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[NATIONWIDE(R) MULTI-FLEX(R) ANNUITY LOGO]
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ANNUAL REPORT
DECEMBER 31, 1996
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NATIONWIDE(R)
MULTI-FLEX
VARIABLE ACCOUNT
[NATIONWIDE INSURANCE LOGO]
Nationwide is on your side
Columbus, Ohio
APO-724-V (12/96)
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[LOGO]
NATIONWIDE LIFE INSURANCE COMPANY
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
[PHOTO]
PRESIDENT'S MESSAGE
On behalf of Nationwide Life Insurance Company, we are pleased
to bring you the 1996 annual report of the Nationwide
Multi-Flex Variable Account.
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.
/s/ Joseph J. Gasper
Joseph J. Gasper, President
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CONTENTS
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 ......................................................... 20
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY .............. 22
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY ................................................ 24
NOTES TO FINANCIAL STATEMENTS ............................................. 25
SCHEDULES OF CHANGES IN UNIT VALUE ........................................ 28
INDEPENDENT AUDITORS' REPORT .............................................. 30
* The discussions refer to a stock market index. 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 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 one of the following
contracts:
- Nationwide Multi-Flex Variable Annuity
- NEA Valuebuilder Annuity
- Nationwide Variable Annuity - Citibank New York
All or some of the funds in the Nationwide Multi-Flex Variable Account (the
Account) are available through these contracts. The Account is a separate
account trust which offers investment options in fifteen mutual funds from seven
mutual fund houses. An explanation of the funds and their objectives can be
found on pages 6 through 19.
The Annual Report has three major financial sections.
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
This statement, found on page 22, 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 23.
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
These statements, found on page 24, 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, annuity 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.
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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 on page 25 will also help explain and clarify the various statements
and schedules.
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A FEW WORDS ABOUT OUR FUNDS
[DREYFUS LOGO]
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, CPC Int'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 is 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
+ "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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DREYFUS STOCK INDEX FUND (CONT'D)
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
purchases 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.
DREYFUS VARIABLE INVESTMENT FUND -
QUALITY BOND PORTFOLIO
OBJECTIVE - Seek to provide the maximum current income to the extent consistent
with the preservation of capital and the maintenance of liquidity.
(Not offered in Nationwide Multi-Flex Variable Annuity and Nationwide Variable
Annuity - Citibank, New York)
NARRATIVE BY DREYFUS CORPORATION
Over the reporting period, the economy has grown moderately, showing little
evidence of accelerating inflation despite the robust pace of new job creation
and the low unemployment rate. It was fear of accelerating inflation that
prompted a sharp rise in long-term interest rates earlier in the year; however,
by year-end, long-term rates had fallen by one half of one percent (50 basis
points) from last summer's peak. Contributing to the drop in rates was the
decision of the Open Market Committee of the Federal Reserve Board (the "Fed")
to leave short-term interest rates unchanged.
Inflation at the consumer level of the economy remains in the 3% range, which
has been accompanied by a comparably benign inflation picture at the production
level of the economy as well. The so-called "core" Producer Price Index (It
excludes the energy and food components because of their volatility) rose just
0.1% in November and a mere 0.6% for the previous 12 months. Producers appeared
to have little ability to pass on price increases to their customers, a reason
cited by the Fed as evidence of the lack of rising price inflation.
Despite the sanguine price environment, consumers remained wary spenders and
modest borrowers, and retail sales growth has been moderate. Nevertheless, the
renewed decline in mortgage rates spurred the housing market: existing home
sales in November increased for the first time in six months. New housing starts
also rose sharply, with the November increase the largest monthly rise since
July 1995. Job growth still appears to have underlying strength; monthly
increases in workers added to payrolls could also move higher. The recent
unemployment rate rose slightly, but still remained near a seven-year low.
Lending optimism to the prospect for continued economic growth was the report
from The Conference Board - a private research group - that its Index of Leading
Economic Indicators rose for the tenth consecutive month in November. An
increase in this index generally correlates with economic expansion over the
next three to twelve months. Manufacturing remained firm all year: both factory
orders and industrial production rose moderately. Despite this overall strength
in production, there were some signs of moderation at year-end. Inventories have
built up and orders for durable goods those items intended to last three or more
years - declined.
Last year, high employment, low inflation and moderate economic growth stayed
the Fed's hand from raising interest rates. The economy is now in the sixth year
of this business cycle and we remain alert to signs of the potential rekindling
of inflationary pressures.
The interest rate environment over the past year was quite volatile. Alternating
signs of economic strength and weakness have caused interest rates to rise and
fall throughout the year. We began 1996 with ten-year Treasury yields at 5.60%.
As fears of economic growth and inflation gripped the market, yields rose to
over 7.00% during the summer months. Slowing economic growth and continued
benign inflation helped ten-year rates to later dip below 6.10% and finish the
year at 6.40%. Despite this interest rate volatility, yield spreads over
Treasuries of both corporate and mortgage backed securities narrowed throughout
the year through October. In November and December, spreads widened as a large
supply of long term bank and insurance debt and commercial mortgage backed debt
was underwritten in a short period of time.
The Portfolio has generally been well positioned for this market environment as
a more defensive, shorter duration posture was adopted during the rising rate
environment early in the year. Additionally, the
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QUALITY BOND PORTFOLIO (CONT'D)
Portfolio was overweighted in corporates and mortgages up until the end of
October. In October and November we sold a large portion of the corporate and
agency mortgage positions to prepare for the anticipated large supply of new
issues. The Portfolio subsequently benefited from corporate and mortgage backed
purchases in November and December as spreads on these securities narrowed late
in the year. We have added numerous names in the Bank sector including First
Union, Barnett Banks, PNC, Bank of Boston and Bank of New York. Additionally, we
have added exposure to commercial mortgage backed securities in the Portfolio.
