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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Commission file number 1-11123
NUVEEN INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3817266
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 WEST WACKER DRIVE 60606
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 312-917-7700
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value New York Stock Exchange
(Title of Class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 if the Act.)
Yes [X] No [ ]
The aggregate market value of the outstanding Common Stock held by
non-affiliates of the Registrant as of June 30, 2004 was $489,462,738. This
calculation does not reflect a determination that persons are affiliates for any
other purposes.
The number of shares of the Registrant's Common Stock outstanding at February
25, 2005 was 94,057,755 consisting of 20,732,541 shares of Class A Common Stock,
$.01 par value, and 73,325,214 shares of Class B Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to the annual meeting of
stockholders to be held May 17, 2005 are incorporated by reference into Part III
of this report.
PART I
ITEM I. BUSINESS
GENERAL
The principal businesses of Nuveen Investments, Inc. ("The Company" or "We" or
"Nuveen" or "Our" where applicable) 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 institutional market segments. We
distribute our investment products and services, including closed-end
exchange-traded funds ("exchange-traded funds"), mutual funds and individually
managed accounts, to 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.
The Company and its subsidiaries offer core investment capabilities through four
branded investment teams: Rittenhouse growth equities, NWQ value equities,
Nuveen fixed-income ("NAM"), and Symphony alternative investments.
Operations of the Company are organized around its principal advisory
subsidiaries, which are registered investment advisers under The Investment
Advisers Act of 1940. Certain of these advisory subsidiaries manage various
Nuveen mutual funds and exchange-traded funds and others provide investment
management services for individual and institutional managed accounts.
Additionally, Nuveen Investments, LLC, a registered broker and dealer in
securities under The Securities Exchange Act of 1934, provides investment
product distribution and related services for the Company's managed funds and,
through March of 2002, sponsored and distributed the Company's defined
portfolios.
COMPANY HISTORY AND ACQUISITIONS
The Company, headquartered in Chicago, is the successor to a business formed in
1898 by Mr. John Nuveen that served as an underwriter and trader of municipal
bonds. This core business was augmented in 1961 when the Company developed and
introduced its first municipal defined portfolio, which is a fixed portfolio of
municipal securities selected and purchased by the Company and deposited in a
trust. The Company introduced its first municipal mutual fund in 1976, its first
municipal money market fund in 1981, and its first municipal exchange-traded
fund in 1987. The Company began providing individual managed account services to
investors in early 1995, and since 1996 the Company has offered an increasingly
wide range of equity-based managed funds and accounts to its target markets.
On January 2, 1997, the Company completed the acquisition of Flagship Resources
Inc. ("Flagship") a manager of both municipal mutual funds and municipal managed
accounts for individual investors.
On August 31, 1997, the Company completed the acquisition of all of the
outstanding stock of Rittenhouse Financial Services, Inc. ("Rittenhouse"), which
specializes in managing individual equity and balanced portfolios primarily for
high-net-worth individuals served by financial advisors. Rittenhouse provided
the Company with a high-quality scalable distribution and service platform
focused on the growing retail managed account markets.
On September 17, 1999, the Company completed the sale of its investment banking
business to US Bancorp Piper Jaffray. In conjunction with the sale, the Company
ceased underwriting and distributing municipal bonds and serving as remarketing
agent for variable rate bonds.
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On July 16, 2001, the Company completed the acquisition of Symphony Asset
Management, LLC ("Symphony"). Symphony is an institutional investment manager
based in San Francisco. As a result of the acquisition, the Company's product
offerings have expanded to include alternative investments designed to reduce
risk through market-neutral and other strategies in several equity and
fixed-income asset classes. Symphony also manages several long-only portfolios
for the Company.
In the first quarter of 2002, the Company exited the defined portfolio product
line. As a result, the Company no longer creates and distributes new defined
portfolios. Defined portfolios previously sponsored by the Company that are
still outstanding continue to be administered by the Company.
On August 1, 2002, the Company completed the acquisition of NWQ Investment
Management ("NWQ"), an asset management firm that specializes in value-oriented
equity investments with significant relationships among institutions and
financial advisors serving high-net-worth investors. NWQ has a product line that
includes large-cap, mid-cap and small-cap value products as well as
international value portfolios.
The Company was incorporated in the State of Delaware on March 23, 1992, as a
wholly owned subsidiary of The St. Paul Companies, Inc. (now The St. Paul
Travelers Companies, Inc. ("St. Paul Travelers")). John Nuveen & Co.
Incorporated, the predecessor of the Company (now named Nuveen Investments,
LLC), had been a wholly owned subsidiary of St. Paul Travelers since 1974.
During 1992, St. Paul Travelers sold a portion of its ownership interest in the
Company through a public offering. As of the date of this report, St. Paul
Travelers owns approximately 78% of the outstanding voting securities of the
Company.
LINES OF BUSINESS
We derive substantially all of our revenues from providing investment advisory,
investment management, distribution and administration services to our family of
funds and high-net-worth and institutional investors. This is our main business
activity and only operating segment.
The following series of tables, including Gross Sales of Investment Products,
Net Flows, and Net Assets Under Management, provide data that should be helpful
in understanding the Company's business and should be referred to while reading
the separate discussions that follow the tables.
2
GROSS SALES OF INVESTMENT PRODUCTS
The following table summarizes gross sales for the Company's products for the
past three years:
GROSS SALES OF INVESTMENT PRODUCTS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Managed Accounts:
Retail $15,497,165 $ 7,943,426 $ 5,692,870
Institutional 5,939,308 2,335,561 1,346,652
----------- ----------- -----------
Total 21,436,473 10,278,987 7,039,522
Mutual Funds:
Municipal 1,381,353 1,428,389 1,365,144
Equity and Income 243,445 107,347 147,606
----------- ----------- -----------
Total 1,624,798 1,535,736 1,512,750
Exchange-Traded Funds:
Common Shares 2,066,227 4,104,778 4,689,477
Preferred Shares 821,967 2,178,623 2,158,668
----------- ----------- -----------
Total 2,888,194 6,283,401 6,848,145
----------- ----------- -----------
Total Managed Assets 25,949,465 18,098,124 15,400,417
Defined Portfolio Sales - - 194,117
----------- ----------- -----------
Total Sales $25,949,465 $18,098,124 $15,594,534
=========== =========== ===========
3
NET FLOWS OF INVESTMENT PRODUCTS
The following table summarizes net flows (equal to sales, reinvestments and
exchanges less redemptions) for the Company's products for the past three years.
NET FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
----------- ----------- -----------
Managed Accounts:
Retail $ 8,367,137 $ 2,921,607 $ 343,314
Institutional 3,455,259 (20,835) (281,361)
----------- ----------- -----------
Total 11,822,396 2,900,772 61,953
Mutual Funds:
Municipal 280,449 372,709 666,192
Equity and Income 7,437 (140,007) (488,663)
----------- ----------- -----------
Total 287,886 232,702 177,529
Exchange-Traded Funds 2,911,406 6,304,661 6,868,361
----------- ----------- -----------
Total Managed Assets 15,021,688 9,438,135 7,107,843
Defined Portfolios - - 194,117
----------- ----------- -----------
Total $15,021,688 $ 9,438,135 $ 7,301,960
=========== =========== ===========
NET ASSETS UNDER MANAGEMENT
The following table shows net assets managed by the Company at December 31 for
each of the past three years. Defined portfolio assets under surveillance are
not included in net assets under management since the portfolios are not
actively managed and generally generate up-front distribution revenues rather
than on-going advisory fees.
NET ASSETS UNDER MANAGEMENT
(IN MILLIONS)
DECEMBER 31,
--------------------------
2004 2003 2002
-------- ------- -------
Managed Accounts:
Retail $ 36,975 $25,676 $19,403
Institutional 15,582 10,301 8,523
-------- ------- -------
Total 52,557 35,977 27,926
Mutual Funds:
Municipal 11,381 11,101 10,759
Equity and Income 1,299 1,184 1,090
-------- ------- -------
Total 12,680 12,285 11,849
Exchange-Traded Funds 50,216 47,094 39,944
-------- ------- -------
Total Managed Assets $115,453 $95,356 $79,719
======== ======= =======
4
ASSET MANAGEMENT
INVESTMENT CAPABILITIES OVERVIEW
The Company, through its advisory subsidiaries, offers four core investment
styles: growth equities through Rittenhouse; value equities through NWQ;
fixed-income through NAM; and hedged alternative investments through Symphony.
Within these core investment styles, the Company sponsors several product
alternatives including separately managed accounts, closed-end exchange-traded
funds and open-end mutual funds. In its capacity as an adviser, the Company is
responsible for the execution of the investment policies of the various funds or
managed accounts it advises. Investment decisions for each fund or account are
made by the portfolio manager responsible for the fund or managed account.
Our Rittenhouse portfolio team follows a core growth stock strategy that centers
generally on identifying large capitalization companies that are financially
strong, are global leaders in their industries and generally have demonstrated
consistent and predictable above-average long-term growth in earnings and, if
applicable, in dividends. Our NWQ portfolio team specializes in value-oriented
equity investments with a philosophy of investing in undervalued companies with
identified catalysts to improve profitability and/or unlock value. Symphony's
hedged alternative investment disciplines are designed to reduce the systematic
risk of investing in several equity and fixed-income asset classes with the goal
of producing positive returns regardless of broad market direction. NAM's
fixed-income style concentrates primarily on the research, selection and
management of municipal bond portfolios with the goal of generating attractive
current income. The Company also offers investment products in a variety of
taxable fixed-income styles including preferred securities, convertible
securities, real estate investment trusts ("REITs"), senior loans and emerging
market debt. Several of these styles provide access to other specialized,
unaffiliated investment managers through sub-advisory arrangements.
The Company has traditionally had a very low employment turnover rate among its
portfolio managers. The majority of the Company's portfolio managers, as well as
those employed by sub-advisers, have devoted most of their professional careers
to the analysis, selection and surveillance of the types of securities held in
the funds or accounts they manage.
SPONSORED PRODUCTS
The Company provides tailored investment management services for individuals and
institutions through traditional managed accounts. Managed accounts are
individual portfolios of stocks and bonds that offer investors the opportunity
for a greater degree of tax planning and customization than traditional mutual
funds. Our managed account offerings include large-cap growth and value
accounts, small-cap and mid-cap value accounts, international equity accounts,
blends of stocks and bonds, and market-neutral as well as tax-free and taxable
fixed-income accounts. Accounts managed by Symphony include privately offered
hedge funds. Symphony offers single-strategy market-neutral hedged portfolios
across different asset classes and capitalization ranges: Large Cap U.S.
Equities, Small Cap U.S. Equities, Convertible-bond Arbitrage, Credit Arbitrage
and Senior Loans. Portfolios are managed through privately offered on-shore
limited partnerships, off-shore funds, and separately managed accounts. Some
separate accounts, partnerships, and funds employ investment leverage. In
addition, some clients may choose to overlay Symphony's strategies with futures
contracts. At December 31, 2004, Rittenhouse, NAM, NWQ and Symphony managed 18%,
20%, 57% and 5% of the Company's total managed account assets, respectively.
Rittenhouse and NWQ manage accounts on both a discretionary and
non-discretionary basis, while NAM and Symphony accounts are managed on a
discretionary basis.
As of December 31, 2004, the Company sponsored 110 closed-end exchange-traded
funds that are actively managed. Of these funds, 98 invest exclusively in
municipal securities. Of the remaining 12 funds, three invest primarily in
senior loans, one invests in REITs, two invest in a blend of fixed-income and
equity strategies, two invest in preferred and convertible securities, three
invest solely in preferred securities and one invests in
5
equity index and option securities. Closed-end exchange-traded funds do not
continually offer to sell and redeem their shares. Rather, daily liquidity is
provided by the ability to trade the shares of these funds on the New York or
American Stock Exchange, at prices that may be above or below the shares' net
asset value. The municipal exchange-traded funds include insured and uninsured
national and single-state funds. Most of these funds have a "leveraged" capital
structure through the issuance of both common and preferred shares. The
dividends paid to preferred shareholders are based on short-term tax-free
interest rates, while the proceeds from the issuance of preferred shares are
invested by the funds in longer-term municipal securities. This leveraged
capital structure is designed to generate additional dividend potential for the
common shareholders based on the historically observed differences between
short-term and long-term interest rates. The exchange-traded funds that invest
in senior loans, REITs, taxable fixed-income and equity strategies, preferred
and convertible securities and preferred securities also have leveraged capital
structures. They use preferred shares or short-term borrowings in a manner
consistent with the municipal exchange-traded funds, in an attempt to generate
additional incremental income for common shareholders. If the preferred share
dividend rate or short-term borrowing rate were to exceed the net rate of return
earned by a fund's investment portfolio for an extended period, the fund's Board
of Directors may consider redeeming the outstanding preferred shares or
eliminate the short-term borrowing. In addition, the fund's Board may consider
converting the fund from its closed-end exchange-traded status into an open-end
fund if the fund persistently trades on the stock exchange at deep discounts to
its net asset value per share. Either of these situations may negatively affect
total assets under management.
As of December 31, 2004, the Company offered 36 equity, balanced and municipal
open-end mutual funds. These funds are actively managed and continuously offer
to sell their shares at prices based on the daily net asset values of their
portfolios. Daily redemption at net asset value is offered by all 36 funds. Of
the 36 mutual funds, the Company offers 30 national and state-specific municipal
funds that invest substantially all of their assets in diversified portfolios of
limited-term, intermediate-term or long-term municipal bonds. The Company offers
6 mutual funds that invest exclusively in U.S. equities, international equities,
or in portfolios combining equity with taxable fixed-income or municipal
securities.
The relative attractiveness of the Company's mutual funds and exchange-traded
funds to investors depends upon many factors, including current and expected
market conditions, the performance histories of the funds, their current yields,
the availability of viable alternatives, and the level of continued
participation by the unaffiliated, third party firms that distribute the
Company's funds to their customers.
The assets under management of managed accounts, mutual funds and
exchange-traded funds are affected by changes in the market values of the
underlying securities. Changing market conditions may cause positive or negative
shifts in valuation, and subsequently in the advisory fees earned from these
assets.
ADVISORY FEES
The Company provides investment management services to funds, accounts and
portfolios pursuant to investment management agreements. With respect to managed
accounts, Rittenhouse, NAM, Symphony, and NWQ generally receive fees, on a
quarterly basis, based on the value of the assets managed on a particular date,
such as the first or last calendar day of a quarter, or on the average asset
value for the period. Symphony also receives performance fees earned on certain
institutional accounts and hedge funds based on the performance of the accounts.
With respect to mutual funds and exchange-traded funds, the Company receives
fees based either on each fund's average daily net assets or on a combination of
the average daily net assets and gross interest income.
Pursuant to sub-advisory agreements, Institutional Capital Corporation ("ICAP")
performs portfolio management services on behalf of three of the equity-based
mutual funds, Security Capital Research & Management Incorporated ("SC")
performs portfolio management services for our REIT exchange-traded fund and
diversified dividend and income exchange-traded fund, Wellington Management
Company, LLP ("WM") performs portfolio management services for the diversified
dividend and income exchange-traded fund,
6
Spectrum Asset Management, Inc. ("SM") performs portfolio management services
for the three preferred securities exchange-traded funds and two preferred and
convertible income exchange-traded funds. Froley, Revy Investment Co., Inc.
("FR") performs portfolio management services for the two preferred and
convertible income exchange-traded funds and Gateway Advisors ("GA") performs
portfolio management services for the equity index and option fund. The Company
has a 23% minority equity ownership interest in ICAP, but has no equity
ownership interest in SC, WM, SM, FR or GA.
Advisory fees, net of sub-advisory fees and expense reimbursements, earned on
managed assets for each of the past three years are shown in the following
table:
MANAGED ASSETS - INVESTMENT ADVISORY FEES
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Managed account advisory fees $ 173,094 $ 122,961 $ 104,480
Exchange-traded fund advisory fees 239,295 220,701 191,567
Mutual fund advisory fees 63,578 61,612 60,449
Less: reimbursed expenses (153) (427) (1,020)
--------- --------- ---------
Net advisory fees 63,425 61,185 59,429
Total $ 475,814 $ 404,847 $ 355,476
========= ========= =========
The Company's advisory fee schedules currently provide for maximum annual fees
ranging from 0.45% to 0.60% in the case of the municipal mutual funds, and 0.75%
to 1.05% in the case of the equity and taxable income mutual funds. Maximum fees
in the case of the exchange-traded funds currently range from 0.35% to 0.90% of
total net assets, except with respect to the five select portfolios. The
investment management agreements for these select portfolios provide for annual
advisory fees ranging from 0.25% to 0.30%. Additionally, for 54 funds offered
since 1999, the investment management agreement specifies that for at least the
first five years the Company will waive management fees or reimburse other
expenses. The investment management agreement provides for waived management
fees or reimbursements of other expenses ranging from 0.30% to 0.45% for the
first five years. In each case, the management fee schedules provide for
reductions in the fee rate at increased asset levels. In August 2004, the
Company implemented a complex-wide fund pricing structure for all of its managed
funds. The complex-wide pricing structure separates traditional portfolio
management fees into two components - a fund specific component and an aggregate
complex-wide component. The aggregate complex-wide component introduces
breakpoints related to the entire complex of managed funds, rather than
utilizing breakpoints only within individual funds. For the separately managed
accounts, fees are negotiated and are based primarily on asset size, portfolio
complexity and individual needs. These fees can range from 0.17% to 1.19% of net
asset value annually, with the majority of the assets falling between 0.27% and
0.60%.
The Company, through its Symphony subsidiary, earns performance fees for
performance above specifically defined benchmarks. These fees are generally
measured annually and are recognized only at the performance measurement date
contained in the individual account management agreement. The underlying
measurement dates for approximately 80% of investors' capital fall in the second
half of the year.
The Company pays ICAP, SC, WM, SM, FR and GA a portfolio advisory fee for
sub-advisory services. The sub-advisory fees are based on the percentage of the
aggregate amount of average daily net assets in the funds they sub-advise. The
fee schedules provide for rate declines as asset levels increase.
7
Pursuant to sub-advisory agreements, the Company, through its advisory
subsidiaries, performs portfolio management services on behalf of an
equity-based exchange-traded fund and a Canadian senior loan fund traded on the
Toronto Stock Exchange. These sub-advisory agreements are with IQ Investment
Advisors, a subsidiary of Merrill Lynch, and Fairway Capital Management,
respectively. The Company earns sub-advisory fees based on the assets in the
funds it sub-advises.
