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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 Page 1 2 3 4 5 6 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. 5 I I I I I I I I I I I I I i I I I I I (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