055 4,610 19,884
----------- ----------- -----------
Cash, end of year....................... $ 43,183 10,055 4,610
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
($000'S OMITTED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Nationwide Financial Services, Inc. (NFS) was formed in November 1996 as a
holding company for Nationwide Life Insurance Company (NLIC) and the other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. NFS is a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). The consolidated financial
statements represent the results of NLIC and subsidiaries and three marketing
and distribution companies as if they were consolidated with NFS for all
periods presented. This presentation is based on Nationwide Corp.'s
contribution of the common stock of those entities to NFS on January 27, 1997
in anticipation of the initial public offering of common stock of NFS
described more fully in note 2. NFS and the other companies whose results are
included in the consolidated financial statements are collectively referred to
as "the Company."
In anticipation of the restructuring described above, on September 24, 1996,
NLIC's Board of Directors declared a dividend payable to Nationwide Corp.
consisting of the outstanding shares of common stock of certain subsidiaries
that do not offer or distribute long-term savings and retirement products. In
addition, during 1996, NLIC entered into two reinsurance agreements whereby
all of NLIC's accident and health and group life insurance business was ceded
to two affiliates effective January 1, 1996. These subsidiaries and all
accident and health and group life insurance business have been accounted for
as discontinued operations for all periods presented. See notes 3 and 14.
In addition, as part of the restructuring described above, NLIC intends to
make an $850,000 distribution to NFS which will then make an equivalent
distribution to Nationwide Corp.
The three marketing and distribution companies contributed by Nationwide
Corp. to NFS in January, 1997 are: Public Employees Benefit Services
Corporation (PEBSCO), NEA Valuebuilder Investor Services, Inc. (NEAVIS) and
Nationwide Financial Institution Distributors Agency, Inc. (NFIDA).
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers and is subject to competition
from other financial services providers throughout the United States. The
Company is subject to regulation by the Insurance Departments of states in
which it is licensed, and undergoes periodic examinations by those
departments.
The following is a description of the most significant risks facing life
insurers and how the Company mitigates those risks:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses
not anticipated by the insurer in pricing its products. That is, regulatory
initiatives, new legal theories or insurance company insolvencies through
guaranty fund assessments may create costs for the insurer beyond those
currently recorded in the consolidated financial statements. The Company
mitigates this risk by offering a wide range of products and by operating
throughout the United States, thus reducing its exposure to any single
product or jurisdiction, and also by employing underwriting practices which
identify and minimize the adverse impact of this risk.
Credit Risk is the risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company will
default or that other parties, including reinsurers, which owe the Company
money, will not pay. The Company minimizes this risk by adhering to a
conservative investment strategy, by maintaining reinsurance and credit and
collection policies and by providing for any amounts deemed uncollectible.
F-7
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Risk is the risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in rates
may cause certain interest-sensitive products to become uncompetitive or
may cause disintermediation. The Company mitigates this risk by charging
fees for non-conformance with certain policy provisions, by offering
products that transfer this risk to the purchaser, and/or by attempting to
match the maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly than
assets mature, an insurer would have to borrow funds or sell assets prior
to maturity and potentially recognize a gain or loss.
(2) INITIAL PUBLIC OFFERING
The Company is currently planning an initial public offering of its Class A
common stock (the Equity Offering) during the first quarter of 1997. After the
Equity Offering, Nationwide Corp. will continue to own all of the shares of
Class B common stock, which will represent approximately 98% of the voting
stock of the Company. Subsequent to December 31, 1996, the Company's Board of
Directors approved a 104,745 for one split of the Company's Class B common
stock, which will become effective February 10, 1997. Share information for
all periods presented has been restated to reflect the split.
Shortly after the Equity Offering, the Company expects to consummate the
public offering of $300,000 of senior notes due 2027. In addition, Nationwide
Financial Services Capital Trust, an affiliate of the Company, expects to
consummate the public offering of $100,000 of capital securities.
See note 13 for information on voting and conversion rights of Class A and
Class B common stock.
(3) DISCONTINUED OPERATIONS
As described in note 1, NFS is a holding company for NLIC and certain other
companies that offer or distribute long-term savings and retirement products.
Prior to the contribution by Nationwide Corp. to NFS of the outstanding common
stock of NLIC and other companies, NLIC effected certain transactions with
respect to certain subsidiaries and lines of business that were unrelated to
long-term savings and retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend to
Nationwide Corp. consisting of the outstanding shares of common stock of three
subsidiaries: Employers Life Insurance Company of Wausau (ELICW), National
Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC). ELICW
writes group accident and health and group life insurance business and
maintains its offices in Wausau, Wisconsin. NCC is a property and casualty
company that serves as a fronting company for a property and casualty
subsidiary of Nationwide Mutual Insurance Company (NMIC), an affiliate. NCC
maintains its offices in Scottsdale, Arizona. WCLIC writes high dollar term
life insurance policies and is located in San Francisco, California. ELICW,
NCC and WCLIC have been accounted for as discontinued operations for all
periods presented. The Company did not recognize any gain or loss on the
disposal of these subsidiaries.
A summary of the combined results of operations, including the results of
the accident and health and group life insurance business ELICW assumed from
NLIC in 1996, and assets and liabilities of ELICW, NCC and WCLIC as of and for
the years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Revenues.................................... $ 668,870 422,149 84,226
Net income.................................. 10,824 25,806 11,753
Assets, consisting primarily of
investments................................ 3,029,293 2,965,353 2,537,692
Liabilities, consisting primarily of policy
benefits and claims........................ 2,543,586 2,460,649 2,179,263
</TABLE>
During 1996, NLIC entered into two reinsurance agreements whereby all of
NLIC's accident and health and group life insurance business was ceded to
ELICW and NMIC, effective January 1, 1996. See note 14 for a
F-8
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
complete discussion of the reinsurance agreements. The Company has
discontinued its accident and health and group life insurance business and in
connection therewith has entered into reinsurance agreements to cede all
existing and any future writings to other affiliated companies and will cease
writing any new business prior to December 31, 1997. NLIC's accident and
health and group life insurance business is accounted for as discontinued
operations for all periods presented. The Company did not recognize any gain
or loss on the disposal of the accident and health and group life insurance
business. The assets, liabilities, results of operations and activities of
discontinued operations are distinguished physically, operationally and for
financial reporting purposes from the remaining assets, liabilities, results
of operations and activities of the Company.
A summary of the results of operations, net of amounts ceded to ELICW and
NMIC in 1996, and assets and liabilities of NLIC's accident and health and
group life insurance business as of and for the years ended December 31, 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenues......................................... $ -- 354,788 362,476
Net income (loss)................................ -- (1,742) 8,706
Assets, consisting primarily of investments...... 259,185 239,426 234,082
Liabilities, consisting primarily of policy
benefits and claims............................. 259,185 239,426 234,082
</TABLE>
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles (GAAP) which differ from statutory accounting practices
prescribed or permitted by regulatory authorities. Annual Statements for the
Company's insurance subsidiaries, filed with the department of insurance of
each insurance company's state of domicile, are prepared on the basis of
accounting practices prescribed or permitted by each department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company's
insurance subsidiaries have no material permitted statutory accounting
practices.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosures of contingent assets and liabilities as of
the date of the consolidated financial statements and the reported amounts of
revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs, valuation allowances for mortgage loans on real
estate and real estate investments and the liability for future policy
benefits and claims. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
(a) Consolidation Policy
The consolidated financial statements include the accounts of NFS and its
wholly owned subsidiaries. Subsidiaries that are classified and reported as
discontinued operations are not consolidated but rather are reported as
"Investment in Subsidiaries Classified as Discontinued Operations" in the
accompanying consolidated balance sheets and "Income from Discontinued
Operations" in the accompanying consolidated statements of income. All
significant intercompany balances and transactions have been eliminated.
F-9
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Valuation of Investments and Related Gains and Losses
The Company is required to classify its fixed maturity securities and equity
securities as either held-to-maturity, available-for-sale or trading. Fixed
maturity securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified as held-to-
maturity and all equity securities are classified as available-for-sale and
are stated at fair value, with the unrealized gains and losses, net of
adjustments to deferred policy acquisition costs and deferred federal income
tax, reported as a separate component of shareholder's equity. The adjustment
to deferred policy acquisition costs represents the change in amortization of
deferred policy acquisition costs that would have been required as a charge or
credit to operations had such unrealized amounts been realized. The Company
has no fixed maturity securities classified as trading as of December 31, 1996
or 1995.
Mortgage loans on real estate are carried at the unpaid principal balance
less valuation allowances. The Company provides valuation allowances for
impairments of mortgage loans on real estate based on a review by portfolio
managers. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the fair value of the collateral, if the loan
is collateral dependent. Loans in foreclosure and loans considered to be
impaired are placed on non-accrual status. Interest received on non-accrual
status mortgage loans on real estate is included in interest income in the
period received.
Real estate is carried at cost less accumulated depreciation and valuation
allowances. Other long-term investments are carried on the equity basis,
adjusted for valuation allowances. Impairment losses are recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.
Realized gains and losses on the sale of investments are determined on the
basis of specific security identification. Estimates for valuation allowances
and other than temporary declines are included in realized gains and losses on
investments.
(c) Revenues and Benefits
Investment Products and Universal Life Insurance Products: Investment
products consist primarily of individual and group variable and fixed
annuities, annuities without life contingencies and guaranteed investment
contracts. Universal life insurance products include universal life insurance,
variable universal life insurance and other interest-sensitive life insurance
policies. Revenues for investment products and universal life insurance
products consist of net investment income, asset fees, cost of insurance,
policy administration and surrender charges that have been earned and assessed
against policy account balances during the period. Policy benefits and claims
that are charged to expense include interest credited to policy account
balances and benefits and claims incurred in the period in excess of related
policy account balances.
Traditional Life Insurance Products: Traditional life insurance products
include those products with fixed and guaranteed premiums and benefits and
consist primarily of whole life insurance, limited-payment life insurance,
term life insurance and certain annuities with life contingencies. Premiums
for traditional life insurance products are recognized as revenue when due.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the life of the contract. This association is
accomplished by the provision for future policy benefits and the deferral and
amortization of policy acquisition costs.
Accident and Health Insurance Products: Accident and health insurance
premiums are recognized as revenue over the terms of the policies. Policy
claims are charged to expense in the period that claims are incurred. All
accident and health insurance business is accounted for as discontinued
operations. See note 3.
F-10
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions, certain
expenses of the policy issue and underwriting department and certain variable
agency expenses have been deferred. For investment products and universal life
insurance products, deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present value of
estimated future gross profits from projected interest margins, asset fees,
cost of insurance, policy administration and surrender charges. For years in
which gross profits are negative, deferred policy acquisition costs are
amortized based on the present value of gross revenues. For traditional life
insurance products, these deferred policy acquisition costs are predominantly
being amortized with interest over the premium paying period of the related
policies in proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium revenue was
estimated using the same assumptions as were used for computing liabilities
for future policy benefits. Deferred policy acquisition costs are adjusted to
reflect the impact of unrealized gains and losses on fixed maturity securities
available-for-sale as described in note 4(b).
(e) Separate Accounts
Separate Account assets and liabilities represent contractholders' funds
which have been segregated into accounts with specific investment objectives.
The investment income and gains or losses of these accounts accrue directly to
the contractholders. The activity of the Separate Accounts is not reflected in
the consolidated statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy Benefits
Future policy benefits for investment products in the accumulation phase,
universal life insurance and variable universal life insurance policies have
been calculated based on participants' contributions plus interest credited
less applicable contract charges.
Future policy benefits for traditional life insurance policies have been
calculated using a net level premium method based on estimates of mortality,
morbidity, investment yields and withdrawals which were used or which were
being experienced at the time the policies were issued, rather than the
assumptions prescribed by state regulatory authorities. See note 7.
Future policy benefits and claims for collectively renewable long-term
disability policies and group long-term disability policies are the present
value of amounts not yet due on reported claims and an estimate of amounts to
be paid on incurred but unreported claims. The impact of reserve discounting
is not material. Future policy benefits and claims on other group health
insurance policies are not discounted. All health insurance business is
accounted for as discontinued operations. See note 3.
(g) Participating Business
Participating business represents approximately 52% in 1996 (54% in 1995 and
55% in 1994) of the Company's life insurance in force, 78% in 1996 (79% in
1995 and 79% in 1994) of the number of life insurance policies in force, and
40% in 1996 (47% in 1995 and 51% in 1994) of life insurance premiums. The
provision for policyholder dividends is based on current dividend scales.
Future dividends are provided for ratably in future policy benefits based on
dividend scales in effect at the time the policies were issued.
(h) Federal Income Tax
The Company files a consolidated federal income tax return with NMIC, the
majority shareholder of Nationwide Corp. The members of the consolidated tax
return group have a tax sharing arrangement which provides, in effect, for
each member to bear essentially the same federal income tax liability as if
separate tax returns were filed.
F-11
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company utilizes the asset and liability method of accounting for income
tax. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce the deferred tax assets to the amounts
expected to be realized.
(i) Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits and claims
incurred are deducted from the respective income and expense accounts. Assets
and liabilities related to reinsurance ceded are reported on a gross basis.
All of the Company's accident and health and group life insurance business is
ceded to affiliates and is accounted for as discontinued operations. See notes
3 and 14.
(j) Earnings per Common Share
Pro forma earnings per common share information is based on the weighted
average actual number of Class B common shares outstanding during the periods
presented, adjusted for the stock split described in note 2, plus the number
of Class A common shares expected to be issued for the Equity Offering.
(5) CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company changed its method of accounting for
certain investments in debt and equity securities in connection with the
issuance of Statement of Financial Accounting Standards (SFAS) No. 115--
Accounting for Certain Investments in Debt and Equity Securities. As of
January 1, 1994, the Company classified fixed maturity securities with
amortized cost and fair value of $6,299,665 and $6,721,714, respectively, as
available-for-sale and recorded the securities at fair value. Previously,
these securities were recorded at amortized cost. The effect as of January 1,
1994 has been recorded as a direct credit to shareholder's equity as follows:
<TABLE>
<S> <C>
Excess of fair value over amortized cost of fixed maturity
securities
available-for-sale............................................. $422,049
Adjustment to deferred policy acquisition costs................. (95,044)
Deferred federal income tax..................................... (114,452)
--------
$212,553
========
</TABLE>
F-12
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INVESTMENTS
The amortized cost and estimated fair value of securities available-for-sale
were as follows as of December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...... $ 275,696 4,795 (1,340) 279,151
Obligations of states and
political subdivisions......... 6,242 450 (2) 6,690
Debt securities issued by
foreign governments............ 100,656 2,141 (857) 101,940
Corporate securities............ 7,999,310 285,946 (33,686) 8,251,570
Mortgage-backed securities...... 3,588,974 91,438 (15,124) 3,665,288
----------- ------- ------- ----------
Total fixed maturity
securities................... 11,970,878 384,770 (51,009) 12,304,639
Equity securities................. 43,890 15,571 (330) 59,131
----------- ------- ------- ----------
$12,014,768 400,341 (51,339) 12,363,770
=========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of the U.S. Treasury security
classified as held-to-maturity as of December 31, 1996 were $5,877 and $5,944,
respectively. Gross gains of $67 were unrealized on the security. The security
had a contractual maturity date of March 31, 1998.
The amortized cost and estimated fair value of securities available-for-sale
were as follows as of December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...... $ 320,500 12,764 (1) 333,263
Obligations of states and
political subdivisions......... 8,655 1,205 (1) 9,859
Debt securities issued by
foreign governments............ 101,414 4,387 (66) 105,735
Corporate securities............ 7,888,440 473,681 (25,742) 8,336,379
Mortgage-backed securities...... 3,553,861 165,169 (8,388) 3,710,642
----------- ------- ------- ----------
Total fixed maturity
securities................... 11,872,870 657,206 (34,198) 12,495,878
Equity securities................. 31,234 6,382 (46) 37,570
----------- ------- ------- ----------
$11,904,104 663,588 (34,244) 12,533,448
=========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of the U.S. Treasury security
classified as held-to-maturity as of December 31, 1995 were $5,720 and $5,989,
respectively. Gross gains of $269 were unrealized on the security.
F-13
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale as of December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- ----------
<S> <C> <C>
Fixed maturity securities available-for-sale
Due in one year or less................................ $ 440,235 444,214
Due after one year through five years.................. 3,937,010 4,053,152
Due after five years through ten years................. 2,809,813 2,871,806
Due after ten years.................................... 1,194,846 1,270,179
----------- ----------
8,381,904 8,639,351
Mortgage-backed securities............................... 3,588,974 3,665,288
----------- ----------
$11,970,878 12,304,639
=========== ==========
</TABLE>
The components of unrealized gains on securities available-for-sale, net,
were as follows as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Gross unrealized gains................................... $349,002 629,344
Adjustment to deferred policy acquisition costs.......... (81,939) (138,914)
Deferred federal income tax.............................. (93,471) (171,649)
-------- --------
173,592 318,781
Unrealized gains on securities available-for-sale, net,
of subsidiaries classified as discontinued operations
(note 3)................................................ -- 65,523
-------- --------
$173,592 384,304
======== ========
</TABLE>
An analysis of the change in gross unrealized gains/(losses) on securities
available-for-sale and fixed maturity securities held-to-maturity follows for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- ----------
<S> <C> <C> <C>
Securities available-for-
sale:
Fixed maturity
securities............. $(289,247) 876,332 (675,373)
Equity securities....... 8,905 (26) (1,927)
Fixed maturity securities
held-to-maturity......... (202) 75,895 (398,183)
--------- ------- ----------
$(280,544) 952,201 (1,075,483)
========= ======= ==========
</TABLE>
Proceeds from the sale of securities available-for-sale during 1996, 1995
and 1994 were $299,558, $150,453 and $268,987, respectively. During 1996,
gross gains of $6,368 ($4,838 and $3,045 in 1995 and 1994, respectively) and
gross losses of $13,659 ($2,147 and $21,280 in 1995 and 1994, respectively)
were realized on those sales.
During 1995, the Company transferred fixed maturity securities classified as
held-to-maturity with amortized cost of $25,429 to available-for-sale
securities due to evidence of a significant deterioration in the issuer's
creditworthiness. The transfer of those fixed maturity securities resulted in
a gross unrealized loss of $3,535.
As permitted by the Financial Accounting Standards Board's Special Report, A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities, issued in November 1995,
F-14
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company transferred nearly all of its fixed maturity securities previously
classified as held-to-maturity to available-for-sale. As of December 14, 1995,
the date of transfer, the fixed maturity securities had amortized cost of
$3,320,093, resulting in a gross unrealized gain of $155,940.
Investments that were non-income producing for the twelve month period
preceding December 31, 1996 amounted to $26,805 ($27,712 in 1995) and
consisted of $248 ($6,982 in 1995) in fixed maturity securities, $20,633
($14,740 in 1995) in real estate and $5,924 ($5,990 in 1995) in other long-
term investments.
Real estate is presented at cost less accumulated depreciation of $30,338 as
of December 31, 1996 ($30,482 as of December 31, 1995) and valuation
allowances of $15,219 as of December 31, 1996 ($25,819 as of December 31,
1995).
The recorded investment of mortgage loans on real estate considered to be
impaired (under SFAS No. 114--Accounting by Creditors for Impairment of a Loan
as amended by SFAS No. 118--Accounting by Creditors for Impairment of a Loan--
Income Recognition and Disclosure) as of December 31, 1996 was $51,765
($44,409 as of December 31, 1995), which includes $41,663 ($23,975 as of
December 31, 1995) of impaired mortgage loans on real estate for which the
related valuation allowance was $8,485 ($5,276 as of December 31, 1995) and
$10,102 ($20,434 as of December 31, 1995) of impaired mortgage loans on real
estate for which there was no valuation allowance. During 1996, the average
recorded investment in impaired mortgage loans on real estate was
approximately $39,674 ($22,181 in 1995) and interest income recognized on
those loans was $2,103 ($387 in 1995), which is equal to interest income
recognized using a cash-basis method of income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Allowance, beginning of year............................. $49,128 $46,381
Additions charged to operations........................ 4,497 7,433
Direct write-downs charged against the allowance....... (2,587) (4,686)
------- -------
Allowance, end of year................................... $51,038 $49,128
======= =======
</TABLE>
An analysis of investment income by investment type follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-
sale:
Fixed maturity
securities............... $ 917,135 685,787 647,927
Equity securities......... 1,291 1,330 509
Fixed maturity securities
held-to-maturity.......... -- 201,808 185,938
Mortgage loans on real
estate.................... 432,815 395,478 372,734
Real estate................ 44,332 38,344 40,170
Short-term investments..... 4,155 10,576 6,141
Other...................... 3,998 7,239 2,121
---------- --------- ---------
Total investment
income................. 1,403,726 1,340,562 1,255,540
Less investment expenses.... 45,967 46,529 44,729
---------- --------- ---------
Net investment income... $1,357,759 1,294,033 1,210,811
========== ========= =========
</TABLE>
F-15
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of realized gains/(losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------ -------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities....................... $ (3,462) 4,213 (7,296)
Equity securities............................... 3,143 3,386 1,422
Mortgage loans on real estate..................... (4,115) (7,091) (20,446)
Real estate and other............................. 4,226 (2,232) 9,793
-------- ------ -------
$ (208) (1,724) (16,527)
======== ====== =======
</TABLE>
Fixed maturity securities with an amortized cost of $6,161 and $5,592 as of
December 31, 1996 and 1995, respectively, were on deposit with various
regulatory agencies as required by law.
(7) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts represents
approximately 87% and 87% of the total liability for future policy benefits as
of December 31, 1996 and 1995, respectively. The average interest rate
credited on investment product policies was approximately 6.3%, 6.6% and 6.5%
for the years ended December 31, 1996, 1995 and 1994, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
Interest rates: Interest rates vary as follows:
<TABLE>
<CAPTION>
YEAR OF ISSUE INTEREST RATES
------------- --------------
<S> <C>
1996................. 6.6%, not graded
1984-1995............ 6.0% to 10.5%, not graded
1966-1983............ 6.0% to 8.1%, graded over 20 years to 4.0% to 6.6%
1965 and prior....... generally lower than post 1965 issues
</TABLE>
Withdrawals: Rates, which vary by issue age, type of coverage and policy
duration, are based on Company experience.
Mortality: Mortality and morbidity rates are based on published tables,
modified for the Company's actual experience.
The Company has entered into a reinsurance contract to cede a portion of its
general account individual annuity business to The Franklin Life Insurance
Company (Franklin). Total recoveries due from Franklin were $240,451 and
$245,255 as of December 31, 1996 and 1995, respectively. The contract is
immaterial to the Company's results of operations. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. Under the terms of the contract, Franklin has established a
trust as collateral for the recoveries. The trust assets are invested in
investment grade securities, the market value of which must at all times be
greater than or equal to 102% of the reinsured reserves.
F-16
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has reinsurance agreements with certain affiliates as described
in note 14. All other reinsurance agreements are not material to either
premiums or reinsurance recoverables.
(8) FEDERAL INCOME TAX
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Future policy benefits.................................. $175,571 149,192
Liabilities in Separate Accounts........................ 188,426 129,120
Mortgage loans on real estate and real estate........... 23,366 25,165
Other policyholder funds................................ 7,407 7,424
Other assets and other liabilities...................... 57,849 52,003
-------- -------
Total gross deferred tax assets....................... 452,619 362,904
Less valuation allowance.............................. (7,776) (7,776)
-------- -------
Net deferred tax assets............................... 444,843 355,128
-------- -------
Deferred tax liabilities:
Deferred policy acquisition costs....................... 399,345 299,579
Fixed maturity securities............................... 133,210 227,345
Deferred tax on realized investment gains............... 37,597 40,634
Equity securities and other long-term investments....... 8,210 3,780
Other................................................... 25,377 21,037
-------- -------
Total gross deferred tax liabilities.................. 603,739 592,375
-------- -------
$158,896 237,247
======== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the total gross
deferred tax assets will not be realized. Nearly all future deductible amounts
can be offset by future taxable amounts or recovery of federal income tax paid
within the statutory carryback period. There has been no change in the
valuation allowance for the year ended December 31, 1996 (decrease of $756
during 1995 and no change during 1994).
Total federal income tax expense for the years ended December 31, 1996, 1995
and 1994 differs from the amount computed by applying the U.S. federal income
tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
-------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax ex-
pense.......................... $114,831 35.0 $98,410 35.0 $84,162 35.0
Tax exempt interest and divi-
dends received deduction....... (212) (0.1) (18) 0.0 (130) (0.1)
Other, net...................... 1,191 0.4 (2,078) (0.7) (1,516) (0.6)
-------- ---- ------- ---- ------- ----
Total (effective rate of each
year)........................ $115,810 35.3 $96,314 34.3 $82,516 34.3
======== ==== ======= ==== ======= ====
</TABLE>
Total federal income tax paid was $117,327, $58,112 and $84,903 during the
years ended December 31, 1996, 1995 and 1994, respectively.
F-17
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107--Disclosures about Fair Value of Financial Instruments (SFAS
107) requires disclosure of fair value information about existing on and off-
balance sheet financial instruments. SFAS 107 defines the fair value of a
financial instrument as the amount at which the financial instrument could be
exchanged in a current transaction between willing parties. In cases where
quoted market prices are not available, fair value is based on estimates using
present value or other valuation techniques.
These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although fair
value estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in the immediate settlement of the instruments. SFAS 107
excludes certain assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Although insurance contracts, other than policies such as annuities that are
classified as investment contracts, are specifically exempted from SFAS 107
disclosures, estimated fair value of policy reserves on life insurance
contracts is provided to make the fair value disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures:
Cash, short-term investments and policy loans: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Fixed maturity and equity securities: Fair value for fixed maturity
securities is based on quoted market prices, where available. For fixed
maturity securities not actively traded, fair value is estimated using
values obtained from independent pricing services or, in the case of
private placements, is estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality and
maturity of the investments. The fair value for equity securities is based
on quoted market prices.
Separate Account assets and liabilities: The fair value of assets held in
Separate Accounts is based on quoted market prices. The fair value of
liabilities related to Separate Accounts is the amount payable on demand,
which includes certain surrender charges.
Mortgage loans on real estate: The fair value for mortgage loans on real
estate is estimated using discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. Fair value for mortgages in default is the
estimated fair value of the underlying collateral.
Investment contracts: Fair value for the Company's liabilities under
investment type contracts is disclosed using two methods. For investment
contracts without defined maturities, fair value is the amount payable on
demand. For investment contracts with known or determined maturities, fair
value is estimated using discounted cash flow analysis. Interest rates used
are similar to currently offered contracts with maturities consistent with
those remaining for the contracts being valued.
Policy reserves on life insurance contracts: Included are disclosures for
individual life insurance, universal life insurance and supplementary
contracts with life contingencies for which the estimated fair
F-18
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value is the amount payable on demand. Also included are disclosures for
the Company's limited payment policies, which the Company has used
discounted cash flow analyses similar to those used for investment
contracts with known maturities to estimate fair value.
Policyholders' dividend accumulations and other policyholder funds: The
carrying amount reported in the consolidated balance sheets for these
instruments approximates their fair value.
Commitments to extend credit: Commitments to extend credit have nominal
fair value because of the short-term nature of such commitments. See note
10.
Carrying amount and estimated fair value of financial instruments subject to
SFAS 107 and policy reserves on life insurance contracts were as follows as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Investments:
Securities available-for-sale:
Fixed maturity securities...... $12,304,639 12,304,639 12,495,878 12,495,878
Equity securities.............. 59,131 59,131 37,570 37,570
Fixed maturity securities held-
to-maturity.................... 5,877 5,944 5,720 5,989
Mortgage loans on real estate,
net............................ 5,272,119 5,397,865 4,627,387 4,987,569
Policy loans.................... 371,816 371,816 336,356 336,356
Short-term investments.......... 9,261 9,261 42,671 42,671
Cash............................. 43,183 43,183 10,055 10,055
Assets held in Separate
Accounts........................ 26,926,702 26,926,702 18,591,108 18,591,108
Liabilities
Investment contracts............. 13,914,441 13,484,526 13,229,360 12,876,798
Policy reserves on life insurance
contracts....................... 2,971,337 2,775,991 2,836,323 2,733,486
Policyholders' dividend
accumulations................... 361,401 361,401 348,027 348,027
Other policyholder funds......... 60,073 60,073 65,297 65,297
Liabilities related to Separate
Accounts........................ 26,926,702 26,164,213 18,591,108 18,052,362
</TABLE>
(10) ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURES
Financial Instruments with Off-Balance-Sheet Risk: The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of
business through management of its investment portfolio. These financial
instruments include commitments to extend credit in the form of loans. These
instruments involve, to varying degrees, elements of credit risk in excess of
amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are agreements
to lend to a borrower, and are subject to conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a deposit. Commitments extended
by the Company are based on management's case-by-case credit evaluation of the
borrower and the borrower's loan collateral. The underlying mortgage property
represents the collateral if the commitment is funded. The Company's policy
for new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amounts of these commitments less the net realizable value of
the collateral. The contractual amounts also represent the cash requirements
for all unfunded commitments. Commitments on mortgage loans on real estate of
$327,456 extending into 1997 were outstanding as of December 31, 1996.
F-19
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the United
States. The Company has a diversified portfolio with no more than 21% (20% in
1995) in any geographic area and no more than 2% (2% in 1995) with any one
borrower as of December 31, 1996.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1996 and 1995. See note 7.
