<PAGE> 1
As filed with the Securities and Exchange Commission
'33 Act File No. 33-18422
'40 Act File No. 811-5405
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Post-Effective Amendment No. 12 [x]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 13 [x]
NATIONWIDE VARIABLE ACCOUNT-3
(Exact Name of Registrant)
NATIONWIDE LIFE INSURANCE COMPANY
(Name of Depositor)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (614) 249-7111
DENNIS W. CLICK, SECRETARY, ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Name and Address of Agent for Service)
This Post-Effective Amendment amends the Registration Statement in
respect of the Prospectus, the Statement of Additional Information, and the
Financial Statements.
It is proposed that this filing will become effective (check appropriate
space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485
[ ] on (date) pursuant to paragraph (a)(i) of Rule (485)
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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<PAGE> 2
NATIONWIDE VARIABLE ACCOUNT-3
REFERENCE TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM PAGE
Part A INFORMATION REQUIRED IN A PROSPECTUS
<S> <C> <C>
Item 1. Cover page..........................................................................................3
Item 2. Definitions.........................................................................................4
Item 3. Synopsis or Highlights.............................................................................10
Item 4. Condensed Financial Information....................................................................11
Item 6. Deductions and Expenses............................................................................16
Item 7. General Description of Variable Annuity Contracts..................................................22
Item 8. Annuity Period.....................................................................................23
Item 9. Death Benefit and Distributions....................................................................24
Item 10. Purchases and Contract Value......................................................................28
Item 11. Redemptions.......................................................................................29
Item 12. Taxes.............................................................................................30
Item 13. Legal Proceedings.................................................................................37
Item 14. Table of Contents of the Statement of Additional Information......................................37
Part B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 15. Cover Page........................................................................................39
Item 16. Table of Contents.................................................................................39
Item 17. General Information and History...................................................................39
Item 18. Services..........................................................................................39
Item 19. Purchase of Securities Being Offered..............................................................39
Item 20. Underwriters......................................................................................39
Item 21. Calculations of Performance.......................................................................39
Item 22. Annuity Payments..................................................................................40
Item 23. Financial Statements..............................................................................41
--
Part C OTHER INFORMATION
Item 24. Financial Statements and Exhibits.................................................................73
Item 25. Directors and Officers of the Depositor...........................................................75
Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant....................77
Item 27. Number of Contract Owners.........................................................................85
Item 28. Indemnification...................................................................................85
Item 29. Principal Underwriter.............................................................................85
Item 30. Location of Accounts and Records..................................................................91
Item 31. Management Services...............................................................................91
Item 32. Undertakings......................................................................................91
</TABLE>
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<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE
P.O. BOX 182030
COLUMBUS, OHIO 43218-2030, 1-800-826-3167, TDD-1-800-238-3035
DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY THE NATIONWIDE LIFE INSURANCE COMPANY
THROUGH ITS NATIONWIDE VARIABLE ACCOUNT-3
The Contracts described in this prospectus are Flexible Purchase Payment
Contracts (collectively referred to as the "Contracts"). The Contracts are sold
for use in retirement plans which may qualify for special federal tax treatment
under the Internal Revenue Code (the "Code"). Annuity payments under the
Contracts are deferred until a selected later date.
Purchase payments are allocated to the Nationwide Variable Account-3 ("Variable
Account"), a separate account of Nationwide Life Insurance Company (the
"Company"). Shares of the Underlying Mutual Fund options are issued only for the
purpose of funding benefits for variable annuity contracts and variable life
insurance policies issued by insurance companies. The Variable Account uses its
assets to purchase shares at Net Asset Value in one or more of the following
Underlying Mutual Fund options:
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST:
- Asset Allocation Portfolio (formerly "Multiple Strategy Fund")
- Domestic Income Portfolio (formerly "Domestic Strategic Income Fund")
- Emerging Growth Portfolio
- Enterprise Portfolio (formerly "Common Stock Fund")
- Global Equity Portfolio
- Government Portfolio
- Money Market Portfolio
- Morgan Stanley Real Estate Securities Portfolio (formerly "Real Estate
Securities Fund")
This prospectus provides you with the basic information you should know about
the Contracts issued by the Variable Account before investing. You should read
it and keep it for future reference. A Statement of Additional Information dated
May 1, 1998, containing further information about the Contracts and the Variable
Account has been filed with the Securities and Exchange Commission ("SEC"). You
can obtain a copy without charge from the Company by calling 1-800-826-3167, TDD
1-800-238-3035, or by writing P. O. Box 182030, Columbus, Ohio 43218-2030.
PLEASE NOTE THAT NOT ALL BENEFITS DESCRIBED IN THIS PROSPECTUS MAY BE AVAILABLE
IN EVERY STATE JURISDICTION. PLEASE REFER TO YOUR CONTRACT FOR SPECIFIC BENEFIT
INFORMATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 1998, IS INCORPORATED
HEREIN BY REFERENCE. THE TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL
INFORMATION APPEARS ON PAGE 35 OF THE PROSPECTUS.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
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<PAGE> 4
GLOSSARY OF SPECIAL TERMS
ACCUMULATION UNIT- An accounting unit of measure used to calculate the Variable
Account Contract Value prior to the Annuitization Date.
ANNUITANT- The person designated to receive annuity payments during
Annuitization and upon whose continuation of life any annuity payment involving
life contingencies depends. This person must be age 78 or younger at the time of
Contract issuance. The Annuitant may be changed prior to the Annuitization Date
with the consent of the Company.
ANNUITIZATION- The period during which annuity payments are received.
ANNUITIZATION DATE- The date on which annuity payments commence.
ANNUITY COMMENCEMENT DATE- The date on which annuity payments are scheduled to
commence. The Annuity Commencement Date is shown on the Data Page of the
Contract. The Annuity Commencement Date may be changed by the Contract Owner
with the consent of the Company.
ANNUITY PAYMENT OPTION- The chosen form of annuity payments. Several options are
available under this Contract. The Annuity Payment Option is named in the
application, unless changed.
ANNUITY UNIT- An accounting unit of measure used to calculate the value of
Variable Annuity payments.
BENEFICIARY- The person designated to receive certain benefits under the
Contract when the Annuitant dies prior to the Annuitization Date. The
Beneficiary can be changed by the Contract Owner as set forth in the Contract.
CODE- The Internal Revenue Code of 1986, as amended.
COMPANY- Nationwide Life Insurance Company.
CONTINGENT BENEFICIARY- The person designated to be the Beneficiary if the named
Beneficiary is not living at the time of the death of the Annuitant.
CONTINGENT ANNUITANT- The Contingent Annuitant, if named, will become the
Annuitant upon the Annuitant's death. With regard to death benefits and other
required distributions upon the death of the Annuitant, these references will
include the later to die of the Annuitant or Contingent Annuitant, if named. A
Contingent Annuitant may not be named for Contracts issued as IRAs or Tax
Sheltered Annuities.
CONTRACT- The Deferred Variable Annuity Contract described in this prospectus.
CONTRACT ANNIVERSARY- An anniversary of the Date of Issue of the Contract.
CONTINGENT OWNER- A Contingent Owner succeeds to the rights of the Contract
Owner upon the Contract Owner's death before Annuitization. A Contingent Owner
may not be named for Contracts issued as Qualified Contracts, IRAs, or Tax
Sheltered Annuities.
CONTRACT OWNER- The person who possesses all rights under the Contract,
including the right to designate and change any designations of the Contract
Owner, Contingent Owner, Annuitant, Contingent Annuitant, Beneficiary,
Contingent Beneficiary, Annuity Payment Option, and the Annuity Commencement
Date. The Contract Owner is the person named on the application, unless changed.
CONTRACT VALUE- The sum of the value of all Accumulation Units plus any amount
in the Fixed Account.
CONTRACT YEAR- Each year the Contract remains in force commencing with the Date
of Issue.
DATE OF ISSUE- The date shown as the Date of Issue on the Data Page of the
Contract.
DEATH BENEFIT- The benefit which is payable upon the death of the Annuitant or
the Contingent Annuitant, if applicable. This benefit does not apply upon the
death of the Contract Owner when the Contract Owner and Annuitant are not the
same person. If the Annuitant dies after the Annuitization Date, any benefit
that may be payable will be as specified in the Annuity Payment Option elected.
DISTRIBUTION- Any payment of part or all of the Contract Value.
ERISA- Employee Retirement Income Security Act of 1974, as amended.
FIXED ACCOUNT- An investment option which is funded by the General Account of
the Company.
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<PAGE> 5
FIXED ANNUITY- An annuity providing for payments which are guaranteed by the
Company as to dollar amount during Annuitization.
HOME OFFICE- The main office of the Company located in Columbus, Ohio.
GENERAL ACCOUNT- All assets of the Company other than those of the Variable
Account or in other separate accounts that have been or may be established by
the Company.
INDIVIDUAL RETIREMENT ANNUITY ("IRA")- An annuity which qualifies for favorable
tax treatment under Section 408 of the Code.
INTEREST RATE GUARANTEE PERIOD- The interval of time during which an interest
rate credited to the Fixed Account is guaranteed to remain the same. For new
Purchase Payments allocated to the Fixed Account or transfers from the Variable
Account, this period begins upon the date of deposit or transfer and ends at the
end of the calendar quarter at least one year (but not more than 15 months) from
deposit or transfer. At the end of an Interest Rate Guarantee Period, a new
interest rate is declared with an Interest Guarantee Period starting at the end
of the prior period and ending at the end of the calendar quarter one year
later.
JOINT OWNER- The Joint Owner possesses an undivided interest in the
entire Contract in conjunction with the Contract Owner. If a Joint Owner is
named, references to "Contract Owner" or "Joint Owner" in this prospectus will
apply to both the Contract Owner and Joint Owner or either of them. Joint Owners
must be spouses at the time Joint Ownership is requested unless otherwise
allowed by state law. Joint Ownership may be selected only for Non-Qualified
Contracts.
NET ASSET VALUE- The value of one share of an Underlying Mutual Fund at the end
of a market day or at the close of the New York Stock Exchange. Net Asset Value
is computed by adding the value of all portfolio holdings plus other assets,
deducting liabilities and then dividing the result by the number of shares
outstanding.
NON-QUALIFIED CONTRACT- A Contract which does not qualify for favorable tax
treatment under Sections 401 and 403(a) (Qualified Plans), 408 (IRAs), or 403(b)
(Tax Sheltered Annuities) of the Code.
PLAN PARTICIPANT- The person for whom contributions are being made to a
Qualified Contract or Tax Sheltered Annuity either through employer
contributions or employee salary reduction contributions.
PURCHASE PAYMENT- A deposit of new value into the Contract. The term "Purchase
Payment" does not include transfers between the Variable Account and the Fixed
Account, or among the Sub-Accounts.
QUALIFIED CONTRACT- A Contract issued to fund a Qualified Plan.
QUALIFIED PLAN- Retirement plans which receive favorable tax treatment under
sections 401 or 403(a) of the Code.
SUB-ACCOUNTS- Separate and distinct divisions of the Variable Account, to which
specific Underlying Mutual Fund shares are allocated and for which Accumulation
Units and Annuity Units are separately maintained.
TAX SHELTERED ANNUITY- An annuity which qualifies for favorable tax treatment
under Section 403(b) of the Code.
UNDERLYING MUTUAL FUND- A registered open-end management investment
company in which the assets of the Sub-Accounts will be invested.
VALUATION DATE- Each day the New York Stock Exchange and the Home Office are
open for business or any other day during which there is a sufficient degree of
trading of the Underlying Mutual Fund shares that the current Cash Value might
be materially affected.
VALUATION PERIOD- The period of time commencing at the close of a Valuation Date
and ending at the close of business for the next succeeding Valuation Date.
VARIABLE ACCOUNT- The Nationwide Variable Account-3, a separate investment
account of the Company into which Variable Account Purchase Payments are
allocated. The Variable Account is divided into Sub-Accounts, each of which
invests in shares of a separate Underlying Mutual Fund.
VARIABLE ANNUITY- An annuity providing for payments which are not predetermined
or guaranteed as to dollar amount and which vary in amount with the investment
experience for the Variable Account.
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<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS..........................................................................2
SUMMARY OF CONTRACT EXPENSES.......................................................................6
UNDERLYING MUTUAL FUND ANNUAL EXPENSES.............................................................6
EXAMPLE............................................................................................7
SYNOPSIS...........................................................................................8
CONDENSED FINANCIAL INFORMATION....................................................................9
NATIONWIDE LIFE INSURANCE COMPANY.................................................................12
THE VARIABLE ACCOUNT..............................................................................12
Underlying Mutual Fund Options...........................................................12
Voting Rights............................................................................13
VARIABLE ACCOUNT CHARGES AND OTHER DEDUCTIONS.....................................................14
Expenses of the Variable Account.........................................................14
Mortality Risk Charge....................................................................14
Expense Risk Charge......................................................................14
Contingent Deferred Sales Charge.........................................................14
Waiver of Contingent Deferred Sales Charge...............................................15
Contract Maintenance Charge..............................................................16
Administration Charge....................................................................16
Premium Taxes............................................................................16
Investments of the Variable Account......................................................16
Right to Revoke..........................................................................16
Transfers................................................................................17
Assignment...............................................................................17
Loan Privilege...........................................................................18
Contract Ownership.......................................................................19
Joint Ownership..........................................................................19
Contingent Ownership.....................................................................19
Beneficiary..............................................................................19
Substitution of Securities...............................................................19
Contract Owner Inquiries.................................................................20
OPERATION OF THE CONTRACT.........................................................................20
Annuitization............................................................................20
Fixed Payment Annuity - First and Subsequent Payments....................................20
Variable Payment Annuity - First and Subsequent Payments.................................20
Variable Payment Annuity - Assumed Investment Rate.......................................20
Variable Payment Annuity - Value of an Annuity Unit......................................20
Variable Payment Annuity - Exchanges Among Underlying Mutual Fund Options................21
Frequency and Amount of Annuity Payments.................................................21
Annuity Commencement Date................................................................21
Annuity Payment Options..................................................................21
Death of Contract Owner - Non-Qualified Contracts........................................21
Death of Annuitant - Non-Qualified Contracts.............................................22
Death of the Contract Owner/Annuitant....................................................22
Death Benefit Payment....................................................................22
Required Distributions for Non-Qualified Contracts.......................................22
Required Distribution for Qualified Plans or Tax Sheltered Annuities.....................23
Required Distributions for IRAs..........................................................24
GENERAL INFORMATION...............................................................................25
Contract Owner Services..................................................................25
Statements and Reports...................................................................25
Allocation of Purchase Payments and Contract Value.......................................25
Value of an Accumulation Unit............................................................26
Net Investment Factor....................................................................26
Determining the Contract Value...........................................................26
Surrender (Redemption)...................................................................26
Surrenders Under a Qualified Plan or Tax Sheltered Annuity Contract......................27
FEDERAL TAX CONSIDERATIONS........................................................................28
Federal Income Taxes.....................................................................28
Puerto Rico..............................................................................28
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
Non-Qualified Contracts - Natural Persons as Contract Owners.............................28
Non-Qualified Contracts - Non-Natural Persons as Contract Owners.........................29
Qualified Plans, IRAs and Tax Sheltered Annuities........................................30
Withholding..............................................................................30
Non-Resident Aliens......................................................................30
Federal Estate, Gift, and Generation Skipping Transfer Taxes.............................30
Charge for Tax...........................................................................31
Diversification..........................................................................31
Tax Changes..............................................................................31
Advertising..............................................................................32
UNDERLYING MUTUAL FUND PERFORMANCE SUMMARY........................................................34
YEAR 2000 COMPLIANCE ISSUES.......................................................................35
LEGAL PROCEEDINGS.................................................................................35
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION......................................35
APPENDIX..........................................................................................36
</TABLE>
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<PAGE> 8
SUMMARY OF CONTRACT EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
Maximum Contingent Deferred Sales Charge ("CDSC")1..................6%
<TABLE>
- --------------------------------------------------------------------------
RANGE OF CDSC OVER TIME
<CAPTION>
Number of Completed Years from Date CDSC Percentage
of Purchase Payment
<S> <C>
0 6%
1 6%
2 6%
3 3%
4 3%
5 3%
6 0%
- --------------------------------------------------------------------------
</TABLE>
MAXIMUM ANNUAL CONTRACT MAINTENANCE CHARGE(2)................................$35
VARIABLE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge...................................1.25%
Administration Charge...............................................0.05%
Total Variable Account Annual Expenses 1.30%
1 During the first Contract Year, the Contract Owner may withdraw without a
CDSC any amount in order for the contract to meet minimum distribution
requirements under the Code. Starting with the second year after a Purchase
Payment has been made, the Contract Owner may withdraw without a CDSC, the
greater of:
(a) an amount equal to 10% of that Purchase Payment; or
(b) any amount withdrawn in order for the Contract to meet minimum
distribution requirements under the Code.
Withdrawals may be restricted for Contracts issued pursuant to the terms of
a Tax Sheltered Annuity Plan or Qualified Plan. This CDSC-free withdrawal
privilege is non-cumulative. Free amounts not taken during any given
Contract Year cannot be taken as free amounts in a subsequent Contract Year
(see "Contingent Deferred Sales Charge".)
2 The Contract Maintenance Charge is deducted on each Contract Anniversary
and on the date of surrender in any year in which the entire Contract Value
is surrendered (see "Contract Maintenance Charge").
UNDERLYING MUTUAL FUND ANNUAL EXPENSES
(as a percentage of Underlying Mutual Fund net assets, after expense
reimbursements)3
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Management Fees Other Expenses Total Underlying
Mutual Fund Expenses
<S> <C> <C> <C>
Van Kampen American Capital Life Investment Trust - 0.50% 0.10% 0.60%
Asset Allocation Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 0.50% 0.10% 0.60%
Domestic Income Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 0.70% 0.15% 0.85%
Emerging Growth Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 0.50% 0.10% 0.60%
Enterprise Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 1.00% 0.20% 1.20%
Global Equity Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 0.50% 0.10% 0.60%
Government Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 0.50% 0.10% 0.60%
Money Market Portfolio*
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life Investment Trust - 1.00% 0.07% 1.07%
Morgan Stanley Real Estate Securities Portfolio
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 9
3The Underlying Mutual Fund expenses shown above are assessed at the
Underlying Mutual Fund level and are not direct charges against Variable
Account assets or reductions from Contract Values. These Underlying Mutual
Fund expenses are taken into consideration in computing each Underlying Mutual
Fund's Net Asset Value, which is the share price used to calculate the unit
values of the Variable Account. The Management Fees and Other Expenses are
more fully described in the prospectus for each individual Underlying Mutual
Fund. The information relating to the Underlying Mutual Fund expenses was
provided by the Underlying Mutual Fund and was not independently verified by
the Company. Except as otherwise noted, the Management Fees and Other Expenses
are not currently subject to fee waivers or expense reimbursements.
*The investment advisers for the indicated Underlying Mutual Funds have
voluntarily agreed to reimburse a portion of the management fees and/or other
expenses resulting in a reduction of total expenses. Absent any partial
reimbursement, "Management Fees" and "Other Expenses" would have been 0.50% and
0.21% for Asset Allocation Portfolio, 0.50% and 0.55% for Domestic Income
Portfolio, 0.70% and 1.44% for Emerging Growth Portfolio, 0.50% and 0.16% for
Enterprise Portfolio, 1.00% and 5.78% for Global Equity Portfolio, 0.50% and
0.24% for Government Portfolio, and 0.50% and 0.48% for Money Market Portfolio.
EXAMPLE
The following chart depicts the dollar amount of expenses that would be incurred
under this Contract assuming a $1000 initial investment and 5% annual return.
These dollar figures are illustrative only and should not be considered a
representation of past or future expenses. Actual expenses may be greater or
lesser than those shown below. The expense amounts presented are derived from a
formula which allows the maximum $35 Contract Maintenance Charge to be expressed
as a percentage of the average Contract account size for existing Contracts.
Since the average Contract account size for Contracts issued under this
prospectus is greater than $1000, the expense effect of the Contract Maintenance
Charge is reduced accordingly.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
If you surrender your If you do not surrender your If you annuitize your
Contract at the end of the Contract at the end of the Contract at the end of the
applicable time period applicable time period applicable time period
- ---------------------------------------------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Van Kampen American 81 119 138 239 21 65 111 239 * 65 111 239
Capital Life
Investment Trust -
Asset Allocation
Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 81 119 138 239 21 65 111 239 * 65 111 239
Capital Life
Investment Trust -
Domestic Income
Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 84 126 151 265 24 72 124 265 * 72 124 265
Capital Life
Investment Trust -
Emerging Growth
Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 81 119 138 239 21 65 111 239 * 65 111 239
Capital Life
Investment Trust -
Enterprise Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 87 137 169 302 27 83 142 302 * 83 142 302
Capital Life
Investment Trust -
Global Equity
Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 81 119 138 239 21 65 111 239 * 65 111 239
Capital Life
Investment Trust -
Government Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 81 119 138 239 21 65 111 239 * 65 111 239
Capital Life
Investment Trust -
Money Market Portfolio**
- ---------------------------------------------------------------------------------------------------------------------
Van Kampen American 86 133 163 163 26 79 136 288 * 79 136 288
Capital Life
Investment Trust
Morgan Stanley Real
Estate Securities
Portfolio
- --------------------------------------------------------------------------------------------------------------------
<FN>
*The Contracts sold under this prospectus do not permit Annuitization during the first two Contract Years.
**The investment advisers for the indicated Underlying Mutual Funds have voluntarily agreed to reimburse
a portion of the management fees and/or other expenses resulting in a reduction of total expenses. Absent
any partial reimbursement, "Management Fees" and "Other Expenses" would have been 0.50% and 0.21% for
Asset Allocation Portfolio, 0.50% and 0.55% for Domestic Income Portfolio, 0.70% and 1.44% for Emerging
Growth Portfolio, 0.50% and 0.16% for Enterprise Portfolio, 1.00% and 5.78% for Global Equity Portfolio,
0.50% and 0.24% for Government Portfolio, and 0.50% and 0.48% for Money Market Portfolio.
</TABLE>
The purpose of the Summary of Contract Expenses and Example is to assist the
Contract Owner in understanding the various costs and expenses that will be
borne directly or indirectly when investing in the Contract. The expenses of the
Variable Account as well as those of the Underlying Mutual Fund options are
reflected in the Example. For more complete descriptions of the expenses of the
Variable Account, see "Variable Account Charges and Other Deductions." For more
complete information regarding expenses paid out of the assets of the Underlying
Mutual Fund options, see the prospectus for each Underlying Mutual Fund.
Deductions for premium taxes may also apply but are not reflected in the Example
shown above (see "Premium Taxes").
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SYNOPSIS
The Contracts can be categorized as follows: (1) Non-Qualified; (2) IRAs; (3)
Tax Sheltered Annuities; and (4) Qualified.
The Company does not deduct a sales charge from Purchase Payments made for these
Contracts. However, if any part of the Contract Value is surrendered, the
Company will, with certain exceptions, deduct from the Contract Value a CDSC not
to exceed 6% of the lesser of the total of all Purchase Payments made, within 72
months prior to the date of the request to surrender, or the amount surrendered.
This charge, when applicable, is imposed to permit the Company to recover sales
expenses which have been advanced by the Company (see "Contingent Deferred Sales
Charge").
On each Contract Anniversary the Company will deduct a Contract Maintenance
Charge of $35 from the Contract Value. The Company will also assess an
Administration Charge equal to an annual rate of 0.05% of the daily Net Asset
Value. These charges are to reimburse the Company for administrative expenses
related to the issue and maintenance of the Contracts (see "Contract Maintenance
Charge" and "Administration Charge").
The Company deducts a Mortality Risk Charge equal to an annual rate of 0.80% of
the daily Net Asset Value for mortality risk assumed by the Company (see
"Mortality Risk Charge"). The Company deducts an Expense Risk Charge equal to an
annual rate of 0.45% of the daily Net Asset Value as compensation for the
Company's risk by undertaking not to increase administrative charges on the
Contracts regardless of the actual administrative costs (see "Expense Risk
Charge").
The initial first year Purchase Payment must be at least $1,500 for
Non-Qualified Contracts. However, if periodic payments are expected by the
Company, this initial first year minimum may be satisfied by Purchase Payments
made on an annualized basis. The cumulative total of all purchase payments under
contracts issued on the life of any one Annuitant may not exceed $1,000,000
without the prior consent of the Company (see "Allocation of Purchase Payments
and Contract Value").
Upon Annuitization, the selected annuity Payment Option will begin (see "Annuity
Payment Options"). However, if the net amount to be applied to any Annuity
Payment Option at the Annuitization Date is less than $500, the Contract Value
may be distributed in one lump sum in lieu of annuity payments. If any annuity
payment would be less than $20, the Company will have the right to change the
frequency of payments to such intervals as will result in payments of at least
$20. In no event, however, will annuity payments be made less frequently than
annually (see "Frequency and Amount of Annuity Payments").
Taxation of the Contracts will depend on the type of Contract issued (see
"Federal Tax Considerations"). In addition, the Company will charge against the
Purchase Payments or the Contract Value the amount of any premium taxes levied
by a state or any other governmental entity (see "Premium Taxes").
The Contract Owner has a ten day free look to examine the Contract. Within ten
days of the date the Contract is received, it may be returned for any reason to
the Home Office at the address shown on page 1 of this prospectus. If the
Contract is returned to the Company in a timely manner, the Company will void
the Contract and refund the Contract Value in full unless otherwise required by
law. State and/or federal law may provide additional free look privileges.
All IRAs will be a return of Purchase Payments (see "Right to Revoke").
8
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<PAGE> 11
CONDENSED FINANCIAL INFORMATION
Accumulation Unit values for an Accumulation Unit outstanding throughout
the period.
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OF AT END OF
FUND OF PERIOD PERIOD PERIOD YEAR
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen American Capital 23.907038 28.743704 422,523 1997
----------------------------------------------------------------------------------
Life Investment Trust - 21.272421 23.907038 513,310 1996
----------------------------------------------------------------------------------
Asset Allocation Portfolio-Q 16.406732 21.272421 606,415 1995
----------------------------------------------------------------------------------
17.253369 16.406732 749,168 1994
----------------------------------------------------------------------------------
16.230095 17.253369 841,559 1993
----------------------------------------------------------------------------------
15.327503 16.230095 812,793 1992
----------------------------------------------------------------------------------
12.222570 15.327503 704,818 1991
----------------------------------------------------------------------------------
12.154424 12.222570 577,104 1990
----------------------------------------------------------------------------------
10.451221 12.154424 405,746 1989
----------------------------------------------------------------------------------
10.000000 10.451221 157,320 1988
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 23.907038 28.743704 771,497 1997
----------------------------------------------------------------------------------
Life Investment Trust - 21.272421 23.907038 1,010,988 1996
----------------------------------------------------------------------------------
Asset Allocation Portfolio- NQ 16.406732 21.272421 1,070,729 1995
----------------------------------------------------------------------------------
17.253369 16.406732 1,250,980 1994
----------------------------------------------------------------------------------
16.230095 17.253369 1,367,736 1993
----------------------------------------------------------------------------------
15.327503 16.230095 1,273,695 1992
----------------------------------------------------------------------------------
12.222570 15.327503 1,058,861 1991
----------------------------------------------------------------------------------
12.154424 12.222570 876,452 1990
----------------------------------------------------------------------------------
10.451221 12.154424 672,660 1989
----------------------------------------------------------------------------------
10.000000 10.451221 295,223 1988
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 16.692636 18.437191 124,140 1997
----------------------------------------------------------------------------------
Life Investment Trust - 15.854864 16.692636 165,684 1996
----------------------------------------------------------------------------------
Domestic Income Portfolio 13.235145 15.854864 294,678 1995
----------------------------------------------------------------------------------
14.016253 13.235145 304,564 1994
----------------------------------------------------------------------------------
12.208185 14.016253 363,127 1993
----------------------------------------------------------------------------------
10.995055 12.208185 247,610 1992
----------------------------------------------------------------------------------
9.189127 10.995055 175,620 1991
----------------------------------------------------------------------------------
10.036383 9.189127 85,930 1990
----------------------------------------------------------------------------------
10.753229 10.036383 87,598 1989
----------------------------------------------------------------------------------
10.000000 10.753229 21,293 1988
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 16.692636 18.437191 329,087 1997
----------------------------------------------------------------------------------
Life Investment Trust - 15.854864 16.692636 486,983 1996
----------------------------------------------------------------------------------
Domestic Income Portfolio-NQ 13.235145 15.854864 720,487 1995
----------------------------------------------------------------------------------
14.016253 13.235145 574,730 1994
----------------------------------------------------------------------------------
12.208185 14.016253 705,552 1993
----------------------------------------------------------------------------------
10.995055 12.208185 707,076 1992
----------------------------------------------------------------------------------
9.189127 10.995055 587,343 1991
----------------------------------------------------------------------------------
10.036383 9.189127 324,341 1990
----------------------------------------------------------------------------------
10.753229 10.036383 311,252 1989
----------------------------------------------------------------------------------
10.000000 10.753229 71,538 1988
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 13.395245 15.921536 58,542 1997
----------------------------------------------------------------------------------
Life Investment Trust - 11.635151 13.395245 91,181 1996
----------------------------------------------------------------------------------
Emerging Growth Portfolio-Q 10.000000 11.635151 24,126 1995
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 13.395245 15.921536 158,887 1997
----------------------------------------------------------------------------------
Life Investment Trust - 11.635151 13.395245 173,307 1996
----------------------------------------------------------------------------------
Emerging Growth Portfolio-NQ 10.000000 11.635151 79,497 1995
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 31.749417 40.944001 316,766 1997
----------------------------------------------------------------------------------
Life Investment Trust - 25.778191 31.749417 352,086 1996
----------------------------------------------------------------------------------
Enterprise Portfolio-Q 19.065611 25.778191 425,489 1995
----------------------------------------------------------------------------------
19.993094 19.065611 549,470 1994
----------------------------------------------------------------------------------
18.587100 19.993094 530,005 1993
----------------------------------------------------------------------------------
17.522020 18.587100 495,092 1992
----------------------------------------------------------------------------------
13.014276 17.522020 398,318 1991
----------------------------------------------------------------------------------
14.154142 13.014276 218,497 1990
----------------------------------------------------------------------------------
10.682887 14.154142 104,326 1989
----------------------------------------------------------------------------------
10.000000 10.682887 3,717 1988
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
9
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<PAGE> 12
CONDENSED FINANCIAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OF AT END
FUND OF PERIOD PERIOD OF PERIOD YEAR
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen American Capital 31.749417 40.944001 666,789 1997
----------------------------------------------------------------------------------
Life Investment Trust - 25.778191 31.749417 797,023 1996
----------------------------------------------------------------------------------
Enterprise Portfolio-NQ 19.065611 25.778191 865,665 1995
----------------------------------------------------------------------------------
19.993094 19.065611 1,141,284 1994
----------------------------------------------------------------------------------
18.587100 19.993094 1,146,227 1993
----------------------------------------------------------------------------------
17.522020 18.587100 926,595 1992
----------------------------------------------------------------------------------
13.014276 17.522020 687,711 1991
----------------------------------------------------------------------------------
14.154142 13.014276 286,980 1990
----------------------------------------------------------------------------------
10.682887 14.154142 141,530 1989
----------------------------------------------------------------------------------
10.000000 10.682887 24,248 1988
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 11.800884 13.493564 20,265 1997
----------------------------------------------------------------------------------
Life Investment Trust - 10.244062 11.800884 13,264 1996
----------------------------------------------------------------------------------
Global Equity Portfolio-Q 10.000000 10.244062 4,239 1995
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 11.800884 13.493564 32,094 1997
----------------------------------------------------------------------------------
Life Investment Trust - 10.244062 11.800884 20,602 1996
----------------------------------------------------------------------------------
Global Equity Portfolio- NQ 10.000000 10.244062 5,677 1995
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 14.944372 16.168107 61,597 1997
----------------------------------------------------------------------------------
Life Investment Trust - 14.827943 14.944372 101,057 1996
----------------------------------------------------------------------------------
Government Portfolio-Q 12.821877 14.827943 187,304 1995
----------------------------------------------------------------------------------
13.620968 12.821877 227,201 1994
----------------------------------------------------------------------------------
12.794291 13.620968 293,305 1993
----------------------------------------------------------------------------------
12.260048 12.794291 171,646 1992
----------------------------------------------------------------------------------
10.689640 12.260048 92,681 1991
----------------------------------------------------------------------------------
10.000000 10.689640 34,202 1990
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 14.944372 16.168107 228,036 1997
----------------------------------------------------------------------------------
Life Investment Trust - 14.827943 14.944372 315,546 1996
----------------------------------------------------------------------------------
Government Portfolio-NQ 12.821877 14.827943 427,994 1995
----------------------------------------------------------------------------------
13.620968 12.821877 501,364 1994
----------------------------------------------------------------------------------
12.794291 13.620968 720,049 1993
----------------------------------------------------------------------------------
12.260048 12.794291 452,081 1992
----------------------------------------------------------------------------------
10.689640 12.260048 257,611 1991
----------------------------------------------------------------------------------
10.000000 10.689640 119,020 1990
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 14.208651 14.734706 108,657 1997
----------------------------------------------------------------------------------
Life Investment Trust - 13.724323 14.208651 115,165 1996
----------------------------------------------------------------------------------
Money Market Portfolio- Q* 13.183559 13.724323 147,447 1995
----------------------------------------------------------------------------------
12.879003 13.183559 277,679 1994
----------------------------------------------------------------------------------
12.709641 12.879003 280,849 1993
----------------------------------------------------------------------------------
12.458190 12.709641 264,988 1992
----------------------------------------------------------------------------------
11.950917 12.458190 209,280 1991
----------------------------------------------------------------------------------
11.217660 11.950917 207,210 1990
----------------------------------------------------------------------------------
10.412806 11.217660 120,394 1989
----------------------------------------------------------------------------------
10.000000 10.412806 1,976 1988
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 14.208651 14.734706 356,149 1997
----------------------------------------------------------------------------------
Life Investment Trust - 13.724323 14.208651 240,045 1996
----------------------------------------------------------------------------------
Money Market Portfolio- NQ* 13.183559 13.724323 326,438 1995
----------------------------------------------------------------------------------
12.879003 13.183559 532,988 1994
----------------------------------------------------------------------------------
12.709641 12.879003 583,001 1993
----------------------------------------------------------------------------------
12.458190 12.709641 374,887 1992
----------------------------------------------------------------------------------
11.950917 12.458190 415,122 1991
----------------------------------------------------------------------------------
11.217660 11.950917 370,884 1990
----------------------------------------------------------------------------------
10.412806 11.217660 188,561 1989
----------------------------------------------------------------------------------
10.000000 10.412806 57,764 1988
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
10
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<PAGE> 13
CONDENSED FINANCIAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION UNIT ACCUMULATION UNIT ACCUMULATION UNITS
VALUE AT BEGINNING VALUE AT END OF AT END
FUND OF PERIOD PERIOD OF PERIOD YEAR
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen American Capital 14.931303 17.901858 9,466 1997
----------------------------------------------------------------------------------
Life Investment Trust - 10.765351 14.931303 4,266 1996
----------------------------------------------------------------------------------
Morgan Stanley Real Estate 10.000000 10.765351 1,762 1995
Securities Portfolio-Q
- ------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital 14.931303 17.901858 29,364 1997
----------------------------------------------------------------------------------
Life Investment Trust - 10.765351 14.931303 5,179 1996
----------------------------------------------------------------------------------
Morgan Stanley Real Estate 10.000000 10.765351 2,808 1995
Securities Portfolio-NQ
- ------------------------------------------------------------------------------------------------------------------
<FN>
*The 7 day yield on the Money Market Portfolio as of December 31, 1997 was 3.81%.
