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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________________ to _________________
Commission file number 1-11123
NUVEEN INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3817266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 917-7700
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes [X] No [ ]
At August 3, 2004, there were 92,336,250 shares of the Company's Common
Stock outstanding, consisting of 19,011,036 shares of Class A Common Stock, $.01
par value, and 73,325,214 shares of Class B Common Stock, $.01 par value.
NUVEEN INVESTMENTS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 2004 and 2003
Six Months Ended June 30, 2004 and 2003 4
Consolidated Statement of Changes in Common Stockholders'
Equity (Unaudited), Six Months Ended June 30, 2004 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 25
ITEM 4.
Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1 through Item 6 26
Signatures 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUVEEN INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
------------ ----------------
ASSETS
Cash and cash equivalents $ 167,981 $ 161,584
Management and distribution fees receivable 43,376 54,972
Other receivables 17,606 10,103
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $48,380 and $44,543, respectively 28,215 29,973
Other investments 73,379 70,721
Goodwill 549,551 535,271
Other intangible assets, net of accumulated amortization of $13,206 and $10,634, respectively 55,944 58,516
Other assets 39,862 33,253
----------- ------------
$ 975,914 $ 954,393
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 304,173 $ 302,113
Accounts payable 28,152 33,242
Accrued compensation and other expenses 51,376 67,915
Deferred compensation 34,185 30,707
Deferred income tax liability, net 15,192 13,501
Other liabilities 21,795 23,707
----------- -----------
Total liabilities 454,873 471,185
----------- -----------
Minority interest 1,744 4,228
Common stockholders' equity:
Class A Common stock, $.01 par value; 160,000,000 shares authorized; 476 476
47,586,266 shares issued
Class B Common stock, $.01 par value; 80,000,000 shares authorized; 733 733
73,325,214 shares issued
Additional paid-in capital 200,215 188,899
Retained earnings 804,932 763,301
Unamortized cost of restricted stock awards (14) (50)
Accumulated other comprehensive loss (1,821) (2,641)
----------- -----------
1,004,521 950,718
Less common stock held in treasury, at cost (28,454,290 and 28,405,108 shares,
respectively) (485,224) (471,738)
----------- -----------
Total common stockholders' equity 519,297 478,980
----------- -----------
$ 975,914 $ 954,393
=========== ===========
The Company began expensing the cost of stock options on April 1, 2004. All
historical financial information has been restated.
See accompanying notes to consolidated financial statements.
3
NUVEEN INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- -----------
Operating revenues:
Investment advisory fees from assets under management $ 115,345 $ 99,047 $ 227,700 $ 194,291
Product distribution 1,833 3,278 4,260 4,862
Performance fees/other revenue 3,235 3,772 8,147 8,491
---------- ---------- ---------- ----------
Total operating revenues 120,413 106,097 240,107 207,644
Operating expenses:
Compensation and benefits 39,233 32,859 75,884 64,923
Advertising and promotional costs 3,121 3,096 6,141 5,651
Occupancy and equipment costs 4,776 4,922 9,589 9,824
Amortization of intangible assets 1,273 1,302 2,572 2,604
Travel and entertainment 2,089 1,956 3,951 3,736
Outside and professional services 5,800 4,994 11,245 9,538
Other operating expenses 5,417 4,278 10,292 7,556
---------- ---------- ---------- ----------
Total operating expenses 61,709 53,407 119,674 103,832
Operating income 58,704 52,690 120,433 103,812
Interest expense and other 42 (915) 241 (1,897)
---------- ---------- ---------- ----------
Income before taxes 58,746 51,775 120,674 101,915
Income taxes 22,767 20,231 46,818 39,736
---------- ---------- ---------- ----------
Net income $ 35,979 $ 31,544 $ 73,856 $ 62,179
========== ========== ========== ==========
Average common and common equivalent shares outstanding:
Basic 92,609 92,473 92,738 92,519
========== ========== ========== ==========
Diluted 95,494 95,787 95,900 95,736
========== ========== ========== ==========
Earnings per common share:
Basic $ 0.39 $ 0.34 $ 0.80 $ 0.67
========== ========== ========== ==========
Diluted $ 0.38 $ 0.33 $ 0.77 $ 0.65
========== ========== ========== ==========
The Company began expensing the cost of stock options on April 1, 2004. All
historical financial information has been restated.
See accompanying notes to consolidated financial statements.
4
NUVEEN INVESTMENTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
UNAMORTIZED ACCUMULATED
CLASS A CLASS B ADDITIONAL COST OF OTHER
COMMON COMMON PAID-IN RETAINED RESTRICTED COMPREHENSIVE TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK AWARDS INCOME/(LOSS) STOCK TOTAL
------- ------- ---------- --------- ------------ -------------- ---------- ------------
Balance at December 31, 2003 $ 476 $ 733 $188,899 $ 763,301 $ (50) $(2,641) $(471,738) $ 478,980
Net income 73,856 73,856
Cash dividends paid (30,616) (30,616)
Amortization of restricted
stock awards 36 36
Purchase of treasury stock (32,359) (32,359)
Exercise of stock options (2,727) (1,533) 18,625 14,365
Issuance of deferred stock (76) 248 172
Compensation expense on options 8,272 8,272
Tax benefit of options exercised 5,771 5,771
Other 820 820
------ ----- -------- --------- ------ ------- --------- -----------
Balance at June 30, 2004 $ 476 $ 733 $200,215 $ 804,932 $ (14) $(1,821) $(485,224) $ 519,297
====== ===== ======== ========= ====== ======= ========= ===========
The Company began expensing the cost of stock options on April 1, 2004. All
historical financial information has been restated.
See accompanying notes to consolidated financial statements.
5
NUVEEN INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
----------------------------
2004 2003
---------- ---------
Cash flows from operating activities:
Net income $ 73,856 $ 62,179
Adjustments to reconcile net income to net cash
provided from operating activities:
Deferred income taxes 1,255 9,225
Depreciation of office property, equipment and leaseholds 3,852 3,783
Amortization of intangible assets 2,572 2,604
Amortization of debt related costs, net (207) --
Compensation expense on options 8,272 6,980
Net (increase) decrease in assets:
Management and distribution fees receivable 11,596 13,120
Other receivables (7,503) (3,824)
Other assets (6,609) (2,343)
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (16,539) (18,662)
Deferred compensation 3,478 2,003
Accounts payable (5,090) (18,322)
Other liabilities (1,876) 75
Other, consisting primarily of the tax effect of options exercised 5,888 7,762
--------- ---------
Net cash provided from operating activities 72,945 64,580
--------- ---------
Cash flows from financing activities:
Repayment of notes payable -- (70,000)
Dividends paid (30,616) (24,061)
Proceeds from stock options exercised 14,365 10,808
Acquisition of treasury stock (32,359) (20,715)
Net private placement related items 2,404 --
Other -- 860
--------- ---------
Net cash used for financing activities (46,206) (103,108)
--------- ---------
Cash flows from investing activities:
Net purchase of office property and equipment (2,094) (4,664)
Proceeds from sales of investment securities 1,003 417
Purchases of investment securities (5,249) (717)
Contingent consideration for Symphony acquisition (1,379) (5,270)
Proceeds from Rittenhouse stock options exercised -- 42,474
Repurchase of NWQ Class 2 minority members' interests (15,424) --
Other, consisting primarily of the change in other investments 2,801 (3,564)
--------- ---------
Net cash (used for)/provided from investing activities (20,342) 28,676
--------- ---------
Increase/(decrease) in cash and cash equivalents 6,397 (9,852)
Cash and cash equivalents:
Beginning of year 161,584 70,480
--------- ---------
End of period $ 167,981 $ 60,628
--------- ---------
Supplemental Information:
Taxes paid $ 48,314 $ 40,684
Interest paid $ 7,020 $ 3,366
The Company began expensing the cost of stock options on April 1, 2004. All
historical financial information has been restated.