The summary below depicts loans by remaining principal balance as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
APARTMENT
OFFICE WAREHOUSE RETAIL & OTHER TOTAL
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1996:
East North Central......... $139,518 119,069 549,064 215,038 1,022,689
East South Central......... 33,267 22,252 172,968 90,623 319,110
Mountain................... 17,972 43,027 113,292 73,390 247,681
Middle Atlantic............ 129,077 54,046 160,833 18,498 362,454
New England................ 33,348 43,581 161,960 -- 238,889
Pacific.................... 202,562 325,046 424,295 110,108 1,062,011
South Atlantic............. 103,889 134,492 482,934 385,185 1,106,500
West North Central......... 126,467 2,441 75,180 40,529 244,617
West South Central......... 104,877 120,314 197,090 304,256 726,537
-------- ------- --------- --------- ----------
$890,977 864,268 2,337,616 1,237,627 5,330,488
======== ======= ========= =========
Less valuation allowances
and unamortized discount.. 58,369
----------
Total mortgage loans on
real estate, net........ $5,272,119
==========
</TABLE>
<TABLE>
<CAPTION>
APARTMENT
OFFICE WAREHOUSE RETAIL & OTHER TOTAL
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1995:
East North Central......... $138,965 101,925 514,995 175,213 931,098
East South Central......... 28,642 15,266 180,858 82,383 307,149
Mountain................... -- 17,219 141,537 45,274 204,030
Middle Atlantic............ 116,187 64,813 158,252 10,793 350,045
New England................ 9,559 39,525 148,449 1 197,534
Pacific.................... 183,206 241,857 378,024 105,419 908,506
South Atlantic............. 106,246 73,541 446,800 278,265 904,852
West North Central......... 133,899 14,205 78,065 36,651 262,820
West South Central......... 69,140 92,594 190,299 267,268 619,301
-------- ------- --------- --------- ----------
$785,844 660,945 2,237,279 1,001,267 4,685,335
======== ======= ========= =========
Less valuation allowances
and unamortized discount.. 57,948
----------
Total mortgage loans on
real estate, net........ $4,627,387
==========
</TABLE>
F-20
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) PENSION PLAN
The Company is a participant, together with other affiliated companies, in a
pension plan covering all employees who have completed at least one thousand
hours of service within a twelve-month period and who have met certain age
requirements. Benefits are based upon the highest average annual salary of a
specified number of consecutive years of the last ten years of service. The
Company funds pension costs accrued for direct employees plus an allocation of
pension costs accrued for employees of affiliates whose work efforts benefit
the Company.
Effective January 1, 1995, the plan was amended to provide enhanced benefits
for participants who met certain eligibility requirements and elected early
retirement no later than March 15, 1995. The entire cost of the enhanced
benefit was borne by NMIC and certain of its property and casualty insurance
company affiliates.
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual Insurance
Company Employees' Retirement Plan and the Wausau Insurance Companies Pension
Plan to form the Nationwide Insurance Enterprise Retirement Plan. Immediately
prior to the merger, the plans were amended to provide consistent benefits for
service after January 1, 1996. These amendments had no significant impact on
the accumulated benefit obligation or projected benefit obligation as of
December 31, 1995.
Pension costs charged to operations by the Company during the years ended
December 31, 1996, 1995 and 1994 were $8,167, $11,383 and $11,113,
respectively.
The Company's net accrued pension expense as of December 31, 1996 and 1995
was $1,236 and $1,553, respectively.
The net periodic pension cost for the Nationwide Insurance Enterprise
Retirement Plan as a whole for the year ended December 31, 1996 and for the
Nationwide Insurance Companies and Affiliates Retirement Plan as a whole for
the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Service cost (benefits earned during the
period)..................................... $ 75,466 64,524 64,740
Interest cost on projected benefit
obligation.................................. 105,511 95,283 73,951
Actual return on plan assets................. (210,583) (249,294) (21,495)
Net amortization and deferral................ 101,795 143,353 (62,150)
-------- -------- -------
$ 72,189 53,866 55,046
======== ======== =======
Basis for measurements, net periodic pension cost:
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Weighted average discount rate............... 6.00% 7.50% 5.75%
Rate of increase in future compensation
levels...................................... 4.25% 6.25% 4.50%
Expected long-term rate of return on plan
assets...................................... 6.75% 8.75% 7.00%
</TABLE>
F-21
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information regarding the funded status of the Nationwide Insurance
Enterprise Retirement Plan as a whole as of December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Accumulated benefit obligation:
Vested............................................ $1,338,554 1,236,730
Nonvested......................................... 11,149 26,503
---------- ---------
$1,349,703 1,263,233
========== =========
Net accrued pension expense:
Projected benefit obligation for services rendered
to date.......................................... $1,847,828 1,780,616
Plan assets at fair value......................... 1,947,933 1,738,004
---------- ---------
Plan assets in excess of (less than) projected
benefit obligation............................... 100,105 (42,612)
Unrecognized prior service cost................... 37,870 42,845
Unrecognized net gains............................ (201,952) (63,130)
Unrecognized net asset at transition.............. 37,158 41,305
---------- ---------
$ (26,819) (21,592)
========== =========
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Basis for measurements, funded status of plan:
Weighted average discount rate.................... 6.50% 6.00%
Rate of increase in future compensation levels.... 4.75% 4.25%
</TABLE>
Assets of the Nationwide Insurance Enterprise Retirement Plan are invested
in group annuity contracts of NLIC and ELICW.
(12) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the defined benefit pension plan, the Company, together with
other affiliated companies, participates in life and health care defined
benefit plans for qualifying retirees. Postretirement life and health care
benefits are contributory and generally available to full time employees who
have attained age 55 and have accumulated 15 years of service with the Company
after reaching age 40. Postretirement health care benefit contributions are
adjusted annually and contain cost-sharing features such as deductibles and
coinsurance. In addition, there are caps on the Company's portion of the per-
participant cost of the postretirement health care benefits. These caps can
increase annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the discretion
of management. Plan assets are invested primarily in group annuity contracts
of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation; however, certain affiliated companies
elected to amortize their initial transition obligation over periods ranging
from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31, 1996
and 1995 was $34,884 and $33,539, respectively, and the net periodic
postretirement benefit cost (NPPBC) for 1996, 1995 and 1994 was $3,394, $3,221
and $4,524, respectively.
F-22
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amount of NPPBC for the plan as a whole for the years ended December 31,
1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year)........................ $ 6,541 6,235 8,586
Interest cost on accumulated postretirement
benefit obligation.............................. 13,679 14,151 14,011
Actual return on plan assets..................... (4,348) (2,657) (1,622)
Amortization of unrecognized transition
obligation of affiliates........................ 173 2,966 568
Net amortization and deferral.................... 1,830 (1,619) 1,622
------- ------ ------
$17,875 19,076 23,165
======= ====== ======
</TABLE>
Information regarding the funded status of the plan as a whole as of
December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees............................................. $ 92,954 88,680
Fully eligible, active plan participants............. 23,749 28,793
Other active plan participants....................... 83,986 90,375
--------- --------
Accumulated postretirement benefit obligation
(APBO)............................................ 200,689 207,848
Plan assets at fair value............................ 63,044 54,325
--------- --------
Plan assets less than accumulated postretirement
benefit obligation................................ (137,645) (153,523)
Unrecognized transition obligation of affiliates..... 1,654 1,827
Unrecognized net gains............................... (23,225) (1,038)
--------- --------
$(159,216) (152,734)
========= ========
</TABLE>
Actuarial assumptions used for the measurement of the APBO as of December
31, 1996 and 1995 and the NPPBC for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1996 1995 1995 1994
APBO NPPBC APBO NPPBC NPPBC
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Discount rate............... 7.25% 6.65% 6.75% 8.00% 7.00%
Long term rate of return on
plan assets, net of tax.... -- 4.80% -- 8.00% N/A
Assumed health care cost
trend rate:
Initial rate.............. 11.00% 11.00% 11.00% 10.00% 12.00%
Ultimate rate............. 6.00% 6.00% 6.00% 6.00% 6.00%
Uniform declining period.. 12 Years 12 Years 12 Years 12 Years 12 Years
</TABLE>
The health care cost trend rate assumption has an effect on the amounts
reported. For the plan as a whole, a one percentage point increase in the
assumed health care cost trend rate would increase the APBO as of December 31,
1996 by $701 and the NPPBC for the year ended December 31, 1996 by $83.
F-23
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
The holders of Class A common stock are entitled to one vote per share. The
holders of Class B common stock are entitled to ten votes per share. Class A
common stock has no conversion rights. Class B common stock is convertible
into Class A common stock, in whole or in part, at any time and from time to
time at the option of the holder, on the basis of one share of Class A common
stock for each share of Class B common stock converted. If at any time after
the initial issuance of shares of Class A common stock the number of
outstanding shares of Class B common stock falls below 5% of the aggregate
number of issued and outstanding shares of common stock, then each outstanding
share of Class B common stock shall automatically convert into one share of
Class A common stock. In the event of any sale or transfer of shares of Class
B common stock to any person or persons other than NMIC or its affiliates,
such shares of Class B common stock so transferred shall be automatically
converted into an equal number of shares of Class A common stock.
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
of the company's regulatory total adjusted capital, as defined by the NAIC, to
its authorized control level risk-based capital, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. NLIC and
each of its insurance company subsidiaries exceed the minimum risk-based
capital requirements.
The combined statutory capital and surplus of NLIC as of December 31, 1996,
1995 and 1994 was $1,000,647, $1,363,031 and $1,262,861, respectively. The
statutory net income of NLIC for the years ended December 31, 1996, 1995 and
1994 was $73,218, $86,529 and $76,532, respectively.
NLIC is limited in the amount of shareholder dividends it may pay without
prior approval by the Department of Insurance of the State of Ohio (the
Department). NLIC's dividend of the outstanding shares of common stock of
certain companies which was declared on September 24, 1996 and the anticipated
$850,000 dividend (as discussed in note 1) are deemed extraordinary under Ohio
insurance laws. As a result of such dividends, any dividend paid by NLIC
during the 12-month period immediately following the $850,000 dividend would
also be an extraordinary dividend under Ohio insurance laws. Accordingly, no
such dividend could be paid without prior regulatory approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the amount
of statutory profits on NLIC's participating policies (measured before
dividends to policyholders) that can inure to the benefit of the Company and
its stockholders.
The Company currently does not expect such regulatory requirements to impair
its ability to pay operating expenses and stockholder dividends in the future.
(14) TRANSACTIONS WITH AFFILIATES
The Company leases office space from NMIC and certain of its subsidiaries.
For the years ended December 31, 1996, 1995 and 1994, the Company made lease
payments to NMIC and its subsidiaries of $9,985, $9,880 and $8,987,
respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its direct
and indirect subsidiaries, including the Company, NMIC provides certain
operational and administrative services, such as sales support, advertising,
personnel and general management services, to those subsidiaries. Expenses
covered by this
F-24
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreement are subject to allocation among NMIC and such subsidiaries. Amounts
allocated to the Company were $101,584, $107,112 and $100,601 in 1996, 1995
and 1994, respectively. Under the cost sharing agreement, expenses are
allocated in accordance with NAIC guidelines and are based on standard
allocation techniques and procedures acceptable under general cost accounting
practices. Measures used to allocate expenses include individual employee
estimates of time spent, special cost studies, salary expense, commissions
expense and other measures that are agreed to by the participating companies
that are within regulatory and industry guidelines and practices. The Company
believes these allocation measures are reasonable. In addition, the Company
does not believe that expenses recognized under the inter-company agreements
are materially different than expenses that would have been recognized had the
Company operated on a stand alone basis. Amounts payable to NMIC from the
Company under the cost sharing agreement were $15,111 and $1,186 as of
December 31, 1996 and 1995, respectively.
The Company also participates in intercompany repurchase agreements with
affiliates whereby the seller will transfer securities to the buyer at a
stated value. Upon demand or a stated period, the securities will be
repurchased by the seller at the original sales price plus a price
differential. Transactions under the agreements during 1996 and 1995 were not
material. The Company believes that the terms of the repurchase agreements are
materially consistent with what the Company could have obtained with
unaffiliated parties.
Intercompany reinsurance agreements exist between NLIC and, respectively,
NMIC and ELICW whereby all of NLIC's accident and health and group life
insurance business is ceded on a modified coinsurance basis. NLIC entered into
the reinsurance agreements during 1996 because the accident and health and
group life insurance business was unrelated to the Company's long-term savings
and retirement products. Accordingly, the accident and health and group life
insurance business has been accounted for as discontinued operations for all
periods presented. Under modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment risk
associated with changes in interest rates is borne by ELICW or NMIC, as the
case may be. Risk of asset default is retained by the Company, although a fee
is paid by ELICW or NMIC, as the case may be, to the Company for the Company's
retention of such risk. The agreements will remain in force until all policy
obligations are settled. However, with respect to the agreement between NLIC
and NMIC, either party may terminate the contract on January 1 of any year
with prior notice. The ceding of risk does not discharge the original insurer
from its primary obligation to the policyholder. The Company believes that the
terms of the modified coinsurance agreements are consistent in all material
respects with what the Company could have obtained with unaffiliated parties.
Amounts ceded to ELICW in 1996 are included in ELICW's results of operations
for 1996 which, combined with the results of WCLIC and NCC, are summarized in
note 3. Amounts ceded to ELICW in 1996 include premiums of $224,224, net
investment income and other revenue of $14,833, and benefits, claims and other
expenses of $246,641. Amounts ceded to NMIC in 1996 include premiums of
$97,331, net investment income of $10,890, and benefits, claims and other
expenses of $100,476.
The Company and various affiliates entered into agreements with Nationwide
Cash Management Company (NCMC) and California Cash Management Company (CCMC),
both affiliates, under which NCMC and CCMC act as common agents in handling
the purchase and sale of short-term securities for the respective accounts of
the participants. Amounts on deposit with NCMC and CCMC were $9,261 and
$18,602 as of December 31, 1996 and 1995, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding shares
of common stock of Farmland Life Insurance Company (Farmland) to NLIC.
Farmland merged into WCLIC effective June 30, 1995. The contribution resulted
in a direct increase to consolidated shareholder's equity of $46,918. As
discussed in note 3, WCLIC is accounted for as discontinued operations.
F-25
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective December 31, 1994, NLIC purchased all of the outstanding shares of
common stock of ELICW from Wausau Service Corporation (WSC) for $155,000. NLIC
transferred fixed maturity securities and cash with a fair value of $155,000
to WSC on December 28, 1994, which resulted in a realized loss of $19,239 on
the disposition of the securities. The purchase price approximated both the
historical cost basis and fair value of net assets of ELICW. ELICW has and
will continue to share home office, other facilities, equipment and common
management and administrative services with WSC. As discussed in note 3, ELICW
is accounted for as discontinued operations.
(15) BANK LINES OF CREDIT
In August 1996, NLIC, along with NMIC, entered into a $600,000 revolving
credit facility which provides for a $600,000 loan over a five year term on a
fully revolving basis with a group of national financial institutions. The
credit facility provides for several and not joint liability with respect to
any amount drawn by either NLIC or NMIC. NLIC and NMIC pay facility and usage
fees to the financial institutions to maintain the revolving credit facility.
All previously existing line of credit agreements were canceled.
(16) CONTINGENCIES
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to be
material to the Company's financial position or results of operations.
(17) SEGMENT INFORMATION
The Company has three primary segments: Variable Annuities, Fixed Annuities
and Life Insurance. The Variable Annuities segment consists of annuity
contracts that provide the customer with the opportunity to invest in mutual
funds managed by the Company and independent investment managers, with the
investment returns accumulating on a tax-deferred basis. The Fixed Annuities
segment consists of annuity contracts that generate a return for the customer
at a specified interest rate, fixed for a prescribed period, with returns
accumulating on a tax-deferred basis. The Life Insurance segment consists of
insurance products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis. In addition, the Company
reports corporate expenses and investments, and the related investment income
supporting capital not specifically allocated to its product segments in a
Corporate and Other segment. In addition, all realized gains and losses,
investment management fees and other revenue earned from mutual funds other
than the portion allocated to the variable annuities and life insurance
segments, and commissions and other income earned by the marketing and
distribution companies are reported in the Corporate and Other segment.
F-26
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes revenues and income from continuing
operations before federal income tax expense for the years ended December 31,
1996, 1995 and 1994 and assets as of December 31, 1996, 1995 and 1994, by
business segment.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Variable Annuities......................... $ 284,638 189,071 132,687
Fixed Annuities............................ 1,092,566 1,051,970 939,868
Life Insurance............................. 435,657 409,135 383,150
Corporate and Other........................ 203,739 186,862 178,379
----------- ---------- ----------
$ 2,016,600 1,837,038 1,634,084
=========== ========== ==========
Income from continuing operations before
federal income tax expense:
Variable Annuities......................... 90,244 50,837 24,574
Fixed Annuities............................ 135,405 137,000 138,950
Life Insurance............................. 67,242 67,590 53,046
Corporate and Other........................ 35,197 25,743 23,893
----------- ---------- ----------
$ 328,088 281,170 240,463
=========== ========== ==========
Assets:
Variable Annuities......................... 25,069,725 17,333,039 11,146,465
Fixed Annuities............................ 13,994,715 13,250,359 11,668,973
Life Insurance............................. 3,353,286 3,027,420 2,752,283
Corporate and Other, including discontinued
operations................................ 5,352,512 4,895,270 3,675,592
----------- ---------- ----------
$47,770,238 38,506,088 29,243,313
=========== ========== ==========
</TABLE>
F-27
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 18
Recent History........................................................... 18
Capitalization........................................................... 19
Selected Consolidated Financial Data..................................... 20
Pro Forma Consolidated Financial Data.................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 38
Management............................................................... 70
Ownership of Capital Stock............................................... 83
Certain Relationships and Related Transactions........................... 84
Description of Notes..................................................... 90
Description of Capital Stock............................................. 97
The Equity Offerings, the Note Offering and the Capital Securities
Offering................................................................ 101
Underwriting............................................................. 102
Notice to Canadian Residents............................................. 103
Legal Matters............................................................ 103
Experts.................................................................. 103
Glossary of Selected Insurance Terms..................................... 104
Index to Consolidated Financial Statements............................... F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
Nationwide Financial Services, Inc.
$300,000,000
% Senior Notes Due 2027
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY & CO.
Incorporated
MERRILL LYNCH & CO.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
offering of Notes pursuant to this Registration Statement that will be paid
fully by the Registrant. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the NYSE listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 90,909.09
NASD filing fee................................................. 30,500.00
NYSE listing fee................................................ --
Blue Sky fees and expenses...................................... 2,000.00
Legal fees and expenses......................................... 350,000.00
Accounting fees and expenses.................................... 50,000.00
Trustee fees and expenses....................................... 8,000.00
Printing, engraving and postage expenses........................ 225,000.00
Miscellaneous................................................... 10,000.00
-----------
Total......................................................... $766,409.09
===========
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Subsection (a) of DGCL Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of DGCL Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
Other subsections of DGCL Section 145 further provide that to the extent a
director, officer, employee or agent of a corporation has been successful on
the merits or otherwise in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) of Section 145, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection therewith; that indemnification provided for by Section 145 shall,
unless otherwise provided
II-1
<PAGE>
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and that expenses incurred by an
officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.
Section 1 of Article VI of the Company's Bylaws provides that the Company
shall indemnify its directors, officers, employees and agents to the fullest
extent permitted by the DGCL. This Section further provides that the Company
may advance expenses incurred by any director or officer in defending a civil
or criminal action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to the indemnification by the
Company.
DGCL Section 145 also provides that any indemnification provided for therein
may only be made upon a determination by (i) a majority vote of the directors
who are not parties to such action, suit or proceeding, even though less than
a quorum, or (ii) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (iii) by the
stockholders that the indemnitee has met the standard of conduct required by
Section 145 entitling him to such indemnification.
DGCL Section 145 empowers the corporation to purchase and maintain insurance
on behalf of a director, officer, employee or agent of the corporation against
any liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liabilities under Section 145.
Section 3 of Article VI of the Company's Bylaws provides that the Company may
purchase and maintain insurance on behalf of any director or officer against
any liability asserted against and incurred by such person arising out of the
person's status as such, whether or not the Company would have the power to
indemnify such person against such liability under the DGCL.
The Company has in force and effect a policy insuring the directors and
officers of the Company against losses which they or any of them shall become
legally obligated to pay for by reason of any actual or alleged error or
misstatement or misleading statement or act or omission or neglect or breach
of duty by the directors and officers in the discharge of their duties,
individually or collectively, or any matter claimed against them solely by
reason of their being directors or officers, such coverage being limited by
the specific terms and provisions of the insurance policy.
Pursuant to the Underwriting Agreement, in the form filed as an exhibit to
the Registration Statement, any Underwriters under the Underwriting Agreement
will agree to indemnify the registrant's directors and officers and persons
controlling the registrant within the meaning of the Securities Act, against
certain liabilities that might arise out of or based upon certain information
furnished to the registrant by any such indemnifying party.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal benefit.
Article TWELFTH of the Company's Certificate limits the liability of directors
to the fullest extent permitted by Section 102(b)(7).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 11, 1996, the Registrant issued 1,000 shares of common stock to
Nationwide Corp. in exchange for $1,000. This exchange is exempt from
registration under the Securities Act pursuant to Section 4(2) thereunder.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 --Form of Underwriting Agreement
**3.1 --Form of Restated Certificate of Incorporation of Nationwide
Financial Services, Inc.
**3.2 --Form of Restated Bylaws of Nationwide Financial Services, Inc.
**4.1 --Form of Indenture relating to the Notes, including the form of
Global Note and the form of Definitive Note
5.1 --Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
10.1 --Form of Intercompany Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and Nationwide Financial
Services, Inc.
**10.2 --Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation
**10.3 --Form of First Amendment to Cost Sharing Agreement among the
parties named therein
**10.4 --Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
**10.5 --Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company
**10.6 --Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent
**10.7 --Form of Lease Agreement between Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, Nationwide Life and
Annuity Insurance Company and Nationwide Financial Services, Inc.
**10.8 --Form of Nationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan
**10.9 --General Description of Nationwide Insurance Enterprise Executive
Incentive Plan
**10.10 --General Description of Nationwide Insurance Enterprise
Management Incentive Plan
**10.11 --Nationwide Insurance Enterprise Excess Benefit Plan effective as
of December 31, 1996
**10.12 --Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of December 31, 1996
**10.13 --Nationwide Salaried Employees Severance Pay Plan
**10.14 --Nationwide Insurance Enterprise Supplemental Defined
Contribution Plan effective as of January 1, 1996
**10.15 --General Description of Nationwide Insurance Enterprise
Individual Deferred Compensation Program
**10.16 --General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program
**10.17 --Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard
McFerson
**10.18 --Nationwide Financial Services, Inc. Stock Retainer Plan for Non-
Employee Directors
11.1 --Statement Regarding Computation of Per Share Earnings
12.1 --Statements Regarding Computation of Ratios
**21.1 --List of Subsidiaries
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
23.1 --Consent of KPMG Peat Marwick LLP
23.2 --Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in
Exhibit 5.1)
**24.1 --Power of Attorney (for Messrs. McFerson, Gasper, Oakley,
Shisler, Holloway, Patterson,
Miller and Fuellgraf)
**24.2 --Power of Attorney for Lydia Micheaux Marshall
**24.3 --Power of Attorney for Donald L. McWhorter
**24.4 --Power of Attorney for Gerald D. Prothro
25.1 --Statement of Eligibility of the Trustee under the Indenture
**27.1 --Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules
Schedule I --Consolidated Summary of Investments--Other than Investments
in Related Parties
Schedule III --Supplementary Insurance Information
Schedule IV --Reinsurance
Schedule V --Valuation and Qualifying Accounts
- --------
*To be filed by amendment.
**Previously filed.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF COLUMBUS, STATE OF OHIO, ON MARCH 4, 1997.
Nationwide Financial Services, Inc.
*
By: _________________________________
DIMON RICHARD MCFERSON
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER--
NATIONWIDE INSURANCE ENTERPRISE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON MARCH
4, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
* Chairman and Chief Executive
- ------------------------------------- Officer--Nationwide Insurance
DIMON RICHARD MCFERSON Enterprise and Director (Principal
Executive Officer)
* President and Chief Operating
- ------------------------------------- Officer and Director
JOSEPH J. GASPER
* Executive Vice President--Chief
- ------------------------------------- Financial Officer (Principal
ROBERT A. OAKLEY Financial Officer and Principal
Accounting Officer)
* Director
- -------------------------------------
ARDEN L. SHISLER
* Director
- -------------------------------------
HENRY S. HOLLOWAY
* Director
- -------------------------------------
JAMES F. PATTERSON
* Director
- -------------------------------------
DAVID O. MILLER
* Director
- -------------------------------------
CHARLES L. FUELLGRAF, JR.
II-5
<PAGE>
SIGNATURE TITLE
--------- -----
* Director
- -------------------------------------
LYDIA MICHEAUX MARSHALL
* Director
- -------------------------------------
DONALD L. MCWHORTER
* Director
- -------------------------------------
GERALD D. PROTHRO
(*) By: /s/ Mark B. Koogler
--------------------------------
MARK B. KOOGLER
ATTORNEY-IN-FACT
II-6
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on Financial Statement Schedules............ S-2
Schedule I Consolidated Summary of Investments--Other Than Investments
In Related Parties as of December 31, 1996................. S-3
Schedule III Supplementary Insurance Information as of December 31,
1996, 1995 and 1994 and for each for the years then ended.. S-4
Schedule IV Reinsurance as of December 31, 1996, 1995 and 1994 and for
each of the years then ended............................... S-5
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994........................... S-6
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information has been included in the
consolidated financial statements or notes thereto.
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Nationwide Financial Services, Inc. :
Under date of January 31, 1997, we reported on the consolidated balance
sheets of Nationwide Financial Services, Inc. and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which are included in the prospectus.
As discussed in note 1 to the consolidated financial statements, the Company
was formed in November 1996 as a holding company for Nationwide Life Insurance
Company and the other companies within the Nationwide Insurance Enterprise
that offer or distribute long-term savings and retirement products. The
consolidated financial statements are presented as if these companies were
consolidated for all periods presented.
In 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules included in the registration statement. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Columbus, Ohio
January 31, 1997
S-2
<PAGE>
SCHEDULE I
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS--
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1996
($000'S OMITTED)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ----------- ---------- ---------------
AMOUNT AT WHICH
SHOWN IN THE
MARKET CONSOLIDATED
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ----------- ---------- ---------------
<S> <C> <C> <C>
Fixed maturity securities available-for-
sale:
Bonds:
United States government and
government agencies and
authorities........................ $ 3,757,887 3,834,762 3,834,762
States, municipalities and political
subdivisions....................... 6,241 6,690 6,690
Foreign governments................. 100,656 101,940 101,940
Public utilities.................... 1,798,736 1,843,938 1,843,938
All other corporate ................ 6,307,358 6,517,309 6,517,309
----------- ---------- ----------
Total fixed maturity securities
available-for-sale............... 11,970,878 12,304,639 12,304,639
----------- ---------- ----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all
other.............................. 43,501 50,405 50,405
Nonredeemable preferred stock......... 389 8,726 8,726
----------- ---------- ----------
Total equity securities available-
for-sale......................... 43,890 59,131 59,131
----------- ---------- ----------
Fixed maturity securities held-to-matu-
rity:
Bonds:
United States government and govern-
ment agencies and authorities...... 5,877 5,944 5,877
----------- ---------- ----------
Total fixed maturity securities
held-to-maturity................. 5,877 5,944 5,877
----------- ---------- ----------
Mortgage loans on real estate, net...... 5,327,317 5,272,119(1)
Real estate, net:
Investment properties................. 253,384 217,611(1)
Acquired in satisfaction of debt...... 57,933 48,148(1)
Policy loans............................ 371,816 371,816
Other long-term investments............. 27,370 28,668(2)
Short-term investments.................. 9,261 9,261
----------- ----------
Total investments................. $18,067,726 18,317,270
=========== ==========
</TABLE>
- --------
See accompanying independent auditors' report.
(1) Difference from Column B is primarily due to accumulated depreciation and
valuation allowances due to impairments on real estate and valuation
allowances due to impairments on mortgage loans on real estate. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and note 6 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains of
investments in limited partnerships.