</TABLE>
11
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<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY
The Company is a stock life insurance company organized under the laws of the
State of Ohio in March, 1929. The Company is a member of the "Nationwide
Insurance Enterprise" with its Home Office at One Nationwide Plaza, Columbus,
Ohio 43215. The Company is a provider of life insurance, annuities and
retirement products. It is admitted to do business in all states, the District
of Columbia and Puerto Rico. The Contracts are distributed by the General
Distributor, Van Kampen American Capital Distributors, Inc.
THE VARIABLE ACCOUNT
The Variable Account was established by the Company on October 7, 1987, pursuant
to Ohio law. The Company has caused the Variable Account to be registered with
the SEC as a unit investment trust pursuant to the Investment Company Act of
1940 (the "1940 Act"). Registration does not involve supervision of the
management of the Variable Account or of the Company by the SEC.
The Variable Account is a separate investment account of the Company and as
such, is not chargeable with liabilities arising out of any other business the
Company may conduct. The Company does not guarantee the investment performance
of the Variable Account. Obligations under the Contracts, however, are
obligations of the Company. Income, gains and losses of the Variable Account,
whether or not realized, are credited to or changed against the Variable Account
without regard to other income, gains or losses of the Company.
Purchase payments are allocated among one or more Sub-Accounts corresponding to
one or more of the Underlying Mutual Funds designated by the Contract Owner.
There are two Sub-Accounts within the Variable Account for each of the
Underlying Mutual Fund options which may be designated by the Contract Owner.
One Sub-Account contains the Underlying Mutual Fund shares attributable to
Accumulation Units under Qualified Contracts and one Sub-Account contains the
Underlying Mutual Fund shares attributable to Accumulation Units under
Non-Qualified Contracts.
UNDERLYING MUTUAL FUND OPTIONS
A Contract Owner may choose from among a number of different Underlying Mutual
Fund options. The Underlying Mutual Fund options are NOT available to the
general public directly. The Underlying Mutual Funds are available as investment
options in variable life insurance policies or variable annuity contracts issued
by life insurance companies or, in some cases, through participation in certain
qualified pension or retirement plans.
Some of the Underlying Mutual Funds have been established by investment advisers
which manage publicly traded mutual funds having similar names and investment
objectives. While some of the Underlying Mutual Funds may be similar to, and may
in fact be modeled after publicly traded mutual funds, Contract purchasers
should understand that the Underlying Mutual Funds are otherwise directly
related to any publicly traded mutual fund. Consequently, the investment
performance of publicly traded mutual funds and any corresponding Underlying
Mutual Funds may differ substantially.
Shares of the Underlying Mutual Fund options available in the Variable Account
are issued only for the purpose of funding benefits for variable annuity
contracts and variable life insurance policies issued by insurance companies.
The Underlying Mutual Funds may also be available to registered separate
accounts offering variable annuity and variable life products of other
participating insurance companies, as well as to the Variable Account and other
separate accounts of the Company. Although the Company does not anticipate any
disadvantages to this, there is a possibility that a material conflict may arise
between the interests of the Variable account and one or more of the other
separate accounts in which the Underlying Mutual Funds participate. A conflict
may occur due to a number of reasons including a change in law affecting the
operations of variable life insurance policies and variable annuity contracts or
differences in the voting instructions of the Contract Owners and those of other
companies. In the event of a conflict, the Company will take any steps necessary
to protect Contract Owners and variable annuity payees, including withdrawal of
the Variable Account from participation in the Underlying Mutual Fund(s)
involved in the conflict.
More detailed information may be found in the current prospectus for each
Underlying Mutual Fund. Prospectuses for the Underlying Mutual Funds should be
read in conjunction with this prospectus. A copy of each prospectus may be
obtained without charge from the Company by calling 1-800-826-3167, TDD
1-800-238-3035, or by writing P. O. Box 182030, Columbus, Ohio 43218-2030. THERE
CAN BE NO ASSURNACE THAT THE INVESTMENT OBJECTIVES WILL BE ACHIEVED.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Van Kampen American Capital Life Investment Trust is an open-end diversified
management investment company organized as a Delaware business trust. Shares are
offered in separate portfolios which are sold only
12
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<PAGE> 15
to insurance companies to provide funding for variable life insurance policies
and variable annuity contracts. Van Kampen American Capital Asset Management,
Inc. serves as the portfolio's investment adviser.
ASSET ALLOCATION PORTFOLIO (FORMERLY "MULTIPLE STRATEGY FUND") seeks a high
total investment return consistent with prudent risk through a fully managed
investment policy utilizing equity securities, primarily common stocks of large
capitalization companies, as well as investment grade intermediate and long-term
debt securities and money market securities.
DOMESTIC INCOME PORTFOLIO (FORMERLY "DOMESTIC STRATEGIC INCOME FUND") seeks
current income as its primary objective. Capital appreciation is a secondary
objective. The Portfolio attempts to achieve these objectives through investment
primarily in a diversified portfolio of fixed-income securities. The Portfolio
may invest in investment grade securities and lower rated and nonrated
securities. Lower rated securities are regarded by the rating agencies as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments.
EMERGING GROWTH PORTFOLIO seeks capital appreciation by investing in a portfolio
of securities consisting principally of common stocks of small and medium sized
companies considered by Van Kampen American Capital Asset Management, Inc. ("the
Adviser"), to be emerging growth companies. Under normal market conditions, at
least 65% of the Portfolio's total assets will be invested in common stocks of
small and medium sized companies (less than $2 billion of market
capitalization), both domestic and foreign. The Portfolio may invest up to 20%
of its total assets in securities of foreign issuers. Additionally, the
Portfolio may invest up to 15% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the Securities Act of 1933) and in other securities not having readily available
market quotations.
ENTERPRISE PORTFOLIO (FORMERLY "COMMON STOCK FUND") seeks capital appreciation
by investing in a portfolio of securities consisting principally of common
stocks.
GLOBAL EQUITY PORTFOLIO seeks long term capital growth through investments in an
internationally diversified portfolio of equity securities of companies of any
nation including the United States. The Portfolio intends to be invested in
equity securities of companies of at least three countries including the United
States. Under normal market conditions, at least 65% of the Portfolio's total
assets are so invested. Equity securities include common stocks, preferred
stocks and warrants or options to acquire such securities.
GOVERNMENT PORTFOLIO seeks to provide investors with a high current return
consistent with preservation of capital. The Government Portfolio invests
primarily in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. In order to hedge against changes in interest
rates, the Government Portfolio may also purchase or sell options and engage in
transactions involving interest rate futures contracts and options on such
contracts.
MONEY MARKET PORTFOLIO seeks protection of capital and high current income by
investing in short-term money market instruments.
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO seeks long-term capital growth
by investing principally in a diversified portfolio of securities of companies
operating in the real estate industry ("Real Estate Securities"). Current income
is a secondary consideration. Real Estate Securities include equity securities,
including common stocks and convertible securities, as well as non-convertible
preferred stocks and debt securities of real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its assets
(marked to market), gross income or net profits from the ownership,
construction, management or sale of residential, commercial or industrial real
estate. Under normal market conditions, at least 65% of the Portfolio's total
assets will be invested in Real Estate Securities, primarily equity securities
of real estate investment trusts. The Portfolio may invest up to 25% of its
total assets in securities issued by foreign issuers, some or all of which may
also be Real Estate Securities.
VOTING RIGHTS
Voting rights under the Contracts apply ONLY with respect to amounts allocated
to the Sub-Account.
In accordance with its view of applicable law, the Company will vote the shares
of the Underlying Mutual Funds at regular and special meetings of the
shareholders. These shares will be voted in accordance with instructions
received from Contract Owners. If the 1940 Act or any regulation thereunder
should be amended or if the present interpretation changes permitting the
Company to vote the shares of the Underlying Mutual Funds in its own right, the
Company may elect to do so.
The Contract Owner is the person who has the voting interest under the Contract.
The number of Underlying Mutual Fund shares attributable to each Contract Owner
is determined by dividing the Contract Owner's interest in each respective
Sub-Account by the Net Asset Value of the Underlying Mutual Fund. The number of
shares which may be voted will be determined as of the date chosen by the
13
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<PAGE> 16
Company not more than 90 days prior to the meeting of the Underlying Mutual
Fund. Each person having a voting interest will receive periodic reports
relating to the Underlying Mutual Fund, proxy material and a form with which to
give voting instructions.
Voting instructions will be solicited by written communication at least 21 days
prior to such meeting. Underlying Mutual Fund shares to which no timely
instructions are received will be voted by the Company in the same proportion as
the voting instructions which are received with respect to all contracts
participating in the Variable Account.
VARIABLE ACCOUNT CHARGES AND OTHER DEDUCTIONS
EXPENSES OF THE VARIABLE ACCOUNT
The Variable Account is responsible for the following types of expenses: (1)
administrative expenses relating to the issuance and maintenance of the
Contracts; (2) mortality risk charge associated with guaranteeing the annuity
purchase rates at issue for the life of the Contracts; and (3) expense risk
charge associated with guaranteeing that the Mortality Risk, Expense Risk,
Contract Maintenance Charge and Administration Charge described in this
prospectus will not be changed regardless of actual expenses. If these charges
are insufficient to cover these expenses, the loss will be borne by the Company.
Deductions from and expenses paid out of the assets of the Underlying Mutual
Funds are described in each Underlying Mutual Fund's prospectus.
All of the charges described in this section apply to Variable Account
allocations. Allocations to the Fixed Account are subject to CDSC and Premium
Tax deductions, if applicable, but are not subject to charges exclusive to the
Variable Account; e.g. the Mortality Risk Charge, the Expense Risk Charge, and
the Administration Charge.
MORTALITY RISK CHARGE
The Company deducts a Mortality Risk Charge from the Variable Account. This
amount is computed on a daily basis, and is equal to an annual rate of 0.80% of
the daily net assets of the Variable Account. By guaranteeing the Contract's
annuity rate, the Company assumes the Mortality Risk. These guarantees cannot
change regardless of the death rates of persons receiving annuity payments or of
the general population.
EXPENSE RISK CHARGE
The Company deducts an Expense Risk Charge from the Variable Account. This
amount is computed on a daily basis, and is equal to an annual rate of 0.45% of
the daily net assets of the Variable Account. The Company will not increase
charges for administration of the Contracts regardless of its actual expenses.
CONTINGENT DEFERRED SALES CHARGE ("CDSC")
No deduction for sales charges is made from the Purchase Payments for these
Contracts. However, if any part of the Contract Value is surrendered, the
Company will, with certain exceptions deduct a CDSC (see "Waiver of CDSC"). The
CDSC will not exceed the lesser of:
1. 6% of the amount surrendered; or
2. 6% of the total of all Purchase Payments made within 6 years prior
to the date of the surrender request.
The CDSC, when it is applicable, will be used to cover expenses relating to the
sale of the Contracts, including commissions paid to sales personnel, the costs
of preparation of sales literature and other promotional activity. The Company
attempts to recover its distribution costs relating to the sale of the Contracts
from the CDSC. Any shortfall will be made up from the General Account of the
Company, which may indirectly include portions of the Mortality and Expense Risk
Charges, since the Company expects to generate a profit from these charges.
Gross Distribution Allowances which may be paid on the sale of these Contracts
are not more than 6.00% of Purchase Payments.
If part or all of the Contract Value is surrendered, a CDSC will be deducted by
the Company. For purposes of calculating the CDSC, surrenders are considered to
come first from the oldest Purchase Payment made to the Contract, then the next
oldest Purchase Payment and so forth. For tax purposes, a surrender is usually
treated as a withdrawal of earnings first.
14
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<PAGE> 17
The CDSC applies to the withdrawal of Purchase Payments as follows:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED CDSC
YEARS FROM DATE OF PERCENTAGE
PURCHASE PAYMENT
<S> <C>
0 6%
1 6%
2 6%
3 3%
4 3%
5 3%
6 0%
</TABLE>
During the first Contract Year, the Contract Owner may withdraw without a CDSC
any amount in order to meet minimum distribution requirements under the Code.
Starting with the second year after a Purchase Payment has been made, the
Contract Owner may withdraw without a CDSC, the greater of: (a) an amount equal
to 10% of that Purchase Payment; or (b) any amount withdrawn in order to meet
minimum Distribution requirements under the Code. This free withdrawal privilege
is non-cumulative. Free amounts not taken during any given Contract Year cannot
be taken as free amounts in a subsequent Contract Year. Withdrawals may be
restricted for Contracts pursuant to the terms of a Tax Sheltered Annuity or
other Qualified Plan. No sales charges are deducted on redemption proceeds that
are transferred to the fixed investment option of this annuity. The Contract
Owner may be subject to a tax penalty if the Contract Owner withdraws Purchase
Payments prior to age 59 1/2 (see "Non-Qualified Contracts-Natural Persons as
Contract Owners").
WAIVER OF CDSC
For Tax Sheltered Annuities purchased on or after May 1, 1992 and Qualified
Contracts sold in conjunction with 401 cases on or after May 1, 1992, and
SEP-IRA Contracts sold after May 1, 1992, the Company will waive the CDSC when:
(a) the Plan Participant experiences a case of hardship (as provided in
Code Section 403(b) and as defined for purposes of Code Section
401(k) );
(b) the Plan Participant becomes disabled (within the meaning of Code
Section 72(m)(7) );
(c) the Plan Participant attains age 59 1/2 and has participated in the
Contract for at least 5 years, as determined from the Contract
Anniversary date;
(d) the Plan Participant has participated in the Contract for at least
15 years as determined from the Contract Anniversary date;
(e) the Plan Participant dies; or
(f) the Contract is annuitized after 2 years from the inception of the
Contract.
For Non-Qualified Contracts and IRAs the Company will waive the CDSC when:
(a) the Annuitant dies; or
(b) the Contract Owner annuitizes after 2 years in the Contract.
When a Contract described in this prospectus is exchanged for another Contract
issued by the Company or any of its affiliated insurance companies, of the type
and class which the Company determines is eligible for such exchange, the
Company will waive the CDSC on the first Contract.
Sales without commissions or other standard distribution expenses can result in
the waiver of sales charges.
In no event will the waiver of CDSC be permitted where the waiver will be
unfairly discriminatory to any person, or where it is prohibited by state law.
15
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<PAGE> 18
CONTRACT MAINTENANCE CHARGE
Each year on the Contract Anniversary, the Company deducts an annual Contract
Maintenance Charge from the Contract Value to reimburse it for administrative
expenses relating to the issuance and maintenance of the Contract. The Charges
are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------ ---------------------------------------------
AMOUNT TYPE OF CONTRACT ISSUED
------------------------------------------------------ ---------------------------------------------
<S> <C>
- Non-Qualified Plans
- IRAs
- Tax Sheltered Annuities (sold prior to
$35.00 May 1, 1992)
- Qualified Contracts (issued pursuant to a
401 plan prior to May 1, 1992).1
------------------------------------------------------ ---------------------------------------------
- Tax Sheltered Annuity Contracts sold on
$12.00 or after May 1, 1992.2
-
------------------------------------------------------ ---------------------------------------------
- Qualified Contracts sold on or after May
$35.00 to $0.00 1, 1992. 3
- SEP-IRA Contracts sold on or after May 1,
1992.3
------------------------------------------------------ ---------------------------------------------
</TABLE>
1 If additional Contracts are or were issued pursuant to a 401 plan funded by
Contracts issued prior to May 1, 1992, the additional Contracts will have a
Contract Maintenance Charge of $35.00.
2 This charge may be lowered to reflect the Company's savings in
administration of the plan.
3 Variances are based on internal underwriting guidelines which can result in
reductions of charges in incremental amounts of $5.00. Underwriting
considerations include the size of the group, the average participant
account balance transferred to the Company, if any, and administrative
savings.
The Contract Maintenance Charge will be allocated between the Fixed Account and
Variable Account in the same percentages as the Purchase Payment allocations are
made. In any Contract Year when a Contract is surrendered for its full value on
other than the Contract Anniversary, the Contract Maintenance Charge will be
deducted at the time of the surrender. The amount of the Contract Maintenance
Charge may not be increased by the Company. In no event will reduction or waiver
of the Contract Maintenance Charge be permitted where the reduction or waiver
will be unfairly discriminatory to any person, or where it is prohibited by
state law.
ADMINISTRATION CHARGE
The Company deducts an Administration Charge equal on an annual rate of 0.05% of
the daily net assets of the Variable Account. The Administration Charge is
designed only to reimburse the Company for administrative expenses.
PREMIUM TAXES
The Company will charge against the Contract Value any premium taxes levied by a
state or any other government entity upon Purchase Payments received by the
Company. Premium tax rates currently range from 0% to 3.5%. This range is
subject to change. The method used to recoup premium tax expense will be
determined by the Company at its sole discretion in compliance with state law.
The Company currently deducts such charges from the Contract Value either at:
(1) the time the Contract is surrendered; (2) Annuitization; (3) such earlier
date as the Company may become subject to such taxes.
INVESTMENTS OF THE VARIABLE ACCOUNT
The Contract Owner may have Purchase Payments allocated among one or more of the
Sub-Accounts. Shares of the respective Underlying Mutual Fund options specified
by the Contract Owner are purchased at Net Asset Value for the respective
Sub-Account(s) and converted into Accumulation Units. The Contract Owner may
change the allocation of Purchase Payments or may exchange amounts among the
Sub-Accounts. Such transactions may be subject to conditions imposed by the
Underlying Mutual Funds, as well as those set forth in the Contract.
RIGHT TO REVOKE
The Contract Owner has a ten day free look to examine the Contract. Within ten
days of the date the Contract is received, it may be returned for any reason to
the Home Office at the address shown on page 1 of this prospectus. If the
Contract is returned to the Company in a timely manner, the Company will void
the Contract
16
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<PAGE> 19
and refund the Contract Value in full, unless otherwise required by law. State
and/or federal law may provide additional free look privileges. All IRAs will be
a return of Purchase Payments.
The liability of the Variable Account under this provision is limited to the
Contract Value in each Sub-Account on the date of revocation. Any additional
amounts refunded to the Contract Owner will be paid by the Company.
TRANSFERS
The Contract Owner may request a transfer of up to 100% of the Variable Account
value to the Fixed Account, without penalty or adjustment. However, the Company
reserves the right to restrict transfers from the Variable Account to the Fixed
Account to 25% of the Contract Value for any 12 month period. All amounts
transferred to the Fixed Account must remain on deposit in the Fixed Account
until the expiration of the current Interest Rate Guarantee Period. In addition,
transfers from the Fixed Account may not be made prior to the end of the then
current Interest Rate Guarantee Period. The Interest Rate Guarantee Period for
any amount allocated to the Fixed Account expires on the final day of a calendar
quarter during which the one year anniversary of the allocation to the Fixed
Account occurs. The Contract Owner's value in each Sub-Account will be
determined as of the date the transfer request is received in the Home Office in
good order at the Home Office. Once the Contract has been annuitized, transfers
may only be permitted on each anniversary of the Annuitization date.
The Contract Owner may at the maturity of an Interest Rate Guarantee Period,
transfer a portion of the value of the Fixed Account to the Variable Account.
The amount that may be transferred from the Fixed Account to the Variable
Account will be determined by the Company, at its sole discretion, but will not
be less than 10% of the total value of the portion of the Fixed Account that is
maturing. The amount that may be transferred will be declared upon the
expiration date of the then current Interest Rate Guarantee Period. Transfers
from the Fixed Account must be made within 45 days after the expiration date of
the guarantee period. Contract Owners who have entered into a Dollar Cost
Averaging Agreement with the Company (see "Dollar Cost Averaging") may transfer
from the Fixed Account to the Variable Account under the terms of that
agreement.
This Contract is not designed for professional market timing organizations or
other entities utilizing programmed and frequent transfers. The Company reserves
the right at any time and without prior notice to any market timer, to
terminate, suspend or modify the transfer privileges regarding transfers among
the Sub-Accounts.
Transfers may be made once per Valuation Day and may be made either in writing
or, in states allowing such transfers, by telephone. This telephone exchange
privilege is made available to Contract Owners automatically without the
Contract Owner's election. The Company will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. Such procedures
may include the following: requesting identifying information, such as name,
contract number, Social Security Number, and/or personal identification number;
tape recording all telephone transactions; or providing written confirmation
thereof to both the Contract Owner and any agent of record, at the last address
of record; or other procedures as the Company may deem reasonable. Although the
Company's failure to follow reasonable procedures may result in the Company's
liability for any losses due to unauthorized or fraudulent telephone transfers,
the Company will not be liable for following instructions communicated by
telephone which it reasonably believes to be genuine. Any losses incurred
pursuant to actions taken by the Company in reliance on telephone instructions
reasonably believed to be genuine will be borne by the Contract Owner.
ASSIGNMENT
The Contract Owner of a Non-Qualified Contract may assign some or all rights
under the Contract at any time during the lifetime of the Annuitant prior to the
Annuitization Date. Once proper notice of assignment is recorded by the Home
Office, the assignment will become effective as of the date the written request
was signed. The Company is not responsible for the validity or tax consequences
of any assignment. The Company will not be liable for any payment or other
settlement made by the Company before recording of the assignment. Where
necessary for the proper administration of the terms of the Contract, an
assignment will not be recorded until the Company has received sufficient
direction from the Contract Owner and assignee as to the proper allocation of
Contract rights under the assignment.
Any portion of the Contract Value, which is pledged or assigned, will be treated
as a Distribution and will be included in gross income to the extent that the
cash value exceeds the investment in the Contract for the taxable year in which
it was pledged or assigned. In addition, any Contract Value assigned may be
subject to a tax penalty equal to 10% of the amount which is included in gross
income. All rights in the Contract are personal to the Contract Owner and may
not be assigned without written consent of the Company. Assignment of the entire
Contract Value may cause the portion of the Contract Value exceeding the total
investment in the Contract and previously taxed amounts to be included in gross
income for federal income tax purposes each year that the assignment is in
effect.
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IRAs, Qualified Contracts and Tax Sheltered Annuities may not be assigned,
pledged or otherwise transferred except under such conditions as may be allowed
by law.
LOAN PRIVILEGE
Prior to the Annuitization Date, the Contract Owner of a Qualified Contract or
Tax Sheltered Annuity Contract may receive a loan from the Contract Value
subject to the terms of the Contract, the Plan, and the Code, which may impose
restrictions on loans.
Loans from Qualified Contracts or Tax Sheltered Annuities are available
beginning 30 days after the Date of Issue. The Contract Owner may borrow a
minimum of $1,000, unless a lower minimum amount is mandated by state law. In
non-ERISA plans, for Contract Values up to $20,000, the maximum loan balance
which may be outstanding at any time is 80% of the Contract Value, but not more
than $10,000. If the Contract Value is $20,000 or more, the maximum loan balance
which may be outstanding at any time is 50% of the Contract Value, but not more
than $50,000. For ERISA plans, the maximum loan balance which may be outstanding
at any time is 50% of the Contract Value, but not more than $50,000. The $50,000
limit will be reduced by the highest loan balances owed during the prior
one-year period. Additional loans are subject to the Contract minimum amount.
The aggregate of all loans may not exceed the Contract Value limitations stated
in this provision. For salary reduction Tax Sheltered Annuities, loans may only
be secured by the Contract Value.
All loans are made from a collateral fixed account. An amount equal to the
principal amount of the loan will be transferred to the collateral fixed
account. The Company will transfer to the collateral fixed account the
Sub-Account's Accumulation Units in proportion to the assets in each option
until the required balance is reached or all such Accumulation Units are
exhausted. Any additional requested collateral will be transferred from the
Fixed Account. No withdrawal charges are deducted at the time of the loan, or on
the transfer from the Variable Account to the collateral fixed account.
Until the loan has been repaid in full, that portion of the collateral fixed
account equal to the outstanding loan balance will credited with interest at a
rate 2.25% less than the loan interest rate fixed by the Company for the term of
the loan. However, the interest rate credited to the collateral fixed account
will never be less than 3.0%. Specific loan terms are disclosed at the time of
loan application or loan issuance.
Loans must be repaid in substantially level payments, not less frequently than
quarterly, within five years. Loans used to purchase the principal residence of
the Contract Owner must be repaid within 15 years. During the loan term, the
outstanding balance of the loan will continue to earn interest at an annual rate
as specified in the loan agreement. Loan repayments will consist of principal
and interest in amounts set forth in the loan agreement. Loan repayments will be
allocated between the Fixed and Variable Accounts in accordance with the
Contract, unless the Contract Owner and the Company agree to amend the Contract
at a later date on a case by case basis.
Any amounts distributed will be reduced by the amount of the loan outstanding,
plus accrued interest if:
(1) the Contract is surrendered;
(2) the Contract Owner/Annuitant dies; or
(3) the Contract Owner who is not the Annuitant dies prior to
Annuitization.
In addition, the Contract Value will be reduced by the amount of any outstanding
loans plus accrued interest if annuity payments begin while the loan is
outstanding. Until the loan is repaid, the Company reserves the right to
restrict any transfer of the Contract which would otherwise qualify as a
transfer as permitted in the Code.
If a loan payment is not made when due, interest will continue to accrue. A
grace period may be available under the terms of the loan agreement. If a loan
payment is not made when due, or by the end of the applicable grace period, the
entire loan will be treated as a deemed Distribution, will be taxable to the
borrower, and may be subject to the early withdrawal tax penalty. Interest will
continue to accrue on the loan after default. Any defaulted amounts, plus
accrued interest, will be deducted from the Contract when the participant
becomes eligible for a Distribution of a least that amount. Additional loans may
not be available while a previous loan remains in default.
Loans may also be subject to additional limitations or restrictions under the
terms of a Qualified Plan or Tax Sheltered Annuity Plan. Loans permitted under
this Contract may still be taxable in whole or part if the participant has
additional loans from other plans or contracts. The Company will calculate the
maximum nontaxable loan based on the information provided by the participant or
the employer.
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Loan repayments must be identified as such or else they will be treated as
Purchase Payments and will not be used to reduce the outstanding loan principal
or interest due. The Company reserves the right to modify the loan's terms or
procedures if there is a change in applicable law. The Company also reserves the
right to assess a loan processing fee.
IRAs, and Non-Qualified Contracts are not eligible for loans.
CONTRACT OWNERSHIP
Unless the Contract otherwise provides, the Contract Owner has all rights under
the Contract. PURCHASERS NAMING SOMEONE OTHER THAN THEMSELVES AS OWNER WILL HAVE
NO RIGHTS UNDER THE CONTRACT. Prior to the Annuitization Date, the Contract
Owner may name a new Contract Owner in Non-Qualified Contracts. Such change may
be subject to state and federal gift taxes and may also result in federal income
taxation. Any change of Contract Owner designation will automatically revoke any
prior Contract Owner designation. Once proper notice of the change is recorded
by the Home Office, the change will become effective as of the date the written
request was signed. A change of Contract Owner will not apply and will not be
effective with respect to any payment made or action taken by the Company prior
to the time that the change was recorded by the Home Office.
Prior to the Annuitization Date, the Contract Owner may request a change in the
Annuitant, the Contingent Annuitant, Contingent Owner, Beneficiary, or
Contingent Beneficiary. The request must be made in writing on a form acceptable
to the Company and must be signed by the Contract Owner. Such request must be
received at the Home Office prior to the Annuitization Date. Any change is
subject to review and approval by the Company. If the Contract Owner is not a
natural person and there is a change of the Annuitant, Distributions will be
made as if the Contract Owner died at the time of the change.
On the Annuitization Date, the Annuitant will become the Contract Owner.
JOINT OWNERSHIP
Joint Owners must be spouses at the time joint ownership is requested, unless
otherwise required by law. If a Joint Owner is named, the Joint Owner will
possess an undivided interest in the Contract. The exercise of any ownership
right in the Contract will require a written request signed by both Joint
Owners. The Company will not be liable for any loss, liability, cost, or expense
for acting in accordance with the instructions of either Joint Owner.
CONTINGENT OWNERSHIP
The Contingent Owner is the person who may receive certain benefits under the
Contract if a Contract Owner, who is not the Annuitant, dies prior to the
Annuitization Date and there is no surviving Joint Owner. If no Contingent Owner
survives a Contract Owner and there is no surviving Joint Owner, all rights and
interest of the Contingent Owner will vest in the Annuitant. If a Contract
Owner, who is also the Annuitant, dies before the Annuitization Date, the
Contingent Owner does not have any rights in the Contract; unless the Contingent
Owner is also the named beneficiary.
Subject to the terms of any existing assignment, the Contract Owner may change
the Contingent Owner prior to the Annuitization Date by written notice to the
Company. Once proper notice of the change is recorded by the Home Office, the
change will become effective as of the date the written request was signed,
whether or not the Contract Owner is living at the time of recording, but
without further liability as to any payment or settlement made by the Company
before receipt of the change.
BENEFICIARY
The Beneficiary is the person(s) who may receive certain benefits under the
Contract in the event the Annuitant dies prior to the Annuitization Date. If
more than one Beneficiary survives the Annuitant, each will share equally unless
otherwise specified in the Beneficiary designation. If no Beneficiary survives
the Annuitant, all rights and interest of the Beneficiary will vest in the
Contingent Beneficiary. If more than one Contingent Beneficiary survives, each
will share equally unless otherwise specified in the Contingent Beneficiary
designation. If no Contingent Beneficiaries survive the Annuitant, all rights
and interest of the Contingent Beneficiary will vest with the Contract Owner or
the estate of the last surviving Contract Owner.