These securities generally offer better prepayment protection than residential
mortgage backed securities and wider spreads than comparably rated corporate
bonds. The steadily improving commercial real estate market should help benefit
these securities.
DREYFUS VARIABLE INVESTMENT FUND -
SMALL CAP PORTFOLIO
OBJECTIVE - To maximize capital appreciation by investing in common stocks of
emerging smaller sized companies.
(Not offered in Nationwide Multi-Flex Variable Annuity and Nationwide Variable
Annuity - Citibank, New York)
NARRATIVE BY DREYFUS CORPORATION
Though 1996 was not as good a year for small cap stocks as for the "blue chips,"
we are pleased to report that Dreyfus Variable Investment Fund - Small Cap
Portfolio matched the performance of its benchmark for the year, a total return
of 16.50% for the Russell 2000 Index of small cap stocks.
The much-heralded "Goldilocks" phase of the U.S. economy - not too hot and not
too cold - may be ending. First, the slowdown to 2% GDP growth seems to have
been confined to the summer and recent data depict faster growth for the fourth
quarter of 1996. Second, inflation has begun a cyclical climb, although there is
yet little linkage to the tight labor market. The economy is operating with very
little slack near the close of its sixth year of expansion. Hence, the
resumption of faster growth quickly restored a rising trend to bond yields and
pulled short-term rates above their December lows. As yet there is little
expectation of tighter Federal Reserve policy, although sustained above-trend
growth would probably justify higher rates during 1997. Modest tightening in
1997 would in our opinion help allay inflation fears and sustain another year of
economic growth.
Although the economy grew near its 2.4% long-term trend rate in 1996, it was
nonetheless quite volatile during the year. After a strong first half, and then
the summer slowdown, the return to faster growth late in the year is not
broad-based. Strong sectors are in manufacturing, exports, services and
construction. By contrast, some retailers found Christmas sales disappointing
and capital goods orders are mixed. However, inventories are quite lean and this
tilts the odds towards yet another year of growth in 1997. While corporate
profit growth slowed in 1996, profits still tended to surprise on the upside and
should maintain steady growth in 1997 too.
Accelerating wage growth in 1996 did not fuel higher prices. And surging energy
prices have failed to lift inflation elsewhere. Indeed, core inflation
(excluding food and energy) decelerated last year. Yet surging energy prices
have forced consumer price inflation above 3% and indications are that this will
accelerate further. The general price structure has far ignored the higher oil
price, responding to it as temporary. However, oil prices have been rising now
for a year and, at some point, their ability to raise the overall price level
may become worrisome, especially if the Fed finds them significant.
Both long-term and short-term interest rates were quite volatile in 1996. The
strength of the economy prompted rising rates through summer's end, but bond
yields then fell 90 basis points after the economy slowed. That period of low
rates may have ended now that faster growth is again apparent.
We believe the economy has reverted to a period of growth above the long-term
average. Key issues are whether faster growth will fuel higher inflation this
time and at what point rising oil prices would disturb price stability. The
economy will shortly begin a seventh expansion year and continued volatility in
growth and in sentiment is likely.
The stock market in 1996 was a mixture of agony and ecstasy, with the accent for
most of the year on the more desirable of those two alternatives. By the end of
the year, the Standard &Poor's 500 Composite Stock Price Index had registered a
gain of 22.95%, while the blue chip Dow Jones Industrial Average ("DJIA") gained
28.91%. The road leading to those impressive year-end gains was not a smooth
one, however.
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SMALL CAP PORTFOLIO (CONT'D)
The market year began haltingly, in the wake of shaky business conditions at the
end of the previous year. As 1996 unfolded, however, the market picked up steam.
The economy took on characteristics that continued for much of the year low
inflation, moderate growth and relatively low interest rates. This was a
combination that investors liked, perhaps too much. By mid-year, satisfaction
with the economy turned into fear that economic growth might be overdone.
The prevailing nervousness about potential inflation served to boost interest
rates temporarily, without the need for Federal Reserve intervention. This was a
temporary setback for large capitalization stocks, but more damaging to Nasdaq
issues and particularly to the smaller capitalization stocks measured by the
Russell 2000 Index.
As summer turned into fall, interest rates eased and inflation remained at bay.
The benign economic environment allowed many stocks to resume their upward
course, causing a string of record-breaking performances by the DJIA and other
broad market indexes. In mid-fall the prospect that government would continue
divided in Washington, with a Democratic President and a Republican-controlled
Congress, appeared to be another plus factor for the market. Stocks continued to
surge, hardly pausing for breath when Chairman Alan Greenspan raised a caution
signal in early December by referring to "irrational exuberance" in the equity
markets.
Stock market veterans issued a stream of warnings that what goes up so strongly
and consistently must, at some point, come down. Nonetheless, a fairly steady
flow of new money coming into stocks from people putting money aside for
retirement seemed to be fueling the boom. While at the very end of the year,
caution caused a softening of stock prices, which backed away from the year's
record of 6560.91 on the DJIA, that record was surpassed in early 1997, when the
average surpassed 6700.
Among the best performing groups for 1996 were oil drillers, semi-conductors,
computers, financial enterprises and consumer non-durables. Corporate earnings
were very strong for much of the year, but showed signs of flagging as the year
wore on. This raised questions in the minds of many market observers whether the
scorching pace of the past year could be maintained.
Equities continue to be the asset class of choice, and in 1996 stock market
investors once again enjoyed robust double digit returns. The Portfolio
participated in these returns in line with the Portfolio benchmark index.
