<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997.
REGISTRATION NO. 333-18527
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
NATIONWIDE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 6719 31-1486870
(State or other (Primary Standard
jurisdiction of Industrial Classification (I.R.S. Employer
incorporation or Code Number) Identification 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
-----------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus, one to be used
in connection with an offering of Class A Common Stock in the United States
and Canada (the "U.S. Offering") and one to be used in connection with a
concurrent international offering outside the United States and Canada (the
"International Offering"). The complete Prospectus for the U.S. Offering
follows immediately. Following such Prospectus is an alternate front cover
page, inside front cover page and page 18 for the International Offering as
well as a section entitled "Subscription and Sale" which replaces the section
entitled "Underwriting" for the International Offering and an additional
section entitled "Certain United States Federal Tax Considerations for Non-
U.S. Holders of Class A Common Stock." All of the other pages of the
Prospectus for the U.S. Offering are to be used for both the U.S. Offering and
the International Offering.
The complete Prospectus for each of the U.S. and International Offerings in
the form in which it is to be used will be filed with the Commission pursuant
to Rule 424 or in an amendment to this Registration Statement.
<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 JANUARY 31, 1997
Shares
Nationwide Financial Services, Inc.
[LOGO] Class A Common Stock
(no par value)
--------
All of the shares of Class A Common Stock, no par value (the "Class A
Common Stock"), of Nationwide Financial Services, Inc. (the "Company")
offered hereby are being sold by the Company. Of the shares being
offered, shares (the "U.S. Shares") are initially being offered for
sale in the United States and Canada by the U.S. Underwriters (the
"U.S. Offering") and shares (the "International Shares") are
initially being concurrently offered outside the United States and
Canada by the Managers (the "International Offering" and,
together with the U.S. Offering, the "Equity Offerings"). The
initial public offering price and the underwriting discounts
and commissions of the U.S. Offering and the International
Offering are identical. See "Underwriting."
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock. It is anticipated that the initial public offering price of
the Class A Common Stock will be between $ and $ per share. For
information relating to the factors considered in determining the
initial public offering price, see "Underwriting."
After the Equity Offerings, Nationwide Corporation will own all of the
outstanding shares of Class B Common Stock, no par value (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), of the Company. The Class B Common Stock will represent %
and % ( % and % if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock
outstanding and the combined voting power of the stockholders of
the Company, respectively, and will be convertible on a share
for share basis into Class A Common Stock. Except with
respect to voting and conversion rights, the Class A Common
Stock is substantially identical to the Class B Common
Stock. See "Description of Capital Stock."
Shortly following the Equity Offerings, the Company expects to consummate
the public offering of $300 million aggregate principal amount of
Senior Notes due 2027 (the "Senior Notes"), and Nationwide
Financial Services Capital Trust, an affiliate of the Company
(the "NFS Trust"), expects to consummate the public
offering of Capital Securities with an aggregate
liquidation amount of $100 million. See "The
Fixed Income Offerings." Such offerings are
being made pursuant to separate
prospectuses.
Up to U.S. Shares are being reserved for sale at the initial public
offering price to employees, officers, directors and agents of the Company
and other members of the Nationwide Insurance Enterprise (as defined
herein).
Application is being made for listing of the Class A Common Stock on the New
York Stock Exchange (the "NYSE") under the symbol "NFS."
--------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE CLASS A COMMON STOCK, SEE "RISK FACTORS" ON PAGE 12
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
to Public Commissions Company(1)
--------- ------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (2)................................... $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $ .
(2) The Company has granted the U.S. Underwriters and the Managers an option,
exercisable by Credit Suisse First Boston Corporation for 30 days from the
date of this Prospectus, to purchase a maximum of additional shares of
Class A Common Stock to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ and Proceeds to Company will be
$ .
--------
The U.S. Shares are offered by the several U.S. Underwriters when, as and if
issued by the Company, delivered to and accepted by the U.S. Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that the U.S. Shares will be ready for delivery 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>
IN CONNECTION WITH THE EQUITY OFFERINGS, CREDIT SUISSE FIRST BOSTON
CORPORATION, ON BEHALF OF THE U.S. UNDERWRITERS AND THE MANAGERS, MAY OVER-
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF
THE CLASS A COMMON STOCK 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.
DURING THE EQUITY OFFERINGS, CERTAIN PERSONS AFFILIATED WITH PERSONS
PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN
ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE CLASS A COMMON STOCK PURSUANT TO
EXEMPTIONS FROM RULES 10B-6 AND 10B-7 UNDER THE SECURITIES EXCHANGE ACT OF
1934.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
----------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") pursuant to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, for the registration of the Class A Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Class A Common Stock offered hereby, reference is made to the
Registration Statement, including exhibits thereto and financial statements
and notes filed as a part thereof. Statements made in this Prospectus
concerning the contents of any contract or other document are not necessarily
complete. With respect to each such contract or other document filed with the
Commission as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto filed by the
Company with the Commission may be inspected at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the regional offices of the Commission located
at Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
As a result of the Equity Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish the holders of the Class A Common Stock with annual reports
containing, among other information, audited consolidated financial statements
reported upon by an independent public accounting firm and quarterly reports
for each of the first three quarters of each fiscal year containing unaudited
condensed consolidated financial information. The Company also intends to
furnish such other reports as it may determine or as may be required by law.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements
appearing elsewhere in this Prospectus. The Company was formed in November 1996
as a holding company for Nationwide Life Insurance Company and the other
companies within the Nationwide Insurance Enterprise that offer or distribute
long-term savings and retirement products. The information contained in this
Prospectus gives effect to the contribution by Nationwide Corporation to the
Company of Nationwide Life and such other companies 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 Dividends (as defined
herein). Except as otherwise indicated: (i) the information in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised and (ii)
all financial data and ratios presented herein have been prepared using
generally accepted accounting principles ("GAAP"). See "Glossary of Selected
Insurance Terms" for the definitions of certain insurance terms used herein.
As used in this Prospectus, the "Company" means Nationwide Financial
Services, Inc. and, unless the context otherwise requires, its subsidiaries;
"Nationwide Life" means Nationwide Life Insurance Company and, unless the
context otherwise requires, Nationwide Life and Annuity Insurance Company;
"Nationwide Corp." means Nationwide Corporation; "Nationwide Mutual" means
Nationwide Mutual Insurance Company; and "Nationwide Insurance Enterprise"
means Nationwide Mutual and its subsidiaries and affiliates. Nationwide(R) is a
registered service mark of Nationwide Mutual, and The Best of America(R) is a
registered service mark of Nationwide Life.
THE COMPANY
OVERVIEW
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers throughout the United States.
The Company offers variable annuities, fixed annuities and life insurance as
well as mutual funds and pension products and administrative services. By
developing and offering a wide variety of products, the Company believes that
it has positioned itself to compete effectively in various stock market and
interest rate environments. The Company markets its products through a broad
spectrum of wholesale and retail distribution channels, including financial
planners, pension plan administrators, securities firms, banks and Nationwide
Insurance Enterprise insurance agents.
The Company is one of the leaders in the development and sale of variable
annuities. For the 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 the Nationwide Insurance Enterprise. Over a 20-year period, the
Company added financial planners, pension plan
3
<PAGE>
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 has grown substantially in recent years as a result of its long-
term investment in developing the distribution channels necessary to reach its
target customers and the products required to meet the demands of these
customers. The Company believes its growth has been further enhanced by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the financial
markets, particularly the U.S. stock markets, in recent years. From 1991 to
1995, the Company's assets grew from $16.8 billion to $37.8 billion, a compound
annual growth rate of 22.5%. Asset growth during this period resulted from
sales of the Company's products as well as market appreciation of assets in the
Company's separate accounts and in its general account investment portfolio.
During the same period, the Company's net operating income (i.e., net income
excluding realized gains and losses on investments and cumulative effect of
accounting changes) 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. Such contracts
consist of single premium deferred annuities, flexible premium deferred
annuities and single premium immediate annuities. The Fixed Annuities segment
also includes the fixed option under the Company's variable annuity contracts,
which
4
<PAGE>
accounted for 69.0% of the Company's fixed annuity policy reserves as of
December 31, 1995. For the year ended December 31, 1995, the average crediting
rate on contracts (including the fixed option under the Company's variable
annuity contracts) in the Fixed Annuities segment was 6.58%. Substantially all
of the Company's crediting rates on its fixed annuity contracts are guaranteed
for a period not exceeding one year. See "Business--Product Segments--Fixed
Annuities." 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.
BUSINESS STRATEGIES
The Company's objective is to continue its record of profitable growth by
following the strategies set forth below:
Enhance the Company's Leading Position in the Market for Variable
Annuities. The Company believes that the variable annuity business is
attractive because it generates fee income and requires significantly less
capital support than fixed annuities and life insurance. The Company also
believes, based on the aging of the U.S. population and recent increases in
sales of retirement savings products, that variable annuities will continue to
experience high rates of industry sales growth and that the Company possesses
distinct competitive advantages that will allow it to continue to benefit from
this anticipated growth. Some of the Company's most important advantages
include its innovative product offerings and strong relationships with
independent, well-known fund managers. For example, the Company's The Best of
America IV and The Best of America--America's Vision individual variable
annuity contracts allow the customer to choose from 36 investment options,
including mutual funds managed by a variety of well-known fund managers and the
Company. In the aggregate, the Company's group variable annuity products offer
over 100 underlying investment options. The Company works closely with its
investment managers and product distributors to adapt the Company's products
and services to changes in the retail and institutional marketplace.
Capture a Growing Share of Sales in all Distribution Channels. The Company's
broad distribution system permits it to offer its products across a wide range
of markets and customers. The Company continually seeks to gain a larger share
of each of its distributor's sales by offering products that are attractive to
its distributors from both a financial perspective and in helping the
distributor build relationships with its customers. In addition to providing
new products to its distributors, the Company seeks to increase sales in each
of its existing distribution channels by cross-selling those products not
currently offered through such channel. The Company also seeks to add new
distributors to its existing channels and regularly evaluates possible new
distribution channels. While many of the Company's competitors employ a variety
of distribution channels, the Company believes that few of its competitors have
a developed distribution system that is as broad as the Company's and that this
distinguishing characteristic provides the Company with an important
competitive advantage.
Maintain a Diverse Product Portfolio. The Company offers a diverse mix of
variable annuity, fixed annuity, mutual fund and life insurance products. Based
on its experience, the Company believes that demand for, and financial results
of, certain of these products are sensitive to stock market and/or interest
rate environments, while some products are relatively insensitive to such
factors. The Company emphasizes the sale and development of variable annuities,
which tend to experience higher sales growth when interest rates are low, and
fixed annuities, which tend to experience higher sales growth when interest
rates are high. The Company also sells traditional life insurance products
which it believes provide it with a stable source of revenues throughout
changing market conditions. The Company's strategy is to rely on a variety of
products, each of which may perform differently in given stock market and
interest rate environments, so that the Company will be able to grow profitably
in a variety of such environments.
Emphasize Payroll 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
5
<PAGE>
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, 41.1% 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 and
retirement products will continue to emphasize nationally known brand names.
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,
representing % and % ( % and % if the Underwriters' over-allotment
option is exercised in full) of the total number of shares of Common Stock
outstanding and the combined voting power of the stockholders of the Company,
respectively. Nationwide Corp. is a subsidiary of Nationwide Mutual. Nationwide
Mutual and Nationwide Mutual Fire Insurance Company ("Nationwide Mutual Fire")
are mutual companies which are the controlling entities of the Nationwide
Insurance Enterprise. The Nationwide Insurance Enterprise is an affiliated
group of over 100 companies that offers a wide range of insurance and
investment products and services. Nationwide Mutual and Nationwide Mutual Fire
control the companies within the Nationwide Insurance Enterprise through a
variety of means, including security ownership, management contracts and common
directors. The Nationwide Insurance Enterprise had $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,"
"Recent History" and "Certain Relationships and Related Transactions."
THE FIXED INCOME OFFERINGS
Shortly following the Equity Offerings, the Company expects to consummate the
public offering of $300 million aggregate principal amount of Senior Notes (the
"Note Offering"), and the NFS Trust expects to consummate the public offering
of Capital Securities with an aggregate liquidation amount of $100 million (the
"Capital Securities Offering," and together with the Note Offering, the "Fixed
Income Offerings"). The consummation of the Equity Offerings is not conditioned
on the completion of the Fixed Income Offerings, and there can be no assurance
that either one or both of the Fixed Income Offerings will be consummated. See
"Use of Proceeds" and "The Fixed Income Offerings." The Fixed Income Offerings
are being made pursuant to separate prospectuses.
----------------
The Company's executive offices are located at One Nationwide Plaza,
Columbus, Ohio 43215, and its telephone number is (614) 249-7111.
6
<PAGE>
THE EQUITY OFFERINGS
<TABLE>
<CAPTION>
<C> <S>
Class A Common Stock:
U.S. Offering.................................................. shares
International Offering......................................... shares
Total.................................................... shares
Class A Common Stock outstanding after the Equity Offerings(1).. shares
Class B Common Stock outstanding after the Equity Offerings..... shares
Common Stock outstanding after the Equity Offerings(1).......... shares
Voting Rights................................................... On all matters submitted
to a vote of
stockholders, holders of
Class A Common Stock are
entitled to one vote per
share and holders of
Class B Common Stock are
entitled to ten votes
per share. See
"Description of Capital
Stock."
Use of Proceeds................................................. Of the $ million
estimated net proceeds
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 Fixed Income
Offerings to the capital
of Nationwide Life. See
"Use of Proceeds" and
"The Fixed Income
Offerings."
Proposed NYSE symbol............................................ NFS
Dividend policy................................................. The Company currently
intends to pay quarterly
cash dividends of $
per share, subject to
declaration by the
Company's Board of
Directors. The Company
anticipates that the
first dividend will be
declared at the end of
the second quarter and
paid during the third
quarter of 1997. There
can be no assurances,
however, that this
dividend or any
dividends will be paid
by the Company. See
"Dividend Policy."
</TABLE>
- --------
(1) Does not include million shares of Class A Common Stock reserved for
issuance under the Company's Long-Term Equity Compensation Plan. See
"Management--Long-Term Equity Compensation Plan."
RISK FACTORS
Potential purchasers of the shares of Class A Common Stock offered hereby
should carefully consider the risk factors set forth herein under "Risk
Factors" commencing on page 12, as well as other information contained in this
Prospectus.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data
for the Company. The consolidated income statement data set forth below for the
years ended December 31, 1992 through 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)............
</TABLE>
8
<PAGE>
- --------
(1) The Company has received capital contributions, paid dividends and paid a
distribution to an affiliate over the periods presented as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------
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)
Distribution to affili-
ate.................... -- -- -- (155.0) -- -- --
------------ ------------ ------- ------- -------- ------- -------
Net contributions....... $ (2.0) $ (8.5) $ (8.5) $ 44.0 $ 89.4 $ 8.9 $ 199.2
============ ============ ======= ======= ======== ======= =======
</TABLE>
The capital contributions, dividends and distribution to an affiliate and
the related increases and decreases to net investment income are recorded in
the Corporate and Other segment. The distribution to an affiliate occurred
on December 31, 1994 when 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 distribution 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
distribution to an affiliate 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
shareholder's 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
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary pro forma consolidated financial data for the Company set forth
below give effect to the Special Dividends, the Equity Offerings and the Fixed
Income Offerings as if they had been consummated at the beginning of the period
indicated or, in the case of the balance sheet data, as of the date indicated.
The summary pro forma financial data do not purport to reflect what the
Company's financial position or results of operations would actually have been
if the Special Dividends, the Equity Offerings and the Fixed Income Offerings
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 NINE MONTHS FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------------- ------------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
------------ -------------- --------- --------------
(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 income per common
share(2)................
Net operating income(3).. 160.3 141.6 184.8 159.9
Net operating income per
common share(2)(3)......
Return on average share-
holders' equity(3)(4)... -- 13.6% -- 13.2%
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------
ACTUAL PRO FORMA(1)
------------ --------------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
General account assets... $ 19,689.2 $ 19,601.2
Separate account assets.. 24,673.5 24,673.5
Total assets............. 44,362.7 44,274.7
Long-term debt........... -- 300.0
Capital Securities(5).... -- 100.0
Shareholders' equity..... 2,074.6 1,586.6
Debt/capital ratio(4).... N/A 16.0%
Debt and Capital
Securities/capital ra-
tio(4).................. N/A 21.4%
Book value per common
share(2)................
Adjusted book value per
common share(2)(4)......
</TABLE>
10
<PAGE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net proceeds
of $ million and the issuance of shares of Class A Common Stock),
(ii) the Special Dividends totalling $ million which will have been paid
by the Company prior to the completion of the Equity Offerings and (iii)
the Fixed Income Offerings (assuming net proceeds of $ million). Results
reflect the reduction of $5.7 million and $7.7 million of pre-tax net
investment income for the nine months ended September 30, 1996 and the year
ended December 31, 1995, respectively, as a result of the net decrease in
invested assets of the Company of $ million. The $300 million aggregate
principal amount of Senior Notes is assumed to bear interest at a rate of
7.5% per annum for the periods indicated. The $100 million aggregate
liquidation amount of the Capital Securities is assumed to bear a
distribution rate of 8.0% per annum for the periods indicated. There can be
no assurance that these will be the actual rates borne by such instruments.
An increase of 1.0% per annum on the assumed interest rate on the Senior
Notes and on the assumed distribution rate on the Capital Securities would
result in increases of $3.0 million and $4.0 million to interest expense
for the nine months ended September 30, 1996 and the year ended December
31, 1995, respectively. Interest expense includes amortization of deferred
issuance costs.
(2) Based on million shares outstanding.
(3) Excludes realized gains/(losses).
(4) Adjusted to exclude net unrealized gains and losses recorded in
shareholders' equity in accordance with SFAS 115.
(5) 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 NFS 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 NFS Trust's
obligations with respect to the Capital Securities are effectively fully
and unconditionally guaranteed by the Company.
11
<PAGE>
RISK FACTORS
Prospective purchasers of the shares of Class A Common Stock offered hereby
should consider carefully the risk factors set forth below, as well as the
other information set forth in this Prospectus.
CONTROL BY AND RELATIONSHIP WITH THE NATIONWIDE INSURANCE ENTERPRISE;
CONFLICTS OF INTEREST
Control by Nationwide Corp.
The Company has two classes of common stock with different voting rights
that enable Nationwide Corp. (the holder of all of the outstanding Class B
Common Stock) to control the Company. On all matters submitted to a
stockholder vote, each share of Class A Common Stock is entitled to one vote
per share and each share of Class B Common Stock is entitled to ten votes per
share. Both classes vote together as a single class on all matters, subject to
certain exceptions described under "Description of Capital Stock." Upon any
transfer of shares of Class B Common Stock to a person other than a member of
the Nationwide Insurance Enterprise, such shares will convert automatically
into shares of Class A Common Stock. See "Description of Capital Stock."
Upon completion of the Equity Offerings, Nationwide Corp. will own all of
the outstanding shares of Class B Common Stock representing % and % ( %
and % if the Underwriters' over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding and the combined voting
power of the stockholders of the Company, respectively. For so long as
Nationwide Corp. and its affiliates (excluding the Company and its
subsidiaries) continue beneficially to own shares of Common Stock representing
more than 50% of the combined voting power of the stockholders of the Company,
Nationwide Corp. will control the Company, will be able to elect all of the
Company's directors and will be able to determine the outcome of corporate
actions requiring stockholder approval, including, among other things, the
adoption of amendments of the Certificate of Incorporation of the Company (the
"Certificate"), the approval of mergers and sales of all or substantially all
of the Company's assets, the incurrence of indebtedness in excess of specified
amounts, the issuance of additional Common Stock or other equity securities
and, with certain specified exceptions, the payment of dividends with respect
to the Common Stock. Pursuant to an intercompany agreement (the "Intercompany
Agreement") among Nationwide Mutual, Nationwide Corp. and the Company, until
such time as Nationwide Corp. and its affiliates no longer own at least 50% of
the combined voting power of the outstanding voting stock of the Company, the
prior written consent of Nationwide Mutual is required in connection with
these and other corporate actions. See "Certain Relationships and Related
Transactions--New Agreements with the Nationwide Insurance Enterprise--
Intercompany Agreement."
Use of Nationwide Insurance Enterprise Insurance Agents
Nationwide Mutual has informed the Company that it currently intends that
the Company will be its principal affiliate in the U.S. offering variable
annuity, fixed annuity and individual universal, variable and traditional life
insurance products. In the Intercompany Agreement, Nationwide Mutual has
agreed that the Company has the exclusive right, subject to certain limited
exceptions, to distribute such products through Nationwide Insurance
Enterprise insurance agents for at least five years following the Equity
Offerings. Thereafter, the Intercompany Agreement provides that Nationwide
Mutual will have the option to terminate such right on one year's notice if
Nationwide Corp. and its affiliates no longer own at least 50% of the combined
voting power of the outstanding voting stock of the Company. The termination
of such right could have an adverse effect on the Company's ability to
distribute certain of its life insurance products. In 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."
Deconsolidation and Control of Tax Matters
Beneficial ownership of at least 80% of the combined voting power and value
of the outstanding capital stock of the Company is required in order for
Nationwide Mutual to continue to include the Company in its
12
<PAGE>
consolidated group for federal income tax purposes. Either a sale by
Nationwide Corp. of some of its shares of Class B Common Stock to persons
other than its affiliates or the Company's issuance of additional shares of
voting stock to persons other than Nationwide Corp. or its affiliates (except
the Company and its subsidiaries) could cause Nationwide Corp.'s ownership of
the combined voting power and value of the outstanding capital stock of the
Company to fall below 80%, resulting in the loss of the ability of the Company
and its domestic subsidiaries to join with Nationwide Mutual and its domestic
subsidiaries in the filing of a consolidated federal income tax return. Under
applicable law, each member of Nationwide Mutual's consolidated tax group,
which includes the Company and its subsidiaries, is jointly and severally
liable for the federal income tax liability of each other member of the group
and is also jointly and severally liable for pension and benefit funding and
termination liabilities of other group members, and certain benefit plan
taxes. If the Company were no longer included in Nationwide Mutual's
consolidated tax group for federal tax purposes, there is no assurance that
the Company's tax position would be as favorable as it is at present.
Additionally, deconsolidation would result in the payment by the Company of
approximately $54.0 million of deferred income taxes. The Company has recorded
this amount as a deferred tax liability and therefore the payment would have
no impact on net income or shareholders' equity. However, the payment would
result in a $54.0 million decrease in Nationwide Life's statutory surplus. See
"Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--Tax Sharing Agreement."
By virtue of its control of the Company and the terms of a tax sharing
agreement (the "Tax Sharing Agreement") among Nationwide Mutual and, among
others, the Company, Nationwide Mutual effectively will control all of the
Company's tax decisions. Under the Tax Sharing Agreement, Nationwide Mutual
will have sole authority to respond to and conduct all tax proceedings
(including tax audits) relating to the Company, to file all returns on behalf
of the Company and to determine the amount of the Company's liability to (or
entitlement to payment from) Nationwide Corp. under the Tax Sharing Agreement.
This arrangement may result in conflicts of interest between the Company and
Nationwide Mutual. For example, under the Tax Sharing Agreement, Nationwide
Mutual may choose to contest, compromise or settle any adjustment or
deficiency proposed by the relevant tax authority in a manner that may be
beneficial to Nationwide Mutual and detrimental to the Company. Under the Tax
Sharing Agreement, however, Nationwide Mutual is obligated to act in good
faith with regard to all persons included in the applicable returns. See
"Certain Relationships and Related Transactions--New Agreements with the
Nationwide Insurance Enterprise--Tax Sharing Agreement."
Use of "Nationwide" Name and Certain Other Service Marks
Pursuant to the Intercompany Agreement, among other things, Nationwide
Mutual has granted to the Company and certain of its subsidiaries a non-
exclusive, non-assignable, revocable license to use the "Nationwide" name and
certain other service marks solely in connection with the Company's annuity,
pension and life insurance businesses and activities related to such
businesses. The Intercompany Agreement provides that, subject to Nationwide
Mutual's right to revoke such license under certain circumstances, such
license will remain in effect for at least five years following the Equity
Offerings. Thereafter, the Intercompany Agreement provides that, subject to
certain exceptions, Nationwide Mutual will have the option to revoke such
license on one year's notice if Nationwide Corp. and its affiliates no longer
own at least 50% of the combined voting power of the outstanding voting stock
of the Company. Upon the revocation of such license, the Company and any of
its subsidiaries shall change their names to exclude the word "Nationwide" and
shall discontinue the use of the other licensed service marks. The revocation
of such license could have a material adverse effect on the Company's ability
to conduct its business. See "Certain Relationships and Related Transactions--
New Agreements with the Nationwide Insurance Enterprise--Intercompany
Agreement--License to Use Nationwide Name and Service Marks." Nationwide Life
owns "The Best of America" service mark and does not license such mark from
Nationwide Mutual.
Common Directors and Officers
The Company's Board of Directors currently consists of eleven members, seven
of whom serve concurrently on the boards of directors of other companies
within the Nationwide Insurance Enterprise. In addition, a
13
<PAGE>
significant number of officers of the Company also serve as officers of
Nationwide Mutual or other companies within the Nationwide Insurance
Enterprise. Service as a director or officer of both the Company and another
company (other than a subsidiary of the Company) within the Nationwide
Insurance Enterprise could create or appear to create potential conflicts of
interest when the director or officer is faced with decisions that could have
different implications for the Company and such other company. A conflict of
interest could also exist with respect to allocation of the time and attention
of persons who are officers of both the Company and one or more other
companies within the Nationwide Insurance Enterprise. Under Delaware law,
directors and officers have a fiduciary duty to act in good faith and in what
they believe to be in the best interests of the corporation and its
stockholders. Such duties include the duty to refrain from impermissible self-
dealing and to deal fairly with respect to transactions in which such
directors or officers, or other companies with which they are affiliated, have
an interest. See "--Allocation of Corporate Opportunities."
Intercompany Transactions
The Company has engaged in various transactions, and is party to various
arrangements, with members of the Nationwide Insurance Enterprise, certain of
which will continue after the consummation of the Equity Offerings. 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, arrangements and agreements between the Company's
insurance subsidiaries and other members of the Nationwide Insurance
Enterprise must be fair and equitable and may be subject to the approval of
the Superintendent of Insurance of the State of Ohio. Finally, the Company's
credit facility requires that any transaction between the Company and any of
its affiliates be on an arm's-length basis on terms at least as favorable to
the Company as could have been obtained from a third party which is not an
affiliate. See "Business--Regulation," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions."
Allocation of Corporate Opportunities
Nationwide Mutual has informed the Company that it currently intends that
the Company will be its principal affiliate in the U.S. offering variable
annuity, fixed annuity and individual universal, variable and traditional life
insurance products. However, conflicts may exist between the Company and other
members of the Nationwide Insurance Enterprise with respect to the allocation
of corporate opportunities among the Company and such other members. The
Certificate provides that members of the Nationwide Insurance Enterprise have
no duty to refrain from engaging in the same or similar lines of business as
the Company. The Certificate further provides that in the event a member of
the Nationwide Insurance Enterprise or a director or officer of the Company
who is also a director or officer of another member of the Nationwide
Insurance Enterprise acquires knowledge of a potential transaction or other
matter that may constitute a corporate opportunity of either or both the
Company and another member of the Nationwide Insurance Enterprise, such member
of the Nationwide Insurance Enterprise, officer or director may allocate such
opportunity among the Company and the other members of the Nationwide
Insurance Enterprise as such member, officer or director deems appropriate
under the circumstances. The Certificate specifies that none of the foregoing
members, officers or directors will be liable to the Company or any
stockholders of the Company for breach of any fiduciary duty by reason of such
action. These provisions may limit the liability of such persons under
Delaware law. See "Description of Capital Stock--Certain Certificate and Bylaw
Provisions--Certain Provisions Relating to Corporate Opportunities."
INTEREST RATE RISK
The Company's Fixed Annuities segment is subject to several inherent risks
arising from movements in interest rates. Interest rate changes can cause
compression of the Company's net spread between interest earned on investments
and interest credited on customer deposits, thereby adversely affecting the
Company's results.
14
<PAGE>
Interest rate changes can also produce an unanticipated increase in surrenders
and withdrawals of the Company's fixed annuity products which may force the
Company to sell investment assets at a loss in order to fund such surrenders
and withdrawals.
The Company will experience spread compression when it is unable or chooses
not to maintain the same margin between its investment earnings and its
crediting rates. When interest rates rise, the Company may not be able to
replace the assets in its investment portfolio with higher-yielding assets
that will be necessary to fund the higher crediting rates necessary to keep
the products in its Fixed Annuities segment competitive. As a result, the
Company may experience either a decrease in sales and an increase in
surrenders and withdrawals (as described below) if it chooses to maintain its
spread by not raising its crediting rates, or spread compression if it does
increase its crediting rates. Conversely, when interest rates fall, the
Company would have to reinvest the cash received from its investments (i.e.,
interest and payments of principal upon maturity or redemption) in the lower-
yielding instruments then available. If the Company were unable (i.e., due to
guaranteed minimum or fixed crediting rates or limitations on the frequency of
crediting rate resets) or chose not to reduce the crediting rate on the
products in its Fixed Annuities segment or acquire relatively higher-risk
securities yielding higher rates of return, spread compression would occur.
If, as a result of interest rate increases, the Company were unable or chose
not to raise its crediting rates to keep them competitive, the Company may
experience an increase in surrenders and withdrawals. If the Company lacked
sufficient liquidity, the Company might have to sell investment securities to
fund associated surrender and withdrawal payments. Because the value of such
securities would likely have decreased in response to the increase in interest
rates, the Company would realize a loss on the sales. Although certain of the
Company's products contain market value adjustment features which approximate
and transfer such loss to the customer if the selected time horizon for the
fixed return investment is terminated prior to maturity, there can be no
assurance that the Company would be fully insulated from realizing any losses
on sales of its securities. In addition, regardless of whether the Company
realizes an investment loss, the surrenders would produce a decrease in
invested assets, with an adverse effect on future earnings therefrom. Finally,
premature surrenders may also cause the Company to accelerate amortization of
deferred policy acquisition costs and value of insurance in force which would
otherwise be amortized over a longer period, but the impact of such
acceleration generally would be offset to some extent by surrender charge
fees.
INVESTMENT PORTFOLIO EXPOSURE
The Company's general account investment portfolio consists primarily of
investment grade fixed maturity securities. The fair value of these and the
Company's other general account invested assets fluctuates depending upon
general economic and market conditions and the interest rate environment. In
general, the market value of the Company's general account fixed maturity
securities portfolio increases or decreases in inverse relationship with
fluctuations in interest rates, and the rate of change of the Company's net
investment income increases or decreases in direct relationship with interest
rate changes.
Mortgage backed securities ("MBSs"), including collateralized mortgage
obligations ("CMOs"), are subject to prepayment risks that vary with, among
other things, interest rates. Such securities accounted for approximately 30%
of the carrying value of the Company's general account fixed maturity
securities as of September 30, 1996. During periods of declining interest
rates, MBSs generally prepay faster as the underlying mortgages are prepaid
and refinanced by the borrowers in order to take advantage of the lower rates.
MBSs that have an amortized cost that is greater than par (i.e., purchased at
a premium) may incur a reduction in yield or a loss as a result of such
prepayments. In addition, during such periods, the Company will generally be
unable to reinvest the proceeds of any such prepayment at comparable yields.
Conversely, during periods of rising interest rates, prepayments generally
slow. MBSs that have an amortized value that is less than par (i.e., purchased
at a discount) may incur a decrease in yield or a loss as a result of slower
prepayments.
The Company attempts to mitigate the negative impact of interest rate
changes through asset/liability management, including investing in non-
callable bonds where practical and purchasing private placement bonds
15
<PAGE>
and entering into mortgage loan contracts which provide prepayment protection.
There can be no assurance, however, that management will be able to manage
successfully the negative impact of interest rate changes. See "Business--
Investments." Additionally, the Company may, from time to time, for business,
regulatory or other reasons, elect or be required to sell certain of its
general account invested assets at a time when their fair values are less than
their original cost, resulting in realized capital losses, which would reduce
net income.
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
As an insurance holding company, the Company's ability to meet debt service
obligations and pay operating expenses and dividends depends primarily on the
receipt of sufficient funds from its 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 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 stockholder dividends in the future. The Company can give no
assurance, however, that any dividends will be declared or paid by Nationwide
Life. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--
Regulation--Regulation of Dividends and Other Payments from Insurance
Subsidiaries."
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. The Company cannot predict the effect
that any proposed or future legislation may have on the financial condition or
results of operations of the Company and its insurance subsidiaries. See
"Business--Regulation."
COMPETITION
The Company competes with a large number of other insurers as well as non-
insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of which have greater financial resources, offer
alternative products and, with respect to other insurers, have higher ratings
than the Company. The Company believes that competition in the Company's lines
of business is based on price, product features, commission structure,
perceived financial strength, claims-paying ratings, service and name
recognition. National banks, with their preexisting customer bases for
financial services products, may pose increasing competition in the future to
insurers who sell annuities, including the Company, as a result of the U.S.
Supreme Court's 1994 decision in 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.
16
<PAGE>
Currently, the Bank Holding Company Act restricts banks from being affiliated
with insurance companies. None of these proposals has yet been enacted, and it
is not possible to predict whether any of these proposals will be enacted, or,
if enacted, their potential effect on the Company. See "Business--
Competition."
RATINGS
Ratings 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, "Aa2" (Excellent) by Moody's Investors
Services, Inc. ("Moody's") and "AA+" (Excellent) by Standard & Poor's
Corporation ("S&P"). Such ratings reflect the rating agency's opinion of
Nationwide Life's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations directed toward
the protection of investors. Such factors are of concern to policyholders,
agents and intermediaries. Such ratings should not be relied upon when making
a decision to invest in the Class A Common Stock. See "Business--Ratings."
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. See "Business--Legal Proceedings."
FEDERAL INCOME TAX LEGISLATION
Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on the accumulated tax-
deferred earnings when such earnings are actually paid. Congress has, from
time to time, considered possible legislation that would eliminate the
deferral of taxation on the accretion of value within certain annuities and
life insurance products. The 1994 United States Supreme Court ruling in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company that
annuities are not insurance for purposes of the National Bank Act may cause
Congress to consider legislation that would eliminate such tax deferral at
least for certain annuities. Other possible legislation, including a
simplified "flat tax" income tax structure with an exemption from taxation for
investment income, could also adversely affect purchases of annuities and life
insurance if such legislation were to be enacted. There can be no assurance as
to whether legislation will be enacted which would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
See "Business--Regulation--Potential Tax Legislation."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate and Bylaws of the Company (the "Bylaws") contain certain
provisions that could impede any merger, consolidation, takeover or other
business combination involving the Company or discourage a potential acquiror
from making a tender offer or otherwise attempting to obtain control of the
Company. Provisions contained in the Certificate, among other things, (i)
divide the Board of Directors of the Company into three classes, which will
serve for staggered three-year terms, (ii) provide that a director of the
Company may be removed only for cause and only by the affirmative vote of
holders of outstanding securities of the Company which represent a majority of
the voting power of all outstanding shares of capital stock of the Company
eligible to vote on such matters, (iii) provide that only the Board of
Directors of the Company, the
17
<PAGE>
Chairman of the Board of Directors, the Chairman and Chief Executive Officer--
Nationwide Insurance Enterprise or the President and Chief Operating Officer
of the Company may call special meetings of the stockholders, (iv) eliminate
the ability of the stockholders to take any action without a meeting and (v)
provide that the stockholders may amend or repeal any of the foregoing
provisions of the Certificate and certain provisions of the Bylaws only by a
vote of holders of outstanding securities of the Company which represent two-
thirds of the combined voting power of the outstanding capital stock of the
Company eligible to vote on such matters. In addition, the Bylaws establish
certain advance notice procedures for nomination of candidates for election as
directors and for stockholders' proposals to be considered at stockholders'
meetings. Nationwide Corp., as owner of approximately % of the combined
voting power of all classes of capital stock of the Company, could sell or
otherwise dispose of a substantial portion of its Common Stock holdings and
still be able to block any merger, consolidation, takeover or other business
combination. In addition, the Company is subject to the provisions of Section
203 ("Section 203") of the General Corporation Law of the State of Delaware
(the "DGCL"). See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of Class A Common Stock outstanding as a result of the
Equity Offerings will be freely tradeable without restriction or further
registration under the Securities Act by persons other than affiliates of the
Company. The shares of Class B Common Stock held by Nationwide Corp. are
deemed "restricted securities" as defined in Rule 144 under the Securities Act
and may not be resold in the absence of registration under the Securities Act
or pursuant to an exemption from such registration, including the exemptions
contained in Rule 144 under the Securities Act. 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." There can be no assurance that holders of such
"restricted securities" will not seek to sell their shares of Common Stock
following the Equity Offerings. Sales of substantial amounts of Common Stock,
or the perception that such sales could occur, could adversely affect
prevailing market prices for the Class A Common Stock. 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, except for
shares of Class A Common Stock being reserved for sale at the initial public
offering price to the employees, directors and agents of the Company and the
Nationwide Insurance Enterprise as described in this Prospectus. See
"Underwriting" and "Shares Eligible for Future Sale."
DILUTION
Purchasers of the shares of Class A Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value
of their investment. See "Dilution."
NO PRIOR MARKET FOR COMMON STOCK
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock and there can be no assurance that an active trading market
will develop and continue upon completion of the Equity Offerings or that the
market price for the Class A Common Stock will not decline below the initial
public offering price. The initial public offering price was determined
through negotiations between the Company and Credit Suisse First Boston
Corporation, on behalf of the U.S. Underwriters and the Managers, and may not
be indicative of the market price for the Class A Common Stock following the
Equity Offerings. See "Underwriting."
18
<PAGE>
USE OF PROCEEDS
Based upon an assumed initial public offering price of $ per share, the
net proceeds to the Company from the sale of the Class A Common Stock in 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 ($ million if the Underwriters'
over-allotment option is exercised in full). The net proceeds to the Company
from the Fixed Income Offerings (after deduction of underwriting discounts and
commissions or, with respect to the Capital Securities Offering, similar
amounts, and estimated offering expenses payable by the Company in connection
therewith) are estimated to be $ . Of the net proceeds from the Equity
Offerings, the Company expects to contribute approximately $ million to the
capital of Nationwide Life. The Company will retain the balance of such net
proceeds for general corporate purposes, which amount will be invested in
short-term interest-bearing securities. The Company expects to contribute all
of the net proceeds from the Fixed Income Offerings 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. The historical
financial information contained in this Prospectus gives effect to the
following transactions that were or will be effected in anticipation of the
Equity Offerings: (i) on January 1, 1997, Nationwide Life paid a dividend to
Nationwide Corp. consisting of the stock of certain of its subsidiaries that
do not operate in the long-term savings and retirement market; (ii) effective
January 1, 1996, Nationwide Life reinsured all of its accident and health and
group life insurance business to other members of the Nationwide Insurance
Enterprise; and (iii) prior to the consummation of the Equity Offerings,
Nationwide Corp. will contribute to the Company all of the outstanding capital
stock of Nationwide Life and the other companies within the Nationwide
Insurance Enterprise that offer or distribute long-term savings and retirement
products.
On December 31, 1996, Nationwide Life paid a $50.0 million cash dividend to
Nationwide Corp. (the "1996 Cash Dividend"). In addition, after the
contribution by Nationwide Corp. of the capital stock of Nationwide Life to
the Company but prior to the consummation of the Equity Offerings, Nationwide
Life will dividend to the Company, and the Company will subsequently dividend
to Nationwide Corp., securities having an aggregate market value of $
million (together with the 1996 Cash Dividend, the "Special Dividends"). The
historical financial information contained in this Prospectus does not give
effect to the Special Dividends, except where indicated in pro forma
presentations. See "Certain Relationships and Related Transactions--Existing
Arrangements with the Nationwide Insurance Enterprise--Organization of the
Company" and "--Modified Coinsurance Agreements."
Following the Equity Offerings, Nationwide Corp. will be the controlling
stockholder of the Company. Upon completion of the Equity Offerings,
Nationwide Corp. will own all of the outstanding shares of the Class B Common
Stock, representing % and % ( % and % if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of Common
Stock outstanding and the combined voting power of the stockholders of the
Company. Nationwide Corp. is a subsidiary of Nationwide Mutual. Nationwide
Mutual and Nationwide Mutual Fire are mutual companies which are the
controlling entities of the Nationwide Insurance Enterprise. The Nationwide
Insurance Enterprise is an affiliated group of over 100 companies that offers
a wide range of insurance and investment products and services. Nationwide
Mutual and Nationwide Mutual Fire control the companies within the Nationwide
Insurance Enterprise through a variety of means, including security ownership,
management contracts and common directors. The Nationwide Insurance Enterprise
had $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."
19
<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 Special Dividends, (iii) the pro forma
capitalization of the Company after giving effect to the Special Dividends and
the Equity Offerings (assuming net proceeds of $ million and issuance of
shares of Class A Common Stock), (iv) the pro forma capitalization of the
Company after giving effect to the Special Dividends, the Equity Offerings and
the Note Offering, (v) the pro forma capitalization of the Company after
giving effect to the Special Dividends, the Equity Offerings and the Capital
Securities Offering and (vi) the pro forma capitalization of the Company after
giving effect to the Special Dividends, the Equity Offerings and the Fixed
Income Offerings. 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 PRO FORMA
PRO FORMA FOR THE FOR THE
FOR THE SPECIAL SPECIAL
PRO FORMA SPECIAL DIVIDENDS, DIVIDENDS,
FOR THE DIVIDENDS, THE EQUITY THE EQUITY
SPECIAL THE EQUITY OFFERINGS OFFERINGS
PRO FORMA DIVIDENDS OFFERINGS AND THE AND THE
FOR THE AND THE AND THE CAPITAL FIXED
SPECIAL EQUITY NOTE SECURITIES INCOME
ACTUAL DIVIDENDS OFFERINGS OFFERING OFFERING OFFERINGS
-------- --------- --------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <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.............. 602.5 602.5 1,014.5 1,014.5 1,014.5 1,014.5
Unrealized gains on
securities available-
for-sale, net........ 114.5 114.5 114.5 114.5 114.5 114.5
Retained earnings..... 1,357.6 457.6 457.6 457.6 457.6 457.6
-------- -------- -------- -------- -------- --------
Total shareholders'
equity............... 2,074.6 1,174.6 1,586.6 1,586.6 1,586.6 1,586.6
-------- -------- -------- -------- -------- --------
Total capitalization.. $2,074.6 $1,174.6 $1,586.6 $1,886.6 $1,686.6 $1,986.6
======== ======== ======== ======== ======== ========
Debt/capital ratio(2)... 0% 0% 0% 16.9% 0% 16.0%
Debt and Capital
Securities/capital ra-
tio(2)................. 0% 0% 0% 16.9% 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 NFS 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 NFS 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.
20
<PAGE>
DIVIDEND POLICY
The Company currently intends to pay quarterly cash dividends of $ per
share. The Company anticipates that the first dividend will be declared in the
second quarter and paid in the third quarter of 1997. The payment of dividends
is subject to the discretion of the Company's Board of Directors and will
depend upon general business conditions, the effect on claims paying and debt
ratings, legal restrictions on the payment of dividends by its insurance
subsidiaries and other factors the Board of Directors deems relevant.
Additionally, until Nationwide Mutual and its affiliates no longer own at
least 50% of the combined voting power of the outstanding voting stock of the
Company, Nationwide Mutual's prior approval is required for payment by the
Company of dividends exceeding specified amounts. See "Certain Relationships
and Related Transactions--New Agreements with the Nationwide Insurance
Enterprise--Intercompany Agreement." There is no requirement or assurance that
any dividends will be paid. For a discussion of the Company's cash sources and
needs, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
As an insurance holding company, the Company depends primarily on dividends
and other permitted payments from its principal operating subsidiary,
Nationwide Life, to pay cash dividends to stockholders as well as to meet debt
service requirements and pay operating expenses. Payment of dividends and
other payments by Nationwide Life are subject to restrictions contained in the
Ohio insurance laws and may be subject to restrictions contained in the New
York insurance laws. The Company will retain approximately $ million of the
net proceeds of the Equity Offerings, which will be invested in short-term
interest-bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business--Regulation--Regulation of Dividends and Other Payments
from Insurance Subsidiaries" and "Use of Proceeds."
21
<PAGE>
DILUTION
As of September 30, 1996, the pro forma net tangible book value of the
Company, after giving effect to the Special Dividends totalling $ million,
was $ million, or $ per share of Common Stock. Net tangible book value
per share of Common Stock represents the amount of the Company's total
tangible assets (total assets less deferred policy acquisition costs) less
total liabilities divided by the number of shares of Common Stock outstanding.
After giving effect to the Special Dividends and the sale by the Company of
shares of Class A Common Stock in the Equity Offerings (at an assumed initial
public offering price of $ per share and after deduction of underwriting
discounts and commissions and estimated offering expenses) and the application
by the Company of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
$ million, or $ per share of Common Stock. This amount represents an
immediate increase of $ per share to the existing stockholder and an
immediate dilution in net tangible book value of $ per share to new
investors purchasing shares of Class A Common Stock offered hereby at the
assumed initial public offering price. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Class A Common
Stock........................................................... $
Pro forma net tangible book value per share before the Equity
Offerings..................................................... $
Increase attributable to the Equity Offerings..................
------
Pro forma net tangible book value per share after the Equity Of-
ferings.........................................................
------
Dilution per share to new investors.............................. $
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1996, after giving effect to the sale by the Company of shares of Class A
Common Stock in the Equity Offerings at an assumed initial public offering
price of $ per share (before deducting estimated underwriting discounts and
commissions), the difference between the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by the existing stockholder and the new investors.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
---------------- -------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder................... (1) % $ % $
New investors..........................
--- ------ ---- ------
Total................................ 100.0% $ 100.0%
=== ====== ==== ======
</TABLE>
- --------
(1) Consists of shares of Class B Common Stock. See "Description of Capital
Stock."
22
<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>
23
<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)...........
</TABLE>
- --------
(1) The Company has received capital contributions, paid dividends and paid a
distribution to an affiliate 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)
Distribution to affili-
ate.................... -- -- -- (155.0) -- -- --
------ ------ ----- ------ ------ ----- ------
Net contributions....... $ (2.0) $ (8.5) $(8.5) $ 44.0 $ 89.4 $ 8.9 $199.2
====== ====== ===== ====== ====== ===== ======
</TABLE>
The capital contributions, dividends and distribution to an affiliate and
the related increases and decreases to net investment income are recorded in
the Corporate and Other segment. The distribution to an affiliate occurred
on December 31, 1994 when the Company transferred $155.0 million of invested
assets from the Corporate and Other segment for the purchase of Employers
Life. The distribution 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 distribution to an affiliate 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.
24
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The pro forma consolidated financial data for the Company set forth in the
tables below give effect to (i) the Special Dividends, the Equity Offerings
and the Fixed Income Offerings, (ii) the Special Dividends and the Equity
Offerings, (iii) the Special Dividends, the Equity Offerings and the Note
Offering and (iv) the Special Dividends, the Equity Offerings and the Capital
Securities Offering. The tables below are presented as if each of the Special
Dividends, the Equity Offerings and the Fixed Income Offerings, as applicable,
had been consummated at the beginning of the period indicated or, in the case
of the balance sheet data, as of the date indicated. The pro forma financial
data do not purport to reflect what the Company's financial position or
results of operations would actually have been if any or all of the Equity
Offerings, the Special Dividends and the Fixed Income Offerings had in fact
occurred on such dates nor should they be taken as indicative of the future
results of operations of the Company. The pro forma consolidated financial
information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto and the other financial
information pertaining to the Company included elsewhere herein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PRO FORMA FOR THE SPECIAL DIVIDENDS, THE EQUITY OFFERINGS AND THE FIXED INCOME
OFFERINGS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------ ------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1) ACTUAL ADJUSTMENTS PRO FORMA(1)
-------- ----------- ------------ -------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 283.3 $ -- $ 283.3 $ 286.6 $ -- $ 286.6
Life insurance premi-
ums................... 151.0 -- 151.0 199.1 -- 199.1
Net investment income.. 1,009.6 (5.7)(2) 1,003.9 1,294.0 (7.7)(2) 1,286.3
Realized gains/(losses)
on investments........ 4.3 -- 4.3 (1.7) -- (1.7)
Other income........... 52.7 -- 52.7 59.0 -- 59.0
-------- ------ -------- -------- ------- --------
Total revenues........ 1,500.9 (5.7) 1,495.2 1,837.0 (7.7) 1,829.3
-------- ------ -------- -------- ------- --------
Benefits and Expenses:
Benefits and claims.... 867.6 -- 867.6 1,115.5 -- 1,115.5
Policyholder divi-
dends................. 31.4 -- 31.4 39.9 -- 39.9
Amortization of de-
ferred policy acquisi-
tion costs............ 96.8 -- 96.8 82.7 -- 82.7
Operating expenses..... 252.2 -- 252.2 317.7 -- 317.7
Interest expense (2)... -- 23.0 (3) 23.0 -- 30.6 (3) 30.6
-------- ------ -------- -------- ------- --------
Total benefits and ex-
penses............... 1,248.0 23.0 1,271.0 1,555.8 30.6 1,586.4
-------- ------ -------- -------- ------- --------
Income before income
taxes.................. 252.9 (28.7) 224.2 281.2 (38.3) 242.9
Provision for income
taxes.................. 88.7 (10.0)(4) 78.7 96.3 (13.4)(4) 82.9
-------- ------ -------- -------- ------- --------
Net income.............. $ 164.2 $(18.7) $ 145.5 $ 184.9 $ (24.9) $ 160.0
======== ====== ======== ======== ======= ========
OTHER DATA:
Net operating income
(5).................... $ 160.3 $(18.7) $ 141.6 $ 184.8 $ (24.9) $ 159.9
Realized gains/(losses)
on investments, net of
tax.................... 3.9 -- 3.9 0.1 -- 0.1
-------- ------ -------- -------- ------- --------
Net income.............. $ 164.2 $(18.7) $ 145.5 $ 184.9 $ (24.9) $ 160.0
======== ====== ======== ======== ======= ========
Net income per common
share.................. $ (6) $ (6)
======== ========
Operating return on av-
erage shareholders' eq-
uity................... 11.4% 13.6% 10.9% 13.2%
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
General account assets.................... $19,689.2 $(88.0)(7) $19,601.2
Separate account assets................... 24,673.5 -- 24,673.5
Total assets.............................. 44,362.7 (88.0) 44,274.7
Long-term debt............................ -- 300.0 (8) 300.0
Capital Securities........................ -- 100.0 (9) 100.0
Shareholders' equity...................... 2,074.6 (488.0)(10) 1,586.6
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $ million and the issuance of shares of Class A
Common Stock), (ii) the Special Dividends totalling $ million which
will have been paid by the Company prior to the completion of the Equity
Offerings and (iii) the Fixed Income Offerings (assuming net proceeds of
$ million).
(2) Reduction in net investment income at 7.5% from the Special Dividends,
partially offset by net investment income at 7.5% on the proceeds from the
Equity Offerings and the Fixed Income Offerings.
(3) The $300 million aggregate principal amount of Senior Notes is assumed to
bear interest at a rate of 7.5% per annum for the periods indicated. The
$100 million aggregate liquidation amount of the Capital Securities is
assumed to bear a distribution rate of 8.0% per annum for the periods
indicated. There can be no assurance that these will be the actual rates
borne by such instruments. An increase of 1.0% per annum on the assumed
interest rate on the Senior Notes and on the assumed distribution rate on
the Capital Securities would result in increases of $3.0 million and $4.0
million to interest expense for the nine months ended September 30, 1996
and the year ended December 31, 1995, respectively. Interest expense
includes amortization of deferred issuance costs.
(4) Income tax effect of the pro forma adjustments at the statutory rate.
(5) Net operating income per share pro forma for the Special Dividends, the
Equity Offerings and the Fixed Income Offerings is $ and $ for the
nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively.
(6) Based on million shares outstanding.
(7) The excess of the Special Dividends over the proceeds from the Equity
Offerings and the Fixed Income Offerings. Also included is capitalized
issuance costs.
(8) Represents aggregate principal amount of Senior Notes.
(9) 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 NFS 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 NFS Trust's
obligations with respect to the Capital Securities are effectively fully
and unconditionally guaranteed by the Company.
(10) The excess of the Special Dividends over the proceeds from the Equity
Offerings.
26
<PAGE>
PRO FORMA FOR THE SPECIAL DIVIDENDS AND THE EQUITY OFFERINGS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------ ------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1) ACTUAL ADJUSTMENTS PRO FORMA(1)
-------- ----------- ------------ -------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues:
Policy charges......... $ 283.3 $ -- $ 283.3 $ 286.6 $ -- $ 286.6
Life insurance premi-
ums................... 151.0 -- 151.0 199.1 -- 199.1
Net investment income.. 1,009.6 (27.5)(2) 982.1 1,294.0 (36.6)(2) 1,257.4
Realized gains/(losses)
on investments........ 4.3 -- 4.3 (1.7) -- (1.7)
Other income........... 52.7 -- 52.7 59.0 -- 59.0
-------- ------ -------- -------- ------ --------
Total revenues........ 1,500.9 (27.5) 1,473.4 1,837.0 (36.6) 1,800.4
-------- ------ -------- -------- ------ --------
Benefits and Expenses:
Benefits and claims.... 867.6 -- 867.6 1,115.5 -- 1,115.5
Policyholder divi-
dends................. 31.4 -- 31.4 39.9 -- 39.9
Amortization of de-
ferred policy acquisi-
tion costs............ 96.8 -- 96.8 82.7 -- 82.7
Operating expenses..... 252.2 -- 252.2 317.7 -- 317.7
Interest expense....... -- -- -- -- -- --
-------- ------ -------- -------- ------ --------
Total benefits and ex-
penses............... 1,248.0 -- 1,248.0 1,555.8 -- 1,555.8
-------- ------ -------- -------- ------ --------
Income before income
taxes.................. 252.9 (27.5) 225.4 281.2 (36.6) 244.6
Provision for income
taxes.................. 88.7 (9.6)(3) 79.1 96.3 (12.8)(3) 83.5
-------- ------ -------- -------- ------ --------
Net income.............. $ 164.2 $(17.9) $ 146.3 $ 184.9 $(23.8) $ 161.1
======== ====== ======== ======== ====== ========
OTHER DATA:
Net operating income
(4).................... $ 160.3 $(17.9) $ 142.4 $ 184.8 $(23.8) $ 161.0
Realized gains/(losses)
on investments, net of
tax.................... 3.9 -- 3.9 0.1 -- 0.1
-------- ------ -------- -------- ------ --------
Net income.............. $ 164.2 $(17.9) $ 146.3 $ 184.9 $(23.8) $ 161.1
======== ====== ======== ======== ====== ========
Net income per common
share.................. $ (5) $ (5)
======== ========
Operating return on
average shareholders'
equity................. 11.4% 13.7% 10.9% 13.3%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
General account assets................ $19,689.2 $(488.0)(6) $19,201.2
Separate account assets............... 24,673.5 -- 24,673.5
Total assets.......................... 44,362.7 (488.0) 43,874.7
Long-term debt........................ -- -- --
Shareholders' equity.................. 2,074.6 (488.0)(6) 1,586.6
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $ million and the issuance of shares of Class A
Common Stock) and (ii) the Special Dividends totalling $ million which
will have been paid by the Company prior to the completion of the Equity
Offerings.
(2) Reduction in net investment income at 7.5% from the Special Dividends,
partially offset by net investment income at 7.5% on the proceeds from the
Equity Offerings.
(3) Income tax effect of the pro forma adjustments at the statutory rate.
(4) Net operating income per share pro forma for the Special Dividends and the
Equity Offerings is $ and $ for the nine months ended September 30,
1996 and the year ended December 31, 1995, respectively.
(5) Based on million shares outstanding.
(6) The excess of the Special Dividends over the proceeds form the Equity
Offerings.