Subject to the terms of any existing assignment recorded at the Home Office, the
Contract Owner may change the Beneficiary or Contingent Beneficiary during the
lifetime of the Annuitant, by written notice to the Company. Once proper notice
of the change is recorded by the Home Office, the change will become effective
as of the date the written request was signed, whether or not the Annuitant is
living at the time of recording, but without further liability as to any payment
or settlement made by the Company before receipt of the change.
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SUBSTITUTION OF SECURITIES
If shares of the Underlying Mutual Fund options are no longer available for
investment by the Variable Account or if, in the judgment of the Company's
management, further investment in such Underlying Mutual Fund shares is
inappropriate, the Company may eliminate Sub-Accounts, combine two or more
Sub-Accounts, or substitute shares of another underlying mutual fund for
underlying mutual fund shares already purchased or to be purchased in the future
with Purchase Payments under the Contract. No substitution of securities in the
Variable Account may take place without prior approval of the SEC.
CONTRACT OWNER INQUIRIES
Contract Owner inquiries may be directed to the Company by writing P. O. Box
182030, One Nationwide Plaza, Columbus, Ohio 43218-2030, or by calling
1-800-826-3167, TDD 1-800-238-3035.
OPERATION OF THE CONTRACT
ANNUITIZATION
Annuitization is irrevocable once payments have begun. When making an
Annuitization election, the Annuitant must choose:
(1) an annuity Payout Option; and
(2) either a Fixed Payment Annuity, Variable Payment Annuity or an
available combination.
If a variable payment option is chosen, all amounts in the Fixed Account must be
moved to a Variable Sub-Account prior to the Annuitization Date.
Payments under a fixed payment annuity are guaranteed by the Company as to the
dollar amount during the annuity payment period. The dollar amount of each
payment under a variable payment annuity will vary depending on the performance
of the Underlying Mutual Fund option the Contract Owner has selected. The dollar
amount of each variable payment could be higher or lower than a previous
payment.
FIXED PAYMENT ANNUITY - FIRST AND SUBSEQUENT PAYMENTS
The first Fixed Annuity payment will be determined by applying the portion of
the total Contract Value specified by the Contract Owner to the Fixed Annuity
table then in effect for the Annuity Payment Option elected, after deducting any
applicable premium taxes from the total Contract Value. This will be done at the
Annuitization Date on an age last birthday basis. Subsequent Fixed Annuity
payments will remain level unless the Annuity Payment Option elected provides
otherwise. The Company does not credit discretionary interest to Fixed Annuity
payments during the annuity payment period.
VARIABLE PAYMENT ANNUITY - FIRST AND SUBSEQUENT PAYMENTS
The first Variable Annuity payment will be determined by applying the portion of
the total Contract Value specified by the Contract Owner to the variable annuity
table then in effect for the Annuity Payment Option elected, after deducting any
applicable premium taxes from the total Contract Value. This will be done at the
Annuitization Date on an age last birthday basis. The dollar amount of the first
Variable Annuity payment is divided by the value of an Annuity Unit as of the
Annuitization Date to establish the number of Annuity Units representing each
monthly annuity payment. This number of Annuity Units remains fixed during the
annuity payment period. The dollar mount of the second and subsequent variable
annuity payments is not predetermined and may change from month to month. The
dollar amount of each subsequent payment is determined by multiplying the fixed
number of Annuity Units by the Annuity Unit value for the Valuation Period in
which the payment is due. The Company guarantees that the dollar amount of each
payment after the first will not be affected by variations in mortality
experience from mortality assumptions used to determined the first payment.
VARIABLE PAYMENT ANNUITY - ASSUMED INVESTMENT RATE
A 3.5% assumed investment rate is built into the Variable Payment Annuity
purchase rate basis in the Contracts. A higher assumption would mean a higher
initial payment but more slowly rising or more rapidly falling subsequent
payments. A lower assumption would have the opposite effect. If the actual
investment rate is at the annual rate of 3.5%, the annuity payments will be
level.
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VARIABLE PAYMENT ANNUITY - VALUE OF AN ANNUITY UNIT
The value of an Annuity Unit for a Sub-Account for any subsequent Valuation
Period is determined by multiplying the Annuity Unit value from the immediately
preceding Valuation Period by the net investment factor for the Valuation Period
for which the Annuity Unit value is being calculated, and multiplying the result
by an interest factor to neutralize the assumed investment rate of 3.5% per
annum built into the Variable Payment Annuity purchase rate basis in the
Contracts (see "Net Investment Factor").
VARIABLE PAYMENT ANNUITY - EXCHANGES AMONG UNDERLYING MUTUAL FUND OPTIONS
During the annuity payment period, exchanges among the Underlying Mutual Fund
Options may only be made by written request and the exchange will take place on
the Anniversary of the Annuity Commencement Date.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Payments will be made based on the Annuity Payment Option selected. However, if
the net amount available to apply under any Annuity Payment Option is less than
$500, the Company will have the right to pay the amount in one lump sum in lieu
of periodic annuity payments. In addition, if the payments to be provided would
be or become less than $20, the Company will have the right to change the
frequency of payments to intervals that will result in payments of at least $20.
In no event will the Company make payments under an annuity option less
frequently than annually.
ANNUITY COMMENCEMENT DATE
An Annuity Commencement Date will be selected. Such date will be the first day
of a calendar month unless otherwise agreed upon. The date must be at least 2
years after the Date of Issue. In the event the Contract is issued subject to
the terms of a Qualified Plan or Tax Sheltered annuity Plan, Annuitization may
occur during the first 2 years subject to approval by the Company.
The Annuity Commencement Date may be changed by the Contract Owner in writing
subject to approval by the Company.
The Annuity Commencement Date may be deferred in writing subject to approval by
the Company. The amount of the Death Benefit will be limited to the Contract
Value if the Annuity Commencement Date is postponed beyond the first day of the
calendar month after the Annuitant's 75th birthday or such other Annuity
Commencement Date provided under the Contract Owner's Qualified Plan.
ANNUITY PAYMENT OPTIONS
The Contract Owner may, upon prior written notice to the Company, at any time
prior to the Annuitization Date, elect one of the following Annuity Payment
Options:
(1) Life Annuity- An annuity payable periodically, but at least annually,
during the lifetime of the Annuitant, ending with the last payment due
prior to the death of the Annuitant. FOR EXAMPLE, IF THE ANNUITANT DIES
BEFORE THE SECOND ANNUITY PAYMENT DATE, THE ANNUITANT WILL RECEIVE ONLY
ONE ANNUITY PAYMENT. THE ANNUITANT WILL ONLY RECEIVE TWO ANNUITY PAYMENTS
IF HE OR SHE DIES BEFORE THE THIRD ANNUITY PAYMENT DATE AND SO ON;
(2)Joint and Last survivor Annuity- An annuity payable monthly during the
joint lifetimes of the Annuitant and designated second individual and
continuing thereafter during the lifetime of the survivor. AS IS THE CASE
UNDER OPTION 1 ABOVE, THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED
UNDER THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING
ANNUITANT REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
(3)Life annuity With 120 or 240 Monthly Payments Guaranteed- An annuity
payable monthly during the lifetime of the Annuitant. If the Annuitant dies
before all of the guaranteed payments have been made, payments will continue to
be made for the remainder of the selected guaranteed period to a designee chosen
by the Contract Owner at the time the annuity Payment Option was elected.
Alternatively, the designee may elect to receive the present value of any
remaining guaranteed payments in a lump sum. The present value will be computed
as of the date on which the Company receives notice of the Annuitant's death.
Some of the stated Annuity Options may not be available in all states. The
Contract Owner may request an alternative option by giving notice in writing
prior to Annuitization.
For Non-Qualified Contracts, no Distribution will be made until an Annuity
Payment Option has been elected. Contracts issued in connection with Qualified
Plans, Tax Sheltered Annuities, and IRAs are subject to the "minimum
distribution" requirements set forth in the Plan, Contract, or Code.
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DEATH OF CONTRACT OWNER - NON-QUALIFIED CONTRACTS
For Non-Qualified Contracts, if the Contract Owner and the Annuitant are not the
same person and a Contract Owner dies prior to the Annuitization Date, then the
Joint Owner, if any, becomes the new Contract Owner. If there is no surviving
Joint Owner, the Contingent Owner becomes the new Contract Owner. If there is no
surviving Contingent Owner, the Annuitant becomes the Contract Owner. The entire
interest in the Contract Value, less any applicable deductions (which may
include a CDSC), must be distributed in accordance with the "Required
Distributions for Non-Qualified Contracts."
DEATH OF THE ANNUITANT - NON-QUALIFIED CONTRACTS
If the Contract Owner and Annuitant are not the same person, and the Annuitant
dies prior to the Annuitization Date, a Death Benefit will be payable to the
Beneficiary, the Contingent Beneficiary, the Contract Owner, or the Contract
Owner's estate, as specified in the "Beneficiary" provision, unless there is a
surviving Contingent Annuitant. In such case, the Contingent Annuitant becomes
the Annuitant and no Death Benefit is payable.
The Beneficiary may elect to receive the Death Benefit:
(1) in a lump sum Distribution;
(2) as an annuity payout; or
(3) any Distribution permitted by law and approved by the Company.
An election must be received by the Company within 60 days of the annuitant's
death. If the Annuitant dies after the Annuitization Date, any benefit that may
be payable will be paid according to the selected Annuity Payment Option.
DEATH OF THE CONTRACT OWNER/ANNUITANT
If any Contract Owner and Annuitant are the same, and the Annuitant dies before
the Annuitization Date, a Death Benefit will be payable to the Beneficiary, the
Contingent Beneficiary, the Contract Owner, or the last surviving Contract
Owner's estate, as specified in the "Beneficiary" provision and in accordance
with the appropriate "Required Distributions" provisions.
If the Annuitant dies after the Annuitization Date, any benefit that may be
payable will be paid according to the selected Annuity Payment Option.
DEATH BENEFIT PAYMENT
The Death Benefit value is determined as of the Valuation Date at or next
following the date the Home Office receives:
(1) proper proof of the Annuitant's death;
(2) an election specifying the distribution method; and
(3) any state required form(s).
IF THE ANNUITANT DIES PRIOR TO THE FIRST DAY OF THE CALENDAR MONTH AFTER HIS OR
HER 75TH BIRTHDAY THE DOLLAR AMOUNT OF THE DEATH BENEFIT WILL BE THE GREATEST
OF:
(1) THE CONTRACT VALUE; OR
(2) THE SUM OF ALL PURCHASE PAYMENTS, LESS ANY MOUNTS SURRENDERED.
IF THE ANNUITANT DIES ON OR AFTER THE FIRST DAY OF THE CALENDAR MONTH AFTER HIS
OR HER 75TH BIRTHDAY AND PRIOR TO ANNUITIZATION, THE DEATH BENEFIT WILL EQUAL
THE CONTRACT VALUE.
If the Annuitant dies after the Annuitization Date, payment will be made
according to the Annuity Payment Option selected.
REQUIRED DISTRIBUTION FOR NON-QUALIFIED CONTRACTS
Upon the death of any Contract Owner or Joint Owner (including an Annuitant who
becomes the Contract Owner of the Contract on the Annuitization Date), certain
Distributions for Non-Qualified Contracts issued on or after January 19, 1985
are required by Section 72(s) of the Code. Notwithstanding any provision of the
Contract to the contrary, the following Distributions will be made in accordance
with such requirements:
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(1) If any Contract Owner dies on or after the Annuitization Date and
before the entire interest under the Contract has been distributed,
then the remaining interest will be distributed at least as rapidly
as under the method of distribution in effect as of the date of the
Contract Owner's death.
(2) If any Contract Owner dies prior to the Annuitization Date, then the
entire interest in the Contract (consisting of either the Death
Benefit or the Contract Value reduced by certain charges as set
forth elsewhere in the Contract) will be distributed within 5 years
of the death of the Contract Owner, provided however:
(a) any interest payable to or for the benefit of a natural person
(referred to herein as a "designated beneficiary"), may be
distributed over the life of the designated beneficiary or
over a period not extending beyond the life expectancy of the
designated beneficiary. Payments must begin within one year of
the date of the Contract Owner's death unless otherwise
permitted by federal income tax regulations; and
(b) if the designated beneficiary is the surviving spouse of the
deceased Contract Owner, the spouse may elect to become the
Contract Owner in lieu of receiving a Death Benefit, and any
Distributions required under these distribution rules will be
made upon the death of the spouse.
In the event that this Contract is owned by a person that is not a natural
person (e.g., a trust or corporation), then, for purposes of these distribution
provisions:
(a) the death of the Annuitant will be treated as the death of any
Contract Owner;
(b) any change of the Annuitant will be treated as the death of
any Contract Owner; and
(c) in either case the appropriate Distribution required under
these distribution rules will be made upon the death or
change, as the case may be. The Annuitant is the primary
Annuitant as defined in Section 72(s)(6)(B) of the Code.
These distribution provisions will not be applicable to any Contract that is not
required to be subject to the provisions of 72(s) of the Code by reason of
Section 72(s)(5) or any other law or rule.
Upon the death of a Contract Owner, the designated beneficiary must elect a
method of Distribution which complies with the above distribution provisions and
which is acceptable to the Company. The election must be received by the Company
within 60 days of the Contract Owner's death.
REQUIRED DISTRIBUTION FOR QUALIFIED PLANS OR TAX SHELTERED ANNUITIES
Amounts in a Qualified Contract or Tax Sheltered Annuity Contract will be
distributed in a manner consistent with the Minimum Distribution and Incidental
Benefit (MDIB) provisions of Section 401(a)(9) of the Code and applicable
regulations. Amounts will be paid, notwithstanding anything else contained
herein, to the Annuitant under the Annuity Payments Option selected, over a
period not exceeding:
(a) the life of the Annuitant or the joint lives of the Annuitant
and the Annuitant's designated Beneficiary under the selected
Annuity Payment Option; or
(b) a period not extending beyond the life expectancy of the
Annuitant or the joint life expectancies of the Annuitant and
the Annuitant's designated beneficiary under the selected
Annuity Payment Option.
If the Annuitant's entire interest in a Qualified Plan or Tax Sheltered Annuity
is to be distributed in equal or substantially equal payments over a period
described in (a) or (b) above, the payments will commence on the "required
beginning date" which is the later of:
(a) the first day of April following the calendar year in which
the Annuitant attains age 70 1/2; or
(b) when the Annuitant retires.
However, provision (b) does not apply to any employee who is a 5% Owner (as
defined in Section 416 of the Code) with respect to the plan year ending in the
calendar year in which the employee attains the age of 70 1/2.
If the Annuitant dies prior to the commencement of his or her Distribution, the
interest in the Qualified or Tax Sheltered Annuity Contract must be distributed
by December 31 of the calendar year in which the fifth anniversary of his or her
death occurs unless:
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(a) the Annuitant names his or her surviving spouse as the
Beneficiary and spouse elects to receive Distribution of the
Contract in substantially equal payments over his or her life
(or a period not exceeding his or her life expectancy) and
commencing not later than December 31 of the year in which the
Annuitant would have attained age 70 1/2; or
(b) the Annuitant names a Beneficiary other than his or her
surviving spouse and the Beneficiary elects to receive
Distribution of the Contract in substantially equal payments
over his or her life (or a period not exceeding his or her
life expectancy) commencing not later than December 31 of the
year following the year in which the Annuitant dies.
If the Contract Owner dies after Distribution has commenced, the Distribution
must continue at least as rapidly as under the schedule being used prior to his
or her death.
Payments commencing on the required beginning date will not be less than the
lesser of the quotient obtained by dividing the entire interest of the Annuitant
by the life expectancy of the Annuitant, or the joint life expectancies of the
Annuitant and the Annuitant's designated beneficiary (whichever is applicable
under the applicable Minimum Distribution or MDIB provisions). Life expectancy
and joint life expectancies are computed by the use of return multiples
contained in Section 1.72-9 of the Treasury Regulations.
If the amounts distributed to the Annuitant are less than those mentioned above,
a penalty tax of 50% is levied on the excess of the amount that should have been
distributed for that year over the amount that was actually distributed for that
year.
REQUIRED DISTRIBUTIONS FOR IRAS
Distribution from an IRA must begin not later than April 1 of the calendar year
following the calendar year in which the Contract Owner attains age 70 1/2.
Distribution may be accepted in a lump sum or in substantially equal payments
over:
(a) the Contract Owner's life or the lives of the Contract Owner
and his or her spouse or designated beneficiary; or
(b) a period not extending beyond the life expectancy of the
Contract Owner or the joint life expectancy of the Contract
Owner and the Contract Owner's designated beneficiary.
If the Contract Owner dies prior to the commencement of his or her Distribution,
the interest in the Qualified Contract or Tax Sheltered Annuity must be
distributed by December 31 of the year during which the fifth anniversary of his
or her death occurs unless:
(a) The Contract Owner names his or her surviving spouse as the
Beneficiary and the spouse elects to:
(i) treat the annuity as an IRA established for his or her
benefit; or
(ii) receive Distribution of the Contract in substantially equal
payments over his or her life (or a period not exceeding
his or her life expectancy) and commencing not later than
December 31 of the year in which the Contract Owner would
have attained age 70 1/2; or
(b) The Contract Owner names a Beneficiary other than his or her
surviving spouse and the Beneficiary elects to receive a
Distribution of the Contract in substantially equal payments
over his or her life (or a period not exceeding his or her
life expectancy) commencing not later than December 31 of the
year following the year in which the Contract Owner dies.
No Distribution will be required from this Contract if Distributions otherwise
required from this Contract are being withdrawn from another IRA or Individual
Annuity Account of the Contract Owner.
If the Contract Owner dies after Distribution has commenced, Distribution must
continue at least as rapidly as under the schedule being used prior to his or
her death, except that a surviving spouse who is the beneficiary under the
Annuity Payment Option, may treat the Contract as his or her own, in the same
manner as is described in section (a)(i) of this provision.
If the amounts distributed to the Contract Owner are less than those mentioned
above, a penalty tax of 50% is levied on the excess of the amount that should
have been distributed for that year over the amount that actually was
distributed for that year.
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A pro-rata portion of all Distributions will be included in the gross income of
the person receiving the Distribution and taxed at ordinary income tax rates.
The portion of the Distribution which is taxable is based on the ratio between
the amount by which non-deductible Purchase Payments exceed prior non-taxable
Distributions and total account balances at the time of the Distribution. The
owner of an IRA must annually report the amount of non-deductible Purchase
Payments, the amount of any Distribution, the amount by which non-deductible
Purchase Payments for all years exceed non-taxable Distributions for all years,
and the total balance of all Individual Retirement Accounts and Annuities.
IRA Distributions will not receive the benefit of the tax treatment of a lump
sum Distribution from a Qualified Plan. If the Contract Owner dies prior to the
time Distribution of his or her interest in the annuity is completed, the
balance will also be included in his or her gross estate.
GENERAL INFORMATION
CONTRACT OWNER SERVICES
ASSET REBALANCING- The Contract Owner may direct the automatic reallocation of
Contract Values to the Sub-Accounts on a predetermined percentage basis. Asset
Rebalancing will occur every three months or on another frequency authorized by
the Company. If the last day of the three month period falls on a Saturday,
Sunday, recognized holiday, or any other day when the New York Stock Exchange is
closed, the Asset Rebalancing reallocation will occur the first business day
after that day. Asset Rebalancing requests must be made in writing on a form
provided by the Company. The Contract Owner may want to contact a financial
adviser to discuss the use of Asset Rebalancing.
Asset Rebalancing may be subject to employer imposed limitations or restrictions
for Contracts issued to a Qualified Plan or Tax Sheltered Annuity Plan.
The Company reserves the right to discontinue establishing new Asset Rebalancing
programs. The Company also reserves the right to assess a processing fee for
this service.
DOLLAR COST AVERAGING- If the Contract Value is $15,000 or more, the Contract
Owner may direct the Company to automatically transfer amounts from the Money
Market Portfolio or the Fixed Account to any other Sub-Account. Dollar Cost
Averaging will occur on a monthly basis or on another frequency permitted by the
Company. Dollar Cost Averaging is a long-term investment program which provides
for regular, level investments over time. There is no guarantee that Dollar Cost
Averaging will result in a profit or protect against loss. The minimum monthly
transfer is $100. Transfers will be processed until either the value in the
originating funds is exhausted or the Contract Owner instructs the Home Office
to cancel the transfers.
The Company reserves the right to discontinue establishing new Dollar Cost
Averaging programs. The Company also reserves a right to assess a processing fee
for this service.
SYSTEMATIC WITHDRAWALS- A Contract Owner may elect in writing to begin receiving
withdrawals of dollar amounts (of at least $100) on a monthly, quarterly,
semi-annual, or annual basis. The withdrawals will be taken from the
Sub-Accounts and the Fixed Account on a prorated basis. Unless otherwise
directed by the Contract Owner, the Company will withhold applicable federal
income taxes. The IRS may assess a 10% penalty tax if the Contract Owner is
under age 59 1/2, unless the Contract Owner has made an irrevocable election of
distributions of substantially equal payments. Withdrawals may be discontinued
at any time by notifying the Home Office in writing.
The Company reserves the right to discontinue establishing new Systematic
Withdrawal programs. The Company also reserves the right to assess a processing
fee for this service. Systematic Withdrawals are not available prior to the
expiration of the ten day free look provision of the Contract (see "Right to
Revoke").
STATEMENTS AND REPORTS
The Company will mail to Contract Owners, at their last known address, any
statements and reports required by law. Contract Owners should promptly notify
the Company of any address change. Statements are mailed detailing the
Contract's quarterly activity. The Company will also send a confirmation
statement to Contract Owners each time a transaction is made affecting the
Contract Value. However, instead of receiving an immediate confirmation of
transactions made pursuant to some types of recurring payment plans (such as a
dollar cost averaging program or salary reduction arrangement), the Contract
Owner may receive confirmation of such transactions in their quarterly
statements. The Contract Owner should review the information in these statements
carefully. All errors or corrections must be reported to the Company immediately
to assure proper crediting to the Contract. The Company will assume all
transactions are accurately reported on quarterly statements or confirmation
statements unless the Contract Owner notifies the Home Office within 30 days
after receipt of the statement. The Company will also send to Contract owners a
semi-annual report as of June 30 and an annual report as of December 31,
containing financial statements for the Variable Account.
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ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE
Purchase Payments are allocated to the Fixed Account and/or one or more
Sub-Accounts in accordance with the designation of the Underlying Mutual Fund
options by the Contract Owner, and converted into Accumulation Units.
The initial first year Purchase Payment must be at least $1,500 for
Non-Qualified Contracts. However, if periodic payments are expected by the
Company, this initial first year minimum may be satisfied by Purchase Payments
made on an annualized basis. Purchase payments, if any, after the first Contract
Year must be at least $10 each. The Company reserves the right to lower this $10
Purchase Payment minimum for certain employer sponsored programs. The Contract
Owner may increase or decrease Purchase Payments or change the frequency of
payment. The Contract Owner is not obligated to continue Purchase Payments in
the amount or at the frequency elected. There are no penalties for failure to
continue Purchase Payments. The cumulative total of all Purchase Payments under
Contracts issued on the life of any Annuitant may not exceed $1,000,000 without
prior consent of the Company.
THE PURCHASER IS CAUTIONED THAT INVESTMENT RETURN ON SMALL INITIAL AND
SUBSEQUENT PURCHASE PAYMENTS MAY BE LESS THAN CHARGES ASSESSED BY THE COMPANY.
The initial Purchase Payment allocated to designated Sub-Accounts will be priced
not later than 2 business days after receipt of an order to purchase, if the
application and all information necessary for processing the purchase order are
complete. The Company may, however, retain the Purchase Payment for up to 5
business days while attempting to complete an incomplete application. If the
application cannot be made complete within 5 business days, the prospective
purchaser will be informed of the reasons for the delay and the Purchase Payment
will be returned immediately unless the prospective purchaser specifically
consents to the Company retaining the Purchase Payment until the application is
complete. Thereafter, subsequent Purchase Payments will be priced on the basis
of the Accumulation Unit value next computed for the appropriate Sub-Account
after the additional Purchase Payment is received.
Purchase Payments will not be priced on the following nationally recognized
holidays: New Year's Day; Martin Luther King, Jr. Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas.
VALUE OF AN ACCUMULATION UNIT
The Accumulation Unit value for any Valuation Period is determined by
multiplying the Accumulation Unit value for each Sub-Account for the immediately
preceding Valuation Period by the net investment factor for the Sub-Account
during the subsequent Valuation Period. Though the number of Accumulation Units
will not change as a result of investment experience, the value of an
Accumulation Unit may increase or decrease from Valuation Period to Valuation
Period.
NET INVESTMENT FACTOR
The net Investment factor for any Valuation Period is determined by dividing (a)
by (b) and subtracting (c) from the result where:
(a) is the net of:
(1) the Net Asset Value per share of the Underlying Mutual Fund held
in the Sub-Account determined at the end of the current Valuation
Period; and
(2) the per share amount of any dividend or capital gain Distributions
made by the Underlying Mutual Fund held in the Sub-Account if the
"ex-dividend" date occurs during the current Valuation Period.
(b) is the Net Asset Value per share of the Underlying Mutual Fund held in
the Sub-Account determined at the end of the immediately preceding
Valuation Period.
(c) is a factor representing the Mortality Risk Charge, Expense Risk Charge
and Administration Charge. Such factor is equal on an annual rate of
1.30% of the daily net assets of the Variable Account.
The net investment factor may be greater or less than one; therefore, the value
of an Accumulation Unit may increase or decrease. It should be noted that
changes in the net investment factor may not be directly proportional to changes
in the Net Asset Value of Underlying Mutual Fund shares, because of the
deduction for Mortality Risk Charge, Expense Risk Charge and Administration
Charge.
DETERMINING THE CONTRACT VALUE
The Contract Value is the sum of the value of all Accumulation Units and amounts
credited to the Fixed Account. The number of Accumulation Units credited to each
Sub-Account is determined by dividing the net amount
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allocated to the Sub-Account by the Accumulation Unit value for the Sub-Account
for the Valuation Period during which the Purchase Payment is received by the
Company. If part or all of the Contract Value is surrendered or charges or
deductions are made against the Contract Value, an appropriate number of
Accumulation Units from the Sub-Account and the Fixed Account will be deducted
in the same proportion that the Contract Owner's interest in each of the
Sub-Accounts and the Fixed Account bears to the total Contract Value.
SURRENDER (REDEMPTION)
Prior to the earlier of the Annuitization Date or the death of the Annuitant,
the Company will allow the Contract Owner to Surrender a portion or all of the
Contract Value. The request for surrender must be made in writing and must
include the Contract when surrendering the Contract in full. In some cases the
Company will require additional documentation. The Company may require that the
signature(s) be guaranteed by a member firm of a major stock exchange or other
depository institution qualified to give such a guaranty.
When requested, the Company will surrender a number of Accumulation Units from
the Variable Account and an amount from the Fixed Account necessary to equal the
gross dollar amount requested, less any applicable CDSC (see "Contingent
Deferred Sales Charge"). The number of Accumulation Units surrendered from each
Sub-Account will be in the same proportion that the Contract Owner's interest in
the Sub-Accounts and Fixed Account bears to the total Contract Value.
The Company will pay any amounts surrendered from the Sub-Accounts within 7
days. However, the Company reserves the right to suspend or postpone the date of
any payment for any Valuation Period when: (1) the New York Stock Exchange
("Exchange") is closed; (2) trading on the Exchange is restricted; (3) an
emergency exists as a result of which disposal of securities held in the
Variable Account is not reasonably practicable to determine the value of the
Variable Account's net assets; or (4) the SEC, by order, permits such suspension
or postponement for the protection of security holders. The applicable rules and
regulations of the SEC will govern as to whether the conditions prescribed in
(2) and (3) exist.
The Contract Value on surrender may be more or less than the total of Purchase
Payments made by a Contract Owner, depending on the market value of the
Underlying Mutual Fund shares.
With respect to Contracts issued under the Texas Optional Retirement Program,
the Texas Attorney General has ruled that withdrawal benefits are available only
in the event of a participant's death, retirement, termination of employment due
to total disability, or other termination of employment in a Texas public
institution of higher education. A participant will not, therefore, be entitled
to receive the right of withdrawal in order to receive the cash values credited
to such participant under the Contract unless one of the foregoing conditions
has been satisfied. The value of the Contracts may, however, be transferred to
other contracts or other carriers during the period of participation in the
Optional Retirement Program. The Company issues this Contract to participants in
the Optional Retirement Program in reliance upon, and in compliance with, Rule
6c-7 of the 1940 Act.
SURRENDERS UNDER A QUALIFIED PLAN OR TAX SHELTERED ANNUITY CONTRACT
Except as provided below, the Contract Owner may surrender part or all of the
Contract Value at any time this Contract is in force prior to the earlier of the
Annuitization Date or the death of the Annuitant:
A. The surrender of Contract Value attributable to contributions made
pursuant to a qualified cash or deferred arrangement (within the meaning
of Code Section 402(g)(3)(A)), a salary reduction agreement (within the
meaning of Code Section 402(g)(3)(C)), or transfers from a Custodial
Account described in Code Section 403(b)(7) may be executed only:
1. when the Contract Owner attains age 59 1/2, separates from
service, dies, or becomes disabled (within the meaning of Code
Section 72(m)(7)); or
2. in the case of hardship (as defined for purposes of Code Section
401(k)), provided that any surrender of Contract Value in the case
of hardship may not include any income attributable to salary
reduction contributions.
B. The surrender limitations described in Section A above also apply to:
1. salary reduction contributions to Tax Sheltered Annuities made for
plan years beginning after December 31, 1988;
2. earnings credited to such contracts after the last plan year
beginning before January 1, 1989, on amounts attributable to
salary reduction contributions; and
3. all amounts transferred from 403(b)(7) Custodial Accounts (except
that earnings, and employer contributions as of December 31, 1988
in such Custodial Accounts may be withdrawn in the case of
hardship).
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C. Any Distribution other than the above, including exercise of a
contractual ten day free look provision (when available) may result in
the immediate application of taxes and penalties and/or retroactive
disqualification of a Qualified Contract or Tax Sheltered Annuity.
A premature Distribution may not be eligible for rollover treatment. To assist
in preventing disqualification in the event of a ten day free look, the Company
will agree to transfer the proceeds to another contract which meets the
requirements of Section 403(b) of the Code, upon proper direction by the
Contract Owner. The foregoing is the Company's understanding of the withdrawal
restrictions which are currently applicable under Code Section 401(k)(2)(B),
Code Section 403(b)(11) and Revenue Ruling 90-24. Such restrictions are subject
to legislative change and/or reinterpretation. Distributions pursuant to
Qualified Domestic Relations Orders will not be considered to be a violation of
the restrictions stated in this provision.
The contract surrender provisions may also be modified pursuant to the plan
terms and tax provisions of the Code when the Contract is issued to fund a
Qualified Plan.
INFORMATION CONTAINED HEREIN SHOULD NOT BE SUBSTITUTED FOR THE ADVICE OF A
PERSONAL TAX ADVISER.
FEDERAL TAX CONSIDERATIONS
FEDERAL INCOME TAXES
The Company does not make any guarantee regarding the tax status for any
Contract or any transaction involving the Contracts. Contract Owners should
consult a financial consultant, legal counsel or tax advisor to discuss in
detail the taxation and the use of the Contracts.
Section 72 of the Code governs federal income taxation of annuities in general.
That section sets forth different rules for: (1) Qualified Contracts; (2) IRAs,
(3) Tax Sheltered Annuities; and (4) Non-Qualified Contracts. Each type of
annuity is discussed below.
Distributions to participants from Qualified Contracts or Tax Sheltered
Annuities are generally taxed when received. A portion of each Distribution is
excludable from income based on the formula required by the Code. The formula
required by the Code excludes from income an amount equal to the investment in
the contract divided by the number of anticipated payments, as determined
pursuant to Section 72(d) of the Code, until the full investment in the Contract
is recovered; thereafter, all Distributions are fully taxable.
Distributions from IRAs and Contracts owned by Individual Retirement Accounts
are generally taxed when received. The portion of each payment which is
excludable is based on the ratio between the amount by which nondeductible
Purchase Payments to all Contracts exceeds prior non-taxable Distributions from
the Contracts, and the total account balances in the Contracts at the time of
the Distribution. The owner of such IRAs or the Annuitant under Contracts held
by Individual Retirement Accounts must annually report to the IRS the amount of
nondeductible Purchase Payments, the amount of any Distribution, the amount by
which nondeductible Purchase Payments for all years exceed non-taxable
Distributions for all years, and the total balance in all IRAs and Individual
Retirement Accounts.
A change of the Annuitant or Contingent Annuitant may be treated by the IRS as a
taxable transaction.
