HomeMy WebLinkAboutFinancial Statements 2007 & 2008NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a Wholly Owned Subsidiary o£
Nationwide Financial Services, Inc.)
Consolidated Financial Statements
December 31, 2008 and 2007
(With Independent Auditors' Report Thereon)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a Wholly Owned Subsidiary ot'
Nationwide Financial Services, Inc.)
Table of Contents
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statemeots
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KPMG LLP
Suite 500
191 West Nationwide Boulevard
Columbus, OH 43215-2568
Independent Auditors' Report
]'he Board of Directors
Nationwide Retirement Solutions, Inc.:
We have audited the accompanyiog consolidated balance sheets of Nationwide Retirement Solutions, Inc.
and subsidiaries (indirectly a wholly owned subsidiary of Nationwide Financial Services, Inc.)
(the Company) as of December 31,2008 and 2007, and the related consolidated statements of operations,
changes in stockholder's equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an
()pinion oe these coesolidated fieancial statements based on our audits.
We condncted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes
cousideratioe of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumslances, but not for the purpose of expressing an opinion on the effectiveness of
the Cmnpany's internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluatiog the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinioe.
In our opinion, the consolidated linancial statements referred to above present fairly, in all material
respects, the tinaecial position of Nationwide Retirement Solutions, Inc. and subsidiaries as of
l)ecember 3 I, 2008 and 2007, and the results of their operations and their cash flows for the years then
ended in conlbrmity with accounting principles generally accepted in the t Inited States of America.
I April 1,2009
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary ot
Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
December 31,2008 and 2007
Assets
Current assets:
Cash and cash equivalents (notes 4 and 5)
Accounts receivable
Due from affiliates (note 5 and 14)
Deferred federal incmne tax, current (note 6)
Total current assets
Goodwill and intangible assets, net of accumalated amortization
{notes 8 and 9)
Equipment and software, net of accumulated depreciatiou and
mnortization (note 10)
Other
Total assets
Liabilities and Stockholder's Equity
Current liabilities:
Accoants payable aod accrued liabilities (note 14)
Due to affiliates (notes 5, 7 and 12)
Deferred revenue, current portion (note I 1)
Obligation under consulting agreemenl~ current portion
(notes 9 aod 14)
Current federal income taxes payable
Total carrent liabilities
Deterred revenue, net of current portion (note I I)
Obligation under consultiog agreement, net of current portion
(notes 9 and 14)
Deferred federal income tax (note 6)
Total liabilities
Stockholder's equiPj:
Common stock, $1 par value. Authorized 500,000 shares; issued
and outstanding 236,494 shares
Additional paid-in capital
Retained earnings
Total stockholder's eqaity
Commitments and contingencies (notes 7 and 14)
Total liabilities and stockholder's equity
2008 2007
33,243,03l 40,020,885
10,336,820 15,902,447
4,388,247 4,862,479
345,374 122,325
See accompanying notes to the consolidated financial statements.
48,313,472 60,908,136
19,378,679 19,613,168
1,375,365 1,197,386
42,000 42,000
$ 69,109,516 81,760,690
4,889,352 9,628,204
422,632 6,462,717
439,023 237,000
67,005 63,814
1,812,345 7,753,501
7,630,357 24,145,236
729,000 919,000
887,180 1,155,200
4,079,854 3,363,371
13,326,391 29,582,807
236,494 236,494
28,852,574 28,852,574
26,694,057 23,088,815
55,783,125 52,177,883
$ 69,109,516 81,760,690
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements of Operations
Years ended December 3 I~ 2008 and 2007
Commissions and asset fees (notes 5 and 11)
Administrative and marketing fees (note 5)
Interest and other income
Realized loss (note 5)
Total revenue
Expenses:
Commissions
General and administrative (notes 5, 7, 12, and 14)
Consultant fees
Amortization of intangibles (note 9)
Depreciation and amortization of property and equipment (note 10)
Total expenses
Net income before income tax
Federal income tax (note 6):
Current expense
Deferred expense
Nel income
2008 2007
70,338,460 71,852,263
32,524,121 41,695,873
840,334 2,665,662
(599,398)
103,103,517 116,213,798
-- 430,961
95,794,194 90,259,763
849,265 1,158,860
234,489 234,489
449,512 416,537
97,327,460 92,500,610
5,776,057 23,713,188
1,677,381 7,753,501
493,434 705,969
2,170,815 8,459,470
$ 3,605,242 15,253,718
See accompanying notes to the consolidated financial statelnents.
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31. 2008 and 2007
llalancc, l)cccmber 3 I, 2006
Dividend to stockholder
Net income
Balance. December 3 I. 2007
Dividend to stockholder
Net income
Balance, I)ecember 3 I, 2008
Common Additional Retained
stock paid-in capital earnings Total
$ 236,494 28.852~574 27,835.097 56.924,165
(20.000.000) (20.000,000)
- 15,253,718 15,253,718
236.494 28~852~574 23~088,815 52.177,883
3,605,242 3,605,242
$ 236,494 28,852,574 26,694,057 55,783,125
See accompanying notes to the consolidated financial statcmcnls.