INVESTMENT MANAGEMENT AGREEMENTS
Each managed fund has entered into an investment management agreement with a
Nuveen advisory subsidiary (each, an "Adviser"). Although the specific terms of
each agreement vary, the basic terms are similar. Pursuant to the agreements,
the Adviser provides overall management services to each of the funds, subject
to the supervision of each fund's Board of Directors and in accordance with each
fund's investment objectives and policies. The investment management agreements
are approved initially by fund shareholders and their continuance must be
approved annually by the directors of the respective funds, including a majority
of the directors who are not "interested persons" of the Adviser, as defined in
the Investment Company Act of 1940. Amendments to such agreements typically must
be approved by fund shareholders. Each agreement may be terminated without
penalty by either party upon 60 days written notice, and terminates
automatically upon its assignment (as defined in the Investment Company Act of
1940). Such an "assignment" will take place in the event of a change in control
of the Adviser. Under the Investment Company Act of 1940, a change in control of
the Adviser would be deemed to occur in the event of certain changes in the
ownership of the Company's voting stock. The termination of all or a portion of
the investment management agreements, for any reason, could have a material
adverse effect on the Company's business and results of operations.
Each fund bears all expenses associated with its operations, including the costs
associated with the issuance and redemption of securities, where applicable. The
fund does not bear compensation expenses of directors and officers of the fund
who are employed by the Company or its subsidiaries. Some of the Company's
investment management agreements provide that, to the extent certain enumerated
expenses exceed a specified percentage of a fund's or a portfolio's average net
assets for a given year, the Adviser will absorb such excess through a reduction
in the management fee and, if necessary, pay such expenses so that the
year-to-date net expense will not exceed the specified percentage. In addition,
the Company may voluntarily waive all or a portion of its advisory fee from a
fund, and/or reimburse expenses, for competitive reasons. Reimbursed expenses
for mutual funds, including voluntary waivers, totaled $0.2 million during the
year ended December 31, 2004. The Company expects to continue voluntary waivers
at its discretion. The amount of such waivers may be more or less than
historical amounts.
Services provided by Rittenhouse, NAM, Symphony, and NWQ to each of the
individual accounts are also governed by management contracts, which are
customized to suit a particular account. A majority of these contracts and of
Rittenhouse's, NAM's and NWQ's assets under management involve investment
management services provided to clients who are participants in "wrap-fee"
programs sponsored by unaffiliated investment advisers or broker-dealers. Such
agreements, and the other investment agreements to which Rittenhouse, NWQ and
NAM are parties, generally provide that they can be terminated without penalty
upon written notice by either party within any specified period. Under the
provisions of the Investment Advisers Act of 1940, such investment management
agreements may not be assigned to another manager without the client's consent.
The term "assignment" is broadly defined under this Act to include any direct or
indirect transfer of the contract or of a controlling block of the adviser's
stock by a security holder.
OVERVIEW OF DISTRIBUTION AND RELATIONSHIPS WITH DISTRIBUTORS
The Company distributes its investment products and services, including
separately managed accounts, exchange-traded funds and mutual funds, through
registered representatives associated with unaffiliated national and regional
broker-dealers, commercial banks and thrifts, broker-dealer affiliates of
insurance agencies and independent insurance dealers, financial planners,
accountants, and tax consultants ("retail distribution firms") and through
unaffiliated consultants serving the institutional market. The Company also
8
provides investment products and services directly to institutional markets. The
Company's distribution strategy is to maximize the liquidity and distribution
potential of its investment products by maintaining strong relationships with a
broad array of registered representatives and independent advisors and
consultants. The Company has well-established relationships with registered
representatives in retail distribution firms throughout the country. These
registered representatives participate to varying degrees in the Company's
marketing programs, depending upon any one or more of the following factors:
their interests in distributing investments provided by the Company; their
perceptions of the relative attractiveness of the Company's managed funds and
accounts; the profiles of their customers and their clients' needs; and the
conditions prevalent in financial markets. Registered representatives may reduce
or eliminate their involvement in marketing the Company's products at any time,
or may elect to emphasize the investment products of competing sponsors, or the
proprietary products of their own firms. Registered representatives may receive
compensation incentives to sell their firm's investment products or may choose
to recommend to their customers investment products sponsored by firms other
than the Company. This decision may be based on such considerations as
investment performance, types and amount of distribution compensation, sales
assistance and administrative service payments, and level and quality of
customer service. In addition, a registered representative's ability to
distribute the Company's mutual funds is subject to the continuation of a
selling agreement between the firm with which the representative is affiliated
and the Company. A selling agreement does not obligate the retail distribution
firm to sell any specific amount of products and typically can be terminated by
either party upon 60 days notice. Redeemable managed assets (consisting of
managed accounts and mutual funds) held in accounts at Merrill Lynch produced 9%
of consolidated operating revenue in 2004, the largest percentage of any of our
distribution firms.
The Company employs external and internal sales and service professionals who
work closely with intermediary distribution partner firms and consultants to
offer customized solutions for high-net-worth and institutional investors. These
professionals regularly meet with independent advisors and consultants, who
distribute the Company's products, to help them develop investment portfolio and
risk-management strategies designed around the core elements of a diversified
portfolio. The Company also employs several professionals who provide education
and training to the same independent advisors and consultants. These
professionals offer expertise and guidance on a number of topics including
wealth management strategies, practice management development, asset allocation
and portfolio construction.
DISTRIBUTION REVENUE
As part of the Company's asset management business, the Company earns revenue
upon the distribution of the Company's mutual funds and upon the public offering
of new closed-end exchange-traded funds. The Company does not earn distribution
revenue upon the establishment of individual or institutional managed accounts.
Common shares of exchange-traded funds are initially sold to the public in
offerings that are underwritten by a syndication group, including the Company,
through our Nuveen Investments, LLC broker-dealer. Underwriting fees earned are
dependent upon our level of participation in the syndicate. During the year
ended December 31, 2004, there were four new exchange-traded fund offerings.
All of the Company's mutual funds have adopted a Flexible Sales Charge Program
that provides investors with alternative ways of purchasing fund shares based
upon their individual needs and preferences.
Class A shares may be purchased at a price equal to the fund's net asset value
plus an up-front sales charge ranging from 2.5% of the public offering price for
limited-term municipal funds to 5.75% for equity funds. At the maximum sales
charge level, approximately 90% to 95% of the sales charge is typically
reallowed as a concession to the retail distribution firms. From time to time,
the Company may reallow all of the sales charge to retail distribution firms or
waive the sales charge and advance a sales commission to such firms in
connection with marketing programs or special promotions. Additionally,
purchases of Class A shares that equal or exceed $1 million may be made without
an up-front sales charge, but are subject to a Contingent
9
Deferred Sales Charge ("CDSC") ranging from 0.50% to 1% for shares redeemed
within 18 months. In order to compensate retail distribution firms for Class A
share sales that are $1 million or greater, the Company advances a sales
commission ranging from 0.50% to 1.75% at the time of sale. Class A shares are
also subject to an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25%
of assets, which is used to compensate securities dealers for providing on-going
financial advice and other services to investors.
Class B shares may be purchased at a price equal to the fund's net asset value
without an up-front sales charge. Class B shares are subject to an annual SEC
Rule 12b-1 distribution fee of 0.75% of assets to compensate the Company for
costs incurred in connection with the sale of such shares, an annual SEC Rule
12b-1 service fee of between 0.20% and 0.25% of assets for the on-going services
of securities dealers, and a CDSC which declines from 5% to 1% for shares
redeemed within a period of 5 or 6 years. The Company compensates retail
distribution firms for sales of Class B shares at the time of sale at the rate
of 4% of the amount of Class B shares sold, which represents a sales commission
plus an advance of the first year's annual SEC Rule 12b-1 service fee. Class B
shares convert to Class A shares after they are held for eight years.
Class C shares may be purchased without an up-front sales charge at a price
equal to the fund's net asset value. However, these shares are subject to an
annual SEC Rule 12b-1 distribution fee of 0.35% to 0.75% of assets designed to
compensate securities dealers over time for the sale of the fund shares, an
annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets used to
compensate securities dealers for providing continuing financial advice and
other services, and a 1% CDSC for shares redeemed within 12 months of purchase.
In addition, the Company advances a 1% sales commission to retail distribution
firms at the time of sale and, in return, receives the first year's SEC Rule
12b-1 distribution fee and SEC Rule 12b-1 service fee.
Class R shares are available for purchase at a price equal to the fund's net
asset value with no on-going fees or CDSCs. These shares are available primarily
to clients of fee-based advisers, wrap programs and others under certain limited
circumstances.
The markets for mutual funds are highly competitive, with many participating
sponsors. Based upon the information available, the Company believes that it
held significantly less than a 5% share of the market with respect to net sales
of mutual funds in each of the last three years.
DEFINED PORTFOLIOS
OVERVIEW
Prior to discontinuing this business in the first quarter of 2002, the Company
was a major sponsor of defined portfolios (unit investment trusts). Each defined
portfolio consists of a fixed portfolio of securities selected and purchased by
the sponsor and deposited in a trust. The trustee of the portfolio is not
affiliated with the Company. Units of undivided beneficial interests in the
portfolio are sold to investors at a price equal to the per unit market price of
the securities deposited in the trust plus a sales charge. Defined portfolios
are not actively managed after the initial deposit. New securities are not added
to defined portfolios after the date of deposit, and may be exchanged or
substituted only under extremely limited circumstances. Securities from the
portfolios can only be sold pursuant to the Company's monitoring program or for
the purpose of raising cash to pay for units that have been redeemed. The
proceeds of any security sales must be distributed to unit holders.
Although the Company no longer creates and distributes new defined portfolios,
accepts deposits into existing portfolios or maintains a secondary market for
sponsored portfolios, it has continued to maintain and administer previously
distributed defined portfolios. At December 31, 2004, 1,586 municipal trusts
sponsored by the Company were outstanding with an aggregate market value of $3.4
billion, and 88 equity and taxable fixed-income trusts sponsored by the Company
were outstanding with an aggregate market value of $0.3 billion.
10
DEFINED PORTFOLIO DISTRIBUTION REVENUE
Units of the Company's sponsored defined portfolios were sold to the public
through financial advisors. For these sales, the Company earned a sales charge
based on the public offering price of the units sold. The Company's distribution
revenue included the sales charge, less an applicable concession to the
distributor firm through which the units were placed. For certain equity trusts,
the Company received a deferred sales charge over a period of months following
the initial sale date.
The following table shows the Company's defined portfolio distribution revenues
during each of the last three years:
DEFINED PORTFOLIO DISTRIBUTION REVENUES
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Distribution Revenues:
Primary - Municipal $ - $ - $ 1,529
Primary - Equity and Income - - 425
Secondary - - 644
------------ ------------ ------------
Total $ - $ - $ 2,598
============ ============ ============
GENERAL BUSINESS DISCUSSIONS
ADVERTISING AND PROMOTION
The Company provides individual registered representatives with daily prices,
weekly, monthly and quarterly sales bulletins, monthly product, statistical and
performance updates, product education programs, product training seminars, and
promotional programs coordinated with its advertising campaigns. In addition,
the Company regularly coordinates its marketing and promotional efforts with
individual registered representatives. The Company also augments its marketing
efforts through magazine, newspaper and television advertising, targeted direct
mail and telemarketing sales programs, web-based marketing, and sponsorship of
certain sports and civic activities.
EMPLOYEES
At December 31, 2004, the Company had 674 full-time employees. Employees are
compensated with a combination of salary, cash bonus and fringe benefits. In
addition, the Company has sought to retain its key and senior employees through
competitive compensation arrangements, which include equity-based incentive
awards. The Company considers its relations with its employees to be good.
COMPETITION
The Company is subject to substantial competition in all aspects of its
business. The registered representatives that distribute the Company's
investment products also distribute numerous competing products, often including
products sponsored by the retail distribution firms where they are employed.
There are relatively few barriers to entry for new investment management firms.
The Company's managed account business is also subject to substantial
competition from other investment management firms seeking to be approved as
managers in the various "wrap-fee" programs. The sponsor firms have a limited
number of approved managers at the highest and most attractive levels of their
programs and closely monitor the investment performance of such firms on an
on-going basis as they evaluate which firms are eligible for continued
participation in these programs. The Company is also subject to competition in
obtaining the commitment of underwriters to
11
underwrite its exchange-traded fund offerings. To the extent the increased
competition for underwriting and distribution causes higher distribution costs,
the Company's net revenue and earnings will be reduced. Investment products are
sold to the public by broker-dealers, banks, insurance companies and others, and
many competing investment product sponsors offer a broader array of investment
products. Many of these institutions have substantially greater resources than
the Company. In addition, continuing consolidation in the financial services
industry is altering the landscape in which the Company's distributors compete
and the economics of many of the products they offer. The effect that these
continuing changes in the brokerage and investment management industries will
have on the Company and its competitors cannot be predicted. The Company
competes with other providers of products primarily on the basis of the range of
products offered, the investment performance of such products, quality of
service, fees charged, the level and type of broker compensation, the manner in
which such products are marketed and distributed, and the services provided to
registered representatives and investors.
REGULATORY
Nuveen Investments, LLC is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is subject to regulation by the Securities and Exchange
Commission (the "SEC"), the NASD Regulation, Inc. (the "NASD") and other federal
and state agencies and self-regulatory organizations. Nuveen Investments, LLC is
subject to the SEC's Uniform Net Capital Rule, designed to enforce minimum
standards regarding the general financial condition and liquidity of a
broker-dealer. Under certain circumstances, this rule may limit the ability of
the Company to make withdrawals of capital and receive dividends from Nuveen
Investments, LLC. Nuveen Investments, LLC's regulatory net capital has
consistently exceeded such minimum net capital requirements. At December 31,
2004, Nuveen Investments, LLC had aggregate net capital, as defined, of
approximately $28.0 million, which exceeded the regulatory minimum by
approximately $26.0 million. The securities industry is one of the most highly
regulated in the United States, and failure to comply with related laws and
regulations can result in the revocation of broker-dealer licenses, the
imposition of censures or fines, and the suspension or expulsion of a firm
and/or its employees from the securities business.
Each of our investment adviser subsidiaries (and each of the previously
identified unaffiliated sub-advisers to certain of the Company's funds) is
registered with the SEC under the Investment Advisers Act. Each closed-end fund,
open-end fund and defined portfolio is registered with the SEC under the
Investment Company Act. Each national open-end fund is qualified for sale (or
not required to be so qualified) in all states in the United States and the
District of Columbia. Each single-state open-end fund is qualified for sale (or
not required to be so qualified) in the state for which it is named and other
designated states. Virtually all aspects of the Company's investment management
business, including the business of the sub-advisers, are subject to various
federal and state laws and regulations. These laws and regulations are primarily
intended to benefit the investment product holder and generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company (and any sub-adviser) from carrying on its
investment management business in the event that it fails to comply with such
laws and regulations. In such event, the possible sanctions, which may be
imposed, include the suspension of individual employees, limitations on the
Company's engaging in the investment management business for specified periods
of time, the revocation of the Advisers' registrations as investment advisers or
other censures and fines.
The Company's officers, directors, and employees may, from time to time, own
securities that are also held by one or more of the funds. The Company's
internal policies with respect to individual investments require prior clearance
of all transactions in securities of the Company and other restrictions are
imposed with respect to transactions in the Company's exchange-traded fund
securities. Employees who are access persons of the Rittenhouse, Symphony, NWQ
or NAM investment disciplines are subject to additional restrictions with
respect to the pre-clearance of the purchase or sale of securities held in, or
considered for, investor accounts and funds. These restrictions are based on the
position of the employee and his or her access to, or participation in, the
investment process of the adviser. The Company also requires employees to report
transactions in certain covered securities and restricts certain transactions so
as to seek to avoid the possibility of conflicts of interest.
12
Regulatory authorities, including the NASD and the SEC, examine our registered
broker-dealer and investment adviser subsidiaries, or the registered investment
companies managed by our affiliates, from time to time in the regular course of
their businesses. In addition, from time to time the Company or one or more of
its registered subsidiaries receives information requests from a regulatory
authority as part of an industry-wide "sweep" examination of particular topics
or industry practices.
Over the past 18 months, the Company has received several requests for
information from the staff of the SEC, which the Company believes were sent
broadly to a wide group of investment management firms, as part of sweep
examinations of industry practices, including mutual fund trading practices. The
topics covered by these requests included market timing and late trading,
valuation of international securities, mutual fund revenue sharing, fund
directed brokerage and soft dollar usage, selective disclosure of fund portfolio
holdings, the pricing and liquidity of holdings in high yield municipal bond
funds and performance advertising by registered investment advisers. The Company
has responded to these requests, including various follow-up requests. While the
SEC and other governmental authorities have brought enforcement and other
proceedings against various industry participants as a result of such sweep
exams, the SEC has not brought any enforcement or other proceedings against the
Company as a result of such exams, and the Company has no reason to believe that
such proceedings will be brought against it in the future.
Also, over the past 18 months the Company has received informational subpoenas
from various governmental authorities, relating to investigations by such
authorities of mutual fund-related activities of parties with whom the Company
had or has a business relationship. The Company also believes that similar
informational subpoenas were sent to a wide group of investment management
firms. These governmental authorities include the Securities Division of the
Commonwealth of Massachusetts, the U.S. Attorney for the Southern District of
New York, and the U.S. Attorney for the Eastern District of Missouri. Due to the
existing regulatory climate, the Company may also receive additional information
requests and/or subpoenas from one or more regulatory agencies or governmental
authorities.
In the course of responding to the various requests referenced above, the
Company identified certain deficiencies in its historical e-mail archives.
During 2004, the Company implemented a new firm-wide e-mail archiving and
retrieval system, as part of a broader review of its overall record retention
practices.
FORWARD-LOOKING INFORMATION
From time to time, information we provide or information included in our filings
with the SEC (including this report on Form 10-K) 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, you 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 risk factors set
forth in Item 7 under Management's Discussion and Analysis of Financial
Condition and Results of Operations under the sub-heading, Forward-Looking
Information and Risks, and elsewhere in this report. 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.
13
AVAILABLE INFORMATION
The Company's website is www.nuveen.com. The Company makes available free of
charge through its internet site, via a link to a third party provider, its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers,
and any amendments to these reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
ITEM 2. PROPERTIES
The Company is headquartered in Chicago, and has other primary offices in Los
Angeles, CA, San Francisco, CA and Radnor, PA. The company also has sales
representatives located nationally. The Company leases approximately 300,000
square feet of office space across the country. Management believes that the
Company's facilities are adequate to serve its currently anticipated business
needs. The Company has also used, registered, and/or applied to register certain
service marks to distinguish its investment products and services from its
competitors in the U.S. and in foreign countries and jurisdictions. The Company
enforces its service marks and other intellectual property rights in the U.S.
and abroad.
ITEM 3. LEGAL PROCEEDINGS
A putative class action lawsuit filed on January 10, 2005 (James Jacobs et al v
Nuveen Investments, Inc. et al., No. 05 C 0143 (N.D. Ill.)) by an individual
purporting to be a shareholder of one open-end fund sponsored by Nuveen is
currently pending in federal district court in Chicago. The defendants include
Nuveen Investments, Inc., Nuveen Institutional Advisory Corp. (merged into NAM
as of 1/1/05), NWQ Investment Management Company, LLC, Rittenhouse Asset
Management, Inc., Institutional Capital Corp, and the individual Nuveen fund
directors, including Nuveen's Chairman and Chief Executive Officer Timothy R.
