Attached files
file | filename |
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EX-31.1 - EX-31.1 - NUVEEN INVESTMENTS INC | c54577exv31w1.htm |
EX-32.2 - EX-32.2 - NUVEEN INVESTMENTS INC | c54577exv32w2.htm |
EX-32.1 - EX-32.1 - NUVEEN INVESTMENTS INC | c54577exv32w1.htm |
EX-31.2 - EX-31.2 - NUVEEN INVESTMENTS INC | c54577exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2009
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from to
Commission File Number 001-11123
NUVEEN INVESTMENTS, INC.
(Exact name of the registrant as specified in its charter)
Delaware | 36-3817266 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
333 West Wacker Drive, Chicago, Illinois | 60606 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (312) 917-7700
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 o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
o | Accelerated filer | o | |||
Non-accelerated filer
|
x | Smaller reporting Company | o | |||
(Do not check if a
smaller reporting
company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
There were 1,000 shares of the Companys Common Stock, par value $0.01 per share, outstanding as of
November 12, 2009.
NUVEEN INVESTMENTS, INC.
TABLE OF CONTENTS
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Certification of CEO |
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Certification of Principal Financial Officer |
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Section 906 Certification of CEO |
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Section 906 Certification of Principal Financial Officer |
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NUVEEN INVESTMENTS, INC. & SUBSIDIARIES
Consolidated Balance Sheets
Unaudited
(in thousands)
Unaudited
(in thousands)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 325,213 | $ | 467,136 | ||||
Restricted cash for debt retirement |
222,745 | - | ||||||
Management and distribution fees receivable |
82,594 | 98,733 | ||||||
Other receivables |
30,492 | 12,354 | ||||||
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation
and amortization of $77,336 and $82,483, respectively |
57,782 | 62,009 | ||||||
Investments |
529,754 | 347,362 | ||||||
Goodwill |
2,239,314 | 2,299,725 | ||||||
Intangible assets, less accumulated amortization of $125,667
and $72,945, respectively |
3,141,833 | 3,131,355 | ||||||
Current taxes receivable |
6,578 | 14,276 | ||||||
Other assets |
21,641 | 21,540 | ||||||
Total assets |
$ | 6,657,946 | $ | 6,454,490 | ||||
LIABILITIES AND EQUITY |
||||||||
Short-term obligations: |
||||||||
Term notes |
$ | 222,249 | $ | - | ||||
Accounts payable |
13,044 | 9,633 | ||||||
Accrued compensation and other expenses |
122,689 | 165,021 | ||||||
Fair value of open derivatives |
7,790 | 20,100 | ||||||
Other short-term liabilities |
24,074 | 20,642 | ||||||
Total short-term obligations |
389,846 | 215,396 | ||||||
Long-term obligations: |
||||||||
Term notes |
$ | 4,184,735 | $ | 4,192,922 | ||||
Fair value of open derivatives |
70,589 | 58,474 | ||||||
Deferred income tax liability, net |
1,022,718 | 1,047,518 | ||||||
Other long-term liabilities |
24,685 | 27,042 | ||||||
Total long-term obligations |
5,302,727 | 5,325,956 | ||||||
Total liabilities |
5,692,573 | 5,541,352 | ||||||
Equity: |
||||||||
Nuveen Investments shareholders equity: |
||||||||
Additional paid-in capital |
2,850,589 | 2,841,465 | ||||||
Retained earnings/ (deficit) |
(1,875,704 | ) | (1,796,162 | ) | ||||
Accumulated other comprehensive income/(loss) |
11,458 | (4,200 | ) | |||||
Total Nuveen Investments shareholders equity |
986,343 | 1,041,103 | ||||||
Noncontrolling interest |
(20,970 | ) | (127,965 | ) | ||||
Total equity |
965,373 | 913,138 | ||||||
Total liabilities and equity |
$ | 6,657,946 | $ | 6,454,490 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
NUVEEN INVESTMENTS, INC. & SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(in thousands)
Unaudited
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Operating revenues: |
||||||||||||||||
Investment advisory fees from assets under management |
$ | 160,187 | $ | 180,279 | $ | 445,634 | $ | 556,972 | ||||||||
Product distribution |
71 | 1,142 | 756 | 3,192 | ||||||||||||
Performance fees / other revenue |
1,306 | 9,953 | 11,297 | 19,207 | ||||||||||||
Total operating revenues |
161,564 | 191,374 | 457,687 | 579,371 | ||||||||||||
Operating expenses: |
||||||||||||||||
Compensation and benefits |
70,995 | 66,299 | 188,142 | 218,623 | ||||||||||||
Severance |
764 | 1,880 | 7,459 | 13,552 | ||||||||||||
Advertising and promotional costs |
2,513 | 3,662 | 6,619 | 10,400 | ||||||||||||
Occupancy and equipment costs |
9,005 | 7,413 | 25,410 | 21,141 | ||||||||||||
Amortization of intangible assets |
20,302 | 16,235 | 52,722 | 48,635 | ||||||||||||
Travel and entertainment |
2,144 | 2,954 | 6,905 | 9,443 | ||||||||||||
Outside and professional services |
10,096 | 11,992 | 30,710 | 32,483 | ||||||||||||
Other operating expenses |
10,650 | 10,607 | 30,537 | 26,736 | ||||||||||||
Total operating expenses |
126,469 | 121,042 | 348,504 | 381,013 | ||||||||||||
Other income/(expense) |
17,058 | (41,017 | ) | 91,162 | (64,395 | ) | ||||||||||
Net interest expense |
(74,168 | ) | (59,729 | ) | (199,462 | ) | (196,707 | ) | ||||||||
Income/(loss) before taxes |
(22,015 | ) | (30,414 | ) | 883 | (62,744 | ) | |||||||||
Income tax expense/(benefit) |
(19,004 | ) | 5,614 | (33,959 | ) | 1,535 | ||||||||||
Net income/(loss) |
(3,011 | ) | (36,028 | ) | 34,842 | (64,279 | ) | |||||||||
Less: net income/(loss) attributable to the noncontrolling interests |
30,369 | (26,906 | ) | 114,289 | (48,911 | ) | ||||||||||
Net income/(loss) attributable to Nuveen Investments |
$ | (33,380 | ) | $ | (9,122 | ) | $ | (79,447 | ) | $ | (15,368 | ) | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
NUVEEN INVESTMENTS, INC. & SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity
Unaudited
(in thousands)
Nuveen Investments, Inc. & Subsidiaries |
||||||||||||||||||||
Accumulated | ||||||||||||||||||||
Additional | Retained | Other | ||||||||||||||||||
Paid-In | Earnings/ | Comprehensive | Noncontrolling | |||||||||||||||||
Capital | (Deficit) | Income/(Loss) | Interests | Total | ||||||||||||||||
Balance at December 31, 2008 |
$ | 2,841,465 | (1,796,162 | ) | (4,200 | ) | (127,965 | ) | $ | 913,138 | ||||||||||
Net income/(loss) |
(79,447 | ) | 114,289 | 34,842 | ||||||||||||||||
Cash dividends paid |
(95 | ) | (3,187 | ) | (3,282 | ) | ||||||||||||||
Amortization of deferred and restricted class A units |
4,161 | 4,161 | ||||||||||||||||||
Deferred and restricted class A unit payouts |
(280 | ) | (280 | ) | ||||||||||||||||
Vested value of class B units |
17,809 | 17,809 | ||||||||||||||||||
Amortization of equity interests |
3,462 | 3,462 | ||||||||||||||||||
Other comprehensive income |
15,658 | 15,658 | ||||||||||||||||||
Purchase of and other changes to noncontrolling interests |
(12,566 | ) | (7,569 | ) | (20,135 | ) | ||||||||||||||
Balance at September 30, 2009 |
$ | 2,850,589 | (1,875,704 | ) | 11,458 | (20,970 | ) | $ | 965,373 | |||||||||||
Nine Months | ||||
Comprehensive Income/(Loss) (in 000s): |
Ending 9/30/09 | |||
Net income |
$ | 34,842 | ||
Other comprehensive income/(loss): |
||||
Unrealized gains/(losses) on marketable equity securities, net of tax |
15,274 | |||
Reclassification adjustments for realized (gains)/losses |
257 | |||
Funded status of retirement plans, net of tax |
123 | |||
Foreign currency translation adjustment |
4 | |||
Subtotal: other comprehensive income/(loss) |
15,658 | |||
Comprehensive income |
50,500 | |||
less: net income attributable to noncontrolling interests |
114,289 | |||
Comprehensive loss attributable to Nuveen Investments |
$ | (63,789 | ) | |
See accompanying notes to consolidated financial statements.
5
Table of Contents
NUVEEN INVESTMENTS, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
Nine Months Ended September 30, | ||||||||
2009 |
2008 |
|||||||
Cash flows from operating activities: |
||||||||
Net income/(loss) |
$ | 34,842 | $ | (64,279 | ) | |||
Adjustments to reconcile net income/(loss) to net cash
provided from operating activities: |
||||||||
Net (income)/loss attributable to noncontrolling interests |
(114,289 | ) | 48,911 | |||||
Deferred income taxes |
(33,984 | ) | (7,036 | ) | ||||
Depreciation of office property, equipment and leaseholds |
11,212 | 7,368 | ||||||
Loss on sale of fixed assets |
1,771 | 4 | ||||||
Realized (gains)/losses from available-for-sale investments |
(2,651 | ) | 62 | |||||
Unrealized (gains)/losses on derivatives |
(142 | ) | 2,966 | |||||
Amortization of intangible assets |
52,722 | 48,635 | ||||||
Amortization of debt related items, net |
8,665 | 6,888 | ||||||
Compensation expense for equity plans |
25,432 | 29,799 | ||||||
Compensation
expense for mutual fund incentive program |
12,343 | - | ||||||
Net gain on early retirement of Senior Unsecured Notes - 5% of 2010 |
(4,291 | ) | - | |||||
Loss due to acceleration of deferred debt items from first lien paydown |
3,697 | - | ||||||
Net (increase) decrease in assets: |
||||||||
Management and distribution fees receivable |
16,139 | 4,655 | ||||||
Other receivables |
(9,855 | ) | 17,310 | |||||
Current taxes receivable |
7,698 | 176,820 | ||||||
Other assets |
(418 | ) | (121 | ) | ||||
Net increase (decrease) in liabilities: |
||||||||
Accrued compensation and other expenses |
(51,214 | ) | (47,362 | ) | ||||
Accounts payable |
2,445 | 871 | ||||||
Other liabilities |
(10,784 | ) | (401 | ) | ||||
Other |
(483 | ) | (7 | ) | ||||
Net cash provided by/(used in) operating activities |
(51,145 | ) | 225,083 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from loans and notes payable, net of discount |
451,500 | - | ||||||
Debt issuance costs |
(29,890 | ) | - | |||||
Restricted cash: escrow for senior notes due 9/15/10 |
(222,745 | ) | - | |||||
Repayment of notes payable |
(210,441 | ) | (11,575 | ) | ||||
Early retirement of notes payable |
(5,178 | ) | - | |||||
Purchase of noncontrolling interests |
(18,132 | ) | (84,934 | ) | ||||
Payment of income allocation to noncontrolling interests |
(2,053 | ) | (7,654 | ) | ||||
Undistributed income allocation for noncontrolling interests |
1,098 | 1,931 | ||||||
Dividends paid |
(95 | ) | (50 | ) | ||||
Conversion of right to receive A shares into A shares |
- | 72 | ||||||
Deferred and restricted Class A unit payouts |
(280 | ) | - | |||||
Net cash used in financing activities |
(36,216 | ) | (102,210 | ) | ||||
Cash flows from investing activities: |
||||||||
Winslow acquisition |
(97 | ) | - | |||||
HydePark acquisition |
(2,692 | ) | - | |||||
MDP Transaction |
- | (127 | ) | |||||
Purchase of office property and equipment |
(7,984 | ) | (18,513 | ) | ||||
Proceeds from sales of investment securities |
27,101 | 13,293 | ||||||
Purchases of investment securities |
(19,662 | ) | (13,225 | ) | ||||
Purchases of securities for mutual fund incentive program |
(52,000 | ) | - | |||||
Net change in consolidated funds |
767 | (100,741 | ) | |||||
Other |
1 | 3 | ||||||
Net cash used in investing activities |
(54,566 | ) | (119,310 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
4 | (9 | ) | |||||
Increase/(decrease) in cash and cash equivalents |
(141,923 | ) | 3,554 | |||||
Cash and cash equivalents: |
||||||||
Beginning of year |
467,136 | 285,051 | ||||||
End of period |
$ | 325,213 | $ | 288,605 | ||||
Supplemental Information: |
||||||||
Taxes Paid |
$ | 221 | $ | 6,362 | ||||
Interest Paid |
$ | 188,124 | $ | 207,696 |
See accompanying notes to consolidated financial statements.
6
Table of Contents
NUVEEN INVESTMENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2009
(Unaudited)
September 30, 2009
Note 1 Basis of Presentation
The unaudited consolidated financial statements presented herein include the accounts of Nuveen
Investments, Inc. (the Company), its majority-owned subsidiaries, and certain funds which the
Company is required to consolidate (further described below), and have been prepared in conformity
with U.S. generally accepted accounting principles. All significant intercompany transactions and
accounts have been eliminated in consolidation.
The unaudited consolidated financial statements presented herein should be read in conjunction with
the audited consolidated financial statements and related notes included in the Companys 2008
Year-End Financial Statement Filing (filed on Form 8-K on March 31, 2009).
These financial statements rely, in part, on estimates. Actual results could differ from these
estimates. In the opinion of management, all necessary adjustments (consisting of normal,
recurring accruals) have been reflected for a fair presentation of the results of operations,
financial position and cash flows in the accompanying unaudited consolidated financial statements.
The results for the period are not necessarily indicative of the results to be expected for the
entire year.
Acquisition of the Company
As more fully discussed in Note 1, Acquisition of the Company, of the Companys 2008 Year-End
Financial Statement Filing (filed on Form 8-K on March 31, 2009), Nuveen Investments, Inc. (the
Predecessor) was acquired by a group of private equity investors led by Madison Dearborn
Partners, LLC (MDP) in a merger and related transactions (collectively, the Transactions or the
MDP Transactions). The Transactions closed on November 13, 2007.
Financial results for periods prior to November 13, 2007 represent operations of the Predecessor.
Financial results from November 14, 2007 forward represent operations of the company surviving the
MDP-led buyout (the Successor). As a result of the MDP-led buyout and the application of
purchase accounting as of November 13, 2007, the consolidated financial statements for the period
after November 13, 2007 (the Successor period) are presented on a different basis than that for
periods prior to November 13, 2007 (the Predecessor period) and therefore are not comparable.
Certain Funds Required to be Consolidated
As more fully discussed in Note 12, Consolidated Funds, of the Companys 2008 Year-End Financial
Statement Filing (filed on Form 8-K on March 31, 2009), the Company is required to consolidate
certain funds into its financial statements. For those funds which the Company is required to
consolidate, the assets, liabilities, revenues and expenses of those funds are included throughout
the Companys consolidated financial statements. For the accompanying consolidated statement of
cash flows, the change in cash and cash equivalents for all of the consolidated funds is included
in the Cash Flows from Investing Activities section.
Symphony CLO V: Symphony CLO V, Ltd. (Symphony CLO V) is a Cayman Islands exempted company
incorporated with limited liability on February 27, 2007, and commenced operations on December 13,
2007. Symphony CLO V entered into an asset management agreement with Symphony Asset Management,
LLC, a subsidiary of the Company. Although the Company does not hold any ownership interest in
Symphony CLO V, because an affiliate of MDP is the majority equity holder of Symphony CLO V, the
Company is treating variable interests in Symphony CLO V held by related parties as its own. The
Company has determined the related party group to be the primary beneficiary of Symphony CLO V.
Within the related party group, the Company determined that it was the primary beneficiary of
Symphony CLO V, as it was most closely related with Symphony CLO V because of the asset management
agreement between Symphony CLO V and one of the Companys subsidiaries, and the ability this
subsidiary has to direct the day-to-day activities of Symphony CLO V. (Refer to Note 12,
Financial Information Related to Guarantor Subsidiaries, for stand-alone financial results for
Symphony CLO V.)
New funds: The Company is also required to consolidate into its financial results those funds
(recently created product portfolios) in which the Company is either the sole investor or in which
the Company holds a majority investment position. For the nine months ended September 30, 2009,
there is only one recently created fund which is consolidated in the Companys financial
statements. The Company began consolidating the results of this one fund starting July 1, 2009.