S-3
<PAGE>
SCHEDULE III
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 1996, 1995 AND 1994 AND FOR EACH OF THE YEARS THEN ENDED
($000'S OMITTED)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
-------- ----------- ---------------- -------- ---------- -------- ---------- ---------- ------------ ---------
FUTURE OTHER
POLICY BENEFITS, POLICY BENEFITS, AMORTIZATION
DEFERRED LOSSES, CLAIMS AND NET CLAIMS OF DEFERRED OTHER
POLICY CLAIMS AND UNEARNED BENEFITS INVESTMENT LOSSES AND POLICY OPERATING
ACQUISITION LOSS PREMIUMS PAYABLE PREMIUM INCOME SETTLEMENT ACQUISITION EXPENSES
SEGMENT COSTS EXPENSES (1) (2) REVENUE (3) EXPENSES COSTS (3)
------- ----------- ---------------- -------- ---------- -------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
Variable
Annuities........ $ 791,611 -- -- -- (21,449) 4,624 57,412 132,357
Fixed Annuities.. 242,421 14,952,877 687 24,030 1,050,557 838,533 38,635 79,737
Life Insurance... 414,417 1,995,802 395,739 174,612 174,002 211,386 37,347 78,965
Corporate and
Other ........... (81,940) 230,381 25,048 -- 154,649 106,037 -- 62,506
---------- ----------- ------- ------- --------- --------- ------- -------
Total........... $1,366,509 17,179,060 421,474 198,642 1,357,759 1,160,580 133,394 353,565
========== =========== ======= ======= ========= ========= ======= =======
1995:
Variable
Annuities........ 571,283 -- -- -- (17,640) 2,881 26,264 109,089
Fixed Annuities.. 221,111 14,221,622 455 32,774 1,002,718 804,980 29,499 80,260
Life Insurance... 366,876 1,898,641 383,983 166,332 171,255 201,986 31,021 68,832
Corporate and
Other............ (138,914) 238,351 28,886 -- 137,700 105,646 (4,089) 59,562
---------- ----------- ------- ------- --------- --------- ------- -------
Total........... $1,020,356 16,358,614 413,324 199,106 1,294,033 1,115,493 82,695 317,743
========== =========== ======= ======= ========= ========= ======= =======
1994:
Variable
Annuities........ 395,397 -- -- -- (13,415) 2,277 22,135 83,701
Fixed Annuities.. 198,639 12,633,253 240 20,134 903,572 702,082 29,849 69,975
Life Insurance... 327,079 1,806,762 371,984 156,524 166,329 191,006 29,495 69,861
Corporate and
Other............ 74,445 233,569 26,927 -- 154,325 97,302 4,089 53,095
---------- ----------- ------- ------- --------- --------- ------- -------
Total........... $ 995,560 14,673,584 399,151 176,658 1,210,811 992,667 85,568 276,632
========== =========== ======= ======= ========= ========= ======= =======
<CAPTION>
COLUMN A COLUMN K
-------- --------
PREMIUMS
SEGMENT WRITTEN
------- --------
<S> <C>
1996:
Variable
Annuities........
Fixed Annuities..
Life Insurance...
Corporate and
Other ...........
Total...........
1995:
Variable
Annuities........
Fixed Annuities..
Life Insurance...
Corporate and
Other............
Total...........
1994:
Variable
Annuities........
Fixed Annuities..
Life Insurance...
Corporate and
Other............
Total...........
</TABLE>
- ----
See accompanying independent auditors' report.
(1) Unearned premiums are included in Column C amounts.
(2) Column E agrees to the sum of Balance Sheet captions, "Policyholders'
dividend accumulations" and "Other policyholder funds."
(3) Allocations of net investment income and certain general expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
S-4
<PAGE>
SCHEDULE IV
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
REINSURANCE
AS OF DECEMBER 31, 1996, 1995 AND 1994
AND FOR EACH OF THE YEARS THEN ENDED
($000'S OMITTED)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- ------------ --------- ---------- ---------- -------------
PERCENTAGE OF
CEDED TO ASSUMED AMOUNT
OTHER FROM OTHER ASSUMED
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1996
Life insurance in
force................ $47,071,264 6,633,567 288,593 40,726,290 0.7%
=========== ========= ======= ========== =====
Year ended December 31,
1996
Insurance premiums
Life insurance........ 225,615 29,282 2,309 198,642 1.2%
Accident and health
insurance............ 291,871 305,789 13,918 -- N/A
----------- --------- ------- ---------- -----
Total insurance
premiums........... $ 517,486 335,071 16,227 198,642 8.2%
=========== ========= ======= ========== =====
As of December 31, 1995
Life insurance in
force................ $41,087,025 8,935,743 391,174 32,542,456 1.2%
=========== ========= ======= ========== =====
Year ended December 31,
1995
Insurance Premiums
Life insurance........ 221,257 24,360 2,209 199,106 1.1%
Accident and health
insurance............ 298,058 313,036 14,978 -- N/A
----------- --------- ------- ---------- -----
Total insurance
premiums........... $ 519,315 337,396 17,187 199,106 8.6%
=========== ========= ======= ========== =====
As of December 31, 1994
Life insurance in
force................ $35,926,633 7,550,623 829,742 29,205,752 2.8%
=========== ========= ======= ========== =====
Year ended December 31,
1994
Insurance premiums
Life insurance........ 198,705 21,912 2,865 176,658 1.6%
Accident and health
insurance............ 303,435 321,696 18,261 -- N/A
----------- --------- ------- ---------- -----
Total insurance
premiums........... $ 502,140 343,608 21,126 176,658 12.0%
=========== ========= ======= ========== =====
</TABLE>
- --------
See accompanying independent auditors' report.
Note: The life insurance caption represents principally premiums for
traditional life and life-contingent immediate annuities and excludes
deposits on investment products and universal life insurance products.
S-5
<PAGE>
SCHEDULE V
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------- ------------- -------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
----------- ---------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1996:
Valuation allowances--
mortgage loans on real
estate................. $49,128 4,497 -- 2,587 51,038
Valuation allowances--
real estate............ 25,819 (10,600) -- -- 15,219
------- ------- ------ ------ ------
Total.................. $74,947 (6,103) -- 2,587 66,257
======= ======= ====== ====== ======
1995:
Valuation allowances--
fixed maturity
securities............. -- 8,908 -- 8,908 --
Valuation allowances--
mortgage loans on real
estate................. 46,381 7,433 -- 4,686 49,128
Valuation allowances--
real estate............ 27,330 (1,511) -- -- 25,819
------- ------- ------ ------ ------
Total.................. $73,711 14,830 -- 13,594 74,947
======= ======= ====== ====== ======
1994:
Valuation allowances--
fixed maturity
securities............. 4,800 (4,800) -- -- --
Valuation allowances--
mortgage loans on real
estate................. 42,150 20,445 -- 16,214 46,381
Valuation allowances--
real estate............ 31,357 (4,027) -- -- 27,330
------- ------- ------ ------ ------
Total.................. $78,307 11,618 -- 16,214 73,711
======= ======= ====== ====== ======
</TABLE>
- --------
See accompanying independent auditors' report.
(1) Amounts represent direct write-downs charged against the valuation
allowance.
S-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
1.1 --Form of Underwriting Agreement
**3.1 --Form of Restated Certificate of Incorporation of Nationwide
Financial Services, Inc.
**3.2 --Form of Restated Bylaws of Nationwide Financial Services, Inc.
**4.1 --Form of Indenture relating to the Notes, including the form of
Global Note and the form of Definitive Note
5.1 --Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
10.1 --Form of Intercompany Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and Nationwide Financial Services,
Inc.
**10.2 --Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation
**10.3 --Form of First Amendment to Cost Sharing Agreement among the parties
named therein
**10.4 --Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
**10.5 --Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company
**10.6 --Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent
**10.7 --Form of Lease Agreement between Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, Nationwide Life and
Annuity Insurance Company and Nationwide Financial Services, Inc.
**10.8 --Form of Nationwide Financial Services, Inc. 1996 Long-Term Equity
Compensation Plan
**10.9 --General Description of Nationwide Insurance Enterprise Executive
Incentive Plan
**10.10 --General Description of Nationwide Insurance Enterprise Management
Incentive Plan
**10.11 --Nationwide Insurance Enterprise Excess Benefit Plan effective as of
December 31, 1996
**10.12 --Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of December 31, 1996
**10.13 --Nationwide Salaried Employees Severance Pay Plan
**10.14 --Nationwide Insurance Enterprise Supplemental Defined Contribution
Plan effective as of January 1, 1996
**10.15 --General Description of Nationwide Insurance Enterprise Individual
Deferred Compensation Program
**10.16 --General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program
**10.17 --Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard McFerson
**10.18 --Nationwide Financial Services, Inc. Stock Retainer Plan for Non-
Employee Directors
11.1 --Statement Regarding Computation of Per Share Earnings
12.1 --Statements Regarding Computation of Ratios
**21.1 --List of Subsidiaries
23.1 --Consent of KPMG Peat Marwick LLP
23.2 --Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in
Exhibit 5.1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
**24.1 --Power of Attorney (for Messrs. McFerson, Gasper, Oakley, Shisler,
Holloway, Patterson, Miller and Fuellgraf)
**24.2 --Power of Attorney for Lydia Micheaux Marshall
**24.3 --Power of Attorney for Donald L. McWhorter
**24.4 --Power of Attorney for Gerald D. Prothro
25.1 --Statement of Eligibility of the Trustee under the Indenture
**27.1 --Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
**Previously filed.
<PAGE>
EXHIBIT 1.1
[FORM OF UNDERWRITING AGREEMENT]
$300,000,000
NATIONWIDE FINANCIAL SERVICES, INC.
__% SENIOR NOTES DUE 2027
UNDERWRITING AGREEMENT
----------------------
_________, 1997
Credit Suisse First Boston Corporation
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Dean Witter Reynolds Inc.
J.P. Morgan & Co.
Salomon Brothers Inc
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010.
Dear Sirs:
1. Introductory. Nationwide Financial Services, Inc., a Delaware
corporation ("Company"), proposes to issue and sell (the "Offering") to the
several Underwriters named in Schedule A hereto ("Underwriters") $300,000,000
principal amount of its ___% Senior Notes Due 2027 ("Offered Securities"). This
Underwriting Agreement, as amended, supplemented or modified from time to time
is referred to herein as "this Agreement." Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Dean Witter Reynolds Inc., J.P. Morgan & Co. and Salomon
Brothers Inc. are collectively referred to in this Agreement as the
"Representatives."
The Offered Securities are to be issued under an indenture, dated as
of March __, 1997 ("Indenture"), between the Company and Wilmington Trust
Company, as Trustee.
The Company hereby agrees with the several Underwriters as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
<PAGE>
(a) A registration statement (No. 333-18531) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (i) has
been declared effective under the Securities Act of 1933 ("Act") and is
not proposed to be amended or (ii) is proposed to be amended by amendment
or post-effective amendment. If such registration statement (the "initial
registration statement") has been declared effective, either (i) an
additional registration statement (the "additional registration
statement") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and,
if so filed, has become effective upon filing pursuant to such Rule and
the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule
462(b) and will become effective upon filing pursuant to such Rule and
upon such filing the Offered Securities will all have been duly
registered under the Act pursuant to the initial registration statement
and such additional registration statement. If the Company does not
propose to amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose to
amend it, and if any post-effective amendment to either such registration
statement has been filed with the Commission prior to the execution and
delivery of this Agreement, the most recent amendment (if any) to each
such registration statement has been declared effective by the Commission
or has become effective upon filing pursuant to Rule 462(c) ("Rule
462(c)") under the Act or, in the case of the additional registration
statement, Rule 462(b). For purposes of this Agreement, "Effective Time"
with respect to the initial registration statement or, if filed prior to
the execution and delivery of this Agreement, the additional registration
statement means (i) if the Company has advised the Representatives that
it does not propose to amend such registration statement, the date and
time as of which such registration statement, or the most recent post-
effective amendment thereto (if any) filed prior to the execution and
delivery of this Agreement, was declared effective by the Commission or
has become effective upon filing pursuant to Rule 462(c), or (ii) if the
Company has advised the Representatives that it proposes to file an
amendment or post-effective amendment to such registration statement, the
date and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement has
not been filed prior to the execution and delivery of this Agreement but
the Company has advised the Representatives that it proposes to file one,
"Effective Time" with respect to such additional registration statement
means the date and time as of which such registration statement is filed
and becomes effective pursuant to Rule 462(b). "Effective Date" with
respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its Effective
Time, including all information contained in the additional registration
statement (if any) and deemed to be a part of the initial registration
statement as of the Effective Time of the
2
<PAGE>
additional registration statement pursuant to the General Instructions of
the Form on which it is filed and including all information (if any)
deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act,
is hereinafter referred to as the "Initial Registration Statement". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement incorporated
by reference therein and including all information (if any) deemed to be
a part of the additional registration statement as of its Effective Time
pursuant to Rule 430A(b), is hereinafter referred to as the "Additional
Registration Statement". The Initial Registration Statement and the
Additional Registration Statement are hereinafter referred to
collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such
filing is required) as included in the Registration Statement, is
hereinafter referred to as the
"Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act, the Trust Indenture Act of 1939 ("Trust
Indenture Act") and the rules and regulations of the Commission ("Rules
and Regulations") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all material
respects to the requirements of the Act, the Trust Indenture Act and the
Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not omit,
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (iii) on the date of this
Agreement, the Initial Registration Statement and, if the Effective Time
of the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included,
each Registration Statement and Prospectus will conform, in all material
respects to the requirements of the Act, the Trust Indenture Act and the
Rules and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit,
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. If the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all material respects to the requirements of
the Act, the
3
<PAGE>
Trust Indenture Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification, except to the
extent that the failure to so qualify or be in good standing would not
have a material adverse effect (i) on the condition, financial or
otherwise, business, properties or results of operations of the Company
and its subsidiaries taken as a whole, (ii) which affects the issuance or
validity of the Offered Securities or, (iii) which affects the
consummation of any of the transactions contemplated by this Agreement or
(iv) is otherwise material in the context of the sale of the Offered
Securities (a "Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and otherwise) to own its properties and conduct its business as
described in the Prospectus; and each subsidiary of the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except to the extent
that the failure to so qualify would not have a Material Adverse Effect;
all of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable and is owned (directly or through subsidiaries) by the
Company; and the capital stock of each subsidiary owned (directly or
through subsidiaries) by the Company is owned free from liens, claims,
encumbrances and defects.
(e) The Indenture has been duly authorized and, if the Effective
Time of a Registration Statement is prior to the execution and delivery
of this Agreement, has been or otherwise upon such Effective Time will be
duly qualified under the Trust Indenture Act with respect to the Offered
Securities registered thereby; the Offered Securities have been duly
authorized; and when the Offered Securities are delivered and paid for
pursuant to this Agreement on each Closing Date (as defined below), the
Indenture will have been duly executed and delivered, such Offered
Securities will have been duly executed, authenticated, issued and
4
<PAGE>
delivered and will conform to the description thereof contained in the
Prospectus and the Indenture and such Offered Securities will constitute
valid and legally binding obligations of the Company, enforceable in
accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter
for a brokerage commission, finder's fee or other like payment in
connection with the Offering.
(g) Except as set forth in the Intercompany Agreement, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company
to include such securities in the securities registered pursuant to a
Registration Statement or in any securities being registered pursuant to
any other registration statement filed by the Company under the Act.
(h) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement (which
shall include, for all purposes of this Agreement, the Special Dividend
(as defined in the Prospectus) and the other transactions described in
the "Recent History" section of the Prospectus (collectively, the
"Restructuring")) in connection with the issuance and sale of the Offered
Securities by the Company, except such as have been obtained under the
insurance laws of the State of Ohio (the "Ohio Insurance Laws"), the
insurance laws of the States of California and Michigan, the Act, the
Rules and Regulations, the by-laws of the National Association of
Securities Dealers, Inc. ("NASD") and the Trust Indenture Act and such as
may be required under foreign or state securities laws (including
insurance securities laws).
(i) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes the valid and binding obligation of the
Company enforceable in accordance with its terms (except as may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization
or similar laws affecting creditors' rights generally and by general
principles of equity, except that the remedies of specific performance
and injunctive and other forms of equitable relief are subject to the
discretion of the court before which any proceeding therefor may be
brought and except with respect to the obligations of the Company
regarding indemnification and contribution as provided in Section 7
below).
(j) The execution, delivery and performance of the Indenture and
this Agreement, and the issuance and sale of the Offered Securities and
compliance
5
<PAGE>
with the terms and provisions thereof and hereof will not result in a
breach or violation of any of the terms and provisions of, or constitute
a default under, any statute, rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or any of
their properties, or any agreement or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company or
any such subsidiary is subject, or the amended and restated certificate
of incorporation or bylaws of the Company or the articles or amended
articles of incorporation and code of regulations or bylaws, as the case
may be, of any such subsidiary, in each case, except for such breaches,
violations or defaults as would not have a Material Adverse Effect, and
the Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by the Indenture and this Agreement,
respectively.
(k) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances, claims and defects, except where the failure to
possess such title would not have a Material Adverse Effect; and except
as disclosed in the Prospectus, the Company and its subsidiaries hold any
leased real or personal property under valid and enforceable leases,
except where the failure to hold such property under such leases would
not have a Material Adverse Effect.
(l) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, service marks, trade names and
other rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively, "intellectual
property rights") necessary to conduct the business now operated by them,
or presently employed by them, except where the failure to own or possess
such intellectual property rights or to have the right to acquire such
intellectual property rights on reasonable terms would not have a
Material Adverse Effect, and have not received any notice of infringement
of or conflict with asserted rights of others with respect to any
intellectual property rights (including, without limitation, "The Best of
America(R)" service mark) that, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a
Material Adverse Effect. Nationwide Life Insurance Company is the owner,
free and clear of any lien, claim or encumbrance of any kind, of the
service mark "The Best of America(R)", which is a registered federal
service mark.
(m) The Company and each of its subsidiaries hold all licenses,
certificates and permits from governmental authorities (including,
without limitation, insurance licenses from the Insurance Departments of
the various states in which the subsidiaries write insurance business
(the "Insurance Licenses")) which are necessary to the conduct of their
businesses, except where the failure to hold such licenses, certificates
or permits would not have a Material Adverse
6
<PAGE>
Effect; the Company's insurance subsidiaries have fulfilled and performed
all obligations necessary to maintain their respective Insurance
Licenses, except where the failure to perform such obligations would not
have a Material Adverse Effect; and no event or events have occurred
which may be reasonably expected to result in any impairment,
modification, termination or revocation of such Insurance Licenses which
individually or in the aggregate would have a Material Adverse Effect.
(n) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, rule, regulation,
decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or contamination
pursuant to any environmental laws, or is subject to any claim relating
to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a Material Adverse
Effect; and to the Company's knowledge, there is no pending investigation
which might lead to such a claim.
(o) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings (including, without limitation, any
proceeding to revoke or deny renewal of any Insurance License) against or
affecting the Company, any of its subsidiaries or any of their respective
properties that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect; and no such actions, suits or proceedings (including,
without limitation, any proceeding to revoke or deny renewal of any
Insurance License) are, to the Company's knowledge, threatened or
contemplated.
(p) The financial statements (other than the notes to the financial
statements) included in each Registration Statement and the Prospectus
present fairly, and the notes to the financial statements included in
each Registration Statement and the Prospectus present fairly in all
material respects, the financial position of the Company and its
consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and, except as otherwise
disclosed in the Prospectus as being prepared in accordance with the
Statutory Accounting Practices (as hereinafter defined), such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis;
and the schedules included in each Registration Statement present fairly
the information required to be stated therein; and the assumptions used
in preparing the pro forma financial statements included in each
Registration Statement and the Prospectus provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma columns therein reflect
7
<PAGE>
the proper application of those adjustments in the corresponding
historical financial statement amounts.
(q) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no change, nor any development or event involving a prospective
change, which has had, or would reasonably be expected to have, a
Material Adverse Effect, and, except as disclosed in or contemplated by
the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(r) The Company is not and, after giving effect to the sale of the
Offered Securities and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" or an
entity "controlled" by an "investment company" required to be registered
under the Investment Company Act of 1940, as amended (the "1940 Act").
(s) Neither the Company nor any of its respective affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida Statutes.
(t) The statutory financial statements of each of the Company's
insurance subsidiaries, from which certain ratios and other statistical
data contained in the Registration Statement have been derived, have for
each relevant period been prepared in accordance with accounting
practices and procedures of the National Association of Insurance
Commissioners ("NAIC"), as prescribed or permitted by the Department of
Insurance of the State of Ohio (the "Statutory Accounting Practices");
and such accounting practices have been applied on a consistent basis
throughout the periods involved, except as disclosed therein.
(u) The Company has filed an application to list the Offered
Securities on the New York Stock Exchange ("NYSE") and has received
notification that such listing has been approved subject to notice of
issuance. The Offered Securities will be registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior or
concurrently with the effectiveness of the Registration Statement.
(v) All reserves and other liabilities reflected in lines 1, 2, 3,
4.1, 4.2, 5 and 7.1 of page 3 of the statutory annual statements of each
of the Company's insurance subsidiaries, filed with or submitted to the
Department of Insurance of the State of Ohio and any other state
department of insurance or similar regulatory authority for the year
ended December 31, 1996 (the "Reserve Liabilities"): (i) are computed in
all material respects in accordance with actuarial standards which have
been adopted by the Actuarial Standards Board, consistently applied and
are fairly stated, in accordance with sound actuarial principles; (ii)
are based in all material respects on actuarial assumptions which produce
reserves at least as great
8
<PAGE>
as those called for in any contract provision as to reserve basis and
method, and are in accordance with all other contract provisions; (iii)
meet all material requirements of the insurance law and duly adopted
regulations, in effect at the valuation date, of the State of Ohio and
are at least as great as the minimum aggregate amounts required by the
insurance law and duly adopted regulations, in effect at the valuation
date, of the State of Ohio and any other states in which the Company's
insurance subsidiaries file an actuarial opinion; (iv) are computed on
the basis of assumptions consistent with those used in computing the
corresponding items in the annual statement of the preceding year end
(except as noted in the supporting memorandum); and (v) include
provisions for all actuarial reserves and related annual statement items
which are required under Ohio Insurance Laws to be established. Adequate
provision for all such Reserve Liabilities has been made in accordance
with Ohio Insurance Laws to cover the total amount of all reasonably
anticipated matured and unmatured benefits, claims and other liabilities
of the Company's insurance subsidiaries under all insurance policies and
annuity contracts under which the Company's insurance subsidiaries had
any liability (including, without limitation, any liability arising under
or as a result of any reinsurance, coinsurance or other similar
agreement) on the Closing Date.
(w) Each of the Company's insurance subsidiaries has duly and
validly filed or caused to be filed all material reports, statements,
documents, registrations, filings or submissions that were required by
applicable Laws (as defined below) to be filed; all such filings complied
with all applicable Laws in all material respects when filed, and no
material deficiencies have been asserted with respect to any such filings
which have not been satisfied. All outstanding insurance policies,
annuity contracts and assumption certificates issued by any of the
Company's insurance subsidiaries and now in force are, to the extent
required under applicable Laws, on forms approved by the insurance
regulatory authority of the jurisdiction where issued and utilize premium
rates which if required to be filed with or approved by insurance
regulatory authorities have been so filed or approved, except where the
failure to use approved forms or to file or have approved such premium
rates would not have a Material Adverse Effect, and the premiums charged
conform thereto, except where the failure to conform would not have a
Material Adverse Effect.
(x) Each of the Company's broker/dealer subsidiaries, where
applicable, is registered with the Commission and with each other
governmental authority with which it is required to register in order to
conduct its business as now conducted, and is in compliance with all
applicable United States federal, state, local or foreign statutes, laws,
ordinances, regulations, rules, codes, orders, permits, other
requirements or rules of law (collectively, the "Laws"), except where the
failure to comply would not have a Material Adverse Effect. The
Company's insurance and broker/dealer subsidiaries have filed all forms,
reports, statements and other documents required by Law to be filed by
them with the Commission, all other reports (periodic or otherwise) and
registration statements,
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including, without limitation, in connection with sales of variable
annuity or variable life contracts, and all amendments and supplements to
all such reports and registration statements, and all such forms,
reports, statements and other documents did not at the time they were
filed (at the time they became effective and so long as they remain
effective in the case of registration statements and amendments thereto)
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading.
(y) Each of the separate accounts of the Company's insurance
subsidiaries that is required to be registered as an investment company
under the 1940 Act is so registered. All forms, reports, statements and
other documents required by Law to be filed with the Commission by or on
behalf of each of the separate accounts of the Company's insurance
subsidiaries, including, without limitation, all registration statements
and all amendments and supplements to all such registration statements,
in connection with sales of variable life insurance policies and variable
annuity contracts, have been so filed by or on behalf of such separate
accounts, and all such forms, reports, statements and other documents,
including, without limitation, those to be filed after the date hereof,
did not at the time they were filed (at the time they become effective
and so long as they remain effective in the case of registration
statements and amendments thereto), or will not at the time they are
filed (at the time they become effective and so long as they remain
effective in the case of registration statements and amendments thereto),
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statement therein, in the light of the circumstances under which they
were made, not misleading.
(z) Except as set forth in the Prospectus, neither the Company nor
any of the Company's insurance subsidiaries is a party to any contract
with or other undertaking to, or is subject to any governmental order by,
or is a recipient of any presently applicable supervisory letter or other
written communication of any kind from, any governmental authority which
(i) has had a Material Adverse Effect, (ii) relates materially and
adversely to its reserve adequacy, or its investment or underwriting
practices or policies or its sales practices or policies, or (iii) would
reasonably be expected to have a Material Adverse Effect, nor has the
Company or any of the Company's insurance subsidiaries been notified by
any governmental authority that it is contemplating issuing or requesting
(or is considering the appropriateness of issuing or requesting) any such
governmental order, contract, undertaking, letter or other written
communication.
(aa) Except as set forth in the Prospectus, and with respect to all
insurance issued:
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(i) No outstanding insurance policy or annuity contract
issued or assumed by any of the Company's insurance subsidiaries
entitles the holder thereof or any other Person (as defined below)
to receive dividends, distributions or other benefits based on the
revenues or earnings of the Company or the Company's insurance
subsidiaries or any other individual, partnership, firm,
corporation, association, trust, unincorporated organization,
governmental authority or other entity, as well as any syndicate or
group that would be deemed to be a person under Section 13(d)(3) of
the Exchange Act (each, a "Person").
(ii) To the Company's and the Company's insurance
subsidiaries' knowledge, no other party to any reinsurance,
coinsurance or other similar agreement with any of the Company's
insurance subsidiaries is in default thereunder, except for such
defaults that would not reasonably be expected to have a Material
Adverse Effect.
(iii) Except as set forth in the Prospectus, all
advertising, promotional and sales materials and other marketing
practices used by the Company and/or the Company's insurance
subsidiaries, or, to the Company's knowledge, any agent of the
Company or the Company's insurance subsidiaries, have complied and
are currently in compliance with applicable Laws, except where the
failure to comply or be in compliance would not have a Material
Adverse Effect.
(iv) Each annuity contract issued by any of the Company's
insurance subsidiaries qualifies as an annuity contract under
Section 72 of the Internal Revenue Code of 1986, as amended through
the date hereof, except where the failure to so qualify would not
have a Material Adverse Effect.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to
the Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Company, at a purchase price of ___% of the principal amount
thereof plus accrued interest from ___________________, if any, to the Closing
Date, the respective principal amounts of Offered Securities set forth
opposite the names of the Underwriters in Schedule A hereto.
The Company will deliver against payment of the purchase price the
Offered Securities in the form of one or more permanent global Securities in
definitive form (the "U.S. Firm Global Securities") deposited with the Trustee
as custodian for The Depository Trust Company ("DTC") and registered in the
name of Cede & Co., as nominee for DTC. Interests in any permanent global
Securities will be held only in book-entry form through DTC, except in the
limited circumstances described in the Prospectus. Payment for the Offered
Securities shall be made by the Underwriters in Federal (same day) funds by
official check or checks [or wire transfer to an account previously designated
to Credit Suisse First Boston Corporation ("CSFBC") by the Company at a bank
acceptable to
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CSFBC drawn to the order of the Company at the office of Dewey Ballantine,
1301 Avenue of the Americas, at 10 A.M., (New York time), on ________, 1997,
or at such other time not later than seven full business days thereafter as
CSFBC and the Company determine, such time being herein referred to as the
"Closing Date", against delivery to the Trustee as custodian for DTC of the
U.S. Firm Global Securities representing all of the Offered Securities. For
purposes of Rule 15c6-1 under the Exchange Act, the Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date
for payment of funds and delivery of securities for all the Offered Securities
sold pursuant to the Offering. The U.S. Firm Global Securities will be made
available for checking at the office of CSFBC at least 24 hours prior to the
Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of
the Offered Securities under the Act but the Effective Time thereof has
not occurred as of such execution and delivery, the Company will file the
additional registration statement or, if filed, will file a post-
effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on
the date of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement,
the Additional Registration Statement (if any) or the Prospectus and will
not effect such amendment or supplementation without CSFBC's consent; and
the Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order
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<PAGE>
proceedings in respect of a Registration Statement and will use its best
efforts to prevent the issuance of any such stop order and to obtain as
soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time
to amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery
of, any such amendment or supplement shall constitute a waiver of any of
the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
stockholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional
Registration Statement) which will satisfy the provisions of Section
11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth fiscal
quarter following the fiscal quarter that includes such Effective Date,
except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the
end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives hard copies of
the Registration Statement (four of which will be signed and will include
all exhibits), copies of each EDGAR filing of each Registration Statement
(and confirmations for each EDGAR filing of each Registration Statement),
each preliminary prospectus relating to the Offered Securities, and, so
long as delivery of a prospectus relating to the Offered Securities is
required to be delivered under the Act in connection with sales by any
Underwriter or dealer, the Prospectus and all amendments and supplements
to such documents, in each case in such quantities as CSFBC requests.
The Prospectus shall be so furnished on the business day following the
later of the execution and delivery of this Agreement or the Effective
Time of the Initial Registration Statement. All other documents shall be
so furnished as soon as available. The Company will pay the expenses of
printing and distributing to the Underwriters all such documents.