When Dreyfus set out on the endeavor of managing this Portfolio in 1990, it was
under the belief that a simple style of investing in good companies with good
fundamentals at appropriate valuations would provide the results that would
sooner or later gain broad acceptance by the investing public. We are pleased
that through our efforts the Portfolio's assets are now approaching one billion
dollars. We are thankful for your support, and have enjoyed working with you on
this journey.
1996 can be characterized by two different investment environments. For the
first half of the year, the Russell 2000 Index, our benchmark, outperformed the
more popular Standard & Poor's 500 Composite Stock Price Index. New money flows
sought out aggressive growth and small capitalization funds. After a significant
setback mid-year, however, investors lost some of their nerve and showed a
marked preference for the perceived safety of the more liquid, blue chip names
that populate the S&P 500. For the full year, the Russell 2000 Index returned
16.50%, underperforming the S&P 500 by 645 basis points.
The Energy sector was the year's big winner on an absolute basis, and we
remained overweighted in this sector throughout 1996. The best individual stock
in your portfolio was by far offshore construction producer Global Industries.
Other big winners were exploration and production companies: Parker & Parsley
Petroleum, Flores & Rucks and Nuevo Energy. Poor energy performers were few, but
included two other exploration and production outfits: Cairn Energy and Benton
Oil & Gas. We continue to feel that an overweight in energy is appropriate in
1997. We believe the fundamentals continue to improve in this group, and the
valuations are still compelling.
Credit-sensitive stocks also had an outstanding year. Top stocks included
insurance companies: ACE Limited, Enhance Financial Services Group, National Re
and Capital Re. The only two financial stocks that lost money for your Portfolio
during this period were insurance broker Alexander & Alexander Services and
property and casualty insurer Commerce Group Inc. Exposure to REITs would have
enhanced the Portfolio's performance.
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SMALL CAP PORTFOLIO (CONT'D)
Another strong group was the diverse Consumer Discretionary sector. The best
performing consumer stock was Culligan Water Technologies followed by Boise
Cascade Office Products, Tiffany, Meredith and Stein Mart. Our biggest loser was
the disappointing Galoob (Lewis) Toys. Our sector analysts continue to prospect
in this area with the goal of discovering 1997's big winners. It is an eclectic
group with many potential opportunities.
Superior stock selection in the Capital Goods sector added significantly to your
Portfolio's returns. A major theme of the Portfolio has been riding the
commercial aerospace cycle by owning the suppliers to Boeing and Airbus. These
stocks included Coltec Industries, Rohr and Thiokol. Other winners in the
Capital Goods segment were USA Waste Service, special chemical producer Crompton
& Knowles, Manitowoc, a crane and ice machine manufacturer, and ship builder
Avondale Industries. Two underperformers were Titan Wheel International, a
manufacturer of agricultural tires and wheels, and IMCO Recycling, which both
disappointed with lower 1996 earnings. We remain constructive on the Capital
Goods segment in 1997 due to the length of the aerospace cycle and the positive
environment for these producers.
Healthcare stocks were a minefield in 1996. This was the only Russell 2000
sector that posted negative returns for the year; however, your Portfolio made
money with its investments in this sector. We were fortunate to avoid most of
the losers, and picked a number of winners. Top holding Mentor, a medical device
designer/manufacturer, was the stellar performer for the year, followed by
Physio-Control International, a designer of emergency care products, GMIS Inc.,
a producer of healthcare information systems, and Guidant, a manufacturer of
cardiological equipment. Losses were purged from the Portfolio but included
INMET Systems, IDX Systems, Circon Corp. and Emeritus. We had been
under-represented in healthcare all year, but are increasing our exposure for
1997 based on our belief that the valuations have now reached reasonable levels.
The trickiest sector always seems to be Technology. Some of our best and worst
stocks fall into this group. After exhibiting leadership in the first half of
1996, the second half of the year was not kind to small cap technology stocks.
Here it is critical to have a sector analyst out in front in an industry that
changes rapidly, and we believe we do. Winners for the year included Aspect
Telecommunications, McAfee Associates, Vanstar, Xircom and Learning Tree
International. Losers included four software companies: Open Markets Inc., GT
Interactive, Edify Corp. and Elcom International and one telemarketing firm: ICT
Group. It is interesting to note that all of these poor performers were publicly
owned less than one year. We go into 1997 slightly overweight in technology with
high hopes that our selected dynamic companies will deliver on their high
potential.
In conclusion, small and medium sized companies will, in our opinion, continue
to prosper in the current environment, so we remain very positive on small cap
equities. We believe there is opportunity for growth in the industries in which
we invest and the niche markets in which these companies are positioned. We want
to assure our investors, both old and new, that we will direct our resources to
attempting to discover the companies and industries that will propel your
Portfolio into the millennium.
[LOGO] FIDELITY INVESTMENTS(R)
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
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EQUITY-INCOME PORTFOLIO (CONT'D)
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.
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.
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
11
<PAGE> 12
HIGH INCOME PORTFOLIO (CONT'D)
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, 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.
12
<PAGE> 13
[LOGO] NATIONWIDE ADVISORY SERVICES, INC.
Columbus, OH 43216-1482 - 1-800-848-0920
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.
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
13
<PAGE> 14
MONEY MARKET FUND (CONT'D)
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.
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.
NEUBERGER[LOGO]BERMAN
MANAGEMENT INC.(TM)
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
BALANCED PORTFOLIO
OBJECTIVE - The Portfolio seeks long-term capital growth and reasonable current
income without undue risk to principal.
