<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1996.
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
NATIONWIDE FINANCIAL SERVICES, INC.
NATIONWIDE FINANCIAL SERVICES CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
DELAWARE 6719 31-1486870
DELAWARE APPLIED FOR
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
-----------
W. SIDNEY DRUEN
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
NATIONWIDE FINANCIAL SERVICES, INC.
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7640
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------
COPIES TO:
ALEXANDER M. DYE/MICHAEL GROLL JEFF LIEBMANN
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. JONATHAN FREEDMAN
125 WEST 55TH STREET DEWEY BALLANTINE
NEW YORK, NEW YORK 10019-5389 1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6092
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2)(3) PRICE(2)(3) FEE(2)
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<S> <C> <C> <C> <C>
Capital Securities of
Nationwide Financial
Services Capital
Trust................. $100,000,000 100% $100,000,000 $30,303.03
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Junior Subordinated De-
bentures of Nationwide
Financial Services,
Inc. ................. -- -- -- --
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Guarantee of Capital Se-
curities of Nationwide
Financial Services Cap-
ital Trust and certain
back-up obliga-
tions(4).............. -- -- -- --
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Total.................. $100,000,000 100% $100,000,000 $30,303.03
</TABLE>
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- -------------------------------------------------------------------------------
(1) Junior Subordinated Debentures of Nationwide Financial Services, Inc. (the
"Company") may be issued and sold to Nationwide Financial Services Capital
Trust (the "Trust"), in which event such Junior Subordinated Debentures in
an indeterminate amount may later be distributed to the holders of Capital
Securities of the Trust upon a dissolution of the Trust and the distribu-
tion of the assets thereof.
(2) Estimated solely for the purpose of calculating the registration fee pur-
suant to Rule 457 under the Securities Act of 1933. The aggregate offering
price of the Capital Securities of the Trust and the Junior Subordinated
Debentures of the Company registered hereby will not exceed $100,000,000.
(3) Exclusive of accrued interest and distributions, if any.
(4) Includes the rights of holders of the Capital Securities under the Guaran-
tee of Capital Securities and certain back-up obligations, consisting of
obligations of the Company to provide certain indemnities in respect of,
and pay and be responsible for, certain expenses, costs, liabilities and
debts of, as applicable, the Trust as set forth in the Declaration of
Trust (including the obligation to pay expenses of the Trust), the Inden-
ture and any applicable supplemental indentures thereto, and the Junior
Subordinated Debentures issued to the Trust, in each case as further de-
scribed in the Registration Statement. No separate consideration will be
received for the Guarantee or any back-up obligations.
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1996
$100,000,000
[LOGO] Nationwide Financial Services Capital Trust
% Capital Securities
(Liquidation Amount $1,000 per Capital Security)
fully and unconditionally guaranteed to the extent set forth herein by
Nationwide Financial Services, Inc.
--------
The % Capital Securities (the "Capital Securities") offered hereby represent
undivided beneficial interests in the assets of Nationwide Financial Services
Capital Trust, a statutory business trust formed under the laws of the State
of Delaware (the "Trust"). Nationwide Financial Services, Inc., a Delaware
corporation (the "Company"), will directly or indirectly own all of the
common securities issued by the Trust (the "Common Securities" and,
together with the Capital Securities, the "Trust Securities") representing
undivided beneficial interests in the assets of the Trust. The Trust
exists for the sole purpose of issuing the Trust Securities and the
Common Securities and investing the proceeds thereof in an equivalent
amount of % Junior Subordinated Deferrable Interest Debentures due
2037 (the "Junior Subordinated Debentures") of the Company having the
terms described herein. Upon a Declaration Event of Default (as
defined herein), the holders of the Capital Securities will have a
preference over the holders of the Common Securities with respect
to cash distributions and amounts payable upon liquidation,
redemption or otherwise.
Prior to the public offering of the Capital Securities (the "Capital Securities
Offering"), the Company expects to consummate the sale of shares of its Class
A Common Stock, no par value ("Class A Common Stock"), in concurrent
underwritten initial public offerings (the "Equity Offerings"). Concurrently
with the Capital Securities Offering, the Company expects to consummate the
public offering (the "Note Offering") of $300 million aggregate amount of
Senior Notes due 2027 (the "Notes"). The Equity Offerings and the Note
Offering are being made pursuant to separate prospectuses. See "The
Equity Offerings, the Note Offering and the Capital Securities
Offering."
(continued on next page)
The Company intends to apply for listing of the Capital Securities on the
New York Stock Exchange, Inc. (the "NYSE"). Trading of the Capital
Securities on the NYSE is expected to commence within a 30-day
period after the initial delivery of the Capital Securities.
See "Underwriting."
--------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE CAPITAL SECURITIES, SEE "RISK
FACTORS" BEGINNING ON PAGE 17 HEREIN.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price Discounts and Proceeds to the
to Public(1) Commissions Trust(1)(2)(3)
------------ ------------- ---------------
<S> <C> <C> <C>
Per Capital Security................. $ (3) $
Total................................ $ (3) $
</TABLE>
(1) Plus accrued distributions, if any, from , 1997.
(2) Expenses of the offering, which are payable by the Company, are estimated
to be $ .
(3) In view of the fact that the proceeds of the sale of the Capital Securities
will ultimately be invested in the Junior Subordinated Debentures, the
Company has agreed to pay to the Underwriters as compensation for their
arranging the investment therein of such proceeds $ per Capital
Security (or $ in the aggregate). See "Underwriting."
--------
The Capital Securities are offered by the several Underwriters when, as and
if issued by the Trust, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Capital Securities in book-entry form, will be made
through the facilities of The Depository Trust Company on or about , 1997,
against payment in immediately available funds.
Credit Suisse First Boston Morgan Stanley & Co.
Incorporated
Merrill Lynch & Co.
The date of this Prospectus is , 1997.
<PAGE>
(continued from front cover)
Holders of the Capital Securities are entitled to receive cumulative cash
distributions at an annual rate of % of the liquidation amount of $1,000 per
Capital Security, accruing from the date of original issuance and payable
semi-annually in arrears on and of each
year, commencing , 1997. See "Description of the Capital Securities--
Distributions."
The distribution rate and the distribution and other payment dates for the
Capital Securities will correspond to the interest rate and interest and other
payment dates on the Junior Subordinated Debentures, which will be the sole
assets of the Trust. As a result, if principal or interest is not paid on the
Junior Subordinated Debentures, no amounts will be paid on the Capital
Securities. Pursuant to a guarantee (the "Guarantee") by the Company, the
payment of distributions and payments on liquidation of the Trust or the
redemption of Capital Securities, as described below, but only to the extent
of funds of the Trust available therefor, are guaranteed by the Company to the
extent described herein. The Company's obligations under the Guarantee are
subordinate and junior to all other liabilities of the Company, except any
liabilities that may be made pari passu expressly by their terms, but are pari
passu with the most senior preferred stock issued from time to time, if any,
by the Company and certain other related guarantees. See "Description of the
Guarantee." If the Company fails to make principal or interest payments on the
Junior Subordinated Debentures, including as a result of the Company's
election to extend the interest payment period on the Junior Subordinated
Debentures as described below, the Trust will have insufficient funds to pay
distributions on the Capital Securities. The Guarantee does not apply to
payment of distributions when the Trust does not have sufficient funds to pay
such distributions. In such event, the remedy of a holder of Capital
Securities is to enforce the rights of the Trust under the Junior Subordinated
Debentures held by the Trust. Effectively, however, the Company has, through
the Guarantee, the Junior Subordinated Debentures, the Indenture and the
Declaration (each as defined herein), taken together, fully and
unconditionally guaranteed all of the Trust's obligations under the Capital
Securities. The obligations of the Company under the Junior Subordinated
Debentures are unsecured and will be subordinate and junior in right of
payment, to the extent set forth herein, to all existing and future Senior
Indebtedness (as defined herein) of the Company and will be effectively
subordinated to all existing liabilities and obligations of the Company's
subsidiaries. At September 30, 1996, after giving effect to the Note Offering,
the aggregate amount of Senior Indebtedness and liabilities and obligations of
the Company's subsidiaries that would effectively rank senior to the Junior
Subordinated Debentures was approximately $ billion. See "Capitalization."
The terms of the Junior Subordinated Debentures place no limitation on the
amount of Senior Indebtedness that may be incurred by the Company.
The Company has the right under the Indenture for the Junior Subordinated
Debentures, subject to the conditions set forth herein, to defer the interest
payments due from time to time on the Junior Subordinated Debentures for
successive periods not exceeding 10 consecutive semi-annual periods (each a
"Deferral Period"), and, as a consequence, semi-annual distributions on the
Capital Securities would be deferred by the Trust until the end of any such
Deferral Period. During such Deferral Period, distributions will continue to
accrue with interest thereon (to the extent permitted by applicable law) at an
annual rate of % per annum compounded semi-annually, and during any Deferral
Period, holders of Capital Securities will be required to include deferred
interest income in their gross income for United States federal income tax
purposes in advance of receipt of the cash distributions with respect to such
deferred interest payments. There could be multiple Deferral Periods of
varying lengths throughout the term of the Junior Subordinated Debentures. See
"Risk Factors--Option to Extend Interest Payment Period; Tax Consequences,"
"Description of the Capital Securities--Distributions" and "Description of the
Junior Subordinated Debentures--Option to Extend Interest Payment Period."
The Junior Subordinated Debentures are redeemable by the Company (i) at any
time and from time to time at par plus the applicable Make-Whole Premium (as
defined herein) or (ii) under certain circumstances, within 90 days following
the occurrence of a Tax Event (as defined herein), at par plus, in each case,
accrued and unpaid interest thereon to the date fixed for redemption. If the
Company redeems Junior Subordinated Debentures, the Trust must redeem Trust
Securities on a pro rata basis having an aggregate liquidation amount equal to
the aggregate principal amount of the Junior Subordinated Debentures so
redeemed at a redemption price per Capital
2
<PAGE>
Security of $1,000 plus any additional amount payable upon redemption of the
Junior Subordinated Debentures as a result of the Make-Whole Premium and, in
all cases, accrued and unpaid distributions thereon to the date fixed for
redemption (the "Redemption Price"). See "Description of the Capital
Securities--Mandatory Redemption." The outstanding Capital Securities will be
redeemed upon maturity of the Junior Subordinated Debentures. In addition, at
any time, the Company will have the right to terminate the Trust and, after
satisfaction of the liabilities of creditors of the Trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust.
Except as described above, in the event of the liquidation of the Trust, the
holders of the Capital Securities will be entitled, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to
receive for each Capital Security a liquidation amount of $1,000 per Capital
Security plus any additional amount payable upon redemption of the Junior
Subordinated Debentures as a result of the Make-Whole Premium and accrued and
unpaid distributions thereon to the date of payment, unless, in connection
with such liquidation, Junior Subordinated Debentures are distributed to the
holders of the Capital Securities. See "Description of the Capital
Securities--Liquidation Distribution Upon Dissolution." If the Junior
Subordinated Debentures are distributed to the holders of the Capital
Securities, the Company will use its best efforts to have the Junior
Subordinated Debentures listed on the NYSE or on such other exchange as the
Capital Securities are then listed. See "Description of the Capital
Securities--Distribution of the Junior Subordinated Debentures Upon
Liquidation of the Trust."
The Capital Securities will be issued only as fully registered securities
registered in the name of Cede & Co., as nominee for The Depositary Trust
Company ("DTC"). One or more fully registered global Capital Security
certificates will be issued, representing in the aggregate the total number of
Capital Securities, and will be deposited with DTC. See "Description of the
Capital Securities--Book-Entry-Only Issuance--The Depositary Trust Company."
------------
IN CONNECTION WITH THE CAPITAL SECURITIES OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE CAPITAL SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
----------------
3
<PAGE>
AVAILABLE INFORMATION
The Company and the Trust have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") pursuant to the provisions of the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, for the registration of the Capital Securities offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the
rules and regulations of the Commission. For further information with respect
to the Company, the Trust and the Capital Securities offered hereby, reference
is made to the Registration Statement, including exhibits thereto and
financial statements and notes filed as a part thereof. Statements made in
this Prospectus concerning the contents of any contract or other document are
not necessarily complete. With respect to each such contract or other document
filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits and schedules
thereto filed by the Company and the Trust with the Commission may be
inspected at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
As a result of the Equity Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish the holders of the Capital Securities with annual reports
containing, among other information, audited consolidated financial statements
reported upon by an independent public accounting firm and quarterly reports
for each of the first three quarters of each fiscal year containing unaudited
condensed consolidated financial information. The Company also intends to
furnish such other reports as it may determine or as may be required by law.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Company does not consider that such
financial statements would be material to the holders of Capital Securities
because (i) all of the voting securities of the Trust will be owned, directly
or indirectly, by the Company, a reporting company under the Exchange Act,
(ii) the Trust has and will have no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interests
in the assets of the Trust and investing the proceeds thereof in Junior
Subordinated Debentures issued by the Company, and (iii) the Company's
obligations described herein, under the Declaration (including the obligation
to pay expenses of the Trust), the Indenture and any supplemental indentures
thereto, the Junior Subordinated Debentures issued to the Trust and the
Guarantee taken together, constitute a full and unconditional guarantee by the
Company of payments due on the Capital Securities. See "Description of Capital
Securities" and "Description of the Guarantee."
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements
appearing elsewhere in this Prospectus. The Company was formed in November 1996
as a holding company for Nationwide Life Insurance Company and the other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. The information contained in this
Prospectus gives effect to the acquisition of Nationwide Life and such other
companies by the Company and the other transactions described under "Recent
History." Except as otherwise indicated, consolidated financial statements and
statistical data presented in this Prospectus for the Company (including all
data set forth in the "Actual" column of any table contained herein) consist of
the consolidated financial statements of Nationwide Life and such other
companies and give effect to the transactions described under "Recent History,"
other than the Special Cash Dividends (as defined herein). Except as otherwise
indicated, all financial data and ratios presented herein have been prepared
using generally accepted accounting principles ("GAAP"). See "Glossary of
Selected Insurance Terms" for the definitions of certain insurance terms used
herein.
As used in this Prospectus, the "Company" means Nationwide Financial
Services, Inc. and, unless the context otherwise requires, its subsidiaries;
"Nationwide Life" means Nationwide Life Insurance Company and Nationwide Life
and Annuity Insurance Company; "Nationwide Corp." means Nationwide Corporation;
"Nationwide Mutual" means Nationwide Mutual Insurance Company; and "Nationwide
Insurance Enterprise" means Nationwide Mutual and its subsidiaries and
affiliates. Nationwide(R) is a registered service mark of Nationwide Mutual,
and The Best of America(R) is a registered service mark of Nationwide Life.
THE COMPANY
OVERVIEW
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers throughout the United States.
The Company offers variable annuities, fixed annuities and life insurance as
well as mutual funds and pension products and administrative services. By
developing and offering a wide variety of products, the Company believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. The Company markets its products through a broad
spectrum of wholesale and retail distribution channels, including financial
planners, pension plan administrators, securities firms, banks and Nationwide
Insurance Enterprise insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the first nine months of 1996, the Company was the third largest
U.S. writer of individual variable annuity contracts based on sales, according
to The Variable Annuity Research & Data Service ("VARDS"). Its principal
variable annuity series, The Best of America, allows the customer to choose
from 36 investment options, including mutual funds managed by such well-known
firms as Dreyfus, Fidelity, Janus, Neuberger & Berman, Oppenheimer, T. Rowe
Price, Templeton, Twentieth Century, Vanguard and Warburg Pincus, as well as
mutual funds managed by the Company.
The Company is a member of the Nationwide Insurance Enterprise, which is
known nationally as a writer of automobile and homeowners' insurance throughout
the United States. The property/casualty insurers within the Nationwide
Insurance Enterprise are the fifth largest property/casualty insurance group in
the United States based on 1995 net premiums written, according to A.M. Best
Company, Inc. ("A.M. Best").
In the mid-1970s, to capitalize on anticipated opportunities in the growing
market for long-term savings and retirement products, the Company embarked on a
specific strategy of broadening its distribution channels and product offerings
beyond selling traditional life insurance to the automobile and homeowner
customers of
5
<PAGE>
the Nationwide Insurance Enterprise. Over a 20-year period, the Company added
financial planners, pension plan administrators, securities firms and banks as
new distribution channels. Such distribution channels in the aggregate
accounted for approximately 93.4% of the Company's sales in 1995. Currently,
the Company administers approximately 15,000 pension plans and has distribution
arrangements with 125 banks and other financial institutions, over 1,000
broker/dealers and over 30,000 registered representatives. The Company has
payroll deduction variable annuity enrollee customers in approximately 6,000
state and local government entities and 1,800 school districts, which have been
obtained principally through sponsorship relationships with the National
Association of Counties and The United States Conference of Mayors and an
exclusive contractual arrangement with The National Education Association of
the United States.
The Company's long-term investment in developing the distribution channels
necessary to reach its target customers and the products required to meet their
demands has resulted in substantial growth. From 1991 to 1995, the Company's
assets grew from $16.8 billion to $37.8 billion, a compound annual growth rate
of 22.5%. During the same period, the Company's net operating income grew from
$82.0 million to $184.8 million, a compound annual growth rate of 22.5%. The
Company's sales of variable annuities grew from $984.0 million in 1991 to $4.40
billion in 1995, a compound annual growth rate of 45.4%. The Company's separate
account assets, which are generated by the sale of variable annuities and
variable universal life insurance, grew from 27.5% of total assets at December
31, 1991 to 49.3% of total assets at December 31, 1995. During this period of
substantial growth, the Company controlled its operating expenses by taking
advantage of economies of scale and by increasing productivity through
investments in technology. From 1991 to 1995, the Company's total assets
increased by 124.9% while operating expenses increased by only 89.5%. As a
result, its ratio of operating expenses to total assets fell from 1.00% in 1991
to 0.84% in 1995.
The Company believes that demographic trends and shifts in attitudes toward
retirement savings will continue to support increased consumer demand for its
products. According to U.S. Census Bureau projections, the number of Americans
between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1
million in 2005, making this "preretirement" age group the fastest growing
segment of the U.S. population. The Company believes that Americans
increasingly are supplementing traditional sources of retirement income, such
as employer-provided defined benefit plans and Social Security, with self-
directed investments. Reflecting this shift, industry sales of individual
variable annuity products grew from $17.3 billion in 1991 to $51.5 billion in
1995, a compound annual growth rate of 31.4%, according to VARDS. During the
same period, industry individual variable annuity assets grew from $176 billion
to $401 billion, a compound annual growth rate of 22.9%, according to VARDS.
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. The Variable Annuities segment, which accounted for $67.8
million (or 27.3%) of the Company's operating income before income taxes for
the first nine months of 1996, consists of annuity contracts that provide the
customer with the opportunity to invest in mutual funds managed by independent
investment managers and the Company, with investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment, which accounted for $103.8
million (or 41.7%) of the Company's operating income before income taxes for
the first nine months of 1996, consists of annuity contracts that generate a
return for the customer at a specified interest rate, fixed for a prescribed
period, with returns accumulating on a tax-deferred basis. The Fixed Annuities
segment also includes the fixed option under the Company's variable annuity
contracts, which accounted for 69.0% of the Company's fixed annuity policy
reserves as of December 31, 1995. The Life Insurance segment, which accounted
for $46.2 million (or 18.6%) of the Company's operating income before income
taxes for the first nine months of 1996, consists of insurance products,
including variable life insurance, that provide a death benefit and may also
allow the customer to build cash value on a tax-deferred basis.
6
<PAGE>
BUSINESS STRATEGIES
The Company's objective is to continue its record of profitable growth by
following the strategies set forth below:
Enhance the Company's Leading Position in the Market for Variable
Annuities. The Company believes that the variable annuity business is
attractive because it generates fee income and requires significantly less
capital support than fixed annuities and life insurance. The Company also
believes variable annuities will continue to experience high rates of industry
sales growth and that the Company possesses distinct competitive advantages
that will allow it to continue to benefit from this anticipated growth. Some of
the Company's most important advantages include its innovative product
offerings and strong relationships with independent, well-known fund managers.
For example, the Company's The Best of America IV and The Best of America--
America's Vision individual variable annuity contracts allow the customer to
choose from 36 investment options, including mutual funds managed by a variety
of well-known fund managers and the Company. In the aggregate, the Company's
group variable annuity products offer over 100 underlying investment options.
The Company works closely with its investment managers and product distributors
to adapt the Company's products and services to changes in the retail and
institutional marketplace.
Capture a Growing Share of Sales in all Distribution Channels. The Company's
broad distribution system permits it to offer its products across a wide range
of markets and customers. The Company continually seeks to gain a larger share
of each of its distributor's sales by offering products that are attractive to
its distributors from both a financial perspective and in helping the
distributor build relationships with its customers. In addition to providing
new products to its distributors, the Company seeks to increase sales in each
of its existing distribution channels by cross-selling those products not
currently offered through such channel. The Company also seeks to add new
distributors to its existing channels and regularly evaluates possible new
distribution channels.
Maintain a Diverse Product Portfolio. The Company offers a diverse mix of
annuity, mutual fund and life insurance products which it believes enables it
to grow profitably in a variety of stock market and interest rate environments
to a greater extent than a company that relies more heavily on a single product
segment. The Company emphasizes the sale and development of variable annuities,
which tend to experience higher sales growth when interest rates are falling,
and fixed annuities, which tend to experience higher sales growth when interest
rates are rising. The Company also sells traditional life insurance products
which it believes provide it with a stable source of revenues throughout
changing market conditions.
Emphasize Payroll Deductions and Tax-Qualified and Group Annuities. To
further enable it to grow profitably in a variety of stock market and interest
rate environments, the Company concentrates on the sale of annuities through
payroll deductions and the sale of tax-qualified and group annuities. Annuities
sold through payroll deductions are somewhat insulated from changes in market
conditions because of the recurring nature of their deposits. In 1995, 48.5% of
the Company's total annuity statutory premiums and deposits were attributable
to payroll deductions. Group annuities and tax-qualified annuities are also
somewhat insulated from changes in market conditions because they usually are
provided through employers as a voluntary retirement benefit with a limited
number of competing investment options. In addition, tax-qualified annuities
subject the customer to a tax penalty for early withdrawal. Tax-qualified
annuities accounted for 71.9% and group annuities accounted for 44.1% of the
Company's total annuity statutory premiums and deposits in 1995.
Build on the Company's Brand Strength. The Company believes that the brand
names it uses in connection with its products, such as Nationwide and The Best
of America, are well-known and have a strong reputation in the financial
services market. The Company intends to extend its brand names across markets,
applying The Best of America name across many of its wholesale and retail
distribution channels. The Company believes that, as the numbers of products
and competitors in its markets grow, consumers, distributors, retirement plan
sponsors and other decision makers in the market for long-term savings products
will continue to emphasize nationally known brand names.
7
<PAGE>
Continue Commitment to Technological Excellence. The Company has made and is
committed to continue making significant investments in information systems to
enable it to offer innovative products, to more effectively cross-sell products
across distribution channels and to offer high quality service. The information
systems that the Company has developed for its variable products are costly to
replicate. The Company believes that these systems provide it with a
significant competitive advantage and impose a barrier to entry for new
competitors.
PRINCIPAL STOCKHOLDER
Following the Equity Offerings, Nationwide Corp. will be the controlling
stockholder of the Company. Upon completion of the Equity Offerings, Nationwide
Corp. will own all of the outstanding shares of the Class B Common Stock, no
par value, of the Company ("Class B Common Stock" and, together with Class A
Common Stock, the "Common Stock"), representing % of the combined voting
power of the capital stock of the Company ( % if the Underwriters' over-
allotment option is exercised in full). Nationwide Corp. is a member of the
Nationwide Insurance Enterprise, a diversified insurance and financial services
organization with over 100 insurance and non-insurance subsidiaries and
affiliates, offering a wide range of insurance and investment products and
services. Member insurance companies of the Nationwide Insurance Enterprise
include Nationwide Mutual, the controlling company of the Nationwide Insurance
Enterprise, and Nationwide Mutual Fire Insurance Company ("Nationwide Mutual
Fire"). The Nationwide Insurance Enterprise had $64.7 billion in total
statutory assets as of September 30, 1996. See "Risk Factors--Control by and
Relationship with the Nationwide Insurance Enterprise; Conflicts of Interest"
and "Certain Relationships and Related Transactions."
THE EQUITY OFFERINGS, THE NOTE OFFERING AND THE CAPITAL SECURITIES OFFERING
Prior to the Capital Securities Offering, the Company expects to consummate
the Equity Offerings, and, concurrently with the Capital Securities Offering,
the Company expects to consummate the Note Offering. The consummation of the
Capital Securities Offering is not conditioned on the completion of the Note
Offering. There can be no assurance that the Note Offering will be consummated.
See "Use of Proceeds" and "The Equity Offerings, the Note Offering and the
Capital Securities Offering." The Equity Offerings and the Note Offering are
being made pursuant to separate prospectuses.
----------------
The Company's executive offices are located at One Nationwide Plaza,
Columbus, Ohio 43215, and its telephone number is (614) 249-7111.
8
<PAGE>
THE CAPITAL SECURITIES OFFERING
The Trust..................... Nationwide Financial Services Capital Trust, a
Delaware business trust. Substantially all the
assets of the Trust will consist of the Junior
Subordinated Debentures of the Company.
Securities Offered............ $100,000,000 aggregate liquidation amount of
% Capital Securities (Liquidation Amount,
$1,000 per Capital Security).
Distributions................. Distributions on the Capital Securities will
accrue from the date of original issuance of
the Capital Securities and will be payable at
the annual rate of % of the liquidation
amount of $1,000 per Capital Security. Subject
to the distribution deferral provisions
described below, distributions will be payable
semi-annually in arrears on and
, commencing , 1997.
Because distributions on the Capital Securities
constitute interest, corporate holders thereof
will not be entitled to a dividends-received
deduction.
Distribution Deferral The ability of the Trust to pay distributions
Provisions.................... on the Capital Securities is solely dependent
on its receipt of principal and interest
payments from the Company on the Junior
Subordinated Debentures. The Company has the
right at any time, and from time to time, to
defer the interest payments due on the Junior
Subordinated Debentures for successive periods
not exceeding 10 consecutive semi-annual
periods on each such Deferral Period. Semi-
annual distributions on the Capital Securities
would be deferred by the Trust (but would
continue to accumulate semi-annually and would
accrue interest to the extent permitted by law)
until the end of any such Deferral Period. See
"Risk Factors--Factors Relating to the Capital
Securities--Option to Extend Interest Payment
Period" and "--Tax Consequences of Extension of
Interest Payment Period," "Description of the
Capital Securities--Distributions" and
"Description of the Junior Subordinated
Debentures--Option to Extend Interest Payment
Period." If a deferral of an interest payment
occurs, the holders of the Capital Securities
will continue to accrue income for United
States federal income tax purposes in advance
of any corresponding cash distribution. See
"Risk Factors--Factors Relating to the Capital
Securities--Option to Extend Interest Payment
Period" and "--Tax Consequences of Extension of
Interest Payment Period," and "United States
Federal Income Taxation--Original Issue
Discount."
Rights Upon Deferral of During any period in respect of which interest
Distributions................. payments on the Junior Subordinated Debentures
are deferred, interest on the Junior
Subordinated Debentures will compound semi-
annually and semi-annual distributions
(compounded semi-annually at the distribution
rate) will accrue on the Capital Securities.
The Company has agreed, among other things, not
to declare or pay any dividend on its capital
stock (subject to certain exceptions) or make
certain other restricted payments during any
Deferral Period. See "Description of the Junior
Subordinated Debentures--Option to Extend
Interest Payment Period" and "Description of
the Guarantee--Certain Covenants of the
Company."
9
<PAGE>
Liquidation Amount............ In the event of any liquidation of the Trust,
holders will be entitled to receive $1,000 per
Capital Security plus an amount equal to any
additional amount payable upon redemption of
the Junior Subordinated Debentures as a result
of the Make-Whole Premium and accrued and
unpaid distributions thereon to the date of
payment, unless Junior Subordinated Debentures
are distributed to such holders. See
"Description of the Capital Securities--
Distribution of Cash Upon Liquidation of the
Trust" and "--Distribution of Junior
Subordinated Debentures Upon Liquidation of the
Trust."
Distribution of Junior
Subordinated Debentures Upon
Liquidation of the Trust.....
At any time, the Company will have the right to
terminate the Trust and cause Junior
Subordinated Debentures with an aggregate
principal amount equal to the aggregate stated
liquidation amount of, with an interest rate
identical to the distribution rate of, and
accrued and unpaid interest equal to accrued
and unpaid distributions on, the Trust
Securities to be distributed to the holders of
the Trust Securities in liquidation of the
Trust. See "Description of the Capital
Securities--Distribution of Junior Subordinated
Debentures Upon Liquidation of the Trust."
Mandatory Redemption.......... Upon the repayment or payment of the Junior
Subordinated Debentures, whether at maturity or
upon redemption or otherwise, the proceeds from
such repayment or redemption shall
simultaneously be applied to redeem Trust
Securities having an aggregate liquidation
amount equal to the aggregate principal amount
of Junior Subordinated Debentures so repaid or
redeemed at the Redemption Price. See
"Description of the Capital Securities--
Mandatory Redemption."
Tax Event..................... If at any time a Tax Event shall occur and be
continuing, the Trust shall, except in limited
circumstances, be dissolved and Junior
Subordinated Debentures with an aggregate
principal amount equal to the aggregate stated
liquidation amount of, with an interest rate
identical to the distribution rate of, and
accrued and unpaid interest equal to accrued
and unpaid distributions on, the Trust
Securities shall be distributed to the holders
of Trust Securities. In certain circumstances,
upon the occurrence of a Tax Event, cash will
be distributed in redemption of the Junior
Subordinated Debentures at the Redemption
Price; provided, that no Make-Whole Premium
shall be payable in connection with such
redemption. See "Description of the Capital
Securities--Tax Event Distribution."
Guarantee..................... The Company will irrevocably guarantee, on a
subordinated basis and to the extent set forth
herein, the payment in full of (i) the
distributions on the Capital Securities to the
extent of funds of the Trust available
therefor, (ii) the amount payable upon
redemption
10
<PAGE>
of the Capital Securities to the extent of
funds of the Trust available therefor, and
(iii) generally, the liquidation amount of the
Capital Securities to the extent of the assets
of the Trust available for distribution to
holders of Capital Securities. The Guarantee
will be unsecured and will be subordinate to
all other liabilities of the Company, except
any liabilities that may be made pari passu
expressly by their terms. The Guarantee will
rank pari passu with the most senior preferred
or preference stock issued by the Company and
any guarantee now or hereafter entered into by
the Company in respect of any preferred or
preference stock or preferred or capital
securities of any affiliate of the Company.
Upon the liquidation, dissolution or winding up
of the Company, its obligations under the
Guarantee will rank junior to all of its other
liabilities, except as aforesaid, and as a
result, funds may not be available for payment
under the Guarantee. See "Risk Factors--Factors
Relating to the Capital Securities--
Subordination of Guarantee and Junior
Subordinated Debentures" and "Description of
the Guarantee."
Effectively, the Company has, through the
Guarantee, the Junior Subordinated Debentures,
the Indenture and the Declaration, taken
together, fully and unconditionally guaranteed
all of the Trust's obligations under the
Capital Securities. No single document standing
alone or operating in conjunction with fewer
than all of the other documents constitutes
such guarantee. It is only the combined
operation of these documents that has the
effect of providing a full and unconditional
guarantee of the Trust's obligations under the
Capital Securities. See "Description of the
Guarantee" and "Effect of Obligations Under the
Junior Subordinated Debentures and the
Guarantee."
Voting Rights................. Generally, holders of the Capital Securities
will not have any voting rights. See
"Description of the Capital Securities--Voting
Rights; Amendment of Declaration."
Junior Subordinated The Junior Subordinated Debentures will mature
Debentures.................... on , 2037 and will bear interest at
the rate of % per annum, payable semi-
annually in arrears. Interest payments may be
deferred from time to time by the Company
(during any Deferral Period, interest would
continue to accrue and compound semi-annually)
for successive periods not exceeding 10
consecutive semi-annual periods, provided that
no Deferral Period may extend beyond the stated
maturity date of the Junior Subordinated
Debentures. Prior to the termination of any
Deferral Period of less than 10 consecutive
semi-annual periods, the Company may further
extend the Deferral Period as long as such
Deferral Period, as further extended, does not
exceed 10 consecutive semi-annual periods and
does not extend beyond the stated maturity date
of the Junior Subordinated Debentures. Upon the
termination of any Deferral Period and the
payment of all accrued and unpaid interest
(including interest thereon to the extent
11
<PAGE>
permitted by law), the Company may select a new
Deferral Period, subject to the preceding
sentence. No interest shall be due during a
Deferral Period until the end of such period.
During a Deferral Period, the Company will be
prohibited from paying dividends on any of its
capital stock (subject to certain exceptions)
and making certain other restricted payments
until semi-annual interest payments are resumed
and all accumulated and unpaid interest
(including interest thereon to the extent
permitted by law) on the Junior Subordinated
Debentures is made current. The Company may
optionally redeem the Junior Subordinated
Debentures at any time at the Redemption Price,
which includes (except in the case of a
redemption following a Tax Event) the Make-
Whole Premium. The payment of the principal of
and interest on the Junior Subordinated
Debentures will be subordinated in right of
payment to all Senior Indebtedness of the
Company. At September 30, 1996, after giving
effect to the Note Offering, the aggregate
amount of Senior Indebtedness and liabilities
and obligations of the Company's subsidiaries
that would effectively rank senior to the
Junior Subordinated Debentures was
approximately $ billion. See "Capitalization"
and "Pro Forma Selected Consolidated Financial
Data." See "Description of the Junior
Subordinated Debentures" and "Risk Factors--
Factors Relating to the Capital Securities--
Subordination of Guarantee and Junior
Subordinated Debentures."
Form of Capital Securities.... The Capital Securities will be issued only as
fully-registered securities registered in the
name of Cede & Co., as nominee for DTC. One or
more fully registered global Capital Security
Certificates will be issued, representing in
the aggregate the total number of Capital
Securities, and will be deposited with DTC. See
"Description of the Capital Securities--Book-
Entry-Only Issuance--The Depositary Trust
Company."
Use of Proceeds............... All of the proceeds from the sale of the
Capital Securities will be invested by the
Trust in Junior Subordinated Debentures and
ultimately will be contributed by the Company
to the capital of Nationwide Life. Of the $
million estimated net proceeds from the Equity
Offerings, the Company will contribute $
million to the capital of Nationwide Life and
retain the balance for general corporate
purposes. All of the net proceeds from the Note
Offering will be contributed by the Company to
the capital of Nationwide Life. See "Use of
Proceeds" and "The Equity Offerings, the Note
Offering and the Capital Securities Offering."
RISK FACTORS
Potential purchasers of the Capital Securities offered hereby should
carefully consider the risk factors set forth herein under "Risk Factors"
commencing on page 17, as well as other information contained in this
Prospectus.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data
for the Company. The consolidated income statement data set forth below for the
years ended December 31, 1992 through 1995 and the consolidated balance sheet
data as of December 31, 1992 through 1995 are derived from the consolidated
financial statements of the Company, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated income
statement data for the nine months ended September 30, 1996 and 1995, and for
the year ended December 31, 1991, and the consolidated balance sheet data as of
September 30, 1996 and 1995, and as of December 31, 1991, are derived from the
unaudited consolidated financial statements of the Company. The Company
believes that such unaudited financial data fairly reflect the consolidated
results of operations and the consolidated financial condition of the Company
for such periods. Segment and Other Data appearing below are unaudited. The
summary consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto and the other financial information, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere herein. The results of operations for an interim period are not
necessarily indicative of results that may be expected for a full year or any
other interim period.
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Total revenues.......... $ 1,500.9 $ 1,364.3 $ 1,837.0 $ 1,634.1 $ 1,639.3 $ 1,405.6 $ 1,238.5
Total benefits and
expenses............... 1,248.0 1,142.2 1,555.9 1,393.7 1,363.5 1,289.2 1,130.4
Income before income
taxes and cumulative
effect of accounting
changes................ 252.9 222.1 281.2 240.4 275.8 116.4 108.1
Provision for income
taxes.................. 88.7 77.1 96.3 82.5 96.7 32.1 38.2
Cumulative effect of
accounting changes..... -- -- -- -- (0.1) -- --
Net income.............. 164.2 145.0 184.9 157.9 179.0 84.3 69.9
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $19,689.2 $18,439.3 $19,163.1 $16,567.8 $15,286.9 $14,320.1 $12,173.3
Separate account
assets................. 24,673.5 17,039.4 18,591.1 12,087.1 9,006.4 6,081.4 4,615.0
Total assets............ 44,362.7 35,478.7 37,754.2 28,654.9 24,293.3 20,401.5 16,788.3
Long-term debt.......... -- -- -- -- -- -- --
Total liabilities....... 42,288.1 33,590.5 35,644.1 27,161.2 22,884.2 19,179.7 15,650.9
Shareholder's
equity(1).............. 2,074.6 1,888.2 2,110.1 1,493.7 1,409.1 1,221.8 1,137.4
Book value per
share(2)...............
Adjusted book value per
share(2)(3)............
SEGMENT AND OTHER DATA:
Operating income (loss)
before income taxes by
segment(4):
Variable Annuities..... $ 67.8 $ 40.2 $ 50.8 $ 24.6 $ 10.4 $ 13.1 $ 9.9
Fixed Annuities........ 103.8 105.6 137.0 139.0 105.9 95.3 72.9
Life Insurance......... 46.2 50.9 67.6 53.0 49.7 46.1 49.0
Corporate and
Other(1)(5)........... 30.8 18.9 27.5 40.3 3.6 (18.7) (5.3)
Policy reserves by
segment:
Variable Annuities(6).. 22,265.1 15,382.6 16,761.8 10,751.1 7,854.8 5,028.2 3,585.1
Fixed Annuities(6)..... 13,220.8 12,425.5 12,784.0 11,247.0 10,154.1 9,659.8 7,952.1
Life Insurance......... 2,842.0 2,604.2 2,660.5 2,425.2 2,255.0 2,084.8 1,914.0
Corporate and
Other(5).............. 3,107.7 2,497.1 2,644.3 2,252.7 2,103.9 1,823.0 1,702.5
Statutory premiums,
deposits and other
considerations by
product segment(7):
Variable Annuities(8).. 4,959.7 3,011.2 4,399.3 3,821.1 2,414.2 1,561.8 984.0
Fixed Annuities(8)..... 1,134.9 1,385.7 1,864.2 1,308.6 1,300.9 1,637.8 1,922.4
Life Insurance......... 296.2 253.2 352.4 320.8 279.4 264.7 264.5
Corporate and
Other(5).............. 388.2 90.2 182.1 148.5 205.3 91.7 87.0
Net operating
income(4).............. 160.3 139.6 184.8 168.2 109.7 97.0 82.0
Net operating income per
share(2)(4)............
Return on average
shareholder's
equity(3)(4)........... 11.4% 11.1% 10.9% 11.2% 8.7% 8.9% 9.0%
Ratio of earnings to
fixed charges(9)....... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
13
<PAGE>
- -------
(1) The Company has received capital contributions and paid dividends over
the periods presented as follows:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- ----- ------ ------ ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions... $ -- $ -- $ -- $200.0 $100.0 $13.5 $206.0
Dividends............... (2.0) (8.5) (8.5) (1.0) (10.6) (4.6) (6.8)
-------- -------- ----- ------ ------ ----- ------
Net contributions....... $(2.0) $ (8.5) $(8.5) $199.0 $ 89.4 $ 8.9 $199.2
======== ======== ===== ====== ====== ===== ======
</TABLE>
The capital contributions and dividends and the related increases and
decreases to net investment income are recorded in the Corporate and Other
segment. In addition, on December 31, 1994, the Company transferred $155.0
million of invested assets from the Corporate and Other segment for the
purchase of Employers Life Insurance Company of Wausau ("Employers Life").
The transfer of the $155.0 million is recorded as a direct charge to
shareholder's equity as discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The capital
contributions, dividends and transfer of invested assets had a direct impact
on the Company's shareholder's equity and the operating income (loss) before
income taxes of the Corporate and Other segment.
(2) Based on million shares outstanding.
(3) Adjusted to exclude net unrealized gains and losses recorded in
shareholders' equity, including, where applicable, the effect of Statement
of Financial Accounting Standards No. 115 ("SFAS 115").
(4) Excludes realized gains/(losses) and cumulative effect of accounting
changes.
(5) The Corporate and Other segment includes net investment income on
investments not allocated to the three product segments; all realized
investment gains and losses; investment management fees, other revenues
and operating expenses of Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments;
commissions and other income earned by the marketing and distribution
subsidiaries of the Company; and revenues, benefits and expenses
associated with group annuity contracts issued to Nationwide Insurance
Enterprise employee and agent benefit plans.
(6) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of September 30,
1996 and 1995 and as of December 31, 1995, 1994 and 1993, such amounts
were $9.33 billion, $8.45 billion, $8.83 billion, $7.27 billion and $6.19
billion, respectively.
(7) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(8) Statutory premiums, deposits and other considerations related to the fixed
option under the Company's variable annuity contracts are included in
Fixed Annuities. For the nine months ended September 30, 1996 and 1995 and
for the years ended December 31, 1995, 1994 and 1993, such amounts were
$894.0 million, $1.14 billion, $1.57 billion, $1.05 billion and $993.8
million, respectively.
(9) For purposes of this computation, earnings consist of income before income
taxes and cumulative effect of accounting changes and fixed charges. Fixed
charges consist of interest, excluding interest credited to policyholder
account balances.
14
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary pro forma consolidated financial data for the Company set forth
below give effect to the Equity Offerings, the Special Cash Dividends, the Note
Offering and the Capital Securities Offering as if they had been consummated at
the beginning of the period indicated. The summary pro forma consolidated
balance sheet data for the Company set forth below is presented (i) on an
actual basis as of the date indicated, (ii) on a pro forma basis as if the
Equity Offerings and the Special Cash Dividends had been consummated as of the
date indicated, (iii) on a pro forma basis as if the Equity Offerings, the
Special Cash Dividends and the Note Offering had been consummated as of the
date indicated, (iv) on a pro forma basis as if the Equity Offerings, the
Special Cash Dividends and the Capital Securities Offering had been consummated
as of the date indicated and (v) on a pro forma basis as if the Equity
Offerings, the Special Cash Dividends, the Note Offering and the Capital
Securities Offering had been consummated as of the date indicated. See "Recent
History." The summary pro forma financial data do not purport to reflect what
the Company's financial position or results of operations would actually have
been if the Equity Offerings, the Special Cash Dividends, the Note Offering and
the Capital Securities Offering had in fact occurred on such dates nor should
they be taken as indicative of the future results of operations of the Company.
The pro forma consolidated financial data should be read in conjunction with
the consolidated financial statements of the Company and the notes thereto and
the other financial information pertaining to the Company included elsewhere
herein. See "Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE NINE MONTHS ENDED ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------ ----------------------
PRO FORMA
PRO FORMA FOR THE EQUITY
FOR THE EQUITY OFFERINGS, THE
OFFERINGS, THE SPECIAL CASH
SPECIAL CASH DIVIDENDS, THE
DIVIDENDS, THE NOTE OFFERING
NOTE OFFERING AND THE
AND THE CAPITAL CAPITAL
SECURITIES SECURITIES
ACTUAL OFFERING ACTUAL OFFERING
------------ ---------------- ------ --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATING
DATA:
Net income.............. $ 164.2 $ 145.5 $184.9 $160.0
Net operating in-
come(1)(2)............. 160.3 141.6 184.8 159.9
Net operating income per
share(1)(2)(3).........
Return on average share-
holders' equity(2)(4).. 11.4% 13.6% 10.9% 13.2%
Ratio of earnings to
fixed charges(5)....... N/A 10.7x N/A 8.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------------
PRO FORMA
FOR THE
PRO FORMA EQUITY
PRO FORMA FOR THE OFFERINGS,
FOR THE EQUITY THE
EQUITY OFFERINGS, SPECIAL
PRO FORMA OFFERINGS, THE CASH
FOR THE THE SPECIAL DIVIDENDS,
EQUITY SPECIAL CASH THE NOTE
OFFERINGS CASH DIVIDENDS OFFERING
AND THE DIVIDENDS AND THE AND THE
SPECIAL AND THE CAPITAL CAPITAL
CASH NOTE SECURITIES SECURITIES
ACTUAL DIVIDENDS OFFERING OFFERING OFFERING
--------- --------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $19,689.2 $19,201.2 $19,501.2 $19,301.2 $19,601.2
Separate account as-
sets................... 24,673.5 24,673.5 24,673.5 24,673.5 24,673.5
Total assets............ 44,362.7 43,874.7 44,174.7 43,974.7 44,274.7
Long-term debt.......... -- -- 300.0 -- 300.0
Capital Securities(6)... -- -- -- 100.0 100.0
Shareholders' equity.... 2,074.6 1,586.6 1,586.6 1,586.6 1,586.6
Debt/capital ratio(4)... N/A N/A 16.9% N/A 16.0%
Debt and Capital
Securities/capital ra-
tio(4)................. N/A N/A N/A 6.4% 21.4%
Book value per
share(3)...............
Adjusted book value per
share(3)(4)............
</TABLE>
15
<PAGE>
- --------
(1) The $300 million aggregate principal amount of the Notes is assumed to bear
interest at a rate of % per annum for the periods indicated. The $100
million aggregate liquidation amount of the Capital Securities is assumed
to pay cash distributions at a rate of % per annum for the periods
indicated. There can be no assurance that these will be the actual rates
borne by such instruments. An increase of % per annum in the assumed
interest rate on the Notes and in the assumed distribution rate on the
Capital Securities would result in increases of $ million and $
million to interest expense for the nine months ended September 30, 1996
and the year ended December 31, 1995, respectively.
(2) Excludes realized gains/(losses).
(3) Based on million shares outstanding.
(4) Adjusted to exclude net unrealized gains and losses recorded in
shareholder's equity in accordance with SFAS 115.
(5) For purposes of this computation, earnings consist of income before income
taxes and cumulative effect of accounting changes and fixed charges. Fixed
charges consist of interest, excluding interest credited to policyholder
account balances.
(6) The Capital Securities will be reflected in the Company's consolidated
financial statements as "Company-obligated mandatorily redeemable capital
securities of the NFS Trust, holding solely junior subordinated debentures
of the Company" with a footnote indicating that all of the Common
Securities of the Trust are owned by the Company, the principal asset of
which is the junior subordinated debentures (indicating the principal
amount, interest rate and maturity date thereof), and that the Trust's
obligations with respect to the Capital Securities are effectively fully
and unconditionally guaranteed by the Company.
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RISK FACTORS
Prospective purchasers of the Capital Securities offered hereby should
consider carefully the risk factors set forth below, as well as the other
information set forth in this Prospectus.
FACTORS RELATING TO THE CAPITAL SECURITIES
Subordination of Guarantee and Junior Subordinated Debentures. The Company's
obligations under the Guarantee are unsecured, subordinate and junior in right
of payment to all other liabilities of the Company, with certain limited
exceptions. The obligations of the Company under the Junior Subordinated
Debentures are subordinate and junior in right of payment to Senior
Indebtedness of the Company. There are no terms of the Capital Securities, the
Junior Subordinated Debentures or the Guarantee that limit the Company's
ability to incur additional unsecured or secured indebtedness or liabilities,
including indebtedness or liabilities that would rank senior to the Junior
Subordinated Debentures and the Guarantee. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise, is subject to the prior claims of creditors of the subsidiary,
except to the extent the Company may itself be recognized as a creditor of
that subsidiary. In addition, the principal sources of the Company's income
are dividends, interest and fees from its insurance and non-insurance
affiliates. In addition, payment of dividends to the Company by the subsidiary
insurance companies is subject to ongoing review by insurance regulators and
is subject to various statutory limitations and in certain circumstances
requires approval by insurance regulatory authorities. See "Business--
Regulation--Regulation of Dividends and Other Payments from Insurance
Subsidiaries." Accordingly, the Junior Subordinated Debentures will be
effectively subordinated to all existing and future liabilities of the
Company's subsidiaries. Holders of Junior Subordinated Debentures should look
only to the assets of the Company for payments of interest and principal and
premium, if any, thereon. See "Description of the Guarantee--Status of the
Guarantee; Subordination," "Description of the Junior Subordinated
Debentures--Subordination," "The Equity Offerings, the Note Offering and the
Capital Securities Offering," Capitalization and "Pro Forma Consolidated
Financial Data." At September 30, 1996, after giving effect to the Note
Offering, the aggregate amount of Senior Indebtedness and liabilities and
obligations of the Company's subsidiaries that would effectively rank senior
to the Junior Subordinated Debentures was approximately $ billion. See
"Capitalization" and "Pro Forma Consolidated Financial Data."
The ability of the Trust to pay amounts due on the Capital Securities is
wholly dependent upon the Company's making payments on the Junior Subordinated
Debentures as and when required.
Option to Extend Interest Payment Period. The Company has the right under
the Indenture to defer interest payments from time to time on the Junior
Subordinated Debentures for successive periods not exceeding 10 consecutive
semi-annual periods. Upon the termination of any Deferral Period and the
payment of all amounts then due, the Company may select a new Deferral Period,
subject to the requirements described herein. As a consequence, during any
such Deferral Period, semi-annual distributions on the Capital Securities
would be deferred (but would continue to accrue with interest thereon) by the
Trust. In the event that the Company exercises this right, during such period
the Company (i) shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than stock dividends paid by the
Company which consist of stock of the same class as that on which the dividend
is being paid, (ii) shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities issued
by the Company that rank pari passu with or junior to the Junior Subordinated
Debentures, and (iii) shall not make any guarantee payments with respect to
the foregoing (other than pursuant to the Guarantee). Prior to the termination
of any such Deferral Period, the Company may further extend the Deferral
Period; provided that such Deferral Period, together with all previous and
further extensions thereof, may not exceed 10 consecutive semi-annual periods
and that such Deferral Period may not extend beyond the maturity date of the
Junior Subordinated Debentures. Upon the termination of any Deferral Period
and the payment of all amounts then due, the Company may commence a new
Deferral Period, subject to the
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above requirements. Consequently, there could be multiple Deferral Periods of
varying lengths prior to the maturity date of the Junior Subordinated
Debentures. See "Description of the Capital Securities--Distributions" and
"Description of the Junior Subordinated Debentures--Option to Extend Interest
Payment Period."
Tax Consequences of Extension of Interest Payment Period. Should the Company
exercise its right to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period, each holder of Capital
Securities will accrue income (as original issue discount ("OID")) in respect
of the deferred interest allocable to its Capital Securities for United States
federal income tax purposes. Such income will be allocated but not distributed
to holders of the Capital Securities. As a result, each such holder of the
Capital Securities will recognize income for United States federal income tax
purposes in advance of the receipt of cash and will not receive the cash from
the Trust related to such income if such holder disposes of its Capital
Securities prior to the record date for the date on which distributions of
such amounts are made. The Company has no current intention of exercising its
right to defer payments of interest by extending the interest payment period
on the Junior Subordinated Debentures. However, should the Company determine
to exercise such right in the future, the market price of the Capital
Securities is likely to be adversely affected. A holder that disposes of its
Capital Securities during a Deferral Period, therefore, might not receive the
same return on its investment as a holder that continues to hold its Capital
Securities. In addition, as a result of the existence of the Company's right
to defer interest payments, the market price of the Capital Securities (which
represent an undivided beneficial interest in the Junior Subordinated
Debentures) may be more volatile than the market price of other securities on
which OID accrues that do not have such rights. See "United States Federal
Income Taxation--Original Issue Discount."
Rights Under the Guarantee. The Guarantee Trustee (as defined herein) will
hold the Guarantee for the benefit of the holders of the Capital Securities.
The Guarantee guarantees to the holders of the Capital Securities the payment
(but not the collection) of (i) any accrued and unpaid distributions on the
Capital Securities to the extent of funds of the Trust available therefor,
(ii) the amount payable upon redemption, including all accrued and unpaid
distributions, of the Capital Securities called for redemption by the Trust,
to the extent of funds of the Trust available therefor and (iii) upon a
voluntary or involuntary dissolution, winding up or termination of the Trust
(other than in connection with a redemption of all of the Capital Securities),
the lesser of (a) the aggregate of the liquidation amount and all accrued and
unpaid distributions on the Capital Securities to the date of payment to the
extent of funds of the Trust available therefor and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Capital
Securities upon the liquidation of the Trust. The holders of a majority in
liquidation amount of the Capital Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Capital Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity. If the Company were to default on its obligations under the Junior
Subordinated Debentures, the Trust would lack available funds for the payment
of distributions or amounts payable on redemption of the Capital Securities or
otherwise, and, in each such event, holders of the Capital Securities would
not be able to rely upon the Guarantee for payment of such amounts. Instead,
the remedy of holders of the Capital Securities is to enforce the rights of
the Trust under the Junior Subordinated Debentures held by the Trust against
the Company pursuant to the terms of the Junior Subordinated Debentures. See
"Description of the Guarantee--Status of the Guarantee; Subordination" and
"Description of the Junior Subordinated Debentures--Subordination" herein. The
Declaration will provide that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Guarantee (including the subordination
provisions thereof) and the Indenture.
Tax Event Distribution. If, at any time, a Tax Event shall occur and be
continuing, the Trust shall, except in the limited circumstances described
below, be dissolved with the result that the Junior Subordinated Debentures
will be distributed to the holders of the Trust Securities in connection with
the liquidation of the Trust. Furthermore, under certain circumstances, the
Company shall have the right to redeem the Junior Subordinated Debentures at
par plus accrued and unpaid interest thereon to the date fixed for redemption,
in
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whole or in part, in lieu of a distribution of the Junior Subordinated
Debentures by the Trust in which event the Trust will redeem the Trust
Securities on a pro rata basis to the same extent as the Junior Subordinated
Debentures are redeemed by the Company. See "Description of the Capital
Securities--Tax Event Distribution."
Under current United States federal income tax law, a distribution of Junior
Subordinated Debentures upon the dissolution of the Trust would not be a
taxable event to holders of the Capital Securities. Upon occurrence of a Tax
Event, however, a dissolution of the Trust in which holders of the Capital
Securities receive cash would be a taxable event to such holders. See "United
States Federal Income Taxation--Receipt of Junior Subordinated Debentures or
Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Capital Securities
or the Junior Subordinated Debentures that may be distributed in exchange for
Capital Securities. Accordingly, the Capital Securities that an investor may
purchase, whether pursuant to the offer made hereby or in the secondary
market, or the Junior Subordinated Debentures that a holder of Capital
Securities may receive on dissolution and liquidation of the Trust, may trade
at a discount to the price that the investor paid to purchase the Capital
Securities offered hereby. Because holders of Capital Securities may receive
Junior Subordinated Debentures upon the occurrence of a Tax Event or upon
liquidation or dissolution of the Trust, prospective purchasers of Capital
Securities are also making an investment decision with regard to the Junior
Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein and in the
Prospectus. See "Description of the Capital Securities--Tax Event
Distribution," "Description of the Capital Securities--Distribution of Junior
Subordinated Debentures Upon Liquidation of the Trust" and "Description of the
Subordinated Debentures--General."
Distribution of the Junior Subordinated Debentures. At any time, the Company
will have the right to terminate the Trust and, after satisfaction of the
liabilities of creditors of the Trust as provided by applicable law, cause the
Junior Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Trust. Under current United States federal
income tax law and interpretations and assuming, as expected, the Trust is
treated as a grantor trust, a distribution of the Junior Subordinated
Debentures should not be a taxable event to holders of the Capital Securities.
Should there be a change in such law, or a change in the legal interpretation
thereof, however, the distribution of the Junior Subordinated Debentures could
be a taxable event to the holders of the Capital Securities. In addition, a
dissolution of the Trust in which holders of the Capital Securities receive
cash would be a taxable event to such holders. See "United States Federal
Income Taxation--Receipt of Junior Subordinated Debentures or Cash Upon
Liquidation of the Trust."
Prepayment Considerations. At the option of the Company, the Junior
Subordinated Debentures may be redeemed, at any time, at a redemption price
equal to the sum of (i) 100% of the principal amount of the Junior
Subordinated Debentures to be redeemed and (ii) the Make-Whole Premium, if
any, plus any accrued and unpaid interest to the redemption date (except that
in the event of a redemption following a Tax Event, the Redemption Price shall
not include the Make-Whole Premium). See "Description of the Junior
Subordinated Debentures--Optional Redemption." If Junior Subordinated
Debentures are redeemed, the Trust must redeem Trust Securities having an
aggregate liquidation amount equal to the aggregate principal amount of Junior
Subordinated Debentures so redeemed. See "Description of the Capital
Securities--Mandatory Redemption."
Proposed Tax Law Changes. On March 19, 1996, the Revenue Reconciliation Bill
of 1996 (the "Bill"), the revenue portion of President Clinton's budget
proposal, was released. The Bill would, among other things, deny deductions
for interest on an instrument, issued by a corporation, issued on or after
December 7, 1995, if the instrument had a maximum weighted average maturity of
more than 40 years. The Bill would also generally deny interest deductions for
interest on an instrument, issued by a corporation, that has a maximum term of
more than 20 years and that is not shown as indebtedness on the separate
balance sheet of the issuer or, where the
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instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not
shown as indebtedness on the issuer's consolidated balance sheet. For purposes
of determining the weighted average maturity or the term of an instrument, any
right to extend would be treated as exercised. The above-described provisions
of the Bill were proposed to be effective generally for instruments issued on
or after December 7, 1995. If either provision were to apply to the Junior
Subordinated Debentures, the Company would be unable to deduct interest on the
Junior Subordinated Debentures. However, on March 29, 1996, the Chairmen of
the Senate Finance and House Ways and Means Committees issued a joint
statement to the effect that it was their intention that the effective date of
the President's legislative proposals, if adopted, will be no earlier than the
date of appropriate Congressional action. In addition, subsequent to the
publication of the joint statement, Senator Daniel Patrick Moynihan and
Representatives Sam M. Gibbons and Charles B. Rangel wrote letters to Treasury
Department officials concurring with the views expressed in the joint
statement. Under current law, the Company will be able to deduct interest on
the Junior Subordinated Debentures and based upon the joint statement, it is
expected that if the proposed legislation were to be enacted, such legislation
would not apply retroactively to the Junior Subordinated Debentures. However,
if the provision of the Bill regarding a 20-year term is enacted with
retroactive effect with regard to the Junior Subordinated Debentures, the
Company will not be entitled to an interest deduction with respect to the
Junior Subordinated Debentures. There can be no assurance that current or
future legislative proposals or final legislation will not deny the Company a
deduction otherwise available for such interest payments, which in turn could
give rise to a Tax Event, which would permit the Company to cause a redemption
of the Junior Subordinated Debentures or a distribution of the Junior
Subordinated Debentures in liquidation of the Trust.
Limited Voting Rights. Holders of Capital Securities will generally have
limited voting rights. See "Description of the Capital Securities--Voting
Rights; Amendment of Declaration."
Trading Characteristics of Capital Securities. The Capital Securities may
trade at a price that does not fully reflect the value of accrued but unpaid
distributions. A holder who disposes of its Capital Securities between record
dates for payments of distributions thereon will be required to include
accrued but unpaid interest on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income. To the extent the selling
price is less than the holder's adjusted tax basis a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax
purposes. See "United States Federal Income Taxation."
Lack of Public Market for the Capital Securities. The Company intends to
apply for listing of the Capital Securities on the NYSE. Trading of the
Capital Securities on the NYSE is expected to commence within a 30-day period
after the initial delivery of the Capital Securities. There is no existing
trading market for the Capital Securities, and there can be no assurance
regarding the future development of a market for the Capital Securities, or
the ability of holders of the Capital Securities to sell their Capital
Securities or the price at which such holders may be able to sell their
Capital Securities. If such a market were to develop, the Capital Securities
could trade at prices that may be higher or lower than the initial offering
price depending on many factors, including prevailing interest rates, the
Company's operating results and the market for similar securities.
CONTROL BY AND RELATIONSHIP WITH THE NATIONWIDE INSURANCE ENTERPRISE;
CONFLICTS OF INTEREST
The Company has two classes of common stock with different voting rights
that enable Nationwide Corp. (the holder of all of the outstanding Class B
Common Stock) to control the Company. On all matters submitted to a
stockholder vote, each share of Class A Common Stock is entitled to one vote
per share and each share of Class B Common Stock is entitled to ten votes per
share. Both classes vote together as a single class on all matters, subject to
certain exceptions described under "Description of Capital Stock." Upon any
transfer of shares of Class B Common Stock to a person other than an affiliate
of Nationwide Mutual, such shares will convert automatically into shares of
Class A Common Stock. See "Description of Capital Stock."
