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'96
Nationwide(R) Variable Account - II
December 31, 1996
[LOGO] ANNUAL REPORT
In cooperation with:
American Century(SM) Investments
Dreyfus Corporation
Fidelity Investments
Nationwide Advisory Services, Inc.
Neuberger & Berman Management Incorporated
Oppenheimer Management Corporation
Strong Funds
Van Eck Associates Corporation
Van Kampen American Capital
Warburg Pincus Funds
APO-725-V (12/96)
[LOGO]
Nationwide Life Insurance Company
Home Office: Columbus, Ohio
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[LOGO]
PRESIDENT'S MESSAGE
On behalf of Nationwide Life Insurance Company, we are
pleased to bring you the 1996 annual report of the Nationwide
Variable Account - II.
The U.S. economy is enjoying the rewards of a stable
political system and a globally competitive business sector.
These good times will last, although not all years will show
the stellar performance of the last two years. 1997 may be
the year in which normalcy will return.
The economic expansion has lasted six years already, and all
resources are more or less fully employed. The job market in
particular is showing some strains, and wages are rising a
bit faster than before. Also, the competitive pressures from
abroad are increasing due to a sharp rise in the exchange
value of our currency. Business will be hard pressed under
those conditions to continue showing above-average profit
increases. For the economy as a whole, inflation has hit the
low point in this business cycle and will slowly but surely
be a more important variable for monetary policy.
In the last few years, and especially in 1996, our economy
expanded faster than the natural rate of growth. This cannot
continue without creating bottlenecks that in turn induce
price increases. Either the economy will slow under its own
weight or the Federal Reserve will have to step in. Some
indicators point to a softening of business activity. But
whether this is enough will be a close call.
Again, the long-term trend is very positive for the U.S., its
business activity, and its financial markets. However, 1997
might turn out to have some more surprises than anticipated
right now.
Joseph J. Gasper, President
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Contents
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HOW TO READ THE ANNUAL REPORT 4
Explanation on how to read and understand
the various financial reports
A FEW WORDS ABOUT OUR FUNDS 6
Fund Objectives and Narratives
written by the fund managers*
FUND PERFORMANCES 36
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY 40
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY 42
NOTES TO FINANCIAL STATEMENTS 43
SCHEDULES OF CHANGES IN UNIT VALUE 52
INDEPENDENT AUDITORS' REPORT 62
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* The discussions refer to two stock market indexes. The Standard & Poor's 500
Index (S&P 500) is an unmanaged index of 500 U.S. common stocks and the
historical performance assumes the reinvestment of dividends. The Morgan
Stanley Capital International Europe, Australia, Far East (EAFE) index is an
unmanaged index of more than 900 companies from these regions. The EAFE
Index reflects the prices of these common stocks translated into U.S.
dollars with dividends reinvested net of any foreign taxes.
The performance figures quoted by the fund managers do not include the
annual mortality, expense and administration charges of the annuity
contract. The Fund's portfolio is subject to change.
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How to Read the Annual Report
This Annual Report is sent to all customers who own a Nationwide annuity with
all or some of the funds in the Nationwide Variable Account-II (the Account).
The Account is a separate account trust which offers investment options in
thirty-seven mutual funds* from eleven mutual fund houses. An explanation of
the funds and their objectives can be found on pages 6 through 35.
The Annual Report has three major financial sections.
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
This statement, beginning on page 40, lists all the funds in the Account, the
number of shares owned, the amount paid for the shares (i.e., cost) and their
market value on December 31, 1996. The funds are presented in alphabetical
order by investment company. The market value of the assets change as the
underlying mutual fund shares change in value. As contract owners make
exchanges between the funds, the number of shares in each fund increases and
decreases. When money is deposited (withdrawn) by contract owners, shares of
the mutual funds are bought (sold) by the Account. The total market value of
the funds is equal to the Total investments.
Accounts receivable, if applicable, is an asset of the Account for money market
fund shares added to the contract owners' accounts, but not yet added to Total
investments. Total investments plus Accounts receivable equals Total assets.
Accounts payable, if applicable, is a liability of the Account for money market
fund shares deducted from the contract owners' accounts, but not yet deducted
from Total investments.
Total assets minus Accounts payable equals Contract owners' equity. For a
summary of Contract owners' equity by fund series turn to page 46.
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
These statements, found on page 42, show the activity in the Account for the
periods stated herein.
The Investment activity section shows the changes in unrealized gain (loss) of
the mutual funds in the Account, realized gain (loss) as shares of the funds
are bought (sold), mortality, expense and administration charges which are
assessed through the daily unit value calculation, and dividends and capital
gains earnings from the underlying mutual funds.
The Equity transactions section illustrates the receipt of purchase payments by
the Account as new contracts are sold, existing contract owners deposit
additional funds; and deductions from the Account when money is withdrawn,
contracts are canceled, death benefits are paid, and annual contract
maintenance charges and contingent deferred sales charges are assessed.
Net change in contract owners' equity equals Investment activity plus Equity
transactions.
The Contract owners' equity at the beginning of the period plus the Net change
in contract owners' equity equals the Contract owners' equity at the end of the
period. Contract owners' equity at the end of the calendar year will equal the
Contract owners' equity at the beginning of the next year.
* The three American Variable Insurance Series Funds are not available for
new contracts.
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SCHEDULES OF CHANGES IN UNIT VALUE
As a contract owner, you invest in the mutual funds offered in your annuity
contract. However, you do not buy shares of the mutual fund. Instead, the
Account buys shares of the fund and you in turn purchase units of the Account.
Except for the units surrendered for the annual contract maintenance charge,
the number of units you own will not change unless you contribute to or
withdraw money from your account. The value of your contract can change based
on the value of the units you own. For example, if you purchase 100 units at
$10 per unit, the value of your contract is $1,000. If the value of the units
increases to $12 per unit, your contract value increases to $1,200. Therefore,
to determine the value of your account, multiply the number of units of each
fund you own by the fund's unit value.
The Schedules of Changes in Unit Value show you the unit value at the beginning
of the period and at the end of the period. The percentage increase (decrease)
in unit value shows how it changed in value. This is computed by subtracting
the beginning unit value from the ending unit value and dividing the difference
by the beginning unit value. This can be used as a measure of the performance
of the funds over the periods reported herein.
As you review the following pages of the Annual Report, the Notes to Financial
Statements, beginning on page 52, will also help explain and clarify the
various statements and schedules.
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A FEW WORDS ABOUT OUR FUNDS
[LOGO]
DREYFUS VARIABLE INVESTMENT FUND - GROWTH AND INCOME PORTFOLIO
OBJECTIVE - To provide long-term capital growth, current income and growth of
income, consistent with reasonable investment risk. This Series invests
primarily in equity securities, debt securities and money market instruments of
domestic and foreign issuers.
NARRATIVE BY DREYFUS CORPORATION
We are pleased to provide you with this report on Dreyfus Variable Investment
Fund - Growth and Income Portfolio.
Since inception on May 2, 1994, the assets of the Portfolio have grown to
$225.9 million as of December 31, 1996. With a mix of different sized companies
included in the Portfolio, the average market capitalization of companies held
in the Portfolio is less than the average of companies in the Standard and
Poor's 500+ Composite Stock Price Index.
During the fiscal year, our approach was to mix together some securities for
growth and others for income. We have also included a mix of large
capitalization stocks, mid-capitalization stocks and small capitalization
stocks.
This mix of investments is illustrated by the largest common stock holdings in
the Portfolio. Gannett is a major newspaper company, owning such properties as
the newspaper "USAToday." UGI is a gas utility which also has an important
investment in a propane company. Columbia/HCA Healthcare is the largest
hospital company in the U.S. Merry Land &Investment is an apartment real estate
investment trust. Nabisco Holdings, Cl. A is a major consumer products company.
Viacom, Cl. B and Time Warner are large media companies whose stocks have been
laggards in the market. International Game Technology provides equipment to the
gaming industry worldwide. Computer Sciences provides computer management and
outsourcing to many of the largest corporations in the U.S. and overseas.
OfficeMax is a nationwide office supplies superstore company.
We believe that many of the securities currently held in the Portfolio have not
fully participated in the powerful gains which have been realized in the stock
market in the last few years. These positions contributed to the Portfolio's
slight underperformance of its benchmark index. Some of them fit into the
category of valuable business franchises which, we believe, are somewhat out of
favor because of near-term disappointments.
We use a mixture of convertible securities, real estate investment trusts and
utilities as a means of satisfying the income portion of the Portfolio's joint
objectives of growth and income. Both the utility indexes and the convertible
securities indexes lagged the return on the Standard and Poor's Composite 500
Stock Price Index in 1996, a year in which bond prices lagged behind stock
prices, and therefore also contributed to the Portfolio's slight
underperformance of that index. The Portfolio includes investments in the
convertible securities of Thermo Electron, Airtouch Communications and Home
Depot, among others.
Several long-term positive forces have provided a supportive background for the
financial markets over the last several years. First, the trend of inflation
has remained generally favorable in the last several years. Second, we are in
the early stages of a key demographic shift as the baby boom generation begins
to focus on the need for a permanent program of saving to provide for future
retirement income. Third, U.S. productivity growth in manufacturing has been
favorable and many U.S. companies are quite competitive with their foreign
competitors.
We continue to believe that the period of strongest earnings growth in the U.S.
economy is behind us. Corporate cost cutting is very far advanced in many
companies as are the benefits of refinancing high cost debt. We believe that
strong profit growth may become increasingly scarce over the next year.
We appreciate the willingness of our shareholders to invest in the Growth and
Income Portfolio of Dreyfus
+"Standard & Poor's 500", "S&P 500(R)" are trademarks of the Standard & Poor's
Corporation and have been licensed for use. The fund is not sponsored,
endorsed, sold or promoted by Standard & Poor's Corporation.
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GROWTH AND INCOME PORTFOLIO (CONT'D)
Variable Investment Fund. We will endeavor to realize a favorable return for the
shareholders commensurate with a reasonable level of risk. There is likely to be
an alternation of periods where the net asset value of the Portfolio declines
and periods when the net asset value rises. Our focus is on achieving a
satisfactory return for the shareholders over a period of time.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
OBJECTIVE - To provide capital growth by investing in stocks that enhance the
quality of life in America.
NARRATIVE BY DREYFUS CORPORATION
The strong performance of the Dreyfus Socially Responsible Growth Fund can be
attributed to three basic factors: (1) superior stock selection, (2) focus on
several strong sectors, technology, consumer staples, and financials, and (3)
avoidance of lower quality companies with potential earnings disappointments.
The superior stock selection can be seen from a brief overview of several of
the names that led the way for the period including BMC Software, 3Com,
Computer Associates, EMC, Colgate Palmolive, Gillette, CPCInt'l, Citicorp,
Greentree Acceptance Corp., SunAmerica, Bank of Boston, and Allstate. Each of
these names not only outperformed the market but also outperformed their
corresponding sectors. Each of these names exhibited superior earnings
revisions during the previous six months and because of their earnings
stability were rewarded by investors who remained skittish about the strength
of the economy.
The sector overweighting decisions contributed nicely to performance as the
fund was weighted heavily in three strong areas. Technology regained investor
attention after a dismal performance in the second quarter as many came to the
conclusion that a slowdown in the capital goods cycle would have a minimal
adverse impact on these companies. We will continue to take some profits in
this area on strength but will remain overweighted as we continue to like the
long term picture for Technology. Consumer Staple stocks continued to attract
interest because of the stability of their earnings although many are beginning
to look pricey. The Financial or Interest-sensitive stocks benefited from a
rebound in the bond market as the Fed decided to leave rates unchanged and
reduce investor anxiety over the prevalence of inflation in this economy. We
remain overweighted in this group as we feel that company specific fundamentals
remain intact along with our belief that the long term direction of interest
rates are lower.
The outlook for the stock market appears mixed to positive. Lower interest
rates, modest economic growth, and continued money flows into mutual funds bode
well for the market. However, somewhat extended valuations, the possibility of
slowing economic growth and tough earnings comparisons for individual companies
give us some concern. We look for 1997 to be a year for much more modest
returns from the equity markets than 1996 or 1995 as a result of overall
slowing economic conditions. The focus will continue to be on the ability of
investment managers to outperform through superior stock selection.
We are confident that the continued application of our disciplined investment
approach and strict adherence of your desires to invest responsibly will lead
to a superior long term result for you, the shareholder. We thank you for your
confidence in us and look forward to serving you well in the future.
DREYFUS STOCK INDEX FUND
OBJECTIVE - To provide investment results that correspond to the price and
yield performance of the S&P 500.
NARRATIVE BY DREYFUS CORPORATION
The objective of the Stock Index Fund is to provide investment results that
correspond to the price and yield performance of publicly traded common stocks
in the aggregate, as represented by the Standard & Poor's 500 Composite Price
Index, better known as the S&P 500.
The manager generally selects stocks for the Fund's portfolio in the order of
their weightings in the S&P 500, beginning with the heaviest weighted stocks.
With respect to the Fund's assets invested in the stocks in the S&P 500, the
percentage of such assets invested in each stock is approximately the same as
the percentage it represents in the S&P 500.
The Fund will attempt to achieve a correlation between the performance of its
portfolio and that of the S&P 500 of at least 0.95, without taking into account
expenses. The Fund's ability to correlate its performance with the S&P 500 may
be affected by, among other things, changes in securities markets, the manner
in which the S&P 500 is calculated by Standard & Poor's Corporation, the timing
of purchas-
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DREYFUS STOCK INDEX FUND (CONT'D)
es and redemptions, the size of the Fund's portfolio, and the size of
cash flow into and out of the Fund. There can be no assurance that the Fund's
investment objective will be achieved and an investment in the Fund involves
risks similar to those of investing in common stocks.
[LOGO]
VARIABLE INSURANCE PRODUCTS FUND
EQUITY-INCOME PORTFOLIO
OBJECTIVE - To seek reasonable income by investing primarily in
income-producing equity securities.
AN INTERVIEW WITH STEPHEN PETERSON, PORTFOLIO MANAGER
NOTE TO SHAREHOLDERS: Stephen Peterson began managing the fund on January 6,
1997 and did not manage the fund during the past year.
Q. HOW DID THE FUND PERFORM, STEPHEN?
A. While performing well on an absolute basis, the fund underperformed the
Standard & Poor's 500 Index which returned 22.95% for the 12 months ended
December 31, 1996.
Q. WHY WERE THE FUND'S RETURNS DISAPPOINTING DURING THE PAST SIX MONTHS?
A. There are a couple of reasons. Primarily, though, it's because of the equity
income style of investing that this fund follows. Equity income fund managers
seek to own stocks of quality companies that also have attractive dividend
yields equal to or greater than the market average. Having that sort of
orientation attracts equity income style managers to utility stocks, financial
stocks and cyclical stocks such as automobiles and basic industries. As a
group, the industries I just mentioned - with the exception of financial stocks
- - performed well on an absolute basis but underperformed the overall market
during the past year. As in 1995, the strong performance of the overall stock
market was primarily concentrated in technology stocks and larger
market-capitalization stocks such as Coca Cola and Gillette.
Q. AND THE FUND DIDN'T HAVE LARGE HOLDINGS IN MANY OF THE OUTPERFORMING STOCKS?
A. Exactly. The past 12 months have not really been a stock picker's market,
but one in which the S&P 500 managed to outperform most actively managed mutual
funds such as this one. Also, the fund had a fairly large weighting in mid-cap
stocks that also underperformed the market average.
Q. WHAT HOLDINGS DID PERFORM WELL?
A. Some of the fund's top holdings performed well. Specifically, General
Electric, IBM and Philip Morris. The fund also was helped by its weighting in
financial stocks such as Aetna, FNMA, Citicorp and American Express. However,
some of the fund's utility stocks and convertible bonds were drags on
performance.
Q. YOU TOOK OVER THE FUND IN EARLY JANUARY 1997. WHAT ARE YOUR PLANS FOR THE
FUND? WHAT CHANGES CAN SHAREHOLDERS EXPECT FROM YOU?
A. As an equity income manager my investment strategy is to look for
better-than-average yielding large-cap stocks with attractive attributes that
will lead to capital appreciation over time. I try to buy stocks that are
currently out-of-favor within this framework, and try to avoid taking large
positions in certain segments of the market, such as mid-cap stocks or
convertible bonds. Once the out-of-favor stocks appreciate, I sell them and buy
other out-of-favor stocks. Mine is a methodical, straight-forward process that
emphasizes individual stock picking more than anything else.
Q. WHAT DO YOU LOOK FOR IN DIVIDEND-YIELDING STOCKS?
A. I usually buy stocks that have dividend yield equal to or above the average
yield of the S&P 500 - currently about 2%. If I own companies with lower
yields, it's because the company has decided to distribute excess capital to
shareholders in other ways such as stock repurchase programs. This is
consistent with my strategy of owning companies that are strong income
producers with higher-than-average dividends, along with stocks of undervalued
companies that I think have the potential to appreciate over time.
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EQUITY-INCOME PORTFOLIO (CONT'D)
Q. DOES THE FUND OWN TURNAROUND STOCKS OR COMPANIES THAT ARE UNDERGOING
POSITIVE CHANGE?
A. Yes. While my goal is to have the fund primarily invested in quality
companies with consistent earnings growth, I would like to own some companies
that haven't performed well in the market recently, and therefore may have
lower valuations and better opportunity for capital appreciation. It's an
approach I've used in the past with some other funds I've managed and it's
worked well.
Q. WHAT'S YOUR OUTLOOK FOR THE MONTHS AHEAD?
A. I don't sense that there's been any significant change in the mood of the
market - it still favors consistent earnings growth. Since the market continues
to reward stocks of large-cap, consistent earnings companies, it's quite
difficult to outperform the general market, especially with the equity income
style of investing. However, as everyone knows, the economic recovery has been
underway since 1991 - historically, quite a long period of time for a strong
economy without an interruption or correction. Therefore, I'm trying to
structure the fund so it can perform relatively well when and if the market
changes course. While I think the outlook for this fund remains good, investors
should be cautious after two years of more than 20% returns from the overall
market.
GROWTH PORTFOLIO
OBJECTIVE - Seeks to achieve capital appreciation.
AN INTERVIEW WITH JENNIFER UHRIG, PORTFOLIO MANAGER
NOTE TO SHAREHOLDERS: Jennifer Uhrig became Portfolio Manager of VIP: Growth on
January 7, 1997, after the period ended.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S PERFORMANCE, JENNIFER?
A. During the 12 months that ended December 31, 1996, VIP: Growth significantly
underperformed the Standard & Poor's 500 Index, which returned 22.95% during the
past one year.
Q. WHAT WERE THE CAUSES OF THE FUND'S RELATIVELY POOR PERFORMANCE?
A. There were three reasons for the fund's underperformance, and most of them
came to the fore in the fourth quarter. First, the fund was significantly
underweighted compared to the S&P 500 in financial services and energy stocks.
Financial services was the best-performing group in the stock market in 1996.
In fact, it was the only sector that outperformed the general market. However,
financial services is not what one would typically consider to be a growth
area, and the fund traditionally has not had a strong weighting in this sector.
Second, the fund's cash position was high - over 9% both six months ago and
when the period ended - while the market was very strong throughout. Third and
perhaps most importantly, the fund had twice the index's weighting in retail.
This sector as a whole performed poorly, and some of the fund's retail holdings
blew up, including Sunglass Hut and CompUSA. So those are three key reasons why
the fund lagged its index. It's worth noting, however, that most of the fund's
underperformance came during the fourth quarter of the year.
Q. WHAT TYPE OF IMPACT DID THE FUND'S TECHNOLOGY INVESTMENTS HAVE ON
PERFORMANCE?
A. As it turned out, the technology investments were a negative, relatively
speaking. With about 26% of its holdings in technology, the fund has about
twice the weighting of its index in this market sector. While technology
generally performed well, the sector's strength came from just a few very large
capitalization stocks - including Intel, Microsoft and IBM. The fund did own
these stocks, but was not overweighted in them. In retrospect, larger
investments in these stocks would have helped the fund.
Q. WHAT WAS THE STORY WITH THE FUND'S HEALTH CARE POSITION?
A. Health care was a strong sector, with the drug stocks doing quite well,
particularly in the second half of the year. Unit growth has been better than
expected, and pricing has stabilized. So the earnings momentum across this
sector has been strong. Drug therapy is just a lot cheaper than other types of
therapy, such as hospitalization. Therefore, it is being recommended over
hospital stays - hence the unit growth in prescription medicine. Drug stocks
were also helped by the stock market's concern about the economy. Drug stocks
such as Merck, Pfizer and Bristol-Myers Squibb are the ultimate non-cyclical or
economically defensive investments, meaning that they are not influenced by the
health of the economy. If your health is at risk, you'll spend money on
medicine, whether the economy is strong, weak or in-between.
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GROWTH PORTFOLIO (CONT'D)
Q. HOW ABOUT RETAIL?
A. Retailers are early cyclicals - what I call the "front end of the economy."
They typically lead economic cycles up and lead economic cycles down. In this
respect, they're the other side of the coin from health care. People who are
worried about the economy typically are not spending as much money on retail
goods. I believe investors' concern about the health on the economy was
justified by the relatively lackluster Christmas season for retail. The fund's
overweighting in this sector hurt, and investments in PETsMART, Staples, Lowes
and HFS - as well as Sunglass Hut and CompUSA that I mentioned earlier -
dragged performance down.
Q. YOU MENTIONED FINANCIAL SERVICES STOCKS AS LEADING PERFORMERS DURING THE
PERIOD? WHY DID THEY SHINE?
A. There were two reasons. First, interest rates went down; that usually helps
this sector. Second, financial stocks had valuations that were low when
compared to the rest of the market - about 12 times earnings, even after a
strong run-up, versus over 17 times earnings for the general market. Fannie Mae
- - the Federal National Mortgage Association - and Citicorp were two of the
fund's larger financial services holdings.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF THE YEAR, JENNIFER?
A. A lot depends on how well the economy does, and chances are it will be
slower in 1997 than it was in 1996. I believe consumers are somewhat
over-extended on their borrowing, and that's an environment that typically
doesn't bode well for economic growth. Another argument for a slowdown in the
economy also can be made based is that we're five years into recovery, which is
a long time without a breather. I don't know if there will be a recession, but
I can't really see the economy taking off a whole lot from the level it's at
today. The good news is that growth stocks - because they tend to be less
influenced by general cycles - can still do well if things slow down.
HIGH INCOME PORTFOLIO
OBJECTIVE - Seeks to obtain a high level of current income by investing
primarily in high risk, lower-rated, high-yielding, fixed income securities,
while also considering growth of capital.
AN INTERVIEW WITH BARRY COFFMAN,
PORTFOLIO MANAGER
Q. HOW DID THE FUND PERFORM, BARRY?
A. Last year was a good year for the high-yield market and the fund's
performance reflects that. The fund performed well and outperformed its
benchmark, the Merrill Lynch High Yield Master Index, which had a total return
of 11.06% for the 12 months ending December 31, 1996.
Q. WHY DID THE FUND BEAT THE BENCHMARK?
A. Credit spreads - which measure the difference in yields between bonds of
various credit qualities - narrowed during the year, primarily due to the
economy's continued strength and strong demand for high-yield bonds from mutual
funds, pension plans and insurance companies. As spreads narrowed,
lower-quality B-rated securities - which the fund emphasizes - did better than
higher-quality BB-rated securities. The latter are much more sensitive to
interest rate changes than B-rated securities, and went down in value when
interest rates rose.
Q. WHICH HOLDINGS WERE AMONG THE FUND'S BEST PERFORMERS DURING THE YEAR?
A. Satellite company PanAmSat, the fund's largest holding, as well as one of
its best performers. The company continued to post strong revenues and cash
flows. In addition, the company announced a merger with a division of GM
Hughes, giving its bonds an added boost. The fund's holdings in Harcor Energy,
Inc. also performed well thanks to rising energy prices, its drilling successes
and the relatively high coupon the bonds carried. The company also did an
equity offering during the year to help it reduce its debt, which had a very
positive effect on its bond prices.
Q. THE FUND'S STAKE IN STOCKS ISSUED BY HIGH-YIELD COMPANIES (THOSE WITH BELOW
INVESTMENT-GRADE CREDIT RATINGS) ROSE DURING THE YEAR. HOW DID THE FUND'S
EQUITY HOLDINGS PERFORM?
A. Generally speaking, the fund's holdings in common stocks did well. One worth
particular note was the stock of Flores & Rucks - another energy company - which
more than tripled in price during the year. The fund also owned the high-yield
debt issued by the company, which also performed relatively well. Another
strong equity performer was Host Marriott. The full-service hotel industry had
a tremendous year,
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HIGH INCOME PORTFOLIO (CONT'D)
benefiting from rising occupancy rates and the lack of any new supply in most
major markets. The fund's debt holdings issued by Host Marriott also performed
well.
Q. EVEN THOUGH THE HIGH-YIELD MARKET HAD A GOOD YEAR, THERE MUST OF BEEN SOME
DISAPPOINTMENTS.