As of September 30, 2009, total assets and liabilities
7
Table of Contents
of this fund approximate $10.6 million and
$2 thousand, respectively, and are included in the Companys consolidated balance sheet as of
September 30, 2009. For the nine months ended September 30, 2009, the net income of this one fund
is approximately $0.5 million and is included in the Companys consolidated statement of income.
For the nine months ended September 30, 2008, the
Companys consolidated financial statements include the results of two different funds in which the
Company was originally either the sole investor or majority investor, but which were eventually
marketed to the public and, by the end of January 2008, the Company was no longer the majority
investor in these two funds. As a result, the Companys
consolidated balance sheet as of December
31, 2008 does not reflect any assets or liabilities for these two funds, but the Companys
consolidated statement of income for the nine months ended September
30, 2008 includes approximately $0.5 million of net loss related to these
funds.
Codification of Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles a Replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 states that
the FASB Accounting Standards Codification TM (the Codification or ASC) will become
the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. On the effective date of SFAS No. 168,
the Codification will supersede all then-existing non-SEC accounting and reporting standards. All
other grandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritative. SFAS No. 168 is effective for financial statements issued for interim and
annual periods ending after September 15, 2009.
The Codification does not change U.S. GAAP. The Codification only changes the way that U.S. GAAP
is referenced. The Codification reorganizes the various U.S. GAAP pronouncements into
approximately 90 accounting topics and displays them in a consistent structure for ease of
research and cross-reference. All existing accounting pronouncements used to create the
Codification became superseded.
Starting with the accompanying consolidated financial statements for the period ending September
30, 2009, the Company will make reference to U.S. GAAP issued by FASB as either FASB ASC or
Topic before the new Codification topic reference number.
Presentation of Minority Interests / Noncontrolling Interests
FASB ASC 810-10-65 discusses the concept of noncontrolling interests in consolidated financial
statements. This topic states that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity, separate from the parents
equity, in the consolidated financial statements. In addition, consolidated net income should be
adjusted to include the net income attributed to the noncontrolling interests. This presentation
(as well as retrospective adoption of the presentation and disclosure requirements for existing
noncontrolling interests) is required for fiscal years beginning on or after December 15, 2008;
earlier adoption is prohibited.
As a result of the retrospective application of the disclosure provisions of the FASB ASC on
noncontrolling interests as of January 1, 2009, minority interest receivable/payable is no longer
presented in the mezzanine section of the Companys consolidated balance sheet. Minority interest
receivable/payable is now presented as Noncontrolling interest on the Companys consolidated
balance sheets.
As a result of presenting Noncontrolling interest on the Companys consolidated balance sheet as
of December 31, 2008 in conformity with the provisions of this FASB Codification topic, Total
Nuveen Investments shareholders equity at December 31, 2008 remains unchanged from that
presented in the Companys 2008 Year-End Financial Statement Filing (filed on Form 8-K on March
31, 2009).
On the statement of cash flows, repurchases of minority interests had previously been recorded in
Cash Flows Used in Investing Activities. Under FASB ASC 810-10-65, such repurchases are
reflected in Cash Flows Used in Financing Activities.
Finally, under FASB ASC 810-10-65, changes in a parent companys ownership interest in a
subsidiary while the parent retains its controlling financial interest in that subsidiary are
accounted for as equity transactions. Any difference between the fair value of the consideration
received or paid and the amount by which the noncontrolling interest is adjusted shall be
recognized in equity attributable to the parent. During February 2009, the Company exercised its
right to call certain noncontrolling interests. Under the provisions of FASB ASC 810-10-65, the
$12.6 million representing the amount paid for the repurchases in excess of the vested value of
these noncontrolling interests was recorded as a reduction to Nuveens additional paid-in-capital.
Prior to FASB ASC 810-10-65, this amount would have been recorded as additional goodwill.
Other
Certain prior year balances have been reclassified to conform to the current year presentation.
These reclassifications include the categorization of the fair value of open derivatives between
short-term and long-term liabilities, based on the derivative transactions maturity date. In
prior periods, the fair value of open derivatives was classified entirely as short-term
obligations.
8
Table of Contents
Note 2 Fair Value Measurements
FASB ASC 820-10 establishes a fair value hierarchy that prioritizes information used to develop
those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data (for example, the reporting entitys own
data). FASB ASC 820-10 requires that fair value measurements be separately disclosed by level
within the fair value hierarchy in order to distinguish between market participant assumptions
based on market data obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting entitys own
assumptions about market participant assumptions (unobservable inputs classified within Level 3 of
the hierarchy). Specifically:
| Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. | ||
| Level 2 - inputs to the valuation methodology other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, through corroboration with observable market data (market-corroborated inputs). | ||
| Level 3 - inputs to the valuation methodology that are unobservable inputs for the asset or liability that is, inputs that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk) developed based on the best information available in the circumstances. |
In instances where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value hierarchy within which
the entire fair value measurement falls is based on the lowest level input that is significant to
the fair value measurement in its entirety. The Companys assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
The Company did not elect to apply the fair value provisions to any qualifying non-financial
assets and liabilities. As a result, the application of FASB ASC 820-10 to the Companys
non-financial assets did not have any impact on the Companys consolidated results of operations
or financial position.
The following table presents information about the Companys fair value measurements at September
30, 2009 and December 31, 2008 (in 000s):
Fair Value Measurements at September 30, 2009 Using |
||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Significant Other | Unobservable | ||||||||||||||
for Identical | Observable Inputs | Inputs | ||||||||||||||
Description |
September 30, |
Assets (Level 1) |
(Level 2) |
(Level 3) |
||||||||||||
2009 |
||||||||||||||||
Assets |
||||||||||||||||
Available-for-sale securities |
$ | 167,409 | $ | 124,746 | $ | 20,868 | $ | 21,795 | ||||||||
Underlying investments from
consolidated vehicle |
361,711 | - | - | 361,711 | ||||||||||||
Other investments |
634 | - | 564 | 70 | ||||||||||||
Subtotal: Total Investments |
$ | 529,754 | $ | 124,746 | $ | 21,432 | $ | 383,576 | ||||||||
Liabilities |
||||||||||||||||
Derivative financial instruments (short-term and long-term) |
$ | (78,379) | - | - | $ | (78,379) |
9
Table of Contents
Fair Value Measurements at December 31, 2008 Using |
||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Significant Other | Unobservable | ||||||||||||||
December 31, |
for Identical | Observable Inputs | Inputs | |||||||||||||
Description |
2008 |
Assets (Level 1) |
(Level 2) |
(Level 3) |
||||||||||||
Assets |
||||||||||||||||
Available-for-sale securities |
$ | 105,967 | $ | 72,179 | $ | 14,796 | $ | 18,992 | ||||||||
Underlying investments from consolidated vehicle |
241,180 | - | - | 241,180 | ||||||||||||
Other investments |
215 | - | 146 | 69 | ||||||||||||
Subtotal: Total Investments |
$ | 347,362 | $ | 72,179 | $ | 14,942 | $ | 260,241 | ||||||||
Liabilities |
||||||||||||||||
Derivative financial instruments
(short-term and long-term) |
$ | (78,574) | (52) | - | $ | (78,522) |
The following tables present a rollforward of fair value measurements considered to be Level 3:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Underlying | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Available- | in | Derivative | ||||||||||||||||||
for-Sale | Consolidated | Other | Financial | |||||||||||||||||
Securities |
Vehicle |
Investments |
Instruments |
Total |
||||||||||||||||
Beginning balance (as of June 30, 2009) |
$ | 18,542 | $ | 322,815 | $ | 10,374 | $ | (78,664 | ) | $ | 273,067 | |||||||||
Total gains or losses (realized/unrealized) |
3,253 | 23,165 | 10 | 285 | 26,713 | |||||||||||||||
Included in earnings |
27 | 23,165 | 10 | 285 | 23,487 | |||||||||||||||
Included in other comprehensive income |
3,226 | - | - | - | 3,226 | |||||||||||||||
Purchases and sales |
- | 15,731 | (9,750 | ) | - | 5,981 | ||||||||||||||
Transfers in and/or out of Level 3 |
- | - | (564 | ) | - | (564 | ) | |||||||||||||
Ending balance (as of September 30, 2009) |
$ | 21,795 | $ | 361,711 | $ | 70 | $ | (78,379 | ) | $ | 305,197 | |||||||||
Underlying | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Available- | in | Derivative | ||||||||||||||||||
for-Sale | Consolidated | Other | Financial | |||||||||||||||||
Securities |
Vehicle |
Investments |
Instruments |
Total |
||||||||||||||||
Beginning balance (as of January 1, 2009) |
$ | 18,992 | $ | 241,180 | $ | 215 | $ | (78,522 | ) | $ | 181,865 | |||||||||
Total gains or losses (realized/unrealized) |
4,478 | 95,643 | 169 | 143 | 100,433 | |||||||||||||||
Included in earnings |
83 | 95,643 | 169 | 143 | 96,038 | |||||||||||||||
Included in other comprehensive income |
4,395 | - | - | - | 4,395 | |||||||||||||||
Purchases and sales |
(1,675 | ) | 24,888 | 250 | - | 23,463 | ||||||||||||||
Transfers in and/or out of Level 3 |
- | - | (564 | ) | - | (564 | ) | |||||||||||||
Ending balance (as of September 30, 2009) |
$ | 21,795 | $ | 361,711 | $ | 70 | $ | (78,379 | ) | $ | 305,197 |
All net gains/losses for the period presented in the table above as included in earnings are
attributable to the change in unrealized gains or losses related to assets which were still held at
September 30, 2009.
10
Table of Contents
Available-for-Sale Securities
At
September 30, 2009, approximately $124.7 million of the Companys available-for-sale securities
are classified as Level 1 financial instruments, as they are valued based on unadjusted quoted
market prices. The majority of these investments are investments in the Companys managed
accounts and certain product portfolios (seed investments).
Approximately $20.9 million of the
Companys available-for-sale investments at September 30, 2009 are considered to be Level 2
financial instruments, as they are valued based on prices developed using observable inputs.
At September 30, 2009, the Company has approximately $21.8 million of available-for-sale
investments classified as Level 3 under FASB ASC 820-10. Of this amount, approximately $5.8
million relates to the Companys investments in the equity of certain collateralized loan
obligations (CLOs) and collateralized debt obligations (CDOs). As further discussed in Note
9, Investments in Collateralized Loan and Debt Obligations, the Company holds investments in the
equity of certain CLOs and CDOs for which it acts as a collateral manager. The Company considers
these investments to be Level 3 financial instruments, as the valuations for these investments are
based on cash flow estimates and the Companys own assumptions about the assumptions market
participants would use in pricing the asset or liability (including assumptions about risk), as
developed based on the best information available in the circumstances. Also included in the
$21.8 million of available-for-sale investments classified as Level 3 at September 30, 2009 is
approximately $12.4 million the Company has invested in auction rate preferred stock issued by
unaffiliated entities. As further discussed in the Companys 2008 Year End Financial Statement
Filing (filed on Form 8-K on March 31, 2009), the auctions for auction rate preferred stock began
to fail on a widespread basis in the beginning of 2008. The Company considers these investments
as Level 3 financial instruments, as there is currently no liquid market for these investments.
At September 30, 2009, the Company also has approximately $3.5 million invested in seed account
portfolios whose underlying investment securities are invested in emerging markets.
The cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of
available-for-sale securities by major security type at September 30, 2009 and December 31, 2008,
are as follows:
(in 000s) | Gross | |||||||||||||||
Unrealized | Gross Unrealized | |||||||||||||||
Cost |
Holding Gains |
Holding Losses |
Fair Value |
|||||||||||||
At September 30, 2009 |
||||||||||||||||
Equity |
$ | 99,510 | $ | 20,292 | $ | (180 | ) | $ | 119,622 | |||||||
Taxable Fixed Income |
44,563 | 4,588 | (1,364 | ) | 47,787 | |||||||||||
$ | 144,073 | $ | 24,880 | $ | (1,544 | ) | $ | 167,409 | ||||||||
At December 31, 2008 |
||||||||||||||||
Equity |
$ | 54,552 | $ | 332 | $ | -- | $ | 54,884 | ||||||||
Taxable Fixed Income |
52,728 | 5 | (1,650 | ) | 51,083 | |||||||||||
$ | 107,280 | $ | 337 | $ | (1,650 | ) | $ | 105,967 | ||||||||
Underlying Investments from Consolidated Vehicle
As discussed in Note 1, Basis of Presentation, the Company is required to consolidate into its
financial results certain funds, namely Symphony CLO V and a recently created product portfolio.
The underlying investment securities in Symphony CLO V are predominantly syndicated loans whose
fair values are derived from broker-quotes. The Company does not normally make adjustments to
these broker quotes. However, the Company considers these investments to be Level 3 financial
instruments, as a significant portion of the inputs to the broker-quotes are unobservable. The
underlying investments in the recently created product portfolio relates to an investment in a
limited partnership for which one of the Companys subsidiary companies is an advisor. As the
Company is the only investor in this fund, the Company is required to consolidate it into the
Companys financial results. The Company considers this limited partnership investment to be a
Level 3 investment due to its illiquid nature and lack of market inputs.
Other Investments
At
September 30, 2009, the Company has approximately $0.6 million of
general partner interests in certain limited partnerships for which
one of the Companys subsidiary companies is the advisor. The
Company considers these limited partnership investments to be Level 2
financial instruments, as the Company is able to liquidate out of these
investments on a quarterly basis.
The $70
thousand in other investments classified as Level 3 financial instruments at September 30,
2009 is comprised of a general partner interest in a limited
partnership. The Company considers this limited
partnership investment to be a Level 3 financial instrument due to its illiquid nature and lack
of market inputs.
Derivative Financial Instruments
As further discussed in Note 7, Derivative Financial Instruments, the Company uses derivative
instruments to manage the economic impact of fluctuations in interest rates related to its
long-term debt and to mitigate the overall market risk for certain product portfolios.
11
Table of Contents
Derivative Instruments Related to Long-Term Debt
Currently, the Company uses interest rate swaps and an interest rate collar to manage its interest
rate risk related to its long-term debt. The valuation of these derivative instruments is
determined using widely accepted valuation techniques including discounted cash flow analysis on
the expected cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs, including
interest rate curves and implied volatilities.
The fair values of interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or receipts) are based on an
expectation of future interest rates (forward curves) derived from observable market interest rate
curves. The fair value of the interest rate collar is determined using the market standard
methodology of discounting the future expected cash payments that would occur if variable interest
rates fell below the floor strike rate or the cash receipts that would occur if variable interest
rates rose above cap strike rate. The variable interest rates used in the calculation of
projected cash flows on the collar are based on an expectation of future interest rates derived
from observable market interest rate curves and volatilities.
To comply with the fair value provisions of FASB ASC 820-10, the Company incorporates credit
valuation adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Company has considered the
impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives
related to long-term debt fall within Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current
credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of
September 30, 2009, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of these derivative positions and has determined
that the credit valuation adjustments are significant to the overall valuation of these
derivatives. As a result, the Company has determined that its valuations for derivatives related
to its long-term debt in their entirety are classified in Level 3 of the fair value hierarchy.
Derivative Instruments Related to Certain Product Portfolios
At December 31, 2008, the Company held futures contracts that had not been designated as hedging
instruments under FASB Topic 815-10 (derivatives) in order to mitigate the overall market risk of
certain product portfolios. As the valuations for these futures contracts were directly received
from the counterparty, the futures arm of a nationally recognized bank, the Company determined
that the valuations for these derivatives were classified in Level 1 of the fair value hierarchy,
as all valuations for these derivatives are quoted prices (unadjusted) in active markets for
identical assets or liabilities. At September 30, 2009, the Company did not hold any such futures
contracts.
Methods for Determining Fair Value
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.
Cash and cash equivalents, marketable securities, notes and other accounts receivable and
investments are financial assets with carrying values that approximate fair value because of the
short maturity of those instruments. Accounts payable and other accrued expenses are financial
liabilities with carrying values that also approximate fair value because of the short maturity of
those instruments. The fair value of long-term debt is based on market prices.
12
Table of Contents
A comparison of the fair values and carrying amounts of these instruments is as follows:
(in 000s)
(in 000s)
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount |
Fair Value |
Amount |
Fair Value |
|||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$325,213 | $325,213 | $467,136 | $467,136 | ||||||||||||
Restricted cash |
222,745 | 222,745 | - | - | ||||||||||||
Fees receivable |
82,594 | 82,594 | 98,733 | 98,733 | ||||||||||||
Other receivables |
30,492 | 30,492 | 12,354 | 12,354 | ||||||||||||
Underlying securities in consolidated funds |
361,711 | 361,711 | 241,180 | 241,180 | ||||||||||||
Available-for-sale securities |
167,409 | 167,409 | 105,967 | 105,967 | ||||||||||||
Other investments |
634 | 634 | 215 | 215 | ||||||||||||
Liabilities: |
||||||||||||||||
Term notes short term and long term,
excluding CLO V |
$4,144,942 | $3,585,772 | $3,864,883 | $1,346,099 | ||||||||||||
Accounts payable |
13,044 | 13,044 | 9,633 | 9,633 | ||||||||||||
Fair value of open derivatives short term
and long term |
78,379 | 78,379 | 78,574 | 78,574 |
Note 3 Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return and 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. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income before the expiration
of the deferred tax assets governed by the tax code.
