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NATIONWIDE(R) VLI
SEPARATE ACCOUNT-2
DECEMBER 31, 1996
[LOGO]
THE BEST
OF AMERICA(R)
LIFEPLANNING SERIES(R)
'96
ANNUAL REPORT
- --------------------------------------------------------------------------------
In cooperation with:
American Century(SM) Investments
Dreyfus Corporation
Fidelity Investments
Nationwide Advisory Services, Inc.
Neuberger &Berman Management Incorporated
Oppenheimer Management Corporation [NATIONWIDE LOGO]
Strong Funds Nationwide Life Insurance Company
Van Eck Associates Corporation Home Office: Columbus, Ohio
Van Kampen American Capital
Warburg Pincus Funds
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[LOGO]
NATIONWIDE LIFE INSURANCE COMPANY
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
[PHOTO]
PRESIDENT'S MESSAGE
On behalf of Nationwide Life Insurance Company, we are pleased
to bring you the 1996 annual report of the Nationwide VLI
Separate Account-2.
The U.S. economy is enjoying the rewards of a stable political
system and a globally competitive business sector. These good
times will last, although not all years will show the stellar
performance of the last two years. 1997 may be the year in
which normalcy will return.
The economic expansion has lasted six years already, and all
resources are more or less fully employed. The job market in
particular is showing some strains, and wages are rising a bit
faster than before. Also, the competitive pressures from
abroad are increasing due to a sharp rise in the exchange
value of our currency. Business will be hard pressed under
those conditions to continue showing above-average profit
increases. For the economy as a whole, inflation has hit the
low point in this business cycle and will slowly but surely be
a more important variable for monetary policy.
In the last few years, and especially in 1996, our economy
expanded faster than the natural rate of growth. This cannot
continue without creating bottlenecks that in turn induce
price increases. Either the economy will slow under its own
weight or the Federal Reserve will have to step in. Some
indicators point to a softening of business activity. But
whether this is enough will be a close call.
Again, the long-term trend is very positive for the U.S., its
business activity, and its financial markets. However, 1997
might turn out to have some more surprises than anticipated
right now.
/s/ Joseph J. Gasper
Joseph J. Gasper, President
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CONTENTS
<S> <C>
HOW TO READ THE ANNUAL REPORT .......................................... 4
Explanation on how to read and understand
the various financial reports
A FEW WORDS ABOUT OUR FUNDS ............................................ 6
Fund Objectives and Narratives
written by the fund managers*
FUND PERFORMANCES ...................................................... 36
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY ........... 44
STATEMENTS OF OPERATIONS AND CHANGES
IN CONTRACT OWNERS' EQUITY ............................................. 46
NOTES TO FINANCIAL STATEMENTS .......................................... 47
SCHEDULES OF CHANGES IN UNIT VALUE ..................................... 54
INDEPENDENT AUDITORS' REPORT ........................................... 64
<FN>
* The discussions refer to two stock market indexes. The Standard & Poor's 500
Index (S&P 500) is an unmanaged index of 500 U.S. common stocks and the
historical performance assumes the reinvestment of dividends. The Morgan
Stanley Capital International Europe, Australia, Far East (EAFE) index is an
unmanaged index of more than 900 companies from these regions. The EAFE Index
reflects the prices of these common stocks translated into U.S. dollars with
dividends reinvested net of any foreign taxes.
The performance figures quoted by the fund managers do not include the
annual mortality, expense and administration charges of the annuity contract.
The Fund's portfolio is subject to change.
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HOW TO READ THE ANNUAL REPORT
This Annual Report is sent to all customers who own a Nationwide life insurance
contract with all or some of the funds in the Nationwide VLISeparate Account-2
(the Account). The Account is a separate account trust which offers investment
options in thirty mutual funds from ten mutual fund houses. An explanation of
the funds and their objectives can be found on pages 6 through 35.
The Annual Report has three major financial sections.
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
This statement, beginning on page 44, lists all the funds in the Account, the
number of shares owned, the amount paid for the shares (i.e., cost) and their
market value on December 31, 1996. The market value of the assets change as the
underlying mutual fund shares change in value. As contract owners make exchanges
between the funds, the number of shares in each fund increases and decreases.
When money is deposited (withdrawn) by contract owners, shares of the mutual
funds are bought (sold) by the Account. The total market value of the funds is
equal to the Total investments.
Accounts receivable, if applicable, is an asset of the Account for money market
fund shares added to the contract owners' accounts, but not yet added to Total
investments. Total investments plus Accounts receivable equals Total assets.
Accounts payable, if applicable, is a liability of the Account for money market
fund shares deducted from the contract owners' accounts, but not yet deducted
from Total investments.
Total assets minus Accounts payable equals Contract owners' equity. For a
summary of Contract owners' equity by fund series turn to page 52.
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
These statements, found on page 46, show the activity in the Account for the
periods stated herein.
The Investment activity section shows the changes in unrealized gain (loss) of
the mutual funds in the Account, realized gain (loss) as shares of the funds are
bought (sold), mortality and expense charges which are assessed through the
daily unit value calculations, and dividends and capital gains earnings from the
underlying mutual funds.
The Equity transactions section illustrates the receipt of purchase payments by
the Account as new contracts are sold, existing contract owners deposit
additional funds; and deductions from the Account when money is withdrawn,
contracts are canceled, death benefits are paid, and other charges associated
with the contract are assessed.
Net change in contract owners' equity equals Investment activity plus Equity
transactions.
The Contract owners' equity at the beginning of the period plus the Net change
in contract owners' equity equals the Contract owners' equity at the end of the
period. Contract owners' equity at the end of the calendar year will equal the
Contract owners' equity at the beginning of the next year.
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SCHEDULES OF CHANGES IN UNIT VALUE
As a contract owner, you invest in the mutual funds offered in your life
insurance contract. However, you do not buy shares of the mutual fund. Instead,
the Account buys shares of the fund and you in turn purchase units of the
Account. Except for the units surrendered for the annual contract maintenance
charge, the number of units you own will not change unless you contribute to or
withdraw money from your account. The value of your contract can change based on
the value of the units you own. For example, if you purchase 100 units at $10
per unit, the value of your contract is $1,000. If the value of the units
increases to $12 per unit, your contract value increases to $1,200. Therefore,
to determine the value of your account, multiply the number of units of each
fund you own by the fund's unit value.
The Schedules of Changes in Unit Value show you the unit value at the beginning
of the period and at the end of the period. The percentage increase (decrease)
in unit value shows how it changed in value. This is computed by subtracting the
beginning unit value from the ending unit value and dividing the difference by
the beginning unit value. This can be used as a measure of the performance of
the funds over the three annual periods reported.
As you review the following pages of the Annual Report, the Notes to Financial
Statements on page 47 will also help explain and clarify the various statements
and schedules.
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A FEW WORDS ABOUT OUR FUNDS
[DREYFUS LOGO]
DREYFUS VARIABLE INVESTMENT FUND - GROWTH AND INCOME PORTFOLIO
OBJECTIVE - To provide long-term capital growth, current income and growth of
income, consistent with reasonable investment risk. This Series invests
primarily in equity securities, debt securities and money market instruments of
domestic and foreign issuers.
NARRATIVE BY DREYFUS CORPORATION
We are pleased to provide you with this report on Dreyfus Variable Investment
Fund - Growth and Income Portfolio.
Since inception on May 2, 1994, the assets of the Portfolio have grown to $225.9
million as of December 31, 1996. With a mix of different sized companies
included in the Portfolio, the average market capitalization of companies held
in the Portfolio is less than the average of companies in the Standard and
Poor's 500 Composite Stock Price Index.
During the fiscal year, our approach was to mix together some securities for
growth and others for income. We have also included a mix of large
capitalization stocks, mid-capitalization stocks and small capitalization
stocks.
This mix of investments is illustrated by the largest common stock holdings in
the Portfolio. Gannett is a major newspaper company, owning such properties as
the newspaper "USAToday." UGI is a gas utility which also has an important
investment in a propane company. Columbia/HCA Healthcare is the largest hospital
company in the U.S. Merry Land &Investment is an apartment real estate
investment trust. Nabisco Holdings, Cl. A is a major consumer products company.
Viacom, Cl. B and Time Warner are large media companies whose stocks have been
laggards in the market. International Game Technology provides equipment to the
gaming industry worldwide. Computer Sciences provides computer management and
outsourcing to many of the largest corporations in the U.S. and overseas.
OfficeMax is a nationwide office supplies superstore company.
We believe that many of the securities currently held in the Portfolio have not
fully participated in the powerful gains which have been realized in the stock
market in the last few years. These positions contributed to the Portfolio's
slight underperformance of its benchmark index. Some of them fit into the
category of valuable business franchises which, we believe, are somewhat out of
favor because of near-term disappointments.
We use a mixture of convertible securities, real estate investment trusts and
utilities as a means of satisfying the income portion of the Portfolio's joint
objectives of growth and income. Both the utility indexes and the convertible
securities indexes lagged the return on the Standard and Poor's Composite 500
Stock Price Index in 1996, a year in which bond prices lagged behind stock
prices, and therefore also contributed to the Portfolio's slight
underperformance of that index. The Portfolio includes investments in the
convertible securities of Thermo Electron, Airtouch Communications and Home
Depot, among others.
Several long-term positive forces have provided a supportive background for the
financial markets over the last several years. First, the trend of inflation has
remained generally favorable in the last several years. Second, we are in the
early stages of a key demographic shift as the baby boom generation begins to
focus on the need for a permanent program of saving to provide for future
retirement income. Third, U.S. productivity growth in manufacturing has been
favorable and many U.S. companies are quite competitive with their foreign
competitors.
We continue to believe that the period of strongest earnings growth in the U.S.
economy is behind us. Corporate cost cutting is very far advanced in many
companies as are the benefits of refinancing high cost debt. We believe that
strong profit growth may become increasingly scarce over the next year.
We appreciate the willingness of our shareholders to invest in the Growth and
Income Portfolio of Dreyfus Variable Investment Fund. We will endeavor to
realize
"Standard &Poor's 500", "S&P 500(R)" are trademarks of the Standard &Poor's
Corporation and have been licensed for use. The fund is not sponsored,
endorsed, sold or promoted by Standard & Poor's Corporation.
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GROWTH AND INCOME PORTFOLIO (CONT'D)
favorable return for the shareholders commensurate with a reasonable level of
risk. There is likely to be an alternation of periods where the net asset value
of the Portfolio declines and periods when the net asset value rises. Our focus
is on achieving a satisfactory return for the shareholders over a period of
time.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
OBJECTIVE - To provide capital growth by investing in stocks that enhance the
quality of life in America.
NARRATIVE BY DREYFUS CORPORATION
The strong performance of the Dreyfus Socially Responsible Growth Fund can be
attributed to three basic factors: (1) superior stock selection, (2) focus on
several strong sectors, technology, consumer staples, and financials, and (3)
avoidance of lower quality companies with potential earnings disappointments.
The superior stock selection can be seen from a brief overview of several of the
names that led the way for the period including BMC Software, 3Com, Computer
Associates, EMC, Colgate Palmolive, Gillette, CPCInt'l, Citicorp, Greentree
Acceptance Corp., SunAmerica, Bank of Boston, and Allstate. Each of these names
not only outperformed the market but also outperformed their corresponding
sectors. Each of these names exhibited superior earnings revisions during the
previous six months and because of their earnings stability were rewarded by
investors who remained skittish about the strength of the economy.
The sector overweighting decisions contributed nicely to performance as the fund
was weighted heavily in three strong areas. Technology regained investor
attention after a dismal performance in the second quarter as many came to the
conclusion that a slowdown in the capital goods cycle would have a minimal
adverse impact on these companies. We will continue to take some profits in this
area on strength but will remain overweighted as we continue to like the long
term picture for Technology. Consumer Staple stocks continued to attract
interest because of the stability of their earnings although many are beginning
to look pricey. The Financial or Interest-sensitive stocks benefited from a
rebound in the bond market as the Fed decided to leave rates unchanged and
reduce investor anxiety over the prevalence of inflation in this economy. We
remain overweighted in this group as we feel that company specific fundamentals
remain intact along with our belief that the long term direction of interest
rates are lower.
The outlook for the stock market appears mixed to positive. Lower interest
rates, modest economic growth, and continued money flows into mutual funds bode
well for the market. However, somewhat extended valuations, the possibility of
slowing economic growth and tough earnings comparisons for individual companies
give us some concern. We look for 1997 to be a year for much more modest returns
from the equity markets than 1996 or 1995 as a result of overall slowing
economic conditions. The focus will continue to be on the ability of investment
managers to outperform through superior stock selection.
We are confident that the continued application of our disciplined investment
approach and strict adherence of your desires to invest responsibly will lead to
a superior long term result for you, the shareholder. We thank you for your
confidence in us and look forward to serving you well in the future.
DREYFUS STOCK INDEX FUND
OBJECTIVE - To provide investment results that correspond to the price and yield
performance of the S&P 500.
NARRATIVE BY DREYFUS CORPORATION
The objective of the Stock Index Fund is to provide investment results that
correspond to the price and yield performance of publicly traded common stocks
in the aggregate, as represented by the Standard & Poor's 500 Composite Price
Index, better known as the S&P 500.
The manager generally selects stocks for the Fund's portfolio in the order of
their weightings in the S&P 500, beginning with the heaviest weighted stocks.
With respect to the Fund's assets invested in the stocks in the S&P 500, the
percentage of such assets invested in each stock is approximately the same as
the percentage it represents in the S&P 500.
The Fund will attempt to achieve a correlation between the performance of its
portfolio and that of the S&P 500 of at least 0.95, without taking into account
expenses. The Fund's ability to correlate its performance with the S&P 500 may
be affected by, among other things, changes in securities markets, the manner in
which the S&P 500 is calculated by Standard & Poor's Corporation, the timing of
purchases and redemptions, the size of the Fund's portfolio,
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DREYFUS STOCK INDEX FUND (CONT'D)
and the size of cash flow into and out of the Fund. There can be no assurance
that the Fund's investment objective will be achieved and an investment in the
Fund involves risks similar to those of investing in common stocks.
[FIDELITY INVESTMENTS(R) LOGO]
VARIABLE INSURANCE PRODUCTS FUND
EQUITY-INCOME PORTFOLIO
OBJECTIVE - To seek reasonable income by investing primarily in income-producing
equity securities.
AN INTERVIEW WITH STEPHEN PETERSON, PORTFOLIO MANAGER
NOTE TO SHAREHOLDERS: Stephen Peterson began managing the fund on January 6,
1997 and did not manage the fund during the past year.
Q. HOW DID THE FUND PERFORM, STEPHEN?
A. While performing well on an absolute basis, the fund underperformed the
Standard &Poor's 500 Index which returned 22.95% for the 12 months ended
December 31, 1996.
Q. WHY WERE THE FUND'S RETURNS DISAPPOINTING DURING THE PAST SIX MONTHS?
A. There are a couple of reasons. Primarily, though, it's because of the equity
income style of investing that this fund follows. Equity income fund managers
seek to own stocks of quality companies that also have attractive dividend
yields equal to or greater than the market average. Having that sort of
orientation attracts equity income style managers to utility stocks, financial
stocks and cyclical stocks such as automobiles and basic industries. As a group,
the industries I just mentioned - with the exception of financial stocks -
performed well on an absolute basis but underperformed the overall market during
the past year. As in 1995, the strong performance of the overall stock market
was primarily concentrated in technology stocks and larger market-capitalization
stocks such as Coca Cola and Gillette.
Q. AND THE FUND DIDN'T HAVE LARGE HOLDINGS IN MANY OF THE OUTPERFORMING STOCKS?
A. Exactly. The past 12 months have not really been a stock picker's market, but
one in which the S&P 500 managed to outperform most actively managed mutual
funds such as this one. Also, the fund had a fairly large weighting in mid-cap
stocks that also underperformed the market average.
Q. WHAT HOLDINGS DID PERFORM WELL?
A. Some of the fund's top holdings performed well. Specifically, General
Electric, IBM and Philip Morris. The fund also was helped by its weighting in
financial stocks such as Aetna, FNMA, Citicorp and American Express. However,
some of the fund's utility stocks and convertible bonds were drags on
performance.
Q. YOU TOOK OVER THE FUND IN EARLY JANUARY 1997. WHAT ARE YOUR PLANS FOR THE
FUND? WHAT CHANGES CAN SHAREHOLDERS EXPECT FROM YOU?
A. As an equity income manager my investment strategy is to look for
better-than-average yielding large-cap stocks with attractive attributes that
will lead to capital appreciation over time. I try to buy stocks that are
currently out-of-favor within this framework, and try to avoid taking large
positions in certain segments of the market, such as mid-cap stocks or
convertible bonds. Once the out-of-favor stocks appreciate, I sell them and buy
other out-of-favor stocks. Mine is a methodical, straight-forward process that
emphasizes individual stock picking more than anything else.
Q. WHAT DO YOU LOOK FOR IN DIVIDEND-YIELDING STOCKS?
A. I usually buy stocks that have dividend yield equal to or above the average
yield of the S&P 500 - currently about 2%. If I own companies with lower yields,
it's because the company has decided to distribute excess capital to
shareholders in other ways such as stock repurchase programs. This is consistent
with my strategy of owning companies that are strong income producers with
higher-than-average dividends, along with stocks of undervalued companies that I
think have the potential to appreciate over time.
Q. DOES THE FUND OWN TURNAROUND STOCKS OR COMPANIES THAT ARE UNDERGOING POSITIVE
CHANGE?
A. Yes. While my goal is to have the fund primarily invested in quality
companies with consistent earnings growth, I would like to own some companies
that
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EQUITY-INCOME PORTFOLIO (CONT'D)
haven't performed well in the market
recently, and therefore may have lower valuations and better opportunity for
capital appreciation. It's an approach I've used in the past with some other
funds I've managed and it's worked well.
Q. WHAT'S YOUR OUTLOOK FOR THE MONTHS AHEAD?
A. I don't sense that there's been any significant change in the mood of the
market - it still favors consistent earnings growth. Since the market continues
to reward stocks of large-cap, consistent earnings companies, it's quite
difficult to outperform the general market, especially with the equity income
style of investing. However, as everyone knows, the economic recovery has been
underway since 1991 - historically, quite a long period of time for a strong
economy without an interruption or correction. Therefore, I'm trying to
structure the fund so it can perform relatively well when and if the market
changes course. While I think the outlook for this fund remains good, investors
should be cautious after two years of more than 20% returns from the overall
market.
GROWTH PORTFOLIO
OBJECTIVE - Seeks to achieve capital appreciation.
AN INTERVIEW WITH JENNIFER UHRIG, PORTFOLIO MANAGER
NOTE TO SHAREHOLDERS: Jennifer Uhrig became Portfolio Manager of VIP: Growth on
January 7, 1997, after the period ended.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S PERFORMANCE, JENNIFER?
A. During the 12 months that ended December 31, 1996, VIP: Growth significantly
underperformed the Standard &Poor's 500 Index, which returned 22.95% during the
past one year.
Q. WHAT WERE THE CAUSES OF THE FUND'S RELATIVELY POOR PERFORMANCE?
A. There were three reasons for the fund's underperformance, and most of them
came to the fore in the fourth quarter. First, the fund was significantly
underweighted compared to the S&P 500 in financial services and energy stocks.
Financial services was the best-performing group in the stock market in 1996. In
fact, it was the only sector that outperformed the general market. However,
financial services is not what one would typically consider to be a growth area,
and the fund traditionally has not had a strong weighting in this sector.
Second, the fund's cash position was high - over 9% both six months ago and when
the period ended - while the market was very strong throughout. Third and
perhaps most importantly, the fund had twice the index's weighting in retail.
This sector as a whole performed poorly, and some of the fund's retail holdings
blew up, including Sunglass Hut and CompUSA. So those are three key reasons why
the fund lagged its index. It's worth noting, however, that most of the fund's
underperformance came during the fourth quarter of the year.
Q. WHAT TYPE OF IMPACT DID THE FUND'S TECHNOLOGY INVESTMENTS HAVE ON
PERFORMANCE?
A. As it turned out, the technology investments were a negative, relatively
speaking. With about 26% of its holdings in technology, the fund has about twice
the weighting of its index in this market sector. While technology generally
performed well, the sector's strength came from just a few very large
capitalization stocks - including Intel, Microsoft and IBM. The fund did own
these stocks, but was not overweighted in them. In retrospect, larger
investments in these stocks would have helped the fund.
Q. WHAT WAS THE STORY WITH THE FUND'S HEALTH CARE POSITION?
A. Health care was a strong sector, with the drug stocks doing quite well,
particularly in the second half of the year. Unit growth has been better than
expected, and pricing has stabilized. So the earnings momentum across this
sector has been strong. Drug therapy is just a lot cheaper than other types of
therapy, such as hospitalization. Therefore, it is being recommended over
hospital stays - hence the unit growth in prescription medicine. Drug stocks
were also helped by the stock market's concern about the economy. Drug stocks
such as Merck, Pfizer and Bristol-Myers Squibb are the ultimate non-cyclical or
economically defensive investments, meaning that they are not influenced by the
health of the economy. If your health is at risk, you'll spend money on
medicine, whether the economy is strong, weak or in-between.
Q. HOW ABOUT RETAIL?
A. Retailers are early cyclicals - what I call the "front end of the economy."
They typically lead economic
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GROWTH PORTFOLIO (CONT'D)
cycles up and lead economic cycles down. In this respect, they're the other side
of the coin from health care. People who are worried about the economy typically
are not spending as much money on retail goods. I believe investors' concern
about the health on the economy was justified by the relatively lackluster
Christmas season for retail. The fund's overweighting in this sector hurt, and
investments in PETsMART, Staples, Lowes and HFS - as well as Sunglass Hut and
CompUSA that I mentioned earlier - dragged performance down.
Q. YOU MENTIONED FINANCIAL SERVICES STOCKS AS LEADING PERFORMERS DURING THE
PERIOD? WHY DID THEY SHINE?
A. There were two reasons. First, interest rates went down; that usually helps
this sector. Second, financial stocks had valuations that were low when compared
to the rest of the market - about 12 times earnings, even after a strong run-up,
versus over 17 times earnings for the general market. Fannie Mae - the Federal
National Mortgage Association - and Citicorp were two of the fund's larger
financial services holdings.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF THE YEAR, JENNIFER?
A. A lot depends on how well the economy does, and chances are it will be slower
in 1997 than it was in 1996. I believe consumers are somewhat over-extended on
their borrowing, and that's an environment that typically doesn't bode well for
economic growth. Another argument for a slowdown in the economy also can be made
based is that we're five years into recovery, which is a long time without a
breather. I don't know if there will be a recession, but I can't really see the
economy taking off a whole lot from the level it's at today. The good news is
that growth stocks - because they tend to be less influenced by general cycles -
can still do well if things slow down.
HIGH INCOME PORTFOLIO
OBJECTIVE - Seeks to obtain a high level of current income by investing
primarily in high risk, lower-rated, high-yielding, fixed income securities,
while also considering growth of capital.
AN INTERVIEW WITH BARRY COFFMAN,
PORTFOLIO MANAGER
Q. HOW DID THE FUND PERFORM, BARRY?
A. Last year was a good year for the high-yield market and the fund's
performance reflects that. The fund performed well and outperformed its
benchmark, the Merrill Lynch High Yield Master Index, which had a total return
of 11.06% for the 12 months ending December 31, 1996.
Q. WHY DID THE FUND BEAT THE BENCHMARK?
A. Credit spreads - which measure the difference in yields between bonds of
various credit qualities - narrowed during the year, primarily due to the
economy's continued strength and strong demand for high-yield bonds from mutual
funds, pension plans and insurance companies. As spreads narrowed, lower-quality
B-rated securities - which the fund emphasizes - did better than higher-quality
BB-rated securities. The latter are much more sensitive to interest rate changes
than B-rated securities, and went down in value when interest rates rose.
Q. WHICH HOLDINGS WERE AMONG THE FUND'S BEST PERFORMERS DURING THE YEAR?
A. Satellite company PanAmSat, the fund's largest holding, as well as one of its
best performers. The company continued to post strong revenues and cash flows.
In addition, the company announced a merger with a division of GM Hughes, giving
its bonds an added boost. The fund's holdings in Harcor Energy, Inc. also
performed well thanks to rising energy prices, its drilling successes and the
relatively high coupon the bonds carried. The company also did an equity
offering during the year to help it reduce its debt, which had a very positive
effect on its bond prices.
Q. THE FUND'S STAKE IN STOCKS ISSUED BY HIGH-YIELD COMPANIES (THOSE WITH BELOW
INVESTMENT-GRADE CREDIT RATINGS) ROSE DURING THE YEAR. HOW DID THE FUND'S EQUITY
HOLDINGS PERFORM?
A. Generally speaking, the fund's holdings in common stocks did well. One worth
particular note was the stock of Flores &Rucks - another energy company - which
more than tripled in price during the year. The fund also owned the high-yield
debt issued by the company, which also performed relatively well. Another strong
equity performer was Host Marriott. The full-service hotel industry had a
tremendous year, benefiting from rising occupancy rates and the lack of any new
supply in most major markets. The fund's debt holdings issued by Host Marriott
also performed well.
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HIGH INCOME PORTFOLIO (CONT'D)
Q. EVEN THOUGH THE HIGH-YIELD MARKET HAD A GOOD YEAR, THERE MUST OF
BEEN SOME DISAPPOINTMENTS.
A. That's true, and two come to mind. First, bonds issued by Marvel
Entertainment - best known for its comic books and trading cards - tumbled when
the company declared bankruptcy. The fund no longer holds these bonds. The
second disappointment was the fund's holdings in wireless cable companies.
Investors had anticipated that the regional Bell operating companies would
partner with these companies to deliver wireless cable services. But when some
of those expected combinations failed to materialize, it sent shock waves
throughout the industry. However, I continued to hold onto People's Choice and
CS Wireless Systems because I felt that their balance sheets were solid enough
to allow them to proceed on rolling out wireless cable services.
Q. AT THE END OF THE PERIOD, 11.69% OF THE FUND'S ASSETS WERE IN CASH OR CASH
EQUIVALENTS. WHAT WAS THE RATIONALE FOR THAT?
A. There were several reasons. First, there were rather healthy new cash inflows
coming into the fund at the end of the period. Second, as has been the case
historically there was a relatively low level of news bonds issued in December.
Finally, given current spreads, I was being very selective in adding new
positions to the fund.
Q. WHAT IS YOUR OUTLOOK?
A. It's been a while since the high-yield market has witnessed credit spreads as
narrow as they were at the end of the period. Given that, it's hard for me to be
extremely bullish about the prospects for the high-yield market. However, I
believe that there are still attractive opportunities out there. The economy
looks like it is cooperating now, but given current spread levels and the
increasing likelihood of a slowdown in economic growth in 1997, I'll likely look
to relatively higher-quality companies in more defensive industries, such as
media and telecommunications. In my view, the penalty for being wrong with
riskier situations outweighs the potential rewards. As a result, capital
preservation has become a priority and earning an attractive coupon could look
favorable relative to the returns from other markets.
OVERSEAS PORTFOLIO
OBJECTIVE - To seek long term growth of capital primarily through investments in
foreign securities.