A. That's true, and two come to mind. First, bonds issued by Marvel
Entertainment - best known for its comic books and trading cards - tumbled when
the company declared bankruptcy. The fund no longer holds these bonds. The
second disappointment was the fund's holdings in wireless cable companies.
Investors had anticipated that the regional Bell operating companies would
partner with these companies to deliver wireless cable services. But when some
of those expected combinations failed to materialize, it sent shock waves
throughout the industry. However, I continued to hold onto People's Choice and
CS Wireless Systems because I felt that their balance sheets were solid enough
to allow them to proceed on rolling out wireless cable services.
Q. AT THE END OF THE PERIOD, 11.69% OF THE FUND'S ASSETS WERE IN CASH OR CASH
EQUIVALENTS. WHAT WAS THE RATIONALE FOR THAT?
A. There were several reasons. First, there were rather healthy new cash
inflows coming into the fund at the end of the period. Second, as has been the
case historically there was a relatively low level of news bonds issued in
December. Finally, given current spreads, I was being very selective in adding
new positions to the fund.
Q. WHAT IS YOUR OUTLOOK?
A. It's been a while since the high-yield market has witnessed credit spreads
as narrow as they were at the end of the period. Given that, it's hard for me
to be extremely bullish about the prospects for the high-yield market. However,
I believe that there are still attractive opportunities out there. The economy
looks like it is cooperating now, but given current spread levels and the
increasing likelihood of a slowdown in economic growth in 1997, I'll likely
look to relatively higher-quality companies in more defensive industries, such
as media and telecommunications. In my view, the penalty for being wrong with
riskier situations outweighs the potential rewards. As a result, capital
preservation has become a priority and earning an attractive coupon could look
favorable relative to the returns from other markets.
OVERSEAS PORTFOLIO
OBJECTIVE - To seek long term growth of capital primarily through investments
in foreign securities.
AN INTERVIEW WITH RICHARD MACE, PORTFOLIO MANAGER
Q. RICK, HOW DID THE FUND PERFORM?
A. For the 12-month period that ended December 31, 1996, the fund outperformed
the Morgan Stanley Capital International EAFE Index - which tracks the
performance of stocks in Europe, Australia and the Far East. The index had a
total return of 6.05% for the period.
Q. WHAT WERE SOME OF THE MORE SIGNIFICANT CHANGES YOU MADE TO THE PORTFOLIO
OVER THE COURSE OF THE YEAR?
A. I continued to sell Japanese stocks in order to keep the fund underweighted
in Japan relative to the EAFE Index. I've placed the proceeds from these sales
in European cyclical stocks - which tend to benefit from a strong economy. This
strategy has been effective in moving the fund into undervalued European
equities that I believe have appealing risk/reward characteristics. It also has
limited the fund's exposure to the negative effects of the weak Japanese yen
and the underperforming Japanese stock market.
Q. DOES THIS MEAN YOU HAVE A NEGATIVE VIEW ON JAPAN?
A. Not at all. In fact, I solidified the fund's position in what I consider my
value holdings in Japan. These are companies that I believe will benefit from
the weak yen, the recent Japanese economic revival, world economic growth and
solid management intent on raising the value of their businesses. I only invest
with conviction, and I believed in the fund's remaining Japanese holdings. Some
examples included Toyota and Honda, and broad-based export companies such as
Canon.
Q. BASED ON YOUR INVESTMENTS DURING THE PERIOD, YOU SAW OPPORTUNITIES IN EUROPE
. . .
A. Six months ago, I saw great potential in Europe. Stocks were generally
undervalued, there was the potential for economic recovery and some companies
were taking steps to raise shareholder value. Some stocks have appreciated and
realized their underlying value. Economic growth has come, although not as
uniformly as I would have hoped. Additionally, many
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<PAGE> 12
OVERSEAS PORTFOLIO (CONT'D)
more corporate managements have been proactive in growing the value of their
businesses by restructuring their balance sheets, selling off poor-performing
subsidiaries and redeploying excess cash more efficiently.
Q. WHAT SPECIFIC TYPES OF COMPANIES DID YOU LIKE IN EUROPE?
A. As I said before, I looked for cyclical names - especially in the energy
sector. I believed many European energy stocks' prices did not reflect rising
oil prices and were discounting lower oil prices that never came to pass. Some
energy stocks in the fund were Total, Royal Dutch Petroleum, Shell and British
Petroleum.
Q. MANY OF THE FUND'S CANADIAN HOLDINGS ARE RELATIVELY NEW TO THIS PORTFOLIO.
WHAT WAS THE STORY THERE?
A. Many Canadian oil and gas, natural resources and bank stocks were
attractively valued during the period. Two additions included Canadian Natural
Resources and Inco.
Q. DID YOU HAVE ANY DISAPPOINTMENTS?
A. Yes. One would be the weakness of the Japanese market. I consider another to
be the legal and governmental impediments to recognizing shareholder value in
Europe. For example, it's not yet legal in many European countries for
corporations to buy back stock, even though many corporate managements seek to
do so. I also continue to be disappointed by the problems that arise from
partial government ownership of companies. Take the case of Eramet, which is
one of the fund's French holdings. It's been reported in the media that the
French government, a partial owner of Eramet, is pressuring the company's
management to sell a nickel mine it owns in the colony of New Caledonia. The
government has denied the report. However, it's also been reported that the
government will take steps to oust the management if they choose not to comply.
I think it's unfortunate that the government is unduly influencing management's
decision-making process.
Q. WHAT'S YOUR OUTLOOK?
A. I'm hopeful that the economic recoveries that have begun in Europe and Japan
will continue. I think the key to a company's stock price will be the company's
shareholder-friendly attitude, reflected in stock buy-backs or a proactive
management. Therefore, I will try to position the fund in companies that could
benefit from economic growth and that are focused on providing returns for
shareholders.
VARIABLE INSURANCE PRODUCTS FUND II
ASSET MANAGER PORTFOLIO
OBJECTIVE - To seek high total return with reduced risk over the long-term by
allocating its assets among stocks, bonds and short-term fixed income
securities.
AN INTERVIEW WITH RICHARD HABERMANN, PORTFOLIO MANAGER, AS WELL AS GEORGE
VANDERHEIDEN AND MICHAEL GRAY, SUB-MANAGERS FOR STOCKS AND BONDS, RESPECTIVELY
Q. HOW DID THE FUND PERFORM, DICK?
A. The fund continued to lag the stock market somewhat during the period.
That's not altogether surprising, however, since the fund invests in both
stocks and bonds, and stocks markedly outperformed bonds over the past year.
The Standard & Poor's 500 Index had a total return of 22.95% for the 12 months
that ended December 31, 1996. The fund benefited most from the performance of
its equity investments, and performed in line with other flexible portfolios
and with our expectations following a repositioning of the fund that we
executed earlier in the year.
Q. CAN YOU ELABORATE ON THIS REPOSITIONING?
A. On the bond side, we focused on investment-grade, dollar-denominated
securities, bringing the bond portfolio's duration - its sensitivity to changes
in interest rates - in line with the bond market average as represented by the
Lehman Brothers Aggregate Index. Our stock selection emphasized
large-capitalization stocks whose dividend yields were slightly higher than
that of the market. Fortunately, these kinds of stocks provided very strong
performance in 1996.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD COMPARED TO SIX
MONTHS AGO?
A. We aimed to bring the fund in line with the new neutral mix we have
developed for the fund. As a result, the fund had about 47% in stocks, 32% in
bonds and 21% in short-term money-market securities.
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ASSET MANAGER PORTFOLIO (CONT'D)
Q. WHAT HAS YOUR ASSET ALLOCATION STRATEGY BEEN OVER THE PAST SIX MONTHS?
A. We've kept the stock weighting fairly steady over that period. As I said,
stocks performed very well. Stock prices rebounded starting in July, after it
became evident that some negative corporate earnings reports were not
indicative of the state of the overall market. A benign economic and interest
rate environment helped stocks maintain their momentum through the last three
months of the year. Federal Reserve Board Chairman Alan Greenspan's comments
about the market's exuberance caused some short-term volatility in December,
but the stock market rebounded fairly quickly. There were times when we added
to the fixed-income component, buying bonds when they became undervalued during
periods of market duress. Periodically, economic data that some feared signaled
impeding inflation shook the market. Inflation is a negative influence on bond
investing because it erodes the value of a bond's fixed payments. We added to
the fund's position in investment-grade bonds when their prices fell and their
yields rose in response to the economic data, enabling us to lock in higher
yields on our new fixed-income investments. When yields subsequently fell, the
value of the fixed-income investments we purchased earlier increased.
Q. HOW DID THIS FIT IN WITH THE WEIGHTING IN BONDS?
A. We reduced the fund's bond investments in order to take profits. In
addition, the market's fears concerns about inflation, a rekindling economy and
potential short-term rate increase have resurfaced, so it made sense to
modestly decrease investments in bonds.
Q. TURNING TO YOU, GEORGE, WHAT STOCK-PICKING STRATEGIES HAVE YOU PURSUED?
A. I've sought to minimize the risk in the stock holdings because I considered
stock market valuations to be high on a historical basis. As a result, I've
pursued two strategies - growth at a reasonable price and vulture investing. I
have always felt the most prudent way to buy growth stocks is to get as much
total return, meaning stock appreciation plus dividend yield, for as small a
price as possible. The price you pay for a growth stock is reflected in its
price-to-earnings ratio, or how much times earnings the market thinks that
stock is worth. To give an example, both Philip Morris and Coca-Cola are growth
stocks with each having grown its earnings per share at an 18% growth rate over
the past 10 years. Assuming they can sustain similar growth rates in the
future, Philip Morris would have a higher total return because its dividend
yield is 5%, whereas Coke's is 1%. But look at what the market was paying for
each stock's total return. At the end of September, Coke was at around $51 and
the consensus estimate for its earnings per share was $1.40 for 1996, thereby
producing a price-to-earnings ratio of 36 times. Philip Morris, on the other
hand, was about $90 with a consensus earnings-per-share estimate of $7.70 for
1996, thereby producing a price-to-earnings ratio of 12 times. Litigation
concerns have been dragging down Philip Morris' ratio, but these worries have
been around for 15 years and this was the biggest gap between the two
companies' price-to-earnings ratios. That's why I invested in Philip Morris and
not Coca-Cola.
Q. WHAT DO YOU MEAN BY VULTURE INVESTING?
A. Occasionally bad things happen to good stocks. Quality growth stocks may
stumble temporarily due to new product introductions, too much inventory or
manufacturing problems that cause a disappointment in quarterly earnings. If
these are truly temporary occurrences, they can be wonderful opportunities to
buy a stock or sector when prices are down. For example, in January 1996, Intel
stock had dropped from $75 to $50 months before as concerns developed over its
receivables with Packard Bell. Nine months later the stock had increased
substantially. Buying a sector with good long-term fundamentals after it has
suffered a big decline can mitigate risk and enhance the ultimate upside gain.
It does require patience.
Q. MICHAEL, WHERE HAVE YOU FOUND OPPORTUNITIES IN THE BOND PORTFOLIO?
A. I've increased the fund's investments in bonds that offered a yield
advantage over Treasuries - agency issues, mortgage-backed securities and
corporate bonds.
Q. WHAT MADE CORPORATE BONDS MORE ATTRACTIVE?
A. As Dick said, they became more attractive earlier in the period. In
addition, for most of the period, the fundamental outlook for corporations was
favorable. This is, business prospects appeared to improve. The best indicator
of a favorable corporate environment has been a strong stock market. This
strength showed that corporations were doing well and that investors were
comfortable with prospects as they drove up stock prices. Part of the optimism
was a function of the economic environment, which has been fairly positive.
Despite the bond market's inflation fears in the spring, the economy looked as
if it were growing while inflation remained under control. Moderate growth with
low inflation is a good recipe for corporations. In addition, there was a
limited supply of new corporate issues, along with fairly strong demand. Many
investors were looking for added yield, and there wasn't much to buy in the way
of corporate bonds. This backdrop helped corporate bonds post strong price
gains on a relative basis.
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<PAGE> 14
ASSET MANAGER PORTFOLIO (CONT'D)
Q. WERE THERE OTHER TYPES OF BONDS THAT WERE ATTRACTIVE TO YOU?
A. I was attracted to Yankee bonds. These are dollar-denominated bonds issued
in the U.S. by foreign banks, governments and corporations. They tend to trade
more cheaply than other bonds with similar credit ratings, and often don't drop
in price as quickly as corporate bonds when bad news affects the issuer.
Q. WHAT KINDS OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
A. When rates rose earlier in the period, I bought mortgage-backed securities
that were selling at a discount. In general, I sought securities that I found
to be less susceptible to changes in interest rates than other choices in the
mortgage-backed sector. Mortgage-backed securities tend not to perform well if
rates go up or down sharply, so I looked for those whose structure by nature
would make them less sensitive to interest rate changes. Those securities
tended to be in 15-year and 30-year mortgages that were selling at a discount.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
A. Twice this year, there has been real excitement in the stock market, in July
and December. Both occasions were related to concerns about earnings. I think
we'll find more risk in the markets. Sometimes people tend to forget that
stocks, most importantly, are stocks of companies. So what we've been trying to
get is a sense of what's going on. There might be a pick-up in the economy to
sustain earnings, but in the short term, earnings disappointments will hit a
stock hard. The stocks and markets that have done poorly are those that haven't
met expectations. If the low-interest, low-inflation environment continues,
earnings will be more crucial. That is, because of lower interest rates, there
will be more of a reaction when earnings don't meet expectations. In addition,
stock prices will be more sensitive to any changes in interest rates. As for
fixed-income, we'll continue to keep on eye on the strength of the economy, and
to look for value in the various sectors of the market.
CONTRAFUND PORTFOLIO
OBJECTIVE - Seeks to achieve capital appreciation.
AN INTERVIEW WITH WILL DANOFF, PORTFOLIO MANAGER
Q. HOW DID THE FUND PERFORM, WILL?
A. The fund slightly underperformed the Standard & Poor's 500 Index, which rose
22.95% during the 12-month period that ended on December 31, 1996.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE DURING THE PERIOD?
A. The market was more difficult to decipher in 1996 than it would appear, and
for a couple of reasons. First, market breadth - meaning the number of stocks
participating in the rally - was only fair, a surprise given the S&P's strong
showing. Larger-capitalization companies led the way, and broader indices -
particularly those reflecting mid-cap and small-cap performance - lagged
behind. For example, the S&P rose almost 23% and the Dow Jones Industrial
Index rose almost 29%, but the Russell 2000, measuring the performance of
smaller-cap companies and the S&P MidCap 400 rose only 16.4% and 19.2%,
respectively. Second, the sectors leading the market changed frequently, a
situation we call market rotation. The technology sector - and particularly
semiconductor stocks, for instance - was borderline schizophrenic, plunging by
a third or more in July's correction after performing poorly during the six
months up to that time, then rising significantly during the second half of
1996. It made for a challenging time for stock fund portfolio managers.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE SINCE YOUR REPORT TO
SHAREHOLDERS EARLY IN THE SUMMER?
A. The fund's investments in the energy and energy service sector - about 24%
of the fund's holdings on December 31 - helped performance considerably. There's
been considerable consolidation in the industry over the past decade, drilling
capacity hasn't increased in years - so prices were high - and new technologies
have reduced drilling costs; that's been a formula for solid earnings growth,
and one not lost on investors. The sector as a whole rose about 45% during the
year, and our holdings in Schlumberger, Halliburton, British Petroleum, Ensco
and Unocal, among others, did well since the last report to you.
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<PAGE> 15
CONTRAFUND PORTFOLIO (CONT'D)
Q. YOU SIGNIFICANTLY INCREASED THE FUND'S HOLDINGS IN TECHNOLOGY FROM SIX
MONTHS AGO. HOW DID IT WORK OUT?
A. I boosted the fund's technology holdings substantially since the summer
correction, to over 15% of our investments from about 6% at the end of June.
Intel and IBM, both among the fund's top five holdings, were tremendous
performers; the former almost doubled in price in the second half of the year,
while "Big Blue" jumped about 60%. EMC, a leader in storage systems and another
top 10 holding, also almost doubled in price, with a nice run late in the year.
Q. DESPITE OUTPERFORMING ITS PEER GROUP, THE FUND MUST HAVE SUFFERED SOME
DISAPPOINTMENTS. WHAT DECISIONS DO YOU REGRET?
A. While I reduced the fund's cash position from 15% six months ago to under
10% at the end of December, not being more fully invested in the stock market
undeniably hurt the fund's performance. Given the market's strong performance,
I estimate the fund's cash position detracted 2% from the fund's showing. A
second decision I regret has to do with the technology sector. While it was the
right call to keep my powder dry during the spring, I regret not moving faster
and more authoritatively in building the fund's technology positions when these
stocks were crushed during the summer correction.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF 1997, WILL?
A. While the current outlook for corporate profitability appears bright, I'm
not willing to bet the ranch on it. On the one hand, I'm keeping the fund
positioned to participate if the market continues its ascent in 1997. On the
other hand, I'll attempt to dampen some of the downside risk should unforeseen
events cloud the otherwise clean economic skies. While stocks could fall
meaningfully if interest rates continue their recent rise, the past year's
record-setting mutual fund inflows slow, or the strong U.S. dollar hurts
corporate earnings growth, I still believe I'll be able to find investment
opportunities to benefit the fund's shareholders.
[LOGO]
NATIONWIDE(R) SEPARATE ACCOUNT TRUST
CAPITAL APPRECIATION FUND
OBJECTIVE - To obtain long-term growth.
NARRATIVE BY CHARLES BATH, FUND MANAGER
The Capital Appreciation Fund benefited from the outstanding performance of
Morningstar Group Inc. Morningstar is a specialty dairy company whose
performance was hindered by the poor performance of its commodity milk
business. The company recently sold the underperforming commodity businesses
and used the proceeds to repay debt. The balance sheet is now greatly improved
and earnings growth has accelerated. This is a good example of the type of
investment situation I like to find for the portfolio. Morningstar is a
high-quality specialty dairy company whose performance was masked by a poor
performing commodity business. Once the underperforming division was divested
the companies core profitability became apparent to investors.
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CAPITAL APPRECIATION FUND (CONT'D)
Two recent additions to the Capital Appreciation Fund portfolio are Millipore
and Pall. These are two high-quality filtration companies serving a variety of
end markets. One of the attractive features of these two companies is their
record of consistent earnings growth serving the high-growth electronics and
health care markets. As their customers products have become more complex, the
need for high-end filtration systems has increased. These companies are
attractive for shareholders because they serve high-growth markets without the
need to select successful new technologies. These companies serve a broad range
of high technology companies. They can grow without the product obsolescence
risk which is so common in high-growth technology markets.
GOVERNMENT BOND FUND
OBJECTIVE - To provide as high a level of income as is consistent with the
preservation of capital.
NARRATIVE BY WAYNE FRISBEE, FUND MANAGER
During 1996 long-term and intermediate-term interest rates were significantly
higher, reversing some of the decline in rates seen in the prior year. Bonds
and bond funds were a relatively uninspiring investment alternative in this
environment, especially given the second consecutive year of outstanding equity
market performance. The price of the Government Bond Fund moved lower
reflecting the move in the broad bond market, although this downward move was
mitigated by investments in areas of the bond market that outperformed during
the year.
Inflation always drives bond market values in the long-term, with the value of
fixed coupons being eroded by higher levels of inflation. The expected level of
inflation in the future is a key determinant of the direction of bond prices in
the short-term. The actual reported inflation numbers have continued to show
stable or even declining inflation rates in recent months, a positive sign for
the bond markets.
Lower bond prices along with a stable inflation environment has created
additional value in the fixed-income markets. The bond markets should be most
attractive to those investors desiring lower levels of risk and/or higher
levels of income than is available in the equity markets. Government bonds in
particular are often appealing to risk-averse investors still interested in
income.
The Government Bond Fund continues to be invested in sectors of the U.S.
Treasury, government agency, and mortgage-backed markets that are perceived to
be undervalued. Approximately one-third of portfolio assets are invested in the
Collateralized Mortgage Obligation (CMO) market. The yield on these
conservatively-structured investments continues to make them attractive
portfolio holdings. The portfolio also continues to hold several positions in
callable Agency notes. Additional yield compensates the Fund for the risk of
the bonds being redeemed early.
The portfolio manager attempts to add value to the Government Bond Fund by
being invested in sectors of the market that are inexpensive on a relative
value basis, while maintaining market exposure to assure a higher level of
income and to take advantage of potential interest rate declines in the future.
MONEY MARKET FUND
OBJECTIVE - To seek as high a level of current income as is considered
consistent with the preservation of capital and liquidity by investing
primarily in money market instruments.
NARRATIVE BY KAREN MADER, FUND MANAGER
For the last seven sessions the Federal Open Market Committee has left the
Federal Funds rate unchanged. The last time the Federal Reserve changed the
direction of the interest rates was in January 1996 when they lowered the
Federal Funds rate to its current rate of 5.25% from 5.50%. Economic indicators
throughout 1996 suggested that the economy was growing at a modest rate with
low inflationary pressures.
Economists offered a mixed forecast for 1997. Week to week, economic indicators
continue to paint an obscure picture as to the exact state of the economy.
At December 31, 1996, the Separate Account Money Market fund had assets of $984
million with an average maturity of 38 days. 92% of the Fund was invested in
first tier commercial paper. Commercial paper continues to have a yield
advantage over other money market instruments. The remaining 8% was invested in
U.S. Government and Canadian Obligations.
The Fund continues to invest in only the highest rated money market
instruments. An internal credit review is completed on every issuer before
investment.
SMALL COMPANY FUND
OBJECTIVE - To seek long-term growth of capital by investing in equity
securities of small-capitalization companies
NARRATIVE BY NATIONWIDE ADVISORY SERVICES, INC.
1996 was a year that can be divided into two main segments from the point of
view of small capitalization stocks. Through May 24, the Russell 2000 Index
advanced 16%, solidly outperformed large cap indexes such as the S&P 500 and
the Dow Jones and S&P 500, meanwhile, each gained more than 10% from their May
highs.
The Small Company Fund's performance showed similar trends to that of the
Russell 2000. Through May the Fund showed tremendous gains, outpacing the
Russell index as well as the large cap market measures. Energy stocks led the
way, as companies such as Flores & Rucks and Nabhors Industries took advantage
of strong gas prices to boost business results.
Gains were much harder to come by during the second half of the year, however.
International markets were disappointing, with small cap stocks not
participating in the general market gains in many European countries. After the
midsummer decline, gains in U.S. holdings were achieved in selected sectors.
Oil stocks continued to do well. Companies taking advantage of business
outsourcing trends also were an important part of the Small Company Fund
portfolio. An example is Teletech Holdings, a company which provides call
centers and customer care solutions for Fortune 1000 companies.
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<PAGE> 17
SMALL COMPANY FUND (CONT'D)
For the year, the Small Company Fund outperformed the Russell 2000 Index. The
Fund's Portfolio Managers continue to see attractive earnings growth and
profitable investment opportunities in the small cap sector.
As of December 31, 1996, the Fund had 69.9% of net assets invested in domestic
stocks, 15.6% in international stocks, and 14.5% in cash and short-term
securities. The market sectors most heavily weighted among Fund investments
were Oil & Gas/Energy, Financial Services and Healthcare.
TOTAL RETURN FUND
OBJECTIVE - To obtain a reasonable long-term total return (i.e., earnings
growth plus potential dividend yield) on invested capital from a flexible
combination of current return and capital gains through investments in common
stocks, convertible issues, money market instruments and bonds with a primary
emphasis on common stocks.
NARRATIVE BY JOHN M. SCHAFFNER, FUND MANAGER
The Total Return Fund's performance in 1996 was positively influenced by
several sectors. The technology stocks it holds, such as IBM and
Hewlett-Packard had strong gains. Financial stocks, including all the brokerage
stocks, Mellon Bank, and Allstate Insurance also had good appreciation. The
drug stocks, particularly Warner-Lambert also had good gains, as did several
chemical companies, including DuPont, Monsanto, Air Products and Crompton
&Knowles. On the negative side, AT&T had very poor performance, with Sprint not
a great deal better. MCICorp. was also having a poor year until the announced
merger with British Telecom increased it to a more respectable result. The Fund
currently has about an 8% weighting in these long distance stocks, and although
we still think they are well positioned long term, and undervalued, fear of
increased competition, plus poor reported results for AT&T led to a significant
drag on Fund performance this year. Several other stocks in which we have
significant positions, such as Equitable, Comcast, and PepsiCo, all of which we
do like long-term, had either small losses or minuscule gains versus a very
strong market this year, also inhibiting Fund results.
The Total Return Fund's strategy has always included a strong element of value.
For most of 1995, and all of 1996, this type of strategy has been out of favor
in the stock market. Momentum and indexing strategies have led to stocks with
relatively high valuations performing well by going to even higher valuations.