(f) The Company will use its best efforts, in cooperation with the
Underwriters, to arrange for the qualification of the Offered Securities
for sale and the determination of their eligibility for investment under
the laws of such
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jurisdictions as CSFBC designates and will continue such qualifications
in effect so long as required for the distribution; provided, however,
-------- -------
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer
in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject.
(g) During the period of three years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, (i) as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year, (ii) as
soon as available, a copy of each report and any definitive proxy
statement of the Company filed with the Commission under the Exchange Act
or mailed to stockholders, and (iii) from time to time, such other
information as shall be furnished by the Company to its stockholders
generally and as shall be reasonably requested by CSFBC.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement and will reimburse the Underwriters
(if and to the extent incurred by them) for any filing fees and other
reasonable expenses (including reasonable fees and disbursements of
counsel) incurred by them in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto, for the filing
fee incident to the review by the NASD of the Offered Securities and
approval of the transactions contemplated hereby by the NASD for any
travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings
with prospective purchasers of the Offered Securities and for expenses
incurred in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the Underwriters.
(i) The Company will notify CSFBC of any material adverse change
affecting any of its representations, warranties, agreements and
indemnities herein at any time prior to payment to the Company on the
Closing Date.
(j) The Company will use the net proceeds received by it from the
sale of the Offered Securities in the manner specified in the Prospectus
under the caption "Use of Proceeds."
(k) The Company will use its best efforts to list the Offered
Securities on the NYSE subject to notice of issuance and to register the
Offered Securities under the Exchange Act.
(l) The Company shall comply with Section 517.075, Florida Statutes,
if prior to the completion of the distribution of the Offered Securities
it or any of its affiliates commences doing business with the government
of Cuba or with any
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<PAGE>
person or affiliate located in Cuba within the meaning of Section
517.075, Florida Statutes.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Offered Securities on
the Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the
statements of Company officers made pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement
to be filed shortly prior to such Effective Time), of KPMG Peat Marwick
LLP confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules audited by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) on the basis of a reading of the latest available
interim financial statements of the Company, inquiries of officials
of the Company who have responsibility for financial and accounting
matters and other specified procedures, nothing came to their
attention that caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations or
any material modifications should be made to such unaudited
financial statements for them to be in conformity with
generally accepted accounting principles;
(B) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days prior to the date of this Agreement,
there was any change in the capital stock or any increase in
short-term indebtedness or long-term debt of the Company and
its consolidated subsidiaries, or, at the date of the latest
available balance sheet read
15
<PAGE>
by such accountants, there was any decrease in total assets or
stockholder's equity as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing date
of the latest available income statement read by such
accountants there were any decreases, as compared with the
corresponding period for the previous year and with the period
of corresponding length ended the date of the latest income
statement included in the Prospectus, in the total or per share
amounts total assets or net income or in the ratio of earnings
to fixed charges;
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iii) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case
to the extent that such dollar amounts, percentages and other
financial information are derived from the general accounting
records of the Company and its subsidiaries subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting
records and other procedures specified in such letter and have found
such dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise specified in
such letter; and
(iv) they have examined the statutory financial statements
of each of the Company's insurance subsidiaries, from which certain
ratios and other statistical data contained in the Registration
Statement have been derived, and in their opinion such statements,
with respect to each such insurance subsidiary, have for each
relevant period been prepared in accordance with accounting
practices prescribed or permitted by the appropriate Insurance
Department of the state of domicile of such subsidiary, except as
disclosed therein; and
(v) with respect to the pro forma financial information
included in the Registration Statement, they have performed the
procedures specified by the American Institute of Certified Public
Accountants Statement on Standards for Attestation Engagements No.
1, "Reporting on Pro Forma Financial Statements"; and
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<PAGE>
(vi) on the basis of the procedures referred to in clause
(v) above, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused
them to believe that the pro forma financial information and
statements included in the Registration Statements do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to such pro
forma financial information and statements for them to be in
accordance with such requirements and generally accepted accounting
principles.
For purposes of this subsection, (i) if the Effective Time of
the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the amendment
or post-effective amendment to be filed shortly prior to its Effective
Time, (ii) if the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement but the Effective
Time of the Additional Registration is subsequent to such execution and
delivery, "Registration Statements" shall mean the Initial Registration
Statement and the additional registration statement as proposed to be
filed or as proposed to be amended by the post-effective amendment to be
filed shortly prior to its Effective Time, and (iii) "Prospectus" shall
mean the prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CSFBC. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter, or shall have
occurred at such later date as shall have been consented to by CSFBC. If
the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, the Prospectus shall have been
filed with the Commission in accordance with the Rules and Regulations
and Section 5(a) of this Agreement. Prior to such Closing Date, no stop
order suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives,
shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its
subsidiaries which, in the reasonable
17
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judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with the completion of the public offering or sale
of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities or preferred securities (including
preferred trust securities of any trust affiliated with the Company of
the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities or preferred securities
(including preferred trust securities of any trust affiliated with the
Company) of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating) or any downgrading of the financial and
operating performance of the Company's insurance subsidiaries by A.M.
Best Company that results in the Company's insurance subsidiaries being
rated lower than A- (Excellent); (iii) any suspension or limitation of
trading in securities generally on the NYSE, or any setting of minimum
prices for trading on such exchange or system, or any suspension of
trading of any securities of the Company on any exchange or in the over-
the-counter market; (iv) any banking moratorium declared by U.S. Federal
or New York authorities; or (v) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration of
war by Congress or any other substantial national or international
calamity or emergency if, in the judgment of a majority in interest of
the Underwriters including the Representatives, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of LeBoeuf, Lamb, Greene & MacRae, L.L.P., special counsel
for the Company to the effect that:
(i) The Company is an existing corporation in good
standing under the laws of the state of its incorporation, with
power and authority (corporate and otherwise) to own its properties
and conduct its business as described in the Prospectus; the Company
is duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or lease
of property or the conduct of its business requires such
qualification, except to the extent that the failure to so qualify
would not have a Material Adverse Effect;
(ii) The Indenture has been duly authorized, executed and
delivered and has been duly qualified under the Trust Indenture Act;
the Offered Securities delivered on such Closing Date have been duly
authorized, executed, authenticated, issued and delivered and
conform to the description thereof contained in the Prospectus; and
the Indenture and the Offered Securities delivered on such Closing
Date constitute valid and
18
<PAGE>
legally binding obligations of the Company enforceable in accordance
with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
general equity principles;
(iii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation by the Company of the transactions
contemplated by this Agreement in connection with the issuance or
sale of the Offered Securities by the Company, except such as have
been obtained and made under the General Corporation Law of
Delaware, the Ohio Insurance Laws, the insurance laws of the States
of California and Michigan, the Act, the Rules and Regulations, the
by-laws of the NASD, or the Trust Indenture Act and such as may be
required under foreign securities laws or state securities laws
(including insurance securities laws);
(iv) The execution, delivery and performance of the
Indenture and this Agreement and the issuance and sale of the
Offered Securities and compliance with the terms or provisions
thereof and hereof will not result in a breach or violation of any
of any of the terms and provisions of, or constitute a default
under, the amended and restated certificate of incorporation or
bylaws of the Company or the articles or amended articles of
incorporation and code of regulations or by-laws, as the case may
be, of any such subsidiary of the Company, and the Company has full
power and authority (corporate and otherwise) to authorize, issue
and sell the Offered Securities as contemplated by this Agreement;
(v) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed
and became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus was filed
with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the Additional
Registration Statement (as the case may be) and, to the best
knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any part thereof has
been issued and no proceedings for that purpose have been instituted
or are pending or contemplated under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates, complied
as to form in all material respects with the requirements of the
Act, the Rules and Regulations and the Trust Indenture Act; the
descriptions in the "Business-Regulation," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," and "Business-Legal Proceedings"
in the Registration Statements and
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Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel does not know of
any legal or governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not described as
required or any contracts or documents of a character required to be
described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not
described and filed as required; it being understood that such
counsel need express no opinion as to the financial statements or
schedules or other financial and statistical data contained in the
Registration Statement or the Prospectus];
(vi) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding
obligation of the Company enforceable in accordance with its terms
(except as may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization or similar laws affecting creditors'
rights generally, except that the remedies of specific performance
and injunctive and other forms of equitable relief are subject to
certain equitable defenses and the discretion of the court before
which any proceeding therefor may be brought, and except that no
opinion need be expressed with respect to the obligations of the
Company regarding indemnification and contribution as provided in
Section 7 below);
(vii) The statements in the Prospectus under the captions
"Description of Capital Stock" and "Description of Notes" insofar as
they purport to constitute a summary of the terms of the securities
therein described, and under the caption "Underwriting" (other than
statements based on information furnished by an Underwriter
expressly for use or incorporation by reference therein); insofar as
they purport to constitute summaries of the terms of the documents
referred to therein, and the statements in the Prospectus under
"Business - Regulation," "Management's Discussion and Analysis of
Financial Condition and Results of Financial Information - Liquidity
and Capital Resources," and "Business - Legal Proceedings" insofar
as they purport to constitute descriptions of laws, rules,
regulations or NAIC model laws, fairly summarize the terms of such
documents or fairly and accurately present the information disclosed
therein in all material respects;
(viii) The Company is not, and after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be an
"investment company" or an entity "controlled" by an "investment
company" as defined under the Investment Company Act of 1940; and
20
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(ix) The Company has filed an application to list the
Offered Securities on the NYSE and has received notification that
such listing has been approved subject to notice of issuance and the
Offered Securities have been registered under the Exchange Act.
Such counsel also shall state that no facts have come to the attention of
such counsel that have caused it to believe that (except for financial
statements and schedules and other financial and statistical data, as
aforesaid) the Registration Statement and the Prospectus, at the time the
Registration Statement became effective, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus, as amended or supplemented, if applicable (except for
financial statements and schedules and other financial and statistical data,
as aforesaid), contain, at the time distributed, any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In making the statement referred to in the preceding paragraph, such
counsel shall state that their opinion and the belief are based upon their
participation in the preparation of the Registration Statement and the
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified.
In rendering the foregoing opinions, such counsel may rely as to matters
of fact upon certificates of the officers of the Company and its subsidiaries,
as to matters involving good standing, authorization to do business and other
matters within their knowledge, upon certificates of public officials, and, as
to matters involving the application of laws of any jurisdiction other than
the State of New York or the United States, upon opinions of local counsel
which opinions shall state that they believe both you and they are justified
in relying upon such certificates and opinions.
(e) The Representatives shall have received an opinion, dated such
Closing Date, from W. Sidney Druen, general counsel to the Company to the
effect that:
(i) Each of the Company's subsidiaries is an existing
corporation in good standing under the laws of the state of its
incorporation, with power and authority (corporate and otherwise) to
own its properties and conducts its business as described in the
Prospectus; each of the Company and it's subsidiaries has been duly
incorporated and each of the Company's subsidiaries is an existing
corporation in good standing under the laws of the state of its
incorporation, with power and authority (corporate and otherwise) to
own its properties and conduct its business as described in the
Prospectus; and each of the Company's subsidiaries is duly qualified
to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or
the
21
<PAGE>
conduct of its business requires such qualification, except to the
extent that the failure to so qualify would not have a Material
Adverse Effect; all of the issued and outstanding capital stock of
each subsidiary of the Company has been duly authorized and validly
issued, and is fully paid and nonassessable and is owned (directly
or through subsidiaries) by the Company; and all of the capital
stock of the subsidiaries is owned (directly or through
subsidiaries) by the Company; and the capital stock of each
subsidiary owned (directly or through subsidiaries) by the Company
is owned free from liens, claims, encumbrances and defects;
(ii) Except for the Intercompany Agreement, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file
a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act;
(iii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation by the Company of the transactions
contemplated by this Agreement in connection with the issuance or
sale of the Offered Securities by the Company, except such as have
been obtained and made under the General Corporation Law of
Delaware, the Ohio Insurance Laws, the insurance laws of the States
of California and Michigan, the Act, the Rules and Regulations, the
by-laws of the NASD, or the Trust Indenture Act and such as may be
required under foreign securities laws or state securities laws
(including insurance securities laws);
(iv) The execution, delivery and performance of the
Indenture and this Agreement and the issuance and sale of the
Offered Securities and compliance with the terms or provisions
thereof and hereof will not result in a breach or violation of any
of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over
the Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company
or any such subsidiary is subject; and
(v) The Company and each of its subsidiaries hold all
licenses, certificates and permits from all governmental authorities
(including, without limitation, Insurance Licenses) which are
necessary to the conduct of their respective businesses, except
where the failure to hold
22
<PAGE>
such licenses, certificates or permits would not have a Material
Adverse Effect; the Company's insurance subsidiaries have fulfilled
and performed all obligations necessary to maintain their respective
Insurance Licenses, except where the failure to perform such
obligations would not have a Material Adverse Effect, and no event
or events have occurred which may be reasonably expected to result
in any impairment, modification, termination or revocation of such
Insurance Licenses which individually or the aggregate would have a
Material Adverse Effect.
(f) The Representatives shall have received from Dewey Ballantine,
counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them
to pass upon such matters. In rendering such opinion, Dewey Ballantine
may rely as to matters governed by the laws of the states in which such
counsel is not licensed to practice upon the opinions of local counsel.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice-President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company complied with all agreements and
satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by
the Commission; the Additional Registration Statement (if any) satisfying
the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing fee
in accordance with Rule 111(a) or (b) under the Act, prior to the time
the Prospectus was printed and distributed to any Underwriter; and,
subsequent to the date of the most recent financial statements in the
Prospectus, there has been no change, nor any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries which has or could reasonably be expected to have a Material
Adverse Effect, except as set forth in or contemplated by the Prospectus
or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, from KPMG Peat Marwick LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three business days
prior to such Closing Date for the purposes of this subsection.
23
<PAGE>
(i) The Offered Securities to be sold by the Company at the Closing Date
shall have been duly listed on the NYSE subject to notice of issuance and
shall have been registered under the Exchange Act.
(j) On or before the Closing Date, the Company shall have received
from the Ohio Insurance Department its consent and approval of those
transactions contemplated by the Restructuring requiring Ohio Insurance
Department approval.
(k) On or before the Closing Date, the Company shall have received
from the Staff of the Commission an exemptive order (or, with the
approval of the Representatives, which shall not be unreasonably
withheld, a no-action letter) in form and substance reasonably
satisfactory to the Representatives with respect to the non-applicability
of Section 17 of the 1940 Act and the rules and regulations promulgated
thereunder to the offering, sale and resale of the Offered Securities
contemplated by this Agreement to affiliates of the Company or to
affiliates of affiliates of the Company that are registered investment
companies. Such exemptive order (or, if applicable, no-action letter)
shall not have been withdrawn or amended in any manner by the Staff of
the Commission and shall be in full force and effect as of the Closing
Date.
The Company will furnish the Representatives with such conformed
copies of such opinions, certificates, letters and documents as the
Representatives may reasonably request. CSFBC may in its sole discretion
waive on behalf of the Underwriters compliance with any conditions to the
obligations of the Underwriters hereunder.
7. Indemnification and Contribution. (a) The Company will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case (A) to
-------- -------
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement in or omission or
alleged omission from any of such documents in reliance upon and in conformity
with written information furnished to the Company by any Underwriter through
the Representatives specifically for use therein, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the information described as such in subsection (b) below, or (B) with respect
to any preliminary prospectus to the extent that any such loss, claim, damage
or liability of such Underwriter results from the fact that such
24
<PAGE>
Underwriter sold Offered Securities to a person who was not sent, at or prior
to the written confirmation of such sale, a copy of the Prospectus and the
loss, claim, damage or liability of such Underwriter results from an untrue
statement or omission of a material fact contained in the preliminary
prospectus that was corrected in the Prospectus.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the following information in the Prospectus furnished on behalf of each
Underwriter: the last paragraph at the bottom of the cover page concerning the
terms of the offering by the Underwriters, the legend concerning over-
allotments and stabilizing on the inside front cover page and the first,
fifth, sixth, seventh, eighth, twelfth and fifteenth paragraphs and second
sentence of the eleventh paragraph under the caption "Underwriting."
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise
than under subsection (a) or (b) above. In case any such action is brought
against any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election to or assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened action in respect of
which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party unless such
25
<PAGE>
settlement includes an unconditional release of such indemnified party from
all liability on any claims that are the subject matter of such action.
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a) or (b) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering of
the Offered Securities or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering of the Offered
Securities (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters bear to
the total price to the public of the Offered Securities. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence
of this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (d).
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Offered Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions to each officer of the Company, to
each person, if any, who controls any Underwriter within the meaning of the
Act; and the obligations of the Underwriters under this Section shall be in
addition to any liability which the respective Underwriters may otherwise have
and shall extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration
26
<PAGE>
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on the Closing
Date and the aggregate principal amount of Offered Securities that such
defaulting Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total principal amount of Offered Securities that the
Underwriters are obligated to purchase on such Closing Date, CSFBC may make
arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate principal amount of
Offered Securities with respect to which such default or defaults occur
exceeds 10% of the total principal amount of Offered Securities that the
Underwriters are obligated to purchase on such Closing Date and arrangements
satisfactory to CSFBC and the Company for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter or the Company, except as provided in Section 9. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a
defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of
the Company and its officers and of the several Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation, or statement as to the results thereof, made
by or on behalf of any Underwriter, the Company or any of their respective
representatives, officers or directors or any controlling person, and will
survive delivery of and payment for the Offered Securities. If this Agreement
is terminated pursuant to Section 8 or if for any reason the purchase of the
Offered Securities by the Underwriters is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company and the Underwriters
pursuant to Section 7 shall remain in effect, and if any Offered Securities
have been purchased hereunder, the representations and warranties in Section 2
and all obligations under Section 5 shall also remain in effect. If the
purchase of the Offered Securities by the Underwriters is not consummated for
any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause
(iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements
of counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the
27
<PAGE>
Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3628, Attention: Investment Banking Department -
- Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at Nationwide Financial Services,
Inc., One Nationwide Plaza, Columbus, Ohio 43215, Attention: President (with a
copy to the General Counsel); provided, however, that any notice to an
-------- -------
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 7, and
no other person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action
under this Agreement taken by the Representatives jointly or by CSFBC will be
binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York
in any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
28
<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
NATIONWIDE FINANCIAL SERVICES, INC.
By________________________________
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
Credit Suisse First Boston Corporation
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Dean Witter Reynolds Inc.
J.P. Morgan & Co.
Salomon Brothers Inc
By Credit Suisse First Boston Corporation
By______________________________________
Name:
Title:
29
<PAGE>
SCHEDULE A
UNDERWRITER PRINCIPAL
- ----------- AMOUNT OF
OFFERED SECURITIES
------------------
Credit Suisse First Boston Corporation
Morgan Stanley & Co. Incorporation..................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.. ------------------
Dean Witter Reynolds Inc............................
J.P. Morgan & Co.................................... ------------------
Salomon Brothers Inc................................
[$]_________________
------------------
Total..................................... $300,000,000
==================
30
<PAGE>
EXHIBIT 5.1
[Letterhead of LeBoeuf, Lamb, Greene & MacRae, L.L.P.]
March 4, 1997
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, OH 43215-2220
Re: Nationwide Financial Services Inc. -- Registration
Statement on Form S-1 (File No. 333-18531)
--------------------------------------------------
Dear Ladies and Gentlemen:
We are acting as counsel for Nationwide Financial Services, Inc., a
Delaware corporation (the "Company"), in connection with the proposed issue and
sale of $300,000,000 aggregate principal amount of the Company's Senior Notes
due 2027 (the "Notes") pursuant to the above captioned Registration Statement
(the "Registration Statement").
We have examined such corporate records, certificates and other
documents as we have considered necessary for the purposes hereof. In such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals, the conformity to the original
documents of all documents submitted to us as copies and the authenticity of the
originals of such latter documents. As to any facts material to our opinion, we
have, when relevant facts were not independently established, relied upon the
aforesaid records, certificates and documents.
Based on the foregoing, we are of the opinion that, upon issuance,
delivery and payment therefor in the manner described in the Registration
Statement and in accordance with the terms of the Underwriting Agreement (filed
as Exhibit 1.1 to the Registration Statement) and the Indenture (filed as
Exhibit 4.1 to the Registration Statement), the Notes will be duly and validly
issued and will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except as may be
subject to applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, rehabilitation, liquidation, moratorium or other similar laws
affecting the rights of the creditors generally and to general principles of
equity.
<PAGE>
Nationwide Financial Services, Inc.
March 4, 1997
Page 2
Our opinion set forth herein is limited in all cases to matters
arising under the laws of the State of New York and the General Corporation Law
of the State of Delaware. We consent to the use of this opinion as an Exhibit
to the Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus that is a part of the Registration Statement.
In giving such consent, we do not thereby concede that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Commission
thereunder.
Very truly yours,
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
<PAGE>
EXHIBIT 10.1
================================================================================
FORM
INTERCOMPANY AGREEMENT
AMONG
NATIONWIDE FINANCIAL SERVICES, INC.,
NATIONWIDE MUTUAL INSURANCE COMPANY
AND
NATIONWIDE CORPORATION
Dated as of March , 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS...............................................1
SECTION 1.1 Definitions.........................................1
ARTICLE II COSTS AND EXPENSES........................................7
SECTION 2.1 Allocation of Costs and Expenses....................7
ARTICLE III CORPORATE GOVERNANCE......................................7
SECTION 3.1 Nationwide Consent to Certain Actions...............7
ARTICLE IV LICENSING AGREEMENT.......................................9
SECTION 4.1 Grant of License....................................9
SECTION 4.2 Nationwide Guidelines and Standards................10
SECTION 4.3 Nationwide Retention of Ownership..................11
SECTION 4.4 Infringement.......................................12
SECTION 4.5 License Fee........................................12
SECTION 4.6 Transactions Affecting NFS, Nationwide and the
Marks..............................................13
SECTION 4.7 Trademark, Trade Name, and/or Service Mark Usage
Marking Requirements and Quality Control...........13
SECTION 4.8 Term and Termination of License....................14
SECTION 4.9 Effect of Termination; Further Assurances;
Attorney-in Fact...................................14
ARTICLE V EQUITY PURCHASE RIGHTS...................................15
SECTION 5.1 Equity Purchase Rights.............................15
ARTICLE VI FINANCIAL AND OTHER INFORMATION..........................17
SECTION 6.1 Twenty Percent Threshold...........................17
SECTION 6.2 Nationwide Annual Statements.......................21
SECTION 6.3 Forty Percent Threshold............................22
SECTION 6.4 Fifty Percent Threshold............................22
SECTION 6.5 Ten Percent Threshold..............................23
SECTION 6.6. Confidentiality....................................24
ARTICLE VII REGISTRATION RIGHTS......................................24
SECTION 7.1 Piggyback Registrations............................24
SECTION 7.2 Requested Registrations............................25
SECTION 7.3 Registration Procedures............................27
SECTION 7.4 Restriction on Disposition of Registrable Shares...30
SECTION 7.5 Selection of Underwriters..........................31
SECTION 7.6 Registration Expenses..............................31
SECTION 7.7 Conversion of Other Securities.....................31
SECTION 7.8 Rule 144...........................................31
SECTION 7.9 Transfer of Registration Rights....................32
i
<PAGE>
ARTICLE VIII INDEMNIFICATION..........................................32
SECTION 8.1 Cross Indemnification..............................32
SECTION 8.2 Registration Statement Indemnification.............33
SECTION 8.3 Contribution.......................................34
SECTION 8.4 Procedure..........................................35
SECTION 8.5 Other Matters......................................36
ARTICLE IX DISPUTE RESOLUTION.......................................36
SECTION 9.1 Negotiation........................................36
SECTION 9.2 Arbitration........................................36
ARTICLE X NATIONWIDE EXCLUSIVE MARKETING FORCE.....................38
SECTION 10.1 Use of Nationwide Exclusive Marketing Force........38
SECTION 10.2 Effect of Termination; Further Assurances;
Attorney-in-Fact...................................38
ARTICLE XI REPRESENTATIONS AND WARRANTIES...........................39
SECTION 11.1 Representations and Warranties of Nationwide and
NWC................................................39
SECTION 11.2 Representations and Warranties of NFS..............40
ARTICLE XII MISCELLANEOUS............................................41
SECTION 12.1 Notices............................................41
SECTION 12.2 Binding Nature of Agreement........................42
SECTION 12.3 Interpretation.....................................42
SECTION 12.4 Remedies...........................................42
SECTION 12.5 Governing Law......................................43
SECTION 12.6 Counterparts.......................................43
SECTION 12.7 Severability.......................................43
SECTION 12.8 Amendments and Waivers.............................43
SECTION 12.9 Entire Agreement...................................43
SECTION 12.10 No Assignment......................................43
SECTION 12.11 Further Assurances.................................43
SECTION 12.12 No Third Party Beneficiaries.......................43
EXHIBITS
EXHIBIT A Trademarks
EXHIBIT B Form of Designated Subsidiary Agreement
EXHIBIT C Guidelines with Respect to the Marks
ii
<PAGE>
INTERCOMPANY AGREEMENT, dated as of March , 1997 ("this Agreement"),
among NATIONWIDE FINANCIAL SERVICES, INC., a Delaware corporation ("NFS"),
NATIONWIDE MUTUAL INSURANCE COMPANY, an Ohio mutual company ("Nationwide"), and
NATIONWIDE CORPORATION, an Ohio corporation ("NWC").
WITNESSETH:
WHEREAS, Nationwide owns substantially all of the outstanding common
stock of NWC and, as of the date hereof, NWC owns all of the outstanding Class
B Common Stock, par value $0.01 per share (the "Class B Common Stock"), of NFS,
constituting all of the outstanding capital stock of NFS;
WHEREAS, NFS is issuing shares of Class A Common Stock, par value $0.01
per share (the "Class A Common Stock"), to the public in an offering (the
"Initial Public Offering") registered under the Securities Act of 1933, as
amended (the "Securities Act");
WHEREAS, as a result of the Initial Public Offering, NFS will cease to be
a wholly owned subsidiary of NWC; and
WHEREAS, in contemplation of the Initial Public Offering, NFS, NWC and
Nationwide desire to enter into this Agreement to set forth the terms of
certain agreements among them.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. For all purposes of this Agreement,
-----------
the following definitions shall apply unless the context otherwise requires:
"Actions" has the meaning set forth in Section 8.1.
-------
"Average Market Price" of any security on any date means the average
--------------------
of the daily closing prices for the 20 consecutive trading days before the day
in question. The closing price for each trading day shall be the last reported
sales price or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices, in either case on the New
York Stock Exchange, Inc. or, if such security is not listed or admitted to
trading on such exchange, on the principal national securities exchange on
which such security is listed or
<PAGE>
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the Nasdaq Stock Market's National Market or, if such
security is not listed or admitted to trading on any national securities
exchange or quoted on such National Market, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm selected from time to time by NFS for that purpose. For
the purpose of this definition, the term "trading day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which securities
are not traded on such exchange or in such market because such exchange or
market is closed.
"Business Day" means any day that is not a Saturday or a Sunday or a
------------
day on which banking institutions in New York City are authorized or obligated
by law or executive order to close.
"Capital Expenditure" means, with respect to any Person, any expense
-------------------
or liability incurred or expenditure made which, in accordance with GAAP, is
required to be capitalized on such Person's balance sheet.
"Class A Common Stock" has the meaning set forth in the recitals of
--------------------
this Agreement.
"Class B Common Stock" has the meaning set forth in the recitals of
--------------------
this Agreement.
"Closing Date" means the date of the closing of the initial sale of
------------
Class A Common Stock in the Initial Public Offering.
"Common Stock" means, collectively, the Class A Common Stock and
------------
Class B Common Stock and any other class or series of common stock of NFS
hereafter created.
"Demand Registration" has the meaning set forth in Section 7.2(a).
-------------------
"Designated Businesses" means (i) the subsidiaries of Nationwide Life
---------------------
whose capital stock was dividended to NWC as part of the Transactions and (ii)
the business reinsured pursuant to the modified coinsurance agreements
effective as of January 1, 1996 between Nationwide Life and certain other
members of the Nationwide Affiliated Group.
"Designated Subsidiary" has the meaning set forth in Section 4.1.
---------------------
"Designated Subsidiary Agreement" has the meaning set forth in
-------------------------------
Section 4.1.
- 2 -
<PAGE>
"Dispute" has the meaning set forth in Section 9.1.
-------
"Equity Purchase Rights" has the meaning set forth in Section 5.1.
----------------------
"Equity Purchase Share Amount" has the meaning set forth in Section
----------------------------
5.1.
"Equity Purchase Shares" means shares of Voting Stock or any
----------------------
securities convertible into or exchangeable for shares of Voting Stock or any
options, warrants or rights to acquire shares of Voting Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Fixed Income Offerings" has the meaning ascribed thereto in the IPO
----------------------
Registration Statement.
"GAAP" means United States generally accepted accounting principles.
----
"Indebtedness" means, with respect to any Person, any liability of
------------
such Person in respect of borrowed money evidenced by bonds, notes, debentures
or similar instruments and shall also include (i) any liability of such Person
under any agreement related to the fixing of interest rates on any
Indebtedness, (ii) any capitalized lease obligations of such Person (if and to
the extent the same would appear on a balance sheet of such Person prepared in
accordance with GAAP), (iii) reimbursement obligations of such Person in
respect of letters of credit (regardless of whether such items would appear on
a balance sheet of such Person) and (iv) guarantees by such Person with respect
to the items described in clauses (i), (ii) and (iii) above (regardless of
whether such guarantees would appear on a balance sheet of such Person).