PUERTO RICO
Under the Puerto Rico tax code, Distributions from a Non-Qualified Contract
prior to Annuitization are treated as nontaxable return of principal until the
principal is fully recovered; thereafter from a Non-Qualified Contract, all
Distributions are fully taxable. Distributions after Annuitization are treated
as part taxable income and part nontaxable return of principal. The amount
excluded from gross income after Annuitization is equal to the amount of the
Distribution in excess of 3% of the total Purchase Payments paid, until an
amount equal to the total Purchase Payments paid has been excluded; thereafter,
the entire Distribution is included in gross income. Puerto Rico does not impose
an early withdrawal penalty tax. Generally, Puerto Rico does not require income
tax to be withheld from Distributions of income. A personal advisor should be
consulted.
NON-QUALIFIED CONTRACTS - NATURAL PERSONS AS CONTRACT OWNERS
The rules applicable to Non-Qualified Contracts provide that a portion of each
annuity payment received is excludable from taxable income based on the ratio
between the Contract Owner's investment in the Contract and the expected return
on the Contract until the investment has been recovered; thereafter the entire
amount is includable in income. The maximum amount excludable from income is the
investment in the Contract. If the
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Annuitant dies prior to excluding from income the entire investment in the
Contract, the Annuitant's final tax return may reflect a deduction for the
balance of the investment in the Contract.
Distributions made from the Contract prior to the Annuitization Date are taxable
to the Contract Owner to the extent that the cash value of the Contract exceeds
the Contract Owner's investment at the time of the Distribution. Distributions,
for this purpose, include partial surrenders, dividends, loans, or any portion
of the Contract which is assigned or pledged; or for Contracts issued after
April 22, 1987, any portion of the Contract transferred by gift. For these
purposes, a transfer by gift may occur upon Annuitization if the Contract Owner
and the Annuitant are not the same. In determining the taxable amount of a
Distribution, all annuity contracts issued after October 21, 1988, by the same
company to the same Contract Owner during any 12 month period, will be treated
as one annuity contract. Additional limitations on the use of multiple contracts
may be imposed by Treasury Regulations. Distributions prior to the Annuitization
Date with respect to that portion of the Contract invested prior to August 14,
1982, are treated first as a recovery of the investment in the Contract as of
that date. A Distribution in excess of the amount of the investment in the
Contract as of August 14, 1982, will be treated as taxable income.
The Tax Reform Act of 1986 has changed the tax treatment of certain
Non-Qualified Contracts held by entities other than individuals. Such entities
are taxed currently on the earnings on the Contract which are attributable to
contributions made to the Contract after February 28, 1986. There are exceptions
for immediate annuities and certain Contracts owned for the benefit of an
individual. An immediate annuity, for purposes of this discussion, is a single
premium Contract on which payments begin within one year of purchase. If this
Contract is issued as the result of an exchange described in Section 1035 of the
Code, for purposes of determining whether the Contract is an immediate annuity,
it will generally be considered to have been purchased on the purchase date of
the contract given up in the exchange.
Code Section 72 also provides for a penalty tax, equal to 10% of the portion of
any Distribution that is includable in gross income, if the Distribution is made
prior to attaining age 59 1/2. The penalty tax does not apply if the
Distribution is attributable to the Contract Owner's death, disability or is one
of a series of substantially equal periodic payments made over the life or life
expectancy of the Contract Owner (or the joint lives or joint life expectancies
of the Contract Owner and the beneficiary selected by the Contract Owner to
receive payment under the Annuity Payment Option selected by the Contract Owner)
or for the purchase of an immediate annuity, or is allocable to an investment in
the Contract before August 14, 1982. A Contract Owner wishing to begin taking
Distributions to which the 10% tax penalty does not apply should forward a
written request to the Company. Upon receipt of a written request from the
Contract Owner, the Company will inform the Contract Owner of the procedures
pursuant to Company policy and subject to limitations of the Contract including
but not limited to first year withdrawals. The election will be irrevocable and
may not be amended or changed.
In order to qualify as an annuity contract under Section 72 of the Code, the
contract must provide for Distribution of the entire contract to be made upon
the death of a Contract Owner. If a Contract Owner dies prior to the
Annuitization Date, then the Joint Owner, the Contingent Owner or other named
recipient must receive the Distribution within 5 years of the Contract Owner's
death. However, the recipient may elect for payments to be made over his/her
life or life expectancy provided that the payments begin within one year from
the death of the Contract Owner. If the Joint Owner, Contingent Owner or other
named recipient is the surviving spouse, the spouse may be treated as the
Contract Owner and the Contract may be continued throughout the life of the
surviving spouse. In the event the Contract Owner dies on or after the
Annuitization Date and before the entire interest has been distributed, the
remaining portion must be distributed at least as rapidly as under the method of
Distribution being used on the date of the Contract Owner's death (see "Required
Distribution for Qualified Plans and Tax Sheltered Annuities"). If the Contract
Owner is not a natural person, the death of the Annuitant (or a change in the
Annuitant) will result in a Distribution pursuant to these rules, regardless of
whether a Contingent Annuitant is named.
The Code requires that any election to receive an annuity in lieu of a lump sum
payment must be made within 60 days after the lump sum becomes payable
(generally, the election must be made within 60 days after the death of a
Contract Owner or the Annuitant). If the election is made more than 60 days
after the lump sum first becomes payable, the election will be ignored for tax
purposes, and the entire amount of the lump sum will be subject to immediate
tax. If the election is made within the 60 day period, each Distribution will be
taxable when it is paid.
NON-QUALIFIED CONTRACTS - NON-NATURAL PERSONS AS CONTRACT OWNERS
The foregoing discussion of the taxation of Non-Qualified Contracts applies to
Contracts owned (or, pursuant to Section 72(u) of the Code, deemed to be owned)
by individuals.
As a general rule, contracts owned by corporations, partnerships, trusts, and
similar entities ("non-natural persons"), rather than by one or more
individuals, are not treated as annuity contracts for most purposes under
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the Code; in particular, they are not treated as annuity contracts for purposes
of Section 72. Therefore, the taxation rules for Distributions, as described
above, do not apply to Non-Qualified Contracts owned by non-natural persons.
Rather the income earned under a Non-Qualified Contract that is owned by a
non-natural person is taxed as ordinary income during the taxable year that is
earned, and is not deferred, even if the income is not distributed out of the
Contract to the Contract Owner.
The foregoing non-natural person rule does not apply to all entity-owned
contracts. A Contract that is owned by a non-natural person as an agent for an
individual is treated as owned by the individual. This exception does not apply,
however, to a non-natural person who is an employer that holds the Contract
under a non-qualified deferred compensation arrangement for one or more
employees.
The non-natural person rule also do not apply to a Contract that is: (a)
acquired by the estate of a decedent by reason of the death of the decedent; (b)
issued in connection with certain qualified retirement plans and individual
retirement plans; (c) used in connection with certain structured settlements;
(d) purchased by an employer upon the termination of certain qualified
retirement plans; or (e) an immediate annuity.
QUALIFIED PLANS, IRAS AND TAX SHELTERED ANNUITIES
Contract Owners seeking information regarding eligibility, limitations on
permissible amounts of Purchase Payments, and the tax consequences of
distributions from Qualified Plans, Tax Sheltered Annuities, IRAs and other
plans that receive favorable tax treatment should seek competent advice; the
terms of such plans may limit the rights available under the Contracts.
Pursuant to Section 403(b)(1)(E) of the Code, a Contract that is issued as a
Tax-Sheltered Annuity is required to limit the amount of the Purchase Payment
for any year to an amount that does not exceed the limit set forth in Section
402(g) of the Code ($7,000), as it is from time to time increased to reflect
increases in the cost of living. This limit may be reduced by any deposits,
contributions or payments made to any other Tax-Sheltered Annuity or other plan,
contract or arrangement by or on behalf of the Contract Owner.
The Code permits the rollover of most Distributions from Qualified Plans to
other Qualified Plans or IRAs. Most Distributions from Tax-Sheltered Annuities
may be rolled into another Tax-Sheltered Annuity, IRA, or an Individual
Retirement Account. Distributions that may not be rolled over are those which
are:
1. one of a series of substantially equal annual (or more frequent)
payments made:
(a) over the life (or life expectancy) of the Contract Owner;
(b) over the joint lives or (joint life expectancies) of the
Contract Owner and the Contract Owner's designated
Beneficiary; or
(c) for a specified period of ten years or more; or
2. a required minimum distribution.
Any Distribution eligible for rollover will be subject to federal tax
withholding at a rate of twenty percent (20%) unless the Distribution is
transferred directly to an appropriate plan as described above.
The Contract is available for Qualified Plans electing to comply with section
404(c) of ERISA. It is the responsibility of the plan and its fiduciaries to
determine and satisfy the requirements of section 404(c).
WITHHOLDING
The Company is required to withhold tax from certain Distributions to the extent
that such Distributions would constitute income to the Contract Owner or other
payee. The Contract Owner or other payee is entitled to elect not to have
federal income tax withheld from certain types of Distributions, but may be
subject to penalties in the event insufficient federal income tax is withheld
during a calendar year. However, if the IRS notifies the Company that the
Contract Owner or other payee has furnished an incorrect taxpayer identification
number, the Distributions may be subject to back-up withholding at the statutory
rate, which is presently 31%, and which cannot be waived by the Contract Owner
or other payee.
NON-RESIDENT ALIENS
Predeath distributions from Modified Endowment Contracts to nonresident aliens
(NRAs) are generally subject to federal income tax and tax withholding, at a
statutory rate of thirty percent (30%) of the amount of income that is
distributed. The Company may be required to withhold such amount from the
distribution and remit it to the IRS. Distributions to certain NRAs may be
subject to lower, or in certain instances, zero tax and withholding rates, if
the United States has entered into an applicable treaty. However, in order to
obtain the benefits of such treaty provisions, the NRA must give to the
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Company sufficient proof of his or her residency and citizenship in the form and
manner prescribed by the IRS. For distributions the NRA must obtain an
Individual Taxpayer Identification Number from the IRS, and furnish that number
to the Company prior to the distribution. If the Company does not have the
proper proof of citizenship or residency and a proper Individual Taxpayer
Identification Number prior to any Distribution, the Company will be required to
withhold 30% of the income, regardless of any treaty provision.
A payment may not be subject to withholding where the recipient sufficiently
establishes to the Company that such payment is effectively connected to the
recipient's conduct of a trade or business in the United States and that such
payment is includable in the recipient's gross income for United States federal
income tax purposes. Any such distributions will be subject to the rules set
forth in the section entitled "Withholding."
FEDERAL ESTATE, GIFT, AND GENERATION SKIPPING TRANSFER TAXES
A transfer of the Contract from one Contract Owner to another, or the payment of
a Distribution under the Contract to someone other than a Contract Owner, may
constitute a gift for federal gift tax purposes. Upon the death of the Contract
Owner, the value of the Contract may be included in his or her gross estate for
federal estate tax purposes even if all, a portion, or none of the value is also
subject to federal income taxes.
The Company may be required to determine whether the Death Benefit or any other
payment or Distribution constitutes a "direct skip" as defined in Section 2612
of the Code, and thereby determine the amount of the generation skipping
transfer tax, if any, resulting from the direct skip. A direct skip may occur
when property is transferred to, or a Death Benefit or other Distribution is
made to: (a) an individual who is two or more generations younger than the
Contract Owner; or (b) certain trusts, as described in Section 2613 of the Code
(generally, trusts that have no beneficiaries who are not 2 or more generations
younger than the Contract Owner). If the Contract Owner is not a natural person,
then for this purpose only, "Contract Owner" refers to any person who would be
required to include the Contract, Death Benefit, Distribution, or other payment
in his or her federal gross estate at his or her death, or who is required to
report the transfer of the Contract, Death Benefit, Distribution, or other
payment for federal gift tax purposes.
If the Company determines that a generation skipping transfer tax is required to
be paid by reason of a direct skip, the Company is required by Section 2603 of
the Code to reduce the amount of the Death Benefit, Distribution, or other
payment by the tax liability, and pay the tax liability directly to the IRS.
Federal estate, gift and generation skipping transfer tax consequences, and
state and local estate, inheritance, succession, generation skipping transfer,
and other tax consequences, of owning or transferring a Contract, and of
receiving a Distribution, Death Benefit, or other payment, depend on the
circumstances of the person owning or transferring the Contract, or person
receiving a Distribution, Death Benefit, or other payment.
CHARGE FOR TAX
The Company is no longer required to maintain a capital gain reserve liability
on Non-Qualified Contracts since capital gains attributable to assets held in
Sub-Accounts for such Contracts are not taxable to the Company. However, the
Company reserves the right to implement and adjust the tax charge in the future,
if the tax laws change.
DIVERSIFICATION
The IRS has promulgated regulations under Section 817(h) of the Code relating to
diversification standards for the investments underlying a variable annuity
contract. The regulations provide that a variable annuity contract which does
not satisfy the diversification standards will not be treated as an annuity
contract, unless the failure to satisfy the regulations was inadvertent, the
failure is corrected, and the Contract Owner or the Company pays an amount to
the IRS. The amount will be based on the tax that would have been paid by the
Contract Owner if the income, for the period the contract was not diversified,
had been received by the Contract Owner. If the failure to diversify is not
corrected in this manner, the Contract Owner will be deemed the owner of the
underlying securities and will be taxed on the earnings of his or her account.
The Company believes, under its interpretation of the Code and regulations
thereunder, that the investments underlying this Contract meet these
diversification standards.
Representatives of the IRS have suggested, from time to time, that the number of
Underlying Mutual Funds available or the number of transfer opportunities
available under a variable product may be relevant in determining whether the
product qualifies for the desired tax treatment. No formal guidance has been
issued in this area. Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of Underlying Mutual Funds, transfers between
Underlying Mutual Funds, exchanges of Underlying Mutual Funds or changes in
investment objectives of Underlying Mutual Funds such that the Contract would no
longer qualify as an annuity under Section 72 of the Code, the Company will take
whatever steps are available to remain in compliance.
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<PAGE> 34
TAX CHANGES
The Code has been subjected to numerous amendments and changes, and it is
reasonable to believe that it will continue to be revised. The United States
Congress has considered numerous legislative proposals that, if enacted, could
change the tax treatment of the Contracts. It is reasonable to believe that such
proposals may be enacted into law. In addition, the Treasury Department may
amend existing regulations, issue new regulations, or adopt new interpretations
of existing law that may be in variance with its current positions on these
matters. In addition, state law (which is not discussed herein) may affect the
tax consequences of the Contract.
The foregoing discussion, which is based on the Company's understanding of
federal tax laws as they are currently interpreted by the IRS, is general and is
not intended as tax advice. Statutes, regulations, and rulings are subject to
interpretation by the courts. The courts may determine that a different
interpretation than the currently favored interpretation is appropriate, thereby
changing the operation of the rules that are applicable to annuity contracts.
Any of the foregoing may change from time to time without any notice, and the
tax consequences arising out of a Contract may be changed retroactively. There
is no way of predicting whether, when, and to what extent a change may take
place. No representation is made as to the likelihood of the continuation of
these current laws, interpretations, and policies.
THE FOREGOING IS A GENERAL EXPLANATION AS TO CERTAIN TAX MATTERS PERTAINING TO
ANNUITY CONTRACTS. IT IS NOT INTENDED TO BE LEGAL OR TAX ADVICE, AND SHOULD NOT
TAKE THE PLACE OF YOUR INDEPENDENT LEGAL, TAX AND/OR FINANCIAL ADVISOR.
ADVERTISING
The Company may, from time to time, advertise several types of historical
performance of the Sub-Accounts. The Company may advertise for the Sub-Account's
standardized "average annual total return," calculated in a manner prescribed by
the SEC, and nonstandardized "total return." "Average annual total return"
illustrates the percentage rate of return of a hypothetical initial investment
of $10,000 for the most recent one, five and ten year periods, or for a period
covering the time the Underlying Mutual Fund has been available in the Variable
Account if the Underlying Mutual Fund has been available for the prescribed
periods. THIS CALCULATION REFLECTS THE DEDUCTION OF ALL APPLICABLE CHARGES MADE
TO THE CONTRACTS EXCEPT FOR PREMIUM TAXES, WHICH MAY BE IMPOSED BY CERTAIN
STATES.
Nonstandardized "total return," calculated similar to standardized "average
annual total return," illustrates the percentage rate of return of a
hypothetical initial investment of $10,000 for the most recent one, five and ten
year periods, or for a period covering the time the Underlying Mutual Fund
option has been in existence. For those Underlying Mutual Fund options which
have not been held as Sub-Accounts for one of the prescribed periods, the
nonstandardized total return illustrations will show the investment performance
such Underlying Mutual Fund options would have achieved (reduced by the same
charges except the CDSC) had such Underlying Mutual Fund options been available
in the Variable Account for the periods quoted. THE CDSC IS NOT REFLECTED
BECAUSE THE CONTRACTS ARE DESIGNED FOR LONG TERM INVESTMENT. THE CDSC, IF
REFLECTED, WOULD DECREASE THE LEVEL OF PERFORMANCE SHOWN. AN INITIAL INVESTMENT
OF $10,000 IS ASSUMED BECAUSE THAT AMOUNT MORE CLOSELY APPROXIMATES THE SIZE OF
A TYPICAL CONTRACT THAN DOES THE $1,000 ASSUMPTION USED IN CALCULATING THE
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS.
The standardized average annual total return and nonstandardized total return
quotations reflected below are calculated as described in the section using
Underlying Mutual fund performance for the period ended December 31,1997.
However, the Company generally provides performance quotations on a more
frequent basis, the results of which could reflect better or worse results than
shown below. The quotations and other comparative material advertised by the
Company are based upon historical earnings and are not intended to represent or
guarantee future results. A Contract Owner's Contract Value at redemption may be
more or less than the original cost.
A "yield" and "effective yield" may be advertised for the Money Market
Portfolio. "Yield" is a measure of the net dividend and interest income earned
over a specific seven-day period (which period will be stated in the
advertisement) expressed as a percentage of the offering price of the Money
Market Portfolio's units. Yield is an annualized figure, which means that it is
assumed that the Money Market Portfolio generates the same level of net income
over a 52- week period. The "effective yield" is calculated similarly but
includes the effect of assumed compounding calculated under rules prescribed by
the SEC. The effective yield will be slightly higher than yield due to this
compounding effect.
The Company may also from time to time advertise the performance of a
Sub-Account relative to the performance of other variable annuity sub-accounts
or mutual funds with similar or different objectives, or the
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<PAGE> 35
investment industry as a whole. Other investments to which the Sub-Accounts may
be compared include, but are not limited to: precious metals; real estate;
stocks and bonds; closed-end funds; CDs; bank money market deposit accounts and
passbook savings; and the Consumer Price Index.
The Sub-Accounts may also be compared to certain market indexes, which may
include, but are not limited to: S&P 500; Shearson/Lehman Intermediate
Government/Corporate Bond Index; Shearson/Lehman Long-Term Government/Corporate
Bond Index; Donoghue Money Fund Average; U.S. Treasury Note Index; Bank Rate
Monitor National Index of 2 1/2 Year CD Rates; and Dow Jones Industrial Average.
Normally these rankings and ratings are published by independent tracking
services and publications of general interest including, but not limited to:
Lipper Analytical Services, Inc., CDA/Wiesenberger, Morningstar, Donoghue's,
magazines such as Money, Forbes, Kiplinger's Personal Finance Magazine,
Financial World, Consumer Reports, Business Week, Time, Newsweek, U.S. News and
World Report, National Underwriter; rating services such as LIMRA, Value, Best's
Agent Guide, Western Annuity Guide, Comparative Annuity Reports; and other
publications such as the Wall Street Journal, Barron's, Columbus Dispatch,
Investor's Daily, and Standard & Poor's Outlook. In addition, Variable Annuity
Research & Data Service (The VARDS Report) is an independent rating service that
ranks over 500 variable annuity mutual funds based upon total return
performance. These rating services and publications rank the performance of the
Underlying Mutual Funds against all underlying mutual funds over specified
periods and against funds in specified categories. The rankings may or may not
include the effects of sales or other charges.
The Company is also ranked and rated by independent financial rating services,
among which are Moody's, Standard & Poor's and A.M. Best Company. The purpose of
these ratings is to reflect the financial strength or claims-paying ability of
the Company. The ratings are not intended to reflect the investment experience
or financial strength of the Variable Account. The Company may advertise these
ratings from time to time. In addition, the Company may include in certain
advertisements, endorsements in the form of a list of organizations, individuals
or other parties which recommend the Company or the Contract. Furthermore, the
Company may occasionally include in advertisements comparisons of currently
taxable and tax deferred investment programs, based on selected tax brackets, or
discussions of alternative investment vehicles and general economic conditions.
ALL PERFORMANCE INFORMATION AND COMPARATIVE MATERIAL ADVERTISED BY THE COMPANY
IS HISTORICAL IN NATURE AND IS NOT INTENDED TO REPRESENT OR GUARANTEE FUTURE
RESULTS. A CONTRACT OWNER'S CONTRACT VALUE AT REDEMPTION MAY BE MORE OR LESS
THAN ORIGINAL COST.
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<PAGE> 36
UNDERLYING MUTUAL FUND PERFORMANCE SUMMARY
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
=========================================================================================================================
1 Year to 12/31/97 5 Years to 12/31/97 Life of Fund to Date Fund
SUB-ACCOUNT OPTIONS 12/31/97 Established
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen American Capital Life 11.33% 8.45% 8.72% 5-6-88
Investment Trust - Asset
Allocation Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 1.56% 4.96% 2.99% 5-6-88
Investment Trust - Domestic Income
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 9.96% N/A 14.87% 7-3-95
Investment Trust - Emerging Growth
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 20.06% 13.62% 13.19% 5-6-88
Investment Trust - Enterprise
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 5.44% N/A 6.64% 7-3-95
Investment Trust - Global Equity
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life -0.71% 0.79% 2.49% 12-1-89
Investment Trust - Government
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life -5.20% -1.21% 0.65% 5-6-88
Investment Trust - Money Market
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 10.99% N/A 20.74% 7-3-95
Investment Trust - Morgan Stanley
Real Estate Securities Portfolio
=========================================================================================================================
</TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
=========================================================================================================================
1 Year to 12/31/97 5 Years to 12/31/97 Life of Fund to Date Fund
SUB-ACCOUNT OPTIONS 12/31/97 Established
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen American Capital Life 19.88% 11.80% 11.30% 5-6-88
Investment Trust - Asset
Allocation Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 10.10% 8.29% 6.23% 5-6-88
Investment Trust - Domestic Income
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 18.51% N/A 20.10% 7-3-95
Investment Trust - Emerging Growth
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 28.61% 16.81% 15.49% 5-6-88
Investment Trust - Enterprise
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 13.99% N/A 12.34% 7-3-95
Investment Trust - Global Equity
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 7.84% 4.46% 6.51% 4-7-85
Investment Trust - Government
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 3.55% 2.66% 3.79% 5-6-88
Investment Trust - Money Market
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Van Kampen American Capital Life 19.54% N/A 25.88% 7-3-95
Investment Trust -Morgan Stanley
Real Estate Securities Portfolio
=========================================================================================================================
</TABLE>
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<PAGE> 37
YEAR 2000 COMPLIANCE ISSUES
The Company has developed a plan to address issues related to the year 2000. The
problem relates to many existing computer programs using only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Company has been evaluating its exposure to the Year
2000 issue through a review of all of its operating systems as well as
dependencies on the systems of other users since 1996. The Company expects all
system changes and replacements needed to achieve Year 2000 compliance to be
completed by the end of 1998. Compliance testing will be completed in the first
quarter of 1999. The Company charges all costs associated with these system
changes as the costs are incurred.
Operating expenses in 1997 include approximately $45 million on technology
projects, which includes costs related to Year 2000 and the development of a new
policy administration system for traditional life insurance products and other
system enhancements. The Company anticipates spending a comparable amount in
1998 on technology projects, including Year 2000 initiatives. These expenses do
not have an effect on the assets of the Variable Account and are not charged
through to the Contract Owner.
LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the ordinary
course of its business, none of which is expected to have a material adverse
effect on the Company
The General Distributor, Van Kampen American Capital Distributors, Inc., is not
engaged in any litigation of any material nature.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements. In February, 1997, Nationwide Life was named as a
defendant in a lawsuit filed in New York Supreme Court related to the sale of
whole life policies on a "vanishing premium" basis (John H. Snyder v. and
Nationwide Life Insurance Co.). The plaintiff in such lawsuit seeks to represent
a national class of Nationwide Life policyholders and claims unspecified
compensatory and punitive damages. In April, 1997, a motion to dismiss the
Snyder complaint in its entirety was filed by the defendants, and the plaintiff
has opposed such motion.
In November 1997, two plaintiffs, one who was the owner of a variable life
insurance contract and another who was the owner of a variable annuity contract,
commenced an action against Nationwide life Insurance Company and the American
Century group of defendants (Robert Young and David D. Distad v. Nationwide Life
Insurance Company et al.). In this action, plaintiffs seek to represent a class
of variable insurance contract owners and variable annuity contract owners whom
they claim were allegedly misled when purchasing these variable contracts into
believing that some portion of their premiums were invested in a publicly traded
mutual fund when, in fact, the premium monies were invested in a mutual fund
whose shares may only be purchased by insurance companies. The complaint seeks
unspecified compensatory, treble and punitive damages. In January 1998, both
Nationwide Life Insurance Company and American Century filed motion to dismiss
the entire complaint. Plaintiff's counsel have opposed these motions and the
federal court in Texas heard arguments on the motions to dismiss in April, 1998.
This lawsuit is in an early stage and has not been certified as a class action.
Nationwide Life Insurance Company intends to defend this case vigorously.
There can be no assurance that any litigation relating to pricing and sales
practices will not have a material adverse effect on the Company in the future.
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
PAGE
General Information and History...................................1
Services..........................................................1
Purchase of Securities Being Offered..............................1
Underwriters......................................................1
Calculations of Performance.......................................1
Annuity Payments..................................................2
Financial Statements..............................................3
35
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<PAGE> 38
APPENDIX
Purchase Payments under to the Fixed Account of the Contract and transfers to
the Fixed Account become part of the general account of the Company, which
supports insurance and annuity obligations. Because of exemptive and
exclusionary provisions, interests in the general account have not been
registered under the 1933 Act, nor is the general account registered as an
investment company under the 1940 Act. Accordingly, neither the general account
nor any interest therein are generally subject to the provisions of the 1933 or
1940 Acts, and we have been advised that the staff of the SEC has not reviewed
the disclosures in this prospectus which relate to the Fixed Account.
Disclosures regarding the Fixed Account and the general account, may be subject
to certain provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
FIXED ACCOUNT ALLOCATIONS
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company, other
than those in the Variable Account and any other segregated asset account.
Purchase Payments will be allocated to the Fixed Account by election of the
Contract Owner.
The Company will invest the assets of the Fixed Account in those assets chosen
by the Company and allowed by law. Investment income from Fixed Account assets
will be allocated by the Company between itself and the Contracts participating
in the Fixed Account.
The level of annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving payments
or of the general population. The Company assumes this "mortality risk" by
virtue of annuity rates incorporated in the Contract which cannot be changed. In
addition, the Company guarantees that it will not increase charges for
maintenance of the Contracts regardless of its actual expenses.
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks borne by the Company in connection
with Fixed Account Contracts. The amount of investment income allocated to the
Contracts will vary at the sole discretion of the Company at such rate(s) as the
Company prospectively declares. The guaranteed rate for any Purchase Payment
will remain in effect for a period not less than twelve months. However, the
Company guarantees that it will credit interest at not less than 3.0% per year.
ANY INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF
3.0% PER YEAR WILL BE DETERMINED AT THE SOLE DISCRETION OF THE COMPANY. THE
CONTRACT OWNER ASSUMES THE RISK THAT INTEREST CREDITED TO FIXED ACCOUNT
ALLOCATIONS MAY NOT EXCEED THE MINIMUM GUARANTEE OF 3.0% FOR ANY GIVEN YEAR.
The Company guarantees that, at any time, the Fixed Account Contract Value will
not be less than the amount of the Purchase Payments allocated to the Fixed
Account, plus interest credited as described above, less any applicable charges
including CDSC.
TRANSFERS
For transfer from the Fixed Account to the Variable account, refer to the
"Transfers" provision of the prospectus.
36
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<PAGE> 39
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
DEFERRED VARIABLE ANNUITY CONTRACTS ISSUED
BY THE NATIONWIDE VARIABLE ACCOUNT-3
OF NATIONWIDE LIFE INSURANCE COMPANY
This Statement of Additional Information is not a prospectus. It contains
additional information than set forth in the Prospectus and should be read in
conjunction with the Prospectus dated May 1, 1998. The Prospectus may be
obtained from Nationwide Life Insurance Company by writing P. O. Box 182030,
Columbus, Ohio 43218-2030, or by calling 1-800-826-3167, TDD 1-800-238-3035.
TABLE OF CONTENTS
PAGE
General Information and History.............................................1
Services....................................................................1
Purchase of Securities Being Offered........................................1
Underwriters................................................................1
Calculations of Performance.................................................1
Annuity Payments............................................................2
Financial Statements........................................................3
GENERAL INFORMATION AND HISTORY
The Nationwide Variable Account-3 ("Variable Account") is a separate investment
account of Nationwide Life Insurance Company ("Company"). The Company is a
member of the Nationwide Insurance Enterprise and all of the Company's common
stock is owned by Nationwide Financial Services, Inc. ("NFS"), a holding
company. NFS has two classes of common stock outstanding with different voting
rights enabling Nationwide Corporation (the holder of all of the outstanding
Class B Common Stock) to control NFS. Nationwide Corporation is a holding
company as well. All of its common stock is held by Nationwide Mutual Insurance
Company (95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), the
ultimate controlling persons of Nationwide Insurance Enterprise. The Nationwide
Insurance Enterprise is one of America's largest insurance and financial
services family of companies, with combined assets of over $83.2 billion as of
December 31, 1997.
SERVICES
The Company, which has responsibility for administration of the Contracts and
the Variable Account, maintains records of the name, address, taxpayer
identification number, and other pertinent information for each Contract Owner
and the number and type of Contract issued to each Contract Owner and records
with respect to the Contract Value of each Contract.
The Custodian of the assets of the Variable Account is the Company. The Company
will maintain a record of all purchases and redemptions of shares of the
Underlying Mutual Funds.
The audited financial statements have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants, Two
Nationwide Plaza, Columbus, Ohio 43215, and upon the authority of said firm as
experts in accounting and auditing.
PURCHASE OF SECURITIES BEING OFFERED
The Contracts will be sold by licensed insurance agents in the states where the
Contracts may be lawfully sold. The agents will be registered representatives of
broker-dealers registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers, Inc. ("NASD").
UNDERWRITERS
The Contracts, which are offered continuously, are distributed by American
Capital Marketing Inc., 2800 Post Oak Blvd., Houston, Texas 77056. No
underwriting commissions are paid by the Company to the Distributor, only sales
commissions.
CALCULATIONS OF PERFORMANCE
Any current yield quotations of the Money Market Portfolio, subject to Rule 482
of the 1933 Act, will consist of a seven calendar day historical yield, carried
at least to the nearest hundredth of a percent. The yield will be calculated by
determining the net change, exclusive of capital changes, in the value of
hypothetical pre-existing account having a balance of one accumulation unit at
the beginning of the base period, subtracting a hypothetical charge reflecting
deductions from Contract Owner accounts, and dividing the net change in account
value by the value of the account at the beginning of the period to obtain a
base period return, and multiplying
1
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<PAGE> 40
the base period return by 365/7 (366/7) or (366/7) in a leap year. At December
31, 1997, the Money Market Portfolio's seven-day current unit value yield was
3.81%. The Money Market Portfolio's effective yield is computed similarly but
includes the effect of assumed compounding on an annualized basis of the current
unit value yield quotations of the Fund. At December 31, 1997, the Money Market
Portfolio's effective yield was 3.88%.
The Money Market Portfolio's yield and effective yield will fluctuate daily.
Actual yields will depend on factors such as the type of instruments in the
Money Market Portfolio, portfolio quality and average maturity, changes in
interest rates, and the Money Market Portfolio's expenses. Although the Money
Market Portfolio determines its yield on the basis of a seven calendar day
period, it may use a different time period on occasion. There is no assurance
that the yields quoted on any given occasion will remain in effect for any
period of time and there is no guarantee that the Net Asset Values will remain
constant. It should be noted that a Contract Owner's investment in the Money
Market Portfolio is not guaranteed or insured. Yield of other Money Market funds
may not be comparable if a different base period or another method of
calculation is used.