Schwertfeger. Purporting to sue on behalf of investors in all Nuveen-sponsored
open-end mutual funds with equity holdings, the plaintiff has alleged that the
defendants breached common law fiduciary duties, duties of care and Sections
36(a), 36(b) and 47(b) of the Investment Company Act of 1940 by failing to
ensure that the open-end funds participated in securities class action
settlements for which those funds were eligible. The complaint contains no
specific allegations that the Nuveen funds failed to participate in particular
settlements but lists 136 settlements during the period from 1/10/2000 through
1/10/2005 and alleges that the funds failed to submit claims in some of those
proceedings. The plaintiff has claimed as damages disgorgement of fees paid to
the investment advisers, compensatory damages, punitive damages, attorney's
fees, and other unspecified relief. On February 4, 2005, the defendants filed a
Motion for an Extension of Time to Answer or Otherwise Respond to Plaintiff's
Complaint which motion was granted. Since the lawsuit was recently filed and our
equity funds include funds managed by sub-advisers, Nuveen is still in the
process of reviewing the facts related to the claims stated in the lawsuit.
However, Nuveen believes that there are a number of grounds to dismiss the
lawsuit, intends to defend its position vigorously, and does not believe the
case will be significant to, or could materially affect, the Company's business
or financial position. According to press reports, a number of similar suits
have been filed against other mutual fund management companies.
The Company's affiliate Symphony Asset Management was advised in January 2005
that the SEC was investigating performance fees paid by an unaffiliated family
of mutual funds to the sub-advisers of such funds. Symphony served as a
sub-adviser to one of the funds in this unaffiliated fund family (the "Fund")
from 1995 to May 2001, prior to the Company's acquisition of Symphony in July
2001. Symphony was informed by an SEC Enforcement Staff attorney in a telephone
conversation and a follow up e-mail message that the SEC (1) believes that the
performance fee component of the management fee in the sub-advisory contract
with Symphony in respect of the Fund was defective and violated provisions of
the Investment Advisers Act of 1940, including Rule 205-2 with respect to the
calculation of so-called "fulcrum" performance fees, (2) believes, based upon
its calculations, that the sub-advisory agreement defect resulted in overcharges
14
to the Fund for the period when Symphony acted as sub-adviser of approximately
$2.8 million in sub-advisory fees, which amount should be repaid to the Fund,
(3) believes that approximately $1 million in interest on such alleged
overcharges should also be repaid to the Fund, and (4) believes that Symphony
should pay these amounts to the Fund. The SEC attorney noted in this
conversation that the SEC believes that there were similar problems with the
calculation of performance fees payable to the sub-advisers to the various other
mutual funds in the unaffiliated family, resulting in overcharges to those funds
as well in violation of the Investment Advisers Act. In response, Symphony has
retained outside counsel to represent it in this matter and is reviewing the
facts surrounding the fee calculations as well as the terms of the agreements
among Symphony, the Fund and the adviser to the Fund. At the time the
sub-advisory agreement was entered into, Symphony received representations from
the Fund and the adviser to the Fund that the performance fee arrangements
complied with legal requirements. The Company intends to seek to resolve the
matter in an appropriate manner upon the completion of its investigation of the
facts and applicable law.
From time to time, the Company is involved in other legal matters relating to
claims arising in the ordinary course of business such as disputes with
employees or customers. There are currently no such other significant matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended
December 31, 2004.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers of the Company as of
December 31, 2004, are set forth below. Unless otherwise indicated in the
following descriptions, each of the following executive officers and other key
officers has held his or her current position with the Company or its
predecessor for more than the past five years.
EXECUTIVE OFFICERS AGE PRINCIPAL POSITION
Timothy R. Schwertfeger........ 55 Chairman, Chief Executive Officer and Director
John P. Amboian................ 43 President and Director
William Adams IV............... 49 Executive Vice President, U.S. Fund Products
Alan G. Berkshire.............. 44 Senior Vice President and General Counsel
Margaret E. Wilson............. 49 Senior Vice President, Finance
All executive officers of the Company serve at the pleasure of the Company's
board of directors. There are no family relationships between any of the
Company's executive officers, key officers and directors, and there are no
arrangements or understandings between any of these executive officers and any
other persons pursuant to which the executive officer was appointed. Each of Mr.
Schwertfeger and Mr. Amboian is party to an employment agreement with the
Company for a three-year term ending October 31, 2005, subject to automatic
one-year extensions if the executive remains employed by the Company.
Mr. Schwertfeger has been Chairman and Chief Executive of the Company and its
various subsidiaries since 1996. He also served as Chairman of the Nuveen Funds
and as a Director of Institutional Capital Corporation for the same period.
Mr. Amboian has been President of the Company and its various subsidiaries since
May 1999. Prior thereto, he served as Executive Vice President of the Company
and its various subsidiaries since June 1995.
Mr. Adams has been Executive Vice President, U.S. Fund Products of the Company
since December 1999. Prior thereto, Mr. Adams was Managing Director of
Structured Investments effective September 1997 and Vice President and Manager,
Corporate Marketing effective August 1994.
Mr. Berkshire has been Senior Vice President and General Counsel of the Company
since April 1999 and Secretary since May 1998. He joined the Company in
September 1997 as Vice President and General Counsel.
Mrs. Wilson has been Senior Vice President, Finance since April of 1999. She
joined the Company as Vice President and Controller in February 1998.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Maximum
Number Number
of Shares of Shares
Purchased that May
Total as Part of Yet Be
Number Average Publicly Purchased
of Shares Price Paid Announced Under the
Period Purchased per Share Program Program
- ------ --------- ---------- ---------- ----------
Share purchases prior to October 1, 2004, under current
repurchase program: 4,272,505 $25.77 4,272,505 2,727,495
Fourth quarter purchases:
October 1, 2004 - October 31, 2004 94,300 30.93 94,300 2,633,195
November 1, 2004 - November 30, 2004 114,807 34.25 114,807 2,518,388
December 1, 2004 - December 31, 2004 106,700 36.97 106,700 2,411,688
--------- ---------
Total fourth quarter purchases 315,807 $34.18 315,807
--------- ---------
Total share repurchases under the current program
4,588,312 $28.61 4,588,312 2,411,688
--------- ------ --------- ---------
As part of the Company's current share repurchase program announced and approved
on August 9, 2002, the Company is authorized to purchase up to 7.0 million
shares of Class A common stock. As of December 31, 2004, there were
approximately 2.4 million shares that may yet be purchased under the share
repurchase program, which has no expiration date. There have been no share
repurchases that were not part of a publicly announced program.
At December 31, 2004, there were approximately 5,300 shareholders of record of
the Company's Class A common stock. Other information required by this item is
contained in footnote 14 in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data table is set forth in Part II, Item 8 of this Annual
Report on Form 10-K, following the footnotes to the financial statements.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 defined portfolio products
we 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 operating
revenue: 1) performance fees and 2) distribution and underwriting revenue.
Performance fees are earned when investment performance on certain institutional
accounts and hedge funds exceeds a contractual threshold. 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 initial public offerings of our
exchange-traded funds. 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.
RECENT EVENTS
Effective April 1, 2004, the Company began expensing the cost of stock options
per the fair value recognition provisions of Statement of Financial Accounting
Standards ("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 8 to the Consolidated
Financial Statements "Equity Incentive Plans"). 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
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations.
18
SUMMARY OF OPERATING RESULTS
The table below presents the highlights of our operations for the last three
fiscal years:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions, except per share amounts)
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
---- ---- ----
Gross sales of investment products $ 25,949 $ 18,098 $ 15,594
Net flows 15,021 9,438 7,302
Assets under management (1) (2) 115,453 95,356 79,719
Operating revenues 505.6 452.0 396.4
Operating expenses 252.8 225.7 196.5
Pretax income 252.5 221.2 194.9
Net income 156.4 135.0 118.8
Basic earnings per share 1.69 1.46 1.26
Diluted earnings per share 1.63 1.41 1.21
Dividends per share 0.69 0.56 0.50
(1) At year end.
(2) Excludes defined portfolio assets under surveillance.
Gross sales for the year of $26 billion were the highest level of sales in our
history, up $8 billion or 43% over sales in the prior year. For the year, 70% of
our sales were in equity-based products, 21% in municipal products and 9% in
taxable, income-oriented products.
Along with record sales, were record net flows (equal to the sum of sales,
reinvestments and exchanges less redemptions) for the year of $15 billion. All
product lines (managed accounts, exchange-traded funds and mutual funds)
experienced positive net flows.
We ended the year with more than $115 billion in assets under management, up $20
billion, or 21% for the year. At December 31, 2004, our assets under management
were evenly split, with 50% of our assets in municipal products and 50% in
equity and income products.
Operating revenues grew 12% for the year to $506 million. Fueled by higher asset
levels, advisory fees grew 18% for the year. This growth was partially offset by
a reduction in performance fees.
Operating expenses for the year increased $27 million or 12%. Higher
compensation expense accounted for the majority of the increase as we continued
to invest in our investment and distribution capabilities as well as legal,
compliance and administrative resources.
19
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 (which include new managed accounts, deposits into existing managed
accounts and the sale of open-end and exchange-traded fund shares) of investment
products for the years ending December 31, 2004, 2003, and 2002 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
For the year ended December 31,
2004 2003 2002
---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 2,888 $ 6,283 $ 6,848
Mutual Funds 1,625 1,536 1,512
Retail Managed Accounts 15,497 7,943 5,693
Institutional Managed Accounts 5,939 2,336 1,347
------- ------- -------
Total Managed Assets 25,949 18,098 15,400
Defined Portfolios - - 194
------- ------- -------
Total $25,949 $18,098 $15,594
======= ======= =======
Gross sales increased 43% during 2004 to a record high $25.9 billion. Growth in
managed account sales was the main driver as sales of retail and institutional
accounts more than doubled versus the prior year. Considerable strength in value
account sales was the main driver as both retail and institutional value equity
account sales more than tripled for the year. Despite rising short-term interest
rates, municipal account sales continued to grow, ending the year up 4% over the
previous year. Partially offsetting the increase in value equity and municipal
account sales was a decline in sales of growth equity accounts. Also showing
growth for the year were mutual fund sales which increased 6% over the prior
year driven by an increase in sales of equity and income funds. Sales of
exchange-traded products declined versus the prior year due to fewer new fund
issuances in 2004.
Gross sales increased 16% during 2003, to $18.1 billion. The main drivers of the
increase were retail and institutional managed account sales due to growing
momentum in our value-based equity strategies and continued strong growth in
municipal managed accounts. Although sales of exchange-traded funds declined
slightly, we raised $6.3 billion in new exchange-traded fund assets in 2003,
with 90% of those assets coming from taxable income and blended income and
equity investment strategies.
20
Net flows of investment products for the years ending December 31, 2004, 2003,
and 2002 are shown below:
NET FLOWS
(in millions)
For the year ended December 31,
2004 2003 2002
---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 2,911 $ 6,305 $ 6,868
Mutual Funds 288 232 178
Managed Accounts 11,822 2,901 62
-------- ------- -------
Total Managed Assets 15,021 9,438 7,108
Defined Portfolios - - 194
-------- ------- -------
Total $ 15,021 $ 9,438 $ 7,302
======== ======= =======
Net flows were also at a record level in 2004, totaling $15.0 billion, an
increase of 59% versus 2003. Managed account flows were particularly strong,
with our value equity accounts contributing $12.6 billion in flows and our
municipal managed accounts another $1.9 billion. Partially offsetting the
positive flows were $2.8 billion in growth equity account outflows. Net flows
for 2003 totaled $9.4 billion, with growth over the prior year primarily driven
by strong value equity and municipal managed accounts.
The following table summarizes net assets under management by product type:
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
DECEMBER 31, 2004 2003 2002
---- ---- ----
Exchange-Traded Funds $ 50,216 $ 47,094 $ 39,944
Mutual Funds 12,680 12,285 11,849
Managed Accounts - Retail 36,975 25,676 19,403
Managed Accounts - Institutional 15,582 10,301 8,523
-------- -------- --------
Total $115,453 $ 95,356 $ 79,719
======== ======== ========
(1) Excludes defined portfolio assets under surveillance.
21
The components of the change in our assets under management were as follows:
NET ASSETS UNDER MANAGEMENT(1)
(in millions)
Year ended December 31, 2004 2003 2002
---- ---- ----
Beginning Assets Under Management $ 95,356 $ 79,719 $ 68,485
Gross Sales 25,949 18,098 15,400
Reinvested Dividends 389 413 435
Redemptions (11,317) (9,073) (8,727)
--------- --------- ---------
Net Flows into Managed Assets 15,021 9,438 7,108
Acquisitions - - 6,904
Appreciation/(Depreciation) 5,076 6,199 (2,778)
--------- --------- ---------
Ending Assets Under Management $ 115,453 $ 95,356 $ 79,719
========= ========= =========
(1) Excludes defined portfolio assets under surveillance.
Assets under management increased $20.1 billion, or 21% to over $115 billion at
December 31, 2004. The growth in assets under management was attributable to
increases of $3.1 billion or 7% in exchange-traded fund assets, $0.4 billion or
3% in mutual fund assets and $16.6 billion or 46% in managed account assets. The
increase in exchange-traded fund assets was the result of $2.9 billion in new
assets and market appreciation of $0.2 billion. New assets of $11.8 billion and
market appreciation (primarily equity appreciation) of $4.8 billion accounted
for the increase in managed account assets.
We ended 2003 with assets under management of $95.4 billion, 20% higher than
2002. Assets under management increased $15.6 billion primarily as a result of
new assets and market appreciation in both the exchange-traded funds and managed
accounts.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
For the year ended December 31, 2004 2003 2002
---- ---- ----
Exchange-Traded Funds $ 239,295 $ 220,701 $ 191,567
Mutual Funds 63,425 61,185 59,429
Managed Accounts 173,094 122,961 104,480
---------- ---------- ----------
Total $ 475,814 $ 404,847 $ 355,476
========== ========== ==========
Higher asset levels drove an 18% increase in advisory fees for the year.
Advisory fees on exchange-traded funds increased 8% while managed account fees
increased 41%. Advisory fees increased 14% during 2003, driven mainly by higher
asset levels for both exchange-traded funds and managed accounts. The increase
in managed accounts was also impacted by the inclusion of NWQ advisory fees for
a full year, as well as strong net flows and market appreciation compared to the
prior year.
22
Product distribution revenue for the years ended December 31, 2004, 2003 and
2002 is shown in the following table:
PRODUCT DISTRIBUTION
(in thousands)
For the year ended December 31, 2004 2003 2002
---- ---- ----
Exchange-Traded Funds $ 3,057 $ 5,819 $ 5,453
Muni/Fund Preferred(TM) 3,907 2,578 1,633
Mutual Funds 1,995 843 2,399
Defined Portfolios - (34) 2,598
------- ------- -------
Total $ 8,959 $ 9,206 $12,083
======= ======= =======
Product distribution revenue remained fairly consistent with the prior year.
Underwriting revenue on exchange-traded funds declined $2.8 million due to fewer
new fund assets raised in 2004. This decline was almost completely offset by
increases in mutual fund distribution revenue and MuniPreferredR and
FundPreferredR fees. The increase in mutual fund distribution revenue was driven
by an increase in sales and a decline in commissions paid on large dollar value
sales. MuniPreferredR and FundPreferredR fees increased as a result of an
increase in preferred shares outstanding and an increase in shares traded by
non-participating brokers who access the auction through the Company's trading
desk. Product distribution revenue in 2003 declined 24% for the year mainly as a
result of our decision to discontinue the defined portfolio product line.
PERFORMANCE FEES/OTHER REVENUE
Performance fees/other revenue consists of performance fees earned on
institutional assets managed by Symphony and various fees earned in connection
with services provided on behalf of our defined portfolio assets under
surveillance.
Performance fees for 2004 were $18.1 million, down from the $34.4 million in
performance fees in 2003. Additionally, fees earned on services provided on
behalf of our defined portfolio assets under surveillance declined due to an
overall decline in these assets.
The increase in this area for 2003 was the result of an increase of $11.2
million in Symphony performance fees. This increase was partially offset by 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.
23
OPERATING EXPENSES
Operating expenses for the years ended December 31, 2004, 2003 and 2002 are
shown in the following table:
OPERATING EXPENSES
(in thousands)
For the year ended December 31, 2004 2003 2002
---- ---- ----
Compensation and benefits $165,321 $144,190 $115,522
Advertising and promotional costs 12,158 11,627 12,608
Occupancy and equipment costs 19,740 19,321 17,912
Amortization of intangible assets 5,118 5,208 3,803
Travel and entertainment 7,981 7,726 8,539
Outside and professional services 22,216 20,331 19,419
Minority interest expense 1,875 1,077 -
Other operating expenses 18,353 16,222 18,744
-------- -------- --------
Total $252,762 $225,702 $196,547
======== ======== ========
As a % of Operating Revenue 50.0% 49.9% 49.6%
SUMMARY
Operating expenses increased $27.1 million or 12% in 2004 and $29.2 million or
15% in 2003, driven mainly by an increase in compensation and benefits. Although
operating expenses increased in both 2003 and 2004, operating expenses as a
percent of operating revenue remained consistent.
COMPENSATION AND BENEFITS
Compensation and related benefits for 2004 increased $21.1 million due to an
increase in base compensation as a result of new positions and salary increases,
an increase in option expense, and an increase in overall incentive compensation
due to the Company's higher profit level.
Compensation and related benefits for 2003 increased $28.7 million due to the
inclusion of NWQ for a full year and an increase in overall incentive
compensation.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional expenditures increased $0.5 million for the year due
to expanded product launches in 2004.
During 2003, advertising and promotional expenditures decreased $1.0 million due
to a reduction in spending as a result of a more focused deployment of our
marketing resources.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased $0.1 million during 2004 as a result
of the completion of the amortization period for certain definite-lived
intangible assets associated with our acquisition of Symphony in 2001.
Amortization of intangible assets increased $1.4 million during 2003 as a result
of a full year of amortization on intangible assets associated with the NWQ
acquisition.
OUTSIDE AND PROFESSIONAL SERVICES
Outside and professional services increased $1.9 million during 2004 as a result
of higher legal expenses as we responded to regulatory requests for information
on compliance policies and practices.
24
Outside and professional services increased $0.9 million during 2003 as a result
of a full year of NWQ expense.
ALL OTHER OPERATING EXPENSES
All other operating expenses increased $3.6 million during 2004 due mainly to
increases in recruiting, relocation and minority interest expense. Recruiting
and relocation expense increased as we invested in our investment and
distribution capabilities as well as legal, compliance and administrative
resources. For additional information on minority interest expense, please refer
to the Capital Resources, Liquidity and Financial Condition section.