See accompanying notes to consolidated financial statements.
6
NUVEEN INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 1 BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Nuveen
Investments, Inc. and its majority-owned subsidiaries (the "Company" or "Nuveen
Investments") and have been prepared in conformity with accounting principles
generally accepted in the United States of America. These financial statements
have also been prepared in accordance with the instructions to Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures have been omitted pursuant
to such rules and regulations. As a result, these financial statements should be
read in conjunction with the audited consolidated financial statements and
related notes included in the Company's latest annual report on Form 10-K.
Effective April 1, 2004, the Company began expensing the cost of stock options
per the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." The retroactive restatement method described in SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
was adopted and the results for prior years have been restated (see Note 2).
Compensation cost recognized is the same as that which would have been
recognized had the fair value method of SFAS No. 123 been applied from its
original effective date. Prior to April 1, 2004, the Company accounted for stock
option plans under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations.
Certain other amounts in the prior year financial statements have been
reclassified to conform to the 2004 presentation. These reclassifications had no
effect on previously reported net income or stockholders' equity.
These financial statements rely, in part, on estimates. In the opinion of
management, all necessary adjustments (consisting of normal recurring accruals)
have been reflected for a fair presentation of the results of operations,
financial position and cash flows in the accompanying unaudited consolidated
financial statements. The results for the period are not necessarily indicative
of the results to be expected for the entire year.
NOTE 2 STOCK-BASED COMPENSATION
Effective April 1, 2004, the Company adopted the fair value recognition
provisions of SFAS No. 123 using the retroactive restatement method described in
SFAS No. 148. Under the fair value recognition provisions of SFAS No. 123,
stock-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the lesser of the options'
vesting period or the related employee service period. A Black-Scholes
option-pricing model was used to determine stock-based compensation expense.
7
The following table provides the effect of the restatement on net income and
earnings per share (in thousands except per share data):
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
As Reported-
Net Income $35,979 $34,009 $73,856 $66,644
Basic EPS $0.39 $0.37 $0.80 $0.72
Diluted EPS $0.38 $0.36 $0.77 $0.70
As Restated-
Net Income n/a $31,544 n/a $62,179
Basic EPS n/a $0.34 n/a $0.67
Diluted EPS n/a $0.33 n/a $0.65
The December 31, 2003 consolidated balance sheet has been restated for the
retroactive adoption of the fair value recognition provisions of SFAS No. 123,
which resulted in a $26.4 million increase in additional paid in capital, a
$11.4 million decrease in retained earnings, and a $15.0 million decrease in
deferred tax liabilities.
NOTE 3 EARNINGS PER COMMON SHARE
The following table sets forth a reconciliation of net income and the weighted
average common shares used in the basic and diluted earnings per share
computations for the three-month and six-month periods ended June 30, 2004 and
June 30, 2003.
In thousands, For the three months ended
except per share data June 30, 2004 June 30, 2003
- --------------------------------------- -------------------------------- ---------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
------- ------ --------- ------- ------ ----------
Basic EPS $35,979 92,609 $0.39 $31,544 92,473 $0.34
Dilutive effect of:
Deferred stock - 458 - 466
Employee stock options - 2,427 - 2,848
------- ------ ------- ------
Diluted EPS $35,979 95,494 $0.38 $31,544 95,787 $0.33
------- ------ ----- ------- ------ -----
In thousands, For the six months ended
except per share data June 30, 2004 June 30, 2003
- --------------------------------------- -------------------------------- ---------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
------- ------ --------- ------- ------ ----------
Basic EPS $73,856 92,738 $0.80 $62,179 92,519 $0.67
Dilutive effect of:
Deferred stock - 455 - 464
Employee stock options - 2,707 - 2,753
------- ------ ------- ------
Diluted EPS $73,856 95,900 $0.77 $62,179 95,736 $0.65
------- ------ ----- ------- ------ -----
Options to purchase 8,131,569 and 8,349,606 shares of the Company's common stock
were outstanding at June 30, 2004 and 2003, respectively, but were not included
in the computation of
8
diluted earnings per share because the options' respective weighted average
exercise prices of $27.98 and $26.72 per share were greater than the average
market price of the Company's common shares during the applicable period.
NOTE 4 NET CAPITAL REQUIREMENT
Nuveen Investments, LLC, the Company's wholly owned broker/dealer subsidiary, is
subject to the Securities and Exchange Commission Rule 15c3-1, the "Uniform Net
Capital Rule," which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, as these terms
are defined in the Rule, shall not exceed 15 to 1. At June 30, 2004, Nuveen
Investments, LLC's net capital ratio was 2.03 to 1 and its net capital was
$17,519,000, which was $15,143,000 in excess of the required net capital of
$2,376,000.
NOTE 5 GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of activity in the balance of
goodwill from December 31, 2003 to June 30, 2004 presented on our consolidated
balance sheets (in thousands):
Goodwill
Balance at December 31, 2003 $ 535,271
Symphony acquisition - contingent consideration 1,379
NWQ repurchase of Class 2 minority interests 12,923
Other (22)
----------
Balance at June 30, 2004 $ 549,551
----------
As part of the NWQ acquisition, key employees purchased three classes of
non-controlling member interests in NWQ (Class 2, Class 3, and Class 4
interests). The purchase allows NWQ key employees to participate in profits of
NWQ above specified levels beginning January 1, 2003. Beginning in 2004 and
continuing through 2008, the Company has the right to purchase the
non-controlling members' respective interests in NWQ. On February 13, 2004, the
Company exercised its right to call 100% of the Class 2 NWQ minority members'
interests for $15.4 million. Of the total amount paid, approximately $12.9
million was recorded as goodwill, with the remainder being recorded as a return
of capital.
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," requires an annual goodwill impairment test. The
results of our last annual test indicated that, as of May 31, 2004, there was no
indication of potential impairment of goodwill.
The following table presents gross carrying amounts and accumulated amortization
amounts for intangible assets presented on our consolidated balance sheets at
June 30, 2004 and December 31, 2003 (in thousands):
9
At June 30, 2004 At December 31, 2003
---------------- --------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amortizable Intangible Assets Amount Amortization Amount Amortization
- ----------------------------- ------ ------------ ------ ------------
Various previous acquisitions $ 459 $ 459 $ 459 $ 459
Symphony-
Customer relationships 43,800 6,557 43,800 5,445
Internally developed software 1,622 945 1,622 783
Favorable lease 369 369 369 343
NWQ customer contracts 22,900 4,876 22,900 3,604
-------- ------- ------- -------
Total $ 69,150 $13,206 $69,150 $10,634
-------- ------- ------- -------
The projected amortization for the next five years is approximately $2.5 million
for the remaining six months of 2004, and annual amortization of $5.1 million
for 2005, $5.0 million for 2006, and $4.8 million for each of 2007 and 2008.