All performance advertising will include quotations of standardized average
annual total return, calculated in accordance with standard method prescribed by
rules of the SEC. Standardized average annual total return is found by first
taking a hypothetical $1,000 investment in each of the Sub-Accounts' units on
the first day of the period at the offering price, which is the Accumulation
Unit value per unit ("initial investment") and computing the ending redeemable
value ("redeemable value") of that investment at the end of the period. The
redeemable value is then divided by the initial investment and this quotient is
taken to the Nth root (N represents the number of years in the period) and 1 is
subtracted from the result which is then expressed as a percentage, carried to
at least the nearest hundredth of a percent. Standardized average annual total
return reflects the deduction of a maximum $35 Contract maintenance Charge and a
1.30% Mortality, Expense Risk and Administration Charge. The redeemable value
also reflects the effect of any applicable CDSC that my be imposed at the end of
the period (see "CDSC" located in the prospectus). No deduction is made for
premium taxes which may be assessed by certain states.
Nonstandardized average annual total return may also be advertised, and is
calculated in a manner similar to standardized average annual total return
except the nonstandardized average annual total return is based on a
hypothetical initial investment of $10,000 and does not reflect the deduction of
any applicable CDSC. Reflecting the CDSC would decrease the level of the
performance advertised. The CDSC is not reflected because the Contract is
designed for long term investment. An assumed initial investment of $10,000 will
be used because that figure more closely approximates the size of a typical
Contract than does the $1,000 figure used in calculating the standardized
average annual total return quotations. The amount of the hypothetical initial
investment used affects performance because the Contract Maintenance Charge is a
fixed per Contract charge.
The standardized average annual total return and nonstandardized average annual
total return quotations will be current to the last day of the calendar quarter
preceding the date on which an advertisement is submitted for publication. The
standardized average annual return will be based on rolling calendar quarters
and will cover periods of one, five, and ten years, or a period covering the
time the Underlying Mutual Fund has been available in the Variable Account if
the Underlying Mutual Fund as not been available for one of the prescribed
periods. The nonstandardized annual total return will be based on rolling
calendar quarters and will cover periods of one, five and ten years, or a period
covering the time the Underlying Mutual Fund has been in existence.
Quotations of average annual total return and total average annual return are
based upon historical earnings and will fluctuate. Any quotation of performance,
is not a guarantee of future performance. Factors affecting a Sub-Account's
performance include general market conditions, operating expenses and investment
management. A Contract Owner's account when redeemed may be more or less than
original cost.
ANNUITY PAYMENTS
See "Frequency and Amount of Annuity Payments" located in the prospectus.
2
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<PAGE> 41
<PAGE> 1
Independent Auditors' Report
The Board of Directors of Nationwide Life Insurance Company and Contract Owners
of Nationwide Variable Account-3:
We have audited the accompanying statement of assets, liabilities and
contract owners' equity of Nationwide Variable Account-3 as of December 31,
1997, and the related statements of operations and changes in contract owners'
equity for each of the years in the two year period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, 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 referred to above present fairly,
in all material respects, the financial position of Nationwide Variable
Account-3 as of December 31, 1997, and the results of its operations and its
changes in contract owners' equity for each of the years in the two year period
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 6, 1998
<PAGE> 2
NATIONWIDE VARIABLE ACCOUNT-3
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments at market value:
Van Kampen American Capital LIT - Asset Allocation Fund
2,883,503 shares (cost $33,015,552) .......................................... $34,342,522
Van Kampen American Capital LIT - Domestic Income Fund
1,014,923 shares (cost $8,317,886) ........................................... 8,373,111
Van Kampen American Capital LIT - Emerging Growth Fund
210,443 shares (cost $2,953,349) ............................................. 3,461,794
Van Kampen American Capital LIT - Enterprise Fund
2,224,853 shares (cost $34,380,523) .......................................... 40,292,094
Van Kampen American Capital LIT - Global Equity Fund
64,286 shares (cost $787,255) ................................................ 706,508
Van Kampen American Capital LIT - Government Fund
528,831 shares (cost $4,598,397) ............................................. 4,717,176
Van Kampen American Capital LIT - Money Market Fund
6,873,994 shares (cost $6,873,994) ........................................... 6,873,994
Van Kampen American Capital LIT - Morgan Stanley Real Estate Securities Portfolio
43,857 shares (cost $668,768) ................................................ 695,137
-----------
Total investments ......................................................... 99,462,336
Accounts receivable ................................................................ 1,792
-----------
Total assets .............................................................. 99,464,128
ACCOUNTS PAYABLE ...................................................................... 130
-----------
CONTRACT OWNERS' EQUITY ............................................................... $99,463,998
===========
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ANNUAL
Contract owners' equity represented by: UNITS UNIT VALUE RETURN
-------- ---------- -------
<S> <C> <C> <C> <C>
Contracts in accumulation phase:
Van Kampen American Capital LIT -
Asset Allocation Fund:
Tax qualified ........................ 422,523 $ 28.743704 $12,144,876 20%
Non-tax qualified .................... 771,497 28.743704 22,175,681 20%
Van Kampen American Capital LIT - .......
Domestic Income Fund:
Tax qualified ........................ 124,140 18.437191 2,288,793 10%
Non-tax qualified .................... 329,087 18.437191 6,067,440 10%
Van Kampen American Capital LIT - .......
Emerging Growth Fund:
Tax qualified ........................ 58,542 15.921536 932,079 19%
Non-tax qualified .................... 158,887 15.921536 2,529,725 19%
Van Kampen American Capital LIT - .......
Enterprise Fund:
Tax qualified ........................ 316,766 40.944001 12,969,667 29%
Non-tax qualified .................... 666,789 40.944001 27,301,009 29%
Van Kampen American Capital LIT - .......
Global Equity Fund:
Tax qualified ........................ 20,265 13.493564 273,447 14%
Non-tax qualified .................... 32,094 13.493564 433,062 14%
Van Kampen American Capital LIT - .......
Government Fund:
Tax qualified ........................ 61,597 16.168107 995,907 8%
Non-tax qualified .................... 228,036 16.168107 3,686,910 8%
Van Kampen American Capital LIT - .......
Money Market Fund:
Tax qualified ........................ 108,657 14.734706 1,601,029 4%
Non-tax qualified .................... 356,149 14.734706 5,247,751 4%
Van Kampen American Capital LIT - Morgan
Stanley Real Estate Securities Portfolio:
Tax qualified ........................ 9,466 17.901858 169,459 20%
Non-tax qualified .................... 29,364 17.901858 525,670 20%
======= =========
Reserves for annuity contracts in payout phase:
Tax qualified ................... 1,862
Non-tax qualified ............... 119,631
---------
$99,463,998
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
NATIONWIDE VARIABLE ACCOUNT-3
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(UNDERLYING MUTUAL FUNDS OF VAN KAMPEN AMERICAN CAPITAL LIT)
<TABLE>
<CAPTION>
TOTAL ASSET ALLOCATION FUND
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends .......................... $ 2,882,784 3,360,097 1,323,309 1,341,790
Mortality, expense and administration
charges (note 2) ............................ (1,297,462) (1,335,708) (447,791) (474,565)
------------ ------------ ------------ ------------
Net investment activity ..................... 1,585,322 2,024,389 875,518 867,225
------------ ------------ ------------ ------------
Proceeds from mutual fund shares sold ......... 42,955,530 44,991,214 10,382,595 7,543,626
Cost of mutual fund shares sold ............... (40,204,323) (43,680,536) (10,464,852) (7,373,798)
------------ ------------ ------------ ------------
Realized gain (loss) on investments ......... 2,751,207 1,310,678 (82,257) 169,828
Change in unrealized gain (loss) on investments 4,412,174 1,290,651 1,899,930 (771,268)
------------ ------------ ------------ ------------
Net gain (loss) on investments .............. 7,163,381 2,601,329 1,817,673 (601,440)
------------ ------------ ------------ ------------
Reinvested capital gains ...................... 9,294,629 7,890,706 3,495,122 3,904,620
------------ ------------ ------------ ------------
Net increase (decrease) in contract owners'
equity resulting from operations ........ 18,043,332 12,516,424 6,188,313 4,170,405
------------ ------------ ------------ ------------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners ............................. 2,333,844 4,521,793 523,984 1,749,286
Transfers between funds ....................... -- -- (2,491,298) 569,459
Redemptions ................................... (20,007,928) (19,642,633) (6,275,268) (5,641,778)
Annuity benefits .............................. (17,547) (15,629) (5,559) (4,967)
Annual contract maintenance charge (note 2) ... (88,218) (97,006) (34,597) (39,849)
Contingent deferred sales charges (note 2) .... (92,750) (155,505) (28,394) (40,707)
Adjustments to maintain reserves .............. 3,551 1,215 525 548
------------ ------------ ------------ ------------
Net equity transactions ................... (17,869,048) (15,387,765) (8,310,607) (3,408,008)
------------ ------------ ------------ ------------
NET CHANGE IN CONTRACT OWNERS' EQUITY ......... 174,284 (2,871,341) (2,122,294) 762,397
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ... 99,289,714 102,161,055 36,465,197 35,702,800
------------ ------------ ------------ ------------
CONTRACT OWNERS' EQUITY END OF PERIOD ......... $ 99,463,998 99,289,714 34,342,903 36,465,197
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC INCOME FUND EMERGING GROWTH FUND
------------------------------ -------------------------------
1997 1996 1997 1996
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends .......................... $ 660,199 960,965 -- --
Mortality, expense and administration
charges (note 2) ............................ (115,033) (168,344) (41,179) (31,824)
------------ ------------ ------------ ------------
Net investment activity ..................... 545,166 792,621 (41,179) (31,824)
------------ ------------ ------------ ------------
Proceeds from mutual fund shares sold ......... 5,623,192 10,853,804 1,698,623 613,503
Cost of mutual fund shares sold ............... (5,435,881) (10,480,762) (1,524,002) (504,539)
------------ ------------ ------------ ------------
Realized gain (loss) on investments ......... 187,311 373,042 174,621 108,964
Change in unrealized gain (loss) on investments 90,778 (643,962) 390,722 60,368
------------ ------------ ------------ ------------
Net gain (loss) on investments .............. 278,089 (270,920) 565,343 169,332
------------ ------------ ------------ ------------
Reinvested capital gains ...................... -- -- -- --
------------ ------------ ------------ ------------
Net increase (decrease) in contract owners'
equity resulting from operations ........ 823,255 521,701 524,164 137,508
------------ ------------ ------------ ------------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners ............................. 610,662 278,859 249,000 241,262
Transfers between funds ....................... (1,206,000) (1,182,910) (598,377) 2,204,446
Redemptions ................................... (2,740,231) (4,766,789) (252,006) (240,314)
Annuity benefits .............................. (2,452) (2,143) -- --
Annual contract maintenance charge (note 2) ... (8,049) (11,508) (2,828) (2,168)
Contingent deferred sales charges (note 2) .... (14,395) (38,823) (1,043) (3,638)
Adjustments to maintain reserves .............. 265 (327) 12 116
------------ ------------ ------------ ------------
Net equity transactions ................... (3,360,200) (5,723,641) (605,242) 2,199,704
------------ ------------ ------------ ------------
NET CHANGE IN CONTRACT OWNERS' EQUITY ......... (2,536,945) (5,201,940) (81,078) 2,337,212
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ... 10,910,269 16,112,209 3,542,882 1,205,670
------------ ------------ ------------ ------------
CONTRACT OWNERS' EQUITY END OF PERIOD ......... $ 8,373,324 10,910,269 3,461,804 3,542,882
============ ============ ============ ============
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ENTERPRISE FUND GLOBAL EQUITY FUND
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends .......................... $ 189,025 232,282 5,587 6,175
Mortality, expense and administration
charges (note 2) ............................ (513,606) (470,375) (9,313) (3,470)
------------ ------------ ------------ ------------
Net investment activity ..................... (324,581) (238,093) (3,726) 2,705
------------ ------------ ------------ ------------
Proceeds from mutual fund shares sold ......... 11,862,498 9,455,987 515,818 124,295
Cost of mutual fund shares sold ............... (9,510,386) (8,515,268) (435,109) (107,858)
------------ ------------ ------------ ------------
Realized gain (loss) on investments ......... 2,352,112 940,719 80,709 16,437
Change in unrealized gain (loss) on investments 2,008,216 2,724,396 (92,300) 9,508
------------ ------------ ------------ ------------
Net gain (loss) on investments .............. 4,360,328 3,665,115 (11,591) 25,945
------------ ------------ ------------ ------------
Reinvested capital gains ...................... 5,615,976 3,979,511 123,625 5,796
------------ ------------ ------------ ------------
Net increase (decrease) in contract owners'
equity resulting from operations ........ 9,651,723 7,406,533 108,308 34,446
------------ ------------ ------------ ------------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners .............................
Transfers between funds ....................... 654,999 1,190,561 81,259 90,019
Redemptions ................................... 614,166 149,486 244,625 274,622
Annuity benefits .............................. (7,063,843) (5,475,218) (125,840) (100,167)
Annual contract maintenance charge (note 2) ... (1,685) (1,156) - -
Contingent deferred sales charges (note 2) .... (32,010) (31,954) (747) (259)
Adjustments to maintain reserves .............. (31,955) (38,948) (750) (601)
2,287 2,520 5 8
Net equity transactions ................... ------------ ------------ ------------ ------------
(5,858,041) (4,204,709) 198,552 263,622
------------ ------------ ------------ ------------
NET CHANGE IN CONTRACT OWNERS' EQUITY ......... 3,793,682 3,201,824 306,860 298,068
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ... 36,499,067 33,297,243 399,649 101,581
------------ ------------ ------------ ------------
CONTRACT OWNERS' EQUITY END OF PERIOD ......... $40,292,749 36,499,067 706,509 399,649
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT FUND MONEY MARKET FUND
---------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends .......................... $ 327,154 505,751 359,396 311,457
Mortality, expense and administration
charges (note 2) ............................ (68,546) (100,796) (94,990) (85,315)
----------- ------------ ------------ ------------
Net investment activity ..................... 258,608 404,955 264,406 226,142
----------- ------------ ------------ ------------
Proceeds from mutual fund shares sold ......... 2,763,818 3,885,427 9,957,418 12,421,752
Cost of mutual fund shares sold ............... (2,748,960) (4,199,470) (9,957,418) (12,421,752)
----------- ------------ ------------ ------------
Realized gain (loss) on investments ......... 14,858 (314,043) - -
Change in unrealized gain (loss) on investments 104,873 (102,999) - -
----------- ------------ ------------ ------------
Net gain (loss) on investments .............. 119,731 (417,042) - -
----------- ------------ ------------ ------------
Reinvested capital gains ...................... - - - -
----------- ------------ ------------ ------------
Net increase (decrease) in contract owners'
equity resulting from operations ........ 378,339 (12,087) 264,406 226,142
----------- ------------ ------------ ------------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners .............................
Transfers between funds ....................... 47,775 188,736 90,587 761,285
Redemptions ................................... (624,152) (1,241,489) 3,600,877 (907,221)
Annuity benefits .............................. (1,327,694) (1,803,207) (2,137,248) (1,519,865)
Annual contract maintenance charge (note 2) ... (4,790) (4,541) (3,061) (2,822)
Contingent deferred sales charges (note 2) .... (4,561) (6,182) (5,021) (5,045)
Adjustments to maintain reserves .............. (7,902) (23,417) (8,068) (9,369)
257 98 212 (1,746)
Net equity transactions ................... ----------- ------------ ------------ ------------
(1,921,067) (2,890,002) 1,538,278 (1,684,783)
----------- ------------ ------------ ------------
NET CHANGE IN CONTRACT OWNERS' EQUITY .........
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ... (1,542,728) (2,902,089) 1,802,684 (1,458,641)
6,260,114 9,162,203 5,071,510 6,530,151
CONTRACT OWNERS' EQUITY END OF PERIOD ......... ----------- ------------ ------------ ------------
$4,717,386 6,260,114 6,874,194 5,071,510
=========== ============ ============ ============
(Continued)
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
REAL ESTATE
SECURITIES PORTFOLIO
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
INVESTMENT ACTIVITY:
Reinvested dividends .......................... $ 18,114 1,677
Mortality, expense and administration
charges (note 2) ............................ (7,004) (1,019)
---------- ----------
Net investment activity ..................... 11,110 658
---------- ----------
Proceeds from mutual fund shares sold ......... 151,568 92,820
Cost of mutual fund shares sold ............... (127,715) (77,089)
---------- ----------
Realized gain (loss) on investments ......... 23,853 15,731
Change in unrealized gain (loss) on investments 9,955 14,608
---------- ----------
Net gain (loss) on investments .............. 33,808 30,339
---------- ----------
Reinvested capital gains ...................... 59,906 779
---------- ----------
Net increase (decrease) in contract owners'
equity resulting from operations ........ 104,824 31,776
---------- ----------
EQUITY TRANSACTIONS:
Purchase payments received from
contract owners .............................
Transfers between funds ....................... 75,578 21,785
Redemptions ................................... 460,159 133,607
Annuity benefits .............................. (85,798) (95,295)
Annual contract maintenance charge (note 2) ... - -
Contingent deferred sales charges (note 2) .... (405) (41)
Adjustments to maintain reserves .............. (243) (2)
(12) (2)
Net equity transactions ................... ---------- ----------
449,279 60,052
---------- ----------
NET CHANGE IN CONTRACT OWNERS' EQUITY .........
CONTRACT OWNERS' EQUITY BEGINNING OF PERIOD ... 554,103 91,828
141,026 49,198
CONTRACT OWNERS' EQUITY END OF PERIOD ......... ---------- ----------
$ 695,129 141,026
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
NATIONWIDE VARIABLE ACCOUNT-3
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
Nationwide Variable Account-3 (the Account) was established pursuant to
a resolution of the Board of Directors of Nationwide Life Insurance
Company (the Company) on October 7, 1987. The Account has been
registered as a unit investment trust under the Investment Company Act
of 1940.
The Company offers tax qualified and non-tax qualified Individual
Deferred Variable Annuity Contracts through the Account. The primary
distribution for the contracts is through the brokerage community;
however, other distributors may be utilized.
(b) The Contracts
Only contracts without a front-end sales charge, but with a contingent
deferred sales charge and certain other fees, are offered for purchase.
See note 2 for a discussion of contract expenses.
Contract owners in either the accumulation or the payout phase may
invest in the following funds of the Van Kampen American Capital Life
Investment Trust (Van Kampen American Capital LIT):
Van Kampen American Capital LIT - Asset Allocation Fund
(formerly Van Kampen American Capital - Multiple Strategy Fund)
Van Kampen American Capital LIT - Domestic Income Fund
(formerly Van Kampen American Capital - Domestic Strategic Income
Fund)
Van Kampen American Capital LIT - Emerging Growth Fund
Van Kampen American Capital LIT - Enterprise Fund
(formerly Van Kampen American Capital - Common Stock Fund)
Van Kampen American Capital LIT - Global Equity Fund
Van Kampen American Capital LIT - Government Fund
Van Kampen American Capital LIT - Money Market Fund
Van Kampen American Capital LIT - Morgan Stanley Real Estate
Securities Portfolio
(formerly Van Kampen American Capital LIT - Real Estate
Securities Fund)
At December 31, 1997, contract owners have invested in all of the above
funds. The contract owners' equity is affected by the investment
results of each fund, equity transactions by contract owners and
certain contract expenses (see note 2). The accompanying financial
statements include only contract owners' purchase payments pertaining
to the variable portions of their contracts and exclude any purchase
payments for fixed dollar benefits, the latter being included in the
accounts of the Company.
(c) Security Valuation, Transactions and Related Investment Income
The market value of the underlying mutual funds is based on the closing
net asset value per share at December 31, 1997. The cost of investments
sold is determined on a specific identification basis. Investment
transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend
date.
(d) Federal Income Taxes
Operations of the Account form a part of, and are taxed with,
operations of the Company which is taxed as a life insurance company
under the Internal Revenue Code.
The Company does not provide for income taxes within the Account. Taxes
are the responsibility of the contract owner upon termination or
withdrawal.
<PAGE> 8
(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 1996 amounts have been reclassified to conform with the current
period presentation.
(2) EXPENSES
The Company does not deduct a sales charge from purchase payments received
from the contract owners. However, if any part of the contract value of
such contracts is surrendered, the Company will, with certain exceptions,
deduct from the contract owner's contract value a contingent deferred sales
charge, not to exceed 6% (3% after 36 months) of the lesser of the total of
all purchase payments made within 72 months prior to the date of the
request for surrender, or the amount surrendered. (For contracts issued in
the State of New York, the contingent deferred sales charge will not exceed
7% of purchase payments, such charge declining 1% per year, to 0%, after
the purchase payment has been held in the contract for seven years.) No
sales charges are deducted on redemptions used to purchase units in the
fixed investment options of the Company.
The following contract charges are deducted by the Company: (a) an annual
contract maintenance charge of $35 ($30 for contracts issued in the State
of New York) which is satisfied by surrendering units; and (b) a mortality
risk charge, an expense risk charge and an administration charge assessed
through the daily unit value calculation equal to an annual rate of 0.80%,
0.45% and 0.05%, respectively.
(3) RELATED PARTY TRANSACTIONS
The Company performs various services on behalf of the Mutual Fund
Companies in which the Account invests and may receive fees for the
services performed. These services include, among other things, shareholder
communications, preparation, postage, fund transfer agency and various
other record keeping and customer service functions. These fees are paid to
an affiliate of the Company.
<PAGE> 42
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life
Insurance Company and subsidiaries (collectively the Company), a wholly owned
subsidiary of Nationwide Financial Services, Inc., as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1997 1996
------
----------------- ---------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $13,204.1 $12,304.6
Equity securities 80.4 59.1
Mortgage loans on real estate, net 5,181.6 5,272.1
Real estate, net 311.4 265.8
Policy loans 415.3 371.8
Other long-term investments 25.2 28.7
Short-term investments 358.4 4.8
---------- ---------
19,576.4 18,306.9
---------- ---------
Cash 175.6 43.8
Accrued investment income 210.5 210.2
Deferred policy acquisition costs 1,665.4 1,366.5
Investment in subsidiaries classified as discontinued operations - 485.7
Other assets 438.4 426.5
Assets held in Separate Accounts 37,724.4 26,926.7
---------- ---------
$59,790.7 $47,766.3
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Future policy benefits and claims $18,702.8 $17,600.6
Other liabilities 885.6 1,101.1
Liabilities related to Separate Accounts 37,724.4 26,926.7
---------- ---------
57,312.8 45,628.4
---------- ---------
Commitments and contingencies (notes 7 and 13)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 914.7 527.9
Retained earnings 1,312.3 1,432.6
Unrealized gains on securities available-for-sale, net 247.1 173.6
---------- ---------
2,477.9 2,137.9
---------- ---------
$59,790.7 $47,766.3
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Investment product and universal life insurance product policy charges $ 545.2 $ 400.9 $ 286.6
Traditional life insurance premiums 205.4 198.6 199.1
Net investment income 1,409.2 1,357.8 1,294.0
Realized gains (losses) on investments 11.1 (0.3) (1.7)
Other 46.5 35.9 20.7
---------- ---------- ----------
2,217.4 1,992.9 1,798.7
---------- ---------- ----------
Benefits and expenses:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Other benefits and claims 178.2 178.3 165.2
Policyholder dividends on participating policies 40.6 41.0 39.9
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Other operating expenses 384.9 342.4 273.0
---------- ---------- ----------
1,787.5 1,677.4 1,511.1
---------- ---------- ----------
Income from continuing operations before federal income tax expense 429.9 315.5 287.6
Federal income tax expense 150.2 110.9 99.8
---------- ---------- ----------
Income from continuing operations 279.7 204.6 187.8
Income from discontinued operations (less federal income tax expense
of $4.5 and $7.4 in 1996 and 1995, respectively) - 11.3 24.7
---------- ---------- ----------
Net income $ 279.7 $ 215.9 $ 212.5
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(in millions of dollars)
<TABLE>
<CAPTION>
Unrealized
gains
(losses)
Additional on securities Total
Common paid-in Retained available- shareholder's
stock capital earnings for-sale, net equity
----------- ------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 $3.8 $ 606.2 $1,378.2 $(119.7) $1,868.5
Capital contribution - 51.0 - (4.1) 46.9
Net income - - 212.5 - 212.5
Dividends to shareholder - - (7.5) - (7.5)
Unrealized gains on securities available-
for-sale, net - - - 508.1 508.1
-------- -------- -------- -------- ---------
December 31, 1995 3.8 657.2 1,583.2 384.3 2628.5
Net income - - 215.9 - 215.9
Dividends to shareholder - (129.3) (366.5) (39.8) (535.6)
Unrealized losses on securities available-
for-sale, net - - - (170.9) (170.9)
-------- -------- -------- -------- ---------
December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9
Capital contribution - 836.8 - - 836.8
Net income - - 279.7 - 279.7
Dividends to shareholder - (450.0) (400.0) - (850.0)
Unrealized gains on securities available-
for-sale, net - - - 73.5 73.5
-------- -------- -------- -------- ---------
December 31, 1997 $3.8 $ 914.7 $1,312.3 $ 247.1 $2,477.9
======== ======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1997 1996 1995
------------------------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 279.7 $ 215.9 $ 212.5
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,016.6 982.3 950.3
Capitalization of deferred policy acquisition costs (487.9) (422.6) (321.3)
Amortization of deferred policy acquisition costs 167.2 133.4 82.7
Amortization and depreciation (2.0) 7.0 10.2
Realized (gains) losses on invested assets, net (11.1) (0.3) 3.3
(Increase) decrease in accrued investment income (0.3) 2.8 (16.9)
(Increase) decrease in other assets (12.7) (38.9) 39.9
(Decrease) increase in policy liabilities (23.1) (151.0) 123.9
Increase in other liabilities 230.6 191.4 27.0
Other, net (10.9) (61.7) 1.8
----------- --------- --------
Net cash provided by operating activities 1,146.1 858.3 1,113.4
----------- --------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 993.4 1,162.8 634.6
Proceeds from sale of securities available-for-sale 574.5 299.6 107.3
Proceeds from maturity of fixed maturity securities held-to-maturity - - 564.4
Proceeds from repayments of mortgage loans on real estate 437.3 309.0 207.8
Proceeds from sale of real estate 34.8 18.5 48.3
Proceeds from repayments of policy loans and sale of other invested assets 22.7 22.8 53.6
Cost of securities available-for-sale acquired (2,828.1) (1,573.6) (1,942.4)
Cost of fixed maturity securities held-to-maturity acquired - - (593.6)
Cost of mortgage loans on real estate acquired (752.2) (972.8) (796.0)
Cost of real estate acquired (24.9) (7.9) (10.9)
Policy loans issued and other invested assets acquired (62.5) (57.7) (75.9)
Short-term investments, net (354.8) 28.0 77.8
----------- --------- --------
Net cash used in investing activities (1,959.8) (771.3) (1,725.0)
----------- --------- --------
Cash flows from financing activities:
Proceeds from capital contributions 836.8 - -
Cash dividends paid - (50.0) (7.5)
Increase in investment product and universal life insurance
product account balances 2,488.5 1,781.8 1,883.7
Decrease in investment product and universal life insurance
product account balances (2,379.8) (1,784.5) (1,258.7)
----------- --------- --------
Net cash provided by (used in) financing activities 945.5 (52.7) 617.5
----------- --------- --------
Net increase in cash 131.8 34.3 5.9
Cash, beginning of year 43.8 9.5 3.6
----------- --------- --------
Cash, end of year $ 175.6 $ 43.8 $ 9.5
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
wholly owned by Nationwide Corporation (Nationwide Corp.). On that
date, Nationwide Corp. contributed the outstanding shares of NLIC's
common stock to Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corp. in November 1996 for NLIC and the
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. On March 11
1997, NFS completed an initial public offering of its Class A common
stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or retirement products. In addition,
during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. These subsidiaries,
through December 31, 1996, and all accident and health and group life
insurance business have been accounted for as discontinued operations
for all periods presented. See notes 11 and 15. Additionally, NLIC paid
$900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc.,
Nationwide Investment Services Corporation and NWE, Inc. NLIC and its
subsidiaries are collectively referred to as "the Company."
The Company is a leading provider of long-term savings and retirement
products. The Company is subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
<PAGE> 7
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. Subsidiaries that are
classified and reported as discontinued operations are not
consolidated but rather are reported as "Investment in
subsidiaries classified as discontinued operations" in the
accompanying consolidated balance sheets and "Income from
discontinued operations" in the accompanying consolidated
statements of income. All significant intercompany balances and
transactions have been eliminated.
(b) VALUATION OF INVESTMENTS AND RELATED GAINS AND LOSSES
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy acquisition costs that would have
been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as
of December 31, 1997 or 1996.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
<PAGE> 8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual and group
variable and fixed annuities. Universal life insurance products
include universal life insurance, variable universal life
insurance and other interest-sensitive life insurance policies.
Revenues for investment products and universal life insurance
products consist of net investment income, asset fees, cost of
insurance, policy administration and surrender charges that have
been earned and assessed against policy account balances during
the period. Policy benefits and claims that are charged to expense
include interest credited to policy account balances and benefits
and claims incurred in the period in excess of related policy
account balances.
TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
(d) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) SEPARATE ACCOUNTS
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $365.5 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the Separate Accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) FUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
Future policy benefits for traditional life insurance policies
have been calculated using a net level premium method based on
estimates of mortality, morbidity, investment yields and
withdrawals which were used or which were being experienced at the
time the policies were issued, rather than the assumptions
prescribed by state regulatory authorities. See note 4.
<PAGE> 9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) PARTICIPATING BUSINESS
Participating business represents approximately 50% in 1997 (52%
in 1996 and 54% in 1995) of the Company's life insurance in force,
77% in 1997 (78% in 1996 and 79% in 1995) of the number of life
insurance policies in force, and 27% in 1997 (40% in 1996 and 47%
in 1995) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) FEDERAL INCOME TAX
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) REINSURANCE CEDED
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis. All of the Company's accident
and health and group life insurance business is ceded to
affiliates and is accounted for as discontinued operations. See
notes 11 and 15.
(j) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 - REPORTING
COMPREHENSIVE INCOME was issued in June 1997 and is effective for
fiscal years beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a
period except those resulting from investments by shareholders and
distributions to shareholders and includes net income.
Comprehensive income would be reported in addition to earnings
amounts currently presented. The Company will adopt the statement
and begin reporting comprehensive income in the first quarter of
1998.
(k) RECLASSIFICATION
Certain items in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
<PAGE> 10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1997 and
1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ - $ 313.7
Obligations of states and political subdivisions 1.6 - - 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
------------ --------- --------- -----------
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
------------ --------- --------- -----------
$ 12,800.7 $ 498.3 $ (14.5) $ 13,284.5
============ ========= ========= ===========
December 31, 1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 275.7 $ 4.8 $ (1.3) $ 279.2
Obligations of states and political subdivisions 6.2 0.5 - 6.7
Debt securities issued by foreign governments 100.7 2.1 (0.9) 101.9
Corporate securities 7,999.3 285.9 (33.7) 8,251.5
Mortgage-backed securities 3,589.0 91.4 (15.1) 3,665.3
------------ --------- --------- -----------
Total fixed maturity securities 11,970.9 384.7 (51.0) 12,304.6
Equity securities 43.9 15.6 (0.4) 59.1
------------ --------- --------- -----------
$ 12,014.8 $ 400.3 $ (51.4) $ 12,363.7
============ ========= ========= ===========
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1997, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
(in millions of dollars) cost fair value
-------------- ----------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 419.2 $ 422.1
Due after one year through five years 4,573.5 4,708.4
Due after five years through ten years 2,772.6 2,879.7
Due after ten years 1,333.4 1,443.6
----------- -----------
9,098.7 9,453.8
Mortgage-backed securities 3,634.2 3,750.3
----------- -----------
$ 12,732.9 $ 13,204.1
=========== ===========
</TABLE>
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- ----------
<S> <C> <C>
Gross unrealized gains $ 483.8 $349.0
Adjustment to deferred policy acquisition costs (103.7) (81.9)
Deferred federal income tax (133.0) (93.5)
-------- -------
$ 247.1 $173.6
======== =======
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $137.5 $(289.2) $876.3
Equity securities (2.7) 8.9 -
Fixed maturity securities held-to-maturity - - 75.6
------- ------- -------
$134.8 $(280.3) $ 951.9
======= ======= =======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1997,
1996 and 1995 were $574.5 million, $299.6 million and $107.3 million,
respectively. During 1997, gross gains of $9.9 million ($6.6 million
and $4.8 million in 1996 and 1995, respectively) and gross losses of
$18.0 million ($6.9 million and $2.1 million in 1996 and 1995,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25.4 million to
available-for-sale securities due to evidence of a significant
deterioration in the issuer's creditworthiness. The transfer of those
fixed maturity securities resulted in a gross unrealized loss of $3.5
million.