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Upon completion of the Equity Offerings, Nationwide Corp. will own all of
the outstanding shares of Class B Common Stock representing approximately %
of the combined voting power of the outstanding shares of Common Stock ( % if
the Underwriters' over-allotment option is exercised in full). For so long as
Nationwide Corp. and its affiliates (excluding the Company and its
subsidiaries) continue beneficially to own shares of Common Stock representing
more than 50% of the combined voting power of the outstanding capital stock of
the Company, Nationwide Corp. will control the Company, will be able to elect
all of the Company's directors and will be able to determine the outcome of
corporate actions requiring stockholder approval, including, among other
things, the adoption of amendments of the Certificate of Incorporation of the
Company (the "Certificate"), the approval of mergers and sales of all or
substantially all of the Company's assets, the incurrence of indebtedness in
excess of specified amounts, the issuance of additional Common Stock or other
equity securities and, with certain specified exceptions, the payment of
dividends with respect to the Common Stock. Pursuant to an intercompany
agreement (the "Intercompany Agreement") among Nationwide Mutual, Nationwide
Corp. and the Company, until such time as Nationwide Corp. and its affiliates
no longer own at least 50% of the combined voting power of the outstanding
capital stock of the Company, the prior written consent of Nationwide Mutual
is required in connection with these and other corporate actions. See "Certain
Relationships and Related Transactions--New Agreements with the Nationwide
Insurance Enterprise--Intercompany Agreement."
While other members of the Nationwide Insurance Enterprise sell life
insurance, primarily accident and health and group life insurance, the Company
is the principal member that offers variable annuity, fixed annuity and
individual universal, variable and traditional life insurance products.
Nationwide Mutual has informed the Company that it currently intends that the
Company will be its principal affiliate in the U.S. offering such products.
Further, in the Intercompany Agreement, Nationwide Mutual has agreed that the
Company has the exclusive right, subject to certain limited exceptions, to
distribute such products through Nationwide Insurance Enterprise insurance
agents for at least five years following the Equity Offerings. Thereafter, the
Intercompany Agreement provides that Nationwide Mutual will only have the
option to terminate such right on one year's notice if Nationwide Corp. and
its affiliates no longer own at least 50% of the combined voting power of the
outstanding capital stock of the Company. The termination of such right could
have an adverse effect on the Company's ability to distribute certain of its
life insurance products. In 1995, 6.6% of the Company's statutory premiums and
deposits were attributable to products sold by Nationwide Insurance Enterprise
insurance agents. See "Certain Relationships and Related Transactions--New
Agreements with the Nationwide Insurance Enterprise--Intercompany Agreement--
Nationwide Insurance Enterprise Insurance Agents."
Nationwide Corp. has advised the Company that it currently intends to
maintain a direct or indirect ownership of at least 80% of the combined voting
power of the outstanding shares of capital stock of the Company. Nationwide
Corp., however, does not have any agreement with the Company not to sell the
Common Stock it holds. The Company has agreed that it will, upon the request
of Nationwide Corp., use its best efforts to effect the registration under
applicable federal and state securities laws of any shares of Common Stock
held by Nationwide Corp. and its affiliates. See "Certain Relationships and
Related Transactions--New Agreements with Nationwide Insurance Enterprise--
Intercompany Agreement--Registration Rights." Notwithstanding the foregoing,
Nationwide Corp. and the Company have agreed that, without the prior written
consent of Credit Suisse First Boston Corporation, they will not offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Securities Act relating to
any additional shares of Class A Common Stock, or securities convertible into
or exchangeable or exercisable for shares of Class A Common Stock, for a
period of 180 days after the date of this Prospectus. See "Underwriting" and
"Shares Eligible for Future Sale."
Beneficial ownership of at least 80% of the combined voting power and value
of the outstanding capital stock of the Company is required in order for
Nationwide Mutual to continue to include the Company in its consolidated group
for federal income tax purposes. Either a sale by Nationwide Corp. of some of
its shares of Class B Common Stock to persons other than its affiliates or the
Company's issuance of additional shares of
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voting stock to persons other than Nationwide Corp. or its affiliates (except
the Company and its subsidiaries) could cause Nationwide Corp.'s ownership of
the combined voting power and value of the outstanding capital stock of the
Company to fall below 80%, resulting in the loss of the ability of the Company
and its domestic subsidiaries to join with Nationwide Mutual and its domestic
subsidiaries in the filing of a consolidated federal income tax return. Under
applicable law, each member of Nationwide Mutual's consolidated tax group,
which includes the Company and its subsidiaries, is jointly and severally
liable for the federal income tax liability of each other member of the group
and is also jointly and severally liable for pension and benefit funding and
termination liabilities of other group members, and certain benefit plan
taxes. If the Company were no longer included in Nationwide Mutual's
consolidated tax group for federal tax purposes, there is no assurance that
the Company's tax position would be as favorable as it is at present.
Additionally, deconsolidation would result in the payment by the Company of
approximately $54.0 million of deferred income taxes. The Company has recorded
this amount as a deferred tax liability and therefore the payment would have
no impact on net income or shareholders' equity. However, the payment would
result in a $54.0 million decrease in Nationwide Life's statutory surplus. See
"Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--Tax Sharing Agreement."
By virtue of its control of the Company and the terms of a tax sharing
agreement (the "Tax Sharing Agreement") between the Company and Nationwide
Mutual, Nationwide Mutual effectively will control all of the Company's tax
decisions. Under the Tax Sharing Agreement, Nationwide Mutual will have sole
authority to respond to and conduct all tax proceedings (including tax audits)
relating to the Company, to file all returns on behalf of the Company and to
determine the amount of the Company's liability to (or entitlement to payment
from) Nationwide Corp. under the Tax Sharing Agreement. This arrangement may
result in conflicts of interest between the Company and Nationwide Mutual. For
example, under the Tax Sharing Agreement, Nationwide Mutual may choose to
contest, compromise or settle any adjustment or deficiency proposed by the
relevant tax authority in a manner that may be beneficial to Nationwide Mutual
and detrimental to the Company. Under the Tax Sharing Agreement, however,
Nationwide Mutual is obligated to act in good faith with regard to all persons
included in the applicable returns. See "Certain Relationships and Related
Transactions--New Agreements with the Nationwide Insurance Enterprise--Tax
Sharing Agreement."
Pursuant to the Intercompany Agreement, among other things, Nationwide
Mutual has granted to the Company and certain of its subsidiaries a non-
exclusive, non-assignable, revocable license to use the "Nationwide" name and
certain other service marks solely in connection with the Company's annuity,
pension and life insurance businesses and activities related to such
businesses. The Intercompany Agreement provides that, subject to Nationwide
Mutual's right to revoke such license under certain circumstances, such
license will remain in effect for at least five years following the Equity
Offerings. Thereafter, the Intercompany Agreement provides that, subject to
certain exceptions, Nationwide Mutual will only have the option to revoke such
license on one year's notice if Nationwide Corp. and its affiliates no longer
own at least 50% of the combined voting power of the outstanding capital stock
of the Company. Upon the revocation of such license, the Company and any of
its subsidiaries shall change their names to exclude the word "Nationwide" and
shall discontinue the use of the other licensed service marks. The revocation
of such license could have a material adverse effect on the Company's ability
to conduct its business. See "Certain Relationships and Related Transactions--
New Agreements with the Nationwide Insurance Enterprise--Intercompany
Agreement--License to Use Nationwide Name and Service Marks." Nationwide Life
owns "The Best of America" service mark and does not license such mark from
Nationwide Mutual.
The Company's Board of Directors currently consists of eleven members, seven
of whom serve concurrently on the boards of directors of other companies
within the Nationwide Insurance Enterprise. In addition, a significant number
of officers of the Company also serve as officers of Nationwide Mutual or
other companies within the Nationwide Insurance Enterprise. Service as a
director or officer of both the Company and another company (other than a
subsidiary of the Company) within the Nationwide Insurance Enterprise could
create or
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appear to create potential conflicts of interest when the director or officer
is faced with decisions that could have different implications for the Company
and such other company. A conflict of interest could also exist with respect
to allocation of the time and attention of persons who are officers of both
the Company and one or more other companies within the Nationwide Insurance
Enterprise. Under Delaware law, directors and officers have a fiduciary duty
to act in good faith and in what they believe to be in the best interests of
the corporation and its stockholders. Such duties include the duty to refrain
from impermissible self-dealing and to deal fairly with respect to
transactions in which such directors or officers, or other companies with
which they are affiliated, have an interest.
The Company has engaged in various transactions, and is party to various
arrangements, with members of the Nationwide Insurance Enterprise, certain of
which will continue after the consummation of the Capital Securities Offering.
In the future, the Company may enter into agreements with members of the
Nationwide Insurance Enterprise that will not be the result of arm's-length
negotiations between independent parties. Conflicts of interest could arise
with respect to transactions involving members of the Nationwide Insurance
Enterprise, on the one hand, and the Company, on the other hand. Any such
transactions that are material to the Company will be subject to approval by a
vote of disinterested members of the Company's Board of Directors. In
addition, under Ohio insurance holding company laws, future arrangements and
agreements between the Company's insurance subsidiaries and other members of
the Nationwide Insurance Enterprise must be fair and equitable and may be
subject to the approval of the Superintendent of Insurance of the State of
Ohio. Finally, the Company's credit facility requires that any transaction
between the Company and any of its affiliates be on an arm's-length basis on
terms at least as favorable to the Company as could have been obtained from a
third party which is not an affiliate. See "Business--Regulation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity," and "Certain Relationships and Related Transactions."
Nationwide Mutual has informed the Company that it currently intends that
the Company will be its principal affiliate in the U.S. offering variable
annuity, fixed annuity and individual universal, variable and traditional life
insurance products. However, conflicts may exist between the Company and other
members of the Nationwide Insurance Enterprise with respect to the allocation
of corporate opportunities among the Company and such other members. The
Certificate provides that members of the Nationwide Insurance Enterprise have
no duty to refrain from engaging in the same or similar lines of business as
the Company. The Certificate further provides that in the event a member of
the Nationwide Insurance Enterprise or a director or officer of the Company
who is also a director or officer of another member of the Nationwide
Insurance Enterprise acquires knowledge of a potential transaction or other
matter that may constitute a corporate opportunity of either or both the
Company and another member of the Nationwide Insurance Enterprise, such member
of the Nationwide Insurance Enterprise, officer or director may allocate such
opportunity among the Company and the other members of the Nationwide
Insurance Enterprise as such member, officer or director deems appropriate
under the circumstances. The Certificate specifies that none of the foregoing
members, officers or directors will be liable to the Company or any
Stockholders of the Company for breach of any fiduciary duty by reason of such
action. These provisions may limit the liability of such persons under
Delaware law. See "Description of Capital Stock--Certain Provisions Relating
to Corporate Opportunities."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
As an insurance holding company, the Company's ability to meet debt service
obligations, including payment of principal and interest on the Junior
Subordinated Debentures, and pay operating expenses and dividends depends
primarily on the receipt of sufficient funds from its principal operating
subsidiary, Nationwide Life. The inability of Nationwide Life to pay dividends
to the Company in an amount sufficient to meet debt service obligations and
pay operating expenses and dividends would have a material adverse effect on
the Company. The payment of dividends by Nationwide Life is subject to
restrictions set forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require Ohio-domiciled life
insurance
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companies to seek prior regulatory approval to pay a dividend or distribution
of cash or other property if the fair market value thereof, together with that
of other dividends or distributions made in the preceding 12 months, exceeds
the greater of (i) 10% of policyholders' surplus as of the prior December 31
or (ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus. The
payment of dividends by Nationwide Life may also be subject to restrictions
set forth in the insurance laws of New York that limit the amount of statutory
profits on Nationwide Life's participating policies (measured before dividends
to policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends and
to meet its debt service obligations. The Company can give no assurance,
however, that any dividends will be declared or paid by Nationwide Life.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of creditors of the subsidiary, except to the extent the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Junior Subordinated Debentures will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries, and holders of
Junior Subordinated Debentures will be able to look only to the assets of the
Company for payments on the Junior Subordinated Debentures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Regulation--Regulation of
Dividends and Other Payments from Insurance Subsidiaries."
REGULATION
The Company's insurance subsidiaries are subject to extensive regulation and
supervision in the jurisdictions in which they do business. Such regulations,
in addition to limiting the amount of dividends and other payments that can be
paid by the Company's insurance subsidiaries without prior approval, impose
restrictions on the amount and type of investments the Company's insurance
subsidiaries may hold. These regulations also affect many other aspects of the
Company's insurance subsidiaries' businesses, including risk-based capital
requirements, the type and amount of required asset valuation reserve accounts
and policy forms. These regulations are primarily intended to protect
policyholders rather than stockholders and other investors. The Company cannot
predict the effect that any proposed or future legislation may have on the
financial condition or results of operations of the Company and its insurance
subsidiaries. See "Business--Regulation."
RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Ratings are important to
maintaining public confidence in the Company and its ability to market its
annuity and life insurance products. Rating organizations continually review
the financial performance and condition of insurers, including the Company.
Any lowering of the Company's ratings could have a material adverse effect on
the Company's ability to market its products and could increase the surrender
of the Company's annuity products. Both of these consequences could, depending
upon the extent thereof, have a material adverse effect on the Company's
liquidity and, under certain circumstances, net income. Nationwide Life is
rated "A+" (Superior) by A.M. Best. Based on its financial strength and claims
paying ability, respectively, Nationwide Life is rated "Aa2" (Excellent) by
Moody's Investors Services, Inc. ("Moody's") and "AA+" (Excellent) by Standard
& Poor's Corporation ("S&P"). The foregoing ratings are based upon factors of
concern to policyholders, agents and intermediaries and are not directed
toward the protection of investors. Such ratings are neither a rating of
securities nor a recommendation to buy, hold or sell any security. See
"Business--Ratings."
COMPETITION
The Company competes with a large number of other insurers as well as non-
insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of which have greater financial resources, offer
alternative products and, with respect to other insurers, have higher ratings
than the Company. The Company
24
<PAGE>
believes that competition in the Company's lines of business is based on
price, product features, commission structure, perceived financial strength,
claims-paying ratings, service and name recognition. National banks, with
their preexisting customer bases for financial services products, may pose
increasing competition in the future to insurers who sell annuities, including
the Company, as a result of the U.S. Supreme Court's 1994 decision in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company,
which permits national banks to sell annuity products of life insurance
companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made
by members of Congress and the Clinton Administration. Currently, the Bank
Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not
possible to predict whether any of these proposals will be enacted, or, if
enacted, their potential effect on the Company. See "Business--Competition."
SENSITIVITY TO INTEREST RATES
The Company is exposed to risk of disintermediation and reduction in
interest spread or profit margins when interest rates fluctuate. Bond calls,
mortgage prepayments, contract surrenders and withdrawals of annuities and
life insurance policies are influenced by the interest rate environment.
Because the Company's general account investment portfolio consists primarily
of fixed income assets, the investment portfolio market value and the yields
on newly invested and reinvested assets vary depending on interest rates.
Management attempts to mitigate the negative impact of interest rate changes
through asset/liability management, product design, management of crediting
rates, relatively high surrender charges and management of mortality charges
and dividend scales with respect to its in-force life insurance policies, but
there can be no assurance that such attempts will be completely successful.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Inflation" and "Business--Investments."
SALES PRACTICE LITIGATION
In recent years, life insurance companies, including the Company, have been
named as defendants in lawsuits relating to life insurance pricing and sales
practices. There can be no assurance that any future litigation relating to
pricing and sales practices will not have a material adverse effect on the
Company.
FEDERAL INCOME TAX LEGISLATION
Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on the accumulated tax-
deferred earnings when such earnings are actually paid. Congress has, from
time to time, considered possible legislation that would eliminate the
deferral of taxation on the accretion of value within certain annuities and
life insurance products. The 1994 United States Supreme Court ruling in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company that
annuities are not insurance for purposes of the National Bank Act may cause
Congress to consider legislation that would eliminate such tax deferral at
least for certain annuities. Other possible legislation, including a
simplified "flat tax" income tax structure with an exemption from taxation for
investment income, could also adversely affect purchases of annuities and life
insurance if such legislation were to be enacted. There can be no assurance as
to whether legislation will be enacted which would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
See "Business--Regulation--Potential Tax Legislation."
25
<PAGE>
NATIONWIDE FINANCIAL SERVICES CAPITAL TRUST
GENERAL
Nationwide Financial Services Capital Trust is a statutory business trust
was formed under the Delaware law pursuant to a declaration of trust, dated as
of December 18, 1996, executed by the Company, as sponsor (the "Sponsor"), and
the trustees of the Trust and the filing of a certificate of trust with the
Secretary of State of the State of Delaware on December 19, 1996. Such
declaration of trust will be amended and restated in its entirety by the
Company, as sponsor of the Trust, and the trustees of the Trust (as so amended
and restated, the "Declaration"), as of or prior to the date the Trust issues
the Capital Securities representing undivided beneficial interests in the
assets of the Trust and invests the gross proceeds of the Capital Securities
in the Junior Subordinated Debentures. The Company will directly or indirectly
acquire Common Securities in an aggregate liquidation amount equal to 3% or
more of the total capital of the Trust. The Common Securities will rank pari
passu, and payment will be made thereon pro rata, with the Capital Securities,
except that, upon the occurrence and during the continuance of an event of
default under the Declaration, the rights of the holders of the Common
Securities to payment in respect of distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of
the holders of the Capital Securities. The assets of the Trust will consist
principally of the Junior Subordinated Debentures, and payments under the
Junior Subordinated Debentures will be the sole revenue of the Trust. The
Trust exists for the exclusive purposes of (i) issuing the Capital Securities
representing undivided beneficial interests in the assets of the Trust, (ii)
investing the gross proceeds of the Capital Securities in the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto. The term of the Trust will expire on
.
Pursuant to the Declaration, the number of trustees will initially be five.
Three of the trustees (the "Regular Trustees") will be individuals who are
employees or officers of or who are affiliated with the Company. The fourth
trustee will be a financial institution that is unaffiliated with the Company
(the "Property Trustee"). The fifth trustee will be an entity which maintains
its principal place of business in the State of Delaware (the "Delaware
Trustee"). Initially, Wilmington Trust Company, a Delaware banking
corporation, will act as Property Trustee and as Delaware Trustee until, in
each case, removed or replaced by the holder of the Common Securities. The
Property Trustee will also act as indenture trustee under the Guarantee (the
"Guarantee Trustee") and under the Indenture (the "Indenture Trustee"). See
"Description of the Guarantee," "Description of the Capital Securities" and
"Description of the Junior Subordinated Debentures."
The Property Trustee will hold title to the Junior Subordinated Debentures
for the benefit of the holders of the Capital Securities and the Property
Trustee will have the power to exercise all rights, powers and privileges
under the Indenture as the holder of the Junior Subordinated Debentures. In
addition, the Property Trustee will maintain exclusive control of a segregated
non-interest bearing bank account (the "Property Account") to hold all
payments made in respect of the Junior Subordinated Debentures for the benefit
of the holders of the Capital Securities. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Capital Securities. The
Company, as the direct or indirect holder of all the Common Securities, will
have the right to appoint, remove or replace any of the Regular Trustees. The
Company will pay all fees and expenses related to the Trust and the offering
of the Capital Securities. See "Description of the Junior Subordinated
Debentures."
The rights of the holders of the Capital Securities, including economic
rights, rights to information and voting rights, are as set forth in the
Declaration and the Delaware Business Trust Act, as amended (the "Trust Act").
See "Description of the Capital Securities." The Declaration, the Indenture
and the Guarantee also incorporate by reference the terms of the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). At the time the
Registration Statement becomes effective, the Declaration, the Indenture and
the Guarantee will be qualified under the Trust Indenture Act.
The place of business and the telephone number of the Trust are the
principal executive offices and telephone number of the Company.
26
<PAGE>
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in the Company's
consolidated financial statements, with the Capital Securities shown as
Company-obligated mandatorily redeemable capital securities of a subsidiary
trust. In a footnote to the Company's audited financial statements there will
be included a statement that all of the Common Securities of the Trust are
owned by the Company and that the sole asset of the Trust is the Junior
Subordinated Debentures (indicating the principal amount, interest rate and
maturity date thereof) and that the Trust's obligations with respect to the
Capital Securities are effectively fully and unconditionally guaranteed by the
Company. See "Capitalization" and "Pro Forma Consolidated Financial Statements
of the Company."
USE OF PROCEEDS
The proceeds to the Trust (without giving effect to expenses of the offering
payable by the Company) from the offering of the Capital Securities will be
$100,000,000. All of the proceeds from the sale of the Capital Securities will
be invested by the Trust in Junior Subordinated Debentures and ultimately will
be contributed by the Company to the capital of Nationwide Life. The net
proceeds to the Company from the Equity Offerings (after deduction of
underwriting discounts and commissions and estimated offering expenses payable
by the Company in connection therewith) are estimated to be $ million. The
net proceeds to the Company from the sale of the Notes are estimated to be
$ . Of the $ million estimated net proceeds to the Company from the Equity
Offerings, the Company will contribute approximately $ million to the
capital of Nationwide Life and retain the balance for general corporate
purposes. The Company expects to contribute all of the net proceeds from the
Note Offering to the capital of Nationwide Life.
RECENT HISTORY
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. Prior to the
Equity Offerings, Nationwide Corp. will acquire all of the Class B Common
Stock of the Company in exchange for all of the outstanding capital stock of
Nationwide Life and such other companies. Prior to such exchange, Nationwide
Life (i) will pay on December 31, 1996 a cash dividend of $50.0 million to
Nationwide Corp. (the "1996 Cash Dividend") and (ii) will dividend on January
1, 1997 to Nationwide Corp. the stock of certain of its subsidiaries that do
not operate in the long-term savings and retirement market. Prior to the
consummation of the Equity Offerings, Nationwide Life will pay an additional
cash dividend of $ million to the Company, and the Company will pay an equal
cash dividend to Nationwide Corp. (together with the 1996 Cash Dividend, the
"Special Cash Dividends"). In addition, effective January 1, 1996, Nationwide
Life reinsured all of its accident and health and group life insurance
business to other members of the Nationwide Insurance Enterprise. See "Certain
Relationships and Related Transactions--Existing Arrangements with the
Nationwide Insurance Enterprise--Organization of the Company" and "--Modified
Coinsurance Agreements."
27
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the Equity Offerings and the Special Cash
Dividends, (iii) the pro forma capitalization of the Company after giving
effect to the Equity Offerings, the Special Cash Dividends and the Note
Offering, (iv) the pro forma capitalization of the Company after giving effect
to the Equity Offerings, the Special Cash Dividends and the Capital Securities
Offering and (v) the pro forma capitalization of the Company after giving
effect to the Equity Offerings, the Special Cash Dividends, the Note Offering
and the Capital Securities Offering. This table should be read in conjunction
with the consolidated financial statements of the Company and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------------------------------------
PRO FORMA
FOR THE
PRO FORMA EQUITY
PRO FORMA FOR THE OFFERINGS,
FOR THE EQUITY THE SPECIAL
EQUITY OFFERINGS, CASH
PRO FORMA OFFERINGS, THE SPECIAL DIVIDENDS,
FOR THE THE SPECIAL CASH THE NOTE
EQUITY CASH DIVIDENDS OFFERING
OFFERINGS DIVIDENDS AND THE AND THE
AND THE AND THE CAPITAL CAPITAL
SPECIAL CASH NOTE SECURITIES SECURITIES
ACTUAL DIVIDENDS OFFERING OFFERING OFFERING
-------- ------------ ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Senior Notes............ $ -- $ -- $ 300.0 $ -- $ 300.0
Company-obligated
mandatorily redeemable
capital securities of
the NFS Trust, holding
solely junior
subordinated debentures
of the Company(1)...... -- -- -- 100.0 100.0
Shareholders' equity:
Preferred stock, no
par value; shares
authorized;
no shares issued and
outstanding.......... -- -- -- -- --
Class A Common Stock,
no par value;
shares authorized; no
shares issued and
outstanding ( as
adjusted and as
further adjusted).... -- -- --
Class B Common Stock,
no par value;
shares authorized;
shares issued and
outstanding ( as
adjusted and as
further adjusted).... -- -- --
Additional paid-in
capital.............. 602.5 1,014.5 1,014.5 1,014.5 1,014.5
Unrealized gains on
securities available-
for-sale, net........ 114.5 114.5 114.5 114.5 114.5
Retained earnings..... 1,357.6 457.6 457.6 457.6 457.6
-------- -------- -------- -------- --------
Total shareholders'
equity............... 2,074.6 1,586.6 1,586.6 1,586.6 1,586.6
-------- -------- -------- -------- --------
Total capitalization.. $2,074.6 $1,586.6 $1,886.6 $1,686.6 $1,986.6
======== ======== ======== ======== ========
Debt/capital ratio(2)... N/A N/A 16.9% N/A 16.0%
Debt and Capital
Securities/capital
ratio(2)............... N/A N/A N/A 6.4% 21.4%
Book value per share.... $ $ $ $
Adjusted book value per
share(2)............... $ $ $ $
</TABLE>
- --------
(1) The Capital Securities will be reflected in the Company's consolidated
financial statements as "Company-obligated mandatorily redeemable capital
securities of the NFS Trust, holding solely junior subordinated debentures
of the Company" with a footnote indicating that all of the Common
Securities of the Trust are owned by the Company, the principal asset of
which is the junior subordinated debentures (indicating the principal
amount, interest rate and maturity date thereof), and that the Trust's
obligations with respect to the Capital Securities are effectively fully
and unconditionally guaranteed by the Company.
(2) Adjusted to exclude the effect of SFAS 115.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
for the Company. The consolidated income statement data set forth below for
the years ended December 31, 1992 through 1995 and the consolidated balance
sheet data as of December 31, 1992 through 1995 are derived from the
consolidated financial statements of the Company, which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated income statement data for the nine months ended September 30,
1996 and 1995, and for the year ended December 31, 1991, and the consolidated
balance sheet data as of September 30, 1996 and 1995, and as of December 31,
1991, are derived from the unaudited consolidated financial statements of the
Company. The Company believes that such unaudited financial data fairly
reflect the consolidated results of operations and the consolidated financial
condition of the Company for such periods. Segment and Other Data appearing
below are unaudited. The selected consolidated financial data set forth below
should be read in conjunction with the consolidated financial statements of
the Company and the notes thereto and the other financial information,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere herein. The results of operations
for an interim period are not necessarily indicative of results that may be
expected for a full year or any other interim period.
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 283.3 $ 208.1 $ 286.6 $ 217.2 $ 165.5 $ 131.3 $ 104.2
Life insurance
premiums.............. 151.0 151.4 199.1 176.7 188.4 200.2 220.4
Net investment income.. 1,009.6 954.5 1,294.0 1,210.8 1,131.2 1,049.4 901.7
Realized gains/(losses)
on investments........ 4.3 6.5 (1.7) (16.5) 106.2 (19.4) (18.4)
Other income........... 52.7 43.8 59.0 45.9 48.1 44.1 30.6
--------- --------- --------- --------- --------- --------- ---------
Total revenues......... 1,500.9 1,364.3 1,837.0 1,634.1 1,639.3 1,405.6 1,238.5
--------- --------- --------- --------- --------- --------- ---------
Benefits and expenses:
Benefits and claims.... 867.6 828.0 1,115.5 992.7 982.2 966.3 880.8
Policyholder
dividends............. 31.4 29.4 39.9 38.8 43.0 45.7 47.8
Amortization of
deferred policy
acquisition costs..... 96.8 63.0 82.7 85.6 70.2 49.2 34.1
Operating expenses..... 252.2 221.8 317.8 276.6 268.2 228.0 167.7
--------- --------- --------- --------- --------- --------- ---------
Total benefits and ex-
penses................ 1,248.0 1,142.2 1,555.9 1,393.7 1,363.5 1,289.2 1,130.4
--------- --------- --------- --------- --------- --------- ---------
Income before income
taxes and cumulative
effect of accounting
changes................ 252.9 222.1 281.2 240.4 275.8 116.4 108.1
Provision for income
taxes.................. 88.7 77.1 96.3 82.5 96.7 32.1 38.2
Cumulative effect of
accounting changes..... -- -- -- -- (0.1) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income............. $ 164.2 $ 145.0 $ 184.9 $ 157.9 $ 179.0 $ 84.3 $ 69.9
========= ========= ========= ========= ========= ========= =========
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $19,689.2 $18,439.3 $19,163.1 $16,567.8 $15,286.9 $14,320.1 $12,173.3
Separate account
assets................. 24,673.5 17,039.4 18,591.1 12,087.1 9,006.4 6,081.4 4,615.0
Total assets............ 44,362.7 35,478.7 37,754.2 28,654.9 24,293.3 20,401.5 16,788.3
Long-term debt.......... -- -- -- -- -- -- --
Total liabilities....... 42,288.1 33,590.5 35,644.1 27,161.2 22,884.2 19,179.7 15,650.9
Shareholder's
equity(1).............. 2,074.6 1,888.2 2,110.1 1,493.7 1,409.1 1,221.8 1,137.4
Book value per
share(2)...............
Adjusted book value per
share(2)(3)............
SEGMENT AND OTHER DATA:
Operating income (loss)
before income taxes by
segment(4):
Variable Annuities..... $ 67.8 $ 40.2 $ 50.8 $ 24.6 $ 10.4 $ 13.1 $ 9.9
Fixed Annuities........ 103.8 105.6 137.0 139.0 105.9 95.3 72.9
Life Insurance......... 46.2 50.9 67.6 53.0 49.7 46.1 49.0
Corporate and
Other(1)(5)........... 30.8 18.9 27.5 40.3 3.6 (18.7) (5.3)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Policy reserves by seg-
ment:
Variable Annuities(6).. $22,265.1 $15,382.6 $16,761.8 $10,751.1 $ 7,854.8 $5,028.2 $3,585.1
Fixed Annuities(6)..... 13,220.8 12,425.5 12,784.0 11,247.0 10,154.1 9,659.8 7,952.1
Life Insurance......... 2,842.0 2,604.2 2,660.5 2,425.2 2,255.0 2,084.8 1,914.0
Corporate and
Other(5).............. 3,107.7 2,497.1 2,644.3 2,252.7 2,103.9 1,823.0 1,702.5
Statutory premiums,
deposits and other
considerations by
product segment(7):
Variable Annuities(8).. 4,959.7 3,011.2 4,399.3 3,821.1 2,414.2 1,561.8 984.0
Fixed Annuities(8)..... 1,134.9 1,385.7 1,864.2 1,308.6 1,300.9 1,637.8 1,922.4
Life Insurance......... 296.2 253.2 352.4 320.8 279.4 264.7 264.5
Corporate and
Other(5).............. 388.2 90.2 182.1 148.5 205.3 91.7 87.0
Net operating in-
come(4)................ 160.3 139.6 184.8 168.2 109.7 97.0 82.0
Net operating income per
share (2)(4)...........
Return on average share-
holder's equity(3)(4).. 11.4% 11.1% 10.9% 11.2% 8.7% 8.9% 9.0%
Ratio of earnings to
fixed charges(9)....... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- --------
(1) The Company has received capital contributions and paid dividends over the
periods presented as follows:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- ----- ------ ------ ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions... $ -- $ -- $ -- $200.0 $100.0 $13.5 $206.0
Dividends............... (2.0) (8.5) (8.5) (1.0) (10.6) (4.6) (6.8)
-------- -------- ----- ------ ------ ----- ------
Net contributions....... $ (2.0) $ (8.5) $(8.5) $199.0 $ 89.4 $ 8.9 $199.2
======== ======== ===== ====== ====== ===== ======
</TABLE>
The capital contributions and dividends and the related increases and
decreases to net investment income are recorded in the Corporate and Other
segment. In addition, on December 31, 1994, the Company transferred $155.0
million of invested assets from the Corporate and Other segment for the
purchase of Employers Life. The transfer of the $155.0 million is recorded
as a direct charge to shareholder's equity as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The capital contributions, dividends and transfer of invested assets had a
direct impact on the Company's shareholder's equity and the operating income
(loss) before income taxes of the Corporate and Other segment.
(2) Based on million shares outstanding.
(3) Adjusted to exclude net unrealized gains and losses recorded in
shareholders' equity, including, where applicable, the effect of SFAS 115.
(4) Excludes realized gains/(losses) and cumulative effect of accounting
changes.
(5) The Corporate and Other segment includes net investment income on
investments not allocated to the three product segments; all realized
investment gains and losses; investment management fees, other revenues
and operating expenses of Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments;
commissions and other income earned by the marketing and distribution
subsidiaries of the Company; and revenues, benefits and expenses
associated with group annuity contracts issued to Nationwide Insurance
Enterprise employee and agent benefit plans.
(6) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of September 30,
1996 and 1995 and as of December 31, 1995, 1994 and 1993, such amounts
were $9.33 billion, $8.45 billion, $8.83 billion, $7.27 billion and $6.19
billion, respectively.
(7) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(8) Statutory premiums, deposits and other considerations related to the fixed
option under the Company's variable annuity contracts are included in
Fixed Annuities. For the nine months ended September 30, 1996 and 1995 and
for the years ended December 31, 1995, 1994 and 1993, such amounts were
$894.0 million, $1.14 billion, $1.57 billion, $1.05 billion and $993.8
million, respectively.
(9) For purposes of this computation, earnings consist of income before income
taxes and cumulative effect of accounting changes and fixed charges. Fixed
charges consist of interest, excluding interest credited to policyholder
account balances.
30
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The pro forma consolidated income statement data for the Company set forth
below give effect to the Equity Offerings, the Special Cash Dividends, the
Note Offering and the Capital Securities Offering as if they had been
consummated at the beginning of the period indicated. The summary pro forma
consolidated balance sheet data for the Company set forth below is presented
(i) on an actual basis as of the date indicated, (ii) on a pro forma basis as
if the Equity Offerings and the Special Cash Dividends had been consummated as
of the date indicated, (iii) on a pro forma basis as if the Equity Offerings,
the Special Cash Dividends and the Note Offering had been consummated as of
the date indicated, (iv) on a pro forma basis as if the Equity Offerings, the
Special Cash Dividends and the Capital Securities Offering had been
consummated as of the date indicated and (v) on a pro forma basis as if the
Equity Offerings, the Special Cash Dividends, the Note Offering and the
Capital Securities Offering had been consummated as of the date indicated. The
pro forma financial data do not purport to reflect what the Company's
financial position or results of operations would actually have been if the
Equity Offerings, the Special Cash Dividends, the Note Offering and the
Capital Securities Offering had in fact occurred on such dates nor should they
be taken as indicative of the future results of operations of the Company. The
pro forma consolidated financial information should be read in conjunction
with the consolidated financial statements of the Company and the notes
thereto and the other financial information pertaining to the Company included
elsewhere herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
PRO FORMA PRO FORMA
FOR THE EQUITY FOR THE EQUITY
OFFERINGS, THE OFFERINGS, THE
SPECIAL CASH SPECIAL CASH
DIVIDENDS, THE DIVIDENDS, THE
NOTE OFFERING NOTE OFFERING
AND THE AND THE
CAPITAL CAPITAL
SECURITIES SECURITIES
ACTUAL OFFERING ACTUAL OFFERING
-------- -------------- -------- --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
DATA:
Revenues:
Policy charges.............. $ 283.3 $ 283.3 $ 286.6 $ 286.6
Life insurance premiums..... 151.0 151.0 199.1 199.1
Net investment income....... 1,009.6 1,003.9 1,294.0 1,286.3
Realized gains/(losses) on
investments................ 4.3 4.3 (1.7) (1.7)
Other income................ 52.7 52.7 59.0 59.1
-------- -------- -------- --------
Total revenues............. 1,500.9 1,495.2 1,837.0 1,829.4
-------- -------- -------- --------
Benefits and Expenses:
Benefits and claims......... 867.6 867.6 1,115.5 1,115.5
Policyholder dividends...... 31.4 31.4 39.9 39.9
Amortization of deferred
policy acquisition costs... 96.8 96.8 82.7 82.7
Operating expenses.......... 252.2 252.2 317.8 317.8
Interest expense(1)......... -- 23.0 -- 30.6
-------- -------- -------- --------
Total benefits and ex-
penses.................... 1,248.0 1,271.0 1,555.9 1,586.5
-------- -------- -------- --------
Income before income taxes... 252.9 224.2 281.2 242.9
Provision for income taxes... 88.7 78.7 96.3 82.9
-------- -------- -------- --------
Net income................... $ 164.2 $ 145.5 $ 184.9 $ 160.0
======== ======== ======== ========
OTHER DATA:
Net operating income(1)(2)... $ 160.3 $ 141.6 $ 184.8 $ 159.9
Net operating income per
share(1)(2)(3)..............
Return on average sharehold-
ers' equity(2)(4)........... 11.4% 13.6% 10.9% 13.2%
Ratio of earnings to fixed
charges(5).................. N/A 10.7x N/A 8.9x
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------------
PRO FORMA
FOR THE
PRO FORMA EQUITY
PRO FORMA FOR THE OFFERINGS,
FOR THE EQUITY THE
EQUITY OFFERINGS, SPECIAL
PRO FORMA OFFERINGS, THE CASH
FOR THE THE SPECIAL DIVIDENDS,
EQUITY SPECIAL CASH THE NOTE
OFFERINGS CASH DIVIDENDS OFFERING
AND THE DIVIDENDS AND THE AND THE
SPECIAL AND THE CAPITAL CAPITAL
CASH NOTE SECURITIES SECURITIES
ACTUAL DIVIDENDS OFFERING OFFERING OFFERING
--------- --------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
General account assets.. $19,689.2 $19,201.2 $19,501.2 $19,301.2 $19,601.2
Separate account as-
sets................... 24,673.5 24,673.5 24,673.5 24,673.5 24,673.5
Total assets............ 44,362.7 43,874.7 44,174.7 43,974.7 44,274.7
Long-term debt.......... -- -- 300.0 -- 300.0
Capital Securities(6)... -- -- -- 100.0 100.0
Shareholders' equity.... 2,074.6 1,586.6 1,586.6 1,586.6 1,586.6
Debt/capital ratio(4)... N/A N/A 16.9% N/A 16.0%
Debt and Capital
Securities/capital ra-
tio(4)................. N/A N/A N/A 6.4% 21.4%
Book value per
share(3)...............
Adjusted book value per
share(3)(4)............
</TABLE>
- --------
(1) The $300 million aggregate principal amount of the Notes is assumed to
bear interest at a rate of % per annum for the periods indicated. The
$100 million aggregate liquidation amount of the Capital Securities is
assumed to pay cash distributions at a rate of % per annum for the
periods indicated. There can be no assurance that these will be the actual
rates borne by such instruments. An increase of % per annum in the
assumed interest rate on the Notes and on the assumed distribution rate on
the Capital Securities would result in increases of $ million and $
million to interest expense for the nine months ended September 30, 1996
and the year ended December 31, 1995, respectively.
(2) Excludes realized gains/(losses).
(3) Based on million shares outstanding.
(4) Adjusted to exclude net unrealized gains and losses recorded in
shareholders' equity in accordance with SFAS 115.
(5) For purposes of this computation, earnings consist of income before income
taxes and cumulative effect of accounting changes and fixed charges. Fixed
charges consist of interest, excluding interest credited to policyholder
account balances.
(6) The Capital Securities will be reflected in the Company's consolidated
financial statements as "Company-obligated mandatorily redeemable capital
securities of the NFS Trust, holding solely junior subordinated debentures
of the Company" with a footnote indicating that all of the Common
Securities of the Trust are owned by the Company, the principal asset of
which is the junior subordinated debentures (including the principal
amount, interest rate and maturity date thereof), and that the Trust's
obligations with respect to the Capital Securities are effectively fully
and unconditionally guaranteed by the Company.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of consolidated results of operations and financial
condition of the Company should be read in conjunction with "Selected
Consolidated Financial Data," "Pro Forma Consolidated Financial Data" and the
Consolidated Financial Statements and related footnotes included elsewhere in
this Prospectus.
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. The
consolidated financial information discussed below: (i) includes the results
of operations of Nationwide Life and the related marketing and distribution
companies as though they had been consolidated with the Company for all
periods presented; (ii) excludes, for all periods presented, the results of
operations for those subsidiaries of Nationwide Life that Nationwide Life will
dividend to Nationwide Corp. prior to the Equity Offerings; and (iii) reflects
the impact of reinsurance agreements between Nationwide Life and other members
of the Nationwide Insurance Enterprise relating to Nationwide Life's accident
and health and group life insurance business as if they were in place for all
periods presented. See "Recent History," "Certain Relationships and Related
Transactions--Existing Arrangements with the Nationwide Insurance Enterprise--
Organization of the Company" and "--Modified Coinsurance Agreements."
RESULTS OF OPERATIONS
Policy Charges. Policy charges include asset fees, which are primarily
earned from separate account assets generated from sales of variable
annuities; administration fees, which include fees charged per contract on a
variety of the Company's products and premium loads on universal life
insurance products; surrender fees, which are charged as a percentage of
assets withdrawn during a specified period (usually the first seven years) of
annuity and certain life insurance contracts; and cost-of-insurance ("COI")
charges earned on universal life insurance products. For the nine months ended
September 30, 1996, policy charges were $283.3 million, a 36.1% increase from
$208.1 million during the same period in 1995. Policy charges increased 31.9%
in 1995 to $286.6 million, from $217.2 million in 1994. Policy charges in 1994
increased 31.2% from $165.5 million in 1993. Increases in policy charges have
resulted primarily from increases in separate account assets and the resulting
higher levels of asset fees, as well as a moderate increase in all of the fees
discussed above due to the growth in customer accounts.
Life Insurance Premiums. Life insurance premiums are earned primarily from
traditional life insurance in the Life Insurance segment, but are also earned
from the sale of life-contingent immediate annuities in the Fixed Annuities
segment. Life insurance premiums were $151.0 million for the first nine months
of 1996, a 0.3% decrease from $151.4 million for the first nine months of
1995. The slight decrease in 1996 was due to a $6.4 million decrease in sales
of life-contingent immediate annuities offset by a $6.0 million increase in
traditional life insurance premiums. Life insurance premiums increased 12.7%
in 1995 to $199.1 million from $176.7 million in 1994, which was a 6.2%
decrease from $188.4 million in 1993. The 1995 increase in life insurance
premiums resulted from an increase in traditional life insurance in-force in
the Life Insurance segment and growth in the Fixed Annuities segment. The
decrease in 1994 from 1993 was due primarily to a decrease in sales of life-
contingent immediate annuities.
Net Investment Income. Net investment income includes the gross investment
income earned on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general account
invested assets which are not allocated to product segments. Net investment
income was $1.01 billion for the first nine months of 1996 and $954.5 million
for the first nine months of 1995. Net investment income was $1.29 billion in
1995, $1.21 billion in 1994 and $1.13 billion in 1993. Net investment income
has increased as a result of growth in the Company's general account invested
assets. General account invested assets were $17.92 billion and $17.05 billion
as of September 30, 1996 and 1995, respectively. General account invested
assets were $17.83 billion, $15.23 billion and $14.24 billion as of December
31, 1995, 1994 and 1993, respectively.
33
<PAGE>
Realized Gains/(Losses) on Investments. Realized gains on investments are
not considered by the Company to be a recurring source of earnings. The
Company makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. All realized gains and
losses are reported in the Corporate and Other segment. Net realized gains on
investments were $4.3 million and $6.5 million for the nine months ended
September 30, 1996 and 1995, respectively. Net realized losses on investments
were $1.7 million in 1995 and $16.5 million in 1994. In 1993, the Company had
$106.2 million of net realized gains on investments, primarily as a result of
the sale of substantially all of its equity securities portfolio.
Other Income. Other income consists of investment management fees earned by
a subsidiary of the Company from the management of Nationwide mutual funds, as
well as commission and other income earned by the Company's marketing and
distribution subsidiaries. Net investment management fees earned on Nationwide
mutual fund assets selected as investment options for variable annuity
products and variable life insurance products are reported in the Variable
Annuities segment and Life Insurance segment, respectively. The Company also
sells its mutual fund products separately, and investment management fees from
these assets are included in the Corporate and Other segment. Other income was
$52.7 million for the first nine months of 1996, a 20.3% increase from $43.8
million for the first nine months of 1995. Other income increased 28.8% to
$59.0 million in 1995 from $45.9 million in 1994, which represented a 4.6%
decrease from $48.1 million in 1993. The increase in other income in 1996 and
1995 resulted primarily from an increase in commission income while the
decrease from 1993 to 1994 resulted from a decrease in commission income.
Benefits and Claims. Benefits and claims consist primarily of interest
credited on fixed annuity products and life insurance benefits in the Life
Insurance segment. Benefits and claims increased 4.8% to $867.6 million for
the nine months ended September 30, 1996 from $828.0 million for the nine
months ended September 30, 1995. The 1996 results include a $13.2 million pre-
tax charge resulting from a reevaluation of reserves on an existing block of
immediate annuities. Benefits and claims increased 12.4% to $1.12 billion in
1995 from $992.7 million in 1994, which was a 1.1% increase from $982.2
million in 1993. The changes in benefits and claims from year to year are
primarily attributable to the changes in interest credited which are discussed
in the Fixed Annuities segment results below. Life insurance benefits have
remained consistent over the periods.
Policyholder Dividends. Policyholder dividends are paid on certain
participating policies, primarily in the Life Insurance segment. Policyholder
dividends were $31.4 million for the first nine months of 1996, a 6.8%
increase over $29.4 million for the first nine months of 1995. Policyholder
dividends increased 2.8% to $39.9 million in 1995 from $38.8 million in 1994,
which was a 9.8% decrease from $43.0 million in 1993. The decrease from 1993
to 1994 was due to a revision in the dividend scale.
Amortization of DAC. Amortization of deferred acquisition costs ("DAC")
results from the capitalization of commissions and other costs of acquiring
new contracts and the amortization of these costs over the estimated life of
the contract. Amortization of DAC was $96.8 million for the first nine months
of 1996, a 53.7% increase from $63.0 million for the first nine months of
1995. Amortization of DAC decreased 3.4% to $82.7 million in 1995 from $85.6
million in 1994, which was a 21.9% increase from $70.2 million in 1993. The
increases in 1996 and 1994 were primarily attributable to growth in all
product segments while the decrease in 1995 resulted from a decrease in the
amortization rate for variable and fixed individual annuities due to lower
than anticipated lapse rates.
Operating Expenses. Operating expenses were $252.2 million for the first
nine months of 1996, a 13.7% increase from $221.8 million for the first nine
months of 1995. Operating expenses increased 14.9% to $317.8 million in 1995
from $276.6 million in 1994, which was a 3.1% increase from $268.2 million in
1993. These increases were primarily due to the increasing number of
individual and group annuity contracts in-force and the related increase in
administrative processing costs. The Company has controlled its operating
expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology. As a result, the ratio of
operating expenses to total assets declined to 0.84% in 1995 from 0.97% in
1994 and 1.10% in 1993.
34
<PAGE>
Federal Income Tax Expenses. Federal income tax expense was $88.7 million
and $77.1 million, representing effective tax rates of 35.1% and 34.7%, for
the nine months ended September 30, 1996 and 1995, respectively. The increase
in the 1996 effective tax rate over the same period in 1995 is the result of a
higher benefit in 1995 from charitable donations of appreciated property.
Federal income tax expense was $96.3 million, $82.5 million and $96.7 million,
representing effective tax rates of 34.3%, 34.3% and 35.1%, for 1995, 1994 and
1993, respectively. The higher effective tax rate for 1993 compared to the
other periods resulted from a change in the federal income tax rate.
Net Operating Income. Net operating income is net income, excluding realized
gains and losses and the cumulative effect of accounting changes. Net
operating income for the first nine months of 1996 was $160.3 million, a 14.8%
increase from $139.6 million for the first nine months of 1995. Excluding the
$13.2 million pre-tax charge in 1996 resulting from a reevaluation of reserves
on an existing block of immediate annuities, net operating income would have
been $168.9 million for the first nine months of 1996, a 21.0% increase over
the first nine months of 1995. The Company's net operating income increased
9.9% to $184.8 million in 1995 from $168.2 million in 1994, which was a 53.3%
increase from $109.7 million in 1993.
RESULTS OF OPERATIONS BY PRODUCT SEGMENT
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. In addition, the Company reports corporate income and
expenses and investments and related investment income supporting capital not
specifically allocated to its product segments in a Corporate and Other
segment. All information set forth below relating to the Company's Variable
Annuities segment excludes the fixed option under the Company's variable
annuity contracts. Such information is included in the Company's Fixed
Annuities segment.
35
<PAGE>
The table below presents summary financial data for the Company by segment.
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Variable Annuities......... $ 198.9 $ 138.7 $ 189.0 $ 132.7 $ 94.8
Fixed Annuities............ 817.6 781.5 1,052.0 939.9 922.8
Life Insurance............. 322.9 303.7 409.1 383.1 371.1
Corporate and Other........ 157.2 133.9 188.6 194.9 144.4
--------- --------- --------- --------- ---------
Total operating reve-
nues.................... 1,496.6 1,357.8 1,838.7 1,650.6 1,533.1
Realized gains (losses) on
investments............... 4.3 6.5 (1.7) (16.5) 106.2
--------- --------- --------- --------- ---------
Total revenues........... $ 1,500.9 $ 1,364.3 $ 1,837.0 $ 1,634.1 $ 1,639.3
========= ========= ========= ========= =========
INCOME BEFORE INCOME TAXES
AND ACCOUNTING CHANGES:
Variable Annuities......... $ 67.8 $ 40.2 $ 50.8 $ 24.6 $ 10.4
Fixed Annuities............ 103.8 105.6 137.0 139.0 105.9
Life Insurance............. 46.2 50.9 67.6 53.0 49.7
Corporate and Other........ 30.8 18.9 27.5 40.4 3.6
--------- --------- --------- --------- ---------
Total operating income... 248.6 215.6 282.9 257.0 169.6
Realized gains (losses).... 4.3 6.5 (1.7) (16.5) 106.2
--------- --------- --------- --------- ---------
Total income before
income taxes and
accounting changes...... $ 252.9 $ 222.1 $ 281.2 $ 240.4 $ 275.8
========= ========= ========= ========= =========
POLICY RESERVES:
Variable Annuities(1)...... $22,265.1 $15,382.6 $16,761.8 $10,751.1 $ 7,854.8
Fixed Annuities(1)......... 13,220.8 12,425.5 12,784.0 11,247.0 10,154.1
Life Insurance............. 2,842.0 2,604.2 2,660.5 2,425.2 2,255.0
Corporate and Other........ 3,107.7 2,497.1 2,644.3 2,252.7 2,103.9
--------- --------- --------- --------- ---------
Total policy re-
serves(2)............... $41,435.6 $32,909.4 $34,850.6 $26,676.0 $22,367.8
========= ========= ========= ========= =========
</TABLE>
- --------
(1) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of September 30,
1996 and 1995 and December 31, 1995, 1994, and 1993, such policy reserves
represented $9.33 billion, $8.45 billion, $8.83 billion, $7.27 billion and
$6.19 billion, respectively.
(2) Total policy reserves as presented here differ from the amounts set forth
in the Company's financial statements because the presented amounts
exclude accident and health and group life insurance business ceded to
other members of the Nationwide Insurance Enterprise. See "Certain
Relationships and Related Transactions--Existing Arrangements with the
Nationwide Insurance Enterprise--Modified Coinsurance Agreements."
Variable Annuities
Revenues. Revenues in the Variable Annuities segment consist of policy
charges and other income. Policy charges consist of asset fees, which are
generally a percentage of separate account assets deposited for the purchase
of variable annuities; administration fees, which are generally a specific
dollar amount per contract; and surrender fees, which are charged against
assets withdrawn during a specified period (generally the first seven years)
of variable annuity contracts. The separate account assets generated by the
Variable Annuities segment do not contribute to net investment income of the
Company because the customer receives the investment benefit and
36
<PAGE>
bears the investment risk of these assets. Other income includes net
investment management fees earned on separate account assets held in mutual
funds managed by a subsidiary of the Company.
Revenues were $198.9 million for the first nine months of 1996, a 43.4%
increase from $138.7 million for the first nine months of 1995. Revenues
increased 42.4% to $189.0 million in 1995 from $132.7 million in 1994, which
was a 40.0% increase from $94.8 million in 1993. Revenues have increased
primarily as a result of growth in separate account assets related to this
segment and the corresponding growth in asset fees, which were $183.2 million
and $123.9 million during the nine months ended September 30, 1996 and 1995,
respectively, and $172.8 million, $120.4 million and $83.4 million in 1995,
1994 and 1993, respectively. Asset fees as a percentage of variable annuity
separate account assets have remained relatively stable during the periods
presented, reflecting minimal changes in the levels of asset fees charged on
most variable annuity products.
Income Before Income Taxes and Accounting Changes. Income before income
taxes and accounting changes was $67.8 million for the first nine months of
1996, a 68.7% increase from $40.2 million for the first nine months of 1995.
Income before income taxes and accounting changes increased 106.5% to $50.8
million in 1995 from $24.6 million in 1994, which was a 136.5% increase from
$10.4 million in 1993. Increases have primarily resulted from growth in
variable annuity separate account assets and the corresponding increases in
asset fees combined with expense levels which have decreased as a percentage
of revenues. Total expenses were $127.6 million and $96.8 million, or 64.2%
and 69.8% of total revenues for the nine months ended September 30, 1996 and
1995, respectively. Total expenses were $135.4 million, $105.8 million and
$83.1 million, or 71.6%, 79.7% and 87.7% of total revenues, for 1995, 1994 and
1993, respectively. During the period, the Company has controlled its
operating expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology.
Policy Reserves. Variable annuity policy reserves increased 32.8% from
$16.76 billion as of December 31, 1995 to $22.27 billion as of September 30,
1996. Of this increase, $1.72 billion was due to market appreciation of
separate account assets, while $4.96 billion of statutory premiums and
deposits offset by $1.17 billion of withdrawals and policy charges resulted in
the remainder of the increase. Variable annuity policy reserves increased
55.9% to $16.76 billion as of December 31, 1995 from $10.75 billion as of
December 31, 1994, which was a 36.8% increase from $7.86 billion as of
December 31, 1993. Variable annuity policy reserves increased $6.01 billion,
$2.90 billion and $2.83 billion in 1995, 1994 and 1993, respectively. Market
appreciation accounted for $2.93 billion and $800.0 million of the increases
in 1995 and 1993, respectively. Market depreciation accounted for $84.0
million of the decrease in 1994. Statutory premiums and deposits were $4.40
billion, $3.82 billion, and $2.41 billion, while withdrawals and policy
charges were $1.32 billion, $840.0 million, and $385.0 million, in 1995, 1994,
and 1993, respectively.
Fixed Annuities
Revenues. Revenues in the Fixed Annuities segment consist mainly of net
investment income, which is earned on invested assets allocated to support
fixed annuity policy reserves and shareholders' equity allocated to such
segment. Total revenues were $817.6 million and $781.5 million for the nine
months ended September 30, 1996 and 1995, respectively. Total revenues were
$1.05 billion, $939.9 million and $922.8 million in 1995, 1994 and 1993,
respectively. Net investment income was $783.8 million and $741.9 million,
reflecting average pre-tax yields on the assets supporting this segment of
8.23% and 8.51%, for the nine months ended September 30, 1996 and 1995,
respectively. Net investment income was $1.00 billion, $903.7 million and
$871.7 million, representing average pre-tax yields on the assets supporting
this segment of 8.50%, 8.59% and 8.93%, in 1995, 1994, and 1993, respectively.
The increase in net investment income for each period presented is the result
of the increases in policy reserves discussed below and the corresponding
increase in invested assets.
Interest Credited. Interest credited on account balances was $595.7 million
and $576.8 million, representing average crediting rates of 6.25% and 6.62%,
for the nine months ended September 30, 1996 and 1995, respectively. Interest
credited on account balances was $775.7 million, $680.9 million and $673.3
million, representing crediting rates of 6.58%, 6.47% and 6.90%, for 1995,
1994 and 1993, respectively. The differential
37
<PAGE>
between net investment income and interest credited on account balances
resulted in spreads of $188.1 million and $165.0 million, or 1.98% and 1.89%
annualized, for the nine months ended September 30, 1996 and 1995,
respectively. Spreads were $224.3 million, $222.7 million and $198.3 million,
or 1.92%, 2.12% and 2.03%, in 1995, 1994, and 1993, respectively. Spreads vary
depending on crediting rates offered by competitors, performance of the
investment portfolio and other factors. The higher spread in 1994 is primarily
the result of declining interest rates in late 1993 and early 1994 which
resulted in lower crediting rates.
Income Before Income Taxes and Accounting Changes. Income before income
taxes and accounting changes was $103.8 million during the first nine months
of 1996, a 1.7% decrease from $105.6 million for the first nine months of
1995. Income before income taxes and accounting changes decreased 1.4% to
$137.0 million in 1995 from $139.0 million in 1994, which was a 31.3% increase
from $105.9 million in 1993. The 1996 results include a $13.2 million pre-tax
charge resulting from a reevaluation of reserves on an existing block of
immediate annuities. Excluding this charge, income before income tax and
accounting changes for the nine months ended September 30, 1996 would have
reflected a 10.8% increase over the comparable period in 1995. The increase in
1994 resulted from widening spreads and growth in assets. Narrowing spreads,
offset by asset growth, caused 1995 earnings to decline from 1994.
Policy Reserves. Fixed annuity policy reserves increased 3.4% to $13.22
billion as of September 30, 1996, from $12.78 billion as of December 31, 1995.
Statutory premiums and deposits of $1.14 billion and interest credited of
$595.0 million were offset by $1.29 billion of withdrawals and policy charges.
Policy reserves increased 10.5% to $12.43 billion as of September 30, 1995,
from $11.25 billion as of December 31, 1994. Statutory premiums and deposits
of $1.39 billion and interest credited of $576.8 million were offset by $784.0
million of withdrawals and policy charges. Policy reserves increased 13.6% to
$12.78 billion as of December 31, 1995 from $11.25 billion as of December 31,
1994, which was an 10.8% increase from $10.15 billion as of December 31, 1993.
Statutory premiums and deposits were $1.86 billion, $1.31 billion, and $1.30
billion, while interest credited was $775.7 million, $680.9 million, and
$673.3 million in 1995, 1994, and 1993, respectively. Withdrawals and policy
charges were $1.10 billion, $895.0 million, and $1.48 billion in 1995, 1994
and 1993, respectively. The higher level of withdrawals in 1993 is due to the
termination of one group annuity contract with policy reserves of $675.0
million.
Life Insurance
Revenues. Revenues in the Life Insurance segment consist of the life
insurance premiums and policy charges, as well as net investment income. Total
revenues were $322.9 million and $303.7 million for the nine months ended
September 30, 1996 and 1995, respectively. Total revenues were $409.1 million,
$383.1 million and $371.1 million for 1995, 1994 and 1993, respectively. The
increases are attributed to increases in life insurance in-force.
Income Before Income Taxes and Accounting Changes. Income before income
taxes and accounting changes was $46.2 million during the first nine months of
1996, a 9.2% decrease from $50.9 million for the first nine months of 1995.
The decrease is attributable to the increased amount of amortization of
deferred policy acquisition costs due to increased volume and higher general
expenses due to increased sales. Income before income taxes and accounting
changes increased 27.5% to $67.6 million in 1995 from $53.0 million in 1994,
which was a 6.6% increase from $49.7 million in 1993. Growth in income before
income taxes and accounting changes has primarily resulted from growth in
insurance in-force, particularly variable universal life, combined with only
minimal increases in expenses.
Life Insurance In-Force. Life insurance in-force was $35.87 billion and
$31.96 billion as of September 30, 1996 and 1995, respectively. Life insurance
in-force was $33.41 billion, $30.13 billion and $26.81 billion as of December
31, 1995, 1994 and 1993, respectively. Nearly two-thirds of the growth of life
insurance in-force is in variable universal life and term insurance policies.
38
<PAGE>
Corporate and Other
Revenues. Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three product
segments, all realized investment gains and losses, investment management fees
and other revenues earned from Nationwide mutual funds other than the portion
allocated to the Variable Annuities and Life Insurance segments, commissions
and other income earned by the marketing and distribution subsidiaries of the
Company and net investment income and policy charges from group annuity
contracts issued to Nationwide Insurance Enterprise employee and agent benefit
plans. Total revenues excluding realized gains and losses were $157.2 million
and $133.9 million for the nine months ended September 30, 1996 and 1995,
respectively. The increase in 1996 is the result of an increase in the
investment management fees and commissions earned. Total revenues excluding
realized gains and losses were $188.6 million, $194.9 million and $144.4
million in 1995, 1994 and 1993, respectively. The decrease in revenues in 1995
is a result of the transfer of $155.0 million of invested assets discussed
below. The increase in revenues in 1994 is due in part to investment income on
a $200.0 million capital contribution received from Nationwide Corp. in
February 1994. Effective December 31, 1994, the Company transferred $155.0
million of invested assets from the Corporate and Other segment for the
purchase of Employers Life. Because Nationwide Life will dividend the common
stock of Employers Life to Nationwide Corp. prior to the consummation of the
Equity Offerings, the transfer of the $155.0 million of invested assets is
recorded as a direct charge to shareholders' equity and the Corporate and
Other segment has $155.0 million less in invested assets as a result of the
transfer. Realized gains were $4.3 million and $6.5 million for the nine
months ended September 30, 1996 and 1995, respectively. For 1995 and 1994
realized losses were $1.7 million and $16.5 million, compared to realized
gains of $106.2 million in 1993. The higher level of gains in 1993 was due to
realized gains on the sale of substantially the entire equity securities
portfolio of the Company.