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 2008 and 2007
Cash flows from operating activities:
Net income $
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Deferred federal income tax expense
Decrease (increase) in assets:
Accounts receivable
Due from affiliates
Other
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities
Due to affiliates
Deferred revenue
Current federal income taxes
Net cash (used) provided by operating activities
Cash flows from investing activities:
Capitalization of software development costs
Net cash used in investing activities
Cash flows from financing activities:
Cash overdraft
Dividend to stockholder
Principal payments on obligation under consulting agreement
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
End of year $
Supplemental disclosure of cash flow infor~nation:
Cash paid for federal income tax, net $
2008 2007
3,605,242 15,253,718
684,001 651,026
493,434 705,969
5,565,627 (6,549,032)
474,232 (2,304,025)
-- (34,127)
(4,675,884) 6,483,155
(6,040,085) (2,391,023)
12,023 (296,000)
(5,941,156) (272,665)
(5,822,566) 11,246,996
(627,491) (583,741)
(627,491) (583,741)
(62,968) --
-- (20,000,000
(264,829) (297,799
(327,797) (20,297,799
(6,777,854) (9,634,544
40,020,885 49,655,429
33,243,031 40,020,885
7,618,537 8,026,166
See accompanying notes to the consolidated financial statelnents.
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(1)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 3 I, 2008 and 2007
Organization and Description of Business
Nationwide Retirement Solntions, Inc. and subsidiaries (Nationwide Retirement Solutions Insurance
Agency, Inc., Nationwide Retirement Solutions, Inc. of Arizona, Nationwide Retirement Solutions, Inc. of
Ohio, and Nationwide Retirement Solutions, Inc. of Texas) (collectively NRS or the Company) are wholly
owned subsidiaries of NFS Distributors, Inc. (NFSDI). NFSDI is a wholly owned subsidiary of Nationwide
Financial Services, Inc. (NFS). NFS is a majority owned subsidiary of Nationwide Corporation (Corp),
which is a subsidiary of Nationwide Mutnal Insurance Company (NM1C) and Nationwide MutuaI Fire
Insurance Company. Effective January 1,2009, NFS is a wholly owned subsidiary of Corp. (note 13). NRS
is in the business of developing, marketing, and administering the operation of deferred compensation
plans and other retirement savings plans lbr govermnental units and educational institutions throughout tbe
United States.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed by NRS and subsidiaries that materially affect financial
reporting are summarized below. The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America (GAAP).
The preparation of financial statements in conlbrmity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly from those estimates.
00
Principles qf Consolidation
The consolidated financial statements include the accounts of NRS and its wholly owned
subsidiaries. All significant intercompany accounts and transactkms have been eliminated in the
consolidation.
Goodwill and Intangible Assets'
The Company accounts for purchased goodwill (note 8) and other intangible assets (note 9) in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under
SFAS 142, purchased goodwill is not amortized, but instead is tested for impairment at least
annually. The process of evaluating goodwill lbr impairment requires a number of judgments and
assumptions to be made in determining the fair value. Some of thc more significant judgments and
assumptions include discount rates and expected levels of cash flows.
In conducting the impairment test for goodwill, the lair value of the Company, which is comprised of
only one reporting nnit, is compared to its carrying amount inclnding goodwill. If the fair value
exceeds the carrying amount, then no impairment exists. If thc carrying amount exceeds the fair
value, further analysis is performed to assess the impairment. The Company performed its annual
impairment tests for 2008 and 2007 with no resulting impairment charges.
6 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31,2008 and 2007
Finite lived intangible assets consist of various agreements and consulting services relating to the
Company's acquisition of certain exclusive rights to market life and health plans from Public
Employee Benefit Consultauts (note 9). These assets are amortized on a straight-line basis over their
estimated useful lives, generally 5 to 15 years, and are assessed for recoverability if indications of
impairment exist.
(c) Equipment and Software
Equipment and software (note 10) are stated at cost less accumulated depreciation. Except for
capitalized software development costs, depreciation is provided using the double-declining balance
method or straight-line basis, as appropriate, over the estimated useful lives of the various assets.
Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use, requires the capitalization of certain costs incurred in connection with developing
or obtaining internal use software. Capitalized costs are amortized over three years on a straight-line
basis. The Company capitalized $627,491 and $583,741 in software development costs during 2008
and 2007, respectively. Such capitalized costs are classified as Equipment and software, net of
accumulated amortization on the Consolidated Balance Sheets. The Company amortized $449,512
and $416,537 in capitalized software development costs during 2008 and 2007, respectively.
In accordance with SFAS 144, Accounting fi~r the Impairment or Disposal of Long Lived Assets,
long-lived assets, such as property, and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of an asset to be held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset.