27
<PAGE>
PRO FORMA FOR THE SPECIAL DIVIDENDS, THE EQUITY OFFERINGS AND THE NOTE
OFFERING
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------ ------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1) ACTUAL ADJUSTMENTS PRO FORMA(1)
-------- ----------- ------------ -------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <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 (11.2)(2) 998.4 1,294.0 (14.9)(2) 1,279.1
Realized gains/(losses)
on investments........ 4.3 -- 4.3 (1.7) -- (1.7)
Other Income........... 52.7 -- 52.7 59.0 -- 59.0
-------- ------- -------- -------- ------- --------
Total revenues....... 1,500.9 (11.2) 1,489.7 1,837.0 (14.9) 1,822.1
-------- ------- -------- -------- ------- --------
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 -- 252.2 317.7 -- 317.7
Interest expense....... -- 17.0 (3) 17.0 -- 22.6 (3) 22.6
-------- ------- -------- -------- ------- --------
Total benefits and
expenses............ 1,248.0 17.0 1,265.0 1,555.8 22.6 1,578.4
-------- ------- -------- -------- ------- --------
Income before income
taxes.................. 252.9 (28.2) 224.7 281.2 (37.5) 243.7
Provision for income
taxes.................. 88.7 (9.8)(4) 78.9 96.3 (13.1)(4) 83.2
-------- ------- -------- -------- ------- --------
Net income.............. $ 164.2 $ (18.4) $ 145.8 $ 184.9 $ (24.4) $ 160.5
======== ======= ======== ======== ======= ========
OTHER DATA:
Net operating income
(5).................... $ 160.3 $(18.4) $ 141.9 $ 184.8 $(24.4) $ 160.4
Realized gains/(losses)
on investments, net of
tax.................... 3.9 -- 3.9 0.1 -- 0.1
-------- ------- -------- -------- ------- --------
Net income.............. $ 164.2 $ (18.4) $ 145.8 $ 184.9 $ (24.4) $ 160.5
======== ======= ======== ======== ======= ========
Net income per common
share.................. $ (6) $ (6)
======== ========
Operating return on av-
erage shareholders'
equity................. 11.4% 13.7% 10.9% 13.2%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
General account assets................ $19,689.2 $(188.0)(6) $19,501.2
Separate accounts assets.............. 24,673.5 -- 24,673.5
Total assets.......................... 44,362.7 (188.0) 44,174.7
Long-term debt........................ -- 300.0 (7) 300.0
Shareholders' equity.................. 2,074.6 (488.0)(8) 1,586.6
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $ million and the issuance of shares of Class A
Common Stock), (ii) the Special Dividends totalling $ million which
will have been paid by the Company prior to the completion of the Equity
Offerings and (iii) the Note Offering (assuming net proceeds of $
million).
(2) Reduction in net investment income at 7.5% from the Special Dividends,
partially offset by net investment income at 7.5% on the proceeds from the
Equity Offerings and the Note Offering.
(3) The $300 million aggregate principal amount of the Senior Notes is assumed
to bear interest at a rate of 7.5% per annum for the periods indicated.
There can be no assurance that this will be the actual rate borne by the
Senior Notes. An increase of 1.0% per annum in the assumed interest rate
on the Senior Notes would result in increases of $2.3 million and $3.0
million to interest expense for the nine months ended September 30, 1996
and the year ended December 31, 1995, respectively. Interest expense
includes amortization of deferred issuance costs.
(4) Income tax effect of the pro forma adjustments at the statutory rate.
(5) Net operating income per share pro forma for the Special Dividends, the
Equity Offerings and the Note Offering is $ and $ for the nine
months ended September 30, 1996 and the year ended December 31, 1995,
respectively.
(6) Based on million shares outstanding.
(7) The excess of the Special Dividends over the proceeds from the Equity
Offerings and Note Offering. Also included is capitalized issuance costs.
(8) Represents aggregate principal amount of Senior Notes
(9) The excess of the Special Dividends over the proceeds from the Equity
Offerings.
28
<PAGE>
PRO FORMA FOR THE SPECIAL DIVIDENDS, THE EQUITY OFFERINGS AND THE CAPITAL
SECURITIES OFFERING
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------ -------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1) ACTUAL ADJUSTMENTS PRO FORMA(1)
-------- ----------- ------------ --------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <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 (22.0)(2) 987.6 1,294.0 (29.4)(2) 1,264.6
Realized gains/(losses)
on investments........ 4.3 -- 4.3 (1.7) -- (1.7)
Other income........... 52.7 -- 52.7 59.0 -- 59.0
-------- ------ -------- --------- ------- ---------
Total revenues........ 1,500.9 (22.0) 1,478.9 1,837.0 (29.4) 1,807.6
-------- ------ -------- --------- ------- ---------
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 -- 252.2 317.7 -- 317.7
Interest expense....... -- 6.0 (3) 6.0 -- 8.0 (3) 8.0
-------- ------ -------- --------- ------- ---------
Total benefits and
expenses............. 1,248.0 6.0 1,254.0 1,555.8 8.0 1,563.8
-------- ------ -------- --------- ------- ---------
Income before income
taxes.................. 252.9 (28.0) 224.9 281.2 (37.4) 243.8
Provision for income
taxes.................. 88.7 (9.8)(4) 78.9 96.3 (13.1)(4) 83.2
-------- ------ -------- --------- ------- ---------
Net income.............. $ 164.2 $(18.2) $ 146.0 $ 184.9 $ (24.3) $ 160.6
======== ====== ======== ========= ======= =========
OTHER DATA:
Net operating
income(5).............. $ 160.3 $(18.2) $ 142.1 $ 184.8 $ (24.3) $ 160.5
Realized gains (losses)
on investments,
net of tax............. 3.9 -- 3.9 0.1 -- 0.1
-------- ------ -------- --------- ------- ---------
Net income.............. $ 164.2 $(18.2) $ 146.0 $ 184.9 $ (24.3) $ 160.6
======== ====== ======== ========= ======= =========
Net income per common
share.................. $ (6) $ (6)
======== =========
Operating return on
average
shareholders' equity... 11.4% 13.7% 10.9% 13.2%
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(1)
--------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
General account assets..................................... $19,689.2 $(388.0)(7) $19,301.2
Separate account assets.................................... 24,673.5 -- 24,673.5
Total assets............................................... 44,362.7 (388.0) 43,974.7
Long-term debt............................................. -- -- --
Capital securities......................................... -- 100.0 (8) 100.0
Shareholders' equity....................................... 2,074.6 (488.0)(9) 1,586.6
</TABLE>
- --------
(1) Pro forma to give effect to (i) the Equity Offerings (assuming net
proceeds of $ million and the issuance of shares of Class A
Common Stock), (ii) the Special Dividends totalling $ million which
will have been paid by the Company prior to the completion of the Equity
Offerings and (iii) the Capital Securities Offering (assuming net proceeds
of $ million).
(2) Reduction in net investment income at 7.5% from the Special Dividends,
partially offset by net investment income at 7.5% on the proceeds from the
Equity Offerings and Capital Securities Offering.
(3) The $100 million aggregate liquidation amount of the Capital Securities is
assumed to bear a distribution rate of 8.0% per annum for the periods
indicated. There can be no assurance that this will be the actual rate
borne by the Capital Securities. An increase of 1.0% per annum on the
assumed distribution rate on the Capital Securities would result in
increases of $0.8 million and $1.0 million to interest expense for the
nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively. Interest expense includes amortization of deferred issuance
costs.
(4) Income tax effect of the pro forma adjustments at the statutory rate.
(5) Net operating income per share pro forma for the Special Dividends, the
Equity Offerings and the Capital Securities Offering is $ and $ for
the nine months ended September 30, 1996 and the year ended December 31,
1995, respectively.
(6) Based on million shares outstanding.
(7) The excess of the Special Dividends over the proceeds from the Equity
Offerings and Capital Securities Offering. Also included is capitalized
issuance costs.
(8) 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 NFS 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 NFS Trust's
obligations with respect to the Capital Securities are effectively fully
and unconditionally guaranteed by the Company.
(9) The excess of the Special Dividends over the proceeds from the Equity
Offerings.
29
<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
dividended to Nationwide Corp. on January 1, 1997; 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 from traditional life insurance policies are
recognized as revenue when due from the policyholder. For life-contingent
immediate annuities, net premium (i.e., the portion of the premium which
covers benefits and expenses) is recognized as revenue when received. Any
premium received in excess of the net premium is deferred and recognized as
revenue over the expected benefit period. Traditional life insurance products
accounted for 85.9% and 81.7% of total life insurance premiums for the nine
months ended September 30, 1996 and 1995, respectively, and 83.5%, 88.6% and
81.2% of the total life insurance premiums in 1995, 1994 and 1993,
respectively. 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
30
<PAGE>
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.
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 and strong separate account asset performance.
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
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<PAGE>
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.
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.
EFFECT OF DIVIDENDS AND THE FIXED INCOME OFFERINGS
Shortly following the Equity Offerings, the Company expects to consummate
the Note Offering and the NFS Trust expects to consummate the Capital
Securities Offering. The consummation of the Equity Offerings is not
conditioned on the completion of the Fixed Income Offerings, and there can be
no assurance that either one or both of the Fixed Income Offerings will be
consummated. See "Use of Proceeds" and "The Fixed Income Offerings."
The proceeds from the Capital Securities Offering will be used by the NFS
Trust to purchase junior subordinated debentures of the Company (the
"Debentures"). The proceeds received by the Company from the sale of the
Debentures, together with proceeds from the Note Offering, will be contributed
to the capital of Nationwide Life. Prior to the consummation of the Equity
Offerings, Nationwide Life will dividend to the Company, and the Company will
subsequently dividend to Nationwide Corp., securities having an aggregate
market value of $ million. Together with the effect of the proceeds of the
Equity Offerings, these transactions are expected to result in a net decrease
in invested assets of the Company of $ million. Interest expense generated
by the securities sold in the Fixed Income Offerings is expected to be
approximately $ million per year, while net investment income is expected
to decline by $ million per year as a result of the net decrease in
invested assets.
The Senior Notes are expected to have a maturity of approximately 30 years
from the date of issuance, with interest payable semi-annually. The Senior
Notes are expected to include the option for the Company to redeem part or all
of the outstanding Senior Notes beginning approximately 10 years from the date
of issuance. The Debentures are expected to mature approximately 40 years from
the date of issuance, with interest payable semi-annually. Interest on the
Debentures will be deferrable, from time to time, for up to 10 consecutive
semi-annual periods, during which period the Company may not pay dividends on
its Common Stock or make other specified payments. Interest on the Debentures
will be cumulative. The Debentures are expected to be optionally redeemable,
in whole or in part, by the Company at any time at a redemption price equal to
the aggregate principal amount plus accrued and unpaid interest plus a premium
based on the value of future interest discounted at a rate based on prevailing
Treasury security rates. Neither the Senior Notes nor the Debentures will
require any sinking fund payments. The Company will guarantee, on a
subordinated basis and only to the extent the NFS Trust has funds legally
available therefor, specified payments with respect to the Capital Securities.
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<PAGE>
RESULTS OF OPERATIONS BY PRODUCT SEGMENT
The Company has three product segments: Variable Annuities, Fixed Annuities
and Life Insurance. In addition, the Company reports corporate income and
expenses and investments and related investment income supporting capital not
specifically allocated to its product segments in a Corporate and Other
segment. All information set forth below relating to the Company's Variable
Annuities segment excludes the fixed option under the Company's variable
annuity contracts. Such information is included in the Company's Fixed
Annuities segment.
The table below presents summary financial data for the Company by segment.
<TABLE>
<CAPTION>
AS OF OR FOR THE 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(1)...... $ 198.9 $ 138.7 $ 189.0 $ 132.7 $ 94.8
Fixed Annuities(1)......... 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 40.3 3.6
--------- --------- --------- --------- ---------
Total operating income... 248.6 215.6 282.9 256.9 169.6
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(2)...... $22,265.1 $15,382.6 $16,761.8 $10,751.1 $ 7,854.8
Fixed Annuities(2)......... 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(3)............... $41,435.6 $32,909.4 $34,850.6 $26,676.0 $22,367.8
========= ========= ========= ========= =========
</TABLE>
- --------
(1) Revenues related to the fixed option under the Company's variable annuity
contracts are included in Fixed Annuities.
(2) Policy reserves related to the fixed option under the Company's variable
annuity contracts are included in Fixed Annuities. As of 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.
(3) 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."
33
<PAGE>
Variable Annuities
Revenues. Revenues in the Variable Annuities segment consist of policy
charges and other income. Policy charges consist of asset fees, which are
generally a percentage of separate account assets deposited for the purchase
of variable annuities; administration fees, which are generally a specific
dollar amount per contract; and surrender fees, which are charged against
assets withdrawn during a specified period (generally the first seven years)
of variable annuity contracts. The separate account assets generated by the
Variable Annuities segment do not contribute to net investment income of the
Company because the customer receives the investment benefit and bears the
investment risk of these assets. Other income includes net investment
management fees earned on separate account assets held in mutual funds managed
by a subsidiary of the Company.
Revenues were $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,
34
<PAGE>
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 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 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.
35
<PAGE>
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.
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 Fixed
Income Offerings 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 the Fixed Income Offerings.
INTERCOMPANY AGREEMENTS
The Company has intercompany agreements with affiliates that provide for the
sharing of home office and other facilities, common management and other
services. See "Certain Relationships and Related Transactions--Existing
Arrangements with the Nationwide Insurance Enterprise." The Company does not
believe that expenses recognized under the intercompany agreements are
materially different than expenses that would have been recognized had the
Company operated on a stand-alone basis.
Upon consummation of the Equity Offerings, certain other intercompany
agreements will become effective. See "Certain Relationships and Related
Transactions--New Agreements with the Nationwide Insurance Enterprise." The
Company does not believe its results of operations will be materially
adversely effected as a result of the new agreements.
REINSURANCE
The Company follows the customary industry practice of reinsuring ("ceding")
a portion of its life insurance and annuity risks with other companies in
order to reduce net liability on individual risks, to provide
36
<PAGE>
protection against large losses and to obtain greater diversification of
risks. The ceding of risk does not discharge the original insurer from its
primary obligation to the policyholder. The Company has entered into a
reinsurance contract to cede a portion of its general account individual
annuity reserves to Franklin Life Insurance Company ("Franklin Life"). Total
recoveries due from Franklin Life were $245.3 million and $223.3 million as of
December 31, 1995 and 1994, respectively. Under the terms of the contract,
Franklin Life has established a trust as collateral for the recoveries. The
trust assets are invested in investment grade securities, the market value of
which must at all times be greater than or equal to 102% of the reinsured
reserves. The Company has no other material reinsurance arrangements with
unaffiliated reinsurers.
The only material reinsurance agreements which the Company has with
affiliates are the modified coinsurance agreements pursuant to which
Nationwide Life reinsured all of its accident and health and group life
insurance business to Employers Life and Nationwide Mutual. See "Certain
Relationships and Related Transactions--Existing Arrangements with the
Nationwide Insurance Enterprise--Modified Coinsurance Agreements." Nationwide
Life entered into these reinsurance agreements because its accident and health
and group life insurance business was unrelated to the Company's long-term
savings and retirement products. Under the modified coinsurance agreements,
invested assets are retained by the ceding company and investment earnings are
paid to the reinsurer. Under the terms of such agreements, the investment risk
is borne by Employers Life or Nationwide Mutual, as the case may be. The
contracts will remain in force until all policy obligations are settled.
However, with respect to the agreement between Nationwide Life and Nationwide
Mutual, either party may terminate the contract on January 1 of any year with
prior notice. The Company believes that the terms of such modified coinsurance
agreements are consistent in all material respects with what the Company could
have obtained with unaffiliated parties.
Total premiums ceded under the intercompany reinsurance agreements were
$322.5 million, $340.3 million and $330.4 million during 1995, 1994 and 1993,
respectively. The effect of the reinsurance agreements was an increase
(decrease) in the Company's income before federal income tax expense and
cumulative effect of changes in accounting principles of $2.6 million, ($13.4
million) and ($21.3 million) during 1995, 1994 and 1993, respectively. The
Company does not expect the intercompany reinsurance agreements to have any
material adverse impact on the Company's future operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
common stock of Nationwide Life. The principal sources of funds for the
Company to pay principal, interest, dividends and operating expenses are
dividends from Nationwide Life and other subsidiaries and payments from
Nationwide Life under the Tax Sharing Agreement.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of certain prescribed limitations without
prior approval. The ability of Nationwide Life to pay dividends is subject to
restrictions set forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require life insurance companies to
seek prior regulatory approval to pay a dividend or distribution of cash or
other property if the fair market value thereof, together with that of other
dividends or distributions made in the preceding 12 months, exceeds the
greater of (i) 10% of policyholders' surplus as of the prior December 31 or
(ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus. The
payment of dividends by Nationwide Life may also be subject to restrictions
set forth in the insurance laws of New York that limit the amount of statutory
profits on Nationwide Life's participating policies (measured before dividends
to policyholders) that can inure to the benefit of the Company and its
stockholders. The Company currently does not expect such regulatory
requirements to impair its ability to pay operating expenses and dividends in
the future. However, the Company can give no assurance that dividends will be
declared or paid by the Company. As 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."
37
<PAGE>
The Special Dividends and the dividends by Nationwide Life of the stock of
certain subsidiaries that do not operate in the long-term savings and
retirement market (see "Recent History") will be deemed extraordinary under
the Insurance Laws of the State of Ohio. As a result, any dividend to be paid
by Nationwide Life over the succeeding 12 months would require prior
regulatory approval. The Company has no reason to believe that Nationwide Life
will not receive regulatory approval for any anticipated dividend requests.
However, in order to increase liquidity at the holding company level, the
Company will retain approximately $ million from the net proceeds of the
Equity Offerings. The $ million, which will be invested in short-term
interest-bearing securities, will be available to pay interest associated with
the Fixed Income Offerings, stockholder dividends, and expenses.
Nationwide Life's statutory capital and surplus, adjusted for the dividend
of the stock of certain subsidiaries that do not operate in the long-term
savings and retirement market (see "Recent History"), was $959.3 million at
December 31, 1995. The Company will contribute to Nationwide Life all but
approximately $ million of the net proceeds from the Equity Offerings. The
Company believes that after the Special Dividends and the Equity Offerings,
Nationwide Life will have adequate statutory capital and surplus to satisfy
all regulatory requirements and to support its growth over the following year.
In addition, proceeds from the Fixed Income Offerings, which will be
contributed to Nationwide Life, will provide Nationwide Life with additional
capital resources.
Nationwide Life paid $50.0 million of the Special Dividends on December 31,
1996. The remainder of the Special Dividends ($ million) will be paid
prior to the consummation of the Equity Offerings. Nationwide Life will pay
the dividend by transferring primarily fixed maturity investments with an
aggregate market value on the date of transfer of $ million from the
Corporate and Other segment. The Company may recognize a gain or loss on the
transfer of the securities. The related tax impact of any gain or loss would
be recognized but would not be paid as long as the securities are held by
Nationwide Mutual and the Company remains within the consolidated federal tax
return of Nationwide Mutual.
Nationwide Life's principal sources of funds are premiums and other
considerations paid, contract charges earned, net investment income received
and proceeds from investments called, redeemed or sold. The principal uses of
these funds are the payment of benefits on annuity contracts and life
insurance policies, operating expenses and the purchase of investments. Net
cash provided by operating activities (reflecting principally (i) premiums and
contract charges collected, less (ii) benefits paid on life insurance
products, plus (iii) income collected on invested assets, less (iv)
commissions and other general expenses paid) was $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.
38
<PAGE>
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."
The short- and long-term liquidity requirements of the Company are monitored
regularly to match cash inflows with cash requirements. The Company
periodically reviews its short- and long-term projected sources and uses of
funds and the asset/liability, investment and cash flow assumptions underlying
these projections. Adjustments are made periodically with respect to the
Company's investment policies to reflect changes in the Company's short- and
long-term cash needs and changing business and economic conditions.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its product lines. The Company's general
account investment assets are primarily managed in a number of pools that are
separated by weighted average maturity of the assets acquired by the pools. On
bonds and mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms of the asset. For mortgage backed
securities, repayments are determined assuming the rate of repayment of the
underlying pool of mortgages. Each product line has an investment strategy
based on the specific characteristics of such product line. The strategy
establishes asset duration, quality and other guidelines. The Company's
actuaries determine the amount of new investments needed for each line to
arrive at the amount of new investments needed for each pool by month. The
investments acquired for each pool are shared on a proportional basis by each
of the lines requesting investments in the pool based on their actual
investment needs. See "Business--Investments."
For all business having future benefits which cannot be changed at the
option of the policyholder, the underlying assets are managed in a separate
pool. The duration of assets and liabilities in this pool are kept as close
together as possible. For assets, the repayment cash flows, plus anticipated
coupon payments, are used in calculating asset duration. Future benefits and
expenses are used for liabilities. On December 31, 1996, the average duration
of assets in this pool was 6.80 years and the average duration of the
liabilities was 7.44 years.
The Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of the Company's
fixed maturity portfolio increases or decreases in inverse relationship
39
<PAGE>
with fluctuations in interest rates, and the Company's net investment income
increases or decreases in direct relationship with interest rate changes. For
example, if interest rates increase, the Company's fixed maturity investments
generally will decrease in market value, while net investment income will
increase as fixed maturity investments mature or are sold and proceeds are
reinvested at the higher rate.
On August 12, 1996, Nationwide Life and Nationwide Mutual entered into a
Credit Facility (the "Credit Facility") which provides for a $600.0 million
loan over a five-year term on a fully revolving basis with a group of banks
led by Morgan Guaranty Trust Company of New York. The Credit Facility provides
for several and not joint liability with respect to any amount drawn by either
Nationwide Life or Nationwide Mutual. To date, neither Nationwide Life nor
Nationwide Mutual has drawn down any amount under the Credit Facility. The
Credit Facility provides for several borrowing options including interest at a
spread over LIBOR, money market auction, CD or base rate. The Credit Facility
also provides covenants, including, but not limited to, restrictions on
decreases in the statutory surplus of Nationwide Mutual below $2.75 billion,
mergers and sales of assets if a default has occurred and is continuing,
transactions with affiliates (which must be on an arms-length basis on terms
at least as favorable to Nationwide Life or Nationwide Mutual as could have
been obtained from a third party who was not affiliated with Nationwide Life
or Nationwide Mutual) and restrictions on the creation, assumption or
suffering to exist of liens. In addition, the Credit Facility provides for
customary representations, warranties and events of default. Pursuant to the
terms of the Credit Facility, Nationwide Life may not declare or pay a
dividend if it is, or if the payment thereof would cause it to be, in default
under such facility. Events of default under the Credit Facility include,
among others, the failure of Nationwide Mutual and its affiliates to maintain
beneficial ownership of more than 50% of the combined voting power of
Nationwide Life's outstanding voting stock and the failure of Nationwide Life
to maintain statutory surplus in excess of $875.0 million. Amounts borrowed
under the Credit Facility may be used for, among other things, general
corporate purposes.
Given the Company's historic cash flow and current financial results,
management of the Company believes that the cash flow from the operating
activities of the Company over the next year will provide sufficient liquidity
for the operations of the Company, as well as provide sufficient funds to
enable the Company to make dividend payments, 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 the risk of a reduction in interest spread or profit
margins when interest rates fluctuate. Bond calls, mortgage prepayments,
contract surrenders and withdrawals of annuities and life insurance policies
are influenced by the interest rate environment. In general, the fair value of
the Company's fixed maturities portfolio increases or decreases inversely with
fluctuations in interest rates, and the Company's investment income increases
or decreases directly with interest rate charges. For example, if interest
rates decline, the Company's fixed maturity investments generally will
increase in fair value, while investment income will decrease as fixed income
investments are sold or mature and proceeds are reinvested at declining 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.
40
<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 has grown substantially in recent years as a result of its long-
term investment in developing the distribution channels necessary to reach its
target customers and the products required to meet the demands of these
customers. The Company believes its growth has been enhanced further by
favorable demographic trends, the growing tendency of Americans to supplement
traditional sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the financial
markets, particularly the U.S. stock markets, in recent years. From 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%. Asset growth during this period resulted from
sales of the Company's products as well as market appreciation of assets in
the Company's separate accounts and in its general account investment
portfolio. The Company's sales of variable annuities grew from $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
41
<PAGE>
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. Such contracts
consist of single premium deferred annuities, flexible premium deferred
annuities and single premium immediate annuities. The Fixed Annuities segment
also includes the fixed option under the Company's variable annuity contracts,
which accounted for 69.0% of the Company's fixed annuity policy reserves as of
December 31, 1995. For the year ended December 31, 1995, the average crediting
rate on contracts (including the fixed option under the Company's variable
contracts) in the Fixed Annuities segment was 6.58%. Substantially all of the
Company's crediting rates on its fixed annuity contracts are guaranteed for a
period not exceeding one year. See "--Product Segments--Fixed Annuities." The
Life Insurance segment, which accounted for $46.2 million (or 18.6%) of the
Company's operating income before income taxes for the 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 Special Dividends, the Equity
Offerings and the Fixed Income Offerings 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 increased consumer demand for its variable annuity
products.
The Company believes that it possesses distinct competitive advantages in
the market for variable annuities. Some of the Company's most important
advantages include its innovative product offerings and strong relationships
with independent, well-known fund managers. For example, the Company's The
Best of America IV and The Best of America--America's Vision individual
variable annuity contracts allow the customer to choose from 36 investment
options, including mutual funds managed by a variety of well-known fund
managers and the Company. In the aggregate, the Company's group variable
annuity products offer over 100 underlying investment options.
The Company markets its variable annuity products through a broad spectrum
of channels, including financial planners, broker/dealers, 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.
42
<PAGE>
The wide array of investment options available under the Company's variable
annuity contracts include mutual funds managed by the nationally recognized
money managers set forth below:
AIM Advisors, Inc. 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
The Company believes that the variable annuity business is attractive
because it generates fee income. In addition, because the investment risk on
variable annuities is borne principally by the customer and not the Company,
the variable annuity business requires significantly less capital support than
fixed annuity and traditional life insurance businesses. The Company receives
income from variable annuity contracts primarily in the form of asset and
administration fees. In addition, most of the Company's variable annuity
products provide for a contingent deferred sales charge, also known as a
"surrender charge" or "back-end load," that is assessed against customer
withdrawals in excess of specified amounts made during a specified period,
usually the first seven years of the contract. Surrender charges are intended
to protect the Company from withdrawals early in the contract period, before
the Company has had the opportunity to recover its sales expenses. Generally,
surrender charges on variable annuity products are 7% of premiums withdrawn
during the first year, scaling ratably to 0% for the eighth year and each year
thereafter.
The Company's variable annuity products consist almost entirely of flexible
premium deferred variable annuity ("FPVA") contracts. FPVA contracts are
distributed through broker/dealers, financial planners, banks, pension plan
administrators and Nationwide Insurance Enterprise insurance agents. Such
contracts are savings vehicles in which the customer makes a single deposit or
a series of deposits. The customer has the flexibility to invest in mutual
funds managed by independent investment managers and the Company. Deposits may
be made at regular or irregular intervals and in regular or irregular amounts.
The value of the annuity fluctuates in accordance with the investment
experience of the mutual funds chosen by the customer. The customer is
permitted to withdraw all or part of the accumulated value of the annuity,
less a surrender charge for withdrawals during an initial penalty period of
generally seven years. As specified in the FPVA contract, the customer
generally can elect from a number of payment options that provide either fixed
or variable benefit payments.
43
<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
44
<PAGE>
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. 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.
45
<PAGE>
Fixed annuity products are marketed to individuals who choose to allocate
long-term savings to products that provide a guarantee of principal, a stable
net asset value and a guarantee of the interest rate to be credited to the
principal amount for some period of time. The Company's fixed annuity products
are offered both to individuals and as group products to employers for use in
employee benefit programs. The Company's individual fixed annuity products are
distributed through its wholesale and retail channels and include single
premium deferred annuity contracts, flexible premium deferred annuity
contracts and single premium immediate annuity contracts. The Company's group
fixed annuity contracts are also distributed through its wholesale and retail
channels. The Company invests fixed annuity customer deposits in its general
account investment portfolio. See "--Investments." Unlike variable annuity
assets that are held in the Company's separate account, the Company bears the
investment risk on assets held in its general account. The Company attempts to
earn a spread by investing a customer's deposits for higher yields than the
interest rate it credits to the customer's fixed annuity contract.
For the year ended December 31, 1995, the average crediting rate on
contracts (including the fixed option under the Company's variable contracts)
in the Fixed Annuities segment was 6.58%. Substantially all of the Company's
crediting rates on the Company's fixed annuity contracts are guaranteed for a
period not exceeding one year.
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.
46
<PAGE>
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 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.
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.
47
<PAGE>
The following table sets forth policy reserves as of December 31, 1996 for
the Company's fixed annuity contracts by crediting rates in effect on such
date. Substantially all of the Company's fixed annuity contracts are
guaranteed for a period not exceeding one year.
FIXED ANNUITY POLICY RESERVES BY CREDITING RATES
<TABLE>
<CAPTION>
AMOUNT OF
CREDITING RATES POLICY RESERVES(1)
- --------------- ------------------
(IN MILLIONS)
<S> <C>
up to 4.75%.................................................. $ 257.0
4.76 to 5.75%................................................ 4,136.2
5.76 to 6.75%................................................ 5,196.3
6.76 to 7.75%................................................ 2,982.0
7.76 to 8.75%................................................ 23.7
8.76 to 9.75%................................................ 5.9
greater than 9.75%........................................... 910.7
---------
Total Policy Reserves...................................... $13,511.8
=========
</TABLE>
- --------
(1) Policy reserves are net of reinsurance of $240.5 million.
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 insurance 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--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.
48
<PAGE>
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 defined
contribution plans pursuant to Section 401 of the IRC sponsored by employers
as part of employee retirement programs. The Company markets group variable
annuities, group fixed annuities and record-keeping services to these plan
sponsors primarily through over 200 regional pension plan administrators
located in 45 states. The Company targets employers having between 25 and
2,000 employees because it believes that these plan sponsors tend to require
more extensive record-keeping services from pension plan administrators and
therefore tend to become long-term customers. As of 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 48 states. The
Company believes that its existing relationships with state and local
government entities and the Company's sponsorship by such entities as the
National Association of Counties ("NACO") and The United States Conference of
Mayors ("USCM") provide it with distinct competitive advantages in this
market. NACO sponsorship, which began in 1980 and has been renewed three
times, expires on December 31, 2005, and USCM sponsorship, which began in 1979
and has been renewed twice, expires on December 31, 2004.
With respect to the Teacher Market, the Company has an exclusive contractual
arrangement with the NEA to offer and sell certain products to its 2.2 million
members. Under The NEA Valuebuilder brand name, the
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 Enterprise's 7.7 million property/casualty
policyholders also owned at least one of the Company's life insurance
products. The Nationwide Insurance Enterprise insurance agents sell
exclusively Nationwide Insurance Enterprise products and may not offer
products which compete with those of the Company. See "Certain Relationships
and Related Transactions--New Agreements with Nationwide Insurance
Enterprise--Intercompany Agreement--Nationwide Insurance Enterprise Insurance
Agents."
Mutual Funds
Nationwide Mutual Funds. In addition to including Company-managed mutual
funds among the investment options for its variable products, the Company
markets 10 public, open-end mutual funds through 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 $ 40.3 $ 3.6
======== ======== ======== ======== ========
OTHER DATA(2):
Nationwide mutual fund assets..... $2,068.9 $2,022.3 $2,113.9 $1,665.6 $1,777.1
</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 Fixed Income Offerings 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 the Fixed
Income 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 a portion
of its life insurance and annuity risks with other companies in order to reduce
net liability on individual risks, to provide protection against large losses
and to obtain greater diversification of risks. The maximum amount of
individual ordinary life insurance retained by the Company on any one life is
$500,000. The Company cedes insurance primarily on an automatic basis, under
which risks are ceded to a reinsurer on specific blocks of business where the
underlying risks meet certain predetermined criteria, and on a facultative
basis, under which the reinsurer's prior approval is required for each risk
reinsured. The Company also cedes insurance on a case-by-case basis
particularly where the Company may be writing new risks or is unwilling to
retain the full costs associated with new lines of business. The ceding of risk
does not discharge the original insurer from its primary obligation to the
policyholder. The Company has entered into a reinsurance contract to cede a
portion of its general account individual annuity reserves to Franklin Life.
Total recoveries due from Franklin Life were $245.3 million and $223.3 million
as of December 31, 1995 and 1994, respectively. Under the terms of the
contract, Franklin Life has established a trust as collateral for the
recoveries. The trust assets are invested in investment grade securities, the
market value of which must at all times be greater than or equal to 102% of the
reinsured reserves. The Company has no other material reinsurance arrangements
with unaffiliated reinsurers. The only material reinsurance agreements the
Company has with affiliates are the modified coinsurance agreements pursuant to
which Nationwide Life reinsured all of its accident and health and group life
insurance business to other members of the Nationwide Insurance Enterprise. See
"Certain Relationships and Related Transactions--Existing Arrangements with
Nationwide Insurance Enterprise--Modified Coinsurance Agreements." Premiums and
policy reserves ceded to unaffiliated reinsurers were 0.8% of statutory
premiums and considerations in 1995 and 0.8% of policy reserves as of December
31, 1995. The Company's principal unaffiliate reinsurers of individual life
insurance and annuity policies at December 31, 1995 (and their corresponding
A.M. Best ratings) were: American United Life Insurance Company (A+),
Reinsurance Group of America (A+), Lincoln National Life Insurance Company
(A+), Franklin Life (A+), and Indianapolis Life Insurance Company (A+). See "--
Ratings."
INVESTMENTS
General
The Company's assets are divided between separate account and general account
assets. As of December 31, 1996, $26.9 billion (or 57%) of the Company's total
assets were held in separate accounts and $20.1 billion (or 43%) were held in
the Company's general account, including $18.3 billion of general account
investments. Separate account assets consist primarily of deposits from the
Company's variable annuity business. Most separate account assets are invested
in various mutual fund options available within the variable annuity products
sold by the Company. 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
54
<PAGE>
of Life Insurance ("ACLI"), the Company's general account investment portfolio
has achieved (i) higher net investment yields, (ii) lower bond default rates
and (iii) lower mortgage delinquency rates, in each case in each of the five
years ended December 31, 1995 (with ACLI data not yet available for the year
ended December 31, 1996).
The following table summarizes the Company's consolidated invested assets by
asset category as of December 31, 1996 and December 31, 1995.
CONSOLIDATED INVESTED ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
% OF % OF
CARRYING GENERAL ACCOUNT CARRYING GENERAL ACCOUNT
VALUE INVESTED ASSETS VALUE INVESTED ASSETS
--------- --------------- --------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities(1):
Public.................... $ 8,395.6 45.8% $ 8,609.8 48.3%
Private................... 3,914.9 21.4 3,891.8 21.8
Mortgage loans, net:
Commercial................ 5,269.4 28.8 4,624.3 25.9
Residential............... 2.7 -- 3.1 --
Real estate, net........... 265.8 1.5 229.4 1.3
Policy loans............... 371.8 2.0 336.4 1.9
Equity securities(1)....... 59.1 0.3 37.5 0.2
Other long-term
investments............... 28.7 0.2 62.0 0.4
Short-term investments..... 9.3 -- 42.7 0.2
--------- ----- --------- -----
Total general account
invested assets......... $18,317.3 100.0% $17,837.0 100.0%
========= ===== ========= =====
Total separate account
assets.................. $26,926.7 $18,591.1
========= =========
</TABLE>
- --------
(1) As of December 31, 1996, all fixed maturities and equity securities are
classified as available-for-sale and are carried at fair value.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its product lines. The Company's general
account investment assets are primarily managed in a number of pools that are
separated by weighted average maturity of the assets acquired by the pools. On
bonds and mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms of the asset. For mortgage backed
securities, repayments are determined assuming the rate of repayment of the
underlying pool of mortgages. Each product line has an investment strategy
based on the specific characteristics of such product line. The strategy
establishes asset duration, quality and other guidelines. The Company's
actuaries determine the amount of new investments needed for each line to
arrive at the amount of new investments needed for each pool by month. The
investments acquired for each pool are shared on a proportional basis by each
of the lines requesting investments in the pool based on their actual
investment needs.
For all business having future benefits which cannot be changed at the
option of the policyholder, the underlying assets are managed in a separate
pool. The duration of assets and liabilities in this pool are kept as close
together as possible. For assets, the repayment cash flows, plus anticipated
coupon payments, are used in calculating asset duration. Future benefits and
expenses are used for liabilities. On December 31, 1996, the average duration
of assets in this pool was 6.80 years and the average duration of the
liabilities was 7.44 years.
55
<PAGE>
The Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of the Company's
fixed maturity portfolio increases or decreases in inverse relationship with
fluctuations in interest rates, and the Company's net investment income
increases or decreases in direct relationship with interest rate changes. For
example, if interest rates increase, the Company's fixed maturity investments
generally will decrease in market value, while net investment income will
increase as fixed maturity investments mature or are sold and proceeds are
reinvested at the higher rate.
The following table summarizes the net investment yield of the Company's
general account invested assets relative to that of the life insurers
reporting to the ACLI.
NET INVESTMENT YIELD
<TABLE>
<CAPTION>
THE BASIS POINT
YEAR COMPANY ACLI(1) DIFFERENCE
- ---- ------- ------- -----------
<S> <C> <C> <C>
1991................................................ 9.34% 9.09% 25
1992................................................ 8.93 8.58 35
1993................................................ 8.57 8.04 53
1994................................................ 8.37 7.63 74
1995................................................ 8.21 7.90 31
1996................................................ 8.00 -- --
</TABLE>
- --------
(1) Source: ACLI Statistical Bulletin #96-5 (September 9, 1996) entitled "Rate
of Investment Income of U.S. Legal Reserve Life Insurance Companies." ACLI
data for the year ended December 31, 1996 are not yet available.
Fixed Maturity Securities
As of December 31, 1996, general account fixed maturity securities were
$12.3 billion (or 67.2%) of the carrying value of consolidated general account
invested assets. As of such date, public and private fixed maturity securities
constituted $8.4 billion (or 68.3%) and $3.9 billion (or 31.7%), respectively,
of total general account fixed maturity securities. The Company's general
account fixed maturity securities portfolio consists primarily of investment
grade corporate fixed maturity securities, high-quality mortgage-backed
securities and U.S. government and agency obligations.
The following table summarizes the composition of the Company's general
account fixed maturity securities by category as of December 31, 1996.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- COMPOSITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
CARRYING
VALUE % OF TOTAL
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
U.S. government/agencies............................ $ 285.0 2.3%
Foreign governments................................. 102.0 0.9
State and political subdivisions.................... 6.6 --
Mortgage-backed securities:
U.S. government/agencies........................... 3,665.3 29.8
Non-government/agencies............................ -- --
Corporate........................................... 8,251.6 67.0
------------- ---------
Total............................................. $ 12,310.5 100.0%
============= =========
</TABLE>
56
<PAGE>
The following table sets forth scheduled maturities for the Company's
general account fixed maturity securities as of December 31, 1996.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- SCHEDULED MATURITIES (1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
CARRYING
VALUE % OF TOTAL
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Due in one year or less............................. $ 444.2 3.6%
Due after one year through five years............... 4,059.1 33.0
Due after five years through 10 years............... 2,871.8 23.3
Due after 10 years.................................. 1,270.1 10.3
Mortgage-backed securities.......................... 3,665.3 29.8
------------- ---------
Total fixed maturity securities................... $ 12,310.5 100.0%
============= =========
</TABLE>
- --------
(1) General account fixed maturity securities with call dates are classified
on their earliest call date.
The average duration and average maturity of the Company's general account
fixed maturity securities as of December 31, 1996 were approximately 3.75 and
7.97 years, respectively. As a result, the market value of the Company's
general account investments may fluctuate significantly in response to changes
in interest rates. In addition, the Company may also be likely to experience
investment losses to the extent its liquidity needs require the disposition of
general account fixed maturity securities in unfavorable interest rate
environments.
The Company's portfolio of general account investment grade fixed maturity
securities is diversified by number and type of issuer. As of December 31,
1996, general account investment grade fixed maturity securities included the
securities of over 548 issuers, with no issuer, other than the U.S. government
or its agencies, representing more than 0.6% of the carrying value of general
account investment grade fixed maturity securities. As of December 31, 1996,
one investment with a value of $0.5 million had been restructured and is
currently performing.
Below investment grade fixed maturity securities in the Company's general
account as of December 31, 1996 included the securities of 23 issuers
representing approximately 1.8% of the carrying value of total fixed maturity
securities. The Company's investment policy provides that fixed maturity
investments are limited to purchases of investment grade securities or unrated
securities which, in the opinion of the Company, should qualify for such
rating. All of the below grade fixed maturity securities held in the Company's
general account as of December 31, 1996 were investment grade securities when
purchased by the Company.
The NAIC assigns securities quality ratings and uniform valuations called
"NAIC Designations" which are used by insurers when preparing their annual
statements. The NAIC assigns designations to publicly traded as well as
privately placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a designation in class 1 being of the highest
quality. Of the Company's general account fixed maturity securities, 98.2% by
the carrying value were in the highest two NAIC Designations as of December
31, 1996.
57
<PAGE>
The following tables set forth an analysis of the credit quality, as
determined by NAIC Designation, of the Company's general account fixed
maturity securities portfolio and general account public fixed maturity
securities portfolio as of December 31, 1996 and December 31, 1995.
GENERAL ACCOUNT FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
-------------------------- --------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------- ------------ ------------- ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A.. $ 8,453.4 68.7% $ 8,659.9 69.3%
2 Baa....... 3,629.9 29.5 3,562.9 28.5
3 Ba........ 166.6 1.3 224.1 1.8
4 B......... 49.7 0.4 44.9 0.4
Caa and
5 lower..... 10.9 0.1 2.8 --
In or near
6 default... -- -- 7.0 --
Redeemable preferred stock and other..... -- -- -- --
------------- --------- ------------- ---------
Total................................. $ 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 December 31, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
GENERAL ACCOUNT PUBLIC FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A... $ 6,540.4 77.9% $ 6,730.2 78.2%
2 Baa........ 1,776.6 21.2 1,811.0 21.0
3 Ba......... 52.7 0.6 49.0 0.6
4 B.......... 25.9 0.3 19.6 0.2
Caa and
5 lower...... -- -- -- --
In or near
6 default.... -- -- -- --
Redeemable preferred stock and other..... -- -- -- --
------------ ---------- ------------ ----------
Total................................. $ 8,395.6 100.0% $ 8,609.8 100.0%
============ ========== ============ ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of December 31, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
The Company invests in private fixed maturity securities because of the (i)
generally higher nominal yield available compared to comparably rated public
fixed maturity securities, (ii) more restrictive financial and business
covenants available in private fixed maturity security loan agreements and
(iii) stronger prepayment protection. Although private fixed maturity
securities are not registered with the Commission and generally are less
liquid than public fixed maturity securities, restrictive financial and
business covenants included in private fixed maturity security loan agreements
generally are designed to compensate for the impact of increased
58
<PAGE>
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 December 31, 1996 and December 31, 1995.
GENERAL ACCOUNT PRIVATE FIXED MATURITY SECURITIES -- CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------- -------------------------
NAIC RATING AGENCY CARRYING CARRYING
DESIGNATION(1) EQUIVALENT DESIGNATION(2) VALUE % OF TOTAL VALUE % OF TOTAL
-------------- ------------------------- ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C>
1 Aaa/Aa/A... $ 1,913.0 48.9% $ 1,929.7 49.6%
2 Baa........ 1,853.4 47.3 1,751.9 45.0
3 Ba......... 113.9 2.9 175.1 4.5
4 B.......... 25.7 0.6 25.3 0.6
Caa and
5 lower...... 10.9 0.3 2.8 0.1
In or near
6 default.... -- -- 7.0 0.2
Redeemable preferred stock and other..... -- -- -- --
------------ ---------- ------------ ----------
Total................................. $ 3,914.9 100.0% $ 3,891.8 100.0%
============ ========== ============ ==========
</TABLE>
- --------
(1) NAIC Designations are assigned no less frequently than annually. Some
designations for securities shown as of December 31, 1996 have been
assigned to securities not yet assigned an NAIC Designation in a manner
approximating equivalent public rating categories.
(2) Comparisons between NAIC and Moody's designations are published by the
NAIC. In the event no Moody's rating is available, the Company has
assigned internal ratings corresponding to the public rating.
The following table sets forth the bond default rates for the Company and
the life insurers reporting to the ACLI for the periods indicated.
COMPANY AND LIFE INDUSTRY
BOND DEFAULT RATES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Company................................. 0.00% 0.04% 0.03% 0.01% 0.03%
ACLI.................................... -- 0.09 0.19 0.28 0.60
</TABLE>
- --------
(1) Source: ACLI Statistical Bulletins entitled "Quality Distribution of Bond
Holdings of U.S. Legal Reserve Life Insurance Companies:" Bulletin #'s 96-
2, 95-7, 94-5 and 93-5, dated May 15, 1996, July 24, 1995, July 28, 1994
and August 3, 1993, respectively. ACLI data for the year ended December
31, 1996 are not yet available.
The Company maintains significant general account investments in MBSs. The
Company's general account MBS investments include residential MBSs and
commercial MBSs. As of December 31, 1996, MBSs were $3.6 billion (or 29.8%) of
the carrying value of the general account fixed maturity securities, all of
which were guaranteed by the U.S. government or an agency of the U.S.
government.
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to its general
account fixed maturity securities portfolio. The objective of the Company's
general account MBS investments is to provide reasonable cash flow stability
and increased yield. General
59
<PAGE>
account MBS investments include CMOs and mortgage-backed pass-through
securities. The Company's general account MBS investments do not include
interest-only securities or principal-only securities or other MBSs which may
exhibit extreme market value volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the degree of
prepayment risk is particular to the type of MBS held. The Company limits its
exposure to prepayments by purchasing less volatile types of MBSs. As of
December 31, 1996, $2.9 billion (or 86.0%) of the carrying value of the
general account MBS portfolio was invested in planned amortization class CMOs
("PACs"). PACs are securities whose cash flows are designed to remain constant
over a variety of mortgage prepayment environments. Other classes in the CMO
security are structured to accept the volatility of mortgage prepayment
changes, thereby insulating the PAC class. Of the remaining general account
MBS portfolio, $2.5 million (or 0.1%) was invested in mortgage-backed pass-
throughs or sequential CMOs. Pass-throughs are securities in which the monthly
cash flows of principal and interest (both scheduled and prepayments)
generated by the underlying mortgages are distributed on a pro rata basis to
the holders of securities. A sequential MBS is structured to divide the CMO
security into sequentially ordered classes. Receipt of principal payments are
made currently on all classes. While these securities are more sensitive to
prepayment risk than PACs, the Company does not consider them highly volatile
securities.
The following table sets forth the distribution by investment type of the
Company's general account MBS portfolio as of December 31, 1996.
GENERAL ACCOUNT MORTGAGE-BACKED SECURITIES -- INVESTMENT TYPE(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------
CARRYING
VALUE % OF TOTAL
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accrual............................................... $ 41.4 1.1%
PAC................................................... 2,970.6 81.0
Sequential............................................ 2.5 0.1
Scheduled............................................. 167.2 4.6
TAC................................................... 87.7 2.4
VADM.................................................. 395.9 10.8
------------ ----------
Total............................................... $ 3,665.3 100.0%
============ ==========
</TABLE>
- --------
(1) All general account mortgage-backed securities are agency-backed.
Pursuant to the Company's investment policies, the Company does not invest
in derivative securities other than MBS.
Mortgage Loans
As of December 31, 1996, general account mortgage loans were $5.3 billion
(or 28.8%) of the carrying value of consolidated general account invested
assets. As of such date, commercial mortgage loans constituted substantially
all (99.9%) of total general account mortgage loans with the remainder being
76 residual residential loans originated prior to 1981 with a principal
balance of $2.7 million. These mortgages, substantially all of which are made
on a non-recourse basis, consist primarily of fixed rate mortgages on existing
income-producing properties. As of December 31, 1996, there were two second
mortgages totaling $2.6 million and no construction loans, participating or
convertible mortgages or land development loans. Commitments to fund mortgage
loans of $327.5 million extending into 1997 were outstanding as of December
31, 1996.
60
<PAGE>
The following tables set forth the distribution by property type and region
of the Company's commercial mortgages as of December 31, 1996 and December 31,
1995.
GENERAL ACCOUNT COMMERCIAL MORTGAGE
LOAN PORTFOLIO -- PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Property Type(1):
Apartment.............. 192 $1,216.0 22.8% 159 $ 995.8 21.3%
Retail................. 426 2,337.6 43.9 396 2,237.3 47.8
Office................. 153 891.0 16.7 131 785.8 16.8
Industrial............. 190 864.3 16.2 159 660.9 14.1
Hotel/motel............ 5 18.6 0.4 2 1.5 --
Other.................. 2 0.3 -- 3 0.9 --
--- -------- ------ --- -------- ------
Total................ 968 $5,327.8 100.0% 850 $4,682.2 100.0%
=== ======== ====== === ======== ======
- --------
(1) As defined by the ACLI.
GENERAL ACCOUNT COMMERCIAL MORTGAGE
LOAN PORTFOLIO -- REGION
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Region(1):
New England............ 35 $ 238.9 4.5% 30 $ 197.5 4.2%
Middle Atlantic........ 62 362.5 6.8 57 350.0 7.5
East North Central..... 180 1,022.5 19.2 160 930.9 19.9
West North Central..... 33 244.5 4.6 36 262.4 5.6
South Atlantic......... 225 1,103.4 20.7 187 901.4 19.3
East South Central..... 65 319.1 6.0 63 307.1 6.5
West South Central..... 105 725.7 13.6 91 618.4 13.2
Mountain............... 51 247.5 4.6 45 203.8 4.4
Pacific................ 212 1,064.0 20.0 181 910.7 19.4
--- -------- ------ --- -------- ------
Total................ 968 $5,327.8 100.0% 850 $4,682.2 100.0%
=== ======== ====== === ======== ======
</TABLE>
- --------
(1) The ACLI defines each of the regions set forth above as follows: (i) New
England includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont; (ii) Middle Atlantic includes New York, New Jersey and
Pennsylvania; (iii) East North Central includes Illinois, Indiana,
Michigan, Ohio and Wisconsin; (iv) West North Central includes Iowa,
Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota; (v)
South Atlantic includes Delaware, District of Columbia, Florida, Georgia,
Maryland, North Carolina, South Carolina, Virginia and West Virginia; (vi)
East South Central includes Alabama, Kentucky, Mississippi and Tennessee;
(vii) West South Central includes Arkansas, Louisiana, Oklahoma and Texas;
(viii) Mountain includes Arizona, Colorado, Idaho, Montana, Nevada, New
Mexico, Utah and Wyoming; and (ix) Pacific includes Alaska, California,
Hawaii, Oregon and Washington.
As of December 31, 1996, the Company's largest mortgage loan exposure to any
borrowing group was $95.7 million, or 1.8% of the Company's general account
mortgage portfolio.
61
<PAGE>
The following table sets forth the composition of the Company's general
account commercial mortgage loan portfolio by loan size as of December 31,
1996 and December 31, 1995.
GENERAL ACCOUNT COMMERCIAL MORTGAGE LOAN PORTFOLIO -- LOAN SIZE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------------- -----------------------------
% OF TOTAL % OF TOTAL
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
SIZE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
---- -------- --------- ---------- -------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Under $5 million........ 559 $1,393.4 26.1% 482 $1,195.4 25.5%
$5 million to $9.9
million................ 273 1,911.7 35.9 251 1,771.3 37.9
$10 million to $19.9
million................ 121 1,582.0 29.7 106 1,387.5 29.6
$20 million to $29.9
million................ 10 238.8 4.5 7 168.4 3.6
Over $30 million........ 5 201.9 3.8 4 159.6 3.4
--- -------- ------ --- -------- ------
Total................. 968 $5,327.8 100.0% 850 $4,682.2 100.0%
=== ======== ====== === ======== ======
</TABLE>
The Company's investment policy with regard to the origination of new
mortgage loans involves a review of the economics of the property being
financed, adherence to guidelines that provide for diversification of the
mortgage portfolio by property type and location, a review of industry lending
practices prevailing from time to time and diversification of the Company's
total general account investment portfolio. Guidelines for new mortgage loans
generally require a loan-to-value ratio of not greater than 75% at the time of
origination.
Substantially all of the general account commercial mortgage loans were
originated by the Company and not purchased from third parties. The Company
originates general account commercial mortgage loans through a national
network of mortgage banking correspondent companies which represent the
Company in many of the major metropolitan areas of the United States.
Typically, a correspondent company is an independent business which has a
staff of experienced specialists in property finance who are highly
knowledgeable about the real estate market in the company's local or regional
area. The correspondent company is an expert in the appraisal, underwriting
and servicing of commercial mortgage loans. Typically, the correspondent
company is the Company's one representative through which all mortgage
investment opportunities in the particular market must originate. The
correspondent company presents commercial mortgage loan opportunities to the
Company on property types and with respect to borrowers that meet the
Company's stringent underwriting requirements. After a mortgage loan is made,
the correspondent company services the loans for the Company by, among other
things, collecting all mortgage payments as well as amounts escrowed for the
payment of any taxes and insurance premiums. For its services, the
correspondent company receives from the Company an annual fee generally
ranging between .0625% and .125% of the mortgage balance.
Currently, the Company is represented by 24 correspondent companies that
originate commercial mortgage investment opportunities and service the general
account mortgage loans. In addition, the Company is represented by another 10
companies that service general account mortgage loans but do not originate
mortgage loan investment opportunities.
The general account commercial mortgage loan portfolio includes both
amortizing and balloon loans. The Company defines balloon loans to be
mortgages with periodic installments of principal and interest that do not
fully amortize the loan. The balance is due at a specified date in the future
which represents the end of the loan term.
62
<PAGE>
The following table sets forth the maturity and principal repayment schedule
for the Company's general account mortgage loan portfolio as of December 31,
1996 and December 31, 1995.
GENERAL ACCOUNT MORTGAGE LOAN PORTFOLIO -- SCHEDULED MATURITIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
--------------------------------- ---------------------------------
AGGREGATE AGGREGATE
PRINCIPAL BALANCE % OF PRINCIPAL BALANCE % OF
OF MORTGAGE TOTAL PRINCIPAL OF MORTGAGE TOTAL PRINCIPAL
LOANS MATURING BALANCE LOANS MATURING BALANCE
----------------- --------------- ----------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1996.................... $ -- 0.0% $ 254.9 5.4%
1997.................... 162.0 3.0 210.4 4.5
1998.................... 210.2 3.9 230.2 4.9
1999.................... 349.3 6.6 347.3 7.4
2000.................... 519.5 9.7 564.6 12.1
2001.................... 357.1 6.7 367.1 7.8
2002.................... 429.8 8.1 439.1 9.4
2003.................... 490.0 9.2 303.5 6.5
2004.................... 378.5 7.1 369.4 7.9
2005.................... 686.7 12.9 694.6 14.8
2006.................... 453.5 8.5 103.3 2.2
After 2006.............. 1,293.9 24.3 800.9 17.1
-------- ------ -------- ------
$5,330.5 100.0% $4,685.3 100.0%
======== ====== ======== ======
</TABLE>
The Company monitors all of the mortgage loans in its general account
mortgage loan portfolio on an ongoing basis and identifies mortgage loans
that, because of certain objective or subjective characteristics, cause
management to conclude that such loans require additional investigation. Among
criteria that cause a loan to be so identified are (i) borrower bankruptcies,
(ii) bankruptcies of major tenants of mortgaged properties, (iii) requests
from borrowers for loan restructuring or relief, (iv) known or suspected cash
flow deficiencies, (v) lateness of payments, (vi) noncompliance with
covenants, (vii) known or suspected loan-to-value imbalances, (viii) lease
rollovers affecting debt service coverage or property value, (ix) property
vacancy rates, (x) maturing loans identified as potential refinancing risks
and (xi) other subjective factors relating to the borrower or the mortgaged
property.
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<PAGE>
The Company and the ACLI define problem mortgage loans as loans which are 60
or more days delinquent and/or are in foreclosure. The following tables set
forth 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, 1996 and 1995.
COMMERCIAL MORTGAGE LOANS DELINQUENT OR IN THE
PROCESS OF FORECLOSURE BY PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------------------------- -------------------------------------------
COMPANY ACLI(1) COMPANY ACLI(2)
------------------------------- ----------- ------------------------------- -----------
DELINQUENCY DELINQUENCY DELINQUENCY DELINQUENCY
AND AND AND AND
NUMBER OF PRINCIPAL FORECLOSURE FORECLOSURE NUMBER OF PRINCIPAL FORECLOSURE FORECLOSURE
LOANS BALANCE RATE(2) RATE LOANS BALANCE RATE(3) RATE
--------- --------- ----------- ----------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Type(4):
Apartment.............. -- $ -- -- % -- % -- $ -- -- % 0.23%
Retail................. 4 26.3 0.49 -- 5 29.5 0.63 0.43
Office................. 3 15.8 0.30 -- -- -- -- 1.20
Industrial............. -- -- -- -- -- -- -- 0.21
Hotel/motel............ -- -- -- -- -- -- -- 0.14
Mixed Use.............. -- -- -- -- -- -- -- 0.01
Other Commercial
Property.............. -- -- -- -- -- -- -- 0.13
--- ----- ---- --- --- ----- ---- ----
Total.................. 7 $42.1 0.79% -- % 5 $29.5 0.63% 2.35%
=== ===== ==== === === ===== ==== ====
</TABLE>
- --------
(1) ACLI data as of December 31, 1996 are not yet available.
(2) Source: ACLI Investment Bulletin entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," Number 1326, dated February 28,
1996.
(3) Reflects, by individual property types, commercial mortgage loans that are
delinquent 60 days or more or in the process of foreclosure as a
percentage of composite total loans.