AN INTERVIEW WITH RICHARD MACE, PORTFOLIO MANAGER
Q. RICK, HOW DID THE FUND PERFORM?
A. For the 12-month period that ended December 31, 1996, the fund outperformed
the Morgan Stanley Capital International EAFE Index - which tracks the
performance of stocks in Europe, Australia and the Far East. The index had a
total return of 6.05% for the period.
Q. WHAT WERE SOME OF THE MORE SIGNIFICANT CHANGES YOU MADE TO THE PORTFOLIO OVER
THE COURSE OF THE YEAR?
A. I continued to sell Japanese stocks in order to keep the fund underweighted
in Japan relative to the EAFE Index. I've placed the proceeds from these sales
in European cyclical stocks - which tend to benefit from a strong economy. This
strategy has been effective in moving the fund into undervalued European
equities that I believe have appealing risk/reward characteristics. It also has
limited the fund's exposure to the negative effects of the weak Japanese yen and
the underperforming Japanese stock market.
Q. DOES THIS MEAN YOU HAVE A NEGATIVE VIEW ON JAPAN?
A. Not at all. In fact, I solidified the fund's position in what I consider my
value holdings in Japan. These are companies that I believe will benefit from
the weak yen, the recent Japanese economic revival, world economic growth and
solid management intent on raising the value of their businesses. I only invest
with conviction, and I believed in the fund's remaining Japanese holdings. Some
examples included Toyota and Honda, and broad-based export companies such as
Canon.
Q. BASED ON YOUR INVESTMENTS DURING THE PERIOD, YOU SAW OPPORTUNITIES IN
EUROPE . . .
A. Six months ago, I saw great potential in Europe. Stocks were generally
undervalued, there was the potential for economic recovery and some companies
11
<PAGE> 12
OVERSEAS PORTFOLIO (CONT'D)
were taking steps to raise shareholder value. Some stocks have appreciated and
realized their underlying value. Economic growth has come, although not as
uniformly as I would have hoped. Additionally, many more corporate managements
have been proactive in growing the value of their businesses by restructuring
their balance sheets, selling off poor-performing subsidiaries and redeploying
excess cash more efficiently.
Q. WHAT SPECIFIC TYPES OF COMPANIES DID YOU LIKE IN EUROPE?
A. As I said before, I looked for cyclical names - especially in the energy
sector. I believed many European energy stocks' prices did not reflect rising
oil prices and were discounting lower oil prices that never came to pass. Some
energy stocks in the fund were Total, Royal Dutch Petroleum, Shell and British
Petroleum.
Q. MANY OF THE FUND'S CANADIAN HOLDINGS ARE RELATIVELY NEW TO THIS PORTFOLIO.
WHAT WAS THE STORY THERE?
A. Many Canadian oil and gas, natural resources and bank stocks were
attractively valued during the period. Two additions included Canadian Natural
Resources and Inco.
Q. DID YOU HAVE ANY DISAPPOINTMENTS?
A. Yes. One would be the weakness of the Japanese market. I consider another to
be the legal and governmental impediments to recognizing shareholder value in
Europe. For example, it's not yet legal in many European countries for
corporations to buy back stock, even though many corporate managements seek to
do so. I also continue to be disappointed by the problems that arise from
partial government ownership of companies. Take the case of Eramet, which is one
of the fund's French holdings. It's been reported in the media that the French
government, a partial owner of Eramet, is pressuring the company's management to
sell a nickel mine it owns in the colony of New Caledonia. The government has
denied the report. However, it's also been reported that the government will
take steps to oust the management if they choose not to comply. I think it's
unfortunate that the government is unduly influencing management's
decision-making process.
Q. WHAT'S YOUR OUTLOOK?
A. I'm hopeful that the economic recoveries that have begun in Europe and
Japan will continue. I think the key to a company's stock price will be the
company's shareholder-friendly attitude, reflected in stock buybacks or a
proactive management. Therefore, I will try to position the fund in companies
that could benefit from economic growth and that are focused on providing
returns for shareholders.
VARIABLE INSURANCE PRODUCTS FUND II
ASSET MANAGER PORTFOLIO
OBJECTIVE - To seek high total return with reduced risk over the long-term by
allocating its assets among stocks, bonds and short-term fixed income
securities.
AN INTERVIEW WITH RICHARD HABERMANN, PORTFOLIO MANAGER, AS WELL AS GEORGE
VANDERHEIDEN AND MICHAEL GRAY, SUB-MANAGERS FOR STOCKS AND BONDS, RESPECTIVELY
Q. HOW DID THE FUND PERFORM, DICK?
A. The fund continued to lag the stock market somewhat during the period. That's
not altogether surprising, however, since the fund invests in both stocks and
bonds, and stocks markedly outperformed bonds over the past year. The Standard
&Poor's 500 Index had a total return of 22.95% for the 12 months that ended
December 31, 1996. The fund benefited most from the performance of its equity
investments, and performed in line with other flexible portfolios and with our
expectations following a repositioning of the fund that we executed earlier in
the year.
Q. CAN YOU ELABORATE ON THIS REPOSITIONING?
A. On the bond side, we focused on investment-grade, dollar-denominated
securities, bringing the bond portfolio's duration - its sensitivity to changes
in interest rates - in line with the bond market average as represented by the
Lehman Brothers Aggregate Index. Our stock selection emphasized
large-capitalization stocks whose dividend yields were slightly higher than that
of the market. Fortunately, these kinds of stocks provided very strong
performance in 1996.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD COMPARED TO SIX MONTHS
AGO?
A. We aimed to bring the fund in line with the new neutral mix we have developed
for the fund. As a result, the fund had about 47% in stocks, 32% in bonds and
21% in short-term money-market securities.
12
<PAGE> 13
ASSET MANAGER PORTFOLIO (CONT'D)
Q. WHAT HAS YOUR ASSET ALLOCATION STRATEGY BEEN OVER THE PAST SIX MONTHS?
A. We've kept the stock weighting fairly steady over that period. As I said,
stocks performed very well. Stock prices rebounded starting in July, after it
became evident that some negative corporate earnings reports were not indicative
of the state of the overall market. A benign economic and interest rate
environment helped stocks maintain their momentum through the last three months
of the year. Federal Reserve Board Chairman Alan Greenspan's comments about the
market's exuberance caused some short-term volatility in December, but the stock
market rebounded fairly quickly. There were times when we added to the
fixed-income component, buying bonds when they became undervalued during periods
of market duress. Periodically, economic data that some feared signaled impeding
inflation shook the market. Inflation is a negative influence on bond investing
because it erodes the value of a bond's fixed payments. We added to the fund's
position in investment-grade bonds when their prices fell and their yields rose
in response to the economic data, enabling us to lock in higher yields on our
new fixed-income investments. When yields subsequently fell, the value of the
fixed-income investments we purchased earlier increased.
Q. HOW DID THIS FIT IN WITH THE WEIGHTING IN BONDS?
A. We reduced the fund's bond investments in order to take profits. In addition,
the market's fears concerns about inflation, a rekindling economy and potential
short-term rate increase have resurfaced, so it made sense to modestly decrease
investments in bonds.
Q. TURNING TO YOU, GEORGE, WHAT STOCK-PICKING STRATEGIES HAVE YOU PURSUED?
A. I've sought to minimize the risk in the stock holdings because I
considered stock market valuations to be high on a historical basis. As a
result, I've pursued two strategies - growth at a reasonable price and vulture
investing. I have always felt the most prudent way to buy growth stocks is to
get as much total return, meaning stock appreciation plus dividend yield, for as
small a price as possible. The price you pay for a growth stock is reflected in
its price-to-earnings ratio, or how much times earnings the market thinks that
stock is worth. To give an example, both Philip Morris and Coca-Cola are growth
stocks with each having grown its earnings per share at an 18% growth rate over
the past 10 years. Assuming they can sustain similar growth rates in the future,
Philip Morris would have a higher total return because its dividend yield is 5%,
whereas Coke's is 1%. But look at what the market was paying for each stock's
total return. At the end of September, Coke was at around $51 and the consensus
estimate for its earnings per share was $1.40 for 1996, thereby producing a
price-to-earnings ratio of 36 times. Philip Morris, on the other hand, was about
$90 with a consensus earnings-per-share estimate of $7.70 for 1996, thereby
producing a price-to-earnings ratio of 12 times. Litigation concerns have been
dragging down Philip Morris' ratio, but these worries have been around for 15
years and this was the biggest gap between the two companies' price-to-earnings
ratios. That's why I invested in Philip Morris and not Coca-Cola.
Q. WHAT DO YOU MEAN BY VULTURE INVESTING?
A. Occasionally bad things happen to good stocks. Quality growth stocks may
stumble temporarily due to new product introductions, too much inventory or
manufacturing problems that cause a disappointment in quarterly earnings. If
these are truly temporary occurrences, they can be wonderful opportunities to
buy a stock or sector when prices are down. For example, in January 1996, Intel
stock had dropped from $75 to $50 months before as concerns developed over its
receivables with Packard Bell. Nine months later the stock had increased
substantially. Buying a sector with good long-term fundamentals after it has
suffered a big decline can mitigate risk and enhance the ultimate upside gain.
It does require patience.
Q. MICHAEL, WHERE HAVE YOU FOUND OPPORTUNITIES IN THE BOND PORTFOLIO?
A. I've increased the fund's investments in bonds that offered a yield advantage
over Treasuries - agency issues, mortgage-backed securities and corporate bonds.
Q. WHAT MADE CORPORATE BONDS MORE ATTRACTIVE?
A. As Dick said, they became more attractive earlier in the period. In addition,
for most of the period, the fundamental outlook for corporations was favorable.
This is, business prospects appeared to improve. The best indicator of a
favorable corporate environment has been a strong stock market. This strength
showed that corporations were doing well and that investors were comfortable
with prospects as they drove up stock prices. Part of the optimism was a
function of the eco-
13
<PAGE> 14
ASSET MANAGER PORTFOLIO (CONT'D)
nomic environment, which has been fairly positive. Despite the bond market's
inflation fears in the spring, the economy looked as if it were growing while
inflation remained under control. Moderate growth with low inflation is a good
recipe for corporations. In addition, there was a limited supply of new
corporate issues, along with fairly strong demand. Many investors were looking
for added yield, and there wasn't much to buy in the way of corporate bonds.
This backdrop helped corporate bonds post strong price gains on a relative
basis.
Q. WERE THERE OTHER TYPES OF BONDS THAT WERE ATTRACTIVE TO YOU?
A. I was attracted to Yankee bonds. These are dollar-denominated bonds issued in
the U.S. by foreign banks, governments and corporations. They tend to trade more
cheaply than other bonds with similar credit ratings, and often don't drop in
price as quickly as corporate bonds when bad news affects the issuer.
Q. WHAT KINDS OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
A. When rates rose earlier in the period, I bought mortgage-backed securities
that were selling at a discount. In general, I sought securities that I found to
be less susceptible to changes in interest rates than other choices in the
mortgage-backed sector. Mortgage-backed securities tend not to perform well if
rates go up or down sharply, so I looked for those whose structure by nature
would make them less sensitive to interest rate changes. Those securities tended
to be in 15-year and 30-year mortgages that were selling at a discount.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
A. Twice this year, there has been real excitement in the stock market, in
July and December. Both occasions were related to concerns about earnings. I
think we'll find more risk in the markets. Sometimes people tend to forget that
stocks, most importantly, are stocks of companies. So what we've been trying to
get is a sense of what's going on. There might be a pick-up in the economy to
sustain earnings, but in the short term, earnings disappointments will hit a
stock hard. The stocks and markets that have done poorly are those that haven't
met expectations. If the low-interest, low-inflation environment continues,
earnings will be more crucial. That is, because of lower interest rates, there
will be more of a reaction when earnings don't meet expectations. In addition,
stock prices will be more sensitive to any changes in interest rates. As for
fixed-income, we'll continue to keep on eye on the strength of the economy, and
to look for value in the various sectors of the market.
CONTRAFUND PORTFOLIO
OBJECTIVE - Seeks to achieve capital appreciation.
AN INTERVIEW WITH WILL DANOFF, PORTFOLIO MANAGER
Q. HOW DID THE FUND PERFORM, WILL?
A. The fund slightly underperformed the Standard &Poor's 500 Index, which rose
22.95% during the 12-month period that ended on December 31, 1996.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE DURING THE PERIOD?
A. The market was more difficult to decipher in 1996 than it would appear, and
for a couple of reasons. First, market breadth - meaning the number of stocks
participating in the rally - was only fair, a surprise given the S&P's strong
showing. Larger-capitalization companies led the way, and broader indices -
particularly those reflecting mid-cap and small-cap performance - lagged behind.
For example, the S&P rose almost 23% and the Dow Jones Industrial Index rose
almost 29%, but the Russell 2000, measuring the performance of smaller-cap
companies and the S&P MidCap 400 rose only 16.4% and 19.2%, respectively.
Second, the sectors leading the market changed frequently, a situation we call
market rotation. The technology sector - and particularly semiconductor stocks,
for instance - was borderline schizophrenic, plunging by a third or more in
July's correction after performing poorly during the six months up to that time,
then rising significantly during the second half of 1996. It made for a
challenging time for stock fund portfolio managers.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE SINCE YOUR REPORT TO
SHAREHOLDERS EARLY IN THE SUMMER?
A. The fund's investments in the energy and energy service sector - about 24% of
the fund's holdings on December 31 helped performance considerably. There's been
considerable consolidation in the industry over the past decade, drilling
capacity hasn't increased in years - so prices were high - and new technologies
have reduced drilling costs; that's been a
14
<PAGE> 15
CONTRAFUND PORTFOLIO (CONT'D)
formula for solid earnings growth, and one not lost on investors. The sector
as a whole rose about 45% during the year, and our holdings in Schlumberger,
Halliburton, British Petroleum, Ensco and Unocal, among others, did well since
the last report to you.
Q. YOU SIGNIFICANTLY INCREASED THE FUND'S HOLDINGS IN TECHNOLOGY FROM SIX
MONTHS AGO. HOW DID IT WORK OUT?
A. I boosted the fund's technology holdings substantially since the summer
correction, to over 15% of our investments from about 6% at the end of June.
Intel and IBM, both among the fund's top five holdings, were tremendous
performers; the former almost doubled in price in the second half of the year,
while "Big Blue" jumped about 60%. EMC, a leader in storage systems and another
top 10 holding, also almost doubled in price, with a nice run late in the year.
Q. DESPITE OUTPERFORMING ITS PEER GROUP, THE FUND MUST HAVE SUFFERED SOME
DISAPPOINTMENTS. WHAT DECISIONS DO YOU REGRET?
A. While I reduced the fund's cash position from 15% six months ago to under 10%
at the end of December, not being more fully invested in the stock market
undeniably hurt the fund's performance. Given the market's strong performance, I
estimate the fund's cash position detracted 2% from the fund's showing. A second
decision I regret has to do with the technology sector. While it was the right
call to keep my powder dry during the spring, I regret not moving faster and
more authoritatively in building the fund's technology positions when these
stocks were crushed during the summer correction.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF 1997, WILL?
A. While the current outlook for corporate profitability appears bright, I'm not
willing to bet the ranch on it. On the one hand, I'm keeping the fund positioned
to participate if the market continues its ascent in 1997. On the other hand,
I'll attempt to dampen some of the downside risk should unforeseen events cloud
the otherwise clean economic skies. While stocks could fall meaningfully if
interest rates continue their recent rise, the past year's record-setting mutual
fund inflows slow, or the strong U.S. dollar hurts corporate earnings growth, I
still believe I'll be able to find investment opportunities to benefit the
fund's shareholders.
[NATIONWIDE LOGO]
NATIONWIDE(R) SEPARATE ACCOUNT TRUST
CAPITAL APPRECIATION FUND
OBJECTIVE - To obtain long-term growth.
NARRATIVE BY CHARLES BATH, FUND MANAGER
The Capital Appreciation Fund benefited from the outstanding performance of
Morningstar Group Inc. Morningstar is a specialty dairy company whose
performance was hindered by the poor performance of its commodity milk business.
The company recently sold the underperforming commodity businesses and used the
proceeds to repay debt. The balance sheet is now greatly improved and earnings
growth has accelerated. This is a good example of the type of investment
situation I like to find for the portfolio. Morningstar is a high-quality
specialty dairy company whose performance was masked by a poor performing
commodity business. Once the underperforming division was divested the companies
core profitability became apparent to investors.
Two recent additions to the Capital Appreciation Fund portfolio are Millipore
and Pall. These are two high-quality filtration companies serving a variety of
end markets. One of the attractive features of these two companies is their
record of consistent earnings growth serving the high-growth electronics and
health care markets. As their customers products have become more complex, the
need for high-end filtration systems has increased. These companies are
attractive for shareholders because they serve high-growth markets without the
need to select successful new technologies. These companies serve a broad range
of high technology companies. They can grow without the product obsolescence
risk which is so common in high-growth technology markets.
GOVERNMENT BOND FUND
OBJECTIVE - To provide as high a level of income as is consistent with the
preservation of capital.
NARRATIVE BY WAYNE FRISBEE, FUND MANAGER
During 1996 long-term and intermediate-term interest rates were significantly
higher, reversing some of the decline in rates seen in the prior year. Bonds and
bond funds were a relatively uninspiring investment alternative in this
environment, especially given the
15
<PAGE> 16
GOVERNMENT BOND FUND (CONT'D)
second consecutive year of outstanding equity market performance. The price
of the Government Bond Fund moved lower reflecting the move in the broad bond
market, although this downward move was mitigated by investments in areas of the
bond market that outperformed during the year.
Inflation always drives bond market values in the long-term, with the value of
fixed coupons being eroded by higher levels of inflation. The expected level of
inflation in the future is a key determinant of the direction of bond prices in
the short-term. The actual reported inflation numbers have continued to show
stable or even declining inflation rates in recent months, a positive sign for
the bond markets.
Lower bond prices along with a stable inflation environment has created
additional value in the fixed-income markets. The bond markets should be most
attractive to those investors desiring lower levels of risk and/or higher levels
of income than is available in the equity markets. Government bonds in
particular are often appealing to risk-averse investors still interested in
income.
The Government Bond Fund continues to be invested in sectors of the U.S.
Treasury, government agency, and mortgage-backed markets that are perceived to
be undervalued. Approximately one-third of portfolio assets are invested in the
Collateralized Mortgage Obligation (CMO) market. The yield on these
conservatively-structured investments continues to make them attractive
portfolio holdings. The portfolio also continues to hold several positions in
callable Agency notes. Additional yield compensates the Fund for the risk of the
bonds being redeemed early.
The portfolio manager attempts to add value to the Government Bond Fund by being
invested in sectors of the market that are inexpensive on a relative value
basis, while maintaining market exposure to assure a higher level of income and
to take advantage of potential interest rate declines in the future.
MONEY MARKET FUND
OBJECTIVE - To seek as high a level of current income as is considered
consistent with the preservation of capital and liquidity by investing primarily
in money market instruments.
NARRATIVE BY KAREN MADER, FUND MANAGER
For the last seven sessions the Federal Open Market Committee has left the
Federal Funds rate unchanged. The last time the Federal Reserve changed the
direction of the interest rates was in January 1996 when they lowered the
Federal Funds rate to its current rate of 5.25% from 5.50%. Economic indicators
throughout 1996 suggested that the economy was growing at a modest rate with low
inflationary pressures.
Economists offered a mixed forecast for 1997. Week to week, economic indicators
continue to paint an obscure picture as to the exact state of the economy.
At December 31, 1996, the Separate Account Money Market fund had assets of $984
million with an average maturity of 38 days. 92% of the Fund was invested in
first tier commercial paper. Commercial paper continues to have a yield
advantage over other money market instruments. The remaining 8% was invested in
U.S. Government and Canadian Obligations.
The Fund continues to invest in only the highest rated money market instruments.
An internal credit review is completed on every issuer before investment.
SMALL COMPANY FUND
OBJECTIVE - To seek long-term growth of capital by investing in equity
securities of small-capitalization companies
NARRATIVE BY NATIONWIDE ADVISORY SERVICES, INC.
1996 was a year that can be divided into two main segments from the point of
view of small capitalization stocks. Through May 24, the Russell 2000 Index
advanced 16%, solidly outperformed large cap indexes such as the S&P 500 and the
Dow Jones and S&P 500, meanwhile, each gained more than 10% from their May
highs.
The Small Company Fund's performance showed similar trends to that of the
Russell 2000. Through May the Fund showed tremendous gains, outpacing the
Russell index as well as the large cap market measures. Energy stocks led the
way, as companies such as FLORES & RUCKS and NABHORS INDUSTRIES took advantage
of strong gas prices to boost business results.
Gains were much harder to come by during the second half of the year, however.
International markets were disappointing, with small cap stocks not
participating in the general market gains in many European
16
<PAGE> 17
SMALL COMPANY FUND (CONT'D)
countries. After the midsummer decline, gains in U.S. holdings were
achieved in selected sectors. Oil stocks continued to do well. Companies taking
advantage of business outsourcing trends also were an important part of the
Small Company Fund portfolio. An example is TELETECH HOLDINGS, a company which
provides call centers and customer care solutions for Fortune 1000 companies.
For the year, the Small Company Fund outperformed the Russell 2000 Index. The
Fund's Portfolio Managers continue to see attractive earnings growth and
profitable investment opportunities in the small cap sector.
As of December 31, 1996, the Fund had 69.9% of net assets invested in domestic
stocks, 15.6% in international stocks, and 14.5% in cash and short-term
securities. The market sectors most heavily weighted among Fund investments were
Oil &Gas/Energy, Financial Services and Healthcare.
TOTAL RETURN FUND
OBJECTIVE - To obtain a reasonable long-term total return (i.e., earnings growth
plus potential dividend yield) on invested capital from a flexible combination
of current return and capital gains through investments in common stocks,
convertible issues, money market instruments and bonds with a primary emphasis
on common stocks.
NARRATIVE BY JOHN M. SCHAFFNER, FUND MANAGER
The Total Return Fund's performance in 1996 was positively influenced by
several sectors. The technology stocks it holds, such as IBM and
Hewlett-Packard had strong gains. Financial stocks, including all the brokerage
stocks, Mellon Bank, and Allstate Insurance also had good appreciation. The
drug stocks, particularly Warner-Lambert also had good gains, as did several
chemical companies, including DuPont, Monsanto, Air Products and Crompton
&Knowles. On the negative side, AT&T had very poor performance, with Sprint not
a great deal better. MCICorp. was also having a poor year until the announced
merger with British Telecom increased it to a more respectable result. The Fund
currently has about an 8% weighting in these long distance stocks, and although
we still think they are well positioned long term, and undervalued, fear of
increased competition, plus poor reported results for AT&T led to a significant
drag on Fund performance this year. Several other stocks in which we have
significant positions, such as Equitable, Comcast, and PepsiCo, all of which we
do like long-term, had either small losses or minuscule gains versus a very
strong market this year, also inhibiting Fund results.
The Total Return Fund's strategy has always included a strong element of value.
For most of 1995, and all of 1996, this type of strategy has been out of favor
in the stock market. Momentum and indexing strategies have led to stocks with
relatively high valuations performing well by going to even higher valuations.
History, and numerous studies have repeatedly shown that investing in highly
valued stocks is a risky and poor-performing long term strategy. Therefore, the
Total Return Fund has stuck to its approach, and will continue to do so. This
approach, especially in the recent environment of high relative valuations, has
included more of buying stocks we like long-term, on news that disappoints short
term investors. PepsiCo, Comcast and Olsten are examples of this, plus the more
recent addition of Electronic Data Systems. We have also continued to add to our
energy stocks, not because of disappointment but because of good long term
fundamentals combined with still-attractive valuations.
While I would certainly like to see better performance from the Fund versus its
peers and the market indexes, I believe this will come from continuing our
current strategies, which are sound, and by continuing to pursue the Fund's
objectives by taking on less risk, rather than more.
[NEUBERGER & BERMAN LOGO]
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
GROWTH PORTFOLIO
OBJECTIVE - The Portfolio seeks capital growth through investments in common
stocks of companies that the investment adviser believes will have above average
potential for long-term capital appreciation.
NARRATIVE BY MARK GOLDSTEIN, PORTFOLIO MANAGER
During 1996 three of our best performing sectors were financial services,
technology and restaurants. One of the best performers was CKE Restaurants,
which was taken over by new management about a year and a half ago. CKE's
earnings have outperformed the esti-
17
<PAGE> 18
GROWTH PORTFOLIO (CONT'D)
mates as a result of a good advertising campaign, updated menu selections and
remodeling many of their restaurants.
The technology sector provided some winners during the year. In particular,
Intel provided a large contribution to the fund in the third quarter. Its
success can be partly attributed to continued demand by end-users in combination
with lower prices. The second largest position in this industry at year end was
KLA, a company that makes test equipment for semiconductor companies. KLA's
earnings held up well during the year. Seagate, a disc drive company, also
helped the Portfolio. Seagate was able to reduce costs, and benefit from
continued end-user demand.
In the third quarter, the Portfolio seized an opportunity to purchase Philip
Morris at a low relative valuation after a federal court decertified a class
action suit brought by smokers seeking damages. This case sets a precedent in
the industry and may influence future class-action suits.
In the consumer/retail sector, we added Staples to our portfolio. Staples is a
leading factor in the office superstore segment. We believe that the pending
merger with Office Depot will create significant cost savings, which we believe
should enhance earnings growth over the next two years.
Two lagging sectors during the year were Communications and Healthcare. These
two sectors comprised about 8%-10% of the portfolio during most of the year.
Cable stocks went through their lowest valuations in 1996 due to worries about
competition from the satellite industry. As a result, the Portfolio reduced its
positions in TCI and sold out of TimeWarner. One exception is UKCable, a
telephone, cable and Internet company based in the United Kingdom. They recently
consolidated with Comcast, forming Comcast UK Cable Partners Ltd., which should
help the company's valuations. We believe this stock should experience 40%-50%
growth over the next two years.
The Portfolio increased its exposure to HMO's during the year. Overall, this
industry did not contribute positively to the Portfolio during the year.
Exceptions were PacifiCare, a Medicare HMO, and United Healthcare, a
conventional HMO. Both of these positions were increased during the period and
have experienced an upswing since June 30. While enrollment in HMOs continues to
rise, their challenge will be to manage rising costs in a flat premium
environment.
LIMITED MATURITY BOND PORTFOLIO
OBJECTIVE - To provide the highest level of total return, consistent with
preservation of capital.
NARRATIVE BY TED GIULIANO, PORTFOLIO MANAGER
1996 ended on an upbeat note for the bond market and the AMT Limited Maturity
Bond Portfolio as yields across the curve fell during the last four months of
the year. Yields that we focus on, in the 1- to 5-year part of the curve, ended
the year higher than at the start of the year. In between, however, the bond
market was on a roller coaster ride with interest rates falling early in the
period, then rising very rapidly, and finally reversing its course once again
for the final rally. The management of our weighted average portfolio duration
("duration" is a measure of a portfolio's exposure to interest rate risk) during
this period of volatility remained consistent with our trend-following style,
and the Portfolio's risk level remained low compared to longer-duration bond
funds. In the early portion of the year our duration was a relatively long 2.9
years on average as we took advantage of the falling rates at the end of 1995
and the beginning of 1996. When the trend reversed in February and March as a
result of signs of increased economic growth, higher inflation expectations and
comments by Fed Chairman Alan Greenspan, we shortened duration several times to
2.3 years in June. By September, the market had overreacted to the economic
signals and, from a technical and fundamental standpoint, appeared undervalued.