Income Before Income Taxes and Accounting Changes. Income before income
taxes and accounting changes excluding realized gains was $30.8 million and
$18.9 million for the nine months ended September 30, 1996 and 1995. Income
before income taxes and accounting changes excluding realized gains and losses
was $27.5 million, $40.3 million and $3.6 million in 1995, 1994 and 1993,
respectively. The changes between years are primarily attributed to the
changes in revenues discussed above. Interest expense related to the Note
Offering and the Capital Securities Offering will be recorded in the Corporate
and Other segment which will reduce income before taxes for the Corporate and
Other segment in periods after the completion of such offerings.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
common stock of Nationwide Life. The principal sources of funds for the
Company to pay principal, interest, dividends and operating expenses are
dividends from Nationwide Life and other subsidiaries and payments from
Nationwide Life under the Tax Sharing Agreement.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of certain prescribed limitations without
prior approval. The ability of Nationwide Life to pay dividends is subject to
restrictions set forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require life insurance companies to
seek prior regulatory approval to pay a dividend or distribution of cash or
other property if the fair market value thereof, together with that of other
dividends or distributions made in the preceding 12 months, exceeds the
greater of (i) 10% of policyholders' surplus as of the prior December 31 or
(ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus. The
payment of dividends by Nationwide Life may also be subject to restrictions
set forth in the insurance laws of New York that limit the amount of statutory
profits on Nationwide Life's participating policies (measured before dividends
to policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends in
the future. However, the Company can give no assurance that dividends will be
39
<PAGE>
declared or paid by the Company. As of September 30, 1996, the maximum amount
of dividends that Nationwide Life was permitted to pay to the Company without
prior regulatory approval was $95.9 million. See "Dividend Policy."
Nationwide Life's principal sources of funds are premiums and other
considerations paid, contract charges earned, net investment income received
and proceeds from investments called, redeemed or sold. The principal uses of
these funds are the payment of benefits on annuity contracts and life
insurance policies, operating expenses and the purchase of investments. Net
cash provided by operating activities (reflecting principally (i) premiums and
contract charges collected, less (ii) benefits paid on life insurance
products, plus (iii) income collected on invested assets, less (iv)
commissions and other general expenses paid) was $325.3 million and $133.1
million for the nine months ended September 30, 1996 and 1995, respectively,
and $183.4 million, $76.6 million and $61.8 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Net cash used by investing
activities (principally reflecting investments purchased less investments
called, redeemed or sold) was $450.9 million and $1.38 billion in the nine
months ended September 30, 1996 and 1995, respectively, and $1.82 billion,
$1.17 billion and $877.5 million in the years ended December 31, 1995, 1994
and 1993, respectively.
A primary liquidity concern with respect to life insurance and annuity
products is the risk of early policyholder and contractholder withdrawal. The
Company closely evaluates and manages this risk. The following table
summarizes the Company's annuity policy reserves as of December 31, 1995 and
1994 by the contractholder's ability to withdraw funds.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
POLICY POLICY
RESERVES % RESERVES %
----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Not subject to discretionary withdrawal.. $ 1,087.2 3.4% $ 1,007.4 4.2%
Subject to discretionary withdrawal with
adjustment:
With market value adjustment........... 27,312.1 84.8 20,263.6 83.5
At contract value, less surrender
charge of 5% or more.................. 992.1 3.1 554.0 2.3
---------- ------ ---------- ------
29,391.4 91.3 21.825.0 90.0
Subject to discretionary withdrawal at
contract value with no surrender charge
or surrender charge less than 5%........ 2,798.7 8.7 2,425.8 10.0
---------- ------ ---------- ------
Total annuity policy reserves........ $32,190.1 100.0% $24,250.8 100.0%
========== ====== ========== ======
</TABLE>
Life insurance policies are also subject to withdrawal. However, they are
less susceptible to withdrawal than are annuity contracts because
policyholders must generally undergo a new underwriting process and incur new
policy acquisition costs in order to obtain new life insurance policies.
Nationwide Life's principal sources of liquidity to meet unexpected cash
outflows are its portfolio of liquid assets and its net operating cash flow.
See "Business--Investments."
On August 12, 1996, Nationwide Life and Nationwide Mutual entered into a
Revolving Credit Facility (the "Credit Facility") which provides for a $600.0
million loan over a five-year term on a fully revolving basis with a group of
banks led by Morgan Guaranty Trust Company of New York. The Credit Facility
provides for several and not joint liability with respect to any amount drawn
by either Nationwide Life or Nationwide Mutual. To date, neither Nationwide
Life nor Nationwide Mutual has drawn down any amount under the Credit
Facility. The Credit Facility provides for several borrowing options including
interest at a spread over LIBOR, money market auction, CD or base rate. The
Credit Facility also provides covenants, including, but not limited to,
restrictions on mergers and sale of assets and transactions with affiliates as
well as a negative pledge. In addition, the Credit Facility provides for
customary representations, warranties and events of default. Pursuant to the
terms
40
<PAGE>
of the Credit Facility, Nationwide Life may not declare or pay a dividend if
it is, or if the payment thereof would cause it to be, in default under such
facility. Events of default under the Credit Facility include, among others,
the failure of Nationwide Mutual and its affiliates to maintain beneficial
ownership of more than 50% of the combined voting power of Nationwide Life's
outstanding voting stock and the failure of Nationwide Life to maintain
statutory surplus in excess of $875.0 million. Amounts borrowed under the
Credit Facility may be used for, among other things, general corporate
purposes, including the service of the Company's debt obligations.
Given the Company's historic cash flow and current financial results,
management of the Company believes that the cash flow from the operating
activities of the Company over the next year will provide sufficient liquidity
for the operations of the Company, as well as provide sufficient funds to
enable the Company to make dividend payments, as described in "Dividend
Policy," satisfy debt service obligations and pay other operating expenses.
Although the Company currently anticipates that it will be able to make
dividend payments and pay other operating and capital expenses for the
foreseeable future, the Company can give no assurances as to whether the net
cash provided primarily by dividends from Nationwide Life and its other
subsidiaries will provide sufficient funds for the Company to do so.
INFLATION
Many of the Company's assets and liabilities are monetary in nature and
sensitive to the interest rate environment which can be affected by inflation.
The Company is exposed to risk of disintermediation and reduction in interest
spread or profit margins when interest rates fluctuate. Bond calls, mortgage
prepayments, contract surrenders and withdrawals of annuities and life
insurance policies are influenced by the interest rate environment. Because
the Company's general account investment portfolio consists primarily of fixed
income assets, the investment portfolio market value and the yields on newly
invested and reinvested assets vary depending on interest rates. Management
attempts to mitigate the negative impact of interest rate changes through
asset/liability management, product design, management of crediting rates,
relatively high surrender charges and management of mortality charges and
dividend scales with respect to its in-force life insurance policies, but
there can be no assurance that such attempts will be completely successful.
Extreme changes in the interest rate environment could cause net interest
margins to fluctuate from historical levels.
41
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers throughout the United States.
The Company offers variable annuities, fixed annuities and life insurance as
well as mutual funds and pension products and administrative services. By
developing and offering a wide variety of products, the Company believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. The Company markets its products through a broad
spectrum of wholesale and retail distribution channels, including financial
planners, pension plan administrators, securities firms, banks and Nationwide
Insurance Enterprise insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the first nine months of 1996, the Company was the third
largest U.S. writer of individual variable annuity contracts based on sales,
according to VARDS. Its principal variable annuity series, The Best of
America, allows the customer to choose from 36 investment options, including
mutual funds managed by such well-known firms as Dreyfus, Fidelity, Janus,
Neuberger & Berman, Oppenheimer, T. Rowe Price, Templeton, Twentieth Century,
Vanguard and Warburg Pincus, as well as mutual funds managed by the Company.
The Company's long-term investment in developing the distribution channels
necessary to reach its target customers and the products required to meet
their demands has resulted in substantial growth. From 1991 to 1995, the
Company's assets grew from $16.8 billion to $37.8 billion, a compound annual
growth rate of 22.5%. During the same period, the Company's net operating
income grew from $82.0 million to $184.8 million, a compound annual growth
rate of 22.5%. The Company's sales of variable annuities grew from $984.0
million in 1991 to $4.40 billion in 1995, a compound annual growth rate of
45.4%. The Company's separate account assets, which are generated by the sale
of variable annuities and variable universal life insurance, grew from 27.5%
of total assets at December 31, 1991 to 49.3% of total assets at December 31,
1995. During this period of substantial growth, the Company controlled its
operating expenses by taking advantage of economies of scale and by increasing
productivity through investments in technology. From 1991 to 1995, the
Company's total assets increased by 124.9% while operating expenses increased
by only 89.5%. As a result, its ratio of operating expenses to total assets
fell from 1.00% in 1991 to 0.84% in 1995.
The Company believes that demographic trends and shifts in attitudes toward
retirement savings will continue to support increased consumer demand for its
products. According to U.S. Census Bureau projections, the number of Americans
between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1
million in 2005, making this "preretirement" age group the fastest growing
segment of the U.S. population. The Company believes that Americans
increasingly are supplementing traditional sources of retirement income, such
as employer-provided defined benefit plans and Social Security, with self-
directed investments. Reflecting this shift, industry sales of individual
variable annuity products grew from $17.3 billion in 1991 to $51.5 billion in
1995, a compound annual growth rate of 31.4%, according to VARDS. During the
same period, industry individual variable annuity assets grew from $176
billion to $401 billion, a compound annual growth rate of 22.9%, according to
VARDS.
PRODUCT SEGMENTS
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. The Variable Annuities segment, which accounted for $67.8
million (or 27.3%) of the Company's operating income before income taxes for
the first nine months of 1996, consists of annuity contracts that provide the
customer with the opportunity to invest in mutual funds managed by independent
investment managers and the Company, with investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment, which accounted for $103.8
million (or 41.7%) of the Company's operating income before income taxes for
the first nine months of 1996, consists of annuity contracts that generate a
return for the customer at a specified interest rate, fixed for a prescribed
period, with returns accumulating on a tax-deferred basis. The Fixed Annuities
segment also includes the fixed option under the Company's variable annuity
products, which accounted for 69.0% of the Company's fixed annuity policy
reserves as of December 31, 1995. The Life Insurance segment, which accounted
for $46.2 million (or 18.6%) of the Company's operating income before income
taxes for the first
42
<PAGE>
nine months of 1996, consists of insurance products, including variable life
insurance products, that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis. In addition, the Company
reports corporate income and expenses not specifically allocated to its
product segments in a Corporate and Other segment, which accounted for $30.8
million (or 12.4%) of the Company's operating income before income taxes for
the first nine months of 1996. After giving pro forma effect to the Equity
Offerings, the Special Cash Dividends, the Note Offering and the Capital
Securities Offering as if each had been consummated at January 1, 1996, the
Variable Annuities, Fixed Annuities, Life Insurance and Corporate and Other
segments would have represented 30.9%, 47.3%, 21.1% and 0.7%, respectively, of
the Company's operating income before income taxes for the first nine months
of 1996. See "Pro Forma Consolidated Financial Data."
Variable Annuities
The Company is one of the leaders in the development and sale of individual
and group variable annuity products. For the first nine months of 1996, the
Company was the third largest U.S. writer of individual variable annuity
contracts based on sales, according to VARDS. The Company believes that
demographic trends and shifts in attitudes toward retirement savings will
continue to support consumer demand for its variable annuity products.
The Company believes that it possesses distinct competitive advantages in
the market for variable annuities. Some of the Company's most important
advantages include its innovative product offerings and strong relationships
with independent, well-known fund managers. For example, the Company's The
Best of America IV and The Best of America--America's Vision individual
variable annuity contracts allow the customer to choose from 36 investment
options, including mutual funds managed by a variety of well-known fund
managers and the Company. In the aggregate, the Company's group variable
annuity products offer over 100 underlying investment options.
The Company distributes its variable annuity products through a broad range
of channels, including broker/dealers, financial planners, banks and
Nationwide Insurance Enterprise insurance agents. See "--Marketing and
Distribution." The Company seeks to capture a growing share of variable
annuity sales in these channels by working closely with its investment
managers and product distributors to adapt the Company's products and services
to changes in the retail and institutional marketplace in order to enhance its
leading position in the market for variable annuities. The Company is
following a strategy of extending The Best of America brand name to more of
its products and distribution channels in an effort to build upon its brand
name recognition.
The wide array of investment options available under the Company's variable
annuity contracts include mutual funds managed by the nationally recognized
money managers set forth below:
AIM Advisors, Inc. Oppenheimer Management Corporation
Banc One Investment Advisers Phoenix Investment Counsel, Inc.
Corporation Putnam Investment Management, Inc.
Capital Research and Management SEI Financial Management
Company Corporation
Davis Selected Advisors, L.P. Smith Barney Mutual Funds
Delaware Management Company, Management, Inc.
Inc. Smith Barney Advisers, Inc.
Evergreen Asset Management Corp. Strong Capital Management, Inc.
Fidelity Management & Research T. Rowe Price-Flemington
Company International, Inc.
INVESCO Funds Group, Inc. Templeton Global Advisors Limited
Federated Advisers Templeton Investment Counsel, Inc.
J&W Seligman & Co. Incorporated Tiffany Capital Advisors, Inc. (The
Janus Capital Corporation Dreyfus Socially Responsible
Lexington Management Corporation Growth Fund, Inc.)
Massachusetts Financial Service Twentieth Century Investors
Company (MFS(R) Variable Research Corporation
Insurance Trust) The Vanguard Group, Inc.
Miller Anderson & Sherrerd Van Eck Associates Corporation
Mellon Equity Associates Van Kampen American Capital Asset
(Dreyfus Stock Index Fund, Management, Inc.
Inc.) Warburg Pincus Counsellors, Inc.
Neuberger & Berman Management Weiss, Peck & Greer, L.L.C.
Incorporated
43
<PAGE>
The Company believes that the variable annuity business is attractive
because it generates fee income. In addition, because the investment risk on
variable annuities is borne principally by the customer and not the Company,
the variable annuity business requires significantly less capital support than
fixed annuity and traditional life insurance businesses. The Company receives
income from variable annuity contracts primarily in the form of asset and
administration fees. In addition, most of the Company's variable annuity
products provide for a contingent deferred sales charge, also known as a
"surrender charge" or "back-end load," that is assessed against customer
withdrawals in excess of specified amounts made during a specified period,
usually the first seven years of the contract. Surrender charges are intended
to protect the Company from withdrawals early in the contract period, before
the Company has had the opportunity to recover its sales expenses. Generally,
surrender charges on variable annuity products are 7% of assets withdrawn
during the first year, scaling ratably to 0% for the eighth year and each year
thereafter.
The Company's variable annuity products consist almost entirely of flexible
premium deferred variable annuity ("FPVA") contracts. FPVA contracts are
distributed through broker/dealers, financial planners, banks and Nationwide
Insurance Enterprise insurance agents. Such contracts are savings vehicles in
which the customer makes a single deposit or a series of deposits. The
customer has the flexibility to invest in mutual funds managed by independent
investment managers and the Company. Deposits may be made at regular or
irregular intervals and in regular or irregular amounts. The value of the
annuity fluctuates in accordance with the investment experience of the mutual
funds chosen by the customer. The customer is permitted to withdraw all or
part of the accumulated value of the annuity, less a surrender charge for
withdrawals during an initial penalty period of generally seven years. As
specified in the FPVA contract, the customer generally can elect from a number
of payment options that provide either fixed or variable benefit payments.
44
<PAGE>
The following table summarizes certain selected unaudited financial data for
the Company's Variable Annuities segment for the periods indicated.
VARIABLE ANNUITIES SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Policy charges.............. $ 206.0 $ 142.7 $ 196.8 $ 137.9 $ 96.2
Net investment income and
other income(2)............ (7.1) (4.0) (7.8) (5.2) (1.4)
-------- -------- -------- -------- --------
Total revenues............ 198.9 138.7 189.0 132.7 94.8
-------- -------- -------- -------- --------
Benefits and claims......... 3.6 1.7 2.9 2.3 1.4
Amortization of deferred
policy acquisition costs... 38.9 22.0 26.3 22.1 15.0
Operating expenses.......... 88.6 74.8 109.0 83.7 68.0
-------- -------- -------- -------- --------
Total benefits and
expenses................. 131.1 98.6 138.2 108.1 84.4
-------- -------- -------- -------- --------
Operating income before
income taxes........... $ 67.8 $ 40.2 $ 50.8 $ 24.6 $ 10.4
======== ======== ======== ======== ========
OTHER DATA:
Statutory premiums, deposits
and other
considerations(3).......... $4,959.7 $3,011.2 $4,399.3 $3,821.1 $2,414.2
Withdrawals................. 1,222.3 835.1 1,071.6 684.8 401.8
Policy reserves at period
end........................ 22,265.1 15,382.6 16,761.8 10,751.1 7,854.8
Ratio of policy
charges/average policy
reserves(4)................ 1.40% 1.48% 1.44% 1.48% 1.51%
</TABLE>
- --------
(1) Excludes the fixed option under the Company's variable annuity contracts
which is reported in the Company's Fixed Annuities segment.
(2) The Company's method of allocating net investment income results in a
charge (negative net investment income) to this segment which is
recognized as net investment income in the Corporate and Other segment.
The charge relates to non-invested assets which support this segment on a
statutory basis.
(3) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(4) Results for interim periods are annualized.
The Company offers individual variable annuities under The Best of America
brand name. In addition to The Best of America individual variable annuities,
the Company markets employer-sponsored variable annuities to both public
sector employees and teachers for use in connection with plans described under
Sections 457 and 403(b) of the Internal Revenue Code (the "IRC"), and to
private sector employees for use in connection with IRC Section 401(k) plans.
These employer-sponsored variable annuities are marketed under several brand
names, including Group Best of America. The Company also markets variable
annuities as "private label" products. Such products are offered through banks
and are also offered to members of The National Education Association of the
United States (the "NEA") under The NEA Valuebuilder brand name.
The Best of America. The Company's principal FPVA contracts are sold under
the brand names The Best of America--America's Vision and The Best of America
IV. These two brand name variable annuities accounted for $2.20 billion (or
50.1%) of the Company's variable annuity sales in 1995, and $9.68 billion (or
57.7%) of the Company's variable annuity policy reserves as of December 31,
1995. The Company's The Best of America--America's Vision product is intended
to appeal to distributors in the market for large initial deposits.
45
<PAGE>
The contract requires a minimum initial deposit of $15,000. The Company's The
Best of America IV product is intended primarily for the tax-qualified,
payroll deduction market, where initial deposits are often smaller. The Best
of America IV generally pays a lower up-front commission to distributors but
requires only $1,500 as an initial deposit. Both products generate an annual
asset fee and annual administration fees for the Company.
Group Best of America. These group variable annuity products accounted for
$1.22 billion (or 27.8%) of the Company's variable annuity sales in 1995, and
$2.93 billion (or 17.5%) of the Company's variable annuity policy reserves as
of December 31, 1995. Group Best of America products are typically offered
only on a tax-qualified basis. These products may be structured with a variety
of features which may be arranged in over 600 combinations of front-end loads,
back-end loads and asset-based fees.
Section 457 Contracts. These products accounted for $559.5 million (or
12.7%) of the Company's variable annuity sales in 1995, and $2.98 billion (or
17.8%) of the Company's variable annuity policy reserves as of December 31,
1995. The Company offers a variety of group variable annuity contracts that
are designed primarily for use in conjunction with plans described under IRC
Section 457. Section 457 permits employees of state and local governments to
defer a certain portion of their yearly income and invest such income on a
tax-deferred basis. These contracts typically generate an annual asset fee and
may also generate annual administration fees for the Company.
Private Label Variable Annuities. These products accounted for $368.2
million (or 8.4%) of the Company's variable annuity sales in 1995, and $1.08
billion (or 6.4%) of the Company's variable annuity policy reserves as of
December 31, 1995. The Company has developed several private label variable
annuity products in conjunction with other financial intermediaries, including
Bank One, Fidelity Asset Management Corporation and First Union Bank. These
products allow financial intermediaries to market products with substantially
the same features as The Best of America IV to their own customer bases under
their own brand names. The Company believes these private label products
strengthen the Company's ties to certain significant distributors of the
Company's products. These contracts generate an annual asset fee and may also
generate annual administration fees for the Company.
The NEA Valuebuilder. This product accounted for $44.4 million (or 1.0%) of
the Company's variable annuity sales in 1995, and $93.0 million (or 0.6%) of
the Company's variable annuity account balances as of December 31, 1995. The
Company offers individual variable annuity contracts to the Teacher Market
under Section 403(b) of the IRC. Section 403(b) permits teachers and other
employees of educational organizations to defer a certain portion of their
yearly income and invest such income on a tax-deferred basis. These contracts
generate an annual asset fee and may also generate annual administration fees
for the Company.
Fixed Annuities
The Company has sought to maintain its ability to grow profitably in a
variety of market environments. The Company believes that periods of rising
interest rates, that tend to cause lower sales growth in its Variable
Annuities segment, make its fixed annuity products more attractive to
consumers. In addition to providing balance to the Company's variable annuity
business, its fixed annuity business allows the Company to offer a
comprehensive portfolio of savings alternatives to its customers and
distributors as the Company seeks to capture a growing share of sales in all
distribution channels. The Fixed Annuities segment includes the fixed option
under the Company's variable annuity products. Customers who purchase variable
annuities are able to designate some or all of their deposits to fixed options
which, like the Company's fixed annuity contracts, offer a guarantee of
principal and a guaranteed interest rate for a specified period of time. The
Company includes such business in its Fixed Annuities segment because of its
similar characteristics. The fixed option under the Company's variable annuity
products accounted for $1.57 billion (or 84.2%) of the Company's fixed annuity
sales in 1995, and $8.83 billion (or 69.0%) of the Company's fixed annuity
policy reserves of December 31, 1995.
Fixed annuity products are marketed to individuals who choose to allocate
long-term savings to products that provide a guarantee of principal, a stable
net asset value and a guarantee of the interest rate to be credited to
46
<PAGE>
the principal amount for some period of time. The Company's fixed annuity
products are offered both to individuals and as group products to employers
for use in employee benefit programs. The Company's individual fixed annuity
products are distributed through its wholesale and retail channels and include
single premium deferred annuity contracts, flexible premium deferred annuity
contracts and single premium immediate annuity contracts. The Company's group
fixed annuity contracts are also distributed through its wholesale and retail
channels. The Company invests fixed annuity customer deposits in its general
account investment portfolio. See "--Investments." Unlike variable annuity
assets that are held in the Company's separate account, the Company bears the
investment risk on assets held in its general account. The Company attempts to
earn a spread by investing a customer's deposits for higher yields than the
interest rate it credits to the customer's fixed annuity contract.
The following table summarizes certain selected unaudited financial data for
the Company's Fixed Annuities segment for the periods indicated.
FIXED ANNUITIES SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Policy charges............. $ 12.4 $ 11.9 $ 16.4 $ 16.1 $ 15.8
Life insurance premiums.... 21.3 27.7 32.8 20.1 35.3
Net investment income...... 783.9 741.9 1,002.8 903.7 871.7
--------- --------- --------- --------- ---------
Total revenues........... 817.6 781.5 1,052.0 939.9 922.8
--------- --------- --------- --------- ---------
Benefits and claims........ 627.2 600.0 805.0 702.1 712.3
Policyholder dividends..... 0.2 0.2 0.2 (1.0) 0.3
Amortization of deferred
policy acquisition costs.. 25.7 19.6 29.5 29.9 28.3
Operating expenses......... 60.7 56.1 80.3 69.9 76.0
--------- --------- --------- --------- ---------
Total benefits and
expenses................ 713.8 675.9 915.0 800.9 816.9
--------- --------- --------- --------- ---------
Operating income before
income taxes.......... $ 103.8 $ 105.6 $ 137.0 $ 139.0 $ 105.9
========= ========= ========= ========= =========
OTHER DATA:
Statutory premiums,
deposits and other
considerations(2)......... $ 1,134.9 $ 1,385.7 $ 1,864.2 $ 1,308.6 $ 1,300.9
Interest credited.......... 595.7 576.8 775.7 680.9 673.3
Withdrawals and benefits... 1,023.3 833.3 1,151.6 906.8 1,360.3
Policy reserves at period
end....................... 13,220.8 12,425.5 12,784.0 11,247.0 10,154.1
Net spread earned (basis
points)(3)................ 198 189 192 212 203
</TABLE>
- --------
(1) Includes the fixed option under the Company's variable annuity contracts.
(2) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(3) Results for interim periods are annualized.
Fixed Option Under Variable Annuity Contracts. Fixed options under variable
annuity contracts accounted for $1.57 billion (or 84.2%) of the Company's
fixed annuity sales in 1995, and $8.83 billion (or 69.0%) of the Company's
fixed annuity policy reserves as of December 31, 1995. Fixed options are
available to customers who purchase certain of the Company's variable
annuities by designation of some or all of their deposits to such options. A
fixed option offers the customer a guarantee of principal and a guaranteed
interest rate for a specified period of time. The Company reports its fixed
option business in its Fixed Annuities segment because the
47
<PAGE>
characteristics of such business are similar to those of its fixed annuity
business. Although the customer may elect, subject to limitations for certain
products, to transfer balances from the fixed option to other investment
options, it is the Company's experience that historically few have made such
election. As part of a variable annuity, the Company receives asset and
administrative fees for the fixed option in addition to earning a spread on
the assets supporting the option.
Single Premium Deferred Annuity ("SPDA") Contracts. SPDA contracts accounted
for $61.7 million (or 3.3%) of the Company's fixed annuity sales in 1995, and
$1.42 billion (or 11.1%) of the Company's fixed annuity policy reserves as of
December 31, 1995. SPDA contracts are distributed through broker/dealers,
financial planners, banks and Nationwide Insurance Enterprise insurance
agents. An SPDA contract is a savings vehicle in which the customer makes a
single deposit with the Company. The Company guarantees the customer's
principal and credits the customer's account with earnings at an interest rate
that is stated and fixed for an initial period, typically at least one year.
Thereafter, the Company resets, typically annually, the interest rate credited
to the contract based upon market and other conditions. After a specified
number of years, the customer may elect to take the proceeds of the annuity as
a single payment or as a specified income for life or for a fixed number of
years. No front-end sales charges are imposed for the Company's SPDA
contracts. All such contracts, however, provide for the imposition of certain
surrender charges, which are assessed against withdrawals in excess of
specified amounts and which occur during the surrender charge period. The
surrender charges are typically set within the range of 7% and 0% and
typically decline from year to year, disappearing after seven contract years.
Flexible Premium Deferred Annuity ("FPDA") Contracts. FPDA contracts
accounted for $160.9 million (or 8.6%) of the Company's fixed annuity sales
for 1995, and $1.54 billion (or 12.1%) of the Company's fixed annuity policy
reserves as of December 31, 1995. FPDA contracts are distributed through
broker/dealers, financial planners, banks and Nationwide Insurance Enterprise
insurance agents. FPDA contracts are typically marketed to teachers and
employees of tax-exempt organizations as tax-qualified retirement programs.
Under these contracts, the Company accepts a single deposit or a series of
deposits. Deposits may be paid at intervals which are either regular or
irregular. FPDA contracts contain substantially the same guarantee of
principal and interest rate terms included in the Company's SPDA contracts.
Surrender charges are typically set within the range of 7% and 0% and
typically decline from year to year, disappearing after seven contract years.
Single Premium Immediate Annuity ("SPIA") Contracts. SPIA contracts
accounted for $72.6 million (or 3.9%) of the Company's fixed annuity sales for
1995, and $995.9 million (or 7.8%) of the Company's fixed annuity policy
reserves as of December 31, 1995. The Company's SPIA contracts are offered
through its retail and wholesale distribution channels and are offered as
either direct purchases or as fixed annuity options under the Company's
various individual and group annuity contracts. An SPIA is an annuity that
requires a one-time deposit in exchange for periodic annuity benefit payments.
SPIA contracts are often purchased by persons at or near retirement age who
desire a steady stream of future income.
Life Insurance
The Company's Life Insurance segment is composed of a wide range of whole
life, universal life, term life and variable universal life products. In
recent years, the Company has placed particular emphasis within this segment
on the sale of variable life insurance products that offer multiple investment
options. From 1991 to 1995, first year premiums related to the Company's
variable universal life products grew from $15.6 million to $96.6 million, a
compound annual growth rate of 57.7%. The Company distributes its variable
universal life insurance products through its wholesale distribution channels
as well as through Nationwide Insurance Enterprise Insurance agents. The
Company's target markets for its life insurance products include the holders
of personal automobile and homeowners' insurance policies issued by the
Nationwide Insurance Enterprise and select customers to whom the accumulation
of cash values is of paramount importance. As of September 30, 1996,
approximately 10% of the Nationwide Insurance Enterprise's 7.7 million
property/casualty policyholders also owned at least one of the Company's life
insurance products. The Company distributes its traditional and universal life
insurance products through Nationwide Insurance Enterprise insurance agents.
See "Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--
48
<PAGE>
Intercompany Agreement--Nationwide Insurance Enterprise Insurance Agents."
During 1995, approximately 57.7% of first year premiums were provided by
Nationwide Insurance Enterprise insurance agents and approximately 42.3% were
provided by the Company's wholesale distribution channels.
The following table summarizes certain selected unaudited financial data for
the Company's Life Insurance segment for the periods indicated.
LIFE INSURANCE SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -----------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Policy charges.............. $ 62.8 $ 52.0 $ 71.3 $ 60.3 $ 52.3
Life insurance premiums..... 129.7 123.7 166.3 156.5 153.0
Net investment income....... 130.1 127.8 171.3 166.3 165.8
Other income................ 0.3 0.2 0.2 -- --
--------- --------- --------- --------- ---------
Total revenues............ 322.9 303.7 409.1 383.1 371.1
--------- --------- --------- --------- ---------
Benefits and claims......... 158.0 149.1 202.0 191.0 184.0
Policyholder dividends...... 31.2 29.2 39.7 39.7 42.7
Amortization of deferred
policy acquisition costs... 32.2 25.5 31.0 29.5 26.9
Operating expenses.......... 55.3 49.0 68.8 69.9 67.8
--------- --------- --------- --------- ---------
Total benefits and
expenses................. 276.7 252.8 341.5 330.1 321.4
--------- --------- --------- --------- ---------
Operating income before
income taxes........... $ 46.2 $ 50.9 $ 67.6 $ 53.0 $ 49.7
========= ========= ========= ========= =========
OTHER DATA:
First year premiums (sales):
Traditional life........... $ 24.0 $ 22.6 $ 31.9 $ 32.1 $ 33.2
Universal life/variable
universal life............ 87.0 67.3 95.4 87.2 60.6
Life insurance in force:
Traditional life........... 18,339.9 16,885.7 17,657.9 16,381.6 15,024.3
Universal life/variable
universal life............ 17,534.0 15,070.3 15,748.5 13,745.9 11,780.8
</TABLE>
Traditional Life Insurance Products. The Company offers whole life and term
life insurance. Whole life insurance combines a death benefit with a savings
plan that increases gradually in amount over a period of years. The customer
pays a level premium over the customer's expected lifetime. The customer may
borrow against the savings and also has the option of surrendering the policy
and receiving the accumulated cash value rather than the death benefit. Term
life insurance provides only a death benefit without any savings component.
These traditional life insurance products are distributed on a retail basis by
Nationwide Insurance Enterprise insurance agents.
Universal Life and Variable Universal Life Insurance Products. The Company
offers universal life and variable universal life insurance products including
both flexible premium and single premium designs. These products provide life
insurance under which the benefits payable upon death or surrender depend upon
the policyholder's account value. Universal life insurance provides whole life
insurance with flexible premiums and adjustable death benefits. For universal
life, the policyholder's account value is credited based on an adjustable rate
of return set by the Company relating to current interest rates. For variable
universal life, the policyholder's account value is credited with the
investment experience of the mutual funds chosen by the customer. The variable
universal life products also typically include a general account guaranteed
interest investment option. All of the Company's variable universal life
insurance products are marketed under the Company's The Best of America--Life
Planning Series brand name and have the same wide range of investment options
as the Company's variable annuity products. These products are distributed on
a retail basis by Nationwide Insurance Enterprise insurance agents as well as
through wholesale distribution channels by broker/dealers, financial planners
and banks.
49
<PAGE>
MARKETING AND DISTRIBUTION
The Company defines wholesale channels of distribution as channels in which
an unaffiliated company, such as a securities broker/dealer, pension plan
administrator, bank or other financial institution, sells the Company's
products to its own customer base. The Company defines retail channels as
those in which the Company's representatives, such as Nationwide Insurance
Enterprise insurance agents, agents of the Company's sales subsidiaries and
affiliates or individual financial planners, market products directly to a
customer base identified by the Company. The Company provides, through both
its retail and wholesale channels, the means for employers sponsoring tax-
favored retirement plans (such as those described in IRC Sections 401(k),
403(b) and 457) to allow their employees to make contributions to such plans
through payroll deductions. Typically, the Company receives the right from an
employer to market products to employees and arrange to deduct periodic
deposits from the employees' regular paychecks. The Company believes that the
payroll deduction market is characterized by more predictable levels of sales
than other markets because these customers are less likely, even in times of
market volatility, to stop making annuity deposits than customers in other
markets. In addition, the Company believes that payroll deduction access to
customers provides significant insulation from competition by providing the
customer with a convenient, planned method of periodic saving. In both the
Pension Market, where the Company's products are distributed primarily on a
wholesale basis, and in the Public Sector and Teacher Markets, where the
Company's products are distributed primarily on a retail basis, payroll
deduction is the primary method used for collecting premiums and deposits.
The following table summarizes certain selected unaudited financial data for
the Company's distribution channels.
STATUTORY PREMIUMS, DEPOSITS AND OTHER CONSIDERATIONS BY DISTRIBUTION
CHANNEL(1)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED FOR THE YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------
1996 1995 1994 1993
--------------- --------------- --------------- ---------------
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale channels:
Investment dealers..... $2,820.1 41.6% $2,835.4 41.7% $2,279.0 40.7% $1,643.5 39.1%
Pension market......... 1,460.5 21.5 1,573.7 23.1 1,366.5 24.4 726.1 17.3
Financial
institutions.......... 677.3 10.0 515.4 7.6 324.3 5.8 291.6 7.0
-------- ------ -------- ------ -------- ------ -------- ------
Total wholesale
channels............. 4,957.9 73.1 4,924.5 72.4 3,969.8 70.9 2,661.2 63.4
-------- ------ -------- ------ -------- ------ -------- ------
Retail channels:
Public sector and
teacher markets....... 1,047.1 15.5 1,244.9 18.3 1,104.4 19.8 977.9 23.3
Nationwide Insurance
Enterprise insurance
agents................ 385.9 5.7 446.5 6.6 376.3 6.7 355.4 8.4
-------- ------ -------- ------ -------- ------ -------- ------
Total retail
channels............. 1,433.0 21.2 1,691.4 24.9 1,480.7 26.5 1,333.3 31.7
-------- ------ -------- ------ -------- ------ -------- ------
Other(2)................ 388.2 5.7 182.1 2.7 148.5 2.6 205.3 4.9
-------- ------ -------- ------ -------- ------ -------- ------
Total statutory
premiums, deposits and
other considerations.. $6,779.1 100.0% $6,798.0 100.0% $5,599.0 100.0% $4,199.8 100.0%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- --------
(1) Statutory data have been derived from the Annual and Quarterly Statements
of Nationwide Life, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
(2) Statutory premiums, deposits and other considerations from Nationwide
Insurance Enterprise employee and agent benefit plans.
50
<PAGE>
Wholesale Channels
Investment Dealers. The Company sells individual and group variable
annuities, fixed annuities and variable life insurance through broker/dealers
in all 50 states and the District of Columbia. The Company has access to over
1,000 broker/dealers and over 30,000 registered representatives. Target
markets include retirement planning for individuals, retirement planning for
institutions of higher education and 501(c)(3) hospitals, participant-directed
401(k) plans covering less than 1,000 lives, small business life insurance
(fewer than 500 employees) and IRA rollovers and tax-sheltered annuity
transfers. The Company historically has focused on distributing through mid-
sized regional broker/dealers and financial planning firms. The Company
believes that it has strong broker/dealer relationships based on its diverse
product mix, large selection of fund options and administrative technology. In
addition to such relationships, the Company believes its financial strength
and The Best of America brand name are competitive advantages in this
distribution channel. The Company regularly seeks to add new broker/dealers to
its distribution network.
Pension Market. The Company defines the Pension Market as 401(k) plans
sponsored by employers as part of employee retirement programs. The Company
markets group variable annuities, group fixed annuities and record-keeping
services to these plan sponsors primarily through over 200 regional pension
plan administrators located in 45 states. The Company targets employers having
between 25 and 2,000 employees because it believes that these plan sponsors
tend to require more extensive record-keeping services from pension plan
administrators and therefore tend to become long-term customers. As of
September 30, 1996, 401(k) plans administered by the Company included over
280,000 participants. These participants generally make deposits through
payroll deductions. The Company believes, based on industry survey data, that
it is the third largest administrator of 401(k) plans based on total number of
plans.
Financial Institutions. The Company markets individual variable annuities
(under its brand names and on a private-label basis), individual fixed
annuities and variable universal life insurance through financial
institutions, consisting primarily of banks and their subsidiaries. The
Company seeks to establish marketing relationships with financial institutions
having assets of $500.0 million or more. From January 1, 1991 to September 30,
1996, the number of financial institutions through which the Company
distributes its products increased from 7 to 125. The Company is actively
seeking to increase the number of financial institutions with which it has
distribution arrangements. The Company believes that its expertise in training
financial institution personnel to sell annuities, its breadth of product
offerings, its financial strength and the Nationwide and The Best of America
brand names are competitive advantages in this distribution channel. See
"Certain Relationships and Related Transactions--New Agreement with the
Nationwide Insurance Enterprise--Intercompany Agreement--License to Use
Nationwide Name and Service Marks".
Retail Channels
Public Sector and Teacher Markets. The Company markets various products and
services on a retail basis through several subsidiary sales organizations to
both the Public Sector and Teacher Markets. With respect to the Public Sector
Market, the Company markets group variable annuities and fixed annuities to
state and local governments for use in their IRC Section 457 retirement
programs. Section 457 permits employees of state and local government entities
and certain tax-exempt organizations to defer receipt of up to 33% of their
taxable income, not to exceed $7,500 per year, and have such amounts
accumulate on a tax-deferred basis until received. The Company currently
markets such products to, and administers Section 457 retirement programs for,
approximately 6,000 state and local government entities in 49 states. The
Company believes that its existing relationships with state and local
government entities and the Company's sponsorship by such entities as the
National Association of Counties ("NACO") and The United States Conference of
Mayors ("USCM") provide it with distinct competitive advantages in this
market. NACO sponsorship, which began in 1980 and has been renewed three
times, expires on December 31, 2005, and USCM sponsorship, which began in 1979
and has been renewed twice, expires on December 31, 2004.
With respect to the Teacher Market, the Company has an exclusive contractual
arrangement with the NEA to offer and sell certain products to its 2.2 million
members. Under The NEA Valuebuilder brand name, the
51
<PAGE>
Company markets both qualified and non-qualified (under IRC Section 403(b))
individual variable annuity contracts. The Company also offers IRAs in this
market. The Teacher Market is primarily serviced by the Company's network of
approximately 140 representatives known as Valuebuilder Investment
Professionals. As of September 30, 1996, the Company administers plans for
over 1,800 school districts in 48 states. Section 403(b) permits teachers and
employees of certain tax-exempt organizations to defer receipt of a portion of
their taxable income, not to exceed $9,500 per year, and invest the amount
deferred in tax-deferred annuity products. The Company's marketing approach to
these customers emphasizes educational seminars and other targeted
communication channels such as direct mail. The NEA exclusive contractual
arrangement, which began in 1990, automatically renewed on July 26, 1995 for
an additional 5-year period.
Nationwide Insurance Enterprise Insurance Agents. The Company sells
traditional life, universal life and variable universal life insurance
products and individual annuities through approximately 4,500 licensed
Nationwide Insurance Enterprise insurance agents who primarily target the
holders of personal automobile and homeowners' insurance policies issued by
the Nationwide Insurance Enterprise. As of September 30, 1996, approximately
10% of the Nationwide Insurance Enterprises' 7.7 million property/casualty
policyholders also owned at least one of the Company's life insurance
products. The Nationwide Insurance Enterprise insurance agents sell
exclusively Nationwide Insurance Enterprise products and may not offer
products which compete with those of the Company. See "Certain Relationships
and Related Transactions--New Agreements with Nationwide Insurance
Enterprise--Intercompany Agreement--Nationwide Insurance Enterprise Insurance
Agents."
Mutual Funds
Nationwide Mutual Funds. In addition to including Company-managed mutual
funds among the investment options for its variable products, the Company
markets 10 public, open-end mutual funds through banks and Nationwide
Insurance Enterprise insurance agents and directly to Nationwide Insurance
Enterprise employees and their families. These products employ the existing
investment management, shareholder services, accounting and administrative
capabilities developed by the Company to support its variable annuity
products. As of September 30, 1996, these mutual funds had $5.5 billion of
assets under management, of which $3.4 billion related to variable annuities
and variable life insurance and $2.1 billion related to retail mutual fund
customers.
CORPORATE AND OTHER SEGMENT
The Corporate and Other segment includes net investment income on
investments not allocated to the three product segments; all realized
investment gains and losses; investment management fees, other revenues and
operating expenses of Nationwide mutual funds other than the portion allocated
to the Variable Annuities and Life Insurance segments; commissions and other
income earned by the marketing and distribution subsidiaries of the Company;
and revenues, benefits and expenses associated with group annuity contracts
issued to Nationwide Insurance Enterprise employee and agent benefit plans.
52
<PAGE>
The following table summarizes certain selected unaudited financial data for
the Company's Corporate and Other segment for the periods indicated.
CORPORATE AND OTHER SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net investment income............. $ 111.8 $ 96.0 $ 137.7 $ 154.3 $ 101.2
Other income(1)................... 45.4 37.9 50.9 40.6 43.2
-------- -------- -------- -------- --------
Total revenues.................. 157.2 133.9 188.6 194.9 144.4
-------- -------- -------- -------- --------
Interest credited................. 79.0 77.1 105.6 97.3 84.5
Operating expenses................ 47.4 37.9 55.5 57.3 56.3
-------- -------- -------- -------- --------
Total benefits and expenses..... 126.4 115.0 161.1 154.6 140.8
-------- -------- -------- -------- --------
Operating income before
income taxes(1).............. $ 30.8 $ 18.9 $ 27.5 $ 40.4 $ 3.6
======== ======== ======== ======== ========
OTHER DATA(2):
Nationwide mutual fund assets..... $2,026.0 $1,813.8 $1,896.7 $1,472.3 $1,608.4
</TABLE>
- --------
(1) Excludes realized gains (losses) on investments.
(2) Excludes mutual funds selected as investment options under the Company's
variable annuity and variable universal life insurance contracts and
mutual funds selected as investment options under Nationwide Insurance
Enterprise employee and agent benefit plans.
Interest expense related to the Note Offering and the Capital Securities
Offering will be recorded in the Corporate and Other segment which will reduce
income before taxes for the Corporate and Other segment in periods after the
completion of such offerings.
LIFE INSURANCE UNDERWRITING
Life insurance policies are individually underwritten based on standardized
underwriting guidelines and procedures. After initial processing, each file is
reviewed and additional information (such as medical examinations, doctors'
statements and special medical tests) is obtained to make an underwriting
decision. The Company follows detailed, uniform underwriting procedures
designed to assess and quantify insurance risks before issuing life insurance
policies to individuals.
LIFE INSURANCE AND ANNUITY RESERVES
In accordance with applicable insurance regulations, the Company records in
its statutory financial statements actuarially determined reserves that are
calculated to meet future obligations under outstanding insurance contracts.
The reserves are based on statutorily recognized methods using prescribed
morbidity and mortality tables and interest rates. Reserves include unearned
premiums, premium deposits, claims that have been reported but are not yet
paid, claims that have been incurred but have not been reported and claims in
the process of settlement. The Company's reserves satisfy applicable statutory
requirements.
The reserves reflected in the consolidated financial statements of the
Company are calculated based on GAAP. These reserves are based upon the
Company's best estimates of mortality, persistency, expenses and investment
income with appropriate provisions for adverse statistical deviation and the
use of the net level premium method for all non-interest-sensitive products
and the retrospective deposit method for interest-sensitive products. GAAP
reserves differ from statutory reserves due to the use of different
assumptions regarding mortality and interest rates and the introduction of
lapse assumptions into the GAAP reserve calculation.
53
<PAGE>
REINSURANCE
The Company follows the customary industry practice of reinsuring ("ceding")
a portion of its life insurance risks with other companies. The Company cedes
insurance principally to reduce net liability on individual risks, to provide
protection against large losses and to obtain greater diversification of
risks. Although reinsurance does not legally discharge the ceding insurer of
its primary liability for the full amount of policies reinsured, it does make
the reinsurer liable to the insurer to the extent of the reinsurance ceded.
The maximum amount of individual ordinary life insurance retained by the
Company on any one life is $500,000. The Company cedes insurance primarily on
an automatic basis, under which risks are ceded to a reinsurer on specific
blocks of business where the underlying risks meet certain predetermined
criteria, and on a facultative basis, under which the reinsurer's prior
approval is required for each risk reinsured. The Company also cedes insurance
on a case-by-case basis particularly where the Company may be writing new
risks or is unwilling to retain the full costs associated with new lines of
business. The Company's principal reinsurers of individual life policies (and
their corresponding A.M. Best ratings) at December 31, 1995 were: American
United Life Insurance Company (A+), Reinsurance Group of America (A+), Lincoln
National Life Insurance Company (A+), Franklin Life Insurance Company (A+),
Business Men's Assurance Company (A), Indianapolis Life Insurance Company (A+)
and Security Life of Denver Insurance Company (A+). See "--Ratings."
Effective January 1, 1996, Nationwide Life reinsured all of its accident and
health and group life insurance business to other members of the Nationwide
Insurance Enterprise. See "Certain Relationships and Related Transactions--
Existing Agreements with Nationwide Insurance Enterprise--Coinsurance
Agreements."
INVESTMENTS
General
The Company's assets are divided between separate account and general
account assets. As of September 30, 1996, $24.7 billion (or 56%) of the
Company's total assets were held in separate accounts and $19.7 billion (or
44%) were held in the Company's general account, including $17.9 billion of
general account investments. Separate account assets consist primarily of
deposits from the Company's variable annuity business. Most separate account
assets are invested in various mutual fund options available within the
variable annuity products sold by the Company. The investment risk in the
Company's separate account assets is borne by the Company's customers. General
account assets consist mainly of investments generated by premiums on life
insurance products and deposits in the Company's Fixed Annuities segment. The
Company generates profits on these products, in part, based on the spread
between the yield on general account invested assets and crediting rates on
these products.
The Company's general account investment policies emphasize high credit
quality, diversification across asset classes and individual investment risks,
and a buy and hold strategy. As noted in the table below, the Company's
general account assets are invested primarily in fixed maturity securities and
commercial mortgage loans. The Company has a general policy of diversifying
investments within asset categories. Additionally, the Company's investment
policy provides that fixed maturity investments are limited to purchases of
investment grade securities or unrated securities which, in the opinion of the
Company, should qualify for such rating. The Company monitors its exposure to
individual borrowers, credit risks, industries or property types and
geographic locations. The Company's investments are subject to suitability and
diversification requirements under applicable insurance laws. See "Business--
Regulation." The Investment Committee of the Board of Directors of Nationwide
Life, which is comprised of the Chairman and five outside directors, meets ten
times a year. Such committee approves investment policy and strategy, approves
all mortgage loans and large private placements and reviews and ratifies all
other investments. In relation to the life insurers reporting to the American
Council of Life Insurance ("ACLI"), the Company's general account investment
portfolio has achieved (i) higher net investment yields, (ii) lower bond
default rates and (iii) lower mortgage delinquency rates, in each case in each
of the past five years.
54
<PAGE>
The following table summarizes the Company's consolidated invested assets by
asset category as of September 30, 1996 and December 31, 1995.
CONSOLIDATED INVESTED ASSETS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
% OF % OF
CARRYING GENERAL ACCOUNT CARRYING GENERAL ACCOUNT
VALUE INVESTED ASSETS VALUE INVESTED ASSETS
--------- --------------- --------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities(1):
Public.................... $ 8,236.2 46.0% $ 8,609.8 48.3%
Private................... 3,732.8 20.9 3,891.8 21.8
Mortgage loans, net:
Commercial................ 5,137.6 28.7 4,624.3 25.9
Residential............... 2.8 -- 3.1 --
Real estate, net........... 235.5 1.3 229.4 1.3
Policy loans............... 364.1 2.0 336.4 1.9
Equity securities(1)....... 53.0 0.3 37.5 0.2
Other long-term
investments............... 59.8 0.3 62.0 0.4
Short-term investments..... 98.1 0.5 42.7 0.2
--------- ----- --------- -----
Total general account
invested assets......... $17,919.9 100.0% $17,837.0 100.0%
========= ===== ========= =====
Total separate account
assets.................. $24,673.5 $18,591.1
========= =========
</TABLE>
- --------
(1) As of September 30, 1996, all fixed maturities and equity securities are
classified as available-for-sale and are carried at fair value.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its product lines. The Company's general
account investment assets are primarily managed in a number of pools that are
separated by weighted average maturity of the assets in the pools. Each
product line has an investment strategy defined in terms of the percentage of
new investments the Company wishes to have invested in each pool. The
Company's actuaries combine this information with the amount of new
investments needed for each line to arrive at the amount of new investments
needed for each pool by month. The investments acquired for each pool are
shared on a proportional basis by each of the lines requesting investments in
the pool based on their actual investment needs.
The following table summarizes the net investment yield of the Company's
general account invested assets relative to that of the life insurers
reporting to the ACLI.
NET INVESTMENT YIELD
<TABLE>
<CAPTION>
THE BASIS POINT
YEAR COMPANY ACLI(1) DIFFERENCE
- ---- ------- ------- -----------
<S> <C> <C> <C>
1991................................................ 9.34% 9.09% 25
1992................................................ 8.93 8.58 35
1993................................................ 8.57 8.04 53
1994................................................ 8.37 7.63 74
1995................................................ 8.21 7.90 31
</TABLE>
- --------
(1) Source: ACLI Statistical Bulletin #96-5 (September 9, 1996) entitled "Rate
of Investment Income of U.S. Legal Reserve Life Insurance Companies."
55
<PAGE>
Fixed Maturity Securities
As of September 30, 1996, general account fixed maturity securities were
$11.9 billion (or 67%) of the carrying value of consolidated general account
invested assets. As of such date, public and private fixed maturity securities
constituted $8.2 billion (or 68.9%) and $3.7 billion (or 31.1%), respectively,
of total general account fixed maturity securities. The Company's general
account fixed maturity securities portfolio consists primarily of investment
grade corporate fixed maturity securities, high-quality mortgage-backed
securities and U.S. government and agency obligations.
The following table summarizes the composition of the Company's general
account fixed maturity securities by category as of September 30, 1996.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- COMPOSITION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
CARRYING
VALUE % OF TOTAL
-------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
U.S. government/agencies.......................... $ 184.8 1.5%
State and political subdivisions.................. 1.7 --
Mortgage-backed securities:
U.S. government/agencies......................... 3,590.1 30.0
Non-government/agencies.......................... -- --
Corporate......................................... 8,192.4 68.5
-------------- ----------
Total........................................... $ 11,969.0 100.0%
============== ==========
</TABLE>
The following table sets forth scheduled maturities for the Company's
general account fixed maturity securities as of September 30, 1996.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- SCHEDULED MATURITIES (1)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
CARRYING
VALUE % OF TOTAL
-------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Due in one year or less........................... $ 399.4 3.3%
Due after one year through five years............. 3,988.1 33.3
Due after five years through 10 years............. 2,738.3 22.9
Due after 10 years................................ 1,253.1 10.5
Mortgage-backed securities........................ 3,590.1 30.0
-------------- ----------
Total fixed maturity securities................. $ 11,969.0 100.0%
============== ==========
</TABLE>
- --------
(1) General account fixed maturity securities with call dates are classified
on their earliest call date.
The average duration and average maturity of the Company's general account
fixed maturity securities as of September 30, 1996 were approximately 3.78 and
8.36 years, respectively. As a result, the market value of the Company's
general account investments may fluctuate significantly in response to changes
in interest rates. In addition, the Company may also be likely to experience
investment losses to the extent its liquidity needs require the disposition of
general account fixed maturity securities in unfavorable interest rate
environments.
The Company's portfolio of general account investment grade fixed maturity
securities is diversified by number and type of issuer. As of September 30,
1996, general account investment grade fixed maturity securities included the
securities of over 554 issuers, with no issuer, other than the U.S. government
or its agencies,
56
<PAGE>
representing more than 1.0% of the carrying value of general account
investment grade fixed maturity securities. As of September 30, 1996, none of
these investments was classified by the Company as a problem investment or had
been restructured.
Below investment grade fixed maturity securities in the Company's general
account as of September 30, 1996 included the securities of 29 issuers
representing approximately 2% of the carrying value of total fixed maturity
securities. The Company's investment policy provides that fixed maturity
investments are limited to purchases of investment grade securities or unrated
securities which, in the opinion of the Company, should qualify for such
rating. All of the below grade fixed maturity securities held in the Company's
general account as of September 30, 1996 were investment grade securities when
purchased by the Company.
The NAIC assigns securities quality ratings and uniform valuations called
"NAIC Designations" which are used by insurers when preparing their annual
statements. The NAIC assigns designations to publicly traded as well as
privately placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a designation in class 1 being of the highest
quality. Of the Company's general account fixed maturity securities, 98.0% by
the carrying value were in the highest two NAIC Designations as of September
30, 1996.
The following tables set forth an analysis of the credit quality, as
determined by NAIC Designation, of the Company's general account fixed
maturity securities portfolio and general account public fixed maturity
securities portfolio as of September 30, 1996 and December 31, 1995.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
-----------------------------------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------- -------------------------- ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A.................. $ 8,188.0 68.4% $ 8,659.9 69.3%
2 Baa....................... 3,545.8 29.6 3,562.9 28.5
3 Ba........................ 156.1 1.3 224.1 1.8
4 B......................... 75.5 0.1 44.9 0.4
5 Caa and lower............. 3.6 0.1 2.8 --
6 In or near default........ -- -- 7.0 --
Redeemable preferred stock and other..... -- -- -- --
---------- ---------- ---------- ----------
Total................................. $ 11,969.0 100.0% $ 12,501.6 100.0%
========== ========== ========== ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of September 30, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
57
<PAGE>
GENERAL ACCOUNT PUBLIC FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
--------------------------- -------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------- ------------- ------------ ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A.................. $ 6,392.2 77.6% $ 6,730.2 78.2%
2 Baa....................... 1,762.2 21.4 1,811.0 21.0
3 Ba........................ 47.4 0.6 49.0 0.6
4 B......................... 34.4 0.4 19.6 0.2
5 Caa and lower............. -- -- -- --
6 In or near default........ -- -- -- --
Redeemable preferred stock and other..... -- -- -- --
--------- ---------- ---------- ---------
Total................................. $ 8,236.2 100.0% $ 8,609.8 100.0%
========= ========== ========== =========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of September 30, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
The Company invests in private fixed maturity securities because of the (i)
generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business
covenants available in private fixed maturity security loan agreements and
(iii) stronger prepayment protection. Although private fixed maturity
securities are not registered with the Commission and generally are less
liquid than public fixed maturity securities, restrictive financial and
business covenants included in private fixed maturity security loan agreements
generally are designed to compensate for the impact of increased liquidity
risk. Substantially all of the private fixed maturity securities that the
Company holds are participations in issues that are also owned by other
investors. In addition, some of the private fixed maturity securities are
rated by nationally recognized rating agencies and substantially all have been
assigned a rating designation by the NAIC.
The following table sets forth an analysis of the credit quality, as
determined by NAIC Designation, of the Company's general account private fixed
maturity securities portfolio as of September 30, 1996 and December 31, 1995.
GENERAL ACCOUNT PRIVATE FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
--------------------------- --------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------- ------------- ------------- ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A.................. $ 1,795.8 48.1% $ 1,929.7 49.6%
2 Baa....................... 1,783.6 47.7 1,751.9 45.0
3 Ba........................ 108.7 3.0 175.1 4.5
4 B......................... 41.1 1.1 25.3 0.6
5 Caa and lower............. 3.6 0.1 2.8 0.1
6 In or near default........ -- -- 7.0 0.2
Redeemable preferred stock and other..... -- -- -- --
---------- ---------- ----------- ----------
Total................................. $ 3,732.8 100.0% $ 3,891.8 100.0%
========== ========== =========== ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of September 30, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
58
<PAGE>
The following table sets forth the bond default rates for the Company and
the life insurers reporting to the ACLI for the periods indicated.
COMPANY AND LIFE INDUSTRY
BOND DEFAULT RATES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Company................................. 0.04% 0.03% 0.01% 0.03% 0.13%
ACLI.................................... 0.09 0.19 0.28 0.60 0.74
</TABLE>
- --------
(1) Source: ACLI Statistical Bulletins entitled "Quality Distribution of Bond
Holdings of U.S. Legal Reserve Life Insurance Companies:" Bulletin #'s 96-
2, 95-7, 94-5, 93-5 and 92-2, dated May 15, 1996, July 24, 1995, July 28,
1994, August 3, 1993 and July 17, 1992, respectively.
The Company maintains significant general account investments in mortgage-
backed securities ("MBS"). The Company's general account MBS investments
include residential MBS and commercial MBS. As of September 30, 1996, MBS were
$3.59 billion (or 30.0%) of the carrying value of the general account fixed
maturity securities, all of which were guaranteed by the U.S. government or an
agency of the U.S. government.
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to its general
account fixed maturity securities portfolio. The objective of the Company's
general account MBS investments is to provide reasonable cash flow stability
and increased yield. General account MBS investments include collateralized
mortgage obligations ("CMOs") and mortgage-backed pass- through securities.
The Company's general account MBS investments do not include interest-only
securities or principal-only securities or other MBS which may exhibit extreme
market value volatility.
Prepayment risk is an inherent risk of holding MBS. However, the degree of
prepayment risk is particular to the type of MBS held. The Company limits its
exposure to prepayments by purchasing less volatile types of MBS. As of
September 30, 1996, $2.9 billion (or 81.5%) of the carrying value of the
general account MBS portfolio was invested in planned amortization class CMOs
("PACs"). PACs are securities whose cash flows are designed to remain constant
over a variety of mortgage prepayment environments. Other classes in the CMO
security are structured to accept the volatility of mortgage prepayment
changes, thereby insulating the PAC class. Of the remaining general account
MBS portfolio, $2.8 million (or 0.1%) was invested in mortgage-backed pass-
throughs or sequential CMOs. Pass-throughs are securities in which the monthly
cash flows of principal and interest (both scheduled and prepayments)
generated by the underlying mortgages are distributed on a pro rata basis to
the holders of securities. A sequential MBS is structured to divide the CMO
security into sequentially ordered classes. Receipt of principal payments are
made currently on all classes. While these securities are more sensitive to
prepayment risk than PACs, the Company does not consider them highly volatile
securities.
59
<PAGE>
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio as of September 30, 1996.
GENERAL ACCOUNT MORTGAGE-BACKED SECURITIES -- INVESTMENT TYPE(1)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------
CARRYING
VALUE % OF TOTAL
------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accrual............................................ $ 40.4 1.1%
PAC................................................ 2,926.2 81.5
Sequential......................................... 2.8 0.1
Scheduled.......................................... 143.8 4.0
TAC................................................ 87.1 2.4
VADM............................................... 389.8 10.9
------------- ----------
Total............................................ $ 3,590.1 100.0%
============= ==========
</TABLE>
- --------
(1) All general account mortgage-backed securities are agency-backed.
Pursuant to the Company's investment policies, the Company does not invest
in derivative securities other than MBS.