(4) As defined by the ACLI.
64
<PAGE>
COMMERCIAL MORTGAGE LOANS DELINQUENT OR IN THE
PROCESS OF FORECLOSURE BY REGION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------------------------- -------------------------------------------
COMPANY ACLI(1) COMPANY ACLI(2)
------------------------------- ----------- ------------------------------- -----------
DELINQUENCY DELINQUENCY DELINQUENCY DELINQUENCY
AND AND AND AND
NUMBER OF PRINCIPAL FORECLOSURE FORECLOSURE NUMBER OF PRINCIPAL FORECLOSURE FORECLOSURE
LOANS BALANCE RATE(2) RATE LOANS BALANCE RATE(3) RATE
--------- --------- ----------- ----------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Region(4):
New England............ 2 $14.6 0.27% -- % 2 $14.8 0.32% 0.17%
Middle Atlantic........ 1 10.5 0.20 -- -- -- -- 0.51
East North Central..... 2 9.5 0.18 -- -- -- -- 0.36
West North Central..... -- -- -- -- -- -- -- 0.04
South Atlantic......... 1 3.1 0.06 -- 2 9.1 0.19 0.34
East South Central..... -- -- -- -- -- -- -- 0.05
West South Central..... -- -- -- -- -- -- -- 0.14
Mountain............... -- -- -- -- -- -- -- 0.06
Pacific................ 1 4.4 0.08 -- 1 5.6 0.12 0.60
Other.................. -- -- -- -- -- -- -- 0.08
--- ----- ---- --- --- ----- ---- ----
Total.................. 7 $42.1 0.79% -- % 5 $29.5 0.63% 2.35%
=== ===== ==== === === ===== ==== ====
</TABLE>
- --------
(1) ACLI data as of December 31, 1996 are not yet available.
(2) Source: ACLI Investment Bulletin entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," Number 1326, dated February 28,
1996.
(3) Reflects, by region, commercial mortgage loans that are delinquent 60 days
or more or in the process of foreclosure as a percentage of composite
total loans.
(4) The ACLI defines each of the regions set forth above as follows: (i) New
England includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont; (ii) Middle Atlantic includes New York, New Jersey and
Pennsylvania; (iii) East North Central includes Illinois, Indiana,
Michigan, Ohio and Wisconsin; (iv) West North Central includes Iowa,
Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota; (v)
South Atlantic includes Delaware, District of Columbia, Florida, Georgia,
Maryland, North Carolina, South Carolina, Virginia and West Virginia; (vi)
East South Central includes Alabama, Kentucky, Mississippi and Tennessee;
(vii) West South Central includes Arkansas, Louisiana, Oklahoma and Texas;
(viii) Mountain includes Arizona, Colorado, Idaho, Montana, Nevada, New
Mexico, Utah and Wyoming; and (ix) Pacific includes Alaska, California,
Hawaii, Oregon and Washington.
In certain situations delinquent mortgages may be restructured or modified.
As of December 31, 1996, the amortized cost of restructured mortgages totaled
$57.5 million, as compared with $66.0 million and $77.0 million as of December
31, 1995 and 1994, respectively.
The Company aggressively seeks to manage and resolve its troubled commercial
mortgage loans. Commercial mortgage loans are placed into default by the
Company immediately following the Company failing to receive a payment when
due. With respect to a delinquent mortgage loan, the Company seeks to enforce
the assignment of rents clause in order to gain control of the rental income
from the property shortly following the default in payment. The foreclosure
process with respect to a delinquent mortgage loan is generally initiated by
the Company prior to the second mortgage payment becoming delinquent. Over the
last five years, the Company has recovered approximately 74% of the unpaid
principal of all of its mortgage loans in default.
65
<PAGE>
The following table sets forth the delinquency, foreclosure and restructured
commercial mortgage loan experience for the Company and for the life insurers
reporting to the ACLI for the periods indicated.
THE COMPANY AND LIFE INSURANCE INDUSTRY
PROBLEM LOAN COMPARISON
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------- ------------------- ------------------- ------------------- -------------------
COMPANY ACLI(1) COMPANY ACLI(2) COMPANY ACLI(2) COMPANY ACLI(2) COMPANY ACLI(2)
---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquent(3)...... 0.79% --% 0.63% 2.35% 0.48% 3.38% 0.80% 4.54% 1.41% 6.62%
In foreclosure(4).. 0.79 -- 0.63 1.45 0.48 1.80 0.80 2.17 1.41 3.16
Restructured(5).... 1.11 -- 1.48 8.27 1.95 9.58 1.87 9.35 1.25 7.44
---------- -------- -------- --------- -------- --------- -------- --------- -------- ---------
Subtotal.......... 1.90 -- 2.11 10.62 2.43 12.96 2.67 13.89 2.66 14.06
Foreclosed--year to
date.............. .35 -- 0.74 1.75 1.18 2.52 1.48 3.21 3.33 3.31
---------- -------- -------- --------- -------- --------- -------- --------- -------- ---------
Total............. 2.25% --% 2.85% 12.37% 3.61% 15.48% 4.15% 17.10% 5.99% 17.37%
========== ======== ======== ========= ======== ========= ======== ========= ======== =========
</TABLE>
- --------
(1) ACLI data for the year ended December 31, 1996 are not yet available.
(2) Source: ACLI Investment Bulletins entitled "Quarterly Survey of Mortgage
Loan Delinquencies and Foreclosures," numbers 1326, 1289, 1253 and 1213,
dated February 28, 1996, March 9, 1995, March 1, 1994 and March 2, 1993,
respectively.
(3) Commercial mortgage loans are classified by the Company and the ACLI as
delinquent when they are 60 days or more past due.
(4) Delinquent includes loans in foreclosure; therefore, subtotal and total
lines exclude "In foreclosure" amounts.
(5) Commercial mortgage loans are classified by the Company and the ACLI as
restructured when they are in good standing, but the basic terms have been
modified as a result of an actual or anticipated delinquency.
The following table shows credit-related realized and unrealized gains and
losses before taxes on the Company's general account commercial mortgage loans
for the periods indicated. Realized losses on general account commercial
mortgage loans are generally a result of delinquent loans 30 days or more past
due. The following table focuses on credit losses and does not reflect gains
from prepayment penalties of $4.5 million, $3.2 million, $6.4 million, $5.2
million and $1.3 million in 1996, 1995, 1994, 1993 and 1992, respectively.
GENERAL ACCOUNT COMMERCIAL MORTGAGE LOAN
CREDIT-RELATED GAINS AND LOSSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
----- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Realized gains (losses)............. $ 4.1 $ (7.1) $ (20.4) $ (28.2) $ (36.1)
Unrealized gains (losses)........... -- -- -- -- --
----- ------ ------- ------- -------
Total............................. $ 4.1 $ (7.1) $ (20.4) $ (28.2) $ (36.1)
===== ====== ======= ======= =======
Percentage of beginning of year
portfolio.......................... 0.10% 0.17% 0.53% 0.79% 1.12%
</TABLE>
Real Estate
As of December 31, 1996, equity real estate assets were $265.8 million, or
1.5% of the carrying value of general account invested assets. The equity real
estate category consists of retail, office, industrial and other properties.
Retail properties constitute the largest component of the category and are
primarily grocery store- anchored neighborhood shopping centers.
66
<PAGE>
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 December 31, 1996, the Company held general account equity securities
of $59.1 million, or 0.3% of general account consolidated invested assets. The
Company's general account equity security investments consist of a diversified
portfolio primarily of publicly traded common stocks.
Other Long-Term Investments
As of December 31, 1996, other long-term investments were $28.7 million, or
0.2% of the carrying value of general account invested assets. Such
investments primarily consist of joint ventures and limited partnership
interests in real estate.
Short-Term Investments
As of December 31, 1996, short-term investments were $9.3 million, or 0.05%
of the carrying value of general account invested assets. Such short-term
investments comprised cash and cash equivalents. The Company invests in U.S.
Treasury bills, commercial paper and certificates of deposit.
RATINGS
Ratings 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, "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.
Moody's rating for insurance companies currently range from "Aaa" to "Caa."
S&P ratings for insurance companies range from "AAA" to "CCCq." In evaluating
a company's financial and operating performance, Moody's and S&P review its
profitability, leverage and liquidity as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its policy reserves and the experience
and competency of its management.
The foregoing ratings reflect each rating agency's opinion of Nationwide
Life's financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed toward the
protection of investors. Such factors are of concern to policyholders, agents
and intermediaries. Such ratings should not be relied upon when making a
decision to invest in the Class A Common Stock.
67
<PAGE>
COMPETITION
The Company competes with a large number of other insurers as well as non-
insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer alternative
products and, with respect to other insurers, have higher ratings than the
Company. The Company believes that competition in the Company's lines of
business is based on price, product features, commission structure, perceived
financial strength, claims-paying ratings, service and name recognition.
National banks, with their preexisting customer bases for financial services
products, may pose increasing competition in the future to insurers who sell
annuities, including the Company, as a result of the U.S. Supreme Court's 1994
decision in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company, which permits national banks to sell annuity products of life
insurance companies in certain circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of 1933, as
amended, and the Bank Holding Company Act of 1956, as amended, have been made
by members of Congress and the Clinton administration. Currently, the Bank
Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not
possible to predict whether any of these proposals will be enacted, or if
enacted, their potential effect on the Company.
REGULATION
General Regulation at State Level
As an insurance holding company, the Company is subject to regulation by the
states in which its insurance subsidiaries are domiciled and/or transact
business. Most states have enacted legislation that requires each insurance
holding company and each insurance company in an insurance holding company
system to register with the insurance regulatory authority of the insurance
company's state of domicile and, annually, to furnish financial and other
information concerning the operations of companies within the holding company
system that may materially affect the operations, management or financial
condition of the insurers within such system. The Company is subject to the
insurance holding company laws in Ohio. Under such laws, all transactions
within an insurance holding company system affecting insurers must be fair and
equitable and each insurer's policyholder surplus following any such
transaction must be both reasonable in relation to its outstanding liabilities
and adequate for its needs. The Ohio insurance holding company laws also
require prior notice or regulatory approval of the change of control of an
insurer or its holding company and of material intercorporate transfers of
assets within the holding company structure. Generally, under such laws, a
state insurance authority must approve in advance the direct or indirect
acquisition of 10% or more of the voting securities of an insurance company
domiciled in its state.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to approve policy forms, grant and revoke
licenses to transact business, regulate trade practices, license agents,
require statutory financial statements and prescribe the type and amount of
investments permitted. In recent years, a number of life and annuity insurers
have been the subject of regulatory proceedings and litigation relating to
alleged improper life insurance pricing and sales practices. Some of these
insurers have incurred or paid substantial amounts in connection with the
resolution of such matters. In addition, state insurance regulatory
authorities regularly make inquiries, hold investigations and administer
market conduct examinations with respect to insurers' compliance with
applicable insurance laws and regulations. None of the Company's insurance
subsidiaries is the subject of any such investigation by any regulatory
authority or any such market conduct examination in any state at this time.
The Company's subsidiaries continuously monitor sales, marketing and
advertising practices and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance
with applicable insurance laws and regulations.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules
68
<PAGE>
and regulations. 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 and pay operating expenses and dividends depends primarily on the
receipt of sufficient funds from its primary operating subsidiary, Nationwide
Life. The inability of Nationwide Life to pay dividends to the Company in an
amount sufficient to meet debt service obligations and pay operating expenses
and dividends would have a material adverse effect on the Company. The payment
of dividends by Nationwide Life is subject to restrictions set forth in the
insurance laws and regulations of Ohio, its domiciliary state. The Ohio
insurance laws require Ohio-domiciled life insurance companies to seek prior
regulatory approval to pay a dividend or distribution of cash or other
property if the fair market value thereof, together with that of other
dividends or distributions made in the preceding 12 months, exceeds the
greater of (i) 10% of policyholders' surplus as of the prior December 31 or
(ii) the net income of the insurer for the 12-month period ending as of the
prior December 31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned surplus.
Earned surplus is defined under the Ohio insurance laws as the amount equal to
the Company's unassigned funds as set forth in its most recent statutory
financial statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an insurer's
policyholder surplus must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. 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.
NAIC IRIS Ratios
In the 1970s, the NAIC developed a set of financial relationships or "tests"
known as the Insurance Regulatory Information System ("IRIS") that was
designed for early identification of companies which may require special
attention by insurance regulatory authorities. There are separate but similar
tests for property/casualty companies and life and health companies. Insurance
companies submit data annually to the NAIC, which in turn analyzes the data by
utilizing, in the case of life insurance companies, 13 ratios, each with
defined "usual ranges." An insurance company may fall out of the usual range
for one or more ratios because of specific transactions that are in themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to regulatory scrutiny if it falls outside the
usual ranges of four or more of the ratios, and regulators may then act, if
the company has insufficient capital, to constrain the company's underwriting
capacity. No ratios for the Company's insurance subsidiaries currently fall
outside the usual range for any of the ratios.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted
a model law to implement risk-based capital ("RBC") requirements for life
insurance companies. The requirements are designed to monitor capital adequacy
and to raise the level of protection that statutory surplus provides for
policyholders.
69
<PAGE>
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
Dividends and the contribution to Nationwide Life by the Company of proceeds
from the Equity Offerings and the Fixed Income Offerings, Nationwide Life
exceeded the Company Action Level by a substantial amount as of December 31,
1996. See "Use of Proceeds," "Recent History" and "The Fixed Income
Offerings."
Assessments Against Insurers
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these
jurisdictions can be assessed for policyholder losses incurred by insolvent
insurance companies. The amount and timing of any future assessment on the
Company's insurance subsidiaries under these laws cannot be reasonably
estimated and are beyond the control of the Company and its insurance
subsidiaries. Recent regulatory actions against certain large life insurers
encountering financial difficulty have prompted the various state insurance
guaranty associations to begin assessing life insurance companies for the
deemed loss. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's solvency and further
provide for annual limits on such assessments. A large part of the assessments
paid by the Company's insurance subsidiaries pursuant to these laws may be
used as credits for a portion of the Company's insurance subsidiaries' premium
taxes. Based on the best information presently available, the Company believes
the total assessments will not be material to its operating results or
financial position. For the 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.
70
<PAGE>
Securities Laws
Certain of the Company's insurance subsidiaries and certain policies and
contracts offered by them are subject to regulation under the federal
securities laws administered by the Commission and under certain state
securities laws. Certain separate accounts of the Company's insurance
subsidiaries are registered as investment companies under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). Separate
account interests under certain variable annuity contracts and variable
insurance policies issued by the Company's insurance subsidiaries are also
registered under the Securities Act. Certain other subsidiaries of the Company
are registered as broker/dealers under the Exchange Act and are members of,
and subject to regulation by, the National Association of Securities Dealers.
Certain of the Company's subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended. The investment
companies managed by such subsidiaries are registered with the Commission
under the Investment Company Act and the shares of certain of these entities
are qualified for sale in certain states in the United States and the District
of Columbia. A subsidiary of the Company is registered with the Commission as
a transfer agent. Certain subsidiaries of the Company are also subject to the
Commission's net capital rules.
All aspects of the Company's subsidiaries' investment advisory activities
are subject to various federal and state laws and regulations in jurisdictions
in which they conduct business. These laws and regulations are primarily
intended to benefit investment advisory clients and investment company
shareholders and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business
for failure to comply with such laws and regulations. In such event, the
possible sanctions which may be imposed include the suspension of individual
employees, limitations on the activities in which the investment advisor may
engage, suspension or revocation of the investment advisor's registration as
an advisor, censure and fines.
ERISA Considerations
On December 13, 1993, the United States Supreme Court issued its opinion in
John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank
holding that certain assets in excess of amounts necessary to satisfy
guaranteed obligations held by John Hancock in its general account under a
participating group annuity contract are "plan assets" and therefore subject
to certain fiduciary obligations under the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which specify that fiduciaries must perform
their duties solely in the interest of ERISA plan participants and
beneficiaries. The Court limited the imposition of ERISA fiduciary obligations
in these instances to assets in an insurer's general account that were not
reserved to pay benefits of guaranteed benefit policies (i.e., benefits whose
value would not fluctuate in accordance with the insurer's investment
experience). The Secretary of Labor is required to issue proposed regulations
not later than June 30, 1997, providing guidance for the purpose of
determining, in cases where an insurer issues one or more policies backed by
the insurer's general account to or for the benefit of an employee benefit
plan, which assets of the insurer constitute plan assets for purposes of ERISA
and the IRC. Final regulations, after a notice and comment period, must be
issued by December 31, 1997. The regulations will apply only with respect to a
policy issued by an insurer on or before December 31, 1998. In the case of
such a policy, the regulations will take effect at the end of the 18-month
period following the date such regulations become final. Generally, no person
will be liable under ERISA or the IRC for conduct occurring prior to the end
of such 18-month period, where the basis of a claim is that insurance company
general account assets constitute plan assets. New policies issued after
December 31, 1998 which are not guaranteed benefit policies will be subject to
the fiduciary obligations under ERISA.
The regulations should indicate the requirements that must be met in order
to satisfy ERISA's fiduciary standards. A review of Nationwide Life's
procedures with respect to its general account contracts will be required to
ensure compliance with the regulations.
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Potential Tax Legislation
Congress has, from time to time, considered possible legislation that would
eliminate the deferral of taxation on the accretion of value within certain
annuities and life insurance products. The 1994 United States Supreme Court
ruling in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company that annuities are not insurance for purposes of the National Bank Act
may cause Congress to consider legislation that would eliminate such tax
deferral at least for certain annuities. Other possible legislation, including
a simplified "flat tax" income tax structure with an exemption from taxation
for investment income, could also adversely affect purchases of annuities and
life insurance if such legislation were to be enacted. There can be no
assurance as to whether legislation will be enacted which would contain
provisions with possible adverse effects on the Company's annuity and life
insurance products.
PROPERTIES
The Company's principal executive offices are located in Columbus, Ohio. The
Company leases its home office complex, consisting of approximately 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. In October 1996, a policyholder of Nationwide Life filed a
complaint in Alabama state court against Nationwide Life and an agent of
Nationwide Life (Wayne M. King v. Nationwide Life Insurance Company and Danny
Nix), alleging, among other things, that Nationwide Life and its agent
fraudulently misrepresented that the dividends on a whole life insurance
policy previously purchased from Nationwide Life would be sufficient to fully
pay the premiums on a new whole life insurance policy with a higher face
value, and seeking unspecified compensatory and punitive damages. Nationwide
Life intends to defend the case vigorously. There can be no assurance that any
future litigation relating to pricing and sales practices will not have a
material adverse effect on the Company.
EMPLOYEES
As of 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
63 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).......... 64 Director
David O. Miller(1)(2)............ 58 Director
James F. Patterson(1)(3)......... 54 Director
Arden L. Shisler(1)(3)........... 55 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Biographical information for each of the individuals listed in the above
table is set forth below.
DIMON RICHARD MCFERSON has been Chief Executive Officer of the Nationwide
Insurance Enterprise since December 1992. He has been Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise of the Company since
December 1996 and a director of the Company since November 1996. Mr. McFerson
has been a director of Nationwide Life and Nationwide Mutual since April 1988
and Chairman and Chief Executive Officer--Nationwide Insurance Enterprise of
Nationwide Life and Nationwide Mutual since April 1996. Previously he was
elected Chief Executive Officer of Nationwide Life in December 1992, and
President and Chief Executive Officer--Nationwide Insurance Enterprise of
Nationwide Life in December 1993. He was President and General Manager of
Nationwide Mutual from April 1988 to April 1991; President and Chief Operating
Officer of Nationwide Mutual from April 1991 to December 1992; and President
and Chief Executive Officer of Nationwide Mutual from December 1992 to April
1996. Mr. McFerson has been with the Nationwide Insurance Enterprise for 17
years.
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--
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Property/Casualty Operations of Nationwide Mutual from September 1993 to April
1995. Prior to that time, Mr. Gasper held numerous positions within the
Nationwide Insurance Enterprise. Mr. Gasper has been with the Nationwide
Insurance Enterprise for 30 years.
GALEN R. BARNES has been Executive Vice President of the Company since
December 1996. Mr. Barnes has been President of the Nationwide Insurance
Enterprise since April 1996. Previously, he was President and Chief Operating
Officer of the Wausau Insurance Companies, members of the Nationwide Insurance
Enterprise, from May 1993 to September 1996 and was Senior Vice President of
the Nationwide Insurance Enterprise from May 1993 to April 1996. Prior to that
time, Mr. Barnes held several positions within the Nationwide Insurance
Enterprise. Mr. Barnes has been with the Nationwide Insurance Enterprise for
21 years.
RICHARD D. CRABTREE has been Executive Vice President of the Company since
December 1996. Mr. Crabtree has been director, President and Chief Operating
Officer of Nationwide Mutual, Nationwide Mutual Fire and Nationwide Property
and Casualty Insurance Company since April 1996. Previously, he was Executive
Vice President--Property/Casualty Operations of the Nationwide Insurance
Enterprise from April 1995 to April 1996. Prior to that time, Mr. Crabtree
held various positions within the Nationwide Insurance Enterprise. Mr.
Crabtree has been with the Nationwide Insurance Enterprise for 31 years.
GORDON E. MCCUTCHAN has been Executive Vice President--Law and Corporate
Services and Secretary of the Company since December 1996. Mr. McCutchan has
been Executive Vice President--Law and Corporate Services and Secretary of the
Nationwide Insurance Enterprise since September 1994. Previously, he was
Executive Vice President, General Counsel and Secretary of the Nationwide
Insurance Enterprise from November 1989 to September 1994. Prior to that time,
Mr. McCutchan held several positions within the Nationwide Insurance
Enterprise. Mr. McCutchan has been with the Nationwide Insurance Enterprise
for 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 21 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President--Chief Investment
Officer of the Company since December 1996. Mr. Woodward has been Executive
Vice President--Chief Investment Officer of the Nationwide Insurance
Enterprise since August 1995. Previously, he was Senior Vice President--Fixed
Income Investments of the Nationwide Insurance Enterprise from March 1991 to
August 1995. Prior to that time, Mr. Woodward held several positions within
the Nationwide Insurance Enterprise. Mr. Woodward has been with the Nationwide
Insurance Enterprise for 32 years.
JAMES E. BROCK has been Senior Vice President--Company Operations of the
Company since December 1996. Mr. Brock has been Senior Vice President--Life
Company Operations of Nationwide Life since April 1996. Previously, he was
Senior Vice President--Investment Product Operations of Nationwide Life from
November 1990 to April 1996. Prior to that time, Mr. Brock held several
positions within the Nationwide Insurance Enterprise. Mr. Brock has been with
the Nationwide Insurance Enterprise for 27 years.
W. SIDNEY DRUEN has been Senior Vice President and General Counsel of the
Company since December 1996. Mr. Druen has been Senior Vice President and
General Counsel and Assistant Secretary of the Nationwide Insurance Enterprise
since September 1994. Previously, he was Vice President, Deputy General
Counsel and Assistant Secretary of the Nationwide Insurance Enterprise from
October 1989 to September 1994. Prior to that time, Mr. Druen held several
positions within the Nationwide Insurance Enterprise. Mr. Druen has been with
the Nationwide Insurance Enterprise for 27 years.
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HARVEY S. GALLOWAY, JR. has been Senior Vice President--Chief Actuary--Life
and Annuities of the Company since December 1996. Mr. Galloway has been Senior
Vice President--Chief Actuary--Life, Health and Annuities of the Nationwide
Insurance Enterprise since April 1993. Previously, he was Senior Vice
President and Chief Actuary of the Nationwide Insurance Enterprise from
January 1983 to April 1993. Prior to that time, Mr. Galloway held several
positions within the Nationwide Insurance Enterprise. Mr. Galloway has been
with the Nationwide Insurance Enterprise for 27 years.
RICHARD A. KARAS has been Senior Vice President--Sales--Financial Services
of the Company since December 1996. Mr. Karas has been Senior Vice President--
Sales--Financial Services of the Nationwide Insurance Enterprise since March
1993. Previously, he was Vice President--Sales--Financial Services of the
Nationwide Insurance Enterprise from February 1989 to March 1993. Prior to
that time, Mr. Karas held several positions within the Nationwide Insurance
Enterprise. Mr. Karas has been with the Nationwide Insurance Enterprise for 32
years.
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
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 serves on the board of directors of several members of
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 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 serves on the
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board of directors of several members of the Nationwide Insurance Enterprise.
He is also a director of the National Cooperative Business Association.
JAMES F. PATTERSON has been a director of the Company since November 1996.
Mr. Patterson has operated the Patterson Fruit Farm in Chesterland, Ohio,
since 1964 and has been the President of Patterson Farms, Inc. since December
1991. He is Chairman of the Board of Nationwide Mutual Fire Insurance Company
and serves on the board of directors of several members of the Nationwide
Insurance Enterprise. He is also a trustee of The Ohio State University and
serves on the board of directors of the University Hospitals Health System in
Cleveland, Ohio, and Geauga Hospital, Inc. in Chardon, Ohio.
ARDEN L. SHISLER has been a director of the Company since November 1996. Mr.
Shisler has been President and Chief Executive Officer of K & B Transport,
Inc., a trucking firm in Dalton, Ohio, since January 1992. Previously, he was
Chief Operating Officer of K & B Transport, Inc. from April 1986 to January
1992. Prior to that time, Mr. Shisler held several positions with K & B
Transport, Inc. He is Chairman of the Board of Nationwide Mutual Insurance
Company and serves on the board of directors of several members of the
Nationwide Insurance Enterprise. He is also a director of the National
Cooperative Business Association.
The Company 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 stockholders 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.
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain a deferred compensation program applicable to
nonemployee members of its board of directors (the "Directors' Deferred
Compensation Program"). Each director who has been elected to the board of
directors at least twice
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and has served for at least 3 years on the board of directors of a
participating company is entitled to monthly payments, following termination
of his or her service on the board of directors, of a monthly amount equal to
the monthly director's fee being received by that director at the time of his
or her retirement from the board of directors. The number of monthly payments
will equal the number of months the individual served on the board of
directors (other than months in which he or she was also a salaried officer of
the participating company). Messrs. Fuellgraf, Holloway, Miller, Patterson and
Shisler, the nonemployee members of the Board of Directors of the Company, are
also nonemployee members of the board of directors of Nationwide Life.
EXECUTIVE COMPENSATION
The Company was incorporated in November 1996. Pursuant to a cost sharing
agreement, the salaries and benefits of certain of the officers and employees
of the Company and its subsidiaries, including the Named Executive Officers
(as defined below), will be paid by Nationwide Mutual and reimbursed in
accordance with the terms of such agreement. See "Certain Relations and
Related Transactions--Existing Arrangements with the Nationwide Insurance
Enterprise--Cost Sharing Agreement."
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)............. $324,790 $80,058(2) $ -- (3) $149,803(4) $13,363(5)
Chairman and Chief
Executive
Officer--Nationwide
Insurance Enterprise
Joseph J. Gasper(6)...... 232,959 -- (2) -- (3) -- (4) 10,650(5)
President and Chief
Operating Officer
Robert J. Woodward, Jr.
........................ 222,784 59,399 -- (3) 64,698(4) 10,610(5)
Executive Vice
President--
Chief Investment
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
</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
Savings Plan (as defined herein) and the DC Supplemental Plan (as defined
herein). See "--Savings Plans."
(6) Represents compensation received by Mr. Gasper solely for his services
rendered to the Company in 1996 as allocated pursuant to a cost sharing
agreement. Prior to April 1996, Mr. Gasper was the Executive Vice
President--Property/Casualty Operations of Nationwide Mutual and received
compensation from Nationwide Mutual and its property/casualty insurance
subsidiaries for services rendered to such companies. Such compensation is
not reflected in the table.
INCENTIVE PLANS
Sustained Performance Incentive Plan
Prior to 1997, Nationwide Mutual and certain of its subsidiaries and
affiliates, including Nationwide Life, maintained the Sustained Performance
Incentive Plan (the "SPIP"). Under the SPIP, payments were made to the Named
Executive Officers and other senior officers of the participating companies in
each odd numbered calendar year based on the achievement of measures tied to
the performance of the Nationwide Insurance Enterprise over the preceding four
years. Performance measures were based on profitability, growth and strategic
objectives for the Nationwide Insurance Enterprise which are established in
advance by the boards of directors
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of the participating companies. Under the SPIP, participants were granted
target incentive amounts that represented a percentage (10% to 20% depending
on the participant's position within the participating company) of the sum of
the participant's base salary for the last two years of the performance cycle.
The actual amount received by the participant ranged from zero to twice the
target incentive amount, depending solely on the achievement of the
performance measures.
Nationwide Mutual and the participating subsidiaries and affiliates
terminated the SPIP at the close of calendar 1996. If a payment under the SPIP
is made in 1997, covering performance measured for the period from 1993 to
1996, such payment will be made in cash as provided in the SPIP. To facilitate
the termination of the SPIP, the performance measurement period for 1995 to
1998 was closed at the end of calendar 1996. 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
Nationwide Life, maintain the Executive Incentive Plan (the "EIP"). Under the
EIP, annual payments are made to the Named Executive Officers and certain
other officers of the participating companies based on the achievement of
measures tied to the performance of the Nationwide Insurance Enterprise and
the relevant operating company over the preceding three years. Performance
measures are based on profitability and growth objectives which are
established in advance by the Board of Directors of the participating company.
Under the EIP, the participant will be granted a target incentive amount that
represents a percentage (from 5% to 25% depending on the participant's
position within the participating company) of the participant's base salary.
The actual amount received by the participant will range from zero to twice
the target incentive amount, depending solely on the achievement of the
performance measures.
Management Incentive Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Management Incentive Plan (the "MIP"). Under the
MIP, annual payments are made to the Named Executive Officers and certain
other management employees of the participating companies based on the
achievement of measures tied to the performance of the Nationwide Insurance
Enterprise, the relevant operating company, the relevant business unit and the
individual participant over the preceding year. Performance measures are based
on profitability, growth, expense management and key strategic objectives
which are established in advance. Under the MIP, the participant will be
granted a target incentive amount that represents a percentage (from 5% to 15%
depending on the participant's position within the participating company) of
the participant's base salary. The actual amount received by the participant
under the MIP will range from zero to twice the target incentive amount,
depending solely on the achievement of the performance measures.
PENSION PLANS
Retirement Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain a qualified defined benefit plan, the Nationwide
Insurance Enterprise Retirement Plan (the "Retirement Plan"). In general, a
participant's annual retirement benefit under the Retirement Plan will be
equal to the sum of (i) 1.25% of the participant's Final Average Compensation
times years of service (to a maximum of 35 years) and (ii) 0.50% of the
participant's Final Average Compensation in excess of Social Security Covered
Compensation times years of service (to a maximum of 35 years). Final Average
Compensation, for the portion of the participant's benefit which is
attributable to service on or after January 1, 1996, is the average of the
highest five consecutive covered compensation amounts of the participant in
the participant's last 10 years of service. For the portion of a participant's
benefit attributable to service prior to January 1, 1996, Final Average
Compensation is the
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<PAGE>
average of the highest 3 consecutive covered compensation amounts of the
participant in the participant's last 10 years of service. Covered
compensation, for purposes of determining Final Average Compensation under
either method, is calculated on a calendar year basis and includes
compensation from any member of the Nationwide Insurance Enterprise. With
respect to Messrs. Gasper, Woodward, Galloway and Brock, 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. The portion of a
participant's benefit attributable to years of service credited prior to 1996
is also subject to post-retirement increases following the commencement of
benefits or the participant's attainment of age 65, whichever is later.
A participant becomes fully vested after the completion of five years of
vesting service. The Retirement Plan generally provides for payments to or on
behalf of each vested participant upon such participant's retirement on his or
her normal retirement date or later, although provision is made for payment of
early retirement benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62 for those
with 5 or more years of vesting service. The normal retirement date under the
Retirement Plan is the later of the date the participant attains age 65 or
completes five years of vesting service. Death benefits are payable to a
participant's spouse or, under certain circumstances, the named beneficiary,
of a participant who dies with a vested benefit under the Retirement Plan or
while an employee. The Retirement Plan also provides for the funding of
retiree medical benefits under Section 401(h) of the IRC.
Excess and Supplemental Plans
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain an unfunded, nonqualified defined benefit excess
benefit plan, the Nationwide Insurance Enterprise Excess Benefit Plan (the
"Excess Plan") and an unfunded, nonqualified defined benefit supplemental
benefit plan pursuant to which certain participants may receive a supplemental
retirement benefit, the Nationwide Insurance Enterprise Supplemental
Retirement Plan (the "Supplemental Plan"). Any participant whose benefits are
limited under the Retirement Plan by reason of limitations under Section 415
of the IRC on the maximum benefit that may be paid under the Retirement Plan
will receive, under the Excess Plan, that portion of the benefit that he or
she would have been entitled to receive under the Retirement Plan in the
absence of such limitations. Officers who earn in excess of $160,000 annually,
have at least 5 years of vesting service and whose benefits under the
Retirement Plan are limited by reason of other certain limitations under the
IRC, may receive benefits under the Supplemental Plan. Benefits under the
Supplemental Plan will be the sum of (i) 1.25% of the participant's Final
Average Compensation times years of service (up to a maximum of 40 years) and
(ii) 0.75% of the participant's Final Average Compensation in excess of Social
Security Covered Compensation times years of service (up to a maximum of 40
years) reduced by benefits accrued under the Retirement Plan and the Excess
Plan. The benefits under the Excess and Supplemental Plans vest at the same
time as benefits vest under the Retirement Plan.
The chart below indicates the estimated maximum annual retirement benefits
that a hypothetical participant would be entitled to receive under the
Retirement Plan (including payments made under the Excess and Supplemental
Plans as a result of limitations imposed by the IRC) computed on a straight-
life annuity basis, if retirement occurred at age 65 and the number of
credited years of service and Final Average Compensation equaled the amounts
indicated. For purposes of the chart, it is assumed that the Final Average
Compensation is the same whether measured over the three-year averaging period
that applies to service accumulated prior to 1996 or the five-year period that
applies to service accumulated after 1995. In actual operation, the total
benefit
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received under the Retirement Plan (including payments made under the Excess
and Supplemental Plans) would be the total of the benefit determined based on
years of service earned under each method.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000........................... $ 30,744 $ 40,992 $ 51,241 $ 61,489 $ 71,737
150,000........................... 41,898 55,864 69,830 83,795 97,761
175,000........................... 49,398 65,864 82,330 98,795 115,261
200,000........................... 56,898 75,864 94,830 113,795 132,761
225,000........................... 64,398 85,864 107,330 128,795 150,261
250,000........................... 71,898 95,864 119,830 143,795 167,761
300,000........................... 86,898 115,864 144,830 173,795 202,761
400,000........................... 116,898 155,864 194,830 233,795 272,761
450,000........................... 131,898 175,864 219,830 263,795 307,761
500,000........................... 146,898 194,864 244,830 293,795 342,761
</TABLE>
All Named Executive Officers have a portion of their benefit calculated
based on the post-1995 definition of Final Average Compensation. As of
December 31, 1995, the number of credited years of service under the
Retirement Plan for Messrs. McFerson, Gasper, Woodward, Galloway and Brock was
23 years, 29.5 years, 32.7 years, 26.5 years and 26.5 years, respectively. Mr.
McFerson's credited years of service include, pursuant to an agreement with
Nationwide Mutual, 8.17 years in excess of those actually earned through
employment by the Nationwide Insurance Enterprise. The benefit attributable to
those additional years will be paid by Nationwide Mutual (not the Retirement
Plan) and is reduced by the benefit payable under the retirement plan of Mr.
McFerson's previous employer. Each of the Named Executive Officers earned an
additional year of service in 1996 and their benefit for such year and all
future years will be calculated under the new definition of Final Average
Compensation. Covered compensation paid by the Company for the fiscal year
ended December 31, 1996 for Messrs. McFerson, Gasper, Woodward, Galloway and
Brock was $444,217, $349,412, $348,003, $392,313 and $343,167, respectively.
SAVINGS PLANS
Savings Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Nationwide Insurance Enterprise Savings Plan
(the "Savings Plan"), a qualified profit sharing plan including a qualified
cash or deferred arrangement covering eligible employees of participating
companies within the Nationwide Insurance Enterprise. Under the Savings Plan,
participants who are not residents of Puerto Rico may elect to contribute
between 1% and 16% of their compensation to accounts established on their
behalf under the Savings Plan in the form of voluntary salary reductions on a
pre-tax basis and participants who are residents of Puerto Rico may make
contributions on an after-tax basis. The participating companies are obligated
to make matching employer contributions, for the benefit of their
participating employees, at the rate of 70% of the first 2% of compensation
deferred or contributed to the Savings Plan by each employee, and 40% of the
next 4% of compensation deferred or contributed by each employee to the
Savings Plan. All amounts contributed to the Savings Plan are held in a
separate account for each participant and are invested in one or more funds
made available under the Savings Plan and selected by the participant.
Normally, a participant receives the value of his or her account upon
termination of employment, although a participant may withdraw all or a part
of the amounts credited to his or her accounts during employment under certain
circumstances including attainment of age 59 1/2, or receive a loan of a
portion of his or her account balance. Under the Savings Plan, a participant
is immediately vested in all amounts credited to his or her account as a
result of salary deferrals (and earnings on those deferrals) or after-tax
contributions (and earnings on those contributions), as applicable. A
participant is vested in amounts attributable to employer matching
contributions (and earnings on those contributions) over a period of five
years.
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Supplemental Defined Contribution Plan
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain an unfunded, nonqualified defined contribution
supplemental benefit plan, the Nationwide Insurance Enterprise Supplemental
Defined Contribution Plan (the "DC Supplemental Plan"), which provides
benefits, equal to employer matching contributions that would have been made
under the Savings Plan for the participants, in the absence of the IRC
limitations on compensation that can be considered and amounts that can be
deferred under the Savings Plan less actual matching contributions to the
Savings Plan in the absence of the limitations under IRC Sections 401(a)(17)
and 402(g), reduced by actual employer contributions made to the Savings Plan.
Participants are limited to those officers earning in excess of $160,000
annually. Benefits under the DC Supplemental Plan vest at the same time as
employer matching contributions vest under the Savings Plan.
DEFERRED COMPENSATION PROGRAM
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain a deferred compensation program (the "Officers'
Deferred Compensation Program") pursuant to which officers of participating
companies may elect to defer payment of amounts otherwise payable to them. In
addition, participants receive credit for employer matching contributions
which were not made under the Savings Plan or DC Supplemental Plan and any
reduction in benefits under the Retirement Plan, Supplemental Plan or Excess
Plan as a result of salary or other deferrals under the Deferred Compensation
Program. An eligible officer is permitted to enter into a deferral agreement
pursuant to which such officer may annually elect to defer a portion of his or
her salary or his or her incentive compensation earned under the Management
Incentive Plan or Executive Incentive Plan during the following year. Any such
election is effective prospectively. Amounts deferred under the Officers'
Deferred Compensation Program will generally be payable in annual installments
beginning in January of the calendar year following the calendar year in which
the officer terminates employment. Amounts deferred under the Officers'
Deferred Compensation Program are credited with interest. The interest rate is
based on the fixed rate option in the Savings Plan.
SEVERANCE PAY PLAN
Nationwide Mutual and certain of its subsidiaries and affiliates, including
Nationwide Life, maintain the Nationwide Salaried Employees Severance Pay Plan
(the "Severance Plan"), an unfunded plan which provides severance benefits to
employees whose employment is involuntarily terminated due to unsatisfactory
job performance or job elimination without an offer of replacement employment
within the Nationwide Insurance Enterprise or with a successor employer.
Employees will not be entitled to benefits if their employment is terminated
as a result of theft, absenteeism, insubordination and other similar problems.
The benefit provided is a lump sum payment determined on the basis of years of
service completed (a minimum of 6 months of service is required) and salary,
with a maximum benefit of 8 weeks of salary plus an additional week of salary
for each full or partial year of service in excess of 11.
LONG-TERM EQUITY COMPENSATION PLAN
General
The Board of Directors of the Company has adopted, and Nationwide Corp., as
the sole stockholder of the Company, has approved, the Nationwide Financial
Services, Inc. 1996 Long-Term Equity Compensation Plan (the "LTEP"). The
purpose of the LTEP is to benefit the stockholders of the Company by
encouraging high levels of performance by selected officers, directors and
employees of the Company and certain of its affiliates, attracting and
retaining the services of such individuals and aligning the interests of such
individuals with those of the stockholders.
The LTEP grants the Compensation Committee of the Board of Directors of the
Company, which will administer the LTEP, flexibility in creating the terms and
restrictions deemed appropriate for particular awards as facts and
circumstances warrant. The LTEP is intended to constitute a nonqualified,
unfunded, unsecured plan for incentive and deferred compensation and is not
intended to be subject to any requirements of ERISA. The
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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 December 11, 2006, and the LTEP may be terminated by the Board of
Directors of the Company prior to such date. In the event of expiration or
earlier termination of the LTEP, the LTEP will remain in effect until such
time as all awards granted thereunder have been satisfied or have expired. No
new awards may by made under the LTEP after its expiration or termination.
Administration
The LTEP will be administered by the Compensation Committee of the Board of
Directors of the Company. The Company intends that each member of the
Compensation Committee shall be a "nonemployee director" within the meaning
and for purposes of Rule 16b-3 under the Exchange Act and an "outside
director" within the meaning and for purposes of Section 162(m) of the IRC.
Under the LTEP, the Compensation Committee will have authority (i) to select
the employees, officers and directors of the Company and its affiliates to
receive awards; (ii) to determine the timing, form, amount or value and terms
of grants and awards, and the terms and conditions, if any, subject to which
grants and awards will be made and become payable under the LTEP, (iii) to
construe the LTEP and to prescribe rules and regulations with respect to the
administration of the LTEP and (iv) to make such other determinations
authorized under the LTEP as the Compensation Committee deems necessary or
appropriate.
Eligibility
All employees, officers and directors of the Nationwide Insurance Enterprise
are eligible to participate.
Shares Subject to the LTEP
The number of shares of Class A Common Stock which may be issued under the
LTEP, or as to which SARs or other awards may be granted, may not exceed
million.
In the event of any increases or decreases in the number of issued and
outstanding shares of Class A Common Stock pursuant to stock splits, mergers,
reorganizations, recapitalizations, stock dividends or other 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.
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Stock Options
The Compensation Committee may grant awards in the form of options to
purchase shares of Class A Common Stock. The Compensation Committee shall,
with regard to each stock option, determine the number of shares subject to
the option and the manner and time of the option's exercise; provided,
however, that the maximum number of shares of Class A Common Stock that may be
subject to stock options granted under the LTEP to an individual optionee
during any calendar year cannot exceed 100,000 shares (subject to appropriate
adjustment in the event of stock dividends, stock splits and certain other
events). The exercise price of a stock option may not be less than the fair
market value of the Class A Common Stock on the date the option is granted.
The Committee will designate each option as a non-qualified or an incentive
stock option. The option price upon exercise may, at the discretion of the
Committee, be paid by a participant in cash, shares of Class A Common Stock, a
"cashless exercise" or a combination thereof.
Prior to the consummation of the Equity Offerings, stock options will be
granted under the LTEP to the following the Named Executive Officers at an
exercise price equal to $ in the following amounts:
<TABLE>
<CAPTION>
NAMED NUMBER OF SHARES
EXECUTIVE OFFICER SUBJECT TO OPTION
----------------- -----------------
<S> <C>
Dimon Richard McFerson........................... 40,000
Joseph J. Gasper................................. 30,000
Robert J. Woodward, Jr. ......................... 10,000
Harvey S. Galloway, Jr. ......................... 7,500
James E. Brock................................... 7,500
</TABLE>
Additionally, 206,500 and 26,000 stock options will be granted in the
aggregate under the LTEP to other officers and directors, respectively, of the
Company and its subsidiaries.
Stock Appreciation Rights
The LTEP also authorizes the Compensation Committee to grant SARs either
independent of, or in connection with, a stock option. If granted with a stock
option, exercise of the SAR will result in the surrender of the right to
purchase the shares under the option to which the SAR was exercised. Upon
exercising an SAR, the holder receives for each share with respect as to which
the SAR is exercised, an amount equal to the difference between the exercise
price and the fair market value of Class A Common Stock on the date of
exercise. Payment of such amount may be made in shares of Class A Common
Stock, cash, or a combination thereof, as determined by the Compensation
Committee. The maximum number of shares of Class A Common Stock that may be
subject to SARs granted under the LTEP to an individual grantee during any
calendar year cannot exceed 100,000 shares (subject to appropriate adjustment
in the event of stock dividends, stock splits and certain other events).
Restricted Stock
The LTEP provides that shares of Class A Common Stock subject to certain
restrictions including restrictions on transferability may be awarded from
time to time as determined by the Compensation Committee. The Compensation
Committee will determine the nature and extent of the restrictions on such
shares, the duration of such restrictions and any circumstance under which
restricted shares will be forfeited by the participant. Subject to such
restrictions as the Compensation Committee shall determine, participants
holding shares of restricted stock may exercise full voting rights with
respect to such shares and may receive dividends payable to holders of such
shares. The maximum number of shares of Class A Common Stock that may be
granted in the form of restricted shares to an individual grantee during any
calendar year cannot exceed 100,000 shares (subject to appropriate adjustment
in the event of stock dividends, stock splits and certain other events).
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Prior to the consummation of the Equity Offerings, restricted stock will be
granted under the LTEP to the following officers of the Company in the
following amounts:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF RESTRICTED STOCK
NAMED (3 YEAR
EXECUTIVE OFFICER RESTRICTION)
----------------- -------------------
<S> <C>
Diman Richard McFerson 15,000
Joseph J. Gasper 10,000
Robert J. Woodward, Jr. 3,500
Harvey S. Galloway, Jr. 3,000
James E. Brock 3,000
</TABLE>
Additionally, 73,750 and 5,000 shares of restricted stock will be granted in
the aggregate under the LTEP to other officers and directors, respectively, of
the Company and its subsidiaries.
Performance Awards
The LTEP provides for the Compensation Committee to grant performance
awards, consisting of performance units and/or performance shares, to eligible
persons under the LTEP from time to time. The beginning value of performance
units is set by the Compensation Committee at the time of grant, while the
beginning value of performance shares is equal to the fair market value of the
shares of the Class A Common Stock at the time of grant. A performance award
will be contingent upon future performance by the Company or any subsidiary,
division or department thereof. The Compensation Committee shall establish at
the time of grant the relevant performance criteria. Performance periods may
overlap and participants may be awarded performance units and performance
shares having different performance criteria. Unless the Compensation
Committee otherwise determines, in the event of a participant's termination as
an employee or director before the end of any relevant performance period
(other than due to death, disability or retirement), the participant will not
be entitled to any performance award related to such period. Subject to the
discretion of the Compensation Committee, participants who have earned shares
of Class A Common Stock in connection with grants of performance awards may
exercise full voting rights with respect to such shares and may receive
dividends payable to holders of such shares. Payment of a performance award
may be made in cash, Class A Common Stock or a combination thereof, as
determined by the Committee. The benefit to the grantee of a performance award
is the difference between its beginning value and its value at the end of the
performance period. The maximum performance award that may be granted to an
individual grantee during any calendar year cannot exceed the value of 100,000
shares of Class A Common Stock (subject to appropriate adjustment in the event
of stock dividends, stock splits and certain other events).
Award Agreements
Each award under the LTEP will be evidenced by an agreement in such form and
containing such provisions consistent with the provisions of the LTEP as the
Compensation Committee from time to time approves. In applicable situations,
such agreements may include provisions to qualify as an incentive stock
option, or providing for the payment of the option price, in whole or in part,
by the delivery of a number of shares of Class A Common Stock (plus cash if
necessary) having a fair market value equal to the option price. Such
agreements may also include provisions relating to (i) vesting, (ii) tax
matters (including provisions covering any applicable employee wage
withholding requirements), and (iii) any other matters not inconsistent with
the terms and 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
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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 % and
% ( % and % if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock outstanding and the
combined voting power of the stockholders of the Company, respectively,
following the Equity Offerings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXISTING ARRANGEMENTS WITH THE NATIONWIDE INSURANCE ENTERPRISE
Organization of the Company
The Company was formed in November 1996 as a holding company for Nationwide
Life and the other companies within the Nationwide Insurance Enterprise that
offer or distribute long-term savings and retirement products. On January 1,
1997, Nationwide Life paid a dividend to Nationwide Corp. consisting of 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 Corp. will contribute to the Company all of the
outstanding capital stock of Nationwide Life and the other companies within
the Nationwide Insurance Enterprise that offer or distribute long-term savings
and retirement products.
On December 31, 1996, Nationwide Life paid a $50.0 million cash dividend to
Nationwide Corp. In addition, after the contribution by Nationwide Corp. of
the capital stock of Nationwide Life to the Company but prior to the
consummation of the Equity Offerings, Nationwide Life will dividend to the
Company, and the Company will subsequently dividend to Nationwide Corp.,
securities having an aggregate market value of $ million.
Effective as of January 1, 1996, Nationwide Life entered into a 100%
modified coinsurance agreement with Employers Life pursuant to which all of
Nationwide Life's nonvariable group and wholesale life insurance business and
group and franchise health insurance business was reinsured by Employers Life.
Nationwide Life also entered into a 100% modified coinsurance agreement with
Nationwide Mutual effective as of January 1, 1996, pursuant to which all of
Nationwide Life's individual accident and health insurance business was
reinsured by Nationwide Mutual. See "--Modified Coinsurance Agreements."
Following the Equity Offerings, Nationwide Corp. will be the controlling
stockholder of the Company. Upon completion of the Equity Offerings,
Nationwide Corp. will own all of the outstanding shares of the Class B Common
Stock representing % and % ( % and % if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of Common
Stock outstanding and the combined voting power of the stockholders of the
Company.
Federal Income Taxes
Nationwide Mutual and its U.S. subsidiaries, including the Company and its
subsidiaries, file a consolidated federal income tax return. The members of
the consolidated group currently have a tax sharing arrangement which
provides, in effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed. For the 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.
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Lease
Pursuant to an arrangement between Nationwide Mutual and certain of 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 Employers Life, and Employers Life assumes,
Nationwide Life's nonvariable group and wholesale life insurance business and
group and franchise health insurance business and any ceded or assumed
reinsurance applicable to such group business. For the nine months ended
September 30, 1996, Nationwide Life ceded $169.3 million of premium to
Employers Life.
Effective as of January 1, 1996, Nationwide Life also entered into a 100%
modified coinsurance agreement with Nationwide Mutual. Under the agreement,
Nationwide Life cedes to Nationwide Mutual, and Nationwide Mutual assumes,
Nationwide Life's individual accident and health insurance business and any
ceded or assumed reinsurance applicable to such business. For the nine months
ended September 30, 1996, Nationwide Life ceded $74.1 million of premium to
Nationwide Mutual.
Nationwide Life entered into these reinsurance agreements because the
accident and health and group life insurance business was unrelated to the
Company's long-term savings and retirement products. Under the modified
coinsurance agreements, invested assets are retained by the ceding company and
investment earnings are paid to the reinsurer. Under the terms of such
agreements, the investment risk is borne by Employers Life or Nationwide
Mutual, as the case may be. The contracts will remain in force until all
policy obligations are settled. However, with respect to the agreement between
Nationwide Life and Nationwide Mutual, either party may terminate the contract
on January 1 of any year with prior notice. The Company believes that the
terms of such modified coinsurance contracts are consistent in all material
respects with what the Company could have obtained with unaffiliated parties.
Total premiums ceded under the reinsurance agreements were $322.5 million,
$340.3 million and $330.4 million during 1995, 1994 and 1993, respectively.
The effect of the reinsurance agreements was an increase (decrease) in the
Company's income before federal income tax expense and cumulative effect of
changes in accounting principles of $2.6 million, ($13.4 million) and ($21.3
million) during 1995, 1994 and 1993, respectively.
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-
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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.
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 Equity Offerings 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 which will become
effective for 1996 and subsequent years, as long as the Company is included in
Nationwide Mutual's consolidated federal income tax return. It will also be
effective for any year in which the Company is included in a consolidated or
combined state or local tax return. Under the Tax Sharing Agreement,
Nationwide Mutual will compute its federal tax on a consolidated basis, and
its state and/or local taxes on a combined basis (in those states or other
jurisdictions in which Nationwide Mutual files a combined return for such
year). Each corporation that is included in the consolidated and/or combined
return shall compute its federal, state, and/or local tax liability on a
separate basis, and the federal, state, and/or local tax liability of each
corporation shall be determined by applying the Percentage Method for
allocating tax liability, all as set forth in Treas. Reg. 1.1502-33(d)(3),
using a fixed percentage of 100%. Pursuant to that regulation, each
corporation's federal income tax liability will be equal to the consolidated
federal income tax liability (including any amounts determined to be due as a
result of a redetermination of the tax liability of the consolidated group of
which Nationwide Mutual is the common parent, whether arising from any audit
or otherwise, but in all instances without regard to the alternative minimum
tax) of Nationwide Mutual times a fraction, the numerator of which is the
federal tax liability of such corporation
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determined on a separate basis, and the denominator of which is the aggregated
federal tax liability of all corporations in the consolidated group,
determined on a separate basis. Any corporation that has no federal income tax
liability when computed on a separate basis is ignored for purposes of
allocating the consolidated tax liability. The state and local tax liability,
in those states or other jurisdictions in which a combined return is filed,
shall be determined in a manner consistent with the foregoing description. The
Company will pay its tax liability, as computed above, to Nationwide Mutual.
The Company will be responsible for all taxes, including assessments, if any,
for prior years with respect to all other taxes payable by the Company or any
of its subsidiaries, and for all other federal, state and local taxes that may
be imposed upon the Company and that are not addressed in the Tax Sharing
Agreement.
By virtue of its control of the Company and the terms of the Tax Sharing
Agreement, Nationwide Mutual effectively will control all of the Company's tax
decisions. Under the Tax Sharing Agreement, Nationwide Mutual will have sole
authority to respond to and conduct all tax proceedings (including tax audits)
relating to the Company, to file all returns on behalf of the Company and to
determine the amount of the Company's liability to (or entitlement to payment
from) Nationwide Corp. under the Tax Sharing Agreement. This arrangement may
result in conflicts of interest between the Company and Nationwide Mutual. For
example, under the Tax Sharing Agreement, Nationwide Mutual may choose to
contest, compromise or settle any adjustment or deficiency proposed by the
relevant tax authority in a manner that may be beneficial to Nationwide Mutual
and detrimental to the Company. Under the Tax Sharing Agreement, however,
Nationwide Mutual is obligated to act in good faith with regard to all persons
included in the applicable returns.
Intercompany Agreement
The Company, Nationwide Mutual and Nationwide Corp. will enter into the
Intercompany Agreement, certain provisions of which are summarized below. As
used herein, "Nationwide Mutual" means Nationwide Mutual collectively with its
subsidiaries and affiliates (other than the Company and its subsidiaries).
Nationwide Mutual Consent to Certain Events. The Intercompany Agreement will
provide that until Nationwide Mutual and its affiliates cease to control at
least 50% of the combined voting power of the outstanding voting stock of the
Company, the prior written consent of Nationwide Mutual will be required for:
(i) any consolidation or merger of the Company or any of its subsidiaries with
any person (other than with a wholly owned subsidiary); (ii) any sale, lease,
exchange or other disposition or acquisition of assets by the Company or any
of its subsidiaries (other than transactions to which the Company and its
subsidiaries are the only parties), or any series of related dispositions or
acquisitions, involving consideration in excess of $250 million; (iii) any
change in the authorized capital stock of the Company or the creation of any
additional class or series of capital stock of the Company; (iv) any issuance
by the Company or any subsidiary of the Company of any equity securities or
rights, warrants or options to purchase such equity securities, except (a) up
to shares of Class A Common Stock pursuant to employee and director stock
option, profit sharing and other benefit plans of the Company and its
subsidiaries and any options exercisable therefor, (b) shares of Class A
Common Stock issued upon the conversion of any Class B Common Stock, (c) the
issuance of shares of capital stock of a wholly owned subsidiary of the
Company to the Company or another wholly owned subsidiary of the Company and
(d) in the Equity Offerings; (v) the dissolution, liquidation or winding up of
the Company; (vi) the amendment of the Certificate and certain provisions of
the Bylaws affecting corporate governance; (vii) the election, removal or
filling of a vacancy in the office of the Chairman or Chief Executive Officer
or President of the Company; (viii) the declaration of dividends on any class
or series of capital stock of the Company, except dividends not in excess of
the most recent regular cash dividend or any dividend per share not in excess
of 15% of the then current per share market price of the Class A Common Stock;
(ix) capital expenditures or series of related capital expenditures of the
Company or any of its subsidiaries in excess of $250 million during any period
of 12 consecutive months; (x) the creation, incurrence or guaranty by the
Company or any of its subsidiaries of indebtedness for borrowed money in
excess of $100 million, except the Fixed Income Offerings; 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.