Valuation allowances may be established, when necessary, to reduce deferred tax assets to amounts
expected to be realized. Management considers the scheduled reversal of deferred tax liabilities
(including the impact of available carryback and carryforward periods), projected taxable income,
and tax planning strategies in making this assessment.
At September 30, 2009 and December 31, 2008, the Company had $16.7 million and $4.9 million,
respectively, in valuation allowances related to state net operating loss carryforwards due to the
uncertainty that the deferred tax assets will be realized. At September 30, 2009 and December 31,
2008, total gross deferred tax assets (after tax valuation allowances) were $182.2 million and
$155.6 million, respectively. The increase in the valuation allowance during 2009 reflects the
impact of changes to estimated Illinois apportionment as well as an increase in future projected
interest costs associated with the Companys new debt issuance in July and August 2009 (refer to
Note 6, Debt). In assessing the likelihood of realization of deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred tax assets will not
be realized. Based on projections for future taxable income over the periods for which the
deferred tax assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the existing valuation
allowances at September 30, 2009. The amount of the deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income during the carryforward period are
reduced.
Note 4 Net Capital Requirement
Nuveen Investments, LLC, the Companys wholly-owned broker/dealer subsidiary, is subject to SEC
Rule 15c3-1, the Uniform Net Capital Rule, which requires the maintenance of minimum net capital
and requires that the ratio of aggregate indebtedness to net capital, as these terms are defined
in the Rule, shall not exceed 15 to 1. At September 30, 2009, Nuveen Investments, LLCs net
capital ratio was 1.08 and its net capital was approximately $25.9 million, which was $24.0
million in excess of the required net capital of $1.9 million.
13
Table of Contents
Note 5 Goodwill and Intangible Assets
The following table presents a reconciliation of activity in the balance of goodwill from December
31, 2008 to September 30, 2009 presented on the Companys consolidated balance sheets (in
thousands):
Balance at December 31, 2008 |
$ | 2,299,725 | ||
Winslow: working capital adjustment |
97 | |||
HydePark contingent payment related to acquisition |
2,692 | |||
Winslow acquisition: reclassification to intangible assets |
(63,200 | ) | ||
Balance at September 30, 2009 |
$ | 2,239,314 | ||
During the three months ended September 30, 2009, the Company paid approximately $2.7 million of
contingent consideration to the former owners of HydePark for meeting certain previously
agreed-upon targets at the date of the acquisition. The $2.7 million is considered additional
purchase price and has been recorded as goodwill.
Also during the three months ended September 30, 2009, the Company, with the assistance of external
valuation specialists, finalized the valuation and purchase price allocation of the Winslow Capital
Management (Winslow Capital) acquisition. This final valuation resulted in the Company
recognizing three intangible assets for the Winslow Capital acquisition: $2.1 million for the
Winslow Capital trade name, $22.8 million for the New York Life Insurance Management (NYLIM)
customer relationship, and $38.3 million for other Winslow customer relationships. As a result of
recognizing these three intangible assets for the Winslow Capital acquisition, the Company has
recorded a $63.2 million reclassification from goodwill to intangible assets arising from the
Winslow Capital acquisition.
The following table presents gross carrying amounts and accumulated amortization amounts for the
intangible assets presented on our consolidated balance sheets at September 30, 2009 and December
31, 2008 (in thousands):
At September 30, 2009 |
At December 31, 2008 |
|||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount |
Amortization |
Amount |
Amortization |
|||||||||||||
Nuveen trade name |
$ | 184,900 | $ | - | $ | 184,900 | $ | - | ||||||||
Nuveen investment contracts closed-end funds |
1,277,900 | - | 1,277,900 | - | ||||||||||||
Nuveen investment contracts mutual funds |
768,900 | - | 768,900 | - | ||||||||||||
Nuveen customer relationships managed accounts |
972,600 | 121,575 | 972,600 | 72,945 | ||||||||||||
Winslow trade name |
2,100 | 80 | - | - | ||||||||||||
Winslow NYLIM customer relationship |
22,800 | 1,344 | - | - | ||||||||||||
Winslow other customer relationships |
38,300 | 2,668 | - | - | ||||||||||||
Total |
$ | 3,267,500 | $ | 125,667 | $ | 3,204,300 | $ | 72,945 | ||||||||
Of the four Nuveen intangible assets presented above, only one is amortizable: Nuveen customer
relationships managed accounts, which has an estimated useful life of 15 years. The remaining
Nuveen intangible assets presented above are indefinite-lived.
Management of the Company has determined that the estimated useful lives of the Winslow intangible
assets are 20 years for the Winslow Capital trade name, 13 years for the Winslow Capital NYLIM
customer relationship, and 11 years for all other Winslow Capital customer relationships. For the
three months ended September 30, 2009, the Company recorded $4.1 million of amortization for the
Winslow Capital intangible assets, which includes cumulative amortization to the date of the
Winslow Capital acquisition on December 26, 2008.
The estimated aggregate amortization expense for the next five years for all intangible assets is
approximately $17.5 million for the remaining three months in 2009, and annual amortization of
$70.2 million for each of the years 2010 through 2013.
14
Table of Contents
Note 6 Debt
At September 30, 2009 and December 31, 2008, debt on the accompanying consolidated balance sheets
was comprised of the following:
(in 000s)
September 30, |
December 31, |
|||||||
2009 |
2008 |
|||||||
Short-Term Obligations: |
||||||||
Senior Term Notes: |
||||||||
Senior term notes 5% due 9/15/10 |
$ | 222,745 | -- | |||||
Net unamortized discount |
(130) | -- | ||||||
Net unamortized debt issuance costs |
(366) | -- | ||||||
Total Short-Term Term Notes |
$ | 222,249 | $ | -- | ||||
Long-Term Obligations: |
||||||||
Senior Term Notes: |
||||||||
Senior term notes 5% due 9/15/10 |
-- | $ | 232,245 | |||||
Net unamortized discount |
-- | (237) | ||||||
Net unamortized debt issuance costs |
-- | (667) | ||||||
Senior term notes 5.5% due 9/15/15 |
$ | 300,000 | 300,000 | |||||
Net unamortized discount |
(994) | (1,098) | ||||||
Net unamortized debt issuance costs |
(1,562) | (1,725) | ||||||
Term Loan Facility due 11/13/14 |
2,087,197 | 2,297,638 | ||||||
Net unamortized discount |
(16,530) | (20,201) | ||||||
Net unamortized debt issuance costs |
(21,244) | (25,958) | ||||||
Senior Unsecured 10.5% Notes due 11/15/15 |
785,000 | 785,000 | ||||||
Net unamortized debt issuance costs |
(22,922) | (24,823) | ||||||
Revolving Credit Facility due 11/13/13 |
250,000 | 250,000 | ||||||
Second Lien Debt 12.5% due 7/31/15 |
450,000 | -- | ||||||
Net unamortized discount |
(44,188) | -- | ||||||
Net unamortized debt issuance costs |
(28,262) | -- | ||||||
Incremental Second Lien Debt due 7/31/15 |
50,000 | -- | ||||||
Net unamortized discount |
(3,436) | -- | ||||||
Net unamortized debt issuance costs |
(1,072) | -- | ||||||
Symphony CLO V Notes Payable |
378,540 | 378,540 | ||||||
Symphony CLO V Subordinated Notes |
24,208 | 24,208 | ||||||
Total Long-Term Term Notes |
$ | 4,184,735 | $ | 4,192,922 | ||||
15
Table of Contents
Senior Secured Credit Agreement
As a result of the MDP Transactions, the Company has a senior secured credit facility (the Credit
Facility) consisting of a $2.3 billion term loan facility and a $250 million secured revolving
credit facility. At September 30, 2009 and December 31, 2008, the Company had $2.1 billion and
$2.3 billion, respectively, outstanding under the term loan facility (the first-lien term loan).
The borrowings under the term loan facility were used as part of the financing to consummate the
MDP Transactions. At September 30, 2009 and December 31, 2008, the Company had $250 million
outstanding under the revolving credit facility. All borrowings under the Credit Facility bear
interest at a rate per annum equal to LIBOR plus 3.0%. In addition to paying interest on
outstanding principal under the Credit Facility, the Company is required to pay a commitment fee
to the lenders in respect of the unutilized loan commitments at a rate of 0.3750% per annum.
All obligations under the Credit Facility are guaranteed by Windy City Investments Inc. (the
Parent) and each of the Companys present and future, direct and indirect, wholly-owned material
domestic subsidiaries (excluding subsidiaries that are broker dealers). The obligations under the
Credit Facility and these guarantees are secured, subject to permitted liens and other specified
exceptions, (1) on a first-lien basis, by all the capital stock of Nuveen Investments and certain
of its subsidiaries (excluding significant subsidiaries and limited, in the case of foreign
subsidiaries, to 100% of the non-voting capital stock and 65% of the voting capital stock of the
first tier foreign subsidiaries) directly held by Nuveen Investments or any guarantor and (2) on a
first lien basis by substantially all present and future assets of Nuveen Investments and each
guarantor, except that the Additional Term Loans (as defined below) are secured by the same
capital stock and other assets on a second lien basis.
The term loan facility matures on November 13, 2014 and the revolving credit facility matures on
November 13, 2013.
The Company was required to make quarterly payments under the term loan facility in the amount of
approximately $5.8 million. The Company used a portion of the proceeds of the Additional Term
Loans (as defined below) to prepay these quarterly payments. All or any portion of the loans
outstanding under the Credit Facility may be prepaid at par, except that the Additional Term Loans
may only be voluntarily prepaid with specified premiums or fees prior to July 31, 2014.
At September 30, 2009 and December 31, 2008, the fair value of the first-lien term loan was
approximately $1.8 billion and $0.9 billion, respectively. At September 30, 2009 and December 31,
2008, the fair value of the $250 million revolving credit facility was approximately $181.3
million and $101.9 million, respectively.
Second-Lien Term Loan and Restricted Cash
On July 28, 2009, Nuveen Investments, Inc. entered into an amendment (the First Amendment) to
the Credit Facility, pursuant to which the Company obtained a new $500 million second-lien term
facility and borrowed $450 million of loans thereunder (the Additional Term Loans). The
Additional Term Loans bear interest at rate of 12.50% per annum and will mature on July 31, 2015.
During August 2009, the Company elected to borrow an additional $50 million of Additional Term
Loans under this second-lien term loan facility.
At
September 30, 2009, the fair value of the $500 million Additional
Term Loans was $502.5 million.
The Additional Term Loans are guaranteed by the same subsidiaries of the Company that guarantee
the first-lien, senior secured Credit Facility. The Additional Term Loans and the guarantees
thereof are secured by the same collateral of the Company and the subsidiary guarantors that
secure the Companys obligations under the existing first-lien, senior secured Credit Facility on
a second-lien basis, and are junior to the security interests of the lenders under the Credit
Facility.
The Company escrowed part of the proceeds from the Additional Term Loans to retire the Companys
5% senior unsecured notes due September 15, 2010 at maturity. The $222.7 million escrowed for the
5% senior unsecured notes due 2010 are reflected in restricted cash for debt retirement on the
Companys accompanying consolidated balance sheet as of September 30, 2009. The Company used the
remaining net proceeds from the Additional Loans to pay down a portion of the Companys existing
first-lien term loans. The Company repaid $198.9 million on the then-existing $2.3 billion
outstanding.
Senior Unsecured Notes
Also in connection with the MDP Transactions, the Company issued $785 million of 10.5% senior
unsecured notes (10.5% senior notes). The 10.5% senior notes mature on November 15, 2015 and
pay a coupon of 10.5% of par value semi-annually on May 15 and November 15 of each year,
commencing on May 15, 2008. The Company received approximately $758.9 million in net proceeds
after underwriting commissions and structuring fees. The net proceeds were used as part of the
financing to consummate the Transactions.
At September 30, 2009 and December 31, 2008, the fair value of the $785 million 10.5% senior notes
was approximately $676.2 million and $176.5 million, respectively.
16
Table of Contents
Obligations under the notes are guaranteed by the Parent and each of our existing, subsequently
acquired, and/or organized direct or indirect, domestic, restricted (as defined in the credit
agreement) subsidiaries that guarantee the debt under the Credit Facility.
Senior Term Notes Predecessor / Successor
On September 12, 2005, the Predecessor issued $550 million of senior unsecured notes, comprised
of $250 million of 5-year notes and $300 million of 10-year notes (Predecessor senior term
notes), the majority of which remain outstanding at September 30, 2009 and December 31, 2008.
The Company received approximately $544 million in net proceeds after discounts and other debt
issuance costs. The 5-year Predecessor senior term notes bear interest at an annual fixed rate
of 5.0% payable semi-annually on March 15 and September 15. The 10-year Predecessor senior term
notes bear interest at an annual fixed rate of 5.5% payable semi-annually also on March 15 and
September 15. The net proceeds from the Predecessor senior term notes were used to refinance
outstanding indebtedness. The costs related to the issuance of the Predecessor senior term notes
were capitalized and amortized to expense over their term. At September 30, 2009, the fair value
of the 5-year and 10-year Predecessor senior term notes was approximately $213.7 million and
$199.4 million, respectively. At December 31, 2008, the fair value of the 5-year and 10-year
Predecessor senior term notes was approximately $110.8 million and $46.4 million, respectively.
During the fourth quarter of 2008, the Company retired a portion of the 5-year Predecessor senior
term notes due 2010. Of the $8.4 million in total cash paid, approximately $0.2 million was for
accrued interest, with the remaining amount representing $17.8 million in par. As a result, the
Company recorded a $9.5 million gain on early extinguishment of debt during the fourth quarter of
2008. This gain is reflected in Other Income/(Expense) on the consolidated statement of income
for the year ended December 31, 2008.
During the first quarter of 2009, the Company retired a portion of the 5-year Predecessor senior
term notes due 2010. Of the $5.2 million in total cash paid, approximately $7 thousand was for
accrued interest, with the remaining amount for principal representing $9.5 million in par on the
5% senior term notes due 2010. The Company also accelerated the recognition of the amortization
of bond discount and debt issuance costs. The net gain recorded by the Company was approximately
$4.3 million and is reflected in Other Income/(Expense) on the Companys consolidated statement
of income for the nine months ended September 30, 2009. There were no additional early
retirements of debt during the second or third quarters of 2009.
Symphony CLO V
As discussed in Note 1, Basis of Presentation, the Company is required to consolidate into its
financial results a collateralized loan obligation, Symphony CLO V, in accordance with U.S.
generally accepted accounting principles. Although the Company does not hold any equity interest
in this investment vehicle, an affiliate of MDP is the majority equity holder. The $378.5
million of Notes Payable and $24.2 million of Subordinated Notes reflected in the table, above,
reflect debt obligations of Symphony CLO V. All of this debt is collateralized by the assets of
Symphony CLO V.
Note 7 Derivative Financial Instruments
FASB Topic 815-10 deals with derivatives and requires recognition of all derivatives on the
balance sheet at fair value. Derivatives that do not meet the criteria for hedge accounting must
be adjusted to fair value through earnings. Changes in the fair value of derivatives that do meet
the hedge accounting criteria under FASB Topic 815-10 are offset against the change in the fair
value of the hedged assets or liabilities, with only any ineffectiveness (as defined) marked
through earnings.
At September 30, 2009 and December 31, 2008, the Company did not hold any derivatives designated
in a formal hedge relationship under the provisions of FASB Topic 815-10.
Derivative Transactions Related to Financing Part of the Transactions
At September 30, 2009 and December 31, 2008, the Company held nine interest rate swap derivative
transactions and one collar derivative transaction that effectively converted $2.3 billion of
variable rate debt under the term loan facility into fixed-rate borrowings. At December 31, 2008,
the Company also held two basis swaps that effectively locked in the expected future difference
between one-month and three-month LIBOR as the primary reference rate for our variable debt.
Collectively, these derivatives are referred to as the New Debt Derivatives.