As permitted by the Financial Accounting Standards Board's Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued in November
1995, the Company transferred nearly all of its fixed maturity
securities previously classified as held-to-maturity to
available-for-sale. As of December 14, 1995, the date of transfer, the
fixed maturity securities had amortized cost of $3.32 billion,
resulting in a gross unrealized gain of $155.9 million.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million ($51.8 million as
of December 31, 1996), which includes $3.9 million ($41.7 million as of
December 31, 1996) of impaired mortgage loans on real estate for which
the related valuation allowance was $0.1 million ($8.5 million as of
December 31, 1996) and $16.0 million ($10.1 million as of December 31,
1996) of impaired mortgage loans on real estate for which there was no
valuation allowance. During 1997, the average recorded investment in
impaired mortgage loans on real estate was approximately $31.8 million
($39.7 million in 1996) and interest income recognized on those loans
was $1.0 million ($2.1 million in 1996), which is equal to interest
income recognized using a cash-basis method of income recognition.
<PAGE> 12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
------------- -------------
<S> <C> <C>
Allowance, beginning of year $51.0 $49.1
(Reductions) additions charged to operations (1.2) 4.5
Direct write-downs charged against the allowance (7.3) (2.6)
------ ------
Allowance, end of year $42.5 $51.0
====== ======
</TABLE>
Real estate is presented at cost less accumulated depreciation of $45.1
million as of December 31, 1997 ($30.3 million as of December 31, 1996)
and valuation allowances of $11.1 million as of December 31, 1997
($15.2 million as of December 31, 1996).
Investments that were non-income producing for the twelve month period
preceding December 31, 1997 amounted to $19.4 million ($26.8 million
for 1996) and consisted of $3.0 million ($0.2 million in 1996) in
securities available-for-sale, $16.4 million ($20.6 million in 1996) in
real estate and none ($5.9 million in 1996) in other long-term
investments.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 911.6 $ 917.1 $ 685.8
Equity securities 0.8 1.3 1.3
Fixed maturity securities held-to-maturity - - 201.8
Mortgage loans on real estate 457.7 432.8 395.5
Real estate 42.9 44.3 38.3
Short-term investments 22.7 4.2 10.6
Other 21.0 4.0 7.2
-------- -------- --------
Total investment income 1,456.7 1,403.7 1,340.5
Less investment expenses 47.5 45.9 46.5
-------- -------- --------
Net investment income $1,409.2 $1,357.8 $1,294.0
======== ======== ========
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ 3.6 $(3.5) $ 4.2
Equity securities 2.7 3.2 3.4
Mortgage loans on real estate 1.6 (4.1) (7.1)
Real estate and other 3.2 4.1 (2.2)
------ ------ ------
$11.1 $(0.3) $(1.7)
====== ====== ======
</TABLE>
Fixed maturity securities with an amortized cost of $6.2 million as
of December 31, 1997 and 1996 were on deposit with various
regulatory agencies as required by law.
<PAGE> 13
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) FUTURE POLICY BENEFITS AND CLAIMS
The liability for future policy benefits for investment contracts
represents approximately 86% and 87% of the total liability for future
policy benefits as of December 31, 1997 and 1996, respectively. The
average interest rate credited on investment product policies was
approximately 6.1%, 6.3% and 6.6% for the years ended December 31,
1997, 1996 and 1995, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
INTEREST RATES: Interest rates vary by issue year and were 6.9%
and 6.6% in 1997 and 1996, respectively. Interest rates have
generally ranged from 6.0% to 10.5% for previous issue years.
WITHDRAWALS: Rates, which vary by issue age, type of coverage and
policy duration, are based on Company experience.
MORTALITY: Mortality and morbidity rates are based on published
tables, modified for the Company's actual experience.
The Company has entered into a reinsurance contract to cede a portion
of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin). Total recoveries due from Franklin were
$220.2 million and $240.5 million as of December 31, 1997 and 1996,
respectively. The contract is immaterial to the Company's results of
operations. The ceding of risk does not discharge the original insurer
from its primary obligation to the policyholder. Under the terms of the
contract, Franklin has established a trust as collateral for the
recoveries. The trust assets are invested in investment grade
securities, the market value of which must at all times be greater than
or equal to 102% of the reinsured reserves.
The Company has reinsurance agreements with certain affiliates as
described in note 11. All other reinsurance agreements are not material
to either premiums or reinsurance recoverables.
(5) FEDERAL INCOME TAX
The Company's current federal income tax liability was $60.1 million
and $30.2 million as of December 31, 1997 and 1996, respectively.
<PAGE> 14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $200.1 $183.0
Liabilities in Separate Accounts 242.0 188.4
Mortgage loans on real estate and real estate 19.0 23.4
Other assets and other liabilities 59.2 53.7
------- ------
Total gross deferred tax assets 520.3 448.5
Less valuation allowance (7.0) (7.0)
------- ------
Net deferred tax assets 513.3 441.5
------- ------
Deferred tax liabilities:
Deferred policy acquisition costs 480.5 399.3
Fixed maturity securities 193.3 133.2
Deferred tax on realized investment gains 40.1 37.6
Equity securities and other long-term investments 7.5 8.2
Other 22.2 25.4
------- ------
Total gross deferred tax liabilities 743.6 603.7
------- ------
Net deferred tax liability $230.3 $162.2
======= ======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. There
has been no change in the valuation allowance for the years ended
December 31, 1997, 1996 and 1995.
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable $121.7 $116.5 $88.7
Deferred tax expense (benefit) 28.5 (5.6) 11.1
------ ------ ------
$150.2 $110.9 $99.8
====== ====== ======
</TABLE>
Total federal income tax expense for the years ended December 31, 1997,
1996 and 1995 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
(in millions of dollars) Amount % Amount % Amount %
---------------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $150.5 35.0 $110.4 35.0 $100.6 35.0
Tax exempt interest and dividends
received deduction - 0.0 (0.2) (0.1) - 0.0
Other, net (0.3) (0.1) 0.7 0.3 (0.8) (0.3)
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $150.2 34.9 $110.9 35.2 $ 99.8 34.7
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $91.8 million, $115.8 million and
$51.8 million during the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE> 15
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
FIXED MATURITY AND EQUITY SECURITIES: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices.
MORTGAGE LOANS ON REAL ESTATE, NET: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
POLICY LOANS, SHORT-TERM INVESTMENTS AND CASH: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in Separate Accounts is based on quoted market prices. The
fair value of liabilities related to Separate Accounts is the
amount payable on demand, which includes certain surrender
charges.
INVESTMENT CONTRACTS: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
<PAGE> 16
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
POLICY RESERVES ON LIFE INSURANCE CONTRACTS: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 13.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
(in millions of dollars) amount fair value amount fair value
------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $13,204.1 $13,204.1 $12,304.6 $12,304.6
Equity securities 80.4 80.4 59.1 59.1
Mortgage loans on real estate, net 5,181.6 5,509.7 5,272.1 5,397.9
Policy loans 415.3 415.3 371.8 371.8
Short-term investments 358.4 358.4 4.8 4.8
Cash 175.6 175.6 43.8 43.8
Assets held in Separate Accounts 37,724.4 37,724.4 26,926.7 26,926.7
Liabilities:
Investment contracts 14,708.2 14,322.1 13,914.4 13,484.5
Policy reserves on life insurance contracts 3,345.4 3,182.4 3,392.8 3,197.5
Liabilities related to Separate Accounts 37,724.4 36,747.0 26,926.7 26,164.2
</TABLE>
(7) RISK DISCLOSURES
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduce demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
CREDIT RISK: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
<PAGE> 17
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
INTEREST RATE RISK: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $341.4 million
extending into 1998 were outstanding as of December 31, 1997. The
Company also had $63.9 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1997.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 20% (21% in 1996) in any geographic area and no more than 2% (2%
in 1996) with any one borrower as of December 31, 1997. As of December
31, 1997, 46% (44% in 1996) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1997 and 1996. See note 4.
(8) PENSION PLAN
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. Benefits are based upon the highest average annual
salary of a specified number of consecutive years of the last ten years
of service. The Company funds pension costs accrued for direct
employees plus an allocation of pension costs accrued for employees of
affiliates whose work efforts benefit the Company.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and
elected early retirement no later than March 15, 1995. The entire cost
of the enhanced benefit was borne by NMIC and certain of its property
and casualty insurance company affiliates.
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual
Insurance Company Employees' Retirement Plan and the Wausau Insurance
Companies Pension Plan to form the Nationwide Insurance Enterprise
Retirement Plan (the Retirement Plan). Immediately prior to the merger,
the plans were amended to provide consistent benefits for service after
January 1, 1996. These amendments had no significant impact on the
accumulated benefit obligation or projected benefit obligation as of
December 31, 1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1997, 1996 and 1995 were $7.5 million, $7.4
million and $10.5 million, respectively.
The Company had no net accrued pension expense as of December 31, 1997
($1.1 million as of December 31, 1996).
The net periodic pension cost for the Retirement Plan as a whole for
the years ended December 31, 1997 and 1996 and for the Nationwide
Insurance Companies and Affiliates Retirement Plan as a whole for the
year ended December 31, 1995 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 77.3 $ 75.5 $ 64.5
Interest cost on projected benefit obligation 118.6 105.5 95.3
Actual return on plan assets (328.0) (210.6) (249.3)
Net amortization and deferral 196.4 101.8 143.4
-------- -------- --------
$ 64.3 $ 72.2 $ 53.9
======== ======== ========
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate 6.50% 6.00% 7.50%
Rate of increase in future compensation levels 4.75% 4.25% 6.25%
Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
</TABLE>
Information regarding the funded status of the Retirement Plan as a
whole as of December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,547.5 $1,338.6
Nonvested 13.5 11.1
-------- ---------
$1,561.0 $1,349.7
======== =========
Net accrued pension expense:
Projected benefit obligation for services rendered to date $2,033.8 $1,847.8
Plan assets at fair value 2,212.9 1,947.9
--------- ---------
Plan assets in excess of projected benefit obligation 179.1 100.1
Unrecognized prior service cost 34.7 37.9
Unrecognized net gains (330.7) (202.0)
Unrecognized net asset at transition 33.3 37.2
--------- ---------
$ (83.6) $ (26.8)
========= =========
</TABLE>
<PAGE> 19
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted average discount rate 6.00% 6.50%
Rate of increase in future compensation levels 4.25% 4.75%
</TABLE>
Assets of the Retirement Plan are invested in group annuity contracts
of NLIC and Employers Life Insurance Company of Wausau (ELICW).
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1997 and 1996 was $36.5 million and $34.9 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1997, 1996 and
1995 was $3.0 million, $3.3 million and $3.1 million, respectively.
Information regarding the funded status of the plan as a whole as of
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996
----------- -----------
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees $ 93.3 $ 93.0
Fully eligible, active plan participants 31.6 23.7
Other active plan participants 113.0 84.0
-------- --------
Accumulated postretirement benefit obligation 237.9 200.7
Plan assets at fair value 69.2 63.0
-------- --------
Plan assets less than accumulated postretirement benefit obligation (168.7) (137.7)
Unrecognized transition obligation of affiliates 1.5 1.7
Unrecognized net losses (gains) 1.6 (23.2)
-------- --------
$(165.6) $(159.2)
======== ========
</TABLE>
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year) $ 7.0 $ 6.5 $ 6.2
Interest cost on accumulated postretirement
benefit obligation 14.0 13.7 14.2
Actual return on plan assets (3.6) (4.3) (2.7)
Amortization of unrecognized transition
obligation of affiliates 0.2 0.2 3.0
Net amortization and deferral (0.5) 1.8 (1.6)
------- ------ ------
$17.1 $17.9 $19.1
======= ====== ======
</TABLE>
Actuarial assumptions used for the measurement of the APBO and the
NPPBC for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
APBO:
Discount rate 6.70% 7.25% 6.75%
Assumed health care cost trend rate:
Initial rate 12.13% 11.00% 11.00%
Ultimate rate 6.12% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
NPPBC:
Discount rate 7.25% 6.65% 8.00%
Long term rate of return on plan
assets, net of tax 5.89% 4.80% 8.00%
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 10.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
</TABLE>
For the plan as a whole, a one percentage point increase in the assumed
health care cost trend rate would increase the APBO as of December 31,
1997 by $0.4 million and have no impact on the NPPBC for the year ended
December 31, 1997.
(10) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
<PAGE> 21
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The statutory capital and surplus of NLIC as of December 31, 1997, 1996
and 1995 was $1.13 billion, $1.00 billion and $1.36 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1997, 1996 and 1995 was $111.7 million, $73.2 million and
$86.5 million, respectively.
As a result of the $850.0 million dividend paid on February 24, 1997,
any dividend paid by NLIC during the twelve-month period immediately
following the $850.0 million dividend would be an extraordinary
dividend under Ohio insurance laws. Accordingly, no such dividend could
be paid without prior regulatory approval. The Company has no reason to
believe that any reasonably foreseeable dividend to be paid by NLIC
would not receive the required approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) TRANSACTIONS WITH AFFILIATES
As part of the restructuring described in note 1, NLIC paid a dividend
valued at $485.7 million to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of ELICW, National
Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC).
Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid
an equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the
Company made lease payments to NMIC and its subsidiaries of $8.4
million, $9.1 million and $9.0 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $85.8 million, $101.6 million and $107.1
million in 1997, 1996 and 1995, respectively. The allocations are based
on techniques and procedures in accordance with insurance regulatory
guidelines. Measures used to allocate expenses among companies include
individual employee estimates of time spent, special cost studies,
salary expense, commissions expense and other methods agreed to by the
participating companies that are within industry guidelines and
practices. The Company believes these allocation methods are
reasonable. In addition, the Company does not believe that expenses
recognized under the inter-company agreements are materially different
than expenses that would have been recognized had the Company operated
on a stand alone basis. Amounts payable to NMIC from the Company under
the cost sharing agreement were $20.5 million and $15.1 million as of
December 31, 1997 and 1996, respectively.
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1997 and
1996 were not material. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
<PAGE> 22
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance agreements exist between NLIC and,
respectively, NMIC and ELICW whereby all of NLIC's accident and health
and group life insurance business is ceded on a modified coinsurance
basis. NLIC entered into the reinsurance agreements during 1996 because
the accident and health and group life insurance business was unrelated
to the Company's long-term savings and retirement products.
Accordingly, the accident and health and group life insurance business
has been accounted for as discontinued operations for all periods
presented. Under modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to the
reinsurer. Under the terms of the Company's agreements, the investment
risk associated with changes in interest rates is borne by ELICW or
NMIC, as the case may be. Risk of asset default is retained by the
Company, although a fee is paid by ELICW or NMIC, as the case may be,
to the Company for the Company's retention of such risk. The agreements
will remain in force until all policy obligations are settled. However,
with respect to the agreement between NLIC and NMIC, either party may
terminate the contract on January 1 of any year with prior notice. The
ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material
respects with what the Company could have obtained with unaffiliated
parties. Amounts ceded to NMIC and ELICW for the years ended December
31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
(in millions of dollars) NMIC ELICW NMIC ELICW
-------------- ------------- ----------------------------
<S> <C> <C> <C> <C>
Premiums $ 91.4 $199.8 $ 97.3 $224.2
Net investment income and other revenue $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and other expenses $100.7 $225.9 $100.5 $246.6
</TABLE>
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $211.0 million and $4.8 million as of
December 31, 1997 and 1996, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding
shares of common stock of Farmland Life Insurance Company (Farmland) to
NLIC. Farmland merged into WCLIC effective June 30, 1995. The
contribution resulted in a direct increase to consolidated
shareholder's equity of $46.9 million. As discussed in note 15, WCLIC
is accounted for as discontinued operations.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1997 were $66.1
million, $76.9 million and $57.3 million, respectively.
(12) BANK LINES OF CREDIT
In August 1996, NLIC, along with NMIC, entered into a $600.0 million
revolving credit facility which provides for a $600.0 million loan over
a five year term on a fully revolving basis with a group of national
financial institutions. The credit facility provides for several and
not joint liability with respect to any amount drawn by either NLIC or
NMIC. NLIC and NMIC pay facility and usage fees to the financial
institutions to maintain the revolving credit facility. All previously
existing line of credit agreements were canceled. In September 1997,
the credit agreement was amended to include NFS as a party to and
borrower under the agreement.
<PAGE> 23
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) CONTINGENCIES
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to
be material to the Company's financial position or results of
operations.
(14) SEGMENT INFORMATION
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment consists
of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by the Company and independent
investment managers, with the investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment consists of annuity
contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, with returns accumulating
on a tax-deferred basis. The Fixed Annuities segment also includes the
fixed option under the Company's variable annuity contracts. The Life
Insurance segment consists of insurance products that provide a death
benefit and may also allow the customer to build cash value on a
tax-deferred basis. In addition, the Company reports corporate expenses
and investments, and the related investment income supporting capital
not specifically allocated to its product segments in a Corporate and
Other segment. In addition, all realized gains and losses and
investment management fees and other revenue earned from mutual funds,
other than the portion allocated to the variable annuities and life
insurance segments, are reported in the Corporate and Other segment.
The following table summarizes revenues and income from continuing
operations before federal income tax expense for the years ended
December 31, 1997, 1996 and 1995 and assets as of December 31, 1997,
1996 and 1995, by segment.
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Variable Annuities $ 404.0 $ 284.6 $ 189.1
Fixed Annuities 1,141.4 1,092.6 1,052.0
Life Insurance 473.1 435.6 409.1
Corporate and Other 198.9 180.1 148.5
----------- ---------- ----------
$ 2,217.4 $ 1,992.9 $ 1,798.7
=========== ========== ==========
Income from continuing operations before federal income tax
expense:
Variable Annuities $ 150.9 $ 90.3 $ 50.8
Fixed Annuities 169.5 135.4 137.0
Life Insurance 70.9 67.2 67.6
Corporate and Other 38.6 22.6 32.2
----------- ---------- ----------
$ 429.9 $ 315.5 $ 287.6
=========== ========== ==========
Assets:
Variable Annuities $ 35,278.7 $ 25,069.7 $ 17,333.0
Fixed Annuities 14,436.3 13,994.7 13,250.4
Life Insurance 3,901.4 3,353.3 3,027.4
Corporate and Other 6,174.3 5,348.6 4,896.8
----------- ---------- ----------
$ 59,790.7 $ 47,766.3 $ 38,507.6
=========== ========== ==========
</TABLE>
<PAGE> 24
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(15) DISCONTINUED OPERATIONS
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. Prior to the
contribution by Nationwide Corp. of the outstanding common stock of
NLIC to NFS, NLIC effected certain transactions with respect to certain
subsidiaries and lines of business that were unrelated to long-term
savings and retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend
payable to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of three subsidiaries: ELICW, NCC
and WCLIC. ELICW writes group accident and health and group life
insurance business and maintains it offices in Wausau, Wisconsin. NCC
is a property and casualty company with offices in Scottsdale, Arizona
that serves as a fronting company for a property and casualty
subsidiary of NMIC. WCLIC writes high dollar term life insurance
policies and is located in San Francisco, California. ELICW, NCC and
WCLIC have been accounted for as discontinued operations in the
accompanying consolidated financial statements through December 31,
1996. The Company did not recognize any gain or loss on the disposal of
these subsidiaries.
Also, during 1996, NLIC entered into two reinsurance agreements whereby
all of NLIC's accident and health and group life insurance business was
ceded to ELICW and NMIC, effective January 1, 1996. See note 11 for a
complete discussion of the reinsurance agreements. The Company has
discontinued its accident and health and group life insurance business
and in connection therewith has entered into reinsurance agreements to
cede all existing and any future writings to other affiliated
companies. NLIC's accident and health and group life insurance business
is accounted for as discontinued operations for all periods presented.
The Company did not recognize any gain or loss on the disposal of the
accident and health and group life insurance business. The assets,
liabilities, results of operations and activities of discontinued
operations are distinguished physically, operationally and for
financial reporting purposes from the remaining assets, liabilities,
results of operations and activities of the Company.
A summary of the results of operations of discontinued operations for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ - $ 668.9 $ 776.9
Net income $ - $ 11.3 $ 24.7
</TABLE>
A summary of the assets and liabilities of discontinued operations as
of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(in millions of dollars) 1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Assets, consisting primarily of investments $247.3 $3,288.5 $3,206.7
Liabilities, consisting primarily of policy benefits and claims $247.3 $2,802.8 $2,700.0
</TABLE>
<PAGE> 43
PART C. OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 24. FINANCIAL INFORMATION
(a) Financial Statements:
(1) Financial statements included PAGE
in Prospectus
(Part A):
Condensed Financial Information. 11
(2) Financial statements included
in Part B:
Those financial statements 41
required by Item 23 to be included in Part B
have been incorporated therein by reference
to the Prospectus (Part A).
Nationwide Variable Account-3:
Independent Auditors' Report. 41
Statement of Assets, Liabilities and Contract 42
Owners' Equity as of December 31, 1997.
Statements of Operations and Changes in 44
Contract Owners' Equity for the years ended
December 31, 1997 and 1996.
Notes to Financial Statements. 45
Nationwide Life Insurance Company:
Independent Auditors' Report. 48
Consolidated Balance Sheets as of December 49
31, 1997 and 1996.
Consolidated Statements of Income for the 50
years ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Shareholder's 51
Equity for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows for 52
the years ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements. 53
Schedule I - Consolidated Summary of Investments - 101
Other Than Investments in Related Parties.
Schedule III - Supplementary Insurance 102
Information.
Schedule IV - Reinsurance 103
Schedule V - Valuation and Qualifying Accounts 104
</TABLE>
73 of 99
<PAGE> 44
Item 24. (b) Exhibits
(1) Resolution of the Depositor's Board of
Directors authorizing the establishment of the
Registrant, adopted October 7, 1987- Filed
previously with registration
(2) Not Applicable
(3) Underwriting or Distribution contract between
the Registrant and Principal Underwriter -
Filed previously with pre-effective amendment
no. 1 to the registration statement, and hereby
incorporated by reference.
(4) The form of the variable annuity contract -
Filed previously with registration
statement, and hereby incorporated by
reference.
(5) Variable Annuity Application - Filed previously
with registration statement, and hereby
incorporated by reference.
(6) Articles of Incorporation of Depositor -
Filed previously with registration
statement, and hereby incorporated by
reference.
(7) Not Applicable
(8) Not Applicable
(9) Opinion of Counsel - Filed previously with
registration statement, and hereby incorporated
by reference.
(10) Not Applicable
(11) Not Applicable
(12) Not Applicable
(13) Performance Advertising Calculation Schedule -
Filed previously with registration statement
and hereby incorporated by reference.
74 of 99
<PAGE> 45
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
<S> <C> <C>
Lewis J. Alphin Director
519 Bethel Church Road
Mount Olive, NC 28365
A. I. Bell Director
4121 North River Road West
Zanesville, OH 43701
Keith W. Eckel Director
1647 Falls Road
Clarks Summit, PA 18411
Willard J. Engel Director
300 East Marshall Street
Marshall, MN 56258
Fred C. Finney Director
1558 West Moreland Road
Wooster, OH 44691
Charles L. Fuellgraf, Jr. Director
600 South Washington Street
Butler, PA 16001
Joseph J. Gasper President and Chief Operating Officer
One Nationwide Plaza and Director
Columbus, OH 43215
Dimon R. McFerson Chairman and Chief Executive Officer-
One Nationwide Plaza Nationwide Insurance Enterprise
Columbus, OH 43215 and Director
David O. Miller Chairman of the Board and Director
115 Sprague Drive
Hebron, OH 43025
Yvonne L. Montgomery Director
2859 Paces Ferry Road
Atlanta, GA 30339
C. Ray Noecker Director
2770 Winchester Southern S.
Ashville, OH 43103
James F. Patterson Director
8765 Mulberry Road
Chesterland, OH 44026
</TABLE>
75 of 99
<PAGE> 46
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
<S> <C> <C>
Arden L. Shisler Director
1356 North Wenger Road
Dalton, OH 44618
Robert L. Stewart Director
88740 Fairview Road
Jewett, OH 43986
Nancy C. Thomas Director
10835 Georgetown Street NE
Louisville, OH 44641
Harold W. Weihl Director
14282 King Road
Bowling Green, OH 43402
Dennis W. Click Vice President and Secretary
One Nationwide Plaza
Columbus, OH 43215
Robert A. Oakley Executive Vice President-
One Nationwide Plaza Chief Financial Officer
Columbus, OH 43215
Robert J. Woodward Jr. Executive Vice President
One Nationwide Plaza Chief Investment Officer
Columbus, OH 43215
W. Sidney Druen Senior Vice President and General
One Nationwide Plaza Counsel and Assistant Secretary
Columbus, OH 43215
Harvey S. Galloway, Jr. Senior Vice President-Chief Actuary-
One Nationwide Plaza Life, Health and Annuities
Columbus, OH 43215
Richard A. Karas Senior Vice President - Sales -
One Nationwide Plaza Financial Services
Columbus, OH 43215
Susan A. Wolken Senior Vice President - Life
One Nationwide Plaza Company Operations
Columbus, OH 43215
Michael D. Bleiweiss Vice President-
One Nationwide Plaza Individual Annuity Operations
Columbus, OH 43215
</TABLE>
76 of 99
<PAGE> 47
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
<S> <C> <C>
Matthew S. Easley Vice President -
One Nationwide Plaza Life Marketing and Administrative Services
Columbus, OH 43215
Timothy E. Murphy Vice President-
One Nationwide Plaza Strategic Marketing
Columbus, Ohio 43215
R. Dennis Noice Vice President-
One Nationwide Plaza Retail Operations
Columbus, OH 43215
Joseph P. Rath
One Nationwide Plaza Vice President
Columbus, OH 43215
</TABLE>
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT.
* Subsidiaries for which separate financial statements are
filed
** Subsidiaries included in the respective consolidated
financial statements
*** Subsidiaries included in the respective group financial
statements filed for unconsolidated subsidiaries
77 of 99
<PAGE> 48
<TABLE>
<CAPTION>
NO. VOTING
SECURITIES
STATE (SEE ATTACHED
OF ORGANIZATION CHART) UNLESS
COMPANY OTHERWISE PRINCIPAL BUSINESS
INDICATED
<S> <C> <C>
Affiliate Agency, Inc. Delaware Life Insurance Agency
Affiliate Agency of Ohio, Inc. Ohio Life Insurance Agency
Allnations, Inc. Ohio Promotes cooperative insurance corporations
worldwide
American Marine Underwriters, Inc. Florida Underwriting Manager
Auto Direkt Insurance Company Germany Insurance Company
The Beak and Wire Corporation Ohio Radio Tower Joint Venture
California Cash Management Company California Inactive
Colonial County Mutual insurance Texas Insurance Company
Company
Colonial Insurance Company of Wisconsin Insurance Company
Wisconsin
Columbus Insurance Brokerage and Germany Insurance Broker
Service GMBH
Companies Agency, Inc. Wisconsin Insurance Broker
Companies Agency Insurance Services California Insurance Broker
of California
Companies Agency of Alabama, Inc. Alabama Insurance Broker
Companies Agency of Georgia Georgia Insurance Broker
Companies Agency of Idaho, Inc. Idaho Insurance Broker
Companies Agency of Kentucky, Inc. Kentucky Insurance Broker
Companies Agency of Massachusetts, Massachusetts Insurance Broker
Inc.
Companies Agency of New York, Inc. New York Insurance Broker
Companies Agency of Pennsylvania, Inc. Pennsylvania Insurance Broker
Companies Agency of Phoenix, Inc. Arizona Insurance Broker
Companies Agency of Texas, Inc. Texas Local Recording Agent (PEC)
Companies Annuity Agency of Texas, Texas Group and Variable Contract Agent
Inc.
Cooperative Service Company Nebraska Insurance Agency
Countrywide Services Corporation Delaware Products Liability, Investigative and Claims
Management Services
Employers Insurance of Wausau A Wisconsin Mutual Insurance Company
Mutual Company
** Employers Life Insurance Company of Wisconsin Life Insurance Company
Wausau
</TABLE>
78 of 101
<PAGE> 49
<TABLE>
<CAPTION>
NO. VOTING
SECURITIES
STATE (SEE ATTACHED
OF ORGANIZATION CHART) UNLESS
COMPANY OTHERWISE PRINCIPAL BUSINESS
INDICATED
<S> <C> <C>
F & B, Inc. Iowa Insurance Agency
Farmland Mutual Insurance Company Iowa Mutual Insurance Company
Financial Horizons Distributors Alabama Life Insurance Agency
Agency of Alabama, Inc.
Financial Horizons Distributors Ohio Life Insurance Agency
Agency of Ohio, Inc.
Financial Horizons Distributors Oklahoma Life Insurance Agency
Agency of Oklahoma, Inc.
Financial Horizons Distributors Texas Life Insurance Agency
Agency of Texas, Inc.
* Financial Horizons Investment Trust Massachusetts Investment Company
Financial Horizons Securities Oklahoma Broker Dealer
Corporation
Gates, McDonald & Company Ohio Cost Control Business
Gates, McDonald & Company of Nevada Nevada Self-Insurance Administration Claims
Examinations and Data Processing Services
Gates, McDonald & Company of New New York Workers Compensation Claims Administration
York, Inc.
Gates, McDonald Health Plus, Inc. Ohio Managed Care Organization
Greater La Crosse Health Plans, Inc. Wisconsin Writes Commercial Health and Medicare
Supplement Insurance
Insurance Intermediaries, Inc. Ohio Insurance Broker and Insurance Agency
Irvin L. Schwartz and Associates, Inc. Ohio Insurance Agency
Key Health Plan, Inc. California Pre-paid health plans
Landmark Financial Services of New New York Life Insurance Agency
York, Inc.
Leben Direkt Insurance Company Germany Life Insurance Company
Lone Star General Agency, Inc. Texas Insurance Agency
** MRM Investments, Inc. Ohio Owns and operates a Recreational Ski Facility
** National Casualty Company Wisconsin Insurance Company
National Casualty Company of America, Great Britain Insurance Company
Ltd.
** National Premium and Benefit Delaware Insurance Administrative Services
Administration Company
** Nationwide Advisory Services, Inc. Ohio Registered Broker-Dealer, Investment Manager
and Administrator
Nationwide Agency, Inc. Ohio Insurance Agency
Nationwide Agribusiness Insurance Iowa Insurance Company
Company
* Nationwide Asset Allocation Trust Massachusetts Investment Company
Nationwide Cash Management Company Ohio Investment Securities Agent
</TABLE>
79 of 101
<PAGE> 50
<TABLE>
<CAPTION>
NO. VOTING
SECURITIES
STATE (SEE ATTACHED
OF ORGANIZATION CHART) UNLESS
COMPANY OTHERWISE PRINCIPAL BUSINESS
INDICATED
<S> <C> <C>
Nationwide Community Urban Ohio Redevelopment of blighted areas within the
Redevelopment Corporation City of Columbus, Ohio
Nationwide Corporation Ohio Organized for the purpose of acquiring,
holding, encumbering, transferring, or
otherwise disposing of shares, bonds,
and other evidences of indebtedness,
securities, and contracts of other
persons, associations, corporations,
domestic or foreign and to form or
acquire the control of other
corporations
Nationwide/Dispatch LLC Ohio Engaged in related Arena development Activity
Nationwide Financial Institution Delaware Insurance Agency
Distributors Agency, Inc.
Nationwide Financial Services Capital Delaware Statutory Business Trust
Trust
Nationwide Financial Services, Inc. Delaware Holding Company
Nationwide General Insurance Company Ohio Insurance Company
Nationwide Global Holdings, Inc. Ohio Holding Company for Enterprise International
Operations
Nationwide Health Plans, Inc. Ohio Health Maintenance Organization
* Nationwide Indemnity Company Ohio Reinsurance Company
Nationwide Insurance Enterprise Ohio Membership Non-Profit Corporation
Foundation
Nationwide Insurance Enterprise Ohio Performs shares services functions for the
Services, LTD. Enterprise
Nationwide Insurance Golf Charities, Ohio Membership Non-Profit Corporation
Inc.