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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. In addition, the
Intercompany Agreement will provide that the Company and its subsidiaries will
not, without the prior written consent of Nationwide Mutual, take any action
with respect to (i) any litigation or proceeding involving the Service Marks,
(ii) any change in the Company's names, logos and other identifications that
might reasonably be expected to adversely affect the Service Marks or (iii)
any advertising campaigns or strategies that use the Service Marks or that
refer to any member of the Nationwide Insurance Enterprise that are
inconsistent with Nationwide Mutual's guidelines and standards. Nationwide
Mutual has the right to revoke the license under certain circumstances
relating to advertising, promotion or use of the Service Marks in a manner
contrary to Nationwide Mutual guidelines and standards. In addition,
Nationwide Mutual can revoke any of the Company's subsidiaries' use of the
Service Marks if there is a change of control of any such subsidiary of the
Company that is licensed to use the Service Marks. A revocation by Nationwide
Mutual of the license to use the Service Marks could have a material adverse
effect on the Company.
Equity Purchase Rights. The Company will agree that, to the extent permitted
by the NYSE and so long as Nationwide Mutual controls at least 50% of the
combined voting power of the outstanding voting stock of the Company,
Nationwide Corp. may purchase its pro rata share (based on its then current
percentage voting interest in the Company) of any voting equity securities to
be issued by the Company (excluding any such securities offered pursuant to
employee stock options or other benefit plans, divided reinvestment plans and
other offerings other than for cash) (the "Equity Purchase Rights").
Registration Rights. The Company will grant to Nationwide Corp. certain
demand and "piggyback" registration rights with respect to shares of Common
Stock owned by it. Nationwide Corp. has the right to request up to two demand
registrations in each calendar year, but not more than four in any five year
period. Nationwide Corp. will also have the right, which it may exercise at
any time and from time to time, to include the shares of Common Stock held by
it in any registration of common equity securities of the Company initiated by
the Company on its own behalf or on behalf of any other stockholders of the
Company. These rights will be subject to certain "blackout" provisions. Such
registration rights will be transferable by Nationwide Corp. The Company will
agree to pay all costs and expenses in connection with each such registration,
except underwriting discounts and commissions applicable to the shares of
Common Stock sold by Nationwide Corp. The Intercompany Agreement will contain
customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification granted by
parties thereunder in connection with the registration of Common Stock on
behalf of Nationwide Mutual.
Indemnification. The Intercompany Agreement will provide that the Company
will indemnify Nationwide Mutual and its respective officers, directors,
employees and agents (collectively, the "Indemnitees") against losses based
on, arising out of or resulting from (i) the use of the Service Marks and (ii)
any acts or omissions arising out of performances of the Intercompany
Agreement by the Company and its subsidiaries. In addition, the Company will
agree to indemnify the Indemnitees against certain civil liabilities,
including liabilities under the Securities Act, relating to misstatements in
or omissions from the Registration Statement of which this 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
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indemnify the Company). Nationwide Mutual also will agree to indemnify the
Company and its subsidiaries and each of their respective officers, directors,
employees and agents against losses based on, arising out of or resulting from
any breach by Nationwide Corp. or Nationwide Mutual of the Intercompany
Agreement and certain other specifically identified matters.
Nationwide Insurance Enterprise Insurance Agents. In the Intercompany
Agreement, Nationwide Mutual will agree to allow the Company to distribute its
variable annuity, fixed annuity and individual universal, variable and
traditional life insurance products through Nationwide Insurance Enterprise
insurance agents. Such right is exclusive to the Company, subject to the
limited right of certain other members of the Nationwide Insurance Enterprise
to sell such products through the agency force, for at least five years
following the Equity Offerings. Thereafter, the Intercompany Agreement
provides that Nationwide Mutual will only have the option to terminate the
Company's right to distribute products through Nationwide Insurance Enterprise
insurance agents on one year's notice if Nationwide Corp. and its affiliates
no longer own at least 50% of the combined voting power of the outstanding
voting stock of the Company. The termination of such right could have an
adverse effect on the Company's ability to distribute certain of its products.
In 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 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 record
entitled to exercise at least a majority of the voting power of the
Corporation, represented in person or by proxy, shall constitute a quorum for
the transaction of business; and the affirmative vote of the holders,
represented in person or by proxy, of a majority of the Common Stock present
at a meeting at which a quorum is in existence shall be the act of the
stockholders of the Company. The superior voting rights of the Class B Common
Stock might discourage unsolicited merger proposals and unfriendly tender
offers.
Transfer
The Certificate does not contain any restrictions on the transfer of shares
of Class A Common Stock. Upon any sale or other transfer of shares of Class B
Common Stock to any person or persons other than a member of the Nationwide
Insurance Enterprise, such shares of Class B Common Stock will be converted
into an equal number of shares of Class A Common Stock.
Conversion
Class A Common Stock has no conversion rights. Class B Common Stock is
convertible into Class A Common Stock, in whole or in part, at any time and
from time to time at the option of the holder, on the basis of one share of
Class A Common Stock for each share of Class B Common Stock converted. If at
any time after the initial issuance of shares of Class A Common Stock the
number of outstanding shares of Class B Common Stock falls below 5% of the
aggregate number of issued and outstanding shares of Common Stock, then each
outstanding share of Class B Common Stock shall automatically convert into one
share of Class A Common Stock. In the event of any sale or transfer of shares
of Class B Common Stock to any person or persons other than a member of the
Nationwide Insurance Enterprise such shares of Class B Common Stock so
transferred shall be automatically converted into an equal number of shares of
Class A Common Stock.
Dividends
Holders of Common Stock are entitled to receive cash dividends pro rata on a
per share basis if and when such dividends are declared by the Board of
Directors of the Company from funds legally available therefor. In
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the case of any dividend paid other than in cash, Common Stock (or securities
convertible into or exchangeable for Common Stock), holders of Class A Common
Stock and Class B Common Stock are entitled to receive such dividend pro rata
on a per share basis. Dividends paid in Common Stock (or securities
convertible into or exchangeable for Common Stock) may be paid in shares of
Class A Common Stock (or securities convertible into or exchangeable for Class
A Common Stock) on the Class A Common Stock and in shares of Class B Common
Stock (or securities convertible into or exchangeable for Class B Common
Stock) on the Class B Common Stock.
Liquidation, Merger or Consolidation
Holders of Class A Common Stock and Class B Common Stock share with each
other on a ratable basis as a single class in the net assets of the Company
available for distribution in respect of the Common Stock in the event of
liquidation or any payments made on the Common Stock in the event of a merger
or consolidation of the Company.
PREFERRED STOCK
Under the Certificate, the Company has authority to issue 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 in any resolution adopted by the Board of Directors of the
Company establishing any class of Preferred Stock. The Board of Directors of
the Company has the authority to issue shares of Preferred Stock without
further action of the stockholders. The ability of the Board of Directors to
issue Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. No
shares of Preferred Stock have been issued or are outstanding.
CERTAIN CERTIFICATE AND BYLAW PROVISIONS
Certain provisions of the Company's Certificate and Bylaws, summarized in
the following paragraphs, may be considered to have an anti-takeover effect
and may delay, deter or prevent a tender offer, proxy contest or other
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including such an attempt as might result in payment of a
premium over the market price for shares held by stockholders.
Classified Board of Directors
The Certificate provides for the Board of Directors of the Company to be
divided into three classes of directors, with each class as nearly equal in
number as possible, serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
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.
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Number of Directors; Removal; Filling Vacancies
The Certificate provides that the Board of Directors will consist of one to
fifteen members, the exact number to be fixed from time to time by resolution
adopted by a majority of the entire Board of Directors assuming no vacancies.
The Board of Directors currently consists of 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 directorships. Accordingly, this provision could prevent a stockholder
from obtaining majority representation on the Board of Directors by permitting
the Board of Directors to enlarge the Board of Directors and fill the new
directorships with its own nominees. A director so elected by the Board of
Directors holds office until the next election of the class for which such
director has been chosen and until his successor is elected and qualified.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, the Certificate also provides that directors may be removed only
for cause and only by the affirmative vote of holders of a majority of the
outstanding voting power of the Company. The effect of these provisions is to
preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
Special Meetings of Stockholders
The Bylaws provide that special meetings of stockholders may be called by
the Chairman of the Board of Directors, the Chairman and Chief Executive
Officer--Nationwide Insurance Enterprise or the President and Chief Operating
Officer and shall be called by the Secretary at the request in writing of a
majority of the Board of Directors. Stockholders are not permitted to call
special meetings of stockholders.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Company's Bylaws provide that in order to properly submit any business
to, or to nominate any person for election to the Board of Directors at, an
annual meeting of stockholders, a stockholder must provide timely notice
thereof in writing to the Secretary of the Company. To be considered timely, a
stockholder's notice must be delivered to, or mailed and received at, the
principal executive offices of the Company (i) not less than 60 days nor more
than 90 days before the first anniversary date of the Company's proxy
statement in connection with the last annual meeting of stockholders or (ii)
if no annual meeting was held in the previous year or the date of the
applicable annual meeting has been changed by more than 30 days from the date
contemplated at the time of the previous year's proxy statement, not less than
a reasonable time, as determined by the Board of Directors, prior to the date
of the applicable annual meeting. The Bylaws also specify certain requirements
pertaining to the form and substance of a stockholder's notice. These
provisions may preclude some stockholders from making nominations for
directors at an annual or special meeting or from bringing other matters
before the stockholders at a meeting.
Class B Common Stock
The superior voting rights of the Class B Common Stock might discourage
unsolicited merger proposals and unfriendly tender offers.
No Action by Written Consent of the Stockholders
The Certificate does not allow the stockholders of the Company to take
action by written consent in lieu of a meeting.
Delaware Takeover Statute
The Company is subject to the provisions of Section 203 of the DGCL. Section
203 prohibits a Delaware corporation from engaging in any "business
combination" with any "interested stockholder" for a period of three years
following the time that such stockholder became an interested stockholder
unless (i) prior to such
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time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (ii) upon the consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation, as
defined in Section 203; or (iii) at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3 of the outstanding voting stock which is
not owned by the interested stockholder. For these purposes, the term
"business combination" includes, but is not limited to, mergers, asset or
stock sales and other similar transactions with an "interested stockholder."
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of
the corporation's voting stock.
Limitation on Liability
The Company's Certificate contains a provision that is designed to limit the
directors' liability to the extent permitted by the DGCL and any amendments
thereto. Specifically, directors will not be held liable to the Company or its
stockholders for an act or omission in such capacity as a director, except for
liability as a result of (i) a breach of the duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper repurchase of the Company's stock under Section
174 of the DGCL, or (iv) actions or omissions pursuant to which the director
received an improper personal benefit. The principal effect of the limitation
on liability provision is that a stockholder is unable to prosecute an action
for monetary damages against a director of the Company unless the stockholder
can demonstrate one of the specified bases for liability. This provision,
however, does not eliminate or limit director liability arising in connection
with causes of action brought under the federal securities laws. The Company's
Certificate does not eliminate its directors' duty of care. The inclusion of
this provision in the Company's Certificate may, however, discourage or deter
stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise have benefited the Company and its stockholders. This
provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
Indemnification
The Company's Bylaws also provide that the Company will indemnify its
directors and officers to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, settlements, legal fees and other expenses incurred in
connection with pending or threatened legal proceedings because of the
director's or officer's position with the Company or another entity that the
director or officer serves at the Company's request, subject to certain
conditions, and to advance funds to its directors and officers to enable them
to defend against such proceedings. To receive indemnification, the director
or officer must have been successful in the legal proceeding or acted in good
faith and in what was reasonably believed to be a lawful manner in the
Company's best interest.
Certificate Provisions Relating to Corporate Opportunities
The Certificate provides that except as Nationwide Mutual (or its successors
or assigns) may otherwise agree in writing and except as set forth in the
Intercompany Agreement:
(i) no member of the Nationwide Insurance Enterprise shall have a duty to
refrain from engaging directly or indirectly in the same or similar
business activities or lines of business as the Company; and
(ii) no member of the Nationwide Insurance Enterprise, nor any director,
officer, employee or agent or any member of Nationwide Mutual (except as
provided below), will be liable to the Company or to its stockholders for
breach of any fiduciary duty by reason of any such activities of such
member's or of such person's participation thereon.
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The Certificate also provides that in the event that any member of the
Nationwide Insurance Enterprise (other than the Company) acquires knowledge of
a potential transaction or matter which may be a corporate opportunity both
for a member of the Nationwide Insurance Enterprise and the Company, no member
of the Nationwide Insurance Enterprise shall have any duty to communicate or
offer such corporate opportunity to the Company nor shall any such member be
liable to the Company or its stockholders for breach of any fiduciary duty as
a stockholder of the Company or controlling person of a stockholder by reason
of the fact that any such member of the Nationwide Insurance Enterprise
pursues or acquires such opportunity for itself, directs such corporate
opportunity to another person or entity or does not communicate information
regarding, or offer, such corporate opportunity to the Company.
Further, the Certificate provides that in the event that a director,
officer, employee or agent of the Company who is also a director, officer,
employee or agent of any member of the Nationwide Insurance Enterprise
acquires knowledge of a potential transaction or matter that may be a
corporate opportunity for the Company or any member of the Nationwide
Insurance Enterprise (whether such potential transaction or matter is proposed
by a third party or is conceived of by such director, officer, employee or
agent of the Company), such director, officer, employee or agent shall be
entitled to offer such corporate opportunity to the Company or such member of
the Nationwide Insurance Enterprise as such director, officer, employee or
agent deems appropriate under the circumstances in his or her sole discretion,
and no such director, officer, employee or agent shall be liable to the
Company or its stockholders for breach of any fiduciary duty or duty of
loyalty or failure to act in (or not opposed to) the best interests of the
Company or the derivation of any improper personal benefit by reason of the
fact that (i) such director, officer, employee or agent offered such corporate
opportunity to such member of the Nationwide Insurance Enterprise (rather than
the Company) or did not communicate information regarding such corporate
opportunity to the Company or (ii) such member of the Nationwide Insurance
Enterprise pursues or acquires such corporate opportunity for itself or
directs such corporate opportunity to another person or does not communicate
information regarding such corporate opportunity to the Company. The
enforceability of the provisions discussed above under the DGCL has not been
established and counsel to the Company has not delivered an opinion as to the
enforceability of such provisions. These provisions of the Certificate may
eliminate certain rights that might have been available to stockholders under
the DGCL had such provisions not been included in the Certificate.
The Company's Board of Directors currently consists of 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 other companies within the
Nationwide Insurance Enterprise.
The foregoing provisions of the Certificate shall expire on the date that
the members of the Nationwide Insurance Enterprise cease to beneficially own
(directly or indirectly) in the aggregate Common Stock representing at least
50% of the voting power of the outstanding shares of Common Stock.
LISTINGS
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 FIXED INCOME OFFERINGS
Shortly following the Equity Offerings, the Company expects to consummate
the Note Offering, and the NFS Trust expects to consummate the Capital
Securities Offering. All of the NFS Trust's common trust securities will be
held by the Company. The principal asset of the NFS Trust will be the
Debentures. See "Capitalization" and "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Effect of Dividends and the
Fixed Income Offerings."
The Senior Notes will rank pari passu with all other senior unsubordinated
indebtedness of the Company. The Senior Notes may be redeemed by the Company
in whole or in part prior to their final maturity upon the terms and at the
redemption prices specified in the prospectus relating to the Note Offering.
The Senior Notes are not entitled to the benefit of any sinking fund.
The consummation of the Equity Offerings is not conditioned on the
completion of the Fixed Income Offerings, and there can be no assurance that
either one or both of the Fixed Income Offerings will be consummated.
The Fixed Income Offerings are being made pursuant to separate prospectuses.
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of Class A Common Stock outstanding as a result of the
Equity Offerings will be freely tradeable without restriction or further
registration under the Securities Act by persons other than affiliates of the
Company. The shares of Class B Common Stock held by Nationwide Corp. are
deemed "restricted securities" as defined in Rule 144 under the Securities Act
and may not be resold in the absence of registration under the Securities Act
or pursuant to an exemption from such registration, including the exemptions
contained in Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including affiliates of the Company who have
beneficially owned "restricted securities" for at least two years, may resell
within any three-month period a number of such shares that does not exceed the
greater of one percent of the outstanding shares of Class A Common Stock or
the reported average weekly trading volume of the Class A Common Stock on all
national securities exchanges during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed to be an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned "restricted securities" for at least three years, may
resell such shares under Rule 144 without regard to the volume limitations,
manner-of-sale provisions or notice requirements. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through the
use of one or more intermediaries, controls, or is controlled by, or is in
common control with, such issuer. Nationwide Corp., as the holder of all of
the Class B Common Stock, is an "affiliate" of the Company for this purpose.
Sales of "restricted securities" by affiliates, even after a three-year
holding period, must continue to be made in brokers' transactions subject to
the volume limitations described above. The foregoing summary of Rule 144 is
not intended to be a complete description of that rule. Each share of Class B
Common Stock is convertible into one share of Class A Common Stock at any time
and is convertible automatically in certain circumstances, including upon
certain transfers. See "Description of Capital Stock--Class A Common Stock and
Class B Common Stock--Conversion." There can be no assurance that shares of
Class B Common Stock will not be converted into Class A Common Stock (which
shares would also be "restricted securities"), or that any holder or holders
of such "restricted securities" will not seek to sell their shares following
the offerings whether pursuant to registration rights or otherwise. Nationwide
Corp. has certain registration rights. See "Certain Relationships and Related
Transactions--New Agreements with the Nationwide Enterprise--Intercompany
Agreement--Registration Rights."
98
<PAGE>
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, except for the shares of
Class A Common Stock being reserved for sale at the initial public offering
price to the employees, directors and agents of the Company and the Nationwide
Insurance Enterprise as described in this Prospectus.
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock and there can be no assurance that an active trading market
will develop and continue upon completion of the Equity Offerings or that the
market price for the Class A Common Stock will not decline below the initial
public offering price. Sales of substantial amounts of Class A Common Stock or
Class B Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Class A Common Stock.
99
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "U.S. Underwriting Agreement"), the
Underwriters named below (the "U.S. 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 numbers of shares of Class A Common Stock:
<TABLE>
<CAPTION>
Number of
Underwriter U.S. Shares
----------- -----------
<S> <C>
Credit Suisse First Boston Corporation...........................
Morgan Stanley & Co. Incorporated................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
---
Total..........................................................
===
</TABLE>
The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters are subject to certain conditions precedent and that the U.S.
Underwriters will be obligated to purchase all of the U.S. Shares offered
hereby (other than those shares covered by the over-allotment option described
below) if any are purchased. The U.S. Underwriting Agreement provides that, in
the event of a default by a U.S. Underwriter, in certain circumstances the
purchase commitments of non-defaulting U.S. Underwriters may be increased or
the U.S. Underwriting Agreement may be terminated.
The Company has entered into a Subscription Agreement dated , 1997 (the
"Subscription Agreement") with the Managers of the International Offering (the
"Managers" and, together with the U.S. Underwriters, the "Underwriters")
providing for the concurrent offer and sale of the International Shares
outside the United States and Canada. The closing of the U.S. Offering is a
condition to the closing of the International Offering and vice versa.
The Company has granted to the U.S. Underwriters and the Managers an option,
exercisable by Credit Suisse First Boston Corporation on behalf of the U.S.
Underwriters and the Managers, expiring at the close of business on the 30th
day after the date of this Prospectus, to purchase up to additional shares
of Class A Common Stock (the "Option Shares") at the initial public offering
price less the underwriting discounts and commissions, all as set forth on the
cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Class A Common Stock. To the
extent that such option is exercised, each U.S. Underwriter and each Manager
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of the Option Shares as the number of U.S.
Shares set forth next to such U.S. Underwriter's name in the preceding table
and as the number set forth next to such Manager's name in the corresponding
table in the prospectus relating to the International Shares bears to the sum
of the total number of shares of Class A Common Stock in such tables.
The Company has been advised by the Representatives that the U.S.
Underwriters propose to offer the U.S. Shares in the United States and Canada
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 $ per share, and the U.S. Underwriters
and such dealers may allow a discount of $ per share on sales
100
<PAGE>
to certain other dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
Representatives.
The public offering price, the aggregate underwriting discounts and
commissions per share and the per share discount to dealers for the U.S.
Offering and the concurrent International Offering will be identical. Pursuant
to an Agreement between the U.S. Underwriters and the Managers (the
"Intersyndicate Agreement") relating to the Offerings, changes in the public
offering price, concession and discount to dealers will be made only upon the
mutual agreement of Credit Suisse First Boston Corporation, as representative
of the U.S. Underwriters, and CS First Boston Limited ("CSFBL") on behalf of
the Managers.
Pursuant to the Intersyndicate Agreement, each of the U.S. Underwriters has
agreed that, as part of the distribution of the U.S. Shares and subject to
certain exceptions, it has not offered or sold, and will not offer or sell,
directly or indirectly, any Class A Common Stock or distribute any prospectus
relating to the Class A Common Stock to any person outside the United States
or Canada or to any other dealer who does not so agree. Each of the Managers
has agreed or will agree that, as part of the distribution of the
International Shares and subject to certain exceptions, it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of Class
A Common Stock or distribute any prospectus relating to the Class A Common
Stock in the United States or Canada or to any other dealer who does not so
agree. The foregoing limitations do not apply to stabilization transactions or
to transactions between the U.S. Underwriters and the Managers pursuant to the
Intersyndicate Agreement. As used herein, "United States" means the United
States of America (including the States and the District of Columbia), its
territories, possessions and other areas subject to its jurisdiction, "Canada"
means Canada, its provinces, territories, possessions and other areas subject
to its jurisdiction, and an offer or sale shall be in the United States or
Canada if it is made to (i) any individual resident in the United States or
Canada or (ii) any corporation, partnership, pension profit-sharing or other
trust or other entity (including any such entity acting as an investment
adviser with discretionary authority) whose office most directly involved with
the purchase is located in the United States or Canada.
Pursuant to the Intersyndicate Agreement, sales may be made between the U.S.
Underwriters and the Managers of such number of shares of Class A Common Stock
as may be mutually agreed upon. The price of any shares so sold will be the
public offering price, less such amount as may be mutually agreed upon by
Credit Suisse First Boston Corporation, as representative of the U.S.
Underwriters, and CSFBL, on behalf of the Managers, but not exceeding the
selling concession applicable to such shares. To the extent there are sales
between the U.S. Underwriters and the Managers pursuant to the Intersyndicate
Agreement, the number of shares of Class A Common Stock initially available
for sale by the U.S. Underwriters or by the Managers may be more or less than
the amount appearing on the cover page of the Prospectus. Neither the U.S.
Underwriters nor the Managers are obligated to purchase from the other any
unsold shares of Class A Common Stock.
The Company has agreed that, without the prior written consent of Credit
Suisse First Boston Corporation, it 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.
The Company has agreed to indemnify the U.S. Underwriters and the Managers
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments which the U.S. Underwriters and the Managers
may be required to make in respect thereof.
Application is being made for listing of the Class A Common Stock on the
NYSE under the symbol "NFS." The U.S. Underwriters will undertake to the NYSE
that the Class A Common Stock will be sold to ensure that NYSE distribution
standards will be met requiring that sales in the United States will be made
in lots of 100 or more shares of Class A Common Stock to a sufficient number
of persons to establish a minimum of 2,000 round lot beneficial holders after
the U.S. Offering.
101
<PAGE>
The Representatives have informed the Company that they do not expect sales
to any accounts over which the U.S. Underwriters exercise discretionary
authority to exceed 5% of the shares offered in the Offerings.
At the request of the Company, up to a maximum of 7% of the shares of Class
A Common Stock are being reserved for sale at the initial public offering
price as set forth on the cover page of this Prospectus to the employees,
officers, directors and agents of the Company and other members of the
Nationwide Insurance Enterprise subject to confirmation after the pricing of
the Equity Offerings. The shares of Class A Common Stock sold through the
reserved share program will be sold subject to the same terms and conditions
as all other shares of Class A Common Stock sold in the Equity Offerings. The
number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any shares not so purchased will be offered by the U.S. Underwriters
to the general public on the same basis as the other shares of Class A Common
Stock offered hereby.
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiations between the Company and Credit Suisse First
Boston Corporation on behalf of the U.S. Underwriters and the Managers. Among
the factors considered in determining the initial public offering price will
be the history of and prospects for the Company and the sectors in which it
operates, the past and present operating results of the Company and the trends
of such results, the general conditions of the securities markets at the time
of the offering and the prices of similar securities of comparable companies.
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 Fixed Income Offerings.
102
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Class A Common Stock 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 Class A Common Stock are effected. Accordingly, any
resale of Class A Common Stock 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 Class A Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Class A Common Stock 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 Class A
Common Stock 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 Class A Common Stock 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 Class A Common Stock 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
Class A Common Stock acquired on the same date and under the same prospectus
exemption.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability
partnership including professional corporations, New York, New York. Certain
other legal matters will be passed upon for the Company by W. Sidney Druen,
Esq., Senior Vice President and General Counsel. Certain legal matters
relating to the Equity Offerings will be passed upon for the Underwriters by
Dewey Ballantine, New York, New York.
103
<PAGE>
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.
104
<PAGE>
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.
The amount of cash that may be realized by
CASH VALUE....................... 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.
FIXED OPTION UNDER THE COMPANY'S
VARIABLE ANNUITY CONTRACTS.......
Includes an investment option under the
Company's individual variable annuity
contracts which provides the contractholder
a return at a specified interest rate,
fixed for a prescribed period. Also
included are the Company's general account
group annuity contracts which also provide
a return at a specified interest rate,
fixed for a prescribed period. Such
contracts are
105
<PAGE>
included as Fixed Option Under the
Company's Variable Annuity Contracts when
they are offered as companion contracts to
separate account group annuity contracts
and participants are permitted to move
funds, subject to certain limitations,
between the general account and separate
account contracts.
GENERAL ACCOUNT.................. All an insurer's assets other than those
allocated to a separate account. The
insurer bears the investment risk on the
invested assets of the general account.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES; GAAP................. United States generally accepted accounting
principles as defined by the American
Institute of Certified Public Accountants
and the Financial Accounting Standards
Board.
IMMEDIATE ANNUITY................ An annuity that begins payment immediately
after issuance.
IN FORCE......................... The total face amount of insurance coverage
under contracts that have not expired.
INSURANCE GUARANTY Associations 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.
106
<PAGE>
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.
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.
107
<PAGE>
SINGLE PREMIUM DEFERRED
ANNUITIES; SPDA'S................ Annuities that require a one-time lump sum
payment of consideration upon the issuance
of the contract with benefit payments
commencing at some future date following an
accumulation period.
STATUTORY ACCOUNTING PRACTICES... Those accounting practices prescribed or
permitted by an insurer's domiciliary state
insurance regulator for purposes of
financial reporting to regulators.
SURRENDERS AND WITHDRAWALS....... Surrenders of life insurance policies and
annuity contracts for their entire net cash
surrender values and withdrawals of a
portion of such values.
TERM LIFE INSURANCE.............. Life insurance offering protection during a
certain number of years, but expiring
without policy cash value if the insured
survives the stated period. Most term
policies provide for guaranteed
continuation of coverage for life at
increased premium rates.
UNIVERSAL LIFE INSURANCE.........
Life insurance under which (i) premiums are
generally flexible, (ii) the level of death
benefits may be adjusted and (iii) 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.
108
<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............................................ 327,916 355,718
Assets held in Separate Accounts (note 8)............... 18,591,108 12,087,117
----------- ----------
$37,999,411 28,878,150
=========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims (notes 6 and 8)....... $16,358,614 14,673,584
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
----------- ----------
35,889,358 27,384,451
----------- ----------
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
----------- ----------
$37,999,411 28,878,150
=========== ==========
</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... 25,844 (72,268) (42,171)
Increase in policy liabilities........ 135,937 118,361 79,366
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)
Short-term investments, net............. 91,659 (98,541) (10,960)
----------- ---------- ----------
Net cash used in investing
activities......................... (1,729,520) (1,272,507) (888,414)
----------- ---------- ----------
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 increase (decrease) in cash........... 5,445 (15,274) (2,757)
Cash, beginning of year................... 4,610 19,884 22,641
----------- ---------- ----------
Cash, end of year......................... $ 10,055 4,610 19,884
=========== ========== ==========
</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 in January, 1997 in anticipation of the initial public offering of
common stock of NFS described more fully in note 2. NFS and the other
companies whose results are included in the consolidated financial statements
are collectively referred to as "the Company."
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.
(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>
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>
F-11
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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>
F-12
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale as of December 31, 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>
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
F-13
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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>
F-14
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
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.
(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.
The Company has entered into a reinsurance contract to cede a portion of its
general account individual annuity reserves to The Franklin Life Insurance
Company (Franklin). Total recoveries due from Franklin were $245,255 and
$223,298 as of December 31, 1995 and 1994, respectively. The contract is
immaterial to the Company's results of operations. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. Under the terms of the contract, Franklin has established a
trust as collateral for the recoveries. The trust assets are invested in
investment grade securities, the market value of which must at all times be
greater than or equal to 102% of the reinsured reserves.
The Company has reinsurance agreements with affiliates. See Note 13. All
other reinsurance agreements are not material to either premiums or
reinsurance recoverables.
F-15
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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>
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.
F-16
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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
F-17
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
(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.
F-18
<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, 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>
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>
F-19
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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>
F-20
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information regarding the funded status of the Nationwide Insurance
Enterprise Retirement Plan as a whole as of December 31, 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.
(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.
F-21
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-22
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) SHAREHOLDERS' EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
The holders of Class A common stock are entitled to one vote per share. The
holders of Class B common stock are entitled to ten votes per share. Class A
common stock has no conversion rights. Class B common stock is convertible
into Class A common stock, in whole or in part, at any time and from time to
time at the option of the holder, on the basis of one share of Class A common
stock for each share of Class B common stock converted. If at any time after
the initial issuance of shares of Class A common stock the number of
outstanding shares of Class B common stock falls below 5% of the aggregate
number of issued and outstanding shares of common stock, then each outstanding
share of Class B common stock shall automatically convert into one share of
Class A common stock. In the event of any sale or transfer of shares of Class
B common stock to any person or persons other than NMIC or its affiliates such
shares of Class B common stock so transferred shall be automatically converted
into an equal number of shares of Class A common stock.
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
of the company's regulatory total adjusted capital, as defined by the NAIC, to
its authorized control level risk-based capital, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. NLIC and
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.
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. Costs are allocated among affiliated
companies in proportion to resources consumed. The Company believes this
allocation method is reasonable. In addition, the Company does not believe
that expenses recognized under the inter-company agreements are materially
different than expenses that would have been recognized had the Company
operated on a stand alone basis.
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
F-23
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
repurchased by the seller at the original sales price plus a price
differential. Transactions under the agreements during 1995 and 1994 were not
material. The Company believes that the terms of the repurchase agreements are
materially consistent with what the Company could have obtained with
unaffiliated parties.
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. The Company believes that the terms of the sale were materially
consistent with what the Company could have obtained with unaffiliated
parties.
Intercompany reinsurance contracts exist between NLIC and, respectively,
NMIC and ELICW whereby all of NLIC's accident and health and group life
insurance business is ceded on a modified coinsurance basis. NLIC entered into
the reinsurance agreements because the accident and health and group life
insurance business was unrelated to the Company's long-term savings and
retirement products. Under the modified coinsurance agreements, invested
assets are retained by the ceding company and investment earnings are paid to
the reinsurer. Under the terms of such agreements, the investment risk is
borne by ELICW or NMIC, as the case may be. The contracts will remain in force
until all policy obligations are settled. However, with respect to the
agreement between NLIC and NMIC, either party may terminate the contract on
January 1 of any year with prior notice. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder. The
Company believes that the terms of the modified coinsurance agreements are
consistent in all material respects with what the Company could have obtained
with unaffiliated parties.
Total premiums ceded under the intercompany reinsurance agreements were
$322,454, $340,309 and $330,377 during 1995, 1994 and 1993, respectively. The
effect of the reinsurance agreements was an increase (decrease) in the
Company's income before federal income tax expense and cumulative effect of
changes in accounting principles of $2,648, ($13,357) and ($21,319) 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
F-24
<PAGE>
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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>
<S> <C>
ASSETS
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....................................................... 360,395
Assets held in Separate Accounts................................... 24,673,451
-----------
$44,606,590
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims.................................. $16,845,875
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
-----------
42,532,036
-----------
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
-----------
$44,606,590
===========
</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 in other assets.......................... (33,010) (325)
Increase in policy liabilities ................... 233,306 102,878
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)
Short-term investments, net......................... (55,434) 85,783
----------- ----------
Net cash used in investing activities........... (506,363) (1,291,002)
----------- ----------
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 in cash.................................. 77,874 38,270
Cash, beginning of period............................. 10,055 4,610
----------- ----------
Cash, end of period................................... $ 87,929 42,880
=========== ==========
</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.................................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 19
Recent History........................................................... 19
Capitalization........................................................... 20
Dividend Policy.......................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Pro Forma Consolidated Financial Data.................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 41
Management............................................................... 73
Ownership of Capital Stock............................................... 86
Certain Relationships and Related Transactions........................... 87
Description of Capital Stock............................................. 93
The Fixed Income Offerings............................................... 98
Shares Eligible for Future Sale.......................................... 98
Underwriting............................................................. 100
Notice to Canadian Residents............................................. 103
Legal Matters............................................................ 103
Experts.................................................................. 104
Glossary of Selected Insurance Terms..................................... 105
Index to Consolidated Financial
Statements.............................................................. F-1
</TABLE>
------------
UNTIL , 1997, (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
Nationwide Financial
Services, Inc.
Shares
Class A Common Stock
(no par value)
PROSPECTUS
Credit Suisse First Boston
Morgan Stanley & Co.
Incorporated
Merrill Lynch & Co.
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE FRONT COVER PAGE
FOR INTERNATIONAL PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 JANUARY 31, 1997
Shares
Nationwide Financial Services, Inc.
[LOGO] Class A Common Stock
(no par value)
--------
All of the shares of Class A Common Stock, no par value ("Class A Common
Stock"), of Nationwide Financial Services, Inc. (the "Company") offered
hereby are being sold by the Company. Of the shares being offered,
shares (the "International Shares") are initially being offered for sale
outside the United States and Canada by the Managers (the "International
Offering") and shares (the "U.S. Shares") are initially being
concurrently offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering" and, together with the
International Offering, the "Equity Offerings"). The initial
public offering price and the underwriting discounts and
commissions of the International Offering and the U.S. Offering
are identical. See "Subscription and Sale."
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock. It is anticipated that the initial public offering price of
the Class A Common Stock will be between $ and $ per share. For
information relating to the factors considered in determining the
initial public offering price, see "Subscription and Sale."
After the Equity Offerings, Nationwide Corporation will own all of the
outstanding shares of Class B Common Stock, no par value (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), of the Company. The Class B Common Stock will represent %
and % ( % and % if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock
outstanding and the combined voting power of the stockholders of
the Company, respectively, and will be convertible on a share
for share basis into Class A Common Stock. Except with
respect to voting and conversion rights the Class A
Common Stock is substantially identical to the Class B
Common Stock. See "Description of Capital Stock."
Shortly following the Equity Offerings, the Company expects to consummate the
public offering of $300 million aggregate principal amount of Senior Notes
due 2027 (the "Senior Notes"), and Nationwide Financial Services
Capital Trust, an affiliate of the Company (the "NFS Trust") expects
to consummate the public offering of Capital Securities with an
aggregate liquidation amount of $100 million. See "The Fixed
Income Offerings." Such offerings are being made pursuant to
separate prospectuses.
Up to U.S. Shares are being reserved for sale at the initial public
offering price to employees, directors and agents of the Company and other
members of the Nationwide Insurance Enterprise (as defined herein).
Application is being made for listing of the Class A Common Stock on the New
York Stock Exchange (the "NYSE") under the symbol "NFS."
--------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE CLASS A COMMON STOCK, SEE "RISK FACTORS" ON PAGE 12
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
to Public Commissions Company(1)
--------- ------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(2).................................... $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $ .
(2) The Company has granted the U.S. Underwriters and the Managers an option,
exercisable by Credit Suisse First Boston Corporation for 30 days from the
date of this Prospectus, to purchase a maximum of additional shares of
Class A Common Stock to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ and Proceeds to Company will be
$ .
--------
.The International Shares are offered by the several Managers when, as and if
issued by the Company, delivered to and accepted by the Managers and subject to
their right to reject orders in whole or in part. It is expected that the
International Shares will be ready for delivery on or about , 1997, against
payment in immediately available funds.
Credit Suisse First Boston Morgan Stanley & Co.
International
Merrill Lynch International
The date of this Prospectus is , 1997.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The International Shares may not be offered or sold, directly or indirectly,
in the United States or Canada or to any U.S. or Canadian person as a part of
the distribution of the shares of Common Stock offered hereby. For further
description of certain restrictions on the offering and sale of the
International Shares, see "Subscription and Sale."
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION 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 MANAGER. 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
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE SUCH DATE.
IN CONNECTION WITH THE OFFERING, CREDIT SUISSE FIRST BOSTON CORPORATION, ON
BEHALF OF THE U.S. UNDERWRITERS AND THE MANAGERS, MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK 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.
In the Prospectus, references to "dollars" and "$" are to United States
dollars.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............... 2
Prospectus Summary.................. 3
Risk Factors........................ 12
Use of Proceeds..................... 19
Recent History...................... 19
Capitalization...................... 20
Dividend Policy..................... 21
Dilution............................ 22
Selected Consolidated Financial
Data............................... 23
Pro Forma Consolidated Financial
Data............................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................................................. 41
Management............................................................ 73
Ownership of Capital Stock............................................ 86
Certain Relationships and Related Transactions........................ 87
Description of Capital Stock.......................................... 93
The Fixed Income Offerings............................................ 98
Shares Eligible for Future Sale....................................... 98
Subscription and Sale.................................................
Legal Matters......................................................... 103
Experts............................................................... 104
Glossary of Selected Insurance Terms.................................. 105
Index to Consolidated Financial Statements............................ F-1
</TABLE>
------------
A-2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") pursuant to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, for the registration of the Class A Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Class A Common Stock offered hereby, reference is made to the
Registration Statement, including exhibits thereto and financial statements
and notes filed as a part thereof. Statements made in this Prospectus
concerning the contents of any contract or other document are not necessarily
complete. With respect to each such contract or other document filed with the
Commission as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto filed by the
Company with the Commission may be inspected at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the regional offices of the Commission located
at Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
As a result of the Equity Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish the holders of the Class A Common Stock 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.
A-3
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of ownership and disposition of Class A
Common Stock by Non-U.S. Holders. For purposes of this discussion, a "Non-U.S.
Holder" is a person that is not (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in the United States or
under the laws of the United States or any State, (iii) an estate or trust the
income of which is includible in gross income for United States federal income
tax purposes regardless of its source, or (iv) for taxable years beginning
after December 31, 1996, a trust if one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust, and a U.S. court
can exercise primary supervision over the administration of the trust. This
discussion is based on current law, which is subject to change. In addition,
this discussion does not address all aspects of United States federal tax law
(or any other tax law) that may be relevant to Non-U.S. Holders in view of
their particular circumstances. Tax treaties between the United States and
certain other countries provide for reduced rates of, or exemptions from,
United States tax in some circumstances, and a Non-U.S. Holder often must
satisfy certification requirements not described below in order to obtain such
a benefit under an applicable treaty. Also, under certain treaties between the
United States and other countries, the Internal Revenue Service may disclose
to the government of a foreign country tax information relating to a Non-U.S.
Holder that is a citizen or resident of that country. Accordingly, prospective
investors are urged to consult their own tax advisors regarding the United
States federal, state and local tax consequences, as well as foreign tax
consequences, of holding and disposing of Class A Common Stock.
DIVIDENDS
Dividends paid on Class A Common Stock to a Non-U.S. Holder generally will
be subject to United States federal withholding tax at a rate of 30% (or any
lower rate provided by an applicable tax treaty). However, if such dividends
are effectively connected with the conduct of a United States trade or
business by the Non-U.S. Holder, they generally will be subject to the United
States federal income tax that applies to the income of United States persons,
and the 30% United States withholding tax will not apply to such effectively
connected income. In the case of a Non-U.S. Holder that is a corporation, any
such dividends that are effectively connected with a United States trade or
business also may be subject to the United States branch profits tax at a rate
of 30% (or any lower rate provided by an applicable tax treaty).
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding discussed above and
for purposes of determining the applicability of a tax treaty rate. However,
under proposed Treasury regulations not currently in effect, in the case of
dividends paid after December 31, 1997 (December 31, 1999 in the case of
dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations), a Non-U.S.
Holder of Class A Common Stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
and other requirements either directly or through an intermediary. In
addition, backup withholding, as discussed below, may apply in certain
circumstances if applicable certification and other requirements are not met.
A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for
refund with the Internal Revenue Service.
GAIN ON DISPOSITION OF STOCK
Except under special rules for individuals described below, a Non-U.S.
Holder generally will not be subject to United States federal income tax on
gain resulting from a sale or other disposition of Class A Common Stock unless
the gain is (i) effectively connected with the conduct of a United States
trade or business by the Non-U.S. Holder, or (ii) treated as effectively
connected with such a trade or business because the Company is or has been a
"United States real property holding corporation" and certain other conditions
are satisfied as discussed below. The Company does not believe that it is, or
will be, a United States real property holding corporation. Any gain from
disposition of Class A Common Stock that is (or is treated as) effectively
connected with a United States
A-4
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
trade or business will be subject to the United States federal income tax that
applies to United States persons (and, in case of corporate Non-U.S. Holders,
may be subject to the branch profits tax), except as otherwise provided by an
applicable tax treaty.
Special rules apply to certain individual Non-U.S. Holders. An individual
Non-U.S. Holder who recognized gain from the disposition of Class A Common
Stock held as a capital asset and is present in the United States for 183 days
or more in the taxable year of disposition generally will be taxed at a rate
of 30% (or any lower rate provided by an applicable tax treaty) on any such
gain (less certain capital losses, if any, from United States sources), if the
Non-U.S. Holder either (i) has a "tax home" in the United States (as defined
in the IRC), or (ii) maintains an office or other fixed place of business in
the United States to which such gain is attributable. In addition, certain
individual Non-U.S. Holders who once were United States citizens may be
subject to special rules applicable to United States expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividends
The Company or other payor of dividends must report annually to the Internal
Revenue Services and each Non-U.S. Holder the amount of dividends paid to, and
the tax (if any) withheld from, that holder. A backup withholding tax is
imposed at a rate of 31% on the gross amount of certain payments made to
persons who fail to furnish required identifying information to the payor.
However, the backup withholding tax generally will not apply to dividends paid
to a Non-U.S. Holder at an address outside the United States (unless the payer
has knowledge that the payee is a U.S. person), but generally will apply to
dividends paid on Class A Common Stock at addresses inside the United States
to Non-U.S. Holders that fail to provide certain identifying information in
the manner required. However, under proposed Treasury regulations not
currently in effect, in the case of dividends paid after December 31, 1997
(December 31, 1999 in the case of dividends paid to accounts in existence on
or before the date that is 60 days after the proposed regulations are
published as final regulations), a Non-U.S. Holder generally would be subject
to backup withholding at a 31% rate, unless certain certification procedures
(or, in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are complied with,
directly or through an intermediary or a Non-U.S. Holder otherwise establishes
an exemption from backup withholding. The backup withholding tax is not an
additional tax.
PROCEEDS FROM DISPOSITION OF CLASS A COMMON STOCK
Payments of gross proceeds from a disposition of Class A Common Stock to a
Non-U.S. Holder made through a United States office of a United States or
foreign broker will be subject to information reporting requirements and
backup withholding, unless the holder certifies under penalties of perjury its
name, address and status as a Non-U.S. Holder or otherwise establishes an
exemption. In general, such payments made through a foreign office of a broker
will not be subject to information reporting requirements or backup
withholding. However, payments of proceeds generally will be subject to
information reporting requirements (but not to backup withholding) if made
through a foreign office of (i) a United States broker or (ii) a foreign
broker that (a) is a "controlled foreign corporation" (generally, a
corporation controlled by United States shareholders) or (b) derives at least
50% of its gross income from the conduct of a trade or business within the
United States, unless the broker has documentary evidence that the holder is a
Non-U.S. Holder and certain other conditions are met, or the holder otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
ESTATE TAX
Class A Common Stock owned or treated as owned, at the time of death, by an
individual Non-U.S. Holder will be includible in the Non-U.S. Holder's gross
estate for United States federal estate tax purposes (unless otherwise
provided by an applicable tax treaty), and thus may be subject to United
States federal estate tax.
A-5
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBSCRIPTION AND SALE
The institutions named below (the "Managers") have, pursuant to a
Subscription Agreement dated , 1997 between the Company and the Managers
(the "Subscription Agreement"), severally but not jointly, have agreed with
the Company to subscribe and pay for the following respective numbers of
International Shares as set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
MANAGER SHARES
------- -------------
<S> <C>
CS First Boston Limited.......................................
Morgan Stanley & Co. International Limited....................
Merrill Lynch International...................................
----
Total.....................................................
====
</TABLE>
The Subscription Agreement provides that the obligations of the Managers are
such that, subject to certain conditions precedent, the Managers will be
obligated to purchase all the International Shares offered hereby (other than
those International Shares covered by the over-allotment option described
below) if any are purchased. The Subscription Agreement provides that, in the
event of a default by a Manager, in certain circumstances the purchase
commitments of the non-defaulting managers may be increased or the
Subscription Agreement may be terminated.
The Company has entered into an Underwriting Agreement with the Underwriters
of the U.S. Offering (the "U.S. Underwriters" and, together with the Managers,
the "Underwriters") providing for the concurrent offer and sale of the U.S.
Shares in the United States and Canada. The closing of the U.S. Offering is a
condition to the closing of the International Offering and vice versa.
The Company has granted to the Managers and the U.S. Underwriters an option,
exercisable by Credit Suisse First Boston Corporation, expiring at the close
of business on the 30th day after the date of this Prospectus to purchase up
to additional shares of Class A Common Stock (the "Option Shares") at the
initial public offering price less the underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. Such option may be
exercised only to cover over-allotments in the sale of the shares of Class A
Common Stock offered hereby. To the extent that this option to purchase is
exercised, each Manager and each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of Option Shares as the number of International Shares set forth next to such
Manager's name in the preceding table and as the number set forth next to such
U.S. Underwriter's name in the corresponding table in the prospectus relating
to the U.S. Shares bears to the sum of the total number of shares of Class A
Common Stock in such tables.
The Company has been advised by CS First Boston Limited, on behalf of the
Managers, that the Managers propose to offer the International Shares outside
the United States and Canada initially at the public offering price set forth
on the cover page of this Prospectus and through the Managers, to certain
dealers at such price less a commission of $ per share and that the
Managers and such dealers may reallow a commission of $ per share on sales
to certain other dealers. After the initial public offering, the public
offering price and commission and reallowance may be changed by the Managers.
The public offering price, the aggregate underwriting discount and
commissions per share and the per share commission and reallowance to dealers
for the International Offering and the concurrent U.S. Offering are identical.
Pursuant to an Agreement Between U.S. Underwriters and Managers dated ,
1997 (the "Intersyndicate Agreement") relating to the Offerings, changes in
the public offering price, the aggregate
A-6
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
underwriting discounts and commissions per share and per share commission and
reallowance to dealers may be made only upon the mutual agreement of CS First
Boston Limited, on behalf of the Managers, and Credit Suisse First Boston
Corporation, as representative of the U.S. Underwriters. Pursuant to the
Intersyndicate Agreement, each of the Managers has agreed or will agree that,
as part of the distribution of the International Shares and subject to certain
exceptions, it has not offered or sold, and will not offer or sell, directly
or indirectly, any Class A Common Stock or distribute any prospectus relating
to the Class A Common Stock to any person in the United States or Canada or to
any other dealer who does not so agree. Each of the U.S. Underwriters has
agreed that, as part of the distribution of the U.S. shares and subject to
certain exceptions, it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Class A Common Stock or distribute any
prospectus relating to the Class A Common Stock to any person outside the
United States and Canada or to any dealer who does not so agree. The foregoing
limitations do not apply to stabilization transactions or to transactions
between the Managers and the U.S. Underwriters pursuant to the Intersyndicate
Agreement. As used herein, "United States" means the United States of America
(including the states and the District of Columbia), its territories,
possessions and other areas subject to its jurisdiction, "Canada" means
Canada, its provinces, territories, possessions and other areas subject to its
jurisdiction, and an offer or sale shall be in the United States or Canada if
it is made to (i) any individual resident in the United States or Canada, or
(ii) any corporation, partnership, pension, profit sharing or other trust or
other entity (including any such entity acting as an investment advisor with
discretionary authority) whose office most directly involved with the purchase
is located in the United States or Canada.
Pursuant to the Intersyndicate Agreement, sales may be made between the
Managers and the U.S. Underwriters of such number of shares of Class A Common
Stock as may be mutually agreed upon. The price of any shares so sold shall be
the public offering price less such amount agreed upon by CS First Boston
Limited, on behalf of the Managers, and Credit Suisse First Boston
Corporation, as representative of the U.S. Underwriters, but not exceeding the
selling concession applicable to such shares. To the extent there are sales
between the Managers and the U.S. Underwriters pursuant to the Intersyndicate
Agreement, the number of shares of Class A Common Stock initially available
for sale by the Managers and the U.S. Underwriters may be more or less than
the amount appearing on the cover page of this Prospectus. Neither the
Managers nor the U.S. Underwriters are obligated to purchase from the other
any unsold shares of Class A Common Stock.
Each of the Managers and U.S. Underwriters severally represents and agrees
that (a) it has not offered or sold and prior to the date six months after the
date of issue of the International Shares will not offer or sell any
International Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (b) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the International Shares in, from or
otherwise involving the United Kingdom, and (c) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issue of the International Shares to a person who
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully issued or passed on.
The Company has agreed that, without the prior written consent of Credit
Suisse First Boston Corporation, it 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.
The Company has agreed to indemnify the Managers and the U.S. Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or contribute to payments which the U.S. Underwriters and the Managers
may be required to make in respect thereof.
A-7
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Application is being made for listing of the Class A Common Stock on the New
York Stock Exchange under the symbol "NFS." The U.S. Underwriters will
undertake to the NYSE that the Class A Common Stock will be sold to ensure
that NYSE distribution standards will be met requiring that sales in the
United States will be made in lots of 100 or more shares of Class A Common
Stock to a sufficient number of persons to establish a minimum of 2,000 round
lot beneficial holders after the U.S. Offering.
At the request of the Company, up to a maximum of 7% of the shares of Class
A Common Stock are being reserved for sale at the initial public offering
price as set forth on the cover page of this Prospectus to the employees,
officers, directors and agents of the Company and other members of the
Nationwide Insurance Enterprise subject to confirmation after the pricing of
the Equity Offerings. The shares of Class A Common Stock sold through the
reserved share program will be sold subject to the same terms and conditions
as all other shares of Class A Common Stock sold in the Equity Offerings. The
number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any shares not so purchased will be offered by the U.S. Underwriters
to the general public on the same basis as the other shares of Class A Common
Stock offered hereby.
Prior to the Equity Offerings, there has been no public market for the Class
A Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiations between the Company and Credit Suisse First
Boston Corporation on behalf of the Managers and the U.S. Underwriters. Among
the factors considered in determining the initial public offering price will
be the history and prospects for the Company and the sectors in which it
operates, the past and present operating results of the Company and the trends
of such results, the general conditions of the securities markets at the time
of the offering and the prices of similar securities of comparable companies.
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. Affiliates of the Managers
also are acting as representatives of the underwriters of the Fixed Income
Offerings.
A-8
<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 Class A Common Stock 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............. $151,515.15
NASD filing fee................................................. 30,500.00
New York Stock Exchange listing fee............................. *
Blue Sky fees and expenses...................................... *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Transfer agent 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 U.S. Underwriting Agreement
*1.2 --Form of Subscription Agreement
3.1 --Form of Amended and Restated Certificate of Incorporation of
Nationwide Financial Services, Inc.
3.2 --Form of Amended and Restated Bylaws of Nationwide Financial
Services, Inc.
*4.1 --Form of Certificate for shares of Class A Common Stock
*5.1 --Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
*10.1 --Form of Intercompany Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and Nationwide Financial
Services, Inc.
*10.2 --Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation
*10.3 --Form of First Amendment to Cost Sharing Agreement among the
parties named therein
**10.4 --Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
**10.5 --Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company
10.6 --Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent
*10.7 --Form of Lease Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
*10.8 --Form of Nationwide Financial Services, Inc. Long-Term Equity
Compensation Plan
*10.9 --General Description of Nationwide Insurance Enterprise Executive
Incentive Plan
*10.10 --General Description of Nationwide Insurance Enterprise
Management Incentive Plan
10.11 --Nationwide Insurance Enterprise Excess Benefit Plan effective as
of December 31, 1996
10.12 --Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of
December 31, 1996
10.13 --Nationwide Salaried Employees Severance Pay Plan
10.14 --Nationwide Insurance Enterprise Supplemental Defined
Contribution Plan effective as of January 1, 1996
*10.15 --General Description of Nationwide Insurance Enterprise
Individual Deferred Compensation Program
*10.16 --General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program
*10.17 --Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard
McFerson
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
**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)
**24.1 --Power of Attorney
27.1 --Financial Data Schedule
</TABLE>
<TABLE>
<C> <C> <S>
(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.
**Previously filed.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(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 AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF COLUMBUS, STATE OF OHIO, ON JANUARY 31, 1997.
Nationwide Financial Services, Inc.
*
By: _________________________________
DIMON RICHARD MCFERSON
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER--
NATIONWIDE INSURANCE ENTERPRISE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON JANUARY
31, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
Chairman and Chief Executive
* Officer--Nationwide Insurance
- ------------------------------------- Enterprise and Director (Principal
Executive Officer)
DIMON RICHARD MCFERSON
President and Chief Operating
* Officer and Director
- -------------------------------------
JOSEPH J. GASPER
Executive Vice President--Chief
* Financial Officer (Principal
- ------------------------------------- Financial Officer and Principal
ROBERT A. OAKLEY Accounting Officer)
Director
*
- -------------------------------------
ARDEN L. SHISLER
Director
*
- -------------------------------------
HENRY S. HOLLOWAY
Director
*
- -------------------------------------
JAMES F. PATTERSON
Director
*
- -------------------------------------
DAVID O. MILLER
Director
*
- -------------------------------------
CHARLES L. FUELLGRAF, JR.
(*) By:
/s/ Mark B. Koogler
- -------------------------------------
MARK B. KOOGLER ATTORNEY-IN-FACT
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 U.S. Underwriting Agreement
*1.2 --Form of Subscription Agreement
3.1 --Form of Amended and Restated Certificate of Incorporation of
Nationwide Financial Services, Inc.
3.2 --Form of Amended and Restated Bylaws of Nationwide Financial
Services, Inc.
*4.1 --Form of Certificate for shares of Class A Common Stock
*5.1 --Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
*10.1 --Form of Intercompany Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and Nationwide Financial Services,
Inc.
*10.2 --Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation
*10.3 --Form of First Amendment to Cost Sharing Agreement among the parties
named therein
**10.4 --Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company
**10.5 --Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company
10.6 --Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent
*10.7 --Form of Lease Agreement between Nationwide Life Insurance Company
and Nationwide Mutual Insurance Company
*10.8 --Form of Nationwide Financial Services, Inc. Long-Term Equity
Compensation Plan
*10.9 --General Description of Nationwide Insurance Enterprise Executive
Incentive Plan
*10.10 --General Description of Nationwide Insurance Enterprise Management
Incentive Plan
10.11 --Nationwide Insurance Enterprise Excess Benefit Plan effective as of
December 31, 1996
10.12 --Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of December 31, 1996
10.13 --Nationwide Salaried Employees Severance Pay Plan
10.14 --Nationwide Insurance Enterprise Supplemental Defined Contribution
Plan effective as of January 1, 1996
*10.15 --General Description of Nationwide Insurance Enterprise Individual
Deferred Compensation Program
*10.16 --General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program
*10.17 --Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard McFerson.
**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)
**24.1 --Power of Attorney
27.1 --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment
** Previously filed.
<PAGE>
Exhibit 3.1
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONWIDE FINANCIAL SERVICES, INC.
Pursuant to Sections 242 and 245
of the General Corporation Law of the State of Delaware
Nationwide Financial Services, Inc., a corporation existing under the laws
of the State of Delaware (the "Corporation"), does hereby certify as follows:
1. The name of the Corporation is Nationwide Financial Services, Inc. The
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on November 19, 1996.
2. This Restated Certificate of Incorporation restates and integrates and
also further amends the Certificate of Incorporation of the Corporation. This
Restated Certificate of Incorporation was proposed by the Board of Directors and
duly adopted by the sole stockholder of the Corporation in the manner, and by
the vote prescribed by, Sections 228, 242 and 245 of the General Corporation Law
of the State of Delaware. The text of the Certificate of Incorporation, as so
amended and restated is as follows:
FIRST: The name of the Corporation is Nationwide Financial Services, Inc.
