<PAGE> 1
[NATIONWIDE LOGO]
NATIONWIDE(R)
VARIABLE
ACCOUNT-3
ANNUAL REPORT
TO
CONTRACT OWNERS
DECEMBER 31, 1998
NATIONWIDE LIFE INSURANCE COMPANY
HOME OFFICE: COLUMBUS, OHIO
APO - 1545 - Z (12/98)
<PAGE> 2
[NATIONWIDE LOGO]
NATIONWIDE LIFE INSURANCE COMPANY
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215 - 2220
[PHOTO OF JOSEPH J. GASPER]
PRESIDENT'S MESSAGE
We at Nationwide Life Insurance Company are pleased to bring you the 1998 annual
report of the Nationwide Variable Account-3.
Equity markets again defied the odds in 1998 to tally a fourth straight year of
double-digit gains, as measured by the major indices. This surprise came
following the breathtaking correction during the third quarter that gave us a
broad double-digit retreat. Fixed income investments also provided respectable
returns in 1998, supported by the continued low inflationary environment and
favorable Federal Reserve actions.
The performance of the American economy continues strong into 1999. However, we
believe the persisting slump in Asia and recent difficulties in Latin America
will inevitably take their toll and dampen growth in the United States. This
moderation, we think, will be healthy for our economy and get us back to a more
sustainable growth level. We look for interest rates to continue within the
range of the recent past, and we expect inflation to remain subdued. Moreover,
we remain optimistic about long-term prospects for U.S. business activity;
holders of financial assets should continue to profit from the anticipated
favorable investment climate.
We are pleased you have chosen our Company to provide the investment products
and services to help you meet your retirement savings and financial planning
goals.
/s/ Joseph J. Gasper
Joseph J. Gasper, President
February 16, 1999
3
<PAGE> 3
NATIONWIDE VARIABLE ACCOUNT-3
STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at market value:
Van Kampen American Capital LIT - Asset Allocation Fund
2,365,967 shares (cost $27,200,098) ..................... $31,656,640
Van Kampen American Capital LIT - Domestic Income Fund
762,233 shares (cost $6,359,603) ........................ 6,707,650
Van Kampen American Capital LIT - Emerging Growth Fund
181,951 shares (cost $2,775,990) ........................ 4,115,742
Van Kampen American Capital LIT - Enterprise Fund
1,843,873 shares (cost $30,898,378) ..................... 41,284,309
Van Kampen American Capital LIT - Global Equity Fund
65,300 shares (cost $787,422) ........................... 862,608
Van Kampen American Capital LIT - Government Fund
436,209 shares (cost $3,876,586) ........................ 4,183,244
Van Kampen American Capital LIT - Money Market Fund
6,020,591 shares (cost $6,020,591) ...................... 6,020,591
Van Kampen American Capital LIT - Morgan Stanley Real
Estate Securities Portfolio 28,947 shares (cost $448,832) 398,316
-----------
Total assets ......................................... 95,229,100
ACCOUNTS PAYABLE ................................................. 977
-----------
CONTRACT OWNERS' EQUITY .......................................... $95,228,123
===========
</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 ................................ 332,781 $ 32.817146 $ 10,920,923 14%
Non-tax qualified ............................ 630,892 32.817146 20,704,075 14%
Van Kampen American Capital LIT -
Domestic Income Fund:
Tax qualified ................................ 83,850 19.461620 1,631,857 6%
Non-tax qualified ............................ 260,019 19.461620 5,060,391 6%
Van Kampen American Capital LIT -
Emerging Growth Fund:
Tax qualified ................................ 60,795 21.616956 1,314,203 36%
Non-tax qualified ............................ 129,602 21.616956 2,801,601 36%
Van Kampen American Capital LIT -
Enterprise Fund:
Tax qualified ................................ 258,320 50.513291 13,048,593 23%
Non-tax qualified ............................ 558,179 50.513291 28,195,458 23%
Van Kampen American Capital LIT -
Global Equity Fund:
Tax qualified ................................ 19,983 16.196384 323,652 20%
Non-tax qualified ............................ 33,277 16.196384 538,967 20%
Van Kampen American Capital LIT -
Government Fund:
Tax qualified ................................ 49,618 17.329001 859,830 7%
Non-tax qualified ............................ 189,945 17.329001 3,291,557 7%
Van Kampen American Capital LIT -
Money Market Fund:
Tax qualified ................................ 89,001 15.274640 1,359,458 4%
Non-tax qualified ............................ 303,632 15.274640 4,637,869 4%
Van Kampen American Capital LIT - Morgan
Stanley Real Estate Securities Portfolio:
Tax qualified ................................ 8,813 15.615675 137,621 (13)%
Non-tax qualified ............................ 16,694 15.615675 260,688 (13)%
======= =========
Reserves for annuity contracts in payout phase:
Tax qualified ................................ 1,930
Non-tax qualified ............................ 139,450
------------
$ 95,228,123
============
</TABLE>
* The annual return does not include contract charges satisfied by surrendering
units.