For the three and nine months ended September 30, 2009, the Company recorded $0.3 million and $0.1
million in unrealized gains, respectively, related to the New Debt Derivatives. Unrealized gains
and losses on the New Debt Derivatives are reflected in Other Income/(Expense) on the
accompanying consolidated statements of income. For the three and nine months ended September 30,
2008, the Company recorded $2.2 million and $3.1 million in unrealized losses, respectively.
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Also for the three and nine months ended September 30, 2009, the Company recorded $19.6 million
and $52.5 million, respectively, of interest expense for both periodic swap payments made by the
Company as well as realized gains/losses on the New Debt Derivatives.
These amounts are reflected in Net Interest Expense on the accompanying consolidated statements
of income. For the three and nine months ended September 30, 2008, the Company recorded $7.5
million and $13.0 million, of interest expense, respectively.
At September 30, 2009, the FASB ASC 820-10 fair value of the New Debt Derivatives was a liability
of $78.4 million and is reflected as $7.8 million of Fair Value of Open Derivatives under
Short-Term Obligations and $70.6 million as Fair Value of Open Derivatives under Long-Term
Obligations on the accompanying consolidated balance sheet as of September 30, 2009. At December
31, 2008, the FASB ASC 820-10 fair value of the New Debt Derivatives was a liability of $78.5
million and is reflected as $20.1 million of Fair Value of Open Derivatives under Short-Term
Obligations and $58.5 million as Fair Value of Open Derivatives under Long-Term Obligations
on the accompanying consolidated balance sheet as of December 31, 2008.
Contingent Features. The New Debt Derivatives are pari-passu (have equal rights of payment or
seniority) with the $2.3 billion of variable rate debt under the term loan facility. Furthermore,
in the event that the Company were to have a technical default of its debt covenants for the term
loan facility, an acceleration of any amounts due on the New Debt Derivatives would only occur if
the lenders accelerate the debt under the term loan facility. The aggregate gross fair value (not
including the fair value credit valuation adjustment required by FASB ASC 820-10) of the New Debt
Derivatives at September 30, 2009 is $87.1 million. Although the Company does have master netting
agreements in place with the various counterparties to the New Debt Derivatives, as of September
30, 2009, each of the Companys New Debt Derivatives are in a liability position. If the
credit-risk-related contingent features underlying the New Debt Derivatives agreements had been
triggered on September 30, 2009, the Company would have been required to make payments totaling
$87.1 million to the various counterparties for the New Debt Derivatives. The Company does not
have any collateral posted for the New Debt Derivatives.
Derivative Transactions Related to Certain Product Portfolios
The Company held futures contracts that were not designated as hedging instruments under FASB
Topic 815-10 in order to mitigate overall market risk of certain product portfolios. By June 30,
2009, all of these positions had been terminated. At December 31, 2008, the net fair value of
these open non-hedging derivatives was a liability of approximately $52.3 thousand and was
included in Fair Value of Open Derivatives under Other Short-Term Obligations on the
accompanying consolidated balance sheet as of December 31, 2008. For the nine months ended
September 30, 2009, the Company recorded approximately $0.2 million of realized gains related to
these futures contracts. These amounts are reflected in Other Income/(Expense) on the
accompanying consolidated statement of income for this period. As all of these futures contracts
were terminated by June 30, 2009, there were no unrealized gains/losses for the three months ended
September 30, 2009. For the three and nine months ended September 30, 2008, the Company recorded
$37 thousand of unrealized losses and $0.1 million of unrealized gains, respectively. The Company
also recorded $0.1 million and $0.4 million of realized losses for the three and nine months ended
September 30, 2008. Realized gains/losses and unrealized gains/losses are reflected in Other
Income/(Expense) on the accompanying consolidated statements of income for those periods.
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Note 8 Retirement Plans
The following table presents the components of the net periodic retirement plans benefit costs
for the three and nine months ended September 30, 2009 and 2008, respectively (in 000s):
Three Months | Three Months | |||||||||||||||
Ended September 30, 2009 | Ended September 30, 2008 | |||||||||||||||
Total | Post- | Total | Post- | |||||||||||||
Pension | Retirement | Pension | Retirement | |||||||||||||
Service Cost |
$ | 367 | $ | 13 | $ | 382 | $ | 90 | ||||||||
Interest Cost |
629 | 114 | 599 | 165 | ||||||||||||
Expected Return on Assets |
(433) | - | (599) | - | ||||||||||||
Amortization of: |
||||||||||||||||
Unrecognized Prior
Service Cost |
(31) | 24 | (38) | - | ||||||||||||
Unrecognized (Gain)/Loss |
114 | (44) | - | - | ||||||||||||
Total |
$ | 646 | $ | 107 | $ | 344 | $ | 255 | ||||||||
Nine Months | Nine Months | |||||||||||||||
Ended September 30, 2009 | Ended September 30, 2008 | |||||||||||||||
Total | Post- | Total | Post- | |||||||||||||
Pension | Retirement | Pension | Retirement | |||||||||||||
Service Cost |
$ | 1,101 | $ | 40 | $ | 1,145 | $ | 270 | ||||||||
Interest Cost |
1,886 | 342 | 1,799 | 496 | ||||||||||||
Expected Return on Assets |
(1,300) | - | (1,796) | - | ||||||||||||
Amortization of: |
||||||||||||||||
Unrecognized Prior
Service Cost |
(92) | 72 | (115) | - | ||||||||||||
Unrecognized (Gain)/Loss |
342 | (133) | - | - | ||||||||||||
Total |
$ | 1,937 | $ | 321 | $ | 1,033 | $ | 766 | ||||||||
During 2009, the Company expects to contribute approximately $3.1 million to its qualified pension
plan, approximately $3.5 million to its excess pension plan, and $0.5 million (net of expected
Medicare Part D reimbursements) for benefit payments to its post-retirement benefit plan. For the
first nine months of 2009, the Company has contributed $3.1 million to its qualified plan, paid
out approximately $1.3 million in benefits related to its excess pension plan, and paid out $0.4
million in benefits related to its post-retirement plan.
Effective October 28, 2009, the excess pension plan was terminated and the actuarial equivalent of
total benefits thereunder will be paid out in two tranches, commencing in 2009 and ending in 2010.
Note 9 Investments in Collateralized Loan and Debt Obligations
The Company holds an investment in the equity of two collateralized debt obligation entities for
which it acts as a collateral manager, Symphony CLO I, Ltd. (CLO) and the Symphony Credit
Opportunities Fund Ltd. (CDO), pursuant to collateral management agreements between the Company
and each of the collateralized debt obligation entities. At September 30, 2009, the assets of the
19
Table of Contents
collateral pool of the CLO were approximately $355 million, which is based on traded cost plus
traded cash. At September 30, 2009, the assets of the collateral pool for the CDO were
approximately $466 million, which is based on traded market value and traded cash. At September
30, 2009 and December 31, 2008, the fair market value of the combined minority interest investment
in the equity of
these entities was $5.8 million and $2.1 million, respectively, reflected in Investments on the
accompanying consolidated balance sheets for the respective periods.
The Company accounts for its investments in the CLO and CDO under FASB ASC 325-40. The excess of
future cash flows over the initial investment at the date of purchase is recognized as interest
income over the life of the investment using the effective yield method. The Company reviews cash
flow estimates throughout the life of the CLO and CDO investment pool to determine whether an
impairment of its equity investments should be recognized. Cash flow estimates are based on the
underlying pool of collateral securities and take into account the overall credit quality of the
issuers in the collateral securities, the forecasted default rate of the collateral securities and
the Companys past experience in managing similar securities. If an updated estimate of future
cash flows (taking into account both timing and amounts) is less than the revised estimate, an
impairment loss is recognized based on the excess of the carrying amount of the investment over
its fair value. The Company has recorded its investment in the equity of the CLO and CDO in
Investments on its consolidated balance sheets at fair value. Fair value is determined using
current information, notably market yields and projected cash flows based on forecasted default
and recovery rates that a market participant would use in determining the current fair value of
the equity interest. Market yields, default rates and recovery rates used in the Companys
estimate of fair value vary based on the nature of the investments in the underlying collateral
pools. In periods of rising credit default rates and lower debt recovery rates, the fair value,
and therefore the carrying value, of the Companys investments in the CLO and CDO may be adversely
affected. The Companys risk of loss is limited to the Companys remaining cost basis in the
equity of the CLO and the CDO, which combined, is approximately $3.8 million as of September 30,
2009.
Note 10 Mutual Fund Incentive Program
During July 2009, the Company funded $52 million into a recently created, secular trust as part
of a newly established multi-year Mutual Fund Incentive Program for certain employees.
The secular trust acquired shares of Nuveen mutual funds and other investment products
supporting the awards under this new incentive program. The awards are subject to vesting
and certain other restrictions.
At September 30, 2009, there is approximately $58.8 million included in Investments on the
Companys September 30, 2009 consolidated balance sheet, which represents the fair value of
these investments at September 30, 2009. For accounting purposes, these investments are
classified as available-for-sale, with any mark-to-market on these investments being
recorded through accumulated other comprehensive income, a separate component of
shareholders equity.
The $58.8 million of investments underlying the mutual fund incentive program is included in
the Issuer of Notes - Nuveen Investments, Inc. column of the consolidating balance sheet
presented in Note 12, Financial Information Related to Guarantor Subsidiaries. Although
these investments are presented within the Issuer of Notes column, these investments may
not be pledged as collateral for the debt obligations referenced in Note 12. The investments
were purchased by a secular trust and the Company does not have access to these investments.
The Company would only have access to these investments in the event that an employee receiving an award does not vest in their award.
For the nine months ended September 30, 2009, the Company has recorded approximately
$12.3 million of compensation expense for this program, which is reflected in Compensation
and benefits on the accompanying consolidated statement of income for that period. The
corresponding liability of $12.3 million is included in Accrued compensation and other
expenses on the accompanying consolidated balance sheet as of September 30, 2009.
Note 11 Recent Updates to Authoritative Accounting Literature
Codification
As discussed in Note 1, Basis of Presentation, the Company is required to make reference to U.S.
GAAP starting with its September 30, 2009 financial statements under the new Codification.
As a result of the Codification, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in
their own right. Accounting Standards Updates will serve to only update the Codification, provide
background information about the Codifications guidance, and provide the bases for conclusions on
change(s) in the Codification.
Variable Interest Entities
Prior to the Codification, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R) (SFAS No. 167), in June 2009.
SFAS No. 167 is effective as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier application is
prohibited. SFAS No. 167 will be effective for Nuveen Investments on January 1, 2010. The
Company is currently evaluating the impact of SFAS No. 167 to its financial statements.
SFAS No. 167 amends FASB Interpretation No. 46(R) to require an enterprise to perform an analysis
to determine whether the enterprises variable interest(s) give it a controlling financial
interest in a variable interest entity. This analysis identifies the primary beneficiary of a
variable interest entity as the enterprise that has both of the following characteristics:
| the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance; and |
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| the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. |
Additionally, the enterprise is required to assess whether it has an implicit financial
responsibility to ensure that a variable interest
entity operates as designed when determining whether it has the power to direct the activities of
the variable interest entity that most significantly impact the entitys economic performance.
SFAS No. 167 amends Interpretation 46(R) to require ongoing reassessments of whether an enterprise
is the primary beneficiary of a variable interest entity. Before this Statement, Interpretation
46(R) required reconsideration of whether an enterprise is the primary beneficiary of a variable
interest entity only when specific events occurred.
SFAS No. 167 also amends Interpretation 46(R) to eliminate the quantitative approach previously
required for determining the primary beneficiary of a variable interest entity, which was based on
determining which enterprise absorbs the majority of the entitys expected losses, receives a
majority of the entitys expected residual returns, or both.
SFAS No. 167 amends certain guidance in Interpretation 46(R) for determining whether an entity is
a variable interest entity. It is possible that application of this revised guidance will change
an enterprises assessment of which entities with which it is involved are variable interest
entities.
SFAS No. 167 amends Interpretation No. 46(R) to include an additional reconsideration event for
determining whether an entity is a variable interest entity when any changes in facts and
circumstances occur such that the holders of the equity investment at risk, as a group, lose the
power from voting rights or similar rights of those investments to direct the activities of the
entity that most significantly impact the entitys economic performance.
Finally, SFAS No. 167 amends Interpretation 46(R) to require enhanced disclosures that will
provide users of financial statements with more transparent information about an enterprises
involvement in a variable interest entity.
Note 12 Financial Information Related to Guarantor Subsidiaries
As discussed in Note 6, Debt, obligations under the 10.5% senior notes due 2015 are guaranteed
by the Parent and each of the Companys present and future, direct and indirect, wholly-owned
material domestic subsidiaries (excluding subsidiaries that are broker dealers).
The following tables present consolidating supplementary financial information for the issuer of
the notes (Nuveen Investments, Inc.), the issuers domestic guarantor subsidiaries, and the
non-guarantor subsidiaries together with eliminations as of and for the periods indicated. The
issuers Parent is also a guarantor of the notes. The Parent was a newly formed entity with no
assets, liabilities or operations prior to the completion of the Transactions on November 13,
2007. Separate complete financial statements of the respective guarantors would not provide
additional material information that would be useful in assessing the financial composition of the
guarantors.