History, and numerous studies have repeatedly shown that investing in highly
valued stocks is a risky and poor-performing long term strategy. Therefore, the
Total Return Fund has stuck to its approach, and will continue to do so. This
approach, especially in the recent environment of high relative valuations, has
included more of buying stocks we like long-term, on news that disappoints
short term investors. PepsiCo, Comcast and Olsten are examples of this, plus
the more recent addition of Electronic Data Systems. We have also continued to
add to our energy stocks, not because of disappointment but because of good
long term fundamentals combined with still-attractive valuations.
While I would certainly like to see better performance from the Fund versus its
peers and the market indexes, I believe this will come from continuing our
current strategies, which are sound, and by continuing to pursue the Fund's
objectives by taking on less risk, rather than more.
[LOGO]
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
GROWTH PORTFOLIO
OBJECTIVE - The Portfolio seeks capital growth through investments in common
stocks of companies that the investment adviser believes will have above
average potential for long-term capital appreciation.
NARRATIVE BY MARK GOLDSTEIN, PORTFOLIO MANAGER
During 1996 three of our best performing sectors were financial services,
technology and restaurants. One of the best performers was CKE Restaurants,
which was taken over by new management about a year and a half ago. CKE's
earnings have outperformed the estimates as a result of a good advertising
campaign, updated menu selections and remodeling many of their restaurants.
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GROWTH PORTFOLIO (CONT'D)
The technology sector provided some winners during the year. In particular,
Intel provided a large contribution to the fund in the third quarter. Its
success can be partly attributed to continued demand by end-users in
combination with lower prices. The second largest position in this industry at
year end was KLA, a company that makes test equipment for semiconductor
companies. KLA's earnings held up well during the year. Seagate, a disc drive
company, also helped the Portfolio. Seagate was able to reduce costs, and
benefit from continued end-user demand.
In the third quarter, the Portfolio seized an opportunity to purchase Philip
Morris at a low relative valuation after a federal court decertified a class
action suit brought by smokers seeking damages. This case sets a precedent in
the industry and may influence future class-action suits.
In the consumer/retail sector, we added Staples to our portfolio. Staples is a
leading factor in the office superstore segment. We believe that the pending
merger with Office Depot will create significant cost savings, which we believe
should enhance earnings growth over the next two years.
Two lagging sectors during the year were Communications and Healthcare. These
two sectors comprised about 8%-10% of the portfolio during most of the year.
Cable stocks went through their lowest valuations in 1996 due to worries about
competition from the satellite industry. As a result, the Portfolio reduced its
positions in TCI and sold out of TimeWarner. One exception is UK Cable, a
telephone, cable and Internet company based in the United Kingdom. They
recently consolidated with Comcast, forming Comcast UK Cable Partners Ltd.,
which should help the company's valuations. We believe this stock should
experience 40%-50% growth over the next two years.
The Portfolio increased its exposure to HMO's during the year. Overall, this
industry did not contribute positively to the Portfolio during the year.
Exceptions were PacifiCare, a Medicare HMO, and United Healthcare, a
conventional HMO. Both of these positions were increased during the period and
have experienced an upswing since June 30. While enrollment in HMOs continues
to rise, their challenge will be to manage rising costs in a flat premium
environment.
LIMITED MATURITY BOND PORTFOLIO
OBJECTIVE - To provide the highest level of total return, consistent with
preservation of capital.
NARRATIVE BY TED GIULIANO, PORTFOLIO MANAGER
1996 ended on an upbeat note for the bond market and the AMT Limited Maturity
Bond Portfolio as yields across the curve fell during the last four months of
the year. Yields that we focus on, in the 1- to 5-year part of the curve, ended
the year higher than at the start of the year. In between, however, the bond
market was on a roller coaster ride with interest rates falling early in the
period, then rising very rapidly, and finally reversing its course once again
for the final rally. The management of our weighted average portfolio duration
("duration" is a measure of a portfolio's exposure to interest rate risk)
during this period of volatility remained consistent with our trend-following
style, and the Portfolio's risk level remained low compared to longer-duration
bond funds. In the early portion of the year our duration was a relatively long
2.9 years on average as we took advantage of the falling rates at the end of
1995 and the beginning of 1996. When the trend reversed in February and March
as a result of signs of increased economic growth, higher inflation
expectations and comments by Fed Chairman Alan Greenspan, we shortened duration
several times to 2.3 years in June. By September, the market had overreacted to
the economic signals and, from a technical and fundamental standpoint, appeared
undervalued. We then lengthened the Portfolio to just over 2.5 years in
duration. Yields fell from this point through the end of the year which
benefited the Portfolio due to the longer duration.
Corporate bonds remained the largest sector in the Portfolio as we continue to
find value through our bottom-up bond selection process (looking at individual
bonds rather than average sector prices) despite a generally expensive
corporate market. The below investment grade segment of our holdings
outperformed all other sectors due to the healthy market conditions in high
yield as well as excellent individual security selection. Our research staff
identified several bonds during the period which were underpriced relative to
their credit fundamentals and which we added to the Portfolio. These included
Tenet Healthcare, a leading hospital firm, which was placed on watch for
potential upgrade by both S&P and Moody's. This caused the market to price
these bonds at a tighter spread to treasuries resulting in significant
outperformance versus the market. This segment of the portfolio ended the year
at about 8% of the overall Fund. Investment grade bonds also performed well.
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LIMITED MATURITY BOND PORTFOLIO (CONT'D)
Restructuring at firms such as Tenneco Inc. and Alco Capital Resource, Inc.
resulted in higher bond prices relative to comparable duration Treasuries.
Investments in mortgage-backed and asset-backed securities accounted for the
majority of the remainder of the portfolio. The asset-backed securities
accounted for the majority of the remainder of the portfolio. The asset-backed
securities are all rated `AAA' and are backed by pools of credit card
receivables, auto loans and leases, or equipment loans. While the increase in
consumer delinquencies on credit cards has received a lot of media attention,
the asset-backed securities in our Portfolio are of the highest quality. The
bonds in our Portfolio have outperformed comparable duration treasury
securities as the collateral backing of these securities performed well
throughout the second half of the year within the bond market's and the ratings
agencies' expectations. In addition, our commitment to 15-year and 7-year
Agency Pass Through Mortgages added to the funds' return.
PARTNERS PORTFOLIO
OBJECTIVE - The Portfolio seeks capital growth through an investment approach
that is designed to increase capital with reasonable risk.
NARRATIVE BY MICHAEL KASSEN & ROBERT GENDELMAN, PORTFOLIO CO-MANAGERS
The financial sectors made a positive contribution to the Portfolio in 1996.
Specifically, we are positive about CITICORP. Many financial companies,
including CITICORP, have instituted stock buyback programs which bodes well for
valuations. In addition, the banking industry should benefit from strength in
emerging markets and global relationships.
During 1996, the Portfolio was underweighted in the energy and technology
sectors relative to the S&P "500." This hindered and helped the Portfolio
respectively. The Portfolio continued to add selectively to its technology
positions throughout the year. Two examples are Komag and KLA. We believed that
some of these technology positions had long-term potential based on consumer
demand.
In the third quarter, the Portfolio seized an opportunity to purchase Philip
Morris at a long relative valuation after a federal court decertified a class
action suit brought by smokers seeking damages. This case sets a precedent in
the industry and may influence future class-action suits.
A recent edition to the Portfolio was Evergreen Media which operates 34 radio
stations across the nation. Historically, radio has been a positive contributor
because it is a legitimate cash flow business. Only one year out of the last 40
has spending on radio advertising dropped. Radio has become a more investable
business over the last few years, as government regulations have eased
regarding the number of radio stations a single entity can own in any one
market. We believe radio is probably underpriced relative to the number of
people you can reach.
In the retail sector, WalMart is an example of a position that was sold. The
stock is being penalized by Wall Street because it has not continued its
20%-30% annual growth rate. The P/E multiple should range from 16 to 18.
WalMart recently initiated a small buy back of their stock which should help to
stimulate the price.
La Quinta Inns is a position that is attractive on a value versus cash flow
basis. Its hotels (240 inns in 29 states), popular among business travelers in
the Southwest, have undergone major renovations. La Quinta is completing a
stock repurchase program authorized in 1995 and its board has authorized a
second repurchase campaign of up to $10 million of company stock.
[LOGO]
OPPENHEIMER VARIABLE ACCOUNT FUNDS
OPPENHEIMER BOND FUND
OBJECTIVE - Primarily seeks a high level of current income from investments in
high yield fixed-income securities rated "Baa" or better by Moody's or "BBB" or
better by Standard & Poor's. Secondarily, the Fund seeks capital growth when
consistent with its primary objective of high current income.
NARRATIVE BY DAVID NEGRI, FUND MANAGER
In spite of a somewhat difficult bond market this past year, Oppenheimer Bond
Fund's performance was relatively strong. While rising interest rates hindered
the performance of many other fixed income investments, our performance was
positive. What's more, we continued to provide competitive monthly income over
the period.
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OPPENHEIMER BOND FUND (CONT'D)
The Fund's strong performance can be attributed to two major factors. First, we
maintained a defensive position and kept the portfolio's average maturity
relatively short. Because shorter-maturity bonds are typically less sensitive
to changes in interest rates, we avoided some of the price fluctuations
associated with longer-term investments as interest rates rose throughout the
year. This strategy also enabled the Fund to capture a competitive level of
income.
The second factor that contributed to the Fund's positive performance was our
strategic diversification over a variety of bonds. Overall, however,
mortgage-backed securities were the strongest performers in the portfolio. As
is typically the case, when interest rates rise, mortgage prepayment risk
decreases because homeowners are less likely to refinance. In addition to
offering less prepayment risk, mortgage-backed securities also paid very
competitive income during the year and this further benefited the portfolio's
performance.
In contrast, as interest rates climbed over the period, our existing holdings
of U.S. Treasury bonds performed relatively poorly. Fortunately, by holding
those bonds with shorter maturities, we were able to limit their negative
impact on portfolio performance.
During the second half of the year, we focused on corporate bonds to capture as
much income as possible. Specifically, we found the greatest potential in bonds
issued by financial services firms and oil- and gas-related businesses. Within
the financial services companies, corporate restructuring and consolidations
have improved profitability and balance sheets, while advanced technology has
strengthened the profits of many companies within the oil and gas industry.
As we move into 1997, we expect to see continued modest economic growth in the
United States, accompanied by low inflation and flat corporate earnings. In an
environment such as this, it does not seem likely that the Federal Reserve will
cut interest rates.
OPPENHEIMER GLOBAL SECURITIES FUND
OBJECTIVE - Seeks capital growth by investing in a diversified portfolio of
foreign and domestic stocks.
NARRATIVE BY WILLIAM WILBY, FUND MANAGER
The Fund performed well over the past year, despite difficulties in the foreign
markets. By combining our theme approach with strong individual stock
selection, we were able to produce solid returns for the year.
Despite on-again, off-again fears of too much or too little growth, the U.S.
market has been the Fund's biggest contributor of positive return this year.
Economic growth overseas has been weak, and most foreign markets lagged the
U.S. despite their lower valuations. We attribute this to the universal focus
of investors on "shareholder friendly" managements which are generally more
numerous in the U.S. As European managements have moved to embrace "shareholder
value", those markets began to perform while the less "shareholder oriented"
managements in Asia lagged.
Our natural resources theme also provided some big winners during this period.
Several years ago, we began to invest in oil service companies in Europe and
North America. These companies, which specialize in deep-water drilling rigs,
had seen a steady decline in day rates to well below replacement cost, while
the demand for offshore drilling facilities increased. In 1996, day rates rose
sharply along with the oil price, which in turn rose because of seasonally low
inventory levels. Meanwhile, demand for oil in emerging economies has continued
to grow unabated.
On the negative side, our Japanese holdings did not perform as expected.
Although we correctly anticipated the economic recovery in Japan, and the
positive impact it would have on corporate earnings, the market did not bounce
back. In fact, it declined.
Going forward, we have recently added to our biotechnology holdings within our
healthcare theme. Prior to the election, biotechnology stocks fell sharply on
fears that a Democratic Congress might reintroduce a Clinton healthcare plan.
We believed those fears were overblown and felt that the long-term fundamentals
of these companies remained excellent. We used the sharp decline to buy into
this sector before the election, and we are continuing to add shares where the
fundamentals are strong.
As the global economic cycle continues to age, and stock valuations move
higher, we have approached 1997 with caution. We believe, however, that the
Fund's portfolio, with substantial investments in high-growth-potential stocks,
continues to offer investors an outstanding opportunity both for
diversification and long-term appreciation potential.
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OPPENHEIMER MULTIPLE STRATEGIES FUND
OBJECTIVE - Seeks a total investment return (including current income and
capital appreciation in the value of its shares) from investments in common
stocks and other equity securities, and "money market" securities. The current
allocation of the Fund's portfolio aims to take advantage of current economic
conditions while managing risk.
NARRATIVE BY RICHARD RUBINSTEIN, FUND MANAGER
This was a very positive year for Oppenheimer Multiple Strategies Fund. We
attribute the portfolio's performance to a solid investment strategy designed
to benefit from a diversified selection of bonds and our ability to take
advantage of the strength of the domestic stock market.
Our bond selection strategy was by far the most notable contributor to the
Fund's performance over the year. Specifically, our high-yield corporate and
foreign bond holdings were the strongest components of the Fund. High yield
bonds benefited from strong corporate earnings and refinancing and foreign
bonds did well due to their higher yields.
There were also several interesting opportunities in emerging markets,
particularly Argentina and Brazil. However, because foreign investments carry
additional risks such as currency and political uncertainties, we tend to
prefer Brady bonds, which are foreign securities that are partially backed by
U.S. government bonds. By owning Brady bonds, we were able to capitalize on
opportunities within emerging markets while reducing our currency risk.
Within our domestic equity holdings, technology, financial services and
healthcare were the strongest performing sectors. Technology stocks were
successful due to the development of efficiency-enhancing products, such as
software programs and other applied technologies. Demand for these innovations
has been strong, largely because they can help lower costs for businesses,
while also improving their quality of service. One of the chief beneficiaries
of these programs is the banking industry. Electronic banking and automated
teller machines have greatly reduced the costs of delivering services. And
fortunately, many banks have spent their increased cash flows wisely, by
raising dividends and instituting stock buybacks.
Healthcare companies benefited during the period from renewed faith in the
industry. Four years ago, with the advent of the Clinton administration, the
industry was clouded with concerns about rising healthcare costs. We took
advantage of some low-priced healthcare companies at that time, and those
companies have since regained their stature.
Even though the Fund's international equity holdings contributed less to the
portfolio's total return than did its U.S. equity component, our broad
international investments added to the Fund's diversification. In addition,
we've been able to locate some very good foreign stocks that were reasonably
priced. Some of our recent additions include a large hotel chain and an English
language newspaper in Hong Kong. We also purchased some energy companies in
Canada because international energy companies are currently more appealing to
us than their domestic counterparts.
Going forward, our performance will depend primarily on the stocks we choose
for the portfolio. While many U.S. stocks currently appear overvalued, there
are still growing companies that remain at reasonable price levels. So, despite
a highly valued stock market, our long-term outlook is positive. We believe the
Fund is diversified enough to weather any unforeseen economic changes with the
opportunity for solid returns and reduced risk.
[LOGO]
STRONG DISCOVERY FUND II
OBJECTIVE - To seek maximum capital appreciation through investments in a
diversified portfolio of securities.
NARRATIVE BY RICHARD STRONG AND CHARLES A. PAQUELET, FUND CO-MANAGERS
In managing the Strong Discovery Fund II, we strive to provide our investors
with long-term capital growth.
We pursue our goal by investing primarily in the stocks for well-managed,
small- and mid-cap growth companies, with a core commitment to larger,
established companies to provide stability and diversification.
Our investment approach combines number-crunching research with on-site visits
to the companies in which we invest. Through frequent discussions with
management, suppliers, customers and competitors, we believe we can identify
vital aspects of companies that aren't reflected in historical financial
statements.
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STRONG DISCOVERY FUND II (CONT'D)
A DIFFICULT FIRST HALF OF 1996 FOR THE FUND...
The Fund's charter gives us the flexibility to allocate assets away from stocks
when we believe it is appropriate. Historically, when it appears the market has
gotten ahead of itself, we've taken defensive positions to help protect
capital. Early 1996 was one of those times.
The year began with investors having enjoyed one of the better markets on
record. However, signs of economic weakness led us to anticipate a downturn in
economic activity that would put corporate profits and the stock market at
risk. Therefore, we decided to reduce the portfolio's commitment to stocks and
invest the proceeds in U.S. Treasury bonds.
But as the first half of the year unfolded, a sharp rebound in economic growth
fueled higher stock prices. Our decision to conservatively position the Fund
prevented it from fully participating in the market's strong advances early in
the year. In addition, interest rates rose as the economy recovered, which
negatively impacted the Fund's bond holdings.
By March, we realized that our cautious stance was incorrect, and we began to
reallocate the bond investments back into stocks. While the decision to return
the portfolio to a normal position emphasizing stocks was sound, the timing was
poor. In June and July, the market corrected sharply, impacting our area of
emphasis - small and mid-cap growth stocks - significantly. This sequence of
events caused the Fund to under-perform the stock market and its peer group
during the first half of 1996.
...A RETURN TO FORM IN LATTER PART OF THE YEAR
During the last five months of the year, the major stock indexes moved higher
as corporate profits continued growing and inflation remained low, enabling the
stock market to anticipate lower interest rates. However, the market's advance
later in the year was concentrated in the stocks of large companies.
While the Discovery Fund II's "bread and butter" is smaller firms, the
portfolio nevertheless performed well from August through the end of the year
topping the performance of our Lipper peer group (12.59%) and enabling us to
end the year in positive territory.
FOCUSING ON WHAT WE DO BEST
To a large extent, the Fund's improved performance during the latter stages of
the year was due to our focusing on what we do best. Our true strength has
always been identifying companies that are just starting to blossom and its
typically been our adeptness at identifying good growers that has generated our
greatest success over the years. To that end, we re-evaluated the portfolio
from top to bottom to emphasize these strengths.
o BRICK-BY-BRICK RECOVERY PROGRAM. While we were disappointed by the Fund's
first half performance, we avoided the temptation to make big bets in an
effort to quickly catch up with the market. Rather, we chose to rely on our
time-tested stock picking abilities to gradually close the gap.
o FACE-TO-FACE EVALUATION. We spent 2-3 days a week visiting companies,
appraising management and generally "kicking the tires." Just since August,
we have met with the management of over 150 companies.
o DIVERSIFY, BUT STAY FOCUSED ON SMALL AND MEDIUM-SIZE GROWTH COMPANIES. As
mentioned previously, small companies are where we usually find the
attributes we prize. To help ensure that we invest in these companies in a
disciplined way, we modified the portfolio mix: one third in companies with
a market capitalization less than $1 billion, one third committed to
companies between $1-3 billion, and the final third invested in larger
firms. (By comparison, the average market cap of companies in the S&P 500 is
over $20 billion.)
o WELCOMED CHARLES "CHIP" PAQUELET. In August, Chip Paquelet was named
portfolio co-manager of the Fund. Chip, whom I've worked with for more than
eight years, managed the Strong Small Cap Fund from its inception on
December 31, 1995 through August of 1996. His proven ability to identify
attractive growth companies should be a great asset.
Having thoroughly gone through the Fund's holdings, we believe it is
well-positioned to pursue its long-term growth goal.
WE SEE MANY OPPORTUNITIES AHEAD
Currently, we like the environment for U.S. stocks. The economy appears strong
enough to support attractive growth in corporate profits, but not so strong as
to trigger inflation and higher interest rates. In addition, valuations should
benefit as baby boomers ratchet up their savings for retirement.
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STRONG DISCOVERY FUND II (CONT'D)
Large cap stock prices largely reflect this positive environment. But we
believe the stocks of small and mid-size companies - our area of emphasis -
still have room for strong gains. In fact, we've not had a problem finding
attractively priced stocks with exciting growth prospects.
For instance, we estimate the average annual growth rate of the companies in
the portfolio at 24% - more than twice that of the companies in the S&P 500
Index. Over time, we believe this superior growth should enable the Fund's
performance to return to the strong relative and absolute level that existed
prior to 1996. Your continued confidence is appreciated as we work to
accomplish this.
STRONG INTERNATIONAL STOCK FUND II
OBJECTIVE - To seek capital growth. The Fund invests primarily in the equity
securities of issuers located outside the United States.
NARRATIVE BY ANTHONY L.T. CRAGG, FUND MANAGER
By investing primarily in the stocks based outside the United States, the
Strong International Stock Fund II pursues capital growth. The Fund provides
convenient access to growth opportunities worldwide that, when compared to a
U.S.-only portfolio, may increase return potential.
INTERNATIONAL STOCKS END HIGHER
On the whole, 1996 was a decent year for international stocks. The Fund
finished the year with a return of 10.38%, which compared favorably with
international stocks in general, as measured by the MSCI EAFE(TM) Index's 6.05%
return for the same period.
This overall performance masks a somewhat difficult year for international
investors, however. During the first six months of the year, foreign stock
markets sustained a broad rally, particularly in Asia. The Fund's substantial
weighting in Asia contributed to a gain of 13.46% for the period, compared to a
gain of 4.52% for the MSCI EAFE(TM) Index.
But from June through October, many international stock markets began to
falter. Asia was particularly hard hit, primarily due to political worries in
Thailand and Indonesia, and a cooling off of earnings and exports throughout
the Pacific Rim.
WE STAYED TRUE TO OUR STRATEGY
As you may be aware, we tend to use a "bottom-up" approach to stock investing.
While global economic climates certainly play a part in our selection process,
we place more emphasis on the strength and potential of individual companies
than on the temporary environment of the countries in which we invest. This
approach occasionally puts us at variance with conventional thinking, but it
also helps us find attractive opportunities in places that others may overlook.
Our bottom-up approach played a large part in our strategy during the year. By
and large, we did little to change our regional portfolio commitments, other
than trim our Japanese holdings, which we believed had become fully valued.
o PACIFIC RIM - Throughout the fiscal year, we maintained a significant
exposure to Pacific Rim countries. As stated earlier, these markets helped
the Fund outperform the benchmark during the first half of the fiscal year,
and hindered its performance during the second half. Concerns about these
markets arose when their annual growth rates declined from 8%-9% to
approximately 6%.
We believe the downdraft in Asian markets will be short-lived, however...6%
annual growth is still very attractive compared to America's projected
growth rate of 3% annually, and less in Europe. Moreover, valuations in
these markets have become even more attractive, and we intend to maintain a
large weighting in the region.
o EUROPE - While Europe certainly doesn't appear to have the growth potential
of the Pacific Rim, many of the portfolio's best performers were in Europe -
an illustration of our "bottom-up" approach in action. Such stocks held
during the year included Tomra, a Norway-based firm that manufacturers
recycling machines for use by the public, and Simint, an Italian franchiser
for Armani.
o LATIN AMERICA - We continue to underweight Mexico and some of the emerging
markets in Latin America. While a few of these markets performed well during
the fiscal year, we believe opportunities elsewhere remain just as
attractive and less potentially volatile.
In our selections, we tended to emphasize small and mid-sized companies. We
favor these companies because they tend to be very good at their particular
business, which gives them outstanding growth potential. In addition, they are
a less obvious way to play larger themes. For example, we hold a pair of
smaller Australian oil companies that we believe will benefit from the recent
increase in oil prices. But they are relatively obscure, we have an opportunity
to buy them for less than a more widely-followed company. Thus, our research
can help add value to the portfolio.
23
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STRONG INTERNATIONAL STOCK FUND II (CONT'D)
OPPORTUNITIES REMAIN IN GLOBAL MARKETS
Foreign stock markets as a whole have underperformed the U.S. market for nearly
two years. So a sense of impatience on the part of U.S. investors is
understandable. However, investors must remember that patience is a key
ingredient for success when investing in foreign markets. We don't know when
they may begin to outperform domestic markets, but we do know that there are
outstanding values now available internationally. We believe this is
particularly true for small and mid-cap stocks. Going forward, we intend to use
our research and stock selection abilities to take advantage of inefficiencies
in these markets.
In addition, the reasons that make international investing so compelling for
long-term investors remain in place:
o With the U.S. market at an all-time high, we believe investors both here and
abroad may be prompted to look elsewhere for greater potential, which should
help drive international stock prices higher.
o Many of these markets continue to grow more than twice as fast as mature
markets.
o Investors have the potential to increase returns and lower overall portfolio
volatility by diversifying a U.S. - only stock portfolio internationally.
As always, keep in mind that the Fund is likely to be more volatile than a
U.S.-only fund, owing to changes in stock market conditions, currency values,
interest rates, local regulations and economic and political conditions. But
given the value currently available in international markets, we believe
foreign equities offer long-term investors an attractive opportunity.
STRONG SPECIAL FUND II, INC.
OBJECTIVE - To seek capital appreciation through investments in a diversified
portfolio of equity securities.
NARRATIVE BY RICHARD WEISS & MARINA CARLSON, FUND MANAGERS
In pursuit of capital growth, the Strong Special Fund II, Inc. invests at least
70% of its total assets in equity securities. It currently emphasizes
medium-sized companies that the Fund's advisor believes are under-researched
and attractively valued.