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, 1998 AND 1997
(UNDERLYING MUTUAL FUNDS OF VAN KAMPEN AMERICAN CAPITAL LIT)
<TABLE>
<CAPTION>
Total Asset Allocation Fund
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Investment activity:
Reinvested dividends ..................................... $ 462,441 2,882,784 36,927 1,323,309
Mortality, expense and administration
charges (note 2) ....................................... (1,266,400) (1,297,462) (429,630) (447,791)
----------- ----------- ---------- -----------
Net investment activity ................................ (803,959) 1,585,322 (392,703) 875,518
----------- ----------- ---------- -----------
Proceeds from mutual fund shares sold .................... 39,771,201 42,955,530 9,985,119 10,382,595
Cost of mutual fund shares sold .......................... (34,580,486) (40,204,323) (9,405,948) (10,464,852)
----------- ----------- ---------- -----------
Realized gain (loss) on investments .................... 5,190,715 2,751,207 579,171 (82,257)
Change in unrealized gain (loss) on investments .......... 8,994,987 4,412,174 3,129,573 1,899,930
----------- ----------- ---------- -----------
Net gain (loss) on investments ......................... 14,185,702 7,163,381 3,708,744 1,817,673
----------- ----------- ---------- -----------
Reinvested capital gains ................................. 1,466,481 9,294,629 998,161 3,495,122
----------- ----------- ---------- -----------
Net increase (decrease) in contract owners'
equity resulting from operations ................... 14,848,224 18,043,332 4,314,202 6,188,313
----------- ----------- ---------- -----------
Equity transactions:
Purchase payments received from
contract owners ........................................ 1,969,286 2,333,844 524,822 523,984
Transfers between funds .................................. - - (809,904) (2,491,298)
Redemptions .............................................. (20,875,429) (20,007,928) (6,663,073) (6,275,268)
Annuity benefits ......................................... (22,456) (17,547) (7,968) (5,559)
Annual contract maintenance charge (note 2) .............. (77,816) (88,218) (29,820) (34,597)
Contingent deferred sales charges (note 2) ............... (76,867) (92,750) (14,549) (28,394)
Adjustments to maintain reserves ......................... (817) 3,551 (558) 525
----------- ----------- ---------- -----------
Net equity transactions .............................. (19,084,099) (17,869,048) (7,001,050) (8,310,607)
----------- ----------- ---------- -----------
Net change in contract owners' equity .................... (4,235,875) 174,284 (2,686,848) (2,122,294)
Contract owners' equity beginning of period .............. 99,463,998 99,289,714 34,342,903 36,465,197
----------- ----------- ---------- -----------
Contract owners' equity end of period .................... $95,228,123 99,463,998 31,656,055 34,342,903
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Domestic Income Fund Emerging Growth Fund
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Investment activity:
Reinvested dividends ..................................... 20,180 660,199 1,446 -
Mortality, expense and administration
charges (note 2) ....................................... (96,249) (115,033) (48,924) (41,179)
---------- ---------- --------- ----------
Net investment activity ................................ (76,069) 545,166 (47,478) (41,179)
---------- ---------- --------- ----------
Proceeds from mutual fund shares sold .................... 3,746,179 5,623,192 1,245,627 1,698,623
Cost of mutual fund shares sold .......................... (3,581,711) (5,435,881) (934,382) (1,524,002)
---------- ---------- --------- ----------
Realized gain (loss) on investments .................... 164,468 187,311 311,245 174,621
Change in unrealized gain (loss) on investments .......... 292,822 90,778 831,306 390,722
---------- ---------- --------- ----------
Net gain (loss) on investments ......................... 457,290 278,089 1,142,551 565,343
---------- ---------- --------- ----------
Reinvested capital gains ................................. - - - -
---------- ---------- --------- ----------
Net increase (decrease) in contract owners'
equity resulting from operations ................... 381,221 823,255 1,095,073 524,164
---------- ---------- --------- ----------
Equity transactions:
Purchase payments received from
contract owners ........................................ 225,507 610,662 217,054 249,000
Transfers between funds .................................. (729,708) (1,206,000) 246,295 (598,377)
Redemptions .............................................. (1,527,773) (2,740,231) (881,368) (252,006)
Annuity benefits ......................................... (2,586) (2,452) - -
Annual contract maintenance charge (note 2) .............. (5,953) (8,049) (3,551) (2,828)
Contingent deferred sales charges (note 2) ............... (6,386) (14,395) (6,441) (1,043)