Consolidating financial information is as follows:
21
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Nuveen Investments, Inc. & Subsidiaries
CONSOLIDATING BALANCE SHEET
September 30, 2009
(in 000s)
CONSOLIDATING BALANCE SHEET
September 30, 2009
(in 000s)
Parent | Issuer of Notes | Consolidated | ||||||||||||||||||||||||||||||
Windy City | Non | excluding | ||||||||||||||||||||||||||||||
Investments, | Nuveen | Guarantor | Guarantor | Intercompany | Symphony CLO | Symphony | ||||||||||||||||||||||||||
Inc. | Investments, Inc. | Subsidiaries | Subsidiaries | Eliminations | V | CLO V | Consolidated | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | - | 240,605 | 12,766 | 55,648 | - | 309,019 | 16,194 | $ | 325,213 | ||||||||||||||||||||||
Restricted cash for debt retirement |
- | 222,745 | - | - | - | 222,745 | - | 222,745 | ||||||||||||||||||||||||
Management and distribution fees receivable |
- | - | 77,613 | 4,981 | - | 82,594 | - | 82,594 | ||||||||||||||||||||||||
Other receivables |
- | (1,171,992 | ) | 1,295,384 | (105,816 | ) | - | 17,576 | 12,916 | 30,492 | ||||||||||||||||||||||
Furniture, equipment and leasehold improvements* |
- | - | 38,591 | 19,191 | - | 57,782 | - | 57,782 | ||||||||||||||||||||||||
Investments |
- | 165,919 | 2,065 | 10,623 | - | 178,607 | 351,147 | 529,754 | ||||||||||||||||||||||||
Investment in Subsidiaries |
986,343 | 1,456,148 | 750,517 | 503 | (3,193,511) | - | - | - | ||||||||||||||||||||||||
Goodwill |
- | 2,166,302 | 70,320 | 2,692 | - | 2,239,314 | - | 2,239,314 | ||||||||||||||||||||||||
Intangible assets* |
- | 3,082,725 | 59,108 | - | - | 3,141,833 | - | 3,141,833 | ||||||||||||||||||||||||
Current taxes receivable |
- | 6,400 | 178 | - | - | 6,578 | - | 6,578 | ||||||||||||||||||||||||
Other assets |
- | - | 11,008 | 6,941 | - | 17,949 | 3,692 | 21,641 | ||||||||||||||||||||||||
$ | 986,343 | 6,168,852 | 2,317,550 | (5,237 | ) | (3,193,511) | 6,273,997 | 383,949 | $ | 6,657,946 | ||||||||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||||||||||
Short-Term Obligations: |
||||||||||||||||||||||||||||||||
Term notes |
$ | - | 222,249 | - | - | - | 222,249 | - | $ | 222,249 | ||||||||||||||||||||||
Accounts payable |
- | 69 | 4,600 | 8,375 | - | 13,044 | - | 13,044 | ||||||||||||||||||||||||
Accrued compensation and other expenses |
- | 57,552 | 62,184 | 678 | - | 120,414 | 2,275 | 122,689 | ||||||||||||||||||||||||
Fair value of open derivatives |
- | 7,790 | - | - | - | 7,790 | - | 7,790 | ||||||||||||||||||||||||
Other short-term liabilities |
- | - | 605 | 452 | - | 1,057 | 23,017 | 24,074 | ||||||||||||||||||||||||
Total Short-Term Obligations |
- | 287,660 | 67,389 | 9,505 | - | 364,554 | 25,292 | 389,846 | ||||||||||||||||||||||||
Long-Term Obligations: |
||||||||||||||||||||||||||||||||
Term notes |
- | 3,781,987 | - | - | - | 3,781,987 | 402,748 | 4,184,735 | ||||||||||||||||||||||||
Fair value of open derivatives |
- | 70,589 | - | - | - | 70,589 | - | 70,589 | ||||||||||||||||||||||||
Deferred income tax liability, net |
- | 1,042,273 | (23,479 | ) | 3,924 | - | 1,022,718 | - | 1,022,718 | |||||||||||||||||||||||
Other long-term liabilities |
- | - | 21,842 | 2,843 | - | 24,685 | - | 24,685 | ||||||||||||||||||||||||
Total Long-Term Obligations |
- | 4,894,849 | (1,637 | ) | 6,767 | - | 4,899,979 | 402,748 | 5,302,727 | |||||||||||||||||||||||
Total Liabilities |
- | 5,182,509 | 65,752 | 16,272 | - | 5,264,533 | 428,040 | 5,692,573 | ||||||||||||||||||||||||
Equity: |
||||||||||||||||||||||||||||||||
Nuveen Investments shareholders equity |
986,343 | 986,343 | 2,228,730 | (21,562 | ) | (3,193,511) | 986,343 | - | 986,343 | |||||||||||||||||||||||
Noncontrolling interest |
- | - | 23,068 | 53 | 23,121 | (44,091 | ) | (20,970 | ) | |||||||||||||||||||||||
Total equity |
986,343 | 986,343 | 2,251,798 | (21,509 | ) | (3,193,511) | 1,009,464 | (44,091 | ) | 965,373 | ||||||||||||||||||||||
$ | 986,343 | 6,168,852 | 2,317,550 | (5,237 | ) | (3,193,511) | 6,273,997 | 383,949 | $ | 6,657,946 | ||||||||||||||||||||||
* At cost, less accumulated depreciation and amortization
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Nuveen Investments, Inc. & Subsidiaries
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2009
(in 000s)
Parent | Issuer of Notes | Consolidated | ||||||||||||||||||||||||||||||
Nuveen | excluding | |||||||||||||||||||||||||||||||
Windy City | Investments, | Guarantor | Non Guarantor | Intercompany | Symphony CLO | Symphony | ||||||||||||||||||||||||||
Investments, Inc. | Inc. | Subsidiaries | Subsidiaries | Eliminations | V | CLO V | Consolidated | |||||||||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||||||||||
Investment advisory fees |
$ | - | - | 442,621 | 3,013 | - | 445,634 | - | $ | 445,634 | ||||||||||||||||||||||
Product distribution |
- | - | - | 756 | - | 756 | - | 756 | ||||||||||||||||||||||||
Performance fees/other
revenue |
- | - | 9,276 | 30,187 | (28,166) | 11,297 | - | 11,297 | ||||||||||||||||||||||||
Total operating revenues |
- | - | 451,897 | 33,956 | (28,166) | 457,687 | - | 457,687 | ||||||||||||||||||||||||
Operating expense |
||||||||||||||||||||||||||||||||
Compensation and benefits |
- | 1,758 | 168,868 | 17,516 | - | 188,142 | - | 188,142 | ||||||||||||||||||||||||
Severance |
- | - | 7,459 | - | - | 7,459 | - | 7,459 | ||||||||||||||||||||||||
Advertising and promotional
costs |
- | - | 6,352 | 267 | - | 6,619 | - | 6,619 | ||||||||||||||||||||||||
Occupancy and equipment
costs |
- | - | 19,509 | 5,901 | - | 25,410 | - | 25,410 | ||||||||||||||||||||||||
Amortization of intangible
assets |
- | 48,630 | 4,092 | - | - | 52,722 | - | 52,722 | ||||||||||||||||||||||||
Travel and entertainment |
- | 228 | 5,578 | 1,099 | - | 6,905 | - | 6,905 | ||||||||||||||||||||||||
Outside and professional
services |
- | 43 | 25,729 | 4,978 | (40) | 30,710 | - | 30,710 | ||||||||||||||||||||||||
Other operating expenses |
- | 1,679 | 25,500 | 31,484 | (28,126) | 30,537 | - | 30,537 | ||||||||||||||||||||||||
Total operating expenses |
- | 52,338 | 263,087 | 61,245 | (28,166) | 348,504 | - | 348,504 | ||||||||||||||||||||||||
Other income/(expense) |
- | 2,140 | (4,837) | 392 | - | (2,305) | 93,467 | 91,162 | ||||||||||||||||||||||||
Net interest revenue/(expense) |
- | (220,225) | 864 | 175 | - | (219,186) | 19,724 | (199,462) | ||||||||||||||||||||||||
Income/(loss) before taxes |
- | (270,423) | 184,837 | (26,722) | - | (112,308) | 113,191 | 883 | ||||||||||||||||||||||||
Income tax expense/(benefit) |
- | (43,373) | 6,612 | 2,802 | - | (33,959) | - | (33,959) | ||||||||||||||||||||||||
Net income (loss) |
- | (227,050) | 178,225 | (29,524) | - | (78,349) | 113,191 | 34,842 | ||||||||||||||||||||||||
Less: net (income)/loss
attributable to the noncontrolling
interests |
- | - | 1,095 | 3 | - | 1,098 | 113,191 | 114,289 | ||||||||||||||||||||||||
Net income/(loss) attributable to
Nuveen Investments |
$ | - | (227,050) | 177,130 | (29,527) | - | (79,447) | - | $ | (79,447) | ||||||||||||||||||||||
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Nuveen Investments, Inc. & Subsidiaries
CONSOLIDATING STATEMENTS OF CASH FLOW
For the Nine Months Ended September 30, 2009
(in 000s)
Parent | Issuer of Notes | Consolidated | ||||||||||||||||||||||||||
Windy City | Nuveen | excluding | ||||||||||||||||||||||||||
Investments, | Investments, | Guarantor | Non Guarantor | Symphony CLO | Symphony CLO | |||||||||||||||||||||||
Inc. | Inc. | Subsidiaries | Subsidiaries | V | V | Consolidated | ||||||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||||||
Net income/(loss) |
$ | - | (227,050) | 178,225 | (29,524) | (78,349) | 113,191 | $ | 34,842 | |||||||||||||||||||
Adjustments to reconcile net income/(loss)
to net cash provided from operating activities: |
||||||||||||||||||||||||||||
Net (income)/loss attributable to
noncontrolling interests |
- | - | (1,095) | (3) | (1,098) | (113,191) | (114,289) | |||||||||||||||||||||
Deferred income taxes |
- | (43,593) | 6,612 | 2,997 | (33,984) | - | (33,984) | |||||||||||||||||||||
Depreciation of office property,
equipment, and leaseholds |
- | - | 7,953 | 3,259 | 11,212 | - | 11,212 | |||||||||||||||||||||
Loss on sale of fixed assets |
- | 1,767 | 4 | 1,771 | 1,771 | |||||||||||||||||||||||
Realized (gains)/losses from
available-for sale investments |
- | (2,484) | (180) | 13 | (2,651) | - | (2,651) | |||||||||||||||||||||
Unrealized (gains)/losses on
derivatives |
- | (142) | - | - | (142) | - | (142) | |||||||||||||||||||||
Amortization of intangible assets |
- | 48,630 | 4,092 | - | 52,722 | - | 52,722 | |||||||||||||||||||||
Amortization of debt related items, net |
- | 8,665 | - | - | 8,665 | - | 8,665 | |||||||||||||||||||||
Compensation expense for equity plans |
- | 1,758 | 23,337 | 337 | 25,432 | - | 25,432 | |||||||||||||||||||||
Compensation
expense for mutual fund incentive
plan |
- | - | 12,343 | - | 12,343 | - | 12,343 | |||||||||||||||||||||
Net gain on early retirement of Senior
Unsecured Notes-5% of 2010 |
- | (4,291) | - | - | (4,291) | - | (4,291) | |||||||||||||||||||||
Loss due to acceleration of deferred
debt items from first lien paydown |
- | 3,697 | - | - | 3,697 | - | 3,697 | |||||||||||||||||||||
Net change in working capital |
- | 136,401 | (210,143) | 27,270 | (46,472) | - | (46,472) | |||||||||||||||||||||
Net cash provided by / (used
in) operating activities |
- | (78,409) | 22,911 | 4,353 | (51,145) | - | (51,145) | |||||||||||||||||||||
Cash flow from financing activities |
||||||||||||||||||||||||||||
Proceeds from loans and notes payable, net
of discount |
- | 451,500 | - | - | 451,500 | - | 451,500 | |||||||||||||||||||||
Debt issuance costs |
- | (29,890) | - | - | (29,890) | - | (29,890) | |||||||||||||||||||||
Restricted cash: escrow for senior notes
due 9/15/10 |
- | (222,745) | - | - | (222,745) | - | (222,745) | |||||||||||||||||||||
Repayments of notes payable |
- | (210,441) | - | - | (210,441) | - | (210,441) | |||||||||||||||||||||
Early retirement of notes payable |
- | (5,178) | - | - | (5,178) | - | (5,178) | |||||||||||||||||||||
Purchase of noncontrolling interests |
- | - | (18,132) | - | (18,132) | - | (18,132) | |||||||||||||||||||||
Payment of income allocation to
noncontrolling interests |
- | (211) | (1,842) | - | (2,053) | - | (2,053) | |||||||||||||||||||||
Undistributed income allocation for
noncontrolling interests |
- | - | 1,095 | 3 | 1,098 | - | 1,098 | |||||||||||||||||||||
Dividends paid |
- | (95) | - | - | (95) | - | (95) | |||||||||||||||||||||
Deferred and restricted Class A unit
payouts |
- | - | (280) | - | (280) | - | (280) | |||||||||||||||||||||
Net cash provided by / (used in)
financing activities |
- | (17,060) | (19,159) | 3 | (36,216) | - | (36,216) | |||||||||||||||||||||
Cash flow from investing activities: |
||||||||||||||||||||||||||||
Winslow acquisition |
- | (92) | (5) | - | (97) | - | (97) | |||||||||||||||||||||
HydePark acquisition |
- | (2,692) | - | - | (2,692) | - | (2,692) | |||||||||||||||||||||
Purchase of office property and equipment |
- | - | (5,265) | (2,719) | (7,984) | - | (7,984) | |||||||||||||||||||||
Proceeds from sales of investment
securities |
- | 27,101 | - | - | 27,101 | - | 27,101 | |||||||||||||||||||||
Purchase of investment securities |
- | (19,412) | (250) | - | (19,662) | - | (19,662) | |||||||||||||||||||||
Purchase of securities for mutual fund
incentive program |
- | (52,000) | - | - | (52,000) | - | (52,000) | |||||||||||||||||||||
Net change in consolidated funds |
- | - | - | - | - | 767 | 767 | |||||||||||||||||||||
Other |
- | - | - | 1 | 1 | - | 1 | |||||||||||||||||||||
Net cash provided by / (used in)
investing activities |
- | (47,095) | (5,520) | (2,718) | (55,333) | 767 | (54,566) | |||||||||||||||||||||
Effect of exchange rates on cash and cash
equivalents |
- | 4 | - | - | 4 | - | 4 | |||||||||||||||||||||
Increase/(decrease) in cash and cash
equivalents |
- | (142,560) | (1,768) | 1,638 | (142,690) | 767 | (141,923) | |||||||||||||||||||||
Cash and cash equivalents |
||||||||||||||||||||||||||||
Beginning of year |
- | 383,165 | 14,534 | 54,010 | 451,709 | 15,427 | 467,136 | |||||||||||||||||||||
End of period |
$ | - | 240,605 | 12,766 | 55,648 | 309,019 | 16,194 | $ | 325,213 | |||||||||||||||||||
24
Table of Contents
Note 13 Subsequent Events
FASB Topic 855-10 deals with subsequent events and establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued (as defined). FASB Topic 855-10 requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date.
FASB Topic 855-10 defines two varieties of subsequent events: (1) events or transactions that
provide additional evidence about conditions that existed at the date of the balance sheet (called
recognized subsequent events), and (2) events that provide evidence about conditions that did
not exist at the date of the balance sheet, but arose after that date (called non-recognized
subsequent events). FASB Topic 855-10 requires that companies recognize in the financial
statements the effects of all subsequent events that provide additional evidence about conditions
that existed at the date of the balance sheet, including the estimates inherent in the process of
preparing financial statements. For example, the settlement of litigation (after the balance
sheet date, but before the date the financial statements are issued or available to be issued)
falls within this category of subsequent events where the events that gave rise to the
litigation had taken place before the balance sheet date. Conversely, a company does not
recognize subsequent events that provide evidence about conditions that did not exist at the
balance sheet date, but instead arose after the balance sheet date and before the date on which
financial statements are issued or are available to be issued. Examples of this type of
subsequent event include sales of investments or business combinations.
Finally, FASB Topic 855-10 states that some non-recognized subsequent events may be of such a
nature that they must be disclosed to keep the financial statements from being characterized as
being misleading. With respect to this type of subsequent event, a company would be required to
disclose: (1) the nature of the event, and (2) an estimate of its financial effect or an
affirmative statement that such an estimate cannot be made.
The FASB stated that this standard should not result in significant changes in subsequent events
that an entity reports either through recognition or disclosure in its financial statements.
FASB Topic 855-10 applies with respect to interim or annual reporting periods ending after June
15, 2009.
The Company has evaluated subsequent events under the provisions of FASB Topic 855-10 and has
determined that, through November 12, 2009, the filing date for the Companys September 30, 2009
interim financial statements, there were no events occurring subsequent to September 30, 2009
fitting the criteria of FASB Topic 855-10 that needed to be reflected on the Companys statement
of financial position as of September 30, 2009 or results of
operations for the three and nine months
ended September 30, 2009.
Termination of Excess Pension Plan
Effective October 28, 2009, the excess pension plan was terminated and the actuarial equivalent of
total benefits thereunder will be paid out in two tranches, commencing in 2009 and ending in 2010.
25
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Description of the Business
The principal businesses of Nuveen Investments are investment management and related
research, as well as the development, marketing and distribution of investment products and
services for the high-net-worth and institutional market segments. We distribute our
investment products and services, which include managed accounts, closed-end exchange-traded
funds (closed-end funds), and open-end mutual funds (open-end funds or mutual funds)
primarily to high-net-worth and institutional investors through intermediary firms, including
broker-dealers, commercial banks, private banks, affiliates of insurance providers, financial
planners, accountants, consultants and investment advisors.
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. 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 main sources of operating revenue:
performance fees and distribution and underwriting revenue. Performance fees are earned when
investment performance on certain institutional accounts and private 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. Generally, 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 closed-end 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. Also included in distribution and
underwriting revenue is revenue relating to our MuniPreferred® and FundPreferred®. These are
types of auction rate preferred stock (ARPS) issued by our closed-end funds, shares of
which have historically been bought and sold through a secondary market auction process. A
participation fee has been paid by the fund to the auction participants based on shares
traded. Access to the auction must be made through a participating broker. We have offered
non-participating brokers access to the auctions, for which we earned a portion of the
participation fee. Beginning in mid-February 2008, the auctions for our ARPS, for the ARPS
issued by other closed-end funds and for other auction rate securities began to fail on a
widespread basis and have continued to fail. As we have described in several public
announcements, we and the Nuveen closed-end funds have been working on various forms of debt
and equity financing to redeem all of the approximately $15.4 billion of ARPS issued by our
closed-end funds. As of September 30, 2009, the Nuveen funds had completed the redemption of
approximately $6.6 billion of ARPS issued by them and we and the Nuveen funds continue to
work on alternatives to address the remaining outstanding ARPS of these funds. However,
turmoil in the credit markets beginning in September 2008 has severely hampered our efforts
to redeem ARPS. If the Nuveen funds are unable to obtain debt or equity financing sufficient
to redeem the remaining outstanding ARPS of the Nuveen funds, we do not expect this failure
to have a direct adverse impact on the financial position, operating results or liquidity of
Nuveen Investments since ARPS are obligations of the Nuveen funds and neither Nuveen
Investments nor the Nuveen funds are contractually obligated to redeem, or provide liquidity
to redeem, ARPS. However, Nuveen Investments and the Nuveen funds believe that it is in the
best interests of the holders of ARPS and the common shareholders of the Nuveen funds to
refinance the ARPS issued by the Nuveen funds as soon as practicable. The redemption of ARPS
and certain related financings may result in lower advisory fees. We also expect
distribution and underwriting revenue relating to ARPS to continue to decrease.
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.
Acquisition of the Company
On June 19, 2007, Nuveen Investments, Inc. (the Predecessor) entered into an agreement (the
merger agreement) under which a group of private equity investors led by Madison Dearborn
Partners, LLC (MDP) agreed to acquire all of the outstanding shares of the Predecessor for
$65.00 per share in cash. The Board of Directors and shareholders of the Predecessor
approved the merger agreement. The transaction closed on November 13, 2007 (the effective
date).