(d) Commissions and Asset Fees
The Company receives commission payments under contracts with certain insurance carriers,
primarily Nationwide Life Insurance Co~npany (NLIC), an affiliate. Commission income is
recognized when plan payroll deferrals are processed at the insurance carrier.
The Company receives asset fees in lieu of commissions under certain administrative and marketing
contracts with certain plan sponsors. Asset fees are calculated as a percentage of assets under
management and are recorded as revenue when earned.
7 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31,2008 and 2007
(e) Administrutive and Marketing Fee Income
The Company receives fee income under administrative and marketing contracts with certain plan
sponsors. Additionally, the Company receives fee income under agreements with NLIC and
Nationwide Investment Services Corporation (N1SC), both affiliated companies, for marketing and
service center support for certain NLIC annuity and life products, and for the payment, on behalf of
NISC, of certain regulatory fees and charges, respectively. Fee income is recognized when assessed
by the Company.
Administrative fees represent revenue earned under certain contracts for administering participant
accounts or insurance carrier payroll deferrals. The Company recognizes the administrative fee
income when the fee is assessed.
09 Commission Expense
Commission expense represents compensation paid under contracts with independent contractors for
enrollment and servicing activities related to certain deferred compensation plans. Such
compensation is expensed when incurred. Commission expense was $430,961 in 2007. During 2008,
there was no commission expense incurred by the Company as it did not sell any products in 2008
with commission related payments.
(g) Federal Income Tax
In 2008, the Company will file a life/non-life consolidated federal income tax return with NFS and
all of its downstream subsidiaries with the exception of NF Reinsurance, Ltd. Effective January 1,
2009, pursuant to a merger agreement dated August 6, 2008, whereby NMIC and its affiliates
purchased all of the NFS common stock they did not already own (note 13), Corp will own more
than 80% of the value of NFS, meeting the requirements for NFS and its non-life subsidiaries,
including the Company, to join the NMIC consolidated federal income tax return. The members of
the NFS consolidated federal income tax return group participate in a tax sharing agreement, which
utilizes a consolidated approach in allocating the amount of current and deferred taxes to the separate
financial statements of a subsidiary. This approach provides for a current tax benefit to the subsidiary
for losses that are utilized in the consolidated tax return. Accordingly, consistent with the tax sharing
agreement, the current federal income taxes payable of $1,812,345 represent an amount due to NFS
for the Company's estimated 2008 federal income tax liability.
The Company utilizes the asset and liability method of accounting for income taxes. 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
8 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, 1NC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
period that includes the enactment date. Valuation allowances are established when it is determined
that it is more likely than not that the deferred tax asset will not be fully realized.
The Company adopted the provision of FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on January 1, 2007. The Company provides for federal
income taxes based on amounts the Company believes it ultimately will owe in accordance with the
requirements of FIN 48. FIN 48 clarifies the accounting for uncertainty in accordance with
FASB Statement No. 109, Accounting.[hr Income Taxes. FIN 48 prescribes a recognition threshold
and measurement attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
Reserves are reviewed regularly and are adjusted as events occur that management believes impact
its liability for additional taxes. The Company believes that its income tax filing positions will be
sustained on audit and does not anticipate any adjustments that will result in a material adverse effect
on the Company's financial condition, results of operation or cash flow. The adoption of
Interpretation No. 48 had no impact on the Company's financial statements in 2008 or in 2007, the
year of adoption. The Company has completed its federal income tax examination through 2002, and
with limited exceptions is no longer subject to any income tax examinations with major taxing
jurisdictions through this period. Tax years after 2002 are still subject to examination by various
taxing jurisdictions~
The Company's policy for recording interest and penalties associated with audits is to record such
amounts as income tax expense. For the years ending December 31, 2008, and December 31, 2007,
the Company had interest of $37,141 and $0, respectively, accrued for tax settlements.
Comprehensive Income
Comprehensive income includes net income as well as certain items that are reported directly within
a separate component of stockholder's equity and are excluded from net income. Currently, net
income is the Company's only component of comprehensive income.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all short-term investments to
be cash equivalents, as the original investment maturity dates are less than three months. Cash and
cash equivalents include the Company's participation in a short-term investment pool managed by
Nationwide Cash Management Company (NCMC), an affiliated company (note 5). At its discretion,
NCMC invests and reinvests assets of the pool. The investment pool consists primarily of
commercial paper, acceptances, and other investments of a short-term nature and is recorded at fair
value (note 5).
9 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
Fair Value of Financial Instruments
The carrying amount of accounts receivable, due from affiliates, accounts payable and accrued
liabilities, due to affiliates, and federal income taxes payable approximates fair value.
As described in note 3, the Company adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157), effective January 1, 2008. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In determining fair value, the Company uses
market approach as the valuation technique, due to the nature of the Company's investments. This
technique maximizes the use of observable inputs and minimizes the use ofunobservable inputs.