We then lengthened the Portfolio to just over 2.5 years in duration. Yields fell
from this point through the end of the year which benefited the Portfolio due to
the longer duration.
Corporate bonds remained the largest sector in the Portfolio as we continue to
find value through our bottom-up bond selection process (looking at individual
bonds rather than average sector prices) despite a generally expensive corporate
market. The below investment grade segment of our holdings outperformed all
other sectors due to the healthy market conditions in high yield as well as
excellent individual security selection. Our research staff identified several
bonds during the period which were underpriced relative to their credit
fundamentals and which we added to the Portfolio. These included Tenet
Healthcare, a leading hospital firm, which was placed on watch for potential
upgrade by both S&P and Moody's. This caused the market to price these bonds at
a tighter spread to treasuries resulting in significant outperformance versus
the market. This segment of the portfolio ended the year at about 8% of the
overall Fund. Investment grade bonds also performed well.
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LIMITED MATURITY BOND PORTFOLIO (CONT'D)
Restructuring at firms such as Tenneco Inc. and Alco Capital Resource, Inc.
resulted in higher bond prices relative to comparable duration Treasuries.
Investments in mortgage-backed and asset-backed securities accounted for the
majority of the remainder of the portfolio. The asset-backed securities
accounted for the majority of the remainder of the portfolio. The asset-backed
securities are all rated `AAA' and are backed by pools of credit card
receivables, auto loans and leases, or equipment loans. While the increase in
consumer delinquencies on credit cards has received a lot of media attention,
the asset-backed securities in our Portfolio are of the highest quality. The
bonds in our Portfolio have outperformed comparable duration treasury securities
as the collateral backing of these securities performed well throughout the
second half of the year within the bond market's and the ratings agencies'
expectations. In addition, our commitment to 15-year and 7-year Agency Pass
Through Mortgages added to the funds' return.
PARTNERS PORTFOLIO
OBJECTIVE - The Portfolio seeks capital growth through an investment approach
that is designed to increase capital with reasonable risk.
NARRATIVE BY MICHAEL KASSEN & ROBERT GENDELMAN, PORTFOLIO CO-MANAGERS
The financial sectors made a positive contribution to the Portfolio in 1996.
Specifically, we are positive about CITICORP. Many financial companies,
including CITICORP, have instituted stock buyback programs which bodes well for
valuations. In addition, the banking industry should benefit from strength in
emerging markets and global relationships.
During 1996, the Portfolio was underweighted in the energy and technology
sectors relative to the S&P "500." This hindered and helped the Portfolio
respectively. The Portfolio continued to add selectively to its technology
positions throughout the year. Two examples are Komag and KLA. We believed that
some of these technology positions had long-term potential based on consumer
demand.
In the third quarter, the Portfolio seized an opportunity to purchase Philip
Morris at a long relative valuation after a federal court decertified a class
action suit brought by smokers seeking damages. This case sets a precedent in
the industry and may influence future class-action suits.
A recent edition to the Portfolio was Evergreen Media which operates 34 radio
stations across the nation. Historically, radio has been a positive contributor
because it is a legitimate cash flow business. Only one year out of the last 40
has spending on radio advertising dropped. Radio has become a more investable
business over the last few years, as government regulations have eased regarding
the number of radio stations a single entity can own in any one market. We
believe radio is probably underpriced relative to the number of people you can
reach.
In the retail sector, WalMart is an example of a position that was sold. The
stock is being penalized by Wall Street because it has not continued its 20%-30%
annual growth rate. The P/E multiple should range from 16 to 18. WalMart
recently initiated a small buy back of their stock which should help to
stimulate the price.
La Quinta Inns is a position that is attractive on a value versus cash flow
basis. Its hotels (240 inns in 29 states), popular among business travelers in
the Southwest, have undergone major renovations. La Quinta is completing a stock
repurchase program authorized in 1995 and its board has authorized a second
repurchase campaign of up to $10 million of company stock.
[OPPENHEIMER LOGO]
OPPENHEIMER VARIABLE ACCOUNT FUNDS
OPPENHEIMER BOND FUND
OBJECTIVE - Primarily seeks a high level of current income from investments in
high yield fixed-income securities rated "Baa" or better by Moody's or "BBB" or
better by Standard & Poor's. Secondarily, the Fund seeks capital growth when
consistent with its primary objective of high current income.
NARRATIVE BY DAVID NEGRI, FUND MANAGER
In spite of a somewhat difficult bond market this past year, Oppenheimer Bond
Fund's performance was relatively strong. While rising interest rates hindered
the performance of many other fixed income investments, our performance was
positive. What's more, we continued to provide competitive monthly income over
the period.
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OPPENHEIMER BOND FUND (CONT'D)
The Fund's strong performance can be attributed to two major factors. First, we
maintained a defensive position and kept the portfolio's average maturity
relatively short. Because shorter-maturity bonds are typically less sensitive to
changes in interest rates, we avoided some of the price fluctuations associated
with longer-term investments as interest rates rose throughout the year. This
strategy also enabled the Fund to capture a competitive level of income.
The second factor that contributed to the Fund's positive performance was our
strategic diversification over a variety of bonds. Overall, however,
mortgage-backed securities were the strongest performers in the portfolio. As is
typically the case, when interest rates rise, mortgage prepayment risk decreases
because homeowners are less likely to refinance. In addition to offering less
prepayment risk, mortgage-backed securities also paid very competitive income
during the year and this further benefited the portfolio's performance.
In contrast, as interest rates climbed over the period, our existing holdings of
U.S. Treasury bonds performed relatively poorly. Fortunately, by holding those
bonds with shorter maturities, we were able to limit their negative impact on
portfolio performance.
During the second half of the year, we focused on corporate bonds to capture as
much income as possible. Specifically, we found the greatest potential in bonds
issued by financial services firms and oil- and gas-related businesses. Within
the financial services companies, corporate restructuring and consolidations
have improved profitability and balance sheets, while advanced technology has
strengthened the profits of many companies within the oil and gas industry.
As we move into 1997, we expect to see continued modest economic growth in the
United States, accompanied by low inflation and flat corporate earnings. In an
environment such as this, it does not seem likely that the Federal Reserve will
cut interest rates.
OPPENHEIMER GLOBAL SECURITIES FUND
OBJECTIVE - Seeks capital growth by investing in a diversified portfolio of
foreign and domestic stocks.
NARRATIVE BY WILLIAM WILBY, FUND MANAGER
The Fund performed well over the past year, despite difficulties in the foreign
markets. By combining our theme approach with strong individual stock selection,
we were able to produce solid returns for the year.
Despite on-again, off-again fears of too much or too little growth, the U.S.
market has been the Fund's biggest contributor of positive return this year.
Economic growth overseas has been weak, and most foreign markets lagged the U.S.
despite their lower valuations. We attribute this to the universal focus of
investors on "shareholder friendly" managements which are generally more
numerous in the U.S. As European managements have moved to embrace "shareholder
value", those markets began to perform while the less "shareholder oriented"
managements in Asia lagged.
Our natural resources theme also provided some big winners during this period.
Several years ago, we began to invest in oil service companies in Europe and
North America. These companies, which specialize in deep-water drilling rigs,
had seen a steady decline in day rates to well below replacement cost, while the
demand for offshore drilling facilities increased. In 1996, day rates rose
sharply along with the oil price, which in turn rose because of seasonally low
inventory levels. Meanwhile, demand for oil in emerging economies has continued
to grow unabated.
On the negative side, our Japanese holdings did not perform as expected.
Although we correctly anticipated the economic recovery in Japan, and the
positive impact it would have on corporate earnings, the market did not bounce
back. In fact, it declined.
Going forward, we have recently added to our biotechnology holdings within our
healthcare theme. Prior to the election, biotechnology stocks fell sharply on
fears that a Democratic Congress might reintroduce a Clinton healthcare plan. We
believed those fears were overblown and felt that the long-term fundamentals of
these companies remained excellent. We used the sharp decline to buy into this
sector before the election, and we are continuing to add shares where the
fundamentals are strong.
As the global economic cycle continues to age, and stock valuations move higher,
we have approached 1997 with caution. We believe, however, that the Fund's
portfolio, with substantial investments in high-growth-potential stocks,
continues to offer investors an outstanding opportunity both for diversification
and long-term appreciation potential.
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<PAGE> 21
OPPENHEIMER MULTIPLE STRATEGIES FUND
OBJECTIVE - Seeks a total investment return (including current income and
capital appreciation in the value of its shares) from investments in common
stocks and other equity securities, and "money market" securities. The current
allocation of the Fund's portfolio aims to take advantage of current economic
conditions while managing risk.
NARRATIVE BY RICHARD RUBINSTEIN, FUND MANAGER
This was a very positive year for Oppenheimer Multiple Strategies Fund. We
attribute the portfolio's performance to a solid investment strategy designed to
benefit from a diversified selection of bonds and our ability to take advantage
of the strength of the domestic stock market.
Our bond selection strategy was by far the most notable contributor to the
Fund's performance over the year. Specifically, our high-yield corporate and
foreign bond holdings were the strongest components of the Fund. High yield
bonds benefited from strong corporate earnings and refinancing and foreign bonds
did well due to their higher yields.
There were also several interesting opportunities in emerging markets,
particularly Argentina and Brazil. However, because foreign investments carry
additional risks such as currency and political uncertainties, we tend to prefer
Brady bonds, which are foreign securities that are partially backed by U.S.
government bonds. By owning Brady bonds, we were able to capitalize on
opportunities within emerging markets while reducing our currency risk.
Within our domestic equity holdings, technology, financial services and
healthcare were the strongest performing sectors. Technology stocks were
successful due to the development of efficiency-enhancing products, such as
software programs and other applied technologies. Demand for these innovations
has been strong, largely because they can help lower costs for businesses, while
also improving their quality of service. One of the chief beneficiaries of these
programs is the banking industry. Electronic banking and automated teller
machines have greatly reduced the costs of delivering services. And fortunately,
many banks have spent their increased cash flows wisely, by raising dividends
and instituting stock buybacks.
Healthcare companies benefited during the period from renewed faith in the
industry. Four years ago, with the advent of the Clinton administration, the
industry was clouded with concerns about rising healthcare costs. We took
advantage of some low-priced healthcare companies at that time, and those
companies have since regained their stature.
Even though the Fund's international equity holdings contributed less to the
portfolio's total return than did its U.S. equity component, our broad
international investments added to the Fund's diversification. In addition,
we've been able to locate some very good foreign stocks that were reasonably
priced. Some of our recent additions include a large hotel chain and an English
language newspaper in Hong Kong. We also purchased some energy companies in
Canada because international energy companies are currently more appealing to us
than their domestic counterparts.
Going forward, our performance will depend primarily on the stocks we choose for
the portfolio. While many U.S. stocks currently appear overvalued, there are
still growing companies that remain at reasonable price levels. So, despite a
highly valued stock market, our long-term outlook is positive. We believe the
Fund is diversified enough to weather any unforeseen economic changes with the
opportunity for solid returns and reduced risk.
[STRONG LOGO]
STRONG DISCOVERY FUND II
OBJECTIVE - To seek maximum capital appreciation through investments in a
diversified portfolio of securities.
NARRATIVE BY RICHARD STRONG AND CHARLES A. PAQUELET, FUND CO-MANAGER S
In managing the Strong Discovery Fund II, we strive to provide our investors
with long-term capital growth.
We pursue our goal by investing primarily in the stocks for well-managed, small-
and mid-cap growth companies, with a core commitment to larger, established
companies to provide stability and diversification.
Our investment approach combines number-crunching research with on-site visits
to the companies in which we invest. Through frequent discussions with
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STRONG DISCOVERY FUND II (CONT'D)
management, suppliers, customers and competitors, we believe we can identify
vital aspects of companies that aren't reflected in historical financial
statements.
A DIFFICULT FIRST HALF OF 1996 FOR THE FUND...
The Fund's charter gives us the flexibility to allocate assets away from stocks
when we believe it is appropriate. Historically, when it appears the market has
gotten ahead of itself, we've taken defensive positions to help protect capital.
Early 1996 was one of those times.
The year began with investors having enjoyed one of the better markets on
record. However, signs of economic weakness led us to anticipate a downturn in
economic activity that would put corporate profits and the stock market at risk.
Therefore, we decided to reduce the portfolio's commitment to stocks and invest
the proceeds in U.S. Treasury bonds.
But as the first half of the year unfolded, a sharp rebound in economic growth
fueled higher stock prices. Our decision to conservatively position the Fund
prevented it from fully participating in the market's strong advances early in
the year. In addition, interest rates rose as the economy recovered, which
negatively impacted the Fund's bond holdings.
By March, we realized that our cautious stance was incorrect, and we began to
reallocate the bond investments back into stocks. While the decision to return
the portfolio to a normal position emphasizing stocks was sound, the timing was
poor. In June and July, the market corrected sharply, impacting our area of
emphasis - small and mid-cap growth stocks significantly. This sequence of
events caused the Fund to under-perform the stock market and its peer group
during the first half of 1996.
...A RETURN TO FORM IN LATTER PART OF THE YEAR
During the last five months of the year, the major stock indexes moved higher as
corporate profits continued growing and inflation remained low, enabling the
stock market to anticipate lower interest rates. However, the market's advance
later in the year was concentrated in the stocks of large companies.
While the Discovery Fund II's "bread and butter" is smaller firms, the portfolio
nevertheless performed well from August through the end of the year topping the
performance of our Lipper peer group (12.59%) and enabling us to end the year in
positive territory.
FOCUSING ON WHAT WE DO BEST
To a large extent, the Fund's improved performance during the latter stages of
the year was due to our focusing on what we do best. Our true strength has
always been identifying companies that are just starting to blossom and its
typically been our adeptness at identifying good growers that has generated our
greatest success over the years. To that end, we re-evaluated the portfolio from
top to bottom to emphasize these strengths.
- - BRICK-BY-BRICK RECOVERY PROGRAM. While we were disappointed by the Fund's
first half performance, we avoided the temptation to make big bets in an
effort to quickly catch up with the market. Rather, we chose to rely on our
time-tested stock picking abilities to gradually close the gap.
- - FACE-TO-FACE EVALUATION. We spent 2-3 days a week visiting companies,
appraising management and generally "kicking the tires." Just since August,
we have met with the management of over 150 companies.
- - DIVERSIFY, BUT STAY FOCUSED ON SMALL AND MEDIUM-SIZE GROWTH COMPANIES. As
mentioned previously, small companies are where we usually find the
attributes we prize. To help ensure that we invest in these companies in a
disciplined way, we modified the portfolio mix: one third in companies with a
market capitalization less than $1 billion, one third committed to companies
between $1-3 billion, and the final third invested in larger firms. (By
comparison, the average market cap of companies in the S&P 500 is over $20
billion.)
- - WELCOMED CHARLES "CHIP" PAQUELET. In August, Chip Paquelet was named
portfolio co-manager of the Fund. Chip, whom I've worked with for more than
eight years, managed the Strong Small Cap Fund from its inception on December
31, 1995 through August of 1996. His proven ability to identify attractive
growth companies should be a great asset.
Having thoroughly gone through the Fund's holdings, we believe it is
well-positioned to pursue its long-term growth goal.
WE SEE MANY OPPORTUNITIES AHEAD
Currently, we like the environment for U.S. stocks. The economy appears strong
enough to support attractive growth in corporate profits, but not so strong as
to trigger inflation and higher interest rates. In addition, valuations should
benefit as baby boomers ratchet up their savings for retirement.
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STRONG DISCOVERY FUND II (CONT'D)
Large cap stock prices largely reflect this positive environment. But we
believe the stocks of small and mid-size companies - our area of emphasis -
still have room for strong gains. In fact, we've not had a problem finding
attractively priced stocks with exciting growth prospects.
For instance, we estimate the average annual growth rate of the companies in the
portfolio at 24% - more than twice that of the companies in the S&P 500 Index.
Over time, we believe this superior growth should enable the Fund's performance
to return to the strong relative and absolute level that existed prior to 1996.
Your continued confidence is appreciated as we work to accomplish this.
STRONG INTERNATIONAL STOCK FUND II
OBJECTIVE - To seek capital growth. The Fund invests primarily in the equity
securities of issuers located outside the United States.
NARRATIVE BY ANTHONY L.T. CRAGG, FUND MANAGER
By investing primarily in the stocks based outside the United States, the Strong
International Stock Fund II pursues capital growth. The Fund provides convenient
access to growth opportunities worldwide that, when compared to a U.S.-only
portfolio, may increase return potential.
INTERNATIONAL STOCKS END HIGHER
On the whole, 1996 was a decent year for international stocks. The Fund finished
the year with a return of 10.38%, which compared favorably with international
stocks in general, as measured by the MSCI EAFE(TM) Index's 6.05% return for the
same period.
This overall performance masks a somewhat difficult year for international
investors, however. During the first six months of the year, foreign stock
markets sustained a broad rally, particularly in Asia. The Fund's substantial
weighting in Asia contributed to a gain of 13.46% for the period, compared to a
gain of 4.52% for the MSCI EAFE(TM) Index.
But from June through October, many international stock markets began to falter.
Asia was particularly hard hit, primarily due to political worries in Thailand
and Indonesia, and a cooling off of earnings and exports throughout the Pacific
Rim.
WE STAYED TRUE TO OUR STRATEGY
As you may be aware, we tend to use a "bottom-up" approach to stock investing.
While global economic climates certainly play a part in our selection process,
we place more emphasis on the strength and potential of individual companies
than on the temporary environment of the countries in which we invest. This
approach occasionally puts us at variance with conventional thinking, but it
also helps us find attractive opportunities in places that others may overlook.
Our bottom-up approach played a large part in our strategy during the year. By
and large, we did little to change our regional portfolio commitments, other
than trim our Japanese holdings, which we believed had become fully valued.
- - PACIFIC RIM - Throughout the fiscal year, we maintained a significant
exposure to Pacific Rim countries. As stated earlier, these markets helped
the Fund outperform the benchmark during the first half of the fiscal year,
and hindered its performance during the second half. Concerns about these
markets arose when their annual growth rates declined from 8%-9% to
approximately 6%.
We believe the downdraft in Asian markets will be short-lived, however...6%
annual growth is still very attractive compared to America's projected growth
rate of 3% annually, and less in Europe. Moreover, valuations in these
markets have become even more attractive, and we intend to maintain a large
weighting in the region.
- - EUROPE - While Europe certainly doesn't appear to have the growth potential
of the Pacific Rim, many of the portfolio's best performers were in Europe -
an illustration of our "bottom-up" approach in action. Such stocks held
during the year included Tomra, a Norway-based firm that manufacturers
recycling machines for use by the public, and Simint, an Italian franchiser
for Armani.
- - LATIN AMERICA - We continue to underweight Mexico and some of the emerging
markets in Latin America. While a few of these markets performed well during
the fiscal year, we believe opportunities elsewhere remain just as attractive
and less potentially volatile.
In our selections, we tended to emphasize small and mid-sized companies. We
favor these companies because they tend to be very good at their particular
business, which gives them outstanding growth poten-
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STRONG INTERNATIONAL STOCK FUND II (CONT'D)
tial. In addition, they are a less obvious way to play larger themes. For
example, we hold a pair of smaller Australian oil companies that we believe will
benefit from the recent increase in oil prices. But they are relatively obscure,
we have an opportunity to buy them for less than a more widely-followed company.
Thus, our research can help add value to the portfolio.
OPPORTUNITIES REMAIN IN GLOBAL MARKETS
Foreign stock markets as a whole have underperformed the U.S. market for nearly
two years. So a sense of impatience on the part of U.S. investors is
understandable. However, investors must remember that patience is a key
ingredient for success when investing in foreign markets. We don't know when
they may begin to outperform domestic markets, but we do know that there are
outstanding values now available internationally. We believe this is
particularly true for small and mid-cap stocks. Going forward, we intend to use
our research and stock selection abilities to take advantage of inefficiencies
in these markets.
In addition, the reasons that make international investing so compelling for
long-term investors remain in place:
- - With the U.S. market at an all-time high, we believe investors both here and
abroad may be prompted to look elsewhere for greater potential, which should
help drive international stock prices higher.
- - Many of these markets continue to grow more than twice as fast as mature
markets.
- - Investors have the potential to increase returns and lower overall portfolio
volatility by diversifying a U.S. - only stock portfolio internationally.
As always, keep in mind that the Fund is likely to be more volatile than a
U.S.-only fund, owing to changes in stock market conditions, currency values,
interest rates, local regulations and economic and political conditions. But
given the value currently available in international markets, we believe foreign
equities offer long-term investors an attractive opportunity.
STRONG SPECIAL FUND II, INC.
OBJECTIVE - To seek capital appreciation through investments in a diversified
portfolio of equity securities.
NARRATIVE BY RICHARD WEISS & MARINA CARLSON, FUND MANAGERS
In pursuit of capital growth, the Strong Special Fund II, Inc. invests at least
70% of its total assets in equity securities. It currently emphasizes
medium-sized companies that the Fund's advisor believes are under-researched and
attractively valued.
STOCKS CLIMBED, BUT NOT SMOOTHLY
For the year, the market proved to be stronger than we expected. The broad-based
S&P 500 Index returned 22.95% for the year. There were plenty of peaks and
troughs on the way to that number, though. Small and mid-size stocks were
powerful in the first several months of the year, then suffered around the
middle of the year. They regained some of their footing, but ultimately
large-capitalization stocks beat them for the year. Thus, the S&P MidCap 400
Stock Index's 19.20% gain trailed the broader S&P 500 Stock Index.
Our returns for the year were 18.5%. That's a robust figure, but it is a little
below the returns of our benchmark, the S&P MidCap 400. This slight difference
is not entirely surprising. The market has been entirely focused on earnings,
with no regard to valuation, to which we pay close attention. Therefore,
high-priced, momentum-driven stocks continued to move up as long as they
delivered a certain level of earnings.
We positioned the fund somewhat defensively around the beginning of the second
quarter. This kept the Fund from fully realizing the gains that many
higher-priced growth stocks posted early in that quarter. It also protected the
portfolio from the sharp declines that hit small- and medium-size stocks in the
summer. The market rallied strongly in the second half of the year, but that
rally got narrower as time progressed. The focus increasingly fell on momentum
stocks - stocks that, for various reasons, attract intense investor interest.
MANY FACTORS CONTRIBUTED TO ROBUST RETURNS
The Fund benefited from more than our defensive stance at mid-year. Late in the
summer we began to identify many solid opportunities, particularly in two
sectors. After an early-summer downturn, technology began to recover, and rising
natural-resource prices helped to strengthen energy stocks.
We've also been able to take profits in some areas. For example, over the course
of the year we slowly reduced our sizable position in retail - an industry we
consider one of our specialties. We had purchased these stocks based on our
perception that the market
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STRONG SPECIAL FUND II, INC. (CONT'D)
was unduly pessimistic about their prospects. Our more optimistic view seems
to have won out - and as the stocks have gone up, we have selectively sold
them off.
APPLYING OUR DISCIPLINE IN TODAY'S MARKET
Both market forces and our stock-selection criteria have made certain parts of
our portfolio especially attractive going into 1997. Our media stocks, for
example, appear to have bottomed out early in 1996's fourth quarter. They were a
drag on returns for most of the year, but now seem set for improved performance.
Although we don't see quite as many opportunities now as we did at points in
1996, we are pleased with the prospects for companies in some of the portfolio's
main sectors. Technology is a good example. We have identified companies in some
less traditional areas in this sector. We believe the performance of these
companies is therefore not entirely tied to the larger industry's. Should
another correction hit technology, these are the types of stocks that may be
insulated from the damage.
As we seek out the best opportunities in the year ahead, we will place renewed
emphasis on selecting high-quality companies for the portfolio - those companies
with superior management teams and a competitive advantage within their
industry. In a market full of lofty valuations, we feel it presents too much
risk not to go with the best-quality companies.
Looking for high-quality management is consistent with our private-value
approach to investing. We evaluate companies as if we were contemplating
purchasing the entire firm, and determining the price we would be willing to pay
(its private-market value). When a stock price does not reflect the strength of
this private value - usually because not many analysts are paying attention to
the stock - we will consider adding it to the portfolio.
OTHER POTENTIAL AREAS OF EMPHASIS
We're looking for growth cyclical stocks to add to the portfolio in the coming
year. These are firms whose businesses are strongly correlated to the economy's
growth, but do not fully depend on a fast-growing economy to increase earnings.
The pricing on some of these issues reflects a somewhat negative opinion of the
economic environment - perhaps more negative than conditions really warrant.
Over the next six months, we may also add to our foreign holdings. One
reason for venturing abroad is that prices in the U.S. market are somewhat high,
cutting down on the number of opportunities at home. At the same time, we are
finding more suitable companies overseas.
We will be working to lower the Fund's median market capitalization. This figure
has moved up a little recently, partly because of appreciation of the stocks in
the portfolio and partly because of the nature of the opportunities we have
found. By heightening our focus on smaller and mid-size firms, we plan to bring
Fund's market cap down from its year-end level of $3.85 billion. (In comparison,
the S&P 500 has a market capitalization of $24.5 billion.) We intend to keep the
Fund in line with its historic character.
[AMERICAN CENTURY LOGO]
A MEMBER OF THE AMERICAN CENTURY(SM) INVESTMENTS FAMILY OF MUTUAL FUNDS.
TCI BALANCED
OBJECTIVE - To seek capital growth and current income.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
The TCI Balanced fund lost some ground in the fourth quarter as the equity
portion, which is invested in rapidly growing companies of all capitalization
sizes, failed to keep pace with the large cap dominated S&P 500. TCI Balanced
continued to follow a two tiered approach to its equity holdings, maintaining a
core position in high quality, large cap growth stocks, augmented by a more
opportunistic weighting in rapidly growing mid cap stocks. The equity portion of
TCI Balanced benefited from companies in the oil service and drilling industry,
positions in large money center banks, and holdings in some of the large
pharmaceutical makers - all of which added value to fund performance for both
the quarter and the year. The foreign weighting was cut down to just over 5% of
the portfolio, as the portfolio team found more attractive growth opportunities
domestically. At year end, the fund was 60% invested in equity securities.
The fixed income portion of the fund is invested in high quality intermediate
term bonds, maintaining a defensive stature. Currently, the fund holds, and is
overweighted in investment grade corporate bonds to
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TCI BALANCED (CONT'D)
boost the yield. The duration of the fixed-income is positioned neutral compared
with the intermediate benchmark. At year end, 39% of the fund was invested in
bonds, with the remaining 1% in cash.
TCI GROWTH
OBJECTIVE - To seek capital growth by investing in common stocks (including
securities convertible into common stocks) that meet certain fundamental and
technical standards of selection and, in the opinion of the Fund's management,
have better than average potential for appreciation.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
During the past year, TCI Growth has been the focus of considerable attention at
the highest levels of American Century(SM) Investments. TCI Growth, a growth
equity option is among our largest and most important funds.
We fully expect the fund to show greater volatility than the market in general,
but to have the potential for greater returns. That this potential has not been
met has been the source of deep concern for us. As a result of these concerns,
we have taken steps we believe will improve the performance of the fund.