STOCKS CLIMBED, BUT NOT SMOOTHLY
For the year, the market proved to be stronger than we expected. The
broad-based S&P 500 Index returned 22.95% for the year. There were plenty of
peaks and troughs on the way to that number, though. Small and mid-size stocks
were powerful in the first several months of the year, then suffered around the
middle of the year. They regained some of their footing, but ultimately
large-capitalization stocks beat them for the year. Thus, the S&P MidCap 400
Stock Index's 19.20% gain trailed the broader S&P 500 Stock Index.
Our returns for the year were 18.5%. That's a robust figure, but it is a little
below the returns of our benchmark, the S&P MidCap 400. This slight difference
is not entirely surprising. The market has been entirely focused on earnings,
with no regard to valuation, to which we pay close attention. Therefore,
high-priced, momentum-driven stocks continued to move up as long as they
delivered a certain level of earnings.
We positioned the fund somewhat defensively around the beginning of the second
quarter. This kept the Fund from fully realizing the gains that many
higher-priced growth stocks posted early in that quarter. It also protected the
portfolio from the sharp declines that hit small- and medium-size stocks in the
summer. The market rallied strongly in the second half of the year, but that
rally got narrower as time progressed. The focus increasingly fell on momentum
stocks - stocks that, for various reasons, attract intense investor interest.
MANY FACTORS CONTRIBUTED TO ROBUST RETURNS
The Fund benefited from more than our defensive stance at mid-year. Late in the
summer we began to identify many solid opportunities, particularly in two
sectors. After an early-summer downturn, technology began to recover, and
rising natural-resource prices helped to strengthen energy stocks.
We've also been able to take profits in some areas. For example, over the
course of the year we slowly reduced our sizable position in retail - an
industry we consider one of our specialties. We had purchased these stocks
based on our perception that the market was unduly pessimistic about their
prospects. Our more optimistic view seems to have won out - and as the stocks
have gone up, we have selectively sold them off.
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STRONG SPECIAL FUND II, INC. (CONT'D)
APPLYING OUR DISCIPLINE IN TODAY'S MARKET
Both market forces and our stock-selection criteria have made certain parts of
our portfolio especially attractive going into 1997. Our media stocks, for
example, appear to have bottomed out early in 1996's fourth quarter. They were
a drag on returns for most of the year, but now seem set for improved
performance.
Although we don't see quite as many opportunities now as we did at points in
1996, we are pleased with the prospects for companies in some of the
portfolio's main sectors. Technology is a good example. We have identified
companies in some less traditional areas in this sector. We believe the
performance of these companies is therefore not entirely tied to the larger
industry's. Should another correction hit technology, these are the types of
stocks that may be insulated from the damage.
As we seek out the best opportunities in the year ahead, we will place renewed
emphasis on selecting high-quality companies for the portfolio - those
companies with superior management teams and a competitive advantage within
their industry. In a market full of lofty valuations, we feel it presents too
much risk not to go with the best-quality companies.
Looking for high-quality management is consistent with our private-value
approach to investing. We evaluate companies as if we were contemplating
purchasing the entire firm, and determining the price we would be willing to
pay (its private-market value). When a stock price does not reflect the
strength of this private value - usually because not many analysts are paying
attention to the stock - we will consider adding it to the portfolio.
OTHER POTENTIAL AREAS OF EMPHASIS
We're looking for growth cyclical stocks to add to the portfolio in the coming
year. These are firms whose businesses are strongly correlated to the economy's
growth, but do not fully depend on a fast-growing economy to increase earnings.
The pricing on some of these issues reflects a somewhat negative opinion of the
economic environment - perhaps more negative than conditions really warrant.
Over the next six months, we may also add to our foreign holdings. One reason
for venturing abroad is that prices in the U.S. market are somewhat high,
cutting down on the number of opportunities at home. At the same time, we are
finding more suitable companies overseas.
We will be working to lower the Fund's median market capitalization. This
figure has moved up a little recently, partly because of appreciation of the
stocks in the portfolio and partly because of the nature of the opportunities
we have found. By heightening our focus on smaller and mid-size firms, we plan
to bring Fund's market cap down from its year-end level of $3.85 billion. (In
comparison, the S&P 500 has a market capitalization of $24.5 billion.) We
intend to keep the Fund in line with its historic character.
[LOGO]
A MEMBER OF THE AMERICAN CENTURY(SM) INVESTMENTS FAMILY OF MUTUAL FUNDS.
TCI BALANCED
OBJECTIVE - To seek capital growth and current income.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
The TCI Balanced fund lost some ground in the fourth quarter as the equity
portion, which is invested in rapidly growing companies of all capitalization
sizes, failed to keep pace with the large cap dominated S&P 500. TCI Balanced
continued to follow a two tiered approach to its equity holdings, maintaining a
core position in high quality, large cap growth stocks, augmented by a more
opportunistic weighting in rapidly growing mid cap stocks. The equity portion
of TCI Balanced benefited from companies in the oil service and drilling
industry, positions in large money center banks, and holdings in some of the
large pharmaceutical makers - all of which added value to fund performance for
both the quarter and the year. The foreign weighting was cut down to just over
5% of the portfolio, as the portfolio team found more attractive growth
opportunities domestically. At year end, the fund was 60% invested in equity
securities.
The fixed income portion of the fund is invested in high quality intermediate
term bonds, maintaining a defensive stature. Currently, the fund holds, and is
overweighted in investment grade corporate bonds to boost the yield. The
duration of the fixed-income is positioned neutral compared with the
intermediate benchmark. At year end, 39% of the fund was invested in bonds,
with the remaining 1% in cash.
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TCI GROWTH
OBJECTIVE - To seek capital growth by investing in common stocks (including
securities convertible into common stocks) that meet certain fundamental and
technical standards of selection and, in the opinion of the Fund's management,
have better than average potential for appreciation.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
During the past year, TCI Growth has been the focus of considerable attention
at the highest levels of American Century(SM) Investments. TCI Growth, a growth
equity option is among our largest and most important funds.
We fully expect the fund to show greater volatility than the market in general,
but to have the potential for greater returns. That this potential has not been
met has been the source of deep concern for us. As a result of these concerns,
we have taken steps we believe will improve the performance of the fund.
MANAGEMENT CHANGE: On June 30, 1996, the former lead manager of TCI Growth
resigned the firm, and the fund's management was transferred to a portfolio
team headed by Glenn Fogle, with oversight by Jim Stowers III, the lead manager
for Ultra. The new team has been, and continues to be, responsible for managing
Vista and Giftrust, two of American Century's more aggressive and well-known
retail funds.
PORTFOLIO CHANGES:
Smaller, faster growing companies: Almost immediately the new team began the
process of restructuring the portfolio with an emphasis on smaller and faster
growing companies. The average earnings growth rate of the portfolio increased
to 74% on December 31 from a level of 7.6% on June 30 when the new team assumed
responsibility.
Increased portfolio concentration: The total number of stocks in the portfolio
has been decreased - 74 companies present in TCI Growth on June 30, 1996 are no
longer held. At the same time, the concentration on our best prospects has
increased, with the top-10 holdings representing 34% of the fund's assets. This
concentration is in line with our traditional portfolio management strategy at
American Century.
Although these changes did not immediately improve fund performance, as the
U.S. stock market environment in 1996 continued to favor larger companies with
more predictable earnings, we believe the new team has repositioned the fund to
be in a better position to meet expectations in the long term.
We hope you'll recognize that these changes in the fund demonstrate our
commitment to seeing it live up to its full performance potential. We hope you
will give the revitalized TCI Growth a renewed consideration in light of the
expertise, commitment and discipline that Twentieth Century - now American
Century - has demonstrated over the years. If, as some have predicted, there is
to be a reversal away from the favor of large index names and toward smaller
companies with increasing, quality earnings growth, then shareholders in TCI
Growth may finally reap just rewards.
TCI INTERNATIONAL
OBJECTIVE - To seek capital growth by investing primarily in an internationally
diversified portfolio of common stocks that are considered by management to
have prospects for appreciation.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
The TCI International portfolio performed well ahead of the EAFE Index. While
1996 was a difficult year for international managers, given relatively low
economic growth in Europe and Japan and the negative effects of a stronger
USdollar, the portfolio team was able to add value due to astute stock
selection and sector rotation among industry groups based on bottom-up
fundamentals.
The Japanese market posted negative returns during the year in both local and
US currency terms. The portfolio exposure to Japan was reduced from 29% to 20%
and refocused on compelling growth situations during the year - with great
companies and a poor market, our Japanese portfolio returns were especially
flat. This was accomplished by focusing upon companies with monopolistic
products that would stand up in the face of weak local economic growth. Selling
Japanese technology holdings was also beneficial to the portfolio. Overall,
technology stocks in the portfolio were reduced from over 20% at the beginning
of the year to less than 10% at year end.
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TCI INTERNATIONAL (CONT'D)
Assets were re-deployed from Japanese position sales into growing companies in
Europe, with our largest increases in country exposure located in the United
Kingdom and Germany. In the United Kingdom, there were no real themes to be
cited, just attractive stock opportunities which paid off nicely. In Germany,
our largest shift including building positions in auto stocks such as Daimler
Benz, BMW and VW. The overall auto weighting in the portfolio increased to
almost 12% by year end, as overseas auto makers began seeing the fruits of
restructuring.
The other significant country exposure was an increase in the Canadian
weighting form 5% to 13%. Many of the stocks added to the portfolio were energy
stocks, including exploration, refining and natural gas. This was one of the
best performing industry/sector groups for the portfolio during the year.
Healthcare stocks also added significant value during the year, especially drug
companies with exciting pipelines of new drugs and better earnings due to
restructuring. The healthcare exposure dropped during the year as several
companies became fully valued relative to new purchase candidates. The other
significant contributors to performance were stocks in the telecommunications
and financial services industries.
Emerging market exposure in the portfolio was low during the year. Many
emerging markets had positive performance largely as a result of an influx of
funds rather than from improving company fundamentals. The portfolio continues
to add value from stock selection by focusing on growing companies with sound
fundamentals, and from risk reduction resulting from solid portfolio
construction.
TCI VALUE
OBJECTIVE - Long-term capital growth. Income is a secondary objective.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
The TCI Value team follows the risk averse strategy of searching for
attractively priced securities that offer a high probability of modest
outperformance, rather than a modest probability of high outperformance. The
fund has never wavered from its strategy of buying undervalued stocks - it has
done so with proven success since its inception last May. The TCI Value fund's
conservative posture prevented it from feeling the full impact of the turbulent
July market pull-back, where it protected assets by falling less than the
market, precisely as it is managed to do.
Although the fund looks like a mid cap value fund, it is important to recognize
that the fund is only mid cap by necessity. In their search for value, the
portfolio management team naturally steers away from the largest cap companies
which have performed so very well over the past two years, simply because they
are overpriced and are not good values. The fund is finding the best values in
the middle capitalization area. TCI Value held positions in integrated energy
which helped performance markedly throughout the year, yet the team lightened
its weightings here as the sector had done so well. However, a lack of exposure
to large banks, which have continued to do very well throughout the year,
hampered the fund at the margin. While the fund held positions in several banks
and other financials which performed admirably and added significant value,
fund positions were somewhat lighter than the market which also hurt modestly
on a relative basis. One of the most positive factors for Value this year, was
the fact that the fund owned a below average number of poor performing
companies. Even for those companies which did suffer disappointing
performance, the team stuck with those who maintained their fundamentally sound
businesses along with undervalued characteristics.
[LOGO]
GOLD AND NATURAL RESOURCES FUND
OBJECTIVE - To seek long-term capital appreciation by investing in equity and
debt securities of companies engaged in the exploration, development,
production and distribution of gold and other natural resources, such as
strategic and other metals, minerals, forest products, oil, natural gas and
coal.
NARRATIVE BY DEREK S. VANECK, PORTFOLIO MANAGER
1996 was a year of mixed results for natural resources/hard assets. Some
sectors, such as energy and real estate, ended the year with exceptional
returns and outperformed the S&P 500, while others, such as precious metals,
were in the doldrums. During the year, a reallocation on the Gold and Natural
Resources portfolio encompassing several other hard asset sectors helped the
Fund's performance. We are pleased to report that the Van Eck Gold and Natural
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GOLD AND NATURAL RESOURCES FUND (CONT'D)
Resources Fund achieved a total return of 18.0% for the year ended December 31,
1996.
The Fund's strong performance was fueled by exceptional returns in the energy
sector, which was the Fund's largest and best performing sector by year end
with an approximate 40% allocation. Returns were driven by stronger commodity
prices, successful application of technology to exploration efforts, and the
cost reduction that this application of technology brings to exploration and
development efforts.
In 1996, crude oil prices averaged more than $4 per barrel higher than in 1995.
Reasons included a combination of a stronger demand brought on by economic
growth in Asia and a cold winter in the U.S. and Europe as well as production
delays in the non-OPEC countries and a lack of Iraqi exports for most of the
year. Natural gas prices were also sharply higher due primarily to a cold
winter in the Northeast and Midwest, which depleted inventories. Moreover,
ongoing advancements in technology continued to improve efficiencies and
exploration results. One estimate shows drilling success rates doubling in the
past ten years due to technological changes. The Fund's energy holdings
benefited from these trends. For example, United Meridian Company, a U.S.-based
company with properties off the African coast, also saw its stock soar almost
200%. On the service side, drilling stocks, such as Falcon Drilling, were
standout investments as well.
Real estate securities in the U.S. were added to the portfolio during the year,
and although they remain a relatively small portion of portfolio assets (8.5%
at year end), they contributed to performance. U.S. Real estate investment
trusts, or REITs, gained approximately 35% for the year as fundamentals
continued to improve. Moreover, REITs finished the year on a strong note, with
fund flows into U.S. REITs accelerating significantly during the fourth
quarter.
Disappointing sectors included industrial metals and forest products and paper.
Industrial metals and paper shares had negative performance as the underlying
asset prices declined. Prices of industrial metals fell almost 9%, while pulp
prices dropped nearly 50% from the high set late in 1995. In both industries,
supply growth outstripped demand. In addition, both sectors endured severe
inventory corrections on both the producer and consumer levels. These two
factors resulted in a loss of pricing power, causing earnings to decline
significantly. Fortunately, our allocations to these sectors were low, at less
than 5% and 7% of assets in each, respectively. The investments we did hold in
these sectors were stocks of companies that held up well in this environment,
namely low-cost producers and companies with undervalued assets. (For example
Rayonier, a forest product and paper company, and Fort Howard, the lowest-cost
commercial tissue producer.)
Gold started the year on a strong note, jumping to $417 per ounce in the first
quarter, but it gradually fell in price throughout 1996, finishing the year at
$370, down 5%. Several factors contributed to the sell-off in gold. With low
inflation dominating the monetary picture, investment demand, a primary price
factor, was weak. Real short-term interest rates were positive, putting a high
opportunity cost on holding gold, and currency stability reigned. Further, an
increasing number of central banks, particularly in Europe, sold large amounts
of their gold reserves. Finally, after two years of declines, mine production
rose despite lower output from the world's largest supplier, South Africa,
where production dropped by 30 tons. The Morgan Stanley Capital International
Gold Mines Index declined 2.8% in 1996. Our reduction of the Fund's weighting
to gold stocks from approximately 50% in the beginning of the year to just over
30% by year end had a very positive effect.
THE OUTLOOK
In 1997, we believe certain natural resource/hard asset sectors will again
outperform financial assets, although we do not expect a repeat of some of the
exceptional returns of 1996. The supply and demand fundamentals that helped the
Fund register solid investment results remain firmly in place.
Our strategy will be to maintain a high energy weighting due to the sector's
excellent fundamentals. We remain optimistic about the oil services and
drilling sector, a group for which we believe there is significant upside
potential. The same factors that drove energy returns last year-strong
commodity prices (although we do not believe the market can sustain the
commodity price levels witnessed at year end), good exploration success and
improved demand for services and equipment-should continue this year. Our focus
remains on companies with good exploration success probabilities-and away from
companies with high commodity exposure. In the oil service sector, fundamentals
remain stronger than at any time in the past 15 years.
Expecting strong returns on real estate investments, we plan to increase the
portfolio's weighting to this
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GOLD AND NATURAL RESOURCES FUND (CONT'D)
sector. Fundamentals in the U.S. commercial property markets are attractive.
Vacancy rates overall are down substantially in many markets while new supply is
relatively minimal.
In our opinion, global growth will be healthy. The monetary environment is
extremely stimulative and central banks around the world are cutting interest
rates. Increased liquidity has been finding its way into financial assets, but
over the next year, we expect to see much of that money going into the real
economy, pushing economic growth higher, with the emerging market countries
showing strength considerably higher than that of the industrialized world.
China is likely to grow by 10% next year, growth in developing Latin America
should accelerate from 0.9% in 1995 to 4% in 1997 and Eastern Europe should
grow at 4%, up from 0.4% this year. Raw materials are essential to the building
of developing economies. Therefore, strong economic growth leads to increasing
demand and higher prices for hard assets.
WORLDWIDE BOND FUND++
OBJECTIVE - To seek high total return through a flexible policy of investing
globally, primarily in debt securities.
NARRATIVE BY MADIS SENNER, FUND MANAGER
Compared to the strong returns recorded in 1995, most major bond markets
registered modest gains last year, which were reduced in dollar terms due to
strength of the U.S. currency. Several "peripheral," higher risk European
markets fared well, but a rise in U.S. interest rates due to
stronger-than-expected economic growth dampened the performance of domestic
bonds. In this environment, the Worldwide Bond Fund had a total return of 2.5%
for the year ended December 31, 1996.
BOND MARKET REVIEW
During the first month of the year, bonds in most major markets were in a
relatively narrow trading range. Then, in February, U.S. interest rates
increased sharply due to a surprisingly strong January employment report. The
rise in U.S. rates and subsequent downturn in the U.S. bond market sparked a
sell-off in many major international markets during the first quarter. The
trend toward higher rates continued into the second quarter, aided by
higher-than-expected oil prices. By June 12, the yield on the 30-year U.S.
Treasury bond hit 7.19% (its high for 1996) after being as low as 5.95% on the
second trading day of the year, January 3.
To protect shareholder capital during the rise in rates, we employed a
defensive investment posture. In February, we reduced the Fund's average
duration to as low as three years. We also decreased the Fund's exposure to
domestic bonds and, later in the first half of the year, added substantially to
our positions in Canada and the United Kingdom, both of which witnessed solid
performance (which, for the UK market, unlike most others, was augmented by a
strong pound.) Our rationale hinged on developments likely to have positive
implications for these markets: Canada would benefit from solid economic
fundamentals and the governments commitment to eliminate the budget deficit by
the year 2000. The UK market would benefit from an environment of low
inflation, strong currency and improving consumer confidence.
Although the Federal Reserve did not raise short-term interest rates in 1996,
fears of a rate hike hung like a cloud over the U.S. and international bond
markets following the rise in long-term interest rates during the first half of
the year. Stronger-than-expected employment numbers in July and August added to
the concern, but the Federal Reserve maintained a neutral monetary policy due
to other data that showed inflation was still under control. (For example, in
August, the government reported that the unemployment rate plunged to 5.1%, its
lowest level in seven years.) The end result for a volatile U.S. bond market
was a lackluster return of 2.7% for the year. A substantial position in U.S.
bonds, although actively managed, had a net dampening effect on Fund
performances.
Some of the Fund's best results came from its investments in peripheral
European bonds, such as those of Italy, Spain and Sweden. Sluggish economic
growth and low inflation led to lower interest rates in many countries on the
Continent. In turn, most European markets achieved moderately positive returns
in local currency terms. The European markets were further helped by increasing
optimism for economic union. Peripheral markets recorded the most impressive
gains. Yields in these markets converged toward those of the higher-quality,
core European markets, due to a growing belief among investors that peripheral
markets will meet the Maastricht criteria for European Monetary Union (EMU). At
year end, the Fund had approximately 15% of total assets allocated to these
peripheral markets.
Early in the year, we liquidated the Fund's relatively small position in
Japanese bonds (which had a posi-
++ Formerly Global Bond Fund
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WORLDWIDE BOND FUND (CONT'D)
tive performance of 5%+ in yen terms, but declined 6.5% in U.S. dollar terms) as
the economy began to overheat. Later in the year, we began purchasing Japanese
bonds again based on signs of continuing economic weakness, which leads to lower
interest rates and higher bond prices. However, given the extreme volatility in
the Japanese market of late, we intend to maintain a "wait-and-see" approach
toward Japan before committing new funds to this market.
CURRENCY REVIEW
In 1996, the U.S. dollar showed strength against most of the major currencies.
For example, the dollar was up 10.8% against the Japanese yen and 6.7% against
the German mark. The only major currencies in the G-7 to show consistent
strength against the dollar were the British pound and the Italian lira, which
advanced 10.5% and 4.5%, respectively, versus the greenback. The dollar's
relative strength against most major currencies dampened the positive returns
for U.S. Investors. The Fund's relatively high cash position on several
occasions throughout the year enabled us to limit losses due to currency
fluctuations.
OUTLOOK
Looking ahead, our forecast for the global bond markets is encouraging. We
believe the slow growth, low inflation environment in Europe will continue to
bode well for bonds there, and we intend to continue favoring European issues.
We expect the U.S. bond market to remain somewhat volatile. While U.S.
inflation still appears to be under control, the general direction of the
economy and long-term interest rates is still uncertain. However, we also
believe the worst of the domestic bond market decline may be behind us.
WORLDWIDE EMERGING MARKETS FUND
OBJECTIVE - Seeks long-term capital appreciation by investing primarily in
equity securities in emerging markets around the world.
NARRATIVE BY GARY GREENBERG, FUND MANAGER
We are pleased to report that the Van Eck Worldwide Emerging Markets Fund rose
26.8% in its first year, substantially outperforming the MSCI Emerging Markets
Free Index, which rose 3.2%. The Lipper - Emerging Markets Fund Index rose
12.2% for the year.
Selected emerging markets did well last year as investors discovered that they
offered companies with superior growth prospects and moderate valuations. Latin
American equities produced excellent gains on balance, increasing 22% for the
year as many countries there showed signs of strong recovery after 1995
recessions. In Asia, there was a marked difference in the year's performance
among various markets, with some Asian markets, such as Hong Kong, Malaysia and
Indonesia, gaining in excess of 20% for the year, while Thailand, Singapore and
Korea had fairly dramatic declines. In Eastern Europe, many markets had
spectacular gains, with Russia leading the way, up 164%.
The Fund's strong performance was due both to stock selection and country
allocation. Although Argentina did well, gaining just over 20% for the year,
our holding in Patagonia, the supermarket chain, did considerably better rising
129% since we purchased it in May. Chinese stocks did extremely well during the
year, rising over 150% as interest rates declined and there was renewed
confidence in the macroeconomic management of the country. Our position in
Fangda, a manufacturer of building materials in Shenzen, rose 177% in less than
six months. Computerland, a systems integrator in Poland, gained 42% since we
bought it in July, outpacing the Polish index's gain of 11%. The Fund's
holdings in Russia rose dramatically, led by GUM, the department store in Red
Square, which rose 103% from May to September (the time period during which we
held the stock).
The Fund uses a "top-down" discipline to screen out countries where political
or economic risk is considered to outweigh the prospects of individual
companies, and to identify fertile regions for investment. Last year, we
screened out South Africa (due to a deterioration of economic prospects) and
Thailand (as a property glut there threatened the banking system), despite
their high weighting in most emerging markets indices. We were intrigued,
however, by what looked like bargain-level stock valuations in Russian,
Brazilian and Egyptian stocks. This led us to look closely at these countries
to see if their economies appeared to contain "turnaround" potential. Our
initial expectations were confirmed as we determined that the likely direction
of government policy was toward economic modernization. An analysis of the
fundamentals of certain individual stocks, such as Irkutskenergo (a utilities
company) and GUM in Russia, Telebras (telecommunications) and Cemig
(electricity) in Brazil, and Eastern Tobacco and Commercial International Bank
in Egypt, showed exceptional promise. These were undervalued stocks in cheap
markets with good prospects for growth. Our positions in each of these stocks
did well.
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WORLDWIDE EMERGING MARKETS FUND (CONT'D)
The fund ended the year with significant weightings in Mexico, Brazil, Hong
Kong, Russia and Egypt. Mexican interest rates remain high, but began to
decline late in the year and we believe the worst is over for the banking
system. The Mexican economy is picking up steam and contains a number of strong
companies with excellent management and accelerating earnings growth. Brazil
has successfully brought inflation down from several thousand percent to the
low teens. We believe the upcoming privatization of electric and telephone
utilities will be done at significant premia to current market valuations. Hong
Kong's hand-over to China will be a non-event, in our opinion, as evidenced by
a strong property market and buoyant automobile sales. Russian stocks, while
carrying significant risks, are priced at a small fraction of their replacement
value, a situation that is certainly not the case in the U.S., where the market
trades at a premium. Egypt has a dynamic privatization program in place and
stocks there appear attractively valued. Yields are high, inflation is low and
earnings are growing at a reasonable rate.