In accordance with SFAS 157, the Company categorized its financial instruments into a three level
hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowe~t priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall
within different levels of the hierarchy, the category level is based on the lowest priority level input
that is significant to the/'air value measurement of the instrument in its entirety.
The Company categorizes financial assets recorded at fair value as follows:
· Level 1 Unadjusted quoted prices accessible in active markets for identical assets at the
measure~nent date. The assets utiliziug Level 1 valuations include investments in registered
mutual funds with quoted market prices.
· Level 2 -~ Uuadjusted quoted prices ibr similar assets in active markets or inputs (other than
quoted prices) that are observable or that are derived principally from or corroborated by
observable market data through correlation or other means.
· Level 3 Prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value ~neasurement. Inputs rellect management's best estimate
about the assumptious market participants would use al the measurement date in pricing the
asset or liability. Consideration is given to the risk inherent in both the method of valuation
and the valuation inputs.
The Company invests only in assets with lhir value measurements in the second level of the fair
value hierarchy.
I 0 (Continued)
(3)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
The following table summarizes investments measured at fair value on a recurring basis as of
December 31, 2008:
Level 1 Level 2 Level 3
Assets
Cash equivalents $ -- 33,243,031 --
Total Investments $ -- 33,243,031
Cash equivalents are held with NCMC, a related party (notes 2i and 5).
The Company did not have any assets or liabilities reported at fair value on a nonrecurring basis
required to be disclosed under SFAS I57.
(lO Change in Accounting Principle
Historically, the Company accrued for legal costs associated with litigation defense and regulatory
investigations by estimating the ultimate costs of such activity. Beginning April 1, 2007, the
Company's accrual for such legal expenses includes only the amount Ibr services that have been
provided but not yet paid. The Company believes the newly adopted accounting principle is
preferable because it more accurately reflects expenses in the periods in which they are incurred. The
Company continues to estimate and accrue the ultimate amounts expected to be paid for litigation
and regulatory iavestigation loss contingencies. The Company has presented its consolidated
financial statements and accompanying notes as applicable for all periods presented to retroactively
apply the adoption of this change in accounting principle. The impact of the adoption resulted in an
increase to beginning retained earnings of$119,754.
(I) Financial Statement Reclassification
In the 2007 Consolidated Statement of Operations, certain expenses were reclassified from
Consultant fees to General and administrative in the amount of $796,917. In the 2007 Consolidated
Balance Sheet, the current portion of net deferred federal income tax of $122,325 was reclassified
from Deferred federal income tax as shown in Liabilities to Deferred federal income tax, current
included in Current assets. These changes to 2007 were made in order to more accurately reflect
expense captions and provide consistency with the 2008 presentation.
Recently Issued Accounting Standards
In November 2008, the FASB Board ratified the Emerging lssues Task Force's consensus EITF 08-7,
Accounting.[or Dq/knsive Intangible Assets (EITF 08-7). EITF 08-7 requires defensive intangible assets
acquired in a business combination or asset acquisition to be accounted 1hr as a separate unit of accounting.
In doing so, the asset should not be included as part of the cost of the acquirer's an entity's existing
intangible asset(s) because the defensive intangible asset is separately identifiable. EITF 08-7 is effective
11 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31,2008 and 2007
for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. EITF 08-7 is not expected to have a material impact on the Company's financial
position or results of operations upon adoption.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value ora Financial Asset When
the Market for That Asset Is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of
SFAS No. 157, Fair Value Measurements (SFAS 157), in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a financial asset when the market
for that financial asset is not active. FSP FAS 157-3 was effective upon issuance. The adoption of FSP
FAS 157-3 did not have a material impact on the Company's financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with U.S. GAAP (the GAAP hierarchy). SFAS 162 will be effective 60
days following the approval by the United States Securities and Exchange Commission (SEC) of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Cot~formity With Generally Accepted Accounting Principles. The Company does not expect the adoption of
SFAS 162 to result in a change in its current practices.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful L!fe of Intangible Assets
(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP FAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after December 15, 2008. The amended
factors that should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142 are to be applied prospectively to intangible
assets acquired after the effective date. The Company does not expect the new factors to materially change
the Company's current methodologies.