Mortgage Loans
As of September 30, 1996, general account mortgage loans were $5.1 billion
(or 28.7%) of the carrying value of consolidated general account invested
assets. As of such date, commercial mortgage loans constituted substantially
all (99.9%) of total general account mortgage loans with the remainder being
79 residual residential loans originated prior to 1981 with a principal
balance of $2.8 million. These mortgages, substantially all of which are made
on a non-recourse basis, consist primarily of fixed rate mortgages on existing
income-producing properties. As of September 30, 1996, there were two second
mortgages totaling $2.6 million and no construction loans, participating or
convertible mortgages or land development loans. Commitments to fund mortgage
loans of $335.4 million extending into 1997 were outstanding as of the date of
this Prospectus.
The following tables set forth the distribution by property type and region
of the Company's commercial mortgages as of September 30, 1996 and December
31, 1995.
GENERAL ACCOUNT COMMERCIAL MORTGAGE
LOAN PORTFOLIO -- PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Property Type(1):
Apartment......... 184 $1,186.2 22.8% 159 $ 995.8 21.3%
Retail............ 418 2,311.4 44.5 396 2,237.3 47.8
Office............ 143 870.6 16.8 131 785.8 16.8
Industrial........ 178 825.3 15.9 159 660.9 14.1
Hotel/motel....... 1 0.5 -- 2 1.5 --
Other............. 2 0.4 -- 3 0.9 --
--- -------- ----- --- -------- -----
Total........... 926 $5,194.4 100.0% 850 $4,682.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
- --------
(1) As defined by the ACLI.
60
<PAGE>
GENERAL ACCOUNT COMMERCIAL MORTGAGE
LOAN PORTFOLIO -- REGION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Region(1):
New England............ 34 $ 232.5 4.5% 30 $ 197.5 4.2%
Middle Atlantic........ 60 357.0 6.9 57 350.0 7.5
East North Central..... 177 1,018.6 19.6 160 930.9 19.9
West North Central..... 33 244.5 4.7 36 262.4 5.6
South Atlantic......... 209 1,068.9 20.6 187 901.4 19.3
East South Central..... 66 324.5 6.2 63 307.1 6.5
West South Central..... 104 720.9 13.9 91 618.4 13.2
Mountain............... 46 223.9 4.3 45 203.8 4.4
Pacific................ 197 1,003.6 19.3 181 910.7 19.4
--- -------- ----- --- -------- -----
Total................ 926 $5,194.4 100.0% 850 $4,682.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
- --------
(1) As defined by the ACLI.
As of September 30, 1996, the Company's largest mortgage loan exposure to
any borrowing group was $88.4 million (or 1.7%) of the Company's general
account mortgage portfolio.
The following table sets forth the composition of the Company's general
account commercial mortgage loan portfolio by loan size as of September 30,
1996 and December 31, 1995.
GENERAL ACCOUNT COMMERCIAL MORTGAGE LOAN PORTFOLIO -- LOAN SIZE
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
SIZE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
---- -------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Under $5 million........ 525 $1,323.9 25.5% 482 $1,195.4 25.5%
$5 million to $9.9
million................ 265 1,861.5 35.8 251 1,771.3 37.9
$10 million to $19.9
million................ 122 1,589.2 30.6 106 1,387.5 29.6
$20 million to $29.9
million................ 9 217.4 4.2 7 168.4 3.6
Over $30 million........ 5 202.4 3.9 4 159.6 3.4
--- -------- ----- --- -------- -----
Total................. 926 $5,194.4 100.0% 850 $4,682.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
The Company's investment policy with regard to the origination of new
mortgage loans involves a review of the economics of the property being
financed, adherence to guidelines that provide for diversification of the
mortgage portfolio by property type and location, a review of industry lending
practices prevailing from time to time and diversification of the Company's
total general account investment portfolio. Guidelines for new mortgage loans
generally require a loan-to-value ratio of not greater than 75% at the time of
origination.
Substantially all of the general account commercial mortgage loans were
originated by the Company and not purchased from third parties. The Company
originates general account commercial mortgage loans through a national
network of mortgage banking correspondent companies which represent the
Company in many of the major metropolitan areas of the United States.
Typically, a correspondent company is an independent business which has a
staff of experienced specialists in property finance who are highly
knowledgeable about the real
61
<PAGE>
estate market in the company's local or regional area. The correspondent
company is an expert in the appraisal, underwriting and servicing of
commercial mortgage loans. Typically, the correspondent company is the
Company's one representative through which all mortgage investment
opportunities in the particular market must originate. The correspondent
company presents commercial mortgage loan opportunities to the Company on
property types and with respect to borrowers that meet the Company's stringent
underwriting requirements. After a mortgage loan is made, the correspondent
company services the loans for the Company by, among other things, collecting
all mortgage payments as well as amounts escrowed for the payment of any taxes
and insurance premiums. For its services, the correspondent company receives
from the Company an annual fee generally ranging between .0625% and .125% of
the mortgage balance.
Currently, the Company is represented by 23 correspondent companies that
originate commercial mortgage investment opportunities and service the general
account mortgage loans. In addition, the Company is represented by another 13
companies that service general account mortgage loans but do not originate
mortgage loan investment opportunities.
The general account commercial mortgage loan portfolio includes both
amortizing and balloon loans. The Company defines balloon loans to be
mortgages with periodic installments of principal and interest that do not
fully amortize the loan. The balance is due at a specified date in the future
which represents the end of the loan term.
The following table sets forth the maturity and principal repayment schedule
for the Company's general account mortgage loan portfolio as of September 30,
1996 and December 31, 1995.
GENERAL ACCOUNT MORTGAGE LOAN PORTFOLIO -- SCHEDULED MATURITIES
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995
--------------------------------- ---------------------------------
AGGREGATE AGGREGATE
PRINCIPAL BALANCE % OF PRINCIPAL BALANCE % OF
OF MORTGAGE TOTAL PRINCIPAL OF MORTGAGE TOTAL PRINCIPAL
LOANS MATURING BALANCE LOANS MATURING BALANCE
----------------- --------------- ----------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1996.................... $ 82.5 1.6% $ 254.9 5.4%
1997.................... 165.9 3.2 210.4 4.5
1998.................... 215.9 4.2 230.2 4.9
1999.................... 361.4 7.0 347.3 7.4
2000.................... 532.8 10.2 564.6 12.1
2001.................... 355.4 6.8 367.1 7.8
2002.................... 429.3 8.3 439.1 9.4
2003.................... 443.0 8.5 303.5 6.5
2004.................... 363.0 7.0 369.4 7.9
2005.................... 687.8 13.2 694.6 14.8
2006.................... 427.6 8.2 103.3 2.2
After 2006.............. 1,132.6 21.8 800.9 17.1
-------- ------ -------- ------
$5,197.2 100.0% $4,685.3 100.0%
======== ====== ======== ======
</TABLE>
The Company monitors all of the mortgage loans in its general account
mortgage loan portfolio on an ongoing basis and identifies mortgage loans
that, because of certain objective or subjective characteristics, cause
management to conclude that such loans require additional investigation. Among
criteria that cause a loan to be so identified are (i) borrower bankruptcies,
(ii) bankruptcies of major tenants of mortgaged properties, (iii) requests
from borrowers for loan restructuring or relief, (iv) known or suspected cash
flow deficiencies, (v) lateness of payments, (vi) noncompliance with
covenants, (vii) known or suspected loan to value imbalances, (viii) lease
rollovers affecting debt service coverage or property value, (ix) property
vacancy rates, (x) maturing
62
<PAGE>
loans identified as potential refinancing risks and (xi) other subjective
factors relating to the borrower or the mortgaged property.
The Company and the ACLI define problem mortgage loans as loans which are 60
or more days delinquent and/or are in foreclosure. The following tables set
forth the distribution by property type and region of the Company's commercial
mortgage loans that were delinquent or in the process of foreclosure, compared
to the life insurers reporting to the ACLI, as of December 31, 1995.
COMMERCIAL MORTGAGE LOANS DELINQUENT OR IN THE
PROCESS OF FORECLOSURE BY PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------------------------------------
COMPANY ACLI(1)
--------------------------------------- ----------------
NUMBER OF PRINCIPAL DELINQUENCY AND DELINQUENCY AND
LOANS BALANCE FORECLOSURE RATE(2) FORECLOSURE RATE
--------- --------- ------------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Property Type(3):
Apartment.............. -- $ -- -- % 0.23%
Retail................. 5 29.5 0.63 0.43
Office................. -- -- -- 1.20
Industrial............. -- -- -- 0.21
Hotel/motel............ -- -- -- 0.14
Mixed Use.............. -- -- -- 0.01
Other Commercial
Property.............. -- -- -- 0.13
--- ----- ---- ----
Total................. 5 $29.5 0.63% 2.35%
=== ===== ==== ====
</TABLE>
- --------
(1) Source: ACLI Investment Bulletin entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," Number 1326, dated February 28,
1996.
(2) Reflects, by individual property types, commercial mortgage loans that are
delinquent 60 days or more or in the process of foreclosure as a
percentage of composite total loans.
(3) Property types are defined by the ACLI.
COMMERCIAL MORTGAGE LOANS DELINQUENT OR IN THE
PROCESS OF FORECLOSURE BY REGION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------------------------------------
COMPANY ACLI(1)
--------------------------------------- ----------------
NUMBER OF PRINCIPAL DELINQUENCY AND DELINQUENCY AND
LOANS BALANCE FORECLOSURE RATE(2) FORECLOSURE RATE
--------- --------- ------------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Region(3):
New England.......... 2 $14.8 0.32% 0.17%
Middle Atlantic...... -- -- -- 0.51
East North Central... -- -- -- 0.36
West North Central... -- -- -- 0.04
South Atlantic....... 2 9.1 0.19 0.34
East South Central... -- -- -- 0.05
West South Central... -- -- -- 0.14
Mountain............. -- -- -- 0.06
Pacific.............. 1 5.6 0.12 0.60
Other................ -- -- -- 0.08
--- ----- ----- -----
Total............... 5 $29.5 0.63% 2.35%
=== ===== ===== =====
</TABLE>
63
<PAGE>
- --------
(1) Source: ACLI Investment Bulletin entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," Number 1326, dated February 28,
1996.
(2) Reflects, by region, commercial mortgage loans that are delinquent 60 days
or more or in the process of foreclosure as a percentage of composite
total loans.
(3) Regions are defined by the ACLI.
In certain situations delinquent mortgages may be restructured or modified.
As of September 30, 1996, the amortized cost of restructured mortgages totaled
$59.4 million, as compared with $66.0 million and $77.0 million as of December
31, 1995 and 1994, respectively.
The following table sets forth the delinquency, foreclosure and restructured
commercial mortgage loan experience for the Company and for the life insurers
reporting to the ACLI for the periods indicated.
THE COMPANY AND LIFE INSURANCE INDUSTRY
PROBLEM LOAN COMPARISON
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
------------------- ------------------- ------------------- ------------------- -------------------
COMPANY ACLI(1) COMPANY ACLI(1) COMPANY ACLI(1) COMPANY ACLI(1) COMPANY ACLI(1)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquent(2)...... 0.63% 2.35% 0.48% 3.38% 0.80% 4.54% 1.41% 6.62% 0.92% 5.93%
In foreclosure(3).. 0.63 1.45 0.48 1.80 0.80 2.17 1.41 3.16 0.92 2.87
Restructured(4).... 1.48 8.27 1.95 9.58 1.87 9.35 1.25 7.44 2.11 5.09
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Subtotal.......... 2.11 10.62 2.43 12.96 2.67 13.89 2.66 14.06 3.03 11.02
Foreclosed--year to
date.............. 0.74 1.75 1.18 2.52 1.48 3.21 3.33 3.31 1.31 2.29
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total............. 2.85% 12.37% 3.61% 15.48% 4.15% 17.10% 5.99% 17.37% 4.34% 13.31%
======== ========= ======== ========= ======== ========= ======== ========= ======== =========
</TABLE>
- --------
(1) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," numbers 1326, 1289, 1253, 1213 and
1174, dated February 28, 1996, March 9, 1995, March 1, 1994, March 2, 1993
and March 3, 1992, respectively.
(2) Commercial mortgage loans are classified by the Company and the ACLI as
delinquent when they are 60 days or more past due.
(3) Delinquent includes loans in foreclosure; therefore, subtotal and total
lines exclude "In foreclosure" amounts.
(4) Commercial mortgage loans are classified by the Company and the ACLI as
restructured when they are in good standing, but the basic terms have been
modified as a result of an actual or anticipated delinquency.
The following table shows credit-related realized and unrealized gains and
losses before taxes on the Company's general account commercial mortgage loans
for the periods indicated. Realized losses on general account commercial
mortgage loans are generally a result of delinquent loans 30 days or more past
due. The following table focuses on credit losses and does not reflect gains
from prepayment penalties of $3.2 million, $6.4 million, $5.2 million, $1.3
million and $3.8 million in 1995, 1994, 1993, 1992 and 1991, respectively.
GENERAL ACCOUNT COMMERCIAL MORTGAGE LOAN
CREDIT-RELATED GAINS AND LOSSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993 1992 1991
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Realized gains (losses)........... $ (7.1) $ (20.4) $ (28.2) $ (36.1) $ (18.4)
Unrealized gains (losses)......... -- -- -- -- --
------ ------- ------- ------- -------
Total........................... $ (7.1) $ (20.4) $ (28.2) $ (36.1) $ (18.4)
====== ======= ======= ======= =======
Percentage of beginning of year
portfolio........................ 0.17% 0.53% 0.79% 1.12% 0.51%
</TABLE>
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<PAGE>
Real Estate
As of September 30, 1996, equity real estate assets were $235.5 million (or
1.3%) of the carrying value of general account invested assets. The equity
real estate category consists of retail, office, industrial and other
properties. Retail properties constitute the largest component of the category
and are primarily grocery store- anchored neighborhood shopping centers.
Policy Loans
The Company held $364.1 million of general account policy loans as of
September 30, 1996. Of such policy loans, 57.6% were on traditional life
policies and 42.4% were on universal life policies and annuities. Policy loans
are permitted to the extent of a policy's contractual limits and are
collateralized fully by policy cash values. Loan rates are fixed in the
contracts and range from 5% to 8%. For policies with variable rate provisions,
the loan interest rates were tied to external indices. The weighted average
policy loan interest rate was 7.75% as of September 30, 1996.
Equity Securities
As of September 30, 1996, the Company held general account equity securities
of $53.0 million (or 0.03%) of general account consolidated invested assets.
The Company's general account equity security investments consist of a
diversified portfolio primarily of publicly traded common stocks.
Other Long-Term Investments
As of September 30, 1996, other long-term investments were $59.8 million (or
0.3%) of the carrying value of general account invested assets. Such
investments primarily consist of joint ventures and limited partnership
interests in real estate.
Short-Term Investments
As of September 30, 1996, short-term investments were $98.1 million (or
0.5%) of the carrying value of general account invested assets. Such short-
term investments comprised cash and cash equivalents. The Company invests in
U.S. Treasury bills, commercial paper and certificates of deposit.
RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Ratings are important to
maintaining public confidence in the Company and its ability to market its
annuity and life insurance products. Rating organizations continually review
the financial performance and condition of insurers, including the Company.
Any lowering of the Company's ratings could have a material adverse effect on
the Company's ability to market its products and could increase the surrender
of the Company's annuity products. Both of these consequences could, depending
upon the extent thereof, have a material adverse effect on the Company's
liquidity and, under certain circumstances, net income. Nationwide Life is
rated "A+" (Superior) by A.M. Best. Based on its financial strength and claims
paying ability, respectively, Nationwide Life is rated "Aa2" (Excellent) by
Moody's and "AA+" (Excellent) by S&P.
A.M. Best's ratings for insurance companies currently range from "A++" to
"F", and some companies are not rated. A.M. Best publications indicate that
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have achieved superior overall performance when compared to the norms
of the life insurance industry and generally have demonstrated a strong
ability to meet their policyholder and other contractual obligations.
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Moody's rating for insurance companies currently range from "Aaa" to "Caa."
S&P ratings for insurance companies range from "AAA" to "CCCq." In evaluating
a company's financial and operating performance, Moody's and S&P review its
profitability, leverage and liquidity as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its policy reserves and the experience
and competency of its management.
The foregoing ratings are based upon factors of concern to policyholders,
agents and intermediaries and are not directed toward the protection of
investors. Such ratings are neither a rating of securities nor a
recommendation to buy, hold or sell any security.
COMPETITION
The Company competes with a large number of other insurers and non-insurance
financial services companies, such as banks, broker/dealers and mutual funds,
some of whom have greater financial resources, offer alternative products and,
with respect to other insurers, have higher ratings than the Company. The
Company believes that competition in the Company's lines of business is based
on price, product features, commission structure, perceived financial
strength, claims paying ratings, service and name recognition. National banks,
with their pre-existing customer bases for financial services products, may
pose increasing competition in the future to insurers who sell annuities,
including the Company, as a result of the U.S. Supreme Court's 1994 decision
in NationsBank of North Carolina v. Variable Annuity Life Insurance Company,
which permits national banks to sell annuity products of life insurance
companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made
by members of Congress and the Clinton administration. Currently, the Bank
Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not
possible to predict whether any of these proposals will be enacted, or if
enacted, their potential effect on the Company.
REGULATION
General Regulation at State Level
As an insurance holding company, the Company is subject to regulation by the
states in which its insurance subsidiaries are domiciled and/or transact
business. Most states have enacted legislation that requires each insurance
holding company and each insurance company in an insurance holding company
system to register with the insurance regulatory authority of the insurance
company's state of domicile and, annually, to furnish financial and other
information concerning the operations of companies within the holding company
system that may materially affect the operations, management or financial
condition of the insurers within such system. The Company is subject to the
insurance holding company laws in Ohio. Under such laws, all transactions
within an insurance holding company system affecting insurers must be fair and
equitable and each insurer's policyholder surplus following any such
transaction must be both reasonable in relation to its outstanding liabilities
and adequate for its needs. The Ohio insurance holding company laws also
require prior notice or regulatory approval of the change of control of an
insurer or its holding company and of material intercorporate transfers of
assets within the holding company structure. Generally, under such laws, a
state insurance authority must approve in advance the direct or indirect
acquisition of 10% or more of the voting securities of an insurance company
domiciled in its state.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to approve policy forms, grant and revoke
licenses to transact business, regulate trade practices, license agents,
require statutory financial statements and prescribe the type and amount of
investments permitted. In recent years, a number of life and annuity insurers
have been the subject of regulatory proceedings and litigation relating to
alleged improper life insurance pricing and sales practices. Some of these
insurers have incurred or paid substantial amounts in connection with the
resolution of such matters. In addition, state insurance regulatory
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authorities regularly make inquiries, hold investigations and administer
market conduct examinations with respect to insurers' compliance with
applicable insurance laws and regulations. None of the Company's insurance
subsidiaries is the subject of any such investigation by any regulatory
authority or any such market conduct examination in any state at this time.
The Company's subsidiaries continuously monitor sales, marketing and
advertising practices and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance
with applicable insurance laws and regulations.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulation. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three years) of the books, records and accounts of insurance companies
domiciled in their states. Such examinations are generally conducted in
cooperation with the departments of two or three other states under guidelines
promulgated by the NAIC. Nationwide Life's last examination occurred during
1993 for the three-year period ended December 31, 1992. Final reports of these
examinations have been issued by each of the Ohio, California and Delaware
insurance departments, and none of such reports raised any significant issues
or adjustments.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
As an insurance holding company, the Company's ability to meet debt service
obligations, including payment of principal and interest on the Junior
Subordinated Debentures, and pay operating expenses and dividends depends
primarily on the receipt of sufficient funds from its primary subsidiary,
Nationwide Life. The inability of Nationwide Life to pay dividends to the
Company in an amount sufficient to meet debt service obligations and pay
operating expenses and dividends would have a material adverse effect on the
Company. The payment of dividends by Nationwide Life is subject to
restrictions set forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require life insurance companies to
seek prior regulatory approval to pay a dividend or distribution of cash or
other property if the fair market value thereof, together with that of other
dividends or distributions made in the preceding 12 months, exceeds the
greater of (i) 10% of policyholders' surplus as of the prior December 31 or
(ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus.
Earned surplus is defined under the Ohio insurance laws as the amount equal to
the Company's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. The payment of
dividends by Nationwide Life may also be subject to restrictions set forth in
the insurance laws of New York that limit the amount of statutory profits on
Nationwide Life's participating policies (measured before dividends to
policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends and
to meet its debt service obligations in the future.
NAIC IRIS Ratios
In the 1970s, the NAIC developed a set of financial relationships or "tests"
known as the Insurance Regulatory Information System ("IRIS") that was
designed for early identification of companies which may require special
attention by insurance regulatory authorities. There are separate but similar
tests for property/casualty companies and life and health companies. Insurance
companies submit data annually to the NAIC, which in turn analyzes the data by
utilizing, in the case of life insurance companies, 13 ratios, each with
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<PAGE>
defined "usual ranges." An insurance company may fall out of the usual range
for one or more ratios because of specific transactions that are in themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to regulatory scrutiny if it falls outside the
usual ranges of four or more of the ratios, and regulators may then act, if
the company has insufficient capital, to constrain the company's underwriting
capacity. No ratios for the Company's insurance subsidiaries currently fall
outside the usual range for any of the ratios.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted
a model law to implement risk-based capital ("RBC") requirements for life
insurance companies. The requirements are designed to monitor capital adequacy
and to raise the level of protection that statutory surplus provides for
policyholders. The model law measures four major areas of risk facing life
insurers: (i) the risk of loss from asset defaults and asset value
fluctuation; (ii) the risk of loss from adverse mortality and morbidity
experience; (iii) the risk of loss from mismatching of asset and liability
cash flow due to changing interest rates and (iv) business risks. Insurers
having less statutory surplus than required by the RBC model formula will be
subject to varying degrees of regulatory action depending on the level of
capital inadequacy.
The RBC formula provides a mechanism for the calculation of an insurance
company's Authorized Control Level RBC and its total adjusted capital. The
model law sets forth the points at which a superintendent of insurance is
authorized and expected to take regulatory action. The first level is known as
the Company Action Level RBC, which is set at twice the Authorized Control
Level RBC. The second level is the Regulatory Action Level RBC, set at 1.5
times the Authorized Control Level RBC. The third is the Authorized Control
Level RBC, and the fourth is the Mandatory Control Level RBC, set at 70
percent of the Authorized Control Level RBC.
If an insurance company's adjusted capital is higher than the Regulatory
Action Level but below the Company Action Level, the insurance company must
submit to its superintendent of insurance a comprehensive financial plan. If
an insurance company's adjusted capital is higher than the Authorized Control
Level but lower than the Regulatory Action Level, the superintendent of
insurance shall perform such examination or analysis as he or she deems
necessary of the insurer's business and operations and issue any appropriate
corrective orders to address the insurance company's financial problems. If an
insurer's adjusted capital is higher than the Mandatory Control Level but
lower than the Authorized Control Level, the superintendent may place the
insurer under regulatory control. If the insurance company's adjusted capital
falls below the Mandatory Control Level, the superintendent will be required
to place the insurer under regulatory control. Based on the formula adopted by
the NAIC, Nationwide Life exceeded the Company Action Level by a substantial
amount as of December 31, 1995. After giving pro forma effect to the Special
Cash Dividends and the contribution to Nationwide Life by the Company of
proceeds from the Equity Offerings, the Note Offering and the Capital
Securities Offering, Nationwide Life will continue to exceed the Company
Action Level by a substantial amount as of December 31, 1996. See "Use of
Proceeds," "Recent History" and "The Equity Offerings, the Note Offering and
the Capital Securities Offering."
Assessments Against Insurers
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these
jurisdictions can be assessed for policyholder losses incurred by insolvent
insurance companies. The amount and timing of any future assessment on the
Company's insurance subsidiaries under these laws cannot be reasonably
estimated and are beyond the control of the Company and its insurance
subsidiaries. Recent regulatory actions against certain large life insurers
encountering financial difficulty have prompted the various state insurance
guaranty associations to begin assessing life insurance companies for the
deemed loss. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's solvency and further
provide for annual limits on such assessments. A large part of the assessments
paid by the Company's insurance subsidiaries pursuant to these laws may be
used as credits for a portion of the Company's insurance subsidiaries' premium
taxes. Based on the best information presently available, the Company believes
the total assessments will not be material to its operating results or
financial
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<PAGE>
position. For the nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and 1993, the Company paid approximately $1.9 million,
$7.5 million, $5.3 million and $8.6 million, respectively, in assessments
pursuant to state insurance guaranty association laws.
General Regulation at Federal Level
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures that may
significantly affect the insurance business include limitations on antitrust
immunity, minimum solvency requirements and the removal of barriers
restricting banks from engaging in the insurance and mutual fund business.
Securities Laws
Certain of the Company's insurance subsidiaries and certain policies and
contracts offered by them are subject to regulation under the federal
securities laws administered by the Commission and under certain state
securities laws. Certain separate accounts of the Company's insurance
subsidiaries are registered as investment companies under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). Separate
account interests under certain variable annuity contracts and variable
insurance policies issued by the Company's insurance subsidiaries are also
registered under the Securities Act. Certain other subsidiaries of the Company
are registered as broker/dealers under the Exchange Act and are members of,
and subject to regulation by, the National Association of Securities Dealers.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment
companies managed by such subsidiaries are registered with the Commission
under the Investment Company Act and the shares of certain of these entities
are qualified for sale in certain states in the United States and the District
of Columbia. A subsidiary of the Company is registered with the Commission as
a transfer agent. Certain subsidiaries of the Company are also subject to the
Commission's net capital rules.
All aspects of the Company's subsidiaries' investment advisory activities
are subject to various federal and state laws and regulations in jurisdictions
in which they conduct business. These laws and regulations are primarily
intended to benefit investment advisory clients and investment company
shareholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business
for failure to comply with such laws and regulations. In such event, the
possible sanctions which may be imposed include the suspension of individual
employees, limitations on the activities in which the investment advisor may
engage, suspension or revocation of the investment advisor's registration as
an advisor, censure and fines.
ERISA Considerations
On December 13, 1993, the United States Supreme Court issued its opinion in
John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank
holding that certain assets in excess of amounts necessary to satisfy
guaranteed obligations held by John Hancock in its general account under a
participating group annuity contract are "plan assets" and therefore subject
to certain fiduciary obligations under the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which specify that fiduciaries must perform
their duties solely in the interest of ERISA plan participants and
beneficiaries. The Court limited the imposition of ERISA fiduciary obligations
in these instances to assets in an insurer's general account that were not
reserved to pay benefits of guaranteed amounts (i.e., benefits whose value
would not fluctuate in accordance with the insurer's investment experience).
The Secretary of Labor is required to issue proposed regulations not later
than June 30, 1997, providing guidance for the purpose of determining, in
cases where an insurer issues one or more policies backed by the insurer's
general account to or for the benefit of an employee benefit plan, which
assets of the insurer constitute plan assets for purposes of ERISA and the
IRC. Final regulations, after a notice and comment
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<PAGE>
period, must be issued by December 31, 1997. The regulations will apply only
with respect to a policy issued by an insurer on or before December 31, 1998.
In the case of such a policy, the regulations will take effect at the end of
the 18-month period following the date such regulations become final.
Generally, no person will be liable under ERISA or the IRC for conduct
occurring prior to the end of such 18-month period, where the basis of a claim
is that insurance company general account assets constitute plan assets. New
policies issued after December 31, 1998 will be subject to the fiduciary
obligations under ERISA. The regulations may provide for the exclusion from
treatment as plan assets of any assets of the insurer with respect to its
operations, products or services.
The regulations should indicate the requirements that must be met in order
to satisfy ERISA's fiduciary standards. A review of Nationwide Life's
procedures with respect to its general account contracts will be required to
ensure compliance with the regulations.
Potential Tax Legislation
Congress has from time to time considered possible legislation that would
eliminate the deferral of taxation on the accretion of value within certain
annuities and life insurance products. The 1994 United States Supreme Court
ruling in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company that annuities are not insurance for purposes of the National Bank Act
may cause Congress to consider legislation that would eliminate such tax
deferral at least for certain annuities. Other possible legislation, including
a simplified "flat tax" income tax structure with an exemption from taxation
for investment income, could also adversely affect purchases of life insurance
if such legislation were to be enacted. There can be no assurance as to
whether legislation will be enacted which would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
PROPERTIES
The Company's principal executive offices are located in Columbus, Ohio. The
Company leases its home office complex, consisting of approximately 536,000
square feet, from Nationwide Mutual and its subsidiaries at One Nationwide
Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus, Ohio. See
"Certain Relationships and Related Transactions."
The Company believes that its present facilities are adequate for the
anticipated needs of the Company.
LEGAL PROCEEDINGS
From time to time the Company is a party to litigation and arbitration
proceedings in the ordinary course of its business. The Company is not a party
to any material pending legal proceedings.
In recent years, life insurance companies, including the Company, have been
named as defendants in lawsuits relating to life insurance pricing and sales
practices. There can be no assurance that any future litigation relating to
pricing and sales practices will not have a material adverse effect on the
Company.
EMPLOYEES
As of September 30, 1996, the Company had approximately 3,550 employees.
None of the employees of the Company is covered by a collective bargaining
agreement, and the Company believes that its employee relations are
satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information regarding the executive officers
and directors of the Company. Of such executive officers, Messrs. Gasper,
Brock, Galloway, Karas and Easley work exclusively for the Company. The other
executive officers perform duties for the Company and other members of the
Nationwide Insurance Enterprise.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<C> <C> <S>
Dimon Richard McFerson(1)........ 59 Chairman and Chief Executive Officer--
Nationwide Insurance Enterprise and
Director
53 President and Chief Operating Officer
Joseph J. Gasper................. and Director
Galen R. Barnes.................. 49 Executive Vice President
Richard D. Crabtree.............. 55 Executive Vice President
61 Executive Vice President--Law and
Gordon E. McCutchan.............. Corporate Services and Secretary
50 Executive Vice President--Chief
Robert A. Oakley................. Financial Officer
55 Executive Vice President--Chief
Robert J. Woodward, Jr........... Investment Officer
49 Senior Vice President--Company
James E. Brock................... Operations
54 Senior Vice President and General
W. Sidney Druen.................. Counsel
62 Senior Vice President--Chief Actuary--
Harvey S. Galloway, Jr........... Life and Annuities
54 Senior Vice President--Sales--Financial
Richard A. Karas................. Services
Dennis W. Click.................. 58 Vice President and Assistant Secretary
David A. Diamond................. 41 Vice President--Controller
40 Vice President--Life Marketing and
Matthew S. Easley................ Administrative Services
Mark R. Thresher................. 40 Vice President and Treasurer
Charles L. Fuellgraf, Jr.(1)(2).. 65 Director
Henry S. Holloway(1)(2).......... 63 Director
David O. Miller(1)(2)............ 58 Director
James F. Patterson(1)(3)......... 54 Director
Arden L. Shisler(1)(3)........... 54 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Biographical information for each of the individuals listed in the above
table is set forth below.
DIMON RICHARD MCFERSON has been Chief Executive Officer of the Nationwide
Insurance Enterprise since December 1992. He has been Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise of the Company since
December 1996 and a director of the Company since November 1996. Mr. McFerson
has been a director of Nationwide Life and Nationwide Mutual since April 1988
and Chairman and Chief Executive Officer--Nationwide Insurance Enterprise of
Nationwide Life and Nationwide Mutual since April 1996. Previously he was
elected Chief Executive Officer of Nationwide Life in December 1992, and
President and Chief Executive Officer--Nationwide Insurance Enterprise of
Nationwide Life in December 1993. He was President and General Manager of
Nationwide Mutual from April 1988 to April 1991; President and Chief Operating
Officer of Nationwide Mutual from April 1991 to December 1992; and President
and Chief Executive Officer of Nationwide Mutual from December 1992 to April
1996. Mr. McFerson has been with the Nationwide Insurance Enterprise 17 years.
JOSEPH J. GASPER has been President and Chief Operating Officer of the
Company since December 1996 and a director of the Company since November 1996.
Mr. Gasper has been President and Chief Operating Officer of Nationwide Life
since April 1996. Previously, he was Executive Vice President--
Property/Casualty Operations of Nationwide Mutual from April 1995 to April
1996. He was Senior Vice President--Property/Casualty Operations of Nationwide
Mutual from September 1993 to April 1995. Prior to that time, Mr. Gasper held
numerous positions within the Nationwide Insurance Enterprise. Mr. Gasper has
been with the Nationwide Insurance Enterprise for 30 years.
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<PAGE>
GALEN R. BARNES has been Executive Vice President of the Company since
December 1996. Mr. Barnes has been President of the Nationwide Insurance
Enterprise since April 1996. Previously, he was President and Chief Operating
Officer of the Wausau Insurance Companies, members of the Nationwide Insurance
Enterprise, from May 1993 to May 1996 and was Senior Vice President of the
Nationwide Insurance Enterprise from May 1993 to April 1996. Prior to that
time, Mr. Barnes held several positions within the Nationwide Insurance
Enterprise. Mr. Barnes has been with the Nationwide Insurance Enterprise for
21 years.
RICHARD D. CRABTREE has been Executive Vice President of the Company since
December 1996. Mr. Crabtree has been director, President and Chief Operating
Officer of Nationwide Mutual, Nationwide Mutual Fire and Nationwide Property
and Casualty Insurance Company since April 1996. Previously, Mr. Crabtree was
Executive Vice President--Property/Casualty Operations of the Nationwide
Insurance Enterprise from April 1995 to April 1996. Prior to that time, Mr.
Crabtree held various positions within the Nationwide Insurance Enterprise.
Mr. Crabtree has been with the Nationwide Insurance Enterprise for 31 years.
GORDON E. MCCUTCHAN has been Executive Vice President--Law and Corporate
Services and Secretary of the Company since December 1996. Mr. McCutchan has
been Executive Vice President--Law and Corporate Services and Secretary of the
Nationwide Insurance Enterprise since September 1994. Previously, he was
Executive Vice President, General Counsel and Secretary of the Nationwide
Insurance Enterprise from November 1989 to September 1994. Prior to that time,
Mr. McCutchan held several positions within the Nationwide Insurance
Enterprise. Mr. McCutchan has been with the Nationwide Insurance Enterprise
for 32 years.
ROBERT A. OAKLEY has been Executive Vice President--Chief Financial Officer
of the Company since December 1996. Mr. Oakley has been Executive Vice
President--Chief Financial Officer of the Nationwide Insurance Enterprise
since April 1995. Previously, he was Senior Vice President--Chief Financial
Officer of the Nationwide Insurance Enterprise from October 1993 to April
1995. Prior to that time, Mr. Oakley held several positions within the
Nationwide Insurance Enterprise. Mr. Oakley has been with the Nationwide
Insurance Enterprise for 20 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President--Chief Investment
Officer of the Company since December 1996. Mr. Woodward has been Executive
Vice President--Chief Investment Officer of the Nationwide Insurance
Enterprise since August 1995. Previously, he was Senior Vice President--Fixed
Income Investments of the Nationwide Insurance Enterprise from March 1991 to
August 1995. Prior to that time, Mr. Woodward held several positions within
the Nationwide Insurance Enterprise. Mr. Woodward has been with the Nationwide
Insurance Enterprise for 32 years.
JAMES E. BROCK has been Senior Vice President--Company Operations of the
Company since December 1996. Mr. Brock has been Senior Vice President--Life
Company Operations of Nationwide Life since April 1996. Previously, he was
Senior Vice President--Investment Product Operations of Nationwide Life from
November 1990 to April 1996. Prior to that time, Mr. Brock held several
positions within the Nationwide Insurance Enterprise. Mr. Brock has been with
the Nationwide Insurance Enterprise for 27 years.
W. SIDNEY DRUEN has been Senior Vice President and General Counsel of the
Company since December 1996. Mr. Druen has been Senior Vice President and
General Counsel and Assistant Secretary of the Nationwide Insurance Enterprise
since September 1994. Previously, he was Vice President, Deputy General
Counsel and Assistant Secretary of the Nationwide Insurance Enterprise from
October 1989 to September 1994. Prior to that time, Mr. Druen held several
positions within the Nationwide Insurance Enterprise. Mr. Druen has been with
the Nationwide Insurance Enterprise for 26 years.
HARVEY S. GALLOWAY, JR. has been Senior Vice President--Chief Actuary--Life
and Annuities of the Company since December 1996. Mr. Galloway has been Senior
Vice President--Chief Actuary--Life, Health and Annuities of the Nationwide
Insurance Enterprise since April 1993. Previously, he was Senior Vice
President and Chief Actuary of the Nationwide Insurance Enterprise from
January 1983 to April 1993. Prior to that time, Mr. Galloway held several
positions within the Nationwide Insurance Enterprise. Mr. Galloway has been
with the Nationwide Insurance Enterprise for 27 years.
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RICHARD A. KARAS has been Senior Vice President--Sales--Financial Services
of the Company since December 1996. Mr. Karas has been Senior Vice President--
Sales--Financial Services of the Nationwide Insurance Enterprise since March
1993. Previously, he was Vice President--Sales--Financial Services of the
Nationwide Insurance Enterprise from February 1989 to March 1993. Prior to
that time, Mr. Karas held several positions within the Nationwide Insurance
Enterprise. Mr. Karas has been with the Nationwide Insurance Enterprise for 32
years.
DENNIS W. CLICK has been Vice President and Assistant Secretary of the
Company since December 1996. Mr. Click has been Vice President and Assistant
Secretary of the Nationwide Insurance Enterprise since August 1994.
Previously, he was Associate Vice President and Assistant Secretary of the
Nationwide Insurance Enterprise from August 1989 to August 1994. Prior to that
time, he held several positions within the Nationwide Insurance Enterprise.
Mr. Click has been with the Nationwide Insurance Enterprise for 36 years.
DAVID A. DIAMOND has been Vice President--Controller of the Company since
December 1996. Mr. Diamond has been Vice President--Enterprise Controller of
the Nationwide Insurance Enterprise since August 1996. Previously, he was Vice
President--Controller of Nationwide Life from October 1993 to August 1996.
Prior to that time, Mr. Diamond held several positions within the Nationwide
Insurance Enterprise. Mr. Diamond has been with the Nationwide Insurance
Enterprise for 8 years.
MATTHEW S. EASLEY has been Vice President--Life Marketing and Administrative
Services of the Company since December 1996. Mr. Easley has been Vice
President--Life Marketing and Administrative Services of the Nationwide
Insurance Enterprise since May 1996. Previously, he was Vice President--
Annuity and Pension Actuarial of the Nationwide Insurance Enterprise from
August 1989 to May 1996. Prior to that time, Mr. Easley held several positions
within the Nationwide Insurance Enterprise. Mr. Easley has been with the
Nationwide Insurance Enterprise for 14 years.
MARK R. THRESHER has been Vice President and Treasurer of the Company since
December 1996. Mr. Thresher has been Vice President--Controller of Nationwide
Life since August 1996. Previously, he was Vice President and Treasurer of the
Nationwide Insurance Enterprise from June 1996 to August 1996. Prior to
joining the Nationwide Insurance Enterprise, Mr. Thresher served as a partner
with KPMG Peat Marwick LLP since July 1988.
CHARLES L. FUELLGRAF, JR. has been a director of the Company since November
1996. Mr. Fuellgraf has been Chief Executive Officer of Fuellgraf Electric
Company, an electrical contractor, of Butler, Pennsylvania, and Nashville,
Tennessee, since 1986. He is Chairman of the Board of Nationwide
Communications Inc. and Nationwide Development Company and serves on the board
of directors of several members of in the Nationwide Insurance Enterprise.
HENRY S. HOLLOWAY has been a director of the Company since November 1996.
Mr. Holloway has been a farm owner and operator in Darlington, Maryland since
1959. He is Chairman of the Board of Nationwide Life, Nationwide Life and
Annuity Insurance Company and Nationwide Corp., and he serves on the board of
directors of several members of the Nationwide Insurance Enterprise. He is
also a director of the National Cooperative Business Association and the
Forest Hill State Bank.
DAVID O. MILLER has been a director of the Company since November 1996. Mr.
Miller has been a farm owner and land developer since 1962. He is the owner of
The Berry Barn and is a partner of M&M Enterprises in Licking County, Ohio. He
is Chairman of the Board of the Wausau Insurance Companies and he serves on
the board of directors of several members of the Nationwide Insurance
Enterprise. He is also a director of the National Cooperative Business
Association.
JAMES F. PATTERSON has been a director of the Company since November 1996.
Mr. Patterson has been President of Patterson Farms, Inc. and operated the
Patterson Fruit Farm in Chesterland, Ohio, since 1964 and has been the
President of Patterson Farms, Inc. since December 1991. He is Chairman of the
Board of Nationwide Mutual Fire Insurance Company and serves on the board of
directors of several members of the
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<PAGE>
Nationwide Insurance Enterprise. He is also a trustee of The Ohio State
University and serves on the board of directors of the University Hospitals
Health System in Cleveland, Ohio, and Geauga Hospital, Inc. in Chardon, Ohio.
ARDEN L. SHISLER has been a director of the Company since November 1996. Mr.
Shisler has been President and Chief Executive Officer of K & B Transport,
Inc., a trucking firm in Dalton, Ohio, since 1962. He is Chairman of the Board
of Nationwide Mutual Insurance Company and serves on the board of directors of
several members of the Nationwide Insurance Enterprise. He is also a director
of the National Cooperative Business Association.
The Company anticipates that prior to completion of the Equity Offerings the
Company's Board of Directors will consist of eleven directors, divided into
three classes. The initial term of the first class will expire at the annual
meeting of shareholders to be held in 1998, the initial term of the second
class will expire in 1999, and the initial term of the third class will expire
in 2000. Officers of the Company are elected annually and serve until their
retirement, resignation or removal.
The Company's Board of Directors will establish prior to completion of the
Equity Offerings an Audit Committee consisting of directors, none of whom is
an officer or employee of the Company. The Audit Committee recommends to the
Board of Directors the selection of independent certified public accountants
to audit annually the books and records of the Company, reviews the activities
and the reports of the independent certified public accountants and reports
the results of such review to the Board of Directors. The Audit Committee also
considers the adequacy of the Company's internal controls and internal
auditing methods and procedures. The Board of Directors will establish a
Compensation Committee consisting of directors, none of whom is an officer
or employee of the Company, which, as authorized by the Board of Directors,
will make recommendations to the Board of Directors with respect to the
administration of the salaries, bonuses and other compensation to be paid to
the Company's officers. The Board of Directors will establish an Executive
Committee consisting of directors, which, to the extent authorized by the
Board of Directors, will exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Company.
DIRECTOR COMPENSATION
Directors of the Company who are not employees of the Company or its
affiliates will receive an annual retainer of $50,000. The annual retainer
will be paid (i) $25,000 in cash and (ii) in shares of Class A Common Stock
having an aggregate market value of $25,000 when issued by the Company. In
addition, the Company will reimburse directors for reasonable travel expenses
incurred in attending meetings of the Board of Directors and committees
thereof.
In addition, directors of the Company who are not employees of the Company
or its affiliates also receive compensation for service on the boards of
directors of Nationwide Life and Nationwide Life and Annuity Insurance
Company. For the fiscal year ended December 31, 1996, Messrs. Fuellgraf,
Holloway, Miller, Patterson and Shisler received $16,758, $23,520, $24,380,
$19,693 and $22,629, respectively, for service to such companies.
EXECUTIVE COMPENSATION
The Company was incorporated in November 1996. Pursuant to the Cost Sharing
Agreement, the salaries and benefits of certain of the officers and employees
of the Company and its subsidiaries, including the Named Executive Officers
(as defined below), will be paid by Nationwide Mutual and reimbursed in
accordance with the terms of such agreement. See "Certain Relations and
Related Transactions--Existing Arrangements with the Nationwide Insurance
Enterprise--Cost Sharing Agreement."
The following summary compensation table sets forth information regarding
the compensation of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ended December 31, 1996 solely for
services rendered to the Company and its subsidiaries.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION PAYOUTS COMPENSATION
- --------------------------- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Dimon Richard
McFerson(1)............. $356,901 $80,080(2) $ -- (3) $149,842(4) $17,688(5)
Chairman and Chief
Executive
Officer--Nationwide
Insurance Enterprise
Joseph J. Gasper(6)...... 231,515 --(2) -- (3) --(4) 7,261(5)
President and Chief
Operating Officer
Harvey S. Galloway, Jr... 247,520 69,901(2) -- (3) 74,100(4) 11,973(5)
Senior Vice President--
Chief Actuary--Life and
Annuities
James E. Brock........... 217,520 59,620(2) -- (3) 65,100(4) 10,492(5)
Senior Vice President--
Company Operations
Richard A. Karas......... 216,905 52,312(2) -- (3) 57,750(4) 10,059(5)
Senior Vice President--
Sales--Financial
Services
</TABLE>
- --------
(1) Figures in the table represent compensation received by Mr. McFerson
solely for his services rendered to the Company and its subsidiaries as
allocated pursuant to a cost sharing agreement. See "Certain Relationships
and Related Transactions--Existing Arrangements with the Nationwide
Insurance Enterprise--Cost Sharing Agreement."
(2) Represents the amount received by the Named Executive Officer under the
Management Incentive Plan in 1996 for the 1995 award year. See "--
Incentive Plans--Management Incentive Plan." Payout under such plan for
the 1996 award year is not available as of the date of this Prospectus.
(3) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(4) Represents the amount received by the Named Executive Officer under the
Executive Incentive Plan in 1996 for the award period 1993 to 1995. See
"--Incentive Plans--Executive Incentive Plan." No payouts were made in
1996 under the Sustained Performance Incentive Plan. See "--Incentive
Plans--Sustained Performance Incentive Plan."
(5) Represents contributions made or credited by the Company in 1996 under the
Nationwide Insurance Enterprise Savings Plan and the DC Supplemental Plan.
See "--Retirement Plans--Savings Plans."
(6) Represents compensation received by Mr. Gasper solely for his services
rendered to the Company in 1996 as allocated pursuant to a cost sharing
agreement. Prior to April 1996, Mr. Gasper was the Executive Vice
President--Property/Casualty Operations of Nationwide Mutual and received
compensation from Nationwide Mutual and its property/casualty insurance
subsidiaries for services rendered to such companies. Such compensation is
not reflected in the above table.
INCENTIVE PLANS
Sustained Performance Incentive Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
the Company, maintain the Sustained Performance Incentive Plan (the "SPIP").
Under the SPIP, payments are made to the Named Executive Officers and other
senior officers of the participating companies in each odd numbered calendar
year based on the achievement of measures tied to the performance of the
Nationwide Insurance Enterprise over the preceding four years. Performance
measures are based on profitability, growth and strategic objectives for the
Nationwide Insurance Enterprise which are established in advance by the boards
of directors of the participating
75
<PAGE>
companies. Under the SPIP, the participant will be granted a target incentive
amount that represents a percentage (10% to 20% depending on the participant's
position within the participating company) of the sum of the participant's
base salary for the last two years of the performance cycle. The actual amount
received by the participant will range from zero to twice the target incentive
amount, depending solely on the achievement of the performance measures.
It is the intent of Nationwide Mutual and its participating subsidiaries and
affiliates that the SPIP be terminated at the close of calendar 1996. If a
payment under the SPIP is made in 1997, covering performance measured for the
period from 1993 to 1996, such payment will be made in cash as provided in the
plan. To facilitate the termination of the SPIP, the performance measurement
period for 1995 to 1998 will be closed at the end of calendar year 1996. If a
payment under the SPIP is made in 1997, covering the performance measurement
period which would have ended in 1998, such payment will be made in restricted
stock of the Company, equal in value at the time of the payment to the cash
payment it is replacing.
Executive Incentive Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
the Company, maintain the Executive Incentive Plan (the "EIP"). Under the EIP,
annual payments are made to the Named Executive Officers and certain other
officers of the participating companies based on the achievement of measures
tied to the performance of the Nationwide Insurance Enterprise and the
relevant operating company over the preceding three years. Performance
measures are based on profitability and growth objectives which are
established in advance by the Board of Directors of the participating company.
Under the EIP, the participant will be granted a target incentive amount that
represents a percentage (from 5% to 25% depending on the participant's
position within the participating company) of the participant's base salary.
The actual amount received by the participant will range from zero to twice
the target incentive amount, depending solely on the achievement of the
performance measures.
Management Incentive Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
the Company, maintain the Management Incentive Plan (the "MIP"). Under the
MIP, annual payments are made to the Named Executive Officers and certain
other management employees of the participating companies based on the
achievement of measures tied to the performance of the Nationwide Insurance
Enterprise, the relevant operating company, the relevant business unit and the
individual participant over the preceding year. Performance measures are based
on profitability, growth, expense management and key strategic objectives
which are established in advance. Under the MIP, the participant will be
granted a target incentive amount that represents a percentage (from 5% to 15%
depending on the participant's position within the participating company) of
the participant's base salary. The actual amount received by the participant
under the MIP will range from zero to twice the target incentive amount,
depending solely on the achievement of the performance measures.
PENSION PLANS
Retirement Plan
The Nationwide Insurance Enterprise maintains a qualified defined benefit
plan, the Nationwide Insurance Enterprise Retirement Plan (the "Retirement
Plan"). In general, a participating employee's annual retirement benefit under
the Retirement Plan will be equal to the sum of (i) 1.25% of the participant's
Final Average Compensation times years of service (to a maximum of 35 years)
and (ii) 0.50% of the participant's Final Average Compensation in excess of
Social Security Covered Compensation times years of service (to a maximum of
35 years). Final Average Compensation, for the portion of the participant's
benefit which is attributable to service on or after January 1, 1996, is the
average of the highest five consecutive covered compensation amounts of the
participant in the participant's last 10 years of service. For the portion of
a participant's benefit attributable to service prior to January 1, 1996,
Final Average Compensation is the average
76
<PAGE>
of the highest 3 consecutive covered compensation amounts of the participant
in the Participant's last 10 years of service. Covered compensation, for
purposes of determining Final Average Compensation under either method, is
calculated on a calendar year basis and includes compensation from any member
of the Nationwide Insurance Enterprise. With respect to Messrs. Gasper,
Galloway, Brock and Karas, because each such officer's compensation is
allocated solely to the Company and its subsidiaries, covered compensation
includes the compensation listed under the headings Salary, Bonus and LTIP
Payouts and a portion of the compensation that is included under the heading
Other Annual Compensation shown in the Summary Compensation Table. Covered
compensation for Mr. McFerson includes the amounts set forth under such
headings and additional compensation amounts received for services rendered to
other members of the Nationwide Insurance Enterprise. Social Security Covered
Compensation means the average of the social security wage bases in effect
during the 35 year period ending with the last day of the year the participant
attains social security retirement age. For employees of Nationwide Mutual and
certain of its subsidiaries and affiliates (including Nationwide Life), the
portion of a participant's benefit attributable to years of service credited
prior to 1996 is also subject to post-retirement increases following the
commencement of benefits or the participant's attainment of age 65, whichever
is later.
A participant becomes fully vested after the completion of five years of
vesting service. The Retirement Plan generally provides for payments to or on
behalf of each vested employee upon such employee's retirement on his or her
normal retirement date or later, although provision is made for payment of
early retirement benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62 for those
with 5 or more years of vesting service. The normal retirement date under the
Retirement Plan is the later of the date the participant attains age 65 or
completes five years of vesting service. Death benefits are payable to a
participant's spouse or, under certain circumstances, the named beneficiary of
a participant who dies with a vested benefit under the Retirement Plan or
while an employee.
Excess and Supplemental Plans
The Nationwide Insurance Enterprise also maintains an unfunded, nonqualified
ERISA excess benefit plan (the "Excess Plan") and a supplemental benefit plan
pursuant to which certain employees may receive a supplemental retirement
benefit (the "Supplemental Plan"). Any employee whose benefits are limited
under the Retirement Plan by reason of limitations under the IRC on the
maximum benefit that may be paid under the Retirement Plan will receive such
benefits under the Excess Plan. Officers who earn in excess of $160,000
annually, and whose benefits under the Retirement Plan are limited by reason
of other limitations under the IRC, may receive benefits under the
Supplemental Plan. Benefits under the Supplemental Plan will be the sum of (i)
1.25% of the participant's Final Average Compensation times years of service
(up to a maximum of 40 years) and (ii) 0.75% of the participant's Final
Average Compensation in excess of Social Security Covered Compensation times
years of service (up to a maximum of 40 years) reduced by benefits accrued
under the Retirement Plan and the Excess Plan.
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<PAGE>
The chart below indicates the estimated maximum annual retirement benefits
that a hypothetical participant would be entitled to receive under the
Retirement Plan (including payments made under the Excess and Supplemental
Plans as a result of limitations imposed by the IRC and ERISA) computed on a
straight-life annuity basis, if retirement occurred at age 65 and the number
of credited years of service and Final Average Compensation equaled the
amounts indicated. For purposes of the chart, it is assumed that the Final
Average Compensation is the same whether measured over the three-year
averaging period that applies to service accumulated prior to 1996 or the
five-year period that applies to service accumulated after 1995. In actual
operation, the total benefit received under the Retirement Plan (including
payments made under the Excess and Supplemental Plans) would be the total of
the benefit determined based on years of service earned under each method.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000........................... $ 30,744 $ 40,992 $ 51,241 $ 61,489 $ 71,737
150,000........................... 41,898 55,864 69,830 83,795 97,761
175,000........................... 49,398 65,864 82,330 98,795 115,261
200,000........................... 56,898 75,864 94,830 113,795 132,761
225,000........................... 64,398 85,864 107,330 128,795 150,261
250,000........................... 71,898 95,864 119,830 143,795 167,761
300,000........................... 86,898 115,864 144,830 173,795 202,761
400,000........................... 116,898 155,864 194,830 233,795 272,761
450,000........................... 131,898 175,864 219,830 263,795 307,761
500,000........................... 146,898 194,864 244,830 293,795 342,761
</TABLE>
All Named Executive Officers have a portion of their benefit calculated
based on the post-1995 definition of Final Average Compensation. As of
December 31, 1995, the number of credited years of service under the
Retirement Plan for Messrs. McFerson, Gasper, Galloway, Brock and Karas was 23
years, 29.5 years, 26.5 years, 26.5 years and 31.5 years, respectively. Mr.
McFerson's credited years of service include, pursuant to an agreement with
Nationwide Mutual, 8.17 years in excess of those actually earned through
employment by the Nationwide Insurance Enterprise. The benefit attributable to
those additional years will be paid by Nationwide Mutual (not the Retirement
Plan) and is reduced by the benefit payable under the retirement plan of Mr.
McFerson's previous employer. Each of the Named Executive Officers earned an
additional year of service in 1996 and their benefit for such year and all
future years will be calculated under the new definition of Final Average
Compensation. Covered compensation paid by the Company for the fiscal year
ended December 31, 1996 for Messrs. McFerson, Gasper, Galloway, Brock and
Karas was $588,368, $236,458, $392,313, $343,171 and $328,513, respectively.
SAVINGS PLANS
The Nationwide Insurance Enterprise maintains the Nationwide Insurance
Enterprise Savings Plan (the "Savings Plan"), a qualified cash or deferred
arrangement plan covering eligible employees of participating companies within
the Nationwide Insurance Enterprise. Under the Savings Plan, participants may
elect to contribute between 1% and 16% of their compensation to accounts
established on their behalf under the Savings Plan in the form of voluntary
salary reductions on a pre-tax basis. The participating companies are
obligated to make matching employer contributions, for the benefit of their
employees, at the rate of 70% of the first 2% of compensation deferred to the
Savings Plan by each employee, and 40% of the next 4% of compensation deferred
by each employee to the Savings Plan. All amounts contributed to the Savings
Plan are invested in one or more funds as designated by the participant.
Normally, a participant receives the value of his or her account upon
termination of employment, although a participant may withdraw all or a part
of the amounts credited to his or her accounts during employment under certain
circumstances, or receive a loan of a portion of his or her account balance.
Under the Savings Plan, a participant is immediately vested in all amounts
credited to his or her account as a result of salary deferrals and earnings on
those deferrals. A participant is vested in amounts attributable to matching
contributions and earnings on those contributions over a period of five years.
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<PAGE>
The Nationwide Insurance Enterprise also maintains an unfunded, nonqualified
supplemental benefit plan (the "DC Supplemental Plan"), which provides
benefits, equal to employer matching contributions that would have been made
under the Savings Plan for the participants, in the absence of the IRC
limitations on compensation that can be considered and amounts that can be
deferred under the Savings Plan less actual matching contributions to the
Savings Plan. Participants are limited to those officers earning in excess of
$160,000 annually. All benefits under the DC Supplemental Plan are fully
vested.
DEFERRED COMPENSATION PROGRAM
The Nationwide Insurance Enterprise maintains a deferred compensation
program (the "Deferred Compensation Program") pursuant to which officers of
participating companies may elect to defer payment of amounts otherwise
payable to such person. Under the Deferred Compensation Program, participants
receive credit for employer matching contributions which were not made under
the Savings Plan or DC Supplemental Plan and any reduction in benefits under
the Retirement Plan, Supplemental Plan or Excess Plan as a result of salary or
other deferrals under the Deferred Compensation Program. An eligible officer
is permitted to enter into a deferral agreement pursuant to which such officer
may annually elect to defer a portion of his or her salary or his or her
incentive compensation earned during the following year. Any such election is
effective prospectively. Amounts deferred under the plan will generally be
payable in annual installments beginning in January of the calendar year
following the calendar year in which the officer terminated employment.
Amounts deferred under the Deferred Compensation Program are credited with
interest. The interest rate is based on the fixed rate option in the Savings
Plan.
SEVERANCE PAY PLAN
The Nationwide Insurance Enterprise maintains the Nationwide Salaried
Employees Severance Pay Plan, a program which provides benefits to employees
whose employment is terminated without an offer of replacement employment
within the Nationwide Insurance Enterprise or with a successor employer. The
benefit provided is a function of years of service completed and salary, with
a maximum benefit of 8 weeks of salary plus an additional week of salary for
each full or partial year of service in excess of 11.
DIRECTORS DEFERRED COMPENSATION PROGRAM
Nationwide Life maintains a deferred compensation program applicable to
nonemployee members of its board of directors. Each director who has been re-
elected to the board of directors at least once and has served for at least 3
years on the board of directors is entitled to monthly payments, following
termination of his or her service on the board of directors, of a monthly
amount equal to the monthly director's fees received at the time of his or her
retirement from the board of directors. The number of monthly payments will
equal the number of months the individual served on the board of directors.
Messrs. Fuellgraf, Holloway, Miller, Patterson and Shisler, the non-employee
members of the Board of Directors of the Company, are also directors of
Nationwide Life.
LONG-TERM EQUITY COMPENSATION PLAN
General
The Board of Directors of the Company has adopted, and Nationwide Corp., as
the sole stockholder of the Company has approved, the Nationwide Financial
Services, Inc. Long-Term Equity Compensation Plan (the "LTEP"). The purpose of
the LTEP is to benefit the stockholders of the Company by encouraging high
levels of performance by selected officers, directors and employees of the
Company and certain of its affiliates, attracting and retaining the services
of such individuals and aligning the interests of such individuals with those
of the stockholders.
The LTEP grants the Compensation Committee of the Board of Directors of the
Company, which will administer the LTEP, flexibility in creating the terms and
restrictions deemed appropriate for particular awards as facts and
circumstances warrant. The LTEP is intended to constitute an unfunded,
unsecured plan for incentive
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<PAGE>
and deferred compensation and is not intended to be subject to any
requirements of ERISA. The LTEP is not qualified under Section 401(a) of the
IRC. The LTEP is intended to satisfy the requirements of Section 16b-3 of the
Exchange Act, and awards under the LTEP which are performance-based are
intended to qualify as "performance-based compensation" for purposes of
Section 162(m) of the IRC.
Types of Awards
The LTEP provides for the grant of any or all of the following types of
awards: (i) stock options, including incentive stock options and non-qualified
stock options, for shares of Class A Common Stock; (ii) stock appreciation
rights ("SARs"), either in tandem with stock options or freestanding; (iii)
restricted stock; and (iv) performance awards. Any stock option granted in the
form of an incentive stock option must satisfy the applicable requirements of
Section 422 of the IRC. Awards may be made to the same person on more than one
occasion and may be granted singly, in combination or in tandem as determined
by the Compensation Committee.
Term
The LTEP was effective as of , 1996. No awards may be granted under the
LTEP after , 2006, and the LTEP may be terminated by the Board of Directors
of the Company prior to such date. In the event of expiration or earlier
termination of the LTEP, the LTEP will remain in effect until such time as all
awards granted thereunder have been satisfied or have expired. No new awards
may by made under the LTEP after its expiration or termination.