We believe that the outlook for emerging markets in 1997 remains positive.
Global interest rates should remain steady and inflation's downward trend in
many emerging markets over the past five years appears set to continue. Asia's
tigers tightened monetary policy in 1996 in order to squeeze out excess growth
and experienced a new spurt of non-inflationary growth later in the year.
Eastern Europe continues to progress steadily along the path of recovery, as do
many of the Latin American countries. Finally, Mediterranean Europe and North
Africa are also beginning to grow again.
Emerging markets are risky. Although the Fund invests in a large number of
geographically diverse markets, world events can at times cause markets to
decline simultaneously. While historically, emerging markets have performed
well compared to developed markets, it is essential to maintain a long-term
perspective when investing in this area. It is with this long-term perspective
that we manage the Fund and remain confident about the future.
[LOGO]
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
OBJECTIVE - To achieve long-term growth of capital through investing in
publicly traded real estate securities. Current income is an important
secondary consideration.
NARRATIVE BY VAN KAMPEN AMERICAN CAPITAL
We seek to achieve our objective by creating a diverse portfolio of securities
of companies operating in the real estate industry, including real estate
investment trusts, or REITs. REITs are companies that own, acquire, develop and
manage real estate like any other operating company.
Before picking the stocks for our portfolio, we first decide which property
sectors are most attractive from a supply/demand point of view; then, we must
also ascertain which geographic regions within that sector are exhibiting what
we believe are the best real estate fundamentals. At that point, we choose
stocks on the basis of a comparison of their share price to our estimate of
intrinsic value. Intrinsic value is primarily a function of the estimated
liquidation value of the underlying assets together with a view towards
potential future growth in value.
As of December 31, 1996, the portfolio was comprised of about 45 companies and
10 different property sectors. Our three largest property sector weights were
office/industrial at 26.1%, retail at 22.5%, and apartments at 19.5%. The
portfolio was moderately underweight retail, market weight apartments and
overweight the office/industrial sectors during 1996.About 40% of the portfolio
is comprised of companies with a nationwide focus. Another 15% of the portfolio
is made up of stocks in the western portion of the U.S.
Our performance over the 12 months, ending December 31, 1996, exceeded the REIT
market overall (as measured by the NAREIT Equity Index) and compares well to a
peer group of dedicated REIT funds. We attribute our superior performance to our
overweighting in the office/industrial and hotel sectors for most of the time
period under review. In addition, we added to our retail exposure in the
beginning of 1996, because this group had been punished in a depressed retail
environment. This sector has performed well of late and contributed to our
recent performance.
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REAL ESTATE SECURITIES FUND (CONT'D)
The total return for REIT index for 1996 was 35.3%, which exceeded the
performance of the S&P 500 by approximately 12.35%. Though REITs have
outperformed the S&P 500 in five out of the last six years, we clearly view the
rally in REIT prices during 1996 as extraordinary. While there are a number of
explanations for this strong growth in REIT share values, certainly one of the
most important was the emergence during the second half of the year of
sustained interest by individual investors and mutual funds in REITs as a
defensive tool against a possible broad market correction. Investors have taken
notice that the REIT market has proven to be generally less volatile than the
equity market overall during the past three to five years, and that the
relatively high dividend yields on REITs may serve as a cushion should the
stock market falter. Even though the REIT market raised a record amount of
capital in follow-on stock offerings during 1996, the flood of new cash into
the market helped to push share prices to new highs in virtually every real
estate sector.
Looking forward, we expect continued significant investor interest and funds
into real estate stocks for the reasons outlined above. Furthermore, the
underlying fundamentals of the real estate markets remain generally favorable.
The ongoing recovery in the economy continues to generate tenant demand for
space, and new construction remains modest in most markets across the country.
Thus, both conditions in the capital markets (supply and demand for stocks) and
in the real markets (supply and demand for property itself) should support
returns to REITs that are in line with their long-term averages of 10-15% per
annum. While these expectations are clearly less than 1996's extraordinary
returns, they do appear attractive relative to other financial assets when
viewed in the context of real estate's defensive characteristics.
[LOGO]
INTERNATIONAL EQUITY PORTFOLIO
OBJECTIVE - Seeks long-term capital appreciation by investing in equity
securities of non-U.S. issuers.
NARRATIVE BY WARBURG PINCUS FUNDS
By region, the largest gains once again belonged to Europe, whose markets
continued to benefit from falling interest rates and optimism regarding the
prospects for monetary union. Asian markets generally struggled. Latin American
markets had mixed performance.
We continue to find value in many markets, and believe that 1997 stands to be a
rewarding year for international investors. Our outlook on specific markets,
and our current strategies are below.
Our European holdings continued to perform strongly. One market that has
performed particularly well and one to which we have increased our exposure, is
Germany. A growing number of German companies have committed to the idea of
building shareholder value, reflected in increased attention to per-share
profit growth and greater transparency in accounting methods. Clearly, the
trend is positive for the German market as a whole, which remains home to a
number of world-class companies. We recently added one of these, chemicals
giant BASF, to the portfolio, and the stock has appreciated strongly since our
purchase. Another new name in the Portfolio is GEA, an engineering company
with strong global market share in three areas: food processing, air treatment
and refrigeration, and thermal power technology.
We remain underweighted in the United Kingdom, a market that has been a strong
performer for the Portfolio, particularly in dollar terms. Collectively,
British companies have enjoyed strong profit growth in recent quarters, and are
much farther along in their earnings cycle than are companies elsewhere in
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INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
Europe. Accordingly, most of our buying in Europe is outside the U.K., where
the potential for earnings growth is proportionately greater.
Elsewhere in Europe, we added Netherlands company Philips Electronics to the
portfolios during the fourth quarter. Philips, a major diversified electronics
firm (and owner of several leading brand names, including PolyGram), saw its
stock lag the soaring Netherlands market in 1996. But the company, led by a
strong management team, is in the process of undergoing significant
restructuring and rationalization of its operations.
Our portfolios benefited from strong performances from our Australian holdings
during the fourth quarter, and we have increased the country's representation
in the portfolios in recent months to nearly 5% currently. Particularly strong
performers were holdings Lend Lease, a property and financial-services firm;
Reinsurance Australia, a reinsurer; and Oil Search, an oil exploration and
development company added to the Portfolio during the third quarter.
We remain similarly positive on New Zealand stocks. The center-right coalition
government that has emerged from New Zealand's October elections appears likely
to maintain most of the country's existing economic policies, which is clearly
favorable for the stock market. Also favorable for the market is the recent
modification of the Reserve Bank Act. The change has allowed New Zealand's
central bank to widen its targeted inflation band (inflation can now legally
drift as high as 3%, vs. a stipulated maximum of 2% previously, and the bank
has responded by lowering short-term interest rates from approximately 10% in
September to under 8% currently, which has had a positive effect on the stock
market.
South Korea's market continued to fall in the fourth quarter, and our weighting
again hurt performance. Sentiment among domestic investors (who still control
80% of the market) remains poor due to concerns over slower economic growth and
widening current-account and trade deficits. Sentiment also took a major hit at
the end of the quarter after the government passed a much-needed labor-reform
law, one deemed so sufficiently harsh by workers that it sparked strikes by
unionized employees and violent protests.
Arguably, most, if not all, of the bad news on South Korea's economy has been
more than sufficiently discounted by the market. And there are clearly reasons
for optimism, including an economy that is growing at approximately 6% a year,
further market-opening moves in store as the country moves toward OECD members,
and the government's recently illustrated commitment to reforming the labor
market in an effort to increase South Korea's competitiveness globally.
Accordingly, we have maintained our exposure to the market, and believe that
there are particularly attractive values to be found among banks and
electronics companies, especially semiconductor makers (e.g., Samsung
Electronics).
Japan's equity market has struggled, largely due to worries over a slowdown in
economic growth. These concerns were fueled by the Japanese Economic Planning
Agency's official forecast of 1.9% growth in GDP for the next fiscal year
(beginning April 1), down from a forecast of 2.5% growth for the current year.
Our own estimate calls for a higher growth rate, as well as a continued
expansion in corporate earnings (Japanese companies' profits rose an average
12.7% in the third quarter vs. year-earlier levels). The combination should
eventually lead to a pickup in investor sentiment and a proportional recovery
in share prices, although, as in South Korea's case, the timing of events is
hard to project. Supporting earnings, and the Japanese economy as a whole, are
the continued low level of interest rates and the weak yen, which has had a
significant impact on the earnings of blue-chip, export-oriented companies in
particular. Known as the "Nifties," many of these large blue chips have seen
concentrated buying in their shares in recent months and have enjoyed
relatively strong performance as a result, belying the general weakness
displayed by the broader-market averages. The Nifties are well-represented in
our portfolios by holdings Canon, Honda, Sony, and TDK among others, and these
have contributed positively to our performance.
Recent developments provide further grounds for optimism, especially over the
longer term. One of our main arguments for investing in Japan is that there is
a significant amount of restructuring taking place among corporations (although
clearly this varies from company to company, necessitating careful stock
selection), as well as a general trend toward deregulation of Japanese industry
as a whole.
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INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
We have also continued to hedge a portion of our yen exposure as a defensive
measure, and much of our unhedged yen exposure is naturally hedged in that it
represents companies (e.g., exporters) whose earnings benefit from a weaker
local currency.
Our largest exposure in the region remains Argentina, a market that performed
very strongly during the period. Driving stocks higher was positive investor
response to the latest economic figures, which showed that Argentina's recovery
is well under way and that growth is likely, in fact, to surprise on the
upside. Inflation, meanwhile, remains almost nonexistent. We continue to view
the market's prospects favorably.
POST VENTURE CAPITAL PORTFOLIO
OBJECTIVE - Seeks long-term growth of capital by investing primarily in equity
securities of issuers in their post-venture capital stage of development and
pursues an aggressive investment strategy.
NARRATIVE BY WARBURG PINCUS FUNDS
For the three months ended December 31, 1996 (the Portfolio's inception date
was September 30, 1996), the Portfolio had a total return of -2.40%. Its
benchmark indexes, the Lipper Growth Funds Index and the Russell 2000 Growth
Index, had returns of 4.80% and 0.27%, respectively, for the period. The
Warburg Pincus/Venture Economics Post-Venture Capital Index (PVCI) had a total
return of -3.16% for the three months.
While clearly a disappointing debut for the Portfolio, we believe that the
Portfolio's longer-term results will more than compensate investors for their
patience during short-term periods of underperformance. We would encourage
investors to take a similarly long-term approach, especially given the types of
high-growth companies in which the Portfolio invests.
The Portfolio targets companies that have, within the past 10 years, received
venture-capital backing, distributed their securities to venture-capital
investors or engaged in an initial public offering. It is our belief that such
venture-backed companies can have above-average earnings prospects vs.
companies that lacked such backing, and that this stands to be reflected in
their share prices over time.
The Portfolio has the latitude to invest in companies of any size (i.e., market
capitalization). Investors should be aware, however, that most companies that
receive venture-capital financing do so at any early stage of their
development. We anticipate that the average market capitalization of stocks
held in the Portfolio will be less than $1 billion at the time of investment.
Because of the nature of the Portfolio's investments and certain strategies it
may use (as further described in the Portfolio's prospectus), we consider the
Portfolio most suitable for the aggressive portion of an investor's portfolio.
As of December 31, the Portfolio held a diversified mix of holdings by
industry, with its greatest concentrations in the technology sector (broadly
defined to include computers and electronics), health care (including
pharmaceuticals) and telecommunications & equipment. We believe that our
specific holdings in these areas, and our other portfolio holdings as well,
have attractive prospects for appreciation relative to the broader market in
1997, and we look forward to a rewarding year.
SMALL COMPANY GROWTH PORTFOLIO
OBJECTIVE - Seeks capital growth by investing in equity securities of
small-sized domestic companies.
NARRATIVE BY WARBURG PINCUS FUNDS
Warburg Pincus' Small-Cap Growth Equity Portfolio posted nominal gains in the
fourth quarter of 1996, underperforming its benchmark indices for the period.
Much of this is attributable to the portfolios' exposure to the health-care
sector, which continued, in general, to perform poorly (though selected
biotechnology and HMO shares managed to rebound from their earlier losses).
We remain committed to health care as a long-term investment opportunity, given
the very favorable demographics, and believe that there are currently some very
attractive opportunities in certain subsectors of the medical-devices,
health-care-services and biotechnology areas. That said, we approach 1997
cautiously with regard to health care in general. The financial problems of the
Medicare trust fund, the prospect of a new FDA Commissioner and the extreme
difficulty in predicting the clinical progress of biotechnology companies make
for a challenging investment environment. Accordingly, the portfolios are
underweighted in health care relative to benchmark indices, and we will likely
maintain this stance until clearer prospects emerge.
34
<PAGE> 35
SMALL COMPANY GROWTH PORTFOLIO (CONT'D)
Beyond health care, much of the rest of the portfolios saw positive
performance. Stocks that performed well for the portfolios include technology
issues, particularly its semiconductor-related holdings, which climbed on good
news from Intel, the industry's bellwether, and on evidence of ongoing
improvement in the supply/demand balance. We continue to find many attractive
opportunities in the technology sector, where the accelerated demand for
information access from individuals, corporations and government, coupled with
the ongoing quest for productivity enhancement, will continue to drive the
demand for innovative products.
Energy, including oil services, is another area that performed well for the
Fund. We continue to build our exposure to this area, given the relative
underinvestment in the industry in recent years and the steady rise in demand
for energy. Demand stands to rise strongly in 1997 and 1998, especially if the
ongoing low level of interest rates in many countries (e.g., Japan and
throughout Europe) spurs a synchronized global economic recovery. Many smaller
companies are well-suited to take advantage of this environment.
Other areas in which we are finding attractive stocks include business
services, a broadly defined group of companies that continue to benefit from
corporate America's downsizing and outsourcing efforts; specialty consumer
companies, including retailers' and telecommunications, where vast
opportunities are unfolding as a result of deregulation and recently passed
legislation. Given our assessment of their prospects, these areas, and those
discussed above, will represent the greater part of our research efforts in
1997.
35
<PAGE> 36
Fund Performances-The BEST OF AMERICA(R) IV
Total Return: Assuming Contract Not Surrendered** (Non-Standardized)
Approximate Percent Change in Net Assets with Capital Gains and Income Dividends
Reinvested
<TABLE>
<CAPTION>
Non-Annualized Percent Change*** Annualized Percent Change***
Inception 1 Yr. to 5 Yr. to Inception to 5 Yr. to Inception to
Funds++ Date*+ 12/31/96 12/31/96+ 12/31/96+ 12/31/96 12/31/96
----------------------------------------------------------------------------------------------------------------------------
DREYFUS CORPORATION
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Portfolio 05/02/94 18.08% NA* 83.25% NA* 25.50%
Socially Responsible Growth Fund, Inc. 10/06/93 19.65% NA* 70.37% NA* 17.90%
Stock Index Fund 09/29/89 20.94% 85.46% 130.54% 13.15% 12.20%
FIDELITY VIP FUND & VIP FUND II
Equity-Income Portfolio 10/09/86 12.79% 114.09% 217.61% 16.44% 11.96%
Growth Portfolio 10/09/86 13.21% 89.75% 259.75% 13.67% 13.33%
High Income Portfolio 09/19/85 12.54% 88.07% 209.57% 13.47% 10.53%
Overseas Portfolio 01/28/87 11.74% 44.97% 86.66% 7.71% 6.49%
Asset Manager Portfolio 09/06/89 13.11% 59.68% 104.26% 9.81% 10.25%
Contrafund Portfolio 01/03/95 19.72% NA* 65.01% NA* 28.57%
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund 04/15/92 24.49% NA* 76.28% NA* 12.79%
Government Bond Fund 11/08/82 2.13% 31.58% 202.88% 5.64% 8.15%
Money Market Fund 11/10/81 3.74% 14.82% 133.28% 2.80% 5.75%
Small Company Fund 10/23/95 21.22% NA* 38.32% NA* 31.31%
Total Return Fund 11/08/82 20.25% 78.68% 527.39% 12.31% 13.86%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Growth Portfolio 09/10/84 7.71% 49.67% 276.05% 8.40% 11.36%
Limited Maturity Bond Portfolio 09/10/84 2.94% 21.36% 127.32% 3.95% 6.90%
Partners Portfolio 03/22/94 27.88% NA* 66.59% NA* 20.16%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Bond Fund 04/30/85 3.43% 35.58% 155.68% 6.28% 8.38%
Global Securities Fund 11/12/90 16.26% 68.27% 72.09% 10.97% 9.25%
Multiple Strategies Fund 02/09/87 13.99% 62.69% 158.55% 10.22% 10.08%
STRONG FUNDS
Strong Discovery Fund II 05/08/92 -0.51% NA* 61.30% NA* 10.83%
Strong International Stock Fund II 10/20/95 8.94% NA* 11.51% NA* 9.51%
Strong Special Fund II, Inc. 05/08/92 16.61% NA* 110.73% NA* 17.39%
TCI PORTFOLIOS, INC.
TCI Balanced 05/01/91 10.74% NA* 61.27% NA* 8.79%
TCI Growth 11/20/87 -5.57% 26.37% 126.27% 4.79% 9.37%
TCI International 05/01/94 12.91% NA* 17.77% NA* 6.32%
TCI Value 05/01/96 NA* NA* 11.32% NA* 17.41%
VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund 09/01/89 16.52% 84.74% 62.48% 13.06% 6.84%
Worldwide Bond Fund++ 09/01/89 1.18% 13.46% 46.04% 2.56% 5.30%
Worldwide Emerging Markets Fund 12/27/95 25.19% NA* 23.93% NA* 23.59%
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 38.70% NA* 49.31% NA* 30.69%
WARBURG PINCUS TRUST
International Equity Portfolio 06/30/95 8.55% NA* 15.72% NA* 10.18%
Post Venture Capital Portfolio 09/30/96 NA* NA* -2.55% NA* -9.74%
Small Company Growth Portfolio 06/30/95 12.42% NA* 39.74% NA* 24.88%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance information is not available for all or part of the period
indicated (See Fund Inception Date).
** SEC and NASD regulations require that any reporting of product performance
be accompanied by standardized data and the disclosures are on the
following page. Please review this information and a product prospectus
before investing.
*** Percent change in unit value price represents total return after the
deduction of a 1.3% annual asset fee.
+ Numbers in this column represent the total percentage change in the unit
value for the period indicated. This is not an annual return figure.
++ Funds are neither insured nor guaranteed by the U.S. Government. For the
Money Market Fund, there is no assurance that a stable $1 fund NAV (used to
calculate Unit Value) can be maintained. Figures quoted represent past
performance and returns can fluctuate.
*+ Performance for some funds reflects performance for periods before the
fund was actually available in the separate account. That hypothetical
performance is calculated by imposing contract charges on actual fund
performance, to determine how the fund would have performed if it had been
available in the separate account.
++ Formerly Global Bond Fund.
36
<PAGE> 37
Fund Performances-The BEST OF AMERICA(R) IV (cont'd)
Total Return: Assuming Contract Surrendered (Standardized)
Approximate Percent Change in Net Assets with Capital Gains
and Income Dividends Reinvested
<TABLE>
<CAPTION>
Inception 1 Yr. to 5 Yr. to 10 Yr. to Inception to
Funds++ Date*+ 12/31/96 12/31/96 12/31/96 12/31/96
-------------------------------------------------------------------------------------------------------------
DREYFUS CORPORATION
<S> <C> <C> <C> <C> <C>
Growth and Income Portfolio 05/02/94 9.68% NA* NA* 21.08%
Socially Responsible Growth Fund, Inc. 10/06/93 11.25% NA* NA* 13.50%
Stock Index Fund 09/29/89 12.54% 10.13% NA* 9.20%
FIDELITY VIP FUND & VIP FUND II
Equity-Income Portfolio 10/09/86 4.39% 13.82% 9.90% 9.25%
Growth Portfolio 10/09/86 4.81% 10.84% 11.55% 10.88%
High Income Portfolio 09/19/85 4.14% 10.84% 7.08% 8.09%
Overseas Portfolio 01/28/87 3.34% 4.50% NA* 3.67%
Asset Manager Portfolio 09/06/89 4.71% 6.90% NA* 7.46%
Contrafund Portfolio 01/03/95 11.32% NA* NA* 23.79%
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund 04/15/92 16.09% NA* NA* 9.35%
Government Bond Fund 11/08/82 -6.21% 2.47% 4.49% 5.85%
Money Market Fund 11/10/81 -4.66% -0.61% 1.65% 3.35%
Small Company Fund 10/23/95 12.82% NA* NA* 21.64%
Total Return Fund 11/08/82 11.85% 9.31% 8.75% 12.12%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Growth Portfolio 09/10/84 -0.69% 5.28% 7.71% 9.39%
Limited Maturity Bond Portfolio 09/10/84 -5.45% 0.64% 2.63% 4.56%
Partners Portfolio 03/22/94 19.48% NA* NA* 15.73%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Bond Fund 04/30/85 -4.97% 3.15% 4.92% 6.14%
Global Securities Fund 11/12/90 7.86% 8.11% NA* 5.91%
Multiple Strategies Fund 02/09/87 5.59% 7.25% NA* 7.77%
STRONG FUNDS
Strong Discovery Fund II 05/08/92 -8.70% NA* NA* 7.58%
Strong International Stock Fund II 10/20/95 0.54% NA* NA* -0.14%
Strong Special Fund II, Inc. 05/08/92 8.21% NA* NA* 14.45%
TCI PORTFOLIOS, INC.
TCI Balanced 05/01/91 2.34% NA* NA* 6.25%
TCI Growth 11/20/87 -13.46% 1.48% NA* 6.80%
TCI International 05/01/94 4.51% NA* NA* 1.16%
TCI Value 05/01/96 NA* NA* NA* 7.41%
VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund 09/01/89 8.12% 10.29% NA* 3.35%
Worldwide Bond Fund++ 09/01/89 -7.11% -1.00% NA* 2.24%
Worldwide Emerging Markets Fund 12/27/95 16.79% NA* NA* 11.62%
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 30.30% NA* NA* 23.24%
WARBURG PINCUS TRUST
International Equity Portfolio 06/30/95 0.15% NA* NA* 2.68%
Post Venture Capital Portfolio 09/30/96 NA* NA* NA* -18.85%
Small Company Growth Portfolio 06/30/95 4.02% NA* NA* 17.79%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The above illustration represents past fund performance based on a $1,000
hypothetical investment. The performance figures reflect the deduction of
a 1.3% annual asset fee, a $30 annual administrative charge, and a maximum
of a 6.0% contingent deferred sales charge (after one year, declining
thereafter). They also reflect the application of an annual 10% free
withdrawal privilege available after the first year. Investment principal
and investment returns are not guaranteed under these variable options.
Account values at the time of redemption may be more or less than the
purchase payment, due to market fluctuations and any specific charges that
may apply. This is neither an offer to sell nor a solicitation to buy
securities. The results shown are not a representation of future
investment performance. Any comparisons should be made only after a
recognition of the differences in the investment policies and objectives
of the funds' investments. This report is authorized for distribution to
prospective investors only when preceded or accompanied by prospectuses
containing more complete information, which should be read carefully
before investing or sending money.
* Performance information is not available for all or part of the period
indicated (See Fund Inception Date).
++ Funds are neither insured nor guaranteed by the U.S. Government. For the
Money Market Fund, there is no assurance that a stable $1 fund NAV (used to
calculate Unit Value) can be maintained. Figures quoted represent past
performance and returns can fluctuate.
*+ Performance for some funds reflects performance for periods before the
fund was actually available in the separate account. That hypothetical
performance is calculated by imposing contract charges on actual fund
performance, to determine how the fund would have performed if it had been
available in the separate account.
++ Formerly Global Bond Fund.