"Indemnitee" has the meaning set forth in Section 8.4.
----------
"Initial Public Offering" has the meaning set forth in the recitals
-----------------------
of this Agreement.
"Inspectors" has the meaning set forth in Section 7.3(g).
----------
"Interested Director" means any member of the Board of Directors of
-------------------
NFS who also is an officer or director of any member of the Nationwide
Affiliated Group.
"IPO Registration Statement" means the registration statement of NFS
--------------------------
filed with the SEC under the Securities Act relating to the Initial Public
Offering.
- 3 -
<PAGE>
"License" has the meaning set forth in Section 4.1.
-------
"License Fee" has the meaning set forth in Section 4.5.
-----------
"Losses" has the meaning set forth in Section 8.1.
------
"Marks" has the meaning set forth in Section 4.1.
-----
"Nationwide" has the meaning set forth in the first paragraph of this
----------
Agreement.
"Nationwide Affiliated Group" means, collectively, Nationwide and all
---------------------------
of its direct and indirect subsidiaries and affiliates now or hereafter
existing, other than NFS and its Subsidiaries.
"Nationwide Annual Financial Statements" has the meaning set forth in
--------------------------------------
Section 6.2.
"Nationwide Auditors" has the meaning set forth in Section 6.2(a).
-------------------
"Nationwide Life" means Nationwide Life Insurance Company, an Ohio
---------------
insurance company.
"Nationwide Exclusive Marketing Force" means insurance agents under
------------------------------------
contract with the Nationwide Affiliated Group to sell commercial, personal
lines and life insurance and annuity products issued by the Nationwide
Affiliated Group; provided, however, that the term Nationwide Exclusive
-------- -------
Marketing Force shall not include the marketing forces established exclusively
for and which solely represent non-insurance company Subsidiaries of NFS.
"NFS" has the meaning set forth in the first paragraph of this
---
Agreement.
"NFS Auditors" has the meaning set forth in Section 6.2(a).
------------
"NFS Information" has the meaning set forth in Section 6.1(k).
---------------
"NFS Public Documents" has the meaning set forth in Section 6.1(h).
--------------------
"NWC" has the meaning set forth in the first paragraph of this
---
Agreement.
"Outstanding Voting Stock" means the shares of Voting Stock issued
------------------------
and outstanding, but shall not include shares of Voting Stock held by NFS as
treasury stock or by any Subsidiary of NFS.
- 4 -
<PAGE>
"Person" means any individual, corporation, partnership, joint
------
venture, limited liability company, association or other business entity and
any trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Piggyback Registration" has the meaning set forth in Section 7.1(a).
----------------------
"Public Company Stock" means any class or series of Voting Stock
--------------------
registered under the Exchange Act.
"Public Filings" has the meaning set forth in Section 6.1(l).
--------------
"Prospectus" means the prospectus or prospectuses included in any
----------
Registration Statement, as amended or supplemented by any prospectus supplement
and by all other amendments and supplements to such prospectus, including
post-effective amendments and all material incorporated by reference in such
prospectus or prospectuses.
"Records" has the meaning set forth in Section 7.3(g).
-------
"Registrable Shares" means any shares of Class A Common Stock held by
------------------
any member of the Nationwide Affiliated Group or by any Transferee thereof.
"Registration Indemnitee" has the meaning set forth in Section
-----------------------
8.2(a).
"Registration Statement" means any registration statement of NFS
----------------------
filed with the SEC under the Securities Act, including, but not limited to, the
registration statements relating to the Initial Public Offering and the Fixed
Income Offerings and any registration statement that relates to any of the
Registrable Shares, including in each such case the Prospectus relating
thereto, amendments and supplements to such Registration Statement, including
post-effective amendments, all exhibits and all materials incorporated by
reference in such Registration Statement and Prospectus.
"Regulation S-K" means Regulation S-K of the General Rules and
--------------
Regulations under the Securities Act.
"Regulation S-X" means Regulation S-X of the General Rules and
--------------
Regulations under the Securities Act.
"Rules" has the meaning set forth in Section 9.2(a).
-----
"Scope of the License" has the meaning set forth in Section 4.1.
--------------------
- 5 -
<PAGE>
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" has the meaning set forth in the recitals of this
--------------
Agreement.
"Subsidiary" or "Subsidiaries" of NFS means and includes all
------------
corporations, partnerships, joint ventures, limited liability companies,
associations and other Persons: (i) in which NFS owns (directly or indirectly)
50 percent or more of the outstanding voting stock, voting power, partnership
interests or similar ownership interests; (ii) of which NFS otherwise possesses
(directly or indirectly) the power to direct or cause the direction of the
management and policies; or (iii) that would be considered "subsidiaries" of
NFS within the meaning of Regulation S-K or Regulation S-X.
"Termination Date" has the meaning set forth in Section 10.1.
----------------
"this Agreement" has the meaning set forth in the first paragraph of
--------------
this Agreement.
"Transactions" means, collectively, (i) the dividend by Nationwide
------------
Life to NWC of all of the outstanding capital stock of the subsidiaries of
Nationwide Life that do not offer or distribute long-term savings and
retirement products; (ii) the dividend of $50 million by Nationwide Life to
NWC; (iii) the reinsurance of Nationwide Life's accident and health and group
life insurance business by certain other members of the Nationwide Affiliated
Group; (iv) the dividend of $850 million by Nationwide Life to NFS and the
dividend of an equal amount by NFS to NWC; (v) the contribution by NWC to
Nationwide Life of those companies that offer or distribute long-term savings
and retirement products; (vi) the split and reclassification of the Common
Stock held by NWC prior to the Initial Public Offering; (vii) the Initial
Public Offering; and (viii) the Fixed Income Offerings.
"Transferee" has the meaning set forth in Section 7.9(a).
----------
"Trigger Date" means the date on which the members of the Nationwide
------------
Affiliated Group cease to own, in the aggregate, at least 50 percent of the
voting power of the Outstanding Voting Stock.
"Underwritten Registration" or "Underwritten Offering" means a
---------------------
registration in which securities of NFS are sold to underwriters for reoffering
to the public.
"Voting Stock" means all securities issued by NFS having the ordinary
------------
power to vote in the election of directors of NFS, other
- 6 -
<PAGE>
than securities having such power only upon the occurrence of a default or any
other extraordinary contingency.
"Wholly Owned Subsidiary" of NFS means and includes all Subsidiaries
-----------------------
of NFS in which NFS owns (directly or indirectly) all of the outstanding voting
stock, voting power, partnership interests or similar ownership interests,
except for director's qualifying shares in nominal amounts.
ARTICLE II
COSTS AND EXPENSES
SECTION 2.1 Allocation of Costs and Expenses. NFS shall pay
--------------------------------
(or, to the extent incurred by and paid for by any member of the Nationwide
Affiliated Group, shall reimburse as promptly as practicable such member of the
Nationwide Affiliated Group for any and all amounts so paid) for all fees,
costs and expenses incurred by NFS or any member of the Nationwide Affiliated
Group in connection with the Transactions, including, but not limited to, any
and all fees, costs and expenses related to: (i) the preparation and
negotiation of this Agreement and of all of the documentation related to the
Transactions and all related transactions; (ii) the preparation and execution
or filing of any and all further documents, agreements, forms, applications,
contracts or consents associated with the Transactions and all related
transactions; (iii) NFS's formation; (iv) the preparation, printing and filing
of the Registration Statements relating to the Initial Public Offering and the
Fixed Income Offerings, including all fees and expenses of complying with
applicable federal, state or foreign securities laws and domestic or foreign
securities exchange rules and regulations together with fees and expenses of
counsel retained to effect such compliance; (v) the preparation, printing and
distribution of the Prospectuses for the Initial Public Offering and the Fixed
Income Offerings; and (vi) the listing of the Class A Common Stock and any
other securities of NFS on any domestic or foreign securities exchange;
provided, however, that in no event shall NFS pay, reimburse or
- -------- -------
otherwise have any responsibility or liability for any amount for which
Nationwide is liable pursuant to Section 8.1(a).
ARTICLE III
CORPORATE GOVERNANCE
SECTION 3.1 Nationwide Consent to Certain Actions. Until the
-------------------------------------
Trigger Date, NFS will not permit any of the following to occur without the
prior written consent of Nationwide:
- 7 -
<PAGE>
(i) any consolidation or merger of NFS with or into any Person or
of any Person with or into NFS (other than a merger or consolidation of
NFS with or into a Wholly Owned Subsidiary of NFS);
(ii) any consolidation or merger of any Subsidiary of NFS with or
into any Person or of any Person with or into any Subsidiary of NFS
(other than a merger or consolidation of a Subsidiary of NFS with or into
NFS or a Wholly Owned Subsidiary of NFS);
(iii) any sale, lease, exchange or other disposition or any
acquisition (by way of merger or consolidation, acquisition of stock,
other securities or assets, or otherwise), in each case by NFS or any
Subsidiary of NFS, directly or indirectly in a single transaction, or
series of related transactions valued in the aggregate, involving
consideration in excess of $250 million (other than acquisitions,
dispositions and transfers of securities pursuant to portfolio investment
decisions in the ordinary course of business and transactions to which
NFS and one or more Wholly Owned Subsidiaries of NFS are the only
parties);
(iv) any increase or decrease in the authorized capital stock of
NFS or the creation of any class or series of capital stock of NFS;
(v) any issuance by NFS or any Subsidiary of NFS of any shares of
its respective capital stock or any options, warrants or rights to
acquire such capital stock or securities convertible into or exchangeable
for capital stock, except (A) up to 2.6 million shares of Class A Common
Stock issuable pursuant to employee and director stock option, profit
sharing and other benefit plans and any options exercisable therefor, (B)
shares of Class A Common Stock issued upon the conversion of any Class B
Common Stock, (C) the issuance of shares of capital stock of a Wholly
Owned Subsidiary of NFS to NFS or another Wholly Owned Subsidiary of NFS
and (D) in the Initial Public Offering;
(vi) the dissolution, liquidation or winding up of NFS;
(vii) any alteration, amendment or repeal of, or adoption of any
provision inconsistent with, Articles FIFTH, NINTH, TENTH and ELEVENTH of
the Restated Certificate of Incorporation of NFS or of Article II,
Section 11 of the Restated Bylaws of NFS;
- 8 -
<PAGE>
(viii) the election, removal or filling of a vacancy in the office
serving in the capacity of the Chairman, Chief Executive Officer or
President of NFS;
(ix) the declaration of dividends on any class or series of the
capital stock of NFS except for cash dividends on the Common Stock in an
amount not to exceed the greater of (x) the most recent regular cash
dividend on the Common Stock and (y) 15 percent of the product of (1) the
last reported sale price of the Class A Common Stock on the principal
national securities exchange on which the Class A Common Stock is listed
on the day preceding the day such dividend is declared and (2) the number
of outstanding shares of Class A Common Stock;
(x) any Capital Expenditure or series of related Capital
Expenditures of NFS or any Subsidiary of NFS in excess of $250 million
during any period of 12 consecutive months;
(xi) the creation or incurrence by NFS or any Subsidiary of NFS,
in a single transaction or a series of related transactions, of
Indebtedness in excess of $100 million, except as contemplated by the
Fixed Income Offerings; or
(xii) any change in the number of directors on the Board of
Directors of NFS, the establishment of any committee of the Board of
Directors of NFS, the determination of the members of the Board of
Directors of NFS or any committee thereof, the removal of members of the
Board of Directors of NFS or any committee thereof, and the filling of
newly created memberships and vacancies on the Board of Directors of NFS
or any committees thereof, except in all cases as described in the IPO
Registration Statement.
ARTICLE IV
LICENSING AGREEMENT
SECTION 4.1 Grant of License. Nationwide hereby grants to NFS
----------------
a non-exclusive and non-transferable license (which is revocable under the
circumstances set forth below) (the "License") to use the name "Nationwide" and
the trademarks, trade names and service marks specified in Exhibit A
---------
hereto, as such Exhibit A may be amended from time to time in accordance
---------
with Section 4.3(b)(such trademarks, trade names and service marks hereinafter
collectively referred to as the "Marks"), but only in the manner identified in
Exhibit A hereto, including the attachments thereto, or Exhibit C or
- --------- ---------
otherwise approved in
- 9 -
<PAGE>
advance in writing by Nationwide, in each case, solely for the purpose of
identifying and advertising NFS's insurance and long-term savings and
retirement business and activities related to such business in the United
States and Canada, subject to any and all legal requirements and legal or
policy limitations on such licensing that may arise from time to time in any
jurisdiction (the "Scope of the License"). Notwithstanding the foregoing, NFS
shall only use the Marks in connection with operations, services and products
of a quality specified and approved by Nationwide in accordance with Section
4.7 hereof. NFS shall have no right to transfer, assign or sublicense its
rights with regard to the License or authorize any person to use the Marks
without Nationwide's prior written consent and any such purported transfer,
assignment or sublicense without Nationwide's prior written consent shall be
null and void; provided, however, that any Wholly Owned Subsidiary of
-------- -------
NFS that is specifically approved in advance in writing by Nationwide (a
"Designated Subsidiary") and which enters into an agreement with Nationwide (a
"Designated Subsidiary Agreement") substantially in the form of Exhibit B
---------
hereto may use the Marks in accordance with the terms of such Designated
Subsidiary Agreement and in the forms and manner and in connection with such
operations, services and products of such Designated Subsidiary as shall be
identified and approved in advance in writing by Nationwide in accordance with
the provisions of this Article IV.
Notwithstanding the foregoing, in the event that a Designated Subsidiary
Agreement is terminated, the Scope of the License shall automatically be deemed
amended (without any action by the parties hereto or thereto) to no longer
license hereunder the Marks for use by such Designated Subsidiary, and such
Designated Subsidiary shall, and NFS shall cause such Designated Subsidiary to,
cease as promptly as reasonably and commercially practicable, but no later than
10 days following such termination, all use of the Marks in connection with all
of such Designated Subsidiary's operations, products and services and all
rights of such Designated Subsidiary with respect to the Marks shall revert
automatically to Nationwide.
NFS and each Designated Subsidiary shall execute all additional documents
that Nationwide may reasonably request, both prior and subsequent to the
expiration or earlier termination of the License, in order to perfect,
maintain, defend or terminate any right of any party in the Marks in any
country of the world, as determined by Nationwide in its sole discretion.
SECTION 4.2 Nationwide Guidelines and Standards. NFS agrees
-----------------------------------
that all advertising, promotion and use of the Marks by NFS and the Designated
Subsidiaries shall in all material respects be consistent with such guidelines
and standards of Nationwide as may be issued from time to time and disclosed to
- 10 -
<PAGE>
NFS pursuant to the last sentence of this Section 4.2, it being agreed that NFS
will use its best efforts to comply as promptly as practicable with any changed
guidelines. NFS agrees that, in the conduct of the business and activities of
NFS and the Designated Subsidiaries under the Marks, it shall, and shall cause
each Designated Subsidiary to, adhere to the appropriate ethical, legal and
business standards and the standards of Nationwide pertaining to NFS's and the
Designated Subsidiaries' businesses and operations, and NFS shall, and shall
cause each Designated Subsidiary to, knowingly do nothing to bring disrepute to
or in any manner damage the goodwill symbolized by the Marks and shall make
available to Nationwide any requested information necessary for Nationwide to
evaluate any such effect on said goodwill. Attached hereto as Exhibit C is
---------
a copy of Nationwide's current guidelines with respect to the advertising,
promotion and use of the Marks as in effect on the date hereof. Nationwide
will promptly provide to NFS a copy of all amendments and replacement of such
guidelines.
SECTION 4.3 Nationwide Retention of Ownership. (a) NFS
---------------------------------
acknowledges and agrees that Nationwide is the effective owner of all of the
right, title and interest in the Marks and all goodwill associated therewith
and acknowledges the validity of all trademark and service mark registrations
of the Nationwide pertaining thereto. NFS agrees that it shall, and shall
cause each of its officers, directors and Subsidiaries to, uphold the goodwill
inherent in the Marks and to assist the Nationwide in any way reasonably
possible to protect the rights of the Nationwide therein. All use of the Marks
by NFS and the Designated Subsidiaries (including all past, present and future
use), and the goodwill generated thereby, shall inure to the benefit of the
Nationwide and shall not vest in NFS or in any Designated Subsidiary, and, for
purposes of trademark registration, all use of the Marks by NFS and the
Designated Subsidiaries shall be deemed to have been made for the benefit of
the Nationwide. NFS and the Designated Subsidiaries shall not, without the
written consent of Nationwide, file or prosecute any trademark, trade name
and/or service mark application to the Marks or any trademarks or service marks
confusingly similar thereto.
(b) Additional trademarks, trade names and service marks may be added
to Exhibit A hereto if (i) NFS makes a written request therefor to such
---------
effect, which request shall specify in reasonable detail a description or
drawing of such trademarks, trade names or service marks and a description of
the manner in which such trademarks, trade name or service marks are to be
used, (ii) NFS shall have provided to Nationwide all additional information
reasonably requested by Nationwide with respect thereto within 10 Business Days
after such request, and (iii) within 30 Business Days after its receipt of the
written request
- 11 -
<PAGE>
referred to in clause (i) above, Nationwide shall have consented in writing to
the inclusion of such trademark, trade name or service mark on Exhibit A
---------
hereto. If the conditions set forth in clauses (i), (ii) and (iii) above are
satisfied, Exhibit A shall be deemed to have been amended to include such
---------
trademark, trade name or service marks (and such trademark, trade name or
service marks shall become part of the Marks) and promptly thereafter the
parties shall execute and deliver to each other a written instrument
acknowledging such amendment and attaching Exhibit A, as so amended,
---------
thereto. NFS acknowledges that the Nationwide shall be the exclusive owners of
all of the right, title and interest in all the marks that become part of the
Marks subsequent to the date hereof. The addition of Marks to Exhibit A
---------
hereto shall not affect the Scope of the License or any other term thereof.
SECTION 4.4 Infringement. NFS acknowledges that it is of the
------------
utmost importance to protect the Marks against unfair competition,
disparagement, infringement and/or dilution. NFS shall as promptly as
practicable notify Nationwide in writing of any infringement of the Marks or of
any act of unfair competition, disparagement or dilution by third parties
relating to the Marks, whenever such infringement or act shall come to NFS's
attention. Nationwide shall have the primary responsibility promptly to
initiate and pursue appropriate actions which, in the reasonable judgment of
Nationwide, are necessary to protect Nationwide's rights to the Marks against
such infringements or acts; provided, however, that if, in the
-------- -------
reasonable judgment of NFS, Nationwide has not within 60 days after written
notification by NFS of such infringement or act, initiated and pursued
appropriate actions necessary to protect Nationwide's rights against such
infringement or act, or unfair competition, disparagement and/or dilution, NFS
may commence a suit or other action in its name that is necessary to protect
the Marks with regard thereto. Nationwide and NFS shall cooperate with each
other to the fullest extent necessary to maintain and/or implement the actions
taken by the other under this Section 4.4, including, without limitation, being
joined as a necessary co-plaintiff in an action brought hereunder. In any such
action where the parties hereto are co-plaintiffs, any recoveries, damages and
costs (including attorneys' fees) or proceeds of a settlement resulting from
such action shall be equitably apportioned between Nationwide and NFS.
SECTION 4.5 License Fee. From the date hereof until the
-----------
License terminates, NFS shall pay Nationwide a fee of $10,000 per annum (the
"License Fee"). The License Fee with respect to the first 12-month period
shall be payable in advance on the Closing Date and the License Fee with
respect to each 12-month period thereafter shall be payable in advance on each
successive anniversary of the Closing Date; provided, however, that if
-------- -------
any
- 12 -
<PAGE>
such anniversary falls on a day that is not a Business Day, the License Fee
shall be paid on the next succeeding Business Day. In the event the License is
terminated prior to the end of any such 12-month period, Nationwide shall not
have any obligation to refund to NFS any portion of the License Fee relating to
such 12-month period.
SECTION 4.6 Transactions Affecting NFS, Nationwide and the
-----------------------------------------------
Marks. NFS shall not, and shall cause each of its Subsidiaries not to, take
- -----
any action with respect to the following matters without informing Nationwide
in advance in writing of all material facts relating thereto and without
obtaining Nationwide's prior written consent thereto:
(a) the commencement, settlement, defense of, consent to a judgment or
decree or other activity with respect to any suit, action or proceeding before
any federal, state, local or foreign court, agency, authority, instrumentality,
arbitration panel or other governmental body or authority involving the Marks,
except as otherwise provided in Section 4.4;
(b) any changes in NFS's or its Subsidiaries' names, logos, signs,
trademarks or other identifications that might reasonably be expected to affect
the appearance of, the reputation of or the goodwill associated with the Marks
or any member of the Nationwide Affiliated Group; or
(c) any television, radio, newspaper, magazine or other advertising
campaign or strategy using the Marks or referring, directly or indirectly, to
any member of the Nationwide Affiliated Group.
SECTION 4.7 Trademark, Trade Name, and/or Service Mark Usage Marking
---------------------------------------------------------
Requirements and Quality Control. (a) NFS shall, and shall cause the
- --------------------------------
Designated Subsidiaries to, apply the appropriate statutory notice (i.e.,
----
the letter "R" in a circle, unless the mark is unregistered, in which case,
"TM" or "SM", as appropriate) or such other notice as may be required by
foreign jurisdictions in connection with the use of the Marks and will, to the
extent reasonably practicable, disclose that use of the Marks is pursuant to
the License granted herein by the Nationwide.
(b) The quality standards applied to the products and services bearing
the Marks, or offered in connection with the Marks, shall be as specified by
Nationwide from time to time in writing. Notwithstanding any other provision
in this Article IV, all operations, products and services offered in connection
with the Marks by NFS and any Designated Subsidiary shall conform in all
material respects to such quality standards. To assure that the applicable
quality standards are maintained, Nationwide shall
- 13 -
<PAGE>
have the right to periodically inspect and evaluate the use of the Marks;
provided that such inspections and evaluations shall be conducted (i)
- --------
during regular business hours and (ii) in such manner as will not interfere
with the conduct of business by NFS or any Designated Subsidiary, as the case
may be, in the ordinary course. Upon request, NFS shall deliver to Nationwide
samples of such use of the Marks by NFS and the Designated Subsidiaries. If
Nationwide disapproves of the quality of such samples, NFS and/or the
Designated Subsidiaries shall have 30 days to cure the deficiency and neither
NFS nor the Designated Subsidiaries may use the Marks in such manner unless and
until such deficiency is cured to Nationwide's reasonable satisfaction.
SECTION 4.8 Term and Termination of License. (a) The License
-------------------------------
granted pursuant to this Article IV shall commence on the Closing Date and,
subject to termination in accordance with paragraph (b) or (c) of this Section
4.8, shall continue in full force and effect for a term of 10 years and
thereafter shall automatically be renewed without any required action or
consent of Nationwide or any other person for successive 10-year terms.
(b) The License shall terminate, subject to earlier termination in
accordance with Section 4.8(c), upon the earlier to occur of (i) the date on
which NFS gives written notice to the Nationwide of the complete termination of
the use of the Marks by NFS and the Designated Subsidiaries or (ii) the date
that is 365 days from the date on which Nationwide gives written notice to NFS
that it has elected to terminate the License; provided, however, that
-------- -------
Nationwide may not give NFS any such notice until the later to occur of (A) the
first anniversary of the Trigger Date or (B) the fourth anniversary of the
Closing Date.
(c) Nationwide shall have the right to terminate the License upon
written notice to NFS at any time if Nationwide notifies NFS in writing that,
in the reasonable judgment of Nationwide, NFS or any Designated Subsidiary has
failed to comply with any term or provision of this Article IV or of such
Designated Subsidiary's Designated Subsidiary Agreement, as the case may be,
and in either case such noncompliance is not cured to the reasonable
satisfaction of Nationwide within 30 days after NFS's receipt of such notice.
SECTION 4.9 Effect of Termination; Further Assurances;
-------------------------------------------
Attorney-in Fact. (a) Upon the termination of the License: (i) all rights
- ----------------
of NFS and the Designated Subsidiaries with respect to the Marks shall revert
automatically to the Nationwide and NFS shall, and shall cause each of the
Designated Subsidiaries to, discontinue all uses of the Marks within 30 days
after such termination; (ii) to the extent requested by Nationwide, NFS shall,
and shall cause each Designated Subsidiary to, as promptly as reasonably
practicable but not later than 30
- 14 -
<PAGE>
days, at its own expense take all legal and administrative steps that may be
required to protect the Nationwide's ownership of and goodwill symbolized by
the Marks; and (iii) NFS shall, and shall cause each of its Designated
Subsidiaries to, amend its respective charter or other organizational documents
to change each such Person's name to one that does not include the word
"Nationwide" or any Mark or any variant or derivative thereof subject to any
required regulatory approval, which NFS will use its best efforts to obtain or
cause to be obtained.
(b) NFS hereby appoints Nationwide as its agent and attorney-in-fact to
execute on its behalf and in its name any documents that Nationwide, in its
good faith reasonable judgment, deems necessary in order to terminate any
rights of NFS or the Designated Subsidiaries in respect of the Marks, however
created, anywhere in the world under or pursuant to this Agreement. This
provision shall not relieve NFS of its obligation to, as promptly as reasonably
practicable, execute any such documents upon the request of Nationwide.
ARTICLE V
EQUITY PURCHASE RIGHTS
SECTION 5.1 Equity Purchase Rights. Until the Trigger Date,
----------------------
NWC shall have the equity purchase rights set forth in this Section 5.1 (the
"Equity Purchase Rights"); provided, however, that NWC shall not be
-------- -------
entitled to Equity Purchase Rights to the extent that the principal national
securities exchange in the United States on which the Common Stock is listed or
traded, if any, prohibits or limits the granting by NFS of such Equity Purchase
Rights.
As soon as practicable after determining to issue Equity Purchase Shares,
but in any event at least five Business Days prior to the issuance of Equity
Purchase Shares to any Person other than to a member of the Nationwide
Affiliated Group (other than Equity Purchase Shares (i) the issuance of which
was consented to by Nationwide pursuant to Section 3.1 hereof, unless such
consent specifically references and is conditioned on the exercise by
Nationwide of Equity Purchase Rights, (ii) if NFS then has outstanding Public
Company Stock, issued under dividend reinvestment plans that offer Voting Stock
to security holders at a discount from Average Market Price no greater than is
then customary for public corporations, (iii) issued pursuant to the
Transactions, or (iv) issued in mergers, acquisitions and exchange offers), NFS
shall notify NWC in writing of such proposed sale (which notice shall specify,
to the extent practicable, the purchase price for, and terms and conditions of,
such Equity Purchase Shares) and shall offer to sell to NWC
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<PAGE>
(which offer may be assigned by NWC to another member of the Nationwide
Affiliated Group) at the purchase price (net of underwriting discounts or
commissions, if any), if any, to be paid by the transferee(s) of such Equity
Purchase Shares an amount of Equity Purchase Shares determined as provided
below. Immediately after the amount of Equity Purchase Shares to be sold to
Persons other than to NWC (or such assignee) is known to NFS, NFS shall notify
NWC (or such assignee) of such amount. If such offer is accepted in writing
within five Business Days after the notice of such proposed sale (or such
longer period as is necessary for NWC (or such assignee) to obtain any required
regulatory consents or approvals), NFS shall sell to NWC (or such assignee) an
amount of Equity Purchase Shares (the "Equity Purchase Share Amount") equal to
the product of (x) the quotient of (1) the aggregate number of shares of Voting
Stock owned by the members of the Nationwide Affiliated Group immediately prior
to the issuance of the Equity Purchase Shares by (2) the aggregate number of
shares of Outstanding Voting Stock owned by Persons other than the members of
the Nationwide Affiliated Group immediately prior to the issuance of the Equity
Purchase Shares, multiplied by (y) the aggregate number of Equity Purchase
Shares being issued by NFS to Persons other than the members of the Nationwide
Affiliated Group rounded up to the nearest whole Equity Purchase Share. If, at
the time of the determination of any Equity Purchase Share Amount, any other
Person has preemptive or other equity purchase rights similar to the Equity
Purchase Rights, such Equity Purchase Share Amount shall be recalculated to
take into account the amount of Voting Stock to be sold to such Persons,
rounding up such Equity Purchase Share Amount to the nearest whole Equity
Purchase Share.
The purchase and sale of any Equity Purchase shares pursuant to this
Section 5.1 shall take place at 9:00 a.m. on the latest of (i) the fifth
Business Day following the acceptance of such offer, (ii) the Business Day on
which such Equity Purchase Shares are issued to Persons other than NWC (or such
assignee) and (iii) the fifth Business Day following the expiration of any
required regulatory waiting periods or the obtaining of any required regulatory
consents or approvals, at the offices of Nationwide. At the time of purchase,
NFS shall deliver to NWC (or such assignee) certificates registered in the name
of NWC (or such assignee). The purchase price shall be in United States
dollars by bank check or wire transfer of immediately available funds, as
specified by NWC (or such assignee), not less than one Business Day prior to
the date of purchase. NFS and NWC (or such assignee) will use their best
efforts to comply as soon as practicable with all federal and state laws and
regulations and stock exchange listing requirements applicable to any purchase
and sale of securities under this Section 5.1.