During 2003, all other operating expenses decreased by $0.8 million as a result
of declines in employee related costs (severance, outplacement) that were
partially offset by an increase as a result of a full year of NWQ expense.
NON-OPERATING INCOME/(EXPENSE)
Non-operating income/(expense) includes investment and other income as well as
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.
The following is a summary of Non-Operating Income/(Expense) for the years ended
December 31, 2004, 2003 and 2002:
NON-OPERATING INCOME/(EXPENSE)
(in thousands)
For the year ended December 31, 2004 2003 2002
---- ---- ----
Dividends and Interest Income $ 4,597 $ 1,438 $ 2,632
Interest Expense (12,513) (7,435) (4,892)
Gains/(Losses) on Investments 4,127 1,440 (1,647)
Miscellaneous Income/(Expense) 3,421 (614) (1,085)
-------- -------- --------
Total $ (368) $ (5,171) $ (4,992)
======== ======== ========
Total non-operating expense declined $4.8 million compared to 2003. Net interest
expense increased $1.9 million as a result of the replacement of short-term
variable rate debt with long-term fixed rate debt, which was completed in
September of 2003 (for further information see Note 4 to the Consolidated
Financial Statements - Notes Payable). Completely offsetting this increase in
expense was an increase in realized gains and income recorded on non-recurring
items.
Total non-operating expense in 2003 increased $0.2 million compared to 2002. Net
interest expense increased $3.7 million as a result of the restructuring of our
debt from short-term variable rate debt to long-term fixed rate debt. Partially
offsetting this increase was an increase in other non-operating income as a
result of non-recurring losses of $2.7 million recorded in 2002 compared to
gains of $0.8 million recorded in 2003.
25
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
is a revision of SFAS No. 123, and supersedes APB Opinion No. 25 and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No. 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005. While the Company currently follows SFAS No. 123, resulting in the
recognition of option expense in the accompanying consolidated statements of
income, the adoption of SFAS No. 123R will require the use of a slightly
different method of accounting for forfeitures beginning in 2005. This change in
methodology will not have a material impact on the Company's consolidated
financial statements.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
DEBT
On September 19, 2003, we 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 every March 19 and September 19.
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.
CREDIT LINES
The Company also has lines of credit with a group of banks and a revolving loan
agreement with its majority shareholder, St. Paul Travelers. The line of credit
with a 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.
At December 31, 2004 and 2003, there were no amounts outstanding under these
lines of credit.
On July 31, 2002, the Company entered into, and borrowed the total amount
available under a $250 million revolving loan agreement with its majority
shareholder, St. Paul Travelers. This loan facility, originally set to expire on
July 15, 2003, 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 of demand by St. Paul Travelers. This loan facility
carries a floating interest rate of LIBOR plus a margin of up to 0.25%. A
portion of the proceeds from this $250 million loan was used to repay $128
million of the previous outstanding debt of $183 million (at December 31, 2001)
under the bank facility discussed above, while the remainder of the proceeds was
used to help fund the NWQ acquisition. During March 2003, the Company paid down
$145 million of the total debt that was outstanding under the St. Paul Travelers
debt facility. The remaining balance of $105 million was repaid on September
19, 2003.
26
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 December 31, 2004 and 2003, no borrowings were outstanding on these
uncommitted lines of credit.
There are financial covenants associated with both our long-term debt and our
credit lines. We were in compliance with those covenants as of December 31, 2004
and December 31, 2003. We do not believe that the bank facility requirements
will have any impact on our ability to use the credit facility in the future.
AGGREGATE CONTRACTUAL OBLIGATIONS
The Company has contractual obligations to make future payments under long-term
debt and long-term non-cancelable lease agreements. The following table
summarizes these contractual obligations at December 31, 2004:
LONG-TERM OPERATING
(in thousands) DEBT (1) LEASES (2) TOTAL
-------- ---------- -----
2005 $ - $ 10,926 $ 10,926
2006 - 11,732 11,732
2007 - 11,744 11,744
2008 300,000 11,270 311,270
2009 - 11,609 11,609
Thereafter - 42,756 42,756
(1) Amounts represent the expected cash principal re-payments on the Company's
long-term debt.
(2) Operating leases represent the minimum rental commitments under
non-cancelable operating leases. The Company has no significant capital
lease obligations.
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 its working capital needs, planned capital
expenditures, future contractual obligations and payment of its anticipated
quarterly dividends.
EQUITY AND DIVIDENDS
Options to purchase 391,122 and 395,142 shares of Rittenhouse non-voting Class B
common stock were exercised by current and former employees on April 11, 2003,
and March 28, 2002, respectively, under the Rittenhouse Financial Services, Inc.
1997 Equity Incentive Award Plan. Rittenhouse accounted for these options in
accordance with APB No. 25; therefore, no expense was recognized. As a result of
these exercises, we recorded $42.5 million and $40.5 million, respectively, of
minority interest on our consolidated balance sheet. The stock was repurchased
on October 14, 2003, and September 30, 2002, thereby eliminating the minority
interest position. Purchase price in excess of the exercise price of $11.1
million and $16.3 million was added to goodwill associated with the Company's
acquisition of Rittenhouse. Consistent with SFAS No. 142, as of January 1, 2002,
goodwill is no longer being amortized.
As part of the NWQ acquisition, key management purchased a non-controlling,
member interest in NWQ Investment Management Company, LLC. The non-controlling
interest of $0.7 million as of December 31, 2004, and $3.0 million as of
December 31, 2003, is reflected in minority interest on the consolidated balance
sheets. This purchase allows management to participate in profits of NWQ above
27
specified levels beginning January 1, 2003. During 2004 and 2003, we recorded
approximately $1.9 million and $1.1 million, respectively, 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. On February 15, 2005, the
Company exercised its right to call 100% of the Class 3 NWQ minority members'
interests for $22.8 million. Of the total amount to be paid on March 2, 2005,
approximately $22.5 million will be recorded as goodwill.
At December 31, 2004, we held in treasury 28,006,208 shares of the Company's
Class A common stock acquired in open market transactions. During 2004, the
Company repurchased 1,820,450 Class A common stock shares in open market
transactions. As part of a share repurchase program approved on August 9, 2002,
we are authorized to purchase up to 7.0 million shares of common stock. As of
December 31, 2004, there were 2.4 million shares remaining under the share
repurchase program.
During 2004, we paid out dividends on common shares totaling $64.0 million.
BROKER-DEALER
Our broker-dealer subsidiary is subject to requirements of the Securities and
Exchange Commission relating to liquidity and capital standards (See Note 13 to
the Consolidated Financial Statements "Net Capital Requirement").
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that impact our financial position and results of operations. These
estimates and assumptions are affected by our application of accounting
policies. Below we describe certain critical accounting policies that we believe
are important to the understanding of our results of operations and financial
position. In addition, please refer to Note 1 to the consolidated financial
statements for further discussion of our accounting policies.
INTANGIBLE ASSETS
At December 31, 2004, our assets included $550 million of goodwill and $53
million of other definite-lived intangible assets. Under Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we are
required to test the fair value of goodwill and indefinite-lived intangibles on
an annual basis and between annual tests in certain circumstances. Application
of the goodwill impairment test requires judgment, including the identification
of reporting units, assigning assets and liabilities to reporting units,
assigning goodwill to reporting units and determining the fair value of each
reporting unit. Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows, determining appropriate
market multiples and other assumptions. We completed the impairment testing of
goodwill and determined that there was no impairment to the goodwill recorded in
our books and records as of May 31, 2004, the date that we have selected as an
annual date. The recognition of any such impairment would have resulted in a
charge to income in the period in which the impairment was determined. While we
believe that our testing was appropriate, the use of different assumptions may
result in recognizing some impairment of goodwill in our financial statements.
28
IMPAIRMENT OF INVESTMENT SECURITIES
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
and Securities and Exchange Commission ("SEC") Staff Bulletin ("SAB") 59,
"Accounting for Noncurrent Marketable Equity Securities" and FASB Emerging
Issues Task Force 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" provide guidance on determining when an
investment is other-than-temporarily impaired. We periodically evaluate our
investments for other-than-temporary declines in value. To determine if an
other-than-temporary decline exists, we evaluate, among other factors, general
market conditions, the duration and extent to which the fair value is less than
cost, as well as our intent and ability to hold the investment. Additionally, we
consider the financial health of and near-term business outlook for an investee,
including factors such as industry performance and operational cash flow. If an
other-than-temporary decline in value is determined to exist, the unrealized
investment loss net of tax, in accumulated other comprehensive income is
realized as a charge to net income in the period in which the
other-than-temporary decline in value is determined. See Note 1 to the
consolidated financial statements for further information.
ACCOUNTING FOR INCOME TAXES
SFAS No. 109, "Accounting for Income Taxes," establishes financial accounting
and reporting standards for the effect of income taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an entity's
financial statements or tax returns. Judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Fluctuations in the actual outcome of these future
tax consequences could impact our financial position or our results of
operations.
FORWARD-LOOKING INFORMATION AND RISKS
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 Form 10-K) 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, you 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 and
elsewhere in this report. 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.
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;
29
(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 investment firms and the Securities Exchange Act of 1934 and other federal
and state securities laws and the rules of National Association of Securities
Dealers that impose, or may in the future impose, numerous obligations on our
broker-dealer 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 brought in response to perceived industry-wide regulatory
violations, including possible government regulation of the amount and level of
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The following information and information included elsewhere in this report,
describe the key aspects of certain financial instruments that have market risk.
INTEREST RATE SENSITIVITY
As of December 31, 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 (refer to Note 5 to the Consolidated Financial Statements -
Derivative Financial Instruments for further information). These agreements
effectively increased our exposure to fluctuations in interest rates. However,
at December 31, 2004, there were no open interest rate swap agreements. A change
in interest rates on our fixed debt has no impact on interest incurred or cash
flow, but would have an impact on the fair value of the debt. We estimate that a
100 basis point (1%) increase in interest rates from the levels at December 31,
2004 and 2003, would result in a net decrease in the fair value of our debt of
approximately $10 million and $12 million, at December 31, 2004 and 2003,
respectively.
Our investments consist primarily of Company-sponsored managed investment funds
that invest in a variety of asset classes. Additionally, the Company
periodically invests in new advisory accounts (incubation funds) to establish a
performance history prior to a potential product launch. Company-sponsored funds
and accounts are carried on our consolidated financial statements at fair market
value and are subject to the investment performance of the underlying sponsored
fund or account. Any unrealized gain or loss is recognized upon the sale of the
investment. The carrying value of the Company's investments in fixed-income
funds or accounts, which expose us to interest rate risk, was approximately $43
million and $3 million at December 31, 2004 and 2003, respectively. We estimate
that a 100 basis point (1%) increase in interest rates from the levels at
December 31, 2004 would result in a net decrease of approximately $5 million in
the fair value of the fixed income investments at December 31, 2004. We estimate
that a 100 basis point movement from the levels at December 31, 2003, would
result in an immaterial change in the fair value of the fixed income investments
at December 31, 2003.
30
Also included in investments at December 31, 2004, are certain swap agreements
and futures contracts that are sensitive to changes in interest rates. The swap
agreements are being used to re-create certain fixed-income indices for purposes
of establishing new fixed-income products that may be offered to investors in
the future. The futures contracts are being used to mitigate overall market risk
related to our investments in certain newly created products described in the
"Investments" section of Note 1 to the consolidated financial statements. The
fair value of these instruments totaled approximately $0.3 million at December
31, 2004. There were no such instruments at December 31, 2003. We estimate that
a 100 basis point (1%) increase in interest rates from the levels at December
31, 2004 would result in a net decrease in the fair value of the open
derivatives of $0.4 million.
EQUITY MARKET SENSITIVITY
As discussed above in the interest rate sensitivity section, we invest in
certain Company-sponsored managed investment funds and accounts that invest in a
variety of asset classes. The carrying value of the Company's investments in
funds and accounts subject to equity price risk is approximately $44 million and
$23 million, at December 31, 2004 and 2003, respectively. As of December 31,
2004 and 2003, we estimate that a 10% adverse change in equity prices would have
resulted in decreases of approximately $4 million and $2 million, respectively,
in the fair value of our equity securities. The model to determine sensitivity
assumes a corresponding shift in all equity prices.
An adverse movement in the equity prices of our holding in privately held
companies cannot be easily quantified as our ability to realize returns on
investment depends on the investees' ability to raise additional capital and/or
derive cash inflows from continuing operations.
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
net asset value of funds and accounts we manage, which in turn would result in a
decline in investment advisory and performance fee revenue.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
DECEMBER 31,
-----------------------
2004 2003
----------- ---------
ASSETS
Cash and cash equivalents $ 209,360 $ 161,584
Management and distribution fees receivable 50,902 54,972
Other receivables 18,754 10,103
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation
and amortization of $51,942 and $44,543, respectively 27,694 29,973
Investments 138,820 75,351
Goodwill 549,811 535,271
Other intangible assets, at cost less accumulated amortization of 53,398 58,516
$15,293 and $10,175, respectively
Other assets 22,854 28,623
----------- ---------
$ 1,071,593 $ 954,393
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short Term Obligations:
Accounts payable $ 14,429 $ 13,572
Current taxes payable 4,255 19,670
Accrued compensation and other expenses 67,311 55,994
Other short-term liabilities 8,788 7,272
----------- ---------
Total Short Term Obligations 94,783 96,508
----------- ---------
Long Term Obligations:
Notes payable 305,047 302,113
Deferred compensation 34,547 30,707
Deferred income tax liability, net 23,959 13,501
Other long-term liabilities 25,177 28,356
----------- ---------
Total Long Term Obligations 388,730 374,677
----------- ---------
Total Liabilities 483,513 471,185
Minority interest 2,602 4,228
Common stockholders' equity:
Class A Common stock, $.01 par value, 160,000,000 shares
authorized, 47,586,266 shares issued 476 476
Class B Common stock, $.01 par value, 80,000,000 shares
authorized, 73,325,214 shares issued 733 733
Additional paid-in capital 215,102 188,899
Retained earnings 854,549 763,301
Unamortized cost of restricted stock awards (77) (50)
Accumulated other comprehensive income/(loss) 892 (2,641)
----------- ---------
1,071,675 950,718
Less common stock held in treasury, at cost (28,006,208 and (486,197) (471,738)
28,405,108 shares, respectively)
----------- ---------
Total common stockholders' equity 585,478 478,980
----------- ---------
$ 1,071,593 $ 954,393
=========== =========
See accompanying notes to consolidated financial statements.
The Company began expensing the cost of stock options on April 1, 2004. All
prior period financial information has been restated.
32
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Operating revenues:
Investment advisory fees from assets under $ 475,814 $ 404,847 $ 355,476
management
Product distribution 8,959 9,206 12,083
Performance fees/other revenue 20,864 37,975 28,888
--------- --------- ---------
Total operating revenues 505,637 452,028 396,447
--------- --------- ---------
Operating expenses:
Compensation and benefits 165,321 144,190 115,522
Advertising and promotional costs 12,158 11,627 12,608
Occupancy and equipment costs 19,740 19,321 17,912
Amortization of intangible assets 5,118 5,208 3,803
Travel and entertainment 7,981 7,726 8,539
Outside and professional services 22,216 20,331 19,419
Minority interest expense 1,875 1,077 -
Other operating expenses 18,353 16,222 18,744
--------- --------- ---------
Total operating expenses 252,762 225,702 196,547
--------- --------- ---------
Non-operating income/(expense):
Investment and other income/(expense) 12,145 2,264 (100)
Interest expense (12,513) (7,435) (4,892)
--------- --------- ---------
Total non-operating income/(expense) (368) (5,171) (4,992)
--------- --------- ---------
Income before taxes 252,507 221,155 194,908
--------- --------- ---------
Income taxes:
Current 87,723 76,097 65,496
Deferred 8,376 10,053 10,618
--------- --------- ---------
Total income taxes 96,099 86,150 76,114
--------- --------- ---------
Net income $ 156,408 $ 135,005 $ 118,794
========= ========= =========
Average common and common equivalent shares outstanding:
Basic 92,671 92,612 93,910
========= ========= =========
Diluted 96,121 95,944 98,042
========= ========= =========
Earnings per common share:
Basic $ 1.69 $ 1.46 $ 1.26
========= ========= =========
Diluted $ 1.63 $ 1.41 $ 1.21
========= ========= =========
See accompanying notes to consolidated financial statements.
The Company began expensing the cost of stock options on April 1, 2004. All
prior period financial information has been restated.
33
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(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 31,2001 $ 470 $ 733 $ 145,386 $ 615,559 $ (1,537) $ (3,713) $ (341,958) $ 414,940
======= ======= ========== ========== ============ ============= ========== ==========
Net income 118,794 118,794
Cash dividends paid (47,103) (47,103)
Conversion of preferred to common 6 5,619 5,625
Purchase of treasury stock (150,663) (150,663)
Compensation expense on options 11,952 11,952
Exercise of stock options (6,058) (4,938) 39,181 28,185
Issuance of restricted stock (34) 88 54
Amortization of restricted
stock awards 789 789
Tax effect of options exercised 15,299 15,299
Other comprehensive income (1,146) (1,146)
------- ------- ---------- ---------- ------------ ------------- ---------- ----------
Balance at December 31,2002 $ 476 $ 733 $ 172,198 $ 682,278 $ (748) $ (4,859) $ (453,352) $ 396,726
======= ======= ========== ========== ============ ============= ========== ==========
Net income 135,005 135,005
Cash dividends paid (51,880) (51,880)
Purchase of treasury stock (41,946) (41,946)
Compensation expense on options 14,132 14,132
Exercise of stock options (3,649) (2,151) 23,480 17,680
Issuance of restricted stock 49 (129) 80 -
Amortization of
restricted stock awards 827 827
Tax effect of options exercised 6,218 6,218
Other comprehensive income 2,218 2,218
------- ------- ---------- ---------- ------------ ------------- ---------- ----------
Balance at December 31, 2003 $ 476 $ 733 $ 188,899 $ 763,301 $ (50) $ (2,641) $ (471,738) $ 478,980
======= ======= ========== ========== ============ ============= ========== ==========
Net income 156,408 156,408
Cash dividends paid (63,979) (63,979)
Purchase of treasury stock (52,076) (52,076)
Compensation expense on options 20,417 20,417
Exercise of stock options (5,857) (1,144) 37,257 30,256
Issuance of deferred stock (66) 300 234
Grant of restricted stock 29 (89) 60 -
Amortization of restricted stock
awards 62 62
Tax effect of options exercised 11,643 11,643
Other comprehensive income 3,533 3,533
------- ------- ---------- ---------- ------------ ------------- ---------- ----------
Balance at December 31, 2004 $ 476 $ 733 $ 215,102 $ 854,549 $ (77) $ 892 $ (486,197) $ 585,478
======= ======= ========== ========== ============ ============= ========== ==========
Comprehensive Income (in 000s): 2004 2003 2002
---- ---- ----
Net income ............................... $156,408 $ 135,005 $ 118,794
Other comprehensive income:
Unrealized gains/(losses) on marketable
equity securities, net of tax ........ 3,176 3,605 (612)
Reclassification adjustments for
realized gains/(losses) ............... 80 30 (534)
Terminated cash flow hedge ............. 276 (1,417) -
Foreign currency translation
adjustments ........................... 1 - -
-------- --------- ---------
Subtotal: other comprehensive income .. 3,533 2,218 (1,146)
-------- --------- ---------
Comprehensive Income .............. $159,941 $ 137,223 $ 117,648
======== ========= =========
Change in Shares Outstanding (in 000s): 2004 2003 2002
---- ---- ----
Shares outstanding at the beginning
of the year ............................ 92,506 92,726 95,142
Shares issued under stock options and
other incentive plans .................. 2,219 1,444 2,713
Shares acquired ........................ (1,820) (1,664) (5,747)
Conversion of preferred to common ...... - - 618
Shares outstanding at the end of ------ ------ ------
the year ............................... 92,905 92,506 92,726
====== ====== ======
See accompanying notes to consolidated financial statements.