On the effective date, Windy City Investments Holdings, L.L.C. (Holdings) acquired all of
the outstanding capital stock of
26
Table of Contents
the Predecessor for approximately $5.8 billion in cash.
Holdings is owned by MDP, affiliates of BAML Capital Partners
(formerly known as Merrill Lynch Global Private Equity) and certain other co-investors and
certain of our employees, including senior management. Windy City Investments, Inc.
(Parent) and Windy City Acquisition Corp. (the Merger Sub) are corporations formed by
Holdings in connection with the acquisition and, concurrently with the closing of the
acquisition on November 13, 2007, the Merger Sub merged with and into Nuveen Investments,
which was the surviving corporation (the Successor) and assumed the obligations of the
Merger Sub by operation of law. The merger agreement and the related financing transactions
resulted in the following events which are collectively referred to as the Transactions or
MDP Transactions:
| the purchase by the equity investors of common units of Holdings for approximately $2.8 billion in cash and/or through a roll-over of existing equity interests in Nuveen Investments; | ||
| the entering into by the Merger Sub of a new senior secured credit facility comprised of (1) a $2.3 billion term loan facility with a term of seven years and (2) a $250 million revolving credit facility with a term of six years; | ||
| the offering by the Merger Sub of $785 million of senior notes due in 2015; | ||
| the merger of the Merger Sub with and into Nuveen Investments, with Nuveen Investments (the Successor) as the surviving corporation, and the payment of the related merger consideration; and | ||
| the payment of approximately $177 million of fees and expenses related to the Transactions, including approximately $53 million of fees expensed. |
Immediately following the merger, Nuveen Investments became a wholly owned direct subsidiary
of Parent and a wholly owned indirect subsidiary of Holdings.
The purchase price of the Company has been allocated to the assets and liabilities acquired
based on their estimated fair market values at the date of acquisition as described in Note
3, Purchase Accounting, to our annual financial statements.
Unless the context requires otherwise, Nuveen Investments, we, us, our or the
Company refers to the Successor and its subsidiaries, and for periods prior to November 13,
2007, the Predecessor and its subsidiaries.
The acquisition of Nuveen Investments was accounted for as a business combination using the
purchase method of accounting, whereby the purchase price (including liabilities assumed) was
allocated to the assets acquired based on their estimated fair market values at the date of
acquisition and the excess of the total purchase price over the fair value of the Companys
net assets was allocated to goodwill. The purchase price paid by Holdings to acquire the
Company and related purchase accounting adjustments were pushed down and recorded on Nuveen
Investments and its subsidiaries financial statements and resulted in a new basis of
accounting for the successor period beginning on the day the acquisition was completed. As
a result, the purchase price and related costs were allocated to the estimated fair values of
the assets acquired and liabilities assumed at the time of the acquisition based on
managements best estimates, which were based in part on the work of external valuation
specialists engaged to perform valuations of certain of the tangible and intangible assets.
As a result of the consummation of the Transactions and the application of purchase
accounting as of November 13, 2007, the consolidated financial statements for periods after
November 13, 2007 are presented on a different basis than that for periods prior to November
13, 2007, and therefore are not comparable to prior periods.
Recent Events
Acquisition of Winslow Capital Management
On December 26, 2008, we acquired Winslow Capital Management (Winslow Capital). Winslow
Capital specializes in large-cap growth investment strategies for institutions and
high-net-worth investors and had approximately $4.5 billion in assets under management at the
time of the acquisition. The results of Winslow Capitals operations are included in our
consolidated statement of income since the acquisition date. The aggregate purchase price
was $77 million (net of cash acquired) plus certain contingent payments which may become due
at the end of 2011 and 2013.
Summary of Operating Results
The table presented below highlights the results of our operations for the three-month and
nine-month periods ended September 30, 2009 and 2008:
27
Table of Contents
Financial Results Summary
Company Operating Statistics
(in millions)
Company Operating Statistics
(in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2009 |
2008 |
% change |
2009 |
2008 |
% change |
|||||||
Gross sales of investment products |
$6,450 | $6,501 | (1) | $18,424 | $16,076 | 15 | ||||||
Net flows of investment products |
(725) | (1,745) | 58 | (1,735) | (5,706) | 70 | ||||||
Assets under management (1) |
140,979 | 134,065 | 5 | 140,979 | 134,065 | 5 | ||||||
Operating revenues |
161.6 | 191.4 | (16) | 457.7 | 579.4 | (21) | ||||||
Operating expenses |
126.5 | 121.0 | 5 | 348.5 | 381.0 | (9) | ||||||
Other income/(expense) |
17.1 | (41.0) | 142 | 91.2 | (64.4) | 242 | ||||||
Net interest expense |
74.2 | 59.7 | 24 | 199.5 | 196.7 | 1 | ||||||
Income tax (benefit)/expense |
(19.0) | 5.6 | N/A | (34.0) | 1.5 | N/A | ||||||
Noncontrolling interest net
income/(loss) |
30.4 | (26.9) | N/A | 114.3 | (48.9) | 334 | ||||||
Net income/(loss) attributable to
Nuveen |
(33.4) | (9.1) | 266 | (79.4) | (15.4) | 417 |
(1) At period end.
Results of Operations
The following tables and discussion and analysis contain 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.
28
Table of Contents
Gross sales of investment products (which include new managed accounts, deposits into
existing managed accounts and the sale of mutual fund and closed-end fund shares) for the
three-month and nine-month periods ended September 30, 2009 and 2008 are shown below:
Gross Investment Product Sales
(in millions)
(in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Closed-End Funds |
$ | 254 | $ | - | $ | 561 | $ | 2 | ||||||||
Mutual Funds |
2,348 | 1,635 | 5,677 | 4,828 | ||||||||||||
Retail Managed Accounts |
2,044 | 2,026 | 6,898 | 5,846 | ||||||||||||
Institutional Managed Accounts |
1,804 | 2,840 | 5,288 | 5,400 | ||||||||||||
Total |
$ | 6,450 | $ | 6,501 | $ | 18,424 | $ | 16,076 | ||||||||
For the three-month period ended September 30, 2009, gross sales were consistent with sales
in the same period of the prior year. In September 2009, we completed the initial public
offering of the Nuveen Enhanced Municipal Value Fund, raising over $250 million in its common
share offering. Mutual fund sales were up $0.7 billion or 44% versus sales in the same
quarter of the prior year. This increase was driven by a 39% increase in municipal fund sales
and a 49% increase in international and global value fund sales. Retail managed account sales
were flat for the period versus sales in the third quarter of the prior year, driven by a 16%
increase in municipal account sales and the acquisition of Winslow Capital, which contributed
$0.1 billion in sales during the quarter. These increases were primarily offset by a 33%
decline in international and global value account sales. Institutional managed account sales
declined $1.0 billion, or 36% versus sales in the third quarter of the prior year. Prior
year gross sales included $1.3 billion raised from the issuance of two collateralized loan
obligations (CLOs). Excluding the impact of the prior year CLO sales, institutional managed
account sales increased $0.3 billion driven mainly by an increase in sales as a result of the
Winslow Capital acquisition, which drove $0.7 billion of sales in the third quarter.
For the nine-month period ended September 30, 2009, gross sales were up $2.3 billion or 15%
versus sales in the same period of the prior year. Closed-end fund sales increased $0.6
billion due to the 2009 initial public offerings of Nuveen Municipal Value 2, four state
municipal funds (Pennsylvania Value, New York Value 2, New Jersey Value and California Value
2) and the Nuveen Enhanced Municipal Value Fund. There were no new offerings in 2008. Mutual
fund sales increased $0.8 billion or 18%, driven by a 54% increase in international and
global value fund sales and a 7% increase in municipal fund sales. These increases were
partially offset by lower growth and domestic value fund sales. Retail managed account sales
were up $1.1 billion or 18%, driven by a $0.5 billion (19%) increase in municipal account
sales, a $0.2 billion increase in taxable fixed income account sales and the acquisition of
Winslow Capital, which contributed $0.3 billion in sales during the period. Institutional
managed account sales were down $0.1 billion, or 2% versus prior year. The decline was driven
by $0.7 billion (47%) of lower international and global value account sales and $0.2 billion
(12%) of lower domestic value account sales. Symphony institutional sales also declined for
the period as a result of the $1.3 billion raised in 2008 through the issuance of two CLOs.
Partially offsetting these declines was an increase in sales as a result of the acquisition
of Winslow Capital, which drove a $2.1 billion increase in sales.
Net flows of investment products for the three-month and nine-month periods ended September
30, 2009 and 2008 are shown below:
Net Flows (in millions) |
||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Closed-End Funds |
$ | 377 | $ | (1,171) | $ | (178) | $ | (1,120) | ||||||||
Mutual Funds |
1,395 | 147 | 2,756 | 953 | ||||||||||||
Retail Managed Accounts |
(338) | (1,895) | (2,153) | (6,241) | ||||||||||||
Institutional Managed Accounts |
(2,159) | 1,174 | (2,160) | 702 | ||||||||||||
Total |
$ | (725) | $ | (1,745) | $ | (1,735) | $ | (5,706) | ||||||||
29
Table of Contents
For the three-month period ended September 30, 2009, we experienced $0.7 billion of net
outflows, driven mainly by the loss of one large institutional account, which accounted for
$2.2 billion in redemptions during the period. Mutual fund net flows were up $1.2 billion for
the period, driven by higher sales and a decline in redemptions on municipal funds. Retail
managed accounts experienced $0.3 billion of net outflows for the quarter, but improved
significantly versus the $1.9 billion of net outflows in the same quarter of the prior year.
This improvement was seen across nearly all of our investment styles. The launch of the
Nuveen Enhanced Municipal Value Fund and the re-leveraging of several other funds resulted in
closed-end fund net inflows of $0.4 billion for the period. This compares favorably to the
third quarter of 2008 when market depreciation caused several of the funds to reduce leverage
in order to stay within internal operating leverage ratio bands.
For the nine-month period ended September 30, 2009, we experienced $1.7 billion of net
outflows, driven mainly by outflows of retail and institutional managed accounts. Retail
managed account outflows were heavily skewed toward the first part of the year with $1.8
billion of the $2.2 billion in outflows occurring in the first quarter during a volatile and
challenging market environment. Institutional net outflows were driven by the third quarter
institutional redemption discussed above, as well as the redemption of one large alternative
investment account (nearly $0.5 billion) in June. These outflows were partially offset by
inflows as a result of the acquisition of Winslow Capital, which contributed $1.2 billion in
net inflows for the period. Closed-end fund sales of $0.6 billion were offset by $0.8 billion
in selective taxable fixed income and equity fund de-leveraging resulting in slight outflows
for the year-to-date period. Offsetting these net outflows were mutual fund net inflows of
$2.8 billion, which were up $1.8 billion versus the prior year driven by higher sales of
municipal and international and global value funds and lower redemptions of municipal and
domestic value funds.
The following table summarizes net assets under management:
Net Assets Under Management
(in millions)
(in millions)
September 30, | December 31, | September 30, | ||||||||||
2009 |
2008 |
2008 |
||||||||||
Closed-End Funds |
$ 45,629 | $ 39,858 | $ 44,710 | |||||||||
Mutual Funds |
20,571 | 14,688 | 17,661 | |||||||||
Retail Managed Accounts |
38,336 | 34,860 | 40,368 | |||||||||
Institutional Managed Accounts |
36,443 | 29,817 | 31,326 | |||||||||
Total |
$ 140,979 | $ 119,223 | $ 134,065 | |||||||||
Assets under management at September 30, 2009, were approximately $141 billion, an increase
of 5% versus assets under management at September 30, 2008, and an increase of 18% versus
assets under management at December 31, 2008. Over the last twelve months we experienced a
change in our product mix reflective of market conditions, with municipal assets as a percent
of total assets increasing while both equity and taxable fixed income assets as a percent of
total declined. At September 30, 2009, 49% of our assets were in municipal portfolios, 43% in
equity portfolios and 8% in taxable income portfolios. This style profile is similar to the
profile of our assets at December 31, 2008 (48% municipal, 44% equity and 8% taxable income).
At September 30, 2008, 45% of our assets were in municipal portfolios, 45% in equity
portfolios and 10% in taxable income portfolios.
30
Table of Contents
The following table presents the component changes in our assets under management for the
three-month and nine-month periods ended September 30, 2009 and 2008:
Change in Net Assets Under Management
(in millions)
(in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Gross Sales |
$ | 6,450 | $ | 6,501 | $ | 18,424 | $ | 16,076 | ||||||||
Reinvested Dividends |
118 | (170) | 295 | 54 | ||||||||||||
Redemptions |
(7,293) | (8,076) | (20,454) | (21,836) | ||||||||||||
Net Flows |
(725) | (1,745) | (1,735) | (5,706) | ||||||||||||
Appreciation/(Depreciation) |
13,889 | (16,022) | 23,490 | (24,536) | ||||||||||||
Increase/(Decrease) in Assets |
$ | 13,164 | $ | (17,767) | $ | 21,755 | $ | (30,242) | ||||||||
Assets under management were up $13.2 billion during the three-month period ended September
30, 2009, as a result of $13.9 billion of market appreciation. Market appreciation during
the quarter was comprised of $8.2 billion of equity, $1.2 billion of taxable fixed-income and
$4.5 billion of municipal market appreciation. Partially offsetting this strong market
appreciation was $0.7 billion of net outflows for the period.
Similarly, assets under management were up $21.8 billion during the nine-month period ended
September 30, 2009, as a result of market appreciation of $23.5 billion, partially offset by
$1.7 billion of net outflows. Year-to-date market movement was comprised of $12.7 billion of
equity, $7.9 billion of municipal and $2.9 billion of taxable fixed-income market
appreciation.
Investment advisory fee income, net of sub-advisory fees and expense reimbursements, for the
three-month and nine-month periods ended September 30, 2009 and 2008 is shown in the
following table:
Investment Advisory Fees (1)
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Closed-End Funds |
$ | 62,798 | $ | 66,071 | $ | 175,748 | $ | 200,778 | ||||||||
Mutual Funds |
26,161 | 26,988 | 68,917 | 80,158 | ||||||||||||
Managed Accounts |
71,228 | 87,220 | 200,969 | 276,036 | ||||||||||||
Total |
$ | 160,187 | $ | 180,279 | $ | 445,634 | $ | 556,972 | ||||||||
(1) Sub-advisory fee expense for the three-month and nine-month
periods ended September 30, 2009 and 2008 was $4.2 million, $6.3 million, $11.3
million and $19.9 million, respectively.
For the three-month period ended September 30, 2009, advisory fees of $160.2 million were
down $20.1 million, or 11%, from the same period of the prior year. Advisory fees were down
across all product categories driven by lower average asset levels, mainly as the result of
significant market depreciation in the second half of 2008. Advisory fees for closed-end
funds, mutual funds and managed accounts declined $3.3 million (5%), $0.8 million (3%) and
$16.0 million (18%), respectively, when compared to the same period of the prior year.
Advisory fees for the nine-month period ended September 30, 2009, declined $111.3 million, or
20% versus the same period of the prior year. Similar to the third quarter, advisory fees
were down across all product categories driven by lower average asset levels, mainly as the
result of significant market depreciation. Closed-end fund fees were down $25.0 million, or
12% from the same period of the prior year. Mutual fund fees were down $11.2 million, or 14%
and managed account fees declined $75.1 million or 27% from the same period of the prior
year.
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Product distribution revenue for the three-month and nine-month periods ended September 30,
2009 and 2008 is shown in the following table:
Product Distribution
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Closed-End Funds |
$ | 492 | $ | - | $ | 917 | $ | (39) | ||||||||
Muni/Fund Preferred® |
127 | 909 | 1,165 | 3,048 | ||||||||||||
Mutual Funds |
(548) | 233 | (1,326) | 183 | ||||||||||||
Total |
$ | 71 | $ | 1,142 | $ | 756 | $ | 3,192 | ||||||||
For the three-month period ended September 30, 2009, product distribution revenue declined
largely due to a $0.8 million reduction in MuniPreferred® and FundPreferred® fees as a result
of an overall decline in ARPS outstanding due to the redemption of these shares and as well
as reduction in the fee rate. Mutual fund distribution revenue declined $0.8 million driven
mainly by an increase in commissions paid on high dollar value sales as a result of the
increase in mutual fund sales. Partially offsetting these declines was an increase in
underwriting revenue as a result of the Nuveen Enhanced Municipal Value closed-end fund
offering in the third quarter of 2009.