Adjustments to maintain reserves ......................... 17 265 (13,062) 12
---------- ---------- --------- ----------
Net equity transactions .............................. (2,046,882) (3,360,200) (441,073) (605,242)
---------- ---------- --------- ----------
Net change in contract owners' equity .................... (1,665,661) (2,536,945) 654,000 (81,078)
Contract owners' equity beginning of period .............. 8,373,324 10,910,269 3,461,804 3,542,882
---------- ---------- --------- ----------
Contract owners' equity end of period .................... 6,707,663 8,373,324 4,115,804 3,461,804
========== ========== ========= ==========
</TABLE>
6
<PAGE> 6
NATIONWIDE VARIABLE ACCOUNT-3
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
(UNDERLYING MUTUAL FUNDS OF VAN KAMPEN AMERICAN CAPITAL LIT)
<TABLE>
<CAPTION>
Enterprise Fund Global Equity Fund
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Investment activity:
Reinvested dividends ....................................... $ 37,274 189,025 10,562 5,587
Mortality, expense and administration
charges (note 2) ......................................... (532,088) (513,606) (11,146) (9,313)
----------- ---------- -------- --------
Net investment activity .................................. (494,814) (324,581) (584) (3,726)
----------- ---------- -------- --------
Proceeds from mutual fund shares sold ...................... 11,539,797 11,862,498 400,134 515,818
Cost of mutual fund shares sold ............................ (7,516,554) (9,510,386) (402,388) (435,109)
----------- ---------- -------- --------
Realized gain (loss) on investments ...................... 4,023,243 2,352,112 (2,254) 80,709
Change in unrealized gain (loss) on investments ............ 4,474,361 2,008,216 155,933 (92,300)
----------- ---------- -------- --------
Net gain (loss) on investments ........................... 8,497,604 4,360,328 153,679 (11,591)
----------- ---------- -------- --------
Reinvested capital gains ................................... 457,154 5,615,976 - 123,625
----------- ---------- -------- --------
Net increase (decrease) in contract owners'
equity resulting from operations ..................... 8,459,944 9,651,723 153,095 108,308
----------- ---------- -------- --------
Equity transactions:
Purchase payments received from
contract owners .......................................... 629,483 654,999 30,769 81,259
Transfers between funds .................................... (128,135) 614,166 266,300 244,625
Redemptions ................................................ (7,873,368) (7,063,843) (291,981) (125,840)
Annuity benefits ........................................... (3,745) (1,685) - -
Annual contract maintenance charge (note 2) ................ (29,054) (32,010) (1,035) (747)
Contingent deferred sales charges (note 2) ................. (24,380) (31,955) (1,051) (750)
Adjustments to maintain reserves ........................... (39,639) 2,287 13 5
----------- ---------- -------- --------
Net equity transactions ................................ (7,468,838) (5,858,041) 3,015 198,552
----------- ---------- -------- --------
Net change in contract owners' equity ...................... 991,106 3,793,682 156,110 306,860
Contract owners' equity beginning of period ................ 40,292,749 36,499,067 706,509 399,649
----------- ---------- -------- --------
Contract owners' equity end of period ...................... $41,283,855 40,292,749 862,619 706,509
=========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Government Fund Money Market Fund
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Investment activity:
Reinvested dividends ....................................... 47,499 327,154 307,418 359,396
Mortality, expense and administration
charges (note 2) ......................................... (58,697) (68,546) (81,908) (94,990)
---------- ---------- ----------- ----------
Net investment activity .................................. (11,198) 258,608 225,510 264,406
---------- ---------- ----------- ----------
Proceeds from mutual fund shares sold ...................... 1,798,576 2,763,818 10,714,673 9,957,418
Cost of mutual fund shares sold ............................ (1,667,686) (2,748,960) (10,714,673) (9,957,418)
---------- ---------- ----------- ----------
Realized gain (loss) on investments ...................... 130,890 14,858 - -
Change in unrealized gain (loss) on investments ............ 187,878 104,873 - -
---------- ---------- ----------- ----------
Net gain (loss) on investments ........................... 318,768 119,731 - -
---------- ---------- ----------- ----------
Reinvested capital gains ................................... - - - -
---------- ---------- ----------- ----------
Net increase (decrease) in contract owners'
equity resulting from operations ..................... 307,570 378,339 225,510 264,406
---------- ---------- ----------- ----------
Equity transactions:
Purchase payments received from