Nationwide Investing Foundation Michigan Investment Company
* Nationwide Investing Massachusetts Investment Company
Foundation II
Nationwide Investing Ohio Investment Company
Foundation III
Nationwide Investment Services Oklahoma Registered Broker-Dealer in Deferred
Corporation Compensation Market
Nationwide Investors Services, Inc. Ohio Stock Transfer Agent
** Nationwide Life and Annuity Insurance Ohio Life Insurance Company
Company
** Nationwide Life Insurance Company Ohio Life Insurance Company
Nationwide Lloyds Texas Texas Lloyds Company
Nationwide Management Systems, Inc. Ohio Offers Preferred Provider Organization and
Other Related Products and Services
Nationwide Mutual Fire Insurance Ohio Mutual Insurance Company
Company
Nationwide Mutual Insurance Company Ohio Mutual Insurance Company
Nationwide Properties, Ltd. Ohio Develops, owns and operates real estate and
real estate investments.
Nationwide Property and Casualty Ohio Insurance Company
Insurance Company
</TABLE>
80 of 101
<PAGE> 51
<TABLE>
<CAPTION>
NO. VOTING
SECURITIES
STATE (SEE ATTACHED
OF ORGANIZATION CHART) UNLESS
COMPANY OTHERWISE PRINCIPAL BUSINESS
INDICATED
<S> <C> <C>
Nationwide Realty Investors, Ltd. Ohio Develops, owns and operates real estate and
real estate investments.
* Nationwide Separate Account Trust Massachusetts Investment Company
NEA Valuebuilder Investor Services, Delaware Life Insurance Agency
Inc.
NEA Valuebuilder Investor Services of Alabama Life Insurance Agency
Alabama, Inc.
NEA Valuebuilder Investor Services of Arizona Life Insurance Agency
Arizona, Inc.
NEA Valuebuilder Investor Services of Montana Life Insurance Agency
Montana, Inc.
NEA Valuebuilder Investor Services of Nevada Life Insurance Agency
Nevada, Inc.
NEA Valuebuilder Investor Services of Ohio Life Insurance Agency
Ohio, Inc.
NEA Valuebuilder Investor Services of Oklahoma Life Insurance Agency
Oklahoma, Inc.
NEA Valuebuilder Investor Services of Texas Life Insurance Agency
Texas, Inc.
NEA Valuebuilder Investor Services of Wyoming Life Insurance Agency
Wyoming, Inc.
NEA Valuebuilder Services Insurance Massachusetts Life Insurance Agency
Agency, Inc.
Neckura General Insurance Company Germany Insurance Company
Neckura Holding Company Germany Administrative Service for Neckura Insurance
Group
Neckura Insurance Company Germany Insurance Company
Neckura Life Insurance Company Germany Life Insurance Company
NWE, Inc. Ohio Special Investments
PEBSCO of Massachusetts Insurance Massachusetts Markets and Administers Deferred Compensation
Agency, Inc. Plans for Public Employees
PEBSCO of Texas, Inc. Texas Markets and Administers Deferred Compensation
Plans for Public Employees
Pension Associates of Wausau, Inc. Wisconsin Pension plan administration, record keeping
and consulting and compensation consulting
Physicians Plus Insurance Corporation Wisconsin Health Maintenance organization
Prevea Health Insurance Plan, Inc. Wisconsin Health Maintenance organization
Public Employees Benefit Services Delaware Markets and Administers Deferred Compensation
Corporation Plans for Public Employees
</TABLE>
81 of 101
<PAGE> 52
<TABLE>
<CAPTION>
NO. VOTING
SECURITIES
STATE (SEE ATTACHED
OF ORGANIZATION CHART) UNLESS
COMPANY OTHERWISE PRINCIPAL BUSINESS
INDICATED
<S> <C> <C>
Public Employees Benefit Services Alabama Markets and Administers Deferred Compensation
Corporation of Alabama Plans for Public Employees
Public Employees Benefit Services Arkansas Markets and Administers Deferred Compensation
Corporation of Arkansas Plans for Public Employees
Public Employees Benefit Services Montana Markets and Administers Deferred Compensation
Corporation of Montana Plans for Public Employees
Public Employees Benefit Services New Mexico Markets and Administers Deferred Compensation
Corporation of New Mexico Plans for Public Employees
Scottsdale Indemnity Company Ohio Insurance Company
Scottsdale Insurance Company Ohio Excess and surplus lines insurance company
Scottsdale Surplus Lines Insurance Arizona Excess and surplus lines insurance company
Company
SVM Sales GmbH, Neckura Insurance Germany Sales support for Neckura Insurance Group
Group
TIG Countrywide Insurance Group California Independent Agency Personal Lines Underwriter
Wausau (Bermuda) Ltd. Bermuda Rent-a-captive Reinsurer
Wausau Business Insurance Company Wisconsin Insurance Company
Wausau General Insurance Company Illinois Insurance Company
Wausau Insurance Company (U.K.) United Kingdom Insurance and Reinsurance Company
Limited
Wausau International Underwriters California Special Risks, Excess and Surplus Lines
Insurance Underwriting Manager
** Wausau Preferred Health Insurance Wisconsin Insurance and Reinsurance Company
Company
Wausau Service Corporation Wisconsin Holding Company
Wausau Underwriters Insurance Company Wisconsin Insurance Company
</TABLE>
82 of 101
<PAGE> 53
<TABLE>
<CAPTION>
(left side)
<S> <C> <C> <C>
- ------------------------
| NATIONWIDE INSURANCE |
| GOLF CHARITIES, INC. |
| |
| MEMBERSHIP |
| NONPROFIT |
| CORPORATION |
- ------------------------
------------------------------------------
| EMPLOYERS INSURANCE OF WAUSAU |
| A MUTUAL COMPANY |
| (EMPLOYERS) |
| |========================================
| Contribution Note Cost |
| ----------------- ---- |
| Casualty $400,000,000 |
------------------------------------------
|
-----------------------------------------------------------------------
| | |
- --------------------------- --------------------------- ---------------------------- ---------------------------
| KEY HEALTH PLAN, INC. | | WAUSAU INSURANCE CO. | | WAUSAU SERVICE | | |
| | | (U.K.) LIMITED | | CORPORATION (WSC) | | NATIONWIDE LLOYDS |
|Common Stock: 1,000 | |Common Stock: 8,506,800 | |Common Stock: 1,000 Shares| | |
|------------ Shares | |------------ Shares | |------------ | | |
| | | | | |=========| |
| Cost | | Cost | | Cost | || | A TEXAS LLOYDS |
| ---- | | ---- | | ---- | || | |
|Employers- | |Employers- | |Employers- | || | |
| 80% $1,828,478 | |100% $18,683,300| |100% $176,763,000| || | |
- --------------------------- --------------------------- ---------------------------- || ---------------------------
| ||
--------------------------------------------------------------------- ||
| | | ||
- --------------------------- | --------------------------- | ---------------------------- | || ---------------------------
| WAUSAU BUSINESS | | | COMPANIES AGENCY | | | COUNTRYWIDE SERVICES | | || | |
| INSURANCE COMPANY | | | OF KENTUCKY, INC. | | | CORPORATION | | || | |
|Common Stock: 10,900,000 | | |Common Stock: 1,000 | | |Common Stock: 100 Shares | | || | COMPANIES |
|------------ Shares | | |------------ Shares | | |------------ | | || | AGENCY OF |
| |---|---| | |---| | | ||==| TEXAS, INC. |
| Cost | | | Cost | | | Cost | | || | |
| ---- | | | ---- | | | ---- | | || | |
|WSC-100% $33,800,000| | |WSC-100% $1,000 | | |WSC-100% $145,852 | | || | |
- --------------------------- | --------------------------- | ---------------------------- | || ---------------------------
| | | ||
- --------------------------- | --------------------------- | ---------------------------- | || ---------------------------
| WAUSAU UNDERWRITERS | | | COMPANIES AGENCY | | | WAUSAU GENERAL | | || | |
| INSURANCE COMPANY | | | OF MASSACHUSETTS, INC. | | | INSURANCE COMPANY | | || | |
|Common Stock: 8,750 | | |Common Stock: 1,000 | | |Common Stock: 200,000 | | || | COMPANIES ANNUITY |
|------------ Shares | | |------------ Shares | | |------------ Shares | | || | AGENCY OF |
| |---|---| | |---| | | ====| TEXAS, INC. |
| Cost | | | Cost | | | Cost | | | |
| ---- | | | ---- | | | ---- | | | |
|WSC-100% $69,560,006| | |WSC-100% $1,000 | | |WSC-100% $39,000,000 | | | |
- --------------------------- | --------------------------- | ---------------------------- | ---------------------------
| | |
- --------------------------- | --------------------------- | ---------------------------- | ---------------------------
| GREATER LA CROSSE | | | COMPANIES AGENCY | | | WAUSAU INTERNATIONAL | | | AMERICAN MARINE |
| HEALTH PLANS, INC. | | | OF NEW YORK, INC. | | | UNDERWRITERS | | | UNDERWRITERS, INC. |
|Common Stock: 3,000 | | |Common Stock: 1,000 | | |Common Stock: 1,000 | | |Common Stock: 20 |
|------------ Shares | | |------------ Shares | | |------------ Shares | | |------------ Shares |
| |---|---| | |---| | |------| |
| Cost | | | Cost | | | Cost | | | Cost |
| ---- | | | ---- | | | ---- | | | ---- |
|WSC-33.3% $1,461,761 | | |WSC-100% $1,000 | | |WSC-100% $10,000 | | |WSC-100% $248,222 |
- --------------------------- | --------------------------- | ---------------------------- | ---------------------------
| | |
- --------------------------- | --------------------------- | ---------------------------- | ---------------------------
| COMPANIES AGENCY | | | COMPANIES AGENCY | | | COMPANIES AGENCY | | | COMPANIES |
| OF ALABAMA, INC. | | | OF PENNSYLVANIA, INC. | | | INSURANCE SERVICES | | | AGENCY, INC. |
| | | | | | | OF CALIFORNIA | | | |
|Common Stock: 1,000 | | |Common Stock: 1,000 | | |Common Stock: 1,000 | | |Common Stock: 100 |
|------------ Shares | | |------------ Shares | |---|------------ Shares | |------|------------ Shares |
| |---|---| | | | | | |
| Cost | | | Cost | | | Cost | | Cost |
| ---- | | | ---- | | | ---- | | ---- |
|WSC-100% $100 | | |WSC-100% $100 | | |WSC-100% $1,000 | |WSC-100% $10,000 |
- --------------------------- | --------------------------- | ---------------------------- ---------------------------
| | |
- --------------------------- | --------------------------- | ---------------------------- ---------------------------
| COMPANIES AGENCY | | | COMPANIES AGENCY | | | PHYSICIANS PLUS | | PENSION ASSOCIATES |
| OF IDAHO, INC. | | | OF PHOENIX, INC. | | | INSURANCE | | OF WAUSAU, INC. |
| | | | | | | CORPORATION | |Common Stock: 1,000 |
|Common Stock: 1,000 | | |Common Stock: 1,000 | | |Common Stock: 7,150 | |------------ Shares |
|------------ Shares | | |------------ Shares | | |------------ Shares | | |
| |-------| | |---|Preferred Stock: 11,540 | | |
| | | | | | |--------------- Shares | |Companies Cost |
| | | | | | | | |Agency, Inc. ---- |
| Cost | | | Cost | | | Cost | |(Wisconsin)-100% $10,000 |
| ---- | | | ---- | | | ---- | | |
|WSC-100% $1,000 | | |WSC-100% $1,000 | | |WSC-33-1/3% $6,215,459| | |
- --------------------------- | --------------------------- | ---------------------------- ---------------------------
| |
| --------------------------- | ----------------------------
| | WAUSAU | | | PREVEA HEALTH |
| | (BERMUDA) LTD. | | | INSURANCE PLAN, INC. |
| | Common Stock: 120,000 | | |Common Stock: 3,000 Shares|
| | ------------- Shares | | |------------ |
----| | ----| |
| | | |
| Cost | | Cost |
| ---- | | ---- |
| WSC-100% $5,000,000| |WSC-33-1/3% $500,000 |
--------------------------- ----------------------------
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
NATIONWIDE INSURANCE ENTERPRISE(R) (middle)
<S> <C> <C>
-----------------------------------------------------------------------------
| |
| |
| NATIONWIDE MUTUAL |
=======| INSURANCE COMPANY |================================================
| (CASUALTY) |
| |
| |
-----------------------------------------------------------------------------
| || |
| || -------------------------------------------------------------
| || ---------------------------------------------------------------------------------------
| || | |
- -------------------------------- || | -------------------------------- --------------------------------
| ALLNATIONS, INC. | || | | NATIONWIDE GENERAL | | NECKURA HOLDING |
|Common Stock: 10,330 Shares | || | | INSURANCE COMPANY | | COMPANY (NECKURA) |
|------------ | || | | | | |
| Cost | || | |Common Stock: 20,000 | |Common Stock: 10,000 |
| ---- | || | |------------ Shares | |------------ Shares |
|Casualty-18.6% $88,320 | || | | Cost | | Cost |
|Fire-18.6% $88,463 | || | | ---- | | ---- |
|Preferred Stock: 1,466 Shares | || |----|Casualty-100% $5,944,422 | ---------|Casualty-100% $87,943,140 |
|--------------- | || | | | | | |
| Cost | || | | | | | |
| ---- | || | | | | | |
|Casualty-6.8% $100,000 | || | | | | | |
|Fire-6.8% $100,000 | || | | | | | |
- -------------------------------- || | -------------------------------- | --------------------------------
|| | |
- -------------------------------- || | -------------------------------- | --------------------------------
| FARMLAND MUTUAL | || | | NATIONWIDE PROPERTY | | | NECKURA |
| INSURANCE COMPANY | || | | AND CASUALTY | | | INSURANCE COMPANY |
|Guaranty Fund | || | | INSURANCE COMPANY | | | |
|------------ |========= |----|Common Stock: 60,000 | |--------|Common Stock: 6,000 |
|Certificate |-------- | |------------ Shares | | |------------ Shares |
|----------- Cost | | | | Cost | | | Cost |
| ---- | | | | ---- | | |Neckura- ---- |
|Casualty $500,000 | | | |Casualty-100% $6,000,000 | | |100% DM 6,000,000 |
- -------------------------------- | | -------------------------------- | --------------------------------
| | | |
- -------------------------------- | | -------------------------------- | --------------------------------
| F & B, INC. | | | | COLONIAL INSURANCE | | | NECKURA LIFE |
| | | | | COMPANY OF WINCONSIN | | | INSURANCE COMPANY |
|Common Stock: 1 Share | | | | (COLONIAL) | | | |
|------------ | ------| |----|Common Stock: 1,750 | |--------|Common Stock: 4,000 |
| Cost | | | |------------ Shares | | |------------ Shares |
| ---- | | | | Cost | | | Cost |
|Farmland | | | | ---- | | | ---- |
|Mutual-100% $10 | | | |Casualty-100% $41,750,000 | | |Neckura-100% DM 15,825,681 |
- -------------------------------- | | -------------------------------- | --------------------------------
| | |
- -------------------------------- | | -------------------------------- | --------------------------------
| COOPERATIVE SERVICE | | | | SCOTTSDALE | | | NECKURA GENERAL |
| COMPANY | | | | INSURANCE COMPANY | | | INSURANCE COMPANY |
|Common Stock: 600 Shares | | | | (SIC) | | | |
|------------ | | | |Common Stock: 30,136 | | |Common Stock: 1,500 |
| Cost |-------- |----|------------ Shares | ---- |--------|------------ Shares |
| ---- | | | Cost | | | | Cost |
|Farmland $3,506,173 | | | ---- | | | | ---- |
|Mutual-100% | | |Casualty-100% $150,000,000 | | | |Neckura-100% DM 1,656,925 |
| | | | | | | | |
| | | | | | | | |
- -------------------------------- | -------------------------------- | | --------------------------------
| | |
- -------------------------------- | -------------------------------- | | --------------------------------
| NATIONWIDE AGRIBUSINESS | | | SCOTTSDALE | | | | COLUMBUS INSURANCE |
| INSURANCE COMPANY | | | SURPLUS LINES | | | | BROKERAGE AND SERVICE |
|Common Stock: 1,000,000 | | | INSURANCE COMPANY | | | | GmbH |
|------------ Shares |------------ | | Common Stock: 100,000 | | | |Common Stock: 1 Share |
| | | | ------------ Shares | ---| |--------|------------ |
| Cost | | | | | | | Cost |
|Casualty-99.9% ---- | | | Cost | | | | ---- |
|Other Capital: $26,714,335 | | | ---- | | | |Neckura-100% DM 51,639 |
|------------- | | | SIC-100% $6,000,000 | | | | |
|Casualty-Ptd. $ 713,576 | | | | | | | |
- -------------------------------- | -------------------------------- | | --------------------------------
| | |
- -------------------------------- | -------------------------------- | | --------------------------------
| NATIONAL CASUALTY | | | NATIONAL PREMIUM & | | | | LEBEN DIREKT |
| COMPANY | | | BENEFIT ADMINISTRATION | | | | INSURANCE COMPANY |
| (NC) | | | COMPANY | | | | |
|Common Stock: 100 Shares | | |Common Stock: 10,000 | | | |Common Stock: 4,000 Shares |
|------------ |------------- |------------ Shares |----- ---------|------------ |
| Cost | | Cost | | | Cost |
| ---- | | ---- | | | ---- |
|Casualty-100% $67,442,439 | |Scottsdale-100% $10,000 | | |Neckura-100% DM 4,000,000 |
| | | | | | |
| | | | | | |
- -------------------------------- -------------------------------- | --------------------------------
| |
- -------------------------------- -------------------------------- | --------------------------------
| NCC OF AMERICA, LTD. | | SVM SALES | | | AUTO DIREKT |
| (INACTIVE) | | GmbH | | | INSURANCE COMPANY |
| | | | | | |
| | |Common Stock: 50 Shares | | |Common Stock: 1,500 Shares |
| | |------------ |----------------- |------------ |
| | | Cost | | Cost |
|NC-100% | | ---- | | ---- |
| | |Neckura-100% DM 50,000 | |Neckura-100% DM 1,643,149 |
| | | | | |
| | | | | |
- -------------------------------- -------------------------------- --------------------------------
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
(right side)
<S> <C> <C> <C>
------------------------
| NATIONWIDE INSURANCE |
| ENTERPRISE FOUNDATION|
| |
| MEMBERSHIP |
| NONPROFIT |
| CORPORATION |
------------------------
-----------------------------------------------------------------------------
| |
| |
| NATIONWIDE MUTUAL |
=======| FIRE INSURANCE COMPANY |
| (FIRE) |
| |
| |
-----------------------------------------------------------------------------
|
- --------------- --------------------------------------------------
| |
- ----------------------------------------------------------------------------------------------------------------- |
| | | |
| -------------------------------- | -------------------------------- ----------------------------------
| | SCOTTSDALE | | | NATIONWIDE | | NATIONWIDE |
| | INDEMNITY COMPANY | | | COMMUNITY URBAN | | CORPORATION |
| | | | | REDEVELOPMENT | | |
| | | | | CORPORATION | |Common Stock: Control: |
| |Common Stock: 50,000 | | |Common Stock: 10 Shares | |------------ ------- |
|-----|------------ Shares | |----|------------ | |$13,642,432 100% |
| | Cost | | | Cost | | Shares Cost |
| | ---- | | | ---- | | ------ ---- |
| |Casualty-100% $8,800,000 | | |Casualty-100% $1,000 | |Casualty 12,992,922 $751,352,485|
| | | | | | |Fire 649,510 24,007,936|
| | | | | | | (See Page 2) |
| -------------------------------- | -------------------------------- ----------------------------------
| |
| -------------------------------- | --------------------------------
| | NATIONWIDE | | | INSURANCE |
| | INDEMNITY COMPANY | | | INTERMEDIARIES, INC. |
| | | | | |
|-----|Common Stock: 28,000 | |----|Common Stock: 1,615 |
| |------------ Shares | | |------------ Shares |
| | Cost | | | Cost |
| | ---- | | | ---- |
| |Casualty-100% $294,529,000 | | |Casualty-100% $1,615,000 |
| -------------------------------- | --------------------------------
| |
| -------------------------------- | --------------------------------
| | LONE STAR | | | NATIONWIDE CASH |
| | GENERAL AGENCY, INC. | | | MANAGEMENT COMPANY |
| | | | |Common Stock: 100 Shares |
------|Common Stock: 1,000 | |----|------------ |
| |------------ Shares | | | Cost |
| | Cost | | | ---- |
| | ---- | | |Casualty-90% $9,000 |
| |Casualty-100% $5,000,000 | | |NW Adv. Serv. 1,000 |
| -------------------------------- | --------------------------------
| || |
| -------------------------------- | --------------------------------
| | COLONIAL COUNTY MUTUAL | | | CALIFORNIA CASH |
| | INSURANCE COMPANY | | | MANAGEMENT |
| | | | | (Inactive) |
| |Surplus Debentures | | | |
| |------------------ | |----| |
| | Cost | | | |
| | ---- | | | |
| |Colonial $500,000 | | |Casualty-100% |
| |Lone Star 150,000 | | | |
| -------------------------------- | --------------------------------
| |
| -------------------------------- | --------------------------------
| | TIG COUNTRYWIDE | | | THE BEAK AND |
| | INSURANCE COMPANY | | | WIRE CORPORATION |
| |Common Stock 12,500 | | | |
-----|------------ Shares | | |Common Stock: 750 Shares |
| | | -----|------------ |
| | Cost | | | Cost |
| | ---- | | | ---- |
| |Casualty-100% $215,273,000 | | |Casualty-100% $1,419,000 |
| | | | | |
| -------------------------------- | | |
| | --------------------------------
| |
| -------------------------------- | --------------------------------
| | NATIONWIDE INSURANCE | | | NATIONWIDE/DISPATCH LLC |
| | ENTERPRISE SERVICES, LTD. | | | |
| | | | | |
| |Single Member Limited | | | |
- - - |Liability Company | - - -| |
| | | |
| | | |
|Casualty-100% | |Casualty-90% |
| | | |
-------------------------------- | |
--------------------------------
Subsidiary Companies -- Solid Line
Contractual Association -- Double Lines
Limited Liability Company -- Dotted Line
December 31, 1997
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
(Left Side)
------------------------------------------------
| EMPLOYERS INSURANCE |
| OF WAUSAU |==========================================
| A MUTUAL COMPANY |
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
| | |
--------------------------- --------------------------- ---------------------------
| NATIONWIDE LIFE INSURANCE | | NATIONWIDE | | NATIONWIDE FINANCIAL |
| COMPANY (NW LIFE) | | FINANCIAL SERVICES | | INSTITUTION DISTRIBUTORS |
| | | CAPITAL TRUST | | AGENCY, INC. (NFIDAI) |
| Common Stock: 3,814,779 | | Preferred Stock: | | Common Stock: 1,000 |
| ------------ Shares | | --------------- | | ------------ Shares |
| | | | | |
| NFS--100% | | NFS--100% | | NFS--100% |
--------------------------- --------------------------- ---------------------------
| ||
--------------------------- | --------------------------- --------------------------- || --------------------------
| NATIONWIDE LIFE AND | | | NATIONWIDE | | FINANCIAL HORIZONS | || | |
| ANNUITY INSURANCE COMPANY | | | ADVISORY SERVICES, INC. | | DISTRIBUTORS AGENCY | || | |
| | | | (NW ADV. SERV.) | | OF ALABAMA, INC. | || | |
| Common Stock: 66,000 | | | Common Stock: 7,676 | | Common Stock: 10,000 | || | FINANCIAL HORIZONS |
| ------------ Shares |--|--| ------------ Shares |==|| | ------------ Shares |--||==| DISTRIBUTORS AGENCY |
| | | | | || | | || | OF OHIO, INC. |
| Cost | | | Cost | || | Cost | || | |
| ---- | | | ---- | || | ---- | || | |
| NW Life -100% $58,070,003 | | | NW Life -100% $5,996,261 | || | NFIDAI -100% $100 | || | |
--------------------------- | --------------------------- || --------------------------- || --------------------------
| || ||
--------------------------- | --------------------------- || --------------------------- || --------------------------
| NWE, INC. | | | NATIONWIDE | || | LANDMARK FINANCIAL | || | |
| | | | INVESTORS SERVICES, INC. | || | SERVICES OF | || | |
| | | | | || | NEW YORK, INC. | || | |
| Common Stock: 100 | | | Common Stock: 5 Shares | || | Common Stock: 10,000 | || | FINANCIAL HORIZONS |
| ------------ Shares |--| | ------------ |==|| | ------------ Shares |--||==| DISTRIBUTORS AGENCY |
| | | | | || | | || | OF OKLAHOMA, INC. |
| Cost | | | Cost | || | Cost | || | |
| ---- | | | ---- | || | ---- | || | |
| NW Life -100% $35,971,375 | | | NW Adv. Serv. -100% $5,000| || | NFIDAI -100% $10,100 | || | |
--------------------------- | --------------------------- || --------------------------- || --------------------------
| || ||
--------------------------- | --------------------------- || --------------------------- || --------------------------
| NATIONWIDE INVESTMENT | | | FINANCIAL HORIZONS | || | FINANCIAL HORIZONS | || | |
| SERVICES CORPORATION | | | INVESTMENT TRUST | || | SECURITIES CORP. | || | |
| | | | | || | | || | |
| Common Stock: 5,000 | | | | || | Common Stock: 10,000 | || | FINANCIAL HORIZONS |
| ------------ Shares |--| | |==|| | ------------ Shares |--||==| DISTRIBUTORS AGENCY |
| | | | | || | | || | OF TEXAS, INC. |
| Cost | | | | || | Cost | || | |
| ---- | | | | || | ---- | || | |
| NW Life -100% $529,728 | | | COMMON LAW TRUST | || | NFIDAI -100% $153,000 | || | |
--------------------------- | --------------------------- || --------------------------- || --------------------------
| || ||
--------------------------- | --------------------------- || --------------------------- || --------------------------
| NATIONWIDE REALTY | | | NATIONWIDE | || | AFFILIATE AGENCY, INC. | || | |
| PROPERTIES, LTD. | | | INVESTING | || | | || | |
| | | | FOUNDATION | || | | || | |
| Units: | | | | || | Common Stock: 100 | || | AFFILIATE |
| ------ - -| | |==|| | ------------ Shares |--||==| AGENCY OF |
| | | | | || | | | OHIO, INC. |
| | | | | || | Cost | | |
| NW Life -90% | | | | || | ---- | | |
| NW Mutual-10% | | | COMMON LAW TRUST | || | NFIDAI -100% $100 | | |
--------------------------- | --------------------------- || --------------------------- --------------------------
| ||
--------------------------- | --------------------------- ||
| NATIONWIDE | | | NATIONWIDE | ||
| PROPERTIES, LTD. | | | INVESTING | ||
| | | | FOUNDATION II | ||
| Units: - -| | | ||
| ------ | | |==||
| | | | ||
| | | | ||
| NW Life -97.6% | | | ||
| NW Mutual -2.4% | | COMMON LAW TRUST | ||
--------------------------- --------------------------- ||
||
--------------------------- ||
| NATIONWIDE | ||
| SEPARATE ACCOUNT | ||
| TRUST | ||
| | ||
| |__||
| |
| |
| |
| COMMON LAW TRUST |
---------------------------
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
(Center)
NATIONWIDE INSURANCE ENTERPRISE (R)
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------
| NATIONWIDE MUTUAL |
========================================| INSURANCE COMPANY |==========================================
| (CASUALTY) |
------------------------------------------------
|
| ----------------------------------------------------------
| |
---------------------------------------
| NATIONWIDE CORPORATION (NW CORP) |
| Common Stock: Control |
| ------------ ------- |
| 13,642,432 100% |
| Shares Cost |
| ------ ---- |
| Casualty 12,992,922 $751,352,485 |
| Fire 649,510 24,007,936 |
---------------------------------------
|-----------------------------------------------------------------
--------------------------- |
| NATIONWIDE FINANCIAL | |
| SERVICES, INC. (NFS) | |
| | |
| Common Stock: Control | |
| ------------ ------- | |
| | |
| | |
| Class A Public--100% | |
| Class B NW Corp--100% | |
--------------------------- |
| |
---------------------------------------------------------------------- |
| | | |
--------------------------- --------------------------- --------------------------- | -------------------------
| IRVIN L. SCHWARTZ | | PUBLIC EMPLOYEES BENEFIT | | NEA VALUEBUILDER | | | NATIONWIDE GLOBAL |
| & ASSOCIATES | | SERVICES CORPORATION | | INVESTOR SERVICES, INC. | | | HOLDINGS, INC. |
| | | (PEBSCO) | | (NEA) | | | |
| Common Stock: Control | | Common Stock: 236,494 |==|| | Common Stock: 500 |= || | | Common Stock: 1 Share |
| ------------ ------- | | ------------ Shares | || | ------------ Shares | || |--| ------------ |
| | | | || | | || | | |
| | | | || | | || | | Cost |
| Class A Other -100% | | | || | | || | | ---- |
| Class B NFS -100% | | NFS -100% | || | NFS -100% | || | | NW Corp-100% $7,000,00 |
- ---------------------------- ---------------------------- || ---------------------------- || | --------------------------
--------------------------- || --------------------------- || |
| PEBSCO OF | || | NEA VALUEBUILDER | || | --------------------------
| ALABAMA | || | INVESTOR SERVICES | || | | MRM INVESTMENT, INC. |
| | || | OF ALABAMA, INC. | || | | |
| Common Stock: 100,000 | || | Common Stock: 500 | || | | |
| ------------ Shares |--|| | ------------ Shares |--|| __ | Common Stock: 1 Share |
| | || | | || | ----------- |
| Cost | || | Cost | || | |
| ---- | || | ---- | || | Cost |
| PEBSCO -100% $1,000 | || | NEA -100% $5,000 | || | ---- |
--------------------------- || --------------------------- || | NW Corp.-100% $7,000,000|
|| || --------------------------
--------------------------- || --------------------------- ||
| PEBSCO OF | || | NEA VALUEBUILDER | ||
| ARKANSAS | || | INVESTOR SERVICES | ||
| | || | OF ARIZONA, INC. | ||
| Common Stock: 50,000 | || | Common Stock: 100 | ||
| ------------ Shares |--|| | ------------ Shares |--||
| | || | | ||
| Cost | || | Cost | ||
| ---- | || | ---- | ||
| PEBSCO -100% $500 | || | NEA -100% $1,000 | ||
--------------------------- || --------------------------- ||
|| ||
--------------------------- || --------------------------- ||
| PEBSCO OF MASSACHUSETTS | || | NEA VALUEBUILDER | ||
| INSURANCE AGENCY, INC. | || | INVESTOR SERVICES | ||
| | || | OF MONTANA, INC. | ||
| Common Stock: 1,000 | || | Common Stock: 500 | ||
| ------------ Shares |--|| | ------------ Shares |--||
| | || | | ||
| Cost | || | Cost | ||
| ---- | || | ---- | ||
| PEBSCO -100% $1,000 | || | NEA -100% $500 | ||
--------------------------- || --------------------------- ||
|| ||
--------------------------- || --------------------------- || -------------------------
| PEBSCO OF | || | NEA VALUEBUILDER | || | NEA VALUEBUILDER |
| MONTANA | || | INVESTOR SERVICES | || | INVESTOR SERVICES |
| | || | OF NEVADA, INC. | || | OF OHIO, INC. |
| Common Stock: 500 | || | Common Stock: 500 | || | |
| ------------ Shares |--|| | ------------ Shares |--||====| |
| | || | | || | |
| Cost | || | Cost | || | |
| ---- | || | ---- | || | |
| PEBSCO -100% $500 | || | NEA -100% $500 | || | |
--------------------------- || --------------------------- || --------------------------
|| ||
--------------------------- || --------------------------- || -------------------------
| PEBSCO OF | || | NEA VALUEBUILDER | || | NEA VALUEBUILDER |
| NEW MEXICO | || | INVESTOR SERVICES | || | INVESTOR SERVICES |
| | || | OF WYOMING, INC. | || | OF OKLAHOMA, INC. |
| Common Stock: 1,000 | || | Common Stock: 500 | || | |
| ------------ Shares |--|| | ------------ Shares |--||====| |
| | || | | || | |
| Cost | || | Cost | || | |
| ---- | || | ---- | || | |
| PEBSCO -100% $1,000 | || | NEA -100% $500 | || | |
--------------------------- || --------------------------- || --------------------------
|| ||
--------------------------- || --------------------------- || --------------------------
| | || | NEA VALUEBUILDER | || | NEA VALUEBUILDER |
| | || | SERVICES INSURANCE | || | INVESTOR SERVICES |
| PEBSCO OF | || | AGENCY, INC. | || | OF TEXAS, INC. |
| TEXAS, INC. | || | Common Stock: 100 | || | |
| |==|| | ------------ Shares |--||=== | |
| | | | | |
| | | Cost | | |
| | | ---- | | |
| | | NEA -100% $1,000 | | |
--------------------------- --------------------------- --------------------------
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
(Right)
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------
| NATIONWIDE MUTUAL |
========================================| FIRE INSURANCE COMPANY |
| (FIRE) |
------------------------------------------------
|
- -----------------------------------------------------------------|
- ----------------------------------------------------------------------------------------------
| | |
--------------------------- ------------------------------ ------------------------------
| GATES, MCDONALD | | EMPLOYERS LIFE INSURANCE | | NATIONWIDE |
| & COMPANY (GATES) | | OF WAUSAU (ELIOW) | | HEALTH PLANS, INC. (NHP) |
| | | | | |
| Common Stock: 254 | | Common Stock: 250,000 | | Common Stock: 100 |
|-- | ------------ Shares | |--| ------------ Shares | |--| ------------ Shares |
| | | | | | | | |
| | Cost | | | Cost | | | Cost |
| | ---- | | | ---- | | | ---- |
| | NW CORP. -100% $25,683,532 | | | NW CORP. -100% $126,509,480 | | | NW CORP. -100% $14,603,732 |
| ----------------------------- | ------------------------------ | ------------------------------
| | |
| --------------------------- | ------------------------------ | ------------------------------
| | GATES, MCDONALD & COMPANY | | | WAUSAU PREFERRED | | | NATIONWIDE MANAGEMENT |
| | OF NEW YORK, INC. | | | HEALTH INSURANCE CO. | | | SYSTEMS, INC. |
| | | | | | | | |
| | Common Stock: 3 | | | Common Stock: 200 | | | Common Stock: 100 |
|-- | ------------ Shares | |--| ------------ Shares | |--| ------------ Shares |
| | | | | | | |
| | Cost | | Cost | | | NHP Cost |
| | ---- | | ---- | | | ---- |
| | GATES -100% $106,947 | | ELIOW -100% $57,413,193 | | | Inc. -100% $25,149 |
| ----------------------------- ------------------------------ | ------------------------------
| |
| ----------------------------- | ------------------------------
| | GATES, MCDONALD & COMPANY | | | NATIONWIDE |
| | OF NEVADA | | | AGENCY, INC. |
| | | | | |
| | Common Stock: 40 | | | Common Stock: 100 |
|-- | ------------ Shares | |--| ------------ Shares |
| | | | |
| | Cost | | Cost |
| | ---- | | NHP ---- |
| | Gates -100% $93,750 | | Inc. -99% $116,077 |
| ----------------------------- ------------------------------
|
| -----------------------------
| | GATESMCDONALD |
| | HEALTH PLUS, INC. |
| | |
| | Common Stock: 200 |
|-- | ------------ Shares |
| |
| Cost |
| ---- |
| Gates -100% $2,000,000 |
-----------------------------
Subsidiary Companies -- Solid Line
Contractual Association -- Double Line
Limited Liability Company -- Dotted Line
December 31, 1997
Page 2
</TABLE>
<PAGE> 59
Item 27. NUMBER OF CONTRACT OWNERS
The number of Contract Owners of Qualified and Non-Qualified
Contracts as of January 31, 1998 was 968 and 1,081 respectively.