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<PAGE>
ARTICLE VI
FINANCIAL AND OTHER INFORMATION
SECTION 6.1 Twenty Percent Threshold. NFS agrees that, during
------------------------
any period in which the members of the Nationwide Affiliated Group, own, in the
aggregate, at least 20 percent of the voting power of the Outstanding Voting
Stock, or during any period in which any member of the Nationwide Affiliated
Group is required to account for its investment in NFS on a consolidated basis
or under the equity method of accounting (determined in accordance with GAAP
consistently applied after consultation with the Nationwide Auditors):
(a) Maintenance of Books and Records. NFS shall, and shall cause
--------------------------------
each of its consolidated Subsidiaries to (i) make and keep books, records and
accounts, which, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of NFS and such Subsidiaries and
(ii) devise and maintain a system of internal accounting controls sufficient to
provide reasonable assurances that: (A) transactions are executed in
accordance with management's general or specific authorization, (B)
transactions are recorded as necessary (1) to permit preparation of financial
statements in conformity with GAAP and for each insurance company, in
conformity with accounting practices prescribed or permitted by the department
of insurance of the insurance company's state of domicile, and (2) to maintain
accountability for assets and (C) access to assets is permitted only in
accordance with management's general or specific authorization.
(b) Fiscal Year. NFS shall, and shall cause each of its
-----------
consolidated Subsidiaries to, maintain a fiscal year that commences on January
1 and ends on December 31 of each calendar year; provided, however,
-------- -------
that, if on the date hereof any consolidated Subsidiary of NFS does not
maintain a fiscal year that commences on January 1 and ends on December 31, NFS
shall use its best efforts to cause such Subsidiary to change its fiscal year
to one which ends on December 31 if such change is reasonably practical.
(c) Unaudited Quarterly Financial Statements. As soon as
----------------------------------------
practicable, and within 35 days after the end of each of the first three fiscal
quarters in each fiscal year of NFS, NFS shall deliver to Nationwide drafts of
the consolidated financial statements of NFS (and notes thereto) for such
periods and for the period from the beginning of the current fiscal year to the
end of such quarter setting forth in each case in comparative form for each
such fiscal quarter of NFS the consolidated figures (and noted thereto) for the
corresponding quarter and periods of
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<PAGE>
the previous fiscal year and all in reasonable detail and prepared in
accordance with Article 10 of Regulation S-X. The information set forth in
this subsection (e) is herein referred to as the "Quarterly Financial
Statements." NFS shall deliver to Nationwide all revisions to such drafts as
soon as practicable after any such revisions are prepared or made. No later
than the date NFS publicly files the Quarterly Financial Statements with the
SEC or otherwise, NFS shall deliver to Nationwide the final form of the
Quarterly Financial Statements.
(d) Quarterly and Annual Reports Furnished to State Insurance
----------------------------------------------------------
Regulatory Authorities. Prior to the filing by NFS or any Subsidiary of NFS
- ----------------------
of quarterly or annual reports with any and all state insurance regulatory
authorities in each jurisdiction in which such reports are required to be
filed, NFS shall deliver drafts of such reports to Nationwide and shall give
Nationwide a reasonable opportunity to review and comment on such reports.
(e) Audited Annual Financial Information. As soon as is
------------------------------------
practicable, and: (i) within 60 days after the end of each fiscal year of NFS,
NFS shall deliver to Nationwide drafts of the consolidated financial statements
of NFS (and notes thereto) for such year setting forth in each case in
comparative form the consolidated figures (and notes thereto) for the previous
fiscal year and all in reasonable detail and prepared in accordance with
Regulation S-X. The information set forth in this subsection (e) is herein
referred to as the "Annual Financial Statements." NFS shall deliver to
Nationwide all revisions to such drafts as soon as any such revisions are
prepared or made. NFS shall deliver to Nationwide, no later than 90 days after
the end of each fiscal year of NFS (or on such earlier date on which the same
are filed with the SEC), in final form, the Annual Financial Statements
accompanied by an opinion thereon by NFS's independent certified public
accountants.
(f) Other Financial Information. NFS shall provide to Nationwide
---------------------------
upon request such other information and analyses as Nationwide may reasonably
request in order to analyze the financial statements and condition of NFS and
its Subsidiaries and shall provide Nationwide and its accountants with an
opportunity to meet with management of NFS (and shall use commercially
reasonable efforts to cause its accountants to so meet) in connection
therewith. NFS shall deliver to Nationwide all Quarterly Financial Statements
and Annual Financial Statements of each Subsidiary of NFS that is itself
required to file financial statements with the SEC or otherwise make such
financial statements publicly available, with such financial statements to be
provided in the same manner and detail and on the same time schedule as those
financial statements of NFS required to be delivered to Nationwide pursuant to
this Section 6.1.
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<PAGE>
(g) General Financial Statement Requirements. All information
----------------------------------------
provided by NFS or any of its Subsidiaries to Nationwide pursuant to Sections
6.l(c)-(h) shall be consistent in all material respects with the format and
detail and otherwise with the procedures and practices in effect on the date
hereof with respect to the provision of such financial and other information by
NFS and its Subsidiaries to Nationwide, with such changes therein as may be
reasonably requested by Nationwide from time to time, unless changes in such
procedures or practices are required in order to comply with the rules and
regulations of the SEC or any other applicable regulatory authority, as
applicable.
(h) Public Information and SEC Reports. NFS and each of its
----------------------------------
Subsidiaries that file information with the SEC shall deliver to Nationwide (to
the attention of its General Counsel) as promptly as practicable as the same are
substantially final, drafts of all reports, notices and proxy and information
statements to be sent or made available by NFS or any of its Subsidiaries to
their security holders and all regular, periodic and other reports filed under
the Exchange Act (including Reports on Forms 10-K, 10-Q and 8-K and Annual
Reports to shareholders), and all registration statements and prospectuses to be
filed by NFS or any of its Subsidiaries with the SEC or any securities exchange
pursuant to the listed company manual (or similar requirements) of such exchange
(collectively, "NFS Public Documents") prior to the filing thereof with the SEC,
and, no later than the date the same are printed, sent or filed, whichever is
earliest, final copies of all NFS Public Documents. Prior to issuance, NFS shall
deliver to Nationwide copies of all press releases and other statements to be
made available by NFS or any of its Subsidiaries to the public, including,
without limitation, information concerning material developments in the
business, properties, results of operations, financial condition or prospects of
NFS or any of its Subsidiaries. No report, registration, information or proxy
statement, prospectus or other document that refers, or contains information
with respect, to any member of the Nationwide Affiliated Group shall be filed
with the SEC or otherwise made public by NFS or any of its Subsidiaries without
the consent of Nationwide (which shall not be unreasonably withheld or delayed)
with respect to those portions of such document which contain information with
respect to such member of the Nationwide Affiliated Group, except as may be
required by law, rule or regulation (in which case NFS shall use commercially
reasonable efforts to notify Nationwide and obtain its consent before making
such a filing with the SEC or otherwise making any such information public).
(i) Budgets and Projections. NFS shall, as promptly as
-----------------------
practicable, deliver to Nationwide copies of annual and other budgets and
financial projections (consistent in terms of format and detail and otherwise
with the procedures in effect on the
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<PAGE>
date hereof) relating to NFS or any of its Subsidiaries and shall provide
Nationwide an opportunity to meet with management of NFS and its Subsidiaries
to discuss such budgets and projections.
(j) Other Information. With reasonable promptness, NFS shall
-----------------
deliver to Nationwide such additional financial and other information and data
with respect to NFS and its Subsidiaries and their business, properties,
financial position, results of operations and prospects as from time to time
may be reasonably requested by Nationwide.
(k) Earnings Releases. Nationwide agrees that, unless required by
-----------------
law, rule or regulations or unless NFS shall have consented thereto, no member
of the Nationwide Affiliated Group shall publicly release any quarterly, annual
or other financial information of or concerning NFS or any of its Subsidiaries
("NFS Information") delivered to Nationwide pursuant to this Section 6.1 prior
to the time that NFS publicly releases such information. NFS and Nationwide
will consult on the timing of their annual and quarterly earnings releases. In
the event that any member of the Nationwide Affiliated Group is required by law
to publicly release such NFS Information prior to the public release of
Nationwide's financial information, Nationwide will use commercially reasonable
efforts to give NFS notice of such release of NFS Information and to obtain its
consent prior to such release of NFS Information.
(l) Nationwide Affiliated Group Public Filings. Nationwide and NFS
------------------------------------------
shall cooperate with each other to the extent reasonably requested by the other
in the preparation of any of their respective public earnings releases,
quarterly reports on Form 10-Q, Annual Reports to stockholders or
policyholders, annual reports on Form 10-K, any current reports on Form 8-K and
any other proxy, information and registration statements, notices, prospectuses
and other filings made by them or any of their respective subsidiaries with the
SEC, any national securities exchange, any governmental or regulatory authority
or otherwise made publicly available (collectively, "Public Filings").
Nationwide and NFS agree to provide to each other all information that the
other reasonably requests in connection with any such Public Filings or that,
in the reasonable judgment of their respective General Counsels, is required to
be disclosed therein under any law, rule or regulation. Such information shall
be provided by Nationwide or NFS, as the case may be, in as timely a manner as
practicable to enable NFS or Nationwide, as the case may be, to prepare, print
and release the Public Filings. If and to the extent requested by Nationwide
or NFS, the other party, shall diligently review all drafts of such Public
Filings and prepare in a diligent and timely fashion any portion of such Public
Filing pertaining to such other party or its subsidiaries. Unless required by
law, rule or regulation, Nationwide or NFS, as
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<PAGE>
the case may be, shall not publicly release any financial or other information
that conflicts with the information with respect to the other party that is
included in any Public Filing without the prior written consent of NFS or
Nationwide, as the case may be.
(m) Subject to the requirements of applicable laws, rules and
regulations, (i) if NFS chooses or is required to submit to a vote of its
stockholders the election, approval or ratification of the selection of its
independent certified public accountants pursuant to Schedule 14A under the
Exchange Act, NFS shall so submit to such a vote such accounting firm, and (ii)
if NFS does not submit a firm of accountants to such a vote, NFS shall cause
its independent certified public accountants to be such accounting firm as is
designated, from time to time, by Nationwide, unless the stockholders of NFS
oppose or fail to ratify such firm, or elect another firm.
SECTION 6.2 Nationwide Annual Statements. In connection with
----------------------------
Nationwide's preparation of its audited annual financial statements and its
Annual Reports to policyholders (collectively, the "Nationwide Annual Financial
Statements"), during any period in which the members of the Nationwide
Affiliated Group own, in the aggregate, at least 20 percent of the voting power
of the Outstanding Voting Stock or 20 percent of the Common Stock then
outstanding, or during any period in which any member of the Nationwide
Affiliated Group is required to account for its investment in NFS on a
consolidated basis or under the equity method of accounting) (determined in
accordance with GAAP consistent applied after consultation with the Nationwide
Auditors), NFS agrees as follows:
(a) Coordination of Auditor's Opinions. NFS will use commercially
----------------------------------
reasonable efforts to enable its independent certified public accountants (the
"NFS Auditors") to complete their audit such that they will date their opinion
on NFS's audited annual financial statements (the "NFS Annual Financial
Statements") on or before the date that Nationwide's independent certified
public accountants (the "Nationwide Auditors") date their opinion on the
Nationwide Annual Statements, and to enable Nationwide to meet its timetable
for the printing, filing and public dissemination of the Nationwide Annual
Statements.
(b) Access to Personnel and Working Papers. NFS will authorize the
--------------------------------------
NFS Auditors to make available to the Nationwide Auditors both the personnel
who performed or are performing the annual audit of NFS and, consistent with
customary professional practice and courtesy of such auditors with respect to
the furnishing of work papers, work papers related to the annual audit of NFS,
in all cases within a reasonable time after the NFS Auditor's opinion date, so
that the Nationwide Auditors are able
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<PAGE>
to perform the procedures they consider necessary to take responsibility for
the work of the NFS Auditors as it relates to the Nationwide Auditors report on
the Nationwide Annual Financial Statements, all within sufficient time to
enable Nationwide to meet its timetable for the printing, filing and public
dissemination of the Nationwide Annual Statements; provided, however, that
-------- -------
nothing in this Section 6.2(b) shall in any way be construed as a representation
of or covenant by NFS that any or all of such personnel or work papers will be
so provided.
SECTION 6.3 Forty Percent Threshold. NFS agrees that, during
-----------------------
any period in which the members of the Nationwide Affiliated Group own, in the
aggregate, at least 40 percent of the voting power of the Outstanding Voting
Stock or during any period in which any member of the Nationwide Affiliated
Group is required to account for its investment in NFS on a consolidated basis
or under the equity method of accounting (determined in accordance with GAAP
consistently applied:
(a) Internal Auditors. NFS shall provide Nationwide and the
-----------------
internal auditors or other representatives of Nationwide reasonable access to
NFS's and its Subsidiaries' books and records so that Nationwide may conduct
reasonable audits relating to the financial statements provided by NFS pursuant
to Sections 6.1(c)-(f) inclusive, as well as to the internal accounting controls
and operations of NFS and its Subsidiaries; provided, however, that such audits
-------- -------
shall be conducted (i) during regular business hours and (ii) in such manner as
will not interfere with the conduct of business by NFS or any Subsidiary in the
ordinary course.
(b) Accounting Estimates and Principles. NFS will give Nationwide
-----------------------------------
as much prior notice as reasonably practicable of any proposed significant
charges in accounting estimates or discretionary accounting principles from
those in effect on the date hereof. In this connection, NFS will consult with
Nationwide and, if requested by Nationwide, NFS will consult with the
Nationwide Auditors with respect thereto. NFS will not make any change in
discretionary accounting principles without Nationwide's prior consent (which
consent will not be unreasonably withheld or delayed) if such a change would be
sufficiently material to be required to be disclosed in NFS's financial
statements as filed with the SEC or otherwise publicly disclosed therein.
SECTION 6.4 Fifty Percent Threshold. NFS agrees that, during
-----------------------
any period in which the members of the Nationwide Affiliated Group own, in the
aggregate, at least 50 percent of the voting power of the Outstanding Voting
Stock or during any period in which any member of the Nationwide Affiliated
Group is required to account for its investment in NFS on a consolidated
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<PAGE>
basis or under the equity method of accounting (determined in accordance with
GAAP consistently applied:
(a) Detailed Quarterly Financial Information. As soon as
----------------------------------------
practicable, and within 35 days after the end of the first three fiscal
quarters in each fiscal year of NFS, NFS shall deliver to Nationwide and NWC
(i) a detailed consolidated balance sheet and consolidated statement of income
consistent with Nationwide's present chart of accounts (with such changes in
such chart of accounts as may be requested by Nationwide from time to time) and
(ii) statistical information necessary for inclusion in any Nationwide
Affiliated Group member's quarterly earnings press release, along with
appropriate supporting documentation.
(b) Detailed Annual Financial Information. As soon as practicable,
-------------------------------------
and within 60 days after the end of each fiscal year of NFS, NFS shall deliver
to Nationwide (i) a detailed consolidated balance sheet and consolidated
statement of income consistent with Nationwide's present chart of accounts
(with such changes in such chart of accounts a may be requested by Nationwide
from time to time) as of and for the full fiscal year, and (ii) statistical
information necessary for inclusion in Nationwide's annual earnings press
release, along with appropriate supporting documentation.
(c) Accountants' Reports. Promptly, but in no event later than five
--------------------
Business Days following the receipt thereof, NFS shall deliver to Nationwide
copies of all reports submitted to NFS or any of its Subsidiaries by their
independent certified public accountants, including, without limitation, each
report submitted to NFS or any of its Subsidiaries concerning its accounting
practices and systems and any comment letter submitted to management in
connection with their annual audit and all responses by management to such
reports and letters.
SECTION 6.5 Ten Percent Threshold. NFS agrees that, during any
---------------------
period in which NWC owns, in the aggregate, at least 10 percent of the voting
power of the Outstanding Voting Stock, NFS shall:
(a) furnish to Nationwide as soon as practicable after they are
publicly available, copies of all financial statements, reports, notices and
proxy statements sent by NFS in a general mailing to all its shareholders, of
all reports on Forms 10-K, 10-Q and 8-K, and of all final prospectuses filed
pursuant to Rule 424 under the Securities Act except with respect to the
Initial Public Offering and the Fixed Income Offerings; and
(b) permit Nationwide to visit and inspect any of the properties,
corporate books, and financial and other records of NFS and its Subsidiaries,
and to discuss the affairs, finances
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<PAGE>
and accounts of any such corporations with the officers of NFS and the NFS
Auditors, all at such time as often as Nationwide may reasonably request;
provided, however, that the foregoing shall be conducted (i) during
- -------- -------
regular business hours and (ii) in such manner as will not interfere with the
conduct of business of NFS or any Subsidiary in the ordinary course.
SECTION 6.6. Confidentiality. All information provided by NFS
---------------
and its Subsidiaries pursuant to this Article VI, except if the purpose for
which such information is furnished to Nationwide pursuant to this Agreement
contemplates such disclosure and except for disclosure to the other members of
the Nationwide Affiliated Group by Nationwide, be kept confidential by
Nationwide and the other members of the Nationwide Affiliated Group, and
Nationwide and the other members of the Nationwide Affiliated Group will not
disclose any such information until such information becomes available
generally to the public, except as such disclosure may be required by law, rule
or regulation. Further, Nationwide shall not, and shall not permit any member
of the Nationwide Affiliated Group to, (i) use in any manner any such
information in connection with the purchase or sale of or any offer to purchase
or sell any securities issued by NFS or (ii) make any purchase or sale of or
any offer to purchase or sell any security while in possession of any such
information, unless and until in each such case such information is publicly
disclosed.
ARTICLE VII
REGISTRATION RIGHTS
SECTION 7.1 Piggyback Registrations.
-----------------------
(a) Right to Piggyback Registration. Whenever NFS proposes to
-------------------------------
register any of its Common Stock (or securities convertible into or
exchangeable or exercisable for Common Stock) under the Securities Act for its
own account or the account of any stockholder of NFS (other than the Initial
Public Offering, offerings pursuant to employee benefit plans, or noncash
offerings in connection with a proposed acquisition, exchange offer,
recapitalization or similar transaction) and the registration form to be used
may be used for the registration of Registrable Shares (a "Piggyback
Registration"), NFS will give written notice as promptly as practicable to
Nationwide and to all other holders of Common Stock having similar registration
rights, of its intention to effect such a registration and, subject to Section
7.1(b), shall include in such registration all Registrable Shares with respect
to which NFS has received written request for inclusion therein within 15 days
after receipt of NFS's notice.
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<PAGE>
(b) Priority. If a registration pursuant to this Section 7.1
--------
involves an Underwritten Offering and the managing underwriter advises NFS in
good faith that in its opinion the number of securities requested to be
included in such registration exceeds the number that can be sold in such
offering without having an adverse effect on such offering, including the price
at which such securities can be sold, then NFS will be required to include in
such registration the maximum number of shares that such underwriter advises
can be so sold, allocated:
(i) if such registration was initiated by NFS, (A) first, to the
securities NFS proposes to sell, (B) second, among the shares of Common
Stock requested to be included in such registration by members of the
Nationwide Affiliated Group and any other stockholders of NFS owning
shares of Common Stock eligible for registration pro rata, on the
--- ----
basis of the number of shares of Common Stock each holder requests be
included in such registration, and (C) third, among other securities, if
any, requested and otherwise eligible to be included in such registration;
and
(ii) if such registration was initiated by a security holder of
NFS, (A) first, among the shares of Common Stock requested to be included
in such registration by such requesting security holder, (B) second,
among the shares of Common Stock requested to be included in such
registration by members of the Nationwide Affiliated Group and among the
shares of Common Stock requested to be included in such registration by
any other stockholder of NFS owning shares of Common Stock eligible for
such registration, pro rata, on the basis of the number of shares
--- ----
of Common Stock each holder requests be included in such registration,
and (C) third, among other securities, if any, requested and otherwise
eligible to be included in such registration (including securities to be
sold for the account of NFS).
SECTION 7.2 Requested Registrations.
-----------------------
(a) Right to Request Registration. At any time after the date
-----------------------------
hereof, upon the written request of any member of the Nationwide Affiliated
Group requesting that NFS effect the registration under the Securities Act of
all or part of the Registrable Shares (a "Demand Registration"), NFS shall use
commercially reasonable efforts to effect, as expeditiously as possible, the
registration under the Securities Act of such number of Registrable Shares
requested to be so registered; provided, however, that NFS shall not be
-------- -------
required to file a registration statement pursuant to this Section 7.2 (a), (i)
within six months after the effective date of any other registration statement
of NFS requested hereunder or pursuant to which any member of the Nationwide
Affiliated Group shall have
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<PAGE>
been given an opportunity to participate pursuant to Section 7.l; (ii) relating
to an offering on a delayed or continuous basis pursuant to Rule 415 (or any
successor rule to similar effect) promulgated under the Securities Act if NFS
is not, at the time, eligible to register shares of Common Stock on Form S-3
(or a successor form); (iii) with respect to any offering that is not
reasonably expected to yield gross proceeds of at least $20 million; or (iv)
more than two times in any calendar year or more than four times in any five
consecutive calendar years.
As promptly as practicable after receipt of any such request for a Demand
Registration, NFS shall give written notice of such request to all other
holders of Common Stock having rights to have their shares included in such
registration and shall, subject to the provisions of Section 7.2(c), include in
such registration all such Registrable Shares with respect to which each member
of the Nationwide Affiliated Group or such other stockholder has requested to
be so registered.
(b) Effective Registration. A registration requested pursuant to
----------------------
this Section 7.2 shall not be deemed to have been effected (and, therefore, not
requested for purposes of Section 7.2(a)) (i) unless the registration statement
relating thereto has become effective under the Securities Act, (ii) if after
it has become effective such registration is interfered with by any stop order,
injunction or other order or requirement of the SEC or other governmental
agency or court for any reason other than a misrepresentation or an omission by
any member of the Nationwide Affiliated Group and, as a result thereof, the
Registrable Shares requested to be registered cannot be completely distributed
in accordance with the plan of distribution, (iii) if the conditions to closing
specified in the purchase agreement or underwriting agreement entered into in
connection with such registration are not satisfied or waived other than by
reason of some act or omission by any member of the Nationwide Affiliated
Group or (iv) if, pursuant to Section 7.2(c) less than all of the Registrable
Shares requested be registered were actually registered.
(c) Priority. If a requested registration pursuant to this Section
--------
7.2 involves an Underwritten Offering and the managing underwriter shall advise
NFS that in its opinion the number of securities requested to be included in
such registration exceeds the number which can be sold in such offering without
having an adverse effect on such offering, including the price at which such
securities can be sold, then NFS will be required to include in such
registration the maximum number of shares that such underwriter advises can be
so sold, allocated (i) first, to Registrable Shares requested by members of the
Nationwide Affiliated Group to be included in such registration, (ii) second,
among all shares of Common Stock requested to be
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<PAGE>
included in such registration by any other stockholder of NFS owning shares of
Common Stock eligible for such registration, pro rata on the basis of
--- ----
the number of shares of Common Stock requested to be included in such
registration, and (iii) third, among other securities, if any, requested and
otherwise eligible to be included in such registration (including securities to
be sold for the account of NFS.
(d) Preemption of Demand Registration. Notwithstanding the
---------------------------------
foregoing, if the board of directors of NFS determines in its good faith
judgment, (i) after consultation with a nationally recognized investment
banking firm, that there will be an adverse effect on the contemplated public
offering of NFS's securities, (ii) that the disclosures that would be required
to be made by NFS in connection with such registration would be materially
harmful to NFS because of transactions then being considered by, or other
events then concerning, NFS or any of its Subsidiaries, or (iii) that
registration at the time would require the inclusion of pro forma or other
information, which requirement NFS is reasonably unable to comply with, then
NFS may defer the filing (but not the preparation) of the registration
statement which is required to effect any registration pursuant to this Section
7.2 for a reasonable period of time, but not in excess of 90 calendar days;
provided, however, that at all times NFS is in good faith using all
- -------- -------
reasonable efforts to file the registration statement as soon as practicable.
SECTION 7.3 Registration Procedures. If and whenever NFS is
-----------------------
required to effect or cause the registration of any Registrable Shares under
the Securities Act as provided this Agreement, NFS shall:
(a) prepare and file with the SEC as expeditiously as possible but in
no event later than 90 days after receipt of a request for registration with
respect to such Registrable Shares, a Registration Statement on any form for
which NFS then qualifies or which counsel for NFS shall deem appropriate, which
form shall be available for the sale of the Registrable Shares in accordance
with the intended methods of distribution thereof, and use commercially
reasonable efforts to cause such Registration Statement to become effective as
soon as practicable; provided, however, that before filing with the SEC
-------- -------
a Registration Statement or Prospectus, NFS shall (i) furnish to Nationwide
copies of all such documents proposed to be filed, which documents shall be
subject to the reasonable and timely review of Nationwide, and (ii) notify
Nationwide of any stop order issued or threatened by the SEC and take all
reasonable actions required to prevent the entry of such stop order or to
remove it if entered;
(b) prepare and file with the SEC such amendments and supplements to
such Registration Statement and the Prospectus
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<PAGE>
used in connection therewith as may be necessary to keep such Registration
Statement effective for a period of not less than 180 days or such shorter
period which shall terminate when all Registrable Shares covered by such
Registration Statement have been sold, and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such Registration Statement during such period in accordance with the intended
methods of disposition by the sellers thereof set forth in such Registration
Statement;
(c) furnish, without charge, to Nationwide and each underwriter, if
any, such number of copies of such Registration Statement, each amendment and
supplement thereto (including one conformed copy to Nationwide and one signed
copy to each managing underwriter and in each case including all exhibits
thereto), and the Prospectus included in such Registration Statement (including
each preliminary prospectus), in conformity with the requirements of the
Securities Act, and such other documents as Nationwide may reasonably request
in order to facilitate the disposition of the Registrable Shares registered
thereunder;
(d) use commercially reasonable efforts to register or qualify such
Registrable Shares covered by such Registration Statement under such other
securities or blue sky laws of such jurisdictions within the United States of
America as the selling holders, and the managing underwriter, if any,
reasonably request and do any and all other acts and things which may he
reasonably necessary or advisable to enable the selling holders and each
underwriter, if any, to consummate the disposition in such jurisdictions of the
Registrable Shares registered thereunder; provided, however, that NFS
-------- -------
shall not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
paragraph (d), (ii) subject itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such jurisdiction;
(e) as promptly as practicable notify the managing underwriter, if any,
Nationwide and the other selling holders, if any, at any time when a Prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event that comes to NFS's attention if, as a result of such
event, the Prospectus included in such Registration Statement contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and NFS shall as promptly as practicable prepare and furnish to the
selling holders a supplement or amendment to such Prospectus so that as
thereafter delivered, such Prospectus shall not contain an untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that if NFS determines
- -------- -------
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<PAGE>
in good faith (i) that the disclosure that would be required to be made by NFS
would be materially harmful to NFS because of transactions then being
considered by, or other events then concerning, NFS or any of its Subsidiaries,
or (ii) a supplement or amendment to such Prospectus at such time would require
the inclusion of pro forma or other information, which requirement NFS is
reasonably unable to comply with, then NFS may defer, for a reasonable period
of time not to exceed 90 days, furnishing to the selling holders a supplement
or amendment to such Prospectus; and provided, further, that at all
-------- -------
times NFS is in good faith using all reasonable efforts to file such amendment
as soon as practicable;
(f) use commercially reasonable efforts to cause all such securities
being registered to be listed on each securities exchange on which similar
securities issued by NFS are then listed, and enter into such customary
agreements including a listing application and indemnification agreement in
customary form, and to provide a transfer agent and registrar for such
Registrable Shares covered by such Registration Statement no later than the
effective date of such Registration Statement;
(g) make available for inspection by Nationwide or any holder of
securities covered by such Registration Statement, any underwriter
participating in any distribution pursuant to such Registration Statement, and
any attorney, accountant or other agent retained by such persons (collectively,
the "Inspectors"), all financial and other records, pertinent corporate
documents and properties of NFS's and its Subsidiaries (collectively,
"Records"), if any, as shall be reasonably necessary to enable them to exercise
their due diligence responsibilities, and cause NFS's and its Subsidiaries'
officers, directors and employees to supply all information and respond to all
inquiries reasonably requested by any such Inspector in connection with such
Registration Statement. Notwithstanding the foregoing, NFS shall have no
obligation to disclose any Records to the Inspectors in the event NFS
determines that such disclosure is reasonable likely to have an adverse effect
on NFS's ability to assert the existence of an attorney-client or other
applicable privilege with respect thereto;
(h) if requested, use commercially reasonable efforts to obtain a "cold
comfort" letter from the NFS Auditors in customary form and covering such
matters of the type customarily covered by "cold comfort" letters;
(i) make available senior management personnel to participate in, and
cause them to cooperate with the underwriters in connection with, "road show"
and other customary marketing activities, including "one-on-one" meetings with
prospective purchasers of the Registrable Shares; and
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<PAGE>
(j) otherwise use commercially reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering a
period of at least 12 months, beginning with the first month after the
effective date of the Registration Statement (as the term "effective date" is
defined in Rule 158(c) under the Securities Act), which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder.