Administration
The LTEP will be administered by the Compensation Committee of the Board of
Directors of the Company. The Company intends that each member of the
Compensation Committee shall be a "nonemployee director" within the meaning of
Rule 16b-3 under the Exchange Act and an "outside director" within the meaning
of Section 162(m) of the IRC. Under the LTEP, the Compensation Committee will
have authority (i) to select the employees, officers and directors of the
Company and its affiliates to receive awards; (ii) to determine the timing,
form, amount or value and terms of grants and awards, and the terms and
conditions, if any, subject to which grants and awards will be made and become
payable under the LTEP, (iii) to construe the LTEP and to prescribe rules and
regulations with respect to the administration of the LTEP and (iv) to make
such other determinations authorized under the LTEP as the Compensation
Committee deems necessary or appropriate.
Eligibility
All employees, officers and directors of the Nationwide Insurance Enterprise
are eligible to participate.
Shares Subject to the LTEP
The number of shares of Class A Common Stock which may be issued under the
LTEP, or as to which SARs or other awards may be granted, may not exceed
million.
In the event of any increases or decreases in the number of issued and
outstanding shares of Common Stock pursuant to stock splits, mergers,
reorganizations, recapitalizations, stock dividends or other events described
under the terms of the LTEP, the Compensation Committee shall make appropriate
adjustments to the aggregate number of shares available for issuance under the
LTEP and the number of shares subject to outstanding grants or awards, to the
exercise price per share of outstanding stock options and to the number or
kinds of shares which may be distributed under the LTEP. The terms of stock
options, SARs, restricted stock and performance awards may also be subject to
adjustments by the Compensation Committee to reflect changes in the Company's
capitalization.
Stock Options
The Compensation Committee may grant awards in the form of options to
purchase shares of Class A Common Stock. The Compensation Committee shall,
with regard to each stock option, determine the number of shares subject to
the option and the manner and time of the option's exercise; provided,
however, that the
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<PAGE>
maximum number of shares of Class A Common Stock that may be subject to each
of stock options, SARs or restricted stock awards granted under the LTEP to an
individual optionee during any calendar year cannot exceed 100,000 shares
(subject to appropriate adjustment in the event of stock dividends, stock
splits and certain other events). The exercise price of a stock option may not
be less than the fair market value of the Class A Common Stock on the date the
option is granted and in the case of an incentive stock option will be at
least such price as is necessary for the option to qualify under Section 422
of the IRC. The Committee will designate each option as a non-qualified or an
incentive stock option. The option price upon exercise may, at the discretion
of the Committee, be paid by a participant in cash, shares of Class A Common
Stock, a "cashless exercise" or a combination thereof.
Prior to the consummation of the Equity Offerings, stock options will be
granted under the LTEP to the following officers of the Company in the
following amounts:
<TABLE>
<CAPTION>
NUMBER OF SHARES
EXECUTIVE OFFICER SUBJECT TO OPTION
----------------- -----------------
<S> <C>
</TABLE>
The option exercise price will be equal to .
Stock Appreciation Rights
The LTEP also authorizes the Compensation Committee to grant SARs either
independent of, or in connection with, a stock option. If granted with a stock
option, exercise of the SAR will result in the surrender of the right to
purchase the shares under the option to which the SAR was exercised. Upon
exercising an SAR, the holder receives for each share with respect as to which
the SAR is exercised, an amount equal to the difference between the exercise
price and the fair market value of Class A Common Stock on the date of
exercise. Payment of such amount may be made in shares of Class A Common
Stock, cash, or a combination thereof, as determined by the Compensation
Committee.
Restricted Stock
The LTEP provides that shares of Class A Common Stock subject to certain
restrictions may be awarded to eligible persons from time to time as
determined by the Compensation Committee. The Compensation Committee will
determine the nature and extent of the restrictions on such shares, the
duration of such restrictions and any circumstance under which restricted
shares will be forfeited by the participant. Subject to such restrictions as
the Compensation Committee shall determine, participants holding shares of
restricted stock may exercise full voting rights with respect to such shares
and may receive dividends payable to holders of such shares.
Prior to the consummation of the Equity Offerings, restricted stock will be
granted under the LTEP to the following officers of the Company in the
following amounts:
<TABLE>
<CAPTION>
NUMBER OF SHARES
EXECUTIVE OFFICER OF RESTRICTED STOCK
----------------- -------------------
<S> <C>
</TABLE>
Performance Awards
The LTEP permits the Compensation Committee to grant performance units or
shares to eligible persons under the LTEP from time to time. A performance
award will be contingent upon future performance by the Company or any
subsidiary, division or department thereof. The Compensation Committee shall
establish at the
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<PAGE>
time of grant the relevant performance criteria. Performance periods may
overlap and participants may be awarded performance units and performance
shares having different performance criteria. Unless the Compensation
Committee otherwise determines, in the event of a participant's termination as
an employee or director before the end of any relevant performance period
(other than due to death, disability or retirement), the participant will not
be entitled to any performance award related to such period. Subject to the
discretion of the Compensation Committee, participants who have earned shares
of Class A Common Stock in connection with grants of performance awards may
exercise full voting rights with respect to such shares and may receive
dividends payable to holders of such shares. Payment of a performance award
may be made in cash, Class A Common Stock or a combination thereof, as
determined by the Committee.
Award Agreements
Each award under the LTEP will be evidenced by an agreement in such form and
containing such provisions consistent with the provisions of the LTEP as the
Compensation Committee from time to time approves. In applicable situations,
such agreements may include provisions to qualify as an incentive stock
option, or providing for the payment of the option price, in whole or in part,
by the delivery of a number of shares of Class A Common Stock (plus cash if
necessary) having a fair market value equal to any option price. Such
agreements may also include provisions relating to (i) vesting, (ii) tax
matters (including provisions covering any applicable employee wage
withholding requirements) and (iii) any other matters not inconsistent with
the terms and provisions of the LTEP that the Compensation Committee in its
sole discretion determines. The terms and conditions of award agreements need
not to be identical.
Amendment
The Board of Directors of the Company may at any time terminate or amend the
LTEP in any respect; provided, however, that no amendment which requires
stockholder approval in order for the LTEP to comply with Rule 16b-3 under the
Exchange Act shall be effective unless such amendment is approved by the
requisite number of stockholders of the Company entitled to vote thereon. No
amendment or termination of the LTEP shall, without the consent of the
optionee or participant in the LTEP, alter or impair the rights of such person
under any options or other awards theretofore granted under the LTEP.
Change of Control
Upon the occurrence of a Change in Control (as defined in the LTEP), (i) the
exercisability and vesting of stock appreciation rights and, subject to
certain limitations, stock options shall be accelerated, (ii) the restrictions
and limitations applicable to any restricted stock shall lapse, (iii) the
target payout opportunities attainable under all outstanding awards of
restricted stock, performance units and performance shares shall be deemed to
have been fully earned for the entire performance period, (iv) the vesting of
restricted stock and performance awards denominated in shares of Class A
Common Stock will be accelerated and (v) within 30 days following the
effective date of the Change in Control, a pro rata amount of any outstanding
performance awards will be paid in cash to participants, based upon an assumed
achievement of all relevant performance goals and upon the portion of the
performance period which has elapsed prior to the Change in Control.
OWNERSHIP OF CAPITAL STOCK
Prior to the consummation of the Equity Offerings, all of the outstanding
shares of Common Stock of the Company will be owned by Nationwide Corp. After
the Equity Offerings, Nationwide Corp. will own all of the outstanding shares
of the Class B Common Stock and none of the outstanding shares of the Class A
Common Stock. Such shares of the Class B Common Stock will represent %
( % if the Underwriters' over-allotment option is exercised in full) of the
combined voting power of the outstanding capital stock of the Company
following the Equity Offerings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXISTING ARRANGEMENTS WITH THE NATIONWIDE INSURANCE ENTERPRISE
Organization of the Company
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. Prior to the
Equity Offerings, Nationwide Corp. will acquire all of the Class B Common
Stock of the Company in exchange for all of the outstanding capital stock of
Nationwide Life and such other companies. Prior to such exchange, Nationwide
Life (i) will pay on December 31, 1996 a cash dividend of $50.0 million to
Nationwide Corp. and (ii) will dividend on January 1, 1997 to Nationwide Corp.
the stock of certain of its subsidiaries that do not operate in the long-term
savings and retirement market. Prior to the consummation of the Equity
Offerings, Nationwide Life will pay an additional cash dividend of $ million
to the Company, and the Company will pay an equal cash dividend to Nationwide
Corp.
In addition, effective as of January 1, 1996, Nationwide Life entered into a
100% modified coinsurance agreement with Employers Life pursuant to which all
of Nationwide Life's nonvariable group and wholesale life insurance business
and group and franchise health insurance business was reinsured by Employers
Life. Nationwide Life also entered into a 100% modified coinsurance agreement
with Nationwide Mutual effective as of January 1, 1996, pursuant to which all
of Nationwide Life's individual accident and health insurance business was
reinsured by Nationwide Mutual. See "--Modified Coinsurance Agreements."
Federal Income Taxes
Nationwide Mutual and its U.S. subsidiaries, including the Company and its
subsidiaries, file a consolidated federal income tax return. The members of
the consolidated group currently have a tax sharing arrangement which
provides, in effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed. For the nine
months ended September 30, 1996 and the year ended December 31, 1995, the
Company made federal income tax payments under the tax sharing arrangement of
$89.7 million and $58.1 million, respectively.
Legal Services
The attorneys in the Office of General Counsel of Nationwide Mutual also
operate as the law firm of Druen, Rath & Dietrich. Pursuant to a partnership
agreement, the firm limits its representation to the members of the Nationwide
Insurance Enterprise. The partnership was formed to assure compliance with
Ohio law that prohibits corporations from practicing law. Through a retainer
arrangement, an annual retainer fee is paid by each member of the Nationwide
Insurance Enterprise based upon an estimate of time spent by each attorney
working on legal matters related to the respective member during the previous
year. W. Sidney Druen, Senior Vice President and General Counsel of the
Company, is the senior partner in such firm, and all attorneys and other
employees of the firm are salaried employees of Nationwide Mutual. The firm
applies all of its retainer fees toward office overhead under a rental and
office expense agreement with Nationwide Mutual. For the nine months ended
September 30, 1996 and the year ended December 31, 1995, the Company paid the
firm $1.5 million and $1.7 million, respectively, for legal services rendered
to the Company which amounts were immediately remitted to Nationwide Mutual.
Lease
Pursuant to an arrangement between Nationwide Mutual and its subsidiaries,
the Company leases approximately 536,000 square feet of office space at One
Nationwide Plaza, Two Nationwide Plaza and Three Nationwide Plaza, Columbus,
Ohio, at a current market rate of $19.53 per square foot. Under the
arrangement, the Company determines the amount of office space necessary to
conduct its operations and leases such space from Nationwide Mutual, subject
to availability. For the nine months ended September 30, 1996 and the year
ended December 31, 1995, the Company made payments to Nationwide Mutual and
its subsidiaries totaling $7.8 million and $9.8 million, respectively, under
such arrangement.
Modified Coinsurance Agreements
Effective as of January 1, 1996, Nationwide Life entered into a 100%
modified coinsurance agreement with Employers Life. Under the agreement,
Nationwide Life cedes to Employer's Life, and Employers Life assumes,
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Nationwide Life's nonvariable group and wholesale life insurance business and
group and franchise health insurance business and any ceded or assumed
reinsurance applicable to such group business. For the nine months ended
September 30, 1996, Nationwide Life ceded $169.3 million of premium to
Employers Life. Under modified coinsurance, the assets related to the group
business remain with Nationwide Life and there is no reserve transfer between
the two companies.
Effective as of January 1, 1996, Nationwide Life also entered into a 100%
modified coinsurance agreement with Nationwide Mutual. Under the agreement,
Nationwide Life cedes to Nationwide Mutual, and Nationwide Mutual assumes,
Nationwide Life's individual accident and health insurance business and any
ceded or assumed reinsurance applicable to such business. For the nine months
ended September 30, 1996, Nationwide Life ceded $74.1 million of premium to
Nationwide Mutual.
Cost Sharing Agreement
Pursuant to a cost sharing agreement among Nationwide Mutual and certain of
its subsidiaries, including Nationwide Life, Nationwide Mutual provides
certain operational and administrative services, such as sales, advertising,
personnel and general management services, to its direct and indirect
subsidiaries (including the Company). All such services are provided at cost,
determined by procedures established in accordance with National Association
of Insurance Commissioners' guidelines. Under such agreement, for the nine
months ended September 30, 1996 and the year ended December 31, 1995, the
Company made payments to Nationwide Mutual totaling $263.7 million and $320.9
million, respectively.
Cash Management Agreements
Nationwide Mutual has entered into separate Investment Agency Agreements
with California Cash Management Company ("CCMC") and Nationwide Cash
Management Company ("NCMC"), each an affiliate of the Company. Pursuant to the
terms of such agreements, CCMC and NCMC make, hold and administer short-term
investments (those maturing in one year or less) for Nationwide Mutual and
certain of its affiliates, including Nationwide Life and certain of the
Company's other subsidiaries. Under each agreement, expenses of CCMC or NCMC,
as the case may be, are allocated pro rata among the participants based upon
the participant's ownership percentage of total assets held by CCMC or NCMC.
For the nine months ended September 30, 1996 and the year ended December 31,
1995, the Company paid CCMC and NCMC fees and expenses totaling $374,694 and
$476,615, respectively, under such agreements.
Benefit Plans
The Company participates in the common employee benefit programs with
Nationwide Mutual and its subsidiaries. Included in these programs are
accident and health benefits, disability income benefits and life insurance
benefits. The Company ultimately pays for all benefits provided to its
employees under the benefit program plus an administrative processing fee,
reduced by employee contributions. The administrative processing fee paid by
the Company approximated $719,805 and $663,016 for the nine months ended
September 30, 1996 and the year ended December 31, 1995, respectively.
The Company also participates, along with Nationwide Mutual and its
subsidiaries and affiliates, in life insurance and health care benefit plans
for qualifying retirees. Such plans are funded in amounts determined at the
discretion of management of the Company based on current and anticipated
future costs. Contributions to the plan by the participating companies are
primarily invested in group annuity contracts of Nationwide Life.
Contributions by the Company approximated $1.2 million and $1.4 million for
the nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively.
Repurchase Agreement
Nationwide Life and certain of the Company's other subsidiaries are party to
a master repurchase agreement pursuant to which securities or other financial
instruments are transferred between parties against the transfer of funds by
the transferee for a period of time ending on a specific date or upon the
demand of the transferor.
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NEW AGREEMENTS WITH THE NATIONWIDE INSURANCE ENTERPRISE
Set forth below are descriptions of certain agreements between the Company
and other members of the Nationwide Insurance Enterprise that will become
effective upon the consummation of the Equity Offerings.
Tax Sharing Agreement
The Company is, and after the Capital Security Offering will continue to be,
included in the consolidated United States federal income tax return for which
Nationwide Mutual is the common parent and the Company's tax liability will be
included in the consolidated federal income tax liability of Nationwide
Mutual. The Company also may be included in certain state and local tax
returns of Nationwide Mutual or its subsidiaries.
The Company will enter into the Tax Sharing Agreement with Nationwide Mutual
which will become effective for 1996 and subsequent years, as long as the
Company is included in Nationwide Mutual's consolidated federal income tax
return. It will also be effective for any year in which the Company is
included in a consolidated or combined state or local tax return. Under the
Tax Sharing Agreement, the Company will pay to Nationwide Corp. amounts equal
to the taxes that the Company would otherwise have to pay if the Company were
to file separate federal income tax return (including any amounts determined
to be due as a result of a redetermination of the tax liability of the
consolidated or combined group of which Nationwide Mutual is the common parent
arising from any audit or otherwise) as if the Company were the common parent
of an affiliated group filing a separate consolidated or combined return
rather than being included in Nationwide Mutual's consolidated federal tax
return or Nationwide Mutual's consolidated or combined state or local tax
return. The Company will be responsible for all taxes, including assessments,
if any, for prior years with respect to all other taxes payable by the Company
or any of its subsidiaries, and for all other federal, state and local taxes
that may be imposed upon the Company and that are not addressed in the Tax
Sharing Agreement.
By virtue of its control of the Company and the terms of the Tax Sharing
Agreement, Nationwide Mutual effectively will control all of the Company's tax
decisions. Under the Tax Sharing Agreement, Nationwide Mutual will have sole
authority to respond to and conduct all tax proceedings (including tax audits)
relating to the Company, to file all returns on behalf of the Company and to
determine the amount of the Company's liability to (or entitlement to payment
from) Nationwide Corp. under the Tax Sharing Agreement. This arrangement may
result in conflicts of interest between the Company and Nationwide Mutual. For
example, under the Tax Sharing Agreement, Nationwide Mutual may choose to
contest, compromise or settle any adjustment or deficiency proposed by the
relevant tax authority in a manner that may be beneficial to Nationwide Mutual
and detrimental to the Company. Under the Tax Sharing Agreement, however,
Nationwide Mutual is obligated to act in good faith with regard to all persons
included in the applicable returns.
Intercompany Agreement
The Company, Nationwide Mutual and Nationwide Corp. will enter into the
Intercompany Agreement, certain provisions of which are summarized below. As
used herein, "Nationwide Mutual" means Nationwide Mutual collectively with its
subsidiaries and affiliates (other than the Company and its subsidiaries).
Nationwide Mutual Consent to Certain Events. The Intercompany Agreement will
provide that until Nationwide Mutual and its affiliates cease to control at
least 50% of the combined voting power of the outstanding capital stock of the
Company, the prior written consent of Nationwide Mutual will be required for:
(i) any consolidation or merger of the Company or any of its subsidiaries with
any person (other than with a wholly owned subsidiary); (ii) any sale, lease,
exchange or other disposition or acquisition of assets by the Company or any
of its subsidiaries (other than transactions to which the Company and its
subsidiaries are the only parties), or any series of related dispositions or
acquisitions, involving consideration in excess of $250 million; (iii) any
change in the authorized capital stock of the Company or the creation of any
additional class or series of capital stock of the Company; (iv) any issuance
by the Company or any subsidiary of the Company of any equity securities or
rights, warrants or options to purchase such equity securities, except (a) up
to shares of Class A Common Stock pursuant to employee and director stock
option, profit sharing and other benefit plans of the Company and its
subsidiaries and any options exercisable therefor, (b) shares of Class A
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Common Stock issued upon the conversion of any Class B Common Stock, (c) the
issuance of shares of capital stock of a wholly owned subsidiary of the
Company to the Company or another wholly owned subsidiary of the Company and
(d) in the Equity Offerings; (v) the dissolution, liquidation or winding up of
the Company; (vi) the amendment of the Certificate and certain provisions of
the Bylaws affecting corporate governance; (vii) the election, removal or
filling of a vacancy in the office of the Chairman or Chief Executive Officer
or President of the Company; (viii) the declaration of dividends on any class
or series of capital stock of the Company, except dividends not in excess of
the most recent regular cash dividend or any dividend per share not in excess
of 15% of the then current per share market price of the Class A Common Stock;
(ix) capital expenditures or series of related capital expenditures of the
Company or any of its subsidiaries in excess of $250 million during any period
of 12 consecutive months; (x) the creation, incurrence or guaranty by the
Company or any of its subsidiaries of indebtedness for borrowed money in
excess of $100 million, except the Note Offering and the Capital Securities
Offering; and (xi) any change in the number of directors on the Board of
Directors of the Company, the determination of members of the Board of
Directors or any committee thereof and the filling of newly created
memberships and vacancies on the Board of Directors or any committee thereof.
License to Use Nationwide Name and Service Marks. Pursuant to the
Intercompany Agreement, Nationwide Mutual will grant to the Company and
certain of its subsidiaries a non-exclusive, non-assignable, revocable license
to use the "Nationwide" trade name and certain other service marks
specifically identified in the Intercompany Agreement (collectively, the
"Service Marks") solely for the purpose of identifying and advertising the
Company's long-term savings and retirement business and activities related to
such business. The Intercompany Agreement will provide, among other things,
that, subject to Nationwide Mutual's ability to revoke such license in the
circumstances described below, such license will remain in effect for at least
five years following the Equity Offerings. Thereafter, the Intercompany
Agreement provides that, subject to certain exceptions, Nationwide Mutual will
only have the option to revoke such license on one year's notice if Nationwide
Corp. and its affiliates no longer own at least 50% of the combined voting
power of the outstanding capital stock of the Company. Upon revocation of such
license, the Company and its subsidiaries will be required to discontinue use
of the Service Marks and to change the Company's name to exclude the word
"Nationwide." In addition, the Intercompany Agreement will provide that the
Company and its subsidiaries will not, without the prior written consent of
Nationwide Mutual, take any action with respect to (i) any litigation or
proceeding involving the Service Marks, (ii) any change in the Company's
names, logos and other identifications that might reasonably be expected to
adversely affect the Service Marks or (iii) any advertising campaigns or
strategies that use the Service Marks or that refer to any member of the
Nationwide Insurance Enterprise that are inconsistent with Nationwide Mutual's
guidelines and standards. Nationwide Mutual has the right to revoke the
license under certain circumstances relating to advertising, promotion or use
of the Service Marks in a manner contrary to Nationwide Mutual guidelines and
standards. In addition, Nationwide Mutual can revoke any of the Company's
subsidiaries' use of the Service Marks if there is a change of control of any
such subsidiary of the Company that is licensed to use the Service Marks. A
revocation by Nationwide Mutual of the license to use the Service Marks could
have a material adverse effect on the Company.
Equity Purchase Rights. The Company will agree that, to the extent permitted
by the NYSE and so long as Nationwide Mutual controls at least 50% of the
combined voting power of the outstanding capital stock of the Company,
Nationwide Corp. may purchase its pro rata share (based on its then current
percentage voting interest in the Company) of any voting equity securities to
be issued by the Company (excluding any such securities offered pursuant to
employee stock options or other benefit plans, divided reinvestment plans and
other offerings other than for cash) (the "Equity Purchase Rights").
Registration Rights. The Company will grant to Nationwide Corp. certain
demand and "piggyback" registration rights with respect to shares of Common
Stock owned by it. Nationwide Corp. has the right to request up to two demand
registrations in each calendar year, but not more than four in any five-year
period. Nationwide Corp. will also have the right, which it may exercise at
any time and from time to time, to include the shares of Common Stock held by
it in any registration of common equity securities of the Company initiated by
the Company on its own behalf or on behalf of any other stockholders of the
Company. These rights will be subject
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to certain "blackout" provisions. Such registration rights will be
transferable by Nationwide Corp. The Company will agree to pay all costs and
expenses in connection with each such registration, except underwriting
discounts and commissions applicable to the shares of Common Stock sold by
Nationwide Corp. The Intercompany Agreement will contain customary terms and
provisions with respect to, among other things, registration procedures and
certain rights to indemnification granted by parties thereunder in connection
with the registration of Common Stock on behalf of Nationwide Mutual.
Indemnification. The Intercompany Agreement will provide that the Company
will indemnify Nationwide Mutual and its respective officers, directors,
employees and agents (collectively, the "Indemnities") against losses based
on, arising out of or resulting from (i) the use of the Service Marks and (ii)
any acts or omissions arising out of performances of the Intercompany
Agreement by the Company and its subsidiaries. In addition, the Company will
agree to indemnify the Indemnitees against certain civil liabilities,
including liabilities under the Securities Act, relating to misstatements in
or omissions from the Registration Statement of which this Prospectus forms a
part and any other registration statement that the Company files under the
Securities Act (other than misstatements or omissions made in reliance on
information relating to and furnished by any member of Nationwide Mutual for
use in the preparation thereof, against which Nationwide Mutual has agreed to
indemnify the Company). Nationwide Mutual also will agree to indemnify the
Company and its subsidiaries and each of their respective officers, directors,
employees and agents against losses based on, arising out of or resulting from
any breach by Nationwide Corp. or Nationwide Mutual of the Intercompany
Agreement and certain other specifically identified matters.
Nationwide Insurance Enterprise Insurance Agents. In the Intercompany
Agreement, Nationwide Mutual will agree to allow the Company to distribute its
variable annuity, fixed annuity and individual universal, variable and
traditional life insurance products through Nationwide Insurance Enterprise
insurance agents. Such right is exclusive to the Company, subject to the
limited right of certain other members of the Nationwide Insurance Enterprise
to sell such products through the agency force, for at least five years
following the Equity Offerings. Thereafter, the Intercompany Agreement
provides that Nationwide Mutual will only have the option to terminate the
Company's right to distribute products through Nationwide Insurance Enterprise
insurance agents on one year's notice if Nationwide Corp. and its affiliates
no longer own at least 50% of the combined voting power of the outstanding
capital stock of the Company. The termination of such right could have an
adverse effect on the Company's ability to distribute certain of its products.
In 1995, 6.6% of the Company's statutory premiums and deposits were
attributable to products sold by Nationwide Insurance Enterprise insurance
agents.
Lease Agreement
The Company will enter into a Lease Agreement with Nationwide Mutual which
will provide that Nationwide Mutual will continue to lease to the Company the
premises currently occupied by the Company on terms consistent with prior
allocation practices. Under the agreement, the Company will determine the
office space necessary to conduct its operations and will lease such space
from Nationwide Mutual, subject to availability. See "--Existing Arrangements
with the Nationwide Insurance Enterprise Lease."
FUTURE TRANSACTIONS WITH THE NATIONWIDE INSURANCE ENTERPRISE
In the future, the Company may enter into agreements with members of the
Nationwide Insurance Enterprise that will not be the result of arm's-length
negotiations between independent parties. Conflicts of interest could arise in
the future with respect to transactions involving members of the Nationwide
Insurance Enterprise, on the one hand, and the Company, on the other hand. Any
such transactions that are material to the Company will be subject to approval
by a vote of disinterested members of the Company's Board of Directors. In
addition, under the Ohio insurance holding company laws, arrangements and
agreements between the Company's insurance subsidiaries and other members of
the Nationwide Insurance Enterprise must be fair and equitable and may be
subject to the approval of the Superintendent of Insurance of the State of
Ohio. The Credit Facility requires that any transaction between the Company
and any of its affiliates be on an arm's-length basis on terms at least as
favorable to the Company as could have been obtained from a third party which
is not an affiliate. See "Business--Regulation."
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DESCRIPTION OF THE CAPITAL SECURITIES
The following summary of the principal terms and provisions of the Capital
Securities does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Declaration, a copy of the form of which is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part, the Trust Act and the Trust Indenture Act. The Capital Securities will
be issued pursuant to the terms of the Declaration. At the time the
Registration Statement becomes effective, the Declaration will be qualified as
an indenture under the Trust Indenture Act. The Property Trustee will act as
indenture trustee for the Declaration for purposes of compliance with the
Trust Indenture Act. The terms of the Capital Securities will include those
stated in the Declaration, including those required to be made part of the
Declaration by the Trust Indenture Act. Capitalized terms not otherwise
defined herein have the meanings assigned to them in the Declaration.
GENERAL
The Declaration authorizes the Regular Trustees to issue on behalf of the
Trust, the Trust Securities, which represent undivided beneficial interests in
the assets of the Trust. The Capital Securities entitle the holders thereof to
a preference in certain circumstances with respect to distributions and
amounts payable on redemption or liquidation over the Common Securities, as
well as other benefits as described in the Declaration.
All of the Common Securities will be owned, directly or indirectly, by the
Company. The Common Securities rank pari passu, and payments will be made
thereon pro rata, with the Capital Securities except as described under "-
Subordination of Common Securities." The Junior Subordinated Debentures will
be owned by the Property Trustee and held for the benefit of the holders of
the Trust Securities. The Guarantee is a full and unconditional guarantee with
respect to the Capital Securities, but does not guarantee payment of
distributions or amounts payable on redemption or liquidation of the Capital
Securities when the Trust does not have funds available to make such payments.
See "Description of the Guarantee."
Effectively, the Company has, through the Guarantee, the Junior Subordinated
Debentures, the Indenture and the Declaration, taken together, fully and
unconditionally guaranteed all of the Trust's obligations under the Capital
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only
the combined operation of these documents that has the effect of providing a
full and unconditional guarantee of the Trust's obligations under the Capital
Securities. See "Effect of Obligations Under the Junior Subordinated
Debentures and the Guarantee."
DISTRIBUTIONS
Distributions on the Capital Securities will be fixed at a rate per annum of
% of the stated liquidation amount of $1,000 per Capital Security. Deferred
distributions (and interest thereon) will (to the extent permitted by
applicable law) accrue interest (compounded semi-annually) at the same rate.
The term "distributions" as used herein includes any such interest payable
unless otherwise stated. The amount of distributions payable for any period
will be computed on the basis of a 360-day year of twelve 30-day months and,
for any period of less than a full calendar month, the number of days elapsed
in such month.
Distributions on the Capital Securities will be cumulative, will accrue from
the date of initial issuance and will be payable semi-annually in arrears on
and of each year, commencing , 1997, when, as and
if available for payment by the Property Trustee, except as otherwise
described below.
The Company has the right under the Indenture to defer interest payments
from time to time on the Junior Subordinated Debentures for successive
periods, not exceeding 10 consecutive semi-annual periods, and, as a
consequence, semi-annual distributions on the Capital Securities would be
deferred by the Trust (although to the extent permitted by law, such
distributions would continue to accrue interest since interest would continue
to
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accrue on the Junior Subordinated Debentures) during any such Deferral Period.
In the event that the Company exercises this right, during such period, the
Company (i) shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than stock dividends paid by the
Company which consist of stock of the same class as that on which the dividend
is being paid or purchases or acquisitions of shares of Common Stock in
connection with the satisfaction by the Company of its obligations under any
employee benefit plans), (ii) shall not make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem any debt
securities issued by the Company that rank pari passu with or junior to the
Junior Subordinated Debentures, and (iii) shall not make any guarantee
payments with respect to the foregoing (other than pursuant to the Guarantee).
Prior to the termination of any Deferral Period, the Company may further
extend such Deferral Period; provided, that such Deferral Period together with
all previous and further deferrals thereof may not exceed 10 consecutive semi-
annual periods. Upon the termination of any Deferral Period, the Company is
required to pay all amounts then due and, upon such payment, the Company may
select a new Deferral Period, subject to the above requirements. In no event
shall any Deferral Period extend beyond the maturity of the Junior
Subordinated Debentures. Consequently, there could be multiple Deferral
Periods of varying lengths prior to the maturity date of the Junior
Subordinated Debentures. See "Description of the Junior Subordinated
Debentures-- Interest" and "--Option to Extend Interest Payment Period." If
distributions are deferred, the deferred distributions and accrued interest
thereon shall be paid to holders of record of the Capital Securities as they
appear on the books and records of the Trust on the record date for
distributions due at the end of such Deferral Period.
Distributions on the Capital Securities must be paid semi-annually on the
dates payable to the extent of funds of the Trust available for the payment of
such distributions. Amounts available to the Trust for distribution to the
holders of the Capital Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust will invest the proceeds from the
issuance and sale of the Trust Securities. See "Description of the Junior
Subordinated Debentures." The payment of distributions, to the extent of funds
of the Trust available therefor, is guaranteed by the Company on a limited
basis, as set forth under "Description of the Guarantee."
Distributions on the Capital Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which will be the first day of the month in which the relevant
payment date falls. Subject to any applicable laws and regulations and the
provisions of the Declaration, each such payment will be made as described
under "--Book-Entry-Only Issuance--The Depository Trust Company" below. In the
event that any date on which distributions are payable on the Capital
Securities is not a Business Day, payment of the distribution payable on such
date will be made on the next succeeding day which is a Business Day (without
any distribution or other payment in respect of any such delay) except that,
if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such date. A "Business Day" shall mean any
day other than a day on which banking institutions in The City of New York are
authorized or required by law to close.
MANDATORY REDEMPTION
The Junior Subordinated Debentures will mature on , 2037 and may
be redeemed, in whole or in part, at any time upon the occurrence of a Tax
Event or an Optional Redemption. Upon the repayment or payment of the Junior
Subordinated Debentures, whether at maturity or upon redemption or otherwise,
the proceeds from such repayment or redemption shall simultaneously be applied
to redeem Trust Securities having an aggregate liquidation amount equal to the
aggregate principal amount of Junior Subordinated Debentures so repaid or
redeemed at the Redemption Price; provided that holders of the Trust
Securities shall be given not less than 30 nor more than 60 days' notice of
such redemption. See "--Tax Event Distribution" and "Description of the Junior
Subordinated Debentures--Optional Redemption." In the event that fewer than
all of the outstanding Trust Securities are to be redeemed, the Trust
Securities will be redeemed pro rata to each holder
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according to the aggregate liquidation amount of Trust Securities held by the
relevant holder in relation to the aggregate liquidation amount of all Trust
Securities outstanding. See "--Book-Entry Issuance--The Depository Trust
Company" below for a description of DTC's (as hereinafter defined) procedures
in the event of redemption.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES UPON LIQUIDATION OF THE TRUST
At any time, the Company will have the right to terminate the Trust and,
after satisfaction of the liabilities of creditors of the Trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Under current
United States federal income tax law and interpretations and assuming, as
expected, the Trust is treated as a grantor trust, a distribution of the
Junior Subordinated Debentures should not be a taxable event to holders of the
Capital Securities. Should there be a change in such law, a change in the
legal interpretation thereof, a Tax Event or other circumstances, however, the
distribution of the Junior Subordinated Debentures could be a taxable event to
the holders of the Capital Securities. In addition, a dissolution of the Trust
in which holders of the Capital Securities receive cash would be a taxable
event to such holders. See "--Distribution of Cash Upon Liquidation of the
Trust" and "United States Federal Income Taxation--Receipt of Subordinated
Debentures or Cash Upon Liquidation of the Trust."
The Trust shall automatically terminate upon the first to occur: (i) certain
events of bankruptcy, dissolution or liquidation of the Company; (ii) the
distribution of an aggregate principal amount of Junior Subordinated
Debentures with an aggregate principal amount equal to the aggregate stated
liquidation amount of, with an interest rate identical to the distribution
rate of, and accrued and unpaid interest equal to accrued and unpaid
distributions on, the Trust Securities, if the Company has given written
direction to the Property Trustee to terminate the Trust (which direction is
optional and, except as described below, wholly within the discretion of the
Company); (iii) redemption of all of the Capital Securities as described under
"--Mandatory Redemption" above; (iv) expiration of the term of the Trust; and
(v) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If a termination occurs as described in clause (i), (ii), (iv), or (v) of
the preceding paragraph, the Trust shall be liquidated by the Regular Trustees
as expeditiously as the Regular Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each holder of the Capital Securities, Junior
Subordinated Debentures with an aggregate principal amount equal to the
aggregate stated liquidation amount of, with an interest rate identical to the
distribution rate of, and accrued and unpaid interest equal to accrued and
unpaid distributions on, the Capital Securities.
If the Company either elects not to or is unable to liquidate the Trust and
distribute the Junior Subordinated Debentures to holders of the Trust
Securities, the Trust Securities will remain outstanding until the repayment
of the Junior Subordinated Debentures on their maturity.
After the date fixed for any distribution of Junior Subordinated Debentures
upon dissolution of the Trust (i) the Capital Securities will no longer be
deemed to be outstanding, and (ii) The Depository Trust Company (the
"Depository" or "DTC") or its nominee, as the record holder of the Capital
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution.
There can be no assurance as to the market prices for either the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Capital Securities. Accordingly, the Capital Securities that an
investor may purchase, or the Junior Subordinated Debentures that the investor
may receive on dissolution and liquidation of the Trust, may trade at a
discount to the price that the investor paid to purchase the Capital
Securities offered hereby.
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DISTRIBUTION OF CASH UPON LIQUIDATION OF THE TRUST
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (each a "Liquidation"), the then
holders of the Capital Securities will be entitled to receive on a pro rata
basis solely out of the assets of the Trust, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, distributions in an
amount equal to the aggregate of the stated liquidation amount of $1,000 per
Capital Security plus any additional amount payable upon redemption of the
Junior Subordinated Debentures as a result of the Make-Whole Premium and
accrued and unpaid distributions thereon to the date of payment (the
"Liquidation Distribution"), unless, in connection with such Liquidation,
Junior Subordinated Debentures are distributed as provided above in "--
Distribution of Junior Subordinated Debentures Upon Liquidation of the Trust."
If, upon any such Liquidation, the Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Capital Securities shall be paid on a pro rata basis. The holders
of the Common Securities will be entitled to receive distributions upon any
such dissolution pro rata with the holders of the Capital Securities, except
that if a Declaration Event of Default has occurred and is continuing, the
Capital Securities shall have a preference over the Common Securities with
regard to such distributions.
TAX EVENT DISTRIBUTION
"Tax Event" means that the Company shall have obtained an opinion of
nationally recognized independent tax counsel (reasonably acceptable to the
Regular Trustees) experienced in such matters to the effect that, as a result
of (a) any amendment to, or change (including any announced prospective
change, provided that a Tax Event shall not occur more than 90 days before the
effective date of any such prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein or (b) any amendment to, or change in, an
interpretation or application of such laws or regulations by any legislative
body, court, governmental agency or regulatory authority (including the
enactment of any legislation and the publication of any judicial decision or
regulatory determination on or after the date of original issuance of the
Capital Securities), which amendment or change is effective or which
interpretation or pronouncement is announced on or after the date of original
issuance of the Capital Securities, there is more than an insubstantial risk
that (i) the Trust is or will be subject to United States Federal income tax
with respect to interest received on the Junior Subordinated Debentures, (ii)
interest payable, in cash to the Trust on the Junior Subordinated Debentures
is not, or will not be, deductible, in whole or in part, by the Company for
United States Federal income tax purposes or (iii) the Trust is or will be
subject to more than a de minimis amount of other taxes, duties, assessments
or other governmental charges.
If, at any time, a Tax Event shall occur and be continuing, the Trust shall,
except in the limited circumstances described below, be dissolved with the
result that the Junior Subordinated Debentures with an aggregate principal
amount equal to the aggregate stated liquidation amount of, with an interest
rate identical to the distribution rate of, and accrued and unpaid interest
equal to accrued and unpaid distributions on, the Trust Securities, will be
distributed to the holders of the Trust Securities in liquidation of such
holders' interests in the Trust on a pro rata basis within 90 days following
the occurrence of such Tax Event; provided, however, that such dissolution and
distribution shall be conditioned on (i) the Regular Trustees' receipt of an
opinion of nationally recognized independent tax counsel experienced in such
matters (a "No Recognition Opinion"), which opinion may rely on published
revenue rulings of the Internal Revenue Service, to the effect that the
holders of the Trust Securities will not recognize any gain or loss for United
States federal income tax purposes as a result of such dissolution and
distribution of Junior Subordinated Debentures and (ii) the Company being
unable to avoid such Tax Event within such 90 day period by taking some
ministerial action or pursuing some other reasonable measure that will have no
adverse effect on the Trust, the Company or the holders of the Trust
Securities. Furthermore, if after receipt of a No Recognition Opinion by the
Regular Trustees (i) the Company has received an opinion (a "Redemption Tax
Opinion") of nationally recognized independent tax counsel experienced in such
matters that, as a result of a Tax Event, there is more than an insubstantial
risk that the
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Company would be precluded from deducting the interest on the Junior
Subordinated Debentures for United States federal income tax purposes, even
after the Junior Subordinated Debentures were distributed to the holders of
Trust Securities in liquidation of such holders' interests in the Trust as
described above, or (ii) the Regular Trustees shall have been informed by such
tax counsel that it cannot deliver a No Recognition Opinion to the Trust, the
Company shall have the right, upon not less than 30 nor more than 60 days
notice, to redeem the Junior Subordinated Debentures at par plus accrued and
unpaid interest thereon to the date fixed for redemption, in whole or in part,
for cash within 90 days following the occurrence of such Tax Event, and,
following such redemption, Trust Securities with an aggregate liquidation
amount equal to the aggregate principal amount of the Junior Subordinated
Debentures so redeemed shall be redeemed by the Trust at the Redemption Price
on a pro rata basis; provided, however, that (i) no Make-Whole Premium shall
be payable in connection with a redemption of Junior Subordinated Debentures
upon the occurrence of a Tax Event and (ii) if at the time there is available
to the Company or the Trust the opportunity to eliminate, within such 90 day
period, the Tax Event by taking some ministerial action, such as filing a form
or making an election or pursuing some other similar reasonable measure that
has no adverse effect on the Trust, the Company or the holders of the Trust
Securities, the Company or the Trust will pursue such measure in lieu of
redemption.
There can be no assurance as to the market prices for either the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Capital Securities if a dissolution and liquidation of the
Trust were to occur. Accordingly, the Capital Securities that an investor may
purchase, whether pursuant to the offer made hereby or in the secondary
market, or the Junior Subordinated Debentures that an investor may receive if
a dissolution and liquidation of the Trust were to occur, may trade at a
discount to the price that the investor paid to purchase the Capital
Securities offered hereby.
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"), the
revenue portion of President Clinton's budget proposal, was released. The Bill
would, among other things, deny deductions for interest on an instrument,
issued by a corporation, issued on or after December 7, 1995 if the instrument
had a maximum weighted average maturity of more than 40 years. The Bill would
also generally deny interest deductions for interest on an instrument, issued
by a corporation, that has a maximum term of more than 20 years and that is
not shown as indebtedness on the separate balance sheet of the issuer or,
where the instrument is issued to a related party (other than a corporation),
where the holder or some other related party issues a related instrument that
is not shown as indebtedness on the issuer's consolidated balance sheet. For
purposes of determining the weighted average maturity or the term of an
instrument, any right to extend would be treated as exercised. The above-
described provisions of the Bill were proposed to be effective generally for
instruments issued on or after December 7, 1995. If either provision were to
apply to the Junior Subordinated Debentures, the Company would be unable to
deduct interest on the Junior Subordinated Debentures. However, on March 29,
1996, the Chairmen of the Senate Finance and House and Ways and Means
Committees issued a joint statement to the effect that it was their intention
that the effective date of the President's legislative proposals, if adopted,
will be no earlier than the date of appropriate Congressional action. In
addition, subsequent to the publication of the joint statement, Senator Daniel
Patrick Moynihan and Representatives Sam M. Gibbons and Charles B. Rangel
wrote letters to Treasury Department officials concurring with the views
expressed in the joint statement. Under current law, the Company will be able
to deduct interest on the Junior Subordinated Debentures and based upon the
joint statement, it is expected that if the proposed legislation were to be
enacted, such legislation would not apply retroactively to the Junior
Subordinated Debentures. However, if the provision of the Bill regarding a 20-
year term is enacted with retroactive effect with regard to the Junior
Subordinated Debentures, the Company will not be entitled to an interest
deduction with respect to the Junior Subordinated Debentures. There can be no
assurance that current or future legislative proposals or final legislation
will not deny the Company a deduction otherwise available for such interest
payments, which in turn could give rise to a Tax Event, which would permit the
Company to cause a redemption of the Junior Subordinated Debentures or a
distribution of the Junior Subordinated Debentures in liquidation of the
Trust.
Notice of any prepayment will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be prepaid at its registered address. Unless the
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Company defaults in payment of the prepayment price, on and after the
prepayment date interest ceases to accrue on such Junior Subordinated
Debentures called for prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures the Additional Sums.
"Additional Sums" means such additional amounts as may be necessary in order
that the amount of distributions then due and payable by the Trust on the
outstanding Capital Securities and Common Securities shall not be reduced as a
result of any additional taxes, duties or other governmental charges to which
the Trust has become subject as a result of a Tax Event.
REDEMPTION OR DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
At any time, the Company will have the right to redeem the Junior
Subordinated Debentures in whole (but not in part) at the Redemption Price
(except that in the event of a redemption following a Tax Event, the
Redemption Price shall not include the Make-Whole Premium) and therefore cause
a mandatory redemption of the Capital Securities at the Redemption Price. The
Company also will have the right at any time to terminate the Trust, and after
satisfaction of claims of creditors as provided by applicable law, to cause
the Junior Subordinated Debentures to be distributed to the holders of the
Trust Securities. See "--Distribution of Junior Subordinated Debentures Upon
Liquidation of the Trust" and "--Mandatory Redemption".
Under current United States federal income tax law, a distribution of Junior
Subordinated Debentures upon the dissolution of the Trust would not be a
taxable event to holders of the Capital Securities. If, however, the Trust is
characterized for United States federal income tax purposes as an association
taxable as a corporation at the time of dissolution of the Trust, the
distribution of the Junior Subordinated Debentures may constitute a taxable
event to holders of Capital Securities. Moreover, a dissolution of the Trust
in which holders of the Capital Securities receive cash would be a taxable
event to such holders. See "Certain Federal Income Tax Considerations--Receipt
of Junior Subordinated Debentures or Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Capital Securities
or the Junior Subordinated Debentures that may be distributed in exchange for
Capital Securities. Accordingly, the Capital Securities or the Junior
Subordinated Debentures may trade at a discount to the price that an investor
pays to purchase the Capital Securities offered hereby. Because holders of
Capital Securities may receive Junior Subordinated Debentures, prospective
purchasers of Capital Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and should carefully review all
the information regarding the Junior Subordinated Debentures contained herein.
See "--Distribution of Junior Subordinated Debentures Upon Liquidation of the
Trust" and "--Mandatory Redemption".
REDEMPTION PROCEDURES
The Capital Securities will not be redeemed unless all accrued and unpaid
distributions have been paid on all Capital Securities for all semi-annual
distribution periods terminating on or prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Capital Securities
(which notice will be irrevocable), then, by 12:00 noon, New York time, on the
redemption date, the Trust will irrevocably deposit with DTC funds sufficient
to pay the amount payable on redemption and will give DTC irrevocable
instructions and authority to pay such amount in respect of Capital
Securities. Notwithstanding the foregoing, distributions payable on or prior
to the redemption date for any Capital Securities called for redemption shall
be payable to the holders of such Capital Securities on the relevant record
dates for the related distribution dates. If notice of redemption shall have
been given and funds are deposited as required, then upon the date of such
deposit, all rights of holders of
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such Capital Securities so called for redemption will cease, except the right
of the holders of such Capital Securities to receive the Redemption Price, but
without interest on such Redemption Price. In the event that any date fixed
for redemption of Capital Securities is not a Business Day, then payment of
the amount payable on such date will be made on the next succeeding day which
is a Business Day (without any interest or other payment in respect of any
such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day. In
the event that payment of the Redemption Price in respect of Capital
Securities is improperly withheld or refused and not paid either by the Trust
or by the Company pursuant to the Guarantee described under "Description of
the Guarantee," distributions on such Capital Securities will continue to
accrue at the then applicable rate, from the original redemption date to the
date of payment, in which case the actual payment date will be considered the
date fixed for redemption for purposes of calculating the amount payable upon
redemption (other than for purposes of calculating any premium).
In the event that fewer than all of the outstanding Capital Securities are
to be redeemed, the Capital Securities will be redeemed as described below
under "--Book-Entry-Only Issuance--The Depository Trust Company."
Subject to the foregoing and applicable law (including, without limitation,
United States Federal securities laws), the Company or its subsidiaries may at
any time and from time to time purchase outstanding Capital Securities by
tender, in the open market or by private agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the amount payable upon redemption of, the
Capital Securities, as applicable, shall be made pro rata based on the
liquidation amount of the Capital Securities; provided, however, that, if on
any distribution date or redemption date a Declaration Event of Default (as
defined herein under "--Declaration Events of Default") under the Declaration
shall have occurred and be continuing, no payment of any distribution on, or
amount payable upon redemption of, any Common Security, and no other payment
on account of the redemption, liquidation or other acquisition of Common
Securities, shall be made unless payment in full in cash of all accumulated
and unpaid distributions on all outstanding Capital Securities for all
distribution periods terminating on or prior thereto, or in the case of
payment of the amount payable upon redemption of the Capital Securities, the
full amount of such amount in respect of all outstanding Capital Securities
shall have been made or provided for, and all funds available to the Property
Trustee shall first be applied to the payment in full in cash of all
distributions on, or the amount payable upon redemption of, Capital Securities
then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived any such Declaration Event of Default
until the effect of all such Declaration Events of Default with respect to the
Capital Securities have been cured, waived or otherwise eliminated. Until any
such Declaration Events of Default with respect to the Capital Securities have
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Capital Securities and not the holders
of the Common Securities, and only the holders of the Capital Securities will
have the right to direct the Property Trustee to act on their behalf.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity or person,
except as described below. The Trust may, without the consent of the holders
of the Capital Securities, consolidate, amalgamate, merge with or into, or be
replaced by, a trust organized as such under the laws of any state of the
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United States of America or of the District of Columbia; provided that (i) if
the Trust is not the survivor, such successor entity either (x) expressly
assumes all of the obligations of the Trust under the Capital Securities or
(y) substitutes for the Capital Securities other securities having
substantially the same terms as the Capital Securities (the "Successor
Securities") as long as the Successor Securities rank, with respect to
participation in the profits and distributions or in the assets of the
successor entity, at least as high as the Capital Securities rank with respect
to participation in the profits and dividends or in the assets of the Trust,
(ii) the Company expressly acknowledges such successor entity as the holder of
the Junior Subordinated Debentures, (iii) the Capital Securities or any
Successor Securities are listed, or any Successor Securities will be listed
upon notification of issuance, on any national securities exchange or other
organization on which the Capital Securities are then listed, (iv) such
merger, consolidation, amalgamation or replacement does not cause the Capital
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the
powers, preferences and other special rights of the holders of the Capital
Securities (including any Successor Securities) in any material respect, (vi)
such successor entity has a purpose substantially identical to that of the
Trust, (vii) the Company has provided a guarantee to the holders of the
Successor Securities with respect to such successor entity having
substantially the same terms as the Guarantee and (viii) prior to such merger,
consolidation, amalgamation or replacement, the Company has received an
opinion of nationally recognized independent counsel (reasonably acceptable to
the Trustee) to the Trust experienced in such matters to the effect that (x)
such successor entity will be treated as a grantor trust for United States
Federal income tax purposes, (y) following such merger, consolidation,
amalgamation or replacement, neither the Company nor such successor entity
will be required to register as an investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and (z) such merger,
consolidation, amalgamation or replacement will not adversely affect the
rights, preferences and privileges of the holders of the Capital Securities
(including any Successor Securities). Notwithstanding the foregoing, the Trust
shall not, except with the consent of holders of 100% in liquidation amount of
the Common Securities, consolidate, amalgamate, merge with or into, or be
replaced by any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it, if such consolidation,
amalgamation, merger or replacement would cause the Trust or the Successor
Entity to be classified as other than a grantor trust for United States
Federal income tax purposes.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Event of Default") or a default
by the Company under the Guarantee constitutes an event of default under the
Declaration with respect to the Capital Securities (a "Declaration Event of
Default"); provided that, pursuant to the Declaration, the holders of the
Common Securities will be deemed to have waived any Declaration Event of
Default with respect to the Common Securities until all Declaration Events of
Default with respect to the Capital Securities have been cured, waived or
otherwise eliminated. Until such Declaration Events of Default with respect to
the Capital Securities have been so cured, waived or otherwise eliminated, the
Property Trustee will be deemed to be acting solely on behalf of the holders
of the Capital Securities and only the holders of the Capital Securities will
have the right to direct the Property Trustee with respect to certain matters
under the Declaration and, therefore, the Indenture.
As long as the Capital Securities are outstanding, upon the occurrence of a
Declaration Event of Default, the Property Trustee as the sole holder of the
Junior Subordinated Debentures will have the right under the Indenture to
declare the principal of and interest on the Junior Subordinated Debentures to
be immediately due and payable. The Company and the Trust are each required to
file annually with the Property Trustee an officer's certificate as to its
compliance with all conditions and covenants under the Declaration.
VOTING RIGHTS; AMENDMENT OF DECLARATION
Except as described herein, under the Trust Act and under "Description of
the Guarantee--Amendments and Assignment," and as otherwise required by law
and the Declaration, the holders of the Capital Securities will have no voting
rights.
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Subject to the requirement of the Property Trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in aggregate liquidation amount of the Capital
Securities have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Property Trustee, or direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration including the right to direct the Property Trustee, as holder of
the Junior Subordinated Debentures, to (i) exercise the remedies available
under the Indenture with respect to the Junior Subordinated Debentures, (ii)
waive any past Event of Default that is waiveable under the Indenture, (iii)
exercise any right to rescind or annul a declaration that the principal of all
the Junior Subordinated Debentures shall be due and payable; or (iv) consent
to any amendment, modification or termination of the Indenture or such Junior
Subordinated Debentures, where such consent shall be required; provided,
however, that, where a consent or action under the Indenture would require the
consent or act of the holders of more than a majority of the aggregate
principal amount of Junior Subordinated Debentures affected thereby, only the
holders of the percentage of the aggregate stated liquidation amount of the
Capital Securities which is at least equal to the percentage required under
the Indenture may direct the Property Trustee to give such consent or take
such action. The Property Trustees shall not revoke any action previously
authorized or approved by a vote of the Capital Securities except by
subsequent vote or the holders of the Capital Securities. A holder of Capital
Securities may also directly institute a proceeding on behalf of the Trust for
enforcement of payment to the Trust of the principal of or premium, if any, or
interest on the Junior Subordinated Debentures on or after the respective due
dates specified in the Junior Subordinated Debentures. The holders of the
Capital Securities would not be able to exercise directly any other remedies
available to the holder of the Junior Subordinated Debentures unless the
Property Trustee or the Indenture Trustee, acting for the benefit of the
Property Trustee, fails to do so. In such event, the holders of at least 25%
in aggregate liquidation amount of outstanding Capital Securities would have a
right to institute such proceedings. The Property Trustee shall notify all
holders of the Capital Securities of any notice of default received from the
Indenture Trustee with respect to the Junior Subordinated Debentures. Such
notice shall state that such Event of Default also constitutes a Declaration
Event of Default. Except with respect to directing the time, method and place
of conducting a proceeding for a remedy, the Property Trustee shall not take
any of the actions described in clause (i), (ii), (iii) or (iv) above unless
the Property Trustee has obtained an opinion of tax counsel to the effect
that, as a result of such action, the Trust will not fail to be classified as
a grantor trust for United States federal income tax purposes.
In the event the consent of the Property Trustee, as the holder of the
Junior Subordinated Debentures, is required under the Indenture with respect
to any amendment, modification or termination of the Indenture, the Property
Trustee shall request the direction of the holders of the Trust Securities
with respect to such amendment, modification or termination and shall vote
with respect to such amendment, modification or termination as directed by a
majority in liquidation amount of the Capital Securities voting together as a
single class; provided, however, that, where a consent under the Indenture
would require the consent of the holders of more than a majority of the
aggregate principal amount of the Junior Subordinated Debentures, the Property
Trustee may only give such consent at the direction of the holders of at least
the same proportion in aggregate stated liquidation amount of the Capital
Securities. The Property Trustee shall not take any such action in accordance
with the directions of the holders of the Trust Securities unless the Property
Trustee has obtained an opinion of tax counsel to the effect that for the
purposes of United States federal income tax the Trust will not be classified
as other than a grantor trust.
A waiver of an Event of Default under the Indenture will constitute a waiver
of the corresponding Declaration Event of Default.
The Declaration may be amended from time to time by the Regular Trustees,
without the consent of the holders of the Capital Securities (i) to cure any
ambiguity, correct or supplement any provisions in the Declaration that may be
defective or inconsistent with any other provision, (ii) to add to the
covenants, restrictions or obligations of the Company, (iii) to conform to any
change in Rule 3a-5 of the 1940 Act or written change in interpretation or
application of Rule 3a-5 of the 1940 Act by any legislative body, court,
government agency or regulatory authority, (iv) to modify, eliminate or add to
any provisions of the Declaration to such
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extent as shall be necessary to ensure that the Trust will be classified for
United States federal income tax purposes as a grantor trust at all times that
any Capital Securities and Common Securities are outstanding; provided,
however, that in the case of (iii) and (iv), such amendment shall not
adversely affect in any material respect the interests of any holder of
Capital Securities or Common Securities. In addition, if any proposed
amendment to the Declaration provides for (i) any action that would adversely
affect the powers, preferences or special rights of the holders of the Capital
Securities or the Common Securities, whether by way of amendment to the
Declaration or otherwise, or (ii) the dissolution, winding-up or termination
of the Trust, other than as described in the Declaration, then the holders of
outstanding Capital Securities or Common Securities as a class, will be
entitled to vote on such amendment or proposal (but not on any other amendment
or proposal) and such amendment or proposal shall not be effective except (i)
with the approval of the holders of at least 66 2/3% in liquidation amount of
the Capital Securities or Common Securities, voting together as a single class
and (ii) upon receipt by the Regular Trustees of an opinion of counsel to the
effect that such amendment or the exercise of any power granted to the Regular
Trustees in accordance with such amendment will not affect the Trust's status
as a grantor trust for United States federal income tax purposes or the
Trust's exemption from status as an "investment company" under the 1940 Act;
provided, however, if any amendment or proposal referred to in clause (i)
above would adversely affect only the Capital Securities or only the Common
Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of 66 2/3% in liquidation amount of such class.
Any required approval or direction of holders of Capital Securities may be
given at a separate meeting of holders of Capital Securities convened for such
purpose, at a meeting of all of the holders of Capital Securities or pursuant
to written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Capital Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Capital Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a
description of any resolution proposed for adoption at such meeting on which
such holders are entitled to vote or of such matter upon which written consent
is sought; and (iii) instructions for the delivery of proxies or consents. No
vote or consent of the holders of Capital Securities will be required for the
Trust to redeem and cancel Capital Securities or distribute Junior
Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned at such time by the Company or any entity directly
or indirectly controlling or controlled by, or under direct or indirect common
control with, the Company, shall not be entitled to vote or consent and shall,
for purposes of such vote or consent, be treated as if such Capital Securities
were not outstanding.
The procedures by which holders of Capital Securities may exercise their
voting rights are described below. See "--Book-Entry-Only Issuance--The
Depository Trust Company" below.
Holders of the Capital Securities will have no rights to appoint or remove
the Regular Trustees, who may be appointed, removed or replaced solely by the
Company as the indirect or direct holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by a majority of the
Regular Trustees (and in certain circumstances the Property Trustee), provided
that, if any proposed amendment provides for, or the Regular Trustees
otherwise propose to effect, (i) any action that would adversely affect the
powers, preferences or special rights of the Trust Securities, whether by way
of amendment to the Declaration or otherwise or (ii) the dissolution, winding-
up or termination of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or
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proposal and such amendment or proposal shall not be effective except with the
approval of at least a majority in liquidation amount of the Trust Securities
affected thereby; provided that, if any amendment or proposal referred to in
clause (i) above would adversely affect only the Capital Securities or the
Common Securities, then only the affected class will be entitled to vote on
such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of majority in liquidation amount of such
class of Trust Securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified as other than a grantor trust for United States federal income
tax purposes, (ii) reduce or otherwise adversely affect the powers of the
Property Trustee or (iii) cause the Trust to be deemed an "investment company"
which is required to be registered under the 1940 Act.
BOOK-ENTRY-ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
DTC will act as securities depository for the Capital Securities. The
Capital Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (DTC's nominee). One or more fully
registered global Capital Security certificates will be issued, representing
in the aggregate the total number of Capital Securities, and will be deposited
with DTC.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in Capital Securities represented
by a global certificate.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement of securities transactions among Participants
through electronic computerized book-entry changes in Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations ("Direct
Participants"). DTC is owned by a number of its Direct Participants and by the
NYSE, the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through, or maintain a custodial relationship with, a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable
to DTC and its Participants are on file with the Commission.
Purchases of Capital Securities within the DTC system must be made by or
through Direct Participants which will receive a credit for the Capital
Securities on DTC's records. The ownership interest of each actual purchaser
of each Capital Security (a "Beneficial Owner") is in turn to be recorded on
the records of the Direct Participants and Indirect Participants. Beneficial
Owners will not receive written confirmation from DTC of their purchases, but
Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Direct Participants or Indirect Participants through which the
Beneficial Owners purchased Capital Securities. Transfers of ownership
interests in the Capital Securities are to be accomplished by entries made on
the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests in
Capital Securities, except in the event that use of the book-entry system for
the Capital Securities is discontinued.
The deposit of Capital Securities with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Capital Securities; DTC's
records reflect only the identity of the Direct Participants to whose accounts
such Capital Securities are credited, which may or may not be the Beneficial
Owners. The Participants are responsible for keeping account of their holdings
on behalf of their customers.
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Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among the respective parties, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. If less than all of the
Capital Securities are being redeemed, DTC's practice is to determine by lot
the amount of interest of each Direct Participant in the Capital Securities to
be redeemed.