For the nine-month period ended September 30, 2009, product distribution revenue declined
$2.4 million, or 76% from the same period of the prior year. Similar to the third quarter,
the year-to-date decline was primarily driven by a decline in MuniPreferred® and
FundPreferred® fees as a result of an overall decline in ARPS outstanding as a result of the
redemption of these shares as well as a reduction in the fee rate. Mutual fund distribution
revenue declined $1.5 million driven mainly by an increase in commissions paid on high dollar
value sales as a result of the increase in mutual fund sales. These declines were partially
offset by an increase in closed-end fund underwriting revenue resulting from the six initial
public offerings year-to-date.
Performance Fees/Other Revenue
Performance fees/other revenue consists of performance fees earned on institutional assets
managed, HydePark consulting revenue and various fees earned in connection with services
provided on behalf of our defined portfolio assets under surveillance. For the three-month
period ended September 30, 2009, performance fees were $0.6 million, down $8.0 million from
the same period of the prior year driven by lower performance fees on Symphony accounts,
partially offset by higher performance fees on Tradewinds accounts. Other revenue for the
third quarter was $0.7 million, down $0.6 million or 49% from the same period of the prior
year driven by lower HydePark consulting revenue.
For the nine-month period ended September 30, 2009, performance fees were $9.3 million, down
$6.5 million from $15.8 million in the same period of the prior year. Significantly lower
performance fees on Symphony accounts were partially offset by higher performance fees on
Tradewinds accounts. Year-to-date other revenue was $2.0 million, down by $1.4 million or 41%
for the period resulting from lower HydePark consulting revenue.
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Operating Expenses
The following table summarizes operating expenses for the three-month and nine-month periods
ended September 30, 2009 and 2008:
Operating Expenses
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Compensation and benefits |
$ | 70,995 | $ | 66,299 | $ | 188,142 | $ | 218,623 | ||||||||
Severance |
764 | 1,880 | 7,459 | 13,552 | ||||||||||||
Advertising and promotional costs |
2,513 | 3,662 | 6,619 | 10,400 | ||||||||||||
Occupancy and equipment costs |
9,005 | 7,413 | 25,410 | 21,141 | ||||||||||||
Amortization of intangible assets |
20,302 | 16,235 | 52,722 | 48,635 | ||||||||||||
Travel and entertainment |
2,144 | 2,954 | 6,905 | 9,443 | ||||||||||||
Outside and professional services |
10,096 | 11,992 | 30,710 | 32,483 | ||||||||||||
Other operating expenses |
10,650 | 10,607 | 30,537 | 26,736 | ||||||||||||
Total |
$ | 126,469 | $ | 121,042 | $ | 348,504 | $ | 381,013 | ||||||||
Compensation and Benefits
Compensation and related benefits increased $4.7 million for the three-month period ended
September 30, 2009, relative to the same period of the prior year. One of the drivers of the
increase was the acquisition of Winslow Capital which added approximately $1.6 million in
compensation and benefits for the period. For the nine-month period ended September 30,
2009, compensation and related benefits declined $30.5 million mainly as a result of a
reduction in incentive compensation as a result of the overall decline in earnings, and a
reduction in staffing levels.
Advertising and Promotional Costs
For the three-month and nine-month periods ended September 30, 2009, advertising and
promotional costs declined $1.1 million and $3.8 million, respectively. These declines
reflect reductions in advertising and event spending as well as lower platform fees as a
result of lower assets under management.
Occupancy and Equipment Costs
For the three-month and nine-month periods ended September 30, 2009, occupancy and equipment
costs increased $1.6 million and $4.3 million, respectively, primarily driven by higher
depreciation and amortization expense.
Outside and Professional Services
Outside and professional services expense declined $1.9 million and $1.8 million for the
three-month and nine-month periods ended September 30, 2009. The lower spending was due to a
decline in consulting fees, partially offset by higher electronic data and research costs for
our investment teams.
All Other Operating Expenses
All other operating expenses, including severance, amortization of intangible assets, travel
and entertainment, structuring fees, recruiting, fund organization costs, communication
costs, software, insurance, contributions and other expenses increased $2.2 million for the
three-month period ended September 30, 2009, due to increased amortization expense as the
result of the Winslow Capital acquisition. This increase in amortization expense is
partially offset by lower severance expense and reductions in travel and entertainment
spending. For the nine-month period ended September 30, 2009, all other operating expenses
decreased $0.8 million. The lower spending is driven by significant reductions in severance
expense, recruiting and travel and entertainment, partially offset by increased structuring
fees, fund organization expenses and amortization expense.
Other Income/(Expense)
Other income/(expense) includes realized gains and losses on investments and miscellaneous
income/(expense), including the
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gain or loss on the disposal of property.
The following is a summary of other income/(expense) for the three-month and nine-month periods
ended September 30, 2009 and 2008:
Other Income/(Expense)
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Gains/(Losses) on Investments |
$ | 1,361 | $ | (3,739) | $ | 2,102 | $ | (3,864) | ||||||||
Gains/(Losses) on CLO V |
22,559 | (35,406) | 95,037 | (56,720) | ||||||||||||
Gains/(Losses) on Fixed Assets |
(967) | - | (968) | (4) | ||||||||||||
Transaction (Expense) |
(1,680) | (1,345) | (3,245) | (2,134) | ||||||||||||
Miscellaneous Income/(Expense) |
(4,215) | (527) | (1,764) | (1,673) | ||||||||||||
Total |
$ | 17,058 | $ | (41,017) | $ | 91,162 | $ | (64,395) | ||||||||
Included in other income/(expense) is $22.6 million for the three-month period ended
September 30, 2009, and $95.0 million for the nine-month period ended September 30, 2009, in
unrealized gains on Symphony CLO V, a collateralized loan obligation managed by Symphony in
which MDP owns a controlling equity interest, but the Company has no equity. Because of the
MDP equity in Symphony CLO V, we are required to consolidate Symphony CLO V in our financial
statements (see also Net Income/Loss Due to Noncontrolling Interests, below). In addition
to the investment gains reported on the consolidated CLO, we recorded approximately $0.5
million in the quarter and $1.6 million year-to-date in miscellaneous expense also as a
result of the consolidation of Symphony CLO V, reflected in miscellaneous income/(expense).
Also included in miscellaneous expense is $3.7 million for both the three-month and
nine-month periods ended September 30, 2009, related to the accelerated amortization of debt
issuance costs as a result of the partial pay down of our term loan in the third quarter (see
Capital Resources, Liquidity and Financial Resources below for additional information).
Transaction-related fees were $1.7 million and $3.2 million for the three-month and
nine-month periods ended September 30, 2009.
Net Interest Expense
The following is a summary of net interest expense for the three-month and nine-month periods
ended September 30, 2009 and 2008:
Net Interest Expense
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Dividend and Interest Revenue |
$ | 10,873 | $ | 11,187 | $ | 29,878 | $ | 31,316 | ||||||||
Interest Expense |
(85,041) | (70,916) | (229,340) | (228,023) | ||||||||||||
Total |
$ | (74,168) | $ | (59,729) | $ | (199,462) | $ | (196,707) | ||||||||
For the three-month and nine-month periods ending September 30, 2009, net interest expense
increased $14.4 million and $2.8 million, respectively, when compared to the same periods in
the prior year. The main driver of this increase was $11.3 million in interest expense
related to our second lien debt. In addition, interest expense from the consolidation of
Symphony CLO V was approximately $0.9 million higher for the three-month period ended
September 30, 2009, although $9.1 million lower for the nine-month period ended September 30,
2009 when compared to the same periods in the prior year.
Included in dividend and interest revenue for 2009 is $9.7 million for the three-month period
ended September 30, 2009 and $26.4 million for the nine-month period ended September 30, 2009
of interest revenue from the consolidation of Symphony CLO V. For the three-month and
nine-month periods ended September 30, 2008, dividend and interest revenue from the
consolidation of Symphony CLO V was $8.9 million and $23.1 million, respectively.
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Net Income/Loss due to Noncontrolling Interests
Symphony CLO V, which is required to be consolidated, is a noncontrolling interest. We have
no equity interest in this CLO investment vehicle and all gains and losses recorded in our
financial statements are attributable to other investors. For the three-month and nine-month
periods ended September 30, 2009, we recorded $30.4 million and $114.3 million of net income,
respectively, on this investment which is offset in net income/loss attributable to
noncontrolling interests.
Also included in net income/loss attributable to noncontrolling interests are equity-based,
noncontrolling profits interests that have been granted to key employees at NWQ, Tradewinds,
Symphony and Santa Barbara for their respective businesses. For additional information on
these noncontrolling interests, please refer to Capital Resources, Liquidity and Financial
Condition - Equity below.
Recent Updates to Authoritative Accounting Literature
Codification
During June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The
FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles a Replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 states
that the FASB Accounting Standards Codification TM (the Codification or ASC) will become
the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP)
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants. On the
effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other grandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative. SFAS No. 168 is effective for
financial statements issued for interim and annual periods ending after September 15, 2009.
The Codification does not change U.S. GAAP. The Codification only changes the way that U.S.
GAAP is referenced. The Codification reorganizes the various U.S. GAAP pronouncements into
approximately 90 accounting topics and displays them in a consistent structure for ease of
research and cross-reference. All existing accounting pronouncements used to create the
Codification became superseded.
Starting with the accompanying consolidated financial statements for the period ending
September 30, 2009, the Company will make reference to U.S. GAAP issued by FASB as either
FASB ASC or Topic before the new Codification topic reference number.
Variable Interest Entities
Prior to the Codification, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167), in June 2009.
SFAS No. 167 is effective as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. SFAS No. 167 will be effective for Nuveen Investments on January
1, 2010. The Company is currently evaluating the impact of SFAS No. 167 to its financial
statements. The Company may be required to consolidate the results of additional variable
interest entities as a result of SFAS No. 167.
SFAS No. 167 amends FASB Interpretation No. 46(R) to require an enterprise to perform an
analysis to determine whether the enterprises variable interest(s) give it a controlling
financial interest in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as the enterprise that has both of the following
characteristics:
| the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance; and | ||
| the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. |
Additionally, the enterprise is required to assess whether it has an implicit financial
responsibility to ensure that a variable interest entity operates as designed when
determining whether it has the power to direct the activities of the variable interest entity
that most significantly impact the entitys economic performance.
SFAS No. 167 amends Interpretation 46(R) to require ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. Before this Statement,
Interpretation 46(R) required reconsideration of whether an
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enterprise is the primary
beneficiary of a variable interest entity only when specific events occurred.
SFAS No. 167 also amends Interpretation 46(R) to eliminate the quantitative approach
previously required for determining the primary beneficiary of a variable interest entity,
which was based on determining which enterprise absorbs the majority of the
entitys expected losses, receives a majority of the entitys expected residual returns, or
both.
SFAS No. 167 amends certain guidance in Interpretation 46(R) for determining whether an
entity is a variable interest entity. It is possible that application of this revised
guidance will change an enterprises assessment of which entities with which it is involved
are variable interest entities.
SFAS No. 167 amends Interpretation No. 46(R) to include an additional reconsideration event
for determining whether an entity is a variable interest entity when any changes in facts and
circumstances occur such that the holders of the equity investment at risk, as a group, lose
the power from voting rights or similar rights of those investments to direct the activities
of the entity that most significantly impact the entitys economic performance.
Finally, SFAS No. 167 amends Interpretation 46(R) to require enhanced disclosures that will
provide users of financial statements with more transparent information about an enterprises
involvement in a variable interest entity.
Capital Resources, Liquidity and Financial Condition
Our primary liquidity needs are to fund capital expenditures, service indebtedness and
support working capital requirements. Our principal sources of liquidity are cash flows from
operating activities and borrowings under our senior secured credit facilities and long-term
notes.
In connection with the MDP Transactions, we significantly increased our level of debt. As of
September 30, 2009 we had outstanding approximately $4.1 billion in aggregate principal
amount of indebtedness and had limited additional borrowing capacity.
During July 2009, we funded $52 million into a recently created, secular trust as part of a
newly established multi-year Mutual Fund Incentive Program for certain of our employees. The
trust acquired shares of Nuveen mutual funds supporting the awards of these mutual fund
shares under this new incentive program. Awards under this new incentive program are subject
to vesting.
Senior Secured Credit Facilities
In connection with the MDP Transactions, we entered into senior secured credit facilities,
consisting of a $2.3 billion term loan facility and a $250 million revolving credit facility.
At the time of the Transactions, we borrowed the full $2.3 billion term loan facility. The
amounts borrowed under the term loan facility were used as part of the financing that was
used to consummate the Transactions. During November 2008, we drew down the full $250
million revolving credit facility due to concerns over counterparty risk as a result of the
severely deteriorating global credit market conditions. The $250 million in proceeds from
the revolving credit facility are included in Cash and cash equivalents on our September
30, 2009 consolidated balance sheet.
On July 28, 2009 we entered into an amendment to our senior secured credit facilities
pursuant to which we obtained a new $500 million second-lien term loan facility and borrowed
$450 million of loans thereunder (Additional Term Loans). We have escrowed proceeds of the
Additional Term Loans to retire our 5% senior unsecured notes due 2010 (described below) at
maturity. The remaining net proceeds from the Additional Term Loans were used to pay down a
portion of our existing $2.3 billion first-lien term loan facility. During August 2009, we
elected to borrow the remaining $50 million of Additional Term Loans under this second-lien
term loan facility. The net proceeds from these Additional Term Loans were also used to pay
down a portion of our existing $2.3 billion first-lien term loan facility.
All borrowings under our senior secured credit facilities, other than the Additional Term
Loans, bear interest at a rate per annum equal to LIBOR plus 3.0%. In addition to paying
interest on outstanding principal under our senior secured credit facilities, we are required
to pay a commitment fee to the lenders in respect of the unutilized loan commitments at a
rate of 0.3750% per annum. The Additional Term Loans bear interest at a rate per annum of
12.5%.
All obligations under our senior secured credit facilities are guaranteed by Parent and each
of our present and future, direct and indirect, material domestic subsidiaries (excluding
subsidiaries that are broker- dealers). The obligations under our senior secured credit
facilities and these guarantees are secured, subject to permitted liens and other specified
exceptions, (1) on a first-lien basis, by all the capital stock of Nuveen Investments and
certain of its subsidiaries (excluding significant subsidiaries and limited, in the case of
foreign subsidiaries, to 100% of the non-voting capital stock and 65% of the voting capital
stock of
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the first tier foreign subsidiaries) directly held by Nuveen Investments or any
guarantor and (2) on a first-lien basis by substantially all other present and future assets
of Nuveen Investments and each guarantor, except that the Additional Term Loans are secured
by the same capital stock and other assets on a second-lien basis.
The first-lien term loan facility matures on November 13, 2014 and the revolving credit
facility matures on November 13,
2013. The Additional Term Loans mature July 31, 2015.
We were required to make quarterly payments under our first-lien term loan facility in the
amount of approximately $5.8 million. We used a portion of the proceeds of the Additional
Term Loans to prepay these quarterly payments. All or any portion of the loans outstanding
under our senior secured credit facilities may be prepaid at par, except that the Additional
Term Loans may only be voluntarily prepaid with specified premiums or fees prior to July 31,
2014.
Our senior secured credit facilities contain a number of covenants that, among other things,
limit or restrict the ability of the borrower and the guarantors to dispose of assets, incur
additional indebtedness, incur guarantee obligations, prepay other indebtedness, make
dividends and other restricted payments, create liens, make equity or debt investments, make
acquisitions, engage in mergers or consolidations, change the line of business, change the
fiscal year, or engage in certain transactions with affiliates. The senior secured credit
facilities contain a financial maintenance covenant that will prohibit the borrower from
exceeding a specified ratio of (1) funded senior secured indebtedness less unrestricted cash
and cash equivalents to (2) consolidated adjusted EBITDA, as defined under our senior secured
credit facilities. The senior secured credit facilities also contain customary events of
default, limitations on our incurrence of additional debt, and other limitations.
Senior Unsecured Notes
Also in connection with the MDP Transactions, we issued $785 million of senior unsecured
notes (the Senior Notes). The Senior Notes mature on November 15, 2015 and pay a coupon of
10.5% based on par value, payable semi-annually on May 15 and November 15 of each year. We
received approximately $758.9 million in net proceeds after underwriting commissions and
structuring fees. The net proceeds were part of the financing that was used to consummate
the MDP Transactions. From time to time, we may, in compliance with the covenants under our
senior secured credit facilities and the indenture for the Senior Notes, redeem, repurchase
or otherwise acquire for value the Senior Notes.