37
<PAGE> 38
Fund Performances-The BEST OF AMERICA(R) IV (cont'd)
America's Vision Annuity(SM)
Total Return: Assuming Contract Not Surrendered** (Non-Standardized)
Approximate Percent Change in Net Assets
with Capital Gains and Income Dividends Reinvested
<TABLE>
<CAPTION>
Non-Annualized Percent Change*** Annualized Percent Change***
Inception 1 Yr. to 5 Yr. to Inception to 5 Yr. to Inception to
Funds++ Date*+ 12/31/96 12/31/96+ 12/31/96+ 12/31/96 12/31/96
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Growth and Income Portfolio 05/02/94 17.97% NA* 82.76% NA* 25.37%
Socially Responsible Growth Fund, Inc. 10/06/93 19.52% NA* 69.82% NA* 17.78%
Stock Index Fund 09/29/89 20.81% 84.56% 128.93% 13.04% 12.09%
FIDELITY VIP FUND & VIP FUND II
Equity-Income Portfolio 10/09/86 12.68% 113.09% 214.54% 16.34% 11.85%
Growth Portfolio 10/09/86 13.09% 88.83% 256.29% 13.56% 13.23%
High Income Portfolio 09/19/85 12.43% 87.20% 206.17% 13.36% 10.43%
Overseas Portfolio 01/28/87 11.62% 44.26% 84.85% 7.60% 6.39%
Asset Manager Portfolio 09/06/89 12.99% 58.91% 102.81% 9.71% 10.14%
Contrafund Portfolio 01/03/95 19.60% NA* 64.68% NA* 28.44%
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund 04/15/92 24.37% NA* 75.47% NA* 12.67%
Government Bond Fund 11/08/82 2.03% 30.94% 198.67% 5.54% 8.04%
Money Market Fund 11/10/81 3.64% 14.24% 130.16% 2.70% 5.66%
Small Company Fund 10/23/95 21.10% NA* 38.15% NA* 31.17%
Total Return Fund 11/08/82 20.13% 77.81% 518.84% 12.20% 13.75%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Growth Portfolio 09/10/84 7.60% 48.94% 271.74% 8.29% 11.26%
Limited Maturity Bond Portfolio 09/10/84 2.84% 20.76% 124.67% 3.84% 6.80%
Partners Portfolio 03/22/94 27.75% NA* 66.13% NA* 20.04%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Bond Fund 04/30/85 3.32% 34.92% 152.86% 6.17% 8.27%
Global Securities Fund 11/12/90 16.14% 67.48% 71.10% 10.86% 9.15%
Multiple Strategies Fund 02/09/87 13.87% 61.90% 156.12% 10.12% 9.97%
STRONG FUNDS
Strong Discovery Fund II 05/08/92 -0.61% NA* 60.56% NA* 10.72%
Strong International Stock Fund II 10/20/95 8.83% NA* 11.37% NA* 9.40%
Strong Special Fund II, Inc. 05/08/92 16.49% NA* 109.80% NA* 17.28%
TCI PORTFOLIOS, INC.
TCI Balanced 05/01/91 10.63% 28.93% 60.38% 5.21% 8.69%
TCI Growth 11/20/87 -5.67% 25.74% 124.31% 4.69% 9.27%
TCI International 05/01/94 12.80% NA* 17.46% NA* 6.21%
TCI Value 05/01/96 NA* NA* 11.24% NA* 17.29%
VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund 09/01/89 16.40% 83.86% 61.28% 12.95% 6.74%
Worldwide Bond Fund++ 09/01/89 1.08% 12.88% 44.99% 2.45% 5.20%
Worldwide Emerging Markets Fund 12/27/95 25.07% NA* 23.81% NA* 23.47%
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 38.56% NA* 49.09% NA* 30.56%
WARBURG PINCUS TRUST
International Equity Portfolio 06/30/95 8.44% NA* 15.55% NA* 10.07%
Post Venture Capital Portfolio 09/30/96 NA* NA* -2.57% NA* -9.84%
Small Company Growth Portfolio 06/30/95 12.31% NA* 39.53% NA* 24.76%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance information is not available for all or part of the period
indicated (See Fund Inception Date).
** SEC and NASD regulations require that any reporting of product performance
be accompanied by standardized data and the disclosures are on the
following page. Please review this information and a product prospectus
before investing.
*** Percent change in unit value price represents total return after the
deduction of a 1.4% annual asset fee.
+ Numbers in this column represent the total percentage change in the unit
value for the period indicated. This is not an annual return figure.
++ Funds are neither insured nor guaranteed by the U.S. Government. For the
Money Market Fund, there is no assurance that a stable $1 fund NAV (used to
calculate Unit Value) can be maintained. Figures quoted represent past
performance and returns can fluctuate.
*+ Performance for some funds reflects performance for periods before the fund
was actually available in the separate account. That hypothetical
performance is calculated by imposing contract charges on actual fund
performance, to determine how the fund would have performed if it had been
available in the separate account.
++ Formerly Global Bond Fund.
38
<PAGE> 39
Fund Performances-The BEST OF AMERICA(R) IV (cont'd)
America's Vision Annuity(SM)
Total Return: Assuming Contract Surrendered (Standardized)
Approximate Percent Change in Net Assets with
Capital Gains and Income Dividends Reinvested
<TABLE>
<CAPTION>
Inception 1 Yr. to 5 Yr. to 10 Yr. to Inception to
Funds++ Date*+ 12/31/96 12/31/96 12/31/96 12/31/96
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Growth and Income Portfolio 05/02/94 12.57% NA* NA* 24.21%
Socially Responsible Growth Fund, Inc. 10/06/93 14.12% NA* NA* 17.00%
Stock Index Fund 09/29/89 15.41% 12.82% NA* 12.09%
FIDELITY VIP FUND & VIP FUND II
Equity-Income Portfolio 10/09/86 7.28% 16.14% 12.16% 11.85%
Growth Portfolio 10/09/86 7.69% 13.34% 13.55% 13.23%
High Income Portfolio 09/19/85 7.03% 13.14% 9.58% 10.43%
Overseas Portfolio 01/28/87 6.22% 7.33% NA* 6.39%
Asset Manager Portfolio 09/06/89 7.59% 9.46% NA* 10.14%
Contrafund Portfolio 01/03/95 14.20% NA* NA* 26.31%
NATIONWIDE SEPARATE ACCOUNT TRUST
Capital Appreciation Fund 04/15/92 18.97% NA* NA* 12.30%
Government Bond Fund 11/08/82 -3.37% 5.25% 6.90% 8.04%
Money Market Fund 11/10/81 -1.76% 2.37% 4.25% 5.66%
Small Company Fund 10/23/95 15.70% NA* NA* 26.86%
Total Return Fund 11/08/82 14.73% 11.97% 11.04% 13.75%
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Growth Portfolio 09/10/84 2.20% 8.03% 9.88% 11.26%
Limited Maturity Bond Portfolio 09/10/84 -2.56% 3.53% 5.19% 6.80%
Partners Portfolio 03/22/94 22.35% NA* NA* 18.86%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Bond Fund 04/30/85 -2.08% 5.89% 7.29% 8.27%
Global Securities Fund 11/12/90 10.74% 10.63% NA* 9.05%
Multiple Strategies Fund 02/09/87 8.47% 9.87% NA* 9.97%
STRONG FUNDS
Strong Discovery Fund II 05/08/92 -5.97% NA* NA* 10.32%
Strong International Stock Fund II 10/20/95 3.43% NA* NA* 4.96%
Strong Special Fund II, Inc. 05/08/92 11.09% NA* NA* 16.95%
TCI PORTFOLIOS, INC.
TCI Balanced 05/01/91 5.23% 4.92% NA* 8.47%
TCI Growth 11/20/87 -10.73% 4.39% NA* 9.27%
TCI International 05/01/94 7.40% NA* NA* 4.67%
TCI Value 05/01/96 NA* NA* NA* 10.29%
VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund 09/01/89 11.00% 12.73% NA* 6.74%
Worldwide Bond Fund++ 09/01/89 -4.32% 2.12% NA* 5.20%
Worldwide Emerging Markets Fund 12/27/95 19.67% NA* NA* 18.15%
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 33.16% NA* NA* 27.38%
WARBURG PINCUS TRUST
International Equity Portfolio 06/30/95 3.04% NA* NA* 6.63%
Post Venture Capital Portfolio 09/30/96 NA* NA* NA* -16.15%
Small Company Growth Portfolio 06/30/95 6.91% NA* NA* 21.53%
----------------------------------------------------------------------------------------------------------------
</TABLE>
The above illustration represents past fund performance based on a $1,000
hypothetical investment. The performance figures reflect the deduction of
a 1.4% annual asset fee, and a maximum of a 6.0% contingent deferred sales
charge (after one year, declining thereafter). They also reflect the
application of an annual 10% free withdrawal privilege available after the
first year. Investment principal and investment returns are not guaranteed
under these variable options. Account values at the time of redemption may
be more or less than the purchase payment, due to market fluctuations and
any specific charges that may apply. This is neither an offer to sell nor
a solicitation to buy securities. The results shown are not a
representation of future investment performance. Any comparisons should be
made only after a recognition of the differences in the investment
policies and objectives of the funds' investments. This report is
authorized for distribution to prospective investors only when preceded or
accompanied by prospectuses containing more complete information, which
should be read carefully before investing or sending money.
* Performance information is not available for all or part of the period
indicated (See Fund Inception Date).
++ Funds are neither insured nor guaranteed by the U.S. Government. For the
Money Market Fund, there is no assurance that a stable $1 fund NAV (used to
calculate Unit Value) can be maintained. Figures quoted represent past
performance and returns can fluctuate.
*+ Performance for some funds reflects performance for periods before the fund
was actually available in the separate account. That hypothetical
performance is calculated by imposing contract charges on actual fund
performance, to determine how the fund would have performed if it had been
available in the separate account.
++ Formerly Global Bond Fund.
39
<PAGE> 40
NATIONWIDE VARIABLE ACCOUNT-II
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
American VI Series - Growth Fund (AVISGro)
591,641 shares (cost $17,724,667) ............................................. $ 23,446,735
American VI Series - High-Yield Bond Fund (AVISHiYld)
206,455 shares (cost $2,831,913) .............................................. 2,970,891
American VI Series - U.S. Government/AAA-Rated Securities Fund (AVISGvt)
558,936 shares (cost $6,405,065) .............................................. 6,125,940
Dreyfus VIF - Growth and Income Portfolio (DryGroInc)
10,651 shares (cost $208,490) ................................................. 208,234
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
4,048,465 shares (cost $80,578,592) ........................................... 81,333,655
Dreyfus Stock Index Fund (DryStkIx)
22,473,273 shares (cost $421,400,078) ......................................... 455,757,970
Fidelity VIP - Equity-Income Portfolio (FidVIPEI)
88,020,775 shares (cost $1,496,527,408) ....................................... 1,851,076,908
Fidelity VIP - Growth Portfolio (FidVIPGr)
53,397,112 shares (cost $1,442,803,412) ....................................... 1,662,786,063
Fidelity VIP - High Income Portfolio (FidVIPHI)
52,277,585 shares (cost $618,483,737) ......................................... 654,515,361
Fidelity VIP - Overseas Portfolio (FidVIPOv)
29,860,586 shares (cost $497,414,533) ......................................... 562,573,437
Fidelity VIP-II - Asset Manager Portfolio (FidVIPAM)
54,719,104 shares (cost $789,170,511) ......................................... 926,394,430
Fidelity VIP-II - Contrafund Portfolio (FidVIPCon)
31,863,416 shares (cost $470,893,739) ......................................... 527,658,176
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
8,543,374 shares (cost $130,457,688) .......................................... 139,086,134
Nationwide SAT - Government Bond Fund (NSATGvtBd)
25,523,974 shares (cost $278,390,626) ......................................... 281,784,675
Nationwide SAT - Money Market Fund (NSATMyMkt)
842,095,034 shares (cost $842,095,034) ........................................ 842,095,034
Nationwide SAT - Small Company Fund (NSATSmCo)
11,411,941 shares (cost $153,200,271) ......................................... 158,511,867
Nationwide SAT - Total Return Fund (NSATTotRe)
43,928,334 shares (cost $493,101,989) ......................................... 582,928,991
Neuberger & Berman - Growth Portfolio (NBAMTGro)
14,576,973 shares (cost $355,570,591) ......................................... 375,794,365
Neuberger & Berman - Limited Maturity Bond Portfolio (NBAMTLMat)
14,503,021 shares (cost $202,666,998) ......................................... 203,767,444
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C>
Neuberger & Berman - Partners Portfolio (NBAMTPart)
21,480,783 shares (cost $316,971,355) ......................................... 354,003,309
Oppenheimer - Bond Fund (OppBdFd)
18,495,009 shares (cost $212,436,168) ......................................... 215,096,952
Oppenheimer - Global Securities Fund (OppGlSec)
17,352,191 shares (cost $273,206,728) ......................................... 306,613,219
Oppenheimer - Multiple Strategies Fund (OppMult)
15,186,448 shares (cost $210,778,683) ......................................... 237,364,175
Strong Special Fund II, Inc. (StSpec2)
31,310,474 shares (cost $502,480,063) ......................................... 602,413,525
Strong VIF - Strong Discovery Fund II (StDisc2)
19,325,445 shares (cost $231,435,391) ......................................... 208,714,811
Strong VIF - Strong International Stock Fund II (StIntStk2)
6,217,919 shares (cost $69,638,167) ........................................... 69,827,234
TCI Portfolios - TCI Balanced (TCIBal)
17,471,812 shares (cost $113,742,920) ......................................... 131,737,463
TCI Portfolios - TCI Growth (TCIGro)
44,171,041 shares (cost $481,435,940) ......................................... 452,311,464
TCI Portfolios - TCI International (TCIInt)
14,897,654 shares (cost $81,567,837) .......................................... 88,790,017
TCI Portfolios - TCI Value (TCIValue)
192,219 shares (cost $1,073,951) .............................................. 1,072,583
Van Eck - Gold and Natural Resources Fund (VEGoldNR)
9,078,169 shares (cost $146,560,262) .......................................... 151,786,988
Van Eck - Worldwide Bond Fund (VEWrldBd)
9,841,666 shares (cost $109,164,680) .......................................... 109,242,492
Van Eck - Worldwide Emerging Markets Fund (VEWrldEMkt)
975,190 shares (cost $12,083,831) ............................................. 12,180,122
Van Kampen American Capital LIT - Real Estate Securities Fund (VKACRESec)
10,164,489 shares (cost $130,485,494) ......................................... 150,231,143
Warburg Pincus - International Equity Portfolio (WPIntEq)
23,071,607 shares (cost $262,173,995) ......................................... 264,862,050
Warburg Pincus - Post Venture Capital Portfolio (WPPVenCap)
968,094 shares (cost $9,297,111) .............................................. 9,448,597
Warburg Pincus - Small Company Growth Portfolio (WPSmCoGr)
18,047,620 shares (cost $255,570,779) ......................................... 257,178,579
---------------
Total investments .......................................................... 12,961,691,033
Accounts receivable ................................................................. 344,106
----------------
Total assets ............................................................... 12,962,035,139
ACCOUNTS PAYABLE ....................................................................... 32,685,984
----------------
CONTRACT OWNERS' EQUITY (NOTE 4) ....................................................... $ 12,929,349,155
================
</TABLE>
See accompanying notes to financial statements.
41
<PAGE> 42
NATIONWIDE VARIABLE ACCOUNT-II
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested capital gains and dividends ................... $ 600,928,342 255,746,278 219,361,059
Mortality, expense and administration charges (note 2) ... (146,901,903) (94,261,621) (63,749,637)
---------------- --------------- ---------------
Net investment activity ............................... 454,026,439 161,484,657 155,611,422
---------------- --------------- ---------------
Proceeds from mutual fund shares sold .................... 4,787,197,972 2,702,034,116 2,081,239,624
Cost of mutual fund shares sold .......................... (4,367,124,608) (2,527,741,633) (1,966,796,733)
---------------- --------------- ---------------
Realized gain (loss) on investments ................... 420,073,364 174,292,483 114,442,891
Change in unrealized gain (loss) on investments .......... 281,999,873 974,875,269 (372,586,662)
---------------- --------------- ---------------
Net gain (loss) on investments ........................ 702,073,237 1,149,167,752 (258,143,771)
---------------- --------------- ---------------
Net increase (decrease) in contract owners'
equity resulting from operations ................ 1,156,099,676 1,310,652,409 (102,532,349)
---------------- --------------- ---------------
EQUITY TRANSACTIONS:
Purchase payments received from contract owners .......... 3,619,439,725 2,272,793,729 2,110,347,434
Redemptions .............................................. (664,029,620) (445,809,864) (229,544,830)
Annuity benefits ......................................... (792,443) (401,351) (155,993)
Annual contract maintenance charge (note 2) .............. (6,040,328) (5,167,706) (3,881,459)
Contingent deferred sales charges (note 2) ............... (10,783,506) (7,795,056) (4,253,379)
Adjustments to maintain reserves ......................... 559,630 (180,793) 29,075
---------------- --------------- ---------------
Net equity transactions .............................. 2,938,353,458 1,813,438,959 1,872,540,848
---------------- --------------- ---------------
NET CHANGE IN CONTRACT OWNERS' EQUITY ....................... 4,094,453,134 3,124,091,368 1,770,008,499
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ................. 8,834,896,021 5,710,804,653 3,940,796,154
---------------- --------------- ---------------
CONTRACT OWNERS' EQUITY END OF PERIOD ....................... $ 12,929,349,155 8,834,896,021 5,710,804,653
================ =============== ===============
</TABLE>
See accompanying notes to financial statements.
42
<PAGE> 43
NATIONWIDE VARIABLE ACCOUNT-II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
The Nationwide Variable Account-II (the Account) was established pursuant
to a resolution of the Board of Directors of Nationwide Life Insurance Company
(the Company) on October 7, 1981. The Account has been registered as a unit
investment trust under the Investment Company Act of 1940.
The Company offers tax qualified and non-tax qualified Individual
Deferred Variable Annuity Contracts, and Individual Modified Single Premium
Deferred Variable Annuity Contracts through the Account. The primary
distribution for the contracts is through the brokerage community; however,
other distributors are utilized.
(b) The Contracts
Only contracts without a front-end sales charge, but with a contingent
deferred sales charge and certain other fees are offered for purchase. See note
2 for a discussion of contract expenses.
With certain exceptions, contract owners in either the accumulation or
the payout phase may invest in the following:
Funds of the American Variable Insurance Series (American VI Series)
(available only for contracts issued on or after May 1, 1987 and
before September 1, 1989);
American VISeries - Growth Fund (AVISGro)
American VISeries - High-Yield Bond Fund (AVISHiYld)
American VISeries - U.S. Government/AAA-Rated Securities Fund
(AVISGvt)
Portfolio of the Dreyfus Variable Investment Fund (Dreyfus VIF);
Dreyfus VIF - Growth andIncome Portfolio (DryGroInc)
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
Dreyfus Stock Index Fund (DryStkIx)
Portfolios of the Fidelity Variable Insurance Products Fund
(Fidelity VIP);
Fidelity VIP - Equity-Income Portfolio (FidVIPEI)
Fidelity VIP - Growth Portfolio (FidVIPGr)
Fidelity VIP - High Income Portfolio (FidVIPHI)
Fidelity VIP - Overseas Portfolio (FidVIPOv)
Portfolios of the Fidelity Variable Insurance Products Fund II
(Fidelity VIP-II);
Fidelity VIP-II - Asset Manager Portfolio (FidVIPAM)
Fidelity VIP-II - Contrafund Portfolio (FidVIPCon)
Funds of the Nationwide Separate Account Trust (Nationwide SAT)
(managed for a fee by an affiliated investment advisor);
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
Nationwide SAT - Government Bond Fund (NSATGvtBd)
Nationwide SAT - Money Market Fund (NSATMyMkt)
Nationwide SAT - Small Company Fund (NSATSmCo)
Nationwide SAT - Total Return Fund (NSATTotRe)
Portfolios of the Neuberger & Berman Advisers Management Trust
(Neuberger & Berman);
Neuberger & Berman - Growth Portfolio (NBAMTGro)
Neuberger & Berman - Limited Maturity Bond Portfolio (NBAMTLMat)
Neuberger & Berman - Partners Portfolio (NBAMTPart)
43
<PAGE> 44
Funds of the Oppenheimer Variable Account Funds (Oppenheimer);
Oppenheimer - Bond Fund (OppBdFd)
Oppenheimer - Global Securities Fund (OppGlSec)
Oppenheimer - Multiple Strategies Fund (OppMult)
Strong Special Fund II, Inc. (StSpec2)
Funds of the Strong Variable Insurance Funds, Inc. (Strong VIF);
Strong VIF - Strong Discovery Fund II (StDisc2)
Strong VIF - Strong International Stock Fund II (StIntStk2)
Portfolios of the TCIPortfolios, Inc. (TCI Portfolios);
TCI Portfolios - TCI Balanced (TCIBal)
TCI Portfolios - TCI Growth (TCIGro)
TCI Portfolios - TCI International (TCIInt)
TCI Portfolios - TCIValue (TCIValue)
Funds of the Van Eck Worldwide Insurance Trust (Van Eck);
Van Eck - Gold and Natural Resources Fund (VEGoldNR)
Van Eck - Worldwide Bond Fund (VEWrldBd)
(formerly Van Eck - Global Bond Fund (VEGlobBd)
Van Eck - Worldwide Emerging Markets Fund (VEWrldEMkt)
Fund of the Van Kampen American Capital Life Investment Trust (Van
Kampen American Capital LIT);
Van Kampen American Capital LIT - Real Estate Securities
Fund (VKACRESec)
Portfolios of the Warburg Pincus Trust (Warburg Pincus);
Warburg Pincus - International Equity Portfolio (WPIntEq)
Warburg Pincus - Post Venture Capital Portfolio (WPPVenCap)
Warburg Pincus - Small Company Growth Portfolio (WPSmCoGr)
At December 31, 1996, contract owners have invested in all of the above
funds. The contract owners' equity is affected by the investment results of
each fund, equity transactions by contract owners and certain contract expenses
(see note 2).
The accompanying financial statements include only contract owners'
purchase payments pertaining to the variable portions of their contracts and
exclude any purchase payments for fixed dollar benefits, the latter being
included in the accounts of the Company.
(c) Security Valuation, Transactions and Related Investment Income
The market value of the underlying mutual funds is based on the closing
net asset value per share at December 31, 1996. The cost of investments sold is
determined on the specific identification basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date.
(d) Federal Income Taxes
Operations of the Account form a part of, and are taxed with, operations
of the Company which is taxed as a life insurance company under the Internal
Revenue Code.
The Company does not provide for income taxes within the Account. Taxes
are the responsibility of the contract owner upon termination or withdrawal.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles may require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(f) Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the
current year presentation.
44
<PAGE> 45
(2) EXPENSES
The Company does not deduct a sales charge from purchase payments
received from the contract owners. However, if any part of the contract value
of such contracts is surrendered the Company will, with certain exceptions,
deduct from a contract owner's contract value a contingent deferred sales
charge. For contracts issued prior to December 15, 1988, the contingent
deferred sales charge will be equal to 5% of the lesser of the total of all
purchase payments made within 96 months prior to the date of the request for
surrender or the amount surrendered. For contracts issued on or after December
15, 1988, the Company will deduct a contingent deferred sales charge not to
exceed 7% of the lesser of purchase payments or the amount surrendered, such
charge declining 1% per year, to 0%, after the purchase payment has been held
in the contract for 84 months. No sales charges are deducted on redemptions
used to purchase units in the fixed investment options of the Company.
The following contract charges are deducted by the Company: (a) for The
BEST OF AMERICA(R) contracts, an annual contract maintenance charge of $30, with
certain exceptions, which is satisfied by surrendering units; and (b) for The
BEST OF AMERICA(R) contracts issued prior to December 15, 1988, a charge for
mortality and expense risk assessed through the daily unit value calculation
equal to an annual rate of 0.80% and 0.50%, respectively; for The BEST OF
AMERICA(R) contracts issued on or after December 15, 1988, a mortality risk
charge, an expense risk charge and an administration charge assessed through the
daily unit value calculation equal to an annual rate of 0.80%, 0.45% and 0.05%,
respectively; for The BEST OF AMERICA(R) America's Vision Annuity(SM) contracts,
a mortality risk charge, an expense risk charge and an administration charge
assessed through the daily unit value calculation equal to an annual rate of
0.80%, 0.45% and 0.15%, respectively; and for The BEST OF AMERICA(R) Nationwide
Insurance Enterprise Annuity contracts, a mortality risk charge assessed through
the daily unit value calculation equal to an annual rate of 0.80%.
(3) SCHEDULE I
Schedule I presents the components of the change in the unit values,
which are the basis for contract owners' equity. This schedule is presented for
each series, as applicable, in the following format:
o Beginning unit value - Jan. 1
o Reinvested capital gains and dividends
(This amount reflects the increase in the unit value due to
capital gains and dividend distributions from the underlying
mutual funds.)
o Unrealized gain (loss)
(This amount reflects the increase (decrease) in the unit value
resulting from the market appreciation (depreciation) of the
underlying mutual funds.)
o Contract charges
(This amount reflects the decrease in the unit value due to the
mortality risk charge, an expense risk charge and an
administration charge discussed in note 2.)
o Ending unit value - Dec. 31
o Percentage increase (decrease) in unit value.
For contracts in the payout phase, an assumed investment return of 3.5%,
used in the calculation of the annuity benefit payment amount, results in a
corresponding reduction in the components of the unit values as shown in
Schedule I.
45
<PAGE> 46
(4) COMPONENTS OF CONTRACT OWNERS' EQUITY
The following is a summary of contract owners' equity at December 31,
1996, for each series, in both the accumulation and payout phases.