The Company began expensing the cost of stock options on April 1, 2004. All
prior period financial information has been restated.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------------------------
2004 2003 2002
--------- --------- ----------
Cash flows from operating activities:
Net income $ 156,408 $ 135,005 $ 118,794
Adjustments to reconcile net income to net cash provided from operating
activities:
Deferred income taxes 8,376 10,053 10,618
Depreciation of office property, equipment, and leaseholds 7,900 7,650 7,321
Unrealized gains/(losses) from available-for-sale investments (388) 63 1,065
Amortization of intangible assets 5,118 5,208 3,803
Amortization of debt related costs, net (637) 14 -
Compensation expense for options 20,417 14,132 11,952
Net (increase) decrease in assets:
Management and distribution fees receivable 4,069 (867) 8,940
Other receivables (7,476) 3,687 (1,045)
Other assets 1,221 2,353 16,121
Net increase (decrease) in liabilities:
Accrued compensation and other expenses 11,825 11,296 10,871
Deferred compensation 3,840 2,731 (422)
Security purchase obligations - - (739)
Accounts payable (14,557) 9,481 1,900
Other liabilities (4,193) 1,359 12,200
Other, consisting primarily of the tax effect of options exercised 11,709 7,046 18,717
--------- --------- ---------
Net cash provided from operating activities 203,632 209,211 220,096
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable - 300,000 250,000
Repayments of notes payable - (305,000) (128,000)
Net private placement related items 3,846 610 -
Dividends paid (63,979) (51,880) (47,103)
Proceeds from stock options exercised 30,256 17,679 28,184
Acquisition of treasury stock (52,076) (41,946) (150,663)
--------- --------- ---------
Net cash used for financing activities (81,953) (80,537) (47,582)
--------- --------- ---------
Cash flows from investing activities:
Purchase of office property and equipment (5,634) (6,964) (8,947)
Proceeds from sales of investment securities 2,543 1,416 1,451
Purchases of investment securities (54,718) (1,808) (2,332)
Contingent consideration for Symphony acquisition (1,639) (14,264) -
NWQ acquisition, net of cash received and
liability due to Old Mutual - - (156,368)
Proceeds from Rittenhouse stock options exercised - 42,474 40,504
Repurchase of Rittenhouse stock - (53,531) (56,811)
Repurchase of NWQ Class 2 minority members'
interests (15,424) - -
Other, consisting primarily of the change in
other investments 968 (4,893) (3,190)
--------- --------- ---------
Net cash used for investing activities (73,904) (37,570) (185,693)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents 1 - -
Increase/(decrease) in cash and cash equivalents 47,776 91,104 (13,179)
Cash and cash equivalents:
Beginning of year 161,584 70,480 83,659
--------- --------- ---------
End of year $ 209,360 $ 161,584 70,480
========= ========= =========
See accompanying notes to consolidated financial statements.
The Company began expensing the cost of stock options on April 1,2004. All prior
period financial information has been restated.
35
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information and Basis of Presentation. The consolidated financial
statements include the accounts of Nuveen Investments, Inc. ("the Company" or
"Nuveen Investments") and its majority-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The Company's majority stockholder is The St. Paul Travelers Companies, Inc.
("St. Paul Travelers").
The Company and its subsidiaries offer core investment management capabilities
through four branded investment teams: Rittenhouse blue-chip growth; NWQ value;
Nuveen fixed-income; and Symphony market-neutral alternative investments.
Operations of Nuveen Investments, Inc. are organized around its principal
advisory subsidiaries, which are registered investment advisers under the
Investment Advisers Act of 1940. These advisory subsidiaries manage the Nuveen
mutual funds and exchange-traded funds and provide investment services for
individual and institutional managed accounts. Additionally, Nuveen Investments,
LLC, a registered broker and dealer in securities under the Securities Exchange
Act of 1934, provides investment product distribution and related services for
the Company's managed funds, and, through March of 2002, sponsored and
distributed the Company's defined portfolios (unit investment trusts).
Effective April 1, 2004, the Company began expensing the cost of stock options
per the fair value recognition provisions of Statement of Financial Accounting
Standards ("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 the "Equity Incentive Plans"
section of this footnote). 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 Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
is a revision of SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related implementation guidance. SFAS No.
123R focuses primarily on accounting for transactions in which an entity obtains
employee services through share-based payment transactions. SFAS No 123R
requires a public entity to measure the cost of employee services received in
exchange for the award of equity instruments based on the fair value of the
award at the date of grant. The cost will be recognized over the period during
which an employee is required to provide services in exchange for the award.
SFAS No. 123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. While the Company currently
follows SFAS No. 123, resulting in the recognition of option expense in the
accompanying consolidated statements of income, the adoption of SFAS 123R will
require the use of a slightly different method of accounting for forfeitures
beginning in 2005. This change in methodology will not have a material impact on
the Company's consolidated financial statements.
Certain other amounts in the prior year financial statements have been
reclassified to conform to the 2004 presentation. These reclassifications had no
effect on net income or stockholders' equity.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and related notes to the
consolidated financial statements. Actual results could differ from these
estimates.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand,
investment instruments with maturities of three months or less and other highly
liquid investments, including commercial paper and money
36
market funds, which are readily convertible to cash. Amounts presented on our
consolidated balance sheets approximate fair value.
Securities Purchased Under Agreements to Resell. Securities purchased under
agreements to resell are treated as collateralized financing transactions and
are carried at the amounts at which such securities will be subsequently resold,
including accrued interest, and approximate fair value. The Company's exposure
to credit risks associated with the nonperformance of counterparties in
fulfilling these contractual obligations can be directly impacted by market
fluctuations that may impair the counterparties' ability to satisfy their
obligations. It is the Company's policy to take possession of the securities
underlying the agreements to resell or enter into tri-party agreements, which
include segregation of the collateral by an independent third party for the
benefit of the Company. The Company monitors the value of these securities daily
and, if necessary, obtains additional collateral to assure that the agreements
are fully secured. At December 31, 2004 and 2003, there were no securities
purchased under agreements to resell.
The Company utilizes resale agreements to invest cash not required to fund daily
operations. The level of such investments will fluctuate on a daily basis. Such
resale agreements typically mature on the day following the day on which the
Company enters into such agreements. Since these agreements are highly liquid
investments, readily convertible to cash, and mature in less than three months,
the Company includes these amounts in cash equivalents for balance sheet and
cash flow purposes.
Securities Transactions. Securities transactions entered into by the Company's
broker-dealer subsidiary are recorded on a settlement date basis, which is
generally three business days after the trade date. Securities owned are valued
at market value with profit and loss accrued on unsettled transactions based on
trade date.
Furniture, Equipment and Leasehold Improvements. Furniture and equipment,
primarily computer equipment, is depreciated on a straight-line basis over
estimated useful lives ranging from three to ten years. Leasehold improvements
are amortized over the lesser of the economic useful life of the improvement or
the remaining term of the lease. The Company capitalizes certain costs incurred
in the development of internal-use software. Software development costs are
amortized over a period of not more than five years.
Investments. Investments consist of securities classified as trading and
available-for-sale, as well as non-marketable securities. Also included are
investments resulting from the consolidation of six new funds managed by the
Company but not yet offered for sale. As a result of being the sole investor in
these six funds, the Company is required to consolidate these funds in its
consolidated financial statements (see Note 10 - Consolidated Funds for
additional information). The following information related to investments does
not include information related to the consolidated fund investments of
approximately $31 million.
Non-marketable securities are investments that are saleable, but for which no
ready market exists. These investments are carried at cost. At December 31,
2004, approximately $41 million of investments are classified as non-marketable
and consist of common stock in a privately held institutional equity manager
(Institutional Capital Corporation) and a non-affiliated private-equity
investment partnership.
Trading securities are securities bought and held principally for the purpose of
selling them in the near term. These investments are reported at fair value,
with unrealized gains and losses included in earnings. At December 31, 2004,
approximately $24 million of investments are classified as trading securities.
Approximately $15 million of these securities are in products or portfolios that
are not currently marketed by the Company but may be offered to investors in the
future. The fair value for these products is determined through a combination of
quoted market prices as well as a valuation of any derivatives employed by means
of discounted cash flow analysis. The remaining balance of approximately $9
million included as trading securities is our investment in certain
company-sponsored mutual funds. The purpose of these investments is to mitigate
interest rate exposure for those participants in the Company's deferred
compensation program who have elected to defer compensation with such deferred
compensation earning interest based on the rate of return of one of several
managed funds sponsored by the Company. To mitigate exposure and to minimize the
37
volatility of the Company's deferred compensation liability, the Company
purchases shares of the underlying fund at the time of the deferral.
Our investments not classified as either non-marketable or trading are
classified as available-for-sale securities. These investments are carried at
fair value with unrealized holding gains and losses reported net of tax as a
separate component of accumulated other comprehensive income until realized.
Realized gains and losses are reflected as a component of non-operating
income/(expense). At December 31, 2004, approximately $41 million of investments
are classified as available-for-sale and consist primarily of Company-sponsored
mutual funds and exchange-traded funds. These marketable securities are carried
at fair value. Fair value is based on quoted market prices.
The cost, gross unrealized holding gains, gross unrealized holding losses, and
fair value of available-for-sale equity securities by major security type and
class of security at December 31, 2004 and 2003, are as follows:
GROSS UNREALIZED GROSS UNREALIZED
(IN 000s) COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
------------- ---------------- ---------------- -------------
At December 31, 2004
Available for Sale:
Incubation funds $ 16,421,954 $ 3,019,093 $ (214,001) $ 19,227,046
Sponsored funds 17,664,448 467,854 (25,455) 18,106,847
Other equity securities 3,870,232 142,127 (39,335) 3,973,024
------------- -------------- ------------- -------------
$ 37,956,634 $ 3,629,074 $ (278,791) $ 41,306,917
------------- -------------- ------------- -------------
At December 31, 2003
Available for Sale:
Incubation funds $ 6,227,599 $ 1,247,477 $ (270,995) $ 7,204,081
Sponsored funds 19,670,330 303,798 (3,207,228) 16,766,900
Other equity securities 3,754,697 - (86,144) 3,668,553
------------- -------------- ------------- -------------
$ 29,652,626 $ 1,551,275 $ (3,564,367) $ 27,639,534
------------- -------------- ------------- -------------
The Company periodically evaluates its non-marketable and available-for-sale
investments for other-than-temporary declines in value. Other-than-temporary
declines in value may exist when the fair value of an investment security has
been below the carrying value for an extended period of time. If an
other-than-
38
temporary decline in value is determined to exist, the unrealized investment
loss net of tax in accumulated other comprehensive income is realized as a
charge to net income in the period in which the other-than-temporary decline in
value occurs. At December 31, 2004, for the investments that have unrealized
losses, the Company believes that all of these unrealized losses are only
temporary and are due to temporary market conditions. Supporting this conclusion
is the significant increase in the value of these investments, and commensurate
decline in total unrealized losses at December 31, 2004, compared to total
unrealized losses at December 31, 2003. The following table presents information
about the Company's investments with unrealized losses at December 31, 2004 and
2003 (in 000s):
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------- --------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
DECEMBER 31, 2004 Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- ----------
Description of Securities
Fund investments $ 477 $ 25 $ 49 $ 1 $ 526 $ 26
Other 2,022 5 1,376 248 3,398 253
------- ------- ------- --------- ------- -------
Total temporarily
impaired securities $ 2,499 $ 30 $ 1,425 $ 249 $ 3,924 $ 279
------- ------- ------- --------- ------- -------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------- --------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
DECEMBER 31, 2003 Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- ----------
Description of Securities
Fund investments $ 482 $ 20 $11,276 $ 3,458 $11,758 $ 3,478
Other - - 3,549 86 3,549 86
------- ------- ------- --------- ------- -------
Total temporarily
impaired securities $ 482 $ 20 $14,825 $ 3,544 $15,307 $ 3,564
------- ------- ------- --------- ------- -------
Revenue Recognition. Investment advisory fees from assets under management are
recognized ratably over the period that assets are under management. Performance
fees are recognized only at the performance measurement dates contained in the
individual account management agreements and are dependent upon performance of
the account exceeding agreed-upon benchmarks over the relevant period. Some of
the Company's investment management agreements provide that, to the extent
certain enumerated expenses exceed a specified percentage of a fund's or a
portfolio's average net assets for a given year, the advisor will absorb such
expenses through a reduction in management fees. Investment advisory fees are
recorded net of any such expense reductions. Investment fees are also recorded
net of any subadvisory fees paid by the Company based on the terms of those
arrangements.
39
Accumulated Other Comprehensive Income/(Loss). The Company's other comprehensive
income/(loss) consists of: changes in unrealized gains and losses on certain
investment securities classified as available-for-sale (recorded net of tax);
reclassification adjustments for realized gains/(losses) (net of tax); the
amortization of a loss resulting from a series of Treasury rate lock
transactions (see Note 5 - Derivative Financial Instruments); and foreign
currency translation adjustments. The changes (net of tax) in unrealized gains
and losses on certain investment securities classified as available-for-sale was
approximately $3,176,000, $3,606,000, and ($612,000) for the years ended
December 31, 2004, 2003, and 2002, respectively. The related cumulative tax
effects of the changes in unrealized gains and losses on certain investment
securities classified as available-for-sale were deferred tax
(liabilities)/benefits of ($2,082,000) in 2004, ($2,326,000) in 2003, and
$658,000 in 2002. The reclassification adjustments for realized gains/(losses)
on investment securities are approximately an $80,200 gain in 2004, a $30,000
gain in 2003, and a $534,000 loss in 2002. The amortization of the Treasury rate
lock loss was approximately $276,500 and $76,500 for the years ending December
31, 2004 and 2003, respectively. As the Treasury rate lock loss did not occur
until 2003, there was no such amortization for the year ended December 31, 2002.
As of December 31, 2004 and 2003, the remaining unamortized Treasury rate lock
loss is $1,140,779 and $1,417,314, respectively, and is being amortized over the
term of the private placement debt (see Note 4 - Notes Payable). Finally, for
the year ended December 31, 2004, approximately $1,000 of a foreign currency
translation gain was recorded into other comprehensive income. There were no
foreign currency translation gains/losses for the years ended December 31, 2003
and 2002. Total comprehensive income for the Company was approximately
$159,941,000 in 2004, $137,223,000 in 2003, and $117,648,000 in 2002.
Goodwill. In July 2001, the FASB issued Statement SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead that
they be tested for impairment at least annually using a two-step process. Other
intangible assets continue to be amortized over their useful lives.
The Company has chosen May 31 as its measurement date for the annual SFAS No.
142 impairment test. Neither the initial SFAS No. 142 impairment test (as of
January 1, 2002), nor any of the subsequent, ongoing annual SFAS No. 142
impairment tests (as of May 31) indicate any impairment of goodwill. The
Company's SFAS No. 142 goodwill impairment test involves the use of estimates.
Specifically, estimates are used in assigning assets and liabilities to
reporting units, assigning goodwill to reporting units and determining the fair
value of reporting units. While we believe that our testing was appropriate, the
use of different assumptions may have resulted in recognizing some impairment of
goodwill in our financial statements.
The following table presents a reconciliation of activity in goodwill from
December 31, 2002, to December 31, 2004, as presented on our consolidated
balance sheets:
(IN 000s)
Balance at December 31, 2002 $ 511,851
Goodwill from exercise of Rittenhouse stock options (see Note 8) 11,057
Symphony contingent consideration 12,363
---------
Balance at December 31, 2003 $ 535,271
Repurchase of 100% of NWQ Class 2 interests (see Note 9) 12,923
Symphony contingent consideration 1,639
Other (22)
---------
Balance at December 31, 2004 $ 549,811
=========
40
Intangible Assets. Intangible assets consist primarily of the estimated value of
customer relationships resulting from our Symphony and NWQ acquisitions. We do
not have any intangible assets with indefinite lives. We amortize our intangible
assets over their estimated useful lives.
The following table presents a reconciliation of activity in other intangible
assets from December 31, 2002, to December 31, 2004, as presented on our
consolidated balance sheets:
(IN 000s)
Balance at December 31, 2002 $ 63,724
Amortization of:
Symphony customer relationships (2,223)
Symphony internally developed software (324)
Symphony favorable lease (117)
NWQ contractual relationships (2,544)
--------
Balance at December 31, 2003 $ 58,516
Amortization of:
Symphony customer relationships (2,223)
Symphony internally developed software (324)
Symphony favorable lease (26)
NWQ contractual relationships (2,545)
--------
Balance at December 31, 2004 $ 53,398
========
The following table reflects the gross carrying amounts and the accumulated
amortization amounts for the Company's intangible assets as of December 31, 2004
and 2003:
AS OF DECEMBER 31, 2004 AS OF DECEMBER 31, 2003
------------------------------ -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(IN 000s) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
Symphony acquisition-
Customer relationships $ 43,800 $ 7,668 $ 43,800 $ 5,445
Internally developed software 1,622 1,107 1,622 783
Favorable lease 369 369 369 343
NWQ acquisition-
Contractual customer relationships 22,900 6,149 22,900 3,604
----------- ----------- ----------- -----------
Total $ 68,691 $ 15,293 $ 68,691 $ 10,175
=========== =========== =========== ===========
For the years ended December 31, 2004 and 2003, the aggregate amortization
expense relating to the Company's amortizable intangible assets was $5.1 million
and $5.2 million, respectively. There were no unamortizable intangible assets at
December 31, 2004 and 2003. The approximate useful lives of these intangible
assets are as follows: Symphony customer relationships - 19 years; Symphony
internally developed software - 5 years; Symphony favorable lease - 38 months;
and NWQ contractual relationships - 9 years. The estimated aggregate
amortization expense for each of the next five years is approximately: $5.1
million for 2005, $5.0 million for 2006, and $4.8 million for each of 2007,
2008, and 2009.