MANAGEMENT CHANGE: On June 30, 1996, the former lead manager of TCI Growth
resigned the firm, and the fund's management was transferred to a portfolio team
headed by Glenn Fogle, with oversight by Jim Stowers III, the lead manager for
Ultra. The new team has been, and continues to be, responsible for managing
Vista and Giftrust, two of American Century's more aggressive and well-known
retail funds.
PORTFOLIO CHANGES:
SMALLER, FASTER GROWING COMPANIES: Almost immediately the new team began the
process of restructuring the portfolio with an emphasis on smaller and faster
growing companies. The average earnings growth rate of the portfolio increased
to 74% on December 31 from a level of 7.6% on June 30 when the new team assumed
responsibility.
INCREASED PORTFOLIO CONCENTRATION: The total number of stocks in the portfolio
has been decreased - 74 companies present in TCI Growth on June 30, 1996 are no
longer held. At the same time, the concentration on our best prospects has
increased, with the top-10 holdings representing 34% of the fund's assets. This
concentration is in line with our traditional portfolio management strategy at
American Century.
Although these changes did not immediately improve fund performance, as the U.S.
stock market environment in 1996 continued to favor larger companies with more
predictable earnings, we believe the new team has repositioned the fund to be in
a better position to meet expectations in the long term.
We hope you'll recognize that these changes in the fund demonstrate our
commitment to seeing it live up to its full performance potential. We hope you
will give the revitalized TCI Growth a renewed consideration in light of the
expertise, commitment and discipline that Twentieth Century - now American
Century - has demonstrated over the years. If, as some have predicted, there is
to be a reversal away from the favor of large index names and toward smaller
companies with increasing, quality earnings growth, then shareholders in TCI
Growth may finally reap just rewards.
TCI INTERNATIONAL
OBJECTIVE - To seek capital growth by investing primarily in an internationally
diversified portfolio of common stocks that are considered by management to have
prospects for appreciation.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
The TCI International portfolio performed well ahead of the EAFE Index. While
1996 was a difficult year for international managers, given relatively low
economic growth in Europe and Japan and the negative effects of a stronger
USdollar, the portfolio team was able to add value due to astute stock selection
and sector rotation among industry groups based on bottom-up fundamentals.
The Japanese market posted negative returns during the year in both local and US
currency terms. The portfolio exposure to Japan was reduced from 29% to 20% and
refocused on compelling growth situations during the year - with great companies
and a poor market, our Japanese portfolio returns were especially flat. This was
accomplished by focusing upon companies with monopolistic products that would
stand up in the face of weak local economic growth. Selling Japanese technology
holdings was also beneficial to the portfolio. Overall, technology stocks in the
portfolio were reduced from over 20% at the beginning of the year to less than
10% at year end.
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TCI INTERNATIONAL (CONT'D)
Assets were re-deployed from Japanese position sales into growing companies in
Europe, with our largest increases in country exposure located in the United
Kingdom and Germany. In the United Kingdom, there were no real themes to be
cited, just attractive stock opportunities which paid off nicely. In Germany,
our largest shift including building positions in auto stocks such as Daimler
Benz, BMW and VW. The overall auto weighting in the portfolio increased to
almost 12% by year end, as overseas auto makers began seeing the fruits of
restructuring.
The other significant country exposure was an increase in the Canadian weighting
form 5% to 13%. Many of the stocks added to the portfolio were energy stocks,
including exploration, refining and natural gas. This was one of the best
performing industry/sector groups for the portfolio during the year.
Healthcare stocks also added significant value during the year, especially drug
companies with exciting pipelines of new drugs and better earnings due to
restructuring. The healthcare exposure dropped during the year as several
companies became fully valued relative to new purchase candidates. The other
significant contributors to performance were stocks in the telecommunications
and financial services industries.
Emerging market exposure in the portfolio was low during the year. Many emerging
markets had positive performance largely as a result of an influx of funds
rather than from improving company fundamentals. The portfolio continues to add
value from stock selection by focusing on growing companies with sound
fundamentals, and from risk reduction resulting from solid portfolio
construction.
TCI VALUE
OBJECTIVE - Long-term capital growth. Income is a secondary objective.
NARRATIVE BY AMERICAN CENTURY(SM) INVESTMENTS, INC.
The TCI Value team follows the risk averse strategy of searching for
attractively priced securities that offer a high probability of modest
outperformance, rather than a modest probability of high outperformance. The
fund has never wavered from its strategy of buying undervalued stocks - it has
done so with proven success since its inception last May. The TCI Value fund's
conservative posture prevented it from feeling the full impact of the turbulent
July market pull-back, where it protected assets by falling less than the
market, precisely as it is managed to do.
Although the fund looks like a mid cap value fund, it is important to recognize
that the fund is only mid cap by necessity. In their search for value, the
portfolio management team naturally steers away from the largest cap companies
which have performed so very well over the past two years, simply because they
are overpriced and are not good values. The fund is finding the best values in
the middle capitalization area. TCI Value held positions in integrated energy
which helped performance markedly throughout the year, yet the team lightened
its weightings here as the sector had done so well. However, a lack of exposure
to large banks, which have continued to do very well throughout the year,
hampered the fund at the margin. While the fund held positions in several banks
and other financials which performed admirably and added significant value, fund
positions were somewhat lighter than the market which also hurt modestly on a
relative basis. One of the most positive factors for Value this year, was the
fact that the fund owned a below average number of poor performing companies.
Even for those companies which did suffer disappointing performance, the team
stuck with those who maintained their fundamentally sound businesses along with
undervalued characteristics.
[VAN ECK LOGO]
GOLD AND NATURAL RESOURCES FUND
OBJECTIVE - To seek long-term capital appreciation by investing in equity and
debt securities of companies engaged in the exploration, development, production
and distribution of gold and other natural resources, such as strategic and
other metals, minerals, forest products, oil, natural gas and coal.
NARRATIVE BY DEREK S. VANECK, PORTFOLIO MANAGER
1996 was a year of mixed results for natural resources/hard assets. Some
sectors, such as energy and real estate, ended the year with exceptional returns
and outperformed the S&P 500, while others, such as precious metals, were in the
doldrums. During the year, a reallocation on the Gold and Natural Resources
portfolio encompassing several other hard asset sectors helped the Fund's
performance. We are
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GOLD AND NATURAL RESOURCES FUND (CONT'D)
pleased to report that the Van Eck Gold and Natural Resources Fund achieved a
total return of 18.0% for the year ended December 31, 1996.
The Fund's strong performance was fueled by exceptional returns in the energy
sector, which was the Fund's largest and best performing sector by year end with
an approximate 40% allocation. Returns were driven by stronger commodity prices,
successful application of technology to exploration efforts, and the cost
reduction that this application of technology brings to exploration and
development efforts.
In 1996, crude oil prices averaged more than $4 per barrel higher than in 1995.
Reasons included a combination of a stronger demand brought on by economic
growth in Asia and a cold winter in the U.S. and Europe as well as production
delays in the non-OPEC countries and a lack of Iraqi exports for most of the
year. Natural gas prices were also sharply higher due primarily to a cold winter
in the Northeast and Midwest, which depleted inventories. Moreover, ongoing
advancements in technology continued to improve efficiencies and exploration
results. One estimate shows drilling success rates doubling in the past ten
years due to technological changes. The Fund's energy holdings benefited from
these trends. For example, United Meridian Company, a U.S.-based company with
properties off the African coast, also saw its stock soar almost 200%. On the
service side, drilling stocks, such as Falcon Drilling, were standout
investments as well.
Real estate securities in the U.S. were added to the portfolio during the year,
and although they remain a relatively small portion of portfolio assets (8.5% at
year end), they contributed to performance. U.S. Real estate investment trusts,
or REITs, gained approximately 35% for the year as fundamentals continued to
improve. Moreover, REITs finished the year on a strong note, with fund flows
into U.S. REITs accelerating significantly during the fourth quarter.
Disappointing sectors included industrial metals and forest products and paper.
Industrial metals and paper shares had negative performance as the underlying
asset prices declined. Prices of industrial metals fell almost 9%, while pulp
prices dropped nearly 50% from the high set late in 1995. In both industries,
supply growth outstripped demand. In addition, both sectors endured severe
inventory corrections on both the producer and consumer levels. These two
factors resulted in a loss of pricing power, causing earnings to decline
significantly. Fortunately, our allocations to these sectors were low, at less
than 5% and 7% of assets in each, respectively. The investments we did hold in
these sectors were stocks of companies that held up well in this environment,
namely low-cost producers and companies with undervalued assets. (For example
Rayonier, a forest product and paper company, and Fort Howard, the lowest-cost
commercial tissue producer.)
Gold started the year on a strong note, jumping to $417 per ounce in the first
quarter, but it gradually fell in price throughout 1996, finishing the year at
$370, down 5%. Several factors contributed to the sell-off in gold. With low
inflation dominating the monetary picture, investment demand, a primary price
factor, was weak. Real short-term interest rates were positive, putting a high
opportunity cost on holding gold, and currency stability reigned. Further, an
increasing number of central banks, particularly in Europe, sold large amounts
of their gold reserves. Finally, after two years of declines, mine production
rose despite lower output from the world's largest supplier, South Africa, where
production dropped by 30 tons. The Morgan Stanley Capital International Gold
Mines Index declined 2.8% in 1996. Our reduction of the Fund's weighting to gold
stocks from approximately 50% in the beginning of the year to just over 30% by
year end had a very positive effect.
THE OUTLOOK
In 1997, we believe certain natural resource/hard asset sectors will again
outperform financial assets, although we do not expect a repeat of some of the
exceptional returns of 1996. The supply and demand fundamentals that helped the
Fund register solid investment results remain firmly in place.
Our strategy will be to maintain a high energy weighting due to the sector's
excellent fundamentals. We remain optimistic about the oil services and drilling
sector, a group for which we believe there is significant upside potential. The
same factors that drove energy returns last year-strong commodity prices
(although we do not believe the market can sustain the commodity price levels
witnessed at year end), good exploration success and improved demand for
services and equipment-should continue this year. Our focus remains on companies
with good exploration success probabilities-and away from companies with high
commodity exposure. In the oil service sector, fundamentals remain stronger than
at any time in the past 15 years.
Expecting strong returns on real estate investments, we plan to increase the
portfolio's weighting to this sector. Fundamentals in the U.S. commercial
property
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GOLD AND NATURAL RESOURCES FUND (CONT'D)
markets are attractive. Vacancy rates overall are down substantially in many
markets while new supply is relatively minimal.
In our opinion, global growth will be healthy. The monetary environment is
extremely stimulative and central banks around the world are cutting interest
rates. Increased liquidity has been finding its way into financial assets, but
over the next year, we expect to see much of that money going into the real
economy, pushing economic growth higher, with the emerging market countries
showing strength considerably higher than that of the industrialized world.
China is likely to grow by 10% next year, growth in developing Latin America
should accelerate from 0.9% in 1995 to 4% in 1997 and Eastern Europe should grow
at 4%, up from 0.4% this year. Raw materials are essential to the building of
developing economies. Therefore, strong economic growth leads to increasing
demand and higher prices for hard assets.
WORLDWIDE BOND FUND++
OBJECTIVE - To seek high total return through a flexible policy of investing
globally, primarily in debt securities.
NARRATIVE BY MADIS SENNER, FUND MANAGER
Compared to the strong returns recorded in 1995, most major bond markets
registered modest gains last year, which were reduced in dollar terms due to
strength of the U.S. currency. Several "peripheral," higher risk European
markets fared well, but a rise in U.S. interest rates due to
stronger-than-expected economic growth dampened the performance of domestic
bonds. In this environment, the Worldwide Bond Fund had a total return of 2.5%
for the year ended December 31, 1996.
BOND MARKET REVIEW
During the first month of the year, bonds in most major markets were in a
relatively narrow trading range. Then, in February, U.S. interest rates
increased sharply due to a surprisingly strong January employment report. The
rise in U.S. rates and subsequent downturn in the U.S. bond market sparked a
sell-off in many major international markets during the first quarter. The trend
toward higher rates continued into the second quarter, aided by
higher-than-expected oil prices. By June 12, the yield on the 30-year U.S.
Treasury bond hit 7.19% (its high for 1996) after being
++Formerly Global Bond Fund
as low as 5.95% on the second trading day of the year, January 3.
To protect shareholder capital during the rise in rates, we employed a defensive
investment posture. In February, we reduced the Fund's average duration to as
low as three years. We also decreased the Fund's exposure to domestic bonds and,
later in the first half of the year, added substantially to our positions in
Canada and the United Kingdom, both of which witnessed solid performance (which,
for the UK market, unlike most others, was augmented by a strong pound.) Our
rationale hinged on developments likely to have positive implications for these
markets: Canada would benefit from solid economic fundamentals and the
governments commitment to eliminate the budget deficit by the year 2000. The UK
market would benefit from an environment of low inflation, strong currency and
improving consumer confidence.
Although the Federal Reserve did not raise short-term interest rates in 1996,
fears of a rate hike hung like a cloud over the U.S. and international bond
markets following the rise in long-term interest rates during the first half of
the year. Stronger-than-expected employment numbers in July and August added to
the concern, but the Federal Reserve maintained a neutral monetary policy due to
other data that showed inflation was still under control. (For example, in
August, the government reported that the unemployment rate plunged to 5.1%, its
lowest level in seven years.) The end result for a volatile U.S. bond market was
a lackluster return of 2.7% for the year. A SUBSTANTIAL POSITION IN U.S. BONDS,
ALTHOUGH ACTIVELY MANAGED, HAD A NET DAMPENING EFFECT ON FUND PERFORMANCES.
Some of the Fund's best results came from its investments in peripheral European
bonds, such as those of Italy, Spain and Sweden. Sluggish economic growth and
low inflation led to lower interest rates in many countries on the Continent. In
turn, most European markets achieved moderately positive returns in local
currency terms. The European markets were further helped by increasing optimism
for economic union. Peripheral markets recorded the most impressive gains.
Yields in these markets converged toward those of the higher-quality, core
European markets, due to a growing belief among investors that peripheral
markets will meet the Maastricht criteria for European Monetary Union (EMU). At
year end, the Fund had approximately 15% of total assets allocated to these
peripheral markets.
Early in the year, we liquidated the Fund's relatively small position in
Japanese bonds (which had a posi-
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WORLDWIDE BOND FUND++ (CONT'D)
tive performance of 5%+ in yen terms, but declined 6.5% in U.S. dollar terms) as
the economy began to overheat. Later in the year, we began purchasing Japanese
bonds again based on signs of continuing economic weakness, which leads to lower
interest rates and higher bond prices. However, given the extreme volatility in
the Japanese market of late, we intend to maintain a "wait-and-see" approach
toward Japan before committing new funds to this market.
CURRENCY REVIEW
In 1996, the U.S. dollar showed strength against most of the major currencies.
For example, the dollar was up 10.8% against the Japanese yen and 6.7% against
the German mark. The only major currencies in the G-7 to show consistent
strength against the dollar were the British pound and the Italian lira, which
advanced 10.5% and 4.5%, respectively, versus the greenback. The dollar's
relative strength against most major currencies dampened the positive returns
for U.S. Investors. The Fund's relatively high cash position on several
occasions throughout the year enabled us to limit losses due to currency
fluctuations.
OUTLOOK
Looking ahead, our forecast for the global bond markets is encouraging. We
believe the slow growth, low inflation environment in Europe will continue to
bode well for bonds there, and we intend to continue favoring European issues.
We expect the U.S. bond market to remain somewhat volatile. While U.S. inflation
still appears to be under control, the general direction of the economy and
long-term interest rates is still uncertain. However, we also believe the worst
of the domestic bond market decline may be behind us.
WORLDWIDE EMERGING MARKETS FUND
OBJECTIVE - Seeks long-term capital appreciation by investing primarily in
equity securities in emerging markets around the world.
NARRATIVE BY GARY GREENBERG, FUND MANAGER
We are pleased to report that the Van Eck Worldwide Emerging Markets Fund rose
26.8% in its first year, substantially outperforming the MSCI Emerging Markets
Free Index, which rose 3.2%. The Lipper - Emerging Markets Fund Index rose 12.2%
for the year.
Selected emerging markets did well last year as investors discovered that
they offered companies with superior growth prospects and moderate valuations.
Latin American equities produced excellent gains on balance, increasing 22% for
the year as many countries there showed signs of strong recovery after 1995
recessions. In Asia, there was a marked difference in the year's performance
among various markets, with some Asian markets, such as Hong Kong, Malaysia and
Indonesia, gaining in excess of 20% for the year, while Thailand, Singapore and
Korea had fairly dramatic declines. In Eastern Europe, many markets had
spectacular gains, with Russia leading the way, up 164%.
The Fund's strong performance was due both to stock selection and country
allocation. Although Argentina did well, gaining just over 20% for the year, our
holding in Patagonia, the supermarket chain, did considerably better rising 129%
since we purchased it in May. Chinese stocks did extremely well during the year,
rising over 150% as interest rates declined and there was renewed confidence in
the macroeconomic management of the country. Our position in Fangda, a
manufacturer of building materials in Shenzen, rose 177% in less than six
months. Computerland, a systems integrator in Poland, gained 42% since we bought
it in July, outpacing the Polish index's gain of 11%. The Fund's holdings in
Russia rose dramatically, led by GUM, the department store in Red Square, which
rose 103% from May to September (the time period during which we held the
stock).
The Fund uses a "top-down" discipline to screen out countries where political or
economic risk is considered to outweigh the prospects of individual companies,
and to identify fertile regions for investment. Last year, we screened out South
Africa (due to a deterioration of economic prospects) and Thailand (as a
property glut there threatened the banking system), despite their high weighting
in most emerging markets indices. We were intrigued, however, by what looked
like bargain-level stock valuations in Russian, Brazilian and Egyptian stocks.
This led us to look closely at these countries to see if their economies
appeared to contain "turnaround" potential. Our initial expectations were
confirmed as we determined that the likely direction of government policy was
toward economic modernization. An analysis of the fundamentals of certain
individual stocks, such as Irkutskenergo (a utilities company) and GUM in
Russia, Telebras (telecommunications) and Cemig (electricity) in Brazil, and
Eastern Tobacco and Commercial International Bank in Egypt, showed exceptional
promise. These were undervalued stocks in cheap markets with good prospects for
growth. Our positions in each of these stocks did well.
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WORLDWIDE EMERGING MARKETS FUND (CONT'D)
The fund ended the year with significant weightings in Mexico, Brazil, Hong
Kong, Russia and Egypt. Mexican interest rates remain high, but began to decline
late in the year and we believe the worst is over for the banking system. The
Mexican economy is picking up steam and contains a number of strong companies
with excellent management and accelerating earnings growth. Brazil has
successfully brought inflation down from several thousand percent to the low
teens. We believe the upcoming privatization of electric and telephone utilities
will be done at significant premia to current market valuations. Hong Kong's
hand-over to China will be a non-event, in our opinion, as evidenced by a strong
property market and buoyant automobile sales. Russian stocks, while carrying
significant risks, are priced at a small fraction of their replacement value, a
situation that is certainly not the case in the U.S., where the market trades at
a premium. Egypt has a dynamic privatization program in place and stocks there
appear attractively valued. Yields are high, inflation is low and earnings are
growing at a reasonable rate.
We believe that the outlook for emerging markets in 1997 remains positive.
Global interest rates should remain steady and inflation's downward trend in
many emerging markets over the past five years appears set to continue. Asia's
tigers tightened monetary policy in 1996 in order to squeeze out excess growth
and experienced a new spurt of non-inflationary growth later in the year.
Eastern Europe continues to progress steadily along the path of recovery, as do
many of the Latin American countries. Finally, Mediterranean Europe and North
Africa are also beginning to grow again.
Emerging markets are risky. Although the Fund invests in a large number of
geographically diverse markets, world events can at times cause markets to
decline simultaneously. While historically, emerging markets have performed well
compared to developed markets, it is essential to maintain a long-term
perspective when investing in this area. It is with this long-term perspective
that we manage the Fund and remain confident about the future.
[VAN KAMPEN LOGO]
REAL ESTATE SECURITIES FUND
OBJECTIVE - To achieve long-term growth of capital through investing in publicly
traded real estate securities. Current income is an important secondary
consideration.
NARRATIVE BY VAN KAMPEN AMERICAN CAPITAL
We seek to achieve our objective by creating a diverse portfolio of securities
of companies operating in the real estate industry, including real estate
investment trusts, or REITs. REITs are companies that own, acquire, develop and
manage real estate like any other operating company.
Before picking the stocks for our portfolio, we first decide which property
sectors are most attractive from a supply/demand point of view; then, we must
also ascertain which geographic regions within that sector are exhibiting what
we believe are the best real estate fundamentals. At that point, we choose
stocks on the basis of a comparison of their share price to our estimate of
intrinsic value. Intrinsic value is primarily a function of the estimated
liquidation value of the underlying assets together with a view towards
potential future growth in value.
As of December 31, 1996, the portfolio was comprised of about 45 companies and
10 different property sectors. Our three largest property sector weights were
office/industrial at 26.1%, retail at 22.5%, and apartments at 19.5%. The
portfolio was moderately underweight retail, market weight apartments and
overweight the office/industrial sectors during 1996.About 40% of the portfolio
is comprised of companies with a nationwide focus. Another 15% of the portfolio
is made up of stocks in the western portion of the U.S.
Our performance over the 12 months, ending December 31, 1996, exceeded the REIT
market overall (as measured by the NAREIT Equity Index) and compares well to a
peer group of dedicated REIT funds. We attribute our superior performance to our
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REAL ESTATE SECURITIES FUND (CONT'D)
overweighting in the office/industrial and hotel sectors for most of the time
period under review. In addition, we added to our retail exposure in the
beginning of 1996, because this group had been punished in a depressed retail
environment.This sector has performed well of late and contributed to our recent
performance.
The total return for REIT index for 1996 was 35.3%, which exceeded the
performance of the S&P 500 by approximately 12.35%. Though REITs have
outperformed the S&P 500 in five out of the last six years, we clearly view the
rally in REIT prices during 1996 as extraordinary. While there are a number of
explanations for this strong growth in REIT share values, certainly one of the
most important was the emergence during the second half of the year of sustained
interest by individual investors and mutual funds in REITs as a defensive tool
against a possible broad market correction. Investors have taken notice that the
REIT market has proven to be generally less volatile than the equity market
overall during the past three to five years, and that the relatively high
dividend yields on REITs may serve as a cushion should the stock market falter.
Even though the REIT market raised a record amount of capital in follow-on stock
offerings during 1996, the flood of new cash into the market helped to push
share prices to new highs in virtually every real estate sector.
Looking forward, we expect continued significant investor interest and funds
into real estate stocks for the reasons outlined above. Furthermore, the
underlying fundamentals of the real estate markets remain generally favorable.
The ongoing recovery in the economy continues to generate tenant demand for
space, and new construction remains modest in most markets across the country.
Thus, both conditions in the capital markets (supply and demand for stocks) and
in the real markets (supply and demand for property itself) should support
returns to REITs that are in line with their long-term averages of 10-15% per
annum. While these expectations are clearly less than 1996's extraordinary
returns, they do appear attractive relative to other financial assets when
viewed in the context of real estate's defensive characteristics.
[WARBURG PINCUS LOGO]
INTERNATIONAL EQUITY PORTFOLIO
OBJECTIVE - Seeks long-term capital appreciation by investing in equity
securities of non-U.S. issuers.
NARRATIVE BY WARBURG PINCUS FUNDS
By region, the largest gains once again belonged to Europe, whose markets
continued to benefit from falling interest rates and optimism regarding the
prospects for monetary union. Asian markets generally struggled. Latin American
markets had mixed performance.
We continue to find value in many markets, and believe that 1997 stands to be a
rewarding year for international investors. Our outlook on specific markets, and
our current strategies are below.
Our European holdings continued to perform strongly. One market that has
performed particularly well and one to which we have increased our exposure, is
Germany. A growing number of German companies have committed to the idea of
building shareholder value, reflected in increased attention to per-share profit
growth and greater transparency in accounting methods. Clearly, the trend is
positive for the German market as a whole, which remains home to a number of
world-class companies. We recently added one of these, chemicals giant BASF, to
the portfolio, and the stock has appreciated strongly since our purchase.
Another new name in the Portfolio is GEA, an engineering company with strong
global market share in three areas: food processing, air treatment and
refrigeration, and thermal power technology.
We remain underweighted in the United Kingdom, a market that has been a strong
performer for the Portfolio, particularly in dollar terms. Collectively, British
companies have enjoyed strong profit growth in recent quarters, and are much
farther along in their earnings cycle than are companies elsewhere in Europe.
Accordingly, most of our buying in Europe is outside the U.K., where the
potential for earnings growth is proportionately greater.
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INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
Elsewhere in Europe, we added Netherlands company Philips Electronics to the
portfolios during the fourth quarter. Philips, a major diversified
electronics firm (and owner of several leading brand names, including PolyGram),
saw its stock lag the soaring Netherlands market in 1996. But the company, led
by a strong management team, is in the process of undergoing significant
restructuring and rationalization of its operations.
Our portfolios benefited from strong performances from our Australian holdings
during the fourth quarter, and we have increased the country's representation in
the portfolios in recent months to nearly 5% currently. Particularly strong
performers were holdings Lend Lease, a property and financial-services firm;
Reinsurance Australia, a reinsurer; and Oil Search, an oil exploration and
development company added to the Portfolio during the third quarter.
We remain similarly positive on New Zealand stocks. The center-right coalition
government that has emerged from New Zealand's October elections appears likely
to maintain most of the country's existing economic policies, which is clearly
favorable for the stock market. Also favorable for the market is the recent
modification of the Reserve Bank Act. The change has allowed New Zealand's
central bank to widen its targeted inflation band (inflation can now legally
drift as high as 3%, vs. a stipulated maximum of 2% previously, and the bank has
responded by lowering short-term interest rates from approximately 10% in
September to under 8% currently, which has had a positive effect on the stock
market.
South Korea's market continued to fall in the fourth quarter, and our weighting
again hurt performance. Sentiment among domestic investors (who still control
80% of the market) remains poor due to concerns over slower economic growth and
widening current-account and trade deficits. Sentiment also took a major hit at
the end of the quarter after the government passed a much-needed labor-reform
law, one deemed so sufficiently harsh by workers that it sparked strikes by
unionized employees and violent protests.
Arguably, most, if not all, of the bad news on South Korea's economy has been
more than sufficiently discounted by the market. And there are clearly reasons
for optimism, including an economy that is growing at approximately 6% a year,
further market-opening moves in store as the country moves toward OECD
members, and the government's recently illustrated commitment to reforming the
labor market in an effort to increase South Korea's competitiveness globally.
Accordingly, we have maintained our exposure to the market, and believe that
there are particularly attractive values to be found among banks and electronics
companies, especially semiconductor makers (e.g., Samsung Electronics).
Japan's equity market has struggled, largely due to worries over a slowdown in
economic growth. These concerns were fueled by the Japanese Economic Planning
Agency's official forecast of 1.9% growth in GDP for the next fiscal year
(beginning April 1), down from a forecast of 2.5% growth for the current year.