It shall be a condition precedent to the obligation of NFS to take any
action pursuant to this Agreement in respect of the Registrable Shares that are
to be registered at the request of any member of the Nationwide Affiliated
Group that such member of the Nationwide Affiliated Group shall have furnished
to NFS such information regarding the Registrable Shares held by such members
of the Nationwide Affiliated Group and the intended method of disposition
thereof as NFS shall reasonably request and as shall be required in connection
with the action to be taken by NFS.
In connection with any registration pursuant to Section 7.1 which is an
Underwritten Offering, Nationwide shall, and shall cause the member of the
Nationwide Affiliated Group to, enter into an underwriting or similar agreement
in form and substance customary for underwritten public offerings similar to
the Underwritten Offering.
SECTION 7.4 Restriction on Disposition of Registrable Shares.
------------------------------------------------
Nationwide agrees that, upon receipt of any notice from NFS of the happening of
any event of the kind described in Section 7.3(f), Nationwide shall, and shall
cause each member of the Nationwide Affiliated Group to, discontinue
disposition of Registrable Shares pursuant to the Registration Statement
covering such Registrable Shares until receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 7.3(f), or until
otherwise notified by NFS such member of the Nationwide Affiliated Group, and,
if so directed by NFS, Nationwide shall, and shall cause such member of the
Nationwide Affiliated Group to deliver to NFS (at NFS's expense) all copies
(including, without limitation, any and all drafts), other than permanent file
copies, then in their possession, of the Prospectus covering such Registrable
Shares at the time of receipt of such notice. In the event NFS shall give any
such notice, the period mentioned in Section 7.3(b) hereof shall be extended by
the greater of (i) three months or (ii) the number of days during the period
from and including the date of the giving of such notice pursuant to Section
7.3(f) to and including the date when the selling holders shall have received
the copies of the supplemented or amended Prospectus contemplated by Section
7.3(f).
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<PAGE>
SECTION 7.5 Selection of Underwriters. If any offering
-------------------------
pursuant to a registration requested pursuant to Section 7.2 hereof is to be an
Underwritten Offering, Nationwide shall select a managing underwriter or
underwriters to administer the offering.
SECTION 7.6 Registration Expenses. NFS shall pay for all costs
---------------------
and expenses with respect to its compliance with its obligations in connection
with a registration hereunder, including, but not limited to: (i) all
registration and filing fees; (ii) fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable Shares);
(iii) printing expenses; (iv) internal expenses (including without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties); (v) the fees and expenses incurred in connection with the
listing of the Registrable Shares on any national securities exchange or inter
dealer quotation system; (vi) the fees and disbursements of counsel for NFS,
and the NFS Auditors (including the expenses of any comfort letters or costs
associated with the delivery by the NFS Auditors of a comfort letter or comfort
letters); (vii) the reasonable fees and disbursements of not more than one firm
of attorneys acting as legal counsel for all of the selling stockholders,
collectively; (viii) the fees and expenses of any registrar and transfer agent
or any depository; (ix) the underwriting fees, discounts and commissions
applicable to any Common Stock sold for the account of NFS; and (x) the cost of
preparing all documentation in connection therewith. Except as otherwise
provided in clause (ix) of this Section 7.6, NFS shall have no obligation to
pay any underwriting fees, discounts, commissions, bonuses or similar amounts
attributable to the sale of Registrable Shares, including, without limitation,
the fees and expenses of any underwriters and such underwriters' counsel.
SECTION 7.7 Conversion of Other Securities. If any holder of
------------------------------
Registrable Shares offers any options, rights, warrants or other securities
issued by it or any other Person that are offered with, convertible into or
exercisable or exchangeable for any Registrable Shares, the Registrable Shares
underlying such options, rights, warrants or other securities shall be eligible
for registration pursuant to Sections 7.1 and 7.2.
SECTION 7.8 Rule 144. If and for so long as NFS is subject to
--------
the reporting requirements of the Exchange Act, NFS shall take such measures
and file such information, documents and reports as shall be required by the
SEC as a condition to the availability of Rule 144 (or any successor provision)
under the Securities Act.
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<PAGE>
SECTION 7.9 Transfer of Registration Rights. (a) Any member
-------------------------------
of the Nationwide Affiliated Group may transfer all or any portion of its
rights under this Article VII and Article VIII (provided that no obligations or
liabilities under Article VIII may be so transferred by any member of the
Nationwide Affiliated Group without the consent of NFS, which shall not be
unreasonably withheld) to any transferee (each, a "Transferee") of Registrable
Shares. Any transfer of registration rights pursuant to this Section 7.9 shall
be effective upon receipt by NFS of written notice from such member of the
Nationwide Affiliated Group stating the name and address of the Transferee and
identifying the amount of Registrable Shares with respect to which the rights
under this Article VII (and Article VIII) are being transferred and the nature
of the rights so transferred and receipt by NFS of an instrument reasonably
satisfactory to NFS pursuant to which such Transferee agrees to be bound by the
covenants and agreements of the transferor contained in this Agreement. In
connection with any such transfer, the terms "Nationwide" and "member of the
Nationwide Affiliated Group" as used in this Agreement shall, where appropriate
to assign each rights and obligations to such Transferee, be deemed to refer to
the transferee holder of such Registrable Shares. Any member of the Nationwide
Affiliated Group and such Transferee may exercise the registration rights
hereunder in such proportion as they shall agree among themselves.
(b) After such transfer, each member of the Nationwide Affiliated Group
shall retain its rights under this Agreement with respect to all other
Registrable Shares owned by such member of the Nationwide Affiliated Group.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Cross Indemnification. (a) Nationwide agrees to
---------------------
indemnify and hold harmless NFS and its Subsidiaries and each of the officers,
directors, employees and agents of NFS and its Subsidiaries against any and all
costs and expenses (including, without limitation, attorneys' fees, interest,
penalties and costs of investigation or preparation for defense), judgments,
fines, losses, claims, damages, liabilities, demands, assessments and amounts
paid in settlement (collectively, "Losses"), in each case based on, arising out
of, resulting from or in connection with any claim, action, cause of action,
suits, proceeding or investigation, whether civil, criminal, administrative,
investigative or other (collectively, "Actions"), based on, arising out of,
pertaining to or in connection with (i) any breach by Nationwide or NWC of this
Agreement or any Designated Subsidiary Agreement, (ii) any third party claims
that
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<PAGE>
the Nationwide does not have the right to use or license the Marks in the
United States or Canada in connection with the products and services within the
Scope of the License as and to the extent provided therein and (iii) the
Designated Businesses.
(b) NFS agrees to indemnify and hold harmless each member of the
Nationwide Affiliated Group and each of the officers, directors, employees and
agents of each member of the Nationwide Affiliated Group, against any and all
Losses, in each case, based on, arising out of, resulting from or in connection
with any Actions, based on, arising out of, pertaining to or in connection with
(i) any breach by NFS of this Agreement or any breach by any Subsidiary of NFS
of any Designated Subsidiary Agreement or (ii) any use of the Marks by NFS and
its Subsidiaries not in accordance with the provisions of this Agreement.
SECTION 8.2 Registration Statement Indemnification. (a) NFS
--------------------------------------
agrees to indemnify and hold harmless each member of the Nationwide Affiliated
Group, each Transferee and each Person, if any, who controls any of the
foregoing within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act (collectively, the "Registration Indemnitee") from and
against any and all Losses arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such Losses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with information relating to a
Registration Indemnitee furnished in writing to NFS by or on behalf of such
Registration Indemnitee expressly for use in the Registration Statement or
Prospectus.
(b) Each Registration Indemnitee agrees, severally and not jointly, to
indemnify and hold harmless NFS, its directors, its officers who sign any
Registration Statement, and any person who controls NFS within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same
extent as the indemnity from NFS to each Registration Indemnitee provided in
Section 8.2(a), but only with respect to information relating to such
Registration Indemnitee furnished in writing to NFS by or on behalf of such
Registration Indemnitee expressly for use in the Registration Statement or
Prospectus. If any Action shall be brought against NFS, any of its directors,
any such officer, or any such controlling person based on any Registration
Statement or Prospectus and in respect of which indemnity may be sought against
a Registration Indemnitee pursuant to this paragraph (b), such Registration
Indemnitee shall have the rights and duties
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<PAGE>
given to NFS by Sections 8.3-8.5 hereof (except that if NFS shall have assumed
the defense thereof such Registration Indemnitee shall not be required to do
so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such
Registration Indemnitee's expense), and NFS, its directors, any such officer,
and any such controlling person shall have the rights and duties given to the
Registration Indemnitee by Article VIII hereof.
SECTION 8.3 Contribution. (a) If the indemnification provided
------------
for in this Article VIII is unavailable to an indemnified party under Section
8.2 hereof with respect to any Losses referred to therein, then an indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such Losses (i)
in such proportion as is appropriate to reflect the relative benefits received
by NFS, on the one hand, and the applicable Registration Indemnitee, on the
other hand, from the offering of the securities covered by such Registration
Statement and Prospectus, or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of NFS, on the one hand, and the applicable
Registration Indemnitee, on the other hand, in connection with the statements
or omissions that resulted in such Losses, an well an any other relevant
equitable considerations. The relative benefits received by NFS, on the one
hand, and the applicable Registration Indemnitee, on the other hand, shall be
deemed to be in the same proportion as the total net proceeds from the
applicable securities offering (before deducting expenses) received by NFS bear
to the total net proceeds from such offering (before deducting expenses)
received by such Registration Indemnitee. The relative fault of NFS, on the
one hand, and the applicable Registration Indemnitee, on the other hand, shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by NFS, on the one
hand, or by such Registration Indemnitee, on the other hand, and the parties
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(b) NFS and each Registration Indemnitee agree that it would not be
just and equitable if contribution pursuant to this Section 8.3 were determined
by pro rata allocation or by any other method of allocation that does
--- ----
not take account of the equitable considerations referred to in Section 8.3(a).
The amount paid or payable by an indemnified party as a result of the Losses
referred to in Section 8.3(a) shall be deemed to include, subject to the
limitations set forth herein, any legal or other expenses reasonably incurred by
such party in connection with
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<PAGE>
investigating any claim or defending any such Action. Notwithstanding the
provisions of this Section 8.3(b), a Registration Indemnitee shall not be
required to contribute any amount in excess of the amount by which the proceeds
to such Registration Indemnitee exceed the amount of any damages that such
Registration Indemnitee has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation, within the meaning of Section 11(f) of
the Securities Act, shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
SECTION 8.4 Procedure. If any Action shall be brought against
---------
a Registration Indemnitee or any other Person entitled to indemnification
pursuant to this Article VIII (collectively with the Registration Indemnitee,
the "Indemnitee") in respect of which indemnity may be sought against NFS, such
Indemnitee shall promptly notify NFS, and NFS shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses. Such
Indemnitee shall have the right to employ separate counsel in any such action,
suit or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such person unless (i) NFS
has agreed in writing to pay such fees and expenses, (ii) NFS has failed to
assume the defense and employ counsel, or (iii) the named parties to an Action
(including any impleaded parties) include both an Indemnitee and NFS and such
Indemnitee shall have been advised by its counsel that representation of such
indemnified party and NFS by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case NFS shall not have
the right to assume the defense of such Action on behalf of such Indemnitee).
It is understood, however, that NFS shall, in connection with any one such
Action or separate but substantially similar or related Actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Indemnitees not having actual or potential differing interests among
themselves, and that all such fees and expenses shall be reimbursed as they are
incurred. NFS shall not be liable for any settlement of any such Action
affected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such Action, NFS
agrees to indemnify and hold harmless each Indemnitee, to the extent provided
in the preceding paragraph from and against any Losses by reason of such
settlement or judgment.
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<PAGE>
SECTION 8.5 Other Matters. (a) No indemnifying party shall
-------------
without the prior written consent of the indemnified party effect any
settlement of any pending or threatened Action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such Action.
(b) Any Losses for which an indemnified party is entitled to
indemnification or contribution under this Article VIII shall be paid by the
indemnifying party to the indemnified party as such Losses are incurred. The
indemnity and contribution agreements contained in this Article VIII shall
remain operative and in full force and effect regardless of (i) any
investigation made by or on behalf of any Indemnitee, NFS, its directors or
officers, or any person controlling such Indemnitee and (ii) any termination of
this Agreement.
ARTICLE IX
DISPUTE RESOLUTION
SECTION 9.1 Negotiation. (a) In the event of any dispute,
-----------
controversy or claim arising out of or relating to this Agreement or the
breach, termination or validity thereof (a "Dispute"), upon the written notice
of any party hereto to the others, the parties hereto shall attempt in good
faith to negotiate a resolution of the Dispute.
(b) If the parties are unable to resolve the Dispute within 30 days
after the receipt of such notice, then any party may submit the Dispute to
arbitration in accordance with Section 9.2 as the exclusive means to resolve
the Dispute.
SECTION 9.2 Arbitration. (a) Any Dispute not resolved
-----------
pursuant to Section 9.1 shall, at the request of any party hereto, be finally
settled by arbitration administered by the American Arbitration Association
under its Commercial Arbitration Rules then in effect (the "Rules") except as
modified herein. The arbitration shall be held in Columbus, Ohio.
(b) There shall be three arbitrators of whom NFS and Nationwide each
shall select one within 15 days of respondent's receipt of claimant's demand
for arbitration. The two party-appointed arbitrators shall select a third
arbitrator to serve as Chair of the tribunal within 15 days after the selection
of the second arbitrator. If any arbitrator has not been appointed within the
time limits specified herein, such appointment shall be made by the American
Arbitration Association in accordance
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<PAGE>
with the Rules upon the written request of NFS or Nationwide within 15 days
after such request.
(c) The hearing shall be held no later than 90 days following the
appointment of the third arbitrator.
(d) The arbitral tribunal shall permit prehearing discovery that is
relevant to the subject matter of the Dispute taking into account the parties'
desire that the arbitration be conducted expeditiously and most effectively.
All discovery shall be completed within 40 days after the appointment of the
third arbitrator.
(e) The award shall be final and binding and shall be the sole and
exclusive remedy between the Parties regarding any claims, counterclaims,
issues, or accounting presented to the arbitral tribunal. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. SS 1-16, and
judgment upon any award may be entered in any court having jurisdiction.
(f) NFS and Nationwide will bear equally all fees, costs, disbursements
and other expenses of the arbitration, and each Party shall be responsible for
all fees, costs, disbursements and other expenses incurred in the preparation
and prosecution of their own case; provided, however, that in the event
-------- -------
that a party fails to comply with the orders or decision of the arbitral
tribunal, then such noncomplying party shall be liable for all costs and
expenses (including, without limitation, attorneys' fees) incurred by the other
parties in its effort to obtain either an order to compel, or an enforcement of
an award from a court of competent jurisdiction.
(g) The arbitral tribunal shall be authorized in its discretion to
grant pre-award and post-award interest at commercial rates. The arbitral
tribunal shall have no authority to award punitive damages or any other damages
not measured by the prevailing parties actual damages.
(h) All notices by or party to the others in connection with the
arbitration shall be in accordance with the provisions of Section 10.1, except
that all notices made pursuant to this Article IX must be made by personal
delivery or overnight courier. This agreement to arbitrate shall be binding
upon the successors and permitted assigns of each party hereto. This Agreement
and the rights and obligations of the parties shall remain in full force and
effect pending the award in any arbitration proceeding hereunder.
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<PAGE>
ARTICLE X
NATIONWIDE EXCLUSIVE MARKETING FORCE
SECTION 10.1 Use of Nationwide Exclusive Marketing Force.
-------------------------------------------
Nationwide hereby grants NFS and its insurance company Subsidiaries the
exclusive, non-assignable right to distribute variable annuity, fixed annuity
and individual universal, variable and traditional life insurance products
through the Nationwide Exclusive Marketing Force. The granting of such right
to NFS and its insurance company Subsidiaries by Nationwide (x) acknowledges
that certain NFS insurance company Subsidiaries have existing agent agreements
individually with the Nationwide Exclusive Marketing Force and the granting of
such right is an extension and affirmation of these rights and (y) permits NFS
and its insurance company Subsidiaries to enter into new and/or renewal agent
agreements or any similar agreements with the Nationwide Exclusive Marketing
Force with respect to the distribution of variable annuity, fixed annuity and
individual universal, variable and traditional life insurance products. Such
right shall terminate on the date that is 365 days from the date on which
Nationwide gives written notice to NFS that it has elected to terminate such
right (the "Termination Date"); provided, however, that Nationwide may
-------- -------
not give NFS any such notice until the later to occur of (i) the first
anniversary of the Trigger Date or (ii) the fourth anniversary of the Closing
Date. Such NFS insurance company Subsidiaries having existing agreements with
the Nationwide Exclusive Marketing Force at the Termination Date may terminate
such right, in whole or in part, by the individual cancellation of those agent
agreements in accordance with the terms thereof and applicable law.
SECTION 10.2 Effect of Termination; Further Assurances;
-------------------------------------------
Attorney-in-Fact. (a) Upon receipt of a written termination notice pursuant
- ----------------
to Section 10.1(a), NFS shall, and shall cause its Subsidiaries to, at its own
expense take all legal and administrative steps that may be required under
applicable legal, regulatory and contractual requirements to terminate its
agency contracts with the Nationwide Exclusive Marketing Force effective not
later than the Termination Date.
(b) NFS hereby appoints Nationwide as its agent and
attorney-in-fact, on its behalf and in its name any document that Nationwide,
in its good faith reasonable judgment, deems necessary in order to terminate
NFS's agency contracts with the Nationwide Exclusive Marketing Force effective
not later than the Termination Date.
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<PAGE>
ARTICLE XI
REPRESENTATIONS AND WARRANTIES
Nationwide, NWC and NFS represent and warrant to each other as follows:
SECTION 11.1 Representations and Warranties of Nationwide and
-------------------------------------------------
NWC. Nationwide and NWC hereby represent and warrant to NFS as follows:
- ---
(a) Organization and Existence; Authority. Nationwide is a
-------------------------------------
mutual insurance company duly organized, validly existing and in good standing
under the laws of Ohio. NWC is a corporation duly organized, validly existing
and in good standing under the laws of Delaware. Nationwide and NWC each have
all corporate power and authority necessary to enter into this Agreement. The
execution, delivery and performance by Nationwide and NWC of this Agreement
have been duly and validly authorized by all necessary corporate action. This
Agreement has been duly executed and delivered by each of Nationwide and NWC
and constitutes a valid and binding obligation of each of Nationwide and NWC,
enforceable against each of Nationwide and NWC in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and by the principles governing the availability of equitable
remedies).
(b) No Conflict. Neither the execution, delivery or
-----------
performance by Nationwide or NWC of this Agreement, nor the consummation by
Nationwide or NWC of the transactions contemplated hereby, will (i) violate or
conflict with any provision of the Certificate of Incorporation or Bylaws of
Nationwide or NWC, (ii) violate, conflict with, result in a breach of or
constitute (with or without notice or lapse of time or both) a default under,
give rise to a right of termination or cancellation of, or result in any change
in the terms of, any contract or permit to which Nationwide or NWC is a party
or by which Nationwide or NWC is bound or affected, or to which any of the
properties or assets of Nationwide or NWC are subject, (iii) violate or
conflict with any order, judgement, injunction, award or decree of any
governmental authority applicable to Nationwide or NWC or to the properties or
assets of Nationwide or NWC, or (iv) violate or conflict with any statute, law
or regulation of any jurisdiction applicable to Nationwide or NWC or to the
properties or assets of Nationwide or NWC; other than, in the case of clauses
(ii), (iii) and (iv) above, any such conflicts, violations, defaults, rights or
changes that individually or in the aggregate would not have a material adverse
effect on Nationwide or NWC or interfere in any material way with the
- 39 -
<PAGE>
ability of Nationwide or NWC to consummate the transactions contemplated
hereby.
(c) Consents. Except as contemplated by this Agreement, no
--------
consent, authorization, order or approval of, registration or filing with, or
notice to, any governmental authority is required to be obtained, made or given
by or with respect to Nationwide or NWC in connection with the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, other than any of the foregoing which, if not
obtained or made, would not individually or in the aggregate have a material
adverse effect on Nationwide or NWC or interfere in any material way with the
ability of Nationwide or NWC to consummate the transactions contemplated
hereby.
SECTION 11.2 Representations and Warranties of NFS. NFS hereby
-------------------------------------
represents and warrants to Nationwide and NWC as follows:
(a) Organization and Existence; Authority. NFS is a
-------------------------------------
corporation duly organized, validly existing and in good standing under the
laws of Delaware. NFS has all corporate power and authority necessary to enter
into this Agreement. The execution, delivery and performance by NFS of this
Agreement have been duly and validly authorized by all necessary corporate
action. This Agreement has been duly executed and delivered by NFS and
constitutes a valid and binding obligation of NFS, enforceable against NFS in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and by the principles governing the
availability of equitable remedies).
(b) No Conflict. Neither the execution, delivery or
-----------
performance by NFS of this Agreement, nor the consummation by NFS of the
transactions contemplated hereby, will (i) violate or conflict with any
provision of the Certificate of Incorporation or Bylaws of NFS, (ii) violate,
conflict with, result in a breach of or constitute (with or without notice or
lapse of time or both) a default under, give rise to a right of termination or
cancellation of, or result in any change in the terms of, any contract or
permit to which NFS is a party or by which NFS is bound or affected, or to
which any of the properties or assets of NFS are subject, (iii) violate or
conflict with any order, judgement, injunction, award or decree of any
governmental authority applicable to NFS or to the properties or assets of NFS,
or (iv) violate or conflict with any statute, law or regulation of any
jurisdiction applicable to NFS or to the properties or assets of NFS; other
than, in the case of clauses (ii), (iii) and (iv) above, any such conflicts,
violations, defaults, rights or changes that individually or in the aggregate
- 40 -
<PAGE>
would not have a material adverse effect on NFS or interfere in any material
way with the ability of NFS to consummate the transactions contemplated hereby.
(c) Consents. Except as contemplated by this Agreement, no
--------
consent, authorization, order or approval of, registration or filing with, or
notice to, any governmental authority is required to be obtained, made or given
by or with respect to NFS in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, other than any of the foregoing which, if not obtained or
made, would not individually or in the aggregate have a material adverse effect
on NFS or interfere in any material way with the ability of NFS to consummate
the transactions contemplated hereby.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Notices. All notices and other communications
-------
provided for hereunder shall be dated and in writing and shall be deemed to
have been given (i) when delivered, if delivered personally, sent by confirmed
telecopy or sent by registered or certified mail, return receipt requested,
postage prepaid, (ii) on the next business day if sent by overnight courier and
(iii) when received if delivered otherwise. Such notices shall be delivered to
the address set forth below, or to such other address as a party shall have
furnished to the other party in accordance with this Section 10.1.
If to Nationwide, to:
Nationwide Mutual Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
Attention: Chief Executive Officer
If to NWC, to:
Nationwide Corporation
One Nationwide Plaza
Columbus, Ohio 43215
Attention: President
If to NFS, to:
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43215
- 41 -
<PAGE>
Attention: President
each with a copy to:
Office of General Counsel
Nationwide Insurance Companies
One Nationwide Plaza
Columbus, Ohio 43215
Attention: General Counsel
SECTION 12.2 Binding Nature of Agreement. This Agreement shall
---------------------------
be binding upon and inure to the benefit of and be enforceable by the parties
hereto or their successors in interest, except as expressly otherwise provided
herein.
SECTION 12.3 Interpretation. The table of contents and the
--------------
descriptive headings of the several Articles and Sections of this Agreement are
for reference only and shall not affect the interpretation of this Agreement.
Wherever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." The words "herein," "hereof" and "hereunder," and other words of
similar import, refer to this Agreement as a whole and not to any particular
Article, Section or clause.
SECTION 12.4 Remedies. Without limiting the rights of each
--------
party hereto to pursue any and all other legal and equitable rights available
to such party against the other parties for failure to perform their
obligations under this Agreement, the parties hereto acknowledge and agree that
the remedy at law for any failure to perform their obligations hereunder would
be inadequate and that each of them, respectively, shall be entitled to
specific performance, injunctive relief or other equitable remedies in the
event of any such failure. Without limiting the generality of the foregoing,
NFS acknowledges and agrees that (i) its covenants and obligations hereunder
are special, unique and relate to matters of extraordinary importance to
Nationwide and NWC, that in the event NFS fails to perform, observe or
discharge any of its obligations under this Agreement Nationwide and NWC will
be irreparably harmed and that no remedy at law will provide adequate relief to
Nationwide and NWC, and (ii) Nationwide and NWC shall be entitled to a
temporary restraining order and temporary and permanent injunctive and other
respectable relief in case of any failure by NFS to perform, observe or
discharge any of its covenants or obligations hereunder and without the
necessity of proving actual damages. The remedies provided herein shall be
cumulative and shall not preclude assertion by any party hereto of any other
rights or the seeking of any other remedies, either legal or equitable, against
any other party hereto. This Section 12.4 shall not limit the
- 42 -
<PAGE>
right of any party hereto to seek arbitration pursuant to Article IX as the
exclusive means for settling a Dispute.
SECTION 12.5 Governing Law. This Agreement shall be governed by
-------------
and construed and enforced in accordance with the laws of the State of Ohio,
without regard to the principles of conflicts of law.
SECTION 12.6 Counterparts. This Agreement may be executed by
------------
the parties hereto in separate counterparts, each of which, when so executed
and delivered, shall be an original, but all such counterparts shall together
constitute one and the same instrument.
SECTION 12.7 Severability. In the event that any one or more of
------------
the provisions of this Agreement, or the application thereof in any
circumstances, is or becomes invalid, illegal or unenforceable in any respect
for any reason, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions contained herein shall
not be in any way impaired thereby, it being intended that all of the rights
and privileges of the parties hereto shall be enforceable to the fullest extent
permitted by law.
SECTION 12.8 Amendments and Waivers. This Agreement may be
----------------------
amended, modified or supplemented, and the terms hereof may be waived, only by
written instrument executed by the parties hereto or, in the case of a waiver,
by the party waiving compliance.
SECTION 12.9 Entire Agreement. This Agreement, including any
----------------
schedules or exhibits annexed hereto, contains the entire agreement among the
parties hereto in respect of the subject matter hereof. There are no
restrictions, promises, representation, warranties, covenants or undertakings,
other than those expressly set forth or referred to herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
SECTION 12.10 No Assignment. Except as otherwise provided
-------------
herein, neither this Agreement nor any of the rights, interests or obligations
of any party hereto may be assigned by such party without the prior written
consent of the other parties.
SECTION 12.11 Further Assurances. Each party hereto shall, on
------------------
notice, request from any other party hereto, take such further action not
specifically required hereby at the expense of the requesting party, as the
requesting party may reasonably request for the implementation of the
transactions contemplated hereby.
SECTION 12.12 No Third Party Beneficiaries. Except as
----------------------------
specifically contemplated in Article VIII, nothing in this
- 43 -
<PAGE>
Agreement shall convey any rights upon any person or entity which is not a
party or a permitted assignee of a party to this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective authorized officers as of the date first above
written.
NATIONWIDE FINANCIAL SERVICES, INC.
By
------------------------------------
Name:
Title:
NATIONWIDE MUTUAL INSURANCE COMPANY
By
------------------------------------
Name:
Title:
NATIONWIDE CORPORATION
By
------------------------------------
Name:
Title:
- 44 -
<PAGE>
EXHIBIT 11.1
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS
($000,000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Income from continuing operations........................ $ 212.3
Income from discontinued operations, net of federal
income tax expense...................................... 11.3
-------
Net income............................................... $ 223.6
=======
Pro forma weighted average number of common shares
outstanding
(in thousands):
Class A common shares expected to be issued in the Eq-
uity Offerings........................................ 20,540
Class B common shares outstanding...................... 104,745
-------
125,285
=======
Pro forma results per common share:
Income from continuing operations...................... $1.69
Net income............................................. $1.78
</TABLE>
<PAGE>
EXHIBIT 12.1
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS REGARDING COMPUTATION OF RATIOS
($000,000'S OMITTED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
PRO
FORMA(1) HISTORICAL
-------- ------------------------------------------
1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income from continuing
operations before
federal income tax
expense and
cumulative effect of
accounting changes... $ 229.2 $ 328.1 $ 281.2 $ 240.4 $ 275.8 $116.4
Fixed charges......... 1,013.0 982.3 950.3 844.6 823.9 802.4
-------- -------- -------- -------- -------- ------
$1,242.2 $1,310.4 $1,231.5 $1,085.0 $1,099.7 $918.8
======== ======== ======== ======== ======== ======
Fixed charges:
Interest credited to
policyholder
account balances..... $ 982.3 $ 982.3 $ 950.3 $ 844.6 $ 823.9 $802.4
Interest on debt...... 30.7 -- -- -- -- --
-------- -------- -------- -------- -------- ------
$1,013.0 $ 982.3 $ 950.3 $ 844.6 $ 823.9 $802.4
======== ======== ======== ======== ======== ======
Ratio of earnings to
fixed charges.......... 1.2x 1.3x 1.3x 1.3x 1.3x 1.1x
======== ======== ======== ======== ======== ======
Ratio of earnings to
fixed charges,
excluding interest
credited to
policyholder account
balances............... 8.5x N/A N/A N/A N/A N/A
======== ======== ======== ======== ======== ======
</TABLE>
- --------
(1) Pro Forma results are presented as if the 1996 Cash Dividend, the Special
Dividend, the Equity Offerings, the Note Offering and the Capital
Securities Offering had been consummated at the beginning of the period
indicated.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Nationwide Financial Services, Inc.:
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Experts", "Summary Consolidated Financial Data"
and "Selected Consolidated Financial Data" in the prospectus. Our reports
dated January 31, 1997 included herein refer to a change in accounting
principle. In 1994, the Company changed its accounting for investments in debt
and equity securities. Our reports also refer to the formation of the Company
as a holding company for Nationwide Life Insurance Company and the other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. The consolidated financial
statements are presented as if these companies were consolidated for all
periods presented.