<TABLE>
<CAPTION>
Contract owners' equity represented by: UNITS UNIT VALUE
----- ----------
<S> <C> <C> <C> <C>
Contracts in accumulation phase:
The BEST OF AMERICA(R) Nationwide Insurance
Enterprise Annuity contracts:
Dreyfus VIF - Growth and Income Portfolio:
Non-tax qualified .......................................... 100 $ 9.988028 $ 999
The Dreyfus Socially Responsible Growth Fund, Inc.:
Tax qualified .............................................. 3,819 12.423035 47,444
Non-tax qualified .......................................... 4,955 12.423035 61,556
Dreyfus Stock Index Fund:
Tax qualified .............................................. 21,527 12.854891 276,727
Non-tax qualified .......................................... 17,543 12.854891 225,513
Fidelity VIP - Equity-Income Portfolio:
Tax qualified .............................................. 38,049 12.163794 462,820
Non-tax qualified .......................................... 26,246 12.163794 319,251
Fidelity VIP - Growth Portfolio:
Tax qualified .............................................. 38,429 10.972453 421,660
Non-tax qualified .......................................... 35,425 10.972453 388,699
Fidelity VIP - High Income Portfolio:
Tax qualified .............................................. 13,647 11.487324 156,768
Non-tax qualified .......................................... 18,821 11.487324 216,203
Fidelity VIP - Overseas Portfolio:
Tax qualified .............................................. 511 11.775309 6,017
Non-tax qualified .......................................... 3,662 11.775309 43,121
Fidelity VIP-II - Asset Manager Portfolio:
Tax qualified .............................................. 6,477 11.975202 77,563
Non-tax qualified .......................................... 1,925 11.975202 23,052
Fidelity VIP-II - Contrafund Portfolio:
Tax qualified .............................................. 14,615 12.282942 179,515
Non-tax qualified .......................................... 12,689 12.282942 155,858
Nationwide SAT - Capital Appreciation Fund:
Tax qualified .............................................. 12,286 13.467403 165,461
Non-tax qualified .......................................... 16,971 13.467403 228,555
Nationwide SAT - Government Bond Fund:
Tax qualified .............................................. 5,170 10.534938 54,466
Non-tax qualified .......................................... 16,048 10.534938 169,065
Nationwide SAT - Money Market Fund:
Tax qualified .............................................. 32,496 10.507347 341,447
Non-tax qualified .......................................... 33,761 10.507347 354,739
Nationwide SAT - Small Company Fund:
Tax qualified .............................................. 13,231 13.903343 183,955
Non-tax qualified .......................................... 31,720 13.903343 441,014
Nationwide SAT - Total Return Fund:
Tax qualified .............................................. 49,402 12.691338 626,977
Non-tax qualified .......................................... 65,856 12.691338 835,801
Neuberger & Berman - Growth Portfolio:
Tax qualified .............................................. 6,941 10.795282 74,930
Non-tax qualified .......................................... 7,119 10.795282 76,852
Neuberger & Berman - Limited Maturity Bond Portfolio:
Tax qualified .............................................. 1,473 10.533549 15,516
Non-tax qualified .......................................... 2,542 10.533549 26,776
Neuberger & Berman - Partners Portfolio:
Tax qualified .............................................. 11,527 13.585552 156,601
Non-tax qualified .......................................... 19,721 13.585552 267,921
Oppenheimer - Bond Fund:
Tax qualified .............................................. 5,191 10.693801 55,512
Non-tax qualified .......................................... 2,496 10.693801 26,692
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C> <C> <C>
Oppenheimer - Global Securities Fund:
Tax qualified ............................................. 1,508 11.787738 17,776
Non-tax qualified ......................................... 4,650 11.787738 54,813
Oppenheimer - Multiple Strategies Fund:
Tax qualified ............................................. 4,469 11.803522 52,750
Non-tax qualified ......................................... 4,093 11.803522 48,312
Strong Special Fund II, Inc.:
Tax qualified ............................................. 7,847 12.408965 97,373
Non-tax qualified ......................................... 8,283 12.408965 102,783
Strong VIF - Strong Discovery Fund II:
Tax qualified ............................................. 897 10.467953 9,390
Non-tax qualified ......................................... 5,000 10.467953 52,340
Strong VIF - Strong International Stock Fund II:
Tax qualified ............................................. 3,313 11.142737 36,916
Non-tax qualified ......................................... 2,222 11.142737 24,759
TCI Portfolios - TCI Balanced:
Tax qualified ............................................. 5,362 11.371689 60,975
Non-tax qualified ......................................... 1,084 11.371689 12,327
TCI Portfolios - TCI Growth:
Tax qualified ............................................. 7,475 9.377268 70,095
Non-tax qualified ......................................... 10,548 9.377268 98,911
TCI Portfolios - TCI International:
Tax qualified ............................................. 365 11.752593 4,290
Non-tax qualified ......................................... 9,164 11.752593 107,701
TCI Portfolios - TCI Value:
Non-tax qualified ......................................... 109 10.143681 1,106
Van Eck - Gold and Natural Resources Fund:
Tax qualified ............................................. 1,121 12.953621 14,521
Non-tax qualified ......................................... 8,904 12.953621 115,339
Van Eck - Worldwide Bond Fund:
Tax qualified ............................................. 683 10.285816 7,025
Non-tax qualified ......................................... 181 10.285816 1,862
Van Eck - Worldwide Emerging Markets Fund:
Non-tax qualified ......................................... 151 10.078944 1,522
Van Kampen American Capital LIT - Real Estate Securities Fund:
Tax qualified ............................................. 3,666 14.773661 54,160
Non-tax qualified ......................................... 10,037 14.773661 148,283
Warburg Pincus - International Equity Portfolio:
Tax qualified ............................................. 6,990 11.306243 79,031
Non-tax qualified ......................................... 7,213 11.306243 81,552
Warburg Pincus - Post Venture Capital Portfolio:
Non-tax qualified ......................................... 74 10.164891 752
Warburg Pincus - Small Company Growth Portfolio:
Tax qualified ............................................. 11,253 12.604244 141,836
Non-tax qualified ......................................... 26,142 12.604244 329,500
The BEST OF AMERICA(R) contracts:
American VI Series - Growth Fund:
Tax qualified ............................................. 486,423 24.479182 11,907,237
Non-tax qualified ......................................... 471,250 24.479182 11,535,815
American VI Series - High-Yield Bond Fund:
Tax qualified ............................................. 74,769 23.160826 1,731,712
Non-tax qualified ......................................... 53,096 23.160826 1,229,747
American VI Series - U.S. Government Fund/AAA-Rated Securities Fund:
Tax qualified ............................................. 183,087 18.395431 3,367,964
Non-tax qualified ......................................... 149,634 18.395431 2,752,582
Dreyfus VIF - Growth and Income Portfolio:
Tax qualified ............................................. 15,022 9.986925 150,024
Non-tax qualified ......................................... 2,643 9.986925 26,395
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C> <C> <C> <C>
The Dreyfus Socially Responsible Growth Fund, Inc.:
Tax qualified ........................................... 1,552,615 17.037112 26,452,076
Non-tax qualified ....................................... 1,190,421 17.037112 20,281,336
Dreyfus Stock Index Fund:
Tax qualified ........................................... 7,592,255 16.470432 125,047,720
Non-tax qualified ....................................... 6,210,747 16.470432 102,293,686
Fidelity VIP - Equity-Income Portfolio:
Tax qualified ........................................... 23,565,494 28.043676 660,863,079
Non-tax qualified ....................................... 20,058,276 28.043676 562,507,793
Fidelity VIP - Growth Portfolio:
Tax qualified ........................................... 17,849,804 38.497038 687,164,583
Non-tax qualified ....................................... 13,715,597 38.497038 528,009,859
Fidelity VIP - High Income Portfolio:
Tax qualified ........................................... 7,274,256 24.553550 178,608,808
Non-tax qualified ....................................... 8,722,126 24.553550 214,159,157
Fidelity VIP - Overseas Portfolio:
Tax qualified ........................................... 13,781,464 16.573676 228,409,519
Non-tax qualified ....................................... 12,840,712 16.573676 212,817,800
Fidelity VIP-II - Asset Manager Portfolio:
Tax qualified ........................................... 21,570,235 20.422622 440,520,756
Non-tax qualified ....................................... 13,822,886 20.422622 282,299,576
Fidelity VIP-II - Contrafund Portfolio:
Tax qualified ........................................... 10,594,586 13.255157 140,432,901
Non-tax qualified ....................................... 9,866,842 13.255157 130,786,540
Nationwide SAT - Capital Appreciation Fund:
Tax qualified ........................................... 2,288,355 17.979967 41,144,547
Non-tax qualified ....................................... 2,612,175 17.979967 46,966,820
Nationwide SAT - Government Bond Fund:
Tax qualified ........................................... 3,938,276 30.296925 119,317,653
Non-tax qualified ....................................... 3,184,368 30.216906 96,221,749
Nationwide SAT - Money Market Fund:
Tax qualified ........................................... 9,766,503 22.132823 216,160,282
Non-tax qualified ....................................... 10,963,993 22.132823 242,664,116
Nationwide SAT - Small Company Fund:
Tax qualified ........................................... 3,071,120 13.831813 42,479,158
Non-tax qualified ....................................... 3,061,699 13.831813 42,348,848
Nationwide SAT - Total Return Fund:
Tax qualified ........................................... 3,546,292 62.707634 222,379,581
Non-tax qualified ....................................... 3,148,253 61.092889 192,335,871
Neuberger & Berman - Growth Portfolio:
Tax qualified ........................................... 5,597,573 29.757359 166,568,989
Non-tax qualified ....................................... 4,702,904 29.757359 139,946,003
Neuberger & Berman - Limited Maturity Bond Portfolio:
Tax qualified ........................................... 3,722,398 16.791470 62,504,534
Non-tax qualified ....................................... 3,388,267 16.791470 56,893,984
Neuberger & Berman - Partners Portfolio:
Tax qualified ........................................... 5,383,558 17.256151 92,899,490
Non-tax qualified ....................................... 5,392,259 17.256151 93,049,636
Oppenheimer - Bond Fund:
Tax qualified ........................................... 3,808,030 17.356310 66,093,349
Non-tax qualified ....................................... 3,276,566 17.356310 56,869,095
Oppenheimer - Global Securities Fund:
Tax qualified ........................................... 7,895,779 13.266755 104,751,366
Non-tax qualified ....................................... 5,355,527 13.266755 71,050,465
Oppenheimer - Multiple Strategies Fund:
Tax qualified ........................................... 4,869,534 18.045475 87,873,054
Non-tax qualified ....................................... 3,811,559 18.045475 68,781,393
Strong Special Fund II, Inc.:
Tax qualified ........................................... 11,342,542 21.072564 239,016,442
Non-tax qualified ....................................... 8,634,564 21.072564 181,952,403
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C> <C> <C> <C>
Strong VIF - Strong Discovery Fund II:
Tax qualified ........................................... 4,502,456 16.129688 72,623,211
Non-tax qualified ....................................... 3,833,429 16.129688 61,832,014
Strong VIF - Strong International Stock Fund II:
Tax qualified ........................................... 1,788,555 11.140682 19,925,722
Non-tax qualified ....................................... 1,660,749 11.140682 18,501,876
TCI Portfolios - TCI Balanced:
Tax qualified ........................................... 3,254,121 14.300170 46,534,484
Non-tax qualified ....................................... 2,577,277 14.300170 36,855,499
TCI Portfolios - TCI Growth:
Tax qualified ........................................... 9,324,052 23.677551 220,770,717
Non-tax qualified ....................................... 6,231,979 23.677551 147,558,001
TCI Portfolios - TCI International:
Tax qualified ........................................... 2,194,705 11.745639 25,778,213
Non-tax qualified ....................................... 1,758,586 11.745639 20,655,716
TCI Portfolios - TCI Value:
Tax qualified ........................................... 12,933 10.142565 131,174
Non-tax qualified ....................................... 77,276 10.142565 783,777
Van Eck - Gold and Natural Resources Fund:
Tax qualified ........................................... 3,151,393 16.248199 51,204,461
Non-tax qualified ....................................... 3,558,069 16.248199 57,812,213
Van Eck - Worldwide Bond Fund:
Tax qualified ........................................... 2,627,198 14.604281 38,368,338
Non-tax qualified ....................................... 2,639,292 14.604281 38,544,962
Van Eck - Worldwide Emerging Markets Fund:
Tax qualified ........................................... 271,881 10.077830 2,739,970
Non-tax qualified ....................................... 239,183 10.077830 2,410,446
Van Kampen American Capital LIT - Real Estate Securities Fund:
Tax qualified ........................................... 2,491,780 14.931303 37,205,522
Non-tax qualified ....................................... 3,554,657 14.931303 53,075,661
Warburg Pincus - International Equity Portfolio:
Tax qualified ........................................... 5,551,036 11.572294 64,238,221
Non-tax qualified ....................................... 5,736,148 11.572294 66,380,391
Warburg Pincus - Post Venture Capital Portfolio:
Tax qualified ........................................... 205,349 10.163772 2,087,120
Non-tax qualified ....................................... 198,784 10.163772 2,020,395
Warburg Pincus - Small Company Growth Portfolio:
Tax qualified ........................................... 4,899,073 13.973889 68,459,102
Non-tax qualified ....................................... 4,810,067 13.973889 67,215,342
The BEST OF AMERICA(R) America's Vision Annuity(SM) contracts:
Dreyfus VIF - Growth andIncome Portfolio:
Tax qualified ........................................... 1,683 9.986704 16,808
Non-tax qualified ....................................... 1,403 9.986704 14,011
The Dreyfus Socially Responsible Growth Fund, Inc.:
Tax qualified ........................................... 863,844 16.091197 13,900,284
Non-tax qualified ....................................... 1,278,742 16.091197 20,576,489
Dreyfus Stock Index Fund:
Tax qualified ........................................... 5,666,553 16.369120 92,756,486
Non-tax qualified ....................................... 8,243,399 16.369120 134,937,187
Fidelity VIP - Equity-Income Portfolio:
Tax qualified ........................................... 16,618,114 16.150507 268,390,966
Non-tax qualified ....................................... 22,169,855 16.150507 358,054,398
Fidelity VIP - Growth Portfolio:
Tax qualified ........................................... 12,013,122 15.220265 182,842,900
Non-tax qualified ....................................... 17,297,852 15.220265 263,277,891
Fidelity VIP - High Income Portfolio:
Tax qualified ........................................... 8,108,419 13.162137 106,724,122
Non-tax qualified ....................................... 11,738,433 13.162137 154,502,863
</TABLE>
49
<PAGE> 50
<TABLE>
<S> <C> <C> <C> <C>
Fidelity VIP - Overseas Portfolio:
Tax qualified ........................................... 3,807,002 12.718928 48,420,984
Non-tax qualified ....................................... 5,707,057 12.718928 72,587,647
Fidelity VIP-II - Asset Manager Portfolio:
Tax qualified ........................................... 6,899,163 12.472730 86,051,397
Non-tax qualified ....................................... 9,363,900 12.472730 116,793,396
Fidelity VIP-II - Contrafund Portfolio:
Tax qualified ........................................... 8,168,270 13.235075 108,107,666
Non-tax qualified ....................................... 11,178,146 13.235075 147,943,601
Nationwide SAT - Capital Appreciation Fund:
Tax qualified ........................................... 1,424,586 15.932775 22,697,608
Non-tax qualified ....................................... 1,750,256 15.932775 27,886,435
Nationwide SAT - Government Bond Fund:
Tax qualified ........................................... 2,626,441 11.423331 30,002,705
Non-tax qualified ....................................... 3,145,104 11.423331 35,927,564
Nationwide SAT - Money Market Fund:
Tax qualified ........................................... 12,748,020 11.072205 141,148,691
Non-tax qualified ....................................... 18,836,301 11.072205 208,559,386
Nationwide SAT - Small Company Fund:
Tax qualified ........................................... 2,079,253 13.815158 28,725,209
Non-tax qualified ....................................... 3,209,131 13.815158 44,334,652
Nationwide SAT - Total Return Fund:
Tax qualified ........................................... 4,698,191 15.378605 72,251,624
Non-tax qualified ....................................... 6,080,735 15.378605 93,513,222
Neuberger & Berman - Growth Portfolio:
Tax qualified ........................................... 1,819,563 13.220449 24,055,440
Non-tax qualified ....................................... 3,383,799 13.220449 44,735,342
Neuberger & Berman - Limited Maturity Bond Portfolio:
Tax qualified ........................................... 2,722,579 11.092313 30,199,698
Non-tax qualified ....................................... 4,876,119 11.092313 54,087,438
Neuberger & Berman - Partners Portfolio:
Tax qualified ........................................... 3,997,138 17.213970 68,806,614
Non-tax qualified ....................................... 5,741,323 17.213970 98,830,962
Oppenheimer - Bond Fund:
Tax qualified ........................................... 3,583,135 11.601791 41,570,783
Non-tax qualified ....................................... 4,341,063 11.601791 50,364,106
Oppenheimer - Global Securities Fund:
Tax qualified ........................................... 4,661,410 12.171005 56,734,044
Non-tax qualified ....................................... 6,079,421 12.171005 73,992,663
Oppenheimer - Multiple Strategies Fund:
Tax qualified ........................................... 2,607,467 13.395639 34,928,687
Non-tax qualified ....................................... 3,408,601 13.395639 45,660,388
Strong Special Fund II, Inc.:
Tax qualified ........................................... 5,059,293 15.477893 78,307,196
Non-tax qualified ....................................... 6,638,439 15.477893 102,749,049
Strong VIF - Strong Discovery Fund II:
Tax qualified ........................................... 2,193,936 13.350547 29,290,246
Non-tax qualified ....................................... 3,358,454 13.350547 44,837,198
Strong VIF - Strong International Stock Fund II:
Tax qualified ........................................... 1,170,883 11.127252 13,028,710
Non-tax qualified ....................................... 1,645,592 11.127252 18,310,917
TCI Portfolios - TCI Balanced:
Tax qualified ........................................... 1,516,835 13.180739 19,993,006
Non-tax qualified ....................................... 2,144,874 13.180739 28,271,024
TCI Portfolios - TCI Growth:
Tax qualified ........................................... 2,639,035 12.067726 31,847,151
Non-tax qualified ....................................... 4,282,747 12.067726 51,683,017
TCI Portfolios - TCI International:
Tax qualified ........................................... 1,434,727 11.716901 16,810,554
Non-tax qualified ....................................... 2,170,866 11.716901 25,435,822
</TABLE>
50
<PAGE> 51
<TABLE>
<S> <C> <C> <C> <C>
TCI Portfolios - TCI Value:
Tax qualified ........................................... 4,681 10.142340 47,476
Non-tax qualified ....................................... 10,752 10.142340 109,050
Van Eck - Gold and Natural Resources Fund:
Tax qualified ........................................... 1,203,386 13.331794 16,043,294
Non-tax qualified ....................................... 1,997,123 13.331794 26,625,232
Van Eck - Worldwide Bond Fund:
Tax qualified ........................................... 1,142,334 11.597396 13,248,100
Non-tax qualified ....................................... 1,639,285 11.597396 19,011,437
Van Eck - Worldwide Emerging Markets Fund:
Tax qualified ........................................... 343,730 10.077608 3,463,976
Non-tax qualified ....................................... 353,687 10.077608 3,564,319
Van Kampen American Capital LIT - Real Estate Securities Fund:
Tax qualified ........................................... 1,646,291 14.908696 24,544,052
Non-tax qualified ....................................... 2,361,457 14.908696 35,206,245
Warburg Pincus - International Equity Portfolio:
Tax qualified ........................................... 4,575,313 11.554772 52,866,699
Non-tax qualified ....................................... 7,026,060 11.554772 81,184,521
Warburg Pincus - Post Venture Capital Portfolio:
Tax qualified ........................................... 258,812 10.163549 2,630,448
Non-tax qualified ....................................... 266,629 10.163549 2,709,897
Warburg Pincus - Small Company Growth Portfolio:
Tax qualified ........................................... 3,578,020 13.952718 49,923,104
Non-tax qualified ....................................... 5,095,747 13.952718 71,099,521
--------- ---------
Reserves for annuity contracts in payout phase:
Tax qualified ........................................... 2,554,123
Non-tax qualified ....................................... 2,710,327
----------------
$ 12,929,349,155
================
</TABLE>
51
<PAGE> 52
SCHEDULE I
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R)
NATIONWIDE INSURANCE ENTERPRISE ANNUITY CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DRYGROINC DRYSRGRO DRYSTKIX FIDVIPEI FIDVIPGR FIDVIPHI
- ------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 $10.000000 10.330490 10.575706 10.729806 9.643317 10.155366
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .536263 .457726 .495196 .693009 .926355
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.010213) 1.647572 1.914712 1.030017 .719991 .492885
- ------------------------------------------------------------------------------------------------------------
Contract charges (.001759) (.091290) (.093253) (.091225) (.083864) (.087282)
- ------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $ 9.988028 12.423035 12.854891 12.163794 10.972453 11.487324
- ------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 0%(b) 20% 22% 13% 14% 13%
============================================================================================================
1995
Beginning unit value -
Jan. 1 ** $10.000000 10.000000 10.000000 10.000000 10.000000
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .284361 .133565 .055400 .000000 .000000
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .059585 .455824 .688141 (.343684) .168653
- ------------------------------------------------------------------------------------------------------------
Contract charges (.013456) (.013683) (.013735) (.012999) (.013287)
- ------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $10.330490 10.575706 10.729806 9.643317 10.155366
- ------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 3%(b) 6%(b) 7%(b) (4)%(b) 2%(b)
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDVIPOV FIDVIPAM FIDVIPCON NSATCAPAP NSATGVTBD
- --------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 10.484931 10.533861 10.207482 10.763065 10.262495
- --------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .258087 .693290 .096225 .560736 .636972
- --------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.121390 .837636 2.068018 2.239869 (.282546)
- --------------------------------------------------------------------------------------------
Contract charges (.089099) (.089585) (.088783) (.096267) (.081983)
- --------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 11.775309 11.975202 12.282942 13.467403 10.534938
- --------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 12% 14% 20% 25% 3%
============================================================================================
1995
Beginning unit value -
Jan. 1 10.000000 10.000000 10.000000 ** 10.000000
- --------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .000000 .131621 .160077
- --------------------------------------------------------------------------------------------
Unrealized gain (loss) .498416 .547401 .089202 .115777
- --------------------------------------------------------------------------------------------
Contract charges (.013485) (.013540) (.013341) (.013359)
- --------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 10.484931 10.533861 10.207482 10.262495
- --------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 5%(b) 5%(b) 2%(b) 3%(b)
============================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
52
<PAGE> 53
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R)
NATIONWIDE INSURANCE ENTERPRISE ANNUITY CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
NSATMYMKT NSATSMCO NSATTOTRE NBAMTGRO NBAMTLMAT NBAMTPART
- ------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 $10.076854 11.411037 10.500717 9.971367 10.180593 10.570046
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .513543 .133865 .702739 .904925 .857039 .430854
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 2.461847 1.579762 .002333 (.421520) 2.680302
- ------------------------------------------------------------------------------------------------------------
Contract charges (.083050) (.103406) (.091880) (.083343) (.082563) (.095650)
- ------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $10.507347 13.903343 12.691338 10.795282 10.533549 13.585552
- ------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 4% 22% 21% 8% 3% 29%
============================================================================================================
1995
Beginning unit value -
Jan. 1 $10.000000 10.000000 10.000000 10.000000 10.000000 10.000000
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .090135 .017460 .616695 .000000 .000000 .000000
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 1.407776 (.102353) (.015308) .193905 .583646
- ------------------------------------------------------------------------------------------------------------
Contract charges (.013281) (.014199) (.013625) (.013325) (.013312) (.013600)
- ------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $10.076854 11.411037 10.500717 9.971367 10.180593 10.570046
- ------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 1%(b) 14%(b) 5%(b) 0%(b) 2%(b) 6%(b)
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPPBDFD OPPGLSEC OPPMULT STSPEC2 STDISC2
- ---------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 10.287129 10.087683 10.302692 10.587949 10.468286
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .661948 .000000 .785088 .498307 2.134313
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) (.172176) 1.787331 .804123 1.414208 (2.052747)
- ---------------------------------------------------------------------------------------------
Contract charges (.083100) (.087276) (.088381) (.091499) (.081899)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 10.693801 11.787738 11.803522 12.408965 10.467953
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 4% 17% 15% 17% 0%
=============================================================================================
1995
Beginning unit value -
Jan. 1 10.000000 10.000000 10.000000 10.000000 10.000000
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .170891 .000000 .105143 .031024 .134105
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) .129602 .100810 .210984 .570573 .347815
- ---------------------------------------------------------------------------------------------
Contract charges (.013364) (.013127) (.013435) (.013648) (.013634)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 10.287129 10.087683 10.302692 10.587949 10.468286
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 3%(b) 1%(b) 3%(b) 6%(b) 5%(b)
=============================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
53
<PAGE> 54
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R)
NATIONWIDE INSURANCE ENTERPRISE ANNUITY CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
STINTSTK2 TCIBAL TCIGRO TCIINT TCIVALUE VEGOLDNR VEWRLDBD
- ----------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 $10.176527 10.216536 9.880281 10.355977 10.000000 11.060595 10.113918
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .050845 .483345 1.108725 .246392 .000000 .234696 .275985
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.003660 .758083 (1.532596) 1.237834 .145456 1.758754 (.023506)
- ----------------------------------------------------------------------------------------------------------------
Contract charges (.088295) (.086275) (.079142) (.087610) (.001775) (.100424) (.080581)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $11.142737 11.371689 9.377268 11.752593 10.143681 12.953621 10.285816
- ----------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 9% 11% (5)% 13% 1%(b) 17% 2%
================================================================================================================
1995
Beginning unit value -
Jan. 1 ** ** $10.000000 10.000000 ** 10.000000 10.000000
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .000000 .53476 .187333
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.106657) .369293 1.021372 (.060143)
- ----------------------------------------------------------------------------------------------------------------
Contract charges (.013062) (.013316) (.014253) (.013272)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $ 9.880281 10.355977 11.060595 10.113918
- ----------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (1)%(b) 4%(b) 11%(b) 1%(b)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VEWRLDEMKT VKACRESEC WPLNTEQ WPPVENCAP WPSMCOGR
- ------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 10.000000 10.597781 10.363169 10.000000 11.154927
- ------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .284217 .220456 .000000 .000000
- ------------------------------------------------------------------------------------------
Unrealized gain (loss) .080700 3.985795 .811087 .166654 1.546684
- ------------------------------------------------------------------------------------------
Contract charges (.001756) (.094132) (.088469) (.001763) (.097367)
- ------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 10.078944 14.773661 11.306243 10.164891 12.604244
- ------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 1%(b) 39% 9% 2%(b) 13%
==========================================================================================
1995
Beginning unit value -
Jan. 1 ** 10.000000 10.000000 ** 10.000000
- ------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .090508 .075167 .000000
- ------------------------------------------------------------------------------------------
Unrealized gain (loss) .520696 .301322 1.168850
- ------------------------------------------------------------------------------------------
Contract charges (.013423) (.013320) (.013923)
- ------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 10.597781 10.363169 11.154927
- ------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 6%(b) 4%(b) 12%(b)
===========================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
54
<PAGE> 55
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
AVISGRO+ AVISHIYLD+ AVISGVT+ DRYGROINC DRYSRGRO DRYSTKIX
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 $21.880052 20.729452 18.077072 10.000000 14.239508 13.619180
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.871220 1.958372 1.351206 .000000 .735635 .587282
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.027121 .758000 (.798218) (.010207) 2.266421 2.459091
- ------------------------------------------------------------------------------------------------------------
Contract charges (.299211) (.284998) (.234629) (.002868) (.204452) (.195121)
- ------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $24.479182 23.160826 18.395431 9.986925 17.037112 16.470432
- ------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 12% 12% 2% 0%(b) 20% 21%
===========================================================================================================
1995
Beginning unit value -
Jan. 1 $16.632869 17.247186 15.872495 ** 10.721141 10.087774
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.970200 1.862872 1.241711 .391978 .361278
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.537128 1.870069 1.184664 3.289326 3.325716
- ------------------------------------------------------------------------------------------------------------
Contract charges (.260145) (.250675) (.221798) (.162937) (.155588)
- ------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $21.880052 20.729452 18.077072 14.239508 13.619180
- ------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 32% 20% 14% 33% 35%
===========================================================================================================
1994
Beginning unit value -
Jan. 1 $16.767635 18.696382 16.810323 ** 10.702195 10.130946
- ------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .539769 1.648226 1.072204 .276343 .283238
- ------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.458197) (2.863015) (1.799954) (.117315) (.195244)
- ------------------------------------------------------------------------------------------------------------
Contract charges (.216338) (.234407) (.210078) (.140082) (.131166)
- ------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $16.632869 17.247186 15.872495 10.721141 10.087774
- ------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (1)% (8)% (6)% 0% 0%
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDVIPEI FIDVIPGR FIDVIPHI FIDVIPOV FIDVIPAM
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 24.863579 34.006052 21.817076 14.832631 18.056027
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.146951 2.442671 1.989184 .364935 1.187807
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.376638 2.528836 1.052032 1.580901 1.428293
- ---------------------------------------------------------------------------------------------
Contract charges (.343492) (.480521) (.304742) (.204791) (.249505)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 28.043676 38.497038 24.553550 16.573676 20.422622
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 13% 13% 13% 12% 13%
=============================================================================================
1995
Beginning unit value -
Jan. 1 18.646331 25.451479 18.327364 13.701507 15.641016
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.458073 .140639 1.326946 .104797 .328525
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) 5.043000 8.817717 2.428014 1.210063 2.303674
- ---------------------------------------------------------------------------------------------
Contract charges (.283825) (.403783) (.265248) (.183736) (.217188)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 24.863579 34.006052 21.817076 14.832631 18.056027
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 33% 34% 19% 8% 15%
=============================================================================================
1994
Beginning unit value -
Jan. 1 17.644458 25.790764 18.859652 13.646118 16.874276
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.324090 1.551366 1.728139 .070437 .820188
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) (.084066) (1.565204) (2.016825) .168983 (1.841072)
- ---------------------------------------------------------------------------------------------
Contract charges (.238151) (.325447) (.243602) (.184031) (.212376)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 18.646331 25.451479 18.327364 13.701507 15.641016
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 6% (1)% (3)% 0% (7)%
=============================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
+ See note 1(b).