NOTE 6 NOTES PAYABLE
At June 30, 2004 and December 31, 2003, notes payable on the accompanying
consolidated balance sheets were comprised of the following (in thousands):
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
Private placement debt $300,000 $300,000
Net unamortized private placement fees (1,628) (1,787)
Net unamortized gains on unwinding of swaps 5,043 3,828
Fair value of open interest rate swap 758 72
-------- --------
Total $304,173 $302,113
======== ========
On September 19, 2003, the Company issued $300 million of senior unsecured notes
(the "private placement debt"). These notes mature on September 19, 2008 and
carry a fixed coupon rate of 4.22%, payable semi-annually. These notes, which
were issued at 100% of par, are unsecured, and are prepayable at any time in
whole or in part. In the event of prepayment, the Company will pay an amount
equal to par plus accrued interest plus a "make-whole premium," if applicable.
Proceeds from the private placement debt were used to refinance existing debt
and for general corporate purposes.
Given the volatility of Treasury bond yields prior to the anticipated pricing
date (i.e., the date when the fixed coupon rate would be set), the Company
entered into a series of rate lock transactions. The purpose of the treasury
rate lock was to hedge against the risk that interest rates would rise prior to
the pricing date. The prevailing treasury rate had declined by the time the
private placement debt was priced and the rate lock transactions were settled
for a payment by the Company of $1.5 million (see Note 7). The loss on
settlement of these transactions is being amortized over the term of the private
placement debt, resulting in an increase in interest expense above the fixed
rate of 4.22%.
Also amortized over the term of the private placement debt are gains associated
with several interest rate swap transactions entered into by the Company. These
interest rate swap
10
transactions, under which the Company agreed to pay variable rates of interest,
hedged only a portion ($150 million) of the $300 million in fixed-rate private
placement debt (see Note 7). Subsequently, the spread between floating and fixed
rates narrowed and these interest rate swap transactions were terminated in
September 2003, December 2003, and January 2004 and settled for payments to the
Company of $3.2 million, $1.7 million, and $1.8 million, respectively. The
resultant gains on settlement (net of interest accruals) of $3.2 million, $0.8
million, and $1.8 million are being amortized over the term of the private
placement debt, effectively reducing interest expense. At June 30, 2004, there
was one open interest rate swap transaction. (See Note 7).
Private placement debt issuance costs are being amortized to interest expense
over the term of the private placement debt.
At June 30, 2004 and December 31, 2003, the fair value of our outstanding debt
was $294.4 million and $299.2 million, respectively.
The Company also has lines of credit with a group of banks and a revolving loan
agreement with its majority shareholder, The St. Paul Travelers Companies, Inc.
("St. Paul Travelers"). The line of credit with the group of banks is a
revolving credit line of $250 million, entered into on August 7, 2003. This
committed line is divided into two equal facilities-- one with a three-year term
that expires in August 2006, and one with a term of 364 days that expires in
August 2005. Proceeds from borrowings under this facility may be used for
fulfilling day to day cash requirements and general corporate purposes including
acquisitions, share repurchases and asset purchases. The rate of interest
payable under the agreement is, at the Company's option, a function of one of
various floating rate indices. The agreement requires the Company to pay a
facility fee at an annual rate of 0.12% of the committed amount for the
three-year facility and 0.10% of the committed amount for the 364-day facility.
The revolving loan agreement with St. Paul Travelers was entered into on July
31, 2002. This $250 million loan facility was originally set to expire on July
15, 2003, however it was amended prior to this expiration date to provide for no
scheduled expiration date, but to specify that borrowings would be required to
be repaid within 30 days demand by St. Paul Travelers. This loan facility
carries a floating interest rate of LIBOR plus a margin of up to 0.25%. At June
30, 2004 and December 31, 2003, there were no amounts outstanding under these
lines of credit.
NOTE 7 DERIVATIVE FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an Amendment of FASB Statement No. 133" and further amended by SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
states that, unless a derivative qualifies as a hedge, the gain or loss from a
derivative instrument must be recorded currently into earnings. Under SFAS No.
133, three types of hedges are recognized: fair value hedges, cash flow hedges,
and hedges of a corporation's net investments in foreign operations.
Fair value hedges. An entity may designate a derivative instrument as hedging
the exposure to changes in the fair value (market value) of financial assets or
liabilities. For example, a fixed rate bond's market value changes when
prevailing market interest rates change. Hedging the fixed-rate bond's price
risk with a derivative would be considered a fair value hedge.
11
Cash flow hedges. An entity may also designate a derivative instrument as
hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk. That exposure may be associated with an
existing recognized asset or liability or a forecasted transaction.
As discussed in Note 6, in anticipation of the private placement debt issuance,
the Company entered into a series of treasury rate lock transactions with an
aggregate notional amount of $100 million. These treasury rate locks are
accounted for as cash-flow hedges, as they hedged against the variability in
future projected interest payments on the then-forecasted issuance of fixed rate
debt (the private placement debt) attributable to changes in interest rates. The
prevailing treasury rates had declined by the time of the private placement debt
issuance and the locks were settled for a payment by the Company of $1.5
million. The Company has recorded this loss in "Accumulated Other Comprehensive
Income/(Loss)" in the accompanying consolidated balance sheets, as the treasury
rate locks were considered highly effective for accounting purposes in
mitigating the interest rate risk on the forecasted debt issuance. Amounts
accumulated in other comprehensive loss will be reclassified into earnings
commensurate with the recognition of the interest expense on the newly issued
debt.
Also as discussed in Note 6, the Company entered into a series of interest rate
swap transactions. The Company entered into forward-starting interest rate swap
transactions as hedges against changes in a portion of the fair value of the
private placement debt. Under the agreements, payments were to be exchanged at
specified intervals based on fixed and floating interest rates. All of the
interest rate swap transactions were designated as fair value hedges to mitigate
the changes in fair value of the hedged portion of the private placement debt.
The Company determined that these interest rate swap transactions qualified for
treatment under the short-cut method of SFAS No. 133 of measuring effectiveness.
Certain of these interest rate swap transactions were cancelled. The
cancellation of these interest rate swap transactions resulted in a total gain
to the Company of $5.7 million. These gains are being amortized over the term of
the private placement debt, lowering the effective interest rate of the private
placement debt.
At June 30, 2004, the fair value of the one open interest rate swap transaction
($100 million notional value) is approximately $758,000 and is reflected in
"Other Assets" on the accompanying consolidated balance sheets, with a
corresponding increase in "Notes Payable" representing the change in fair value
of the fixed rate debt. In accordance with the short-cut method of SFAS No. 133,
the fair value adjustment had no earnings impact since the interest rate swap is
considered "highly effective" in eliminating the interest rate risk of the fixed
rate debt that it is hedging.