Other Receivables and Other Liabilities. Included in other receivables and other
liabilities are receivables from and payables to broker-dealers and customers,
primarily in conjunction with unsettled trades. These receivables were
approximately $8,695,000 and $1,567,000, and these payables were approximately
$4,988,000 and $3,871,000 at December 31, 2004 and 2003, respectively.
Other Assets. Other assets consist primarily of approximately $16.9 million in
commissions advanced by the Company on sales of certain mutual fund shares.
Advanced sales commission costs are being amortized over the lesser of the
Securities and Exchange Commission Rule 12b-1 revenue stream period (one to
eight years) or the period during which the shares of the fund upon which the
commissions were paid remain outstanding.
Fair Value of Financial Instruments. Cash and cash equivalents, marketable
securities, notes and other accounts receivable, and investments are financial
assets with carrying values that approximate fair value
41
because of the short maturity of those instruments. Accounts payable and other
accrued expenses are financial liabilities with carrying values that approximate
fair value also because of the short maturity of those instruments. The fair
value of long-term debt is estimated using discounted cash flows based on our
incremental borrowing rates for similar debt and comparable bond prices.
In determining the fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risk
existing at each balance sheet date. For the majority of financial instruments,
including most derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow analysis, option
pricing models, replacement cost and termination cost are used to determine fair
value. Dealer quotes are used for the remaining financial instruments. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.
A comparison of the fair values and carrying amounts of these instruments is as
follows:
(IN 000s)
2004 2003
----------------------- ----------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31, AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Assets:
Cash and cash equivalents $209,360 $209,360 $161,584 $161,584
Fees receivable 50,902 50,902 54,972 54,972
Other receivables 18,754 18,754 10,103 10,103
Marketable securities 97,533 97,533 33,476 33,476
Non-marketable securities 41,287 66,450 41,875 58,120
Open derivatives - - 72 72
Liabilities:
Notes payable (long-term debt) $305,047 $299,000 $302,113 $299,200
Accounts payable 18,684 18,684 33,242 33,242
Open derivatives 66 66 - -
42
Equity Incentive Plans. Effective April 1, 2004, the Company began expensing the
cost of stock options per the fair value 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 the
fair value of each award at the time of the grant.
The following table provides the effect of the restatement on net income and
earnings per share for the years ended December 31, 2003 and 2002:
(IN 000s, EXCEPT PER SHARE DATA)
2003 2002
-------- --------
As Reported-
Net Income $143,996 $126,185
Basic EPS $ 1.55 $ 1.34
Diluted EPS $ 1.50 $ 1.29
As Restated-
Net Income $135,005 $118,794
Basic EPS $ 1.46 $ 1.26
Diluted EPS $ 1.41 $ 1.21
Advertising and Promotional Costs. Advertising and promotional costs include
amounts related to the marketing and distribution of specific products offered
by the Company as well as expenses associated with promoting the Company's
brands and image. The Company's policy is to expense such costs as incurred.
Non-Operating Income/(Expense). Non-operating income/(expense) includes
investment and other income and 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.
The following is a summary of non-operating income/(expense) for the years ended
December 31, 2004, 2003, and 2002:
(IN 000s)
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
-------- -------- --------
Dividends and Interest Income $ 4,597 $ 1,438 $ 2,632
Interest Expense (12,513) (7,435) (4,892)
Gains/(Losses) on Investments 4,127 1,440 (1,647)
Miscellaneous Income/(Expense) 3,421 (614) (1,085)
-------- -------- --------
Total $ (368) $ (5,171) $ (4,992)
======== ======== ========
43
Taxes. The Company and its subsidiaries file a consolidated federal income tax
return. The Company provides for income taxes on a separate return basis. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and the tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
applicable to periods in which the differences are expected to affect taxable
income. Although valuation allowances may be established, when necessary, to
reduce deferred tax assets to amounts expected to be realized, there were no
deferred tax asset valuation allowances at December 31, 2004 or 2003.
Supplemental Cash Flow Information. The Company paid cash interest of $12.6
million in 2004, $6.1 million in 2003, and $5.7 million in 2002. This compares
with interest expense reported in the Company's consolidated statements of
income of $12.5 million, $7.4 million, and $4.9 million for the respective
reporting years.
Federal and state income taxes paid in the years ending December 31, 2004, 2003
and 2002, amounting to approximately $92.6 million, $63.5 million, and $41.7
million, respectively, include required payments on estimated taxable income and
final payments of prior year taxes required to be paid upon filing the final
federal and state tax returns, reduced by refunds received.
2. EARNINGS PER COMMON SHARE
The following table sets forth a reconciliation of net income and common shares
used in the basic and diluted earnings per share computations for the three
years ended December 31, 2004:
NET PER SHARE
(IN 000s, EXCEPT PER SHARE DATA) INCOME SHARES AMOUNT
----------- ----------- ---------
2002:
Net income........................................................ $ 118,794
Less: Preferred stock dividends................................... (141)
-----------
Basic EPS......................................................... $ 118,653 93,910 $ 1.26
Dilutive effect of:
Restricted stock............................................... -- 416
Employee stock options......................................... -- 3,304
Assumed conversion of preferred stock.......................... 141 412
----------- -----------
Diluted EPS....................................................... $ 118,794 98,042 $ 1.21
=========== =========== ======
2003:
Basic EPS......................................................... $ 135,005 92,612 $ 1.46
Dilutive effect of:
Restricted stock............................................... -- 465
Employee stock options......................................... -- 2,867
----------- -----------
Diluted EPS....................................................... $ 135,005 95,944 $ 1.41
=========== =========== ======
2004:
Basic EPS......................................................... $ 156,408 92,671 $ 1.69
Dilutive effect of:
Restricted stock............................................... -- 457
Employee stock options......................................... -- 2,993
----------- -----------
Diluted EPS....................................................... $ 156,408 96,121 $ 1.63
=========== =========== ======
44
Options to purchase 103,437 shares of the Company's common stock at a range of
$34.40 to $39.47 were outstanding at December 31, 2004, but were not included in
the computation of diluted earnings per share because the options' respective
exercise prices per share were greater than the average market price of the
Company's common shares. At December 31, 2003, options to purchase 4,990,800
shares of the Company's common stock at a range of $27.10 to $27.50 were
outstanding, but were not included in the computation of diluted earnings per
share because the options' respective exercise prices per share were greater
than the average market price of the Company's common shares. At December 31,
2002, options to purchase 5,072,400 shares of the Company's common stock at a
range of $26.34 to $27.50 were outstanding, but were not included in the
computation of diluted earnings per share because the options' respective
exercise prices per share were greater than the average market price of the
Company's common shares.
45
3. INCOME TAXES
The provision for income taxes on earnings for the three years ended December
31, 2004 is:
(IN 000s) 2004 2003 2002
-------- -------- --------
Current:
Federal ................ $ 73,893 $ 63,979 $ 56,109
State .................. 13,830 12,118 9,387
-------- -------- --------
87,723 76,097 65,496
-------- -------- --------
Deferred:
Federal ................ 9,103 8,471 8,297
State .................. (727) 1,582 2,321
-------- -------- --------
$ 8,376 $ 10,053 $ 10,618
======== ======== ========
The provision for income taxes is different from that which would be computed by
applying the statutory federal income tax rate to income before taxes. The
principal reasons for these differences are as follows:
2004 2003 2002
------- ------- --------
Federal statutory rate applied to income before taxes............. 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit... 3.4 4.5 4.4
Tax-exempt interest income, net of disallowed interest expense.... (0.1) (0.1) (0.1)
Other, net........................................................ (0.2) (0.4) (0.2)
------- ------- --------
Effective tax rate................................................ 38.1% 39.0% 39.1%
======= ======= ========
The tax effects of significant items that give rise to the net deferred tax
asset/(liability) recorded on the Company's consolidated balance sheets are
shown in the following table:
(IN 000's)
DECEMBER 31, 2004 2003
-------- --------
Gross deferred tax asset:
Stock options .............................................. $ 21,848 $ 15,025
Deferred compensation ...................................... 12,405 11,253
Accrued post-retirement benefit obligation ................. 3,888 3,225
Unfunded accrued pension cost (non-qualified plan) ......... 1,238 922
Book depreciation in excess of tax depreciation ............ 3,978 3,119
Other ...................................................... 7,992 11,491
-------- --------
Gross deferred tax asset ...................................... 51,349 45,035
-------- --------
Gross deferred tax liability:
Deferred commissions and fund offering costs ............... (6,396) (3,815)
Goodwill amortization ...................................... (59,310) (47,478)
Prepaid pension costs ...................................... (1,361) (1,360)
Other, consisting primarily of internally developed software (8,241) (5,883)
-------- --------
Gross deferred tax liability .................................. (75,308) (58,536)
-------- --------
Net deferred tax liability ................................. $(23,959) $(13,501)
======== ========
46
The future realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management believes it is more likely than not the Company
will realize the benefits of these future tax deductions.
Not included in income tax expense for 2004, 2003 and 2002 are income tax
benefits of $11,643,000, $6,218,000, and $15,299,000, respectively, attributable
to the vesting of restricted stock and the exercise of stock options. Such
amounts are reported on the consolidated balance sheets in additional paid-in
capital and as a reduction of taxes payable included in other liabilities on our
consolidated balance sheets.
At December 31, 2004, the Company had state tax loss carryforwards of
approximately $1.6 million that will expire between 2022 and 2024. The Company
believes that all state tax loss carryforwards will be utilized prior to
expiration.
4. NOTES PAYABLE
At December 31, 2004 and December 31, 2003, notes payable on the accompanying
consolidated balance sheets were comprised of the following:
(IN 000s) DECEMBER 31, DECEMBER 31,
2004 2003
--------- ---------
Private placement debt $ 300,000 $ 300,000
Net unamortized private placement fees (1,568) (1,787)
Net unamortized gains on unwinding of swaps 6,615 3,828
Fair value of open interest rate swap - 72
--------- ---------
Total $ 305,047 $ 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.
In connection with the private placement debt, we entered into a series of
treasury rate lock and interest rate swap transactions (see Note 5, "Derivative
Financial Instruments"). The resultant net gain on these transactions along with
the private placement debt issuance costs are being amortized over the term of
the private placement debt. The net reduction in interest expense as a result of
both the debt issuance costs and the derivative transactions was $1.5 million in
2004 and $0.9 million in 2003. After considering both the debt issuance costs
and the derivative transactions, our current effective interest rate on the
private placement debt is 3.8%.
The Company also has lines of credit with a group of banks and a revolving loan
agreement with its majority shareholder, St. Paul Travelers. The line of credit
with a 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
47
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.
At December 31, 2004 and 2003, there were no amounts outstanding under these
lines of credit.
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
December 31, 2004 and 2003, there were no amounts outstanding under this loan
facility.
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 December 31, 2004 and 2003,
no borrowings were outstanding on these uncommitted lines of credit.
5. DERIVATIVE FINANCIAL INSTRUMENTS
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," (collectively, "SFAS No. 133") 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.
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 4, in anticipation of the private placement debt issuance,
the Company entered into a series of treasury rate lock transactions in 2003
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 debt. At
December 31, 2004 and 2003, the unamortized loss on the treasury rate lock
transactions was approximately $1.1 million and $1.4 million, respectively.
Within the next 12 months, the Company expects to reclassify approximately
$289,000 of the loss on the treasury rate lock transactions into interest
expense.
48
Also as discussed in Note 4, 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.
All 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
approximately $8.1 million. These gains are being amortized over the term of the
private placement debt, lowering the effective interest rate of the private
placement debt. The amortization of the gains resulting from the cancellation of
these interest rate swap transactions is reflected in "Interest Expense" on the
accompanying consolidated statements of income. Approximately $1.3 million and
$0.2 million of these gains have been amortized as a reduction to interest
expense for the years ended December 31, 2004 and 2003. As the private placement
debt and corresponding hedges were initiated in 2003, there were no amounts to
amortize for the year ended December 31, 2002. At December 31, 2004 and 2003,
the remaining unamortized gains on the cancellation of the interest rate swap
transactions were approximately $6.6 million and $3.8 million, respectively.
Within the next 12 months, the Company expects to reclassify approximately $1.7
million of the gains on the cancellation of the interest rate swap transactions
as a reduction of interest expense. At December 31, 2004, there were no open
interest rate swap hedging transactions. At December 31, 2003, the fair value of
the one open interest rate swap transaction was approximately $72,000 and is
reflected in "Other Assets" on the accompanying consolidated balance sheet, 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.
Included in "Investments" on the accompanying consolidated balance sheet as of
December 31, 2004, are certain swap agreements that have not been designated as
hedging instruments. These swaps are being used to re-create certain
fixed-income indices for purposes of establishing new fixed-income products that
may be offered to investors in the future (see Note 1 - Summary of Significant
Accounting Policies - Investments). At December 31, 2004, the notional values
and related expiration dates of these swap agreements were as follows: $2.0
million of positions expiring in August 2005 and $2.6 million of positions
expiring in September 2009. For the year ended December 31, 2004, the net change
in the fair value of these instruments totaled approximately $183,000 and has
been reflected as an unrealized gain in "Investment and Other Income/(Expense)"
in the accompanying consolidated statement of income.
Included in "Other Liabilities" on the accompanying consolidated balance sheet
as of December 31, 2004, are certain swap agreements and futures contracts that
have not been designated as hedging instruments. The futures contracts are being
used to mitigate overall market risk of certain new product portfolios, recently
incubated and described in the "Investments" section of Note 1 under "trading
securities." At December 31, 2004, the fair value of the open non-hedging
derivatives was approximately $66,000 and is reflected in "Other Liabilities" on
the accompanying consolidated balance sheet. This fair value adjustment resulted
in a loss of approximately $66,000 that was charged to net income. Certain of
the non-hedging derivative transactions were closed by December 31, 2004, and
resulted in a net gain of approximately $15,000 that is reflected in "Investment
and Other Income/(Expense)."
49
6. COMMITMENTS AND CONTINGENCIES
Rent expense for office space and equipment was $10,643,000, $10,537,000, and
$9,640,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
Minimum rental commitments for office space and equipment, including estimated
escalation for insurance, taxes and maintenance for the years 2005 through 2014,
the last year for which there is a commitment, are as follows:
(IN 000s)
YEAR COMMITMENT
-----------
2005....................................... $ 10,926
2006....................................... 11,732
2007....................................... 11,744
2008....................................... 11,270
2009....................................... 11,609
Thereafter................................. 42,756
As part of the Symphony acquisition, the Company may be required to make future
additional payments for substantially above average growth of the Symphony
business over the next two years. As of December 31, 2004, the potential for
future additional payments is up to a maximum of approximately $120 million. Any
future payments will be recorded as additional goodwill.
As of December 31, 2004, the Company also has a remaining outstanding commitment
to make an additional investment of approximately $2.4 million in the
private-equity investment partnership referenced in the "Investments" section of
Note 1. The drawdown schedule for this remaining outstanding commitment will be
determined by the general partner.
From time to time, the Company and its subsidiaries are named as defendants in
pending legal matters. In the opinion of management, based on current knowledge
and after discussions with legal counsel, the outcome of such litigation will
not have a material adverse effect on the Company's financial condition, results
of operations or liquidity.
7. RETIREMENT PLANS
The Company has a noncontributory retirement plan and a post-retirement benefit
plan covering the majority of employees, excluding employees of certain of its
subsidiaries. Pension benefits are based on years of service and the employee's
average compensation during the highest consecutive five years of the employee's
last ten years of employment. The Company's funding policy is to contribute
annually at least the minimum amount that can be deducted for federal income tax
purposes. Additionally, the Company currently maintains plans providing certain
life insurance and health care benefits for retired employees and their eligible
dependents. The cost of these benefits is shared by the Company and the retiree.
Effective March 24, 2003, the retirement plan was amended to provide that: (1)
participation in the retirement plan was frozen such that no new employees will
enter the plan, and (2) existing plan participants will not accrue any new
benefits after March 31, 2014.
The Company also maintains a noncontributory excess pension plan for certain
employees who participate in the retirement plan and whose pension benefits
exceed the Section 415 limitations of the Internal Revenue Code. Pension
benefits for this plan follow the vesting provisions of the funded plan with new
participation frozen and benefit accruals ending as described in the prior
paragraph. Funding is not made under this plan until benefits are paid.
For purposes of our consolidated financial statements, our plans' measurement
date is December 31. The market-related value of plan assets is determined based
on the fair value at measurement date. The projected benefit obligation is
determined based on the present value of projected benefit distributions at an
assumed discount rate. The discount rate used reflects the rate at which we
believe the pension plan obligations could be effectively settled at the
measurement date, as though the pension benefits of all plan participants were
determined as of that date.
50
An accumulated benefit obligation represents the actuarial present value of
benefits. Whether vested or non-vested, they are attributed by the pension
benefit formula to employee services rendered before a specified date using
existing salary levels. As of December 31, 2004 and 2003, the accumulated
benefit obligation for our pension plans was $25,834,000 and $20,604,000,
respectively. For our post-retirement plan, our accumulated benefit obligation
at December 31, 2004 and 2003, was $8,609,000 and $7,465,000, respectively.
A projected benefit obligation represents the actuarial present value as of a
date of all benefits attributed by the pension benefit formula to employee
service performed before that date. It is measured using assumptions as to
future compensation levels, as the pension benefit formula is based on those
future salary levels. The following tables provide a reconciliation of the
changes in the plans' projected benefit obligations and fair value of plan
assets over the two-year period ending December 31, 2004, and a statement of the
funded status as of December 31 of both years:
PENSION POST-RETIREMENT
BENEFITS BENEFITS
------------------------ ------------------------
(IN 000s) 2004 2003 2004 2003
---------- ---------- ---------- ----------
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Obligation at January 1 $ 28,238 $ 25,418 $ 7,465 $ 9,072
Service cost 1,615 1,660 212 268
Interest cost 1,671 1,661 484 493
Plan amendments -- -- -- (3,534)
Actuarial loss 2,158 1,596 919 1,499
Benefit payments (766) (2,097) (471) (333)
Curtailments (2,700) -- -- --
---------- ---------- ---------- ----------
Obligation at December 31 $ 30,216 $ 28,238 $ 8,609 $ 7,465
========== ========== ========== ==========
PENSION POST-RETIREMENT
BENEFITS BENEFITS
----------------------- ------------------------
(IN 000s) 2004 2003 2004 2003
---------- ---------- ---------- ----------
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at January 1 $ 24,702 $ 23,212 $ -- $ --
Actual return on plan assets 2,021 3,585 -- --
Benefit payments (766) (2,097) (471) (333)
Company contributions -- 2 471 333
---------- ---------- ---------- ----------
Fair value of plan assets at December 31 $ 25,957 $ 24,702 $ -- $ --
========== ========== ========== ==========
RECONCILIATION OF PREPAID (ACCRUED) AND TOTAL
AMOUNT RECOGNIZED:
Funded status at December 31 $ (4,259) $(3,536) $(8,609) $(7,465)
Unrecognized prior-service cost 49 93 (2,719) (2,984)
Unrecognized net loss 4,509 5,128 1,886 1,002
---------- ---------- ---------- ----------
Prepaid (accrued) cost $ 299 $1,685 $(9,442) $(9,447)
========== ========== ========== ==========
The Company employs a total return approach whereby a mix of equities and
fixed-income investments is used to maximize the long-term return of plan assets
for a prudent level of risk. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status, and corporate financial
condition. The investment portfolio contains a diversified blend of equity and
fixed-income investments. Furthermore, equity investments are diversified across
U.S. and non-U.S. stocks, as well as small and large capitalizations. Other
assets such as real estate are used judiciously to enhance long-term returns
while improving portfolio diversification. Derivatives may be used to gain
market exposure in an efficient and timely manner; however, derivatives may not
be used to leverage the portfolio beyond the market value of the underlying
investments.