Our own estimate calls for a higher growth rate, as well as a continued
expansion in corporate earnings (Japanese companies' profits rose an average
12.7% in the third quarter vs. year-earlier levels). The combination should
eventually lead to a pickup in investor sentiment and a proportional recovery in
share prices, although, as in South Korea's case, the timing of events is hard
to project. Supporting earnings, and the Japanese economy as a whole, are the
continued low level of interest rates and the weak yen, which has had a
significant impact on the earnings of blue-chip, export-oriented companies in
particular. Known as the "Nifties," many of these large blue chips have seen
concentrated buying in their shares in recent months and have enjoyed relatively
strong performance as a result, belying the general weakness displayed by the
broader-market averages. The Nifties are well-represented in our portfolios by
holdings Canon, Honda, Sony, and TDK among others, and these have contributed
positively to our performance.
Recent developments provide further grounds for optimism, especially over the
longer term. One of our main arguments for investing in Japan is that there is a
significant amount of restructuring taking place among corporations (although
clearly this varies from company to company, necessitating careful stock
selection), as well as a general trend toward deregulation of Japanese industry
as a whole.
We have also continued to hedge a portion of our yen exposure as a defensive
measure, and much of our unhedged yen exposure is naturally hedged in that it
represents companies (e.g., exporters) whose earnings benefit from a weaker
local currency.
Our largest exposure in the region remains Argentina, a market that performed
very strongly during the period. Driving stocks higher was positive investor
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INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
response to the latest economic figures, which showed that Argentina's
recovery is well under way and that growth is likely, in fact, to surprise on
the upside. Inflation, meanwhile, remains almost nonexistent. We continue to
view the market's prospects favorably.
POST VENTURE CAPITAL PORTFOLIO
OBJECTIVE - Seeks long-term growth of capital by investing primarily in equity
securities of issuers in their post-venture capital stage of development and
pursues an aggressive investment strategy.
NARRATIVE BY WARBURG PINCUS FUNDS
For the three months ended December 31, 1996 (the Portfolio's inception date was
September 30, 1996), the Portfolio had a total return of -2.40%. Its benchmark
indexes, the Lipper Growth Funds Index and the Russell 2000 Growth Index, had
returns of 4.80% and 0.27%, respectively, for the period. The Warburg
Pincus/Venture Economics Post-Venture Capital Index (PVCI) had a total return of
- -3.16% for the three months.
While clearly a disappointing debut for the Portfolio, we believe that the
Portfolio's longer-term results will more than compensate investors for their
patience during short-term periods of underperformance. We would encourage
investors to take a similarly long-term approach, especially given the types of
high-growth companies in which the Portfolio invests.
The Portfolio targets companies that have, within the past 10 years, received
venture-capital backing, distributed their securities to venture-capital
investors or engaged in an initial public offering. It is our belief that such
venture-backed companies can have above-average earnings prospects vs. companies
that lacked such backing, and that this stands to be reflected in their share
prices over time.
The Portfolio has the latitude to invest in companies of any size (i.e., market
capitalization). Investors should be aware, however, that most companies that
receive venture-capital financing do so at any early stage of their development.
We anticipate that the average market capitalization of stocks held in the
Portfolio will be less than $1 billion at the time of investment. Because of the
nature of the Portfolio's investments and certain strategies it may use (as
further described in the Portfolio's prospectus), we consider the Portfolio
most suitable for the aggressive portion of an investor's portfolio.
As of December 31, the Portfolio held a diversified mix of holdings by industry,
with its greatest concentrations in the technology sector (broadly defined to
include computers and electronics), health care (including pharmaceuticals) and
telecommunications & equipment. We believe that our specific holdings in these
areas, and our other portfolio holdings as well, have attractive prospects for
appreciation relative to the broader market in 1997, and we look forward to a
rewarding year.
SMALL COMPANY GROWTH PORTFOLIO
OBJECTIVE - Seeks capital growth by investing in equity securities of
small-sized domestic companies.
NARRATIVE BY WARBURG PINCUS FUNDS
Warburg Pincus' Small-Cap Growth Equity Portfolio posted nominal gains in the
fourth quarter of 1996, underperforming its benchmark indices for the period.
Much of this is attributable to the portfolios' exposure to the health-care
sector, which continued, in general, to perform poorly (though selected
biotechnology and HMO shares managed to rebound from their earlier losses).
We remain committed to health care as a long-term investment opportunity, given
the very favorable demographics, and believe that there are currently some very
attractive opportunities in certain subsectors of the medical-devices,
health-care-services and biotechnology areas. That said, we approach 1997
cautiously with regard to health care in general. The financial problems of the
Medicare trust fund, the prospect of a new FDA Commissioner and the extreme
difficulty in predicting the clinical progress of biotechnology companies make
for a challenging investment environment. Accordingly, the portfolios are
underweighted in health care relative to benchmark indices, and we will likely
maintain this stance until clearer prospects emerge.
Beyond health care, much of the rest of the portfolios saw positive performance.
Stocks that performed well for the portfolios include technology issues,
particularly its semiconductor-related holdings, which climbed on good news from
Intel, the industry's bellwether, and on evidence of ongoing improvement in the
supply/demand balance. We continue to find many attractive opportunities in the
technology sector, where the accelerated demand for information access
34
<PAGE> 35
SMALL COMPANY GROWTH PORTFOLIO (CONT'D)
from individuals, corporations and government, coupled with the ongoing quest
for productivity enhancement, will continue to drive the demand for innovative
products.
Energy, including oil services, is another area that performed well for the
Fund. We continue to build our exposure to this area, given the relative
underinvestment in the industry in recent years and the steady rise in demand
for energy. Demand stands to rise strongly in 1997 and 1998, especially if the
ongoing low level of interest rates in many countries (e.g., Japan and
throughout Europe) spurs a synchronized global economic recovery. Many smaller
companies are well-suited to take advantage of this environment.
Other areas in which we are finding attractive stocks include business services,
a broadly defined group of companies that continue to benefit from corporate
America's downsizing and outsourcing efforts; specialty consumer companies,
including retailers' and telecommunications, where vast opportunities are
unfolding as a result of deregulation and recently passed legislation. Given our
assessment of their prospects, these areas, and those discussed above, will
represent the greater part of our research efforts in 1997.
35
<PAGE> 36
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R)
LIFE PLANNING SERIES(SM)
FOR SINGLE PREMIUM CONTRACTS
ISSUED ON OR AFTER APRIL 16, 1990
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT NOT SURRENDERED**
APPROXIMATE PERCENT CHANGE IN NET ASSETS WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- -----------------------------------------------------------------------------------------------------------------------------
NON-ANNUALIZED PERCENT CHANGE+ ANNUALIZED PERCENT CHANGE***
INCEPTION 1 YR. TO 5 YR. TO INCEPTION TO 5 YR. TO INCEPTION TO
FUNDS+/- DATE++ 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 20.95% 85.51% 130.60% 13.16% 12.21%
Socially Responsible Growth Fund, Inc. 10/06/93 19.66% NA* 70.42% NA* 17.92%
FIDELITY VIP FUND & VIP FUND II
Asset Manager Portfolio 09/06/89 13.12% 59.71% 104.27% 9.82% 10.25%
High Income Portfolio 09/19/85 12.55% 88.11% 207.53% 13.47% 10.47%
Equity-Income Portfolio 10/09/86 12.80% 114.13% 217.54% 16.45% 11.96%
Overseas Portfolio+/-+/- 01/28/87 11.75% 45.01% 86.63% 7.72% 6.49%
Growth Portfolio 10/09/86 13.22% 89.79% 259.72% 13.67% 13.34%
Contrafund Portfolio 01/03/95 19.73% NA* 65.03% NA* 28.60%
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 3.74% 14.82% 130.02% 2.80% 5.66%
Government Bond Fund 11/08/82 2.14% 31.61% 202.54% 5.65% 8.14%
Total Return Fund 11/08/82 20.26% 78.72% 526.54% 12.31% 13.85%
Capital Appreciation Fund 04/15/92 24.50% NA* 76.32% NA* 12.80%
Small Company Fund 10/23/95 21.23% NA* 38.33% NA* 31.40%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 7.72% 49.70% 275.91% 8.40% 11.36%
Limited Maturity Bond Portfolio 09/10/84 2.95% 21.38% 127.25% 3.95% 6.90%
Partners Portfolio 03/22/94 27.89% NA* 66.63% NA* 20.21%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 14.00% 62.73% 158.51% 10.23% 10.08%
Bond Fund 04/30/85 3.44% 35.61% 155.68% 6.28% 8.38%
Global Securities Fund+/-+/- 11/12/90 16.27% 68.31% 72.14% 10.97% 9.26%
STRONG FUNDS
Discovery Fund II 05/08/92 -0.50% NA* 61.34% NA* 10.85%
Special Fund II, Inc. 05/08/92 16.62% NA* 110.77% NA* 17.41%
International Stock Fund II+/-+/- 10/20/95 8.95% NA* 11.52% NA* 9.54%
TCI PORTFOLIOS, INC.
TCI Growth 11/20/87 -5.56% 26.40% 126.25% 4.80% 9.37%
TCI Balanced 05/01/91 10.75% 29.62% 61.30% 5.33% 8.81%
TCI International+/-+/- 05/01/94 12.92% NA* 17.80% NA* 6.34%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund****+/-+/- 09/01/89 1.19% 13.48% 46.05% 2.56% 5.30%
Gold and Natural Resources Fund 09/01/89 16.53% 84.78% 62.49% 13.07% 6.85%
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 38.71% NA* 49.33% NA* 30.84%
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 8.56% NA* 15.74% NA* 10.29%
Small Company Growth Portfolio 06/30/95 12.43% NA* 39.76% NA* 25.15%
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
* Performance information is not available for the fund for part or all of the period indicated. See Fund Inception Date.
** SEC and NASD regulations require that any reporting of product performance be accompanied by standardized data and other
important disclosures on the following page. Please review this information and a product prospectus before investing.
*** Percent change in unit value price represents total return after the deduction of a 1.30% asset charge for mortality and
expense risk, administrative charges and premium tax recovery.
Percent change in unit value price represents total return after the deduction of a 1.30% asset charge for mortality and
expense risk, administrative charges and premium tax recovery.
+ Numbers in these columns represent the total percentage change in the unit value for the period indicated. This is not
an annual return figure.
++ Performance includes hypothetical performance for periods before the fund was available in The BEST OF AMERICA, where
applicable, applying contract charges to actual fund NAV's to determine the performance the fund would have achieved
inside the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that a
stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and
returns can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and
political factors.
**** Formerly Global Bond Fund.
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R)
LIFE PLANNING SERIES(SM)
FOR SINGLE PREMIUM CONTRACTS
ISSUED ON OR AFTER APRIL 16, 1990
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT SURRENDERED
APPROXIMATE CONTRACT VALUE WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF
INCEPTION 12/31/95 12/31/91 12/31/86 FUND
DATE++ TO 12/31/96 TO 12/31/96 TO 12/31/96 TO 12/31/96
FUNDS+/- AV CSV AV CSV AV CSV AV CSV
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 $59,728 $55,478 $ 86,703 $82,953 NA* NA* $104,768 $102,268
Socially Responsible Growth Fund, Inc. 10/06/93 59,098 54,848 NA* NA* NA* NA* 81,943 77,943
FIDELITY VIP FUND & VIP FUND II
Asset Manager Portfolio 09/06/89 55,832 51,582 74,834 71,084 NA* NA* 93,347 90,847
High Income Portfolio 09/19/85 55,565 51,315 89,224 85,474 $ 108,810 $ 108,810 135,060 135,060
Equity-Income Portfolio 10/09/86 55,675 51,425 101,563 97,813 141,964 141,964 140,829 140,829
Overseas Portfolio+/-+/- 01/28/87 55,157 50,907 67,399 63,649 NA* NA* 79,118 79,118
Growth Portfolio 10/09/86 55,904 51,654 92,174 88,424 169,144 169,144 162,707 162,707
Contrafund Portfolio 01/03/95 59,117 54,867 NA* NA* NA* NA* 80,875 76,625
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 51,179 46,929 52,653 48,903 64,711 64,711 92,972 92,972
Government Bond Fund 11/08/82 50,362 46,112 61,842 58,092 86,333 86,333 129,204 129,204
Total Return Fund 11/08/82 59,383 55,133 83,535 79,785 127,358 127,358 287,487 287,487
Capital Appreciation Fund 04/15/92 61,499 57,249 NA* NA* NA* NA* 82,394 78,644
Small Company Fund 10/23/95 59,902 55,652 NA* NA* NA* NA* 68,202 63,952
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 53,154 48,904 69,644 65,894 115,896 115,896 170,971 170,971
Limited Maturity Bond Portfolio 09/10/84 50,775 46,525 56,072 52,322 71,419 71,419 97,924 97,924
Partners Portfolio 03/22/94 63,183 58,933 NA* NA* NA* NA* 80,362 76,362
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 56,275 52,025 76,143 72,393 NA* NA* 115,391 115,391
Bond Fund 04/30/85 51,009 46,759 63,066 59,316 88,916 88,916 112,121 112,121
Global Securities Fund+/-+/- 11/12/90 57,407 53,157 79,155 75,405 NA* NA* 79,021 76,021
STRONG FUNDS
Discovery Fund II 05/08/92 49,040 44,790 NA* NA* NA* NA* 76,065 72,315
Special Fund II, Inc. 05/08/92 57,573 53,323 NA* NA* NA* NA* 100,525 96,775
International Stock Fund II+/-+/- 10/20/95 53,797 49,547 NA* NA* NA* NA* 54,833 50,583
TCI PORTFOLIOS, INC
TCI Growth 11/20/87 46,568 42,318 58,395 54,645 NA* NA* 102,271 102,271
TCI Balanced 05/01/91 54,658 50,408 59,420 55,670 NA* NA* 74,673 71,173
TCI International+/-+/- 05/01/94 55,732 51,482 NA* NA* NA* NA* 56,516 52,516
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund***+/-+/- 09/01/89 49,891 45,641 51,940 48,190 NA* NA* 65,263 62,763
Gold and Natural Resources Fund 09/01/89 57,581 53,331 87,255 83,505 NA* NA* 71,287 68,787
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 68,503 64,253 NA* NA* NA* NA* 73,247 68,997
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 53,587 49,337 NA* NA* NA* NA* 56,738 52,488
Small Company Growth Portfolio 06/30/95 55,521 51,271 NA* NA* NA* NA* 68,754 64,504
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
This is neither an offer to sell, nor a solicitation to buy securities. This material is authorized for distribution to prospective
investors only when preceded or accompanied by a current prospectus which contains more complete information. You should read the
prospectus carefully before investing. These performance illustrations represent past fund performance based on a hypothetical
single premium of $50,000 for a 50-year-old male non-smoker. Investment return and the principal value of such investments are not
guaranteed and will fluctuate so that an investor's shares/units, when redeemed, may be worth more or less than their original cost.
Past performance does not guarantee future returns. The performance figures reflect a mortality and expense risk charge, applicable
cost of insurance charges, surrender charges, an annual administrative charge, and applicable investment advisory fees. Please refer
to the current prospectus for details regarding these charges.
* Certain funds are less than 1, 5 or 10 years old, therefore such figures are not available for these funds.
** Performance includes hypothetical performance for periods before the fund was available in THE BEST OF AMERICA Life Planning
Series(SM), where applicable, applying contract charges to actual fund NAV's to determine the performance the fund would have
achieved in the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that a
stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and returns
can fluctuate.
*** Formerly Global Bond Fund.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and political
factors.
AV means Accumulated Value. CSV means Cash Surrender Value.
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R)
LIFE PLANNING SERIES(SM)
FOR FLEXIBLE PREMIUM CONTRACTS
- --------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT NOT SURRENDERED**
APPROXIMATE PERCENT CHANGE IN NET ASSETS WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ---------------------------------------------------------------------------------------------------------------------------
NON-ANNUALIZED PERCENT CHANGE+ ANNUALIZED PERCENT CHANGE***
INCEPTION 1 YR. TO 5 YR. TO INCEPTION TO 5 YR. TO INCEPTION TO
FUNDS+/- DATE++ 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 21.56% 90.23% 139.17% 13.72% 12.78%
Socially Responsible Growth Fund, Inc. 10/06/93 20.26% NA* 73.20% NA* 18.51%
FIDELITY VIP FUND & VIPFUND II
Asset Manager Portfolio 09/06/89 13.69% 63.78% 111.97% 10.37% 10.81%
High Income Portfolio 09/19/85 13.12% 92.90% 225.65% 14.04% 11.03%
Equity-Income Portfolio 10/09/86 13.37% 119.59% 234.45% 17.04% 12.53%
Overseas Portfolio+/-+/- 01/28/87 12.31% 48.70% 96.27% 8.26% 7.03%
Growth Portfolio 10/09/86 13.79% 94.63% 278.86% 14.25% 13.91%
Contrafund Portfolio 01/03/95 20.34% NA* 66.69% NA* 29.24%
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 4.27% 17.76% 148.47% 3.32% 6.20%
Government Bond Fund 11/08/82 2.66% 34.96% 225.10% 6.18% 8.69%
Total Return Fund 11/08/82 20.87% 83.27% 573.25% 12.88% 14.43%
Capital Appreciation Fund 04/15/92 25.13% NA* 80.54% NA* 13.37%
Small Company Fund 10/23/95 21.85% NA* 39.16% NA* 32.06%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 8.27% 53.51% 300.16% 8.95% 11.93%
Limited Maturity Bond Portfolio 09/10/84 3.47% 24.48% 141.90% 4.48% 7.44%
Partners Portfolio 03/22/94 28.53% NA* 68.96% NA* 20.81%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 14.57% 66.87% 171.81% 10.78% 10.64%
Bond Fund 04/30/85 3.96% 39.06% 171.26% 6.82% 8.93%
Global Securities Fund+/-+/- 11/12/90 16.86% 72.59% 77.53% 11.53% 9.81%
STRONG FUNDS
Discovery Fund II 05/08/92 0.00% NA* 65.15% NA* 11.40%
Special Fund II, Inc. 05/08/92 17.20% NA* 115.75% NA* 18.00%
International Stock Fund II+/-+/- 10/20/95 9.50% NA* 12.19% NA* 10.09%
TCI PORTFOLIOS, INC.
TCI Growth 11/20/87 -5.09% 29.62% 136.94% 5.33% 9.93%
TCI Balanced 05/01/91 11.31% 32.92% 65.98% 5.86% 9.36%
TCI International+/-+/- 05/01/94 13.49% NA* 19.38% NA* 6.88%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund****+/-+/- 09/01/89 1.70% 16.37% 51.56% 3.08% 5.84%
Gold and Natural Resources Fund 09/01/89 17.12% 89.49% 68.63% 13.64% 7.39%
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 39.41% NA* 50.45% NA* 31.49%
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 9.10% NA* 16.61% NA* 10.85%
Small Company Growth Portfolio 06/30/95 13.00% NA* 40.81% NA* 25.78%
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
* Performance information is not available for the fund for part or all of the period indicated. See Fund Inception Date
** SEC and NASD regulations require that any reporting of product performance be accompanied by standardized data and
other important disclosures on the following page. Please review this information and a product prospectus before
investing.
*** Percent change in unit value price represents total return after the deduction of an .80% asset charge for mortality
and expense risk, administrative charges and premium tax recovery.
+ Percent change in unit value price represents total return after the deduction of an .80% asset charge for mortality
and expense risk, administrative charges and premium tax recovery. Numbers in these columns represent the total
percentage change in the unit value for the period indicated. This is not an annual return figure.
++ Performance includes hypothetical performance for periods before the fund was available in The BEST OF AMERICA, where
applicable, applying contract charges to actual fund NAV's to determine the performance the fund would have achieved
inside the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that
a stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and
returns can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and
political factors.
**** Formerly Global Bond Fund.
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R) LIFE PLANNING SERIES(SM)
FOR FLEXIBLE PREMIUM CONTRACTS (CONT'D)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT SURRENDERED
APPROXIMATE CONTRACT VALUE WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ------------------------------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF
INCEPTION 12/31/95 12/31/91 12/31/86 FUND
DATE++ TO 12/31/96 TO 12/31/96 TO 12/31/96 TO 12/31/96
FUNDS+/- AV CSV AV CSV AV CSV AV CSV
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 $ 9,793 $4,987 $66,133 $62,769 NA* NA* $118,954 $117,032
Socially Responsible Growth Fund, Inc. 10/06/93 9,699 4,893 NA* NA* NA* NA* 46,654 42,809
FIDELITY VIP FUND & VIP FUND II
Asset Manager Portfolio 09/06/89 9,110 4,304 54,647 51,282 NA* NA* 99,503 97,580
High Income Portfolio 09/19/85 9,085 4,279 59,251 55,886 $ 159,947 $ 159,947 194,340 194,340
Equity-Income Portfolio 10/09/86 9,084 4,278 67,665 64,301 185,658 185,658 191,647 191,647
Overseas Portfolio+/-+/- 01/28/87 9,001 4,195 54,336 50,972 NA* NA* 125,293 125,293
Growth Portfolio 10/09/86 9,156 4,350 63,878 60,513 191,663 191,663 198,663 198,663
Contrafund Portfolio 01/03/95 9,675 4,869 NA* NA* NA* NA* 23,500 18,694
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 8,311 3,505 44,655 41,290 99,524 99,524 187,088 187,088
Government Bond Fund 11/08/82 8,137 3,332 48,126 44,762 120,593 120,593 221,701 221,701
Total Return Fund 11/08/82 9,727 4,921 63,269 59,905 170,082 170,082 357,799 357,799
Capital Appreciation Fund 04/15/92 10,104 5,298 NA* NA* NA* NA* 63,586 60,222
Small Company Fund 10/23/95 9,868 5,062 NA* NA* NA* NA* 20,735 15,929
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 8,649 3,843 54,416 51,051 147,478 147,478 209,444 209,444
Limited Maturity Bond Portfolio 09/10/84 8,226 3,420 45,915 42,550 107,529 107,529 152,678 152,678
Partners Portfolio 03/22/94 10,399 5,593 NA* NA* NA* NA* 37,151 32,826
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 9,195 4,389 56,988 53,624 NA* NA* 144,747 144,747
Bond Fund 04/30/85 8,258 3,452 49,145 45,781 123,856 123,856 161,231 161,231
Global Securities Fund+/-+/- 11/12/90 9,394 4,588 56,985 53,621 NA* NA* 81,050 78,647
STRONG FUNDS
Discovery Fund II 05/08/92 7,897 3,091 NA* NA* NA* NA* 54,598 51,234
Special Fund II, Inc. 05/08/92 9,416 4,610 NA* NA* NA* NA* 63,876 60,512
International Stock Fund II+/-+/- 10/20/95 8,812 4,006 NA* NA* NA* NA* 18,224 13,419
TCI PORTFOLIOS, INC
TCI Growth 11/20/87 7,534 2,728 48,157 44,793 NA* NA* 125,891 125,891
TCI Balanced 05/01/91 8,908 4,102 52,327 48,963 NA* NA* 66,835 63,952
TCI International+/-+/- 05/01/94 9,089 4,283 NA* NA* NA* NA* 28,700 24,374
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund***+/-+/- 09/01/89 8,059 3,253 46,060 42,696 NA* NA* 78,800 76,877
Gold and Natural Resources Fund 09/01/89 9,490 4,684 61,254 57,890 NA* NA* 95,213 93,291
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 11,236 6,430 NA* NA* NA* NA* 23,462 18,656
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 8,753 3,947 NA* NA* NA* NA* 18,106 13,300
Small Company Growth Portfolio 06/30/95 9,102 4,296 NA* NA* NA* NA* 20,238 15,432
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
This is neither an offer to sell, nor a solicitation to buy securities. This material is authorized for distribution to
prospective investors only when preceded or accompanied by a current prospectus which contains more complete information.
You should read the prospectus carefully before investing. These performance illustrations represent past fund performance
based on a hypothetical annual premium of $10,000 for a 45-year-old male non-smoker preferred with a level death benefit
and an initial specified amount of $495,941 (based on a guideline-level premium of $10,000 issued on a preferred basis).
Investment return and the principal value of such investments are not guaranteed and will fluctuate so that an investor's
shares/units, when redeemed, may be worth more or less than their original cost. Past performance does not guarantee future
returns. The performance figures reflect a premium load, a mortality and expense risk charge, applicable cost of insurance
charges, surrender charges, a monthly administrative charge, and applicable investment advisory fees. Please refer to the
current prospectus for details regarding these charges.
* Certain funds are less than 1, 5 or 10 years old, therefore such figures are not available for these funds.
** Performance includes hypothetical performance for periods before the fund was available in THE BEST OF AMERICA Life
Planning Series(SM), where applicable, applying contract charges to actual fund NAV's to determine the performance the
fund would have achieved in the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that
a stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and
returns can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and
political factors.
*** Formerly Global Bond Fund.
AV means Accumulated Value. CSV means Cash Surrender Value.
39
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R)
LIFE PLANNING SERIES(SM)
FOR MODIFIED SINGLE
PREMIUM CONTRACTS
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT NOT SURRENDERED
APPROXIMATE PERCENT CHANGE IN NET ASSETS WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ---------------------------------------------------------------------------------------------------------------------------
NON-ANNUALIZED PERCENT CHANGE + ANNUALIZED PERCENT CHANGE**
INCEPTION 1 YR. TO 5 YR. TO INCEPTION TO 5 YR. TO INCEPTION TO
FUNDS+/- DATE++ 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 22.54% 101.79% 153.50% 15.08% 13.68%
Socially Responsible Growth Fund, Inc. 10/06/93 21.23% NA* 77.74% NA* 19.46%
FIDELITY VIP FUND & VIPFUND II
Asset Manager Portfolio 09/06/89 14.60% 70.47% 124.77% 11.26% 11.71%
High Income Portfolio 09/19/85 14.03% 100.79% 258.69% 14.96% 11.99%
Equity-Income Portfolio 10/09/86 14.28% 128.56% 263.05% 17.98% 13.44%
Overseas Portfolio+/-+/- 01/28/87 13.22% 54.78% 112.54% 9.13% 7.89%
Growth Portfolio 10/09/86 14.71% 102.58% 311.23% 15.16% 14.83%
Contrafund Portfolio 01/03/95 21.31% NA* 67.16% NA* 29.43%
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 5.13% 22.58% 184.92% 4.16% 7.16%
Government Bond Fund 11/08/82 3.49% 40.48% 264.17% 7.03% 9.57%
Total Return Fund 11/08/82 21.84% 90.76% 654.17% 13.79% 15.35%
Capital Appreciation Fund 04/15/92 26.14% NA* 87.48% NA* 14.28%
Small Company Fund 10/23/95 22.83% NA* 40.49% NA* 33.12%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 9.14% 59.79% 341.70% 9.83% 12.83%
Limited Maturity Bond Portfolio 09/10/84 4.31% 29.57% 167.00% 5.32% 8.31%
Partners Portfolio 03/22/94 29.57% NA* 72.76% NA* 21.78%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 15.50% 73.69% 194.24% 11.67% 11.53%
Bond Fund 04/30/85 4.80% 44.75% 197.83% 7.68% 9.81%
Global Securities Fund+/-+/- 11/12/90 17.80% 79.64% 86.47% 12.43% 10.69%
STRONG FUNDS
Discovery Fund II 05/08/92 0.81% NA* 71.41% NA* 12.30%
Special Fund II, Inc. 05/08/92 18.15% NA* 123.93% NA* 18.95%
International Stock Fund II+/-+/- 10/20/95 10.38% NA* 13.27% NA* 10.98%
TCI PORTFOLIOS, INC.