Although voting with respect to the Capital Securities is limited to the
holders of record of the Capital Securities, in those cases where a vote is
required, neither DTC nor Cede & Co. will itself consent or vote with respect
to Capital Securities. Under its usual procedures, DTC would mail an Omnibus
Proxy to the Trust as soon as possible after the record date. The Omnibus
Proxy assigns the consenting or voting rights of Cede & Co. to those Direct
Participants to whose accounts the Capital Securities are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Distribution payments on the Capital Securities will be made by the Trust to
DTC. DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payments on
such payment date. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Participant and not of DTC, the Trust or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
Trust, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners is the responsibility of Direct Participants and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Capital Securities at any time by giving reasonable notice to
the Trust. Under such circumstances, in the event that a successor securities
depository is not obtained, Capital Securities certificates are required to be
printed and delivered. Additionally, the Regular Trustees (with the consent of
the Company) could decide to discontinue use of the system of book-entry
transfers through DTC (or a successor depository). In that event, certificates
for the Capital Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company and the Trust believe to be
reliable, but the Trust and the Company assume no responsibility for the
accuracy thereof. Neither the Trust nor the Company assume any responsibility
for the performance by DTC or its Participants of their respective obligations
as described herein or under the rules and procedures governing their
respective operations.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, prior to the occurrence of a default with respect to
the Trust Securities, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after default, shall exercise
the same degree of care as a prudent individual would exercise in the conduct
of his or her own affairs. Subject to such provisions, the Property Trustee is
under no obligation to exercise any of the powers vested in it by the
Declaration at the request of any holder of Capital Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The holders of Capital Securities
will not be required to offer such indemnity in the event such holders, by
exercising their voting rights, direct the Property Trustee to take action
following a Declaration Event of Default.
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GOVERNING LAW
The Declaration and the Capital Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for Federal income tax purposes
and so that the Junior Subordinated Debentures will be treated as indebtedness
of the Company for United States Federal income tax purposes. In this
connection, the Regular Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust or the Declaration
that the Regular Trustees determine in their discretion to be necessary or
desirable for such purposes as long as such action does not adversely affect
the interests of the holders of the Capital Securities.
Holders of the Capital Securities have no preemptive rights.
The Trust may not borrow money or issue debt or mortgage or pledge any of
its assets.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by the Company for the benefit of the holders
from time to time of the Capital Securities. The summary does not purport to
be complete and is subject in all respects to the provisions of, and is
qualified in its entirety by reference to, the Guarantee. At the time the
Registration Statement becomes effective, the Guarantee will be qualified as
an Indenture under the Trust Indenture Act. Wilmington Trust Company will act
as trustee under the Guarantee. Wilmington Trust Company, as the Guarantee
Trustee, will hold the Guarantee for the benefit of the holders of the Capital
Securities. The terms of the Guarantee will include those stated in the
Guarantee including those required to be made part of the Declaration by the
Trust Indenture Act.
GENERAL
The Company will irrevocably agree, to the extent set forth herein, to pay
in full on a subordinated basis, to the holders of the Capital Securities, the
Guarantee Payments (as defined herein), as and when due, regardless of any
defense, right of set off or counterclaim that the Trust may have or assert.
The following payments with respect to the Capital Securities, to the extent
not paid by or on behalf of the Trust (the "Guarantee Payments"), will be
subject to the Guarantee (without duplication): (i) any accrued and unpaid
distributions which are required to be paid on the Capital Securities to the
extent of funds of the Trust available therefor, (ii) the amount payable upon
redemption of the Capital Securities, to the extent of funds of the Trust
available therefor, with respect to any Capital Securities called for redemption
by the Trust and (iii) upon a voluntary or involuntary dissolution, winding up
or termination of the Trust (other than in connection with the distribution of
Junior Subordinated Debentures to the holders of the Capital Securities in
exchange for Capital Securities as provided in the Declaration), the lesser of
(a) the aggregate of the liquidation amount and all accrued and unpaid dividends
on the Capital Securities to the date of payment, to the extent of funds of the
Trust available therefor, and (b) the amount of assets of the Trust remaining
available for distribution to holders of Capital Securities upon the liquidation
of the Trust. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of Capital Securities or by causing the Trust to pay such amounts to
such holders.
Because the Guarantee is a guarantee of payment and not of collection,
holders of the Capital Securities may proceed directly against the Company as
guarantor, rather than having to proceed against the Trust before attempting
to collect from the Company, and the Company waives any right or remedy to
require that any action be brought against the Trust or any other person or
entity before proceeding against the Company. Such obligations will not be
discharged except by payment of the Guarantee Payments in full.
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If the Company fails to make interest payments on the Junior Subordinated
Debentures or pay amounts payable upon the redemption, acceleration or
maturity of the Junior Subordinated Debentures, the Trust will have
insufficient funds to pay distributions on or to pay amounts payable upon the
redemption or repayment of the Capital Securities. The Guarantee does not
cover payment of distributions or the amount payable upon redemption or
repayment in respect of the Capital Securities when the Trust does not have
sufficient funds to pay such distributions or such amount. However,
effectively, the Company has, through the Guarantee, the Junior Subordinated
Debentures, the Indenture and the Declaration, taken together, fully and
unconditionally guaranteed all of the Trust's obligations under the Capital
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only
the combined operation of these documents that has the effect of providing a
full and unconditional guarantee of the Trust's obligations under the Capital
Securities. See "Effect of Obligations Under the Junior Subordinated
Debentures and the Guarantee."
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company will covenant that, so long as any Capital
Securities remain outstanding, if at such time (i) the Company has exercised
its option to defer interest payments on the Junior Subordinated Debentures
and such deferral is continuing, (ii) the Company shall be in default with
respect to its payment or other obligations under the Guarantee or (iii) there
shall have occurred any event that, with the giving of notice or the lapse of
time or both, would constitute an Event of Default under the Indenture, then
the Company (a) shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than stock dividends paid by the
Company which consist of the stock of the same class as that on which the
dividend is being paid), (b) shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities
issued by the Company that rank pari passu with or junior to the Junior
Subordinated Debentures, and (c) shall not make any guarantee payments with
respect to the foregoing (other than pursuant to the Guarantee).
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of Capital Securities (in which case no consent of the holders of
the Capital Securities will be required), the Guarantee may be changed only
with the prior approval of the holders of not less than 66 2/3% in aggregate
stated liquidation amount of the outstanding Capital Securities. The manner of
obtaining any such approval of holders of the Capital Securities will be as
set forth under "Description of the Capital Securities--Voting Rights;
Amendment of Declaration." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders
of the Capital Securities then outstanding. Except in connection with any
permitted merger or consolidation of the Company with or into another entity
or any permitted sale, transfer or lease of the Company's assets to another
entity as described below under "Description of the Junior Subordinated
Debentures--Restrictions", the Company may not assign its rights or delegate
its obligations under the Guarantee without the prior approval of the holders
of at least 66 2/3 % of the aggregate stated liquidation amount of the Capital
Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Capital Securities and be
of no further force and effect upon (a) full payment of the applicable
redemption price of such holder's Capital Securities or (b) the distribution
of the Junior Subordinated Debentures to all holders of the Capital Securities
and will terminate completely upon full payment of the amounts payable upon
liquidation of the Trust. The Guarantee will continue to be effective or will
be reinstated, as the case may be, if at any time any holder of Capital
Securities must restore payment of any sums paid under such Capital Securities
or the Guarantee.
STATUS OF THE GUARANTEE; SUBORDINATION
The Guarantee will constitute an unsecured obligation of the Company and
will rank (i) subordinate and junior in right of payment to all liabilities of
the Company, except any liabilities that may be made pari passu
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expressly by their terms, (ii) pari passu with the most senior preferred or
preference stock now or hereafter issued by the Company and with any guarantee
now or hereafter entered into by the Company in respect of any preferred or
preference stock or preferred securities of any affiliate of the Company and
(iii) senior to the Common Stock. Upon the bankruptcy, liquidation or winding
up of the Company, its obligations under the Guarantee will rank junior to all
its other liabilities (except as aforesaid) and, therefore, funds may not be
available for payment under the Guarantee.
The Declaration provides that each holder of Capital Securities by
acceptance thereof agrees to the subordination provisions and other terms of
the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Capital Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the specific terms of the Junior
Subordinated Debentures in which the Trust will invest with the proceeds of
the issuance and sale of (i) the Capital Securities and (ii) the Common
Securities. The following description does not purport to be complete and is
qualified in its entirety by reference to the Indenture dated as of
, 1997 (the "Indenture"), between the Company and Wilmington Trust
Company, as Indenture Trustee, a copy of the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part, and
the Trust Indenture Act. The Indenture will be qualified under the Trust
Indenture Act. Whenever particular provisions or defined terms in the
Indenture are referred to herein, such provisions or defined terms are
incorporated by reference herein.
At any time, the Company will have the right to liquidate the Trust and
cause the Junior Subordinated Debentures to be distributed to the holders of
the Trust Securities in liquidation of the Trust. See "Description of the
Capital Securities--Distribution of Junior Subordinated Debentures upon
Liquidation of the Trust."
GENERAL
The Property Trustee will be the initial holder of the Junior Subordinated
Debentures. The Junior Subordinated Debentures will be limited in aggregate
principal amount to approximately % of the aggregate stated
liquidation amount of the Capital Securities, such amount being the sum of the
aggregate stated liquidation amount of the Capital Securities and the Common
Securities.
The entire principal amount of the Junior Subordinated Debentures will
become due and payable, together with any accrued and unpaid interest thereon,
including Additional Sums, if any, on , 2037.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. See "--Subordination."
The Junior Subordinated Debentures, if distributed to holders of Capital
Securities in a dissolution of the Trust, will initially be issued as a global
security.
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Payments on Junior Subordinated Debentures will be made to DTC, as the
depository for the Junior Subordinated Debentures.
The Indenture does not contain any provisions that afford holders of Junior
Subordinated Debentures protection in the event of a highly leveraged
transaction involving the Company or any change of control of the Company. The
Junior Subordinated Debentures are not entitled to the benefit of any sinking
fund.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the
prior claims of creditors of the subsidiary, except to the extent the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Junior Subordinated Debentures will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries, and holders of
Junior Subordinated Debentures should look only to the assets of the Company
for payments on the Junior Subordinated Debentures. The Indenture does not
limit the incurrence or issuance of other secured or unsecured debt of the
Company including Senior Indebtedness. In addition, the Company relies
primarily on dividends from such subsidiaries to meet its obligations for
payment of principal and interest on its outstanding debt obligations and
corporate expenses, which dividends may be limited in certain circumstances.
See "--Subordination" below and "Business-- Regulation--Regulation of
Dividends and Other Payments from Insurance Subsidiaries" above.
INTEREST
Each Junior Subordinated Debenture will bear interest at the rate of % per
annum from the original date of issuance, payable semi-annually in arrears on
and (each, an "Interest Payment
Date"), commencing , 1997, to the person in whose name such Junior
Subordinated Debenture is registered at the close of business on the first day
of the month in which the Interest Payment Date occurs. Interest will compound
semi-annually and will accrue to the extent permitted by law at the annual
rate of % on any interest installment not paid when due
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months, and, for any period of less than a
full calendar month, the number of days elapsed in such month. In the event
that any date on which interest is payable on the Junior Subordinated
Debentures is not a Business Day, then payment of the interest payable on such
date will be made on the next succeeding day which is a Business Day (without
any interest or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company shall have the right at any time during the term of the Junior
Subordinated Debentures to defer interest payments from time to time for
successive periods not exceeding 10 consecutive semi-annual periods. At the
end of each Deferral Period, the Company shall pay all interest then accrued
and unpaid (together with interest thereon at the rate specified for the
Junior Subordinated Debentures to the extent permitted by applicable law). In
no event shall any Deferral Period extend beyond the maturity of the Junior
Subordinated Debentures. During any Deferral Period, the Company (i) shall not
declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any of its
capital stock (other than stock dividends paid by the Company which consist of
stock of the same class as that on which the dividend is being paid), (ii)
shall not make any payment of interest, principal or premium, if any, on or
repay, repurchase or redeem any debt securities issued by the Company that
rank pari passu with or junior to the Junior Subordinated Debentures, and
(iii) shall not make any guarantee payments with respect to the foregoing
(other than pursuant to the Guarantee). Prior to the termination of any such
Deferral Period, the
Company may further extend such Deferral Period; provided that such Deferral
Period together with all previous and further extensions thereof may not
exceed 10 consecutive semi-annual periods. Upon the termination of any
Deferral Period and the payment of all amounts then due, the Company may
select a new Deferral Period, subject
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to the above requirements. Consequently, there could be multiple Deferral
Periods of varying lengths prior to the maturity of the Junior Subordinated
Debentures. No interest during a Deferral Period, except at the end thereof,
shall be due and payable. If the Trust shall be the sole holder of the Junior
Subordinated Debentures, the Company shall give the Trust notice of its
selection of such Deferral Period at least one Business Day prior to the
earlier of (i) the date the distributions on the Capital Securities are
payable or (ii) the date the Trust is required to give notice to any
applicable self-regulatory organization or to holders of the Capital
Securities on the record date or the date such distribution is payable, but in
any event not less than ten Business Days prior to such record date. The
Company shall cause the Trust to give notice of the Company's selection of
such Deferral Period to the holders of the Capital Securities. If the Trust
shall not be the sole holder of the Junior Subordinated Debentures, the
Company shall give the holders of the Junior Subordinated Debentures notice of
its selection of such Deferral Period at least ten Business Days prior to the
earlier of (i) the Interest Payment Date or (ii) the date the Company is
required to give notice to any applicable self-regulatory organization or to
holders of the Junior Subordinated Debentures on the record or payment date of
such related interest payment, but in any event not less than two Business
Days prior to such record date.
OPTIONAL REDEMPTION
The Company shall have the right to redeem the Junior Subordinated
Debentures, in certain circumstances upon the occurrence of a Tax Event as
described under "Description of the Capital Securities--Tax Event
Distribution", upon not less than 30 nor more than 60 days notice, at a
redemption price equal to 100% of the principal amount of the Junior
Subordinated Debentures to be redeemed plus any accrued and unpaid interest to
the redemption date. The Company shall also have the right to redeem the
Junior Subordinated Debentures at any time and from time to time, upon not
less than 30 nor more than 60 days notice, at a redemption price equal to the
sum of (i) 100% of the principal amount of the Junior Subordinated Debentures
to be redeemed and (ii) the Make-Whole Premium, if any, plus any accrued and
unpaid interest thereon to the date fixed for redemption. As used herein, the
Make-Whole Premium shall mean the excess, if any, of (i) the sum of the
present values of the remaining scheduled payments of principal and interest
thereon discounted to the redemption date on a semiannual basis at the
Treasury Rate plus basis points over (ii) 100% of the principal amount of
the Junior Subordinated Debentures to be redeemed.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed
as a percentage of its principal amount) equal to the Comparable Treasury
Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable
to the remaining term of the Subordinated Debentures to be redeemed that would
be utilized, at the time of selection and in accordance with customary
financial practice, in pricing new issues of corporate debt securities of
comparable maturity to the remaining term of such Subordinated Debentures.
"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by the Indenture Trustee after consultation with the Company.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for
U.S. Government Securities" or (ii) if such release (or any successor release)
is not published or does not contain such prices on such business day, (A) the
average of the Reference Treasury Dealer Quotations for such redemption date,
after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Indenture Trustee obtains fewer than three such
Reference Treasury Dealer Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to
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the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third
business day preceding such redemption date.
"Reference Treasury Dealer" means each of Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and their respective successors; provided,
however, that if any of the foregoing shall cease to be a primary U.S.
Government Securities dealer in New York City (a "Primary Treasury Dealer"),
the Company shall substitute therefor another Primary Treasury Dealer.
SUBORDINATION
The Indenture provides that the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness of the
Company as provided in the Indenture. No payment of principal of (including
redemption payments), or interest on, the Junior Subordinated Debentures may
be made (i) if any Senior Indebtedness is not paid when due, any applicable
grace period with respect to such default has ended and such default has not
been cured or waived, or (ii) if the maturity of any Senior Indebtedness has
been accelerated because of a default. Upon any distribution of assets of the
Company to creditors upon any dissolution, winding up, liquidation or
reorganization, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all principal of, and premium, if any, and
interest due or to become due on, all Senior Indebtedness must be paid in full
before the holders of the Junior Subordinated Debentures are entitled to
receive or retain any payment. In the event that, notwithstanding the
foregoing, any payment or distribution of cash, property or securities shall
be received or collected by a holder of the Junior Subordinated Debentures in
contravention of the foregoing provisions, such payment or distribution shall
be held for the benefit of and shall be paid over to the holders of Senior
Indebtedness or their representative or representatives or to the trustee or
trustees under any indenture under which any instrument evidencing Senior
Indebtedness may have been issued, as their respective interests may appear,
to the extent necessary to pay in full all Senior Indebtedness then due, after
giving effect to any concurrent payment to the holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the rights of the
holders of the Junior Subordinated Debentures will be subrogated to the rights
of the holders of Senior Indebtedness to receive payments or distributions
applicable to Senior Indebtedness until all amounts owing on the Junior
Subordinated Debentures are paid in full.
The term "Senior Indebtedness" shall mean in respect of the Company (i) the
principal, premium, if any, and interest in respect of (A) indebtedness of
such obligor for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments issued by such obligor, (ii)
all capital lease obligations of such obligor, (iii) all obligations of such
obligor issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such obligor and all obligations of such
obligor under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business), (iv) all obligations of
such obligor for the reimbursement of any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction, (v) all
obligations of the type referred to in clauses (i) through (iv) above of other
persons for the payment of which such obligor is responsible or liable as
obligor, guarantor or otherwise, and (vi) all obligations of the type referred
to in clauses (i) through (v) above of other persons secured by any lien on
any property or asset of such obligor (whether or not such obligation is
assumed by such obligor), except for (1) any such indebtedness that is by its
terms subordinated to or pari passu with the Junior Subordinated Debentures
and (2) any indebtedness (including all other debt securities and guarantees
in respect of those debt securities) initially issued to any other trust, or a
trustee of such trust, partnership or other entity affiliated with the Company
that is, directly or indirectly, a financing vehicle of the Company (a
"Financing Entity") in connection with the issuance by such Financing Entity
of capital or preferred securities or other similar securities. Senior
Indebtedness will also include interest accruing subsequent to events of
bankruptcy of the Company and its subsidiaries at the rate provided for in the
documentation governing such Senior Indebtedness, whether or not such interest
is an allowed claim enforceable against the debtor in a bankruptcy case under
relevant bankruptcy law. Such Senior Indebtedness shall continue to be Senior
Indebtedness and entitled to the benefits of the subordination provisions
irrespective of any amendment, modification or waiver of any term of such
Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness the
Company may issue.
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The Company is a non-operating holding company and almost all of the
operations of the Company are conducted by the Company's subsidiaries. The
Company relies primarily on dividends from such subsidiaries to meet its
obligations for payment of principal and interest on its outstanding debt
obligations and corporate expenses. The Company is a legal entity separate and
distinct from its insurance and non-insurance affiliates. The principal
sources of the Company's income are dividends, interest and fees from its
insurance and non-insurance affiliates. In addition, payment of dividends to
the Company by the subsidiary insurance companies is subject to ongoing review
by insurance regulators and is subject to various statutory limitations and in
certain circumstances requires approval by insurance regulatory authorities.
See "Business--Regulation--Regulation of Dividends and Other Payments from
Insurance Subsidiaries." Accordingly, the Junior Subordinated Debentures will
be effectively subordinated to all existing and future liabilities of the
Company's subsidiaries. Holders of Junior Subordinated Debentures should look
only to the assets of the Company for payments of interest and principal and
premium, if any.
At September 30, 1996, after giving effect to the Note Offering, the
aggregate amount of Senior Indebtedness and liabilities and obligations of the
Company's subsidiaries that would effectively rank senior to the Junior
Subordinated Debentures was approximately $ billion.
CERTAIN COVENANTS
If (i) there shall have occurred any event that would constitute an Event of
Default, (ii) the Company shall be in default with respect to its payment of
any obligations under the Guarantee, or (iii) the Company shall have given
notice of its election to defer payments of interest on the Junior
Subordinated Debentures by extending the interest payment period as provided
in the Indenture and such period, or any extension thereof, shall be
continuing, then the Company (a) shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than
stock dividends paid by the Company which consist of stock of the same class
as that on which the dividend is being paid), (b) shall not make any payment
of interest, principal or premium, if any, on or repay, repurchase or redeem
any debt securities issued by the Company that rank pari passu with or junior
to the Junior Subordinated Debentures, and (c) shall not make any guarantee
payments with respect to the foregoing (other than pursuant to the Guarantee).
The Company will covenant (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company under the Indenture may succeed to the
Company's ownership of such Common Securities and (ii) to use its reasonable
efforts to cause the Trust (x) to remain a statutory business trust, except in
connection with the distribution of Junior Subordinated Debentures to the
holders of Trust Securities permitted by the Declaration, and (y) to otherwise
continue to be classified as a grantor trust for United States federal income
tax purposes.
RESTRICTIONS
The Indenture provides that the Company shall not consolidate with or merge
with or into any other corporation, or, directly or indirectly, convey,
transfer or lease all or substantially all of the properties and assets of the
Company on a consolidated basis to any person, unless either the Company is
the continuing corporation or such corporation or person assumes by
supplemental indenture all the obligations of the Company under the Indenture
and the Junior Subordinated Debentures, no default or Event of Default shall
exist immediately after the transaction, and the surviving corporation or such
person is a corporation, partnership or trust organized and validly existing
under the laws of the United States of America, any state thereof or the
District of Columbia.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of
Default" with respect to the Junior Subordinated Debentures: (i) failure for
30 days to pay interest on the Junior Subordinated Debentures, including any
Additional Sums in respect thereof, when due; or (ii) failure to pay principal
of or premium, if any, on the Junior Subordinated Debentures when due whether
at maturity, upon redemption, by declaration or otherwise; or (iii) failure to
observe or perform any other covenant contained in the Indenture for 90 days
after notice; or (iv) the dissolution, winding up or termination of the Trust,
except in connection with the distribution of Junior Subordinated Debentures
to the
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holders of Capital Securities permitted by the Declaration; or (v) certain
events in bankruptcy, insolvency or reorganization of the Company. A default
under any other indebtedness of the Company or the Trust would not constitute
an Event of Default under the Junior Subordinated Debentures.
The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal of and interest (including any Additional Sums) on the Junior
Subordinated Debentures due and payable immediately on the occurrence of an
Event of Default and, should the Indenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate liquidation amount of outstanding Capital Securities shall
have such right. After such acceleration, but before a judgment or decree
based on acceleration, the holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived
as provided in the Indenture and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Indenture Trustee.
No holder of any Junior Subordinated Debenture will have any right to
institute any proceeding with respect to the Indenture or for any remedy
thereunder, unless such holder shall have previously given to the Indenture
Trustee written notice of a continuing Event of Default and, if the Trust is
not the sole holder of Junior Subordinated Debentures, unless the holders of
at least 25% in aggregate principal amount of the Junior Subordinated
Debentures then outstanding shall also have made written request, and offered
reasonable indemnity, to the Indenture Trustee to institute such proceeding as
Indenture Trustee, and the Indenture Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding Junior
Subordinated Debentures a direction inconsistent with such request and shall
have failed to institute such proceeding within 60 days. However, such
limitations do not apply to a suit instituted by a holder of a Junior
Subordinated Debenture or a holder of a Capital Security for enforcement of
payment of the principal of or interest on such Junior Subordinated Debenture
on or after the respective due dates specified in such Junior Subordinated
Debenture.
A holder of Capital Securities may directly institute a proceeding on behalf
of the Trust for enforcement of payment to the Trust of the principal of or
premium, if any, or interest on the Junior Subordinated Debentures on or after
the respective due dates specified in the Junior Subordinated Debentures. The
holders of the Capital Securities would not be able to exercise directly any
other remedies available to the holder of the Junior Subordinated Debentures
unless the Property Trustee or the Indenture Trustee, acting for the benefit
of the Property Trustee, fails to do so. In such event, the holders of at
least 25% in aggregate liquidation preference of outstanding Capital
Securities would have such right to institute proceedings.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default shall occur and be continuing,
the Indenture Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any
holders of Junior Subordinated Debentures, unless such holders shall have
offered to the Indenture Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the Indenture Trustee, the holders of a
majority in aggregate principal amount of the Junior Subordinated Debentures
then outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee,
or exercising any trust or power conferred on the Indenture Trustee with
respect to such series.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may, on behalf of the holders of all the Junior
Subordinated Debentures, waive any past default, except a default in the
payment of principal, premium, if any, or interest (unless such default has
been cured and a sum sufficient to pay all matured installments of principal,
premium, if any, and interest due otherwise than by acceleration has been
deposited with the Indenture Trustee) or a default in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the holder of each Junior Subordinated Debenture. The Company is
required to file annually with the Indenture Trustee and the Property Trustee
a certificate as to whether or not the Company is in compliance with all the
conditions and covenants under the Indenture.
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MODIFICATION OF THE INDENTURE
From time to time, the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies (provided that any such
action does not adversely affect the interests of the holders of the Junior
Subordinated Debentures). The Indenture contains provisions permitting the
Company and the Indenture Trustee, with the consent of the holders of not less
than a majority in principal amount of the Junior Subordinated Debentures to
modify the Indenture or any supplemental indenture; provided that no such
modification may, without the consent of the holder of each outstanding Junior
Subordinated Debenture (i) extend the fixed maturity of any Junior
Subordinated Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon, or reduce any premium
payable upon the redemption thereof, or modify the subordination provisions of
the Indenture in a manner adverse to the holders without the consent of the
holder of each Junior Subordinated Debenture, or (ii) reduce the percentage of
Junior Subordinated Debentures, the holders of which are required to consent
to any such supplemental indenture, without the consent of the holders of each
Junior Subordinated Debenture then outstanding, provided that, so long as any
of the Capital Securities remains outstanding, no such modification may be
made that adversely affects the holders of such Capital Securities, and no
termination of the Indenture may occur, and no waiver of any Event of Default
or compliance with any covenant under the Indenture shall be effective,
without the prior consent of the holders of the percentage of the aggregate
stated liquidation amount of the outstanding Capital Securities which is at
least equal to the percentage of aggregate stated liquidation preference of
the outstanding Junior Subordinated Debentures required to make such
modification.
In addition, the Company and the Indenture Trustee may execute, without the
consent of any holder of Junior Subordinated Debentures, any supplemental
indenture for certain other usual purposes.
SETOFF
Notwithstanding anything contained to the contrary in the Indenture, the
Company shall have the right to set off any payment with respect to the Junior
Subordinated Debentures it is otherwise required to make thereunder with and
to the extent the Company has theretofore made, or is concurrently on the date
of such payment making, a payment under the Guarantee.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default,
shall exercise the same degree of care as a prudent individual would exercise
in the conduct of his or her own affairs. Subject to such provision, the
Indenture Trustee is under no obligation to exercise any of the powers vested
in it by the Indenture at the request of any holder of Junior Subordinated
Debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities which might be incurred thereby. The Indenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Indenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
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EFFECT OF OBLIGATIONS UNDER THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Capital Securities and use the proceeds thereof to purchase from the
Company the Junior Subordinated Debentures.
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
distributions and payments due on the Capital Securities primarily because (i)
the aggregate principal amount of Junior Subordinated Debentures will be equal
to the sum of the aggregate stated liquidation amount of the Capital
Securities and the Common Securities; (ii) the interest rate and interest and
other payment dates on the Junior Subordinated Debentures will match the
distribution rate and distribution and other payment dates for the Capital
Securities; (iii) the Declaration provides that the Company shall pay for all,
and the Trust shall not be obligated to pay, directly or indirectly, for any,
costs and expenses of the Trust; and (iv) the Declaration further provides
that the holders of Common Securities and the Regular Trustees shall not cause
or permit the Trust to, among other things, engage in any activity that is not
consistent with the purposes of the Trust. In addition, the Company has also
guaranteed payment of the cost and expenses of the Trust.
A holder of Capital Securities may directly institute a proceeding on behalf
of the Trust for enforcement of payment to the Trust of the principal of or
premium, if any, or interest on the Junior Subordinated Debentures on or after
the respective due dates specified in the Junior Subordinated Debentures. The
holders of the Capital Securities would not be able to exercise directly any
other remedies available to the holder of the Junior Subordinated Debentures
unless the Property Trustee or the Indenture Trustee, acting for the benefit
of the Property Trustee, fails to do so. In such event, the holders of at
least 25% in aggregate liquidation amount of outstanding Capital Securities
would have such right to institute proceedings. In addition, if the Company
fails to make interest or other payments on the Junior Subordinated Debentures
when due, the Declaration provides a mechanism whereby the holders of the
Capital Securities may direct the Property Trustee to enforce its rights under
the Junior Subordinated Debentures.
Payments of distributions and other payments due on the Capital Securities
out of moneys held by the Trust are fully and unconditionally guaranteed by
the Company to the extent set forth under "Description of the Guarantee,"
although the Guarantee does not cover payment of distributions or the amount
payable upon redemption or repayment in respect of the Capital Securities when
the Trust does not have sufficient funds to pay such distributions or such
amount. Effectively, however, taken together, the Company's obligations under
the Junior Subordinated Debentures, the Indenture, the Declaration and the
Guarantee provide a full and unconditional guarantee of payments of
distributions and other amounts due on the Capital Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation
of these documents that has the effect of providing a full and unconditional
guarantee of the Trust's obligations under the Capital Securities. If and to
the extent that the Company does not make payments on the Junior Subordinated
Debentures, the Trust will not pay distributions or other payments due on the
Capital Securities.
If the Company fails to make payments under the Guarantee, any holder of a
Capital Security may institute a legal proceeding directly against the Company
to enforce its rights under the Guarantee without first instituting a legal
proceeding against the Trust or any other person or entity.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of Capital
Securities. Unless otherwise stated, this summary deals only with Capital
Securities held as capital assets by holders who purchase the Capital
Securities upon original issuance
("Initial Holders"). It does not deal with special classes of holders such as
banks, thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Capital Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
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capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Capital
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or
of any foreign government that may be applicable to the Capital Securities.
This summary is based on the IRC, U.S. Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof,
all of which are subject to change, possibly on a retroactive basis. Any such
changes may be applied retroactively in a manner that could cause the tax
consequences to vary substantially from the consequences described below,
possibly adversely affecting a beneficial owner of the Capital Securities. See
"-- Proposed Tax Law Changes."
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES AND THE TRUST
In connection with the issuance of the Junior Subordinated Debentures,
LeBoeuf, Lamb, Greene & MacRae, L.L.P., legal counsel for the Company and the
Trust, will render its opinion generally to the effect that, under then
current law and assuming full compliance with the terms of the Indenture (and
certain other documents), the Junior Subordinated Debentures will be
classified for United States federal income tax purposes as indebtedness of
the Company.
In connection with the issuance of the Capital Securities, LeBoeuf, Lamb,
Greene & MacRae, L.L.P., will render its opinion generally to the effect that,
under then current law and assuming full compliance with the terms of the
Declaration, the Trust will be classified for United States federal income tax
purposes as a grantor trust and not as an association taxable as a
corporation. Accordingly, for United States federal income tax purposes, each
holder of Capital Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures. Each holder will be
required to include in its gross income its allocable share of income accrued
on the Subordinated Debentures.
Investors should be aware that these tax opinions do not address any other
issue and are not binding on the Internal Revenue Service or the courts.
ORIGINAL ISSUE DISCOUNT
Under recently issued income tax regulations applicable to all debt
instruments that, like the Junior Subordinated Debentures, are issued on or
after August 13, 1996, remote contingencies that stated interest will not be
timely paid are ignored in determining whether a debt instrument is issued
with OID, which determination depends in part on whether interest is
"unconditionally payable" on the debt instrument. OID must be included in
income by all holders as it accrues economically on a daily basis, without
regard to when it is paid in cash or whether a particular holder generally
uses the cash method of accounting. The Company has concluded that the
likelihood of its exercising its option to defer payments of interest is
remote. This conclusion is based on the Company's analysis, as of the date of
issue of the Junior Subordinated Debentures, of various facts and
circumstances deemed relevant to exercising such deferral option, including,
among other things, the inability of the Company to declare dividends on its
stock while interest on the Junior Subordinated Debentures is being deferred,
and the likely impact of the non-payment of dividends upon the ratings of the
Company's securities if the deferral option is exercised. Based upon this
conclusion by the Company, and in the absence of any specific definition of
"remote" in the applicable income tax regulations, in the opinion of LeBoeuf,
Lamb, Greene & MacRae, L.L.P., although the matter is not entirely free from
doubt, the Subordinated Debentures will not include OID. As a consequence,
holders of the Capital Securities should report interest under their own
methods of accounting (e.g., cash or accrual) instead of under the daily
economic accrual rules for OID instruments.
Under the new regulations, however, if the Company exercises its right to
defer payments of interest, the Junior Subordinated Debentures will become OID
instruments, and all holders of the Capital Securities will be required to
accrue interest on a daily basis and to report that OID as taxable interest
income during any Deferral Period even though the Company will not pay the
interest in cash until the end of the Deferral Period, and even though a
holder may use the cash method of accounting. A holder who disposes of the
Capital Securities during such a Deferral Period may suffer a loss because the
market value of the Trust Securities will likely fall if the
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Company exercises its option to defer payments of interest on the Junior
Subordinated Debentures. Furthermore, the market value of the Capital
Securities may not reflect the accumulated distribution that will be paid at
the end of the Deferral Period, and a holder who sells the Capital Securities
during the Deferral Period will not receive from the Company any cash related
to the interest (OID) income the holder accrued and included in its taxable
income under the OID rules (because that cash will be paid to the holder of
record at the end of the Deferral Period).
If the Junior Subordinated Debentures become OID instruments (i.e., if the
Company exercises its rights to defer payment of interest), the Junior
Subordinated Debentures will be taxed as OID instruments for as long as they
remain outstanding. Thus, even after the end of the Deferral Period, all
holders will be required to continue accruing interest (OID) on the Junior
Subordinated Debentures on a daily basis, regardless of their method of
accounting.
The new regulations have not been addressed in any rulings or other
interpretations by the Internal Revenue Service other than the preamble to the
Treasury Decision that issued the new regulations, which added the concept of
"remote contingencies" to existing definitions used to determine whether
interest payable under a debt instrument is "unconditionally payable." The new
regulations could be viewed as a favorable reversal of the Internal Revenue
Service's previous position, as expressed in a 1995 Revenue Ruling that has
not been withdrawn. It is possible that the IRS could take a position contrary
to the interpretation herein.
MARKET DISCOUNT AND BOND PREMIUM
Holders of Capital Securities other than Initial Holders may be considered
to have acquired their undivided interests in the Junior Subordinated
Debentures with "market discount" or "acquisition premium" as such phrases are
defined for United States federal income tax purposes. Such holders are
advised to consult their tax advisors as to the income tax consequences of the
acquisition, ownership and disposition of the Capital Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE
TRUST
As described under the caption "Description of the Capital Securities--
Distribution of the Junior Subordinated Debentures upon Liquidation of the
Trust," Junior Subordinated Debentures may be distributed to holders in
exchange for the Capital Securities and in liquidation of the Trust. Under
current law, such a distribution, for United States federal income tax
purposes, would be treated as a non-taxable event to each holder, and each
holder would receive an aggregate tax basis in the Junior Subordinated
Debentures equal to such holder's aggregate tax basis in its Capital
Securities. A holder's holding period in the Junior Subordinated Debentures so
received in liquidation of the Trust would include the period during which the
Capital Securities were held by such holder.
Under certain circumstances described herein (see "Description of the
Capital Securities--Tax Event Distribution" and "Description of the
Subordinated Debentures -- Optional Redemption"), the Junior Subordinated
Debentures may be redeemed for cash and the proceeds of such redemption
distributed to holders in redemption of their Capital Securities. Under
current law, such a redemption would, for United States federal income tax
purposes, constitute a taxable disposition of the redeemed Capital Securities,
and a holder could recognize gain or loss as if it sold such redeemed Capital
Securities for cash. See "-- Sales of Capital Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities will recognize gain or loss equal to
the difference between its adjusted tax basis in the Capital Securities and
the amount realized on the sale of such Capital Securities. To the extent of
any accrued but unpaid interest the amount realized on the sale of such
Capital Securities will be treated as ordinary income. Assuming the Company
does not defer interest on the Junior Subordinated Debentures by extending the
interest payment period, a holder's adjusted tax basis in the Capital
Securities generally will equal its initial purchase price. Subject to the
market discount rules described above and the discussion below regarding
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accrued and unpaid interest, such gain or loss generally will be a capital
gain or loss and generally will be a long-term capital gain or loss if the
Capital Securities have been held for more than one year.
The Capital Securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. If the Company exercises its right to defer payments
of interest, the Junior Subordinated Debentures will become OID instruments
and a holder who disposes of Capital Securities between record dates for
payments of distributions thereon will be required to include in income as
ordinary income, accrued and unpaid interest on the Junior Subordinated
Debentures through the date of disposition, and to add such amount to such
holder's adjusted tax basis in its pro rata share of the underlying Junior
Subordinated Debentures deemed disposed of. To the extent the selling price is
less than the holder's adjusted tax basis (which will include all accrued but
unpaid interest) a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes. Accrual basis taxpayers would
be subjected to similar treatment without regard to the Company's election to
defer.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the
United States, a foreign corporation, a non-resident alien individual, a
foreign partnership, or a foreign estate or trust.
Under present United States federal income tax law: (i) payments by the
Trust or any of its paying agents to any holder of a Capital Security who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that, (a) the beneficial owner of the
Capital Security does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (b) the beneficial owner of the Capital Security is not a controlled
foreign corporation that is related to the Company through stock ownership,
and (c) either (A) the beneficial owner of the Capital Security certifies to
the Trust or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Capital Security in such capacity, certifies to
the Trust or its agent, under penalties of perjury, that such statement has
been received from the beneficial owner by it or by a Financial Institution
between it and the beneficial owner and furnishes the Trust or its agent with
a copy thereof; and (ii) a United States Alien Holder of a Capital Security
will not be subject to United States federal withholding tax on any gain
realized upon the sale or other disposition of a Capital Security.
INFORMATION REPORTING TO HOLDERS
Income on the Capital Securities will be reported to holders on Forms 1099,
which forms should be mailed to holders of Capital Securities by January 31
following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities may
be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's federal income tax, provided the required
information is provided to the Internal Revenue Service.
PROPOSED TAX LAW CHANGES
On March 19, 1996, the Revenue Reconciliation Bill of 1996, the revenue
portion of President Clinton's budget proposal was released. The Bill would,
among other things, generally deny interest deductions for interest on an
instrument, issued by a corporation, that has a maximum weighted average
maturity of more than 40 years. The Bill would also generally deny interest
deductions for interest on an instrument, issued by a corporation,
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that has a maximum term of more than 20 years and that is not shown as
indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not
shown as indebtedness on the issuer's consolidated balance sheet. For purposes
of determining the weighted average maturity or the term of an instrument, any
right to extend would be treated as exercised. The above-described provisions
of the Bill were proposed to be effective generally for instruments issued on
or after December 7, 1995. However, on March 29, 1996, the Chairmen of the
Senate Finance and House Ways and Means Committees issued a joint statement to
the effect that it was their intention that the effective date of the
President's legislative proposals, if adopted, will be no earlier than the
date of appropriate Congressional action. In addition, subsequent to the
publication of the joint statement, Senator Daniel Patrick Moynihan and
Representatives Sam M. Gibbons and Charles B Rangel wrote letters to Treasury
Department officials concurring with the views expressed in the joint
statement. Under current law, the Company will be able to deduct interest on
the Subordinated Debentures and based upon the joint statement, it is expected
that if the Proposed Legislation were to be enacted, such legislation would
not apply retroactively, to the Junior Subordinated Debentures. However, if
the provision of the Bill regarding a 20-year term is enacted with retroactive
effect with regard to the Junior Subordinated Debentures, the Company will not
be entitled to an interest deduction with respect to the Junior Subordinated
Debentures. There can be no assurance that current or future legislative
proposals or final legislation will not affect the ability of the Company to
deduct interest on the Junior Subordinated Debentures, giving rise to a Tax
Event which would permit the Company to cause the redemption of the Capital
Securities as described more fully under "Description of the Capital
Securities--Tax Event Distribution."
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS
WITHIN RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the IRC or entities whose assets are considered assets of such plans
("Plans"), may purchase the Capital Securities subject to the investing
fiduciary's determination that the investment in the Capital Securities
satisfies ERISA's fiduciary standards and other requirements applicable to
investments by Plans.
Under regulations issued by the U.S. Department of Labor (the "DOL"), a Plan
that owns the Capital Securities may be deemed to own a portion of the assets
held in the Trust, including a portion of the Junior Subordinated Debentures
held in the Trust. In addition, the Company and its affiliates may be "parties
in interest" (within the meaning of ERISA) or "disqualified persons" (within
the meaning of Section 4975 of the IRC) with respect to certain Plans
(generally, Plans maintained or sponsored by, or contributed to by, any such
persons or Plans with respect to which any such persons are fiduciaries or
service providers). The acquisition and ownership of the Capital Securities
and a deemed acquisition and ownership of an interest in the Junior
Subordinated Debentures by a Plan with respect to which the Company or any of
its affiliates is considered a party in interest or a disqualified person, may
constitute or result in a prohibited transaction under ERISA or Section 4975
of the IRC, unless such securities are acquired and are held pursuant to and
in accordance with an applicable exemption. In this regard, the DOL has issued
prohibited transaction class exemptions ("PTCEs") that may apply to the
acquisition and holding of the Capital Securities. These class exemptions are
PTCE 84-14
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(respecting transactions determined by independent qualified professional
asset managers), PTCE 90-1 (respecting insurance company separate accounts),
PTCE 91-38 (respecting bank collective trust funds), PTCE 95-60 (respecting
insurance company general accounts) and PTCE 96-23 (respecting transactions
determined by in-house asset managers).
Any Plan proposing to acquire the Capital Securities should consult with its
own ERISA counsel and should not acquire the Capital Securities unless it is
determined that such acquisition and holding does not and will not constitute
a prohibited transaction. Any such acquisition by a Plan shall be deemed a
representation by the Plan and the fiduciary effecting the investment on
behalf of the Plan that such acquisition and holding is in accordance with one
of the foregoing class exemptions or another available prohibited transaction
exemption.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The following statements are subject to and qualified in their entirety by
reference to detailed provisions of the Company's Certificate and Bylaws
(copies of which have been incorporated by reference as exhibits to the
Registration Statement of which this Prospectus forms a part).
The Company is currently authorized to issue shares of Class A Common
Stock, shares of Class B Common Stock and shares of Preferred Stock. The
shares of Class A Common Stock and Class B Common Stock are identical in all
respects except for voting rights and certain conversion rights and transfer
restrictions regarding the shares of Class B Common Stock as described below.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
Voting
All outstanding shares of Common Stock are fully paid and nonassessable.
Except for the Equity Purchase Rights, holders of Common Stock do not have any
preemptive rights to subscribe for or purchase any additional securities
issued by the Company. No redemption or sinking fund provisions are associated
with the Common Stock. Cumulative voting is not permitted by holders of Common
Stock.
The holders of Class B Common Stock are entitled to ten votes per share. The
holders of Class A Common Stock are entitled to one vote per share. Proposals
submitted to a vote of stockholders will be voted on by holders of Class A
Common Stock and Class B Common Stock voting together as a single class. At
all meetings of the stockholders of the Company, the holders of a majority of
the outstanding shares of Class A Common Stock and Class B Common Stock
entitled to vote, represented in person or in proxy, shall constitute a quorum
for the transaction of business; and the affirmative vote of the holders of a
majority of such common stock at a meeting at which a quorum is present shall
be the act of the stockholders of the Company. The superior voting rights of
the Class B Common Stock might discourage unsolicited merger proposals and
unfriendly tender offers.
Transfer
The Certificate does not contain any restrictions on the transfer of shares
of Class A Common Stock. Upon transfer of shares of Class B Common Stock to
any person except to a "Permitted Transferee" (as defined therein), such
shares of Class B Common Stock will be converted into an equal number of
shares of Class A Common Stock. Permitted Transferees include, among others,
Nationwide Mutual and any of its affiliates.
Conversion
Class A Common Stock has no conversion rights. Class B Common Stock is
convertible into Class A Common Stock, in whole or in part, at any time and
from time to time at the option of the holder, on the basis of one share of
Class A Common Stock for each share of Class B Common Stock converted. If at
any time after the initial issuance of shares of Class A Common Stock the
number of outstanding shares of Class B Common Stock falls below 5% of the
aggregate number of issued and outstanding shares of Common Stock, then each
outstanding share of Class B Common Stock shall automatically convert into one
share of Class A Common Stock. In the event of a transfer of shares of Class B
Common Stock to any person other than to a Permitted Transferee, each share of
Class B Common Stock so transferred shall be automatically converted into one
share of Class A Common Stock.
Dividends
Holders of Common Stock are entitled to receive cash dividends pro rata on a
per share basis if and when such dividends are declared by the Board of
Directors of the Company from funds legally available therefor. In
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the case of any dividend paid other than in cash, holders of Class A Common
Stock and Class B Common Stock are entitled to receive such dividend pro rata
on a per share basis. Dividends paid in Common Stock may be paid in shares of
Class A Common Stock on the Class A Common Stock and in shares of Class B
Common Stock on the Class B Common Stock.
Liquidation, Merger or Consolidation
Holders of Class A Common Stock and Class B Common Stock share with each
other on a ratable basis as a single class in the net assets of the Company
available for distribution in respect of the Common Stock in the event of
liquidation or any payments made on the Common Stock in the event of a merger
or consolidation of the Company.
PREFERRED STOCK
Under the Certificate, the Company has authority to issue shares of
Preferred Stock. Preferred Stock may be issued from time to time in one or
more classes with such full, special, limited or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights, and qualifications and limitations or restrictions thereof, as
shall be stated and expressed in the Certificate or any amendment thereof or
in any resolution adopted by the Board of Directors of the Company
establishing any class of Preferred Stock. The Board of Directors of the
Company has the authority to issue shares of Preferred Stock without further
action of the stockholders. The ability of the Board of Directors to issue
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. No
shares of Preferred Stock are outstanding.
CERTAIN CERTIFICATE AND BYLAW PROVISIONS
Certain provisions of the Company's Certificate and Bylaws, summarized in
the following paragraphs, may be considered to have an anti-takeover effect
and may delay, deter or prevent a tender offer, proxy contest or other
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including such an attempt as might result in payment of a
premium over the market price for shares held by stockholders.
Classified Board of Directors
The Certificate provides for the Board of Directors of the Company to be
divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
The Board of Directors believes that a classified board of directors will help
to assure the continuity and stability of the Board of Directors and the
business strategies and policies of the Company as determined by the Board of
Directors because continuity and stability in the composition of the Board of
Directors and in the policies formulated by it will be enhanced by the
staggered three-year terms.
The classified board provisions could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain
control of the Company, even though such an attempt might be beneficial to the
Company and its stockholders. In addition, the classified board provisions
could delay stockholders who do not like the policies of the Board of
Directors from removing a majority of the Board of Directors for two years.
Number of Directors; Removal; Filling Vacancies
The Certificate provides that the Board of Directors will consist of three
to fifteen members, the exact number to be fixed from time to time by
resolution adopted by the directors of the Company. The Board of Directors
currently consists of eleven directors. Further, subject to the rights of the
holders of any series of Preferred Stock then outstanding, the Certificate
authorizes the Board of Directors to fill newly created
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directorships. Accordingly, this provision could prevent a stockholder from
obtaining majority representation on the Board of Directors by permitting the
Board of Directors to enlarge the Board of Directors and fill the new
directorships with its own nominees. A director so elected by the Board of
Directors holds office until the next election of the class for which such
director has been chosen and until his successor is elected and qualified.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, the Certificate also provides that directors may be removed only
for cause and only by the affirmative vote of holders of a majority of the
outstanding shares of voting securities. The effect of these provisions is to
preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
Special Meetings of Stockholders
The Bylaws provide that special meetings of stockholders may be called by
the Chairman of the Board of Directors, the Chief Executive Officer or the
President and shall be called by the President or the Secretary at the request
in writing of a majority of the Board of Directors of the Company.
Stockholders are not permitted to call special meetings of stockholders.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Company's Bylaws provide that stockholders seeking to bring business
before a meeting of stockholders, or to nominate candidates for election as
directors at a meeting of stockholders, must provide timely notice thereof in
writing. To be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive office of the Company, not less than
60 days nor more than 90 days prior to the scheduled meeting (or, if a special
meeting, not later than the close of business on the tenth day following the
earlier of (i) the day on which such notice of the date of the meeting was
mailed or (ii) the day on which public disclosure of the date of the special
stockholders' meeting was made). The Bylaws also specify certain requirements
pertaining to the form and substance of a stockholder's notice. These
provisions may preclude some stockholders from making nominations for
directors at an annual or special meeting or from bringing other matters
before the stockholders at a meeting.
Class B Common Stock
The superior voting rights of the Class B Common Stock might discourage
unsolicited merger proposals and unfriendly tender offers.
No Action by Written Consent of the Stockholders
The Certificate does not allow the stockholders of the Company to take
action by written consent in lieu of a meeting.
Delaware Takeover Statute
The Company is subject to the provisions of Section 203 ("Section 203") of
the General Corporation Law of the State of Delaware (the "DGCL"). Section 203
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which such person became an interested
stockholder unless (i) prior to such date, the board of directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (ii) upon the consummation
of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder then owned at least 85% of the voting
stock of the corporation, as defined in Section 203; or (iii) subsequent to
such date, the business combination is approved by both the board of directors
and by holders of at least 66 2/3% of the corporation's outstanding voting
stock at an annual or special meeting, excluding shares owned by the
interested stockholder. For these purposes, the term "business combination"
includes mergers, asset or stock sales and other similar transactions with an
"interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior three
years, did own) 15% or more of the corporation's voting stock.
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Limitation on Liability
The Company's Certificate contains a provision that is designed to limit the
directors' liability to the extent permitted by the DGCL and any amendments
thereto. Specifically, directors will not be held liable to the Company or its
stockholders for an act or omission in such capacity as a director, except for
liability as a result of (i) a breach of the duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper repurchase of the Company's stock under Section
174 of the DGCL, or (iv) actions or omissions pursuant to which the director
received an improper personal benefit. The principal effect of the limitation
on liability provision is that a stockholder is unable to prosecute an action
for monetary damages against a director of the Company unless the stockholder
can demonstrate one of the specified bases for liability. This provision,
however, does not eliminate or limit director liability arising in connection
with causes of action brought under the federal securities laws. The Company's
Certificate does not eliminate its directors' duty of care. The inclusion of
this provision in the Company's Certificate may, however, discourage or deter
stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise have benefited the Company and its stockholders. This
provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
Indemnification
The Company's Bylaws also provide that the Company will indemnify its
directors and officers to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, settlements, legal fees and other expenses incurred in
connection with pending or threatened legal proceedings because of the
director's or officer's position with the Company or another entity that the
director or officer serves at the Company's request, subject to certain
conditions, and to advance funds to its directors and officers to enable them
to defend against such proceedings. To receive indemnification, the director
or officer must have been successful in the legal proceeding or acted in good
faith and in what was reasonably believed to be a lawful manner in the
Company's best interest.
Certificate Provisions Relating to Corporate Opportunities
The Certificate provides that except as Nationwide Mutual may otherwise
agree in writing and except as set forth in the Intercompany Agreement:
(i) neither Nationwide Mutual nor any member of the Nationwide Insurance
Enterprise (other than the Company) shall have a duty to refrain from
engaging directly or indirectly in the same or similar business activities
or lines of business as the Company; and
(ii) neither Nationwide Mutual nor any Member of the Nationwide Insurance
Enterprise (other than the Company), nor any officer or director of
Nationwide Mutual (except as provided below), will be liable to the Company
or to its stockholders for breach of any fiduciary duty by reason of any
such activities or of such person's participation thereon.
The Certificate also provides that if Nationwide Mutual or any member of the
Nationwide Insurance Enterprise (other than the Company) acquires knowledge of
a potential transaction or matter which may be a corporate opportunity both
for Nationwide Mutual or such member and for the Company, neither Nationwide
Mutual nor such member shall have a duty to communicate or offer such
corporate opportunity to the Company and shall not be liable to the Company or
its stockholders for breach of fiduciary duty as a stockholder of the Company
or controlling person of a stockholder by reason of the fact that Nationwide
Mutual or such member pursues or acquires such opportunity for itself, directs
such corporate opportunity to another person or does not communicate
information regarding such corporate opportunity to the Company.
Further, the Certificate provides that in the event that a director, officer
or agent of the Company who is also a director, officer or agent of Nationwide
Mutual or any of its subsidiaries acquires knowledge of a potential
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transaction or matter that may be a corporate opportunity for the Company,
Nationwide Mutual or other members of the Nationwide Insurance Enterprise
(whether such potential transaction or matter is proposed by a third party or
is conceived of by such director, officer or agent of the Company), such
director, officer or agent shall be entitled to offer such corporate
opportunity to the Company, Nationwide Mutual or such member as such director,
officer or agent deems appropriate under the circumstances in his or her sole
discretion, and no such director, officer or agent shall be liable to the
Company or its stockholders for breach of any fiduciary duty or duty of
loyalty or failure to act in (or not opposed to) the best interests of the
Company or the derivation of any improper personal benefit by reason of the
fact that (i) such director, officer or agent offered such corporate
opportunity to Nationwide Mutual or such member (rather than the Company) or
did not communicate information regarding such corporate opportunity to the
Company or (ii) Nationwide Mutual or such member pursues or acquires such
corporate opportunity for itself or directs such corporate opportunity to
another person or does not communicate information regarding such corporate
opportunity to the Company. The enforceability of the provisions discussed
above under the DGCL has not been established and counsel to the Company has
not delivered an opinion as to the enforceability of such provisions. These
provisions of the Certificate may eliminate certain rights that might have
been available to stockholders under the DGCL had such provisions not been
included in the Certificate.
The Company's Board of Directors currently consists of eleven members, seven
of whom serve concurrently on the boards of directors of other companies
within the Nationwide Insurance Enterprise. In addition, a significant number
of officers of the Company will also be officers of Nationwide Mutual or other
companies within the Nationwide Insurance Enterprise.
The foregoing provisions of the Certificate shall expire on the date that
Nationwide Mutual ceases to beneficially own Common Stock representing at
least 50% of the voting power of the outstanding shares of Common Stock.
LISTINGS
Application is being made for listing the Class A Common Stock on the NYSE
under the symbol "NFS."
TRANSFER AGENT AND REGISTRAR
will serve as transfer agent and registrar for the Class A Common Stock.
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THE EQUITY OFFERINGS, THE NOTE OFFERING AND THE CAPITAL SECURITIES OFFERING
Prior to the Capital Securities Offering, the Company expects to consummate
the public offering of shares of Class A Common Stock in the United
States and Canada and, concurrently with the Capital Securities Offering, the
Company expects to consummate the public offering of $300 million aggregate
principal amount of Senior Notes. See "Capitalization."
The consummation of the Capital Securities Offering is not conditioned on
the completion of the Note Offering. There can be no assurance that the Note
Offering will be consummated.
The Equity Offerings and the Note Offering are being made pursuant to
separate prospectuses.
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement, dated , 1997 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company the following respective liquidation amounts of Capital Securities:
<TABLE>
<CAPTION>
Liquidation
Amount of
Capital
Underwriter Securities
----------- -----------
<S> <C>
Credit Suisse First Boston Corporation...........................
Morgan Stanley & Co. Incorporated................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Total..........................................................
=====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Capital Securities, if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances the purchase commitments of non-
defaulting Underwriters may be increased or the Underwriting Agreement may be
terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Capital Securities to the public initially at the public
offering price set forth on the cover page of this Prospectus and, through the
Representatives, to certain dealers at such price less a concession of % of
the principal amount per Note, and the Underwriters and such dealers may allow
a discount of % of such principal amount per Note on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
In view of the fact that the proceeds of the sale of the Capital Securities
will be used to purchase the Junior Subordinated Debentures, the Underwriting
Agreement provides that the Company will agree to pay as compensation
("Underwriters' Compensation") to the Underwriters arranging the investment
therein of such proceeds, an amount in same day funds of $ per Capital
Security (or $ in the aggregate).
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During a period of 90 days from the date of this Prospectus, neither the
Trust nor the Company will, without the prior written consent of the
Underwriters, directly or indirectly, sell, offer to sell, grant any option
for the sale of, or otherwise dispose of, any Capital Securities, any security
convertible into or exchangeable into or exercisable for Capital Securities or
the Junior Subordinated Debentures or any debt securities substantially
similar to the Junior Subordinated Debentures or any equity securities
substantially similar to the Capital Securities (except for the Junior
Subordinated Debentures and the Capital Securities offered hereby).
Application is being made for listing the Capital Securities on the NYSE.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in
respect thereof.
From time to time, Credit Suisse First Boston Corporation has provided
investment banking services to the Company, Nationwide Life and other members
of the Nationwide Insurance Enterprise, for which it has received customary
compensation. It is expected that Credit Suisse First Boston Corporation will
continue to provide such services in the future. The Representatives also are
acting as representatives of the underwriters of the Equity Offerings and the
Note Offering.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Capital Securities in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of the Capital Securities are effected. Accordingly, any
resale of Capital Securities in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Capital Securities in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Capital
Securities without the benefit of a prospectus qualified under such securities
laws, (ii) where required by law, that such purchaser is purchasing as
principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Company or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of the Capital Securities to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file within
the British Columbia Securities Commission a report within ten days of the
sale of any Capital Securities acquired by such purchaser pursuant to this
offering. Such report must be in the form attached to British Columbia
Securities Commission Blanket Order BOR #95/17, a copy of which may be
obtained from the Company. Only one such report must be filed in respect of
Capital Securities acquired on the same date and under the same prospectus
exemption.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Capital
Securities will be passed upon on behalf of the Trust by Richards, Layton &
Finger, P.A., Wilmington, Delaware, special Delaware counsel to the Trust. The
validity of the Junior Subordinated Debentures, the Guarantee and certain
matters relating thereto, will be passed upon on behalf of the Company and the
Trust by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability
partnership including professional corporations, New York, New York. LeBoeuf,
Lamb, Greene & MacRae, L.L.P. will also pass upon certain United States
federal income tax matters on behalf of the Company and the Trust. Certain
legal matters will be passed upon for the Underwriters by Dewey Ballantine,
New York, New York.
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EXPERTS
The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries as of December 31, 1995 and 1994, and for
each of the years in the three-year period ended December 31, 1995 included
herein and elsewhere in this Registration Statement have been included herein
and elsewhere in this Registration Statement in reliance on the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
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GLOSSARY OF SELECTED INSURANCE TERMS
ANNUITY.......................... A contract that provides for a fixed or
variable periodic payment made from a
stated or contingent date and continued for
a specific period, such as for a number of
years (certain period) or for life (life
contingent), either immediately or after a
stated accumulation period.
ASSET VALUATION RESERVE; AVR..... The asset valuation reserve adopted by the
NAIC in 1991. AVR appears as a liability on
a life insurer's statutory financial
statements. AVR establishes statutory
reserves for debt securities, common
stocks, preferred stocks, mortgage loans,
equity real estate, joint ventures and
other invested assets. AVR generally
captures all realized and unrealized gains
and losses on such assets, other than those
resulting from changes in interest rates.
AVR has no effect on financial statements
prepared in conformity with GAAP.
CASH VALUE....................... The amount of cash that may be realized by
the owner of a life insurance policy or
annuity contract with a life insurance
company upon lapse or surrender of the
policy or contract prior to its maturity.
CEDE, CEDING COMPANY............. When a company reinsures all or a portion
of its risk with another, it "cedes"
business and is referred to as the "ceding
company."
COINSURANCE...................... A form of reinsurance whereby the reinsurer
assumes an agreed portion of risk insured
by the ceding insurer and shares premium
revenues and losses in proportion to the
agreed portion.
CREDITING RATES.................. Interest rates applied to life insurance
policies and annuity contracts, whether
contractually guaranteed or currently
declared for a specified period.
DEFERRED ANNUITY................. An annuity that (i) can be paid either with
a single premium or a series of
installments and (ii) includes a schedule
of periodic income benefit to commence
after an accumulation period.
DEFERRED POLICY ACQUISITION Commissions and other selling expenses that
COSTS............................ vary with and are directly related to the
production of business. These acquisition
costs are deferred and amortized in
conformity with GAAP.
GENERAL ACCOUNT.................. All an insurer's assets other than those
allocated to a separate account. The
insurer bears the investment risk on the
invested assets of the general account.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES; GAAP................. United States generally accepted accounting
principles as defined by the American
Institute of Certified Public Accountants
and the Financial Accounting Standards
Board.
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IMMEDIATE ANNUITY................
An annuity that begins payment immediately
after issuance.
IN FORCE......................... The total face amount of insurance coverage
under contracts that have not expired.
INSURANCE GUARANTY Associations created in all states, the
ASSOCIATIONS..................... District of Columbia and Puerto Rico by
law, to cover funding shortfalls in paying
claims of insolvent life insurance
companies. These associations obtain funds
by post-insolvency assessments of life
insurance companies operating in a
particular state in proportion to their
business written in that state.