51
Investment risk is measured and monitored on an on-going basis through quarterly
investment portfolio reviews, annual liability measurements, and periodic
asset/liability studies.
The expected long-term rate of return on plan assets is estimated based on the
plan's actual historical return results, the allowable allocation of plan assets
by investment class, market conditions and other relevant factors. We evaluate
whether the actual allocation has fallen within an allowable range, and we then
evaluate actual asset returns in total and by asset class. The following table
presents actual allocation of plan assets, in comparison with the allowable
allocation range, both expressed as a percentage of total plan assets, as of
December 31:
2004 2003
------------------- -------------------
ASSET CLASS ACTUAL ALLOWABLE ACTUAL ALLOWABLE
- ----------- ------ --------- ------ ---------
Cash 2% 0-15% 3% 0-15%
Fixed income 32 20-60 36 20-60
Equities 66 30-70 61 30-70
Other - 0-10 - 0-10
---- ----
Total 100% 100%
---- ----
The Company does not expect to make any contributions during 2005 for its
pension plans; however, for its post-retirement benefit plan, the Company
expects to contribute approximately $491,000 during 2005.
The following table provides the expected benefit payments for each of the plans
in each of the next five years as well as for the aggregate of the five fiscal
years thereafter:
(IN 000s)
PENSION POST-RETIREMENT
EXPECTED BENEFIT PAYMENTS BENEFITS BENEFITS
-------- ---------------
2005 $ 481 $ 491
2006 642 460
2007 658 482
2008 3,010 485
2009 824 505
2010 - 2014 12,057 2,599
52
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31, 2004 and 2003. Prepaid benefit cost is recorded in
other assets. Accrued benefit liability is recorded in accrued compensation and
other expenses.
PENSION POST-RETIREMENT
BENEFITS BENEFITS
------------------------- ----------------------
(IN 000s) 2004 2003 2004 2003
---------- ---------- --------- ---------
Prepaid benefit cost $ 3,305 $ 4,158 $ -- $ --
Accrued benefit liability (3,006) (2,473) (9,442) (9,447)
---------- ---------- --------- ---------
Net amount recognized $ 299 $ 1,685 $ (9,442) $ (9,447)
========== ========== ========= =========
The Company's qualified and non-qualified pension plans' projected benefit
obligations exceed the fair value of plan assets for the years ending December
31, 2004 and 2003. The Company's post-retirement benefits plan has no plan
assets. The aggregate benefit obligation for the post-retirement plan is
$8,609,000 as of December 31, 2004, and $7,465,000 as of December 31, 2003.
53
The following table provides the components of net periodic benefit costs for
the plans for the three years ending December 31, 2004:
(IN 000s) PENSION BENEFITS
-----------------------------
2004 2003 2002
------- ------- -------
Service cost $ 1,615 $ 1,660 $ 1,462
Interest cost 1,671 1,661 1,515
Expected return on plan assets (2,084) (1,930) (2,239)
Amortization of unrecognized net asset -- -- --
Amortization of prior-service cost 3 7 7
Amortization of net loss 139 175 9
Curtailments and settlements 41 -- (108)
------- ------- -------
Net periodic benefit cost $ 1,385 $ 1,573 $ 646
======= ======= =======
(IN 000s) POST-RETIREMENT BENEFITS
-----------------------------
2004 2003 2002
------- ------- -------
Service cost $ 212 $ 268 $ 464
Interest cost 484 493 549
Amortization of prior-service cost (265) (188) 43
Amortization of unrecognized loss 35 -- (20)
Curtailments and settlements -- -- (174)
------- ------- -------
Net periodic benefit cost $ 466 $ 573 $ 862
======= ======= =======
The assumptions used in the measurement of the Company's benefit obligation are
shown in the following table:
PENSION POST-RETIREMENT
BENEFITS BENEFITS
-------- ---------------
Weighted-average assumptions as of December 31, 2004
Discount rate 6.00% 6.00%
Rate of compensation increase 4.50% N/A
Weighted-average assumptions as of December 31, 2003
Discount rate 6.25% 6.25%
Rate of compensation increase 4.50% N/A
Weighted-average assumptions as of December 31, 2002
Discount rate 6.75% 6.75%
Rate of compensation increase 5.00% N/A
54
The assumptions used in the determination of the Company's net cost for the
three years ended December 31, 2004 are shown in the following table:
PENSION POST-RETIREMENT
BENEFITS BENEFITS
-------- ---------------
Weighted-average assumptions as of December 31, 2004
Discount rate 6.06% 6.25%
Return on plan assets 8.50% N/A
Rate of compensation increase 4.50% N/A
Weighted-average assumptions as of December 31, 2003
Discount rate 6.75% 6.75%
Return on plan assets 8.50% N/A
Rate of compensation increase 5.00% N/A
Weighted-average assumptions as of December 31, 2002
Discount rate 6.75% 6.75%
Return on plan assets 8.50% N/A
Rate of compensation increase 5.00% N/A
For measurement purposes, a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2005 and gradually declines to a
5% annual rate of increase by the year 2009.
Assumed health care trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
(IN 000s) 1% INCREASE 1% DECREASE
----------- -----------
Effect on total service and interest cost....................................... $ 132 $ (109)
Effect on the health care component of the accumulated post-retirement
benefit obligation........................................................... $ 1,324 $ (1,123)
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act (the "Act") became law. The Act provides for a federal subsidy
to sponsors of retiree health care benefit plans that provide a prescription
drug benefit that is at least actuarially equivalent to the benefit established
by the Act. On May 19, 2004, the FASB issued Staff Position No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "FSP"). The FSP provides
guidance on accounting for the effects of the Act, which resulted in a reduction
in the accumulated projected benefit obligation for the subsidy related to
benefits attributed to past service. Treating the future subsidy under the Act
as an actuarial experience gain, as required by the guidance, decreased the
accumulated projected benefit obligation at the beginning of the third quarter
of 2004 by approximately $636,000. The subsidy also decreased the net periodic
post-retirement benefit cost for the last half of 2004 by approximately $35,000.
The Company has a 401(k)/profit sharing plan that covers all of its employees,
including employees of its subsidiaries. Amounts determinable under the plan are
contributed in part to a profit sharing trust qualified under the Internal
Revenue Code with the remainder paid as cash bonuses, equity awards and matching
401(k) employee contributions. During the years ended December 31, 2004 and
2003, the Company made contributions of approximately $3.2 million and $2.9
million, respectively, to the profit sharing trust for profit sharing awards and
matching 401(k) employee contributions.
55
The Company has a nonqualified deferred compensation program whereby certain key
employees can elect to defer receipt of all or a portion of their cash bonuses
until a date certain or until retirement, termination, death or disability. The
deferred compensation liabilities incur interest expense at the prime rate or at
a rate of return of one of several managed funds sponsored by the Company, as
selected by the participant. The Company mitigates its exposure relating to
participants who have selected a fund return by investing in the underlying fund
at the time of the deferral. At December 31, 2004 and 2003, the Company's
deferred compensation liability was approximately $34.5 million and $30.7
million, respectively.
8. EQUITY INCENTIVE PLANS
The Company currently maintains one stock-based compensation plan, the Second
Amended and Restated Nuveen 1996 Equity Incentive Award Plan (the "1996 Plan").
Through May 2002, the Company also maintained the Nuveen 1992 Special Incentive
Plan (the "1992 Plan"). The 1992 Plan was developed in connection with the
Company's initial public offering of stock and authorized the issuance of an
aggregate of 17,940,000 shares of Class A common stock for the grant of equity
awards, including up to 7,020,000 shares of restricted common stock and deferred
units. Under the 1996 Plan, the Company has reserved an aggregate of 30,900,000
shares of Class A common stock for awards. Under both plans, options may be
awarded at exercise prices not less than 100% of the fair market value of the
stock on the grant date, and maximum option terms may not exceed ten years.
In 2002, the Company granted 200,000 shares of restricted stock with a weighted
average fair value of $29.45. In 2003, the Company granted 5,000 shares of
restricted stock with a weighted average fair value of $25.89. In 2004, the
Company granted 9,208 shares of restricted stock with a weighted average fair
value of $25.86. The Company awarded 309,479 shares of restricted stock with a
weighted average fair value of $38.01 in January 2005 to employees pursuant to
the Company's incentive compensation program for 2004. All awards are subject to
restrictions on transferability, a risk of forfeiture, and certain other terms
and conditions. The value of such awards is reported as compensation expense
over the shorter of the period beginning on the date of grant and ending on the
last vesting date, or the period in which the related employee services are
rendered. Recorded compensation expense for restricted stock awards, including
the amortization of prior year awards, was $1.1 million, $1.9 million, and $1.5
million for 2004, 2003, and 2002, respectively.
The Company also awarded certain employees options to purchase the Company's
Class A common stock at exercise prices equal to or greater than the closing
market price of the stock on the day the options were awarded. All options
awarded under the 1992 Plan have been exercised or forfeited as of May, 2002.
Options awarded during 1996 through 2004, pursuant to the 1996 Plan, are
generally subject to three- and four-year cliff vesting and expire ten years
from the award date. The Company awarded options to purchase 987,496 shares of
common stock in January 2005 to employees pursuant to the Company's incentive
compensation program for 2004. There were 1,927,000 shares available for future
equity awards as of December 31, 2004, after consideration of the January 2005
incentive awards.
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" (see "Equity Incentive Plans" in Note 1). 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. 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.
In accordance with SFAS No. 123, compensation expense of approximately
$20,417,000, $14,132,000, and $11,952,000 has been recognized for 2004, 2003,
and 2002, respectively. Included in compensation expense for 2004 is
approximately $4.3 million of stock option compensation expense recognized due
to a change in the assumed vesting period for certain options that have a
56
vesting period that can be accelerated based on stock performance. At December
31, 2004, there were no other stock option grants containing a similar
performance-vesting feature.
A summary of the Company's stock option activity for the years ended December
31, 2004, 2003 and 2002 is presented in the following table and narrative:
WEIGHTED
AVERAGE
(IN 000s, EXCEPT PER SHARE DATA) OPTIONS EXERCISE PRICE
-------- --------------
Options outstanding at December 31, 2001........................................ 13,618 $ 12.87
Awarded...................................................................... 5,280 27.19
Exercised.................................................................... (2,707) 10.41
Forfeited.................................................................... (318) 20.21
Options outstanding at December 31, 2002........................................ 15,873 $ 17.91
Awarded...................................................................... 3,453 25.91
Exercised.................................................................... (1,439) 12.29
Forfeited.................................................................... (162) 25.99
Options outstanding at December 31, 2003........................................ 17,725 $ 19.85
Awarded...................................................................... 3,524 29.09
Exercised.................................................................... (2,198) 13.77
Forfeited.................................................................... (313) 27.43
Options outstanding at December 31, 2004........................................ 18,738 $ 22.17
Options exercisable at:
December 31, 2002............................................................ 5,552 $ 11.48
December 31, 2003............................................................ 6,837 $ 12.06
December 31, 2004............................................................ 7,672 $ 14.61
All options awarded in 2004, 2003 and 2002 have exercise prices equal to the
closing market price of the stock on the date of grant and have a weighted
average exercise price of $29.09, $25.91, and $27.19, respectively.
The following table provides information about options outstanding as of
December 31, 2004:
OPTIONS OUTSTANDING WEIGHTED-AVERAGE
AS OF REMAINING RANGE OF EXERCISE
DECEMBER 31, 2004 CONTRACTUAL LIFE PRICES
------------------- ---------------- -----------------
4,937,100 3.4 years $ 7.00 - $17.00
5,733,900 7.1 $17.01 - $27.00
8,060,600 7.8 $27.01 - $37.00
6,000 10.0 $37.01 - $47.00
------------------- ---------------- -----------------
18,737,600 6.4 $ 7.00 - $47.00
=================== ================ =================
57
The options awarded during 2004 had weighted average fair values as of the time
of the grant of $5.46 per share. The options awarded during 2003 had weighted
average fair values of $4.24 per share. Options awarded during 2002 had weighted
average fair values of $4.77 per share. The fair value of stock option awards
was estimated at the date of grant using a Black-Scholes option-pricing model
with the following assumptions for 2004, 2003 and 2002, respectively: weighted
average risk-free interest rates of 3.1%, 3.2%, and 3.9%; dividend yields of
2.4%, 2.7%, and 2.7%; weighted average expected option lives of 5.2, 5.2 and 5
years; and volatility factors of the expected market price of our common stock
of 22%, 21% and 20%.
Through October of 2003, Rittenhouse maintained the Rittenhouse Financial
Services, Inc. 1997 Equity Incentive Award Plan ("1997 Plan"). This plan was
established subsequent to the acquisition in order to attract and retain
officers and other employees. The 1997 Plan authorized the issuance to
Rittenhouse employees of non-qualified options to purchase shares of a newly
created series of Rittenhouse common stock, the non-voting Class B Common Stock.
The exercise price for any options granted under the 1997 Plan was equal to or
greater than the fair market value of the Rittenhouse common stock on the date
of grant, as determined and fixed by a committee serving the Rittenhouse board
of directors on the relevant valuation date. The term of each option was no more
than four years from the date of grant. In accordance with APB No. 25, no
compensation expense has been recognized for any of the stock options awarded
under the 1997 Plan. Each option awarded under the 1997 Plan provided that
Rittenhouse, or its designee, had the right to purchase any or all shares of
Rittenhouse Class B Common Stock issued upon exercise of such option at any time
following the six-month period subsequent to the date of exercise, at a price
per share equal to the fair market value most recently determined by the
committee on the valuation date last preceding the date of purchase. As of
December 31, 2004, all of the options to acquire the 1,200,000 shares of
Rittenhouse Class B Common Stock (the total number of options authorized under
the 1997 Plan) have been exercised. Of these awards, no options were exercised
during 2004, and 391,122 and 395,142 options were exercised during 2003 and
2002, respectively. No options were forfeited during 2004 or 2003. Of the 4,180
options that were forfeited in 2002, none were reissued. The shares exercised in
2003 were repurchased by the Company on October 14, 2003. Purchase price in
excess of the exercise price of $11.1 million was added to goodwill. The shares
exercised in 2002 were repurchased by the Company on September 30, 2002.
Purchase price in excess of the exercise price of $16.3 million was added to
goodwill. Effective January 1, 2002, goodwill is no longer being amortized but
will be tested for impairment at least annually (See Note 1 - Summary of
Significant Accounting Policies - Goodwill).
9. ACQUISITION OF NWQ INVESTMENT MANAGEMENT COMPANY, INC.
On August 1, 2002, Nuveen Investments completed the acquisition of NWQ
Investment Management Company, Inc. ("NWQ"). NWQ is an asset management firm
based in Los Angeles that specializes in value-oriented equity investments and
has significant relationships with institutions and financial advisors serving
high-net-worth investors. The acquisition price included potential additional
future payments up to a maximum of $20.5 million over a five year period that
can be offset by fees paid to seller affiliates under a strategic alliance
agreement. As these future payments relate to a take-or-pay type of contract,
the $20.5 million had been recorded as both goodwill and a corresponding
liability on the Company's consolidated balance sheet. During 2004 and 2003,
$3.1 million and $2.5 million, respectively, was paid on this $20.5 million
liability. As of December 31, 2004 and 2003, the remaining liability of $14.9
million and $18.0 million, respectively, is included in other liabilities on the
accompanying consolidated balance sheets.
As part of the NWQ acquisition, key management purchased a non-controlling
member interest in NWQ Investment Management Company, LLC. The non-controlling
interest of $0.7 million and $3.0 million as of December 31, 2004 and 2003,
respectively, 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 2004 and 2003, the Company
recorded minority interest expense of approximately $1.9 million and $1.1
million, respectively. These amounts reflect the portion of profits applicable
to the minority
58
interest. Beginning in 2004 and continuing through 2008, the Company has the
right to acquire the respective interests of the non-controlling members. 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. (See Note 15 - Subsequent
Events).
The results of NWQ operations are included in our consolidated statements of
income since August 1, 2002, the date of the NWQ acquisition. The following
actual (as restated for expensing stock options) and unaudited pro-forma
information for the year ended December 31, 2002 reflects a summary of the
consolidated results of operations of Nuveen Investments and NWQ as if the
acquisition had occurred on January 1, 2002:
AS RESTATED PRO-FORMA
YEAR ENDED YEAR ENDED
(IN 000s, EXCEPT PER SHARE DATA) DEC. 31, 2002 DEC. 31, 2002
------------- -------------
Revenues $396,447 $417,044
Net Income $118,794 $120,623
Earnings per common share (diluted) $ 1.21 $ 1.23
10. CONSOLIDATED FUNDS
During 2004, the Company created and invested in six new funds, all managed by
two of the Company's subsidiaries. It is anticipated that these funds will be
marketed to the public at a future date. However, at December 31, 2004, the
Company was the sole investor in these funds. As a result of its being the sole
investor in these six funds, the Company is required to consolidate these funds
in its consolidated financial statements. For three of these funds, the
investment strategy is taxable fixed-income with various objectives: short
duration, multi-strategy core, and high yield. The remaining three funds are all
of a value-oriented equity style/strategy. At December 31, 2004, the total
assets of these six funds were approximately $39.1 million, including
investments of $31.0 million, and the total liabilities were approximately $2.9
million. In addition, the funds' net income of approximately $231,000 has been
included in the Company's consolidated financial results for the year ended
2004.
11. 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 was
payable on or before December 31, 2006, and carried a variable interest rate
equal to the Applicable Federal Rate published by the Secretary of the Treasury.
As of December 31, 2003, the remaining note receivable of approximately $827,570
was included in other assets on our consolidated balance sheet. A portion of the
contingent consideration amount paid during the year ended December 31, 2004,
was used to extinguish the then remaining loan balance of $827,570.