-----
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at that address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as the same exists or may hereafter be amended (the
"DGCL").
FOURTH: A. Authorized Shares. The total number of shares of stock that
------ -----------------
the Corporation shall have the authority to issue is 0 shares consisting of 0
shares of Class A Common Stock with no par value per share (the "Class A Common
Stock"), 0 shares of Class B Common Stock with no par value per share (the
"Class B Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), and 0 shares of Preferred Stock with no par value per share (the
"Preferred Stock"). The number of authorized shares of Class A Common Stock or
Class B Common Stock may be increased or decreased (but not below the number of
shares of Class A Common Stock or Class B Common Stock then outstanding) by the
affirmative vote of a majority of the aggregate voting power of the outstanding
shares of Class A Common Stock and Class B Common Stock, voting together without
regard to class.
<PAGE>
Effective upon the filing of this Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware, each share of common
stock, no par value per share, of the Corporation outstanding as of the close of
business on the day prior to the date of such filing shall be reclassified on a
basis of one share of Class B Common Stock for each share of such common stock
outstanding and, accordingly, each share of such common stock outstanding as of
the close of business on the day prior to the date of such filing shall, without
further action by the Corporation or any stockholder, be deemed to represent one
share of Class B Common Stock.
B. Ranking. The powers, preferences and rights of the Class A Common
-------
Stock and Class B Common Stock, and the qualifications, limitations and
restrictions thereof, shall be in all respects identical, except as otherwise
required by law or expressly provided in this Restated Certificate of
Incorporation.
C. Voting. Except as otherwise required by law or in this Restated
------
Certificate of Incorporation, with respect to all matters upon which
stockholders are entitled to vote or to which stockholders are entitled to give
consent, the holders of any outstanding shares of the Class A Common Stock and
the holders of any outstanding shares of Class B Common Stock shall vote
together without regard to class, and every holder of the Class A Common Stock
shall be entitled to cast thereon one vote in person or by proxy for each share
of the Class A Common Stock standing in such holder's name, and every holder of
the Class B Common Stock shall be entitled to cast thereon ten votes in person
or by proxy for each share of Class B Common Stock standing in such holder's
name.
D. Amendments Affecting Stock. So long as any shares of Class A Common
--------------------------
Stock are outstanding, the Corporation shall not, without the affirmative vote
of at least a majority (or such higher percentage, if any, as may then be
required by applicable law) of the outstanding shares of Class A Common Stock
voting as a single class, (i) amend, alter or repeal any provision of Sections B
through K of this Article FOURTH so as to affect adversely the relative rights,
preferences, qualifications, limitations or restrictions of the Class A Common
Stock as compared to those of the Class B Common Stock or (ii) take any other
action upon which class voting is required by law.
E. Dividends; Changes in Stock. No dividend or distribution may be
---------------------------
declared or paid on any share of Class A Common Stock unless a dividend or
distribution, payable in the same consideration and manner, is simultaneously
declared or paid, as the case may be, on each share of Class B Common Stock, nor
shall any dividend or distribution be declared or paid on any share of Class B
Common Stock unless a dividend or distribution, payable in the same
consideration and manner, is simultaneously declared or paid, as the case may
be, on each share of Class A Common Stock, in each case without preference or
priority of any kind; provided, however, that if dividends are declared that are
-------- -------
payable in shares of Class A Common Stock or Class B Common Stock or in rights,
options, warrants or other securities convertible into or exchangeable for
shares of Class A Common Stock or Class B Common Stock, dividends shall be
declared that are payable at the same rate on both classes of Common Stock and
the dividends payable in shares of Class A Common Stock or in rights, options,
warrants or other securities
-2-
<PAGE>
convertible into or exchangeable for shares of Class A Common Stock shall be
payable to holders of Class A Common Stock and the dividends payable in shares
of Class B Common Stock or in rights, options, warrants or other securities
convertible into or exchangeable for shares of Class B Common Stock shall be
payable to holders of Class B Common Stock. If the Corporation in any manner
subdivides or combines the outstanding shares of Class B Common Stock, the
outstanding shares of the Class A Common Stock shall be proportionately
subdivided or combined, as the case may be. Similarly, if the Corporation in
any manner subdivides or combines the outstanding shares of Class A Common
Stock, the outstanding shares of the Class B Common Stock shall be
proportionately subdivided or combined, as the case may be.
F. Optional Conversion. (i) Each share of Class B Common Stock shall be
-------------------
convertible at any time, at the option of the holder thereof into one share of
Class A Common Stock, subject to adjustment as provided in paragraph (iv) of
this Section F and subject to the conditions and limitations described below and
in the manner described below.
(ii) In order to convert shares of Class B Common Stock into Class A
Common Stock pursuant to this Section F, the holder thereof shall surrender to
the Corporation the certificate or certificates therefor, duly endorsed or
assigned to the Corporation or in blank, and give written notice to the
Corporation that the holder elects to convert such shares. Such notice shall be
dated and received by the Corporation at least one business day prior to the
date fixed for conversion and shall state (a) the number of shares of Class B
Common Stock to be converted, (b) the date fixed for conversion, (c) the
denominations in which the shares of Class A Common Stock issuable upon such
conversion are to be issued, (d) the name in which the shares of Class A Common
Stock are to be registered, if different from the registered holder of the Class
B Common Stock being converted, and (e) the name and address of the registered
holder requesting such conversion.
(iii) Shares of Class B Common Stock shall be deemed to have been
converted immediately prior to the close of business on the day of the surrender
of such shares for conversion in accordance with the foregoing provisions, and
the person or persons entitled to receive Class A Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such Class A Common Stock at such time. As promptly as practicable
on or after the conversion date, the Corporation shall issue and shall deliver a
certificate or certificates for the number of shares of Class A Common Stock
issuable upon such conversion to the person or persons entitled to receive the
same.
(iv) If there occurs any capital reorganization or any reclassification of
the capital stock of the Corporation (other than a subdivision or combination
described in Section E or pursuant to a merger or consolidation referred to in
Section I), each share of Class B Common Stock shall thereafter be convertible
into, in lieu of one share of Class A Common Stock, the same kind and amounts of
securities or other assets, or both, that were issuable or distributable to the
holders of shares of outstanding Class A Common Stock upon such reorganization
or reclassification in respect to that number of shares of Class A Common Stock
into which such share of Class B Common Stock would have been converted had such
share of Class B Common
-3-
<PAGE>
Stock been converted into Class A Common Stock immediately prior to such
reorganization or reclassification.
(v) Upon any event described in paragraph (iv) above, the Corporation
shall promptly mail to each holder of Class B Common Stock a notice that shall
describe such event and the change in the number of shares or other assets or
securities issuable upon the conversion of Class B Common Stock, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based.
(vi) The Corporation shall pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Class A Common Stock on conversion
of the Class B Common Stock pursuant hereto. The Corporation shall not,
however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue and delivery of shares of Class A Common Stock in
a name other than that in which the shares of Class B Common Stock so converted
were registered, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the Corporation the amount of any
such tax, or has established to the satisfaction of the Corporation that such
tax has been paid.
G. Automatic Conversion. (i) At any time after the initial issuance of
--------------------
shares of Class A Common Stock, if the number of shares of Class B Common Stock
that are issued and outstanding falls below 5% of the total number of shares of
Common Stock that are issued and outstanding, then, immediately upon the
occurrence of such event, each outstanding share of Class B Common Stock shall
be converted into a share of Class A Common Stock and each right, option,
warrant or other security convertible into or exchangeable for shares of Class B
Common Stock shall be automatically converted into a right, option, warrant or
other security convertible into or exchangeable for shares of Class A Common
Stock, in each case, without any further action on the part of the Corporation
or any other person, and the certificates representing such shares of Class B
Common Stock or the rights, options, warrants or other securities convertible
into or exchangeable for shares of Class B Common Stock shall be deemed to
represent shares of Class A Common Stock or rights, options, warrants or
securities convertible into or exchangeable for shares of Class A Common Stock,
as the case may be.
(ii) Upon any issuance by the Corporation, or any sale or other transfer
(whether or not for value) by a stockholder of the Corporation, of shares of
Class B Common Stock, of rights, options or warrants to purchase Class B Common
Stock or of securities convertible into or exchangeable for shares of Class B
Common Stock to any person or persons other than a member of the Nationwide
Insurance Enterprise (as defined in Article SEVENTH hereof), including, without
limitation, pursuant to any private placement or public sale of such shares
(including a public offering registered under the Securities Act of 1933, as
amended, and a sale pursuant to Rule 144 under the Securities Act of 1933, as
amended, or any similar rule then in force), such shares shall automatically
convert into an equal number of shares of Class A Common Stock (with the same
rights and restrictions as shares of Class A Common Stock generally), and such
rights, options, warrants or convertible or exchangeable securities shall
automatically convert into rights, options or warrants to purchase Class A
Common Stock or securities convertible into or exchangeable for shares of Class
A Common Stock (otherwise with
-4-
<PAGE>
terms identical to the rights, options, warrants or convertible or exchangeable
securities that so automatically convert), in each case, without any further
action on the part of the Corporation or any other person, and the certificates
representing such shares, rights, options, warrants or convertible or
exchangeable securities shall be deemed to represent shares of Class A Common
Stock, rights, options or warrants to purchase shares of Class A Common Stock or
securities convertible into or exchangeable for shares of Class A Common Stock,
as the case may be. For purposes of this Section G: (a) a "person" shall mean
a corporation, a trust, a limited liability company, an association, a
partnership, a joint venture, an organization, a business, an individual, a
government or a subdivision thereof or a governmental agency and; (b) the term
"transfer" shall not include a bona fide pledge of shares of Class B Common
Stock; provided, however, that any execution, levy, exercise of rights or other
-------- -------
enforcement by the pledgee pursuant to such pledge shall be considered a
transfer.
H. Liquidation. Shares of Class B Common Stock shall rank pari passu with
----------- ---- -----
the Class A Common Stock as to distribution of assets in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation.
I. Merger or Consolidation. In the event of a merger or consolidation of
-----------------------
the Corporation with or into another entity (whether or not the Corporation is
the surviving entity), the holders of each share of Class A Common Stock and
Class B Common Stock shall be entitled to receive the same per share
consideration as the per share consideration, if any, received by the holders of
each share of such other class of stock.
J. Status of Converted Stock. Any shares of Class B Common Stock that
-------------------------
shall have been converted into Class A Common Stock at any time pursuant to the
provisions of Section F or Section G of this Article FOURTH shall, after such
conversion, be cancelled and shall not be reissued.
K. Reservation. The Corporation shall at all times reserve and keep
-----------
available, free from pre-emptive rights, out of its authorized but unissued
shares of Class A Common Stock solely for the purpose of issuance upon the
conversion of the Class B Common Stock, such number of shares of Class A Common
Stock issuable upon the conversion of all outstanding Class B Common Stock. All
shares of Class A Common Stock that are so issuable shall, when issued, be duly
and validly issued, fully paid and nonassessable. The Corporation shall take
all such actions as it deems necessary or appropriate to assure that all such
shares of Class A Common Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any securities
exchange upon which shares of Class A Common Stock may be listed.
L. Preferred Stock. The Corporation may issue Preferred Stock from time
---------------
to time in one or more series or classes as the Board of Directors may establish
by the adoption of a resolution or resolutions relating thereto, each series or
class to have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issue of
such series adopted
-5-
<PAGE>
by the Board of Directors pursuant to its authority to do so, which authority is
hereby granted to the Board of Directors.
FIFTH: A. Board of Directors. The business and affairs of the
----- ------------------
Corporation shall be managed by or under the direction of a Board of Directors,
the number of directors to be determined from time to time by resolution adopted
by affirmative vote of a majority of the entire Board of Directors that the
Corporation would have if there were no vacancies. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. The initial
division of the Board of Directors into classes shall be made by the decision of
the affirmative vote of a majority of the entire Board of Directors. Class I
directors shall be elected initially for a one-year term, Class II directors
initially for a two-year term and Class III directors initially for a three-year
term. At each succeeding annual meeting of stockholders beginning in 1998,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his or her term expires
and until his or her successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring in the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or a sole
remaining director. Any director elected to fill a vacancy not resulting from
an increase in the number of directors shall have the same remaining term as
that of his or her predecessor. Notwithstanding the foregoing, whenever the
holders of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Restated Certificate of Incorporation applicable
thereto, and such directors so elected shall not be divided into classes
pursuant to this Article FIFTH unless expressly provided by such terms.
B. Removal of Directors Solely for Cause. No director may be removed from
-------------------------------------
office except for cause and only by the affirmative vote of the holders of a
majority of the combined voting power of all outstanding shares of stock then
entitled to vote generally in the election of directors, voting as a single
class. Notwithstanding the foregoing, directors who shall have been elected by
the holders of a series or class of Preferred Stock, voting separately as a
class, shall be removed only pursuant to the provisions establishing the rights
of such series or class to elect such directors.
-6-
<PAGE>
SIXTH: The books and records of the Corporation may be kept (subject to
-----
any mandatory requirement of law) outside the State of Delaware at such place or
places as may be designated from time to time by the Board of Directors or by
the Bylaws of the Corporation.
SEVENTH: A. Purpose. In anticipation that the Corporation will cease to
------- -------
be a wholly owned subsidiary of Nationwide Corporation, but that Nationwide
Corporation will remain a stockholder of the Corporation, and in light of the
fact that the Corporation and one or more members of the Nationwide Insurance
Enterprise may engage in the same or similar activities or lines of business and
have an interest in the same areas of corporate opportunities, and in
recognition of (i) the benefits to be derived by the Corporation through its
continued contractual, corporate and business relations with members of the
Nationwide Insurance Enterprise (including service of officers and directors of
members of the Nationwide Insurance Enterprise as officers and directors of the
Corporation) and (ii) the difficulties attendant to any director, who desires
and endeavors fully to satisfy such director's fiduciary duties, in determining
the full scope of such duties in any particular situation, the provisions of
this Article SEVENTH are set forth to regulate, define and guide the conduct of
certain affairs of the Corporation as they may involve members of the Nationwide
Insurance Enterprise and their officers and directors, and the powers, rights,
duties and liabilities of the Corporation and its officers, directors and
stockholders in connection therewith.
B. Conduct of Similar Business Activities; Corporate Opportunities.
---------------------------------------------------------------
Except as Nationwide Mutual (as hereinafter defined) (or its successor or
assign) may otherwise agree in writing:
(i) no member of the Nationwide Insurance Enterprise shall have a duty to
refrain from engaging directly or indirectly in the same or similar business
activities or lines of business as the Corporation; and
(ii) no member of the Nationwide Insurance Enterprise, nor any director,
officer, employee or agent of any member of the Nationwide Insurance Enterprise
(except as provided below), shall be liable to the Corporation or its
stockholders for breach of any fiduciary duty by reason of any such activities
of such member's or of such person's participation therein.
In the event that any member of the Nationwide Insurance Enterprise acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity both for a member of the Nationwide Insurance Enterprise and the
Corporation, no member of the Nationwide Insurance Enterprise shall have any
duty to communicate or offer such corporate opportunity to the Corporation, nor
shall any such member be liable to the Corporation or its stockholders for
breach of any fiduciary duty as a stockholder of the Corporation or controlling
person of a stockholder by reason of the fact that any member of the Nationwide
Insurance Enterprise pursues or acquires such corporate opportunity for itself,
directs such corporate opportunity to another person or entity, or does not
communicate information regarding, or offer, such corporate opportunity to the
Corporation.
-7-
<PAGE>
C. Liability of Directors, Officers and Employees With Respect to
--------------------------------------------------------------
Corporate Opportunities. In the event that a director, officer, employee or
- -----------------------
agent of the Corporation who is also a director, officer, employee or agent of
any member of the Nationwide Insurance Enterprise acquires knowledge of a
potential transaction or matter that may be a corporate opportunity for the
Corporation or any member 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, employee or agent of the Corporation), such director,
officer, employee or agent shall be entitled to offer such corporate opportunity
to the Corporation or such member of the Nationwide Insurance Enterprise as such
director, officer or employee deems appropriate under the circumstances in his
sole discretion, and no such director, officer, employee or agent shall be
liable to the Corporation 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 Corporation or the derivation of any improper personal benefit by reason
of the fact that (i) such director, officer, employee or agent offered such
corporate opportunity to such member of the National Insurance Enterprise
(rather than to the Corporation) or did not communicate information regarding
such corporate opportunity to the Corporation or (ii) such member of the
Nationwide Insurance Enterprise pursues or acquires such corporate opportunity
for itself or directs such corporate opportunity to another person or does not
communicate information regarding such corporate opportunity to the Corporation.
D. Notice. Any person purchasing or otherwise acquiring any interest in
------
any shares of capital stock of the Corporation shall be deemed to have notice of
and to have consented to the provisions of this Article SEVENTH.
E. Certain Definitions. For purposes of this Article SEVENTH and Article
-------------------
EIGHTH hereof only, the term "Corporation" shall mean the Corporation and all
corporations, partnerships, joint ventures, associations and other entities in
which the Corporation beneficially owns (directly or indirectly) 50% or more of
the outstanding voting stock, voting power or similar voting interests, (ii) the
term "Nationwide Mutual" shall mean Nationwide Mutual Insurance Company, an Ohio
mutual insurance company, and (iii) the term "Nationwide Insurance Enterprise"
shall mean, collectively, Nationwide Mutual and its subsidiaries and affiliates
(other than the Corporation).
F. Termination of Corporate Opportunities Provisions. Notwithstanding
-------------------------------------------------
anything in this Restated Certificate of Incorporation to the contrary, the
foregoing provisions of this Article SEVENTH shall terminate on the date (the
"Expiration Date") that the members of the Nationwide Insurance Enterprise cease
to beneficially own (directly or indirectly) in the aggregate Common Stock
representing at least 50% of the voting power of the outstanding shares of
Common Stock. Neither the alteration, amendment, termination or repeal of this
Article SEVENTH nor the adoption of any provision inconsistent with this Article
SEVENTH shall eliminate or reduce the effect of this Article SEVENTH in respect
of any matter occurring, or any cause of action, suit or claim that, but for
this Article SEVENTH, would accrue or arise, prior to such alteration,
amendment, termination, repeal or adoption.
G. General. The provisions of this Article SEVENTH are in addition to the
-------
provisions of Article EIGHTH and Article ELEVENTH hereof.
-8-
<PAGE>
EIGHTH: A. Participation of Interested Officers and Directors. No
------ --------------------------------------------------
contract, agreement, arrangement or transaction (or any amendment, modification
or termination thereof) between the Corporation and any member of the Nationwide
Insurance Enterprise or any Related Entity (as defined below) or between the
Corporation and one or more of the directors or officers of the Corporation, any
member of the Nationwide Insurance Enterprise or any Related Entity, shall be
void or voidable solely for the reason that any member of the Nationwide
Insurance Enterprise or any Related Entity or any one or more of the officers or
directors of the Corporation, any member of the Nationwide Insurance Enterprise
or any Related Entity are parties thereto, or solely because any such directors
or officers are present at or participate in the meeting of the Board of
Directors of the Corporation or committee thereof which authorizes the contract,
agreement, arrangement, transaction, amendment, modification or termination or
solely because his, her or their votes are counted for such purpose, but any
such contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) shall be governed by the provisions of this
Restated Certificate of Incorporation, the Bylaws of the Corporation, the DGCL
and other applicable law. For purposes of this Article EIGHTH, the term
"Related Entities" means one or more directors of the Corporation, or one or
more corporations, partnerships, associations or other organizations in which
one or more of the directors of the Corporation have a direct or indirect
financial interest.
B. Quorum. Directors of the Corporation who are also directors or
------
officers of any member of the Nationwide Insurance Enterprise or any Related
Entity may be counted in determining the presence of a quorum at a meeting of
the Board of Directors of the Corporation or of a committee thereof that
authorizes or approves any contract, agreement, arrangement or transaction
described in this Article EIGHTH (or amendment, modification or termination
thereof). Outstanding shares of Common Stock owned by any member of the
Nationwide Insurance Enterprise and any Related Entities may be counted in
determining the presence of a quorum at a meeting of stockholders that
authorizes or approves any contract, agreement, arrangement or transaction
described in this Article EIGHTH (or amendment, modification or termination
thereof).
C. No Liability for Breach of Fiduciary Duties. Neither any member of the
-------------------------------------------
Nationwide Insurance Enterprise nor any officer or director thereof nor any
Related Entity shall be liable to the Corporation 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 Corporation or the derivation of any improper
personal benefit by reason of the fact that any member of the Nationwide
Insurance Enterprise or an officer or director thereof or such Related Entity in
good faith takes any action or exercises any rights or gives or withholds any
consent in connection with any agreement or contract between any member of the
Nationwide Insurance Enterprise or such Related Entity and the Corporation. No
vote cast or other action taken by any person who is an officer, director or
other representative of any member of the Nationwide Insurance Enterprise or
such Related Entity, which vote is cast or action is taken by such person in his
or her capacity as a director of the Corporation, shall constitute an action of
or the exercise of a right by or a consent of such member of the Nationwide
Insurance Enterprise or such Related Entity for the purpose of any such
agreement or contract.
-9-
<PAGE>
D. Notice. Any person or entity purchasing or otherwise acquiring any
------
interest in any shares of capital stock of the Corporation shall be deemed to
have notice of and to have consented to the provisions of this Article EIGHTH.
E. Transactions with the Corporation. For purposes of this Article
---------------------------------
EIGHTH, any contract, agreement, arrangement or transaction with any
corporation, partnership, joint venture, association or other entity in which
the Corporation beneficially owns (directly or indirectly) 50% or more of the
outstanding voting stock, voting power or similar voting interests, or with any
officer or director thereof, shall be deemed to be a contract, agreement,
arrangement or transaction with the Corporation.
F. Termination of Participation of Interested Officers and Directors
-----------------------------------------------------------------
Provisions. Notwithstanding anything in this Restated Certificate of
- ----------
Incorporation to the contrary, the foregoing provisions of this Article EIGHTH
shall terminate on the Expiration Date. Neither the alteration, amendment,
termination or repeal of this Article EIGHTH nor to adoption of any provision
inconsistent with this Article EIGHTH shall eliminate or reduce the effect of
this Article EIGHTH in respect of any matter occurring or any cause of action,
suit or claim that, but for this Article EIGHTH, would accrue or arise, prior to
such alteration, amendment, termination, repeal or adoption.
G. General. The provisions of this Article EIGHTH are in addition to the
-------
provisions of Article SEVENTH and Article TWELFTH hereof.
NINTH: Following the consummation of an initial public offering of Common
-----
Stock or any transaction or event as a result of which any Common Stock is
listed on a national securities exchange or registered under Section 12 of the
Securities Exchange Act of 1934, as amended, any action required or permitted to
be taken by the stockholders of the Corporation must be affected at a duly
called annual or special meeting of stockholders of the Corporation, and the
ability of the stockholders to consent in writing to the taking of any action is
hereby specifically denied. Except as otherwise required by law, special
meetings of stockholders of the Corporation may be called only by (i) the
Chairman of the Board, the Chairman and Chief Executive Officer -- Nationwide
Insurance Enterprise (or any successor title) or the President and Chief
Operating Officer of the Corporation and (ii) shall be called by the Secretary
of the Corporation at the request in writing of a majority of the members of the
Board of Directors.
TENTH: In furtherance and not in limitation of the powers conferred upon
-----
it by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, alter, amend, terminate or repeal the Corporation's Bylaws. The
affirmative vote of at least 66-2/3% of the entire Board of Directors shall be
required to adopt, alter, amend, terminate or repeal the Corporation's
Bylaws.
ELEVENTH: The provisions of Articles FIFTH, NINTH, TENTH and ELEVENTH
--------
hereof and Article II, Section 11 of the Corporation's Bylaws may only be
altered, amended, terminated or repealed, or a provision adopted inconsistent
with the purpose and intent
-10-
<PAGE>
of the provisions of such Articles, by the affirmative vote of the holders of at
least 66-2/3% of the voting power of the shares entitled to vote at an election
of directors.
TWELFTH: No director or officer of the Corporation shall be liable to the
-------
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director or officer, except for liability (i) for any breach of the
director's or officer's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit.
THIRTEENTH: Except as provided in Articles FOURTH and ELEVENTH of this
----------
Restated Certificate of Incorporation, the Corporation reserves the right to
amend and repeal any provision contained in this Restated Certificate of
Incorporation in the manner prescribed by the laws of the State of Delaware, and
all rights of stockholders shall be subject to this reservation.
THE UNDERSIGNED, being the Secretary of the Corporation, does hereby
certify that the Corporation has restated its Certificate of Incorporation as
set forth above, does hereby certify that such restatement has been duly adopted
in accordance with the applicable provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware, and does hereby make and file
this Restated Certificate of Incorporation.
Dated: , 1997
_________________________________
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<PAGE>
Exhibit 3.2
FORM OF
RESTATED BYLAWS
OF
NATIONWIDE FINANCIAL SERVICES, INC.
(hereinafter called the "Corporation")
For the Government of the Stockholders
and Board of Directors
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
-----------------
Corporation in the State of Delaware is c/o Corporation Trust Center, 1209
Orange Street, in the City of Wilmington, in the State of Delaware.
Section 2. Other Offices. The Corporation may have other offices,
-------------
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Meetings In or Out of State. Any annual or special
---------------------------
meeting of stockholders may be held in or outside of the State of Delaware.
Section 2. Annual Meetings. An annual meeting of the stockholders
---------------
for the election of directors and such other business as may come before the
meeting shall be held on such date, at such place and at such time as shall be
designated by the Board of Directors. If for any reason the annual meeting is
not held as provided for in this section, then the business to be transacted
thereat may be transacted at any special meeting of stockholders called as
provided for in Section 3 of this Article II.
Section 3. Special Meetings. Special meetings of the stockholders
----------------
may be called by the Chairman of the Board, the Chairman and Chief Executive
Officer--Nationwide Insurance Enterprise, or the President and Chief Operating
Officer and shall be called by the Secretary at the request in writing of a
majority of the members of the
<PAGE>
Board of Directors. No business other than that included in the notice of the
special meeting shall be acted upon at such meeting.
Section 4. Notice of Stockholders' Meetings. A written, printed or
--------------------------------
typewritten notice of each annual or special meeting of the stockholders,
stating the place, time and date and, if it is for a special meeting, the
purpose or purposes thereof, shall be delivered or mailed to each stockholder of
record entitled to vote at such meeting or entitled to notice thereof. If
mailed, such notice shall be addressed to such stockholder's last known address
as the same appears on the records of the Corporation. Such notices for each
annual or special meeting shall be so delivered or mailed not more than 60 nor
less than 10 days before the date fixed for the meeting. In the event of the
transfer of shares after notice has been given and prior to the holding of the
meeting, it shall not be necessary to serve notice upon the transferee. If a
meeting is adjourned to another time or place and such adjournment is for 30
days or less and no new record date is fixed for the adjourned meeting, no
further notice as to such adjourned meeting need be given if the time and place
to which the meeting is adjourned are fixed and announced at such meeting. If
the adjournment is for more than 30 days, or after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each stockholder of record entitled to vote at the meeting or
entitled to notice thereof.
Section 5. Waiver of Notice. Any stockholder entitled to notice of
----------------
any stockholders' meeting may, in person or by proxy, either before, at or after
such meeting, waive notice in writing, which writing shall be filed with or
entered upon the records of the meeting, of any or all of the provisions of law,
the Certificate of Incorporation of the Corporation, as amended and restated
from time to time (the "Certificate of Incorporation"), or these Bylaws as to
notice of such meeting, including the time, place and purpose thereof, or as to
any irregularities in such notice or arising in connection therewith or with the
giving thereof and shall thereby validate the proceedings at such meeting as
fully as though all of the requirements waived had been duly met in their
respective cases. The attendance of any stockholder at any such meeting, in
person or by proxy, without protesting the lack of a proper notice of such
meeting shall be deemed to be a waiver of notice of such meeting.
Section 6. Quorum. A stockholders' meeting duly called shall not be
------
organized for the transaction of business unless a quorum is present. Except as
otherwise expressly provided by law, the Certificate of Incorporation, these
Bylaws or any certificate filed under Section 151(g) of the Delaware General
Corporation Law (the "DGCL") (or its successor statute as in effect from time to
time), the presence in person or by proxy of holders of record entitled to
exercise at least a majority of the voting power of the Corporation shall
constitute a quorum for such meeting. The stockholders present at a duly
organized meeting can continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. If a meeting
cannot be organized because a quorum has not attended, stockholders representing
a majority of the voting power of the stockholders present may adjourn, or, in
the absence of a decision by the majority, any officer entitled to preside at
such meeting may adjourn, the meeting from time to time to such time (not more
than 30 days after the previously adjourned meeting) and
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place as such stockholders or officer may determine, without notice other than
by announcement at the meeting of the time and place of the adjourned meeting.
At any such adjourned meeting at which a quorum is present any business may be
transacted which might have been transacted at the meeting as originally called.
Section 7. Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 days nor less than 10 days before the date of such meeting,
nor more than 60 days prior to any other action. A determination of
stockholders entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of such meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 8. Voting.
------
(a) Stockholders Entitled to Vote. Each stockholder shall, at each meeting of
-----------------------------
the stockholders, be entitled to vote in person or by proxy each share or
fractional share of the stock of the Corporation having voting rights on the
matter in question and which shall have been held by him or her and registered
in his name on the books of the Corporation on the date fixed pursuant to
Section 7 of this Article II as the record date for the determination of
stockholders entitled to notice of and to vote at such meeting.
(b) Voting by Another Corporation. Subject to the provisions of the
-----------------------------
Certificate of Incorporation and subsection (a) of this Section 8, the chairman
of the board of directors, the president, any vice president, the secretary, the
treasurer or any other duly elected officer or duly authorized agent, proxy or
attorney-in-fact of another corporation holding shares of this Corporation and
entitled to vote at any meeting shall conclusively be deemed to have authority
to vote such shares and to execute proxies and written waivers or consents in
relation thereto, whether such shares are held in a fiduciary capacity or
otherwise, unless before a vote is taken or a consent or waiver is acted upon, a
certified copy of the bylaws, or a resolution of the board of directors, of the
corporation holding such shares is delivered to the Secretary of this
Corporation, showing that such authority does not exist or is vested in some
other officer or person. A person executing such writing or so acting as one of
such officers, agents, proxies or attorneys-in-fact of such corporation shall,
for the purposes of this subsection (b), be prima facie deemed to be duly
elected (if applicable) or appointed, qualified and acting as such officer,
agent, proxy or attorney-in-fact and to be fully authorized.
(c) Voting by Proxy. A stockholder may, through a written proxy, authorize
---------------
another person (who need not be a stockholder) to vote in the stockholder's
stead and to represent the stockholder at one or more stockholders' meetings,
whether annual or special meetings, or any adjournment thereof, but such
instrument must be filed with the Secretary
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of this Corporation before the convening of the meeting and before the person
authorized thereby may exercise the rights thereunder. A vote in accordance
with the terms of a duly filed proxy shall be valid notwithstanding the previous
death of the principal or the revocation of the appointment or the transfer of
the share on which the vote was given, unless notice in writing of such death,
revocation or transfer shall have been received by the Secretary of this
Corporation, or such revocation is made in open meeting, before the vote is
taken or the authority granted is otherwise exercised; provided, however, that
-------- -------
no proxy hereafter made shall be valid after the expiration of 3 years after the
date of its execution unless the stockholder executing it shall have specified
therein the length of time it is to continue in force. A telegram, cablegram,
wireless message or photograph, photostatic or equivalent reproduction of a
writing appointing a proxy or proxies shall be a sufficient writing. A
stockholder, without affecting any vote previously taken, may revoke such
writing not otherwise revoked by giving notice to this Corporation in writing or
in open meeting.
Section 9. Inspectors of Election. The Board of Directors, in advance
----------------------
of any meeting of stockholders, may appoint 3 inspectors to act at the meeting.
If inspectors are not so appointed, the person acting as the chairman of any
meeting of stockholders may appoint such inspectors. If any person so appointed
fails to appear or act, the vacancy may be filled by appointment made by the
Board of Directors in advance of the meeting or at the meeting by the person
acting as chairman thereat. The inspectors so appointed, if any, shall (i)
determine the number of shares outstanding, the voting rights with respect to
the shares outstanding, the shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies, (ii) receive
votes, ballots, consents, waivers, or releases, (iii) hear and determine all
challenges and questions arising in connection with the vote, (iv) count and
tabulate all votes, consents, waivers, and releases, (v) determine and announce
the result, and (vi) do such acts as are proper to conduct the election or vote
with fairness to all stockholders. The decision, act or certificate of a
majority of the inspectors shall be effective in all respects as the decision,
act or certificate of all 3 inspectors. If requested to do so by the person
acting as chairman of the meeting, the inspectors shall make a report in writing
of any challenge, question or matter determined by them, and make and execute a
certificate of any facts found by them. The certificate of the inspectors shall
be prima facie evidence of the facts therein stated and of the vote as certified
by them.
Section 10. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board, or in his absence or by his or her request, the Chairman
and Chief Executive Officer--Nationwide Insurance Enterprise, or in his or her
absence or by his or her request, the President and Chief Operating Officer, or
in his or her absence or by his or her request, any Vice President, or, in the
absence of the Chairman of the Board, the Chairman and Chief Executive Officer--
Nationwide Insurance Enterprise, the President and Chief Operating Officer and a
Vice President, a chairman chosen by stockholders representing a majority of the
voting power present in person or by proxy and entitled to vote shall act as
chairman, and the Secretary of this Corporation, or, if the Secretary of this
Corporation not be present, an Assistant Secretary, or if neither the Secretary
nor an Assistant Secretary be present, any person whom the chairman of the
meeting shall appoint, shall act as secretary of the meeting.
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Section 11. Advance Notice of Stockholder Proposals and Stockholder
-------------------------------------------------------
Nominations of Directors. In order to properly submit any business to, or
- ------------------------
nominate any person for election to the Board of Directors at, an annual meeting
of stockholders, a stockholder must give timely notice in writing to the
Secretary of the Corporation. To be considered timely, a stockholder's notice
must be delivered either in person or by United States certified mail, postage
prepaid, and received at the principal executive offices of the Corporation (i)
not less than 60 days nor more than 90 days before the first anniversary date of
the Corporation's proxy statement in connection with the last annual meeting of
stockholders or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than a reasonable time, as determined by the Board of Directors, prior to
the date of the applicable annual meeting. With respect to any special meeting
of stockholders, written notice of a stockholder's proposal to submit business
or to nominate a person for election to the Board of Directors must be delivered
in the manner specified above and not later than the close of business on the
seventh day following the earlier of (a) the day on which notice of such meeting
is first given to stockholders or (b) the day on which public disclosure of the
meeting is made.
The Secretary of the Corporation shall deliver any stockholder proposals
and nominations received in a timely manner for review by the Board of Directors
or a committee designated by the Board of Directors.
A stockholder's notice to submit business at an annual meeting of
stockholders shall set forth (1) the name and address of such stockholder, (2)
the class and number of shares of stock beneficially owned by such stockholder,
(3) the name in which such shares are registered on the stock transfer books of
the Corporation, (4) a representation that such stockholder intends to appear at
the meeting in person or by proxy to submit the business specified in such
notice, (5) any material interest of such stockholder in the business to be
submitted, and (6) a brief description of the business desired to be submitted
at the annual meeting, including the complete text of any resolutions to be
presented at the annual meeting, and the reasons for conducting such business at
the annual meeting. In addition, the stockholder making such proposal shall
promptly provide any other information reasonably requested by the Corporation.
In addition to the information required above to be given by a
stockholder who intends to submit business at a meeting of stockholders, if the
business to be submitted is the nomination of a person or persons for election
to the Board of Directors then such stockholder's notice must also set forth, as
to each person whom such stockholder proposes to nominate for election as a
director, (A) the name, age, business address and, if known, residential address
of such person, (B) the principal occupation or employment of such person, (C)
the class and number of shares of stock of the Corporation which are
beneficially owned by such person, (D) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors or is otherwise required by the rules and regulations of the
Securities and Exchange Commission promulgated under the
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<PAGE>
Securities Exchange Act of 1934, as amended, (E) the written consent of such
person to be named in the proxy statement as a nominee and to serve as a
director if elected, and (F) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder.
Any person nominated for election as a director by the Board of Directors
or any committee designated by the Board of Directors shall, upon the request of
the Board of Directors or such committee, furnish to the Secretary of the
Corporation all such information pertaining to such person that is required to
be set forth in a stockholder's notice of nomination.
Notwithstanding the foregoing provisions of this Section 11, a
stockholder who seeks to have any proposal included in the Corporation's proxy
statement shall comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended, at any time when such requirements
are applicable pursuant thereto.
ARTICLE III
DIRECTORS
Section 1. Powers and Number of Directors. The affairs, property and
------------------------------
business of the Corporation shall be conducted and managed by a Board of
Directors consisting of not less than 1 nor more than 15 directors. The exact
number of directors shall be determined from time to time by resolution or
resolutions adopted by affirmative vote of a majority of the entire Board of
Directors which the Corporation would have if there were no vacancies. The
directors shall be divided into three classes, designated Class I, Class II and
Class III, as provided in the Certificate of Incorporation. The terms of
directors shall be as provided in the Certificate of Incorporation.
Section 2. Election of Directors. At each meeting of the stockholders
---------------------
for the election of directors, the persons receiving the greatest number of
votes shall be the directors. Directors need not be stockholders.
Section 3. Nominations. Nominations of persons for election to the
-----------
Board of Directors may be made by the Board of Directors, any committee thereof,
or by any stockholders entitled to vote for the election of directors at the
applicable meeting of stockholders. Nominations made by stockholders must be
made in accordance with the provisions of Section 11 of Article II of these
Bylaws. Notice of nominations which are proposed by the Board of Directors
shall be given on behalf of the Board of Directors by the chairman of the
meeting. The chairman of the meeting may, if the facts warrant, determine that
a nomination was not made in accordance with the foregoing procedure, and if the
chairman should so determine, the chairman shall so declare at the meeting and
the defective nomination shall be disregarded.
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<PAGE>
Section 4. Resignations. Any director of the Corporation may resign at
------------
any time by giving written notice to the Chairman of the Board, the Chairman and
Chief Executive Officer--Nationwide Insurance Enterprise, the President and
Chief Operating Officer or the Secretary of the Corporation. Such resignation
shall take effect at the time specified therein, and if no time is specified, at
the time of its receipt. Unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. Vacancies and Removal of Directors. Vacancies in the Board
----------------------------------
of Directors shall be filled, and directors may be removed, only as provided in
the Certificate of Incorporation.
Section 6. Place of Meeting. The Board of Directors may hold any of its
----------------
meetings at the principal office of the Corporation or at such other place or
places as the Board of Directors (or the Chairman of the Board in the absence of
a determination by the Board of Directors) may from time to time designate.
Section 7. Annual Meeting. An annual meeting of the Board of Directors
--------------
shall be held each year at the same place as, and immediately after, the annual
meeting of stockholders, or at such other place and time as shall theretofore
have been determined by the Board of Directors and notice thereof need not be
given. At its annual meeting, the Board of Directors shall organize itself and
elect the officers of the Corporation for the ensuing year, and may transact any
other business which may properly come before the meeting.
Section 8. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held without notice at such intervals, at such time and at such place as
shall from time to time be determined by resolution of the Board of Directors.
Section 9. Special Meetings. Special meetings of the Board of Directors
----------------
may be called at any time by the Chairman of the Board, the Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise, the President and Chief
Operating Officer or by a majority of directors then in office to be held on
such day and at such time and place as shall be specified by the person or
persons calling the meeting.
Section 10. Notice of Meeting. Notice of each special meeting or, where
-----------------
required, each regular meeting of the Board of Directors shall be given to each
director either by being mailed on at least the third day prior to the date of
the meeting or by being telegraphed, faxed or given personally or by telephone
on at least 24 hours notice prior to the date of meeting. Such notice shall
specify the place, the date and the hour of the meeting and, if it is for a
special meeting, the purpose or purposes for which the meeting is called. At any
meeting of the Board of Directors at which every director shall be present
(unless any director shall be so present solely to protest the validity or
legality of such meeting), even though without such notice, any business may be
transacted. Any acts or proceedings taken at a meeting of the Board of
Directors not validly called or constituted may be made valid
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<PAGE>
and fully effective by ratification at a subsequent meeting which shall be
legally and validly called or constituted. Notice of any regular meeting of the
Board of Directors need not state the purpose of the meeting and, at any regular
meeting duly held, any business may be transacted. If the notice of a special
meeting shall state as a purpose of the meeting the transaction of any business
that may come before the meeting, then at the meeting any business may be
transacted, whether or not referred to in the notice thereof. A written waiver
of notice of a special or regular meeting, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed the equivalent of such notice, and attendance of a director at a
meeting shall constitute a waiver of notice of such meeting except when the
director attends the meeting and prior to or at the commencement of such meeting
protests the lack of proper notice.
Section 11. Quorum and Voting. At all meetings of the Board of
-----------------
Directors, the presence of a majority of the directors then in office shall
constitute a quorum for the transaction of business. Except as otherwise
required by law, the Certificate of Incorporation, or these Bylaws, the vote of
a majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors. If at any meeting of the Board of
Directors, there shall be less than a quorum present, a majority of the
directors present may adjourn the meeting from time to time until a quorum is
obtained, and no further notice thereof need be given other than by announcement
at the adjourned meeting. At all meetings of the Board of Directors, each
director shall have one vote.
Section 12. Committees. The Board of Directors, by resolution passed
----------
by a majority of the entire board, may designate one or more committees of the
Board of Directors, each consisting of two or more directors. To the extent
provided in the resolution and permitted by law, the committee or committees
shall have and may exercise all powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation and may
authorize the seal of the Corporation to be affixed to all papers that may
require it, but no committee shall have the power or authority to approve or
adopt, or recommend to the stockholders of the Corporation, any matter expressly
required by the DGCL to be submitted to stockholders for approval or adopt,
amend or repeal any provision of these Bylaws or the Certificate of
Incorporation. Any committee or committees shall have the name or names
determined from time to time by resolution adopted by the Board of Directors.
Any vacancy in a committee occurring from any cause whatsoever may be filled by
the Board of Directors. Each committee shall serve at the pleasure of the Board
of Directors and shall be subject to the control and direction of the Board of
Directors. Any such committee may act by a majority of its members at a meeting
of such committee. Any such committee shall keep written minutes of its
meetings and report the same to the Board of Directors at the next regular
meeting of the Board of Directors.
Section 13. Compensation. The Board of Directors may, by resolution
------------
passed by a majority of those in office, fix the compensation of directors for
service in any capacity and may fix fees for attendance at meetings and may
authorize the Corporation to pay the traveling and other expenses of directors
incident to their attendance at meetings, or may delegate such authority to a
committee of the Board of Directors.
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<PAGE>
Section 14. Action by Consent. Any action required or permitted to be
-----------------
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if a written consent thereto is signed by all members
of the Board of Directors or of such committee, as the case may be, and such
written consent is filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 15. Participation in Meeting by Telephone. Unless otherwise
-------------------------------------
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors or any committee thereof may participate in a meeting of the
Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 15 shall constitute presence in person at such meeting.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a
--------
Chairman of the Board, a Chairman and Chief Executive Officer--Nationwide
Insurance Enterprise, a President and Chief Operating Officer, one or more Vice
Presidents, a General Counsel, a Secretary, and a Treasurer. The Corporation
may also have such other officers, assistant officers and agents as, from time
to time, may be elected or appointed by the Board of Directors. The Chairman of
the Board, the Chairman and Chief Executive Officer--Nationwide Insurance
Enterprise and the President and Chief Operating Officer must be members of the
Board of Directors. Any two or more of the offices may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity, if such instrument is required by law, by the
Certificate of Incorporation or by these Bylaws to be executed, acknowledge or
verified by two or more officers.
Section 2. Election and Term of Office. The Chairman of the Board, the
---------------------------
Chairman and Chief Executive Officer -- Nationwide Insurance Enterprise, the
President and Chief Operating Officer, the Vice Presidents, the General
Counsel, the Secretary and the Treasurer shall be elected by the majority of the
Board of Directors at the annual meeting of the Board of Directors. The
officers shall hold office until the date of the next annual meeting of the
Board of Directors and until their respective successors are elected and
qualified. All other officers, assistant officers and agents of the Corporation
shall be elected or appointed by the Board of Directors and shall hold office
for such period, have such authority and perform such duties as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any officer the power to appoint any subordinate officers or agents.
Section 3. Removal. Any officer of the Corporation may be removed from
-------
office at any time, for or without cause, by a vote of a majority of the Board
of Directors.
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Any officer appointed not by the Board of Directors but by a committee or
officer to which the Board of Directors shall have delegated the power of
appointment may be removed, for or without cause, by the committee or superior
officer (including successors) who made the appointment, or by any committee or
officer upon whom such power of removal may be conferred by the Board of
Directors.
Section 4. Resignations. Any officer may resign at any time by giving
------------
written notice to the Chairman of the Board, the Chairman and Chief Executive
Officer--Nationwide Insurance Enterprise, the President and Chief Operating
Officer, or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein, and if no time is specified, at the time
of its receipt. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise, shall be filled in the
manner prescribed in these Bylaws for regular appointments or elections to such
office.
ARTICLE V
DUTIES OF OFFICERS
Section 1. Chairman of the Board. The Chairman of the Board shall
---------------------
preside, if present, at all meetings of the stockholders and the Board of
Directors, shall sign the record of such meetings at which he or she shall
preside and shall have such other powers and duties as are conferred upon him or
her by these Bylaws or may be assigned to him or her from time to time by the
Board of Directors.
Section 2. Chairman and Chief Executive Officer--Nationwide Insurance
----------------------------------------------------------
Enterprise. The Chairman and Chief Executive Officer--Nationwide Insurance
- ----------
Enterprise shall be the Chief Executive Officer of the Corporation and shall
exercise general administrative leadership and direction of the Corporation in
conformity with actions and controls established and maintained by the Board of
Directors. The Chairman and Chief Executive Officer--Nationwide Insurance
Enterprise shall, in compliance with the laws of Delaware, the Certificate of
Incorporation and these Bylaws, and in concurrence with the actions of the Board
of Directors, direct the activities of the officers of the Corporation. The
Chairman and Chief Executive Officer--Nationwide Insurance Enterprise shall have
the power and authority to execute on behalf of the Corporation any and all
approved documents, contracts, instruments, or other papers to which the
signature of the Corporation is to be attached; provided, however, that a
-------- -------
facsimile of his or her signature may be printed, engraved or stamped on any
approved document, contract, instrument or other paper of the Corporation. The
Chairman and Chief Executive Officer--Nationwide Insurance Enterprise shall
exercise the discretion of and perform generally all of the duties incident to
the office of Chairman and Chief Executive Officer--Nationwide Insurance
Enterprise and such other
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<PAGE>
duties as are conferred upon him or her by these Bylaws or may be assigned to
him or her from time to time by the Board of Directors.
In the absence of the Chairman of the Board, or at the request thereof,
the Chairman and Chief Executive Officer--Nationwide Insurance Enterprise shall
preside at meetings of the stockholders and the Board of Directors and sign the
record of such meetings at which he or she shall preside. In the absence of the
Chairman of the Board and the Chairman and Chief Executive Officer--Nationwide
Insurance Enterprise, another director shall be selected by the directors
present at the meeting of the Board of Directors to preside at such meeting and
shall be authorized to sign the record of the meeting at which such director
shall preside.
Section 3. President and Chief Operating Officer. The President and
-------------------------------------
Chief Operating Officer shall be the chief operating officer of the Corporation
and shall, in compliance with the laws of Delaware, the Certificate of
Incorporation and these Bylaws, and in concurrence with the Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise and the actions of the Board
of Directors, direct the activities of the officers of the Corporation. Except
as provided for by resolution of the Board of Directors or by memorandum from
the Chairman and Chief Executive Officer--Nationwide Insurance Enterprise, the
President and Chief Operating Officer shall have the power and authority to
execute on behalf of the Corporation any and all approved documents, contracts,
instruments, or other papers to which the signature of the Corporation is to be
attached; provided, however, that a facsimile of his or her signature may be
-------- -------
printed, engraved or stamped on any approved document, contract, instrument or
other paper of the Corporation. The President and Chief Operating Officer shall
exercise the discretion of and perform generally all of the duties incident to
the office of President and Chief Operating Officer and such other and further
duties as are conferred upon him or her by these Bylaws or may be assigned to
him or her from time to time by the Board of Directors or the Chairman and Chief
Executive Officer--Nationwide Insurance Enterprise.
Section 4. Vice Presidents. The Vice Presidents, who may be designated
---------------
Executive Vice President, Senior Vice President, Vice President or Associate
Vice President, shall have such powers and perform such duties as are conferred
upon them by these Bylaws or may be assigned to them from time to time by the
Chairman and Chief Executive Officer--Nationwide Insurance Enterprise or the
President and Chief Operating Officer and approved by the Board of Directors.
The officer designated by the President and Chief Operating Officer and approved
by the Chairman and Chief Executive Officer--Nationwide Insurance Enterprise
shall act for the President and Chief Operating Officer upon his or her absence
or disability.
Section 5. General Counsel. The General Counsel shall furnish legal
---------------
counsel on corporate matters as required; render legal opinions to the Board of
Directors, the Chairman and Chief Executive Officer--Nationwide Insurance
Enterprise, the President and Chief Operating Officer and the other officers and
employees as requested; interpret all laws and regulations relating to the
business of the Corporation; initiate recommendations with
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respect to legislation affecting the business of the Corporation; and shall
perform such other and further duties as may be required by the Board of
Directors, the Chairman and Chief Executive Officer--Nationwide Insurance
Enterprise or the President and Chief Operating Officer.
Section 6. Secretary. The Secretary shall (i) issue notices and
---------
maintain the official records of all meetings of the stockholders and the Board
of Directors and such records shall be attested by the Secretary or by such
other person as shall have acted as secretary of such meeting in the case of the
Secretary's absence for any reason, (ii) have charge of the seal, share or other
security books of the Corporation, and (iii) shall issue and attest all
certificates of shares or other securities of the Corporation; provided,
--------
however, that a facsimile of his or her signature may be printed, engraved or
- -------
stamped on certificates for shares, bonds or other securities of the Corporation
when such certificates are countersigned by an incorporated transfer agent or
registrar. In case a transfer agent or registrar of the shares or other
securities of the Corporation shall be duly appointed by the Corporation, the
Secretary may place in the charge of such transfer agent or registrar the seal
and share or other security books of the Corporation and such transfer agent or
registrar may perform in the Secretary's stead all duties in connection with the
shares of the Corporation. The Secretary shall have power and authority to sign
or attest on behalf of the Corporation any and all approved documents,
contracts, instruments or other papers where required in carrying on the
business of the Corporation; provided, however, that a facsimile of his or her
-------- -------
signature may be printed, engraved or stamped on any approved document,
contract, instrument or other paper of the Corporation. The Secretary shall
perform such other and further duties as are conferred upon him or her by these
Bylaws or may be assigned to him or her from time to time by the Chairman and
Chief Executive Officer--Nationwide Insurance Enterprise or the President and
Chief Operating Officer and approved by the Board of Directors.
Section 7. Treasurer. The Treasurer shall (i) maintain custody of all
---------
funds, securities and properties of the Corporation, (ii) direct the receipt and
deposit of all funds and securities and payment of all authorized disbursements,
(iii) direct the administration of all accounting activities of the Corporation,
(iv) furnish financial reports of the Corporation, as required, and (v) have
the power and authority to sign or attest on behalf of the Corporation any and
all approved documents, contracts, instruments, or other papers where required
in carrying on the business of the Corporation; provided, however, that a
-------- -------
facsimile of his signature may be printed, engraved or stamped on any approved
document, contract, instrument or other paper of the Corporation. The Treasurer
shall perform such other and further duties as are conferred upon him or her by
these Bylaws or may be assigned to him or her from time to time by the Chairman
and Chief Executive Officer--Nationwide Insurance Enterprise or the President
and Chief Operating Officer and approved by the Board of Directors.
Section 8. Assistant Secretary. Any Assistant Secretary shall at all
-------------------
times act as an assistant to the Secretary and have such powers and perform such
duties as are conferred upon him or her by these Bylaws or be assigned to him or
her from time to time
-12-
<PAGE>
by the Secretary and approved by the Chairman and Chief Executive Officer--
Nationwide Insurance Enterprise or the President and Chief Operating Officer.
In case both the Secretary and all Assistant Secretaries are at the same time
absent or unable to perform their duties, the Board of Directors may appoint a
secretary pro tempore with the power and duty to act as Secretary during such
absence or disability of the Secretary and the Assistant Secretaries.
Section 9. Assistant Treasurer. Any Assistant Treasurer shall at all
-------------------
times act as an assistant to the Treasurer and shall have powers and perform
such duties as are conferred upon him or her by these Bylaws or may be assigned
to him or her from time to time by the Treasurer and approved by the Chairman
and Chief Executive Officer--Nationwide Insurance Enterprise or the President
and Chief Operating Officer.
Section 10. Execution of Instruments. Any Vice President and any
------------------------
assistant secretary or assistant treasurer shall have the power and authority to
sign any and all approved documents, contracts, instruments, or other papers in
connection with the operation of the business of the Corporation in addition to
the Chairman and Chief Executive Officer--Nationwide Insurance Enterprise, the
President and Chief Operating Officer, the Treasurer and the Secretary;
provided, however, the facsimile signature of any of them may be printed,
- -------- -------
engraved or stamped on any approved document, contract, instrument, or other
paper of the Corporation.
Section 11. Bond of Officers and Employees. Any officer or employee of
------------------------------
the Corporation handling funds or negotiable instruments or any other property
of the Corporation shall furnish such bond or shall be covered by a blanket bond
in such amounts and with such surety and sureties as may be required by the
Board of Directors. The premium of any such bond shall be paid by the
Corporation.
ARTICLE VI
INDEMNIFICATION
Section 1. Indemnification. The Corporation shall indemnify, to the
---------------
fullest extent permissible under the DGCL, or the indemnification provisions of
any successor statute, any person, and the heirs and personal representatives of
such person, against any and all judgments, fines, amounts paid in settlement
and costs and expenses, including attorneys' fees, actually and reasonably
incurred by or imposed upon such person, in connection with, or resulting from
any claim, action, suit or proceeding (civil, criminal, administrative or
investigative) in which such person is a party or is threatened to be made a
party by reason of such person being or having been a director, officer,
employee or agent of the Corporation, or of another corporation, joint venture,
trust or other organization in which such person serves as a director, officer,
employee or agent at the request of the Corporation, or by reason of such person
being or having been an administrator or a member of any board or committee of
the Corporation or of any such other organization, including, but not limited
to, any administrator, board or committee related to any employee benefit plan.
-13-
<PAGE>
The Corporation may advance expenses incurred in defending a civil or
criminal action, suit or proceeding to any such director, officer, employee or
agent upon receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount, if it shall ultimately be determined
that such person is not entitled to indemnification by the Corporation.
The foregoing right of indemnification and advancement of expenses shall
in no way be exclusive of any other rights of indemnification to which any such
person may be entitled, under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, and shall inure to the benefit of the
heirs and personal representatives of such person. Any repeal or amendment of
this Section 1 of Article VI by the Corporation shall be prospective only and
shall not adversely affect any right of protection of a person with respect to
any act or omission occurring prior to the time of such repeal or modification.
Section 2. Reliance on Books and Records. Each director and officer and
-----------------------------
each member of any committee designated by the Board of Directors shall, in the
performance of his or her duties, be fully protected in relying in good faith
upon the books of account or other records of the Corporation or of any of its
subsidiaries, or upon reports made to the Corporation or any of its subsidiaries
by any officer of the Corporation or of a subsidiary or by an independent
certified public accountant or by an appraiser selected with reasonable care by
the Board of Directors or by any such committee.
Section 3. Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
the person's status as such, whether or not the Corporation would have the power
to indemnify such person against such liability under the DGCL.
ARTICLE VII
SHARES
Section 1. Certificates of Shares. Each stockholder of the Corporation
----------------------
whose shares are paid in full shall be entitled to a certificate or certificates
showing the number and class of shares registered in such stockholder's name on
the books of the Corporation. Certificates for the respective classes of shares
of the Corporation shall be issued in numerical order and signed in the name of
the Corporation by the Chairman of the Board, the Chairman and Chief Executive
Officer--Nationwide Insurance Enterprise or the President and Chief Operating
Officer and the Secretary or the Treasurer, or such other officers or persons as
may be authorized by the Board of Directors and permitted by applicable law.
The signature of any of said officers may be facsimile, engraved, stamped or
printed when such certificates are countersigned by an incorporated transfer
agent or
-14-
<PAGE>
registrar. A full record of each certificate as issued shall be entered on the
stock record books of the Corporation. No new certificate shall be issued until
the former certificate for the same number of shares shall have been surrendered
and canceled, except as provided for in Section 3 of this Article VII. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he or she was such
officer, transfer agent or registrar at the date of issue.