NOTE 8 RELATED PARTY TRANSACTIONS
On June 30, 2002, the Company made a loan of approximately $2.1 million to one
of Symphony's prior owners, Maestro LLC. The members of Maestro LLC are also
senior executives of Symphony. This uncollateralized, interest-bearing loan is
payable on or before December 31, 2006 and carries an interest rate equal to the
Applicable Federal Rate published by the Secretary of the Treasury (as of June
2004, the applicable interest rate was 3.89% per annum). Any 5-year contingent
consideration payments required to be made by the Company relating to the
Symphony acquisition may be used to offset this loan obligation. A portion of
the 5-year contingent consideration amount paid during the six months ended June
30, 2004 has been used to offset the remaining loan balance of $827,570. As of
December 31, 2003, the remaining note receivable of approximately $827,570 was
included in other assets on our consolidated balance sheets.
12
NOTE 9 RETIREMENT PLANS
On December 23, 2003, the Financial Accounting Standards Board ("FASB") released
a revised version of SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." The revised version of SFAS No. 132 includes new
interim disclosure requirements regarding components of net periodic benefit
cost as well as estimated contributions. The following table presents the
components of the net periodic retirement plans' benefit costs for the three and
six months ended June 30, 2004 and June 30, 2003, respectively:
Three Months Three Months
Ended June 30, 2004 Ended June 30, 2003
--------------------- -------------------
Total Post- Total Post-
Pension retirement Pension retirement
------- ---------- ------- ----------
Service Cost $ 389,000 $ 52,000 $ 414,995 $ 63,215
Interest Cost 409,000 116,000 415,244 143,138
Expected Return on Assets (523,000) -- (482,626) --
Amortization of:
Unrecognized Transition Asset -- -- -- --
Unrecognized Prior Service Cost 1,000 (66,000) 1,626 (77,485)
Unrecognized (Gain)/Loss 29,000 5,000 43,992 --
--------- --------- --------- ---------
Total $ 305,000 $ 107,000 $ 393,231 $ 128,868
========= ========= ========= =========
13
Six Months Six Months
Ended June 30, 2004 Ended June 30, 2003
------------------------ ------------------------
Total Post- Total Post-
Pension retirement Pension retirement
------- ---------- ------- ----------
Service Cost $ 842,000 $ 104,000 $ 829,990 $ 171,388
Interest Cost 851,000 232,000 830,488 272,811
Expected Return on Assets (1,037,000) -- (965,252) --
Amortization of:
Unrecognized Transition Asset -- -- -- --
Unrecognized Prior Service Cost 3,000 (132,000) 3,252 (69,199)
Unrecognized (Gain)/Loss 83,000 10,000 87,984 --
----------- ----------- ----------- -----------
Total $ 742,000 $ 214,000 $ 786,462 $ 375,000
=========== =========== =========== ===========
The Company does not expect to make any contributions during 2004 to its pension
plans. For its postretirement benefit plan, the Company expects to contribute a
total of $350,000 during 2004; for the first six months of 2004, the Company has
contributed approximately $107,942.
14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2004
DESCRIPTION OF THE BUSINESS
Our principal businesses are asset management and related research as well as
the development, marketing and distribution of investment products and services
for the affluent, high-net-worth and the institutional market segments. We
distribute our investment products and services, which include individually
managed accounts, closed-end exchange-traded funds, and mutual funds, to the
affluent and high-net-worth market segments through unaffiliated intermediary
firms including broker/dealers, commercial banks, affiliates of insurance
providers, financial planners, accountants, consultants and investment advisors.
We also provide managed account services, including privately offered
partnerships, to several institutional market segments and channels.
We derive a substantial portion of our revenue from investment advisory fees,
which are recognized as services are performed. These fees are directly related
to the market value of the assets we manage. Advisory fee revenues generally
will increase with a rise in the level of assets under management. Assets under
management will rise through sales of our investment products or through
increases in the value of portfolio investments. Assets under management may
also increase as a result of reinvestment of distributions from funds and
accounts, and from reinvestment of distributions from company-sponsored defined
portfolio (unit investment trust) products we have sponsored into shares of
mutual funds. Fee income generally will decline when assets under management
decline, as would occur when the values of fund portfolio investments decrease
or when managed account withdrawals or mutual fund redemptions exceed gross
sales and reinvestments.
In addition to investment advisory fees, we have two other sources of revenue:
(1) performance fees and (2) underwriting and distribution revenue. Performance
fees are earned when investment performance on certain institutional accounts
exceeds a contractual threshold. Accordingly, performance fee revenue will rise
and fall with the performance of these accounts. These fees are recognized only
at the performance measurement date contained in the individual account
management agreement. Distribution revenue is earned when certain funds are sold
to the public through financial advisors. Correspondingly, distribution revenue
will rise and fall with the level of our sales of mutual fund products.
Underwriting fees are earned on the distribution of shares of our
exchange-traded funds through initial public offerings. The level of
underwriting fees earned in any given year will fluctuate depending on the
number of new funds offered, the size of the funds offered and the extent to
which we participate as a member of the syndicate group underwriting the fund.
Sales of our products, and our profitability, are directly affected by many
variables, including investor preferences for equity, fixed-income or other
investments, the availability and attractiveness of competing products, market
performance, continued access to distribution channels, changes in interest
rates, inflation, and income tax rates and laws.
15
SUMMARY OF OPERATING RESULTS
The table presented below highlights the results of our operations for the
three-month and six-month periods ended June 30, 2004 and 2003:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
($ in millions except per share amounts)
FOR THE SECOND QUARTER OF FOR THE FIRST SIX MONTHS OF
2004 2003 % CHANGE 2004 2003 % CHANGE
---- ---- -------- ---- ---- --------
Gross sales of investment products $ 5,988 $ 5,424 10% $ 12,080 $ 9,620 26%
Net flows of investment products 3,108 3,088 1 6,905 5,193 33
Assets under management (1)(2) 101,857 88,258 15 101,857 88,258 15
Operating revenues 120.4 106.1 13 240.1 207.6 16
Operating expenses 61.7 53.4 16 119.7 103.8 15
Net income 36.0 31.5 14 73.9 62.2 19
Basic earnings per share 0.39 0.34 15 0.80 0.67 19
Diluted earnings per share 0.38 0.33 15 0.77 0.65 18
Dividends per share 0.18 0.13 38 0.33 0.26 27
(1) At period end.
(2) Excludes defined portfolio assets under surveillance.
RESULTS OF OPERATIONS
The following discussion and analysis contains important information that should
be helpful in evaluating our results of operations and financial condition, and
should be read in conjunction with the consolidated financial statements and
related notes.
Gross sales of investment products (which include new managed accounts, deposits
into existing managed accounts and the sale of open-end and exchange-traded fund
shares) for the three-month and six-month periods ended June 30, 2004 and 2003
are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Exchange-Traded Funds $ 512 $2,798 $ 1,535 $ 4,525
Mutual Funds 282 446 673 831
Managed Accounts 5,194 2,180 9,872 4,264
------ ------ ------- -------
Total $5,988 $5,424 $12,080 $ 9,620
====== ====== ======= =======
16
Second quarter gross sales increased 10%, year over year, to nearly $6.0
billion. Retail and institutional managed account sales were $5.2 billion, more
than double the level of sales in the second quarter of the prior year. The
largest driver of the increase was a $3.0 billion increase in value-style equity
managed account sales. Also showing growth were municipal managed account sales,
which increased $0.1 billion or 10%. Sales of exchange-traded funds were down
$2.3 billion from the $2.8 billion we raised in the second quarter of 2003.