In February 2008, the FASB issued FSP FAS 157-2, Effkctive Date c?fFASB Statement No. 157 (FSP
FAS 157-2). This FSP delays the effective date of SFAS 157 for non-financial assets and liabilities until
fiscal years beginning after November 15, 2008. FSP FAS 157-2 applies to non-financial assets and
liabilities, except for items that are recognized or disclosed at fair value in the Company's financial
statements on a recurring basis (at least annually), and is effective upon issuance. The Company has not yet
applied the provisions of SFAS 157 to the non-financial assets and liabilities within the scope of FSP
FAS 157-2. However, the Company does not expect such application to have a material impact on its
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R),
which replaces SFAS No. 141, Business Combinations (SFAS 141). The objective of SFAS 14IR is to
improve the relevance, representational faithfulness~ and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its effects. SFAS 141R is
12 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
applicable prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application
is prohibited. The Company will adopt SFAS 141R effective January 1, 2009 and apply it to any'business
combination on or after that date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51 (SFAS 160). The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting standards for the non-
controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also amends
certain consolidation procedures prescribed by Accounting Research Bulletin No. 51, Consolidated
Financial Statements, for consistency with the requirements of SFAS 141R. SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Company will adopt SFAS 160 effective January 1, 2009 and apply it to any
acquisitions or dispositions of non-controlling interests on or after that date and modify the financial
statement presentation for the first reporting period subsequent to that date.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS 159 is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. The Company elected to not adopt the provisions of
SFAS 159 with respect to current financial instruments or other itelns at this time. The Company will
assess the fair value election for new financial assets or liabilities on a prospective basis.
In September 2006, the FASB issued SFAS 157. SFAS 157 provides enhanced guidance for using fair
value to measure assets and liabilities and requires new disclosures about fair value measurements.
SFAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at
fair value, the information used to measure fair value, and the effect of fair value measurements on
earnings. For assets and liabilities that are measured at fair value on a recurring basis in periods subsequent
to initial recognition, the reporting entity shall disclose information that enables financial statement users to
assess the inputs used to develop those measurements. For recurring fair value measurements using
significant unobservable inputs, the reporting entity shall disclose the effect of the measurements on
earnings for the period. SFAS 157 applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157
is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years, with early adoption permitted. The Company adopted SFAS 157 effective January 1, 2008. The
adoption of SFAS 157 did not have a material impact on the Company's financial position or results of
operations. See note 2j for disclosures required by SFAS 157.
In June 2006~ the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation
q£FASB Statement No. 109, AccountingJbr Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB
13 (Continued)
(4)
(5)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
State~nent No. 109, Accounting .for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. See
note 2g.
Controlled Disbursement Cash Management
The Company nses a controlled disbursement system for settling obligations. This system is an
arrangement with a disbursing bank which allows the Company to retain funds in short-term investment
accounts until checks are presented for payment. See note 5.
Related-Party Transactions
Subsidiaries of NFS, including NLIC, provide certain insurance and banking products for the deferred
compensation plans and other retirement savings plans administered by the Company (Plans). Revenue
from these related parties, which include commissions and asset fees as well as administrative and
marketing fees were approximately $49,899,000 in 2008 and $60,101,000 in 2007. NLIC is the primary
insurance carrier for these Plans. Related amounts receivable at December 31,2008 and 2007 are included
in Due from affiliates on the Consolidated Balance Sheets.
The Company reimbursed NMIC approximately $94,043,000 in 2008 and $90,625,000 in 2007 for certain
general and administrative expenses and consulting fees allocated to the Company. Such expense
allocations are made periodically based on services provided and other factors and are not subject to a
written agreement. The Company may have paid more or less than these amounts if it had to procure these
services on its own. Related amounts due to NMIC at December 31, 2008 and 2007 for certain operating
expenses are included in Due to affiliates on the Consolidated Balance Sheets.
The Company also purchased certain trust and other administrative services from related subsidiaries of
NFS of approximately $1,619,000 during 2008 and $258,000 during 2007. Related amounts payable at
December 31,2008 and 2007 are included in Due to affiliates on the Consolidated Balance Sheets.
Amounts on deposit with NCMC (note 2i) as of December 31,2008 and 2007 were approximately
$33,243,000 and $39,998,000, respectively. During 2008, NCMC recognized a loss on certain investments
and allocated the toss pro-rata to participants. The Company's share of this loss was $599,398 which is
recorded in Realized loss on the Consolidated Statement of Operations.
The Company paid dividends of $ 20,000,000 to NFSDI in 2007. The Company did not pay dividends in
2008.
14 (Continued)
(6)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
Federal Income Taxes
The following table summarizes the federal income tax expense/(benefit) attributable to income/(loss) from
continuing operations for the tax years ended December 31:
2008 2007
Current $ 1,677,38I 7,753,501
Deferred 493,434 705,969
Federal income tax expense/(benefit) $ 2,170,815 8,459,470
Total income tax expense for the years ended December 31, 2008 and 2007 differs from the amount
computed by applying the U.S. federal income tax rate to net income before tax as follows:
2008 2007
Amount % Amount
Expected tax expense $ 2,021,620
Nondeductible meals and
entertainmenl I 11,813
Interest accrual 37,382
Total (effective rate of each year) $ 2,170,815
35.0% $ 8,299,616 35.0%
1.9 159,854 0.7
0.6 -- --
37.5% $ 8,459,470 35.7%
The tax effects of temporary differences that give rise to significant components of the net deferred tax
liability as of December 3 I, 2008 and 2007 are as follows:
Deferred tax assets:
Accounts receivable allowance
Intangible assets
Commissions Payable
Deferred revenue
Total gross deferred tax assets
Deferred tax liabilities:
Goodwill
Internally developed software costs
Total gross deferred tax liabilities
Net deferred tax liability
2008 2007
39,375 39,375
108,050 119,786
152,341 --
408,808 404,600
708,574 563,761
3,961,676 3,385,722
481,378 419,085
4,443,054 3,804,807
$ 3,734,480 3,241,046
15 (Continued)
(7)
(8)
(9)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31,2008 and 2007
The Company determines a valuation allowance based on their analysis of future deductible amounts. As
of December 31, 2008 and 2007, management believes it is more likely than not that all future deductible
amounts can be offset by future taxable amounts or recovery of federal income tax paid within the statutory
carryback period.