Section 2. Transfer of Shares. Transfers of shares in the Corporation
------------------
shall be made only on the books of the Corporation by the registered holder
thereof, his legal guardian, executor or administrator, or by his attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary or with a transfer agent appointed by the Board of Directors, and on
surrender of the certificate or certificates for such shares properly endorsed
or accompanied by properly executed stock powers and evidence of the payment of
all taxes imposed upon such transfer.
Section 3. Lost, Stolen, Destroyed or Mutilated Certificates. If any
-------------------------------------------------
share certificate in this Corporation becomes worn, defaced or mutilated, the
Secretary, upon presentation or surrender thereof, shall order the same
canceled, and shall issue a new certificate in lieu thereof. If any share
certificate is lost, stolen or destroyed, the Secretary shall issue a new
certificate in lieu thereof to the person entitled to such lost, stolen or
destroyed certificate upon receiving a bond of indemnity containing such terms
as the Board of Directors may reasonably require to protect the Corporation or
any person, firm or other corporation from loss, cost or damage resulting from
the issue of such new certificate.
Section 4. Holder of Record. The Corporation shall be entitled to treat
----------------
the holder of record of any share or shares of the Corporation as the holder in
fact thereof, and accordingly shall not be bound to recognize any equitable or
other claim to, or interest in, such share on the part of any person, whether or
not the Corporation shall have express or other notice thereof, except as
expressly provided by the laws of Delaware.
Section 5. Transfer Agents and Registrars. The Board of Directors may
------------------------------
appoint, or revoke the appointment of, transfer agents and registrars and may
require all certificates for shares to bear the signatures of such transfer
agents and registrars, or any of them. The Board of Directors shall have
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, and registration of certificates for shares of
the Corporation.
-15-
<PAGE>
ARTICLE VIII
FISCAL YEAR
Section 1. Fiscal Year. The fiscal year of the Corporation shall be the
-----------
calendar year ending December 31, unless otherwise fixed by resolution of the
Board of Directors.
ARTICLE IX
SEAL
Section 1. Seal. The corporate seal shall be circular in form and shall
----
contain the name of the Corporation, the year of its creation and the words
"CORPORATE SEAL Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE X
MISCELLANEOUS
Section 1. Checks. All checks, drafts or other orders for the payment
------
of money, notes, or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers or agent or agents of
the Corporation, and in such manner, as shall be determined from time to time by
resolution of the Board of Directors.
Section 2. Notice and Waiver of Notice. Except as otherwise expressly
---------------------------
provided herein, any notice required by these Bylaws to be given shall be
sufficient if given by depositing the same in a post office or letter box in a
sealed wrapper with first-class postage prepaid thereon and addressed to the
person entitled thereto at such person's address, as the same appears upon the
books of the Corporation, or by faxing, telegraphing or cabling the same to such
person at such address; and such notice shall be deemed to be given at the time
it is faxed, telegraphed or cabled or at the time the mailing is received.
Whenever any notice is required to be given under the provisions of any law, or
under the provisions of the Certificate of Incorporation or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE XI
AMENDMENTS
-16-
<PAGE>
Section 1. By Stockholders. Except as otherwise provided in the
---------------
Certificate of Incorporation, these Bylaws may be altered or amended at any
meeting of the stockholders by affirmative vote of holders of a majority of the
voting power of the shares entitled to vote thereon at such meeting.
Section 2. By Directors. Except as otherwise provided in the
------------
Certificate of Incorporation, these Bylaws may be altered or amended at any
meeting of the Board of Directors by affirmative vote of a majority of the Board
of Directors.
-17-
<PAGE>
EXHIBIT 10.6
$600,000,000
CREDIT AGREEMENT
dated as of
August 12, 1996
among
Nationwide Mutual Insurance Company,
Nationwide Life Insurance Company
The Banks Parties Hereto
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent
-----------------------
J.P. Morgan Securities Inc.,
Arranger
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS
1.1. Definitions......................................................... 1
1.2. Accounting Terms and Determinations................................. 14
1.3. Types of Borrowings................................................. 14
ARTICLE 2
THE CREDITS
2.1. Commitments to Lend................................................. 15
2.2. Notice of Committed Borrowing....................................... 15
2.3. Money Market Borrowings............................................. 16
2.4. Notice to Banks; Funding of Loans................................... 20
2.5. Notes............................................................... 21
2.6. Maturity of Loans................................................... 21
2.7. Interest Rates...................................................... 22
2.8. Fees................................................................ 26
2.9. Optional Termination or Reduction of
Commitments..................................................... 26
2.10. Method of Electing Interest Rates................................... 26
2.11. Mandatory Termination of Commitments................................ 28
2.12. Optional Prepayments................................................ 28
2.13. General Provisions as to Payments................................... 29
2.14. Funding Losses...................................................... 30
2.15. Computation of Interest and Fees.................................... 30
2.16. Regulation D Compensation........................................... 30
ARTICLE 3
CONDITIONS
3.1. Closing............................................................. 31
3.2. Borrowings.......................................................... 31
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1. Corporate Existence and Power....................................... 32
4.2. Corporate and Governmental Authorization; No
Contravention................................................... 33
4.3. Binding Effect...................................................... 33
4.4. Financial Information............................................... 33
i
<PAGE>
4.5. Litigation............................................... 33
4.6. Compliance with ERISA.................................... 33
4.7. Environmental Matters.................................... 34
4.8. Taxes.................................................... 34
4.9. Material Subsidiaries.................................... 35
4.10. Regulatory Restrictions.................................. 35
4.11. Full Disclosure.......................................... 35
ARTICLE 5
COVENANTS
5.1. Information.............................................. 35
5.2. Maintenance of Property; Insurance....................... 37
5.3. Conduct of Business and Maintenance of Existence......... 37
5.4. Compliance with Laws..................................... 37
5.5. Mergers and Sales of Assets.............................. 38
5.6. Use of Proceeds.......................................... 38
5.7. Minimum Statutory Surplus................................ 38
5.8. Negative Pledge.......................................... 38
5.9. Transactions with Affiliates............................. 39
ARTICLE 6
DEFAULTS
6.1. Events of Default........................................ 40
6.2. Notice of Default........................................ 43
ARTICLE 7
THE ADMINISTRATIVE AGENT
7.1. Appointment and Authorization............................ 43
7.2. Administrative Agent and Affiliates...................... 43
7.3. Action by Administrative Agent........................... 44
7.4. Consultation with Experts................................ 44
7.5. Liability of Administrative Agent........................ 44
7.6. Indemnification.......................................... 44
7.7. Credit Decision.......................................... 45
7.8. Successor Administrative Agent........................... 45
7.9. Administrative Agent's Fee............................... 45
ARTICLE 8
CHANGE IN CIRCUMSTANCES
8.1. Basis for Determining Interest Rate Inadequate
or Unfair............................................ 46
8.2. Illegality............................................... 47
<PAGE>
Page
----
8.3. Increased Cost and Reduced Return............................... 47
8.4. Taxes........................................................... 49
8.5. Base Rate Loans Substituted for Affected
Fixed Rate Loans........................................... 51
8.6. Substitution of Bank ........................................... 52
ARTICLE 9
MISCELLANEOUS
9.1. Notices......................................................... 52
9.2. No Waivers...................................................... 53
9.3. Expenses; Indemnification....................................... 53
9.4. Sharing of Set-Offs............................................. 54
9.5. Amendments and Waivers.......................................... 54
9.6. Successors and Assigns.......................................... 54
9.7. Collateral...................................................... 56
9.8. Governing Law; Submission to Jurisdiction....................... 56
9.9. Counterparts; Integration; Effectiveness;
Termination of Designated Credit
Facilities.................................................. 57
9.10. WAIVER OF JURY TRIAL............................................ 57
9.11. Confidentiality................................................. 57
PRICING SCHEDULE
SCHEDULE I - Designated Credit Facilities
EXHIBIT A - Note
EXHIBIT B - Money Market Quote Request
EXHIBIT C - Invitation for Money Market Quotes
EXHIBIT D - Money Market Quote
EXHIBIT E - Opinion of Counsel for the Borrowers
EXHIBIT F - Opinion of Special Counsel for the
Administrative Agent
EXHIBIT G - Assignment and Assumption Agreement
iii
<PAGE>
CREDIT AGREEMENT dated as of August 12, 1996 among NATIONWIDE MUTUAL
INSURANCE COMPANY, NATIONWIDE LIFE INSURANCE COMPANY, the BANKS parties hereto
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1. Definitions. The following terms, as used herein, have the
-----------
following meanings:
"Absolute Rate Auction" means a solicitation of Money market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.3.
"Adjusted CD Rate" has the meaning set forth in Section 2.7(b).
"Administrative Agent" means Morgan Guaranty Trust Company of New York
in its capacity as agent for the Banks hereunder, and its successors in such
capacity.
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Administrative Agent
and submitted to the Administrative Agent (with a copy to the Borrowers) duly
completed by such Bank.
"Affiliate" means, with respect to either Borrower, (i) any Person that
directly, or indirectly through one or more intermediaries, controls such
Borrower (a "Controlling Person") or (ii) any Person (other than such Borrower
or a Subsidiary of such Borrower) which is controlled by or is under common
control with a Controlling Person. As used herein, the term "control" means
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its
Money Market Loans, its Money Marketing Lending Office.
<PAGE>
"Article 8 Share" has the meaning set forth in Section 8.3.
"Assessment Rate" has the meaning set forth in Section 2.7(b).
"Assignee" has the meaning set forth in Section 9.6(c).
"Availability Percentage" means, with respect to either Borrower, 50%;
provided that if the Commitments are terminated with respect to one but not both
- --------
Borrowers pursuant to Section 6.1, the Availability Percentage of the Borrower
with respect to which the Commitments are terminated shall be zero and the
Availabilty Percentage of the other Borrower shall be 100%.
"Bank" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective
successors.
"Base Rate" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"Base Rate Loan" means (i) a Committed Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount
which was a Base Rate Loan immediately before it became overdue.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan
and which is maintained or otherwise contributed to by any member of the ERISA
Group.
"Borrower" means either Nationwide Mutual or Nationwide Life. References
to "the Borrower" in connection with any Loan or Borrowing are to the particular
Borrower to which such Loan is made or proposed to be made or by which such
Borrowing is made or proposed to be made.
"Borrowing" has the meaning set forth in Section 1.3.
"CD Base Rate" has the meaning set forth in Section 2.7(b).
2
<PAGE>
"CD Loan" means (i) a Committed Loan which bears interest at a CD Rate
pursuant to the applicable Notice of Committed Borrowing or Notice of Interest
Rate Election or (ii) an overdue amount which was a CD Loan immediately before
it became overdue.
"CD Margin" means a rate per annum determined in accordance with the
Pricing Schedule.
"CD Rate" means a rate of interest determined pursuant to Section 2.7(b)
on the basis of an Adjusted CD Rate.
"CD Reference Banks" means The First National Bank of Chicago, Mellon
Bank, and Morgan Guaranty Trust Company of New York.
"Closing Date" means the date on or after the Effective Date on which
the Administrative Agent shall have received the documents specified in or
pursuant to Section 3.1.
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof (or, in the case of
an Assignee, the portion of the transferor Bank's Commitment assigned to such
Assignee pursuant to Section 9.6(c)), as such amount may be reduced from time to
time pursuant to Section 2.9.
"Committed Loan" means a loan made by a Bank pursuant to Section 2.1;
provided that, if any such loan or loans (or portions thereof) are combined or
- --------
subdivided pursuant to a Notice of Interest Rate Election, the term "Committed
Loan" shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"Debt" of any Persons means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v) all
non-contingent obligations (and, for purposes of Section 5.8 and the definitions
of Material Debt and Material Financial Obligations, all contingent obligations)
of such Person to reimburse any bank or other Person in
3
<PAGE>
respect of amounts paid under a letter of credit or similar instrument, (vi) all
Debt secured by a Lien on any asset of such Person, whether or not such Debt is
otherwise an obligation of such Person and (vii) all Debt of others Guaranteed
by such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Derivatives Obligations" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect to any of
the foregoing transactions) or any combination of the foregoing transactions.
"Designated Credit Facilities" means the credit facilities listed on
Schedule I.
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized or required
by law to close.
"Domestic Lending Office" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrowers and the Administrative Agent; provided that any Bank may
--------
so designate separate Domestic Lending Offices for its Base Rate Loans, on the
one hand, and its CD Loans, on the other hand, in which case all references
herein to the Domestic Lending Office of such Bank shall be deemed to refer to
either or both of such offices, as the context may require.
"Domestic Loans" means CD Loans or Base Rate Loans or both.
"Domestic Reserve Percentage" has the meaning set forth in Section
2.7(b).
4
<PAGE>
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 9.9.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means, with respect to either Borrower, any Subsidiary
of such Borrower and all members of a controlled group of corporations and all
trades or businesses (whether or not incorporated) under common control which,
together with such Borrower or any Subsidiary of such Borrower, are treated as a
single employer under Section 414 of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office,
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrowers and the Administrative Agent.
"Euro-Dollar Loan" means (i) a Committed Loan which bears interest at
a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election or (ii) an overdue amount which was a
Euro-Dollar Loan immediately before it became overdue.
5
<PAGE>
"Euro-Dollar Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
"Euro-Dollar Rate" means a rate of interest determined pursuant to
Section 2.7(c) on the basis of a London Interbank Offered Rate.
"Euro-Dollar Reference Banks" means the principal London offices of
The First National Bank of Chicago, Mellon Bank, and Morgan Guaranty Trust
Company of New York.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.7(c).
"Event of Default" has the meaning set forth in Section 6.1.
"Facility Fee Rate" has the meaning set forth in the Pricing Schedule.
"Facility Fee Share" means, at any date with respect to either
Borrower, a portion of the aggregate amount of the Commitments equal to the sum
of (i) the aggregate principal amount of Loans outstanding to such Borrower plus
----
(ii) such Borrower's Availability Percentage of an amount equal to the excess
(if any) of the aggregate amount of the Commitments over the aggregate principal
amount of the Loans outstanding to both Borrowers, all determined as of such
date.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
--------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions as determined by the Administrative Agent.
"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market
Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate
pursuant to Section 8.1) or any combination of the foregoing.
6
<PAGE>
"Group of Loans" means at any time a group of Loans consisting of
(i) all Committed Loans to a single Borrower which are Base Rate Loans at such
time, (ii) all Euro-Dollar Loans to a single Borrower having the same Interest
Period at such time or (iii) all CD Loans to a single Borrower having the same
interest period at such time, provided that, if a Committed Loan of any
particular Bank is converted to or made as a Base Rate Loan pursuant to Article
8, such Loan shall be included in the same Group or Groups of Loans from time to
time as it would have been in if it had not been so converted or made.
"Guarantee" by any Person means any obligation, contingent or other
wise, of such Person directly or indirectly guaranteeing any Debt of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such Debt
(whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt of the
payment thereof or to protect such holder against loss in respect thereof (in
whole or in part), provided that the term Guarantee shall not include (a)
--------
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives, by-products
and other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"Indemnitee" has the meaning set forth in Section 9.3(c).
"Interest Period" means: (1) with respect to each Euro-Dollar Loan,
the period commencing on the date of borrowing specified in the applicable
Notice of Borrowing or on the date specified in the applicable Notice of
Interest Rate Election and ending one, two, three or six months thereafter, as
the Borrower may elect in the applicable notice; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business
7
<PAGE>
Day unless such Euro-Dollar Business Day falls in another calendar month,
in which case such Interest Period shall end on the next preceding Euro-
Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last Euro-
Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(2) with respect to each CD Loan, the period commencing on the date
of borrowing specified in the applicable Notice of Borrowing or on the date
specified in the applicable Notice of Interest Rate Election and ending 30, 60,
90 or 180 days thereafter, as the Borrower may elect in the applicable notice
provided that:
- --------
(a) any Interest Period (other than an Interest Period determined
pursuant to clause (b) below) which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(3) with respect to each Money Market LIBOR Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.3; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest
8
<PAGE>
Period) shall, subject to clause (c) below, end on the last Euro-Dollar
Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(4) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than 7 days)
as the Borrower may elect in accordance with Section 2.3; provided that:
--------
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"LIBOR Auction" means a solicitation of Money Market Quotes setting
forth Money Market Margins based on the London Interbank Offered Rate
pursuant to Section 2.3.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a
security interest, in respect of such asset. For the purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Loan" means a Domestic Loan, a Euro-Dollar Loan or a Money Market
Loan and "Loans" means Domestic Loans, Euro-Dollar Loans or Money Market
Loans or any combination of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section
2.7 (c).
"Material Affiliate" means,
9
<PAGE>
(i) in respect of Nationwide Mutual, (x) any other Person which is a
party to the Nationwide Insurance Intercompany Pooling Agreement, effective
as of January 1, 1994, as amended or supplemented from time to time and (y)
any of its Material Subsidiaries.
(ii) in respect of Nationwide Life, any of its Material Subsidiaries.
"Material Debt" means, with respect to either Borrower, Debt (other
than the Notes) of such Borrower and/or one or more of its Subsidiaries, arising
in one or more related or unrelated transactions, in an aggregate principal or
face amount exceeding $25,000,000.
"Material Financial Obligations" means, with respect to either
Borrower, a principal or face amount of Debt and/or payment or collateralization
obligations in respect of Derivatives Obligations of such Borrower and/or one or
more of its Subsidiaries, arising in one or more related or unrelated
transactions, exceeding in the aggregate $25,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $25,000,000.
"Material Subsidiary" means,
(i) in respect of Nationwide Mutual, any Subsidiary having, as of the
date of the Combined Annual Statement most recently delivered to the Banks
pursuant to Section 4.4 or 5.1(a)(iii), consolidated assets of at least 1%
of the total combined assets set out in such statement; provided that, for
--------
purposes of this Agreement, neither Nationwide Life nor any of its
consolidated Subsidiaries shall be considered to be a Material Subsidiary
of Nationwide Mutual, and
(ii) in respect of Nationwide Life, any Subsidiary having, as of the
date of the balance sheet most recently delivered to the Banks by such
Borrower pursuant to Section 4.4 or 5.1(a)(ii), consolidated assets of at
least 1% of the total consolidated assets set out in such statement.
"Money Market Absolute rate" has the meaning set forth in Section
2.3(d).
"Money Market Absolute Rate Loan" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
10
<PAGE>
"Money Market Lending Office" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the
Borrowers and the Administrative Agent; provided that any Bank may from time to
--------
time by notice to the Borrowers and the Administrative Agent designate separate
Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand,
and its Money Market Absolute Rate Loans, on the other hand, in which case all
references herein to the Money Market Lending Office of such Bank shall be
deemed to refer to either or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank pursuant
to a LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 8.1).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section
2.3(d)(ii)(C).
"Money Market Quote" means an offer by a Bank to make a Money Market
Loan in accordance with Section 2.3.
"Moody's" means Moody's Investors Services, Inc.
"Multiemployer Plan" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group during
such five year period.
"Nationwide Life" means Nationwide Life Insurance Company, an Ohio
insurance company, and its successors.
"Nationwide Mutual" means Nationwide Mutual Insurance Company, an Ohio
mutual insurance company, and its successors.
"Notes" means promissory notes of a Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of such Borrower to repay
the Loans made to it, and "Note" means any one of such promissory notes issued
hereunder.
11
<PAGE>
"Notice of Borrowing" means a Notice of Committed Borrowing (as defined
in Section 2.2) or a Notice of Money Market Borrowing (as defined in
Section 2.3(f)).
"Notice of Interest Rate Election" has the meaning set forth in
Section 2.10.
"Other Taxes" has the meaning set forth in Section 8.4.
"Parent" means, with respect to any Bank, any Person controlling such
Bank.
"Participant" has the meaning set forth in Section 9.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Plan" means, at any time with respect to either Borrower, an employee
pension benefit plan (other than a Multiemployer Plan) which is covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Internal Revenue Code and either (i) is maintained, or contributed to, by
any member of the ERISA Group of such Borrower for employees of any member of
the ERISA Group of such Borrower or (ii) has at any time within the preceding
five years been maintained, or contributed to, by any Person which was a such
time a member of the ERISA Group of such Borrower for employees of any Person
which was at such time a member the ERISA Group of such Borrower.
"Pricing Schedule" means the Schedule attached hereto identified as
such.
"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"Quarterly Dates" means each March 31, June 30, September 30 and
December 31.
12
<PAGE>
"Reference Banks" means the CD Reference Banks or the Euro-Dollar
Reference Banks, as the context may require, and "Reference Bank" means any one
of such Reference Banks.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least 66 2/3% of
the aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid
principal amount of the Loans.
"Revolving Credit Period" means the period from and including the
Effective Date to but not including the Termination Date.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc.
"Statutory Surplus" means, at any date with respect to either Borrower,
the statutory capital and surplus of such Borrower at such date, determined in
accordance with Section 1.2.
"Subsidiary" means, as to any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person.
"Termination Date" means August 12, 2001, or, if such day is not a
Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day unless
such Euro-Dollar Business Day falls in another calendar month, in which case
the Termination Date shall be the next preceding Euro-Dollar Business Day.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of
13
<PAGE>
a member of the related ERISA Group to the PBGC or any other Person under Title
IV of ERISA.
"United States" means the United States of America, including the
States and the District of Columbia, but excluding its territories and
possessions.
SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
included in Annual Statements required to be delivered hereunder shall be
prepared in accordance with accounting practices prescribed or permitted by
applicable insurance regulatory authorities as in effect from time to time (the
"Insurance Accounting Principles"), applied on a basis consistent (except for
changes required by such insurance regulatory authorities) with the most recent
Annual Statement of the applicable Borrower delivered to the Banks; provided
--------
that, if such Borrower notifies the Agent that it wishes to amend any covenant
in Article 5 to eliminate the effect of any change in Insurance Accounting
Principles on the operation of such covenant (or if the Agent notifies such
Borrower that the Required Banks wish to amend Article 5 for such purpose), then
such Borrower's compliance with such covenant shall be determined on the basis
of accounting practices prescribed or permitted by insurance regulatory
authorities in effect immediately before the relevant change in such accounting
practices or principles became effective, until either such notice is withdrawn
or such covenant is amended in a manner satisfactory to the Borrowers and the
Required Banks.
SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the
-------------------
aggregation of Loans of one or more Banks to be made to a single Borrower
pursuant to Article 2 on the same date, all of which Loans are of the same type
(subject to Article 8) and, except in the case of Base Rate Loans, have the same
initial Interest Period. Borrowings are classified for purposes of this
Agreement either by reference to the pricing of Loans comprising such Borrowing
(e.g., a "Fixed Rate Borrowing" is a Euro-Dollar Borrowing, a CD Borrowing or a
----
Money Market Borrowing (excluding any such Borrowing consisting of Money Market
LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.1), and a
"Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by
reference to the provisions of Article 2 under which participation therein is
determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in
----
which all Banks participate in proportion to their Commitments, while a "Money
Market Borrowing" is a Borrowing
14
<PAGE>
under Section 2.3 in which the Bank participants are determined on the basis of
their bids in accordance therewith).
ARTICLE 2
THE CREDITS
SECTION 2.1. Commitments to Lend. During the Revolving Credit
-------------------
Period, each Bank severally agrees, on the terms and conditions set forth in
this Agreement, to make loans to either Borrower pursuant to this Section from
time to time in amounts such that the aggregate principal amount of Committed
Loans by such Bank at any one time outstanding to both Borrowers shall not
exceed the amount of its Commitment. Each Borrowing under this Section shall
be in an aggregate principal amount of $10,000,000 or any larger multiple of
$1,000,000 (except that any such Borrowing may be in the aggregate amount
available in accordance with Section 3.2) and shall be made from the several
Banks ratably in proportion to their respective Commitments. Within the
foregoing limits, the Borrowers may borrow under this Section, prepay Loans to
the extent permitted by Section 2.12 and reborrow at any time during the
Revolving Credit Period under this Section.
SECTION 2.2. Notice of Committed Borrowing. The relevant Borrower
-----------------------------
shall give the Administrative Agent notice (a "Notice of Committed Borrowing")
not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate
Borrowing, (y) the second Domestic Business Day before each CD Borrowing and
(z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing,
specifying:
(i) the date of such Borrowing, which shall be a Domestic Business
Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar
Day in the case of a Euro-Dollar Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) whether the Loans comprising such Borrowing are to bear
interest initially at the Base Rate, a CD Rate or a Euro-
Dollar Rate; and
(iv) in the case of a Fixed Rate Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions
of the definition of Interest Period.
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<PAGE>
SECTION 2.3. Money Market Borrowings. (a) The Money Market Option.
----------------------- -----------------------
In addition to Committed Borrowings pursuant to Section 2.1, either Borrower
may, as set forth in this Section, request the Banks during the Revolving Credit
Period to make offers to make Money Market Loans to such Borrower. The Banks
may, but shall have no obligation to, make such offers and such Borrower may,
but shall have no obligation to, accept any such offers in the manner set forth
in this Section.
(b) Money Market Quote Request. When a Borrower wishes to request
--------------------------
offers to make Money Market Loans under this Section, it shall transmit to the
Administrative Agent by telex or facsimile transmission a Money Market Quote
Request substantially in the form of Exhibit B hereto so as to be received not
later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business
Day prior to the date of Borrowing proposed therein, in the case of a LIBOR
Auction or (y) the Domestic Business Day next preceding the date of Borrowing
proposed therein, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Administrative Agent shall have
mutually agreed and shall have notified to the Banks not later than the date of
the Money Market Quote Request for the LIBOR Auction or Absolute Rate Auction
for which such change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in
the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$10,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto, subject
to the provisions of the definition of Interest period, and
(iv) whether the Money Market Quotes requested are to set forth a
Money Market Margin or a Money Market Absolute Rate.
A Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Administrative Agent may agree) of any
other Money Market Quote Request.
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<PAGE>
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
----------------------------------
Money Market Quote Request, the Administrative Agent shall send to the Banks by
telex or facsimile transmission an Invitation for Money Market Quotes
substantially in the form of Exhibit C hereto, which shall constitute an
invitation by the Borrower to each Bank to submit Money Market Quotes offering
to make the Money Market Loans to which such Money Market Quote Request relates
in accordance with this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank
----------------------------------------------
may submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each Money
Market Quote must comply with the requirements of this subsection (d) and must
be submitted to the Administrative Agent by telex or facsimile transmission at
its offices specified in or pursuant to Section 9.1 not later than (x) 2:00 P.M.
(New York City time) on the fourth Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in
either case, such other time or date as the Borrower and the Administrative
Agent shall have mutually agreed and shall have notified to the Banks not later
than the date of the Money Market Quote Request for the first LIBOR Auction or
Absolute Rate Auction for which such change is to be effective); provided that
--------
Money Market Quotes submitted by the Administrative Agent (or any affiliate of
the Administrative Agent) in the capacity of a Bank may be submitted, and may
only be submitted, if the Administrative Agent or such affiliate notifies the
Borrower of the terms of the offer or offers contained therein not later than
(x) one hour prior to the deadline for the other Banks, in the case of a LIBOR
Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case
of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market
Quote so made shall be irrevocable except with the written consent of the
Administrative Agent given on the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which each such
offer is being made, which principal amount (w) may be greater than or less
than the Commitment of the quoting Bank, (x) must be
17
<PAGE>
$5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the
principal amount of Money Market Loans for which offers were requested and
(z) may be subject to an aggregate limitation as to the principal amount of
Money Market Loans for which offers being made by such quoting Bank may be
accepted,
(C) in the case of a LIBOR Auction, the margin above or below the
applicable London Interbank Offered Rate (the "Money Market Margin")
offered for each such Money Market Loan, expressed as a percentage
(specified to the nearest 1/10,000th of 1%) to be added to or subtracted
from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of interest per
annum (specified to the nearest 1/10,000th of 1%) (the "Money Market
Absolute Rate") offered for each such Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto or does
not specify all of the information required by subsection (d)(ii) above;
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set forth in
the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i)
(e) Notice to Borrower. The Administrative Agent shall promptly
------------------
notify the Borrower of the terms (x) of any Money Market Quote submitted by a
Bank that is in accordance with subsection (d) and (y) of any Money Market Quote
that amends, modifies or is otherwise inconsistent with a previous Money Market
Quote submitted by such Bank with respect to the same Money Market Quote
Request. Any such subsequent Money Market Quote shall be disregarded by the
18
<PAGE>
Administrative Agent unless such subsequent Money Market Quote is submitted
solely to correct a manifest error in such former Money Market Quote. The
Administrative Agent's notice to the Borrower shall specify (A) the aggregate
principal amount of Money Market Loans for which offers have been received for
each Interest Period specified in the related Money Market Quote Request, (B)
the respective principal amounts and Money Market Margins or Money Market
Absolute Rates, as the case may be, so offered and (C) if applicable,
limitations on the aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30 A.M.
---------------------------------
(New York City time) on (x) the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either case,
such other time or date as the Borrower and the Administrative Agent shall have
mutually agreed and shall have notified to the Banks not later than the date of
the Money Market Quote Request for the first LIBOR Auction or Absolute Rate
Auction for which such change is to be effective), the Borrower shall notify the
Administrative Agent of its acceptance or non-acceptance of the offers so
notified to it pursuant to subsection (e). In the case of acceptance, such
notice (a "Notice of Money Market Borrowing") shall specify the aggregate
principal amount of offers for each Interest Period that are accepted. The
Borrower may accept any Money Market Quote in whole or in part; provided that:
--------
(i) the aggregate principal amount of each Money Market Borrowing may
not exceed the applicable amount set forth in the related Money Market Quote
Request;
(ii) the principal amount of each Money Market Borrowing must be
$10,000,000 or a larger multiple of $1,000,000;
(iii) acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be; and
(iv) the Borrower may not accept any offer that is described in
subsection (d) (iii) or that otherwise fails to comply with the requirements
of this Agreement.
(g) Allocation by Administrative Agent. If offers are made by two or
----------------------------------
more Banks with the same Money
19
<PAGE>
Market Margins or Money Market Absolute Rates, as the case may be, for a greater
aggregate principal amount than the amount in respect of which such offers are
accepted for the related Interest Period, the principal amount of Money
Market-Loans in respect of which such offers are accepted shall be allocated by
the Administrative Agent among such Banks as nearly as possible (in multiples of
$1,000,000, or as the Administrative Agent may deem appropriate) in proportion
to the aggregate principal amounts of such offers. Determinations by the
Administrative Agent of the amounts of Money Market Loans shall be conclusive in
the absence of manifest error.
SECTION 2.4. Notice to Banks; Funding of Loans.
---------------------------------
(a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall
promptly notify each Bank of the contents thereof and of such Bank's share (if
any) of such Borrowing and such Notice of Borrowing shall not thereafter be
revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date of
each Borrowing, each Bank participating therein shall make available its share
of such Borrowing, in Federal or other funds immediately available in New York
City, to the Administrative Agent at its address referred to in Section 9.1.
Unless the Administrative Agent determines that any applicable condition
specified in Article 3 has not been satisfied, the Administrative Agent will
make the funds so received from the Banks available to the Borrower at the
Administrative Agent's aforesaid address.
(c) Unless the Administrative Agent shall have received notice from a
Bank prior to the date of any Borrowing that such Bank will not make available
to the Administrative Agent such Bank's share of such Borrowing, the
Administrative Agent may assume that such Bank has made such share available to
the Administrative Agent on the date of such Borrowing in accordance with
subsection (b) of this Section and the Administrative Agent may, in reliance
upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Administrative Agent, such Bank and the Borrower
severally agree to repay to the Administrative Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate
per annum equal to the higher of the Federal Funds Rate and the interest rate
applicable thereto pursuant to Section 2.7 and (ii) in the case of such Bank,
20
<PAGE>
the Federal Funds Rate. If such Bank shall repay to the Administrative Agent
such corresponding amount, such amount so repaid shall constitute such Bank's
Loan included in such Borrowing for purposes of this Agreement.
SECTION 2.5. Notes. (a) The Loans of each Bank to each Borrower
-----
shall be evidenced by a single Note of such Borrower payable to the order of
such Bank for the account of its Applicable Lending Office in an amount equal to
the aggregate unpaid principal amount of such Bank's Loans to such Borrower.
(b) Each Bank may, by notice to a Borrower and the Administrative
Agent, request that its Loans of a particular type to such Borrower be evidenced
by a separate Note of such Borrower in an amount equal to the aggregate unpaid
principal amount of such Loans. Each such Note shall be in substantially the
form of Exhibit A hereto with appropriate modifications to reflect the fact that
it evidences solely Loans of the relevant type. Each reference in this Agreement
to the "Note" of such Bank shall be deemed to refer to and include any or all of
such Notes, as the context may require.
(c) Upon receipt of each Bank's Notes pursuant to Section 3.1(a), the
Administrative Agent shall forward such Notes to such Bank. Each Bank shall
record the date, amount and type of each Loan made by it to each Borrower and
the date and amount of each payment of principal made with respect thereto, and
may, if such Bank so elects in connection with any transfer or enforcement of
its Note of either Borrower, endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to each
such Loan to such Borrower then outstanding; provided that the failure of any
--------
Bank to make any such recordation or endorsement shall not affect the
obligations of any Borrower hereunder or under the Notes. Each Bank is hereby
irrevocably authorized by each Borrower so to endorse its Notes and to attach to
and make a part of any Note a continuation of any such schedule as and when
required.
SECTION 2.6. Maturity of Loans. (a) Each Committed Loan shall
-----------------
mature, and the principal amount thereof shall be due and payable, together with
accrued interest thereon, on the Termination Date.
(b) Each Money Market Loan included in any Money Market Borrowing
shall mature, and the principal amount thereof shall be due and payable,
together with accrued
21
<PAGE>
interest thereon, on the last day of the Interest Period applicable to such
Borrowing.
SECTION 2.7. Interest Rates. (a) Each Base Rate Loan shall bear
--------------
interest on the outstanding principal amount thereof, for each day from the date
such Loan is made until it becomes due, at a rate per annum equal to the Base
Rate for such day. Such interest shall be payable quarterly in arrears on each
Quarterly Date and, with respect to the principal amount of any Base Rate Loan
converted to a CD Loan or a Euro-Dollar Loan, on each date a Base Rate Loan is
so converted. Any overdue principal of or interest on any Base Rate Loan shall
bear interest, payable on demand, for each day until paid at a rate per annum
equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for
such day.
(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each day during each Interest Period applicable thereto, at
a rate per annum equal to the sum of the CD Margin for such day plus the
Adjusted CD Rate applicable to such Interest Period; provided that if any CD
--------
Loan shall, as a result or clause (2)(b) of the definition of Interest Period,
have an Interest Period of less than 30 days, such CD Loan shall bear interest
during such Interest Period at the rate applicable to Base Rate Loans during
such period. Such interest shall be payable for each Interest Period on the last
day thereof and, if such Interest Period is longer than 90 days, at intervals of
90 days after the first day thereof. Any overdue principal of or interest on any
CD Loan shall bear interest, payable on demand, for each day until paid at a
rate per annum equal to the sum of 2% plus the higher of (i) the rate applicable
to Base Rate Loans for such day and (ii) the sum of the CD Margin plus the
Adjusted CD Rate applicable to such Loan at the date such payment was due.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:
22
<PAGE>
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
----------
* The amount in brackets being rounded upward, if necessary, to the next
higher 1/100 of 1%
The "CD Base Rate" applicable to any Interest Period is the rate of
interest determined by the Administrative Agent to be the average (rounded
upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates
per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as
practicable) on the first day of such Interest Period by two or more New York
certificate of deposit dealers of recognized standing for the purchase at face
value from each CD Reference Bank of its certificates of deposit in an amount
comparable to the principal amount of the CD Loan of such CD Reference Bank to
which such Interest Period applies and having a maturity comparable to such
Interest Period.
"Domestic Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
"Assessment Rate" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. (S) 327.4(a) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of such institution in the
23
<PAGE>
United States. The Adjusted CD Rate shall be adjusted automatically on and as of
the effective date of any change in the Assessment Rate.
(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such
day plus the London Interbank Offered Rate applicable to such Interest Period.
Such interest shall be payable for each Interest Period on the last day thereof
and, if such Interest Period is longer than three months, at intervals of three
months after the first day thereof.
The "London Interbank Offered Rate" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1 /16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
each of the Euro-Dollar Reference Banks in the London interbank market at
approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the
first day of such Interest Period in an amount approximately equal to the
principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to
which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The London Interbank Offered rate shall be adjusted
automatically on and as of the effective date of any change in the Euro-Dollar
Reserve Percentage.
(d) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day until paid at a rate per annum
equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such
day plus the quotient obtained (rounded upward, if necessary, to the next higher
1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the
next higher 1/16 of 1%) of the respective rates per annum at which one day (or,
if such amount due remains unpaid more
24
<PAGE>
than three Euro-Dollar Business Days, then for such other period of time not
longer than three months as the Administrative Agent may select) deposits in
dollars in an amount approximately equal to such overdue payment due to each of
the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank
in the London interbank market for the applicable period determined as provided
above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the
circumstances described in clause (a) or (b) of Section 8.1 shall exist, at a
rate per annum equal to the sum of 2% plus the rate applicable to Base Rate
Loans for such day) and (ii) the sum of 2% plus the Euro-Dollar Margin for such
day plus the Adjusted London Interbank Offered Rate applicable to such Loan at
the date such payment was due.
(e) Subject to Section 8.1, each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London Interbank
Offered Rate for such Interest Period (determined in accordance with Section 2.7
(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar
Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making
such Loan in accordance with Section 2.3. Each Money Market Absolute Rate Loan
shall bear interest on the outstanding principal amount thereof, for the
Interest Period applicable thereto, at a rate per annum equal to the Money
Market Absolute Rate quoted by the Bank making such Loan in accordance with
Section 2.3. Such interest shall be payable for each Interest Period on the last
day thereof and, if such Interest Period is longer than three months, at
intervals of three months after the first day thereof. Any overdue principal of
or interest on any Money Market Loan shall bear interest, payable on demand, for
each day until paid at a rate per annum equal to the sum of 2% plus the Base
Rate for such day.
(f) The Administrative Agent shall determine each interest rate
applicable to the Loans hereunder. The Administrative Agent shall give prompt
notice to the Borrower and the participating Banks of each rate of interest so
determined, and its determination thereof shall be conclusive in the absence of
manifest error.
(g) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Administrative Agent as contemplated by this Section. If any
Reference Bank does not furnish a timely quotation, the Administrative Agent
shall determine the relevant interest rate on the basis of the quotation or
quotations furnished by the remaining Reference Bank or Banks or, if none of
such quotations is
25
<PAGE>
available on a timely basis, the provisions of Section 8.1 shall apply.
SECTION 2.8 Fees. (a) The Borrowers shall pay to the Administrative
----
Agent for the account of the Banks ratably a facility fee at the Facility Fee
Rate (determined daily in accordance with the Pricing Schedule). Such Facility
fee shall accrue for the account of each Borrower (i) from and including the
Effective Date to but excluding the date of termination of the Commitments in
their entirety, on such Borrower's Facility Fee Share of the daily aggregate
amount of the Commitments (whether used or unused) and (ii) from and including
such date of termination to but excluding the date the Loans to such Borrower
shall be repaid in their entirety, on the daily aggregate outstanding principal
amount of the Loans to such Borrower.
(b) Accrued fees under this Section shall be payable quarterly in
arrears on each Quarterly Date and on the date of termination of the Commitments
in their entirety (and, if later, each date on which the Loans to such Borrower
shall be repaid in their entirety).
SECTION 2.9. Optional Termination or Reduction of Commitments.
------------------------------------------------
During the Revolving Credit Period, the Borrowers may, upon at least three
Domestic Business Days' notice to the Administrative Agent, (i) terminate the
Commitments at any time, if no Loans are outstanding at such time or (ii)
ratably reduce from time to time by an aggregate amount of $10,000,000 or a
larger multiple of $1,000,000, the aggregate amount of the Commitments in excess
of the aggregate outstanding principal amount of the Loans.
SECTION 2.10. Method of Electing Interest Rates. (a) The Loans
---------------------------------
included in each Committed Borrowing shall bear interest initially at the type
of rate specified by the Borrower in the applicable Notice of Committed
Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject in each
case to the provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert such Loans to CD Loans as of any Domestic Business Day or to Euro-
Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are CD Loans, the Borrower may elect to convert
such Loans to Base Rate Loans or Euro-Dollar Loans or elect to continue
such Loans as CD
26
<PAGE>
Loans for an additional Interest Period, subject to Section 2.14 in the
case of any such conversion or continuation effective on any day other than
the last day of the then current Interest Period applicable to such Loans;
and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or CD Loans or elect to continue such
Loans as Euro-Dollar Loans for an additional Interest Period, subject to
Section 2.14 in the case of any such conversion or continuation effective
on any day other than the last day of the then current Interest Period
applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Administrative Agent not later than 10:00 A.M. (New York
City time) on the third Euro-Dollar Business Day before the conversion or
continuation selected in such notice is to be effective (unless the relevant
Loans are to be converted to Domestic Loans of the other type or are CD Rate
Loans to be continued as CD Rate Loans for an additional Interest Period, in
which case such notice shall be delivered to the Administrative Agent not later
than 10:00 A.M. (New York City time) on the second Domestic Business Day before
such conversion or continuation is to be effective). A Notice of Interest Rate
Election may, if it so specifies, apply to only a portion of the aggregate
principal amount of the relevant Group of Loans; provided that (i) such portion
--------
is allocated ratably among the Loans comprising such Group and (ii) the portion
to which it does not apply, are each $10,000,000 or any larger multiple of
$1,000,000. If no such notice is timely received prior to the end of an Interest
Period, the Borrower shall be deemed to have elected that all Loans having such
Interest Period be converted to Base Rate Loans.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice
applies;
(ii) the date on which the conversion or continuation selected in such
notice is to be effective, which shall comply with the applicable clause of
subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the new
type of Loans and, if the Loans
27
<PAGE>
being converted are to be Fixed Rate Loans, the duration of the next
succeeding Interest Period applicable thereto; and
(iv) if such Loans are to be continued as CD Loans or Euro-Dollar
Loans for an additional Interest Period, the duration of such additional
Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Administrative Agent shall
promptly notify each Bank of the contents thereof and such notice shall not
thereafter be revocable by the Borrower.
(d) An election by the Borrower to change or continue the rate of
interest applicable to any Group of Loans pursuant to this Section shall not
constitute a "Borrowing" subject to the provisions of Section 3.2.
SECTION 2.11. Mandatory Termination of Commitments. The Commitments
------------------------------------
shall terminate on the Termination Date and any Loans then outstanding (together
with accrued interest thereon) shall be due and payable on such date.
SECTION 2.12. Optional Prepayments. (a) Subject in the case of any
Fixed Rate Borrowing to Section 2.14, the Borrower may, upon at least one
Domestic Business Day's notice to the Administrative Agent, prepay any Group of
Domestic Loans (or any Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.1) or upon at least three Euro-Dollar Business Days'
notice to the Administrative Agent, prepay any Group of Euro-Dollar Loans, in
each case in whole at any time, or from time to time in part in amounts
aggregating $10,000,000 or any larger multiple of $1,000,000, by paying the
principal amount to be prepaid together with accrued interest thereon to the
date of prepayment. Each such optional prepayment shall be applied to prepay
ratably the Loans of the several Banks included in such Group.
(b) Except as provided in subsection (a) above, no Borrower may
prepay all or any portion of the principal amount of any Money Market Loan prior
to the maturity thereof.
28
<PAGE>
(c) Upon receipt of a notice of prepayment pursuant to this Section,
the Administrative Agent shall promptly notify each Bank of the contents thereof
and of such Bank's ratable share (if any) of such prepayment and such notice
shall not thereafter be revocable by the Borrower.
SECTION 2.13. General Provisions as to Payments.
---------------------------------
(a) The Borrowers shall make each payment of principal of, and interest on, the
Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on
the date when due, in Federal or other funds immediately available in New York
City, to the Administrative Agent at its address referred to in Section 9.1. The
Administrative Agent will promptly distribute to each Bank its ratable share of
each such payment received by the Administrative Agent for the account of the
Banks. Whenever any payment of principal of, or interest on, the Domestic Loans
or of fees shall be due on a day which is not a Domestic Business Day, the date
for payment thereof shall be extended to the next succeeding Domestic Business
Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans
shall be due on a day which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding Euro-Dollar Business
Day unless Euro-Dollar Business Day falls in another calendar month, in which
case the date for payment thereof shall be the next preceding Euro-Dollar
Business Day. Whenever any payment of principal of, or interest on, the Money
Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the
date for payment thereof shall be extended to the next succeeding Euro-Dollar
Business Day. If the date for any payment of principal is extended by operations
of law or otherwise, interest thereon shall be payable for such extended time.
(b) Unless the Administrative Agent shall have received notice from a
Borrower prior to the date on which any payment is due from such Borrower to the
Banks hereunder that such Borrower will not make such payment in full, the
Administrative Agent may assume that such Borrower has made such payment in full
to the Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
such Borrower shall not have so made such payment, each Bank shall repay to the
Administrative Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from the date such account is
distributed to such Bank until the date such Bank repays such amount to the
Administrative Agent, at the Federal Funds Rate.
29
<PAGE>
SECTION 2.14. Funding Losses. If a Borrower makes any payment of
--------------
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted (pursuant to Article 2, 6, or 8 or otherwise) on any day other than
the last day of an Interest Period applicable thereto, or the last day of an
applicable period fixed pursuant to Section 2.7(d), or if a Borrower fails to
borrow, prepay, convert or continue any Fixed Rate Loans after notice has been
given to any Bank in accordance with Section 2.4(a), 2.12(c) or 2.10(c), such
Borrower shall reimburse each Bank within 15 days after demand for any resulting
loss or expense incurred by it (or by an existing or prospective Participant in
the related Loan), including (without limitation) any loss incurred in
obtaining, liquidating or employing deposits from third parties, but excluding
loss of margin for the period after any such payment or conversion or failure to
borrow, prepay, convert or continue, provided that such Bank shall have
--------
delivered to such Borrower a certificate as to the amount of such loss or
expense, which certificate shall be conclusive in the absence of manifest error.
SECTION 2.15. Computation of Interest and Fees. Interest based on
--------------------------------
the Prime Rate hereunder shall be computed on the basis of a year of 365 days
(or 366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.16. Regulation D Compensation. Each Bank may require the
-------------------------
Borrower to pay, contemporaneously with each payment of interest on the
Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such
Bank at a rate per annum determined by such Bank up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London
-----
Interbank Offered Rate. Any Bank wishing to require payment of such additional
interest (x) shall so notify the Borrower and the Administrative Agent, in which
case such additional interest on the Euro-Dollar Loans of such Bank shall be
payable to such Bank at the place indicated in such notice with respect to each
Interest Period commencing at least three Euro-Dollar Business Days after the
giving of such notice and (y) shall notify the Borrower at least five
Euro-Dollar Business Days prior to each date on which interest is payable on the
Euro-Dollar Loans of the amount then due it under this Section.
30
<PAGE>
ARTICLE 3
CONDITIONS
SECTION 3.1. Closing. The closing hereunder shall occur on or after the
-------
Effective Date upon receipt by the Administrative Agent of the following
documents, each dated the Closing Date unless otherwise indicated:
(a) a duly executed Note of each Borrower for the account of each Bank,
dated on or before the Closing Date and complying with the provisions of
Section 2.5;
(b) an opinion of Druen, Rath & Dietrich, counsel for the Borrowers,
substantially in the form of Exhibit E hereto and covering such additional
matters relating to the transactions contemplated hereby as the Required
Banks may reasonably request;
(c) an opinion of Davis Polk & Wardwell, special counsel for the
Administrative Agent, substantially in the Form of Exhibit F hereto and
covering such additional matters relating to the transactions contemplated
hereby as the Required Banks may reasonably request:; and
(d) all documents the Administrative Agent may reasonably request
relating to the existence of the Borrowers, the corporate authority for and
the validity this Agreement and the Notes, and any other matters relevant
all in form and substance satisfactory to the Administrative Agent.
The Administrative Agent shall promptly notify the Borrowers and the Banks of
the Closing Date, and such notice shall be conclusive and binding on all parties
hereto.
SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan on
----------
the occasion of any Borrowing is subject to the satisfaction of the following
conditions:
(a) the fact that the Closing Date shall have occurred on or prior to
August 25, 1996;
(b) receipt by the Administrative Agent of a Notice of Borrowing as
required by Section 2.2 or 2.3, as the case may be;
31
<PAGE>
(c) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Loans will not exceed the aggregate
amount of the Commitments;
(d) the fact that, immediately before and after such Borrowing, no
Default with respect to the Borrower shall have occurred and be continuing;
and
(e) the fact that the representations and warranties of the Borrower
contained in this Agreement (except, unless the Borrowing is taking place
on the Closing Date, the representations and warranties set forth in
Sections 4.4(b) and 4.5 as to any matter which has been disclosed in
writing by the Borrower to the Banks) shall be true and correct on and as
of the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in clauses
(c), (d) and (e) of this Section.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Each Borrower severally represents and warrants that:
SECTION 4.1. Corporate Existence and Power. (a) In the case of
-----------------------------
Nationwide Mutual, such Borrower is a mutual insurance company duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted.
(b) In the case of Nationwide Life, such Borrower is an insurance
company duly incorporated, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted.
32
<PAGE>
SECTION 4.2. Corporate and Governmental Authorization; No
--------------------------------------------
Contravention. The execution, delivery and performance by such Borrower of this
- -------------
Agreement and its Notes are within the corporate powers of such Borrower, have
been duly authorized by all necessary corporate action, require no action by or
in respect of, or filing with, any governmental body, agency or official and do
not contravene, or constitute a default under, any provision of applicable law
or regulation or of the certificate of incorporation or by-laws of such Borrower
or of any agreement, judgment, injunction, order, decree or other instrument
binding upon such Borrower or any of its Subsidiaries or result in the creation
or imposition of any Lien on any asset of such Borrower or any of its
Subsidiaries.
SECTION 4.3. Binding Effect. This Agreement constitutes a valid and
--------------
binding agreement of such Borrower and each Note, when executed and delivered in
accordance with this Agreement, will constitute a valid and binding obligation
of the relevant Borrower, in each case enforceable in accordance with its terms.
SECTION 4.4. Financial Information. (a) The respective financial
---------------------
statements of such Borrower (and, when applicable, its Subsidiaries and
affiliates) heretofore delivered to the Banks fairly present the financial
condition and results of operations of such Borrower at the dates and for the
periods covered thereby on the basis set forth therein.
(b) Since the date of the most recent financial statements of such
Borrower delivered prior to the date hereof, there has been no material adverse
change in the business, financial position, results of operations or prospects
of such Borrower.
SECTION 4.5. Litigation. There is no action, suit or proceeding
----------
pending against, or to the knowledge of such Borrower threatened against or
affecting, such Borrower or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could materially adversely
affect the business, financial position or results of operations of such
Borrower or which in any manner draws into question the validity or
enforceability of this Agreement or the Notes.
SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group
---------------------
of such Borrower has fulfilled its obligations under the minimum funding
standards of ERISA and the Internal Revenue Code with respect to each Plan and
is
33
<PAGE>
in compliance in all material respects with the presently applicable provisions
of ERISA and the Internal Revenue Code with respect to each Plan. No member of
such ERISA Group has (i) sought a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to
make any contribution or payment to any Plan or Multiemployer Plan or in respect
of any Benefit Arrangement, or made any amendment to any Plan or Benefit
Arrangement, which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security under ERISA or the Internal Revenue Code
or (iii) incurred any liability under Title IV of ERISA other than a liability
to the PBGC for premiums under Section 4007 of ERISA.
SECTION 4.7. Environmental Matters. In the ordinary course of its
---------------------
business, such Borrower conducts an ongoing review of the effect of
Environmental Laws on the business, operations and properties of such Borrower,
in the course of which it identifies and evaluates associated liabilities and
costs (including, without limitation, any capital or operating expenditures
required for clean-up or closure of properties presently or previously owned,
any capital or operating expenditures required to achieve or maintain
compliance with environmental protection standards imposed by law or as a
condition of any license, permit or contract, any related constraints on
operating activities, including any periodic or permanent shutdown of any
facility or reduction in the level of or change in the nature of operations
conducted thereat, any costs or liabilities in connection with off-site
disposal of wastes or Hazardous Substances, and any actual or potential
liabilities to third parties, including employees, and any related costs and
expenses. On the basis of this review, such Borrower has reasonably concluded
that such associated liabilities and costs, including the costs of compliance
with Environmental Laws, are unlikely to have a material adverse effect on the
business, financial condition, results of operations or prospects of such
Borrower.
SECTION 4.8. Taxes. Such Borrower and its Subsidiaries have filed
-----
all United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes due pursuant to
such returns or pursuant to any assessment received by such Borrower or any
Subsidiary. The charges, accruals and reserves on the books of such Borrower
and its Material Subsidiaries in respect of taxes or other governmental charges
are, in the opinion of such Borrower, adequate.
34
<PAGE>
SECTION 4.9. Material Subsidiaries. Each of such Borrower's
---------------------
Material Subsidiaries is duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization, and has all necessary powers
and all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
SECTION 4.10. Regulatory Restrictions on Borrowing. Such Borrower is
------------------------------------
not an "investment company" within the meaning of the Investment Company Act of
1940, as amended, a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935, as amended, or otherwise subject to any regulatory
scheme which restricts its ability to incur debt.
SECTION 4.11. Full Disclosure. All information heretofore furnished
---------------
by or in respect of such Borrower to the Administrative Agent or any Bank for
purposes of or in connection with this Agreement or any transaction contemplated
hereby is, and all such information hereafter furnished by or in respect of such
Borrower to the Administrative Agent or any Bank will be, true and accurate in
all material respects on the date as of which such information is stated or
certified. Such Borrower has disclosed to the Banks in writing any and all
facts which materially and adversely affect or may affect (to the extent such
Borrower can now reasonably foresee), the business, operations or financial
condition of such Borrower or the ability of such Borrower to perform its
obligations under this Agreement.
ARTICLE 5
COVENANTS
Each Borrower severally agrees that, so long as any Bank has any
Commitment hereunder or any amount payable by such Borrower under any Note
remains unpaid:
SECTION 5.1. Information. Such Borrower will deliver to each of the
-----------
Banks:
(a) as soon as available and in any event within 90 days after the
each fiscal year of such Borrower,
(i) in the case of each Borrower, the Annual Statement of such
Borrower as of the end of such
35
<PAGE>
fiscal year in the form submitted to the Insurance Department of the
State of Ohio;
(ii) in the case of Nationwide Life, the consolidated financial
statements of Nationwide Life and its consolidated Subsidiaries as of
the end of such fiscal year, setting forth in each case in comparative
form the figures for the previous fiscal year, all reported on in a
manner consistent with generally accepted accounting principles in the
United States by KPMG Peat Marwick LLP or other independent public
accountants of nationally recognized standing; and
(iii) in the case of Nationwide Mutual, the Combined Annual
Statement of the Nationwide Mutual Insurance Company and its Affiliated
Property and Casualty Insurances as of the end of such fiscal year, in
the form submitted to the Insurance Department of the State of Ohio;
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each fiscal year of such Borrower, the
quarterly statement of such Borrower as of the end of such fiscal quarter in the
form submitted to the Insurance Department of the State of Ohio;
(c) simultaneously with the delivery of each statement referred to in
clauses (a) and (b) above, a certificate of the chief financial officer or the
chief accounting officer of such Borrower stating whether any Default exists on
the date of such certificate and, if any Default then exists, setting forth the
details thereof and the action which such Borrower is taking or proposes to take
with respect thereto;
(d) within five Domestic Business Days after any officer of such
Borrower obtains knowledge of any Default, if such Default is then continuing, a
certificate of the chief financial officer or the chief accounting officer of
such Borrower setting forth the details thereof and the action which such
Borrower is taking or proposes to take with respect thereto;
(e) in the event that such Borrower becomes subject to the periodic
reporting requirements of the Securities Exchange Act of 1934 (as amended),
promptly upon the mailing thereof to securityholders of the Borrower generally,
copies of all financial statements, reports and proxy statements so mailed;
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(f) within five Domestic Business Days after the receipt thereof by
the Borrower, any written communication from the Insurance Department of
the State of Ohio which questions in any material respect the financial
soundness of the Borrower; and
(g) from time to time such additional information regarding the
financial position or business of the Borrower as the Administrative Agent,
at the request of any Bank, may reasonably request.
SECTION 5.2. Maintenance of Property; Insurance. (a) Such Borrower
----------------------------------
will keep, and will cause each of its Subsidiaries to keep, all property useful
and necessary in its business in good working order and condition, ordinary wear
and tear excepted.
(b) Such Borrower will maintain, and will cause each of its
Subsidiaries to maintain (either in the name of such Borrower or in such
Subsidiary's own name) with financially sound and responsible insurance
companies, insurance on all their respective properties in at least such
amounts, against at least such risks and with such risk retention as are usually
maintained, insured against or retained, as the case may be, in the same general
area by companies of established repute engaged in the same or a similar
business, and will furnish to the Banks, upon request from the Administrative
Agent, information presented in reasonable detail as to the insurance so
carried; provided that such Borrower may self-insure such risks to the extent it
--------
deems it prudent to do so.