Year-to-date sales increased $2.5 billion or 26%. Consistent with sales for the
quarter, the increase was driven by an increase in managed account sales.
Year-to-date managed account sales increased $5.6 billion or 132% driven mainly
by value-style equity account sales which were more than four times the level of
sales in the comparable period of 2003.
Net flows of investment products for the three-month and six-month periods ended
June 30, 2004 and 2003 are shown below:
NET FLOWS
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Exchange-Traded Funds $ 518 $2,804 $1,552 $4,536
Mutual Funds (207) 106 (162) 195
Managed Accounts 2,797 178 5,515 462
------ ------ ------ ------
Total $3,108 $3,088 $6,905 $5,193
====== ====== ====== ======
Net flows for the quarter totaled $3.1 billion, consistent with flows in the
same quarter of the prior year. Both managed accounts and exchange-traded funds
experienced net inflows for the quarter while mutual funds experienced slight
net outflows. Managed account net flows of $2.8 billion were $2.6 billion higher
than the previous year driven by the increase in value-style equity account
sales.
Year-to-date net flows totaled $6.9 billion. Similar to the second quarter, both
managed accounts and exchange-traded funds experienced net inflows for the
quarter while mutual funds experienced slight net outflows.
The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT
(in millions)
JUNE 30, DECEMBER 31, JUNE 30,
2004 2003 2003
---- ---- ----
Exchange-Traded Funds $ 47,262 $47,094 $45,315
Mutual Funds 11,873 12,285 12,228
Managed Accounts - Retail 30,303 25,676 21,692
Managed Accounts - Institutional 12,419 10,301 9,023
-------- ------- -------
Total $101,857 $95,356 $88,258
======== ======= =======
17
Assets under management of nearly $102 billion on June 30, 2004 were 15% higher
than the $88.3 billion reported a year earlier and 7% higher than end of the
year assets. During both timeframes, we experienced asset growth across all
categories with the exception of mutual funds which declined slightly as a
result of net outflows.
The following table presents the component changes in our assets under
management for the three-month and six-month periods ended June 30, 2004 and
June 30, 2003:
CHANGE IN NET ASSETS UNDER MANAGEMENT
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Gross Sales $ 5,988 $ 5,424 $12,080 $ 9,620
Reinvested Dividends 82 96 154 170
Redemptions (2,962) (2,432) (5,329) (4,597)
------- ------- ------- -------
Net Flows 3,108 3,088 6,905 5,193
Appreciation/(Depreciation) (2,175) 3,810 (404) 3,346
------- ------- ------- -------
Increase in Assets $ 933 $ 6,898 $ 6,501 $ 8,539
======= ======= ======= =======
For the three-month period ended June 30, 2004, the $0.9 billion increase in
assets under management was driven by $3.1 billion in net flows offset by $2.2
billion in market depreciation, primarily on our fixed income assets. For the
six-month period ended June 30, 2004 net flows of $6.9 billion were offset
slightly by market depreciation resulting in a net increase in assets under
management of $6.5 billion.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Exchange-Traded Products $ 58,542 $54,698 $117,531 $106,132
Mutual Funds 15,461 15,337 31,608 30,232
Managed Accounts 41,342 29,012 78,561 57,927
-------- ------- -------- --------
Total $115,345 $99,047 $227,700 $194,291
======== ======= ======== ========
Advisory fees for the quarter increased 16% driven by an increase in fees across
all product lines. Fees on managed accounts increased due mainly to an increase
in fees on value-style equity and municipal accounts as a result of an increase
in assets under management. Fees on
18
our growth-style equity accounts remained stable, while base fees on our
alternative investment style managed accounts declined somewhat, due to a
reduction in assets under management.
Year-to-date advisory fees increased 17%. Consistent with the second quarter,
year-to-date fees increased across all product lines. Managed account fees
increased 36% driven by a significant increase in fees on value-style accounts
as a result of a doubling of assets under management. Fees on exchange-traded
funds increased 11% driven by an increase in assets under management due to net
inflows of $3.4 billion over the last year.
Underwriting and distribution revenue for the three-month and six-month periods
ended June 30, 2004 and 2003 is shown in the following table:
UNDERWRITING AND DISTRIBUTION REVENUE
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Exchange-Traded Products $ 226 $2,617 $1,442 $3,609
Muni/Fund Preferred(TM) 923 551 1,743 1,113
Mutual Funds 706 133 1,097 155
Defined Portfolios (22) (23) (22) (15)
------ ------ ------ ------
Total $1,833 $3,278 $4,260 $4,862
====== ====== ====== ======
Underwriting and distribution revenue declined for the quarter and year-to-date,
driven by a reduction in underwriting revenue on exchange-traded funds.
Exchange-traded fund underwriting revenue declined as a result of a decline in
the number of new offerings in 2004. Muni/Fund Preferred(TM) revenue increased
for both the quarter and year-to-date as a result of an increase in the number
of preferred shares outstanding. Mutual fund distribution revenue increased as a
result of a reduction in commissions paid to distributors on high dollar value
sales and an increase in the value of assets upon which rule 12b-1 fees are
earned.
PERFORMANCE FEES/OTHER REVENUE
Performance fees/other revenue consists of various fees earned in connection
with services provided on behalf of our defined portfolio assets under
surveillance and performance fees earned on institutional assets managed by
Symphony. The decline in this area for the second quarter of 2004 is due to a
decline in Symphony performance fees of $0.5 million. Year-to-date, Symphony
performance fees were consistent with the prior year, and the slight decrease in
other revenue is due to a decline in fees earned on defined portfolio assets
under surveillance as a result of a decline in the overall level of defined
portfolio assets due to the exit of this business in early 2002.
19
OPERATING EXPENSES
The following table summarizes operating expenses for the three-month and
six-month periods ended June 30, 2004 and 2003:
OPERATING EXPENSES
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Compensation and Benefits $39,233 $32,859 $ 75,884 $ 64,923
Advertising and Promotion 3,121 3,096 6,141 5,651
Occupancy and Equipment 4,776 4,922 9,589 9,824
Amortization of Intangibles 1,273 1,302 2,572 2,604
Travel and Entertainment 2,089 1,956 3,951 3,736
Outside/Professional Services 5,800 4,994 11,245 9,538
Other Operating Expenses 5,417 4,278 10,292 7,556
------- ------- -------- --------
Total $61,709 $53,407 $119,674 $103,832
======= ======= ======== ========
% of Operating Revenue 51.2% 50.3% 49.8% 50.0%
SUMMARY
Operating expenses increased 16% for the quarter and 15% year-to-date due mainly
to increases in compensation and benefits, outside services and other operating
expenses. Although operating expenses increased overall, on a year-to-date basis
expenses as a percentage of operating revenue are still slightly lower than a
year ago.