12. COMMON STOCK
A summary of common stock activity for the three-year period ended December 31,
2004, follows:
(IN 000s) 2004 2003 2002
----------- --------- ---------
Shares outstanding at beginning of year........................... 92,506 92,726 95,142
Shares issued due to stock option exercises....................... 2,219 1,444 2,713
Shares acquired................................................... (1,820) (1,664) (5,747)
Conversion of preferred to common................................. - - 618
----------- --------- ---------
Shares outstanding at end of year................................. 92,905 92,506 92,726
=========== ========= =========
59
As part of a share repurchase program approved on August 9, 2002, the Company is
authorized to purchase up to 7.0 million shares of Class A common stock. As of
December 31, 2004, there were 2.4 million shares remaining under the share
repurchase program.
13. NET CAPITAL REQUIREMENT
Nuveen Investments, LLC, the Company's wholly owned broker-dealer subsidiary, is
a Delaware limited liability company and 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, shall not exceed 15 to
1. At December 31, 2004, our broker-dealer's net capital ratio was 1.03 to 1 and
its net capital was approximately $27,956,000, which is $26,043,000 in excess of
the required net capital of $1,913,000.
14. QUARTERLY RESULTS (UNAUDITED)
The tables below set forth selected quarterly financial information for each
quarter in the two-year period ending December 31, 2004. As discussed in Note 1,
the Company began expensing the cost of stock options per the fair value
recognition provisions of SFAS No. 123. In addition, the retroactive restatement
method described in SFAS No. 148 was adopted and the results for prior years
have been restated.
(IN 000s, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
2004 QUARTER QUARTER QUARTER QUARTER
---------- --------- --------- ---------
Total operating revenues............................... $ 119,694 $ 120,413 $ 131,617 $ 133,913
Net income............................................. 37,877 35,979 39,062 43,490
Per common share:
Basic EPS........................................... 0.41 0.39 0.42 0.47
Diluted EPS......................................... 0.39 0.38 0.41 0.45
Cash dividends...................................... 0.15 0.18 0.18 0.18
Closing stock price range:
High................................................ 29.920 28.010 30.550 39.470
Low................................................. 26.290 23.890 24.760 30.280
(IN 000s, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
2003 QUARTER QUARTER QUARTER QUARTER
---------- --------- --------- ---------
Total operating revenues............................... $ 101,547 $ 106,097 $ 120,827 $ 123,557
Net income............................................. 30,635 31,544 34,989 37,837
Per common share:
Basic EPS........................................... 0.33 0.34 0.38 0.41
Diluted EPS......................................... 0.32 0.33 0.36 0.39
Cash dividends...................................... 0.13 0.13 0.15 0.15
Closing stock price range:
High................................................ 26.840 28.150 30.300 29.000
Low................................................. 19.990 22.380 25.800 25.650
Nuveen Investments, Inc. Class A common stock, representing approximately 21% of
the Company's issued and outstanding common stock at December 31, 2004, is
listed on the New York Stock Exchange under the symbol "JNC." There are no
contractual restrictions on the Company's present ability to pay dividends on
its common stock.
15. SUBSEQUENT EVENTS
Effective January 1, 2005, Nuveen Investments combined all of its fixed-income
asset management services and operations for both open-end and closed-end funds
and managed accounts under one registered investment adviser, Nuveen Asset
Management ("NAM"). As a result of this combination, Nuveen Advisory Corp.,
Nuveen Institutional Advisory Corp., and Nuveen Senior Loan Asset Management
Inc. were merged into NAM and ceased to exist as separate corporations.
On January 31, 2005, the Company's majority shareholder, The St. Paul Travelers
Companies, Inc., announced that it was reviewing strategic alternatives with
respect to its equity stake in Nuveen, including the possible divestiture of
this stake.
On February 15, 2005, the Company exercised its right to call 100% of the Class
3 NWQ minority members' interests (see Note 9 - Acquisition of NWQ Investment
Management Company, Inc.) for $22.8 million. Of the total amount to be paid on
March 2, 2005, approximately $22.5 million will be recorded as goodwill.
60
Five Year Financial Summary
(in thousands, unless otherwise indicated)
December 31, 2004 2003 2002 2001 2000
----------- --------- --------- ---------- --------
INCOME STATEMENT DATA
Operating Revenues:
Investment advisory fees from assets
under management $ 475,814 $ 404,847 $ 355,476 $ 330,588 $311,075
Product distribution 8,959 9,206 12,083 19,513 38,160
Performance fees/other revenue 20,864 37,975 28,888 21,002 9,158
----------- --------- --------- ---------- --------
Total operating revenues 505,637 452,028 396,447 371,103 358,393
Operating Expenses:
Compensation and benefits 165,321 144,190 115,522 102,727 98,074
Advertising and promotional costs 12,158 11,627 12,608 17,751 34,992
All other operating expenses 75,283 69,885 68,417 71,484 64,227
----------- --------- --------- ---------- --------
Total operating expenses 252,762 225,702 196,547 191,962 197,293
Operating Income 252,875 226,326 199,900 179,141 161,100
Non-Operating Income/(Expense) (368) (5,171) (4,992) 820 9,248
----------- --------- --------- ---------- --------
Income Before Taxes 252,507 221,155 194,908 179,961 170,348
Income Taxes 96,099 86,150 76,114 71,365 68,184
----------- --------- --------- ---------- --------
Net Income $ 156,408 $ 135,005 $ 118,794 $ 108,596 $102,164
=========== ========= ========= ========== ========
Earnings per Common Share:
Basic $ 1.69 $ 1.46 $ 1.26 $ 1.15 $ 1.06
Diluted $ 1.63 $ 1.41 $ 1.21 $ 1.07 $ 1.00
Return on average equity 29.4% 30.8% 29.1% 24.8% 23.9%
Total dividends per share $ 0.69 $ 0.56 $ 0.50 $ 0.47 $ 0.41
Balance Sheet Data
Total assets $ 1,071,593 $ 954,393 $ 841,042 $ 705,287 $583,394
Total short term obligations $ 94,783 $ 96,508 $ 380,131 $ 119,461 $ 88,866
Total long term obligations $ 388,730 $ 374,677 $ 61,385 $ 165,261 $ 37,732
Minority interest $ 2,602 $ 4,228 $ 2,800 $ - $ -
Redeemable preferred stock $ - $ - $ - $ 5,625 $ 45,000
Common stockholders' equity $ 585,478 $ 478,980 $ 396,726 $ 414,940 $411,796
Nuveen Managed Assets (in millions)
Net assets under management
Mutual funds $ 12,680 $ 12,285 $ 11,849 $ 11,814 $ 11,485
Exchange-traded funds 50,216 47,094 39,944 32,000 28,355
Money market funds - - - - 472
Managed accounts 52,557 35,977 27,926 24,671 21,699
----------- --------- --------- ---------- --------
Total $ 115,453 $ 95,356 $ 79,719 $ 68,485 $ 62,011
=========== ========= ========= ========== ========
Gross Investment Product Sales (in
millions)
Mutual funds $ 1,625 $ 1,536 $ 1,512 $ 1,246 $ 1,022
Defined portfolios - - 194 1,481 4,047
Exchange-traded funds 2,888 6,283 6,848 3,937 46
Managed accounts 21,436 10,279 7,040 7,570 5,694
----------- --------- --------- ---------- --------
Total $ 25,949 $ 18,098 $ 15,594 $ 14,234 $ 10,809
=========== ========= ========= ========== ========
See accompanying notes to consolidated financial statements.
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-l common stock dividend paid to shareholders of record on June 3,
2002.
The Company began expensing the cost of stock options on April 1, 2004. All
prior period financial information has been restated.
61
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management of Nuveen Investments, Inc., together with its consolidated
subsidiaries (the "Company"), is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
the Company's executive and financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
As of December 31, 2004, management conducted an assessment of the effectiveness
of the Company's internal control over financial reporting based on the
framework established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2004, is effective.
Our internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on our financial
statements.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004, has been audited by KPMG LLP,
an independent registered public accounting firm, as stated in their report
appearing on pages 63 and 64 which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Nuveen Investments, Inc.:
We have audited the accompanying consolidated balance sheets of Nuveen
Investments, Inc. and subsidiaries (the Company) as of December 31, 2004 and
2003, and the related consolidated statements of income, changes in common
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nuveen Investments,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, effective April
1, 2004, the Company began expensing the cost of stock options per the fair
value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 24, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Chicago, Illinois
February 24, 2005
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Nuveen Investments, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Nuveen
Investments, Inc. (the Company) maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Nuveen Investments, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, changes in common
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated February 24, 2005 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
February 24, 2005
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Effective as of December 31, 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 Exchange Act Rule 13a-15(d), no changes during the quarter ended December 31,
2004 were identified that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Registrant's executive officers is included in Part I
of this report. Information concerning our directors is incorporated by
reference to the 2005 Proxy Statement under the "Nominees for Directors"
subsection and the "Nominees for Class B Directors" subsection in the "Election
of Directors" section. Information concerning the compliance of our officers,
directors and 10% stockholders with Section 16(a) of the Securities Exchange Act
of 1934 is incorporated by reference to the information contained in the 2005
Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance". The information regarding Audit Committee members and "audit
committee financial experts" is incorporated by reference to the information
contained in the 2005 Proxy Statement under the "Audit Committee" subsection of
the "Committees of the Board of Directors" subsection of the "Corporate
Governance" Section. Information regarding the Company's Corporate Governance
Guidelines is incorporated by reference to the information contained in the 2005
Proxy Statement under the "Corporate Governance Guidelines" subsection of the
"Corporate Governance" section. The Company has adopted a Code of Business
Conduct and Ethics, which applies broadly to all employees, officers and
directors and also includes specific provisions applying to the Chief Executive
Officer, Chief Financial Officer and other senior financial officers, in
compliance with regulatory requirements. The Company also has a Code of Ethics
and various related compliance procedures that apply to its business as an
investment manager and sponsor of investment products, and the conduct of its
employees and executives. The Company will promptly post on its website any
amendments or waivers of its Code of Business Conduct and Ethics which apply to
the Chief Executive Officer, Chief Financial Officer, and other senior financial
officers.
ITEM 11. EXECUTIVE COMPENSATION
The "Executive Compensation", "Retirement Plans" and "Employment Agreements"
sections, and the "Compensation of Directors" subsection in the "Election of
Directors" section of the 2005 Proxy Statement are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The "Beneficial Ownership of the Company's Common Stock" section of the 2005
Proxy Statement is incorporated herein by reference.
The following table sets forth certain information as of December 31, 2004,
about equity compensation plans that have been approved by security holders. The
Company has no plans at such date that have not been approved by security
holders.
66
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE FOR
SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION
OF OUTSTANDING OUTSTANDING PLANS (EXCLUDING
OPTIONS, OPTIONS, WARRANTS SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS COLUMN (a))
-------------------- ----------------- -----------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders.......... 18,737,619(1) $22.17 3,300,936(2)
Equity compensation
plans not approved by
security holders.......... N/A N/A N/A
Total....................... 18,737,619 $22.17 3,300,936
(1) Excludes 462,351 shares of restricted stock granted under the compensation
plan approved by shareholders. Of such shares, 3,500 shares have not been
delivered because the restrictive period has not yet lapsed, and the
receipt of the remaining shares has been deferred by the recipients beyond
the expiration of the restrictive period.
(2) All such shares are available for issuance pursuant to stock option
awards. Of these shares, 1,722,750 are also available for issuance
pursuant to restricted stock awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Certain Relationships and Related Transactions" section of the 2005 Proxy
Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The "Fees and Services of Independent Auditors" section of the 2005 Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) FILED DOCUMENTS. The following documents are filed as part of this report:
1. Consolidated Financial Statements:
The consolidated financial statements required to be filed in the
Annual Report on Form 10-K are in Part II, item 8 hereof.
2. Financial Statement Schedules: None
All schedules are omitted because they are not required, are not
applicable or the information is otherwise shown in the financial
statements or notes thereto.
3. Exhibits:
See Exhibit Index on pages E-1 through E-4 hereof.
The management contracts and compensatory plans and arrangements
have been filed as Exhibits and are identified as such in the
Exhibit Index which follows.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 1, 2005.
NUVEEN INVESTMENTS, INC
By: /s/ Margaret E. Wilson
------------------------------------------
Margaret E. Wilson
Senior Vice President, Finance
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 1, 2005.
SIGNATURE TITLE
--------- -----
*
- ------------------------------------- Chairman, Chief Executive Officer and
Timothy R. Schwertfeger Director (Principal Executive Officer)
*
- ------------------------------------- President, and Director
John P. Amboian
*
- ------------------------------------- Director
Jay S. Benet
*
- ------------------------------------- Director
Willard L. Boyd
*
- ------------------------------------- Director
John L. Carl
*
- ------------------------------------- Director
W. John Driscoll
- ------------------------------------- Director
Jay S. Fishman
*
- ------------------------------------- Director
William H. Heyman
*
- ------------------------------------- Director
Duane R. Kullberg
*
- ------------------------------------- Director
Samuel G. Liss
- ------------------------------------- Director
Roderick A. Palmore
/s/ Margaret E. Wilson Senior Vice President, Finance
- ------------------------------------- (Principal Financial and Accounting Officer)
Margaret E. Wilson
*By /s/Alan G. Berkshire
----------------------------------
Alan G. Berkshire
As Attorney-in-Fact for each
of the persons indicated
68
EXHIBIT INDEX
to
ANNUAL REPORT ON FORM 10-K
for the
FISCAL YEAR ENDED DECEMBER 31, 2004
Copies of the documents listed below which are identified with an asterisk (*)
have heretofore been filed with the Commission as exhibits to registration
statements or reports filed with the Commission and are incorporated herein by
reference and made a part hereof; the exhibit number and location of each
document so filed and incorporated herein by reference are set forth opposite
each such exhibit. Exhibits not so identified are filed herewith.
Exhibit Exhibit No.
Designation Exhibit and Location
- ----------- ------- ------------
*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 (the "S-1
Registration Statement")
*3.2 Certificate of Designations, Preferences and Rights of Exhibit 3.1(a) to the Company's Form 10-Q for quarter
5% Cumulative convertible Preferred Stock of the Company ended September 30, 2000 filed on November 11, 2000
*3.3 Amendment to Restated Certificate of Incorporation of Exhibit 3.1(b) to the Company's Form 10-K for year
the Company 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 filed on March 29, 1994
*+10.1 Amended and Restated Nuveen 1996 Equity Incentive Award Exhibit A to Company's Schedule 14A, Definitive Proxy
Plan Statement filed on March 31, 1999
*+10.1(a) Second Amendment and Restatement of the Company's 1996 Exhibit 10.1(c) to the Company's Form 10-K for year
Equity Incentive Award Plan ended December 31, 2001
*+10.2 Employment Agreement between the Company and Timothy R. Exhibit 10.1 to the Company's 2002 Third Quarter Form
Schwertfeger, dated November 1, 2002 10-Q
E-1
Exhibit Exhibit No.
Designation Exhibit and Location
- ----------- ------- ------------
*+10.3 Employment Agreement between the Company and John P. Exhibit 10.2 to the Company's 2002 Third Quarter Form
Amboian, dated November 1, 2002. 10-Q
*+10.4 Nuveen 1999 Executive Officer Performance Plan Exhibit 10.3(b) to the Company's Form 10-K for year ended
December 31, 1999
*+10.5 Nuveen 2002 Executive Officer Performance Plan Exhibit 10.3(a) to the Company's Form 10-K for year ended
December 31, 2001
*+10.6 Amended and Restated Profit Sharing Plan Exhibit 10.4 to the Company's 1996 Form 10-K
*+10.7 Amended and Restated Rittenhouse Financial Services, Exhibit 10.4(a) to the Company's 1998 Form 10-K
Inc. 1997 Equity Incentive Award Plan
*+10.8 Nuveen Investments, LLC Employees' Retirement Plan, as Exhibit 10.5 to the Company's Form 10-K for year ended
amended and restated effective January 1, 1997 December 31, 2001
*+10.9 Excess Benefit Retirement Plan Exhibit 10.6 to the S-1 Registration Statement
*+10.10 The Company Deferred Bonus Plan Exhibit 10.7(a) to the Company's 1999 Form 10-K
*10.11 Lease dated January 22, 1998 between Overseas Partners Exhibit 10.8(c) to the Company's 1998 Form 10-K
(333), Inc. and Nuveen Investments, LLC
*10.12 Registration Rights Agreement between the Company and Exhibit 10.13 to the Company's Form 10-K for year
The St. Paul Companies, Inc. ended December 31, 1992
*10.13 Acquisition Agreement, dated as of June 15, 2001, by and Exhibit 2.1 to the Company's Form 8-K filed on June 20,
among the Company, Barra, Inc., Symphony Asset 2001
Management, Inc., Maestro, LLC, Symphony Asset
Management LLC, Praveen K. Gottipalli, Michael J.
Henman, Neil L. Rudolph and Jeffrey L. Skelton
E-2
Exhibit Exhibit No.
Designation Exhibit and Location
- ----------- ------- ------------
*10.14 Amendment to Acquisition Agreement, dated as of February Exhibit 10.4 to the Company's 2003 First Quarter 10-Q
1, 2003, by and among the Company, Barra, Inc., Symphony
Asset Management, Inc., Maestro, LLC, Symphony Asset
Management LLC, Praveen K. Gottipalli, Michael J.
Henman, Neil L. Rudolph and Jeffrey L. Skelton
*10.15 Revolving Loan Agreement, dated as of July 29, 2002, Exhibit 10.21 to the Company's 2002 Second Quarter 10-Q
between The St. Paul Companies, Inc. and the Company
*10.16 Amendment to Revolving Loan Agreement, dated as of July Exhibit 10.4 to the Company's 2003 Second Quarter 10-Q
15, 2003, between The St. Paul Companies, Inc. and the
Company
*10.17 Stock Purchase Agreement, dated as of May 28, 2002, by Exhibit 2.1 to the Company's Form 8-K filed on August
and among Old Mutual (US) Holdings Inc., NWQ Investment 14, 2002
Management Company, Inc. and the Company
*10.18 3-Year Credit Agreement, dated as of August 7, 2003, Exhibit 10.6 to the Company's 2003 Third Quarter 10-Q
among the Company, Bank of America, N.A., Citibank, N.A.
and Bank One, N.A.
*10.19 364 Day Credit Agreement, dated as of August 7, 2003, Exhibit 10.7 to the Company's 2003 Third Quarter 10-Q
among the Company, Bank of America, N.A., Citibank, N.A.
and Bank One, N.A.
*10.20 Note Purchase Agreement, dated as of September 19, 2003, Exhibit 10.8 to the Company's 2003 Third Quarter 10-Q
relating to $300,000,000 principal amount of 4.22%
Senior Notes Due September 19, 2008.
10.21 Description of Investment Management Contracts --
21 Subsidiaries of the Company --
23 Independent Auditors' Consent --
E-3
Exhibit Exhibit No.
Designation Exhibit and Location
- ----------- ------- ------------
24 Powers of Attorney --
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
* Previously filed; incorporated herein by reference.
+ Management contracts and compensatory plans and arrangements.
E-4