SECTION 5.3. Conduct of Business and Maintenance of Existence. Such
------------------------------------------------
Borrower will continue, and will cause each of its Subsidiaries to continue, to
engages in the insurance business and will preserve, renew and keep in full
force and effect, and will cause each such Subsidiary to preserve, renew and
keep in full force and effect their respective corporate existence and their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of business; provided that nothing in this Section 5.3 shall
--------
prohibit any consolidation, merger, sale, lease or other transfer permitted
under Section 5.5.
SECTION 5.4. Compliance with Laws. Such Borrower will comply, and
--------------------
will cause each of its Subsidiaries to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities (including, without limitation, Environmental Laws and
ERISA and the rules and regulations thereunder) except where the necessity of
compliance
37
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therewith is contested in good faith by appropriate proceedings.
SECTION 5.5. Mergers and Sales of Assets. Such Borrower will not (i)
---------------------------
consolidate or merge with or into any other Person or (ii) sell, lease or
otherwise transfer, directly or indirectly, all or any substantial part of the
assets of such Borrower and its Subsidiaries, taken as a whole, to any other
Person; provided that the Borrower may merge with another Person if (x) such
--------
Borrower is the corporation surviving such merger and (y) after giving effect to
such merger, no Default shall have occurred and be continuing.
SECTION 5.6. Use of Proceeds. The proceeds of the Loans made under
---------------
this Agreement will be used by such Borrower for general corporate purposes.
None of such proceeds will be used, directly or indirectly, for the purpose,
whether immediate, incidental or ultimate, of buying or carrying any "margin
stock" within the meaning of Regulation U.
SECTION 5.7. Minimum Statutory Surplus. (a) In the case of
-------------------------
Nationwide Mutual, its Statutory Surplus shall at no time be less than
$2,750,000,000.
(b) In the case of Nationwide Life, its Statutory Surplus shall at no
time be less than $875,000,000.
SECTION 5.8. Negative Pledge. Neither such Borrower nor any Subsidiary
---------------
of such Borrower will create, assume or suffer to exist any Lien on any asset
now owned or hereafter acquired by it, except:
(a) Liens existing on the date of this Agreement securing Debt
outstanding on the date of this Agreement in an aggregate principal or face
amount not exceeding (i) in the case of Nationwide Mutual, $10,000,000 and
(ii) in the case of Nationwide Life, $10,000,000;
(b) any Lien existing on any asset of any Person at the time such
Person becomes its Subsidiary and not created in contemplation of such
event;
(c) any Lien on any asset securing Debt incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such asset,
provided that such Lien attaches to such asset concurrently with or within
--------
90 days after the acquisition thereof;
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(d) any Lien on any asset of any Person existing at the time such
Person is merged or consolidated with or into such Borrower or its
Subsidiary and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition thereof
by such Borrower or its Subsidiary and not created in contemplation of
such acquisition;
(f) any Lien arising out of the refinancing, extension, renewal or
refunding of any Debt secured by any Lien permitted by any of the
foregoing clause of this Section, provided that such Debt is not increased
--------
and is not secured by an additional assets;
(g) any Lien which arises by operation of law (including, without
limitation, preferences given to insurance policyholders under law);
(h) Liens arising in the ordinary course of its business which (i) do
not secure Debt or Derivatives Obligations, (ii) do not secure any
obligation in an amount exceeding $25,000,000 and (iii) do not in the
aggregate materially detract from the value of its assets or materially
impair the use thereof in the operation of its business;
(i) Liens on cash and cash equivalents securing Derivatives
Obligations, provided that the aggregate amount of cash and cash
equivalents subject to such Liens may at no time exceed $25,000,000; and
(j) Liens not otherwise permitted by the foregoing clauses of this
Section securing Debt in an aggregate principal or face amount at any date
not to exceed 5% of such Borrower's Statutory Surplus.
SECTION 5.9. Transaction with Affiliates. Such Borrower will not,
---------------------------
and will not permit any of its Subsidiaries to, directly or indirectly, pay
any funds to or for the account of, make any investment (whether by acquisition
of stock or indebtedness, by loan, advance, transfer of property, guarantee or
other agreement to pay, purchase or service, directly or indirectly, any Debt,
or otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect, any transaction with,
any Affiliate except on an arms-length basis on terms at least as favorable to
such Borrower or such Subsidiary as could have been obtained from a third party
who was not an Affiliate; provided that the
--------
39
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foregoing provisions of this Section shall not prohibit any such Person from
declaring or paying any lawful dividend or other payment ratably in respect of
all of its capital stock of the relevent class so long as, after giving effect
thereto, no Default in respect of such Borrower shall have occurred and be
continuing.
ARTICLE 6
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the following
-----------------
events ("Events of Default") shall have occurred and be continuing with respect
to any Borrower:
(a) such Borrower shall fail to pay when due any principal of any
Loan or any interest, any fees or any other amount payable by it hereunder;
(b) such Borrower shall fail to observe or perform any covenant
contained in Article 5, other than those contained in Sections 5.1 through
5.4;
(c) such Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause
(a) or (b) above) for 10 days after notice thereof has been given to such
Borrower by the Administrative Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made by
such Borrower in this Agreement or in any certificate, financial statement
or other document delivered pursuant to this Agreement shall prove to have
been incorrect in any material respect when made or deemed made;
(e) such Borrower or any of its Material Affiliates shall fail to make
any payment in respect of any Material Financial Obligations when due or
within any applicable grace period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Debt of such Borrower or any
of its Material Affiliates or enables (or, with the giving of notice or
lapse of time or both, would enable) the holder of such Debt or any Person
acting on such holder's behalf to accelerate the maturity thereof;
40
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(g) such Borrower or any of its Material Affiliated shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing;
(h) an involuntary case or other proceeding shall be commenced against
such Borrower or any of its Material Affiliates seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other, similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of 60 days; or an order for relief shall be entered against such Borrower
or any of its Material Affiliates under the federal bankruptcy laws as now or
hereafter in effect;
(i) a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a conservator or
receiver or liquidator in any insolvency proceedings, readjustment of debt,
marshalling of assets and liabilities or similar proceedings affecting such
Borrower or any of its Material Affiliates or all or substantially all of their
respective property, or for the winding-up or liquidation of their respective
affairs, shall have been entered, or such Borrower or any of its Material
Affiliates shall consent to the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings affecting such Borrower or Material Affiliate
or all or substantially all of their respective property (including, in either
case, without limitation, the commencement of proceedings for the rehabilitation
or liquidation of such Borrower or any of its Material
41
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Affiliates in accordance with the applicable provisions of Chapter 3903 of
the Ohio Insurance Code);
(j) any member of the ERISA Group of such Borrower shall fail to pay
when due an amount or amounts aggregating in excess of $5,000,000 which it
shall have become liable to pay to the PBGC or to a Plan under Title IV of
ERISA; or notice of intent to terminate a Material Plan shall be filed under
Title IV of ERISA by any member of such ERISA Group, any plan administrator
or any combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate, to impose liability (other than for
premiums under Section 4007 of ERISA) in respect of, or to cause a trustee
to be appointed to administer any Material Plan; or a condition shall exist
by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or there shall occur
a complete or partial withdrawal from, or a default, within the meaning of
Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer
Plans which could cause one or more members of such ERISA Group to incur a
current payment obligation in excess of $5,000,000;
(k) the rights, privileges or franchises of such Borrower or any of
its Material Affiliates to do business shall be declared forfeited by any
governmental authority or any court of competent jurisdiction where the loss
of such rights, privileges or franchises would have a material adverse
effect on the ability of such Borrower to meet its obligations under this
Agreement or the Notes;
(l) judgments or orders for the payment of money in excess of 3% of
such Borrower's Statutory Surplus shall be rendered against such Borrower or
any of its Material Affiliates and such judgments or orders shall continue
unsatisfied and unstayed for a period of 10 days;
(m) in the case of Nationwide Life, it shall cease to be Subsidiary of
Nationwide Mutual; or
(n) in the case of Nationwide Mutual, it shall cease to be mutual
insurance company;
then, and in every such event, the Administrative Agent shall (i) if requested
by Banks having more than 50% in aggregate amount of the Commitments, by notice
to such
42
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Borrower terminate the Commitments as to such Borrower and they shall thereupon
terminate as to such Borrower, and (ii) if requested by Banks holding more than
50% of the aggregate principal amount of the Loans outstanding to such Borrower,
by notice to such Borrower declare such Loans (together with accrued interest
thereon) to be, and such Loans (together with accrued interest thereon) shall
thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by each
Borrower; provided that in the case of any of the Events of Default specified in
--------
clause 6.1(g), 6.1(h) or 6.1(i) above with respect to such Borrower, without any
notice to such Borrower or any other act by the Administrative Agent or the
Banks, the Commitments shall thereupon terminate as to such Borrower and the
Loans outstanding to such Borrower (together with accrued interest thereon)
shall become immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by each Borrower.
Termination of the Commitments as to either Borrower under this Section 6.1
shall not terminate the Commitments as to the other Borrower.
SECTION 6.2. Notice of Default. The Administrative Agent shall give
-----------------
notice to a Borrower under Section 6.1(c) promptly upon being requested to do so
by any Bank and shall thereupon notify all the Banks thereof.
ARTICLE 7
THE ADMINISTRATIVE AGENT
SECTION 7.1. Appointment and Authorization. Each Bank irrevocably
-----------------------------
appoints and authorizes the Administrative Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement and the Notes as are
delegated to the Administrative Agent by the terms hereof or thereof, together
with all such powers as are reasonably incidental thereto.
SECTION 7.2. Administrative Agent and Affiliates. Morgan Guaranty
-----------------------------------
Trust Company of New York shall have the same rights and powers under this
Agreement as any other Bank and may exercise or refrain from exercising the same
as though it were not the Administrative Agent, and Morgan Guaranty Trust
Company of New York and its affiliates may accept deposits from, lend money to,
and generally engage in any kind of business with either Borrower or any
Subsidiary
43
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or affiliate of either Borrower as if it were not the Administrative Agent.
SECTION 7.3. Action by Administrative Agent. The obligations of the
------------------------------
Administrative Agent hereunder are only those expressly set forth herein.
Without limiting the generality of the foregoing, the Administrative Agent shall
not be required to take any action with respect to any Default, except as
expressly provided in Article 6.
SECTION 7.4. Consultation with Experts. The Administrative Agent may
-------------------------
consult with legal counsel (who may be counsel for any Borrower), independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel, accountants or experts.
SECTION 7.5. Liability of Administration Agent. Neither the
---------------------------------
Administrative Agent nor any of its affiliates nor any of their respective
directors, officers, agents or employees shall be liable for any action, taken
or not taken by it in connection herewith (i) with the consent or at the request
of the Required Banks (or, when expressly required hereby, all the Banks) or
(ii) in the absence of its own gross negligence or willful misconduct. Neither
the Administrative Agent nor any of its affiliates nor any of their respective
directors, officers, agents or employees shall be responsible for or have any
duty to ascertain, inquire into or verify (i) any statement, warranty or
representation made in connection with this Agreement or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of any Borrower; (iii) the satisfaction of any condition specified in
Article 3, except receipt of items required to be delivered to the
Administrative Agent; or (iv) the validity, effectiveness or genuineness of this
Agreement, the Notes or any other instrument or writing furnished in connection
herewith. The Administrative Agent shall not incur any liability by acting in
reliance upon any notice, consent, certificate, statement, or other writing
(which may be a bank wire, telex, facsimile transmission or similar writing)
believed by it to be genuine or to be signed by the proper party or parties.
SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance
---------------
with its Commitment, indemnify the Administrative Agent, its affiliates and
their respective directors, officers, agents and employees (to the extent
not reimbursed by the Borrowers) against any cost, expense (including counsel
fees and disbursements), claim, demand,
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<PAGE>
action, loss or liability (except such as result from such indemnitees' gross
negligence or willful misconduct) that such indemnities may suffer or incur in
connection with this Agreement or any action taken or omitted by such
indemnities hereunder.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
---------------
independently and without reliance upon the Administrative Agent or any other
Bank, and based on such documents and information as it has deemed appropriate,
made its own credit analysis and decision to enter into this Agreement. Each
Bank also acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Bank, and based on such documents, and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking any action under this Agreement.
SECTION 7.8. Successor Administrative Agent. The Administrative Agent
------------------------------
may resign at any time by giving notice thereof to the Banks and the Borrowers.
Upon any such resignation, the Required Banks shall have the right to appoint a
successor Administrative Agent. If no successor Administrative Agent shall have
been so appointed by the Required Banks, and shall have accepted such
appointment, within 30 days after the retiring Administrative Agent may, on
behalf of the Banks, appoint a successor Administrative Agent, which shall be a
commercial bank organized or licensed under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of at
least $100,000,000. Upon the acceptance of its appointment as Administrative
Agent hereunder by a successor Administrative Agent, such successor
Administrative Agent shall thereupon succeed to and become vested with all the
rights and duties of the retiring Administrative Agent shall be discharged from
its duties and obligations hereunder. After any retiring Administrative Agent's
resignation hereunder as Administrative Agent, the provisions of this Article
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Administrative Agent.
SECTION 7.9. Administrative Agent's Fee. The Borrowers shall pay to
--------------------------
the Administrative Agent for its own account fees in the amounts and at the
times previously agreed upon between the Borrowers and the Administrative Agent.
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ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair.
--------------------------------------------------------
If on or prior to the first day of any Interest Period for any CD Loan,
Euro-Dollar Loan or Money Market LIBOR Loan:
(a) the Administrative Agent is advised by the Reference Banks that
deposits in dollars (in the applicable amounts) are not being offered to the
Reference Banks that deposits in dollars (in the applicable amounts) are not
being offered to the Reference Banks in the relevant market for such
Interest Period, or
(b) in the case of CD Loans or Euro-Dollar Loans, Banks having 50% or
more of the aggregate principal amount of the affected Loans advise the
Administrative Agent that the Adjusted CD Rate or the London Interbank
Offered Rate, as the case may be, as determined by the Administrative Agent
will not adequately and fairly reflect the cost to such Banks of funding
their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest
Period,
the Administrative Agent shall forthwith give notice thereof to the Borrower and
the Banks, whereupon until the Administrative Agent notifies the Borrower that
the circumstances giving rise to such suspension no longer exist, (i) the
obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may
be, or to continue or convert outstanding Loans as or into CD Loans or
Euro-Dollar Loans, as the case may be, shall be suspended and (ii) each
outstanding CD Loan or Euro-Dollar Loan, as the case may be, shall be converted
into a Base Rate Loan on the last day of the then current Interest Period
applicable thereto. Unless the Borrower notifies the Administrative Agent at
least two Domestic Business Days before the date of any Fixed Rate Borrowing for
which a Notice of Borrowing has previously been given that it elects not to
borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing,
such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such
Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR
Loans comprising such Borrowing shall bear interest for each day from and
including the first day to but excluding the last day of the Interest Period
applicable thereto at the Base Rate for such day.
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SECTION 8.2. Illegality. If, on or after the date of this Agreement.
----------
the adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Euro-Dollar Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall make it unlawful or impossible for any Bank (or its
Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans to
either Borrower and such Bank shall so notify the Administrative Agent, the
Administrative Agent shall forthwith give notice thereof to the other Banks and
such Borrower, whereupon until such Bank notifies such Borrower and the
Administrative Agent that the circumstances giving rise to such suspension no
longer exist, the obligation of such Bank to make Euro-Dollar Loans to such
Borrower, or to convert outstanding Loans to such Borrower, or to convert
outstanding Loans to such Borrower into Euro-Dollar Loans, shall be suspended.
Before giving any notice to the Administrative Agent pursuant to this Section,
such Bank shall designate a different Euro-Dollar Lending Office if such
designation will avoid the need for giving such notice and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice
is given, each Euro-Dollar Loan of such Bank to such Borrower then outstanding
shall be converted to a Base Rate Loan either (a) on the last day of the then
current Interest Period applicable to such Euro-Dollar Loan if such Bank may
lawfully continue to maintain and fund such Loan to such day or (b) immediately
if such Bank shall determine that it may not lawfully continue to maintain and
fund such Loan to such day.
SECTION 8.3. Increased Cost and Reduced Return. (a) If on or after
---------------------------------
(x) the date hereof, in the case of any Committed Loan or any obligation to make
Committed Loans or (y) the date of the related Money Market Quote, in the case
of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation of
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall impose, modify or
deem applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System, but
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excluding (i) with respect to any CD Loan any such requirement included in an
applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar
Loan any such requirement with respect to which such bank is entitled to
compensation during the relevant Interest Period under Section 2.16), special
deposit, insurance assessment (excluding, with respect to any CD Loan, any such
requirement against assets of, deposits with or for similar requirement against
assets of, deposits with or for the account of, or credit extended by, any Bank
(or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or on the United States market for certification of
deposit or the London interbank market any other condition affecting its Fixed
Rate Loans and the result of any of the foregoing is to increase the cost to
such Bank (or its Applicable Lending Office) of making or maintaining any Fixed
Rate Loan, or to reduce the amount of any sum received or receivable by such
Bank (or its Applicable Lending Office) under this Agreement or under any of its
Notes with respect thereto, by an amount deemed by such Bank to be material,
then, within 15 days after demand by such Bank (with a copy to the
Administrative Agent), the Borrowers shall pay to such Bank such additional
amount or amounts as will compensate such Bank for such increased cost or
reduction. Each Borrower shall be severally liable for its Article 8 Share of
each such amount.
(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after demand by such Bank (with a copy to the Administrative Agent), the
Borrowers shall pay to such Bank such additional amount or amounts as will
compensate such Bank (or its Parent) for such reduction. Each Borrower
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shall be severally liable for its Article 8 Share of each such amount.
(c) Each Bank will promptly notify the Borrowers and the
Administrative Agent of any event of which it has knowledge, occurring after the
date hereof, which will entitle such Bank to compensation pursuant to this
Section and will designate a different Lending Office if such designation will
avoid the need for, or reduce the amount of, such compensation and will not, in
the judgment of such Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section and setting
forth the additional amount or amounts to be paid to it hereunder shall be
conclusive in the absence of manifest error. In determining such amount, such
Bank may use any reasonable averaging and attribution methods.
(d) The "Article 8 Share" of any Borrower with respect to any amount
payable hereunder is the sum of (i) to the extent such amount is properly
allocable to Loans outstanding hereunder, the portion of such amount properly
allocable to the Loans outstanding to such Borrower and (ii) to the extent such
amount is not properly allocable to Loans outstanding hereunder, such Borrower's
Availability Percentage thereof.
SECTION 8.4. Taxes. (a) For the purposes of this Section 8.4, the
-----
following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by any
Borrower pursuant to this Agreement or under any Note, and all liabilities with
respect thereto, excluding (i) in the case of each Bank and the Administrative
---------
Agent, taxes imposed on its income, and franchise or similar taxes imposed on
it, by a jurisdiction under the laws of which such Bank or the Administrative
Agent (as the case may be) is organized or in which its principal executive
office is located or, in the case of each Bank, in which its Applicable Lending
Office is located and (ii) in the case of each Bank, any United States
withholding tax imposed on such payments but only to the extent that such Bank
is subject to United States withholding tax at the time such Bank first becomes
a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary taxes
and any other excise or property taxes, or similar charges or levies, which
arise from any payment made
49
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pursuant to this Agreement or under any Note or from the execution or delivery
of, or otherwise with respect to, this Agreement or any Note.
(b) Any and all payments by any Borrower to or for the account of any
Bank or the Administrative Agent hereunder or under any Note shall be made
without deduction for any Taxes or Other Taxes; provided that, if any Borrower
--------
shall be required by law to deduct any Taxes or Other Taxes from any such
payments, (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) such Bank or the Administrative Agent (as the
case may be) receives an amount equal to the sum it would have received had no
such deductions been made, (ii) such Borrower shall make such deductions, (iii)
such Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law and (iv) such
Borrower shall furnish to the Administrative Agent, at its address referred to
in Section 9.1, the original or a certified copy of a receipt evidencing payment
thereof.
(c) The Borrowers agree to indemnify each Bank and the
Administrative Agent for the full amount of Taxes or Other Taxes (including,
without limitation, any Taxes or Other Taxes imposed or asserted by any
jurisdiction on amounts payable under this Section) paid by such Bank or the
Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Each Borrower shall be severally liable for its Article 8 Share of each such
amount. This indemnification shall be paid within 15 days after such Bank or the
Administrative Agent (as the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
and from time to time thereafter if requested in writing by the Borrowers (but
only so long as such Bank remains lawfully able to do so), shall provide the
Borrowers and the Administrative Agent with Internal Revenue Service form 1001
or 4224, as appropriate, or any successor form prescribed by the Internal
Revenue Service, certifying that such Bank is entitled to benefits under an
income tax treaty to which the United States is a party which exempts the Bank
from United States withholding tax or reduces the rate of withholding tax on
payments of interest for the
50
<PAGE>
account of such Bank or certifying that the income receivable pursuant to this
Agreement is effectively connected with the conduct of a trade or business in
the United States.
(e) For any period with respect to which a Bank has failed to provide
the Borrowers or the Administrative Agent with the appropriate form described in
Section 8.4(d) (unless such failure is due to a change in treaty, law or
regulation occurring subsequent to the date on which such form originally was
required to be provided), such Bank shall not be entitled to indemnification
under Section 8.4(b) or (c) with respect to Taxes imposed by the United States;
provided that if a Bank, which is otherwise exempt from or subject to a reduced
- --------
rate of withdrawal tax, becomes subject to Taxes because of its failure to
deliver a form required hereunder, the Borrowers shall take such steps as such
Bank shall reasonably request to assist such Bank to recover such Taxes.
(f) If any Borrower is required to pay additional amounts to or for the
account of any Bank pursuant to this Section, then such Bank will change the
jurisdiction of its Applicable Lending Office if, in the judgement of such Bank,
such change (i) will eliminate or reduce any such additional payment which may
thereafter accrue and (ii) is not otherwise disadvantageous to such Bank.
SECTION 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans.
---------------------------------------------------------
If (i) the obligation of any Bank to make, or convert outstanding Loans to,
Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank
has demanded compensation under Section 8.3 or 8.4 with respect to its CD Loans
or Euro-Dollar Loans and a Borrower shall, by at least five Euro-Dollar Business
Day's prior notice to such Bank through the Administrative Agent, have elected
that the provisions of this Section shall apply to such Bank with respect to
such Borrower, then, unless and until such Bank notifies such Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist:
(a) all Loans which would otherwise be made by such Bank to such
Borrower as (or continued as or converted into) CD Loans or Euro-Dollar
Loans, as the case may be, shall instead be Base Rate Loans (on which
interest and principal shall be payable contemporaneously with the related
Fixed Rate Loans of the other Banks); and
51
<PAGE>
(b) after each of its CD Loans or Euro-Dollar Loans, as the case may
be, to such Borrower has been repaid (or converted to a Base Rate Loan),
all payments or principal which would otherwise be applied to repay such
Fixed Rate Loans shall be applied to repay its Base Rate Loans to such
Borrower instead.
If such Bank notifies such Borrower that the circumstances giving rise to such
notice no longer apply, the principal amount of each such Base Rate Loan shall
be converted into a CD Loan or Euro-Dollar Loan, as the case may be, on the
first day of the next succeeding Interest Period applicable to the related CD
Loans or Euro-Dollar Loans of the other Banks.
SECTION 8.6. Substitution of Bank. If (a) the obligation of any
--------------------
Bank to make Loans has been suspended pursuant to Section 8.2 or (b) any Bank
has demanded compensation under Section 8.3 or 8.4, the Borrowers, acting
jointly, shall have the right to seek a substitute financial institution or
institutions (which may be one or more of the Banks) to purchase the Notes and
assume the Commitment of such Bank pursuant to Section 9.6(c).
ARTICLE 9
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other
-------
communications to any party hereunder shall be in writing (including bank wire,
telex, facsimile transmission or similar writing) and shall be given to such
party: (a) in the case of any Borrower or the Administrative Agent, at its
address, facsimile number or telex number set forth on the signature pages
hereof, (b) in the case of any Bank, at its address, facsimile number or telex
number set forth in its Administrative Questionnaire or (c) in the case of any
party, such other address, facsimile number or telex number as such party may
hereafter specify for the purpose by notice to the Administrative Agent and the
Borrowers. Each such notice, request or other communication shall be effective
(i) if given by telex, when such telex is transmitted to the telex number
specified in this Section and the appropriate answerback is received, (ii) if
given by facsimile transmission, when transmitted to the facsimile number
specified in this Section and confirmation of receipt is received, (iii) if
given by mail, 72 hours after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (iv) if given by
52
<PAGE>
any other means, when delivered at the address specified in this Section;
provided that notices to the Administrative Agent under Article 2 or Article 8
- --------
shall not be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Administrative
----------
Agent or any Bank in exercising any right, power or privilege hereunder or under
any Note shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification. (a) The Borrowers jointly
-------------------------
and severally agree to pay all out-of-pocket expenses of the Administrative
Agent, including reasonable fees and disbursements of special counsel for the
Administrative Agent, in connection with the preparation and administration of
this Agreement, any waiver or consent hereunder or any amendment hereof.
(b) If any Default or alleged Default or Event of Default occurs
with respect to either Borrower, such Borrower shall pay all out-of-pocket
expenses incurred by the Administrative Agent and each Bank, including (without
duplication) the reasonable fees and disbursements of outside counsel and the
allocated cost of inside counsel, in connection with such Default, alleged
Default, or Event of Default and all collection, settlement, bankruptcy,
insolvency and other enforcement proceeding resulting therefrom.
(c) The Borrowers jointly and severally agree to indemnify the
Administrative Agent and each Bank, their respective affiliates and the
respective directors, officers, agents and employees of the foregoing (each an
"Indemnitee") and hold each Indemnitee harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind, including, without
limitation, the reasonable fees and disbursements of counsel, which may be
incurred by such Indemnitee in connection with any investigative, administrative
or judicial proceeding (whether or not such Indemnitee shall be designated a
party thereto) brought or threatened relating to or arising out of this
Agreement or any actual or proposed use of proceeds of Loans hereunder; provided
--------
that no Indemnitee shall have the right to be indemnified hereunder for such
Indemnitee's own gross negligence or willful misconduct as determined by a court
of competent jurisdiction.
53
<PAGE>
SECTION 9.4. Sharing of Set-Offs. Each Bank agrees that if it
-------------------
shall, by exercising any right of set-off or counterclaim or otherwise, receive
payment of an proportion of the aggregate amount of principal and interest then
due with respect to the Note of either Borrower held by it which is greater than
the proportion received by any other Bank in respect of the aggregate amount of
principal and interest then due with respect to the Note of such Borrower held
by such other Bank, the Bank receiving such proportionately greater payment
shall purchase such participations in the Notes of such Borrower held by the
other Banks, and such other adjustments shall be made, as may be required so
that all such payments of principal and interest with respect to the Notes of
such Borrower held by the Banks shall be shared by the Banks pro rata; provided
--------
that nothing in this Section shall impair the right of any Bank to exercise any
right of set-off or counterclaim it may have to apply the amount subject to such
exercise to the payment of indebtedness of either Borrower other than its
indebtedness hereunder. Each Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in a
Note of such Borrower, whether or not acquired pursuant to the foregoing
arrangements, may exercise rights of set-offs or counterclaim and other rights
with respect to such participation as fully as if such holder of a participation
were a direct creditor of such Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers. Any provision of this
----------------------
Agreement or the Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrowers and the Required Banks
(and, if the rights or duties of the Administrative Agent are affected thereby,
by the Administrative Agent); provided that no such amendment or waiver shall,
unless signed by all the Banks, (i) increase or decrease the Commitment of any
Bank (except for a ratable decrease in the Commitments of all Banks) or subject
any Bank to any additional obligation, (ii) reduce the principal of or rate of
interest on any Loan or any fees hereunder, (iii) postpone the date fixed for
any payment of principal of or interest on any Loan or any fees hereunder or for
the scheduled termination of any Commitment, (iv) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Notes, or the
number of Banks, which shall be required for the Banks or any of them to take
any action under this Section or any other provision of this Agreement, or
(v) change this proviso.
-------
SECTION 9.6. Successors and Assigns. (a) The provisions of this
----------------------
Agreement shall be binding upon and inure
54
<PAGE>
to the benefit of the parties hereto and their respective successors and
assigns, except that no Borrower may assign or otherwise transfer any of its
rights under this Agreement without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to either
Borrower and the Administrative Agent, such Bank shall remain responsible for
the performance of its obligations hereunder, and the Borrowers and the
Administrative Agent shall continue to deal solely and directly with such Bank
in connection with such Bank's rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating interest
shall provide that such Bank shall retain the sole right and responsibility to
enforce the obligations of the Borrowers hereunder including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement; provided that such participation agreement may
--------
provide that such Bank will not agree to any modification, amendment or waiver
of this Agreement described in clause (i), (ii), or (iii) of Section 9.5 without
the consent of the Participant. Subject to subsection (e) below, each Borrower
agrees that each Participant shall, to the extent provided in its participation
agreement, be entitled to the benefits of Section 2.16 and Article 8 with
respect to its participating interest. An assignment or other transfer which is
not permitted by subsection (c) or (d) below shall be given effect for purposes
of this Agreement only to the extent of a participating interest granted in
accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part (equivalent to an
initial Commitment of not less than $10,000,000.00) of all, of its rights and
obligations under this Agreement and the Notes, and such Assignee shall assume
such rights and obligations, pursuant to an Assignment and Assumption Agreement
in substantially the form of Exhibit G hereto executed by such Assignee and such
transferor Bank, with (and subject to) the subscribed consent of the Borrowers
and the Administrative Agent; provided that if an Assignee is an affiliate of
--------
such transferor Bank or was a Bank immediately prior to such assignment, no such
consent shall be required; and provided further that such assignment may, but
-------- -------
need not, include rights of the transferor Bank in respect of outstanding
55
<PAGE>
Money Market Loans; and provided further that the assignor Bank shall retain a
----------------
Commitment equivalent to an initial Commitment of not less than $10,000,000.
Upon execution and delivery of such instrument and payment by such Assignee to
such transferor Bank of an amount equal to the purchase price agreed between
such transferor Bank and such Assignee, such Assignee shall be a Bank party to
this Agreement and shall have all the rights and obligations of a Bank with a
Commitment as set forth in such instrument of assumption, and the transferor
Bank shall be released from its obligations hereunder to a corresponding extent,
and no further consent or action by any party shall be required. Upon the
consummation of any assignment pursuant to this subsection (c), the transferor
Bank, the Administrative Agent and the Borrowers shall make appropriate
arrangements so that, if required, new Notes are issued to the Assignee. In
connection with any such assignment, the transferor Bank shall pay to the
Administrative Agent an Administrative fee for processing such assignment in
the amount of $2,5000. If the Assignee is not incorporated under the laws of
the United States of America or a state thereof, it shall deliver to the
Borrowers and the Administrative Agent certification as to exemption from
deduction or withholding of any United States federal income taxes in accordance
with Section 8.4.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Notes to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.3 or 8.4 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
SECTION 9.7. Collateral. Each of the Banks represents to the
----------
Administrative Agent and each of the other Banks that it in good faith is not
relying upon any "margin stock" (as defined in Regulation U) as collateral in
the extension or maintenance of the credit provide for in this Agreement.
SECTION 9.8. Governing Law; Submission to Jurisdiction. This Agreement
-----------------------------------------
and each Note shall be
56
<PAGE>
governed by and construed in accordance with the laws of the State of New York.
Each Borrower hereby submits to the nonexclusive jurisdiction of the United
States District Court for the Southern District of New York and of any New York
State court sitting in New York City for purposes of all legal proceedings
arising out of or relating to this Agreement or the transactions contemplated
hereby. Each Borrower irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum.
SECTION 9.9. Counterparts; Integration; Effectiveness; Termination of
--------------------------------------------------------
Designated Credit Facilities. (a) This Agreement may be signed in any number of
- ----------------------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. This Agreement
constitutes the entire agreement and understanding among the parties hereto and
supersedes any and all prior agreements and understandings, oral or written,
relating to the subject matter hereof. This Agreement shall become effective
upon receipt by the Administrative Agent of counterparts hereof signed by each
of the parties hereto (or, in the case of any party as to which an executed
counterpart shall not have been received, receipt by the Administrative Agent
in form satisfactory to it of telegraphic, telex, facsimile or other written
confirmation from such party of execution of a counterpart hereof by such
party).
(b) The parties hereto (comprising all the parties to the Designated
Credit Facilities) agree that, on the Effective Date, the Designated Credit
Facilities shall terminate without further action by any party thereto, and any
loans outstanding thereunder and other amounts payable thereunder shall be due
and payable on such date.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE
--------------------
ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Confidentiality. The Administrative Agent and each Bank
---------------
agree to keep any information delivered or made available by the Borrowers
pursuant to this Agreement confidential from anyone other than persons employed
or retained by such Bank or its affiliates who are engaged in evaluating,
approving, structuring or administering the credit facility.
57
<PAGE>
contemplated hereby; provided that nothing herein shall prevent any Bank from
--------
disclosing such information (a) to any other Bank or to the Administrative
Agent, (b) to any other Person if reasonably incidental to the administration of
the credit facility contemplated hereby, (c) upon the order of any court or
administrative agency, (d) upon the request or demand of any regulatory agency
or authority, (e) which had been publicly disclosed other than as a result of a
disclosure by the Administrative Agent or any Bank prohibited by this Agreement,
(f) in connection with any litigation to which the Administrative Agent, any
Bank or its affiliates or Parent may be a party, (g) to the extent necessary in
connection with the exercise of any remedy hereunder, (h) to such Bank's or
Administrative Agent's legal counsel and independent auditors and (i) subject to
provisions substantially similar to those contained in this Section, to any
actual or proposed Participant or Assignee.
58
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
NATIONWIDE MUTUAL INSURANCE
COMPANY
By
-----------------------
Name:
Title:
Address: One Nationwide Plaza
Columbus, OH 43251
Facsimile: (614) 249-2739
NATIONWIDE MUTUAL INSURANCE
COMPANY
By
-----------------------
Name:
Title:
Address: One Nationwide Plaza
Columbus, OH 43251
Facsimile: (614) 249-2739
$70,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By
-----------------------
Title:
$65,000,000 THE BANK OF NEW YORK
By
-----------------------
Title:
59
<PAGE>
$65,000,000 BANK ONE, COLUMBUS, NA
By
-----------------------
Title:
$65,000,000 THE FIRST NATIONAL BANK
OF CHICAGO
By
-----------------------
Title:
$65,000,000 MELLON BANK, N.A.
By
-----------------------
Title:
$30,000,000 THE CHASE MANHATTAN BANK N.A.
By
-----------------------
Title:
$30,000,000 FLEET NATIONAL BANK
By
-----------------------
Title:
$30,000,000 THE HUNTINGTON NATIONAL BANK
By
-----------------------
Title:
60
<PAGE>
$30,000,000 KEYBANK NATIONAL ASSOCIATION
By
-----------------------
Title:
$30,000,000 NATIONAL CITY BANK OF COLUMBUS
By
-----------------------
Title:
$30,000,000 THE NORTHERN TRUST COMPANY
By
-----------------------
Title:
$30,000,000 ROYAL BANK OF CANADA
By
-----------------------
Title:
$30,000,000 STATE STREET BANK AND TRUST
COMPANY
By
-----------------------
Title:
$30,000,000 WELLS FARGO BANK, N.A.
By
-----------------------
Title:
Total Commitments
$600,000,000
============
61
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
as Administrative Agent
By
-----------------------
Name:
Title:
Address: 60 Wall Street
New York, NY 10260
Facsimile: (212) 648-5249
62
<PAGE>
PRICING SCHEDULE
Each of "Euro-Dollar Margin", "CD Margin", and "Facility Fee Rate"
means, for any date, the rates set forth below in the row opposite such term and
in the column corresponding to the "Pricing Level" that applies at such date:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Level Level Level Level Level Level
I II III IV V VI
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CD Margin
Usage less than
and/or equal to 50% 0.2525% 0.255% 0.285% 0.375% 0.425% 0.625%
Usage greater than 50% 0.3025% 0.305% 0.335% 0.425% 0.475% 0.725%
--------------------------------------------------------------------------------------------------
Euro-Dollar Margin
Usage less than
and/or equal to 50% 0.1275% 0.130% 0.160% 0.250% 0.300% 0.500%
Usage greater than 50% 0.1775% 0.180% 0.210% 0.300% 0.350% 0.600%
--------------------------------------------------------------------------------------------------
Facility Fee 0.060% 0.070% 0.090% 0.125% 0.150% 0.250%
Rate
--------------------------------------------------------------------------------------------------
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings, subject to the concluding paragraph of this Schedule:
"Level I Pricing" applies at any date if, at such date, Nationwide
Mutual's claims paying ability is rated AAA or higher by S&P or Aaa or higher
--
by Moody's.
"Level II Pricing" applies at any date if, at such date, (i)
Nationwide Mutual's claims paying ability is rated AA- or higher by S&P or Aa3
--
or higher by Moody's and (ii) Level I Pricing does not apply.
"Level III Pricing" applies at any date if, at such date, (i)
Nationwide Mutual's claims paying ability is rated A or higher by S&P or A2 or
--
higher by Moody's and (ii) neither Level I Pricing nor Level II Pricing
applies.
"Level IV Pricing" applies at any date if, at such date, (i)
Nationwide Mutual's claims paying ability is rated A- or higher by S&P or A3
--
or higher by Moody's and (ii) none of Level I Pricing, Level II Pricing and
Level III Pricing applies.
"Level V Pricing" applies at any date if, at such date, (i) Nationwide
Mutual's claims paying ability is rated BBB+ or higher by S&P or Baa1 or
--
higher by Moody's and (ii) none of Level I Pricing, Level II Pricing, Level
III Pricing or Level IV Pricing applies.
"Level VI Pricing" applies at any date if, at such date, no other
Pricing Level applies.
63
<PAGE>
"Pricing Level" refers to the determination of which of Level I, Level
II, Level III, Level IV, Level V or Level VI applies at any date.
"Usage" means at any date the percentage equivalent of a fraction (i)
the numerator of which is the aggregate outstanding principal amount of the
Loans at such date, after giving effect to any borrowing or payment on such
date, and (ii) the denominator of which is the aggregate amount of the
Commitments at such date, after giving effect to any reduction of the
Commitments on such date. For purposes of this Schedule, if for any reason any
Loans remain outstanding after termination of the Commitments, the Usage for
each date on or after the date of such termination shall be deemed to be greater
than 50%.
The rating in effect at any date is that in effect at the close of business on
such date.
For purposes of determining which Pricing Level applies: (a) if the claims
paying ability of Nationwide Mutual is split-rated and the differential is one
category, the higher rating category will apply (e.g., AAA/Aa1 results in Level
I Pricing); but (b) if the claims paying ratings of Nationwide Mutual is
split-rated and the differential is two categories or more, the rating at the
midpoint will apply (e.g., AAA/Aa2 results in Level II Pricing) and if there is
no such midpoint category, the higher of the two intermediate categories will
apply (e.g., A+/Baa1 results in Level III Pricing).
64
<PAGE>
Schedule I
Designated Credit Facilities
----------------------------
$15,000,000 lines of credit in favor of nationwide Mutual and/or Nationwide Life
from each of the following financial institutions:
1. Morgan Guaranty Trust Company of New York
2. Mellon Bank, N.A.
3. NBD Bank
4. Shawmut Bank
5. Huntington National Bank
6. Bank One, Columbus, NA
7. Fleet National Bank
8. National City Bank
65
<PAGE>
EXHIBIT A
NOTE
New York, New York
____________ __, 199_
For value received, [Name of Borrower], a [Borrower's Jurisdiction of
Incorporation] corporation (the "Borrower"), promises to pay to the order of
___________________(the "Bank"), for the account of its Applicable Lending
Office, the unpaid principal amount of each Loan made by the Bank to the
Borrower pursuant to the Credit Agreement referred to below on the maturity date
provided for in the Credit Agreement. The Borrower promises to pay interest on
the unpaid principal amount of each such Loan on the dates and at the rate or
rates provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of Morgan Guaranty Trust Company of
New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types thereof and all repayments
of the principal thereof shall be recorded by the Bank and, if the Bank so
elects in connection with any transfer or enforcement hereof, appropriate
notations to evidence the foregoing information with respect to each such Loans
then outstanding may be endorsed by the Bank on the schedule attached hereto, or
on a continuation of such schedule attached to and made a part hereof; provided
--------
that the failure of the Bank to make any such recordation or endorsement shall
not affect the obligations of the Borrower hereunder or under the Credit
Agreement.
This note is one of the Notes referred to in the Credit Agreement dated as
of August 12, 1996 among Nationwide Mutual Insurance Company, Nationwide Life
Insurance Company, the Banks parties thereto and Morgan
<PAGE>
Guaranty Trust Company of New York, as Administrative Agent (as amended from
time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are
used herein with the same meanings. Reference is made to the Credit Agreement
for provisions for the prepayment hereof and the acceleration of the maturity
hereof.
[NAME OF BORROWER]
By
----------------------------------
Name:
Title:
2
<PAGE>
LOANS AND PAYMENTS OF PRINCIPAL
- --------------------------------------------------------------------------------
Amount Type Amount of
of of Principal Notation
Date Loan Loan Repaid Made By
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
<PAGE>
EXHIBIT B
Form of Money Market Quote Request
----------------------------------
[Date]
To: Morgan Guaranty Trust Company of New York (the "Administrative
Agent")
From: [Name of Borrower]
Re: Credit Agreement (as amended from time to time, the "Credit
Agreement") dated as of August 12, 1996 among Nationwide Mutual
Insurance Company, Nationwide Life Insurance Company, the
Banks parties thereto and the Administrative Agent
We hereby give notice pursuant to Section 2.3 of the Credit Agreement that
we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: _____________________
Principal Amount/1/ Interest Period/2/
- ------------------- ------------------
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
- --------------------
/1/ Amount must be $10,000,000 or a larger multiple of $1,000,000.
/2/ Not less than one month (LIBOR Auction) or not less than 7 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE>
Terms used herein have the meanings assigned to them in the Credit
Agreement.
[NAME OF BORROWER]
By
---------------------------------
Name:
Title:
2
<PAGE>
EXHIBIT C
Form of Invitation for Money Market Ouotes
------------------------------------------
To: [Name of Bank]
Re: Invitation for Money Market Quotes to [Name of
Borrower] (the "Borrower")
Pursuant to Section 2.3 of the Credit Agreement dated as of August 12, 1996
among Nationwide Mutual Insurance Company, Nationwide Life Insurance Company,
the Banks parties thereto and the undersigned, as Administrative Agent, we are
pleased on behalf of the Borrower to invite you to submit Money Market Quotes to
the Borrower for the following proposed Money Market Borrowing(s):
Date of Borrowing:
_____________________
Principal Amount Interest Period
- ---------------- ---------------
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.]
(New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
as Administrative Agent
By
---------------------------
Authorized Officer
<PAGE>
EXHIBIT D
Form of Money Market Ouote
--------------------------
To: Morgan Guaranty Trust Company of New York, as
Administrative Agent
Re: Money Market Quote to [Name of Borrower] (the
"Borrower")
In response to your invitation on behalf of the Borrower dated , we hereby
make the following Money Market Quote on the following terms:
1. Quoting Bank:_____________________________
2. Person to contact at Quoting Bank:
___________________________________
3. Date of Borrowing:________________________*
4. We hereby offer to make Money Market Loan(s) in the following principal
amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Marqin****] [Absolute Rate*****]
- -------- ------------------------------------------
$
$
[Provided, that the aggregate principal amount of Money Market Loans for
which the above offers may be accepted shall not exceed $___________ .]**
________
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed principal amount
requested. Specify aggregate limitation if the sum of the individual offers
exceeds the amount the Bank is willing to lend. Bids must be made for
$5,000,000 or a larger multiple of $1,000,000.
(notes continued on following page)
<PAGE>
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the Credit Agreement
dated as of August 12, 1996 among Nationwide Mutual Insurance Company,
Nationwide Life Insurance Company, the Banks parties thereto and yourselves, as
Administrative Agent, irrevocably obligates us to make the Money Market Loan(s)
for which any offer(s) are accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated: By:
______________ ____________________________
Authorized Officer
________
*** Not less than one month or not less than 30 days, as specified in the
related Invitation. No more than five bids are permitted for each Interest
Period.
**** Margin over or under the London Interbank Offered Rate determined for the
applicable Interest Period. Specify percentage (to the nearest l/l0,000 of 1%)
and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum
(to the nearest 1/10,OOOth of 1%).
77
<PAGE>
EXHIBIT E
August 12, 1996
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have acted as counsel for Nationwide Mutual Insurance Company and
Nationwide Life Insurance Company (each, a "Borrower") in connection with the
Credit Agreement (the "Credit Agreement") dated as of August 12, 1996 among the
Borrowers, the Banks parties thereto, and Morgan Guaranty Trust Company of New
York, as Administrative Agent. Terms defined in the Credit Agreement are used
herein as therein defined. This opinion is being rendered to you at the request
of the Borrowers pursuant to Section 3.1(b) of the Credit Agreement.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. Each Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
and has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted.
<PAGE>
2. The execution, delivery and performance by each Borrower of the
Credit Agreement and its Notes are within the corporate powers of such Borrower,
have been duly authorized by all necessary corporate action, require no action
by or in respect of, or filing with, any governmental body, agency or official
and do not contravene, or constitute a default under, any provision of
applicable law or regulation or of the certificate of incorporation or by-laws
of such Borrower or of any agreement, judgment, injunction, order, decree or
other instrument binding upon such Borrower or any of its Subsidiaries or result
in the creation or imposition of any Lien on any asset of such Borrower or any
of its Subsidiaries.
3. The Credit Agreement constitutes a valid and binding agreement of
each Borrower and each note constitutes a valid and binding obligation of the
Borrower issuing the same, in each case enforceable in accordance with its terms
except as the same may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and by general principles of equity.
4. There is no action, suit or proceeding pending against, or to the
best of our knowledge threatened against or affecting, any Borrower or any of
their Subsidiaries before any court or arbitrator or any governmental body,
agency or official, in which there is a reasonable possibility of an adverse
decision which could materially adversely affect the business, consolidated
financial position or consolidated results of operations of such Borrower or any
of its consolidated Subsidiaries, considered as a whole, or which in any manner
draws into question the validity of the Credit Agreement or the Notes.
Very truly yours,
2
<PAGE>
EXHIBIT F
August 12, 1996
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the Credit Agreement (the
"Credit Agreement") dated as of August 12, 1996 among Nationwide Mutual
Insurance Company, Nationwide Life Insurance Company, the Banks parties thereto
and Morgan Guaranty Trust Company of New York, as Administrative Agent, and have
acted as special counsel for the Administrative Agent for the purpose of
rendering this opinion pursuant to Section 3.1(c) of the Credit Agreement.
Terms defined in the Credit Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The execution, delivery and performance by each Borrower of the
Credit Agreement and its Notes are within such Borrower's corporate powers and
have been duly authorized by all necessary corporate action.
<PAGE>
2. The Credit Agreement constitutes a valid and binding agreement of
each Borrower and each Note constitutes a valid and binding obligation of the
Borrower issuing the same, in each case enforceable in accordance with its terms
except as the same may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and by general principles of equity.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York and the federal laws of
the United States of America. In giving the foregoing opinion, (i) we express no
opinion as to the effect (if any) of any law of any jurisdiction (except the
State of New York) in which any Bank is located which the rate of interest that
such Bank may charge or collect and (ii) as to all matters governed by the laws
of Ohio, we have relied, without independent investigation, on the opinion of
counsel for the Borrowers, copies of which have been delivered to you.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for other purposes or relied
upon by any other person without our prior written consent.
Very truly yours,
2
<PAGE>
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT, dated as of ________________ among (NAME OF ASSIGNOR) (the
"Assignor"), (NAME OF ASSIGNEE) (the "Assignee"), NATIONWIDE MUTUAL INSURANCE
NATIONWIDE LIFE INSURANCE COMPANY (each, a "Borrower") and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Administrative Agent (the "Administrative Agent").
WHEREAS, this Assignment and Assumption Agreement (the "Agreement")
relates to the Credit Agreement dated as of August 12, 1996 among the Borrowers,
the Assignor and the other Banks parties thereto, as Banks, and the
Administrative Agent (as amended from time to time, the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans to the Borrowers in an aggregate principal amount at
any time outstanding not to exceed $___________;
WHEREAS, Committed Loans made to the Borrowers by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $____________ (the "Assigned
Amount"), together with a corresponding portion of its outstanding Committed
Loans, and the Assignee proposes to accept assignment of such rights and assume
the corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
<PAGE>
SECTION 1. Definitions. All capitalized terms not otherwise defined
-----------
herein shall have the respective meanings set forth in the Credit
Agreement.
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
----------
Assignee all of the rights of the Assignor under the Credit Agreement to
the extent of the Assigned Amount, and the Assignee hereby accepts such
assignment from the Assignor and assumes all of the obligations of the
Assignor under the Credit Agreement to the extent of the Assigned Amount,
including the purchase from the Assignor of the corresponding portion of
the principal amount of the Committed Loans made by the Assignor
outstanding at the date hereof. Upon the execution and delivery hereof by
the Assignor, the Assignee, [the Borrowers and the Administrative Agent]
and the payment of the amounts specified in Section 3 required to be paid
on the date hereof (i) the Assignee shall, as of the date hereof, succeed
to the rights and be obligated to perform the obligations of a Bank under
the Credit Agreement with a Commitment in an amount equal to the Assigned
Amount, and (ii) the Commitment of the Assignor shall, as of the date
hereof, be reduced by a like amount and the Assignor released from its
obligations under the Credit Agreement to the extent such obligations have
been assumed by the Assignee. The assignment provided for herein shall be
without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
--------
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on
the date hereof in Federal funds the amount heretofore agreed between
them./1/ It is understood that facility fees accrued to the date hereof
with respect to the Assigned Amount are for the account of the Assignor and
such fees accruing from and including the date hereof are for the account
of the Assignee. Each of the Assignor and the Assignee hereby agrees that
if it receives any amount under the Credit Agreement which is for the
account of the other party hereto, it shall receive the
- --------------------------------
/1/ Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any portion of
any upfront fee to be paid by the Assignor to the Assignee. It may be preferable
in an appropriate case to specify these amounts generically or by formula rather
than as a fixed sum.
2
<PAGE>
same for the account of such other party to the extent of such other party's
interest therein and shall promptly pay the same to such other party.
[SECTION 4. Consent of the Borrowers and the Administrative Agent. This
-----------------------------------------------------
Agreement is conditioned upon the consent of the Borrowers and the
Administrative Agent pursuant to Section 9.6(c) of the Credit Agreement. The
execution of this Agreement by the Borrowers and the Administrative Agent is
evidence of this consent. Pursuant to Section 9.6(c), the Borrowers agree to
execute and deliver a Note payable to the order of the Assignee to evidence the
assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
------------------------
representation or warranty in connection with, and shall have no responsibility
with respect to, the solvency, financial condition, or statements of any
Borrower, or the validity and enforceability of the obligations of any Borrower
in respect of the Credit Agreement or any Note. The Assignee acknowledges that
it has, independently and without reliance on the Assignor, and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and will continue to be
responsible for making its own independent appraisal of the business, affairs
and financial condition of the Borrowers.
SECTION 6. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
[NAME OF ASSIGNOR]
By
-----------------------
Name:
Title:
[NAME OF ASSIGNOR]
By
-----------------------
Name:
Title:
[NATIONWIDE MUTUAL INSURANCE
COMPANY
By
-----------------------
Name:
Title:
NATIONWIDE LIFE INSURANCE
COMPANY
By
-----------------------
Name:
Title:
4
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
as Administrative Agent
By
-----------------------
Name:
Title: ]
5
<PAGE>
EXHIBIT 10.11
NATIONWIDE INSURANCE ENTERPRISE
EXCESS BENEFIT PLAN
-------------------
WHEREAS, certain Participating Employers as that term is defined in the
Nationwide Insurance Enterprise Retirement Plan (the "Retirement Plan") have
previously adopted the Nationwide Insurance Companies and Affiliates Excess
Benefit Plan for the benefit of certain of its employees;
WHEREAS, said Participating Employers do now desire to amend and restate such
plan as the Nationwide Insurance Enterprise Excess Benefit Plan (this "Plan"),
effective December 31, 1996;
WHEREAS, Wausau Service Corporation hereby adopts the Nationwide Insurance
Enterprise Excess Benefit Plan, effective December 31, 1996;
NOW THEREFORE, the Participating Employers do hereby adopt, amend and restate
this Plan set forth in this instrument, effective as of December 31, 1996.
ARTICLE I
Definitions
-----------
Any word or term used in this instrument, if defined in the Retirement Plan,
shall have the same meaning as set forth in such definition.
ARTICLE II
Eligibility
-----------
Each Participant in the Retirement Plan will become a Participant in this Plan
on the later of the date that the Participating Employer adopts this Plan or the
first date that such Participant's Projected Annual Benefit exceeds the maximum
amount of annual straight life annuity that may be payable to him or her under
the Retirement Plan at his or her Normal Retirement Date due to application of
the Maximum Benefit provisions set forth in Section 3.06 of the Retirement Plan
(the "Maximum Benefit Provisions"). Any individual who is a Participant in this
Plan at any time will cease to be a Participant on the first date that his or
her Projected Annual Benefit shall fall below such maximum amount set forth in
the Retirement Plan.
Each spouse of a Participant in the Retirement Plan will become a Participant in
this Plan on the first date that such spouse receives an annuity payment under
Article V of the Retirement Plan which is less than the amount of payment such
spouse would have received thereunder due to the application of the Maximum
Benefit Provisions.
"Projected Annual Benefit" means the annual amount of Straight Life Annuity that
would be payable to a Participant on his or her Normal Retirement Date under the
Retirement Plan, without taking into account the Maximum Benefit Provisions, on
the assumptions that (i) he or she continues employment with the Participating
Employers until his or her Normal Retirement Date, (ii) that his or her Covered
Compensation at date of determination continues without change until Normal
Retirement Date, and (iii) that all other factors relevant to the determination
of benefits under the Retirement Plan remain constant until his or her Normal
Retirement Date.
<PAGE>
ARTICLE III
Benefit Payable
---------------
3.1 Each time that a Participant, or his or her contingent annuitant receives a
life contingent annuity payment from the Retirement Plan, he or she shall
receive a payment from this Plan equal to the difference between
(a) the amount of payment he or she received from the Retirement Plan, and
(b) the amount of payment he or she would have received from the
Retirement Plan except for the Maximum Benefit Provisions.
3.2 In no event shall the calculation of benefits payable under this Plan under
Section 3.1 consider compensation excluded from the calculation of the
Retirement Plan benefit by reason of application of the annual compensation
limit required under Code Section 401(a)(17).
ARTICLE IV
Liability for Payment
---------------------
4.1 Each Participating Employer shall be liable for payments due under this
Plan which are based upon its employees' participation in the Retirement
Plan.
In the event that a payment due hereunder is based upon participation in
the Retirement Plan during employment with two or more Participating
Employers, the Actuary for the Retirement Plan shall determine each such
Participating Employer's share of the liability for such payment after
taking into account each such Participating Employer's liability under the
Retirement Plan as to the person to whom such payment is due.
4.2 The Actuary for the Retirement Plan shall also determine each Participating
Employer's liability for post-retirement increases in benefits from the
Retirement Plan, which are applied to increase benefits payable under
Article III.
4.3 The value of the benefit under this Plan shall be determined on the
Participant's Severance Date or, if later, the date the Maximum Benefit
Provisions first apply, and any resulting employment tax consequences of
the Participating Employers shall be allocated among them by the Actuary at
such time.
ARTICLE V
Method of Payment
-----------------
5.1 The dollar amount of each payment due under this Plan shall be paid from
the general assets of the Participating Employer(s) liable for such
payment. Such payments shall not be funded. As an unfunded plan, this
Plan has no assets and each Participant's right to a payment due hereunder
is that of an unsecured creditor of the Participating Employer(s) liable
for such payment.
5.2 Regardless of which annuity form is selected under the Retirement Plan, the
survivor benefit election made by the Participant under the Retirement Plan
shall apply to benefits under this
<PAGE>
Plan. No separate annuity form or beneficiary designation is permitted
under this Plan.
5.3 Notwithstanding Sections 3.1 or 5.2 of this Plan, the Level Income Option
is not available on benefits otherwise payable under this Plan.
ARTICLE VI
Amendment; Termination; Administration
--------------------------------------
6.1 This Plan may be amended or terminated at any time by means of an action of
the Board of Directors of each Participating Employer.