INSURANCE PREMIUM................ The amount that a policyholder is charged,
in reflecting the expectation of loss or
risk. The insurance company assumes the
risks of the insured (length of life, state
of health or liability exposure) in
exchange for a premium payment. Premiums
are calculated by combining expectation of
loss and expense and profit loadings.
INTEREST MAINTENANCE RESERVE; The interest maintenance reserve adopted by
IMR.............................. the NAIC in 1991. IMR appears as a
liability on a life insurer's statutory
financial statements and applies to all
types of fixed income investments (bonds,
preferred stocks, mortgage-backed
securities and mortgage loans). IMR
captures the net gains or losses from
changes in the overall level of interest
rates that are realized upon the sale of
investments prior to maturity and amortizes
these net realized gains into income over
the remaining life of each investment sold.
IMR has no effect on financial statements
prepared in conformity with GAAP.
MORBIDITY RATE................... The relative incidence of disability due to
disease or physical impairment.
MORTALITY RATE................... The relative incidence of death of life
insureds or annuitants.
NAIC............................. The National Association of Insurance
Commissioners, an association of the chief
insurance supervisory officials of each
state, territory and possession of the
United States.
PERSISTENCY...................... Percentage of life insurance policies or
annuity contracts remaining in force until
completion of the term for which the policy
or contract was written.
POLICY ACQUISITION COSTS......... Agents' and brokers' commissions, premiums,
taxes, marketing, underwriting and other
direct expenses related to the production
of business. Such costs that vary with and
are directly related to the production of
business are deferred and amortized to
achieve a matching of revenues and expenses
when reported in financial statements
prepared in conformity with GAAP.
POLICY RESERVES; RESERVES........ Liabilities established by insurers to
reflect the present value of claims
payments and the related expenses that the
insurer will ultimately be required to pay
in respect of insurance it has written.
125
<PAGE>
REINSURANCE......................
The practice whereby one party, called the
reinsurer or assuming company, in
consideration of a premium paid to such
party, agrees to indemnify another party,
called the ceding company. Reinsurance
provides a primary insurer with three major
benefits: it reduces net liability on
individual risks; it helps to protect
against catastrophic losses; and it helps
to maintain acceptable surplus and reserve
ratios. Reinsurance provides a primary
insurer with additional underwriting
capacity in that the primary insurer can
accept larger risks and can expand the
volume of business it writes without
increasing its capital base. Reinsurance
may be on an assumption basis, which
effectively transfers to the reinsurer all
rights and obligations on the business
reinsured. Reinsurance may be a coinsurance
basis, which means that the reinsurer
accepts a stated proportion of all policy
risks. Reinsurance may be on an excess or
stop loss basis, which means that the
reinsurer is responsible for any benefits
in excess of a stated amount.
RISK-BASED CAPITAL Regulatory and rating agency targeted
REQUIREMENTS..................... surplus based on the relationship of
statutory capital and surplus, with certain
adjustments, to the sum of stated
percentages of each element of a specified
list of Company risk exposures.
SEPARATE ACCOUNTS................ Investment accounts maintained by an
insurer to which funds have been allocated
for certain policies under provisions of
relevant state insurance law. The
investments in each separate account are
maintained separately from those in other
separate accounts and the general account.
The investment results of the separate
account assets are passed through directly
to the separate account policyholders, so
that an insurer derives management and
other fees from, but bears no investment
risk on, these assets, except the risk on a
small number of products that returns on
separate account assets will not meet the
relatively low minimum rate guaranteed on
these products.
SINGLE PREMIUM DEFERRED
ANNUITIES; SPDA'S................ Annuities that require a one-time lump sum
payment of consideration upon the issuance
of the contract with benefit payments
commencing at some future date following an
accumulation period.
STATUTORY ACCOUNTING PRACTICES... Those accounting practices prescribed or
permitted by an insurer's domiciliary state
insurance regulator for purposes of
financial reporting to regulators.
SURRENDERS AND WITHDRAWALS....... Surrenders of life insurance policies and
annuity contracts for their entire net cash
surrender values and withdrawals of a
portion of such values.
TERM LIFE INSURANCE.............. Life insurance offering protection during a
certain number of years, but expiring
without policy cash value if the insured
survives the stated period. Most term
policies provide for guaranteed
continuation of coverage for life at
increased premium rates.
126
<PAGE>
UNIVERSAL LIFE INSURANCE.........
Life insurance under which (i) premiums are
generally flexible, (ii) the level of death
benefits may be adjusted and (iii) expenses
and other charges are specifically
disclosed to a purchaser. This policy is
sometimes referred to as unbundled life
insurance because its three basic elements
(investment earnings, cost of protection
and expense charges) are separately
identified both in the policy and in an
annual report to the policyholder.
VARIABLE ANNUITY................. Annuity in which premium payments are used
to purchase accumulation units. The value
of a unit fluctuates in accordance with the
investment experience of a separate
account; variable annuity contracts
typically include a general account
guaranteed interest investment option. At
the time of the payment of benefits to the
annuitant, the annuitant can generally
elect from a number of payment options
which provide either fixed or variable
benefit payments.
VARIABLE LIFE INSURANCE.......... Life insurance under which the benefits
payable upon death or surrender vary to
reflect the investment experience of the
separate account supporting such policies;
variable life insurance policies typically
include a general account guaranteed
interest investment option.
WHOLE LIFE INSURANCE.............
Permanent life insurance offering
guaranteed death benefits and guaranteed
cash values.
127
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1994................ F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
1994 and 1993........................................................... F-4
Consolidated Statements of Shareholder's Equity for the Years Ended
December 31, 1995, 1994 and 1993........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995,
1994 and 1993........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1996...................... F-26
Consolidated Statements of Income for the Nine Months Ended September 30,
1996 and 1995........................................................... F-27
Consolidated Statements of Shareholder's Equity for the Nine Months Ended
September 30, 1996
and 1995................................................................ F-28
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1996 and 1995....................................................... F-29
Notes to Consolidated Financial Statements............................... F-30
</TABLE>
F-1
<PAGE>
WHEN THE TRANSACTIONS REFERRED TO IN NOTE 1 OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS HAVE BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Nationwide
Financial Services, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholder's equity and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nationwide
Financial Services, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
was formed in November 1996 as a holding company for Nationwide Life Insurance
Company and the other companies within the Nationwide Insurance Enterprise
that offer or distribute long-term savings and retirement products. The
consolidated financial statements are presented as if these companies were
consolidated for all periods presented.
In 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. In 1993, the
Company adopted the provisions of SFAS No. 109, Accounting for Income Taxes
and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions.
Columbus, Ohio
January , 1997
F-2
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(000'S OMITTED)
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Investments (notes 5, 8 and 9):
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $11,872,870 in 1995;
$7,327,585 in 1994)................................ $12,495,878 7,074,261
Equity securities (cost $31,234 in 1995; $23,053 in
1994).............................................. 37,570 29,415
Fixed maturity securities held-to-maturity, at
amortized cost (fair value $5,989 in 1995; $3,233,408
in 1994)............................................. 5,720 3,309,034
Mortgage loans on real estate, net.................... 4,627,387 4,081,794
Real estate, net...................................... 229,442 242,243
Policy loans.......................................... 336,356 310,644
Other long-term investments........................... 61,989 57,350
Short-term investments (note 13)...................... 42,671 134,330
----------- ----------
17,837,013 15,239,071
----------- ----------
Cash.................................................... 10,055 4,610
Accrued investment income............................... 212,963 196,074
Deferred policy acquisition costs....................... 1,020,356 995,560
Other assets............................................ 82,661 132,420
Assets held in Separate Accounts (note 8)............... 18,591,108 12,087,117
----------- ----------
$37,754,156 28,654,852
=========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims (notes 6 and 8)....... $16,113,359 14,450,286
Policyholders' dividend accumulations................... 348,027 335,388
Other policyholder funds................................ 65,297 63,763
Accrued Federal income tax (note 7):
Current............................................... 36,980 4,401
Deferred.............................................. 237,247 79
----------- ----------
274,227 4,480
----------- ----------
Other liabilities....................................... 252,085 220,119
Liabilities related to Separate Accounts (note 8)....... 18,591,108 12,087,117
----------- ----------
35,644,103 27,161,153
----------- ----------
Commitments and contingencies (notes 9 and 15)
Shareholder's equity (notes 2, 3, 4, 5, 12 and 13):
Class A common shares, no par value. Authorized
shares,
no shares issued and outstanding..................... -- --
Class B common shares, no par value. Authorized
shares,
no shares issued and outstanding..................... -- --
Additional paid-in capital............................ 602,468 602,468
Retained earnings..................................... 1,188,804 1,003,057
Unrealized gains (losses) on securities available-for-
sale, net............................................ 318,781 (111,826)
----------- ----------
2,110,053 1,493,699
----------- ----------
$37,754,156 28,654,852
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000'S OMITTED)
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Revenues (note 16):
Investment product and universal life
insurance product policy charges.......... $ 286,534 217,245 165,454
Traditional life insurance premiums........ 199,106 176,658 188,385
Net investment income (note 5)............. 1,294,033 1,210,811 1,131,244
Realized gains (losses) on investments
(notes 5 and 13).......................... (1,724) (16,527) 106,190
Other income............................... 59,089 45,897 48,053
---------- --------- ---------
1,837,038 1,634,084 1,639,326
---------- --------- ---------
Benefits and expenses:
Benefits and claims........................ 1,115,493 992,667 982,158
Provision for policyholders' dividends on
participating policies
(note 12)................................. 39,937 38,754 43,025
Amortization of deferred policy acquisition
costs..................................... 82,695 85,568 70,220
Other operating expenses................... 317,743 276,632 268,167
---------- --------- ---------
1,555,868 1,393,621 1,363,570
---------- --------- ---------
Income before Federal income tax expense
and cumulative effect of changes in
accounting principles................... 281,170 240,463 275,756
---------- --------- ---------
Federal income tax expense (note 7):
Current.................................... 89,400 77,009 56,140
Deferred................................... 6,914 5,507 40,537
---------- --------- ---------
96,314 82,516 96,677
---------- --------- ---------
Income before cumulative effect of
changes in accounting principles........ 184,856 157,947 179,079
Cumulative effect of changes in accounting
principles, net (note 4).................... -- -- (98)
---------- --------- ---------
Net income............................... $ 184,856 157,947 178,981
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000'S OMITTED)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
CLASS A CLASS B ADDITIONAL ON SECURITIES TOTAL
COMMON COMMON PAID-IN RETAINED AVAILABLE-FOR- SHAREHOLDER'S
SHARES SHARES CAPITAL EARNINGS SALE, NET EQUITY
------- ------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1993:
Balance, beginning of
year................. $-- -- 307,468 826,060 88,238 1,221,766
Capital
contributions........ -- -- 100,000 -- -- 100,000
Dividends paid to
shareholder.......... -- -- (5,000) (5,565) -- (10,565)
Net income............ -- -- -- 178,981 -- 178,981
Unrealized losses on
equity securities,
net.................. -- -- -- -- (81,513) (81,513)
Other................. -- -- -- 398 -- 398
---- --- ------- --------- -------- ---------
Balance, end of year.. $-- -- 402,468 999,874 6,725 1,409,067
==== === ======= ========= ======== =========
1994:
Balance, beginning of
year................. -- -- 402,468 999,874 6,725 1,409,067
Capital contribution.. -- -- 200,000 -- -- 200,000
Dividends paid to
shareholder.......... -- -- -- (1,000) -- (1,000)
Net income............ -- -- -- 157,947 -- 157,947
Adjustment for change
in accounting for
certain investments
in debt and equity
securities, net (note
4)................... -- -- -- -- 212,553 212,553
Unrealized losses on
securities available-
for-sale, net........ -- -- -- -- (331,104) (331,104)
Other (note 13)....... -- -- -- (153,764) -- (153,764)
---- --- ------- --------- -------- ---------
Balance, end of year.. $-- -- 602,468 1,003,057 (111,826) 1,493,699
==== === ======= ========= ======== =========
1995:
Balance, beginning of
year................. -- -- 602,468 1,003,057 (111,826) 1,493,699
Dividends paid to
shareholder.......... -- -- -- (8,450) -- (8,450)
Net income............ -- -- -- 184,856 -- 184,856
Unrealized gains on
securities available-
for-sale, net........ -- -- -- -- 430,607 430,607
Other................. -- -- -- 9,341 -- 9,341
---- --- ------- --------- -------- ---------
Balance, end of year.. $-- -- 602,468 1,188,804 318,781 2,110,053
==== === ======= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000'S OMITTED)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 184,856 157,947 178,981
Adjustments to reconcile net income to
net cash provided by operating
activities:
Capitalization of deferred policy
acquisition costs.................... (321,327) (242,431) (180,977)
Amortization of deferred policy
acquisition costs.................... 82,695 85,568 70,220
Amortization and depreciation......... 13,189 5,383 12,080
Realized losses (gains) on invested
assets, net.......................... 3,250 16,094 (106,259)
Deferred Federal income tax expense... 5,305 6,190 7,676
Increase in accrued investment
income............................... (16,889) (12,918) (4,626)
Decrease (increase) in other assets... 47,801 (52,119) 2,912
Increase in policy liabilities........ 113,980 98,212 34,283
Increase in policyholders' dividend
accumulations........................ 12,639 15,298 17,256
Increase (decrease) in accrued Federal
income tax payable................... 32,579 (3,927) 13,106
Increase in other liabilities......... 31,966 6,856 21,729
Other, net............................ (6,597) (3,537) (4,622)
----------- ---------- ----------
Net cash provided by operating
activities......................... 183,447 76,616 61,759
----------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturity of securities
available-for-sale..................... 634,553 544,843 --
Proceeds from sale of securities
available-for-sale..................... 150,453 268,987 268,332
Proceeds from maturity of fixed maturity
securities held-to-maturity............ 564,450 491,862 1,072,706
Proceeds from sale of fixed maturity
securities............................. -- -- 28,507
Proceeds from repayments of mortgage
loans on real estate................... 207,832 190,574 141,825
Proceeds from sale of real estate....... 48,331 46,713 23,587
Proceeds from repayments of policy loans
and sale of other invested assets...... 53,587 120,506 53,302
Cost of securities available-for-sale
acquired............................... (1,998,165) (1,858,036) (46,945)
Cost of fixed maturity securities held-
to-maturity acquired................... (599,356) (410,379) (1,865,566)
Cost of mortgage loans on real estate
acquired............................... (796,026) (497,349) (467,886)
Cost of real estate acquired............ (10,928) (6,385) (8,826)
Policy loans issued and other invested
assets acquired........................ (75,910) (65,302) (76,490)
----------- ---------- ----------
Net cash used in investing
activities......................... (1,821,179) (1,173,966) (877,454)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from capital contributions..... -- 200,000 100,000
Dividends paid to shareholder........... (8,450) (1,000) (10,565)
Proceeds from affiliated companies...... 9,341 1,236 398
Distributions to affiliated companies... -- (155,000) --
Increase in investment product and
universal life insurance product
account balances....................... 2,809,385 3,547,976 2,130,791
Decrease in investment product and
universal life insurance product
account balances....................... (1,258,758) (2,412,595) (1,396,726)
----------- ---------- ----------
Net cash provided by financing
activities......................... 1,551,518 1,180,617 823,898
----------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents.............................. (86,214) 83,267 8,203
Cash and cash equivalents, beginning of
year..................................... 138,940 55,673 47,470
----------- ---------- ----------
Cash and cash equivalents, end of year.... $ 52,726 138,940 55,673
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(000'S OMITTED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Nationwide Financial Services, Inc. (NFS) is an insurance holding company
which was formed in November 1996 and is a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). The consolidated financial
statements represent the results of Nationwide Life Insurance Company (NLIC)
and subsidiaries (excluding certain subsidiaries and lines of business as
discussed below) and three marketing and distribution companies as if they
were consolidated with NFS for all periods presented. This presentation is
based on Nationwide Corp.'s contribution of the common stock of those entities
to NFS on January 1, 1997 in anticipation of the initial public offering of
common stock of NFS described more fully in note 2 in exchange for all of the
shares of Class B common stock of NFS. NFS had no operating activity and had
no assets or liabilities as of December 31, 1995. NFS and the other companies
whose results are included in the consolidated financial statements are
collectively referred to as "the Company."
Immediately preceding the contribution of NLIC's outstanding shares of
common stock from Nationwide Corp. to NFS, NLIC will dividend the outstanding
shares of common stock of West Coast Life Insurance Company, Employers Life
Insurance Company of Wausau (ELICW) and National Casualty Company to
Nationwide Corp. Accordingly, the accompanying consolidated financial
statements do not reflect the assets, liabilities, results of operations and
cash flows of those previously wholly owned subsidiaries of NLIC.
During 1996, in anticipation of the restructuring described above, NLIC
entered into two reinsurance agreements whereby all of NLIC's accident and
health and group life insurance business was ceded to Nationwide Mutual
Insurance Company (NMIC), an affiliate, and ELICW effective January 1, 1996.
Accordingly, the accompanying consolidated financial statements present the
results of operations as if these reinsurance agreements were in place for all
periods presented. See note 13.
In addition, as part of the restructuring described above, NLIC anticipates
obtaining regulatory approval to make distributions to NFS which will then
make distributions to Nationwide Corp. in amounts approximating $ in
total.
The three marketing and distribution companies to be contributed by
Nationwide Corp. to NFS are: Public Employees Benefit Services Corporation
(PEBSCO), NEA Valuebuilder Investor Services, Inc. (NEAVIS) and Nationwide
Financial Institution Distributors Agency, Inc. (NFIDA).
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers and is subject to competition
from other financial services providers throughout the United States. The
Company is subject to regulation by the Insurance Departments of states in
which it is licensed, and undergoes periodic examinations by those
departments.
The following is a description of the most significant risks facing life
insurers and how the Company mitigates those risks:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses
not anticipated by the insurer in pricing its products. That is, regulatory
initiatives, new legal theories or insurance company insolvencies through
guaranty fund assessments may create costs for the insurer beyond those
currently recorded in the consolidated financial statements. The Company
mitigates this risk by offering a wide range of products and by operating
throughout the United States, thus reducing its exposure to any single
product or jurisdiction, and also by employing underwriting practices which
identify and minimize the adverse impact of this risk.
F-7
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Credit Risk is the risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company will
default or that other parties, including reinsurers, which owe the Company
money, will not pay. The Company minimizes this risk by adhering to a
conservative investment strategy, by maintaining reinsurance and credit and
collection policies and by providing for any amounts deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in rates
may cause certain interest-sensitive products to become uncompetitive or
may cause disintermediation. The Company mitigates this risk by charging
fees for non-conformance with certain policy provisions, by offering
products that transfer this risk to the purchaser, and/or by attempting to
match the maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly than
assets mature, an insurer would have to borrow funds or sell assets prior
to maturity and potentially recognize a gain or loss.
(2) INITIAL PUBLIC OFFERING
The Company is currently planning an initial public offering of its Class A
common stock (the Equity Offering) during the first quarter of 1997. After the
Equity Offering, Nationwide Corp. will continue to own all of the shares of
Class B common stock, which will represent approximately % of the voting
stock of the Company.
Shortly after the Equity Offering, the Company expects to consummate the
public offering of $300,000 of senior notes due 2027. In addition, Nationwide
Financial Services Capital Trust, an affiliate of the Company, expects to
consummate the public offering of $100,000 of capital securities (collectively
referred to as the Fixed Income Offerings).
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles (GAAP) which differ from statutory accounting practices
prescribed or permitted by regulatory authorities. Annual Statements for NLIC
and Nationwide Life and Annuity Insurance Company (NLAIC), filed with the
Department of Insurance of the State of Ohio (the Department), are prepared on
the basis of accounting practices prescribed or permitted by the Department.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed. The
Company has no material permitted statutory accounting practices.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosures of contingent assets and liabilities as of
the date of the consolidated financial statements and the reported amounts of
revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs, valuation allowances for mortgage loans on real
estate and real estate investments and the liability for future policy
benefits and claims. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
F-8
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(a) Consolidation Policy
The consolidated financial statements include the accounts of NFS and its
wholly owned subsidiaries, NLIC, PEBSCO, NEAVIS and NFIDA. All significant
intercompany balances and transactions have been eliminated.
(b) Valuation of Investments and Related Gains and Losses
The Company is required to classify its fixed maturity securities and equity
securities as either held-to-maturity, available-for-sale or trading. Fixed
maturity securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified as held-to-
maturity and all equity securities are classified as available-for-sale and
are stated at fair value, with the unrealized gains and losses, net of
adjustments to deferred policy acquisition costs and deferred Federal income
tax, reported as a separate component of shareholder's equity. The adjustment
to deferred policy acquisition costs represents the change in amortization of
deferred policy acquisition costs that would have been required as a charge or
credit to operations had such unrealized amounts been realized. The Company
has no fixed maturity securities classified as trading as of December 31, 1995
or 1994.
Mortgage loans on real estate are carried at the unpaid principal balance
less valuation allowances. The Company provides valuation allowances for
impairments of mortgage loans on real estate based on a review by portfolio
managers. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the fair value of the collateral, if the loan
is collateral dependent. Loans in foreclosure and loans considered to be
impaired are placed on non-accrual status. Interest received on non-accrual
status mortgage loans on real estate is included in interest income in the
period received.
Real estate is carried at cost less accumulated depreciation and valuation
allowances. Other long-term investments are carried on the equity basis,
adjusted for valuation allowances.
Realized gains and losses on the sale of investments are determined on the
basis of specific security identification. Estimates for valuation allowances
and other than temporary declines are included in realized gains and losses on
investments.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121--Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The statement is
effective for fiscal years beginning after December 15, 1995 and earlier
application is permitted. Previously issued consolidated financial statements
shall not be restated. The Company will adopt SFAS 121 in 1996 and the impact
on the consolidated financial statements is not expected to be material.
(c) Revenues and Benefits
Investment Products and Universal Life Insurance Products: Investment
products consist primarily of individual and group variable and fixed
annuities, annuities without life contingencies and guaranteed investment
contracts. Universal life insurance products include universal life insurance,
variable universal life insurance and other interest-sensitive life insurance
policies. Revenues for investment products and universal life insurance
products consist of asset fees, cost of insurance, policy administration and
surrender charges that have been
F-9
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earned and assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest credited to
policy account balances and benefits and claims incurred in the period in
excess of related policy account balances.
Traditional Life Insurance Products: Traditional life insurance products
include those products with fixed and guaranteed premiums and benefits and
consist primarily of whole life insurance, limited-payment life insurance,
term life insurance and certain annuities with life contingencies. Premiums
for traditional life insurance products are recognized as revenue when due.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the life of the contract. This association is
accomplished by the provision for future policy benefits and the deferral and
amortization of policy acquisition costs.
(d) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions, certain
expenses of the policy issue and underwriting department and certain variable
agency expenses have been deferred. For investment products and universal life
insurance products, deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present value of
estimated future gross profits from projected interest margins, asset fees,
cost of insurance, policy administration and surrender charges. For years in
which gross profits are negative, deferred policy acquisition costs are
amortized based on the present value of gross revenues. For traditional life
insurance products, these deferred policy acquisition costs are predominantly
being amortized with interest over the premium paying period of the related
policies in proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium revenue was
estimated using the same assumptions as were used for computing liabilities
for future policy benefits. Deferred policy acquisition costs are adjusted to
reflect the impact of unrealized gains and losses on fixed maturity securities
available-for-sale as described in note 3(b).
(e) Separate Accounts
Separate Account assets and liabilities represent contractholders' funds
which have been segregated into accounts with specific investment objectives.
The investment income and gains or losses of these accounts accrue directly to
the contractholders. The activity of the Separate Accounts is not reflected in
the consolidated statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy Benefits
Future policy benefits for investment products in the accumulation phase,
universal life insurance and variable universal life insurance policies have
been calculated based on participants' contributions plus interest credited
less applicable contract charges.
Future policy benefits for traditional life insurance policies have been
calculated using a net level premium method based on estimates of mortality,
morbidity, investment yields and withdrawals which were used or which were
being experienced at the time the policies were issued, rather than the
assumptions prescribed by state regulatory authorities. See note 6.
(g) Participating Business
Participating business represents approximately 54% (55% in 1994 and 57% in
1993) of the Company's ordinary life insurance in force, 79% (79% in 1994 and
80% in 1993) of the number of ordinary life insurance policies in force, and
47% (51% in 1994 and 56% in 1993) of life insurance premiums. The provision
for policyholder dividends is based on current dividend scales. Future
dividends are provided for ratably in future policy benefits based on dividend
scales in effect at the time the policies were issued.
F-10
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(h) Federal Income Tax
The Company files a consolidated Federal income tax return with NMIC, the
majority shareholder of Nationwide Corp. The members of the consolidated tax
return group have a tax sharing arrangement which provides, in effect, for
each member to bear essentially the same Federal income tax liability as if
separate tax returns were filed.
In 1993, the Company adopted SFAS No. 109--Accounting for Income Taxes,
which required a change from the deferred method of accounting for income tax
of APB Opinion 11 to the asset and liability method of accounting for income
tax. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the deferred tax
assets to the amounts expected to be realized.
The Company has reported the cumulative effect of the change in method of
accounting for income tax in the 1993 consolidated statement of income. See
note 4.
(i) Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits and claims
incurred are deducted from the respective income and expense accounts. Assets
and liabilities related to reinsurance ceded are reported on a gross basis.
(j) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments with original maturities of three months
or less to be cash equivalents.
(4) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Company changed its method of accounting for
certain investments in debt and equity securities in connection with the
issuance of SFAS No. 115--Accounting for Certain Investments in Debt and
Equity Securities. As of January 1, 1994, the Company classified fixed
maturity securities with amortized cost and fair value of $6,299,665 and
$6,721,714, respectively, as available-for-sale and recorded the securities at
fair value. Previously, these securities were recorded at amortized cost. The
effect as of January 1, 1994 has been recorded as a direct credit to
shareholder's equity as follows:
<TABLE>
<S> <C>
Excess of fair value over amortized cost of fixed maturity
securities
available-for-sale............................................. $422,049
Adjustment to deferred policy acquisition costs................. (95,044)
Deferred Federal income tax..................................... (114,452)
--------
$212,553
========
</TABLE>
F-11
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, the Company adopted accounting principles in connection with
the issuance of two accounting standards by the FASB. The effect as of January
1, 1993, the date of adoption, has been recognized in the 1993 consolidated
statement of income as the cumulative effect of changes in accounting
principles, as follows:
<TABLE>
<S> <C>
Asset/liability method of recognizing income tax (note 3(h))..... $18,750
Accrual method of recognizing postretirement benefits other than
pensions
(net of tax benefit of $10,149) (note 11)....................... (18,848)
-------
$ (98)
=======
</TABLE>
(5) INVESTMENTS
The amortized cost and estimated fair value of securities available-for-sale
were as follows as of December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...... $ 320,500 12,764 (1) 333,263
Obligations of states and
political subdivisions......... 8,655 1,205 (1) 9,859
Debt securities issued by
foreign governments............ 101,414 4,387 (66) 105,735
Corporate securities............ 7,888,440 473,681 (25,742) 8,336,379
Mortgage-backed securities...... 3,553,861 165,169 (8,388) 3,710,642
----------- ------- ------- ----------
Total fixed maturity
securities................... 11,872,870 657,206 (34,198) 12,495,878
Equity securities................. 31,234 6,382 (46) 37,570
----------- ------- ------- ----------
$11,904,104 663,588 (34,244) 12,533,448
=========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of U.S. Treasury securities
held-to-maturity as of December 31, 1995 are $5,720 and $5,989, respectively.
Gross gains of $269 and no gross losses were unrealized on those securities.
F-12
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of securities available-for-sale
and fixed maturity securities held-to-maturity were as follows as of December
31, 1994:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...... $ 287,526 1,761 (15,684) 273,603
Obligations of states and
political subdivisions......... 273 -- (21) 252
Debt securities issued by
foreign governments............ 121,305 872 (8,260) 113,917
Corporate securities............ 3,672,187 49,841 (117,704) 3,604,324
Mortgage-backed securities...... 3,246,294 17,853 (181,982) 3,082,165
---------- ------ -------- ---------
Total fixed maturity
securities.................... 7,327,585 70,327 (323,651) 7,074,261
Equity securities................. 23,053 6,636 (274) 29,415
---------- ------ -------- ---------
$7,350,638 76,963 (323,925) 7,103,676
========== ====== ======== =========
Fixed maturity securities held-to-
maturity
Obligations of states and
political subdivisions........... $ 11,614 91 (255) 11,450
Debt securities issued by foreign
governments...................... 14,817 2 (39) 14,780
Corporate securities.............. 3,282,603 28,437 (103,862) 3,207,178
---------- ------ -------- ---------
$3,309,034 28,530 (104,156) 3,233,408
========== ====== ======== =========
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale as of December 31, 1995, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- ----------
<S> <C> <C>
Fixed maturity securities available-for-sale
Due in one year or less................................ $ 533,305 538,733
Due after one year through five years.................. 4,761,935 4,999,208
Due after five years through ten years................. 2,195,367 2,314,017
Due after ten years.................................... 828,402 933,278
----------- ----------
8,319,009 8,785,236
Mortgage-backed securities............................. 3,553,861 3,710,642
----------- ----------
$11,872,870 12,495,878
=========== ==========
</TABLE>
The components of unrealized gains (losses) on securities available-for-
sale, net, were as follows as of December 31:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Gross unrealized gains (losses)......................... $ 629,344 (246,962)
Adjustment to deferred policy acquisition costs......... (138,914) 74,922
Deferred Federal income tax............................. (171,649) 60,214
--------- --------
$ 318,781 (111,826)
========= ========
</TABLE>
F-13
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of the change in gross unrealized gains (losses) on securities
available-for-sale and fixed maturity securities held-to-maturity follows for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- --------
<S> <C> <C> <C>
Securities available-for-
sale:
Fixed maturity
securities............. $876,332 (675,373) --
Equity securities....... (26) (1,927) (125,404)
Fixed maturity securities
held-to-maturity......... 75,895 (398,183) 221,423
-------- ---------- --------
$952,201 (1,075,483) 96,019
======== ========== ========
</TABLE>
Proceeds from the sale of fixed maturity securities available-for-sale
during 1995 and 1994 were $107,345 and $228,308, respectively, while proceeds
from sales of investments in fixed maturity securities during 1993 were
$28,507. During 1995, gross gains of $4,838 ($3,045 and $2,266 in 1994 and
1993, respectively) and gross losses of $2,147 ($21,280 and $39 in 1994 and
1993, respectively) were realized on those sales.
During 1995, the Company transferred fixed maturity securities classified as
held-to-maturity with amortized cost of $25,429 to available-for-sale
securities due to evidence of a significant deterioration in the issuer's
creditworthiness. The transfer of those fixed maturity securities resulted in
a gross unrealized loss of $3,535.
As permitted by the FASB's Special Report, A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities, issued in November 1995, the Company transferred nearly all of its
fixed maturity securities previously classified as held-to-maturity to
available-for-sale. As of December 14, 1995, the date of transfer, the fixed
maturity securities had amortized cost of $3,320,093, resulting in a gross
unrealized gain of $155,940.
Investments that were non-income producing for the twelve month period
preceding December 31, 1995 amounted to $27,712 ($11,513 for 1994) and
consisted of $6,982 (none in 1994) in fixed maturity securities, $14,740
($11,111 in 1994) in real estate and $5,990 ($402 in 1994) in other long-term
investments.
Real estate is presented at cost less accumulated depreciation of $30,482 as
of December 31, 1995 ($29,066 as of December 31, 1994) and valuation
allowances of $25,819 as of December 31, 1995 ($27,330 as of December 31,
1994).
As of December 31, 1995, the recorded investment of mortgage loans on real
estate considered to be impaired (under SFAS No. 114--Accounting by Creditors
for Impairment of a Loan as amended by SFAS No. 118--Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosure) was $44,409,
which includes $23,975 of impaired mortgage loans on real estate for which the
related valuation allowance was $5,276 and $20,434 of impaired mortgage loans
on real estate for which there was no valuation allowance. During 1995, the
average recorded investment in impaired mortgage loans on real estate was
approximately $22,181 and interest income recognized on those loans was $387,
which is equal to interest income recognized using a cash-basis method of
income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the year ended December 31, 1995:
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Allowance, beginning year......................................... $46,381
Additions charged to operations................................. 7,433
Direct write-downs charged against the allowance................ (4,686)
-------
Allowance, end of year............................................ $49,128
=======
</TABLE>
F-14
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of investment income by investment type follows for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities................ $ 685,787 647,927 --
Equity securities........................ 1,330 509 6,629
Fixed maturity securities held-to-
maturity................................. 201,808 185,938 767,451
Mortgage loans on real estate............. 395,478 372,734 361,102
Real estate............................... 38,344 40,170 39,623
Short-term investments.................... 10,576 6,141 4,312
Other..................................... 7,239 2,121 (1,909)
---------- --------- ---------
Total investment income................ 1,340,562 1,255,540 1,177,208
Less investment expenses................... 46,529 44,729 45,964
---------- --------- ---------
Net investment income.................. $1,294,033 1,210,811 1,131,244
========== ========= =========
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities....................... $ 4,213 (7,296) --
Equity securities............................... 3,386 1,422 125,582
Fixed maturity securities......................... -- -- 16,888
Mortgage loans on real estate..................... (7,091) (20,446) (28,187)
Real estate and other............................. (2,232) 9,793 (8,093)
------- ------- -------
$(1,724) (16,527) 106,190
======= ======= =======
</TABLE>
Fixed maturity securities with an amortized cost of $5,592 and $4,646 as of
December 31, 1995 and 1994, respectively, were on deposit with various
regulatory agencies as required by law.
F-15
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts represents
approximately 87% and 86% of the total liability for future policy benefits as
of December 31, 1995 and 1994, respectively. The average interest rate
credited on investment product policies was approximately 6.5%, 6.5% and 7.0%
for the years ended December 31, 1995, 1994 and 1993, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
Interest rates: Interest rates vary as follows:
<TABLE>
<CAPTION>
YEAR OF ISSUE INTEREST RATES
------------- --------------
<C> <S>
1995............ 7.6%, not graded--permanent contracts with loan
provisions
7.7%, not graded--all other contracts
1984-1994....... 6.0% to 10.5%, not graded
1966-1983....... 6.0% to 8.1%, graded over 20 years to 4.0% to 6.6%
1965 and prior.. generally lower than post 1965 issues
</TABLE>
Withdrawals: Rates, which vary by issue age, type of coverage and policy
duration, are based on Company experience.
Mortality: Mortality and morbidity rates are based on published tables,
modified for the Company's actual experience.
(7) FEDERAL INCOME TAX
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Future policy benefits.................................. $149,192 132,726
Liabilities in Separate Accounts........................ 129,120 94,783
Fixed maturity securities............................... -- 75,489
Mortgage loans on real estate and real estate........... 25,165 24,999
Other policyholder funds................................ 7,424 6,949
Other assets and other liabilities...................... 52,003 44,017
-------- -------
Total gross deferred tax assets....................... 362,904 378,963
Less valuation allowance.............................. (7,776) (8,532)
-------- -------
Net deferred tax assets............................... 355,128 370,431
-------- -------
Deferred tax liabilities:
Deferred policy acquisition costs....................... 299,579 303,946
Fixed maturity securities............................... 227,345 --
Deferred tax on realized investment gains............... 40,634 41,728
Equity securities and other long-term investments....... 3,780 3,980
Other................................................... 21,037 20,856
-------- -------
Total gross deferred tax liabilities.................. 592,375 370,510
-------- -------
$237,247 79
======== =======
</TABLE>
F-16
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the total gross
deferred tax assets will not be realized. Nearly all future deductible amounts
can be offset by future taxable amounts or recovery of Federal income tax paid
within the statutory carryback period. In addition, for future deductible
amounts for securities available-for-sale, affiliates of the Company which are
included in the same consolidated Federal income tax return hold investments
that could be sold for capital gains that could offset capital losses realized
by the Company should securities available-for-sale be sold at a loss.
Total Federal income tax expense for the years ended December 31, 1995, 1994
and 1993 differs from the amount computed by applying the U.S. Federal income
tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense.. $98,410 35.0 $84,162 35.0 $96,515 35.0
Tax exempt interest and dividends
received deduction.............. (18) 0.0 (130) (0.1) (1,951) (0.7)
Current year increase in U.S.
Federal income tax rate......... -- -- -- -- 1,811 0.7
Other, net....................... (2,078) (0.7) (1,516) (0.6) 302 0.1
------- ---- ------- ---- ------- ----
Total (effective rate of each
year)........................... $96,314 34.3 $82,516 34.3 $96,677 35.1
======= ==== ======= ==== ======= ====
</TABLE>
Total Federal income tax paid was $58,112, $84,903 and $54,449 during the
years ended December 31, 1995, 1994 and 1993, respectively.
(8) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107--Disclosures about Fair Value of Financial Instruments (SFAS
107) requires disclosure of fair value information about existing on and off-
balance sheet financial instruments. SFAS 107 defines the fair value of a
financial instrument as the amount at which the financial instrument could be
exchanged in a current transaction between willing parties. In cases where
quoted market prices are not available, fair value is based on estimates using
present value or other valuation techniques.
These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although fair
value estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in the immediate settlement of the instruments. SFAS 107
excludes certain assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Although insurance contracts, other than policies such as annuities that are
classified as investment contracts, are specifically exempted from SFAS 107
disclosures, estimated fair value of policy reserves on life insurance
contracts are provided to make the fair value disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures:
Cash, short-term investments and policy loans: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
F-17
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fixed maturity and equity securities: Fair value for fixed maturity
securities is based on quoted market prices, where available. For fixed
maturity securities not actively traded, fair value is estimated using
values obtained from independent pricing services or, in the case of
private placements, is estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality and
maturity of the investments. The fair value for equity securities is based
on quoted market prices.
Separate Account assets and liabilities: The fair value of assets held in
Separate Accounts is based on quoted market prices. The fair value of
liabilities related to Separate Accounts is the amount payable on demand.
Mortgage loans on real estate: The fair value for mortgage loans on real
estate is estimated using discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. Fair value for mortgages in default is the
estimated fair value of the underlying collateral.
Investment contracts: Fair value for the Company's liabilities under
investment type contracts is disclosed using two methods. For investment
contracts without defined maturities, fair value is the amount payable on
demand. For investment contracts with known or determined maturities, fair
value is estimated using discounted cash flow analysis. Interest rates used
are similar to currently offered contracts with maturities consistent with
those remaining for the contracts being valued.
Policy reserves on life insurance contracts: Included are disclosures for
individual life insurance, universal life insurance and supplementary
contracts with life contingencies for which the estimated fair value is the
amount payable on demand. Also included are disclosures for the Company's
limited payment policies, which the Company has used discounted cash flow
analyses similar to those used for investment contracts with known
maturities to estimate fair value.
Policyholders' dividend accumulations and other policyholder funds: The
carrying amount reported in the consolidated balance sheets for these
instruments approximates their fair value.
Carrying amount and estimated fair value of financial instruments subject to
SFAS 107 and policy reserves on life insurance contracts were as follow as of
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Investments:
Securities available-for-sale:
Fixed maturity securities...... $12,495,878 12,495,878 7,074,261 7,074,261
Equity securities.............. 37,570 37,570 29,415 29,415
Fixed maturity securities held-
to-maturity.................... 5,720 5,989 3,309,034 3,223,408
Mortgage loans on real estate,
net............................ 4,627,387 4,987,569 4,081,794 4,032,047
Policy loans.................... 336,356 336,356 310,644 310,644
Short-term investments.......... 42,671 42,671 134,330 134,330
Cash............................. 10,055 10,055 4,610 4,610
Assets held in Separate
Accounts........................ 18,591,108 18,591,108 12,087,117 12,087,117
Liabilities
Investment contracts............. 12,984,105 12,631,543 11,390,901 10,858,564
Policy reserves on life insurance
contracts....................... 2,836,323 2,733,486 2,699,605 2,463,904
Policyholders' dividend
accumulations................... 348,027 348,027 335,388 335,388
Other policyholder funds......... 65,297 65,297 63,763 63,763
Liabilities related to Separate
Accounts........................ 18,591,108 18,052,362 12,087,117 11,671,987
</TABLE>
F-18
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURES
Financial Instruments with Off-Balance-Sheet Risk: The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of
business through management of its investment portfolio. These financial
instruments include commitments to extend credit in the form of loans. These
instruments involve, to varying degrees, elements of credit risk in excess of
amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are agreements
to lend to a borrower, and are subject to conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a deposit. Commitments extended
by the Company are based on management's case-by-case credit evaluation of the
borrower and the borrower's loan collateral. The underlying mortgage property
represents the collateral if the commitment is funded. The Company's policy
for new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amounts of these commitments less the net realizable value of
the collateral. The contractual amounts also represent the cash requirements
for all unfunded commitments. Commitments on mortgage loans on real estate of
$328,158 extending into 1996 were outstanding as of December 31, 1995.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the United
States. The Company has a diversified portfolio with no more than 20% (22% in
1994) in any geographic area and no more than 2% (2% in 1994) with any one
borrower.
The summary below depicts loans by remaining principal balance as of
December 31, 1995:
<TABLE>
<CAPTION>
APARTMENT
OFFICE WAREHOUSE RETAIL & OTHER TOTAL
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1995:
East North Central......... $138,965 101,925 514,995 175,213 931,098
East South Central......... 28,642 15,266 180,858 82,383 307,149
Mountain................... -- 17,219 141,537 45,274 204,030
Middle Atlantic............ 116,187 64,813 158,252 10,793 350,045
New England................ 9,559 39,525 148,449 1 197,534
Pacific.................... 183,206 241,857 378,024 105,419 908,506
South Atlantic............. 106,246 73,541 446,800 278,265 904,852
West North Central......... 133,899 14,205 78,065 36,651 262,820
West South Central......... 69,140 92,594 190,299 267,268 619,301
-------- ------- --------- --------- ----------
$785,844 660,945 2,237,279 1,001,267 4,685,335
======== ======= ========= =========
Less valuation allowances
and unamortized discount.. 57,948
----------
Total mortgage loans on
real estate, net........ $4,627,387
==========
</TABLE>
F-19
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The summary below depicts loans by remaining principal balance as of
December 31, 1994:
<TABLE>
<CAPTION>
APARTMENT
OFFICE WAREHOUSE RETAIL & OTHER TOTAL
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1994:
East North Central......... $107,852 98,778 520,407 183,812 910,849
East South Central......... 29,352 8,864 124,973 76,186 239,375
Mountain................... 3,150 13,028 141,068 37,695 194,941
Middle Atlantic............ 59,197 49,677 132,155 26,151 267,180
New England................ 10,536 43,282 134,894 4 188,716
Pacific.................... 188,878 214,013 379,919 68,029 850,839
South Atlantic............. 84,860 76,420 399,170 203,233 763,683
West North Central......... 126,779 11,766 77,370 3,803 219,718
West South Central......... 51,013 78,551 180,460 189,612 499,636
-------- ------- --------- ------- ----------
$661,617 594,379 2,090,416 788,525 4,134,937
======== ======= ========= =======
Less valuation allowances
and unamortized
discount................ 53,143
----------
Total mortgage loans on
real estate, net........ $4,081,794
==========
</TABLE>
(10) PENSION PLAN
The Company is a participant, together with other affiliated companies, in a
pension plan covering all employees who have completed at least one thousand
hours of service within a twelve-month period and who have met certain age
requirements. Benefits are based upon the highest average annual salary of a
specified number of consecutive years of the last ten years of service. The
Company funds pension costs accrued for direct employees plus an allocation of
pension costs accrued for employees of affiliates whose work efforts benefit
the Company.
Effective January 1, 1995, the plan was amended to provide enhanced benefits
for participants who met certain eligibility requirements and elected early
retirement no later than March 15, 1995. The entire cost of the enhanced
benefit was borne by NMIC and certain of its property and casualty insurance
company affiliates.
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual Insurance
Company Employees' Retirement Plan and the Wausau Insurance Companies Pension
Plan to form the Nationwide Insurance Enterprise Retirement Plan. Immediately
prior to the merger, the plans were amended to provide consistent benefits for
service after January 1, 1996. These amendments had no significant impact on
the accumulated benefit obligation or projected benefit obligation as of
December 31, 1995.
Pension costs charged to operations by the Company during the years ended
December 31, 1995, 1994 and 1993 were $11,383, $11,113 and $7,069,
respectively.
The Company's net accrued pension expense as of December 31, 1995 and 1994
was $1,392 and $1,853, respectively.
F-20
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic pension cost for the Nationwide Insurance Companies and
Affiliates Retirement Plan as a whole for the years ended December 31, 1995,
1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ------- --------
<S> <C> <C> <C>
Service cost (benefits earned during the
period).................................... $ 64,524 64,740 47,694
Interest cost on projected benefit
obligation................................. 95,283 73,951 70,543
Actual return on plan assets................ (249,294) (21,495) (105,002)
Net amortization and deferral............... 143,353 (62,150) 20,832
--------- ------- --------
$ 53,866 55,046 34,067
========= ======= ========
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Weighted average discount rate............................. 7.50% 5.75% 6.75%
Rate of increase in future compensation levels............. 6.25% 4.50% 4.75%
Expected long-term rate of return on plan assets........... 8.75% 7.00% 7.50%
</TABLE>
Information regarding the funded status of the Nationwide Insurance
Enterprise Retirement Plan as a whole as of December 31, 1995 (post-merger)
and the Nationwide Insurance Companies and Affiliates Retirement Plan as of
December 31, 1995 (pre-merger) and 1994 follows:
<TABLE>
<CAPTION>
POST- PRE-
MERGER MERGER
1995 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Accumulated benefit obligation:
Vested................................. $1,236,730 1,002,079 914,850
Nonvested.............................. 26,503 8,998 7,570
---------- --------- ---------
$1,263,233 1,011,077 922,420
========== ========= =========
Net accrued pension expense:
Projected benefit obligation for
services rendered to date............. $1,780,616 1,447,522 1,305,547
Plan assets at fair value.............. 1,738,004 1,508,781 1,241,771
---------- --------- ---------
Plan assets (less than) in excess of
projected benefit obligation.......... (42,612) 61,259 (63,776)
Unrecognized prior service cost........ 42,845 42,850 46,201
Unrecognized net (gains) losses........ (63,130) (86,195) 39,408
Unrecognized net obligation (asset) at
transition............................ 41,305 (19,841) (21,994)
---------- --------- ---------
$ (21,592) (1,927) (161)
========== ========= =========
</TABLE>
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
POST-MERGER PRE-MERGER
1995 1995 1994
----------- ---------- -----
<S> <C> <C> <C>
Weighted average discount rate................ 6.00% 6.00% 7.50%
Rate of increase in future compensation
levels....................................... 4.25% 4.25% 6.25%
</TABLE>
Assets of the Nationwide Insurance Enterprise Retirement Plan are invested
in group annuity contracts of NLIC and ELICW. Prior to the merger, the assets
of the Nationwide Insurance Companies and Affiliates Retirement Plan were
invested in a group annuity contract of NLIC.
F-21
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the defined benefit pension plan, the Company, together with
other affiliated companies, participates in life and health care defined
benefit plans for qualifying retirees. Postretirement life and health care
benefits are contributory and generally available to full time employees who
have attained age 55 and have accumulated 15 years of service with the Company
after reaching age 40. Postretirement health care benefit contributions are
adjusted annually and contain cost-sharing features such as deductibles and
coinsurance. In addition, there are caps on the Company's portion of the per-
participant cost of the postretirement health care benefits. These caps can
increase annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the discretion
of management. Plan assets are invested primarily in group annuity contracts
of NLIC.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106--Employers' Accounting for Postretirement Benefits Other Than Pensions
(SFAS 106), which requires the accrual method of accounting for postretirement
life and health care insurance benefits based on actuarially determined costs
to be recognized over the period from the date of hire to the full eligibility
date of employees who are expected to qualify for such benefits.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation as of January 1, 1993. Accordingly, a
noncash charge of $28,997 ($18,848 net of related income tax benefit) was
recorded in the 1993 consolidated statement of income as a cumulative effect
of a change in accounting principle. See note 4. The adoption of SFAS 106,
including the cumulative effect of the change in accounting principle,
increased the expense for postretirement benefits by $32,143 to $33,115 in
1993. Certain affiliated companies elected to amortize their initial
transition obligation over periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31, 1995
and 1994 was $33,539 and $31,752, respectively, and the net periodic
postretirement benefit cost (NPPBC) for 1995 and 1994 was $3,221 and $4,524,
respectively.
The amount of NPPBC for the plan as a whole for the years ended December 31,
1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year)......................... $ 6,235 8,586 7,090
Interest cost on accumulated postretirement
benefit obligation............................... 14,151 14,011 13,928
Actual return on plan assets...................... (2,657) (1,622) --
Amortization of unrecognized transition obligation
of affiliates.................................... 2,966 568 568
Net amortization and deferral..................... (1,619) 1,622 --
------- ------ ------
$19,076 23,165 21,586
======= ====== ======
</TABLE>
F-22
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information regarding the funded status of the plan as a whole as of
December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees............................................ $ 88,680 76,677
Fully eligible, active plan participants............ 28,793 22,013
Other active plan participants...................... 90,375 59,089
--------- --------
Accumulated postretirement benefit obligation
(APBO)............................................. 207,848 157,779
Plan assets at fair value........................... 54,325 49,012
--------- --------
Plan assets less than accumulated postretirement
benefit obligation................................. (153,523) (108,767)
Unrecognized transition obligation of affiliates.... 1,827 6,577
Unrecognized net gains.............................. (1,038) (41,497)
--------- --------
$(152,734) (143,687)
========= ========
</TABLE>
Actuarial assumptions used for the measurement of the APBO as of December
31, 1995 and 1994 and the NPPBC for 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1995 1994 1994 1993
APBO NPPBC APBO NPPBC NPPBC
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Discount rate.................... 6.75% 8% 8% 7% 8%
Assumed health care cost trend
rate:
Initial rate................... 11% 10% 11% 12% 14%
Ultimate rate.................. 6% 6% 6% 6% 6%
Uniform declining period....... 12 Years 12 Years 12 Years 12 Years 12 Years
</TABLE>
The health care cost trend rate assumption has an effect on the amounts
reported. For the plan as a whole, a one percentage point increase in the
assumed health care cost trend rate would increase the APBO as of December 31,
1995 by $641 and the NPPBC for the year ended December 31, 1995 by $107.
(12) REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS AND DIVIDEND
RESTRICTIONS
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
of the company's regulatory total adjusted capital, as defined by the NAIC, to
its authorized control level risk-based capital, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. NLIC and
NLAIC each exceed the minimum risk-based capital requirements.
The combined statutory capital and surplus of NLIC and NLAIC, as adjusted
for the reorganization described in note 1, as of December 31, 1995, 1994 and
1993 was $959,346, $902,469 and $817,739, respectively. The combined statutory
net income of NLIC and NLAIC, as adjusted for the reorganization described in
note 1, for the years ended December 31, 1995, 1994 and 1993 was $85,623,
$72,537 and $179,287, respectively.
The Company's insurance company subsidiaries are limited in their payment of
dividends by the Department. As of December 31, 1995, the maximum amount
available for dividend payment to NFS in 1996 by NLIC without prior approval
is $88,485.
F-23
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the amount
of statutory profits on NLIC's participating policies (measured before
dividends to policyholders) that can inure to the benefit of the Company and
its stockholders.
The Company currently does not expect such regulatory requirements to impair
its ability to pay operating expenses and stockholder dividends in the future.
(13) TRANSACTIONS WITH AFFILIATES
The Company has inter-company agreements with affiliates that provide for
the sharing of home office and other facilities, equipment and common
management and administrative services.
The Company participates in intercompany repurchase agreements with
affiliates whereby the seller will transfer securities to the buyer at a
stated value. Upon demand or a stated period, the securities will be
repurchased by the seller at the original sales price plus a price
differential. Transactions under the agreements during 1995 and 1994 were not
material.
During 1993, the Company sold equity securities with a market value $190,013
to NMIC, resulting in a realized gain of $120,888. With the proceeds, the
Company purchased securities with a market value of $189,719 and cash of $294
from NMIC.
Intercompany reinsurance contracts exist between NLIC and NMIC and ELICW.
Total premiums ceded to NMIC and ELICW, including premiums ceded under the
reinsurance agreements discussed in note 1, were $332,454, $340,309 and
$330,377 during 1995, 1994 and 1993, respectively.
As discussed in note 1, the consolidated financial statements exclude
certain subsidiaries of NLIC which NLIC will dividend to Nationwide Corp. on
January 1, 1997. One of the excluded subsidiaries, ELICW, was purchased by
NLIC effective December 31, 1994 in exchange for fixed maturity securities and
cash with a fair value of $155,000. Because ELICW is excluded from the
consolidated financial statements, the $155,000 purchase price is included in
other charges to retained earnings in 1994.
The Company and various affiliates entered into agreements with Nationwide
Cash Management Company (NCMC) and California Cash Management Company (CCMC),
both affiliates, under which NCMC and CCMC act as common agents in handling
the purchase and sale of short-term securities for the respective accounts of
the participants. Amounts on deposit with NCMC and CCMC were $18,602 and
$95,218 as of December 31, 1995 and 1994, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
(14) BANK LINES OF CREDIT
As of December 31, 1995 and 1994, NLIC had $120,000 of confirmed but unused
bank lines of credit which support a $100,000 commercial paper borrowing
authorization.
In August 1996, NLIC, along with NMIC, entered into a $600,000 revolving
credit facility which provides for a $600,000 loan over a five year term on a
fully revolving basis with a group of national financial institutions. The
credit facility provides for several and not joint liability with respect to
any amount drawn by either NLIC or NMIC. NLIC and NMIC pay facility and usage
fees to the financial institutions to maintain the revolving credit facility.
All previously existing line of credit agreements were canceled.
F-24
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) CONTINGENCIES
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to be
material to the Company's financial position or results of operations.
(16) SEGMENT INFORMATION
The Company has three primary segments: Variable Annuities, Fixed Annuities
and Life Insurance. The Variable Annuities segment consists of annuity
contracts that provide the customer with the opportunity to invest in mutual
funds managed by the Company and independent investment managers, with the
investment returns accumulating on a tax-deferred basis. The Fixed Annuities
segment consists of annuity contracts that generate a return for the customer
at a specified interest rate, fixed for a prescribed period, with returns
accumulating on a tax-deferred basis. The Life Insurance segment consists of
insurance products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis. In addition, the Company
reports corporate expenses and investments, and the related investment income
supporting capital not specifically allocated to its product segments in a
Corporate and Other segment. In addition, all realized gains and losses,
investment management fees and other revenue earned from mutual funds other
than the portion allocated to the variable annuity segment, and commissions
and other income earned by the marketing and distribution companies are
reported in the Corporate and Other segment.
The following table summarizes the revenues and income before Federal income
tax expense and cumulative effect of changes in accounting principles for the
years ended December 31, 1995, 1994 and 1993 and assets as of December 31,
1995, 1994 and 1993, by business segment.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Variable Annuities........................ $ 189,071 132,687 94,831
Fixed Annuities........................... 1,051,970 939,868 922,784
Life Insurance............................ 409,135 383,150 371,097
Corporate and Other....................... 186,862 178,379 250,614
----------- ---------- ----------
$ 1,837,038 1,634,084 1,639,326
=========== ========== ==========
Income before Federal income tax expense and
cumulative effect of changes in accounting
principles:
Variable Annuities........................ 50,837 24,574 10,345
Fixed Annuities........................... 137,000 138,950 105,926
Life Insurance............................ 67,590 53,046 49,667
Corporate and Other....................... 25,743 23,893 109,818
----------- ---------- ----------
$ 281,170 240,463 275,756
=========== ========== ==========
Assets:
Variable Annuities........................ 17,333,039 11,146,465 8,125,177
Fixed Annuities........................... 13,005,104 11,445,675 10,343,551
Life Insurance............................ 3,027,420 3,752,283 2,554,076
Corporate and Other....................... 4,388,593 3,310,429 3,270,455
----------- ---------- ----------
$37,754,156 28,654,852 24,293,259
=========== ========== ==========
</TABLE>
F-25
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $11,766,599)................... $11,963,214
Equity securities (cost $46,251)............................... 52,941
Fixed maturity securities held-to-maturity, at amortized cost
(fair value $5,983)............................................. 5,854
Mortgage loans on real estate, net............................... 5,140,401
Real estate, net................................................. 235,525
Policy loans..................................................... 364,131
Other long-term investments...................................... 59,742
Short-term investments .......................................... 98,105
-----------
17,919,913
-----------
Cash............................................................... 87,929
Accrued investment income.......................................... 215,452
Deferred policy acquisition costs.................................. 1,349,450
Other assets....................................................... 116,516
Assets held in Separate Accounts................................... 24,673,451
-----------
$44,362,711
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims.................................. $16,601,996
Policyholders' dividend accumulations.............................. 358,003
Other policyholder funds........................................... 65,686
Accrued Federal income tax:
Current.......................................................... 36,868
Deferred......................................................... 122,996
-----------
159,864
-----------
Other liabilities.................................................. 429,157
Liabilities related to Separate Accounts........................... 24,673,451
-----------
42,288,157
-----------
Shareholder's equity:
Class A common shares, no par value. Authorized shares,
no shares issued and outstanding................................ --
Class B common shares, no par value. Authorized shares,
no shares issued and outstanding................................ --
Additional paid-in capital....................................... 602,468
Retained earnings................................................ 1,357,571
Unrealized gains on securities available-for-sale, net........... 114,515
-----------
2,074,554
-----------
$44,362,711
===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-26
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revenues:
Investment product and universal life insurance product
policy charges......................................... $ 283,274 208,142
Traditional life insurance premiums..................... 151,057 151,408
Net investment income................................... 1,009,618 954,457
Realized gains on investments........................... 4,300 6,476
Other income............................................ 52,960 43,818
--------- ---------
1,500,939 1,364,301
--------- ---------
Benefits and expenses:
Benefits and claims..................................... 867,652 827,926
Provision for policyholders' dividends on participating
policies............................................... 31,416 29,383
Amortization of deferred policy acquisition costs....... 96,782 63,070
Other operating expenses................................ 252,229 221,799
--------- ---------
1,248,079 1,142,228
--------- ---------
Income before Federal income tax expense.............. 252,860 222,073
--------- ---------
Federal income tax expense (benefit):
Current................................................. 98,087 65,604
Deferred................................................ (9,402) 11,477
--------- ---------
88,685 77,081
--------- ---------
Net income............................................ $ 164,175 144,992
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-27
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
CLASS A CLASS B ADDITIONAL ON SECURITIES TOTAL
COMMON COMMON PAID-IN RETAINED AVAILABLE-FOR- SHAREHOLDER'S
SHARES SHARES CAPITAL EARNINGS SALE, NET EQUITY
------- ------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995:
Balance, January 1,
1995................. $ -- -- 602,468 1,003,057 (111,826) 1,493,699
Dividends paid to
shareholder.......... -- -- -- (8,450) -- (8,450)
Net income............ -- -- -- 144,992 -- 144,992
Unrealized gains on
securities available-
for-sale, net........ -- -- -- -- 249,296 249,296
Other................. -- -- -- 8,692 -- 8,692
----- --- ------- --------- -------- ---------
Balance, September 30,
1995................. $ -- -- 602,468 1,148,291 137,470 1,888,229
===== === ======= ========= ======== =========
1996:
Balance, January 1,
1996................. $ -- -- 602,468 1,188,804 318,781 2,110,053
Dividends paid to
shareholder.......... -- -- -- (2,000) -- (2,000)
Net income............ -- -- -- 164,175 -- 164,175
Unrealized losses on
securities available-
for-sale, net........ -- -- -- -- (204,266) (204,266)
Other................. -- -- -- 6,592 -- 6,592
----- --- ------- --------- -------- ---------
Balance, September 30,
1996................. $ -- -- 602,468 1,357,571 114,515 2,074,554
===== === ======= ========= ======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-28
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 164,175 144,992
Adjustments to reconcile net income to net cash
provided by operating activities:
Capitalization of deferred policy acquisition
costs............................................ (313,703) (220,916)
Amortization of deferred policy acquisition
costs............................................ 96,782 63,070
Amortization and depreciation..................... 6,317 15,790
Realized gains on invested assets, net............ (4,861) (6,775)
Deferred Federal income tax (benefit) expense..... (4,262) 11,897
Increase in accrued investment income............. (2,489) (27,147)
(Increase) decrease in other assets............... (34,386) 20,266
Increase in policy liabilities ................... 234,682 82,287
Increase in policyholders' dividend
accumulations.................................... 9,976 9,169
(Decrease) increase in accrued Federal income tax
payable.......................................... (112) 3,950
Increase in other liabilities..................... 177,072 39,624
Other, net........................................ (3,888) (3,125)
----------- ----------
Net cash provided by operating activities....... 325,303 133,082
----------- ----------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-
sale............................................... 917,365 385,741
Proceeds from sale of securities available-for-
sale............................................... 195,429 92,514
Proceeds from maturity of fixed maturity securities
held-to-maturity................................... -- 421,691
Proceeds from repayments of mortgage loans on real
estate............................................. 191,144 131,467
Proceeds from sale of real estate................... 16,106 39,688
Proceeds from repayments of policy loans and sale of
other invested assets.............................. 18,564 41,271
Cost of securities available-for-sale acquired...... (1,020,036) (1,493,374)
Cost of fixed maturity securities held-to-maturity
acquired........................................... -- (459,056)
Cost of mortgage loans on real estate acquired...... (721,651) (468,285)
Cost of real estate acquired........................ (4,788) (10,627)
Policy loans issued and other invested assets
acquired........................................... (43,062) (57,815)
----------- ----------
Net cash used in investing activities........... (450,929) (1,376,785)
----------- ----------
Cash flows from financing activities:
Dividends paid to shareholder....................... (2,000) (8,450)
Proceeds from affiliated companies.................. 6,590 8,690
Increase in investment product and universal life
insurance product account balances................. 1,597,731 1,596,502
Decrease in investment product and universal life
insurance product account balances................. (1,343,387) (400,552)
----------- ----------
Net cash provided by financing activities....... 258,934 1,196,190
----------- ----------
Net increase (decrease) in cash and cash equivalents.. 133,308 (47,513)
Cash and cash equivalents, beginning of period........ 52,726 138,940
----------- ----------
Cash and cash equivalents, end of period.............. $ 186,034 91,427
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-29
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(000'S OMITTED)
(1) BASIS OF PRESENTATION
Nationwide Financial Services, Inc. (NFS) is an insurance holding company
which was formed in November 1996 and is a wholly owned subsidiary of
Nationwide Corporation (Nationwide Corp.). The consolidated financial
statements represent the results of Nationwide Life Insurance Company (NLIC)
and subsidiaries (excluding certain subsidiaries and lines of business as
discussed below) and three marketing and distribution companies as if they
were consolidated with NFS for all periods presented. This presentation is
based on Nationwide Corp.'s contribution of the common stock of those entities
to NFS on January 1, 1997 in anticipation of the initial public offering of
common stock of NFS described more fully in note 2 in exchange for all of the
shares of Class B common stock of NFS. NFS had no operating activity and had
no assets or liabilities as of September 30, 1996. NFS and the other companies
whose results are included in the consolidated financial statements are
collectively referred to as "the Company."