TCI Growth 11/20/87 -4.32% 34.92% 154.91% 6.17% 10.81%
TCI Balanced 05/01/91 12.21% 38.36% 73.69% 6.71% 10.24%
TCI International+/-+/- 05/01/94 14.10% NA* 20.03% NA* 7.09%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund***+/-+/- 09/01/89 2.52% 21.13% 60.74% 3.91% 6.69%
Gold and Natural Resources Fund 09/01/89 20.57% 103.41% 84.44% 15.26% 8.71%
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 40.53% NA* 50.93% NA* 31.77%
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 9.98% NA* 18.01% NA* 11.74%
Small Company Growth Portfolio 06/30/95 13.91% NA* 42.50% NA* 26.79%
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
* Performance information is not available for the fund for part or all of the period indicated. See Fund Inception Date.
** Unit values reflect the deduction of applicable investment advisory fees.
+ Percent change in unit value price represents total return after the deduction of applicable investment advisory fees.
Numbers in these columns represent the total percentage change in the unit value for the period indicated. This is not
an annual return figure.
++ Performance includes hypothetical performance for periods before the fund was available in The BEST OF AMERICA, where
applicable, applying contract charges to actual fund NAV's to determine the performance the fund would have achieved
inside the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that
a stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and
returns can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and
political factors.
*** Formerly Global Bond Fund.
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R)
LIFE PLANNING SERIES(SM)
FOR MODIFIED SINGLE
PREMIUM CONTRACTS
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT SURRENDERED
APPROXIMATE CONTRACT VALUE WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF
INCEPTION 12/31/95 12/31/91 12/31/86 FUND
DATE++ TO 12/31/96 TO 12/31/96 TO 12/31/96 TO 12/31/96
FUNDS+/- AV CSV AV CSV AV CSV AV CSV
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 $60,124 $55,124 $ 92,029 $ 88,529 NA* NA* $110,855 $108,855
Socially Responsible Growth Fund, Inc. 10/06/93 59,485 54,485 NA* NA* NA* NA* 83,699 79,699
FIDELITY VIP FUND & VIP FUND II
Asset Manager Portfolio 09/06/89 56,228 51,228 77,750 74,250 NA* NA* 98,359 96,359
High Income Portfolio 09/19/85 55,949 50,949 91,695 88,195 $ 119,647 $ 119,647 147,689 147,689
Equity-Income Portfolio 10/09/86 56,070 51,070 104,366 100,866 151,280 151,280 151,098 151,098
Overseas Portfolio+/-+/- 01/28/87 55,548 50,548 70,529 67,029 NA* NA* 88,500 88,500
Growth Portfolio 10/09/86 56,281 51,281 92,421 88,921 171,428 171,428 171,592 171,592
Contrafund Portfolio 01/03/95 59,520 54,520 NA* NA* NA* NA* 80,570 75,570
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 51,576 46,576 55,807 52,307 72,595 72,595 111,589 111,589
Government Bond Fund 11/08/82 50,765 45,765 64,009 60,509 93,383 93,383 145,092 145,092
Total Return Fund 11/08/82 59,782 54,782 86,982 83,482 136,813 136,813 302,010 302,010
Capital Appreciation Fund 04/15/92 61,895 56,895 NA* NA* NA* NA* 85,849 82,349
Small Company Fund 10/23/95 60,273 55,273 NA* NA* NA* NA* 68,634 63,634
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 53,545 48,545 72,820 69,320 123,303 123,303 180,222 180,222
Limited Maturity Bond Portfolio 09/10/84 51,169 46,169 59,009 55,509 79,390 79,390 108,381 108,381
Partners Portfolio 03/22/94 63,580 58,580 NA* NA* NA* NA* 81,946 77,446
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 56,667 51,667 79,203 75,703 NA* NA* 123,021 123,021
Bond Fund 04/30/85 51,409 46,409 65,967 62,467 96,920 96,920 122,105 122,105
Global Securities Fund+/-+/- 11/12/90 57,797 52,797 81,958 78,458 NA* NA* 83,236 80,736
STRONG FUNDS
Discovery Fund II 05/08/92 49,448 44,448 NA* NA* NA* NA* 78,661 75,161
Special Fund II, Inc. 05/08/92 57,969 52,969 NA* NA* NA* NA* 102,891 99,391
International Stock Fund II+/-+/- 10/20/95 54,160 49,160 NA* NA* NA* NA* 55,316 50,316
TCI PORTFOLIOS, INC
TCI Growth 11/20/87 46,936 41,936 61,439 57,939 NA* NA* 108,046 108,046
TCI Balanced 05/01/91 55,052 50,052 62,957 59,457 NA* NA* 78,255 75,255
TCI International+/-+/- 05/01/94 55,980 50,980 NA* NA* NA* NA* 57,056 52,556
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund**+/-+/- 09/01/89 50,293 45,293 55,112 51,612 NA* NA* 70,323 68,323
Gold and Natural Resources Fund 09/01/89 59,170 54,170 92,845 89,345 NA* NA* 80,548 78,548
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 68,955 63,955 NA* NA* NA* NA* 73,373 68,373
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 53,963 48,963 NA* NA* NA* NA* 57,366 52,366
Small Company Growth Portfolio 06/30/95 55,891 50,891 NA* NA* NA* NA* 69,305 64,305
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
This is neither an offer to sell, nor a solicitation to buy securities. This material is authorized for distribution to prospective
investors only when preceded or accompanied by a current prospectus which contains more complete information. You should read
the prospectus carefully before investing. These performance illustrations represent past fund performance based on a
hypothetical single premium of $50,000 for a 50-year-old male. Investment return and the principal value of such investments
are not guaranteed and will fluctuate so that an investor's shares/units, when redeemed, may be worth more or less than their
original cost. Past performance does not guarantee future returns. All performance figures reflect the deduction of the
applicable fund-level investment advisory fees and an asset fee compromised of a mortality and expense risk charge, applicable
cost of insurance charges, tax expense charges and an annual administrative charge. Performance for the CSV columns reflect the
deduction of the applicable Surrender Charge at the end of each period. The asset fee for policy years 1-10 is 2.35% based on
current cost of insurance charges. For policy years 11+ the asset fee reduces to current rate of 1.85%. Please refer to the
current prospectus for more detailed information regarding these charges. and applicable investment advisory fees. Please refer
to the current prospectus for details regarding these charges.
* Certain funds are less than 1, 3, 5 or 10 years old, therefore such figures are not available for these funds.
++ Performance includes hypothetical performance for periods before the fund was available in THE BEST OF AMERICA Life Planning
Series (SM), where applicable, applying contract charges to actual fund NAV's to determine the performance the fund would
have achieved in the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that a
stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and returns
can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and political
factors.
** Formerly Global Bond Fund.
AV means Accumulated Value. CSV means Cash Surrender Value.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R)
LIFE PLANNING SERIES(SM)
FOR SURVIVORSHIP CONTRACTS
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT NOT SURRENDERED
APPROXIMATE PERCENT CHANGE IN NET ASSETS WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ------------------------------------------------------------------------------------------------------------------------------
NON-ANNUALIZED PERCENT CHANGE+ ANNUALIZED PERCENT CHANGE***
INCEPTION 1 YR. TO 5 YR. TO INCEPTION TO 5 YR. TO INCEPTION TO
FUNDS+/- DATE++ 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 22.54% 101.79% 153.50% 15.08% 13.68%
Socially Responsible Growth Fund, Inc. 10/06/93 21.23% NA* 77.74% NA* 19.46%
FIDELITY VIP FUND & VIP FUND II
Asset Manager Portfolio 09/06/89 14.60% 70.47% 124.77% 11.26% 11.71%
High Income Portfolio 09/19/85 14.03% 100.79% 258.69% 14.96% 11.99%
Equity-Income Portfolio 10/09/86 14.28% 128.56% 263.05% 17.98% 13.44%
Overseas Portfolio+/-+/- 01/28/87 13.22% 54.78% 112.54% 9.13% 7.89%
Growth Portfolio 10/09/86 14.71% 102.58% 311.23% 15.16% 14.83%
Contrafund Portfolio 01/03/95 21.31% NA* 67.16% NA* 29.43%
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 5.13% 22.58% 184.92% 4.16% 7.16%
Government Bond Fund 11/08/82 3.49% 40.48% 264.17% 7.03% 9.57%
Total Return Fund 11/08/82 21.84% 90.76% 654.17% 13.79% 15.35%
Capital Appreciation Fund 04/15/92 26.14% NA* 87.48% NA* 14.28%
Small Company Fund 10/23/95 22.83% NA* 40.49% NA* 33.12%
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 9.14% 59.79% 341.70% 9.83% 12.83%
Limited Maturity Bond Portfolio 09/10/84 4.31% 29.57% 167.00% 5.32% 8.31%
Partners Portfolio 03/22/94 29.57% NA* 72.76% NA* 21.78%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 15.50% 73.69% 194.24% 11.67% 11.53%
Bond Fund 04/30/85 4.80% 44.75% 197.83% 7.68% 9.81%
Global Securities Fund+/-+/- 11/12/90 17.80% 79.64% 86.47% 12.43% 10.69%
STRONG FUNDS
Discovery Fund II 05/08/92 0.81% NA* 71.41% NA* 12.30%
Special Fund II, Inc. 05/08/92 18.15% NA* 123.93% NA* 18.95%
International Stock Fund II+/-+/- 10/20/95 10.38% NA* 13.27% NA* 10.98%
TCI PORTFOLIOS, INC.
TCI Growth 11/20/87 -4.32% 34.92% 154.91% 6.17% 10.81%
TCI Balanced 05/01/91 12.21% 38.36% 73.69% 6.71% 10.24%
TCI International+/-+/- 05/01/94 14.10% NA* 20.03% NA* 7.09%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund**+/-+/- 09/01/89 2.52% 21.13% 60.74% 3.91% 6.69%
Gold and Natural Resources Fund 09/01/89 20.57% 103.41% 84.44% 15.26% 8.71%
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 40.53% NA* 50.93% NA* 31.77%
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 9.98% NA* 18.01% NA* 11.74%
Small Company Growth Portfolio 06/30/95 13.91% NA* 42.50% NA* 26.79%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* Performance information is not available for the fund for part or all of the period indicated. See Fund Inception Date.
*** Unit values reflect the deduction of applicable investment advisory fees.
+ Percent change in unit value price represents total return after the deduction of applicable investment advisory fees.
Numbers in these columns represent the total percentage change in the unit value for the period indicated. This is not an
annual return figure.
++ Performance includes hypothetical performance for periods before the fund was available in The BEST OF AMERICA, where
applicable, applying contract charges to actual fund NAV's to determine the performance the fund would have achieved inside
the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that a
stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and returns
can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and
political factors.
** Formerly Global Bond Fund.
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
FUND PERFORMANCES - THE BEST OF AMERICA(R) LIFE PLANNING SERIES(SM)
FOR SURVIVORSHIP CONTRACTS
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: ASSUMING CONTRACT SURRENDERED
APPROXIMATE CONTRACT VALUE WITH CAPITAL GAINS AND INCOME DIVIDENDS REINVESTED
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS LIFE OF
INCEPTION 12/31/95 12/31/91 12/31/86 FUND
DATE++ TO 12/31/96 TO 12/31/96 TO 12/31/96 TO 12/31/96
FUNDS+/- AV CSV AV CSV AV CSV AV CSV
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DREYFUS CORPORATION
Stock Index Fund 09/29/89 $21,542 $10,706 $142,561 $132,808 NA* NA* $257,503 $249,375
Socially Responsible Growth Fund, Inc. 10/06/93 21,317 10,481 NA* NA* NA* NA* 99,623 89,329
FIDELITY VIP FUND & VIP FUND II
Asset Manager Portfolio 09/06/89 20,128 9,291 119,015 109,262 NA* NA* 214,979 206,851
High Income Portfolio 09/19/85 20,036 9,199 128,346 118,593 $ 347,013 $ 339,969 428,610 423,734
Equity-Income Portfolio 10/09/86 20,071 9,235 146,639 136,886 401,482 394,438 416,725 410,223
Overseas Portfolio+/-+/- 01/28/87 19,885 9,048 118,139 108,386 NA* NA* 272,330 265,286
Growth Portfolio 10/09/86 20,161 9,324 138,888 129,135 413,882 406,838 446,605 440,103
Contrafund Portfolio 01/03/95 21,319 10,482 NA* NA* NA* NA* 50,450 39,613
NATIONWIDE SEPARATE ACCOUNT TRUST
Money Market Fund 11/10/81 18,446 7,610 97,635 87,882 218,057 211,013 424,956 424,956
Government Bond Fund 11/08/82 18,139 7,303 105,057 95,304 263,456 256,412 496,436 496,436
Total Return Fund 11/08/82 21,416 10,579 137,538 127,785 368,808 361,764 790,656 790,656
Capital Appreciation Fund 04/15/92 22,185 11,349 NA* NA* NA* NA* 137,739 127,986
Small Company Fund 10/23/95 21,615 10,779 NA* NA* NA* NA* 43,311 32,474
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
Growth Portfolio 09/10/84 19,158 8,321 118,645 108,892 319,377 312,333 463,425 460,174
Limited Maturity Bond Portfolio 09/10/84 18,292 7,456 100,312 90,559 235,256 228,213 339,412 336,161
Partners Portfolio 03/22/94 22,797 11,961 NA* NA* NA* NA* 80,428 69,591
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Multiple Strategies Fund 02/09/87 20,290 9,454 123,987 114,234 NA* NA* 314,660 307,617
Bond Fund 04/30/85 18,376 7,539 107,183 97,430 270,267 263,224 355,680 350,803
Global Securities Fund+/-+/- 11/12/90 20,701 9,864 123,783 114,030 NA* NA* 174,517 165,848
STRONG FUNDS
Discovery Fund II 05/08/92 17,658 6,821 NA* NA* NA* NA* 118,083 108,331
Special Fund II, Inc. 05/08/92 20,761 9,924 NA* NA* NA* NA* 137,813 128,060
International Stock Fund II+/-+/- 10/20/95 19,402 8,565 NA* NA* NA* NA* 38,162 27,325
TCI PORTFOLIOS, INC
TCI Growth 11/20/87 16,775 5,938 105,197 95,444 NA* NA* 271,405 264,361
TCI Balanced 05/01/91 19,703 8,866 114,355 104,602 NA* NA* 144,515 135,303
TCI International+/-+/- 05/01/94 20,036 9,199 NA* NA* NA* NA* 61,519 50,682
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund***+/-+/- 09/01/89 17,969 7,133 100,679 90,926 NA* NA* 169,936 161,809
Gold and Natural Resources Fund 09/01/89 21,231 10,394 136,739 126,987 NA* NA* 214,698 206,570
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
Real Estate Securities Fund 07/03/95 24,708 13,872 NA* NA* NA* NA* 49,589 38,753
WARBURG PINCUS TRUST
International Equity Portfolio+/-+/- 06/30/95 19,321 8,484 NA* NA* NA* NA* 38,522 27,685
Small Company Growth Portfolio 06/30/95 20,025 9,188 NA* NA* NA* NA* 42,849 32,013
- ------------------------------------------------------------------------------------------------------------------------------------
This is neither an offer to sell, nor a solicitation to buy securities. This material is authorized for distribution to prospective
investors only when preceded or accompanied by a current prospectus which contains more complete information. You should read the
prospectus carefully before investing. These performance illustrations represent past fund performance based on a hypothetical
annual guideline level premium of $20,000 for a 55-year old male and a 55-year old female, both non-smoker preferred, with a level
initial basic coverage death benefit of $958,894. Investment return and the principal value of such investments are not guaranteed
and will fluctuate so that an investor's shares/units, when redeemed, may be worth more or less than their original cost. Past
performance does not guarantee future returns. The performance figures reflect a mortality and expense risk charge, applicable cost
of insurance charges, surrender charges, an annual administrative charge, and applicable investment advisory fees. Please refer to
the current prospectus for details regarding these charges.
* Certain funds are less than 1, 5 or 10 years old, therefore such figures are not available for these funds.
** Performance includes hypothetical performance for periods before the fund was available in THE BEST OF AMERICA Life Planning
Series(SM), where applicable, applying contract charges to actual fund NAV's to determine the performance the fund would have
achieved in the separate account.
+/- Funds are neither insured nor guaranteed by the U.S. Government. For the Money Market Fund, there is no assurance that a
stable $1 fund NAV (used to calculate Unit Value) can be maintained. Figures quoted represent past performance and returns
can fluctuate.
+/-+/- There are increased risks associated with an investment in global markets, e.g. currency fluctuations, economic and political
factors.
*** Formerly Global Bond Fund.
AV means Accumulated Value. CSV means Cash Surrender Value.
</TABLE>
43
<PAGE> 44
NATIONWIDE VLI SEPARATE ACCOUNT-2
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at market value:
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
146,819 shares (cost $3,024,270) ................................. $ 2,949,585
Dreyfus Stock Index Fund (DryStkIx)
763,499 shares (cost $14,597,832) ................................ 15,483,766
Fidelity VIP - Equity-Income Portfolio (FidVIPEI)
2,131,003 shares (cost $38,585,366) .............................. 44,815,000
Fidelity VIP - Growth Portfolio (FidVIPGr)
1,730,628 shares (cost $51,294,462) .............................. 53,891,755
Fidelity VIP - High Income Portfolio (FidVIPHI)
1,362,065 shares (cost $16,148,006) .............................. 17,053,049
Fidelity VIP - Overseas Portfolio (FidVIPOv)
859,910 shares (cost $14,604,187) ................................ 16,200,703
Fidelity VIP II - Asset Manager Portfolio (FidVIPAM)
1,317,970 shares (cost $19,127,367) .............................. 22,313,225
Fidelity VIP II - Contrafund Portfolio (FidVIPCon)
824,740 shares (cost $12,402,278) ................................ 13,657,697
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
505,369 shares (cost $7,950,583) ................................. 8,227,404
Nationwide SAT - Government Bond Fund (NSATGvtBd)
605,008 shares (cost $6,588,470) ................................. 6,679,290
Nationwide SAT - Money Market Fund (NSATMyMkt)
34,777,014 shares (cost $34,777,014) ............................. 34,777,014
Nationwide SAT - Small Company Fund (NSATSmCo)
425,548 shares (cost $5,751,682) ................................. 5,910,856
Nationwide SAT - Total Return Fund (NSATTotRe)
3,193,395 shares (cost $37,809,735) .............................. 42,376,355
Neuberger &Berman - Growth Portfolio (NBAMTGro)
493,535 shares (cost $12,574,511) ................................ 12,723,337
Neuberger &Berman - Limited Maturity Bond Portfolio (NBAMTLMat)
197,236 shares (cost $2,784,764) ................................. 2,771,172
Neuberger &Berman - Partners Portfolio (NBAMTPart)
646,222 shares (cost $9,535,912) ................................. 10,649,743
Oppenheimer - Bond Fund (OppBdFd)
513,225 shares (cost $5,888,181) ................................. 5,968,803
Oppenheimer - Global Securities Fund (OppGlSec)
561,069 shares (cost $8,710,530) ................................. 9,914,098
Oppenheimer - Multiple Strategies Fund (OppMult)
509,706 shares (cost $7,225,046) ................................. 7,966,703
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C>
Strong Special Fund II, Inc. (StSpec2)
893,185 shares (cost $14,371,245) ................................ 17,184,873
Strong VIF - Strong Discovery Fund II (StDisc2)
624,950 shares (cost $7,308,503) ................................. 6,749,458
Strong VIF - Strong International Stock Fund II (StIntStk2)
162,907 shares (cost $1,831,224) ................................. 1,829,443
TCI Portfolios - TCI Balanced (TCIBal)
351,201 shares (cost $2,386,878) ................................. 2,648,056
TCI Portfolios - TCI Growth (TCIGro)
1,169,740 shares (cost $12,750,085) .............................. 11,978,141
TCI Portfolios - TCI International (TCIInt)
576,818 shares (cost $3,278,870) ................................. 3,437,835
TCI Portfolios - TCI Value (TCIValue)
1,637 shares (cost $9,188) ....................................... 9,133
Van Eck - Gold and Natural Resources Fund (VEGoldNR)
377,518 shares (cost $6,100,328) ................................. 6,312,096
Van Eck - Worldwide Bond Fund (VEWrldBd)
202,885 shares (cost $2,232,824) ................................. 2,252,023
Van Eck - Worldwide Emerging Markets Fund (VEWrldEMkt)
257 shares (cost $3,213) ......................................... 3,213
Van Kampen American Capital LIT - Real Estate Securities Fund (VKACRES
216,078 shares (cost $2,880,829) ................................. 3,193,630
Warburg Pincus - International Equity Portfolio (WPIntEq)
730,797 shares (cost $8,366,199) ................................. 8,389,554
Warburg Pincus - Small Company Growth Portfolio (WPSmCoGr)
514,119 shares (cost $7,238,771) ................................. 7,326,189
-------------
Total investments ............................................. 405,643,199
Accounts receivable .................................................... 3,525,975
-------------
Total assets .................................................. 409,169,174
-------------
CONTRACT OWNERS' EQUITY (NOTE 7) .......................................... $ 409,169,174
=============
</TABLE>
See accompanying notes to financial statements.
45
<PAGE> 46
<TABLE>
<CAPTION>
NATIONWIDE VLI SEPARATE ACCOUNT-2
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested capital gains and dividends . . . . . . . . . . . . . $ 16,972,691 6,764,208 3,376,057
Mortality and expense charges (note 3) . . . . . . . . . . . . . (2,983,466) (1,747,342) (879,737)
------------ ----------- -----------
Net investment activity . . . . . . . . . . . . . . . . . . . 13,989,225 5,016,866 2,496,320
------------ ----------- -----------
Proceeds from mutual fund shares sold . . . . . . . . . . . . . 275,979,207 163,574,836 184,340,809
Cost of mutual fund shares sold . . . . . . . . . . . . . . . . (266,008,543) (154,208,870) (184,441,475)
------------ ----------- -----------
Realized gain (loss) on investments . . . . . . . . . . . . . 9,970,664 9,365,966 (100,666)
Change in unrealized gain (loss) on investments . . . . . . . . 12,175,328 17,134,325 (3,604,010)
------------ ----------- -----------
Net gain (loss) on investments . . . . . . . . . . . . . . . 22,145,992 26,500,291 (3,704,676)
------------ ----------- -----------
Net increase (decrease) in contract owners'
equity resulting from operations . . . . . . . . . . . 36,135,217 31,517,157 (1,208,356)
------------ ----------- -----------
EQUITY TRANSACTIONS:
Purchase payments received from contract owners . . . . . . . . 174,104,282 106,694,208 77,172,455
Surrenders (note 2d) . . . . . . . . . . . . . . . . . . . . . . (6,124,049) (4,970,867) (1,308,994)
Death benefits . . . . . . . . . . . . . . . . . . . . . . . . . (730,700) (143,265) (15,398)
Policy loans (net of repayments) (note 5) . . . . . . . . . . . (6,468,023) (2,529,830) (2,980,396)
Deductions for surrender charges (note 2d) . . . . . . . . . . . (721,263) (364,725) (116,899)
Redemptions to pay cost of insurance charges
and administrative charges (notes 2b and 2c) . . . . . . . . (24,075,896) (14,110,656) (5,382,393)
Deductions for asset charges (note 3) . . . . . . . . . . . . . (20,037) - -
------------ ----------- -----------
Net increase (decrease) in equity transactions . . . . . . 135,964,314 84,574,865 67,368,375
------------ ----------- -----------
NET CHANGE IN CONTRACT OWNERS' EQUITY . . . . . . . . . . . . . . . 172,099,531 116,092,022 66,160,019
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD . . . . . . . . . . . . 237,069,643 120,977,621 54,817,602
------------ ----------- -----------
CONTRACT OWNERS' EQUITY END OF PERIOD . . . . . . . . . . . . . . . $ 409,169,174 237,069,643 120,977,621
============= =========== ===========
See accompanying notes to financial statements.
</TABLE>
46
<PAGE> 47
NATIONWIDE VLI SEPARATE ACCOUNT-2
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
The Nationwide VLI Separate Account-2 (the Account) was established
pursuant to a resolution of the Board of Directors of Nationwide Life Insurance
Company (the Company) on May 7, 1987. The Account has been registered as a unit
investment trust under the Investment Company Act of 1940.
The Company offers Modified Single Premium and Flexible Premium Variable
Life Insurance Policies through the Account. The primary distribution for the
contracts is through the brokerage community; however, other distributors may be
utilized.
(b) The Contracts
Prior to December 31, 1990, only contracts without a front-end sales
charge, but with a contingent deferred sales charge and certain other fees, were
offered for purchase. Beginning December 31, 1990, contracts with a front-end
sales charge, a contingent deferred sales charge and certain other fees, are
offered for purchase. See note 2 for a discussion of policy charges, and note 3
for asset charges.
Contract owners may invest in the following:
The Dreyfus Socially Responsible Growth Fund, Inc. (DrySRGro)
Dreyfus Stock Index Fund (DryStkIx)
Dreyfus Variable Investment Fund - Growth and Income Portfolio (DryGroInc)
Portfolios of the Fidelity Variable Insurance Products Fund
(Fidelity VIP);
Fidelity VIP - Equity-Income Portfolio (FidVIPEI)
Fidelity VIP - Growth Portfolio (FidVIPGr)
Fidelity VIP - High Income Portfolio (FidVIPHI)
Fidelity VIP - Overseas Portfolio (FidVIPOv)
Portfolios of the Fidelity Variable Insurance Products Fund II (Fidelity
VIP-II);
Fidelity VIP-II - Asset Manager Portfolio (FidVIPAM)
Fidelity VIP-II - Contrafund Portfolio (FidVIPCon)
Funds of the Nationwide Separate Account Trust (Nationwide SAT) (managed
for a fee by an affiliated investment advisor);
Nationwide SAT - Capital Appreciation Fund (NSATCapAp)
Nationwide SAT - Government Bond Fund (NSATGvtBd)
Nationwide SAT - Money Market Fund (NSATMyMkt)
Nationwide SAT - Small Company Fund (NSATSmCo)
Nationwide SAT - Total Return Fund (NSATTotRe)
Portfolios of the Neuberger & Berman Advisers Management Trust
(Neuberger & Berman);
Neuberger & Berman - Growth Portfolio (NBAMTGro)
Neuberger & Berman - Limited Maturity Bond Portfolio (NBAMTLMat)
Neuberger & Berman - Partners Portfolio (NBAMTPart)
Funds of the Oppenheimer Variable Account Funds (Oppenheimer);
Oppenheimer - Bond Fund (OppBdFd)
Oppenheimer - Global Securities Fund (OppGlSec)
Oppenheimer - Multiple Strategies Fund (OppMult)
47
<PAGE> 48
Strong Special Fund II, Inc. (StSpec2)
Funds of the Strong Variable Insurance Funds, Inc. (Strong VIF);
Strong VIF - Strong Discovery Fund II (StDisc2)
Strong VIF - Strong International Stock Fund II (StIntStk2)
Portfolios of the TCI Portfolios, Inc. (TCI Portfolios);
TCI Portfolios - TCI Balanced (TCIBal)
TCI Portfolios - TCI Growth (TCIGro)
TCI Portfolios - TCI International (TCIInt)
TCI Portfolios - TCI Value (TCIValue)
Funds of the Van Eck Worldwide Insurance Trust (Van Eck);
Van Eck - Gold and Natural Resources Fund (VEGoldNR)
Van Eck - Worldwide Bond Fund (VEWrldBd) (formerly Van Eck - Global
Bond Fund (VEGlobBd))
Van Eck - Worldwide Emerging Markets Fund (VEWrldEMkt)
Fund of the Van Kampen American Capital Life Investment Trust
(Van Kampen American Capital);
Van Kampen American Capital LIT - Real Estate Securities Fund
(VKACRESec)
Portfolios of the Warburg Pincus Trust (Warburg Pincus);
Warburg Pincus - International Equity Portfolio (WPIntEq)
Warburg Pincus - Post Venture Capital Portfolio (WPPVenCap)
Warburg Pincus - Small Company Growth Portfolio (WPSmCoGr)
At December 31, 1996, contract owners have invested in all of the above
funds (except Dreyfus Variable Investment Fund - Growth and Income Portfolio and
Warburg Pincus - Post Venture Capital Portfolio.) The contract owners' equity is
affected by the investment results of each fund, equity transactions by contract
owners and certain contract expenses (see notes 2 and 3). The accompanying
financial statements include only contract owners' purchase payments pertaining
to the variable portions of their contracts and exclude any purchase payments
for fixed dollar benefits, the latter being included in the accounts of the
Company.