55
<PAGE> 56
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NSATGVTBD NSATGVTBD
FIDVIPCON NSATCAPAP QUAL NON-QUAL NSATMYMKT
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 $11.071500 14.442619 29.663756 29.585401 21.334141
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .104321 .749106 1.835340 1.830491 1.084427
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.235809 2.998126 (.817100) (.814933) .000000
- -----------------------------------------------------------------------------------------------
Contract charges (.156473) (.209884) (.385071) (.384053) (.285745)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $13.255157 17.979967 30.296925 30.216906 22.132823
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 20% 24% 2% 2% 4%
===============================================================================================
1995
Beginning unit value -
Jan. 1 $10.000000 11.311683 25.309101 25.242252 20.457373
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .142778 .642190 1.790910 1.786181 1.150096
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) .998371 2.653706 2.924333 2.916602 .000000
- -----------------------------------------------------------------------------------------------
Contract charges (.069649) (.164960) (.360588) (.359634) (.273328)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $11.071500 14.442619 29.663756 29.585401 21.334141
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 11%(b) 28% 17% 17% 4%
===============================================================================================
1994
Beginning unit value -
Jan. 1 ** $11.564256 26.497619 26.427634 19.951530
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .182737 1.662261 1.657870 .769331
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) (.286833) (2.516459) (2.509816) .000000
- -----------------------------------------------------------------------------------------------
Contract charges (.148477) (.334320) (.333436) (.263488)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $11.311683 25.309101 25.242252 20.457373
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (2)% (4)% (4)% 3%
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
NSATTOTRE NSATTOTRE
NSATSMCO QUAL NON-QUAL NBAMTGRO NBAMTLMAT NBAMTPART
- -----------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 11.410135 52.147953 50.805130 27.626244 16.311479 13.494251
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .133283 3.474445 3.384976 2.505038 1.372002 .549587
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.456383 7.826655 7.625118 .001295 (.677039) 3.410729
- -----------------------------------------------------------------------------------------------------------
Contract charges (.167988) (.741419) (.722335) (.375218) (.214972) (.198416)
- -----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 13.831813 62.707634 61.092889 29.757359 16.791470 17.256151
- -----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 21% 20% 20% 8% 3% 28%
===========================================================================================================
1995
Beginning unit value -
Jan. 1 10.000000 40.926247 39.872391 21.247525 14.896724 10.017795
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .017459 4.054856 3.950443 .751645 .827026 .081856
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.418317 7.778269 7.577969 5.960166 .791918 3.550121
- -----------------------------------------------------------------------------------------------------------
Contract charges (.025641) (.611419) (.595673) (.333092) (.204189) (.155521)
- -----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 11.410135 52.147953 50.805130 27.626244 16.311479 13.494251
- -----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 14%(b) 27% 27% 30% 9% 35%
===========================================================================================================
1994
Beginning unit value -
Jan. 1 ** 41.023082 39.966728 22.656907 15.115753 10.000000
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 2.069920 2.016621 2.730116 .638336 .000000
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (1.626696) (1.584802) (3.855326) (.662388) .072563
- -----------------------------------------------------------------------------------------------------------
Contract charges (.540059) (.526156) (.284172) (.194977) (.054768)
- -----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 40.926247 39.872391 21.247525 14.896724 10.017795
- -----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 0% 0% (6)% (1)% 0%(b)
===========================================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
56
<PAGE> 57
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
OPPBDFD OPPGISEC OPPMULT STSPEC2
- ---------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Beginning unit value -
Jan. 1 $16.781326 11.411200 15.831164 18.071722
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.076598 .000000 1.203421 .849258
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) (.281316) 2.015955 1.231538 2.405366
- ---------------------------------------------------------------------------------------------
Contract charges (.220298) (.160400) (.220648) (.253782)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $17.356310 13.266755 18.045475 21.072564
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 3% 16% 14% 17%
=============================================================================================
1995
Beginning unit value -
Jan. 1 $14.531774 11.307851 13.216172 14.551898
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.000174 .297358 1.064619 .752969
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.454423 (.045704) 1.742703 2.978530
- ---------------------------------------------------------------------------------------------
Contract charges (.205045) (.148305) (.192330) (.211675)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $16.781326 11.411200 15.831164 18.071722
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 15% 1% 20% 24%
=============================================================================================
1994
Beginning unit value -
Jan. 1 $15.013579 12.151882 13.655607 14.230988
- ---------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .845781 .214070 .695235 .407882
- ---------------------------------------------------------------------------------------------
Unrealized gain (loss) (1.135198) (.900281) (.959283) .103551
- ---------------------------------------------------------------------------------------------
Contract charges (.192388) (.157820) (.175387) (.190523)
- ---------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $14.531774 11.307851 13.216172 14.551898
- ---------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (3)% (7)% (3)% 2%
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
STDISC2 STINTSTK2 TCIBAL TCIGRO TCIINT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 16.212409 10.226470 12.912980 25.074858 10.402550
- -------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 3.300022 .050935 .609851 2.810305 .247026
- -------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (3.176638) 1.007473 .954518 (3.881210) 1.239063
- -------------------------------------------------------------------------------------------------------------
Contract charges (.206105) (.144196) (.177179) (.326402) (.143000)
- -------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 16.129688 11.140682 14.300170 23.677551 11.745639
- -------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (1)% 9% 11% (6)% 13%
=============================================================================================================
1995
Beginning unit value -
Jan. 1 12.143604 10.000000 10.801286 19.378026 9.392316
- -------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .211635 .041084 .305744 .022298 .000000
- -------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 4.041557 .209464 1.961261 5.972516 1.136498
- -------------------------------------------------------------------------------------------------------------
Contract charges (.184387) (.024078) (.155311) (.297982) (.126264)
- -------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 16.212409 10.226470 12.912980 25.074858 10.402550
- -------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 34% 2%(b) 20% 29% 11%
=============================================================================================================
1994
Beginning unit value -
Jan. 1 13.003747 ** 10.876699 19.864882 10.000000
- -------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .971108 .260548 .002124 .000000
- -------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (1.670219) (.194362) (.235006) (.554314)
- -------------------------------------------------------------------------------------------------------------
Contract charges (.161032) (.141599) (.253974) (.053370)
- -------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 12.143604 10.801286 19.378026 9.392316
- -------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (7)% (1)% (2)% (6)%(b)
=============================================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
57
<PAGE> 58
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
TCIVALUE VEGOLDNR VEWRLDBD VEWRLDEMKT VKACRESEC WPINTEQ WPPVENCAP WPSMCOGR
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 $10.000000 13.944310 14.433345 10.000000 10.765351 10.661059 10.000000 12.430073
- -----------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .295267 .393026 .000000 .287350 .225703 .000000 .000000
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .145460 2.214346 (.035238) .080692 4.033978 .833419 .166646 1.720113
- -----------------------------------------------------------------------------------------------------------------------------------
Contract charges (.002895) (.205724) (.186852) (.002862) (.155376) (.147887) (.002874) (.176297)
- -----------------------------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $10.142565 16.248199 14.604281 10.077830 14.931303 11.572294 10.163772 13.973889
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 1%(b) 17% 1% 1%(b) 39% 9% 2%(b) 12%
===================================================================================================================================
1995
Beginning unit value -
Jan. 1 ** $12.728311 12.465907 ** 10.000000 10.000000 ** 10.000000
- -----------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .125379 1.008457 .091958 .077344 .000000
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.262065 1.139655 .739393 .650502 2.501564
- -----------------------------------------------------------------------------------------------------------------------------------
Contract charges (.171445) (.180674) (.066000) (.066787) (.071491)
- -----------------------------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $13.944310 14.433345 10.765351 10.661059 12.430073
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 10% 16% 8%(b) 7%(b) 24%(b)
===================================================================================================================================
1994
Beginning unit value -
Jan. 1 ** $13.544828 12.798654 ** ** ** ** **
- -----------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .068031 .051478
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.711769) (.222396)
- -----------------------------------------------------------------------------------------------------------------------------------
Contract charges (.172779) (.161829)
- -----------------------------------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $12.728311 12.465907
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value*(a) (6)% (3)%
===================================================================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
58
<PAGE> 59
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R)
AMERICA'S VISION ANNUITY(SM) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DRYGROINC DRYSRGRO DRYSTKIX FIDVIPEI FIDVIPGR
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 $10.000000 13.462638 13.549203 14.333670 13.458405
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .694830 .583832 .661147 .966633
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) (.010207) 2.141897 2.445129 1.368948 1.000033
- -----------------------------------------------------------------------------------------------
Contract charges (.003089) (.208168) (.209044) (.213258) (.204806)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $ 9.986704 16.091197 16.369120 16.150507 15.220265
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 0%(b) 20% 21% 13% 13%
===============================================================================================
1995
Beginning unit value -
Jan. 1 ** $10.146464 10.046079 10.760332 10.082986
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .370596 .359517 .841191 .055711
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.111650 3.310456 2.908537 3.491973
- -----------------------------------------------------------------------------------------------
Contract charges (.166072) (.166849) (.176390) (.172265)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $13.462638 13.549203 14.333670 13.458405
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 33% 35% 33% 33%
===============================================================================================
1994
Beginning unit value -
Jan. 1 ** $10.138790 10.099271 10.192462 10.227729
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .261532 .282153 .764674 .615160
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) (.110944) (.194528) (.048662) (.620912)
- -----------------------------------------------------------------------------------------------
Contract charges (.142914) (.140817) (.148142) (.138991)
- -----------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $10.146464 10.046079 10.760332 10.082986
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 0% (1)% 6% (1)%
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDVIPHI FIDVIPOV FIDVIPAM FIDVIPCON NSATCAPAP NSATGVTBD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 11.707151 11.394419 11.038610 11.065996 12.811228 11.196001
- ----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.067306 .280317 .726101 .104260 .663900 .692273
- ----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .563776 1.213612 .872284 2.233243 2.658151 (.308425)
- ----------------------------------------------------------------------------------------------------------
Contract charges (.176096) (.169420) (.164265) (.168424) (.200504) (.156518)
- ----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 13.162137 12.718928 12.472730 13.235075 15.932775 11.423331
- ----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 12% 12% 13% 20% 24% 2%
==========================================================================================================
1995
Beginning unit value -
Jan. 1 9.844496 10.536141 9.571852 10.000000 10.044095 9.562079
- ----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .712698 .080579 .201029 .142710 .569727 .676196
- ----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.303393 .929853 1.408870 .998320 2.355148 1.104438
- ----------------------------------------------------------------------------------------------------------
Contract charges (.153436) (.152154) (.143141) (.075034) (.157742) (.146712)
- ----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 11.707151 11.394419 11.038610 11.065996 12.811228 11.196001
- ----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 19% 8% 15% 11%(b) 28% 17%
==========================================================================================================
1994
Beginning unit value -
Jan. 1 10.140663 10.504149 10.337032 ** 10.278752 10.021251
- ---------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .929117 .054214 .502389 .162311 .628252
- ---------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (1.084223) .130333 (1.127465) (.254834) (.951262)
- ---------------------------------------------------------------------------------------------------------
Contract charges (.141061) (.152555) (.140104) (.142134) (.136162)
- ---------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 9.844496 10.536141 9.571852 10.044095 9.562079
- ---------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (3)% 0% (7)% (2)% (5)%
=========================================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
59
<PAGE> 60
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R)
AMERICA'S VISION ANNUITY(SM) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NSATMYMKT NSATSMCO NSATTOTRE NBAMTGRO NBAMTLMAT
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 $10.683538 11.408018 12.801951 12.286164 10.786223
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .542750 .133144 .852193 1.113872 .907105
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 2.454868 1.920473 .000119 (.447926)
- -----------------------------------------------------------------------------------------------
Contract charges (.154083) (.180872) (.196012) (.179706) (.153089)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $11.072205 13.815158 15.378605 13.220449 11.092313
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 4% 21% 20% 8% 3%
===============================================================================================
1995
Beginning unit value -
Jan. 1 $10.254838 10.000000 10.057257 9.458916 9.860649
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .576257 .017456 .995563 .334560 .547347
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 1.418186 1.910936 2.652367 .523785
- -----------------------------------------------------------------------------------------------
Contract charges (.147557) (.027624) (.161805) (.159679) (.145558)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $10.683538 11.408018 12.801951 12.286164 10.786223
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value*(a) 4% 14%(b) 27% 30% 9%
===============================================================================================
1994
Beginning unit value -
Jan. 1 $10.011385 ** 10.091256 10.096549 10.015749
- -----------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .385849 .508763 1.216477 .422915
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 (.399693) (1.717723) (.438889)
- -----------------------------------------------------------------------------------------------
Contract charges (.142396) (.143069) (.136387) (.139126)
- -----------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $10.254838 10.057257 9.458916 9.860649
- -----------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 2% 0% (6)% (2)%
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
NBAMTPART OPPBDFD OPPGISEC OPPMULT STSPEC2 STDISC2
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 13.474969 11.228877 10.479380 11.763879 13.287288 13.432714
- ----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .548709 .719951 .000000 .893804 .624234 2.733315
- ----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.403649 (.188311) 1.850267 .914532 1.767320 (2.631584)
- ----------------------------------------------------------------------------------------------------------
Contract charges (.213357) (.158726) (.158642) (.176576) (.200949) (.183898)
- ----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 17.213970 11.601791 12.171005 13.395639 15.477893 13.350547
- ----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 28% 3% 16% 14% 16% (1)%
==========================================================================================================
1995
Beginning unit value -
Jan. 1 10.013591 9.733460 10.394970 9.830640 10.710138 10.071698
- ----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .081808 .669514 .273289 .791531 .553997 .175352
- ----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.546970 .973805 (.042048) 1.295766 2.190922 3.350345
- ----------------------------------------------------------------------------------------------------------
Contract charges (.167400) (.147902) (.146831) (.154058) (.167769) (.164681)
- ----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 13.474969 11.228877 10.479380 11.763879 13.287288 13.432714
- ----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value*(a) 35% 15% 1% 20% 24% 33%
==========================================================================================================
1994
Beginning unit value -
Jan. 1 10.000000 10.066342 11.182167 10.167774 10.484543 10.796000
- ----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .566682 .196942 .517326 .300283 .805515
- ----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .072593 (.760661) (.827742) (.713828) .076473 (1.385836)
- ----------------------------------------------------------------------------------------------------------
Contract charges (.059002) (.138903) (.156397) (.140632) (.151161) (.143981)
- ----------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 10.013591 9.733460 10.394970 9.830640 10.710138 10.071698
- ----------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 0%(b) (3)% (7)% (3)% 2% (7)%
==========================================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
60
<PAGE> 61
SCHEDULE I, CONTINUED
NATIONWIDE VARIABLE ACCOUNT-II
The BEST OF AMERICA(R)
AMERICA'S VISION ANNUITY(SM) CONTRACTS
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
STINTSTK2 TCIBAL TCIGRO TCIINT TCIVALUE VEGOLDNR
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 $10.224570 11.914266 12.792935 10.387676 10.000000 11.453100
- ------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .050894 .562489 1.433431 .246577 .000000 .242414
- ------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.007035 .880033 (1.979303) 1.236426 .145458 1.818253
- ------------------------------------------------------------------------------------------------------
Contract charges (.155247) (.176049) (.179337) (.153778) (.003118) (.181973)
- ------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $11.127252 13.180739 12.067726 11.716901 10.142340 13.331794
- ------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 9% 11% (6)% 13% 1%(b) 16%
======================================================================================================
1995
Beginning unit value -
Jan. 1 $10.000000 9.975959 9.896469 9.388381 ** 10.464922
- ------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .041077 .282199 .011387 .000000 .103018
- ------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .209428 1.810577 3.048970 1.135219 1.036957
- ------------------------------------------------------------------------------------------------------
Contract charges (.025935) (.154469) (.163891) (.135924) (.151797)
- ------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $10.224570 11.914266 12.792935 10.387676 11.453100
- ------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 2%(b) 19% 29% 11% 9%
======================================================================================================
1994
Beginning unit value -
Jan. 1 ** $10.055760 10.155359 10.000000 ** 11.147499
- ------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .240728 .001086 .000000 .055957
- ------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.179560) (.120150) (.554133) (.585405)
- ------------------------------------------------------------------------------------------------------
Contract charges (.140969) (.139826) (.057486) (.153129)
- ------------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 $ 9.975959 9.896469 9.388381 10.464922
- ------------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (1)% (3)% (6)%(b) (6)%
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VEWRLDBD VEWRLDEMKT VKACRESEC WPLNTEQ WPPVENCAP WPSMCOGR
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value -
Jan. 1 11.473340 10.000000 10.759998 10.655759 10.000000 12.423899
- ----------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .312292 .000000 .286935 .225373 .000000 .000000
- ----------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.028284) .080691 4.028984 .832826 .166644 1.718585
- ----------------------------------------------------------------------------------------------------
Contract charges (.159952) (.003083) (.167221) (.159186) (.003095) (.189766)
- ----------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 11.597396 10.077608 14.908696 11.554772 10.163549 13.952718
- ----------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 1% 1%(b) 39% 8% 2%(b) 12%
====================================================================================================
1995
Beginning unit value -
Jan. 1 9.919400 ** 10.000000 10.000000 ** 10.000000
- ----------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .802034 .091916 .077309 .000000
- ----------------------------------------------------------------------------------------------------
Unrealized gain (loss) .906733 .739173 .650383 2.500906
- ----------------------------------------------------------------------------------------------------
Contract charges (.154827) (.071091) (.071933) (.077007)
- ----------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 11.473340 10.759998 10.655759 12.423899
- ----------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) 16% 8%(b) 7%(b) 24%(b)
====================================================================================================
1994
Beginning unit value -
Jan. 1 10.194477 ** ** ** ** **
- ----------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .040987
- ----------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.177244)
- ----------------------------------------------------------------------------------------------------
Contract charges (.138820)
- ----------------------------------------------------------------------------------------------------
Ending unit value -
Dec. 31 9.919400
- ----------------------------------------------------------------------------------------------------
Percentage increase
(decrease)
in unit value* (a) (3)%
====================================================================================================
</TABLE>
* An annualized rate of return cannot be determined as:
(a) Contract charges do not include the annual contract maintenance charge
discussed in note 2; and
(b) This investment option was not being utilized for the entire year
indicated.
** This investment option was not being utilized or was not available.
See Note 3.
61
<PAGE> 62
Independent Auditors' Report
The Board of Directors of Nationwide Life Insurance Company and
Contract Owners of Nationwide Variable Account-II:
We have audited the accompanying statement of assets, liabilities and
contract owners' equity of Nationwide Variable Account-II as of December 31,
1996, and the related statements of operations and changes in contract owners'
equity and schedules of changes in unit value for each of the years in the
three year period then ended. These financial statements and schedules of
changes in unit value are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules of changes in unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules of
changes in unit value are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures include confirmation of securities
owned as of December 31, 1996, by correspondence with the transfer agents of
the underlying mutual funds. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and schedules of changes in unit
value referred to above present fairly, in all material respects, the financial
position of Nationwide Variable Account-II as of December 31, 1996, and the
results of its operations and its changes in contract owners' equity and the
schedules of changes in unit value for each of the years in the three year
period then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 7, 1997
62
<PAGE> 63
This report is for the information of contract owners with funds in
the Nationwide Variable Account-II. It may also be used, from time to
time, as sales literature, but only when accompanied or preceded by
the current prospectus, which contains complete information about the
contracts which invest in the separate account, and their fees,
charges and expenses. If this report is used as sales literature after
March 31, 1997, it must be accompanied by the fund performance report
reflecting performances for the most recently completed calendar
quarter. Prospective investors should read the prospectus carefully
before investing.
63
<PAGE> 64
Nationwide(R) is a registered federal service mark of Nationwide Mutual
Insurance Company
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE: ONE NATIONWIDE PLAZA o COLUMBUS, OHIO 43215-2220
Bulk Rate
U.S. Postage
PAID
Columbus, Ohio
Permit No. 521