(Not offered in Nationwide Multi-Flex Variable Annuity)
NARRATIVE BY MARK GOLDSTEIN, PORTFOLIO MANAGER
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<PAGE> 15
BALANCED PORTFOLIO (CONT'D)
GROWTH PORTION 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.
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 sector was KLA, a company
that makes test equipment for semiconductor companies. KLA's earnings held up
well during the year but the psychology of this business weighed down on the
stock. 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 made up for 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 we
believe should help the company's valuations.
The Portfolio increased its exposure to HMOs 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 PORTION
1996 ended on an upbeat note for the bond market and the debt securities portion
of the 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 into 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 a low for the year of 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 outperfor-
15
<PAGE> 16
BALANCED PORTFOLIO (CONT'D)
mance versus the market. This segment of the portfolio ended the year at about
8% of the overall Fund. Investment grade bonds also performed well.
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 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 since 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.
[LOGO]
STRONG FUNDS
STRONG SPECIAL FUND II, INC.
OBJECTIVE - To seek capital appreciation through investments in a diversified
portfolio of equity securities.
(Not offered in Nationwide Multi-Flex Variable Annuity and Nationwide Variable
Annuity - Citibank, New York)
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.
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.
16
<PAGE> 17
STRONG SPECIAL FUND II, INC. (CONT'D)
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]
AMERICAN CENTURY
A MEMBER OF THE AMERICAN CENTURY(SM) FAMILY OF MUTUAL FUNDS.
TCI ADVANTAGE
OBJECTIVE - To seek capital growth and current income.
NARRATIVE BY AMERICAN CENTURY(SM) COMPANIES, INC.
The TCI Advantage 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 Advantage
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 Advantage benefited from companies in the oil service and drilling industry,
positions in large money center banks, and holdings in some of the larger
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 39% 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 help 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 22% in cash.
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
17
<PAGE> 18
TCI GROWTH (CONT'D)
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.
[LOGO FRANKLIN TEMPLETON]
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL FUND
OBJECTIVE - To seek long-term capital growth through a flexible policy of
investing in stocks and debt obligations of companies and governments outside
the United States.
(Not offered in Nationwide Multi-Flex Variable Annuity and Nationwide Variable
Annuity - Citibank, New York)
NARRATIVE BY FRANKLIN TEMPLETON
The Templeton International Fund seeks long-term capital growth through a
flexible policy of investing in stocks and debt obligations of companies and
governments outside the United States.
We are pleased to report that the Fund provided a total return of 24.04% for the
12-month period ended December 31, 1996. Its benchmark, the unmanaged Morgan
Stanley Capital International Europe, Australia and, Far East (MSCI EAFE) Index,
posted a total return of only 6.05% for the same period. The Fund's strong
performance was in part the result of our bottom-up, value style of investing
and our relative overweighting in markets that performed exceptionally well
during the fiscal year. Our underweighting in poorly performing markets,
particularly Japan, also aided the Fund's performance. You should keep in mind
that Fund performance does not reflect expenses associated with the variable
contract; had those expenses been included, performance would have been lower.
18
<PAGE> 19
TEMPLETON INTERNATIONAL FUND (CONT'D)
At the end of the fiscal year, European holdings comprised our largest
geographic exposure, representing 61.0% of the Fund's total net assets, up from
56.9% on December 31, 1995. Compared with the MSCI EAFE Index, the Fund was
overweighted in Spain, Finland, and Sweden - three countries whose stock markets
increased more than 35% in U.S. dollar terms during the reporting period. Among
the Fund's ten largest holdings, the share price of Stadshypotek AB appreciated
37.4%, Rhone-Poulenc SA 59.5%, and Telefonica de Espana SA more than 65% in
1996. During the twelve months under review, we initiated positions in British
Telecommunications PLC, Fiat Spa, and Nokia AB, and sold our holdings of U.K.
utility Southern Electric PLC, Dutch insurer Aegon NV, and Swiss food
manufacturer Nestle SA at a profit.
Although some Asian stock markets performed poorly in 1996 because of slowing
economies and weakening currencies, Hong Kong's equity market rose 37.5% as
concerns about China's takeover in 1997 faded and investors focused on the
growth prospects of Hong Kong companies with established operations in China.
During the period, we added to our holdings of Consolidated Electric Power Asia
Ltd. and Hong Kong Electric, two Hong Kong utilities, and the Fund's performance
benefited from its relatively large exposure in Hong Kong. Indonesia's stock
market also strengthened appreciably during the fiscal year, and we initiated
positions in Asia Pulp and Paper Co. Ltd., a large Indonesian paper company, and
PT Bank Bali, a major Indonesian bank. However, we limited our exposure to
Japan, whose stock market declined more than 12% in U.S. dollar terms during
1996. Our Japanese holdings represented less than 1% of the Fund's total net
assets at the end of the fiscal year, compared with a 32.3% weighting in the
MSCI EAFE Index. Based on standard measures such as price/earnings ratios, we
believe that Japanese stocks remain among the world's most expensive, and we do
not anticipate increasing our Japanese exposure meaningfully unless valuations
fall substantially.
Latin American equity markets rebounded strongly in 1996 due to improved
economic fundamentals and renewed interest from foreign investors. The
telecommunications and electric utility industries performed well, increasing
the value of our holdings of Telecomunicaciones de Chile SA (CTC),
Telebras-Telecomunicacoes Brasileiras SA (Telebras), and Electricidad de
Caracas. We believe demand for utility services will continue to increase, and
the expected deregulation of the Brazilian telephone industry could provide
Telebras with strong growth potential. During the year, we added to our holdings
of Telefonica de Argentina, Telefonica del Peru, and Telefonos de Mexico, and we
realized profits by eliminating our position in CTC.
