<PAGE> 1
[NATIONWIDE LIFE INSURANCE LOGO]
NATIONWIDE(R)
VARIABLE
ACCOUNT-3
ANNUAL REPORT
TO
CONTRACT OWNERS
DECEMBER 31, 1997
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE: COLUMBUS, OHIO
<PAGE> 2
[NATIONWIDE LIFE INSURANCE LOGO]
NATIONWIDE LIFE INSURANCE COMPANY
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215 - 2220
[PICTURE OF JOSEPH J. GASPER]
PRESIDENT'S MESSAGE
We at Nationwide Life Insurance Company are pleased to bring you the
1997 annual report of the Nationwide Variable Account-3.
Equity markets ended a volatile season to record the third straight
year of gains topping the 20 percent mark. Additionally, returns on
fixed income investments were buoyed by declining inflation, steady
Federal Reserve policy and the positive outlook for lower budget
deficits.
The U.S. economy continues to be strong into 1998. However, there is
still much uncertainty about what effect the Southeast Asian crisis
will have on our economy during this year. The obvious result, we
believe, will be a slowing of economic growth due to reduced
exports, restrained pricing flexibility and lower corporate profits.
We expect the Federal Reserve will continue to stay on the sidelines
as the Southeast Asian economic turmoil plays out. At the same time,
low inflation and low interest rates should continue to provide a
healthy environment for financial assets.
We are committed to our customers as our most valuable asset. Our
commitment to you is to continue to add value to our products and
services to help you achieve your financial planning and retirement
goals. As always, we welcome and encourage your feedback.
/s/ Joseph J. Gasper, President
Joseph J. Gasper, President
3
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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>
4
<PAGE> 4
<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.
5
<PAGE> 5
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>
6
<PAGE> 6
<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>
7
<PAGE> 7
<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.
8
<PAGE> 8
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.
9
<PAGE> 9
(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.
10
<PAGE> 10
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
11
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE: ONE NATIONWIDE PLAZA - COLUMBUS, OHIO 43215-2220
Bulk Rate
U.S. Postage
PAID
Columbus, Ohio
Permit No. 521
Nationwide(R) is a registered federal service mark of
Nationwide Mutual Insurance Company.