contract owners .......................................... 58,124 47,775 252,638 90,587
Transfers between funds .................................... 28,249 (624,152) 1,199,627 3,600,877
Redemptions ................................................ (915,228) (1,327,694) (2,556,917) (2,137,248)
Annuity benefits ........................................... (5,087) (4,790) (3,070) (3,061)
Annual contract maintenance charge (note 2) ................ (3,571) (4,561) (4,321) (5,021)
Contingent deferred sales charges (note 2) ................. (4,251) (7,902) (19,446) (8,068)
Adjustments to maintain reserves ........................... 41 257 52,370 212
---------- ---------- ----------- ----------
Net equity transactions ................................ (841,723) (1,921,067) (1,079,119) 1,538,278
---------- ---------- ----------- ----------
Net change in contract owners' equity ...................... (534,153) (1,542,728) (853,609) 1,802,684
Contract owners' equity beginning of period ................ 4,717,386 6,260,114 6,874,194 5,071,510
---------- ---------- ----------- ----------
Contract owners' equity end of period ...................... 4,183,233 4,717,386 6,020,585 6,874,194
========== ========== =========== ==========
</TABLE>
(Continued)
7
<PAGE> 7
NATIONWIDE VARIABLE ACCOUNT-3
STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
(UNDERLYING MUTUAL FUNDS OF VAN KAMPEN AMERICAN CAPITAL LIT)
<TABLE>
<CAPTION>
MORGAN STANLEY REAL ESTATE
SECURITIES PORTFOLIO
1998 1997
<S> <C> <C>
Investment activity:
Reinvested dividends .......................................... $ 1,135 18,114
Mortality, expense and administration
charges (note 2) ............................................ (7,758) (7,004)
-------- --------
Net investment activity ..................................... (6,623) 11,110
-------- --------
Proceeds from mutual fund shares sold ......................... 341,096 151,568
Cost of mutual fund shares sold ............................... (357,144) (127,715)
-------- --------
Realized gain (loss) on investments ......................... (16,048) 23,853
Change in unrealized gain (loss) on investments ............... (76,886) 9,955
-------- --------
Net gain (loss) on investments .............................. (92,934) 33,808
-------- --------
Reinvested capital gains ...................................... 11,166 59,906
-------- --------
Net increase (decrease) in contract owners'
equity resulting from operations ........................ (88,391) 104,824
-------- --------
Equity transactions:
Purchase payments received from
contract owners ............................................. 30,889 75,578
Transfers between funds ....................................... (72,724) 460,159
Redemptions ................................................... (165,721) (85,798)
Annuity benefits .............................................. - -
Annual contract maintenance charge (note 2) ................... (511) (405)
Contingent deferred sales charges (note 2) .................... (363) (243)
Adjustments to maintain reserves .............................. 1 (12)
-------- --------
Net equity transactions ................................... (208,429) 449,279
-------- --------
Net change in contract owners' equity ......................... (296,820) 554,103
Contract owners' equity beginning of period ................... 695,129 141,026
-------- --------
Contract owners' equity end of period ......................... $398,309 695,129
======== ========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 8
NATIONWIDE VARIABLE ACCOUNT-3
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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
Van Kampen American Capital LIT - Domestic Income Fund
Van Kampen American Capital LIT - Emerging Growth Fund
Van Kampen American Capital LIT - Enterprise 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
At December 31, 1998, 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.
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, the underlying mutual funds are not 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.
9
<PAGE> 9
(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, 1998. 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.
(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.
(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 up to $35, dependent upon contract type and
issue date (up to $30, dependent upon contract type and issue date, 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,
1998, 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, 1998, 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, 1998, 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 LLP
Columbus, Ohio
February 5, 1999
11
<PAGE> 11
NATIONWIDE LIFE INSURANCE COMPANY Bulk Rate
HOME OFFICE: ONE NATIONWIDE PLAZA U.S. Postage
- COLUMBUS, OHIO 43215-2220 PAID
Columbus, Ohio
Permit No. 521
Nationwide(R) is a registered federal service mark of Nationwide Mutual
Insurance Company