Leases
The Company has certain noncancelable operating lease agreements primarily for office space. A portion
of these leases contain renewal options for period ranging from one to five years. Futura minimum lease
payments under noocancelable operating leases as of December 31, 2008 are:
2009 $ 320,372
2010 250,338
2011 96,444
2012 53,173
2013
Total minimum lease payments $ 720,327
Total lease expense was $2,115,389 and $2,247,860 in 2008 and 2007, respectively, which includes
$ I ~68 I, 179 and $ 1.790~378 for property rented from related parties in 2008 and 2007, respectively.
(;oodwill
In 1()08. NFS acquired National Deferred Compensation (NDC) for approxi~nately $24 million in excess of
the fair value o/the uet assets acquired (goodwill). On Decelnber 31, 2005, NDC was ~nerged into the
Company with thc Company becoming the surviving entity. Prior to the adoption of SFAS 142 which was
effective for fiscal years beginuing after December 15, 20Q l, Accounting Principles Board Opinion No. 17
(APB 17), [nta/~gible Assets, required the amortization of goodwill. As a result, the net unamortized
goodwill balance is $18,675,213, ~vhich consists of goodwill of $23,846,588 and accumulated amortization
of $5,171~375 at December 31,2008 and 2007. The Company completed its 2008 and 2007 impairment
tests on the existing goodwill and concluded there were no i]npairment losses.
Intangible Assets and Consulting Agreement
F~ffective October 10, 1996, the Company acquired certain intangible assets in the form of administrative,
endorsement and trust agreements for the exclusive rights to market life insurance and health plans to
certain collectively bargained public employees from Public Employee Benefit Consultants, Inc. (Seller).
Additionally, the Company entered into an agreement with the Seller to provide future consulting services.
Tile intangible assets attributable to these agreements were fully amortized at December 31. 200 I.
In December 2001, the Company and NLIC entered into a new agreement with the Seller that released the
Company and NLIC fi'om any obligation to make further payments under the October 1996 agreement.
Under the ne~v agreement, the Company will pay the Seller approximately $3 million throngh 201 l. Tile
16 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
agreement provided for an initial payment of $500,000 upon execution of the agreement and scheduled
annual payments thereafter, which vest at 20% per year. In addition, the Company paid noncompete and
compensatory payments totaling approximately $829,000. The noncompete and compensatory payments
were completed in 2006. Vesting of the annual payments, and the obligation to make the noncompete and
compensatory payments, is contingent upon certain performance requirements of the Seller. The intangible
asset attributable to this agreement, net of accumulated amortization, was $703,466 and $937,955 at
December 31, 2008 and 2007, respectively. In accordance with SFAS 142 the Company completed during
2008 and 2007 its review of intangible assets with finite lives and determined that there were no
indications of impairment.
The following table discloses the gross intangible asset and accumulated amortization at the balance sheet
date, and the amortization expense for the twelve month period ending there-on, for the years 2007 and
2008 as well as the estimated amounts for each of the three remaining years on the amortization schedule:
Gross
intangible Accumulated Amortization
asset amortization expense
2007 $ 2,515,580 1,577,625 234,489
2008 2,515,580 1,812,114 234,489
2009 2,515,580 2,046,603 234,489
2010 2,515,580 2,281,092 234,489
2011 2,515,580 2,515,580 234,488
00)
Equipment and software
The Company owns data processing equipment and software. The costs at December 3 I, 2008 and 2007
are as follows:
Data processing equipment and software
Accumulated depreciation and amortization
Net
2008 2007
$ 3,699,583 3,072,092
(2,324~218) (I,874,706)
$ 1,375,365 1,197,386
(11) Deferred Revenue
On August 22, 2003, the Company entered into a settlement agreement with Monumental Life Insurance
Company (Monumental), resulting in the discontinuance of the Company's marketing of Monumental
universal and term life insurance products in the public sector ~narketplace. Under terms of the agremnent,
the Company paid Monumental $14 million in cash and agreed to waive its right to future cash
compensation related to the then existing block of Monumental policies. The Company's management
determined the present value of the foregone compensation to be $3,371,000, and recorded this amount as
17 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31, 2008 and 2007
(12)
deferred revenue. Also, under the agreement, the Company retains the obligation for administration of the
existing policies. Deferred revenue under this agreement is being amortized to income over approximately
20 years, the expected term of the Company's servicing obligation. The amount of deferred revenue
recognized as income in 2008 and 2007 was $237,000 and $296,000, respectively, and is included in
Commissions and asset fees in the accompanying Consolidated Statements of Operations.