(c) Security Valuation, Transactions and Related Investment Income
The market value of the underlying mutual funds is based on the closing
net asset value per share at December 31, 1996. Fund purchases and sales are
accounted for on the trade date (date the order to buy or sell is executed). The
cost of investments sold is determined on a specific identification basis, and
dividends (which include capital gain distributions) are accrued as of the
ex-dividend date.
(d) Federal Income Taxes
Operations of the Account form a part of, and are taxed with, operations
of the Company, which is taxed as a life insurance company under the provisions
of the Internal Revenue Code.
Fund purchases and sales are accounted for on the trade date (date the
order to buy or sell is executed). The cost of investments sold is determined on
a specific identification basis, and dividends (which include capital gain
distributions) are accrued as of the ex-dividend date.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles may require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(f) Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the
current year presentation.
48
<PAGE> 49
(2) POLICY CHARGES
(a) Deductions from Premiums
On multiple payment contracts and flexible premium contracts, the Company
deducts a charge for state premium taxes equal to 2.5% of all premiums received
to cover the payment of these premium taxes. The Company also deducts a sales
load from each premium payment received not to exceed 3.5% of each premium
payment.
On last survivor flexible premium contracts, the Company deducts a charge
for state premium taxes equal to 3.5% of all premiums received to cover the
payment of these premium taxes. The Company also deducts a sales load from each
premium payment received not to exceed 5% of each premium payment during the
first ten years and 1.5% of each premium payment thereafter.
The Company may at its sole discretion reduce this sales loading.
(b) Cost of Insurance
A cost of insurance charge is assessed monthly against each contract by
liquidating units. The amount of the charge is based upon age, sex, rate class
and net amount at risk (death benefit less total contract value).
For last survivor flexible premium contracts, the monthly cost of
insurance is determined in a manner that reflects the anticipated mortality of
the two insureds and the fact that the death benefit is not payable until the
death of the second insured to die.
(c) Administrative Charges
An administrative charge is assessed against each contract to recover
policy maintenance, accounting, record keeping and other administrative expenses
and is assessed against each contract by liquidating units.
For single premium contracts, the Company deducts an annual administrative
charge which is determined as follows:
Contracts issued prior to April 16, 1990:
Purchase payments totalling less than $25,000 - $10/month
Purchase payments totalling $25,000 or more - none
Contracts issued on or after April 16, 1990:
Purchase payments totalling less than $25,000 - $90/year ($65/year in
New York)
Purchase payments totalling $25,000 or more - $50/year
For multiple payment contracts, the Company currently deducts a monthly
administrative charge of $5 (may deduct up to $7.50, maximum).
For flexible premium contracts, the Company currently deducts a monthly
administrative charge of $25 during the first policy year and $5 per month
thereafter (may deduct up to $7.50, maximum). Additionally, the Company deducts
an increase charge of $2.04 per year per $1,000 applied to any increase in the
specified amount during the first 12 months after the increase becomes
effective.
For modified single premium contracts, the monthly charge is equal to an
annual rate of .30% multiplied by the policy's cash value. For policy years 11
and later, this monthly charge is reduced to an annual rate of 0.15% of the
policy's cash value. The monthly charge is subject to a $10 minimum.
For last survivor flexible premium contracts, the Company deducts a
monthly administrative charge equal to the sum of the policy charge and the
basic coverage charge. For policy years one through ten the policy charge is
$10. Additionally, there is a $0.04 per $1000 basic coverage charge (not less
than $20 or more than $80 per policy). For policy years eleven and after, the
policy charge is $5. Additionally, there is a $0.02 per $1000 basic coverage
charge (not less than $10 or more than $40 per policy). Additionally, the
Company deducts a monthly increase charge of $2.40 per $1000 applied to any
increase in the specified amount during the first 12 months after the increase
becomes effective. The charge may be raised to $3.60 per $1000 of increase per
year at the Company's discretion.
49
<PAGE> 50
(d) Surrender Charges
Policy surrenders result in a redemption of the contract value from the
Account and payment of the surrender proceeds to the contract owner or designee.
The surrender proceeds consist of the contract value, less any outstanding
policy loans, and less a surrender charge, if applicable. The charge is
determined according to contract type.
For single premium contracts, the charge is determined based upon a
specified percentage of the original purchase payment. For single premium
contracts issued prior to April 16, 1990, the charge is 8% in the first year and
declines to 0% after the ninth year. For single premium contracts issued on or
after April 16, 1990, the charge is 8.5% in the first year, and declines to 0%
after the ninth year.
For multiple payment contracts and flexible premium contracts, the amount
charged is based upon a specified percentage of the initial surrender charge,
which varies by issue age, sex and rate class. The charge is 100% of the initial
surrender charge in the first year, declining to 0% after the ninth year.
For modified single premium contracts, the amount charged is based on the
original purchase payment. The charge is 10% in the first year, declining to 0%
in the ninth year.
For last survivor flexible premium contracts, the charge is 100% of the
initial surrender charge, declining to 0% in the fourteenth year if the average
issue age is 74 or less. The charge is 100% of the initial surrender charge,
declining to 0% in the ninth year if the average issue age is 75 or greater. For
last survivor flexible payment contracts, the initial surrender charge is
comprised of two components, an underwriting surrender charge and a sales
surrender charge.
The Company may waive the surrender charge for certain contracts in which
the sales expenses normally associated with the distribution of a contract are
not incurred.
(3) ASSET CHARGES
For single premium contracts, the Company deducts a charge from the
contract to cover mortality and expense risk charges related to operations, and
to recover policy maintenance and premium tax charges. For contracts issued
prior to April 16, 1990, the charge is equal to an annual rate of .95% during
the first ten policy years, and .50% thereafter. A reduction of charges on these
contracts is possible in policy years six through ten for those contracts
achieving certain investment performance criteria. For single premium contracts
issued on or after April 16, 1990, the charge is equal to an annual rate of
1.30% during the first ten policy years, and 1.00% thereafter.
For multiple payment contracts and flexible premium contracts, the Company
deducts a charge equal to an annual rate of .80%, with certain exceptions, to
cover mortality and expense risk charges related to operations. The above
charges are assessed through the daily unit value calculation.
For modified single premium contracts, the Company deducts an annual rate
of .90% charged against the cash value of the contacts. This charge is assessed
monthly against each contract by liquidating units.
For last survivor flexible premium contracts, the Company deducts an
annual rate of .80% in policy years one through ten. This charge is assessed
monthly by liquidating units. In policy years eleven and greater, the Company
deducts an annual rate of .80% if the cash value of the contract is less than
$100,000. If the cash value is greater than or equal to $100,000, the Company
reduces the annual asset fee rate to .30%.
(4) DEATH BENEFITS
Death benefits result in a redemption of the contract value from the
Account and payment of the death benefit proceeds, less any outstanding policy
loans (and policy charges), to the legal beneficiary. For last survivor flexible
premium contracts, the proceeds are payable on the death of the last surviving
insured. The excess of the death benefit proceeds over the contract value on the
date of death is paid by the Company's general account.
50
<PAGE> 51
(5) POLICY LOANS (NET OF REPAYMENTS)
Contract provisions allow contract owners to borrow up to 90% (50% during
first year of single and modified single premium contracts) of a policy's cash
surrender value. For single premium contracts issued prior to April 16, 1990,
6.5% interest is due and payable annually in advance. For single premium
contracts issued on or after April 16, 1990, multiple payment, flexible premium,
modified single and last survivor flexible premium contracts, 6% interest is due
and payable in advance on the policy anniversary when there is a loan
outstanding on the policy.
At the time the loan is granted, the amount of the loan is transferred
from the Account to the Company's general account as collateral for the
outstanding loan. Collateral amounts in the general account are credited with
the stated rate of interest in effect at the time the loan is made, subject to a
guaranteed minimum rate. Loan repayments result in a transfer of collateral,
including interest, back to the Account.
(6) SCHEDULE I
Schedule I presents the components of the change in the unit values, which
are the basis for determining contract owners' equity. This schedule is
presented for each series, as applicable, in the following format:
- Beginning unit value - Jan. 1
- Reinvested capital gains and dividends
(This amount reflects the increase in the unit value due to
capital gains and dividend distributions from the underlying
mutual funds.)
- Unrealized gain (loss)
(This amount reflects the increase (decrease) in the unit value
resulting from the market appreciation (depreciation) of the
underlying mutual funds.)
- Asset charges
(This amount reflects the decrease in the unit value due to the
charges discussed in note 3.)
- Ending unit value - Dec. 31
- Percentage increase (decrease) in unit value.
51
<PAGE> 52
(7) COMPONENTS OF CONTRACT OWNERS' EQUITY
The following is a summary of contract owners' equity at December 31, 1996,
for each series, in both the accumulation and payout phases.
Contract owners' equity represented by:
<TABLE>
<CAPTION>
UNITS UNIT VALUE
----- ----------
<S> <C> <C> <C>
Single Premium contracts issued prior to April 16, 1990:
Fidelity VIP - Equity-Income Portfolio ........................ 8,709 $29.854628 $260,004
Fidelity VIP - Growth Portfolio ............................... 5,280 34.379126 181,522
Fidelity VIP - High Income Portfolio .......................... 3,462 24.493313 84,796
Fidelity VIP - Overseas Portfolio ............................. 5,297 19.654083 104,108
Fidelity VIP-II - Asset Manager Portfolio ..................... 1,158 20.525705 23,769
Nationwide SAT - Government Bond Fund ......................... 2,831 19.842234 56,173
Nationwide SAT - Money Market Fund ............................ 28,405 14.875178 422,529
Nationwide SAT - Total Return Fund ............................ 1,189 26.717684 31,767
Neuberger &Berman - Growth Portfolio .......................... 5,398 24.838185 134,077
Neuberger &Berman - Limited Maturity Bond Portfolio ........... 5,192 16.433880 85,325
Oppenheimer - Global Securities Fund .......................... 1,616 13.422186 21,690
Strong Special Fund II, Inc. .................................. 406 21.426416 8,699
TCI Portfolios - TCIGrowth .................................... 8,408 24.053649 202,243
Van Eck - Gold and Natural Resources Fund ..................... 4,593 15.014547 68,962
Van Eck - Worldwide Bond Fund ................................. 23 14.682655 338
Van Kampen American Capital LIT - Real Estate Securities Fund . 5,134 15.011508 77,069
Warburg Pincus - International Equity Portfolio ............... 1,802 11.634515 20,965
Single Premium contracts issued on or after April 16, 1990:
The Dreyfus Socially Responsible Growth Fund, Inc. ............ 16,672 17.041821 284,121
Dreyfus Stock Index Fund ...................................... 166,883 16.474993 2,749,396
Fidelity VIP - Equity-Income Portfolio ........................ 556,249 24.419978 13,583,588
Fidelity VIP - Growth Portfolio ............................... 436,608 23.774932 10,380,326
Fidelity VIP - High Income Portfolio .......................... 160,710 25.198564 4,049,661
Fidelity VIP - Overseas Portfolio ............................. 349,868 14.155666 4,952,615
Fidelity VIP-II - Asset Manager Portfolio ..................... 328,224 20.046209 6,579,647
Fidelity VIP-II - Contrafund Portfolio ........................ 253,591 13.256842 3,361,816
Nationwide SAT - Capital Appreciation Fund .................... 69,468 17.984058 1,249,317
Nationwide SAT - Government Bond Fund ......................... 215,649 16.449774 3,547,377
Nationwide SAT - Money Market Fund ............................ 1,264,987 12.479104 15,785,904
Nationwide SAT - Small Company Fund ........................... 84,265 13.833221 1,165,656
Nationwide SAT - Total Return Fund ............................ 145,392 23.035683 3,349,204
Neuberger &Berman - Growth Portfolio .......................... 171,390 17.521012 3,002,926
Neuberger &Berman - Limited Maturity Bond Portfolio ........... 72,295 14.088625 1,018,537
Neuberger &Berman - Partners Portfolio ........................ 166,759 17.259712 2,878,212
Oppenheimer - Bond Fund ....................................... 107,202 16.608318 1,780,445
Oppenheimer - Global Securities Fund .......................... 112,397 13.270426 1,491,556
Oppenheimer - Multiple Strategies Fund ........................ 137,052 18.701076 2,563,020
Strong Special Fund II, Inc. .................................. 145,314 21.077454 3,062,849
Strong VIF - Strong Discovery Fund II ......................... 96,856 16.133543 1,562,630
Strong VIF - Strong International Stock Fund II ............... 51,959 11.141803 578,917
TCI Portfolios - TCIBalanced .................................. 38,880 14.303509 556,120
TCI Portfolios - TCIGrowth .................................... 187,431 16.163625 3,029,564
TCI Portfolios - TCIInternational ............................. 140,670 11.748051 1,652,598
Van Eck - Gold and Natural Resources Fund ..................... 179,378 16.582948 2,974,616
Van Eck - Worldwide Bond Fund ................................. 51,233 14.339608 734,661
Van Kampen American Capital LIT - Real Estate Securities Fund . 77,060 14.933196 1,150,752
Warburg Pincus - International Equity Portfolio ............... 229,373 11.573771 2,654,711
Warburg Pincus - Small Company Growth Portfolio ............... 101,386 13.975650 1,416,935
Multiple Payment contracts and Flexible Premium contracts:
The Dreyfus Socially Responsible Growth Fund, Inc. ............ 149,312 17.319589 2,586,022
Dreyfus Stock Index Fund ...................................... 743,163 16.744674 12,444,022
Fidelity VIP - Equity-Income Portfolio ........................ 1,203,661 25.185570 30,314,888
Fidelity VIP - Growth Portfolio ............................... 1,774,112 24.186560 42,909,666
</TABLE>
52
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
Fidelity VIP - High Income Portfolio .......................... 519,177 23.588786 12,246,755
Fidelity VIP - Overseas Portfolio ............................. 723,688 15.324813 11,090,383
Fidelity VIP-II - Asset Manager Portfolio ..................... 858,375 18.169993 15,596,668
Fidelity VIP-II - Contrafund Portfolio ........................ 741,153 13.356323 9,899,079
Nationwide SAT - Capital Appreciation Fund .................... 373,658 18.410667 6,879,293
Nationwide SAT - Government Bond Fund ......................... 196,023 15.383251 3,015,471
Nationwide SAT - Money Market Fund ............................ 1,548,800 12.214743 18,918,194
Nationwide SAT - Small Company Fund ........................... 325,390 13.915643 4,528,011
Nationwide SAT - Total Return Fund ............................ 1,740,045 21.988773 38,261,455
Neuberger &Berman - Growth Portfolio .......................... 542,729 17.282005 9,379,445
Neuberger &Berman - Limited Maturity Bond Portfolio ........... 117,219 13.551318 1,588,472
Neuberger &Berman - Partners Portfolio ........................ 434,744 17.469360 7,594,699
Oppenheimer - Bond Fund ....................................... 260,488 15.764821 4,106,547
Oppenheimer - Global Securities Fund .......................... 616,399 13.487753 8,313,837
Oppenheimer - Multiple Strategies Fund ........................ 287,199 18.446363 5,297,777
Strong VIF - Strong Discovery Fund II ......................... 305,653 16.514861 5,047,817
Strong VIF - Strong International Stock Fund II ............... 103,783 11.208230 1,163,224
Strong Special Fund II, Inc. .................................. 649,651 21.575419 14,016,493
TCI Portfolios - TCIBalanced .................................. 137,856 14.642920 2,018,614
TCI Portfolios - TCIGrowth .................................... 564,722 15.327392 8,655,715
TCI Portfolios - TCIInternational ............................. 145,930 11.890858 1,735,233
TCI Portfolios - TCI Value .................................... 900 10.143687 9,129
Van Eck - Gold and Natural Resources Fund ..................... 174,641 18.284590 3,193,239
Van Eck - Worldwide Bond Fund ................................. 110,868 13.479157 1,494,407
Van Eck - Worldwide Emerging Markets Fund ..................... 319 10.078948 3,215
Van Kampen American Capital LIT - Real Estate Securities Fund . 120,572 15.045195 1,814,029
Warburg Pincus - International Equity Portfolio ............... 469,367 11.660648 5,473,123
Warburg Pincus - Small Company Growth Portfolio ............... 402,279 14.080553 5,664,311
Modified Single Premium and Last Survivor Flexible Premium contracts:
The Dreyfus Socially Responsible Growth Fund, Inc. ............ 7,118 11.180091 79,580
Dreyfus Stock Index Fund ...................................... 25,438 11.459856 291,516
Fidelity VIP - Equity-Income Portfolio ........................ 61,195 10.790149 660,303
Fidelity VIP - Growth Portfolio ............................... 40,595 10.446167 424,062
Fidelity VIP - High Income Portfolio .......................... 62,142 10.830462 673,027
Fidelity VIP - Overseas Portfolio ............................. 5,158 10.668178 55,026
Fidelity VIP-II - Asset Manager Portfolio ..................... 10,453 11.022140 115,214
Fidelity VIP-II - Contrafund Portfolio ........................ 35,353 11.249999 397,721
Nationwide SAT - Capital Appreciation Fund .................... 8,542 11.610340 99,176
Nationwide SAT - Government Bond Fund ......................... 5,711 10.679205 60,989
Nationwide SAT - Money Market Fund ............................ 304,482 10.339005 3,148,041
Nationwide SAT - Small Company Fund ........................... 20,576 10.524418 216,550
Nationwide SAT - Total Return Fund ............................ 64,330 11.444877 736,249
Neuberger &Berman - Growth Portfolio .......................... 21,053 9.869834 207,790
Neuberger &Berman - Limited Maturity Bond Portfolio ........... 7,552 10.477247 79,124
Neuberger &Berman - Partners Portfolio ........................ 15,462 11.476324 177,447
Oppenheimer - Bond Fund ....................................... 7,727 10.644626 82,251
Oppenheimer - Global Securities Fund .......................... 8,064 10.833847 87,364
Oppenheimer - Multiple Strategies Fund ........................ 9,746 10.937578 106,598
Strong Special Fund II, Inc. .................................. 9,106 10.766829 98,043
Strong VIF - Strong Discovery Fund II ......................... 14,115 9.884557 139,521
Strong VIF - Strong International Stock Fund II ............... 8,692 10.054422 87,393
TCI Portfolios - TCIBalanced .................................. 6,725 10.931147 73,512
TCI Portfolios - TCIGrowth .................................... 9,987 9.118427 91,066
TCI Portfolios - TCIInternational ............................. 4,661 10.773558 50,216
Van Eck - Gold and Natural Resources Fund ..................... 7,974 10.056004 80,187
Van Eck - Worldwide Bond Fund ................................. 2,209 10.516764 23,232
Van Kampen American Capital LIT - Real Estate Securities Fund . 11,112 13.673840 151,944
Warburg Pincus - International Equity Portfolio ............... 24,290 9.935018 241,322
Warburg Pincus - Small Company Growth Portfolio ............... 24,804 9.827590 243,764
------ -------- ------------
$409,169,174
============
</TABLE>
53
<PAGE> 54
SCHEDULE I
NATIONWIDE VLI SEPARATE ACCOUNT-2
SINGLE PREMIUM CONTRACTS ISSUED PRIOR TO APRIL 16, 1990
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
FIDVIPEI FIDVIPGR FIDVIPHI FIDVIPOV FIDVIPAM
-------- -------- -------- -------- --------
1996**
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan 1 $26.373971 30.259267 21.685282 17.526172 18.081878
- -------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.217030 2.174262 1.977825 .431349 1.189904
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.528645 2.256603 1.050520 1.872575 1.435663
- -------------------------------------------------------------------------------------------------------------------------------
Asset charges (.265018) (.311006) (.220314) (.176013) (.181740)
- -------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $29.854628 34.379126 24.493313 19.654083 20.525705
- -------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* 13% 14% 13% 12% 14%
================================================================================================================================
1995
Beginning unit value - Jan 1 $19.708533 22.566466 18.151674 16.131866 15.607540
- -------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.542607 .124738 1.314664 .123427 .327932
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 5.341041 7.828480 2.410020 1.428229 2.304058
- -------------------------------------------------------------------------------------------------------------------------------
Asset charges (.218210) (.260417) (.191076) (.157350) (.157652)
- -------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $26.373971 30.259267 21.685282 17.526172 18.081878
- -------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* 34% 34% 19% 9% 16%
================================================================================================================================
1994
Beginning unit value - Jan 1 $18.583057 22.785679 18.612185 16.009316 16.778042
- -------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.395798 1.371061 1.706032 .082663 .815806
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.087894) (1.381165) (1.991707) .196908 (1.832732)
- -------------------------------------------------------------------------------------------------------------------------------
Asset charges (.182428) (.209109) (.174836) (.157021) (.153576)
- -------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $19.708533 22.566466 18.151674 16.131866 15.607540
- -------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* 6% (1)% (2)% 1% (7)%
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NSATGVTBD NSATMYMKT NSATTOTRE
--------- --------- ---------
1996
<S> <C> <C> <C>
Beginning unit value - Jan. 1 19.357639 14.287454 22.138653
- --------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.200383 .727569 1.479674
- --------------------------------------------------------------------------------------------
Unrealized gain (loss) (.533024) .000000 3.328301
- --------------------------------------------------------------------------------------------
Asset charges (.182764) (.139845) (.228944)
- --------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 19.842234 14.875178 26.717684
- --------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* 3% 4% 21%
============================================================================================
1995
Beginning unit value - Jan. 1 16.457035 13.652006 17.312690
- --------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.167149 .768745 1.720678
- --------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.903991 .000000 3.293404
- --------------------------------------------------------------------------------------------
Asset charges (.170536) (.133297) (.188119)
- --------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 19.357639 14.287454 22.138653
- --------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* 18% 5% 28%
============================================================================================
1994
Beginning unit value - Jan. 1 17.168348 13.267517 17.291720
- --------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 1.079469 .512535 .875020
- --------------------------------------------------------------------------------------------
Unrealized gain (loss) (1.633239) .000000 (.688478)
- --------------------------------------------------------------------------------------------
Asset charges (.157543) (.128046) (.165572)
- --------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 16.457035 13.652006 17.312690
- --------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (4)% 3% 0%
============================================================================================
<FN>
* An annualized rate of return cannot be determined as asset charges do not
include the policy charges discussed in note 2.