This discussion reflects the strategies we employed for the Fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
There are, of course, special risks involved with global investing related to
market, currency, economic, political, and other factors; developing markets
involve similar but heightened risks. These risks are discussed in the
prospectus.
19
<PAGE> 20
<TABLE>
FUND PERFORMANCES
Total Return: Assuming Contract Not Surrendered** (Non-Standardized)
Approximate Percent Change in Net Assets with Capital Gains and Income Dividends Reinvested
- ---------------------------------------------------------------------------------------------------------------------------
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
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%
VIF - Quality Bond Portfolio 08/31/90 1.78% 43.47% 64.76% 7.49% 8.20%
VIF - Small Cap Portfolio 08/31/90 15.07% 339.34% 1045.97% 34.45% 45.95%
FIDELITY VIP FUND
Equity-Income Portfolio 10/09/86 12.79% 114.09% 217.61% 16.44% 11.96%
High Income Portfolio 09/19/85 12.54% 88.07% 209.57% 13.47% 10.53%
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%
Total Return Fund 11/08/82 20.25% 78.68% 527.39% 12.31% 13.86%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Balanced Portfolio 02/28/89 5.49% 37.74% 93.22% 6.61% 8.77%
STRONG FUNDS
Strong Special Fund II, Inc. 05/08/92 16.61% NA* 110.73% NA* 17.39%
TCI PORTFOLIOS, INC.
TCI Advantage 08/01/91 7.82% 24.11% 40.55% 4.41% 6.48%
TCI Growth 11/20/87 -5.57% 26.37% 126.27% 4.79% 9.37%
TEMPLETON VPS FUND
Templeton International Fund 05/01/92 22.42% NA* 82.70% NA* 13.78%
<FN>
* Performance information is not available for the fund for part or all 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.
</TABLE>
20
<PAGE> 21
<TABLE>
Total Return: Assuming Contract Surrendered (Standardized)
Approximate Percent Change in Net Assets with Capital Gains and Income Dividends Reinvested
<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
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%
VIF - Quality Bond Portfolio 08/31/90 -6.55% 4.51% NA* 5.18%
VIF - Small Cap Portfolio 08/31/90 6.67% 32.88% NA* 45.47%
FIDELITY VIP FUND
Equity-Income Portfolio 10/09/86 4.39% 13.82% 9.90% 9.25%
High Income Portfolio 09/19/85 4.14% 10.84% 7.08% 8.05%
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%
Total Return Fund 11/08/82 11.85% 9.31% 8.75% 12.12%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Balanced Portfolio 02/28/89 -2.91% 3.43% NA* 6.30%
STRONG FUNDS
Strong Special Fund II, Inc. 05/08/92 8.21% NA* NA* 14.45%
TCI PORTFOLIOS, INC.
TCI Advantage 08/01/91 -0.58% 0.92% NA* 3.01%
TCI Growth 11/20/87 -13.46% 1.48% NA* 6.80%
TEMPLETON VPS FUND
Templeton International Fund 05/01/92 14.02% NA* NA* 10.47%
<FN>
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 the fund for part or all 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.
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
NATIONWIDE MULTI-FLEX VARIABLE ACCOUNT
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
December 31, 1996
ASSETS:
Investments at market value:
<S> <C>
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
341,534 shares (cost $6,389,466) ......................... $ 6,861,416
Dreyfus Stock Index Fund (DryStkIx)
1,084,344 shares (cost $17,891,133) ...................... 21,990,497
Dreyfus VIF - Quality Bond Portfolio (DryQualBd)
200,080 shares (cost $2,286,692) ......................... 2,300,920
Dreyfus VIF - Small Cap Portfolio (DrySmCap)
621,611 shares (cost $29,305,097) ........................ 32,373,482
Fidelity VIP - Equity-Income Portfolio (FidVIPEI)
3,730,625 shares (cost $63,131,778) ...................... 78,455,038
Fidelity VIP - High Income Portfolio (FidVIPHI)
693,430 shares (cost $8,123,518) ......................... 8,681,750
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
2,967,603 shares (cost $35,468,907) ...................... 48,312,570
Nationwide SAT - Government Bond Fund (NSATGvtBd)
11,788,842 shares (cost $132,141,892) .................... 130,148,820
Nationwide SAT - Money Market Fund (NSATMyMkt)
46,229,642 shares (cost $46,229,642) ..................... 46,229,642
Nationwide SAT - Total Return Fund (NSATTotRe)
33,938,583 shares (cost $330,436,923) .................... 450,364,994
Neuberger &Berman - Balanced Portfolio (NBAMTBal)
2,413,487 shares (cost $36,425,096) ...................... 38,422,710
Strong Special Fund II, Inc. (StSpec2)
281,216 shares (cost $5,001,628) ......................... 5,410,598
TCI Portfolios - TCI Advantage (TCIAdv)
1,648,442 shares (cost $9,131,066) ....................... 10,368,698
TCI Portfolios - TCI Growth (TCIGro)
4,380,090 shares (cost $40,968,483) ...................... 44,852,127
Templeton VPS - Templeton International Fund (TemIntFd)
837,949 shares (cost $12,758,410) ........................ 15,418,263
------------
Total investments ..................................... 940,191,525
Accounts receivable ............................................ 42,036
------------
Total assets .......................................... 940,233,561
ACCOUNTS PAYABLE .................................................. 51,079
------------
CONTRACT OWNERS' EQUITY ........................................... $940,182,482
============
</TABLE>
22
<PAGE> 23
<TABLE>
Contract owners' equity represented by:
<CAPTION>
UNITS UNIT VALUE
----- -----------
Contracts in accumulation phase:
<S> <C> <C> <C>
The Dreyfus Socially Responsible Growth Fund, Inc.:
Tax qualified ............................................. 399,889 $ 15.953248 $ 6,379,528
Non-tax qualified ......................................... 30,211 15.953248 481,964
Dreyfus Stock Index Fund:
Tax qualified ............................................. 995,299 16.698256 16,619,757
Non-tax qualified ......................................... 321,661 16.698256 5,371,178
Dreyfus VIF - Quality Bond Portfolio:
Tax qualified ............................................. 202,913 10.679640 2,167,038
Non-tax qualified ......................................... 13,559 10.679640 144,805
Dreyfus VIF - Small Cap Portfolio:
Tax qualified ............................................. 1,991,389 15.245571 30,359,862
Non-tax qualified ......................................... 132,109 15.245571 2,014,077
Fidelity VIP - Equity-Income Portfolio:
Tax qualified ............................................. 3,685,628 16.255386 59,911,306
Non-tax qualified ......................................... 1,140,873 16.255386 18,545,331
Fidelity VIP - High Income Portfolio:
Tax qualified ............................................. 621,493 13.256841 8,239,034
Non-tax qualified ......................................... 33,405 13.256841 442,845
Nationwide SAT - Capital Appreciation Fund:
Tax qualified ............................................. 1,905,248 17.979967 34,256,296
Non-tax qualified ......................................... 779,474 17.979967 14,014,917
Nationwide SAT - Government Bond Fund:
Tax qualified ............................................. 2,948,795 30.092479 88,736,552
Non-tax qualified ......................................... 1,371,551 30.103580 41,288,595
Nationwide SAT - Money Market Fund:
Tax qualified ............................................. 1,617,637 20.329483 32,885,724
Non-tax qualified ......................................... 600,726 22.088348 13,269,045
Nationwide SAT - Total Return Fund:
Tax qualified ............................................. 5,119,908 62.170693 318,308,228
Non-tax qualified ......................................... 2,180,633 60.382482 131,672,033
Neuberger & Berman - Balanced Portfolio:
Tax qualified ............................................. 1,766,421 15.563120 27,491,022
Non-tax qualified ......................................... 702,451 15.563120 10,932,329
Strong Special Fund II, Inc.:
Tax qualified ............................................. 408,289 12.193238 4,978,365
Non-tax qualified ......................................... 35,456 12.193238 432,323
TCI Portfolios - TCI Advantage:
Tax qualified ............................................. 511,115 14.055040 7,183,742
Non-tax qualified ......................................... 199,799 14.055040 2,808,183
Initial Funding by Depositor (note 1a) .................... 25,000 15.079515 376,988
TCI Portfolios - TCI Growth:
Tax qualified ............................................. 1,991,010 15.531281 30,922,936
Non-tax qualified ......................................... 896,863 15.531281 13,929,431
Templeton VPS - Templeton International Fund:
Tax qualified ............................................. 1,044,821 13.869569 14,491,217
Non-tax qualified ......................................... 66,863 13.869569 927,361
============ ============
Reserves for annuity contracts in payout phase:
Tax qualified ............................................. 338,428
Non-tax qualified ......................................... 262,042
------------
$940,182,482
============
</TABLE>
See accompanying notes to financial statements.
================================================================================
23
<PAGE> 24
<TABLE>
<CAPTION>
NATIONWIDE MULTI-FLEX VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested capital gains and dividends ........................... $ 54,005,529 46,393,801 29,703,314
Mortality, expense and administration charges (note 2) ........... (11,142,442) (9,125,823) (8,122,349)
------------- ------------- -------------
Net investment activity ....................................... 42,863,087 37,267,978 21,580,965
------------- ------------- -------------
Proceeds from mutual fund shares sold ............................ 74,149,404 88,238,390 76,838,985
Cost of mutual fund shares sold .................................. (63,374,669) (75,818,878) (73,196,125)
------------- ------------- -------------
Realized gain (loss) on investments ........................... 10,774,735 12,419,512 3,642,860
Change in unrealized gain (loss) on investments .................. 53,497,947 96,906,383 (34,476,283)
------------- ------------- -------------
Net gain (loss) on investments ................................ 64,272,682 109,325,895 (30,833,423)
------------- ------------- -------------
Net increase (decrease) in contract owners'
equity resulting from operations ........................ 107,135,769 146,593,873 (9,252,458)
------------- ------------- -------------
EQUITY TRANSACTIONS:
Purchase payments received from contract owners .................. 133,336,058 83,073,876 116,273,060
Redemptions ...................................................... (74,091,271) (77,469,618) (60,979,679)
Annuity benefits ................................................. (88,867) (70,923) (64,720)
Annual contract maintenance charge (note 2) ...................... (1,406,646) (1,225,487) (1,015,180)
Contingent deferred sales charges (note 2) ....................... (829,238) (817,609) (948,537)
Adjustments to maintain reserves ................................. 38,880 (11,132) (9,850)
------------- ------------- -------------
Net equity transactions .................................... 56,958,916 3,479,107 53,255,094
------------- ------------- -------------
NET CHANGE IN CONTRACT OWNERS' EQUITY ............................... 164,094,685 150,072,980 44,002,636
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ......................... 776,087,797 626,014,817 582,012,181
------------- ------------- -------------
CONTRACT OWNERS' EQUITY END OF PERIOD ............................... $ 940,182,482 776,087,797 626,014,817
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
================================================================================
24
<PAGE> 25
================================================================================
NATIONWIDE MULTI-FLEX VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
The Nationwide Multi-Flex Variable Account (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. On August 21,
1991, the Company (the Depositor) transferred to the Account 50,000 shares of
the TCI Portfolios, Inc. - TCI Advantage fund for which the Account was credited
with 25,000 accumulation units. The value of the accumulation units purchased by
the Company on August 21, 1991 was $250,000.