COMPENSATION AND BENEFITS
Base compensation for both the quarter and year-to-date was up approximately 8%
due to salary increases and headcount increases. Profit sharing expense also
increased for both the quarter and year-to-date due to an increase in net
income. Beginning in the second quarter of 2004 we elected to begin expensing
options and that cost is reflected in compensation expense. All prior periods
have been restated to include stock option expense.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional expenditures for the quarter were consistent with
the prior year while year-to-date expenditures increased $0.5 million.
OUTSIDE AND PROFESSIONAL SERVICES
Outside and professional services increased $0.8 million for the quarter and
$1.7 million year-to-date due mainly to an increase in legal fees as a result of
the recent mutual fund industry information requests from the Securities and
Exchange Commission.
ALL OTHER OPERATING EXPENSES
All other operating expenses, including occupancy and equipment costs,
amortization of intangible assets, travel and entertainment, fund organization
costs and other expenses increased approximately $1.1 million for the quarter
and $2.7 million year-to-date due mainly to an increase in severance and
recruiting expense as we continue to invest in our distribution
20
and investment teams. Additionally, minority interest expense increased as a
result of the growth of our NWQ business and insurance and other taxes increased
due to an overall increase in insurance costs and an increase in miscellaneous
business taxes due to the expansion of our business.
INTEREST EXPENSE AND OTHER
Interest expense and other includes investment and other income and interest
expense. Investment and other income is comprised primarily of dividends and
interest income from investments, realized gains and losses on investments and
miscellaneous income, including gain or loss on the disposal of property.
Included in other income for the quarter is approximately $2 million in income
related to the release of a customer reserve that was no longer required. This
additional income is partially offset by an increase in net interest expense of
$1.1 million resulting from the private placement debt.
Year-to-date, interest expense and other increased $2.1 million as the income
recorded in the second quarter and the non-recurring investment gains recorded
in the first quarter of 2004 were partially offset by an increase in net
interest expense of $2.5 million resulting from the private placement debt.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46,
(Revised December 2003), "Consolidation of Variable Interest Entities (FIN
46R)". In conjunction with the adoption of FIN 46R, the Company has determined
that certain investment partnerships, for which the Company's wholly-owned
subsidiary, Symphony Asset Management, holds a general partner interest in and
acts as the asset manager of, meet the definition of a voting interest entity as
defined in FIN 46R. The conclusion that these investment partnerships meet the
definition of a voting interest entity required the Company to determine if it
is necessary to consolidate the partnerships into its operating results.
Accounting guidance indicates that absent "important rights" available to the
limited partners, the general partner controlling the partnership should
consolidate the partnership. Common industry practice relied on redemption
rights of the limited partners to meet the "important rights" requirement.
However, we understand that a Securities and Exchange Commission ("SEC") staff
member recently provided guidance in a speech and in response to follow up
questions regarding what may constitute an "important right" as described in the
AICPA Statement of Position No. 78-9. The guidance from this SEC staff member
indicates the view that the redemption rights alone would not be an "important
right" that would eliminate the need for the general partner to consolidate the
partnership.
As a result of the recent guidance from this SEC staff member, during the second
quarter of 2004 Symphony Asset Management amended its investment partnership
agreements to incorporate "important rights" as contemplated in the recent SEC
staff member's interpretative guidance. The Company continues to account for its
general partnership interests in these limited partnerships using the equity
method of accounting and not consolidate them into the Company's results.
21
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
On September 19, 2003, the Company issued $300 million of senior unsecured notes
(the "private placement debt") which mature on September 19, 2008, and carry a
fixed coupon rate of 4.22%, payable semi-annually. These notes, which were
issued at 100% of par, are unsecured and are prepayable at any time in whole or
in part. In the event of prepayment, the Company will pay an amount equal to par
plus accrued interest plus a "make-whole premium," if applicable. Proceeds from
the private placement debt were used to refinance existing debt and for general
corporate purposes.
In addition to the private placement debt, the Company has a committed line of
credit in place to provide liquidity. On August 7, 2003, the Company entered
into a $250 million revolving line of credit with a group of banks. This
committed line is divided into two equal facilities--one with a three-year term
that expires in August 2006 and one that is renewable every 364 days that
expires in August 2005. Proceeds from borrowings under these facilities may be
used for fulfilling day to day cash requirements and general corporate purposes,
including acquisitions, share repurchases and asset purchases. The rate of
interest payable under the agreement is, at the Company's option, a function of
one of various floating rate indices. As of June 30, 2004, there were no amounts
outstanding under either part of the line of credit.
Nuveen Investments also has a $250 million revolving loan agreement with its
majority shareholder, The St. Paul Travelers Companies, Inc. ("St. Paul
Travelers"). This loan facility was originally set to expire on July 15, 2003,
however it was amended prior to this expiration date to provide for no scheduled
expiration date, but to specify that borrowings would be required to be repaid
within 30 days demand by St. Paul Travelers. As of June 30, 2004, there were no
amounts outstanding under this line of credit.
In addition to the above facilities, our broker/dealer subsidiary occasionally
utilizes available, uncommitted lines of credit with no annual facility fees,
which approximate $100 million, to satisfy periodic, short-term liquidity needs.
As of June 30, 2004, no borrowings were outstanding on these uncommitted lines
of credit.
As part of the NWQ acquisition, key employees purchased a non-controlling,
member interest in NWQ Investment Management Company, LLC. The non-controlling
interest of approximately $1.0 million as of June 30, 2004, is reflected in
minority interest on the consolidated balance sheets. This purchase allows
management to participate in profits of NWQ above specified levels beginning
January 1, 2003. During the six months ended June 30, 2004, we recorded
approximately $0.9 million of minority interest expense, which reflects the
portion of profits applicable to the minority shareholders. Beginning in 2004
and continuing through 2008, the Company has the right to purchase the
non-controlling members' respective interests in NWQ. On February 13, 2004, the
Company exercised its right to call 100% of the Class 2 minority members'
interests for $15.4 million. Of the total amount paid, approximately $12.9
million was recorded as goodwill and $2.5 million was a return of capital.
At June 30, 2004, we held in treasury 28,454,290 shares of Class A common stock
acquired in open market transactions. During the second quarter and first half
of 2004, the Company repurchased 557,000 and 1,178,382 Class A common stock
shares in open market transactions, respectively. As part of a share repurchase
program approved on August 9, 2002, we are authorized to purchase up to 7.0
million shares of Class A common stock. As of June 30, 2004, the remaining
authorization covered 3.1 million shares.
22
During the second quarter and first half of 2004, we paid out dividends on
common shares totaling approximately $16.6 million and $30.6 million,
respectively.
Our broker/dealer subsidiary is subject to requirements of the Securities and
Exchange Commission relating to liquidity and capital standards (See Note 4 to
Consolidated Financial Statements).
Management believes that cash provided from operations and borrowings available
under its uncommitted and committed credit facilities will provide the Company
with sufficient liquidity to meet our operating and other financing needs for
the foreseeable future.