If this Plan is terminated or amended, there shall be established a minimum
benefit under this Plan equal to the benefit accrued under this Plan as if
the Participant had terminated employment on the effective date of the
amendment or termination, but not more than (a) reduced by (b):
(a) the accrued benefit of the Participant under the Retirement Plan as of
the date of the amendment or termination, determined as if the Maximum
Benefit provisions did not apply; and
(b) The accrued benefit of the Participant under the Retirement Plan as of
his or her Retirement Date.
Any amendment or termination of this Plan shall not affect benefits in pay
status for any Participant, beneficiary or contingent annuitant.
When another organization becomes a Participating Employer under the
Retirement Plan, this Plan shall be amended to include such organization as
a Participating Employer under this Plan.
In the event that a Participating Employer hereunder ceases to be a
Participating Employer under the Retirement Plan, termination of this Plan
shall be deemed to have occurred with respect to such Participating
Employer effective as of the date it ceased to be a Participating Employer
under the Retirement Plan without the need for amendment of this
instrument, provided, however, that such termination of plan shall not
discharge such Participating Employer from any liability it may have
hereunder as to any persons who are Participants or contingent annuitants
immediately prior to the Effective Date of such termination of plan.
6.2 The Nationwide Mutual Insurance Company shall be the Administrator of the
Plan. The Administrator shall have the discretion and authority to
construe/interpret the Plan to determine eligibility to participate in the
Plan and to issue such regulations as it deems appropriate. The
Administrator shall have the duty and responsibility of maintaining
records, making the requisite calculations and disbursing payments
hereunder. The Administrator's interpretations, determinations,
regulations and calculations shall be final and binding on all
Participants, persons
<PAGE>
and parties concerned. The Administrator may appoint such agents as it
shall deem appropriate from time to time to assist in carrying out its
functions hereunder.
6.3 The benefits payable under this Plan or the right to receive future
benefits under this Plan may not be anticipated, alienated, pledged,
encumbered, or subjected to any charge or legal process, and if any
attempts are made to do so, or a person eligible for any benefits becomes
bankrupt, the interest under the Plan of the person affected may be
terminated by the Administrator which, in its sole discretion, may cause
the same to be held or applied for the benefit of one or more of the
dependents of such person or make any other disposition of such benefits
that it deems appropriate.
6.4 Nothing contained in this Plan shall be construed as a contract of
employment between a Participating Employer and any Participant, or as a
right of any Participant to be continued in employment of the Participating
Employer, or as a limitation on the right of the Participating Employer to
discharge any of its employees, with or without cause.
ARTICLE VII
Construction
------------
The provisions of this Plan shall be construed, regulated, administered, and
enforced according to the laws of the State of Ohio.
ARTICLE VIII
Execution
---------
This Plan has been established by the Participating Employers in conformity with
resolutions adopted by their respective Boards of Directors and may be executed
in any number of counterparts, each of which will be considered an original.
ARTICLE IX
Benefit Exceptions
------------------
Anything in the Plan to the contrary notwithstanding, any Participant in the
Gates, McDonald & Company, Unfunded Deferred Compensation Excess Benefit Plan as
of January 1, 1990 shall become a participant in this Plan on January 2, 1990.
Effective February 1, 1990, all payments that would have been paid from the
Gates, McDonald & Company, Unfunded Deferred Compensation Excess Benefit Plan
shall be paid from this Plan.
Effective December 31, 1996, all payments that would have been paid from the
Wausau Insurance Company Excess Defined Benefit Plan (the "Wausau Excess Plan")
shall be paid from this Plan. Any benefit in a pay status under the Wausau
Excess Plan as of December 31, 1996, shall not be affected by any amendment or
termination of this Plan.
<PAGE>
IN WITNESS WHEREOF, this agreement has been duly executed by the officers of the
parties thereunto duly authorized.
NATIONWIDE MUTUAL INSURANCE COMPANY
NATIONWIDE MUTUAL FIRE INSURANCE COMPANY
NATIONWIDE GENERAL INSURANCE COMPANY
NATIONWIDE LIFE INSURANCE COMPANY
NATIONWIDE COMMUNICATIONS INC.
NATIONWIDE CORPORATION
COLONIAL INSURANCE COMPANY OF CALIFORNIA
NATIONWIDE FINANCIAL INSTITUTION DISTRIBUTORS
AGENCY, INC.
GATES, MCDONALD & COMPANY
GATES, MCDONALD & COMPANY OF NEVADA
GATES, MCDONALD & COMPANY OF NEW YORK, INC.
NEA VALUEBUILDER INVESTOR SERVICES, INC.
SCOTTSDALE INSURANCE COMPANY
WEST COAST LIFE INSURANCE COMPANY
Attest: FARMLAND MUTUAL INSURANCE COMPANY
By:
- -------------------------- ---------------------------------------
Attest: NATIONWIDE DEVELOPMENT COMPANY
By:
- -------------------------- ---------------------------------------
Attest: NATIONWIDE ADVISORY SERVICES, INC.
By:
- -------------------------- ---------------------------------------
Attest: PEOPLES TRAVEL SERVICE, INC.
By:
- -------------------------- ---------------------------------------
<PAGE>
Attest: INSURANCE INTERMEDIARIES, INC.
By:
- -------------------------- ---------------------------------------
Attest: PUBLIC EMPLOYEES BENEFIT SERVICES CORPORATION
By:
- -------------------------- ---------------------------------------
Attest: NATIONAL CASUALTY COMPANY
By:
- -------------------------- ---------------------------------------
Attest: NATIONWIDE HMO, INC.
By:
- -------------------------- ---------------------------------------
Attest: EMPLOYERS INSURANCE OF WAUSAU A MUTUAL COMPANY
WAUSAU SERVICE CORPORATION
By:
- -------------------------- ---------------------------------------
Attest: KEY HEALTH PLAN, INC.
By:
- -------------------------- ---------------------------------------
<PAGE>
EXHIBIT 10.12
Nationwide Insurance Enterprise Supplemental Retirement Plan
------------------------------------------------------------
WHEREAS, the Participating Employers have previously adopted the Predecessor
Plans, for the benefit of certain of their employees; and
WHEREAS, the Participating Employers now desire to merge, amend and restate the
Predecessor Plans; and
NOW, THEREFORE, said Participating Employers do hereby merge, amend and restate
the Predecessor Plans as the Nationwide Insurance Enterprise Supplemental
Retirement Plan, effective as of December 31, 1996, as set forth below:
ARTICLE I
----------
DEFINITIONS
-----------
Any word or term used in this document, if defined in the Retirement Plan shall
have the same meaning as set forth in such definition, unless otherwise defined
herein.
Company shall mean the Nationwide Mutual Insurance Company
- -------
Covered Compensation, Farmland Covered Compensation, Nationwide Covered
- -----------------------------------------------------------------------
Compensation and Wausau Covered Compensaton shall each have the meaning assigned
- -------------------------------------------
in the Retirement Plan, adjusted as follows:
(a) Ignoring any maximum dollar limitation that may be applied under
Section 401(a)(17) of the Code,
(b) Excluding sales compensation where such compensation is based on an
open-ended sales compensation program, and
(c) Excluding compensation paid to an individual prior to his or her
election as an officer of a Participating Employer.
Effective Date shall mean December 31, 1996.
- --------------
Excess Plan shall mean the Nationwide Insurance Enterprise Excess Benefit Plan.
- -----------
Final Average Compensation shall mean:
- --------------------------
1
<PAGE>
(a) for purposes of Section 3.1(a)(i), the average of the highest five (5)
consecutive Covered Compensations in effect with respect to a
Participant during his or her last ten (10) years of Service, or, if
he or she has accrued less than five (5) such Covered Compensations,
the average of all such Covered Compensations accrued;
(b) for purposes of Section 3.1(a)(ii), the average of the highest four
(4) Farmland Covered Compensations of the Participant's last ten (10)
consecutive Farmland Covered Compensations determined as of the end of
the calendar year ending coincident with or immediately preceding the
Participant's Severance Date, or, if he or she has accrued less than
four (4) such Farmland Covered Compensations, the average of all such
Covered Compensations accrued;
(c) for purposes of Section 3.1(a)(iii), the average of the highest three
(3) consecutive Nationwide Covered Compensations in effect with
respect to a Participant during his or her last ten (10) years of
Service or, if he or she has accrued less than three (3) such
Nationwide Covered Compensations, the average of all such Nationwide
Covered Compensations accrued, provided, however, that for years prior
to January 1, 1988, Nationwide Covered Compensations for calendar
years after an employee attained Normal Retirement Age were excluded
from consideration under this Section; and
(d) for purposes of Section 3.1(a)(iv), the average of the highest three
(3) consecutive Wausau Covered Compensations in effect with respect to
a Participant during his or her last ten (10) years of Service
determined as of the end of the calendar year ending coincident with
or immediately preceding the Participant's Severance Date, or, if he
or she has accrued less than three (3) such Wausau Covered
Compensations, the average of all such Covered Compensations accrued.
Highly Compensated Employee or HCE shall mean an Employee of a Participating
- ----------------------------------
Employer whose Covered Compensation, for any year beginning on or after the
Effective Date, exceeds the maximum dollar limitation set forth in Code Section
401(a)(17), except those individuals excluded by Article IX.
Officer shall mean an elected officer of a Participating Employer whose Covered
- -------
Compensation, for any year beginning on or after the Effective Date, exceeds the
maximum dollar limitation set forth in Code Section 401(a)(17), except those
individuals excluded by Article IX.
Plan shall mean the Nationwide Insurance Enterprise Supplemental Retirement
- ----
Plan.
Plan Administrator shall mean the Nationwide Mutual Insurance Company.
- ------------------
2
<PAGE>
Predecessor Plans shall mean the Nationwide Supplemental Retirement Plan, the
- -----------------
Wausau Insurance Companies Supplemental Benefit Plan or the Farmland Mutual
Insurance Company Supplemental Retirement Plan.
Retirement Plan means the Nationwide Insurance Enterprise Retirement Plan.
- ---------------
3
<PAGE>
ARTICLE II
----------
ELIGIBILITY
-----------
Each Employee who:
(a) Is a Participant in the Retirement Plan; and
(b) Is an Officer or is entitled to a Minimum Benefit under Section 3.2 of
this Plan; and
(c) Terminates employment with all Participating Employers and Non-
Participating Employers on or after completing 60 Months of Vesting
Service, or whose death results in his or her beneficiary becoming
eligible for a death benefit under the Retirement Plan,
shall be eligible for a benefit under this Plan on his or her Severance Date.
4
<PAGE>
ARTICLE III
-----------
BENEFIT PAYABLE
---------------
3.1 Benefit Payable
---------------
An eligible Officer shall have an annual accrued benefit under this Plan
equal to (a) reduced by (b):
(a) the sum of:
(i) an annual amount equal to the product of (A) and (B) plus the
product of (A) and (C):
(A) the number of Months of Participation Service, converted to
years, prior to the date of determination, to a maximum of
the lesser of
(I) 40 years, or
(II) 40 years reduced, but not below zero (0), by the sum of
the Participant's Months of Farmland Participation
Service, Months of Nationwide Participation Service,
and Months of Wausau Participation Service, each
converted to years;
(B) one and a quarter percent (1.25%) of his or her Final
Average Compensation on the date of determination; and
(C) three quarters of one percent (.75%) of his or her Final
Average Compensation in excess of his or her Social Security
Covered Compensation;
(ii) an annual amount equal to the product of (A) and (B) plus the
product of (A) and (C):
(A) the number of Months of Farmland Participation Service,
converted to years, prior to the date of determination, to a
maximum of 40 years,
(B) one and a quarter percent (1.25%) of his or her Final
Average Compensation on the date of determination; and
5
<PAGE>
(C) three quarters of one percent (.75%) of his or her Final
Average Compensation in excess of his or her Social Security
Covered Compensation;
(iii) an annual amount equal to the product of (A) and (B) plus the
product of (A) and (C):
(A) the number of Months of Nationwide Participation Service,
converted to years, prior to the date of determination, to a
maximum of 40 years,
(B) one and a quarter percent (1.25%) of his or her Final
Average Compensation on the date of determination; and
(C) three quarters of one percent (.75%) of his or her Final
Average Compensation in excess of his or her Social Security
Covered Compensation;
(iv) an annual amount equal to the product of (A) and (B) plus the
product of (A) and (C):
(A) the number of Months of Wausau Participation Service,
converted to years, prior to the date of determination, to a
maximum of 40 years,
(B) one and a quarter percent (1.25%) of his or her Final
Average Compensation on the date of determination; and
(C) three quarters of one percent (.75%) of his or her Final
Average Compensation in excess of his or her Social Security
Covered Compensation; and
(b) the accrued benefit of the Participant from the Retirement Plan, the
Excess Plan and all other defined benefit retirement plans maintained
by one or more of the Participating Employers at any time.
The benefit payable to any eligible Officer under this Section shall be
adjusted as provided in Section 3.03 of the Retirement Plan in the same
manner as a benefit provided under Section 3.01(a) of that plan in the
event such benefit commences prior to such Officer's Normal Retirement
Date.
3.2 Minimum Benefit
---------------
6
<PAGE>
The minimum benefit for each eligible Employee is the greater of (a) or
(b):
(a) the sum of (i) and (ii):
(i) for such eligible Employee who had a Benefits Salary in 1993
which was greater than or equal to $150,000, and who would have
been eligible to receive a benefit from this Plan had employment
terminated effective December 31, 1993, the benefit accrued under
the Nationwide Supplemental Retirement Plan as of December 31,
1993; and
(ii) for such eligible Employee who would have been eligible to
receive a benefit from the Nationwide Insurance Companies and
Affiliates Excess Benefit Plan had his or her employment
terminated on December 31, 1993, the benefit accrued under that
plan as of December 31, 1993, to the extent it exceeds the
benefit actually paid under that plan.
The benefit payable to any eligible Employee under this Section 3.2(a)
shall be adjusted, as provided in this Plan as in effect on December
31, 1993, in the event such benefit commences prior to such eligible
Employee's Normal Retirement Date.
(b) for each eligible Employee whose Severance Date is on or after January
1, 1997, and who was either:
(i) a participant in the Nationwide Plan (other than an Employee of
Wausau) who had Covered Compensation in excess of $150,000 during
the ten calendar year period 1987 through 1996, or
(ii) an elected Vice President or more senior officer who was an
Employee of Wausau and participated in the Wausau Plan for a Plan
Year prior to 1996,
the benefits he or she would have received under the Predecessor Plans
where such benefits are calculated as if he or she terminated
employment on December 31, 1996. Any eligible Employee who was an
Officer on January 1, 1997, shall not be eligible for a benefit under
this Section.
The benefit payable to any eligible Employee under this Section 3.2(b)
shall be adjusted, as provided in the Predecessor Plans as in effect
on December 31, 1996, in the event such benefit commences prior to
such eligible Employee's Normal Retirement Date.
7
<PAGE>
ARTICLE IV
----------
FORM OF PAYMENT
---------------
4.1 Form of Payment
---------------
The payment from this Plan shall be payable to a Participant in the same
form and manner, shall begin at the same time, and shall be subject to the
same adjustments as the life contingent annuity payable from the Retirement
Plan. However, the Level Income Option does not apply to this Plan.
Optional forms of payment shall be calculated using the Actuarial
Equivalent factors defined in the Retirement Plan.
4.2 Small Benefit Amounts
---------------------
At the election of the Plan Administrator, any benefit payable under this
Plan which is less than $83.33 per month, under the annuity form selected,
may be paid in one payment in the month of retirement for the year of
retirement, and in an annual payment in January of each subsequent year for
that year. Any adjustment necessary to offset an overpayment (or
underpayment ) of benefits in a calendar year shall be made in the
following January payment (without adjustment for interest).
8
<PAGE>
ARTICLE V
---------
VARIABLE PAYMENT
----------------
The benefit determined under Section 3.1(a)(iii) shall increase on the same date
and in the same percentage as benefits determined under Section 3.01(c) of the
Retirement Plan.
9
<PAGE>
ARTICLE VI
----------
LIABILITY AND METHOD OF PAYMENT
-------------------------------
6.1 Liability for Payment
---------------------
Each Participating Employer shall be liable for payments under this Plan
which are based upon its employees' participation in the Retirement Plan.
In the event that a payment due hereunder is based upon participation in
the Retirement Plan during employment with two or more Participating
Employers, the Actuary for the Retirement Plan shall determine each such
Participating Employer's share of the liability for such payment after
taking into account each such Participating Employer's liability under the
Retirement Plan and the Excess Plan as to the person to whom such payment
is due.
The value of the benefit under this Plan shall be determined on the
Participant's Severance Date, and any resulting tax consequences of the
Participating Employers shall be allocated among them by the Actuary at
that time.
6.2 Method of Payment
-----------------
The dollar amount of each payment and all costs, charges and expenses
relating thereto under this Plan shall be paid from the general assets of
the Participating Employer(s) liable for such payment. Such payments shall
not be funded in advance.
As an unfunded plan, this Plan has no assets and each Participant's right
to a payment due hereunder is that of an unsecured creditor of the
Participating Employer(s) liable for such payment.
10
<PAGE>
ARTICLE VII
-----------
AMENDMENT AND TERMINATION
-------------------------
7.1 Amendment
---------
This Plan may be amended at any time in whole or in part by means of a
resolution adopted by the Board of Directors of each Participating
Employer. In the event that this Plan is amended, benefits may be limited
to payments made on or prior to the date of termination. When another
organization becomes a Participating Employer under the Retirement Plan,
this Plan shall be deemed to have been amended to include such organization
as a Participating Employer under this Plan, without the need for formal
action by any party.
7.2 Termination
-----------
The Participating Employers may terminate this Plan at any time by means of
amendment. In the event that a Participating Employer hereunder ceases to
be a Participating Employer under the Retirement Plan, termination of this
Plan shall be deemed to have occurred with respect to such Participating
Employer effective as of the date it ceased to be a Participating Employer
under the Retirement Plan without the need for amendment of this Plan.
11
<PAGE>
ARTICLE VIII
------------
ADMINISTRATION OF THE PLAN
--------------------------
8.1 Administrator
-------------
The Plan Administrator shall have the discretion and authority to
construe/interpret the Plan, to determine the eligibility to participate in
this Plan, and to issue such regulations as it deems appropriate. The Plan
Administrator shall have the duty and responsibility of maintaining
records, making the requisite calculations and disbursing the payments
hereunder. The Plan Administrator's interpretations, determinations,
regulations and calculations shall be final and binding on all persons and
parties concerned.
8.2 Non-Assignability of Benefits
-----------------------------
The benefits payable hereunder or the right to receive future benefits
under this Plan may not be anticipated, alienated, pledged, encumbered, or
subjected to any charge or legal process, and if any attempt is made to do
so, or a person eligible for any benefits becomes bankrupt, the interest
under this Plan of the person affected may be terminated by the Plan
Administrator which, in its sole discretion, may cause the same to be held
or applied for the benefit of one or more of the dependents of such person
or make any other disposition of such benefits that it deems appropriate.
8.3 Nonguarantee of Employment
--------------------------
Nothing contained in this Plan shall be construed as a contract of
employment between the Participating Employers and any eligible Employee,
or as a right of any eligible Employee to be continued in employment of the
Participating Employers, or as a limitation on the right of the
Participating Employers to discharge any of its employees, with or without
cause.
8.4 Construction
------------
The provisions of this Plan shall be construed, regulated, administered,
and enforced according to the laws of the State of Ohio.
8.5 Execution
---------
This Plan has been established by the Participating Employers in conformity
with resolutions adopted by their respective Boards of Directors and may be
executed in any number of counterparts, each of which will be considered an
original.
12
<PAGE>
ARTICLE IX
----------
BENEFIT EXCEPTIONS
------------------
9.1 Coordination With Other Agreements
----------------------------------
Anything in this Plan to the contrary, in no event shall the calculation of
benefits payable under this Plan as determined under Section 3.1, consider
any compensation paid to any eligible Employee prior to termination of
employment through an individual deferred compensation agreement, if such
individual deferred compensation specifically precludes consideration of
such payment in the calculation of retirement benefits.
9.2 Specific Individuals Excluded
-----------------------------
Certain individuals, who might otherwise be eligible for a benefit under
Section 3.2(b) of this Plan, shall not receive such a benefit. Such
individuals are:
(a) the National Sales Manager-Wholesaler, the National Sales Manager-
Pensions, Regional Sales Managers-Wholesalers, Regional Sales
Managers-Pensions, Regional Pension Consultants, Life Sales
Specialists, Pension Sales Representatives, Regional Life Consultants;
(b) Public Employees Benefit Services Corporation President and Regional
Vice Presidents; and
(c) NEA Valuebuilder Investor Services, Inc. President, Vice President-
Affiliate Relations, Vice President-Sales, Vice President-Sales
Operations, Affiliate Relations Manager, Communications Manager,
Director-Education and Training, Member Services Manager, Regional
Sales Managers, and Valuebuilder Investment Professionals.
13
<PAGE>
IN WITNESS WHEREOF, this agreement has been duly executed by the officers of the
parties thereunto duly authorized, and their respective seals have been affixed.
NATIONWIDE MUTUAL INSURANCE COMPANY
NATIONWIDE MUTUAL FIRE INSURANCE COMPANY
NATIONWIDE GENERAL INSURANCE COMPANY
NATIONWIDE LIFE INSURANCE COMPANY
NATIONWIDE CORPORATION
NATIONWIDE COMMUNICATIONS INC.
COLONIAL INSURANCE COMPANY OF CALIFORNIA
SCOTTSDALE INSURANCE COMPANY
GATES, McDONALD & COMPANY
GATES, McDONALD & COMPANY OF NEW YORK, INC.
GATES, McDONALD & COMPANY OF NEVADA
WEST COAST LIFE INSURANCE COMPANY
NATIONWIDE FINANCIAL INSTITUTION DISTRIBUTORS AGENCY, INC.
NEA VALUEBUILDER INVESTOR SERVICES, INC.
FARMLAND MUTUAL INSURANCE COMPANY
Attest:
____________________ By:___________________________________________________
NATIONWIDE DEVELOPMENT COMPANY
Attest:
____________________ By:___________________________________________________
NATIONWIDE ADVISORY SERVICES, INC.
Attest:
____________________ By:___________________________________________________
14
<PAGE>
PEOPLES TRAVEL SERVICE, INC.
Attest:
____________________ By:___________________________________________________
INSURANCE INTERMEDIARIES, INC.
Attest:
____________________ By:___________________________________________________
PUBLIC EMPLOYEES BENEFIT SERVICES CORPORATION
Attest:
____________________ By:___________________________________________________
NATIONAL CASUALTY COMPANY
Attest:
____________________ By:___________________________________________________
NATIONWIDE HMO, INC.
Attest:
____________________ By:___________________________________________________
KEY HEALTH PLAN, INC.
Attest:
____________________ By:___________________________________________________
15
<PAGE>
EMPLOYERS INSURANCE OF WAUSAU A MUTUAL COMPANY
WAUSAU SERVICE CORPORATION
Attest:
____________________ By:___________________________________________________
16
<PAGE>
Exhibit 10.13
THE NATIONWIDE SALARIED EMPLOYEES SEVERANCE PAY PLAN
This plan is available to employees of the following Participating Employers:
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Life Insurance Company
Nationwide General Insurance Company
Scottsdale Insurance Company
Public Employees Benefit Services Corporation
Nationwide Financial Services, Inc.
Nationwide Development Company
Peoples Travel Service, Inc.
Insurance Intermediaries, Inc.
West Coast Life Insurance Company
Financial Horizons Distributors Agency, Inc.
NEA Valuebuilder Investor Services, Inc.
Nationwide Health Care Corporation
Gates, McDonald & Company
Gates, McDonald & Company of New York, Inc.
Gates, McDonald & Company of Nevada
Farmland Mutual Insurance Company
Nationwide Corporation
Nationwide Communications Inc.
Colonial Insurance Company of California
Hickey-Mitchell Insurance Agency, Inc.
National Casualty Company
<PAGE>
Table of Contents
-----------------
<TABLE>
<S> <C> <C>
Article I DEFINITIONS 1
Article II ELIGIBILITY 4
2.1 Eligibility for Participation 4
2.2 Eligibility for Severance Pay 4
Article III AMOUNT OF SEVERANCE PAY 4
3.1 Determination of Severance Pay 4
3.2 Payment of Severance Pay 5
Article IV CLAIMS 5
Article V APPEALS 5
Article VI ADMINISTRATION 6
6.1 Appointment of the Plan Administrator 6
6.2 Conduct of Plan Administrator Business 6
6.3 Records and Reports of the Plan Administrator 6
6.4 Administrative Powers and Duties 7
6.5 Fiduciary Duties 7
6.6 Allocation or Delegation of Duties and Responsibilities 8
6.7 Procedure for the Allocation or Delegation of Fiduciary Duties 8
6.8 Compensation and Indemnification 8
Article VII FUNDING OF THE PLAN 9
Article VIII FUTURE OF THE PLAN 9
Article IX EXCLUSIVE BENEFIT OF EMPLOYEES 9
Article X LEGALLY ENFORCEABLE 9
</TABLE>
<PAGE>
ARTICLE I - Definitions
- ------------------------
Section 1.1
- -----------
"Board" means the Board of Directors of a Participating Employer.
Section 1.2
- -----------
"Effective Date" shall mean January 1,1987 for any Participating Employer who
adopts the Plan for its Employees on the Plan's Effective Date, January 1, 1987.
For all other Participating Employers, Effective Date shall mean the date
specified by the Participating Employer's Board in its resolution adopting the
Plan.
Section 1.3
- -----------
"Employee" means a person employed by a Participating Employer on a salaried
basis as a common law employee, excluding any such person who is participating
in any new agents' development plan maintained and operated by any Participating
Employer (called NADP - NBAP agent).
Section 1.4
- -----------
"Involuntary Termination" means the termination of the employment relationship
between an Employee and the Participating Employers solely as a result of an
action taken by one or more of the Participating Employers. An Involuntary
Termination occurs only if the employment relationship is terminated on the date
chosen by the Participating Employer(s). If the Employee resigns prior to such
date, the termination will be deemed to be voluntary.
Section 1.5
- -----------
"Most Recent Date of Hire" means the most recent date on which an individual
commenced or recommenced employment with a Participating or Non-Participating
Employer.
Section 1.6
- -----------
"Non-Participating Employer" means the Nationwide Mutual Insurance Company, the
Nationwide Mutual Fire Insurance Company, Employers Insurance of Wausau A Mutual
Company, Farmland Mutual Insurance Company or any subsidiary of such companies,
if such company or subsidiary is not a Participating Employer under the Plan.
Section 1.7
- -----------
"Participant" means any Employee who has terminated employment by reason of job
elimination or job performance and who is eligible to receive severance pay.
<PAGE>
Section 1.8
- -----------
"Participating Employer" or "Employer" means the Nationwide Mutual Insurance
Company, Nationwide Mutual Fire Insurance Company, Employers Insurance of Wausau
A Mutual Company, Farmland Mutual Insurance Company, or any subsidiary of such
companies, whose Board of Directors has duly adopted this Plan for its
Employees.
Section 1.9
- -----------
"Pay" means the product of:
(a) the Employee's biweekly benefits salary as shown on the Employee's Human
Resources Profile on the date the Employee's employment relationship ends
due to an Involuntary Termination, divided by the Employee's regularly
scheduled hours of work for each biweekly pay period at that time, and
(b) the Employee's regularly scheduled hours of work at the time the Employee
receives written notice from the Employer that his or her employment
relationship is expected to end.
Section 1.10
- ------------
"Plan" means the Nationwide Enterprise Salaried Employees Severance Pay Plan, as
set forth in this document or as it may be hereafter amended.
Section 1.11
- ------------
"Plan Administrator" means the Benefits Administrative Committee as described in
Article VI.
Section 1.12
- ------------
"Plan Year" means a period of 12 consecutive months beginning January 1 and
ending the next following December 31.
Section 1.13
- ------------
"Severance Pay" means the benefit determined in accordance with Article III
applicable to an Employee as of a termination date, based upon such Employee's
Pay and Years of Service completed at such termination date.
Section 1.14
- ------------
"Successor Employer" means an employer which acquires assets, stock or
operations from any of the Participating Employers and continues the existing
operation in whole or in part.
<PAGE>
Section 1.15
- ------------
"Suitable Replacement Employment" means:
(a) any position accepted by the Employee with a Participating, Non-
Participating or Successor Employer;
(b) any position with a Participating, Non-Participating or Successor Employer
which was offered but not accepted by the Employee where the
offered/rejected position:
(1) was similar to the eliminated position in that the responsibilities
and duties of such position did not require extensive retraining, and
(2) such position offered compensation of not less than eighty percent
(80%) of the level of pay and benefits provided by the eliminated
position; or
(c) a position as an agent licensed to sell the products of a Participating or
Non-Participating Employer.
Suitable Replacement Employment does not include any position with a
Participating, Non-Participating or Successor Employer which was offered but not
accepted by the Employee if the Employee's new principal place of work would
have been:
(d) at least fifty (50) miles farther from the Employee's former residence than
was the former principal place of work; or
(e) if the Employee had no former principal place of work, would have been at
least fifty (50) miles from the Employee's former residence.
An Employee's principal place of work is the location at which the Employee
spends most of his or her working time and at which he or she performs services,
or, if no one place of work dominates, the location at which business activities
are centered (such as the reporting location).
A position with a Participating or Non-Participating Employer will be deemed to
have been accepted upon the earliest to occur of the following:
(f) commencement of duties in the new position;
(g) receipt of payment under the transfer expense policy of the Participating
or Non-Participating Employer; or
(h) written acknowledgment of the decision to accept the new position.
Section 1.16
- ------------
<PAGE>
"Years of Service Completed" means, as to an Employee employed by a
Participating Employer, each twelve consecutive month period of continuous
employment on a salaried or non-salaried basis commencing from the Employee's
Most Recent Date of Hire, including all types of continuous salaried or non-
salaried employment with any Non-Participating Employer. Termination of
employment with a Participating or Non-Participating Employer, coincident with
commencement of employment with any such employer, shall not change the Most
Recent Date of Hire, for purposes of this determination.
ARTICLE II - Eligibility
- -------------------------
Section 2.1 - Eligibility for Participation
- --------------------------------------------
All salaried Employees of Participating Employers are eligible to participate in
the Plan.
Section 2.2 - Eligibility for Severance Pay
- --------------------------------------------
An Employee of a Participating Employer becomes a Participant, eligible for
Severance Pay, when the employment relationship with all Participating Employers
ends due to an Involuntary Termination due to job performance (the inability to
meet performance standards or unsatisfactory work performance) or job
elimination. In no event shall an Employee be eligible for Severance Pay where
the Employee was terminated for the following reasons, which are illustrative
and not exclusive: theft, dishonesty, an offense involving moral turpitude,
tardiness, absenteeism, failure to report for work, company rule violation,
gross misconduct, insubordination, mutual agreement of the Employee and the
Employer, illness, or termination of temporary employment.
Job elimination means that the Employee's current position with the
Participating Employer is eliminated due to workforce reduction, office closure
or organizational change and no Suitable Replacement Employment is offered. Job
---
elimination includes any job eliminated due to consolidation, termination or
sale of operations, or a reduction in work force. Job elimination occurs on the
latter of the day an Employee's position is eliminated or the last day of
employment with a Participating Employer by the Employee.
ARTICLE III- Amount of Severance Pay
- -------------------------------------
Section 3.1 - Determination of Severance Pay
- ---------------------------------------------
Severance Pay is provided in accordance with the following schedule:
Years of Service Completed Amount of Severance Pay
-------------------------- ------------------------
Less than 6 months N/A
6 months but less than 2 years Pay divided by 2 times 2
2 years but less than 4 years Pay divided by 2 times 3
4 years but less than 6 years Pay divided by 2 times 4
6 years but less than 8 years Pay divided by 2 times 5
<PAGE>
8 years but less than 10 years Pay divided by 2 times 6
10 years but less than 11 years Pay divided by 2 times 7
11 years or more Pay divided by 2 times 8 plus
Pay divided by 2 for each
complete or partial Year of
Service Completed over eleven (11).
Severance Pay is not reduced by reason of entitlement to any other employer or
government-sponsored benefit.
Section 3.2 - Payment of Severance Pay
- ---------------------------------------
Severance Pay is paid in a lump sum amount as soon as practical following
termination of employment. Severance Pay is paid through the payroll system of
the applicable Participating Employer.
ARTICLE IV - Claims
- --------------------
Generally, eligible Employees are identified by the appropriate personnel or
human resources representative of the Office of Human Resources and are notified
of the amount of Severance Pay to which they are entitled. A claim form is not
required. Should the appropriate representative not identify an Employee
eligible for Severance Pay, that Employee may submit a claim in accordance with
Article V.
ARTICLE V - Appeals
- --------------------
Any Employee or former Employee who does not receive benefits from the Plan to
which he or she feels entitled shall have the right to file a written claim with
the Plan Administrator for such benefit.
If a claim is denied (in whole or in part), the Employee or former Employee will
receive - within 90 days after receipt of a claim (180 days if special
circumstances apply) - a written explanation from the Plan Administrator or its
designee detailing:
(a) the specific reasons for the denial,
(b) specific references to plan provisions to support those reasons,
(c) the additional information needed to be provided to improve the claim and
the reasons why that information is necessary, and
(d) the procedures available for a further review of the claim.
Each claimant shall have the right to appeal that denial by submitting a written
application to the
<PAGE>
Plan Administrator within 60 days after the claim has been denied. The claimant
or a representative may review the Plan document and submit any written comments
in the appeal. A request for review of a claim should be submitted through the
Human Resources Department.
The Plan Administrator will conduct a full and fair review of all claim appeals
and notify the claimant of the decision within 60 days (120 if special
circumstances apply). That decision will be in writing and will include the
specific reasons and the plan references on which the decision was based.
ARTICLE VI - Administration
- ----------------------------
Section 6.1 - Appointment of the Plan Administrator
- ----------- --------------------------------------
The administration of the Plan, as provided herein, including the payment of all
benefits to Participants, shall be the responsibility of the Plan Administrator.
In addition, the Plan Administrator shall be Named Fiduciary of the Plan. The
Plan Administrator shall be the Benefits Administrative Committee consisting of
at least 3 persons appointed from time to time by the Chief Executive Officer of
the Company (herein called the "CEO"). Any person appointed a member of the
Benefits Administrative Committee shall signify his or her acceptance by filing
written acceptance with the CEO and with the Secretary of the Benefits
Administrative Committee. Any member of the Benefits Administrative Committee
may resign by delivering his or her written resignation to the CEO and the
Secretary of the Benefits Administrative Committee, and such resignation shall
become effective on the date that such resignation is "accepted by the remainder
of the Benefits Administrative Committee, if any, and the CEO, or some specified
future date.
Section 6.2 - Conduct of Plan Administrator Business
- ----------- ---------------------------------------
The Benefits Administrative Committee shall elect a Chairman and a Secretary who
may be, but need not be, members of the Benefits Administrative Committee. It
may appoint agents including, but not limited to, the Office of Human Resources
and the Payroll Department of the Nationwide Mutual Insurance Company, and a
committee, who may be, but need not be, members of the Benefits Administrative
Committee, with such powers as it shall determine, and it may authorize one or
more of its number, or any agent, or agents, to execute or deliver any
instrument or make any payment in its behalf.
A majority of the members of the Benefits Administrative Committee shall
constitute a quorum for the transaction of business. All resolutions or other
action taken by the Benefits Administrative Committee shall be by the vote of a
majority of the members of the Benefits Administrative Committee present at any
meeting or without a meeting by an instrument in writing signed by a majority of
the members of the Benefits Administrative Committee.
Section 6.3 - Records and Reports of the Plan Administrator
- ----------- ----------------------------------------------
The Plan Administrator shall keep such written records as it shall deem
necessary or proper, and
<PAGE>
such records shall be open to inspection by the Company. The Plan Administrator
shall prepare and submit to the Participating Employers an annual report which
shall include such information as the Plan Administrator deems necessary or
advisable.
Section 6.4 - Administrative Powers and Duties
- ----------- ---------------------------------
The Plan Administrator shall have the power to take all actions required to
carry out the provisions of the Plan and shall further have the following powers
and duties, which shall be exercised in a manner consistent with the provisions
of the Plan:
(a) exercise discretion and authority to construe and interpret the provisions
of the Plan, to determine eligibility to participate in the Plan, and to
make rules and regulations under the Plan to the extent deemed advisable by
the Chairperson, Secretary, other Committee Members and Subcommittees;
(b) decide all questions as to the rights of Participants under the Plan;
(c) file or cause to be filed all such annual reports, returns, schedules,
descriptions, financial statements and other statements as may be required
by any federal or state statute, agency, or authority;
(d) obtain from the Participating Employer and Employees such information as
shall be necessary to the proper administration of the Plan;
(e) determine the amount, manner, and time of payment of benefits hereunder;
(f) notify the Employees, in writing, of any amendment or termination of the
Plan, or of a change in any benefits available under the Plan;
(g) prescribe such actions as may be required for Employees to make elections
under this Plan; and
(h) do such other acts as it deems reasonably required to administer the Plan
in accordance with its provisions, or as may be provided for or required by
law.
Section 6.5 - Fiduciary Duties The Plan Administrator and any other fiduciary
- ----------- -----------------
within the meaning of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), shall discharge their duties solely in the interest of
Participants and:
(a) for the exclusive purpose of providing benefits to Participants and
defraying reasonable expenses of administering the Plan;
(b) with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with
such matters would use in the conduct of an enterprise of a like character
and with like aims;
<PAGE>
(c) in accordance with the documents and instruments governing the Plan insofar
as such documents and instruments are consistent with the provisions of
ERISA.
Section 6.6 - Allocation or Delegation of Duties and Responsibilities
- ----------- --------------------------------------------------------
In furtherance of their duties and responsibilities under the Plan, the Plan
Administrator may, subject always to the requirements of Section 6.5 and except
as may be prohibited by law,
(a) employ agents to carry out nonfiduciary responsibilities;
(b) employ agents to carry out fiduciary responsibilities (other than trustee
responsibilities as defined in section 405(c)(3) of ERISA);
(c) consult with counsel, who may be counsel to the Participating Employers;
and
(d) provide for the allocation of fiduciary responsibilities (other than
trustee responsibilities as defined in section 405(c)(3) of ERISA).
Section 6.7 - Procedure for the Allocation or Delegation of Fiduciary Duties
- ----------- ---------------------------------------------------------------
Any action described in subsections (b) or (d) of Section 6.6 may be taken by
the Plan Administrator only in accordance with the following procedures:
(a) such action shall be taken by a majority of the Benefits Administrative
Committee in a resolution approved by the Benefits Administrative
Committee;
(b) a vote cast by a member of the Benefits Administrative Committee for or
against the adoption of such resolution shall be recorded and made a part
of the written record of the Plan Administrator's proceedings; and
(c) any delegation of fiduciary responsibilities or any allocation of fiduciary
responsibilities by the Plan Administrator may be modified or rescinded by
the Plan Administrator according to the procedure set forth in subsections
(a) and (b) of this Section 6.7.
Section 6.8 - Compensation and Indemnification No member of the Benefits
- ----------- ---------------------------------
Administrative Committee shall receive any compensation for his or her services
as such, and no bond or other security need be required of him or her in such
capacity in any jurisdiction.
The members of the Benefits Administrative Committee and the Participating
Employers shall not be liable for any action taken, suffered or omitted by them
in good faith or for any action in reliance upon certificates, reports, opinions
made or given by any actuary, accountant, or counsel selected by the Benefits
Administrative Committee.
Each member of the Benefits Administrative Committee, and any person appointed
as agent of the Benefits Administrative Committee or employed by the Benefits
Administrative Committee in accordance with Section 6.6 or Section 6.7, shall be
reimbursed and indemnified by the Participating Employers for any loss or
expenses incurred by him or her by reason of any claims
<PAGE>
for asserted liability, so long as he or she acts in good faith and is not
guilty of willful misconduct, gross negligence, or willful failure to act.
Article VII - Funding of the Plan
- ----------------------------------
Severance Pay is funded entirely by the Participating Employers and is paid out
of the general assets of the Participating Employers.
Article VIII - Future of the Plan
- ----------------------------------
The Plan is intended to be maintained for an indefinite period of time, however,
the Participating Employers reserve the right to amend, alter, or terminate the
Plan, or any portion thereof, at any time, without the consent of Employees or
other participants of the Plan, by an action properly taken, in accordance with
state law, by their Boards of Directors. If a former Employee has "qualified for
Severance Pay (as outlined in Section 2.2) prior to termination of the Plan,
Severance Pay will be paid in accordance with the schedule of benefits and other
plan provisions in effect on the date of his or her termination of employment.
Article IX - Exclusive Benefit of Employees
- --------------------------------------------
This Plan shall be maintained for the exclusive benefit of Employees.
Article X - Legally Enforceable
- --------------------------------
It is intended that Employee's rights under the Plan are legally enforceable.
<PAGE>
Exhibit 10.14
NATIONWIDE INSURANCE ENTERPRISE
SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
WHEREAS, the Participating Employers (as that term is defined in the Nationwide
Insurance Enterprise Savings Plan) have previously adopted the Nationwide
Insurance Companies and Affiliates Supplemental Defined Contribution Plan (the
"Supplemental DC Plan") for the benefit of certain employees; and
WHEREAS, said Participating Employers do now desire to amend, rename, and
restate the Supplemental DC Plan as the Nationwide Insurance Enterprise
Supplemental Defined Contribution Plan (this "Plan") effective January 1, 1996;
and
WHEREAS, Wausau Service Corporation hereby adopts this Plan effective January 1,
1996.
NOW THEREFORE, the Participating Employers do hereby adopt, amend and restate
this plan as set forth in this instrument.
ARTICLE I
DEFINITIONS
-----------
1.1 Any word or term used in this instrument, if defined in the Savings Plan or
the Wausau Plan, shall have the same meaning as set forth in such
definition.
1.2 "Covered Compensation" shall have the meanings set forth below.
(a) For Plan Years commencing prior to January 1, 1997.
"Covered Compensation" means compensation as defined in Section
414(s) of the Code and Treasury Regulation Section 1.414(s)-1(c)(2)
and (4), but excluding (i) severance pay and other amounts paid after
a Participant's Severance Date, (ii) reimbursement for relocation
expenses and related payments, (iii) company car value or subsidy or
reimbursement for loss of company car, (iv) a lump sum payment for
vacation days made at severance of employment, or (v) expense
reimbursements or expense allowances; and is the compensation earned
for a calendar year which is taken into account in determining his or
her Final Average Compensation hereunder, as herein determined.
For the purpose of determining a Neckura employee's Covered
Compensation, remuneration, based on the inclusions and exclusions set
forth in this Section, paid to him or her by Neckura shall be deemed
to have been paid by the Plan
1
<PAGE>
Sponsor.
(b) For Plan Years beginning on or after January 1, 1997.
Covered Compensation means compensation as defined in Section 414(s)
of the Code and Treasury Regulation Section 1.414(s)-1(c)(2) and (4),
but excluding (i) severance pay, (ii) reimbursement for relocation
expenses and related payments, (iii) company car value or subsidy or
reimbursement for loss of company car, (iv) a lump sum payment for
vacation days made at severance of employment, (v) for purposes of
Article IV, any payment made to an Employee to offset, in whole or
part, the tax cost of other amounts paid by a Participating Employer
which are included in the Employee's income for federal income tax
purposes, or (vi) for Agency Managers who are not employed by Wausua,
recurring payments to the extent additional recurring payments do
represent payments of or reimbursements for agency business expenses.
For the purpose of determining a Neckura employee's Covered
Compensation, remuneration, based on the inclusions and exclusions set
forth in this Section, paid to him or her by Neckura shall be deemed
to have been paid by the Plan Sponsor.
1.3 "Highly Compensated Employee" means an Employee of a Participating Employer
whose Covered Compensation, for any year beginning on or after the
Effective Date, exceeds the maximum dollar limitation set forth in Code
Section 401(a)(17).
1.4 "NIERP" means the Nationwide Insurance Enterprise Retirement Plan.
1.5 "Officer" means an elected officer of a Participating Employer whose
Covered Compensation, for any year beginning on or after the Effective
Date, exceeds the maximum dollar limitation set forth in Code Section
401(a)(17).
1.6 "Participating Employer" means any organization defined as such in the
Savings Plan or the Wausau Plan.
1.7 "Plan" means the Nationwide Insurance Enterprise Supplemental Defined
Contribution Plan.
1.8 "Predecessor Plan" means the Nationwide Insurance Companies and Affiliates
Supplemental Defined Contribution Plan or the Wausau Insurance Companies
Supplemental Defined Contribution Plan.
2
<PAGE>
1.9 "Savings Plan" means the Nationwide Insurance Enterprise Savings Plan.
1.10 "Wausau Plan" means the Wausau Insurance Companies Employees' Savings Plan.
3
<PAGE>
ARTICLE II
ELIGIBILITY
-----------
2.1 Each Participant in the Savings Plan or the Wausau Plan who is an Officer
as of December 31 of any Plan Year, will become a Participant in this Plan
on the later of: (a) January 1 preceding the first date in the Plan Year
that the Employer Matching Contribution which would otherwise have been
made to the account of such Participant in the Savings Plan or Wausau Plan
exceeds the maximum Employer Matching Contribution that may be made for him
or her under the Savings Plan or the Wausau Plan due to application of the
maximum benefit and the maximum deferral provisions set forth in the
Savings Plan or the Wausau Plan, the maximum salary provisions in the
Savings Plan or the Wausau Plan, the nondiscrimination provisions in the
Savings Plan or the Wausau Plan, and any limitations imposed by the
Administrative Committee, as permitted under the Savings Plan or the Wausau
Plan; and (b) January 1 preceding the date the Participant becomes an
Officer.
2.2 Highly Compensated Employees are eligible to participate during Plan Years
after 1995 if they: (a) had an account balance in a Predecessor Plan as of
December 31, 1995, (b) participated in the Savings Plan or the Wausau Plan
during the Plan Year, and (c) had not terminated employment prior to
December 31 of the Plan Year or terminated employment after qualifying for
an immediately payable monthly NIERP benefit. For Plan Years beginning on
or after January 1, 1997, additional amounts shall be credited only for
those individuals described in Section 2.1.
4
<PAGE>
ARTICLE III
CREDITS
-------
3.1 Following the end of the Plan Year beginning on January 1, 1996, an amount
will be credited to the account of each Officer and any other eligible
Highly Compensated Employee described in Section 2.2 of this Plan.
Following the end of each Plan Year beginning on or after January 1, 1997,
an amount will be credited to the account of each Officer who had not
terminated employment prior to December 31 of the Plan Year or terminated
employment after qualifying for an immediately payable monthly NIERP
benefit. The credited amount will be equal to the difference between
(a) and (b):
(a) The total company matching credit calculated as follows:
(1) Determine the deferral percentage ("DP") for the Officer for the
preceding Plan Year. For the 1996 Plan Year, use the
Participant's total deferrals under the Savings Plan and the
Wausau Plan for the Plan Year, divided by his or her base salary
(or Benefits Salary for those employees whose Covered
Compensation is determined on the basis of Benefits Salary)
compensation used to determine. For Plan Years after 1996,
divide the total deferrals in the Savings Plan by the Savings
Plan Covered Compensation (up to the Code Section 401(a)(17)
limit).
(2) Determine the appropriate matching contribution percentage based
on the DP determined in (1) and the provisions of Section 5.02 of
the Savings Plan, provided, however, that the matching
contribution percentage for an Officer or Highly Compensated
Employee who defers, under the Savings Plan or the Wausau Plan,
the maximum amount permitted under Section 402(g) of the Code in
any year shall be the aggregate percentage of Employer Matching
Contribution provided under Section 5.02 of the Savings Plan for
such year. For 1996, multiply such percentage by the total
compensation used in determining the actual deferral percentage
("ADP") discrimination test result under the Savings Plan and the
Wausau Plan in 1996 (without applying the Code Section 401(a)(17)
limit). For Plan Years after 1996, multiply such percentage by
the Covered Compensation for the Plan Year to determine the total
company matching credit.
(b) The actual Employer Matching Contribution credited to the Savings Plan
or Wausau Plan account for such Plan Year.
The credit amount will be credited as of the first day of such Plan Year.
5
<PAGE>
3.2 Interest shall accrue on amounts credited to this Plan at the highest
annualized yield credited on the Guaranteed Fund assets of the Savings Plan
during such Plan Year.
3.3 Eligible Officers and Highly Compensated Employees shall vest in the
amounts credited under this Plan at the same time as they become vested in
the Employer Matching Contributions under the Savings Plan.
6
<PAGE>
ARTICLE IV
LIABILITY FOR PAYMENT
---------------------
Each Participating Employer shall be liable for payments due under this Plan
which are based upon its employees' participation in the Savings Plan.
In the event that a payment due hereunder is based upon participation in the
Savings Plan during employment with two or more Participating Employers, each
such Participating Employer's share of the liability will be based on amounts
credited and interest accrued due to participation in the Savings Plan while
employed with each such Participating Employer.
7
<PAGE>
ARTICLE V
METHOD OF PAYMENT
-----------------
5.1 The dollar amount of each payment due under this Plan shall be paid from
the general assets of the Participating Employers liable for such payment.
Such payments shall not be funded.
As an unfunded plan, this Plan has no assets and each Participant's right
to a payment due hereunder is that of an unsecured creditor of the
Participating Employers liable for such payment.
5.2 Credits made to the Predecessor Plans for Plan Years prior to 1996, and
earnings thereon are to be paid in January of the year following the year
the Participant ceases employment with all Participating Employers and Non-
Participating Employers. Unless otherwise elected credits made to this
Plan for Plan Years after 1995, and earnings thereon will be paid as
follows:
(a) For each Participant who qualifies for an immediately payable monthly
benefit from the NIERP, and whose post 1995 account balance exceeds
$10,000, 10 installment payments.
(b) For all other Participants, a single sum payment.
Employees may elect to receive distributions in the form of approximately
equal annual installments over a period of one to ten years if that
election is received within 60 days following the later of the
determination of the 1996 credit amount or the determination of the initial
amount to be credited to the account of the Participant. Such payment
shall be calculated by dividng the Participant's account balance as of the
last day of the preceding Plan Year by the remaining number of annual
installments.
5.3 Should a Participant die, payment shall be made to the Savings Plan
beneficiary in January of the year following the Participant's death.
Where installment payments have commenced pursuant to Section 5.2, such
payments will continue to the Savings Plan beneficiary at the same time and
in the same amount as would be paid to the Participant had he or she
survived.
8
<PAGE>
ARTICLE VI
AMENDMENT; TERMINATION
----------------------
6.1 This Plan may be amended at any time by means of an action of the Board of
Directors of each Participating Employer, provided, however, that no such
amendment may reduce the benefits payable hereunder with respect to persons
who are Participants or beneficiaries on the effective date of amendment.
When another organization becomes a Participating Employer under the
Savings Plan, this Plan shall be amended to include such organization as a
Participating Employer under this Plan.
6.2 The Participating Employers may terminate this Plan at any time by means of
amendment provided, however, that any such termination shall not apply to
persons who are Participants or beneficiaries on the effective date of
termination.
In the event that a Participating Employer hereunder ceases to be a
Participating Employer under the Savings Plan, termination of this Plan
shall be deemed to have occurred with respect to such Participating
Employer effective as of the date it ceased to be a Participating Employer
under the Savings Plan without the need for amendment of this instrument,
provided, however, that such termination of this Plan shall not discharge
such Participating Employer from any liability it may have hereunder as to
any persons who are Participants or beneficiaries immediately prior to the
effective date of such termination of this Plan.
6.3 The Nationwide Mutual Insurance Company shall be the Administrator of this
Plan. The Administrator shall have the authority to interpret the Plan and
issue such regulations as it deems appropriate. The Administrator shall
have the duty and responsibility of maintaining records, making the
requisite calculations and disbursing payments hereunder. The
Administrator's interpretations, determinations, regulations and
calculations shall be final and binding on all Participants, beneficiaries,
persons and parties concerned.
6.4 The benefits payable under this Plan or the right to receive future
benefits under this Plan may not be anticipated, alienated, pledged,
encumbered, or subjected to any charge or legal process, and if any attempt
is made to do so, or a person eligible for any benefits becomes bankrupt,
the interest under this Plan of the person affected may be terminated by
the Administrator which, in its sole discretion, may cause the same to be
held or applied for the benefit of one or more of the dependents of such
person or make any other disposition of such benefits that it deems
appropriate.
6.5 Nothing contained in this Plan shall be construed as a contract of
employment between a
9
<PAGE>
Participating Employer and any Participant, or as a right of any
Participant to be continued in employment of the Participating Employer, or
as a limitation on the right of the Participating Employer to discharge any
of its employees, with or without cause.
10
<PAGE>
ARTICLE VII
CONSTRUCTION
------------
The provisions of this Plan shall be construed, regulated, administered, and
enforced according to the laws of the State of Ohio.
11
<PAGE>
ARTICLE VIII
EXECUTION
---------
This Plan has been established by the Participating Employers in conformity with
resolutions adopted by their respective Boards of Directors and may be executed
in any number of counterparts, each of which will be considered an original.
12
<PAGE>
ARTICLE IX
WAUSAU
------
The Wausau Insurance Companies Supplemental Defined Contribution Plan was
eliminated effective December 31, 1995. Individuals who would have been
eligible for benefits under that plan as of December 31, 1995, shall receive a
credit under this Plan in the same amount as of January 1, 1996.
13
<PAGE>
IN WITNESS WHEREOF, this amendment had been duly executed by the parties
thereto, being hereunto duly authorized.
NATIONWIDE MUTUAL INSURANCE COMPANY
NATIONWIDE MUTUAL FIRE INSURANCE COMPANY
NATIONWIDE GENERAL INSURANCE COMPANY
NATIONWIDE LIFE INSURANCE COMPANY
NATIONWIDE CORPORATION
NATIONWIDE COMMUNICATIONS, INC.
COLONIAL INSURANCE COMPANY OF CALIFORNIA
SCOTTSDALE INSURANCE COMPANY
GATES, McDONALD & COMPANY
GATES, McDONALD & COMPANY OF NEW YORK, INC.
GATES, McDONALD & COMPANY OF NEVADA
WEST COAST LIFE INSURANCE COMPANY
NATIONWIDE FINANCIAL INSTITUTION DISTRIBUTORS
AGENCY, INC.
NEA VALUEBUILDER INVESTOR SERVICES, INC.
NEA VALUEBUILDER INVESTOR SERVICES OF OHIO, INC.
FARMLAND MUTUAL INSURANCE COMPANY
Attest:
By:
- -------------------- ----------------------------------
NATIONWIDE DEVELOPMENT COMPANY
Attest:
By:
- -------------------- ----------------------------------
NATIONWIDE ADVISORY SERVICES, INC.
Attest:
By:
- -------------------- ----------------------------------
14
<PAGE>
PEOPLES TRAVEL SERVICE, INC.
Attest:
By:
- -------------------- ----------------------------------
INSURANCE INTERMEDIARIES, INC.
Attest:
By:
- -------------------- ----------------------------------
PUBLIC EMPLOYEES BENEFIT SERVICES
CORPORATION
Attest:
By:
- -------------------- ----------------------------------
NATIONAL CASUALTY COMPANY
Attest:
By:
- -------------------- ----------------------------------
NATIONWIDE HMO, INC.
Attest:
By:
- -------------------- ----------------------------------
15
<PAGE>
EMPLOYERS INSURANCE OF WAUSAU A MUTUAL
COMPANY
WAUSAU SERVICE CORPORATION
Attest:
By:
- -------------------- ----------------------------------
KEY HEALTH PLAN, INC.
Attest:
By:
- -------------------- ----------------------------------
16
<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
January 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<DEBT-HELD-FOR-SALE> 12,495,878 11,963,214
<DEBT-CARRYING-VALUE> 5,720 5,854
<DEBT-MARKET-VALUE> 5,989 5,983
<EQUITIES> 37,570 52,941
<MORTGAGE> 4,627,387 5,140,401
<REAL-ESTATE> 229,442 235,525
<TOTAL-INVEST> 17,837,013 17,919,913
<CASH> 52,726 186,034
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 1,020,356 1,349,450
<TOTAL-ASSETS> 37,999,411 44,606,590
<POLICY-LOSSES> 16,113,359 16,601,996
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 348,027 358,003
<POLICY-HOLDER-FUNDS> 65,297 65,686
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 2,110,053 2,074,554
<TOTAL-LIABILITY-AND-EQUITY> 37,999,411 44,606,590
199,106 151,057
<INVESTMENT-INCOME> 1,294,033 1,009,618
<INVESTMENT-GAINS> (1,724) 4,300
<OTHER-INCOME> 59,089 52,960
<BENEFITS> 1,115,493 867,652
<UNDERWRITING-AMORTIZATION> 82,695 96,782
<UNDERWRITING-OTHER> 317,743 252,229
<INCOME-PRETAX> 281,170 252,860
<INCOME-TAX> 96,314 88,685
<INCOME-CONTINUING> 184,856 164,175
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 184,856 164,175
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