Item 28. INDEMNIFICATION
Provision is made in the Company's Amended and Restated Code of
Regulations and expressly authorized by the General Corporation
Law of the State of Ohio, for indemnification by the Company of
any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a
director, officer or employee of the Company, against expenses,
including attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, to the extent and
under the circumstances permitted by the General Corporation Law
of the State of Ohio.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Act") may be permitted to directors,
officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITER
(a) Investment Companies For Which Van Kampen American Capital
Distributors Inc. Acts As Principal Underwriter Or Depositor
as of March 24, 1998
Van Kampen American Capital U.S. Government Trust
Van Kampen American Capital U.S. Government Fund
Van Kampen American Capital Tax Free Trust
Van Kampen American Capital Insured Tax Free Income Fund
Van Kampen American Capital Tax Free High Income Fund
Van Kampen American Capital California Insured Tax Free Fund
Van Kampen American Capital Municipal Income Fund
Van Kampen American Capital Intermediate Term Municipal
Income Fund
Van Kampen American Capital Florida Insured Tax Free Income
Fund
Van Kampen American Capital New York Tax Free Income Fund
Van Kampen American Capital Trust
Van Kampen American Capital High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund
Van Kampen American Capital Equity Trust
Van Kampen American Capital Utility Fund
Van Kampen American Capital Value Fund
Van Kampen American Capital Great American Companies Fund
Van Kampen American Capital Growth Fund
Van Kampen American Capital Prospector Fund
Van Kampen American Capital Aggressive Growth Fund
Van Kampen American Capital Foreign Securities Fund
Van Kampen American Capital Pennsylvania Tax Free Income Fund
Van Kampen American Capital Tax Free Money Fund
Van Kampen American Capital Prime Rate Income Trust
Van Kampen American Capital Senior Floating Rate Fund
Van Kampen American Capital Comstock Fund
Van Kampen American Capital Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Enterprise Fund
Van Kampen American Capital Equity Income Fund
Van Kampen American Capital Limited Maturity Government Fund
Van Kampen American Capital Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund
Van Kampen American Capital Growth and Income Fund
Van Kampen American Capital Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund
Van Kampen American Capital Life Investment Trust
Van Kampen American Capital Asset Allocation Portfolio
Van Kampen American Capital Domestic Income Portfolio
Van Kampen American Capital Emerging Growth Portfolio
Van Kampen American Capital Enterprise Portfolio
Van Kampen American Capital Global Equity Portfolio
Van Kampen American Capital Government Portfolio
Van Kampen American Capital Growth and Income Portfolio
Van Kampen American Capital Money Market Portfolio
Van Kampen American Capital Strategic Stock Portfolio
85 of 99
<PAGE> 60
Morgan Stanley Real Estate Securities Portfolio
Van Kampen American Capital Pace Fund
Van Kampen American Capital Real Estate Securities Fund
Van Kampen American Capital Reserve Fund
Van Kampen American Capital Tax - Exempt Trust
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital U.S. Government Trust for Income
Van Kampen American Capital World Portfolio Series Trust
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
Morgan Stanley Fund, Inc.
Morgan Stanley Aggressive Equity Fund
Morgan Stanley American Value Fund
Morgan Stanley Asian Growth Fund
Morgan Stanley Emerging Markets Fund
Morgan Stanley Global Equity Allocation Fund
Morgan Stanley Global Fixed Income Fund
Morgan Stanley Government Obligations Money Market Fund
Morgan Stanley High Yield Fund
Morgan Stanley International Magnum Fund
Morgan Stanley Latin American Fund
Morgan Stanley Money Market Fund
Morgan Stanley U.S. Real Estate Fund
Morgan Stanley Value Fund
Morgan Stanley Worldwide High Income Fund
Insured Municipals Income Trust
Arizona Insured Municipals Income Trust
California Insured Municipals Income Trust
Colorado Insured Municipals Income Trust
Connecticut Insured Municipals Income Trust
Florida Insured Municipals Income Trust
Georgia Insured Municipals Income Trust
Kentucky Investors' Quality Tax-Exempt Trust
Maryland Investors' Quality Tax-Exempt Trust
Massachusetts Insured Municipals Income Trust
Michigan Insured Municipals Income Trust
Minnesota Insured Municipals Income
Missouri Insured Municipals Income Trust
New Jersey Insured Municipals Income Trust
New York Insured Municipals Income Trust
North Carolina Investors' Quality Tax-Exempt Trust
Ohio Insured Municipals Income Trust
Pennsylvania Insured Municipals Income Trust
South Carolina Investors' Quality Tax-Exempt Trust
Tennessee Insured Municipals Income Trust
Virginia Investors' Quality Tax-Exempt Trust
Van Kampen American Capital Insured Income Trust
Internet Trust
Strategic Ten Trust, United States Portfolio
Strategic Ten Trust, United Kingdom
Strategic Ten Trust, Hong Kong
Strategic Five Trust, United States Portfolio
Strategic Thirty Trust Global Portfolio
Great International Firms Trust
Blue Chip Opportunity and Treasury Trust
Blue Chip Opportunity Trust
Baby Boomer Opportunity Trust
86 of 99
<PAGE> 61
Global Energy Trust
Brand Name Equity Trust
Strategic Picks Opportunity Trust
International Assets Advisory Corp. Global
Infrastructure and Utilities Growth Trust
Edward Jones Select Growth Trust
Banking Trust
Morgan Stanley High-Technology 35 Index Trust
MidCap Growth Trust
Small Cap Growth Trust
Real Estate Income and Growth Trust
OFFICERS
--------
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman Houston, TX
Philip N. Duff Chief Executive Officer Oakbrook Terrace, IL
John H. Zimmerman III President & Chief Operating Oakbrook Terrace, IL
Officer
Douglas B. Gehrman Executive Vice President Houston, TX
Ronald A. Nyberg Executive Vice President, General Oakbrook Terrace, IL
Counsel & Assistant Secretary
William R. Rybak Executive Vice President & Chief
Financial Officer
Paul R. Wolkenberg Executive Vice President Oakbrook Terrace, IL
Laurence J. Althoff Sr. Vice President & Controller Oakbrook Terrace, IL
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
John E. Doyle Sr. Vice President Oakbrook Terrace, IL
Richard G. Golod, Sr. Vice President Annapolis, MD
Scott E. Martin Sr. Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Secretary
Mark T. McGannon Sr. Vice President Oakbrook Terrace, IL
Charles G. Millington Sr. Vice President & Treasurer Oakbrook Terrace, IL
Walter E. Rein Sr. Vice President Oakbrook Terrace, IL
Colette M. Saucedo Sr. Vice President Houston, TX
Frederick Shepherd Sr. Vice President Houston, TX
Steven P. Sorenson Sr. Vice President Oakbrook Terrace, IL
Michael L. Stallard Sr. Vice President Oakbrook Terrace, IL
</TABLE>
87 of 99
<PAGE> 62
<TABLE>
<S> <C> <C>
Robert S. West Sr. Vice President Oakbrook Terrace, IL
Edward G. Wood, III Sr. Vice President,
Chief Operating Officer Oakbrook Terrace. IL
Glenn M. Cackovic 1st Vice President Laguna Niguel, CA
Eric J. Hargens 1st Vice President Orlando, FL
David S. Hogaboom 1st Vice President Oakbrook Terrace, IL
Dominic C. Martellaro 1st Vice President Danville, CA
Carl Mayfield 1st Vice President Lakewood, CO
Mark R. McClure 1st Vice President Oakbrook Terrace, IL
James J. Ryan 1st Vice President Oakbrook Terrace, IL
George J. Vogel 1st Vice President Oakbrook Terrace, IL
Patrick J. Woelfel 1st Vice President Oakbrook Terrace, IL
James K. Ambrosio Vice President Massapequa, NY
Brian P. Arcara Vice President Buffalo, NY
Sheldon Barker Vice President Moon, PA
Patricia A. Bettlach Vice President Chesterfield, MO
Carol S. Biegel Vice President Oakbrook Terrace, IL
Christopher M. Bisaillon Vice President Oakbrook Terrace, IL
Michael P. Boos Vice President Oakbrook Terrace, IL
James J. Boyne Vice President, Associate General Oakbrook Terrace, IL
Counsel & Assistant Secretary
Robert C. Brooks Vice President Oakbrook Terrace, IL
William F. Burke, Jr. Vice President Mendham, NJ
Loren Burket Vice President Plymouth, MN
Christine Cleary Byrum Vice President Tampa, FL
Joseph N. Caggiano Vice President New York, NY
Daniel R. Chambers Vice President Austin, TX
Richard J. Charlino Vice President Oakbrook Terrace, IL
Deanne Margaret Chiaro Vice President Oakbrook Terrace, IL
Scott A. Chriske Vice President Plano, TX
German Clavijo Vice President Atlanta, GA
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Michael Colston Vice President Louisville, KY
</TABLE>
88 of 99
<PAGE> 63
<TABLE>
<S> <C> <C>
Suzanne Cummings Vice President Oakbrook Terrace, IL
Nicholas Dalmaso Vice President, Associate General Oakbrook Terrace, IL
Counsel & Asst. Secretary
Daniel R. DeJong Vice President Oakbrook Terrace, IL
Tracey M. DeLusant Vice President New York, NY
Michael E. Eccleston Vice President Oakbrook Terrace, IL
Jonathan Eckard Vice President Tampa, FL
Huey P. Falgout, Jr. Vice President, Assistant Secretary
Sr. Attorney Houston, TX
Charles Edward Fisher Vice President Naperville, IL
William J. Fow Vice President Redding, CT
Nicholas J. Foxhoven Vice President Englewood, CO
Charles Friday Vice President Gibsonia, PA
Richard G. Golod Vice President Annapolis, MD
Timothy D. Griffith Vice President Kirkland, WA
Dalton L. Gustafson Vice President Bolton, Ma
Kyle D. Haas Vice President Oakbrook Terrace, IL
Daniel Hamilton Vice President Austin, TX
John A. Hanhauser Vice President Philadelphia, PA
John G. Hansen Vice President Oakbrook Terrace, IL
Calvin B. Hays Vice President Richmond, VA
Joseph Hays Vice President Cherry Hill, NJ
Daniel M. Hazard Vice President Huntington Beach, CA
Gregory Heffington Vice President Ft. Collins, CO
Susan J. Hill Vice President Oakbrook Terrace, IL
Thomas R. Hindelang Vice President Gilbert, AZ
Bryn M. Hoggard Vice President Houston, TX
Michael B. Hughes Vice President Oakbrook Terrace, IL
Robert S. Hunt Vice President Phoenix, MD
Lowell Jackson Vice President Norcross, GA
Kevin G. Jajuga Vice President Baltimore, MD
Steven T. Johnson Vice President Oakbrook Terrace, IL
Jeffrey S. Kinney Vice President Overland Park, KS
Dana R. Klein Vice President Oakbrook Terrace, IL
Frederick Kohly Vice President Miami, FL
David R. Kowalski Vice President & Director
of Compliance Oakbrook Terrace, IL
Richard D. Kozlowski Vice President Atlanta, GA
Bradford N. Langs Vice President Oakbrook Terrace, IL
Patricia D. Lathrop Vice President Tampa, FL
Brian Laux Vice President Staten Island, NY
Tony E. Leal Vice President Daphne, AL
S. William Lehew III Vice President Charlotte, NC
Eric Levinson Vice President San Francisco, CA
Jonathan Linstra Vice President Oakbrook Terrace, IL
Richard M. Lundgren Vice President Oakbrook Terrace, IL
Walter Lynn Vice President Flower Mound, TX
Linda S. MacAyeal Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Brooks D. McCartney Vice President Puyallup, WA
Anne Therese McGrath Vice President Los Gatos, CA
Maura A. McGrath Vice President New York, NY
John Mills Vice President Kenner, LA
Ted Morrow Vice President Dallas, TX
Robert Muller, Jr. Vice President Cypress, TX
Peter Nicholas Vice President Beverly, MA
Michael D. Ossmen Vice President Oakbrook Terrace, IL
Todd W. Page Vice President Oakbrook Terrace, IL
Gregory S. Parker Vice President Houston, TX
Christopher Petrungaro Vice President Oakbrook Terrace, IL
Anthony Piazza Vice President Old Bridge, NJ
Ronald E. Pratt Vice President Marietta, GA
Craig S. Prichard Vice President Fairlawn, OH
Daniel D. Reams Vice President Royal Oak, MI
Michael W. Rohr Vice President Oakbrook Terrace. IL
Jeffrey L. Rose Vice President Houston, TX
Suzette N. Rothberg Vice President Plymouth, MN
Jeffrey Rourke Vice President Oakbrook Terrace, IL
Thomas Rowley Vice President St. Louis, MO
Heather R. Sabo Vice President Richmond, VA
Stephanie Scarlata Vice President Bedford Corners, NY
Andrew J. Scherer Vice President Oakbrook Terrace, IL
Ronald J. Schuster Vice President Tampa, FL
</TABLE>
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<PAGE> 64
<TABLE>
<S> <C> <C>
Gwen L. Shaneyfalt Vice President Oakbrook Terrace, IL
Jeffrey C. Shirk Vice President Swampscott, MA
Traci T. Sorenson Vice President Oakbrook Terrace, IL
Kimberly M. Spangler Vice President Fairfax, VA
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
Gary R. Steele Vice President Philadelphia, PA
Richard Stefanec Vice President Los Angles, CA
James D. Stevens Vice President North Andover, MA
James M. Stilwell Vice President San Diego, CA
William C. Strafford Vice President Granger, IN
Mark A. Syswerda Vice President Oakbrook Terrace, IL
David A. Tabone Vice President Scottsdale, AZ
James C. Taylor Vice President Naperville, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Todd A. Volkman Vice President Austin, TX
Daniel B. Waldron Vice President Oakbrook Terrace, IL
Jeff Warland Vice President Oakbrook Terrace, IL
Robert A. Watson Vice President Oakbrook Terrace. IL
Weston B. Wetherell Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
Harold Whitworth, III Vice President Oakbrook Terrace, IL
Kirk Wiggins Vice President Arlington, TX
Thomas M. Wilson Vice President Oakbrook Terrace, IL
Barbara A. Withers Vice President Oakbrook Terrace, IL
David M. Wynn Vice President Phoenix, AZ
James R. Yount Vice President Mercer Island, WA
Patrick M. Zacchea Vice President Oakbrook Terrace, IL
Scott F. Becker Asst. Vice President Oakbrook Terrace, IL
Brian E. Binder Asst. Vice President Oakbrook Terrace, IL
Joan E. Blackwood Asst. Vice President Oakbrook Terrace, IL
Billie J. Bronaugh Asst. Vice President Houston, TX
Gregory T. Brunk Asst. Vice President Oakbrook Terrace, IL
Gina Costello Asst. Vice President Oakbrook Terrace, IL
Sarah K. Geiser Asst. Vice President Oakbrook Terrace, IL
Walter C. Gray Asst. Vice President Oakbrook Terrace, IL
Valri G. Hamilton Asst. Vice President Houston, TX
Laurie L. Jones Asst. Vice President Houston, TX
Robin R. Jordan Asst. Vice President Oakbrook Terrace, IL
Ivan R. Lowe Asst. Vice President Houston, TX
Pamela D. Meyer Asst. Vice President Phoenix, AZ
Susan M. Mini Asst. Vice President Oakbrook Terrace, IL
Brian K. Mitchell Asst. Vice President Oakbrook Terrace, IL
Stuart R. Moehlman Asst. Vice President Houston, TX
Steven R. Norvid Asst. Vice President Oakbrook Terrace, IL
Vincent M. Pellegrini Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
Regina Rosen Asst. Vice President Oakbrook Terrace, IL
Pamela S. Salley Asst. Vice President Houston, TX
Vanessa M. Sanchez Asst. Vice President Oakbrook Terrace, IL
Thomas J. Sauerborn Asst. Vice President New York, NY
Bruce Saxon Asst. Vice President Oakbrook Terrace, IL
David T. Saylor Asst. Vice President Oakbrook Terrace, IL
Christina L. Schmieder Asst. Vice President Oakbrook Terrace, IL
Lauren B. Sinai Asst. Vice President Oakbrook Terrace, IL
Kristen L. Transier Asst. Vice President Houston, TX
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
Sharon M. C. Wells Asst. Vice President Oakbrook Terrace, IL
Cathy Napoli Assistant Secretary Oakbrook Terrace, IL
Elizabeth M. Brown Officer Houston, TX
John Browning Officer Oakbrook Terrace, IL
Leticia George Officer Houston, TX
Sarah Kessler Officer Oakbrook Terrace, IL
William D. McLaughlin Officer Houston, TX
</TABLE>
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<PAGE> 65
<TABLE>
<S> <C> <C>
Rebecca Newman Officer Houston, TX
Larry Vickrey Officer Houston, TX
John Yovanovic Officer Houston, TX
</TABLE>
DIRECTORS
---------
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman 2800 Post Oak Blvd.
Houston, TX 77056
Philip N. Duff Chief Executive Officer One Parkview Plaza
Oakbrook Terrace, IL 60181
Ronald A. Nyberg Executive Vice President One Parkview Plaza
& General Counsel & Oakbrook Terrace, IL 60181
Assistant Secretary
William R. Rybak Executive Vice President One Parkview Plaza
& Chief Financial Officer Oakbrook Terrace, IL 60181
John H. Zimmerman III President & Chief One Parkview Plaza
Operating Officer Oakbrook Terrace, IL 60181
</TABLE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS
Robert O. Cline
Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, OH 43216
Item 31. MANAGEMENT SERVICES
Not Applicable
Item 32. UNDERTAKINGS
The Registrant hereby undertakes to:
(a) file a post-effective amendment to this registration
statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement
are never more than 16 months old for so long as payments
under the variable annuity contracts may be accepted;
(b) include either (1) as part of any application to purchase a
Contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional
Information, or (2) a post card or similar written
communication affixed to or included in the prospectus that
the applicant can remove to send for a Statement of
Additional Information; and
(c) deliver any Statement of Additional Information and any
financial statements required to be made available under
this form promptly upon written or oral request.
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<PAGE> 66
The Registrant represents that any of the Contracts which are
issued pursuant to Section 403(b) of the Code are issued by the
Company through the Registrant in reliance upon, and in compliance
with, a no-action letter issued by the Staff of the SEC to the
American Council of Life Insurance (publicly available November
28, 1988) permitting withdrawal restrictions to the extent
necessary to comply with Section 403(b)(11) of the Code.
The Company represents that the fees and the charges deducted
under the Contract in the aggregate are reasonable in relation to
the services rendered, the expenses expected to be incurred, and
the risks assumed by the Company.
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<PAGE> 67
Offered by
Nationwide Life Insurance Company
NATIONWIDE
LIFE INSURANCE COMPANY
NATIONWIDE
VARIABLE ACCOUNT - 3
DEFERRED
VARIABLE ANNUITY CONTRACT
PROSPECTUS
MAY 1, 1998
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<PAGE> 68
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors of Nationwide Life Insurance Company and Contract Owners
of the Nationwide Variable Account-3:
The audits referred to in our report on Nationwide Life Insurance Company (the
Company) dated January 30, 1998 included the related financial statement
schedules as of December 31, 1997, and for each of the years in the three-year
period ended December 31, 1997, included in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Services" in the Statement of Additional Information.
KPMG Peat Marwick LLP
Columbus, Ohio
April 29, 1998
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<PAGE> 69
<PAGE> 1
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions of dollars)
As of December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------- ------------- -------------- ---------------
Column A Column B Column C Column D
- ----------------------------------------------------------------------------- ------------- -------------- ---------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- ----------------------------------------------------------------------------- ------------- -------------- ---------------
Fixed maturity securities available-for-sale:
Bonds:
<S> <C> <C> <C>
U.S. Government and government agencies and authorities $ 3,859.7 $ 3,981.7 $ 3,981.7
States, municipalities and political subdivisions 1.6 1.6 1.6
Foreign governments 93.3 95.8 95.8
Public utilities 1,555.3 1,609.8 1,609.8
All other corporate 7,223.0 7,515.2 7,515.2
---------- ---------- ----------
Total fixed maturity securities available-for-sale 12,732.9 13,204.1 13,204.1
---------- ---------- ----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 67.8 78.0 78.0
Non-redeemable preferred stock - 2.4 2.4
---------- ---------- ----------
Total equity securities available-for-sale 67.8 80.4 80.4
---------- ---------- ----------
Mortgage loans on real estate, net 5,228.1 5,181.6 (1)
Real estate, net:
Investment properties 254.9 235.7 (1)
Acquired in satisfaction of debt 82.6 75.7 (1)
Policy loans 415.3 415.3
Other long-term investments 27.9 25.2 (2)
Short-term investments 358.4 358.4
---------- ----------
Total investments $19,167.9 $19,576.4
========== ==========
</TABLE>
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains (losses) of
investments in limited partnerships.
See accompanying independent auditors' report.
<PAGE> 2
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions of dollars)
As of December 31, 1997, 1996 and 1995 and for each of the years then ended
<TABLE>
<CAPTION>
- -------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- -------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Deferred Future policy Other policy
policy benefits, losses, Unearned claims and
acquisition claims and premiums benefits payable Premium
Segment costs loss expenses (1) (1) revenue
- ------------------------------- ------------------ -------------------- ------------------- ------------------ ---------------
1997: Variable Annuities $1,018.4 $ - $ -
Fixed Annuities 277.9 14,103.1 27.3
Life Insurance 472.9 2,683.4 178.1
Corporate and Other (103.8) 1,916.3 -
-------- ------------- ---------
Total $1,665.4 $18,702.8 $ 205.4
======== ============= =========
1996: Variable Annuities $ 792.1 $ - $ -
Fixed Annuities 242.0 13,388.9 24.0
Life Insurance 414.4 2,391.5 174.6
Corporate and Other (82.0) 1,820.2 -
-------- ------------- ---------
Total $1,366.5 $17,600.6 $ 198.6
======== ============= =========
1995: Variable Annuities $ 569.8 $ - $ -
Fixed Annuities 220.7 12,759.3 32.8
Life Insurance 366.9 2,282.6 166.3
Corporate and Other (136.9) 1,730.0 -
-------- ------------- ---------
Total $1,020.5 $ 16,771.9 $ 199.1
======== ============= =========
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
Column A Column G Column H Column I Column J Column K
- ---------------------------------------------------- -------------------- ------------------- ------------------ ----------------
Net investment Benefits, claims, Amortization Other
income losses and of deferred policy operating Premiums
Segment (2) settlement expenses acquisition costs expenses written
(2)
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
<C> <C> <C> <C> <C>
1997: Variable Annuities $ (26.8) $ 5.9 $ 87.8 $ 159.4
Fixed Annuities 1,098.2 846.7 39.8 85.4
Life Insurance 189.1 227.5 39.6 94.5
Corporate and Other 148.7 114.7 - 45.6
-------- ---------- ------- -------
Total $1,409.2 $ 1,194.8 $ 167.2 $ 384.9
======== ========== ======= =======
1996: Variable Annuities $ (21.4) $ 4.6 $ 57.4 $ 132.3
Fixed Annuities 1,050.6 838.5 38.6 79.7
Life Insurance 174.0 211.4 37.4 79.0
Corporate and Other 154.6 106.1 - 51.4
-------- ---------- ------- -------
Total $1,357.8 $ 1,160.6 $ 133.4 $ 342.4
======== ========== ======= =======
1995: Variable Annuities $ (17.6) $ 2.9 $ 26.3 $ 109.1
Fixed Annuities 1,002.7 805.0 29.5 80.3
Life Insurance 171.2 202.0 31.0 68.8
Corporate and Other 137.7 105.6 (4.1) 14.8
-------- ---------- ------- -------
Total $1,294.0 $ 1,115.5 $ 82.7 $ 273.0
======== ========== ======= =======
</TABLE>
- ----------
(1) Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
<PAGE> 3
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions of dollars)
As of December 31, 1997, 1996 and 1995 and for each of the years then ended
<TABLE>
<CAPTION>
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
--------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1997:
Life insurance in force $ 52,648.4 $13,678.7 $ 289.7 $ 39,259.4 0.7%
=========== ========= ======== =========== =======
Premiums:
Life insurance $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1%
Accident and health insurance 261.2 272.6 11.4 - N/A
----------- ---------- --------- ----------- -------
Total $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6%
=========== ========= ========= =========== =======
1996:
Life insurance in force $47,150.6 $11,164.6 $ 288.6 $ 36,274.6 0.8%
=========== ========= ======== =========== =======
Premiums:
Life insurance $ 225.6 $ 29.3 $ 2.3 $ 198.6 1.2%
Accident and health insurance 291.9 305.8 13.9 - N/A
----------- --------- -------- ----------- -------
Total $ 517.5 $ 335.1 $ 16.2 $ 198.6 8.2%
=========== ========= ======== =========== =======
1995:
Life Insurance in force $41,087.9 $ 8,935.7 $ 391.2 $ 32,543.4 1.2%
=========== ========= ======== =========== =======
Premiums:
Life insurance $ 221.3 $ 24.4 $ 2.2 $ 199.1 1.1%
Accident and health insurance 298.0 313.0 15.0 - N/A
----------- --------- -------- ----------- -------
Total $ 519.3 $ 337.4 $ 17.2 $ 199.1 8.6%
=========== ========= ======== =========== =======
</TABLE>
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
<PAGE> 4
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions of dollars)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------- ------------- -------------
Column A Column B Column C Column D Column E
- --------------------------------------------------- ----------------------------------------------- ------------- -------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end of
Description of period expenses accounts (1) period
- --------------------------------------------------- -------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997:
Valuation allowances - fixed maturity securities $ - $ 16.2 $ - $ 16.2 $ -
Valuation allowances - mortgage loans on real estate 51.0 (1.2) - 7.3 42.5
Valuation allowances - real estate 15.2 (4.1) - - 11.1
-------- ------ ------- ------- -------
Total $ 66.2 $ 10.9 $ - $ 23.5 $ 53.6
======== ====== ======= ======= =======
1996:
Valuation allowances - mortgage loans on real estate $ 49.1 $ 4.5 $ - $ 2.6 $ 51.0
Valuation allowances - real estate 25.8 (10.6) - - 15.2
-------- ------ ------- ------- -------
Total $ 74.9 $ (6.1) $ - $ 2.6 $ 66.2
======== ====== ======= ======= =======
1995:
Valuation allowances - fixed maturity securities $ - $ 8.9 $ - $ 8.9 $ -
Valuation allowances - mortgage loans on real estate 46.4 7.4 - 4.7 49.1
Valuation allowances - real estate 27.3 (1.5) - - 25.8
-------- ------ ------- ------- -------
Total $ 73.7 $ 14.8 $ - $ 13.6 $ 74.9
======== ====== ======= ======= =======
</TABLE>
- ----------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
See accompanying independent auditors' report.
<PAGE> 70
SIGNATURES
As required by the Securities Act of 1933, and the Investment Company Act of
1940, the Registrant, NATIONWIDE VARIABLE ACCOUNT-3, certifies that it meets the
requirements of Securities Act Rule 485(b) for effectiveness of this
Post-Effective Amendment and has caused this Post-Effective Amendment to be
signed on its behalf in the City of Columbus, and State of Ohio, on this 29th
day of April, 1998.
NATIONWIDE VARIABLE ACCOUNT-3
------------------------------------------------
(Registrant)
NATIONWIDE LIFE INSURANCE COMPANY
------------------------------------------------
(Depositor)
By/s/JOSEPH P. RATH
------------------------------------------------
Joseph P. Rath
Vice President- Product and Market Compliance
As required by the Securities Act of 1933, this Post-Effective Amendment has
been signed by the following persons in the capacities indicated on the 29th day
of April, 1998.
SIGNATURE TITLE
<TABLE>
<S> <C>
LEWIS J. ALPHIN Director
- -----------------------------------------
Lewis J. Alphin
A. I. BELL Director
- ----------------------------------------- --------
A. I. Bell
KEITH W. ECKEL Director
- -----------------------------------------
Keith W. Eckel
WILLARD J. ENGEL Director
- -----------------------------------------
Willard J. Engel
FRED C. FINNEY Director
- -----------------------------------------
Fred C. Finney
CHARLES L. FUELLGRAF, JR. Director
- -----------------------------------------
Charles L. Fuellgraf, Jr.
JOSEPH J. GASPER President/Chief
- -----------------------------------------
Joseph J. Gasper Operating Office and Director
DIMON R. McFERSON Chairman and Chief Executive Officer-
- -----------------------------------------
Dimon R. McFerson Nationwide Insurance Enterprise and Director
DAVID O. MILLER Chairman of the Board and Director
- -----------------------------------------
David O. Miller
YVONNE L. MONTGOMERY Director
- --------------------
Yvonne L. Montgomery
C. RAY NOECKER Director
- -----------------------------------------
C. Ray Noecker
ROBERT A. OAKLEY Executive Vice President-
- -----------------------------------------
Robert A. Oakley Chief Financial Officer
JAMES F. PATTERSON Director By: JOSEPH P. RATH
- ----------------------------------------- --------------------------------
James F. Patterson Joseph P. Rath, Attorney-in-Fact
ARDEN L. SHISLER Director
- -----------------------------------------
Arden L. Shisler
ROBERT L. STEWART Director
- -----------------------------------------
Robert L. Stewart
NANCY C. THOMAS Director
- -----------------------------------------
Nancy C. Thomas
HAROLD W. WEIHL Director
- -----------------------------------------
Harold W. Weihl
</TABLE>
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