Deferred revenue also includes certain asset fees taken by the Company in 2008 for services to be
performed in 2009 in the amount of $249,023.
Pension Plan and Postretirement Benefits Other than Pensions
(a) Defined Benefit Plans
NFS, and certain affiliated companies, including the Company, participate in a qualified defined
benefit pension plan sponsored by NMIC. This plan covers all employees of participating companies
who have completed at least one year of service. Plan assets are invested in a trust with Bank of New
York as the custodian and trustee, a group annuity contract issued by NLIC, and a group annuity
contract issued by Nationwide Life Insurance Company of America (NLICA), an affiliate of the
Company. All participants are eligible for benefits based on an account balance feature. Participants
last hired before 2002 are eligible for benefits based on the highest average annual salary of a
specified number of consecutive years of the last ten years of service, if such benefits are of greater
value than the account balance feature. In addition, separate non-qualified defined benefit pension
plans sponsored by NMIC cover certain executives with at least one year of service. NFS funds
pension costs accrued for direct employees plus an allocation of pension costs accrued for employees
of affiliates, including the Company, whose work benefits NFS.
In addition to the NMlC pension plans, NFS, and certain affiliated companies, including the
Company, participate in life and health care defined benefit plans sponsored by NMIC for qualifying
retirees. Postretirement life and health care benefits are contributory. The level of contribution
required by a qualified retiree depends on the retiree's years of service and date of hire. [n general,
postretirement benefits are available to full-time employees who are credited with 120 months of
retiree life and health service. Postretirement health care benefit contributions are adjusted annually
and contain cost-sharing features such as deductibles and coinsurance. In addition, there are caps on
NFS' portion of the per-participant cost of the postretirement health care benefits. NFS' policy is to
fund the cost of health care benefits in amounts determined at the discretion of management. Plan
assets are invested in a trust with Bank of New York as the custodian and trustee, and a group
annuity contract issued by NLIC. All participants are eligible for benefits based on an account
balance feature.
The Company's portion of allocated expenses related to the pension plans and other postretirement
benefit plans during 2008 and 2007 was $1,237,501 and $801,838, respectively, which are included
in General and administrative in the accompanying Consolidated Statements of Operations.
18 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 31,2008 and 2007
Defined Contribution Phms
NM1C sponsors a defined contribution retirement savings plan covering substantially all employees
of the Company. Employees may make salary deferral contributions of up to 80%. Salary deferrals
of up to 6% are subject to a 50% Company match. The Company's expense for contributions to these
plans was $509,528, and $415,439 for the years ended December 31,2008 and 2007, respectively,
which are included in General and administrative in the accompanying Consolidated Statements of
Operations.
(13) Subsequent Event
On August 6, 2008, NFS entered into a definitive agreement for NMIC, Corp and NWM Merger Sub, lnc.
for Nationwide Corporation to acquire by merger all of the outstanding Class A common stock of NFS that
it did not already own. The transaction was approved by NFS shareholders on December 31,2008 and
closed effective January 1, 2009. As a result of the transaction, NFS became a wholly owned subsidiary of
Corp.
(14) Commitments and Contingencies
(a) Commitments
On May 17, 1982, the Company entered into a consulting agreement with a former majority
stockholder and director of the Company. The agreement terminated December 31, 1986. Under the
terms of this termination agreement, the consultant continued to receive compensation until June 30,
2002 based upon asset balances of participants held by NLIC who were enrolled before January I,
1987. Payments made subsequent to June 30, 2002, which are payable for fifteen years, are made
under a nonqualified deferred compensation agreement of amounts deferred under the
aforementioned termination agreement. Amounts paid to the consultant under the deferred
compensation agreement are incurred and paid by NLIC through the Company. Related amounts
receivable from NLIC at December 3 I, 2008 and 2007 are included in Due from affiliates on the
Consolidated Balance Sheets.
The scheduled annual payments subject to vesting and performance requirements payable to the
Seller under the December2001 consulting agreement, as described in note9, are included in
Obligation under consulting agreement on the Consolidated Balance Sheets as of December 31, 2008
and 2007.
(b) Contingencies-Legal Matters
The Company is a party to litigations and arbitration proceedings in the ordinary course of its
business. It is often not possible to determine the ultilnate outcome of the pending investigations and
legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty.
Some matters, including certain of those referred to below, are in very preliminary stages, and the
Company does not have sufficient information to make an assessment of the plaintiffs' claims for
liability or dmnages. In some of the cases seeking to be certified as class actions, the court has not
19 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 3 l~ 2008 and 2007
yet decided whether a class will be certified or (in the event of certification) the size of the class and
class period. In many cases, the plaintiffs are seeking undefined amounts of damages or other reliel;
including punitive damages and equitable remedies, which are difficult to quantify and cannot be
defined based on the information currently available. The Company does not believe, based on
information currently known by management, that the outcomes of such pending investigations and
legal proceedings are likely to have a material adverse effect on the Company's consolidated
financial position or results of operations in a particular period.