INFLATION
Our assets are, to a large extent, liquid in nature and therefore not
significantly affected by inflation. However, inflation may result in increases
in our expenses, such as employee compensation, advertising and promotional
costs, and office occupancy costs. To the extent inflation, or the expectation
thereof, results in rising interest rates or has other adverse effects upon the
securities markets and on the value of financial instruments, it may adversely
affect our financial condition and results of operations. A substantial decline
in the value of fixed-income or equity investments could adversely affect the
value of assets we manage, which in turn would result in a decline in investment
advisory and performance fee revenue.
REGULATORY
The Company continues to respond to periodic information requests from
regulatory and governmental authorities. The Company believes that these
requests have been sent broadly to several firms in the industry in connection
with various investigations and proceedings regarding the asset management
industry, including those described in the Company's most recent Form 10-K, as
well as subsequent inquiries.
FORWARD-LOOKING INFORMATION
From time to time, information we provide or information included in our filings
with the SEC (including Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Notes to Consolidated Financial
Statements in this report on Form 10-Q) may contain statements that are not
historical facts, but are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
relate to future events or future financial performance and reflect management's
expectations and opinions. In some cases, one can identify forward-looking
statements by terminology such as "may", "will", "could", "would", "should",
"expect", "plan", "anticipate", "intend", "believe", "estimate", "predict" or
"potential" or comparable terminology. These statements are only predictions,
and our actual future results may differ significantly from those anticipated in
any forward-looking statements due to numerous known and unknown risks,
uncertainties and other factors. All of the forward-looking statements are
qualified in their entirety by reference to the factors discussed below. These
factors may not be exhaustive, and we cannot predict the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those predicted in any forward-looking statements. We undertake no
responsibility to update publicly or revise any forward-looking statements.
23
Risks, uncertainties and other factors that pertain to our business and the
effects of which may cause our assets under management, earnings, revenues,
profit margins, and/or our stock price to decline include: (1) the effects of
the substantial competition that we, like all market participants, face in the
investment management business, including competition for continued access to
the brokerage firms' retail distribution systems and "wrap fee" managed account
programs where the loss of such access would cause a resulting loss of assets;
(2) the adverse effects of declines in securities markets on our assets under
management and future offerings; (3) the adverse effects of increases in
interest rates from their present levels on the net asset value of our assets
under management that are invested in fixed-income securities and the magnifying
effect such increases in interest rates may have on our leveraged closed-end
exchange-traded funds; (4) the adverse effects of poor investment performance by
our managers or declining markets resulting in redemptions, loss of clients, and
declines in asset values; (5) our failure to comply with contractual
requirements and/or guidelines in our client relationships, which could result
in losses that the client could seek to recover from us and in the client
withdrawing its assets from our management; (6) the competitive pressures on the
management fees we charge; (7) our failure to comply with various government
regulations such as the Investment Advisers Act and the Investment Company Act
of 1940 and other federal and state securities laws that impose, or may in the
future impose, numerous obligations on our investment advisers and managed funds
and accounts and the Securities Exchange Act of 1934 and other federal and state
securities laws and the rules of the National Association of Securities Dealers
that impose, or may in the future impose, numerous obligations on our
broker/dealer subsidiary Nuveen Investments, LLC, where the failure to comply
with such requirements could cause the SEC or other regulatory authorities to
institute proceedings against our investment advisers and/or broker/dealer and
impose sanctions ranging from censure and fines to termination of an investment
adviser or broker/dealer's registration and otherwise prohibiting an adviser
from serving as an adviser; (8) our reliance on revenues from investment
management contracts that are subject to annual renewal by the independent board
of trustees overseeing the related funds according to their terms; (9) the loss
of key employees that could lead to loss of assets; (10) burdensome regulatory
developments including the adoption of regulations governing the amount of
investment management fees charged by investment advisers; (11) the impact of
recent accounting pronouncements; and (12) unforeseen developments in litigation
involving the securities industry or the Company.
24
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
JUNE 30, 2004
The following information, together with information included in this report,
describes the key aspects of certain financial instruments that have market
risk.
INTEREST RATE SENSITIVITY
As of June 30, 2004, all of our long-term debt was at a fixed interest rate.
However, we have periodically entered into receive-fixed, pay-floating interest
rate swap agreements. The agreements effectively increase our exposure to
fluctuations in interest rates. At June 30, 2004 approximately one-third of our
fixed rate debt was converted to variable rate debt through interest rate swaps.
These swaps mature in September of 2008 and had a fair market value of $0.8
million at June 30, 2004. During the year ended December 31, 2003 we utilized
interest rate lock contracts to hedge the risk-free rate component of our then
anticipated private placement debt issuance. The contracts were closed during
the third quarter of 2003 and no interest rate lock contracts were outstanding
at June 30, 2004. For further information regarding interest rate contracts,
refer to Note 7 to the Consolidated Financial Statements - Derivative Financial
Instruments.
INVESTMENT SENSITIVITY
We invest in short-term debt instruments, classified as "Cash and cash
equivalents" on our consolidated balance sheets. The investments are treated as
collateralized financing transactions and are carried at the amounts at which
they will be subsequently resold, including accrued interest. We also invest in
certain Company-sponsored managed investment funds that invest in a variety of
asset classes. These investments are carried on our consolidated financial
statements at fair market value and are subject to the investment performance of
the underlying sponsored fund. Any unrealized gain or loss is recognized upon
the sale of the investment.
ITEM 4. CONTROLS AND PROCEDURES
Effective as of June 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chairman and Chief Executive Officer, President, and Senior Vice
President, Finance, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon that evaluation, the Company's Chairman and Chief
Executive Officer, President, and Senior Vice President, Finance concluded that
the Company's disclosure controls and procedures are effective and no changes
are required at this time. In connection with management's evaluation, pursuant
to the Exchange Act Rule 13a-15(d), no changes during the quarter ended June 30,
2004 were identified that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company is
involved in legal matters such as disputes with employees or customers.
There are currently no such significant matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total (d) Maximum
Number Number
of Shares of Shares
Purchased that May
(a)Total as Part of Yet Be
Number (b) Average Publicly Purchased
of Shares Price Paid Announced Under the
Period Purchased per Share Program Program
- ------------------------------------------- ------------- ----------- ------------- --------------
Share purchases prior to April 1, 2004
under current repurchase program: 3,389,244 $ 25.53 3,389,244 3,610,756
Second quarter purchases:
April 1, 2004 - April 30, 2004 184,100 25.00 184,100 3,426,656
May 1, 2004 - May 31, 2004 201,400 25.00 201,400 3,225,256
June 1, 2004 - June 30, 2004 171,500 27.20 171,500 3,053,756
--------- ------- ---------
Total second quarter purchases 557,000 $ 26.31 557,000
--------- ------- ---------
Total share repurchases under the current
program 3,946,244 $ 25.64 3,946,244 3,053,756
--------- ------- --------- ---------
As part of the Company's current share repurchase program announced and
approved on August 9, 2002, we are authorized to purchase up to 7.0
million shares of Class A common stock. As of June 30, 2004, there are
approximately 3.1 million shares that may yet be purchased under the share
repurchase program. There have been no share repurchases that were not
part of a publicly announced program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 14, 2004, the nine
directors were elected for a one-year term expiring at the annual meeting
to be held in 2004. The following individuals were elected directors by
the vote of holders of the following number of shares of Class A and Class
B Common Stock represented at the meeting, voting together as a single
class:
26
DIRECTOR FOR WITHHELD BROKER NON-VOTE
-------- --- -------- ---------------
Timothy R. Schwertfeger 91,382,495 268,765 0
John P. Amboian 91,381,297 269,963 0
Willard L. Boyd 90,712,834 938,426 0
John L. Carl 90,860,070 791,190 0
W. John Driscoll 90,807,746 843,514 0
Duane R. Kullberg 90,791,446 859,814 0
Roderick A. Palmore 90,858,945 792,315 0
The following individuals were elected as Class B directors by the vote of
holders of the following number of shares of Class B Common Stock
represented at the meeting, voting as a separate class:
CLASS B DIRECTOR FOR WITHHELD BROKER NON-VOTE
- ---------------- --- -------- ---------------
Jay S. Fishman 73,325,214 0 0
William H. Heyman 73,325,214 0 0
The proposal to ratify the selection of KPMG LLP as independent auditors
for the Company was approved by a vote of 91,308,056 shares in favor,
241,774 shares opposed and 101,430 shares abstaining.