Immediately preceding the contribution of NLIC's outstanding shares of
common stock from Nationwide Corp. to NFS, NLIC will dividend the outstanding
shares of common stock of West Coast Life Insurance Company, Employers Life
Insurance Company of Wausau (ELICW) and National Casualty Company to
Nationwide Corp. Accordingly, the accompanying unaudited consolidated
financial statements do not reflect the assets, liabilities, results of
operations and cash flows of those previously wholly owned subsidiaries of
NLIC.
During 1996, in anticipation of the restructuring described above, NLIC
entered into two reinsurance agreements whereby all of NLIC's accident and
health and group life insurance business was ceded to Nationwide Mutual
Insurance Company, an affiliate, and ELICW effective January 1, 1996.
Accordingly, the accompanying unaudited consolidated financial statements
present the results of operations as if these reinsurance agreements were in
place for all periods presented.
In addition as part of the restructuring described above, NLIC anticipates
obtaining regulatory approval to make distributions to NFS which will then
make distributions to Nationwide Corp. in amounts approximating $ in
total.
The three marketing and distribution companies to be contributed by
Nationwide Corp. to NFS are: Public Employees Benefit Services Corporation,
NEA Valuebuilder Investor Services, Inc. and Nationwide Financial Institution
Distributors Agency, Inc.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited consolidated
financial statements should be read in conjunction with the December 31, 1995
audited consolidated financial statements of NFS contained on pages F-3
through F-25 herein.
The financial information included herein reflects all adjustments (all of
which are normal and recurring in nature) which are, in the opinion of
management, necessary for a fair presentation of financial position and
results of operations.
(2) INITIAL PUBLIC OFFERING
The Company is currently planning an initial public offering of its Class A
common stock (the Equity Offering) during the first quarter of 1997. After the
Equity Offering, Nationwide Corp. will continue to own all of the shares of
Class B common stock, which will represent approximately % of the voting
stock of the Company.
F-30
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Shortly after the Equity Offering, the Company expects to consummate the
public offering of $300,000 of senior notes due 2027. In addition, Nationwide
Financial Services Capital Trust, an affiliate of the Company, expects to
consummate the public offering of $100,000 of capital securities (collectively
referred to as the Fixed Income Offerings).
F-31
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 17
Nationwide Financial Services Capital Trust.............................. 26
Use of Proceeds.......................................................... 27
Recent History........................................................... 27
Capitalization........................................................... 28
Selected Consolidated Financial Data..................................... 29
Pro Forma Consolidated Financial Data.................................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 42
Management............................................................... 71
Ownership of Capital Stock............................................... 82
Certain Relationships and Related Transactions........................... 83
Description of the Capital Securities.................................... 88
Description of the Guarantee............................................. 100
Description of the Junior Subordinated Debentures........................ 102
Effect of Obligations under the Junior Subordinated Debentures and the
Guarantee............................................................... 109
United States Federal Income Taxation.................................... 109
ERISA Considerations..................................................... 113
Description of Capital Stock............................................. 115
The Equity Offerings, the Note Offering and the Capital Securities Offer-
ing..................................................................... 120
Underwriting............................................................. 120
Notice to Canadian Residents............................................. 122
Legal Matters............................................................ 122
Experts.................................................................. 123
Glossary of Selected Insurance Terms..................................... 124
Index to Financial Statements............................................ F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
Nationwide Financial
Services Capital Trust
$100,000,000
% Capital Securities
(Liquidation Amount $1,000 per Capital Security)
fully and unconditionally guaranteed,
to the extent set forth herein, by
Nationwide Financial Services, Inc.
PROSPECTUS
Credit Suisse First Boston
Morgan Stanley & Co.
Incorporated
Merrill Lynch & Co.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
offering of Notes pursuant to this Registration Statement that will be paid
fully by the Registrant. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the New York Stock Exchange listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $30,303.03
NASD filing fee.................................................. 10,500.00
New York Stock Exchange listing fee.............................. *
Blue Sky fees and expenses....................................... *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Trustee fees and expenses........................................ *
Printing, engraving and postage expenses......................... *
Miscellaneous.................................................... *
----------
Total.......................................................... $ *
==========
</TABLE>
- --------
* To be completed by Amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Directors and officers of the Company may be indemnified against
liabilities, fines, penalties, and claims imposed upon or asserted against
them as provided in the Delaware General Corporation Law and the Company's
Articles of Incorporation. Such indemnification covers all costs and expenses
incurred by a director or officer. The Board of Directors, by a majority vote
of a quorum of disinterested directors or, under certain circumstances,
independent counsel appointed by the Board of Directors, must determine that
the director or officer seeking indemnification was not guilty of willful
misconduct or a knowing violation of the criminal law. In addition, the
Delaware General Corporation Law and the Company's Certificate may under
certain circumstances eliminate the liability of directors and officers in a
stockholder or derivative proceeding.
If the person involved is not a director or officer of the Company, the
Board of Directors may cause the Company to indemnify to the same extent
allowed for directors and officers of the Company such person who was or is a
party to a proceeding, by reason of the fact that he is or was an employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise.
The Company has in force and effect a policy insuring the directors and
officers of the Company against losses which they or any of them shall become
legally obligated to pay for by reason of any actual or alleged error or
misstatement or misleading statement or act or omission or neglect or breach
of duty by the directors and officers in the discharge of their duties,
individually or collectively, or any matter claimed against them solely by
reason of their being directors or officers, such coverage being limited by
the specific terms and provisions of the insurance policy.
Pursuant to the Underwriting Agreement, in the form filed as an exhibit to
the Registration Statement, any Underwriters under the Underwriting Agreement
will agree to indemnify the registrant's directors and officers and persons
controlling the registrant within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), against certain liabilities that might
arise out of or based upon certain information furnished to the registrant by
any such indemnifying party.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 11, 1996, the Registrant issued 1,000 shares of common stock to
Nationwide Corporation in exchange for $1,000. This exchange is exempt from
registration under the Securities Act pursuant to Section 4(2) thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Exhibits
<TABLE>
<C> <S>
*1.1 --Form of Underwriting Agreement
*3.1 --Amended and Restated Certificate of Incorporation of Nationwide
Financial Services, Inc.
*3.2 --Amended and Restated Bylaws of Nationwide Financial Services, Inc.
*3.3 --Amended and Restated Certificate of Trust of Nationwide Financial
Services Capital Trust
*3.4 --Amended and Restated Declaration of Trust of Nationwide Financial
Services Capital Trust
*4.1 --Form of Subordinated Indenture
*4.2 --Form of Certificate for Capital Securities of Nationwide Financial
Services Capital Trust
*4.3 --Form of Certificate for Junior Subordinated Deferrable Interest
Debentures of Nationwide Financial Services, Inc.
*4.4 --Form of Capital Securities Guarantee Agreement by Nationwide
Financial Services, Inc.
*5.1 --Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
*5.2 --Opinion of Richards, Layton & Finger, P.A.
*8.1 --Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
*10.1 --Form of Intercompany Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and Nationwide Financial Services,
Inc.
*10.2 --Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation
*10.3 --Cost Sharing Agreement among the parties named therein
10.4 --Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
10.5 --Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company
*10.6 --Revolving Credit Facility, dated August 12, 1996, among Nationwide
Life Insurance Company, Nationwide Mutual Insurance Company, the
banks named therein and Morgan Guaranty Trust Company of New York,
the administrative agent
*10.7 --Form of Lease Agreement between Nationwide Life Insurance Company
and Nationwide Mutual Insurance Company
*10.8 --Form of Nationwide Financial Services, Inc. Long-Term Equity
Compensation Plan
*10.9 --Executive Incentive Plan
*10.10 --Management Incentive Plan
*10.11 --Excess Benefit Plan of Nationwide Mutual Insurance Company
*10.12 --Supplemental Benefit Plan of Nationwide Mutual Insurance Company
*10.13 --Nationwide Salaried Employees Severance Pay Plan
*10.14 --Deferred Compensation Program
*10.15 --Directors Deferred Compensation Plan
12.1 --Statements Regarding Computation of Ratios
21.1 --List of Subsidiaries
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
23.1 --Consent of KPMG Peat Marwick LLP
*23.2 --Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in
Exhibit 5.1)
*23.3 --Consent of Richards, Layton & Finger, P.A. (contained in Exhibit 5.2)
*23.4 --Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in
Exhibit 8.1)
24.1 --Power of Attorney (included with the signatures in Part II of this
Registration Statement)
*25.1 --Statement of Eligibility of Trustee under the Subordinated Indenture
*25.2 --Statement of Eligibility of Trustee under the Amended and Restated
Declaration of Trust of Nationwide Financial Services Capital Trust
*25.3 --Statement of Eligibility of Trustee under the Capital Securities
Guarantee Amendment
*27.1 --Financial Data Schedule
(b)Financial Statement Schedules
Schedule I --Consolidated Summary of Investments--Other than Investments in Related
Parties
Schedule III --Supplementary Insurance Information
Schedule IV --Reinsurance
Schedule V --Valuation and Qualifying Accounts
</TABLE>
- --------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
(c) The undersigned registrant undertakes to provide to the underwriters at
the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF COLUMBUS, STATE OF
OHIO, ON DECEMBER 23, 1996.
Nationwide Financial Services, Inc.
/s/ D. Richard McFerson
By: _________________________________
D. RICHARD MCFERSON
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER--
NATIONWIDE INSURANCE ENTERPRISE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON DECEMBER 23, 1996 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED. EACH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY APPOINTS AND CONSTITUTES JOSEPH J. GASPER, W. SIDNEY
DRUEN AND MARK B. KOOGLER, AND EACH OF THEM, AS HIS OR HER ATTORNEY-IN-FACT,
WITH FULL POWER OF SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL CAPACITIES, TO
EXECUTE IN THE NAME AND ON BEHALF OF SUCH PERSON ANY AMENDMENT TO THIS
REGISTRATION STATEMENT (INCLUDING ANY POST-EFFECTIVE AMENDMENT) AND TO FILE
THE SAME, WITH EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH,
MAKING SUCH CHANGES IN THIS REGISTRATION STATEMENT AS THE PERSON SO ACTING
DEEMS APPROPRIATE, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEY-IN-
FACT, OR HIS OR HER SUBSTITUTE MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE
/s/ D. Richard McFerson Chairman and Chief Executive
- ------------------------------------- Officer--Nationwide Insurance
D. RICHARD MCFERSON Enterprise and Director (Principal
Executive Officer)
/s/ Joseph J. Gasper President and Chief Operating
- ------------------------------------- Officer and Director
JOSEPH J. GASPER
/s/ Robert A. Oakley Executive Vice President--Chief
- ------------------------------------- Financial Officer (Principal
ROBERT A. OAKLEY Financial Officer and Principal
Accounting Officer)
/s/ Arden L. Shisler Director
- -------------------------------------
ARDEN L. SHISLER
/s/ Henry S. Holloway Director
- -------------------------------------
HENRY S. HOLLOWAY
/s/ James F. Patterson Director
- -------------------------------------
JAMES F. PATTERSON
/s/ David O. Miller Director
- -------------------------------------
DAVID O. MILLER
/s/ Charles L. Fuellgraf, Jr. Director
- -------------------------------------
CHARLES L. FUELLGRAF, JR.
II-4
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Independent Auditors' Report on Financial Statement Schedules........... S-2
Schedule I Consolidated Summary of Investments--Other Than
Investments In Related Parties as of December 31, 1995.... S-3
Schedule III Supplementary Insurance Information for the years ended
December 31, 1995, 1994 and 1993.......................... S-4
Schedule IV Reinsurance as of December 31, 1995, 1994 and 1993 and for
each of the years then ended.............................. S-5
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994
and 1993.................................................. S-6
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information has been included in the
consolidated financial statements of notes thereto.
S-1
<PAGE>
WHEN THE TRANSACTIONS REFERRED TO IN NOTE 1 OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS HAVE BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Nationwide Financial Services, Inc. :
Under date of January , 1997, we reported on the consolidated balance
sheets of Nationwide Financial Services, Inc. and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1995, which are included in the prospectus.
As discussed in note 1 to the consolidated financial statements, the Company
was formed in November 1996 as a holding company for Nationwide Life Insurance
Company and the other companies within the Nationwide Insurance Enterprise
that offer or distribute long-term savings and retirement products. The
consolidated financial statements are presented as if these companies were
consolidated for all periods presented.
In 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. In 1993, the
Company adopted the provisions of SFAS No. 109, Accounting for Income Taxes
and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules included in the registration statement. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
Columbus, Ohio
January , 1997
S-2
<PAGE>
SCHEDULE I
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS--
OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ----------- ----------- ---------------
AMOUNT AT WHICH
SHOWN IN THE
CONSOLIDATED
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ----------- ----------- ---------------
<S> <C> <C> <C>
Fixed maturity securities available-
for-sale:
Bonds:
United States government and
government agencies and
authorities...................... $ 3,673,177 $ 3,846,921 $ 3,846,921
States, municipalities and
political subdivisions........... 8,655 9,859 9,859
Foreign governments............... 101,414 105,734 105,734
Public utilities.................. 1,818,074 1,900,831 1,900,831
All other corporate bonds......... 6,271,550 6,632,533 6,632,533
----------- ----------- -----------
Total fixed maturity securities
available-for-sale............. $11,872,870 $12,495,878 $12,495,878
----------- ----------- -----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all
other............................ $ 30,845 $ 37,223 $ 37,223
Nonredeemable preferred stock....... 389 347 347
----------- ----------- -----------
Total equity securities
available-for-sale............. $ 31,234 $ 37,570 $ 37,570
----------- ----------- -----------
Fixed maturity securities held-to-ma-
turity:
Bonds:
United States government and gov-
ernment agencies and authori-
ties............................. $ 5,720 $ 5,989 $ 5,720
----------- ----------- -----------
Total fixed maturity securities
held-to-maturity............... $ 5,720 $ 5,989 $ 5,720
----------- ----------- -----------
Mortgage loans on real estate, net.... $ 4,678,891 $ 4,627,387(1)
Real estate, net:
Investment properties............... 208,961 167,753(1)
Acquired in satisfaction of debt.... 76,782 61,689(1)
Policy loans.......................... 336,356 336,356
Other long-term investments........... 66,421 61,989(2)
Short-term investments................ 42,671 42,671
----------- -----------
Total investments............... $17,319,906 $17,837,013
=========== ===========
</TABLE>
- --------
See accompanying independent auditors' report.
(1) Difference from Column B is primarily due to accumulated depreciation and
valuation allowances due to impairments on real estate and valuation
allowances due to impairments on mortgage loans on real estate. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and note 5 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating losses of
investments in limited partnerships.
S-3
<PAGE>
SCHEDULE III
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
AS OF DECEMBER 31, 1995, 1994 AND 1993 AND FOR EACH OF THE YEARS THEN ENDED
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
-------- ----------- ---------------- -------- ---------- -------- ---------- ---------- ------------ ---------
FUTURE OTHER
POLICY BENEFITS, POLICY BENEFITS, AMORTIZATION
DEFERRED LOSSES, CLAIMS AND NET CLAIMS OF DEFERRED OTHER
POLICY CLAIMS AND UNEARNED BENEFITS INVESTMENT LOSSES AND POLICY OPERATING
ACQUISITION LOSS PREMIUMS PAYABLE PREMIUM INCOME SETTLEMENT ACQUISITION EXPENSES
SEGMENT COSTS EXPENSES (1) (2) REVENUE (3) EXPENSES COSTS (3)
------- ----------- ---------------- -------- ---------- -------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
Variable
Annuities........ $ 571,283 $ -- $ -- $ -- $ (19,886) $ 2,881 $26,264 $109,089
Fixed Annuities.. 221,111 13,976,367 455 32,774 934,266 804,980 29,499 80,260
Life Insurance... 366,876 1,898,641 383,983 166,332 158,299 201,986 31,021 68,832
Corporate and
Other ........... (138,914) 238,351 28,886 -- 221,354 105,646 (4,089) 59,562
---------- ----------- -------- -------- ---------- ---------- ------- --------
Total........... $1,020,356 $16,113,359 $413,324 $199,106 $1,294,033 $1,115,493 $82,695 $317,743
========== =========== ======== ======== ========== ========== ======= ========
1994:
Variable
Annuities........ 395,397 -- -- -- (14,982) 2,277 22,135 83,701
Fixed Annuities.. 198,639 12,409,955 240 20,134 839,293 702,082 29,849 69,975
Life Insurance... 327,079 1,806,762 371,984 156,524 153,393 191,006 29,495 69,861
Corporate and
Other............ 74,445 233,569 26,927 -- 233,107 97,302 4,089 53,095
---------- ----------- -------- -------- ---------- ---------- ------- --------
Total........... $ 995,560 $14,450,286 $399,151 $176,658 $1,210,811 $ 992,667 $85,568 $276,632
========== =========== ======== ======== ========== ========== ======= ========
1993:
Variable
Annuities........ 270,369 -- -- -- (8,411) 1,405 15,015 68,066
Fixed Annuities.. 189,449 11,296,014 1,752 35,341 807,434 712,288 28,276 75,987
Life Insurance... 299,121 1,703,700 359,880 153,044 152,428 184,018 26,929 67,765
Corporate and
Other............ 4,836 212,739 26,461 -- 179,793 84,447 -- 56,349
---------- ----------- -------- -------- ---------- ---------- ------- --------
Total........... $ 763,775 $13,212,453 $388,093 $188,385 $1,131,244 $ 982,158 $70,220 $268,167
========== =========== ======== ======== ========== ========== ======= ========
<CAPTION>
COLUMN A COLUMN K
-------- --------
PREMIUMS
SEGMENT WRITTEN
------- --------
<S> <C>
1995:
Variable
Annuities........
Fixed Annuities..
Life Insurance...
Corporate and
Other ...........
Total...........
1994:
Variable
Annuities........
Fixed Annuities..
Life Insurance...
Corporate and
Other............
Total...........
1993:
Variable
Annuities........
Fixed Annuities..
Life Insurance...
Corporate and
Other............
Total...........
</TABLE>
- ----
See accompanying independent auditors' report.
(1) Unearned premiums are included in Column C amounts.
(2) Column E agrees to the sum of Balance Sheet captions, "Policyholders'
dividend accumulations" and "Other policyholder funds."
(3) Allocations of net investment income and certain general expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
S-4
<PAGE>
SCHEDULE IV
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
REINSURANCE
(IN THOUSANDS)
AS OF DECEMBER 31, 1995, 1994 AND 1993
AND FOR EACH OF THE YEARS THEN ENDED
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- ------------ --------- ---------- ---------- -------------
PERCENTAGE OF
CEDED TO ASSUMED AMOUNT
OTHER FROM OTHER ASSUMED
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1995
Life insurance in
force................ $41,087,025 8,935,743 391,174 32,542,456 1.2%
=========== ========= ======= ========== =====
Year end December 31,
1995
Insurance Premiums
Life insurance........ $ 238,296 24,228 2,209 216,277 1.0%
Accident and health
insurance............ 298,058 313,036 14,978 -- N/A
----------- --------- ------- ---------- -----
Total insurance
premiums........... $ 536,354 337,264 17,187 216,277 7.9%
=========== ========= ======= ========== =====
As of December 31, 1994
Life insurance in
force................ $35,926,633 7,550,623 829,742 29,205,752 2.8%
=========== ========= ======= ========== =====
Year ended December 31,
1994
Insurance premiums
Life insurance........ $ 214,348 21,923 2,865 195,290 1.5%
Accident and health
insurance............ 303,435 321,696 18,261 -- N/A
----------- --------- ------- ---------- -----
Total insurance
premiums........... $ 517,783 343,619 21,126 195,290 10.8%
=========== ========= ======= ========== =====
As of December 31, 1993
Life insurance in
force................ $31,786,704 6,795,712 884,709 25,875,701 3.4%
=========== ========= ======= ========== =====
Year ended December 31,
1993
Insurance premiums
Life insurance........ $ 223,811 20,090 2,609 206,330 1.3%
Accident and health
insurance............ 274,793 281,786 6,993 -- N/A
----------- --------- ------- ---------- -----
Total insurance
premiums........... $ 498,604 301,876 9,602 206,330 4.7%
=========== ========= ======= ========== =====
</TABLE>
- --------
See accompanying independent auditors' report.
Note: The life insurance caption represents principally premiums for
traditional life, group life and limited payment products and excludes
deposits on universal life products and investment contracts.
S-5
<PAGE>
SCHEDULE V
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(000'S OMITTED)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- --------- ------------------- ------------- -------------
BALANCE
AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
- ----------- --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1995:
Valuation allowances--
fixed maturity
securities............. $ -- $ 8,908 $-- $ 8,908 $ --
Valuation allowances--
mortgage loans on real
estate................. 46,381 7,433 -- 4,686 49,128
Valuation allowances--
real estate............ 27,330 (1,511) -- -- 25,819
1994:
Valuation allowances--
fixed maturity
securities............. 4,800 (4,800) -- -- --
Valuation allowances--
mortgage loans on real
estate................. 42,150 20,445 -- 16,214 46,381
Valuation allowances--
real estate............ 31,357 (4,027) -- -- 27,330
1993:
Valuation allowances--
fixed maturity
securities............. 3,800 1,000 -- -- 4,800
Valuation allowances--
mortgage loans on real
estate................. 31,872 28,187 -- 17,909 42,150
Valuation allowances--
real estate............ 35,471 (4,114) -- -- 31,357
Valuation allowances--
other long-term
investments............ 700 (700) -- -- --
</TABLE>
- --------
See accompanying independent auditors' report.
(1) Amounts represent direct write-downs charged against the valuation
allowance.
S-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
*1.1 --Form of Underwriting Agreement
*3.1 --Amended and Restated Certificate of Incorporation of Nationwide
Financial Services, Inc.
*3.2 --Amended and Restated Bylaws of Nationwide Financial Services, Inc.
*3.3 --Amended and Restated Certificate of Trust of Nationwide Financial
Services Capital Trust
*3.4 --Amended and Restated Declaration of Trust of Nationwide Financial
Services Capital Trust
*4.1 --Form of Subordinated Indenture
*4.2 --Form of Certificate for Capital Securities of Nationwide Financial
Services Capital Trust
*4.3 --Form of Certificate for Junior Subordinated Deferrable Interest
Debentures of Nationwide Financial Services, Inc.
*4.4 --Form of Capital Securities Guarantee Agreement by Nationwide
Financial Services, Inc.
*5.1 --Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
*5.2 --Opinion of Richards, Layton & Finger, P.A.
*8.1 --Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
*10.1 --Form of Intercompany Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and Nationwide Financial Services,
Inc.
*10.2 --Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation
*10.3 --Cost Sharing Agreement among the parties named therein
10.4 --Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
10.5 --Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company
*10.6 --Revolving Credit Facility, dated August 12, 1996, among Nationwide
Life Insurance Company, Nationwide Mutual Insurance Company, the
banks named therein and Morgan Guaranty Trust Company of New York,
the administrative agent
*10.7 --Form of Lease Agreement between Nationwide Life Insurance Company
and Nationwide Mutual Insurance Company
*10.8 --Form of Nationwide Financial Services, Inc. Long-Term Equity
Compensation Plan
*10.9 --Executive Incentive Plan
*10.10 --Management Incentive Plan
*10.11 --Excess Benefit Plan of Nationwide Mutual Insurance Company
*10.12 --Supplemental Benefit Plan of Nationwide Mutual Insurance Company
*10.13 --Nationwide Salaried Employees Severance Pay Plan
*10.14 --Deferred Compensation Program
*10.15 --Directors Deferred Compensation Plan
12.1 --Statements Regarding Computation of Ratios
21.1 --List of Subsidiaries
23.1 --Consent of KPMG Peat Marwick LLP
*23.2 --Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in
Exhibit 5.1)
*23.3 --Consent of Richards, Layton & Finger, P.A. (contained in Exhibit
5.2)
*23.4 --Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in
Exhibit 8.1)
24.1 --Power of Attorney (included with the signatures in Part II of this
Registration Statement)
*25.1 --Statement of Eligibility of Trustee under the Subordinated
Indenture
*25.2 --Statement of Eligibility of Trustee under the Amended and Restated
Declaration of Trust of Nationwide Financial Services Capital Trust
*25.3 --Statement of Eligibility of Trustee under the Capital Securities
Guarantee Amendment
*27.1 --Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
MODIFIED COINSURANCE AGREEMENT
This Agreement made and entered into between Nationwide Life Insurance Company
(hereinafter referred to as "NWL") , a life insurance company organized under
the laws of the State of Ohio, and Nationwide Mutual Insurance Company
(hereinafter referred to as "NMIC"), an insurance company organized under the
laws of the State of Ohio.
WITNESSETH:
WHEREAS, NWL has written certain policies of individual health and medical
insurance; and
WHEREAS, NWL desires to cede NWL's entire liability arising under said policies;
and
WHEREAS, NMIC is willing to accept, as reinsurer the liability which NWL desires
to cede; and
WHEREAS, NWL represents that it has the power and authority to cede said
liability, which it hereby agrees to cede; and
WHEREAS, NMIC represents that it has the power and authority to reinsure said
liability, which it hereby agrees to reinsure;
NOW THEREFORE, NWL and NMIC agree as follows:
ARTICLE I
---------
BUSINESS REINSURED; CONSIDERATION
---------------------------------
1.1 Reinsurance and Indemnification. Upon the terms and subject to the
-------------------------------
conditions of this Agreement, NMIC does hereby agree to reinsure and to
reimburse and indemnify NWL, and NWL does hereby agree to accept such
reinsurance, reimbursement and indemnification, for 100% of the liability for
all of the Policies (including any liability resulting from any mandatory
provisions in such Policies), as set forth in Article V hereof.
1.2 Policies. The term "Policies" means the following:
--------
(a) All right, title and interest of NWL in, to and under all
Individual Health and Ohio Farm Bureau health insurance policies (except group
life) issued and in force as of the Effective Date or thereafter, including all
endorsements, riders and supplemental agreements which are parts thereof;
(b) All future premiums received under the Policies on and after the
Effective Date; and
(c) All of NWL's assignable right, title and interest in, to and under any
ceded or assumed reinsurance treaties or agreements (other than this Agreement)
applicable to the
<PAGE>
Policies after all such treaties or agreements are settled. After the Effective
Date of this Agreement, neither changes to such agreements nor any new
reinsurance agreements applicable to the Policies will be executed without the
specific approval of NMIC.
1.3 Effect of Insolvency or Bankruptcy. In the event of the insolvency of NWL
----------------------------------
all reinsurance made, ceded, renewed or otherwise becoming effective under this
Agreement shall be payable by NMIC directly to NWL or its liquidator, receiver,
or statutory successor on the basis of the liability of NWL under the Policies
reinsured without diminution because of the insolvency of NWL.
1.4 Reserves. NWL shall retain and maintain all premium reserves, claims
---------
reserves and policy reserves with respect to the Policies.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF NWL
-------------------------------------
NWL represents and warrants to NMIC as follows:
2.1 Organization, Ownership, Standing and Authority. NWL is a life insurance
-----------------------------------------------
company duly organized, validly existing and in good standing under the laws of
the State of Ohio and has all requisite power and authority to issue the
Policies and to carry on its business related thereto. NWL is duly licensed to
transact the business of life insurance, health insurance and annuities in the
State of Ohio and in such other states in which the Policies were issued at the
time of issuance.
2.2 Approved Policy Forms. All policy forms, endorsements and riders used in
---------------------
connection with the Policies are, to the extent required under applicable law,
on forms approved or deemed approved by the applicable insurance regulatory
authorities. To the good faith best knowledge of NWL, those forms which have
been filed with and deemed approved by the applicable insurance regulatory
authorities are in compliance with applicable insurance laws in all material
respects.
2.3 Agents Properly Licensed and Appointed. To the extent required by law, all
--------------------------------------
of the Policies were issued through agents properly licensed as insurance agents
by the applicable state insurance regulatory authorities and properly appointed.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF NMIC
--------------------------------------
NMIC hereby represents and warrants to NWL as follows:
3.1 Litigation. There is no suit, action or proceeding pending or, to the best
----------
knowledge of
<PAGE>
NMIC, threatened against NMIC which, if adversely determined, (i) would prohibit
any of the transactions contemplated by this Agreement, or insofar as reasonably
can be foreseen materially impair or threaten NMIC's ability to carry out and
Perform the obligations assumed by NMIC hereunder.
3 .2 Licenses, Permits and Authorization. Subject to receipt of the approvals
-----------------------------------
and consents listed in Schedule 1, NMIC has all approvals, authorizations,
consents, licenses, franchises, orders and other permits necessary to carry out
the terms and provisions of this Agreement.
ARTICLE IV
----------
COVENANTS
---------
4.1 Regulatory Approvals. Both NWL and NMIC will promptly take all reasonable
--------------------
actions necessary to secure any regulatory approvals necessary or appropriate to
enable them to
consummate the transactions contemplated herein.
4.2 Premiums and Investment Income. Notwithstanding anything in this Agreement
------------------------------
to the contrary, NMIC shall be entitled to receive, all premiums payable and
investment income with respect to the Policies on and after the Effective Date.
4.3 Assets. Notwithstanding anything in this Agreement to the contrary, NWL
------
shall continue to invest and maintain all assets held in support of the Policies
reinsured.
4.4 Maintenance of Reserves. So long as any of the Policies remain in force,
-----------------------
NWL shall maintain reserves with respect to the Policies in accordance with
applicable statutory and regulatory requirements. For purposes of this
Agreement, reserves will equal statutory policy and claim reserves included in
exhibits 7, 8, 9, 10 and 11 in the NAIC Blue Blank Annual Statement plus any
premiums paid in advance less any due and unpaid premiums. The basis for
calculation of reserves will not be changed without the written mutual agreement
of both parties to this Agreement.
4.5 Premiums Changes. To the extent allowed under the Policies, NWL will have
----------------
the right to change premiums charged for the policies and will notify NMIC of
its intent to make such changes. Such changes shall conform to all applicable
standards of practice of the Actuarial Standards Board or its successors and
shall conform to all applicable laws and regulations. NWL will take any action
reasonably necessary including but not limited to board resolutions or state
regulatory filings to implement such changes on a timely basis.
4.6 Dividends and Non Guaranteed Elements. NWL will have the right to
-------------------------------------
determine the dollar amount of policyholder dividends on participating policies
and extra contractual interest payable on all other policies if such
determination (1) conforms with all applicable standards of practice of the
Actuarial Standards Board or its successors, and (2) complies with applicable
law and regulation. NWL will provide NMIC with notice of all such
determinations, and NMIC will take action reasonably necessary or desirable to
implement
<PAGE>
such determinations on a timely basis, including but not limited to, action of
the board of directors or state regulatory filings.
ARTICLE V
---------
REINSURANCE
-----------
5.1 Reinsurance of Policies. Except as otherwise specifically provided, NMIC
-----------------------
agrees to, and effective as of the Effective Date does hereby, reinsure and
agree to reimburse NWL for the following with respect to the Policies:
(a) 100% of all benefits paid on or after the Effective Date plus the
increase in reserves described in Article 1.4;
(b) 100% of all dividends paid in connection with the Policies;
(c) An allowance for expenses computed in accordance with normal life
insurance statutory accounting practices including commissions, premium taxes
and normal administrative expenses which include reasonable fees of legal
counsel and related disbursements;
(d) The above amounts shall be reduced by amounts incurred by NWL due to
reinsurance agreements described in Article 1.2 (c) .
5.2 Direct Obligations. From and after the Effective Date, the Policies shall
------------------
continue to be direct obligations of NWL.
ARTICLE VI
----------
ACCOUNTING AND SETTLEMENT
-------------------------
6.1 Accounting Period. The accounting under this Agreement shall be on a
-----------------
calendar quarter basis.
6.2 Accounting Reports. Accounting records shall be submitted by NWL to NMIC
------------------
not later than 30 days after the end of each accounting period. Along with the
amount of settlement for the accounting period, such reports shall include
information on the amounts of reinsurance premiums, benefits, expenses,
investment income and capital gains or losses on the assets being held in
support of the reinsured Policies (as Provided in Article IV) plus a listing of
such assets and the reserves held on the Policies.
6.3 Settlements. Within 30 days of receipt of the accounting report, the
-----------
amount of settlement shall be paid. The settlement amount will be equal to
premiums (in accordance with Article 4.2) plus the reserve adjustment (in
accordance with Article 6.3) less benefits, dividends,
<PAGE>
losses and expenses (in accordance with Article 5.1). If the amount is positive,
it shall be paid to NMIC. If negative, it will be paid to NWL.
ARTICLE VII
-----------
DEFERRED ACQUISITION COST ELECTION
----------------------------------
7.1 NWL and NMIC hereby agree to the following, pursuant to Treasury Regulation
Section 1.848-2(g)(8), issued under Section 848 of the Internal Revenue Code of
1986, as amended. This election shall be effective for 1993 and for all
subsequent taxable years for which this Agreement remains in effect.
(a) The terms used herein are defamed by reference to Treasury Regulation
Section 1.848-2 as in effect on December 29, 1992.
(b) The party with the net positive consideration for this reinsurance
agreement for each taxable year will capitalize specified policy acquisition
expenses with respect to this agreement without regard to the general deductions
limitation of Section 848(c)(1).
(c) Both parties agree to exchange information pertaining to the amount of
net consideration under this Agreement each year to ensure consistency or as
otherwise required by the Internal Revenue Service.
(d) NWL will submit a schedule to the NMIC by March 1 of each year of its
calculation of the net consideration for the preceding calendar year. This
schedule of calculations will be accompanied by a statement signed by an officer
of NWL stating that NWL will report such net consideration in its tax return for
the preceding calendar year.
(e) NMIC may contest such calculation by providing an alternative
calculation to NWL in writing within 30 days of NMIC's receipt of the
Reinsured's calculation. If NMIC does not so notify NWL, NMIC will report" the
net consideration as determined by NWL in NMIC's tax return for the previous
calendar year.
(f) If NMIC contests NWL's calculation of the net consideration, the
parties will act in good faith to reach an agreement as to the correct amount
within thirty (30) days of the date NMIC submits its alternative calculation.
If NWL and NMIC reach agreement on an amount of net consideration, each party
shall report such amount in their respective tax returns for the previous
calendar year.
ARTICLE VIII
------------
GENERAL PROVISIONS
------------------
<PAGE>
8.1 Amendment. Any change or modification to this Agreement shall be null and
---------
void unless made by amendment to the Agreement and signed by both parties.
8.2 Interpretation. The headings contained in this Agreement are for reference
--------------
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. All accounting terms not defined in this Agreement shall have
the meanings determined by insurance statutory accounting principles. Wherever
Agreement this refers to the "knowledge" or "best knowledge" of a party, it
means the knowledge or best knowledge of an Officer of such party responsible
for the administration and supervision of the Policies covered by this
Agreement.
8.3 Counterparts. This Agreement may be executed in two or more counterparts,
------------
all of which shall be considered one and the same agreement, and shall become
effective when two or more counterparts have been signed by each of the parties
and delivered to the other party, it being understood that both parties need not
sign the same counterpart.
8.4 Entire Agreement; Third-Party Beneficiaries. This Agreement constitutes
-------------------------------------------
the entire agreement between the parties with respect to the Policies and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof. This Agreement
is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
8.6 Governing Laws. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Ohio.
8.7 Assignment. Neither this Agreement nor any of the rights, interests or
----------
obligations of either party hereunder shall be assigned without the prior
written consent of the other party. This Agreement will be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.8 Inspection of Books and Records. All books and records pertaining to the
-------------------------------
Policies shall be made available to NMIC for inspection during regular business
hours.
ARTICLE IX
----------
This Agreement shall remain in full force and effect until all liability
terminates under the Policies provided however that either party may terminate
this Agreement January 1 of any given year provided such party provides to the
other written notice no later than September 30 of the year immediately
preceding termination of its intention to terminate.
ARTICLE X
---------
The Effective Date of this Agreement shall be as of 12:01 a.m., 1/1/96.
<PAGE>
IN WITNESS WHEREOF, NWL and NMIC have caused this Agreement to be executed, in
duplicate, by their respective officers duly authorized to do so, as of the date
shown above.
NATIONWIDE LIFE INSURANCE
COMPANY
/s/ Mark R. Thresher
--------------------------------------
Mark R.Thresher
Vice President--Controller
NATIONWIDE MUTUAL INSURANCE
COMPANY
/s/ John I. Howarth
--------------------------------------
John I. Howarth
Vice President--Health Actuary
<PAGE>
SCHEDULE 1
STATES REQUIRING APPROVALS OR CONSENTS
--------------------------------------
OHIO
<PAGE>
MODIFIED COINSURANCE AGREEMENT
This Agreement made and entered into between Employers Life Insurance Company of
Wausau (hereinafter referred to as "ELOW"), a corporation organized under the
laws of the State of Wisconsin, and Nationwide Life Insurance Company
(hereinafter referred to as "NLIC"), a corporation organized under the laws of
the State of Ohio.
WITNESSETH:
WHEREAS, NLIC has written certain Group Contracts; and
WHEREAS, NLIC desires to cede NLIC's entire liability arising under said Group
Contracts; and
WHEREAS, ELOW is willing to accept, as reinsurer, the liability which NLIC
desires to cede; and
WHEREAS, NLIC represents that it has the power and authority to cede said
liability, which it hereby agrees to cede; and
WHEREAS, ELOW represents that it has the power and authority to reinsure said
liability, which it hereby agrees to reinsure;
NOW THEREFORE, NLIC and ELOW agree as follows:
ARTICLE I
BUSINESS REINSURED; CONSIDERATION
---------------------------------
1.1 Reinsurance and Indemnification. Upon the terms and subject to the
--------------------------------
conditions of this Agreement, ELOW does hereby agree to reinsure and to
reimburse and indemnify NLIC, and NLIC does hereby agree to accept such
reinsurance, reimbursement and indemnification, for 100% of the liability for
the Group Contracts, as set forth in Article V hereof.
1.2 Group Contracts. The term "Group Contracts" means the following:
----------------
(a) All Group Contracts described in Schedule 1.
(b) All of NLIC's assignable right, title and interest in, to and under any
ceded reinsurance agreements (other than this Agreement) applicable to the Group
Contracts. After the Effective Date of this Agreement, neither changes to such
agreements nor any new reinsurance agreements applicable to the Group Contracts
will be executed without the specific approval of ELOW.
1
<PAGE>
1.3 Effect of Insolvency or Bankruptcy. In the event of the insolvency of NLIC
-----------------------------------
all reinsurance made, ceded, renewed or otherwise becoming effective under this
Agreement shall be payable by ELOW directly to NLIC or to its liquidator,
receiver, or statutory successor on the basis of the liability of NLIC under the
Group Contracts without diminution because of the insolvency of NLIC.
1.4 Initial Reinsurance Premium. With respect to Group Contracts issued by
----------------------------
NLIC and in force as of the Effective Date of this Agreement, NLIC agrees to pay
ELOW in cash an amount equal to the total amount of NLIC's aggregate contract
and claim reserves as defined in Article 4.4, as shown on the books and records
of NLIC as of 12:01 a.m. on the Effective Date.
1.5 Initial Settlement. The initial settlement shall be equal to the initial
-------------------
reinsurance premium less the initial reserve adjustment.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF NLIC
--------------------------------------
NLIC represents and warrants to ELOW as follows:
2.1 Organization, Ownership, Standing and Authority. NLIC is a life insurance
------------------------------------------------
company duly organized, validly existing and in good standing under the laws of
the State of Ohio and has all requisite power and authority to issue the Group
Contracts and to carry on its business related thereto. NLIC is duly licensed
to transact the business of life insurance, health insurance and annuities in
the State of Ohio and in such other states in which the Group Contracts were
issued at the time of issuance.
2.2 Approved Group Contract Forms. All Group Contract forms, endorsements and
------------------------------
riders used in connection with the Group Contracts are, to the extent required
under applicable law, on forms approved or deemed approved by the applicable
insurance regulatory authorities. To the good faith best knowledge of NLIC,
those forms which have been filed with and deemed approved by the applicable
insurance regulatory authorities are in compliance with applicable insurance
laws in all material respects.
2.3 Litigation. Schedule 2 sets forth a true and complete list of all suits,
-----------
actions or proceedings pending or threatened against NLIC concerning or relating
to the Group Contracts of which NLIC has received written notice at its Home
Office as of the Effective Date which are outside the ordinary course of NLIC's
business.
2
<PAGE>
2.4 Agents Properly Licensed and Appointed. To the extent required by law, all
--------------------------------------
of the Group Contracts were issued through agents properly licensed as insurance
agents by the applicable state insurance regulatory authorities and properly
appointed.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ELOW
--------------------------------------
ELOW hereby represents and warrants to NLIC as follows:
3.1 Litigation. There is no suit, action or proceeding pending or, to the best
-----------
knowledge of ELOW, threatened against ELOW which, if adversely determined, (i)
would prohibit any of the transactions contemplated by this Agreement, or (ii)
insofar as reasonably can be foreseen materially impair or threaten ELOW's
ability to carry out and perform the obligations assumed by ELOW hereunder.
3.2 Licenses, Permits and Authorization. Subject to receipt of the approvals
------------------------------------
and consents listed in Schedule 3, ELOW has all approvals, authorizations,
consents, licenses, franchises, orders and other permits necessary to carry out
the terms and provisions of this Agreement.
ARTICLE IV
COVENANTS
---------
4.1 Regulatory Approvals. Both NLIC and ELOW will promptly take all reasonable
---------------------
actions necessary to secure any regulatory approvals necessary or appropriate to
enable them to consummate the transactions contemplated herein.
4.2 Premiums. Notwithstanding anything in this Agreement to the contrary,
---------
ELOW shall be entitled to receive, as premium for the reinsurance provided under
and pursuant to this Agreement, all premiums payable with respect to the Group
Contracts on and after the Effective Date and all premiums with respect to the
Group Contracts which, as of the Effective Date, are due. Such premiums will be
net of any refunds which may be made to contractholders or others. Such
premiums will also be reduced by the amount of premiums paid by NLIC due to any
reinsurance agreements described in Article 1.2(b).
4.3 Assets. Notwithstanding anything in this Agreement to the contrary, NLIC
-------
shall continue to invest and maintain all assets held in support of the Group
Contracts reinsured.
3
<PAGE>
4.4 Maintenance of Reserves. So long as any of the Group Contracts remain in
------------------------
force, NLIC shall maintain reserves with respect to the Group Contracts in
accordance with applicable statutory and regulatory requirements. For purposes
of this Agreement, reserves will equal to statutory contract and claim reserves
included in Exhibits 7,8,9, 10 and 11 plus any other liabilities less any other
assets associated with the Group Contracts and held in the NAIC Life Company
Annual Statement. The basis for calculation of reserves will not be changed
without the written mutual agreement of both parties to this Agreement.
4.5 Dividends And Experience Rate Credits. ELOW will have the right to
--------------------------------------
determine the dollar amount of contractholder dividends and experience rate
credits if such determination (1) conforms with all applicable standards of
practice of the Actuarial Standards Board or its successors, and (2) complies
with applicable law and regulation. ELOW will provide NLIC with notice of all
such determinations, and NLIC will take action reasonably necessary or desirable
to implement such determinations on a timely basis, including but not limited
to, action of the board of directors or state regulatory filings.
4.6 Service of Suit and Consent to Jurisdiction. ELOW agrees that if it fails
--------------------------------------------
to perform its obligations hereunder that it will, at the request of NLIC,
submit to the jurisdiction of any court of competent jurisdiction in any state
of the United States, will comply with all requirements necessary to give the
court jurisdiction, and will abide by the final decision of such court or of any
appellate court in the event of an appeal. Nothing in this Article constitutes
or should be understood to constitute a waiver of ELOW's rights to commence an
action in any court of competent jurisdiction in the United States, to remove an
action to a United States District Court, or to seek a transfer of a case to
another court as permitted by the laws of the United States or of any state in
the United States.
ELOW hereby agrees that any lawful process in such a suit instituted by or on
behalf of NLIC may be served upon W. Sidney Druen of Druen, Rath & Dietrich, One
Nationwide Plaza, Columbus, Ohio 43216. Mr. Druen is hereby authorized and
directed to accept service of process on behalf of ELOW in any such suit and/or
upon the request of NLIC to give a written undertaking to NLIC that will enter a
general appearance upon ELOW's behalf in the event such a suit shall be
instituted.
ARTICLE V
REINSURANCE
-----------
5.1 Reinsurance of Policies. Except as provided in Article 5.2, ELOW agrees
------------------------
to, and effective as of the Effective Date does hereby, reinsure and agree to
reimburse NLIC for the following with respect to the Group Contracts:
4
<PAGE>
(a) 100% of all benefits paid on or after the Effective Date;
(b) 100% of all dividends and experience rate credits paid in connection with
the Policies;
(c) 100% of all accrued premium taxes attributable to premiums received on or
after the Effective Date and all premiums held in suspense on the Effective
Date;
(d) 100% of all accrued losses, liabilities, costs and expenses (including
reasonable fees of legal counsel and related disbursements) on account of,
arising out of, or in connection with, lawsuits and legal actions and
proceedings;
(e) 100% of all accrued other losses and direct expenses which are incurred on
and after the Effective Date and which are attributable to the Group Contracts
under sound and proper insurance accounting procedures.
(f) The above amounts shall be reduced by amounts incurred by NLIC due to
reinsurance agreements described in Article 1.2(b).
5.2 Direct Obligations. From and after the Effective Date, the Group Contracts
-------------------
shall continue to be direct obligations of NLIC.
ARTICLE VI
ACCOUNTING AND SETTLEMENT
-------------------------
6.1 Accounting Period. The accounting under this Agreement shall be on a
------------------
calendar quarter basis.
6.2 Accounting Reports. Accounting reports shall be submitted by NLIC to ELOW
-------------------
not later than 30 days after the end of each accounting period. Along with the
amount of settlement for the accounting period, such reports shall include
information on the amounts of reinsurance premiums, benefits, expenses, and
investment income on the assets being held in support of the reinsured Group
Contracts (as provided in Article IV) plus a listing of such assets and the
reserves held on the Group Contracts.
6.3 Reserve Adjustments. At the end of each accounting period, NLIC shall
--------------------
determine a reserve adjustment for the reinsured Group Contracts equal to (a)
less (b) where
(a) Is the amount of investment income adjusted for IMR amortization for the
accounting period attributable to the Group Contracts determined in accordance
with Schedule 4 net of any investment expenses and default risk charges
allocable to them; and
5
<PAGE>
(b) Is the increase in reserves (as defined in Article 4.4) held for the Group
Contracts. For this purpose, a decrease in reserves will be treated as a
negative amount.
The initial reserve adjustment will be equal to the negative of the amount of
reserves held for the Group Contracts as of the Effective Date of this
Agreement.
6.4 Settlements. Within 30 days of receipt of the accounting report, the
------------
amount of settlement shall be paid. The settlement amount will be equal to
premiums (in accordance with Article 4.2) plus the reserve adjustment (in
accordance with Article 6.3) less benefits, dividends, losses and expenses (in
accordance with Article 5.1). If the amount is positive, it shall be paid to
ELOW. If negative, it shall be paid to NLIC.
ARTICLE VII
DEFERRED ACQUISITION COST ELECTION
----------------------------------
7.1 NLIC and ELOW hereby agree to the following, pursuant to Treasury
Regulation Section 1.848-2(g)(8), issued under Section 848 of the Internal
Revenue Code of 1986, as amended. This election shall be effective for 1996 and
for all subsequent taxable years for which this Agreement remains in effect.
(a) The terms used herein are defined by reference to Treasury Regulation
Section 1.848-2 as in effect on December 29, 1992.
(b) The party with the net positive consideration for this reinsurance agreement
for each taxable year will capitalize specified policy acquisition expenses with
respect to this Agreement without regard to the general deductions limitation of
Section 848(c)(1).
(c) Both parties agree to exchange information pertaining to the amount of net
consideration under this Agreement each year to ensure consistency or as
otherwise required by the Internal Revenue Service.
(d) NLIC will submit a schedule to ELOW by March 1 of each year of its
calculation of the net consideration for the preceding calendar year. This
schedule of calculation will be accompanied by a statement signed by an officer
of NLIC stating that NLIC will report such net consideration in its tax return
for the preceding calendar year.
(e) ELOW may contest such calculation by providing an alternative calculation to
NLIC in writing within 30 days of ELOW receipt of the Reinsured's calculation.
If ELOW does not so notify NLIC, ELOW will report the net consideration as
determined by NLIC in ELOW's tax return for the previous calendar year.
6
<PAGE>
(f) If ELOW contests NLIC's calculation of the net consideration, the parties
will act in good faith to reach an agreement as to the correct amount within
thirty (30) days of the date ELOW submits its alternative calculation. If NLIC
and ELOW reach agreement on an amount of net consideration, each party shall
report such amount in their respective tax returns for the previous calendar
year.
ARTICLE VIII
ARBITRATION
-----------
8.1 Arbitration. As a condition precedent to any right of action hereunder, any
-------------
dispute arising out of the interpretation, performance or breach of this
Agreement, including the formation or validity thereof, will be submitted for
decision to a panel of three arbitrators. Notice requesting arbitration will
be in writing and sent certified or registered mail, return receipt requested.
One arbitrator will be chosen by each party and the two arbitrators will, before
instituting the hearing, choose a third arbitrator who will preside at the
hearing. If either party fails to appoint its arbitrator within 30 days after
being requested to do so by the other party, the latter, after 10 days notice by
certified or registered mail of its intention to do so, may appoint the second
arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within 30
days of their appointment, the third arbitrator will be selected from a list of
six individuals (three named by each arbitrator) by a judge of the federal
district court having jurisdiction over the geographical area in which the
arbitration is to take place, or if the federal court declines to act, the state
court having general jurisdiction in such area.
All arbitrators will be impartial and disinterested active or former executive
officers of insurance or reinsurance companies which are not controlled by or
affiliated with any party to this Agreement or any of their affiliates.
Within 30 days after notice of appointment of all arbitrators, the panel will
meet and determine timely periods for briefs, discovery procedures and schedules
for hearings.
The panel will be relieved of all judicial formality and will not be bound by
the strict rules of procedure and evidence. Unless the panel agrees otherwise,
arbitration will take place in Wausau, Wisconsin, U.S.A., but the venue may be
changed when deemed by the panel to be in the best interest of the arbitration
proceeding. Insofar as the arbitration panel looks to substantive law, it will
consider the law of the State of Wisconsin. The decision of any two arbitrators
when rendered in writing will be final and binding. The panel is empowered to
grant interim relief as it may deem appropriate.
7
<PAGE>
The panel may interpret this Agreement as an honorable engagement rather than as
merely a legal obligation and will make its decision considering the custom and
practice of the applicable insurance and reinsurance business as promptly as
possible following the termination of the hearings. Judgment upon the award may
be entered in any court having jurisdiction thereof.
Each party will bear the expense of its own arbitrator and will jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration will be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to interest and attorneys fees, to the
extent not prohibited by law.
ARTICLE VIII
GENERAL PROVISIONS
------------------
9.1 Amendment. Any change or modification to this Agreement shall be null and
----------
void unless made by amendment to this Agreement and signed by both parties.
9.2 Interpretation. The headings contained in this Agreement are for reference
---------------
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. All accounting terms not defined in this Agreement shall have
the meanings determined by insurance statutory accounting principles. Wherever
this Agreement refers to the "knowledge" or "best knowledge" of a party, it
means the knowledge or best knowledge of an officer of such party responsible
for the administration and supervision of the Group Contracts covered by this
Agreement.
9.3 Counterparts. This Agreement may be executed in two or more counterparts,
-------------
all of which shall be considered one and the same agreement, and shall become
effective when two or more counterparts have been signed by each of the parties
and delivered to the other party, it being understood that both parties need not
sign the same counterpart.
9.4 Entire Agreement; Third-Party Beneficiaries. This Agreement constitutes
--------------------------------------------
the entire agreement between the parties with respect to the Group Contracts,
and supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof. This Agreement
is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
9.5 Governing Laws. This Agreement shall be governed by and construed in
---------------
accordance with the laws of the State of Wisconsin.
9.6 Assignment. Neither this Agreement nor any of the rights, interests or
-----------
obligations of either party hereunder shall be assigned without the prior
written consent of the other
8
<PAGE>
party. This Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
9.7 Inspection of Books and Records. All books and records pertaining to the
--------------------------------
Group Contracts (except for the settlement agreements pertaining thereto and the
underlying claim files which are deemed confidential pursuant to agreement or
court order) shall be made available to ELOW for inspection during regular
business hours.
ARTICLE IX
This Agreement shall remain in full force and effect until all liability
terminates under the Group Contracts.
ARTICLE X
The Effective Date of this Agreement shall be as of 12:01 a.m., January 1, 1996.
IN WITNESS WHEREOF, NLIC and ELOW have caused this Agreement to be executed, in
duplicate, by their respective officers duly authorized to do so, as of the date
shown above.
NATIONWIDE LIFE INSURANCE COMPANY
BY: /s/ Joseph G. Gasper
------------------------------------------
Joseph G. Gasper
President and Chief Operating Officer
EMPLOYERS LIFE INSURANCE COMPANY
OF WAUSAU
BY: /s/ James M. Magalska
------------------------------------------
James M. Magalska, Executive Vice
President and Chief Operating Officer
9
<PAGE>
SCHEDULE 1
REINSURED CONTRACTS
-------------------
The reinsured contracts consist of all policies, contracts, certificates and
agreements of nonvariable group and wholesale life insurance, and group and
franchise health insurance which has been or will be written, issued or assumed
by NLIC (and classified as such by the company writing, issuing or assuming such
business) at any time prior to the Termination Date defined below, except any
such policies, contracts, certificates or agreements of group health insurance
which have been written for the Ohio Farm Bureau.
10
<PAGE>
SCHEDULE 2
SUITS, ACTIONS OR PROCEEDINGS
-----------------------------
None
11
<PAGE>
SCHEDULE 3
----------
STATE REQUIRING APPROVALS OR CONSENTS
-------------------------------------
Wisconsin
Ohio
12
<PAGE>
SCHEDULE 4
INVESTMENT INCOME DETERMINATION
Investment income attributable to the reinsured Group Contracts will be the
amount determined by NLIC's current method of investment income allocation and
asset segmentation, as filed with the New York State Insurance Department.
13
<PAGE>
EXHIBIT 12.1
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS REGARDING COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE -------------------------------------------
MONTHS ENDED PRO
SEPTEMBER 30, 1996 FORMA(1) HISTORICAL
------------------- -------- ----------------------------------
PRO
FORMA(1) HISTORICAL 1995 1995 1994 1993 1992 1991
-------- ---------- -------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income
taxes and cumulation
effect of accounting
changes.............. $224.2 $252.9 $242.9 $281.2 $240.4 $275.8 $116.4 $108.1
Fixed charges......... 23.0 -- 30.6 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
$247.2 $252.9 $273.5 $281.2 $240.4 $275.8 $116.4 $108.1
====== ====== ====== ====== ====== ====== ====== ======
Fixed charges:
Interest (2).......... $ 23.0 -- $ 30.6 -- -- -- -- --
Ratio of earnings to
fixed charges.......... 10.7X N/A 8.9X N/A N/A N/A N/A N/A
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) Pro Forma results are presented as if the Equity Offerings, the Special
Cash Dividends, the Note Offering and the Capital Securities Offering had
been consummated at the beginning of the periods indicated.
(2)Excludes interest credited to policyholder account balances.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The following are wholly owned subsidiaries of Nationwide Financial Services,
Inc.:
1. Nationwide Life Insurance Company
2. Public Employees Benefit Services Corporation
3. NEA Valuebuilder Investor Services, Inc.
4. Nationwide Financial Institution Distributors Agency, Inc.
The following are wholly owned subsidiaries of Nationwide Life Insurance
Company:
1. Nationwide Life and Annuity Insurance Company
2. Nationwide Advisory Services, Inc.
3. Nationwide Investment Services, Inc.
4. NWE, Inc.
The following are wholly owned subsidiaries of Public Employees Benefit Services
Corporation:
1. Public Employees Benefit Services Corporation of Alabama
2. Public Employees Benefit Services Corporation of Arkansas
3. PEBSCO of Massachusetts Insurance Agency, Inc.
4. Public Employees Benefit Services Corporation of Montana
5. Public Employees Benefit Services Corporation of New Mexico
The following are wholly owned subsidiaries of NEA Valuebuilder Investor
Services, Inc.:
1. NEA Valuebuilder Investor Services of Alabama, Inc.
2. NEA Valuebuilder Investor Services of Arizona, Inc.
3. NEA Valuebuilder Investor Services of Montana, Inc.
4. NEA Valuebuilder Investor Services of Nevada, Inc.
5. NEA Valuebuilder Investor Services of Ohio, Inc.
6. NEA Valuebuilder Investor Services of Oklahoma, Inc.
7. NEA Valuebuilder Investor Services of Wyoming, Inc.
8. NEA Valuebuilder Investor Services of Texas, Inc.
9. NEA Valuebuilder Investor Services of Agency, Inc.
<PAGE>
The following are wholly owned subsidiaries of Nationwide Financial Institution
Distributors Agency, Inc.:
1. Affiliate Agency, Inc.
2. Financial Horizons Distributors Agency of Alabama, Inc.
3. Landmark Financial Services of New York, Inc.
4. Financial Horizons Securities Corp.
The following is a subsidiary of Nationwide Advisory Services, Inc.:
1. Nationwide Investor Services, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Nationwide Financial Services, Inc.:
When the transactions referred to in note 1 of the Notes to the Consolidated
Financial Statements have been consummated, we will be in a position to render
our reports included herein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Experts", "Summary Consolidated Financial Data"
and "Selected Consolidated Financial Data" in the prospectus. Our reports
dated January , 1997 included herein refer to several changes in accounting
principles. In 1994, the Company changed its accounting for investments in
debt and equity securities. In 1993, the Company changed its accounting for
income taxes and postretirement benefits other than pensions. Our reports also
refer to the formation of the Company as a holding company for Nationwide Life
Insurance Company and the other companies within the Nationwide Insurance
Enterprise that offer or distribute long-term savings and retirement products.
The consolidated financial statements are presented as if these companies were
consolidated for all periods presented.
KPMG Peat Marwick LLP
Columbus, Ohio
December 23, 1996