The financial services industry has been the subject of increasing scrutiny by regulators, legislators,
and the media over the past few years. Numerous regulatory agencies have commenced
investigations regarding late trading, market timing, unsuitable sales practices, compensation,
revenue sharing arrangements and fee arrangements in retirement plans. The Company and/or its
affiliates have been contacted by or received subpoenas from state and federal regulatory agencies
and other governmental bodies, state securities law regulators, and state attorneys general for
information relating to certain of these investigations. The Company and its affiliates are cooperating
with regulators in connection with these inquires.
A promotional and marketing arrangement associated with the Company's offering of a retirement
plan product and related services in Alabama is under investigation by the Alabama Securities
Commission. The Company currently expects that any damages paid to settle this matter will not
have a material adverse impact on its consolidated financial position. It is not possible to predict
what effect, if any, the outcome of this investigation may have on the Company's operations with
respect to promotional and marketing arrangements in general in the future.
On November 20, 2007, NRS and NLIC were named in a lawsuit filed in the Circuit Court of
Jefferson County, Alabama entitled Ruth A. Gwin and Sandra H. Turner. and a class of similarly
situated individuals v~ Nationwide L!i~e Insurance Company, Nationwide Retirement Solutions, Inc..
Alabama State Employees Association, PEBCO, lnc. and Fictitious Defendants ,4 to Z. On
December 2, 2008, the plaintiffs filed an amended complaint. The plaintiffs claim to represent a class
of all participants in the Alabama State Employees Association (ASEA) Plan, excluding members of
the Deferred Compensation Committee, members of the Board of Control, ASEA's directors,
officers and board members, and PEBCO's directors, officers, and board members. The class period
is November 20, 2001 to the date of trial. In the amended class action complaint, the plaintiffs allege
breach of fiduciary duty, wantonness and breach of contract. The amended class action complaint
seeks a declaratory judgment, an injunction, an appointment of an independent fiduciary to protect
Plan participants, disgorgement of amounts paid, reformation of Plan documents, compensatory
damages, and punitive damages, plus interest, attorneys' fees and costs and such other equitable and
legal relief to which plaintiffs and class members may be entitled. Also, on December 2, 2008, the
plaintiffs filed a motion for preliminary injunction seeking an order requiring periodic payments
made by NRS and/or NLIC to ASEA or PEBCO to be held in a trust account for the benefit of Plan
20 (Continued)
NATIONWIDE RETIREMENT SOLUTIONS, INC.
AND SUBSIDIARIES
(Indirectly a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to the Consolidated Financial Statements
December 3 I, 2008 and 2007
participants. On December 4, 2008, the Alabama State Personnel Board and the State of Alabama by,
and through the State Personnel Board, filed a motion to intervene and a complaint in intervention.
On December 16, 2008. the Companies filed their Answer. On February 4, 2009, the court
provisionally agreed to add the State of Alabama, by and through the State Personnel Board as a
party. NRS and NLIC continue to defend this case vigorously.
On November 15, 2006, NFS, NLIC, and NRS were named in a lawsuit filed in the United States
District Court tbr the Southern District of Ohio entitled Kevin Beery, Sher![~ q[' ()range CrmnO,.
Florida, in His O[~cial Capaci(v, Individually and On Beha~[ qiC All Others Similarly Situated v
Nationwide L~[e Insurance £'o.. Nationwide Retirement Solutions, lnc. and Nationwide Financial
Services, Inc. The plaintiff seeks to represent a class of all sponsors of 457(b) deferred compensation
plans in the United States that had variable annuity contracts witb the defendants at any tilne during
the class period, or in the alternative, all sponsors of 457(b) deferred cmnpensation plans in Florida
that had variable annuity contracts with the defendants during the class period. The class period is
from January I, 1996 until the class notice is provided. The plaintiff alleges that the defendants
breached their fiduciary duties by arranging for and retaining service payments from certain mutual
funds. The complaint seeks an accounting, a declaratory judg~nent, a permanent injunction and
disgorgement or restitution of the service fee payments allegedly received by the defendants,
including interest. On Janaary 25, 2007, NFS, NLIC, and NRS filed a motion to dismiss. On
September 17, 2007, the Court granted the motion to dismiss. On October 1, 2007, the plaintiff filed
a motion to vacate judgment and for leave to file an amended complaint. On September 15, 2008, the
Court denied the plaintiff's' motion to vacate judg~nent and for leave to file an amended complaint.
On October 15. 2008, the plaintill~ filed a notice of appeal. NFS, NLIC and NRS continue to defend
this lawsuit vigorously.
21