** No other investment options were being utilized.
</TABLE>
54
<PAGE> 55
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
SINGLE PREMIUM CONTRACTS ISSUED PRIOR TO APRIL 16, 1990
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NBAMTGRO NBAMTLDMAT OPPGLSEC STSPEC2
-------- ---------- -------- -------
1996***
<S> <C> <C> <C> <C>
Beginning unit value - Jan 1 $22.976381 15.906671 11.503363 18.309087
- -----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 2.084651 1.338753 .000000 .861320
- -----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .004126 (.659070) 2.036434 2.443023
- -----------------------------------------------------------------------------------------------------------------
Asset charges (.226973) (.152474) (.117611) (.187014)
- -----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $24.838185 16.433880 13.422186 21.426416
- -----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
unit value* (a) 8% 3% 17% 17%
=================================================================================================================
1995
Beginning unit value - Jan 1 $17.608267 14.475203 11.358489 14.690448
- -----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .623265 .804090 .298934 .761035
- -----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 4.945641 .771696 (.045712) 3.013032
- -----------------------------------------------------------------------------------------------------------------
Asset charges (.200792) (.144318) (.108348) (.155428)
- -----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $22.976381 15.906671 11.503363 18.309087
- -----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 30% 10% 1% 25%
=================================================================================================================
1994
Beginning unit value - Jan 1 $18.709214 14.635617 12.162716 14.315226
- -----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 2.255334 .618309 .214436 .411358
- -----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (3.185612) (.641424) (.903773) .103258
- -----------------------------------------------------------------------------------------------------------------
Asset charges (.170669) (.137299) (.114890) (.139394)
- -----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $17.608267 14.475203 11.358489 14.690448
- -----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (6)% (1)% (7)% 3%
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TCIGRO VEGOLDNR VEWRLDBD VKACRESEC WPINTEQ
------ -------- -------- --------- --------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan 1 25.381408 12.839256 14.458585 10.784280 10.679811
- -----------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends 2.847171 .272272 .394300 .288822 .226874
- -----------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (3.934619) 2.040791 (.034088) 4.051625 .835595
- -----------------------------------------------------------------------------------------------------------------------------
Asset charges (.240311) (.137772) (.136142) (.113219) (.107765)
- -----------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 24.053649 15.014547 14.682655 15.011508 11.634515
- -----------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
unit value* (a) (5)% 17% 2% 39% 9%
=============================================================================================================================
1995
Beginning unit value - Jan 1 19.544976 11.677805 12.443161 10.000000 **
- -----------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .022491 .115292 1.008475 .092106
- -----------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 6.032555 1.160549 1.138120 .740132
- -----------------------------------------------------------------------------------------------------------------------------
Asset charges (.218614) (.114390) (.131171) (.047958)
- -----------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 25.381408 12.839256 14.458585 10.784280
- -----------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 30% 10% 16% 8%(B)
=============================================================================================================================
1994
Beginning unit value - Jan 1 19.964524 12.382561 12.729709 ** **
- -----------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .002137 .062321 .051271
- -----------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.236035) (.652194) (.220753)
- -----------------------------------------------------------------------------------------------------------------------------
Asset charges (.185650) (.114883) (.117066)
- -----------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 19.544976 11.677805 12.443161
- -----------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (2)% (6)% (2)%
=============================================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
55
<PAGE> 56
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
SINGLE PREMIUM CONTRACTS ISSUED ON OR AFTER APRIL 16, 1990
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DRYSRGRO DRYSTKIX FIDVIPEI FIDVIPGR FIDVIPHI
-------- -------- -------- -------- --------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $14.242220 13.621789 21.648958 20.999607 22.388295
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .735836 .587431 .998669 1.508424 2.041281
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.266937 2.459672 2.069513 1.561724 1.079684
- -----------------------------------------------------------------------------------------------------------
Asset charges (.203172) (.193899) (.297162) (.294823) (.310696)
- -----------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $17.041821 16.474993 24.419978 23.774932 25.198564
- -----------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 20% 21% 13% 13% 13%
============================================================================================================
1995
Beginning unit value - Jan. 1 $10.722275 10.088849 16.234159 15.715602 18.805616
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .392053 .361339 1.269479 .086841 1.361583
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.289798 3.326196 4.390826 5.444880 2.491513
- -----------------------------------------------------------------------------------------------------------
Asset charges (.161906) (.154595) (.245506) (.247716) (.270417)
- -----------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $14.242220 13.621789 21.648958 20.999607 22.388295
- -----------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 33% 35% 33% 34% 19%
============================================================================================================
1994
Beginning unit value - Jan. 1 $10.702403 10.131165 15.360584 15.923752 19.350153
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .276372 .283260 1.152726 .957853 1.773098
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.117327) (.195255) (.073161) (.966373) (2.069306)
- -----------------------------------------------------------------------------------------------------------
Asset charges (.139173) (.130321) (.205990) (.199630) (.248329)
- -----------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $10.722275 10.088849 16.234159 15.715602 18.805616
- -----------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 0% 0% 6% (1)% (3)%
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDVIPOV FIDVIPAM FIDVIPCON NSATCAPAP NSATGVTBD
-------- -------- --------- --------- ---------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 12.667544 17.721708 11.071965 14.444672 16.104612
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .311669 1.165823 .104326 .749268 .996469
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.350232 1.401973 2.236026 2.998693 (.443598)
- -----------------------------------------------------------------------------------------------------------
Asset charges (.173779) (.243295) (.155475) (.208575) (.207709)
- -----------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 14.155666 20.046209 13.256842 17.984058 16.449774
- -----------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 12% 13% 20% 25% 2%
============================================================================================================
1995
Beginning unit value - Jan. 1 11.700527 15.350115 10.000000 11.312336 13.739287
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .089493 .322418 .142783 .642275 .972265
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.033414 2.260958 .998389 2.653961 1.587542
- -----------------------------------------------------------------------------------------------------------
Asset charges (.155890) (.211783) (.069207) (.163900) (.194482)
- -----------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 12.667544 17.721708 11.071965 14.444672 16.104612
- -----------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 8% 15% 11%(B) 28% 17%
============================================================================================================
1994
Beginning unit value - Jan. 1 11.652241 16.559029 ** 11.563943 14.383265
- -----------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .060146 .804872 .182742 .902346
- -----------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .144272 (1.806726) (.286826) (1.366016)
- -----------------------------------------------------------------------------------------------------------
Asset charges (.156132) (.207060) (.147523) (.180308)
- -----------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 11.700527 15.350115 11.312336 13.739287
- -----------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 0% (7)% (2)% (4)%
============================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
56
<PAGE> 57
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
SINGLE PREMIUM CONTRACTS ISSUED ON OR AFTER APRIL 16, 1990
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NSATMYMKT NSATSMCO NSATTOTRE NBAMTGRO NBAMTLMAT
--------- -------- --------- -------- ---------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan 1 $12.028786 11.410311 19.154939 16.264834 13.684722
- ------------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .611421 .133295 1.276326 1.474851 1.151075
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 2.456523 2.875006 .000818 (.567983)
- ------------------------------------------------------------------------------------------------------------------------------------
Asset charges (.161103) (.166908) (.270588) (.219491) (.179189)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $12.479104 13.833221 23.035683 17.521012 14.088625
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 4% 21% 20% 8% 3%
====================================================================================================================================
1995
Beginning unit value - Jan 1 $11.534440 10.000000 15.031721 12.508337 12.496729
- ------------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .648458 .017459 1.489410 .442496 .693794
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 1.418328 2.856936 3.508824 .664378
- ------------------------------------------------------------------------------------------------------------------------------------
Asset charges (.154112) (.025476) (.223128) (.194823) (.170179)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $12.028786 11.410311 19.154939 16.264834 13.684722
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 4% 14%(b) 27% 30% 10%
====================================================================================================================================
1994
Beginning unit value - Jan 1 $11.249231 ** 15.066007 13.336899 12.679406
- ------------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .433762 .760244 1.607088 .535454
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 (.597472) (2.269450) (.555628)
- ------------------------------------------------------------------------------------------------------------------------------------
Asset charges (.148553) (.197058) (.166200) (.162503)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $11.534440 15.031721 12.508337 12.496729
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 3% 0% (6)% (1)%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NBAMTPART OPPBDFD OPPGLSEC OPPMULT STDISC2 STINTSTK2
--------- ------- -------- ------- ------- ---------
1996***
<S> <C> <C> <C> <C> <C> <C>
Beginning unit value - Jan 1 13.495873 16.056725 11.413379 16.404926 16.214896 10.226632
- ------------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .549661 1.030165 .000000 1.247087 3.300617 .050938
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.411340 (.269155) 2.016448 1.276232 (3.177170) 1.007488
- ------------------------------------------------------------------------------------------------------------------------------------
Asset charges (.197162) (.209417) (.159401) (.227169) (.204800) (.143255)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 17.259712 16.608318 13.270426 18.701076 16.133543 11.141803
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 28% 3% 16% 14% (1)% 9%
====================================================================================================================================
1995
Beginning unit value - Jan 1 10.018146 13.903136 11.309050 13.693997 12.144445 10.000000
- ------------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .081860 .956955 .297396 1.103154 .211667 .041085
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.550382 1.391543 (.045694) 1.805769 4.042004 .209467
- ------------------------------------------------------------------------------------------------------------------------------------
Asset charges (.154515) (.194909) (.147373) (.197994) (.183220) (.023920)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 13.495873 16.056725 11.413379 16.404926 16.214896 10.226632
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 35% 15% 1% 20% 34% 2%(b)
====================================================================================================================================
1994
Beginning unit value - Jan 1 10.000000 14.362878 12.152136 14.148115 13.003547 **
- ------------------------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .809172 .214078 .720350 .971167
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .072562 (1.086058) (.900362) (.993926) (1.670283)
- ------------------------------------------------------------------------------------------------------------------------------------
Asset charges .054416 (.182856) (.156802) (.180542) (.159986)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 10.018146 13.903136 11.309050 13.693997 12.144445
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 0%(b) (3)% (7)% (3)% (7)%
====================================================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
57
<PAGE> 58
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
SINGLE PREMIUM CONTRACTS ISSUED ON OR AFTER APRIL 16, 1990
SCHEDULES OF CHANGES IN UNIT VALUE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
STSPEC2 TCIBAL TCIGRO TCIINT VEGOLDNR
------- ------ ------ ------ --------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $18.074367 12.914886 17.116040 10.403803 14.230388
- ------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .849403 .609960 1.918348 .247063 .301335
- ------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.405871 .954721 (2.649394) 1.239275 2.259820
- ------------------------------------------------------------------------------------------------------------------
Asset charges (.252187) (.176058) (.221369) (.142090) (.208595)
- ------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $21.077454 14.303509 16.163625 11.748051 16.582948
- ------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 17% 11% (6)% 13% 17%
==================================================================================================================
1995
Beginning unit value - Jan. 1 $14.552799 10.801955 13.226279 9.392654 12.988341
- ------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .753037 .305779 .015219 .000000 .127947
- ------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.978850 1.961461 4.076606 1.136602 1.287916
- ------------------------------------------------------------------------------------------------------------------
Asset charges (.210319) (.154309) (.202064) (.125453) (.173816)
- ------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $18.074367 12.914886 17.116040 10.403803 14.230388
- ------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 24% 20% 29% 11% 10%
==================================================================================================================
1994
Beginning unit value - Jan. 1 $14.230663 10.876445 13.557427 10.000000 13.820369
- ------------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .407898 .260556 .001450 .000000 .069418
- ------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .103521 (.194370) (.160376) (.554327) (.726294)
- ------------------------------------------------------------------------------------------------------------------
Asset charges (.189283) (.140676) (.172222) (.053019) (.175152)
- ------------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $14.552799 10.801955 13.226279 9.392654 12.988341
- ------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 2% (1)% (2)% (6)%(b) (6)%
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VEWRLDBD VKACRESEC WPLNTEQ WPSMCOGR
-------- --------- ------- --------
1996***
<S> <C> <C> <C> <C>
Beginning unit value - Jan. 1 14.170551 10.765797 10.661502 12.430586
- -------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .385883 .287384 .225731 .000000
- -------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.034573) 4.034391 .833478 1.720228
- -------------------------------------------------------------------------------------------------
Asset charges (.182253) (.154376) (.146940) (.175164)
- -------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 14.339608 14.933196 11.573771 13.975650
- -------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 1% 39% 9% 12%
=================================================================================================
1995
Beginning unit value - Jan. 1 $ 12.237880 10.000000 10.000000 10.000000
- -------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .990055 .091962 .077347 .000000
- -------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.118852 .739397 .650501 2.501606
- -------------------------------------------------------------------------------------------------
Asset charges (.176236) (.065562) (.066346) (.071020)
- -------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $ 14.170551 10.765797 10.661502 12.430586
- -------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 16% 8%(b) 7%(b) 24%(b)
=================================================================================================
1994
Beginning unit value - Jan. 1 $ 12.563474 ** ** **
- -------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .050533
- -------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.218292)
- -------------------------------------------------------------------------------------------------
Asset charges (.157835)
- -------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $ 12.237880
- -------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (3)%
=================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
58
<PAGE> 59
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
MULTIPLE PAYMENT CONTRACTS AND FLEXIBLE PREMIUM CONTRACTS
SCHEDULES OF CHANGES IN UNIT VALUES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DRYSRGRO DRYSTKIX FIDVIPEI FIDVIPGR FIDVIPHI
-------- -------- -------- -------- --------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $14.401809 13.775382 22.215745 21.256059 20.852993
- --------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .747630 .596225 1.025291 1.527554 1.902180
- --------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.296912 2.494042 2.132663 1.587071 1.012148
- --------------------------------------------------------------------------------------------------------
Asset charges (.126762) (.120975) (.188129) (.184124) (.178535)
- --------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $17.319589 16.744674 25.185570 24.186560 23.588786
- --------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 20% 22% 13% 14% 13%
========================================================================================================
1995
Beginning unit value - Jan. 1 $10.788547 10.151919 16.576413 15.828463 17.428943
- --------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .396430 .364933 1.297971 .087506 1.262495
- --------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.317353 3.354508 4.496038 5.494030 2.316172
- --------------------------------------------------------------------------------------------------------
Asset charges (.100521) (.095978) (.154677) (.153940) (.154617)
- --------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $14.401809 13.775382 22.215745 21.256059 20.852993
- --------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 33% 36% 34% 34% 20%
========================================================================================================
1994
Beginning unit value - Jan. 1 $10.715005 10.143796 15.606442 15.958341 17.844401
- --------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .278073 .284601 1.172669 .960381 1.635883
- --------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.118575) (.195976) (.073581) (.966828) (1.910067)
- --------------------------------------------------------------------------------------------------------
Asset charges (.085956) (.080502) (.129117) (.123431) (.141274)
- --------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $10.788547 10.151919 16.576413 15.828463 17.428943
- --------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 1% 0% 6% (1)% (2)%
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDVIPOV FIDVIPAM FIDVIPCON NSATCAPAP NSATGVTBD
-------- -------- --------- --------- ---------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 13.645033 15.982529 11.099135 14.713230 14.984933
- --------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .335875 1.051899 .104631 .766553 .930103
- --------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.459385 1.270941 2.248711 3.061949 (.412550)
- --------------------------------------------------------------------------------------------------------
Asset charges (.115480) (.135376) (.096154) (.131065) (.119235)
- --------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 15.324813 18.169993 13.356323 18.410667 15.383251
- --------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 12% 14% 20% 25% 3%
========================================================================================================
1995
Beginning unit value - Jan. 1 12.540728 13.774855 10.000000 11.465403 12.720514
- --------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .095965 .289466 .143118 .653781 .903001
- --------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.111417 2.035460 .998657 2.696528 1.472503
- --------------------------------------------------------------------------------------------------------
Asset charges (.103077) (.117252) (.042640) (.102482) (.111085)
- --------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 13.645033 15.982529 11.099135 14.713230 14.984933
Percentage increase (decrease)
in unit value* (a) 9% 16% 11%(b) 28% 18%
========================================================================================================
1994
Beginning unit value - Jan. 1 12.426854 14.785784 ** 11.662121 13.250482
- --------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .064174 .719044 .184927 .833925
- --------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .152413 (1.615920) (.289863) (1.261429)
- --------------------------------------------------------------------------------------------------------
Asset charges (.102713) (.114053) (.091782) (.102464)
- --------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 12.540728 13.774855 11.465403 12.720514
- --------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 1% (7)% (2)% (4)%
========================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
59
<PAGE> 60
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
MULTIPLE PAYMENT CONTRACTS AND FLEXIBLE PREMIUM CONTRACTS
SCHEDULES OF CHANGES IN UNIT VALUES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NSATMYMKT NSATSMCO NSATTOTRE NBAMTGRO NBAMTLMAT NBAMTPART
--------- -------- --------- -------- --------- ---------
1996***
<S> <C> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $11.714295 11.420759 18.192762 15.962482 13.096811 13.591346
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .596995 .133983 1.217547 1.448641 1.102543 .554011
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 2.463983 2.737018 .003774 (.542247) 3.446498
- ----------------------------------------------------------------------------------------------------------------
Asset charges (.096547) (.103082) (.158554) (.132892) (.105789) (.122495)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $12.214743 13.915643 21.988773 17.282005 13.551318 17.469360
- ----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 4% 22% 21% 8% 3% 29%
================================================================================================================
1995
Beginning unit value - Jan. 1 $11.176411 10.000000 14.205723 12.214794 11.900389 10.038887
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .629782 .017475 1.413734 .432461 .661221 .082096
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 1.418968 2.703396 3.432609 .635177 3.565899
- ----------------------------------------------------------------------------------------------------------------
Asset charges (.091898) (.015684) (.130091) (.117382) (.099976) (.095536)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $11.714295 11.420759 18.192762 15.962482 13.096811 13.591346
- ----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 5% 14%(b) 28% 31% 10% 35%
================================================================================================================
1994
Beginning unit value - Jan. 1 $10.845265 ** 14.167308 12.959107 12.014277 10.000000
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .419275 .717782 1.562441 .507651 .000000
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) .000000 (.565055) (2.207122) (.526553) .072401
- ----------------------------------------------------------------------------------------------------------------
Asset charges (.088129) (.114312) (.099632) (.094986) (.033514)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $11.176411 14.205723 12.214794 11.900389 10.038887
- ----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 3% 0% (6)% (1)% 0%(b)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPPBDFD OPPGLSEC OPPMULT STDISC2 STINTSTK2
------- -------- ------- ------- ---------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 15.164813 11.542134 16.100377 16.514850 10.236021
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .975830 .000000 1.226905 3.367146 .051144
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.253799) 2.045080 1.256649 (3.238459) 1.009533
- ----------------------------------------------------------------------------------------------------------------
Asset charges (.122023) (.099461) (.137568) (.128676) (.088468)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 15.764821 13.487753 18.446363 16.514861 11.208230
- ----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 4% 17% 15% 0% 9%
================================================================================================================
1995
Beginning unit value - Jan. 1 $13.065574 11.379737 13.372968 12.307607 10.000000
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .902009 .299595 1.079776 .215562 .041121
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.310232 (.045711) 1.766931 4.106245 .209625
- ----------------------------------------------------------------------------------------------------------------
Asset charges (.113002) (.091487) (.119298) (.114564) (.014725)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $15.164813 11.542134 16.100377 16.514850 10.236021
- ----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 16% 1% 20% 34% 2%(b)
================================================================================================================
1994
Beginning unit value - Jan. 1 $13.430475 12.167250 13.747705 13.112678 **
- ----------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .759284 .214589 .702216 .983647
- ----------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (1.018698) (.905246) (.968729) (1.689193)
- ----------------------------------------------------------------------------------------------------------------
Asset charges (.105487) (.096856) (.108224) (.099525)
- ----------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $13.065574 11.379737 13.372968 12.307607
- ----------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (3)% (6)% (3)% (6)%
================================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
60
<PAGE> 61
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
MULTIPLE PAYMENT CONTRACTS AND FLEXIBLE PREMIUM CONTRACTS
SCHEDULES OF CHANGES IN UNIT VALUES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
STSPEC2 TCIBAL TCIGRO TCIINT TCIVALUE
------- ------ ------ ------ --------
1996***
<S> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $18.408627 13.155049 16.149061 10.477472 10.000000
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .866384 .622373 1.812196 .249286 .000000
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.458870 .976138 (2.505020) 1.252389 .145457
- ---------------------------------------------------------------------------------------------------
Asset charges (.158462) (.110640) (.128845) (.088289) (.001770)
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $21.575419 14.642920 15.327392 11.890858 10.143687
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 17% 11% (5)% 13% 1%(b)
===================================================================================================
1995
Beginning unit value - Jan. 1 $14.748256 10.948128 12.417011 9.412116 **
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .764407 .310910 .014289 .000000
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) 3.027469 1.992508 3.834812 1.142911
- ---------------------------------------------------------------------------------------------------
Asset charges (.131505) (.096497) (.117051) (.077555)
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $18.408627 13.155049 16.149061 10.477472
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 25% 20% 30% 11%
===================================================================================================
1994
Beginning unit value - Jan. 1 $14.350073 10.968814 12.664593 10.000000 **
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .412806 .263602 .001356 .000000
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) .103139 (.196764) (.149703) (.555221)
- ---------------------------------------------------------------------------------------------------
Asset charges (.117762) (.087524) (.099235) (.032663)
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $14.748256 10.948128 12.417011 9.412116
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 3% 0% (2)% 6%(b)
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VEGOLDNR VEWRLDBD VEWRLDEMKT VKACRESEC WPLNTEQ WPSMCOGR
-------- -------- ---------- --------- ------- --------
1996***
<S> <C> <C> <C> <C> <C> <C>
Beginning unit value - Jan. 1 15.612002 13.253457 10.000000 10.792212 10.687672 12.461074
- --------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .331277 .361660 .000000 .289441 .227366 .000000
- --------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 2.482492 (.030793) .080699 4.059026 .836487 1.727810
- --------------------------------------------------------------------------------------------------------------
Asset charges (.141181) (.105167) (.001751) (.095484) (.090877) (.108331)
- --------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 18.284590 13.479157 10.078948 15.045195 11.660648 14.080553
- --------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 17% 2% 1%(b) 39% 9% 13%
==============================================================================================================
1995
Beginning unit value - Jan. 1 14.178501 11.388987 ** 10.000000 10.000000 10.000000
- --------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .140115 .923751 .092168 .077521 .000000
- --------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.410450 1.041904 .740443 .651025 2.504833
- --------------------------------------------------------------------------------------------------------------
Asset charges (.117064) (.101185) (.040399) (.040874) (.043759)
- --------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 15.612002 13.253457 10.792212 10.687672 12.461074
- --------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) 10% 16% 8%(b) 7%(b) 25%(b)
==============================================================================================================
1994
Beginning unit value - Jan. 1 15.011706 11.633841 ** ** ** **
- --------------------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .075618 .046884
- --------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) (.791458) (.201583)
- --------------------------------------------------------------------------------------------------------------
Asset charges (.117365) (.090155)
- --------------------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 14.178501 11.388987
- --------------------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value* (a) (6)% (2)%
==============================================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** This investment option was not being utilized or was not available.
*** No other investment options were being utilized.
</TABLE>
61
<PAGE> 62
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
MODIFIED SINGLE PREMIUM AND LAST SURVIVOR FLEXIBLE PREMIUM CONTRACTS
SCHEDULES OF CHANGES IN UNIT VALUE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DRYSRGRO DRYSTKIX FIDVIPEI FIDVIPGR
-------- -------- -------- --------
1996**
<S> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $10.000000 10.000000 10.000000 10.000000
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .482403 .358216 .000000 .000000
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) .697688 1.101640 .790149 .446167
- ---------------------------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000 .000000
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $11.180091 11.459856 10.790149 10.446167
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 12%(b) 15%(b) 8%(b) 4%(b)
===================================================================================================
FIDVIPCON NSATCAPAP NSATGVTBD NSATMYMKT
--------- --------- --------- ---------
1996**
Beginning unit value - Jan. 1 $10.000000 10.000000 10.000000 10.000000
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .445367 .489314 .339005
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) 1.249999 1.164973 .189891 .000000
- ---------------------------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000 .000000
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec. 31 $11.249999 11.610340 10.679205 10.339005
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 12%(b) 16%(b) 7%(b) 3%(b)
===================================================================================================
NBAMTLMAT NBAMTPART OPPBDFD OPPGLSEC
--------- --------- ------- --------
1996**
Beginning unit value - Jan. 1 $10.000000 10.000000 10.000000 10.000000
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .000000 .479143 .000000
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) .477247 1.476324 .165483 .833847
- ---------------------------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000 .000000
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec.31 $10.477247 11.476324 10.644626 10.833847
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 5%(b) 15%(b) 6%(b) 8%(b)
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDVIPHI FIDVIPOV FIDVIPAM
-------- -------- --------
1996**
<S> <C> <C> <C>
Beginning unit value - Jan. 1 10.000000 10.000000 10.000000
- --------------------------------------------------------------------------------
Reinvested capital gains
and dividends .000000 .000000 .000000
- --------------------------------------------------------------------------------
Unrealized gain (loss) .830462 .668178 1.022140
- --------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000
- --------------------------------------------------------------------------------
Ending unit value - Dec.31 10.830462 10.668178 11.022140
- --------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 8%(b) 7%(b) 10%(b)
================================================================================
NSATSMCO NSATTOTRE NBAMTGRO
-------- --------- --------
1996**
Beginning unit value - Jan. 1 10.000000 10.000000 10.000000
- --------------------------------------------------------------------------------
Reinvested capital gains
and dividends .095576 .580169 .000000
- --------------------------------------------------------------------------------
Unrealized gain (loss) .428842 .864708 (.130166)
- --------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000
- --------------------------------------------------------------------------------
Ending unit value - Dec.31 $10.524418 11.444877 9.869834
- --------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 5%(b) 14%(b) (1)%(b)
================================================================================
OPPMULT STDISC2 STINTSTK2
------- ------- ---------
1996**
Beginning unit value - Jan. 1 $10.000000 10.000000 10.000000
- --------------------------------------------------------------------------------
Reinvested capital gains
and dividends .402281 .520758 .045738
- --------------------------------------------------------------------------------
Unrealized gain (loss) .535297 (.636201) .008684
- --------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000
- --------------------------------------------------------------------------------
Ending unit value - Dec.31 10.937578 9.884557 10.054422
- --------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 9%(b) (1)%(b) 1%(b)
================================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** No other investment options were being utilized.
</TABLE>
62
<PAGE> 63
SCHEDULE I, CONTINUED
NATIONWIDE VLI SEPARATE ACCOUNT-2
MODIFIED SINGLE PREMIUM AND LAST SURVIVOR FLEXIBLE PREMIUM CONTRACTS
SCHEDULES OF CHANGES IN UNIT VALUE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
STSPEC2 TCIBAL TCIGRO TCIINT
------- ------ ------ ------
1996**
<S> <C> <C> <C> <C>
Beginning unit value - Jan. 1 $10.000000 10.000000 10.000000 10.000000
- ---------------------------------------------------------------------------------------------------
Reinvested capital gains
and dividends .045100 .122861 .000000 .224735
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) .721729 .808286 (.881573) .548823
- ---------------------------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000 .000000
- ---------------------------------------------------------------------------------------------------
Ending unit value - Dec.31 $10.766829 10.931147 9.118427 10.773558
- ---------------------------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 8%(b) 9%(b) (9)%(b) 8%(b)
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VEGoldNR VEWrldNR VKACRESec
-------- -------- ---------
1996**
<S> <C> <C> <C>
Beginning unit value - Jan. 1 10.000000 10.000000 10.000000
- ---------------------------------------------------------------------------------
Reinvested capital gains
and dividends .181335 .280847 .255666
- ---------------------------------------------------------------------------------
Unrealized gain (loss) (.125331) .235917 3.418174
- ---------------------------------------------------------------------------------
Contract charges .000000 .000000 .000000
- ---------------------------------------------------------------------------------
Ending unit value - Dec. 31 10.056004 10.516764 13.673840
- ---------------------------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) 1%(b) 5%(b) 37%(b)
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
WPINTEQ WPSMCOGR
------- --------
1996**
<S> <C> <C>
Beginning unit value - Jan. 1 $10.000000 10.000000
- ----------------------------------------------------------------
Reinvested capital gains
and dividends .193639 .000000
- ----------------------------------------------------------------
Unrealized gain (loss) (.258621) (.172410)
- ----------------------------------------------------------------
Contract charges .000000 .000000
- ----------------------------------------------------------------
Ending unit value - Dec.31 $9.935018 9.827590
- ----------------------------------------------------------------
Percentage increase (decrease)
in unit value*(a) (1)%(b) (2)%(b)
================================================================
<FN>
* An annualized rate of return cannot be determined as:
(a) Asset charges do not include the policy charges discussed in note 2; and
(b) This investment option was not utilized for the entire year indicated.
** No other investment options were being utilized.
See note 6.
</TABLE>
63
<PAGE> 64
Independent Auditors' Report
----------------------------
The Board of Directors of Nationwide Life Insurance Company and
Contract Owners of Nationwide VLI Separate Account-2:
We have audited the accompanying statement of assets, liabilities and
contract owners' equity of Nationwide VLI Separate Account-2 as of December 31,
1996, and the related statements of operations and changes in contract owners'
equity and schedules of changes in unit value for each of the years in the three
year period then ended. These financial statements and schedules of changes in
unit value are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules of changes in unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules of
changes in unit value are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures include confirmation of securities
owned as of December 31, 1996, by correspondence with the transfer agents of the
underlying mutual funds. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and schedules of changes in unit
value referred to above present fairly, in all material respects, the financial
position of Nationwide VLI Separate Account-2 as of December 31, 1996, and the
results of its operations and its changes in contract owners' equity and the
schedules of changes in unit value for each of the years in the three year
period then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 7, 1997
64
<PAGE> 65
[THIS PAGE LEFT BLANK INTENTIONALLY]
65
<PAGE> 66
This report is for the information of contract owners with funds in the
Nationwide VLI Separate Account-2. It may also be used, from time to
time, as sales literature, but only when accompanied or preceded by the
current prospectus, which contains complete information about the
contracts which invest in the separate account, and their fees, charges
and expenses. If this report is used as sales literature after March
31, 1997, it must be accompanied by the fund performance report
reflecting performances for the most recently completed calendar
quarter. Prospective investors should read the prospectus carefully
before investing.
66
<PAGE> 67
[THIS PAGE LEFT BLANK INTENTIONALLY]
67
<PAGE> 68
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE: ONE NATIONWIDE PLAZA - COLUMBUS, OHIO 43215-2220
Bulk Rate
U.S. Postage
PAID
Columbus, Ohio
Permit No. 521
Nationwide(R) is a registered federal service mark of Nationwide Mutual
Insurance Company