The Company offers tax qualified and non-tax qualified Individual Deferred
Variable Annuity Contracts through the Account. The primary distributions for
the contracts is through Company Agents and an affiliated sales organization;
however, other distributors may be 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 payout phase may invest in any of the
following:
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
Dreyfus Stock Index Fund (DryStkIx)
Portfolios of the Dreyfus Variable Investment Fund (Dreyfus VIF);
Dreyfus VIF - Quality Bond Portfolio (DryQualBd)
Dreyfus VIF - Small Cap Portfolio (DrySmCap)
Portfolios of the Fidelity Variable Insurance Products Fund
(Fidelity VIP);
Fidelity VIP - Equity-Income Portfolio (FidVIPEI)
Fidelity VIP - High Income Portfolio (FidVIPHI)
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 - Total Return Fund (NSATTotRe)
Portfolio of the Neuberger & Berman Advisers Management Trust
(Neuberger &Berman);
Neuberger & Berman - Balanced Portfolio (NBAMTBal)
Strong Special Fund II, Inc. (StSpec2)
Portfolios of the TCIPortfolios, Inc. (TCI Portfolios);
TCIPortfolios - TCI Advantage (TCIAdv)
TCIPortfolios - TCI Growth (TCIGro)
Portfolio of the Templeton Variable Products Series Fund
(Templeton VPS);
Templeton VPS - Templeton International Fund (TemIntFd)
25
<PAGE> 26
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 a 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.
(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 February 1, 1989, 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 February 1, 1989, 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) an annual
contract maintenance charge of $30, with certain exceptions, which is satisfied
by surrendering units; and (b) for contracts issued prior to February 1, 1989, 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
contracts issued on or after February 1, 1989, 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. No charges were deducted from the initial funding, or from
earnings thereon.
26
<PAGE> 27
(3) SHEDULE 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:
- Beginning unit value - Jan. 1
- 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.)
- Unrealized gain (loss)
(This amount reflects the increase (decrease) in the unit value
resulting from the market appreciation (depreciation) of the
underlying mutual funds.)
- Contract charges
(This amount reflects the decrease in the unit value due to the
mortality risk charge, expenses risk charge and administration
charge discussed in note 2.)
- Ending unit value - Dec. 31
- 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.
27
================================================================================
<PAGE> 28
<TABLE>
========================================================================================================================
SCHEDULE I
NATIONWIDE MULTI-FLEX VARIABLE ACCOUNT
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
DrySRGro DrySTkix DryQualBd DrySmCap FidVIPEI FidVIPHI
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value - Jan. 1 $13.333625 13.807559 10.493309 13.249127 14.412060 11.779381
- -------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .688836 .595405 .595052 .478471 .664825 1.073991
- -------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.122234 2.493107 (.272588) 1.704904 1.377615 .567992
- -------------------------------------------------------------------------------------------------------------------------
Contract charges (.191447) (.197815) (.136133) (.186931) (.199114) (.164523)
- -------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $15.953248 16.698256 10.679640 15.245571 16.255386 13.256841
- -------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 20% 21% 2% 15% 13% 13%
=========================================================================================================================
1995
Beginning unit value - Jan. 1 $10.039093 10.227308 10.000000 10.374796 10.808255 9.895223
- -------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .367042 .366275 .300901 .305817 .845166 .716438
- -------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.080069 3.371719 .235955 2.722323 2.923160 1.310923
- -------------------------------------------------------------------------------------------------------------------------
Contract charges (.152579) (.157743) (.043547) (.153809) (.164521) (.143203)
- -------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $13.333625 13.807559 10.493309 13.249127 14.412060 11.779381
- -------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 33% 35% 5%(b) 28% 33% 19%
=========================================================================================================================
1994
Beginning unit value - Jan. 1 $10.000000 10.271065 ** 10.000000 10.227513 10.000000
- -------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .258763 .287154 .168745 .767502 .000000
- -------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.132737) (.197934) .294439 (.048719) (.018339)
- -------------------------------------------------------------------------------------------------------------------------
Contract charges (.086933) (.132977) (.088388) (.138041) (.086438)
- -------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $10.039093 10.227308 10.374796 10.808255 9.895223
- -------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (0)%(b) 0% (4)%(b) 6% (1)%(b)
=========================================================================================================================
<CAPTION>
NSATGvtBd NSATGvtBd
NSATCapAP Qual Non-Qual
--------- ---- --------
<S> <C> <C> <C>
1996
Beginning unit value - Jan. 1 14.442619 29.463573 29.474435
- ----------------------------------------------------------------------------------
Reinvested capital gains
and dividends .749106 1.822953 1.823626
- ----------------------------------------------------------------------------------
Unrealized gain (loss) 2.998126 (.811577) (.811863)
- ----------------------------------------------------------------------------------
Contract charges (.209884) (.382470) (.382618)
- ----------------------------------------------------------------------------------
Ending unit value - Dec. 31 17.979967 30.092479 30.103580
- ----------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 24% 2% 2%
==================================================================================
1995
Beginning unit value - Jan. 1 11.311683 25.138302 25.147577
- ----------------------------------------------------------------------------------
Reinvested capital gains
and dividends .642190 1.778825 1.779480
- ----------------------------------------------------------------------------------
Unrealized gain (loss) 2.653706 2.904595 2.905666
- ----------------------------------------------------------------------------------
Contract charges (.164960) (.358149) (.358288)
- ----------------------------------------------------------------------------------
Ending unit value - Dec. 31 14.442619 29.463573 29.474435
- ----------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 28% 17% 17%
==================================================================================
1994
Beginning unit value - Jan. 1 11.564256 26.318797 26.328516
- ----------------------------------------------------------------------------------
Reinvested capital gains
and dividends .182737 1.651042 1.651652
- ----------------------------------------------------------------------------------
Unrealized gain (loss) (.286833) (2.499476) (2.500401)
- ----------------------------------------------------------------------------------
Contract charges (.148477) (.332061) (.332190)
- ----------------------------------------------------------------------------------
Ending unit value - Dec. 31 11.311683 25.138302 25.147577
- ----------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (2)% (4)% (4)%
===================================================================================
<FN>
* 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.