KPMG Peat Marwick LLP
Columbus, Ohio
March 4, 1997
<PAGE>
EXHIBIT 25.1
Registration No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
---
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of obligor as specified in its charter)
Delaware 31-1486870
(State of incorporation) (I.R.S. employer identification no.)
One Nationwide Plaza
Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
___% Senior Notes Due 2027
1
<PAGE>
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the trustee
and upon information furnished by the obligor, the obligor is not an affiliate
of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes
the certificate of authority of Wilmington Trust Company to commence business
and the authorization of Wilmington Trust Company to exercise corporate trust
powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b) of
Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 21st day
of February, 1997.
WILMINGTON TRUST COMPANY
[SEAL]
3
<PAGE>
Attest:/s/ Donald G. MacKelcan By:/s/ Emmett R. Harmon
-------------------------- ----------------------
Assistant Secretary Name: Emmett R. Harmon
Title: Vice President
4
<PAGE>
EXHIBIT A
AMENDED CHARTER
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON MAY 9, 1987
5
<PAGE>
AMENDED CHARTER
OR
ACT OF INCORPORATION
OF
WILMINGTON TRUST COMPANY
WILMINGTON TRUST COMPANY, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the
name of which company was changed to "WILMINGTON TRUST COMPANY" by an
amendment filed in the Office of the Secretary of State on March 18, A.D. 1903,
and the Charter or Act of Incorporation of which company has been from time to
time amended and changed by merger agreements pursuant to the corporation law
for state banks and trust companies of the State of Delaware, does hereby alter
and amend its Charter or Act of Incorporation so that the same as so altered
and amended shall in its entirety read as follows:
FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY.
SECOND: - The location of its principal office in the State of Delaware
is at Rodney Square North, in the City of Wilmington, County of New
Castle; the name of its resident agent is WILMINGTON TRUST COMPANY whose
address is Rodney Square North, in said City. In addition to such
principal office, the said corporation maintains and operates branch
offices in the City of Newark, New Castle County, Delaware, the Town of
Newport, New Castle County, Delaware, at Claymont, New Castle County,
Delaware, at Greenville, New Castle County Delaware, and at Milford
Cross Roads, New Castle County, Delaware, and shall be empowered to
open, maintain and operate branch offices at Ninth and Shipley Streets,
418 Delaware Avenue, 2120 Market Street, and 3605 Market Street, all in
the City of Wilmington, New Castle County, Delaware, and such other
branch offices or places of business as may be authorized from time to
time by the agency or agencies of the government of the State of
Delaware empowered to confer such authority.
THIRD: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation
are to do any or all of the things herein mentioned as fully and to the
same extent as natural persons might or could do and in any part of the
world, viz.:
1
<PAGE>
(1) To sue and be sued, complain and defend in any Court of law or
equity and to make and use a common seal, and alter the seal at
pleasure, to hold, purchase, convey, mortgage or otherwise deal in real
and personal estate and property, and to appoint such officers and
agents as the business of the Corporation shall require, to make by-laws
not inconsistent with the Constitution or laws of the United States or
of this State, to discount bills, notes or other evidences of debt, to
receive deposits of money, or securities for money, to buy gold and
silver bullion and foreign coins, to buy and sell bills of exchange, and
generally to use, exercise and enjoy all the powers, rights, privileges
and franchises incident to a corporation which are proper or necessary
for the transaction of the business of the Corporation hereby created.
(2) To insure titles to real and personal property, or any estate or
interests therein, and to guarantee the holder of such property, real or
personal, against any claim or claims, adverse to his interest therein,
and to prepare and give certificates of title for any lands or premises
in the State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all descriptions,
and to prepare and execute all papers which may be necessary or proper
in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every description, and
to carry on the business of conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry, plate,
deeds, bonds and any and all other personal property of every sort and
kind, from executors, administrators, guardians, public officers,
courts, receivers, assignees, trustees, and from all fiduciaries, and
from all other persons and individuals, and from all corporations
whether state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
2
<PAGE>
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or underwriting the
stock, bonds or other obligations of any corporation, association, state
or municipality, and may receive and manage any sinking fund therefor on
such terms as may be agreed upon between the two parties, and in like
manner may act as Treasurer of any corporation or municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or other
instrument issued by any state, municipality, body politic, corporation,
association or person, either alone or in conjunction with any other
person or persons, corporation or corporations.
(8) To guarantee the validity, performance or effect of any contract or
agreement, and the fidelity of persons holding places of responsibility
or trust; to become surety for any person, or persons, for the faithful
performance of any trust, office, duty, contract or agreement, either by
itself or in conjunction with any other person, or persons, corporation,
or corporations, or in like manner become surety upon any bond,
recognizance, obligation, judgment, suit, order, or decree to be entered
in any court of record within the State of Delaware or elsewhere, or
which may now or hereafter be required by any law, judge, officer or
court in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy, executor,
administrator, guardian, bailee, or in any other trust capacity in the
receiving, holding, managing, and disposing of any and all estates and
property, real, personal or mixed, and to be appointed as such trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian or bailee by any persons,
corporations, court, officer, or authority, in the State of Delaware or
elsewhere; and whenever this Corporation is so appointed by any person,
corporation, court, officer or authority such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy, executor,
administrator, guardian, bailee, or in any other trust capacity, it
shall not be required to give bond with surety, but its capital stock
shall be taken and held
3
<PAGE>
as security for the performance of the duties devolving upon it by such
appointment.
(10) And for its care, management and trouble, and the exercise of any
of its powers hereby given, or for the performance of any of the duties
which it may undertake or be called upon to perform, or for the
assumption of any responsibility the said Corporation may be entitled to
receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages, debentures,
shares of capital stock, and other securities, obligations, contracts
and evidences of indebtedness, of any private, public or municipal
corporation within and without the State of Delaware, or of the
Government of the United States, or of any state, territory, colony, or
possession thereof, or of any foreign government or country; to receive,
collect, receipt for, and dispose of interest, dividends and income upon
and from any of the bonds, mortgages, debentures, notes, shares of
capital stock, securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to exercise in
respect of all such bonds, mortgages, debentures, notes, shares of
capital stock, securities, obligations, contracts, evidences of
indebtedness and other property, any and all the rights, powers and
privileges of individual owners thereof, including the right to vote
thereon; to invest and deal in and with any of the moneys of the
Corporation upon such securities and in such manner as it may think fit
and proper, and from time to time to vary or realize such investments;
to issue bonds and secure the same by pledges or deeds of trust or
mortgages of or upon the whole or any part of the property held or owned
by the Corporation, and to sell and pledge such bonds, as and when the
Board of Directors shall determine, and in the promotion of its said
corporate business of investment and to the extent authorized by law, to
lease, purchase, hold, sell, assign, transfer, pledge, mortgage and
convey real and personal property of any name and nature and any estate
or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred by the
laws of the State of Delaware, it is hereby expressly provided that the said
Corporation shall also have the following powers:
4
<PAGE>
(1) To do any or all of the things herein set forth, to the same extent
as natural persons might or could do, and in any part of the world.
(2) To acquire the good will, rights, property and franchises and to
undertake the whole or any part of the assets and liabilities of any
person, firm, association or corporation, and to pay for the same in
cash, stock of this Corporation, bonds or otherwise; to hold or in any
manner to dispose of the whole or any part of the property so purchased;
to conduct in any lawful manner the whole or any part of any business so
acquired, and to exercise all the powers necessary or convenient in and
about the conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and to
lease, sell, exchange, transfer, or in any manner whatever dispose of
property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of every kind
with any person, firm, association or corporation, and, without limit as
to amount, to draw, make, accept, endorse, discount, execute and issue
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same extent as
natural persons might or could do, to purchase or otherwise acquire, to
hold, own, to mortgage, sell, convey or otherwise dispose of, real and
personal property, of every class and description, in any State,
District, Territory or Colony of the United States, and in any foreign
country or place.
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except where otherwise
expressed in said paragraph) be nowise limited or restricted by reference to or
inference from the terms of any other clause of this or any other paragraph in
this charter, but that the objects, purposes and powers specified in each of
the clauses of this paragraph shall be regarded as independent objects,
purposes and powers.
5
<PAGE>
FOURTH: - (a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is forty-one million (41,000,000)
shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par value $1.00
per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one or more
series as may from time to time be determined by the Board of Directors each of
said series to be distinctly designated. All shares of any one series of
Preferred Stock shall be alike in every particular, except that there may be
different dates from which dividends, if any, thereon shall be cumulative, if
made cumulative. The voting powers and the preferences and relative,
participating, optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding; and, subject to the
provisions of subparagraph 1 of Paragraph (c) of this Article FOURTH, the
Board of Directors of the Corporation is hereby expressly granted authority to
fix by resolution or resolutions adopted prior to the issuance of any shares of
a particular series of Preferred Stock, the voting powers and the designations,
preferences and relative, optional and other special rights, and the
qualifications, limitations and restrictions of such series, including, but
without limiting the generality of the foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number may be
increased (except where otherwise provided by the Board of Directors) or
decreased (but not below the number of shares thereof then outstanding)
from time to time by like action of the Board of Directors;
(2) The rate and times at which, and the terms and conditions on which,
dividends, if any, on Preferred Stock of such series shall be paid, the
extent of the preference or relation, if any, of such dividends to the
dividends payable
6
<PAGE>
on any other class or classes, or series of the same or other class of
stock and whether such dividends shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such series
to convert the same into or exchange the same for, shares of any other
class or classes or of any series of the same or any other class or
classes of stock of the Corporation and the terms and conditions of such
conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be subject to
redemption, and the redemption price or prices and the time or times at
which, and the terms and conditions on which, Preferred Stock of such
series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of such series
upon the voluntary or involuntary liquidation, merger, consolidation,
distribution or sale of assets, dissolution or winding-up, of the
Corporation.
(6) The terms of the sinking fund or redemption or purchase account, if
any, to be provided for the Preferred Stock of such series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of the
foregoing include the right, voting as a series or by itself or together
with other series of Preferred Stock or all series of Preferred Stock as
a class, to elect one or more directors of the Corporation if there
shall have been a default in the payment of dividends on any one or more
series of Preferred Stock or under such circumstances and on such
conditions as the Board of Directors may determine.
(c) (1) After the requirements with respect to preferential dividends on the
Preferred Stock (fixed in accordance with the provisions of section (b) of this
Article FOURTH), if any, shall have been met and after the Corporation
shall have complied with all the requirements, if any, with respect to the
setting aside of sums as sinking funds or redemption or purchase accounts
(fixed in accordance with the provisions of section (b) of this Article
FOURTH), and subject further to any conditions which may be fixed in
accordance with the provisions of section (b) of this Article FOURTH, then
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and not otherwise the holders of Common Stock shall be entitled to receive such
dividends as may be declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amount, if any,
(fixed in accordance with the provisions of section (b) of this Article
FOURTH), to be distributed to the holders of Preferred Stock in the
event of voluntary or involuntary liquidation, distribution or sale of
assets, dissolution or winding-up, of the Corporation, the holders of
the Common Stock shall be entitled to receive all of the remaining
assets of the Corporation, tangible and intangible, of whatever kind
available for distribution to stockholders ratably in proportion to the
number of shares of Common Stock held by them respectively.
(3) Except as may otherwise be required by law or by the provisions of
such resolution or resolutions as may be adopted by the Board of
Directors pursuant to section (b) of this Article FOURTH, each holder of
Common Stock shall have one vote in respect of each share of Common
Stock held on all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series or any
additional shares of any class or series to be issued by reason of any increase
of the authorized capital stock of the Corporation of any class or series, or
bonds, certificates of indebtedness, debentures or other securities convertible
into or exchangeable for stock of the Corporation of any class or series, or
carrying any right to purchase stock of any class or series, but any such
unissued stock, additional authorized issue of shares of any class or series of
stock or securities convertible into or exchangeable for stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to resolution
of the Board of Directors to such persons, firms, corporations or associations,
whether such holders or others, and upon such terms as may be deemed advisable
by the Board of Directors in the exercise of its sole discretion.
(e) The relative powers, preferences and rights of each series of Preferred
Stock in relation to the relative powers, preferences and rights of each other
series of Preferred Stock shall, in each case, be as fixed from time to time by
the Board of Directors in the resolution or resolutions adopted pursuant to
authority granted in section (b) of this Article FOURTH and the consent, by
class or series vote or
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otherwise, of the holders of such of the series of Preferred Stock as are from
time to time outstanding shall not be required for the issuance by the Board of
Directors of any other series of Preferred Stock whether or not the powers,
preferences and rights of such other series shall be fixed by the Board of
Directors as senior to, or on a parity with, the powers, preferences and rights
of such outstanding series, or any of them; provided, however, that the Board of
Directors may provide in the resolution or resolutions as to any series of
Preferred Stock adopted pursuant to section (b) of this Article FOURTH that the
consent of the holders of a majority (or such greater proportion as shall be
therein fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of Directors of
the Corporation shall determine and on such terms and for such consideration as
shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(h) The authorized amount of shares of Common Stock and of Preferred Stock
may, without a class or series vote, be increased or decreased from time to
time by the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote thereon.
FIFTH: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more than
twenty-five as fixed from time to time by vote of a majority of the whole
Board, provided, however, that the number of directors shall not be reduced so
as to shorten the term of any director at the time in office, and provided
further, that the number of directors constituting the whole Board shall be
twenty-four until otherwise fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the whole
Board permits, with the term of office of one class expiring each year. At the
annual meeting of stockholders in 1982, directors of the first class shall be
elected to hold office for a term expiring at the next succeeding annual
meeting, directors of the second class shall be elected to hold office for a
term expiring at the second succeeding annual
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meeting and directors of the third class shall be elected to hold office for a
term expiring at the third succeeding annual meeting. Any vacancies in the Board
of Directors for any reason, and any newly created directorships resulting from
any increase in the directors, may be filled by the Board of Directors, acting
by a majority of the directors then in office, although less than a quorum, and
any directors so chosen shall hold office until the next annual election of
directors. At such election, the stockholders shall elect a successor to such
director to hold office until the next election of the class for which such
director shall have been chosen and until his successor shall be elected and
qualified. No decrease in the number of directors shall shorten the term of any
incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Charter or Act of
Incorporation or the By-Laws of the Corporation), any director or the entire
Board of Directors of the Corporation may be removed at any time without cause,
but only by the affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the Board of
Directors or by any stockholder entitled to vote for the election of directors.
Such nominations shall be made by notice in writing, delivered or mailed by
first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than 14 days nor more than 50 days prior to any meeting
ofthe stockholders called for the election of directors; provided, however, that
if less than 21 days' notice of the meeting is given to stockholders, such
written notice shall be delivered or mailed, as prescribed, to the Secretary of
the Corporation not later than the close of the seventh day following the day on
which notice of the meeting was mailed to stockholders. Notice of nominations
which are proposed by the Board of Directors shall be given by the Chairman on
behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of such nominee and
(iii) the number of shares of stock of the Corporation which are beneficially
owned by each such nominee.
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(f) The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
SIXTH: - The Directors shall choose such officers, agent and servants as
may be provided in the By-Laws as they may from time to time find necessary or
proper.
SEVENTH: - The Corporation hereby created is hereby given the same powers,
rights and privileges as may be conferred upon corporations organized under the
Act entitled "An Act Providing a General Corporation Law", approved March 10,
1899, as from time to time amended.
EIGHTH: - This Act shall be deemed and taken to be a private Act.
NINTH: - This Corporation is to have perpetual existence.
TENTH: - The Board of Directors, by resolution passed by a majority of the
whole Board, may designate any of their number to constitute an Executive
Committee, which Committee, to the extent provided in said resolution, or in
the By-Laws of the Company, shall have and may exercise all of the powers of
the Board of Directors in the management of the business and affairs of the
Corporation, and shall have power to authorize the seal of the Corporation to
be affixed to all papers which may require it.
ELEVENTH: - The private property of the stockholders shall not be liable
for the payment of corporate debts to any extent whatever.
TWELFTH: - The Corporation may transact business in any part of the world.
THIRTEENTH: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by a vote of
the majority of the entire Board. The stockholders may make, alter or repeal
any By-Law whether or not adopted by them, provided however, that any such
additional By-Laws, alterations or repeal may be adopted only by the
affirmative vote of the holders of
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two-thirds or more of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class).
FOURTEENTH: - Meetings of the Directors may be held outside of the State of
Delaware at such places as may be from time to time designated by the Board, and
the Directors may keep the books of the Company outside of the State of Delaware
at such places as may be from time to time designated by them.
FIFTEENTH: - (a) In addition to any affirmative vote required by law, and
except as otherwise expressly provided in sections (b) and (c) of this Article
FIFTEENTH:
(A) any merger or consolidation of the Corporation or any Subsidiary (as
hereinafter defined) with or into (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder), which, after such merger or
consolidation, would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions) to
or with any Interested Stockholder or any Affiliate of any Interested
Stockholder of any assets of the Corporation or any Subsidiary having an
aggregate fair market value of $1,000,000 or more, or
(C) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of related transactions) of any securities
of the Corporation or any Subsidiary to any Interested Stockholder or
any Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
<PAGE>
(E) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise involving
an Interested Stockholder) which has the effect, directly or indirectly,
of increasing the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any Interested
Stockholder, or any Affiliate of any Interested Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or
that some lesser percentage may be specified, by law or in any agreement with
any national securities exchange or otherwise.
(2) The term "business combination" as used in this Article FIFTEENTH
shall mean any transaction which is referred to any one or more of
clauses (A) through (E) of paragraph 1 of the section (a).
(b) The provisions of section (a) of this Article FIFTEENTH shall not be
applicable to any particular business combination and such business
combination shall require only such affirmative vote as is required by law
and any other provisions of the Charter or Act of Incorporation of By-Laws
if such business combination has been approved by a majority of the whole
Board.
(c) For the purposes of this Article FIFTEENTH:
(1) A "person" shall mean any individual firm, corporation or other entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary) who or
which as of the record date for the determination of stockholders entitled to
notice of and to vote on such business combination, or immediately prior to
the consummation of any such transaction:
(A) is the beneficial owner, directly or indirectly, of more than 10% of
the Voting Shares, or
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(B) is an Affiliate of the Corporation and at any time within two years
prior thereto was the beneficial owner, directly or indirectly, of not
less than 10% of the then outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any share of capital
stock of the Corporation which were at any time within two years prior
thereto beneficially owned by any Interested Stockholder, and such
assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates (as
hereafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has (i) the
right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote pursuant to
any agreement, arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any other
person with which such first mentioned person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned through
application of paragraph (3) above but shall not include any other Voting
Shares which may be issuable pursuant to any agreement, or upon exercise of
conversion rights, warrants or options or otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings given those
terms in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on December 31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of any class
of equity security (as defined in Rule 3a11-1 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect in
December 31, 1981) is
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owned, directly or indirectly, by the Corporation; provided, however, that for
the purposes of the definition of Investment Stockholder set forth in
paragraph (2) of this section (c), the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty to determine
for the purposes of this Article FIFTEENTH on the basis of information
known to them, (1) the number of Voting Shares beneficially owned by any
person (2) whether a person is an Affiliate or Associate of another, (3)
whether a person has an agreement, arrangement or understanding with
another as to the matters referred to in paragraph (3) of section (c), or
(4) whether the assets subject to any business combination or the
consideration received for the issuance or transfer of securities by the
Corporation, or any Subsidiary has an aggregate fair market value of
$1,00,000 or more.
(e) Nothing contained in this Article FIFTEENTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed
by law.
SIXTEENTH: Notwithstanding any other provision of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and in addition to any other
vote that may be required by law, this Charter or Act of Incorporation by the
By-Laws), the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) shall be required to amend, alter or repeal any provision of Articles
FIFTH, THIRTEENTH, FIFTEENTH or SIXTEENTH of this Charter or Act of
Incorporation.
SEVENTEENTH: (a) a Director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except to the extent such exemption from liability or
limitation thereof is not permitted under the Delaware General Corporation Laws
as the same exists or may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a Director of the Corporation
existing hereunder with respect to any act or omission occurring prior to
the time of such repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON JANUARY 16, 1997
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BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10 days before said meeting, at
his last known address, a written or printed notice fixing the time and place
of such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one
vote, either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
DIRECTORS
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
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Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members, or at the call of the Chairman of the Board of
Directors or the President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability
to act, or disqualification of any director, the Board of Directors, although
less than a quorum, shall have the right to elect the successor who shall hold
office for the remainder of the full term of the class of directors in which
the vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect
from its own members a Chairman of the Board of Directors and a President who
may be the same person. The Board of Directors shall also elect at such
meeting a Secretary and a Treasurer, who may be the same person, may appoint at
any time such other committees and elect or appoint such other officers as it
may deem advisable. The Board of Directors may also elect at such meeting one
or more Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
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ARTICLE III
COMMITTEES
Section I. Executive Committee
(A) The Executive Committee shall be composed of not more
than nine members who shall be selected by the Board of Directors from its own
members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and
in behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members, or at the call of the Chairman of the
Executive Committee or at the call of the Chairman of the Board of Directors.
The majority of its members shall be necessary to constitute a quorum for the
transaction of business. Special meetings of the Executive Committee may be
held at any time when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the
Board of Directors from time to time make.
(F) In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Company by its directors and officers as contemplated by these By-Laws any
two available members of the Executive Committee as constituted immediately
prior to such disaster shall constitute a quorum of that Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the provisions of Article III of these By-Laws; and if less than three
members of the Trust Committee is constituted immediately prior to such
disaster shall be available for the transaction of its business, such Executive
Committee shall also be empowered to exercise all of the powers reserved to the
Trust Committee under Article III Section 2 hereof. In the event of the
unavailability, at such time, of a minimum of two members of such Executive
Committee, any three available directors shall constitute the Executive
Committee for the full conduct and management of the affairs and business of
the Company in accordance with
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the foregoing provisions of this Section. This By-Law shall be subject to
implementation by Resolutions of the Board of Directors presently existing or
hereafter passed from time to time for that purpose, and any provisions of these
By-Laws (other than this Section) and any resolutions which are contrary to the
provisions of this Section or to the provisions of any such implementary
Resolutions shall be suspended during such a disaster period until it shall be
determined by any interim Executive Committee acting under this section that it
shall be to the advantage of the Company to resume the conduct and management of
its affairs and business under all of the other provisions of these By-Laws.
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Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office
during the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters,
however, being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members who
shall be selected by the Board of Directors from its own members, none of whom
shall be an officer of the Company, and shall hold office at the pleasure of
the Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division, review all reports of examination of
the Company made by any governmental agency or such independent auditor
employed for that purpose, and make such recommendations to the Board of
Directors with respect thereto or with respect to any other matters pertaining
to auditing the Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
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Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than five (5) members who shall be selected by the Board of Directors from its
own members who are not officers of the Company and who shall hold office
during the pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected by
the Board of Directors as an associate director, to serve during the pleasure
of the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An
associate director will be eligible for appointment to Committees of the
Company, with the exception of the Executive Committee, Audit Committee and
Compensation Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absence or disqualified member.
ARTICLE IV
OFFICERS
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Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and
shall perform such duties as the Board of Directors may from time to time
confer and direct. He shall also exercise such powers and perform such duties
as may from time to time be agreed upon between himself and the President of
the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of
-------------------------------
the Board of Directors shall preside at all meetings of the Board of Directors
at which the Chairman of the Board shall not be present and shall have such
further authority and powers and shall perform such duties as the Board of
Directors or the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors in the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and
responsible for all monies, funds and valuables
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of the Company and for the keeping of proper records of the evidence of property
or indebtedness and of all the transactions of the Company. He shall have
general supervision of the expenditures of the Company and shall report to the
Board of Directors at each regular meeting of the condition of the Company, and
perform such other duties as may be assigned to him from time to time by the
Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to
all Vice Presidents with such functional titles as shall be determined from
time to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
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Section 2. Certificate of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new
certificate or certificates shall be issued in lieu thereof. Duplicate
certificates of stock shall be issued only upon giving such security as may be
satisfactory to the Board of Directors or the Executive Committee.
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Section 3. The Board of Directors of the Company is authorized to fix
in advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the
date for the payment of any dividend, or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock shall go
into effect, or a date in connection with obtaining such consent.
ARTICLE VI
SEAL
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner
circle the words "Wilmington, Delaware."
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Company shall be the calendar year.
ARTICLE VIII
EXECUTION OF INSTRUMENTS OF THE COMPANY
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver
and the Secretary or any Assistant Secretary shall have full power and
authority to attest and affix the corporate seal of the Company to any and all
deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person,
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corporation, court officer or authority in the State of Delaware, or elsewhere,
without any specific authority, ratification, approval or confirmation by the
Board of Directors or the Executive Committee, and any and all such instruments
shall have the same force and validity as although expressly authorized by the
Board of Directors and/or the Executive Committee.
ARTICLE IX
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors
who serve as members of committees, other than salaried employees of the
Company, shall be paid such reasonable honoraria or fees for services as
members of committees as the Board of Directors shall from time to time
determine and directors and associate directors may be employed by the Company
for such special services as the Board of Directors may from time to time
determine and shall be paid for such special services so performed reasonable
compensation as may be determined by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. (A) The Corporation shall indemnify and hold harmless, to
the fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or
was a director, officer, employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
fiduciary or agent of another corporation or of a partnership, joint venture,
trust, enterprise or non-profit entity, including service with respect to
employee benefit plans, against all liability and loss suffered and expenses
reasonably incurred by such person. The Corporation shall indemnify a person
in connection with a proceeding initiated by such person only if the proceeding
was authorized by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided,
--------
however, that the payment of expenses incurred by a Director officer in his
- -------
capacity as a Director or officer in advance of
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the final disposition of the proceeding shall be made only upon receipt of an
undertaking by the Director or officer to repay all amounts advanced if it
should be ultimately determined that the Director or officer is not entitled to
be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses,
under this Article X is not paid in full within ninety days after a written
claim therefor has been received by the Corporation the claimant may file suit
to recover the unpaid amount of such claim and, if successful in whole or in
part, shall be entitled to be paid the expense of prosecuting such claim. In
any such action the Corporation shall have the burden of proving that the
claimant was not entitled to the requested indemnification of payment of
expenses under applicable law.
(D) The rights conferred on any person by this Article X
shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions of
this Article X shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time of
such repeal or modification.
ARTICLE XI
AMENDMENTS TO THE BY-LAWS
Section 1. These By-Laws may be altered, amended or repealed, in whole
or in part, and any new By-Law or By-Laws adopted at any regular or special
meeting of the Board of Directors by a vote of the majority of all the members
of the Board of Directors then in office.
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EXHIBIT C
SECTION 321(b) CONSENT
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: February 21, 1997 By: /s/ Emmett R. Harmon
---------------------
Name: Emmett R. Harmon
Title: Vice President
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EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and savings banks with
state publication requirements. It has not been approved by any state banking
authorities. Refer to your appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ---------------------------------------------- --------------------
Name of Bank City
in the State of DELAWARE , at the close of business on December 31, 1996.
------------
ASSETS
Thousands of dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins 213,895
Interest-bearing balances 0
Held-to-maturity securities 465,818
Available-for-sale securities 752,297
Federal funds sold 95,000
Securities purchased under agreements to resell 39,190
Loans and lease financing receivables:
Loans and leases, net of unearned income. . . . . . . 3,634,003
LESS: Allowance for loan and lease losses. . . . . . 51,847
LESS: Allocated transfer risk reserve. . . . . . . . 0
Loans and leases, net of unearned income,
allowance, and reserve 3,582,156
Assets held in trading accounts 0
Premises and fixed assets (including capitalized leases) 89,129
Other real estate owned 3,520
Investments in unconsolidated subsidiaries and associated companies . 52
Customers' liability to this bank on acceptances outstanding 0
Intangible assets 4,593
Other assets 114,300
Total assets 5,359,950
CONTINUED ON NEXT PAGE
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LIABILITIES
Deposits:
In domestic offices 3,749,697
Noninterest-bearing . . . . . . . . 852,790
Interest-bearing. . . . . . . . . . 2,896,907
Federal funds purchased 77,825
Securities sold under agreements to repurchase 192,295
Demand notes issued to the U.S. Treasury 53,526
Trading liabilities 0
Other borrowed money: ///////
With original maturity of one year or less 714,000
With original maturity of more than one year 43,000
Mortgage indebtedness and obligations under capitalized leases 0
Bank's liability on acceptances executed and outstanding 0
Subordinated notes and debentures 0
Other liabilities 98,756
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 4,929,099
Limited-life preferred stock and related surplus 0
EQUITY CAPITAL
Perpetual preferred stock and related surplus 0
Common Stock 500
Surplus 62,118
Undivided profits and capital reserves 367,371
Net unrealized holding gains (losses) on available-for-sale securities 862
Total equity capital 430,851
Total liabilities, limited-life preferred stock, and equity capital 5,359,950
2