At the meeting of the Board of Directors following the Annual Meeting of
Shareholders, Jay S. Benet and Samuel G. Liss were elected to serve as
Class B directors of the Company by vote of the Board of Directors.
ITEM 5. OTHER INFORMATION
The next annual shareholder meeting for Nuveen Investments, Inc. has been
set for Tuesday, May 17, 2005 in Chicago, Illinois.
As discussed in Note 2 to the Consolidated Financial Statements, the
Company began expensing the cost of stock options on April 1, 2004 by
adopting the fair value recognition provisions of SFAS No. 123 using the
retroactive restatement method described in SFAS No. 148. The Restated
Five Year Financial Summary that follows restates the Company's financial
information for the prior five years assuming that options were expensed
in this period and is provided for purposes of consistency in reviewing
the Company's financial information.
27
RESTATED FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
DECEMBER 31, 2003 2002 2001 2000 1999
- ------------ ---- ---- ---- ---- ----
INCOME STATEMENT DATA
Operating Revenues:
Investment advisory fees from assets under
management $ 404,847 $ 355,476 $ 330,588 $ 311,075 $ 302,200
Product distribution 9,206 12,083 19,513 38,160 27,224
Investment banking - - - - 6,213
Performance fees/other revenue 37,975 28,888 21,002 9,158 3,123
------------- ---------- ---------- ----------- ----------
Total operating revenues 452,028 396,447 371,103 358,393 338,760
Operating Expenses:
Compensation and benefits 144,190 115,522 102,727 98,074 96,223
Advertising and promotional costs 11,627 12,608 17,751 34,992 29,317
All other operating expenses 69,885 68,417 71,484 64,227 68,436
------------- ---------- ---------- ----------- ----------
Total operating expenses 225,702 196,547 191,962 197,293 193,976
Operating Income 226,326 199,900 179,141 161,100 144,784
Interest Expense and Other (5,171) (4,992) 820 9,248 10,940
Income Before Taxes 221,155 194,908 179,961 170,348 155,724
------------- ---------- ---------- ----------- ----------
Income Taxes 86,150 76,114 71,365 68,184 61,677
Net Income $ 135,005 $ 118,794 $ 108,596 $ 102,164 $ 94,047
============= ========== ========== =========== ==========
Earnings per Common Share:
Basic $ 1.46 $ 1.26 $ 1.15 $ 1.06 $ 1.00
Diluted $ 1.41 $ 1.21 $ 1.07 $ 1.00 $ 0.92
Return on average equity 30.8% 29.1% 24.8% 23.9% 24.9%
Total dividends per share $ 0.56 $ 0.50 $ 0.47 $ 0.40 $ 0.38
Balance Sheet Data
Total assets $ 954,393 $ 841,042 $ 705,287 $ 583,394 $ 549,764
Total liabilities and minority interest $ 475,414 $ 444,316 $ 284,722 $ 126,598 $ 149,903
Redeemable preferred stock $ - $ - $ 5,625 $ 45,000 $ 45,000
Common stockholders' equity $ 478,979 $ 396,726 $ 414,940 $ 411,796 $ 354,861
Nuveen Managed Assets (in millions)
Net assets under management
Mutual funds $ 12,285 $ 11,849 $ 11,814 $ 11,485 $ 11,406
Exchange-traded funds 47,094 39,944 32,000 28,355 26,846
Money market funds - - - 472 637
Managed accounts 35,977 27,926 24,671 21,699 20,895
------------- ---------- ---------- ----------- ----------
Total $ 95,356 $ 79,719 $ 68,485 $ 62,011 $ 59,784
Gross Investment Product Sales (in millions)
Mutual funds $ 1,536 $ 1,512 $ 1,246 $ 1,022 $ 1,535
Defined portfolios - 194 1,481 4,047 2,660
Exchange-traded funds 6,283 6,848 3,937 46 2,770
Managed accounts 10,279 7,040 7,570 5,694 7,101
------------- ---------- ---------- ----------- ----------
Total $ 18,098 $ 15,594 $ 14,234 $ 10,809 $ 14,066
Earnings per common share data have been restated for the 3-for-2 common stock
dividend paid to shareholders of record on September 20, 2001, and restated for
the 2-for-1 common stock dividend paid to shareholders of record on June 3,
2002.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Certain of the following exhibits, as indicated parenthetically,
were previously filed as exhibits to registration statements or
reports filed by the Company with the Commission and are
incorporated herein by reference to such statements or reports and
made a part hereof. Exhibit numbers which are identified with an
asterisk (*) have such documents filed herewith. See exhibit index
on page E-1.
3.1 Restated Certificate of Incorporation of the Company (Exhibit 3.1 to
Registration Statement on Form S-1 filed on April 2, 1992, File No.
33-46922).
3.2 Certificate of Designations, Preferences and Rights of 5% Cumulative
convertible Preferred Stock of the Company (Exhibit 3.1(a) to the
Company's Form 10-Q for quarter ended September 30, 2000).
3.3 Amendment to Restated Certificate of Incorporation of the Company
(Exhibit 3.1(b) to the Company's Form 10-K for year ended December
31, 2002).
3.4 Certificate of Ownership and Merger (Exhibit 3.1(c) to the Company's
Form 10-K for year ended December 31, 2002).
3.5 Amended and Restated By-Laws of the Company (Exhibit 3.2 to the
Company's Form 10-K for year ended December 31, 1993).
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.
31.2* Certification of President pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
31.3* Certification of Principal Financial and Accounting Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of President pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3* Certification of Principal Financial and Accounting Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
On April 20, 2004, a report was furnished to the Securities and
Exchange Commission under Item 12 of Form 8-K relating to the
Company's April 20, 2004 press release announcing the Company's
first quarter 2004 earnings results.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUVEEN INVESTMENTS, INC.
(Registrant)
DATE: August 6, 2004 /s/ John P. Amboian
-------------------------------------
John P. Amboian
President
DATE: August 6, 2004 /s/ Margaret E. Wilson
---------------------------------------
Margaret E. Wilson
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of President pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
31.3 Certification of Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of President pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.3 Certification of Principal Financial and Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
E-1