</TABLE>
28
<PAGE> 29
<TABLE>
SCHEDULE I, CONTINUED
NATIONWIDE MULTI-FLEX VARIABLE ACCOUNT
TAX QUALIFIED and NON-TAX QUALIFIED
SCHEDULES OF CHANGES IN UNIT VALUE
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
NSATMyMkt NSATMyMkt NSATTotRe NSATTotRe
Qual Non-Qual Qual Non-Qual NBAMTBal StSpec2
---- -------- ---- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1996
Beginning unit value - Jan. 1 $19.595876 21.291272 51.701438 50.214359 14.753402 10.456863
- ---------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .996061 1.082246 3.444695 3.345616 2.260284 .491408
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 .000000 7.759641 7.536444 (1.253279) 1.391802
- ---------------------------------------------------------------------------------------------------------------------------
Contract charges (.262454) (.285170) (.735081) (.713937) (.197287) (.146835)
- ---------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $20.329483 22.088348 62.170693 60.382482 15.563120 12.193238
- ---------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 4% 4% 20% 20% 5% 17%
===========================================================================================================================
1995
Beginning unit value - Jan. 1 $18.790546 20.416267 40.575816 39.408735 12.077573 10.000000
- ---------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.056381 1.147773 4.020137 3.904506 .307323 .046668
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 .000000 7.711672 7.489864 2.548627 .453424
- ---------------------------------------------------------------------------------------------------------------------------
Contract charges (.251051) (.272768) (.606187) (.588746) (.180121) (.043229)
- ---------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $19.595876 21.291272 51.701438 50.214359 14.753402 10.456863
- ---------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 4% 4% 27% 27% 22% 5%(b)
===========================================================================================================================
1994
Beginning unit value - Jan. 1 $18.325918 19.911440 40.671816 39.501981 12.661508 **
- ---------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .706658 .767804 2.052197 1.993171 .493737
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 .000000 (1.612762) (1.566374) (.917170)
- ---------------------------------------------------------------------------------------------------------------------------
Contract charges (.242030) (.262977) (.535435) (.520043) (.160502)
- ---------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $18.790546 20.416267 40.575816 39.408735 12.077573
- ---------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 3% 3% 0% 0% (5)%
===========================================================================================================================
<CAPTION>
TCIAdv TCIGro TemintFd TCIAdv+
------ ------ -------- -------
<S> <C> <C> <C> <C>
1996
Beginning unit value - Jan. 1 13.035463 16.447846 11.329203 13.802855
- ------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .938763 1.843419 .231661 .998314
- ------------------------------------------------------------------------------------------
Unrealized gain (loss) .257308 (2.545876) 2.470934 .278346
- ------------------------------------------------------------------------------------------
Contract charges (.176494) (.214108) (.162229) .000000
- ------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 14.055040 15.531281 13.869569 15.079515
- ------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 8% (6)% 22% 9%
==========================================================================================
1995
Beginning unit value - Jan. 1 11.312248 12.711014 9.913613 11.822996
- ------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .409891 .014626 .112246 .431938
- ------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.472626 3.917671 1.440756 1.547921
- ------------------------------------------------------------------------------------------
Contract charges (.159302) (.195465) (.137412) .000000
- ------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 13.035463 16.447846 11.329203 13.802855
- ------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 15% 29% 14% 17%
==========================================================================================
1994
Beginning unit value - Jan. 1 11.343435 13.030369 10.000000 11.701906
- ------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .297949 .001393 .000000 .309969
- ------------------------------------------------------------------------------------------
Unrealized gain (loss) (.181282) (.154144) .001766 (.188879)
- ------------------------------------------------------------------------------------------
Contract charges (.147854) (.166604) (.088153) .000000
- ------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 11.312248 12.711014 9.913613 11.822996
- ------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 0% (2)% (1)%(b) 1%
==========================================================================================
<FN>
* 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.
+ For Depositor, see note 1a.
See note 3.
</TABLE>
29
<PAGE> 30
================================================================================
Independent Auditors' Report
----------------------------
The Board of Directors of Nationwide Life Insurance Company and
Contract Owners of Nationwide Multi-Flex Variable Account:
We have audited the accompanying statement of assets, liabilities and
contract owners' equity of Nationwide Multi-Flex Variable Account 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 Multi-Flex Variable Account 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
================================================================================
30
<PAGE> 31
This report is for the information of contract owners with funds in the
Nationwide Multi-Flex Variable Account. 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.
31
<PAGE> 32
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE: ONE NATIONWIDE PLAZA - COLUMBUS, OHIO 43215-2220
------------------
| Bulk Rate |
| U.S. Postage |
| PAID |
| Columbus, Ohio |
| Permit No. 521 |
------------------
Nationwide(R) is a registered federal service mark of Nationwide Mutual
Insurance Company