Obligations under the Senior Notes are guaranteed by Parent and each of our existing and
subsequently acquired or organized direct or indirect domestic subsidiaries (excluding
subsidiaries that are broker dealers) that guarantee the debt under our senior secured credit
facilities. These subsidiary guarantees are subordinated in right of payment to the
guarantees of the senior secured credit facilities.
Senior Term Notes
On September 12, 2005, we issued $550 million of senior unsecured notes, consisting of $250
million of 5-year notes due 2010 and $300 million of 10-year notes due 2015 of which the
majority remain outstanding. We received approximately $544.4 million in net proceeds after
discounts. The 5-year senior term notes bear interest at an annual fixed rate of 5.0%,
payable semi-annually on March 15 and September 15 of each year. The 10-year senior term
notes bear interest at an annual fixed rate of 5.5%, payable semi-annually also beginning
March 15, 2006. The net proceeds from the notes were used to refinance outstanding debt.
The costs related to the issuance of the senior term notes were capitalized and are being
amortized to expense over their respective terms. From time to time, we may, in compliance
with the covenants under our senior secured credit facilities and the indentures for the
Senior Notes and these notes, redeem, repurchase or otherwise acquire for value these notes.
During 2008, we repurchased an aggregate $17.8 million (par value) of our 5-year notes due
2010. Of the $8.4 million in total cash paid, approximately $0.2 million was for accrued
interest, with the remaining amount for principal. As a result, we recorded a $9.5 million
gain on early extinguishment of debt during the fourth quarter of 2008. This gain is
reflected in Other Income/(Expense) on our consolidated statement of income for the year
ended December 31, 2008.
During the first three months of 2009, we repurchased $9.5 million (par value) of our 5-year
notes due 2010. Of the $5.2 million in total cash paid, approximately $7 thousand was for
accrued interest, with the remaining amount for principal. As a result, we recorded a $4.3
million gain on the early extinguishment of debt, which is reflected in Other
income/(expense) on our consolidated statement of income for the nine months ended September
30, 2009.
As noted above, we escrowed a portion of the proceeds of our Additional Term Loans to repay
the remaining $222 million of 5-year notes due 2010 at maturity in September 2010.
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Adequacy of Liquidity
We believe that funds generated from operations and existing cash reserves will be adequate
to fund debt service requirements, capital expenditures and working capital requirements for
the foreseeable future. Our ability to continue to fund these items and to service debt may
be affected by general economic, financial, competitive, legislative, legal and regulatory
factors and
by our ability to refinance or repay outstanding indebtedness with scheduled maturities
beginning in November 2013. On April 1, 2009, Moodys Investor Service lowered our corporate
family rating to Caa1, the rating for our senior secured credit facilities to B3, and the
rating for our senior unsecured notes to Caa3. In addition, on April 1, 2009, Standard and
Poors Ratings Services lowered our local currency long-term counterparty credit rating to
B-. While these ratings downgrades have not affected our financial condition, results of
operations or liquidity, they could make it more difficult for us to obtain financing in the
future. In the event that we are unable to repay any of our outstanding indebtedness as it
becomes due, we might need to explore alternative strategies for funding, such as selling
assets, refinancing or restructuring our indebtedness or selling equity capital. However,
securing alternative sources of funding might not be feasible which could result in further
adverse effects on our financial condition.
As noted above, our senior secured credit facilities include a financial maintenance covenant
requiring us to maintain a maximum ratio of senior secured indebtedness to adjusted EBITDA.
As of September 30, 2009, this maximum ratio was 6.00:1.00. As of September 30, 2009, we
were in compliance with this covenant, as our actual ratio of senior secured indebtedness to
adjusted EBITDA was 4.92:1.00. In addition, as of September 30, 2009, we were in compliance
with all other covenants and other restrictions under our debt agreements.
Equity
As part of the NWQ acquisition, key individuals of NWQ purchased a noncontrolling, member
interest in NWQ Investment Management Company, LLC. This purchase allowed management to
participate in profits of NWQ above specified levels beginning January 1, 2003. Beginning in
2004 and continuing through 2008, we had the right to purchase the noncontrolling members
respective interests in NWQ at fair value. During the first quarter of 2008, we exercised
our right to call all of the remaining Class 4 noncontrolling members interests for $23.6
million. As of March 31, 2008, we had repurchased all member interests outstanding under
this program.
As part of the Santa Barbara acquisition, an equity opportunity was put in place to allow key
individuals to participate in Santa Barbaras earnings growth over the subsequent five years
(Class 2 Units, Class 5A Units, Class 5B Units, and Class 6 Units, collectively referred to
as Units). The Class 2 Units were fully vested upon issuance. One third of the Class 5A
Units vested on June 30, 2007, one third vested on June 30, 2008, and one third vested on
June 30, 2009. One third of the Class 5B Units vested upon issuance, one third vested on
June 30, 2007, and one third vested on June 30, 2009. The Class 6 Units vested on June 30,
2009. The Units entitle the holders to receive a distribution of the cash flow from Santa
Barbaras business to the extent such cash flow exceeds certain thresholds. The distribution
thresholds vary from year to year, reflecting Santa Barbara achieving certain profit levels
and the distributions of profits interests are also subject to a cap in each year. During
the nine months ended September 30, 2008, approximately $0.2 million of income was
attributable to these noncontrolling interests. For the nine months ended September 30,
2009, less than $0.1 million of income was attributable to these noncontrolling interests.
Beginning in 2008 and continuing through 2012, we have the right to acquire the Units of the
noncontrolling members. During the first quarter of 2008, we exercised our right to call 100%
of the Class 2 Units for approximately $30.0 million. Through September 30, 2009, there have
been no further calls of these Units.
During 2006, new equity opportunities were put in place covering NWQ, Tradewinds and
Symphony. These programs allow key individuals of these businesses to participate in the
growth of their respective businesses over the subsequent six years. Classes of interests
were established at each subsidiary (collectively referred to as Interests). Certain of
these Interests vested or vest on June 30, 2007, 2008, 2009, 2010 and 2011. The Interests
entitle the holders to receive a distribution of the cash flow from their business to the
extent such cash flow exceeds certain thresholds. The distribution thresholds increase from
year to year and the distributions of the profits interests are also subject to a cap in each
year. During the nine months ended September 30, 2009 and 2008, we recorded approximately
$1.1 million and $1.8 million, respectively, of income attributable to these noncontrolling
interests. Beginning in 2008 and continuing through 2012, we have the right to acquire the
Interests of the noncontrolling members. During the first quarter of 2008, we exercised our
right to call all of the Class 7 Interests outstanding for approximately $31.3 million.
During the first quarter of 2009, we exercised our right to call all the Class 8 Interests
for approximately $18.2 million. Through September 30, 2009, there have been no further
calls on these Interests.
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Broker-Dealer
Our broker-dealer subsidiary is subject to requirements of the Securities and Exchange
Commission relating to liquidity and capital standards. (See Note 4, Net Capital
Requirement, to our Consolidated Financial Statements).
Forward-Looking Information and Risks
From time to time, information we provide or information included in our filings with the SEC
(including Managements
Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q
and the notes to the Consolidated Financial Statements) 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 managements 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, 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, whether as a result of new information, future events or any other reason.
Risks, uncertainties and other factors that pertain to our business and the effects of which
may cause our assets under management, earnings, revenues, and/or profit margins to decline
include: (1) the adverse effects of declines in securities markets and/or poor investment
performance by us; (2) adverse effects of volatility in the equity markets and disruptions
in the credit markets, including the effects on our assets under management as well as on our
distribution partners; (3) our inability to access third-party distribution channels to
market our products or a reduction in fees we might receive for services provided in these
channels; (4) the effects of the substantial competition that we face in the investment
management business; (5) a change in our asset mix to lower revenue generating assets; (6) a
loss of key employees; (7) the effects on our business and financial results of the failure
of the auctions beginning in mid-February 2008 of the approximately $15.4 billion of auction
rate preferred stock (ARPS) issued by our closed-end funds (which has resulted in a loss
of liquidity for the holders of these ARPS) and our and the funds efforts to obtain
financing to redeem the ARPS at their par value of $25,000 per share and the effects of any
regulatory activity or litigation relating thereto; (8) a decline in the market for
closed-end funds, mutual funds and managed accounts; (9) our failure to comply with various
government regulations, including federal and state securities laws, and the rules of FINRA;
(10) the impact of changes in tax rates and regulations; (11) developments in litigation
involving the securities industry or us; (12) our reliance on revenues from our investment
advisory contracts which generally may be terminated on sixty days notice and, with respect
to our closed-end and open-end funds, are also subject to annual renewal by the independent
board of trustees of such funds; (13) adverse public disclosure, failure to follow client
guidelines and other matters that could harm our reputation; (14) the effect on us of
increased leverage as a result of our incurrence of additional indebtedness in connection
with the MDP Transactions and the Additional Term Loans issued by us in July and August 2009,
including that our business may not generate sufficient cash flow from operations or that
future borrowings may not be available in amounts sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs; (15) future acquisitions that are not
profitable for us; (16) the impact of accounting pronouncements; and (17) any failure of our
operating personnel and systems to perform effectively.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The following information, and information included elsewhere in this report, describes the
key aspects of certain financial instruments that have market risk.
Interest Rate Sensitivity
Although we have sought to mitigate our interest rate risk as discussed hereafter, our
obligations under our senior secured credit facilities will expose our earnings to changes in
short-term interest rates since the interest rate on this debt is variable. At September 30,
2009, the aggregate principal amount of our indebtedness was
approximately $4.1 billion, of
which approximately $2.3 billion is variable rate debt and
approximately $1.8 billion is
fixed rate debt. For our variable rate debt, we estimate that a 100 basis point increase
(one percentage point) in variable interest rates would have resulted in a $23.4 million
increase in annual interest expense; however, it would not be expected to have a substantial
impact on the fair value of the debt at September 30, 2009. A change in interest rates
would have had no impact on interest incurred on our fixed rate debt or cash flow, but would
have had an impact on the fair value of the debt. We estimate that a 100 basis point
increase in interest rates from the levels at September 30, 2009 would result in a net
decrease in the fair value of our debt of approximately $58.6 million.
The variable nature of our obligations under the senior secured credit facilities creates
interest rate risk. In order to mitigate this risk, we entered into nine interest rate swap
derivative transactions and one collar derivative transaction (collectively, the New Debt
Derivatives) that effectively convert $2.3 billion of our variable rate debt into fixed-rate
borrowings or borrowings that are subject to a maximum rate. The New Debt Derivatives are not
accounted for as hedges for accounting purposes. For additional information see Note 7,
Derivative Financial Instruments, to our Consolidated Financial Statements. At September
30, 2009 the fair value of the New Debt Derivatives was a liability of $78.4 million. We
estimate that a 100 basis point change in interest rates would have a $23.1 million impact on
the fair value of the New Debt Derivatives.
Our investments consist primarily of company-sponsored managed investment funds that invest
in a variety of asset classes. Additionally, we periodically invest in new advisory accounts
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 securities in the sponsored
fund or account. Any unrealized gain or loss is recognized upon the sale of the investment.
The carrying value of our investments in fixed-income funds or accounts which expose us to
interest rate risk, was approximately $47.8 million (which excludes Symphony CLO V), at
September 30, 2009. We estimate that a 100 basis point increase in interest rates from the
levels at September 30, 2009 would result in a net decrease of
approximately $5.2 million in
the fair value of the fixed-income investments at September 30, 2009. A 100 basis point
increase in interest rates is a hypothetical scenario used to demonstrate potential risk and
does not represent managements view of future market changes.
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 our investments in funds and accounts subject to equity price
risk is approximately $119.6 million at September 30, 2009. We estimate that a 10% adverse
change in equity prices would result in a $12.0 million decrease in the fair value of our
equity securities. The model to determine sensitivity assumes a corresponding shift in all
equity prices.
We do not enter into foreign currency transactions for speculative purposes and currently
have no material investments that would expose us to foreign currency exchange risk.
In evaluating market risk, it is also important to note that most of our revenue is based on
the market value of assets under management. Declines of financial market values will
negatively impact our revenue and net income.
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
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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.
Item 4T. Controls and Procedures
Effective as of September 30, 2009, the Company carried out an evaluation, under the supervision
and with the participation of the Companys management, including the Companys Chairman and Chief
Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based
upon that evaluation, the Companys Chairman and Chief Executive Officer and Principal Financial
Officer concluded that the Companys disclosure controls and procedures are effective and no
changes are required at this time. In connection with managements evaluation, pursuant to the
Exchange Act Rule 13a-15(d), no changes during the quarter ended September 30, 2009 were identified
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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Part II Other Information
Item 1. Legal Proceedings
Regulatory authorities, including the Financial Industry Regulatory Authority (FINRA) and the
SEC, examine our registered broker-dealer and investment advisor 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 we or one or more of our registered subsidiaries
receives information requests from a regulatory authority as part of an industry-wide sweep
examination of particular topics or industry practices. We are producing documents and being
interviewed in connection with inquiries by FINRA and other regulatory authorities into our
marketing and distribution of ARPS. Certain states have also requested information about our
marketing materials for ARPS. We believe that such marketing materials were accurate and not
misleading when provided to broker dealers for their use.
From time to time, we are involved in legal matters relating to claims arising in the ordinary
course of business such as disputes with employees or customers, and in regulatory inquiries that
may involve the industry generally or be specific to us. There are currently no such matters or
inquiries pending that we believe would have a material adverse effect on our business or financial
condition.
Item 1A. Risk Factors
Information regarding risk factors appears in Managements Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking Information and Risks, in Part I - Item 2 of
this Form 10-Q and as set forth below.
Significant and sustained declines in securities markets, such as the declines occurring beginning
in 2008 and early 2009, have and may continue to adversely affect our assets under management and
financial results. Poor investment performance may also adversely affect our assets under
management and our future offerings.
A large portion of our revenues is derived from investment advisory contracts with clients.
Under these contracts, the investment advisory fees we receive are typically based on the market
value of assets under management. Significant and sustained declines in securities markets and/or
the value of the securities managed may reduce our assets under management and sales of our
products, and, as a result, adversely affect our revenues and financial results. Beginning in 2008,
accelerating in the fourth quarter of 2008 and continuing through the first quarter of 2009,
securities markets have been characterized by substantially increased volatility and have
experienced significant overall declines. Primarily as a result of market depreciation, our assets
under management decreased from $164.3 billion at December 31, 2007 to $115.3 billion at March 31,
2009.
In addition, our investment performance is one of the primary factors associated with the
success of our business. Poor investment performance by our managers for a sustained period could
adversely affect our level of assets under management and associated revenues. Moreover, some of
our investment advisory contracts provide for performance fees based on investment performance.
Sustained periods of poor investment performance and increased redemptions by existing clients may
reduce or eliminate performance fees that we are able to earn under our investment advisory
contracts and diminish our ability to sell our other investment management products and attract new
investors.
Our assets under management and investment products are impacted by many factors beyond our
control, including the following:
General fluctuations in equity markets and dealings in equity markets. As of September 30,
2009, approximately 43% of our assets under management were equity assets. As noted above, in
recent periods there have been substantial fluctuations in price levels in securities markets,
including equity markets. These fluctuations can occur on a daily basis and over longer periods as
a result of a variety of factors, including national and international economic and political
events, broad trends in business and finance, and interest rate movements. Reduced equity market
prices generally may result in lower levels of assets under management and the loss of, or
reduction in, incentive and performance fees, each of which will result in reduced revenues.
Periods of reduced market prices may adversely affect our profitability if we do not reduce our
fixed costs.
Changes in interest rates and defaults. As of September 30, 2009, approximately 57% of our
assets under management were fixed income securities. During 2008, particularly in the fourth
quarter of 2008, there were several disruptions in the credit markets and periods of illiquidity.
This resulted in a decline in the value of the fixed income securities that we manage reducing our
assets under management. Although fixed income securities markets appear to have stabilized in
2009, these conditions could recur. Increases in interest rates from their present levels may also
adversely affect the values of fixed income securities. Further, the value of the assets may
decline as a result of an issuers actual or perceived creditworthiness or an issuers ability to
meet its obligations. In
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addition, increases in interest rates may have a magnified adverse effect
on our leveraged closed-end funds. Moreover, fluctuations in interest rates may have a significant
impact on securities markets, which may adversely affect our overall assets under management.
Redemptions and other withdrawals. Investors (in response to adverse market conditions,
inconsistent investment performance, changing credit qualities of assets or financial guarantees
thereof, the pursuit of other investment opportunities or otherwise) may reduce their investments
in our specific investment products or in the market segments in which our investment products are
concentrated.
Political and general economic risks. The investment products managed by us may invest
significant funds in international markets that are subject to risk of loss from political or
diplomatic developments, government policies, civil unrest, currency fluctuations and changes in
legislation related to foreign ownership. International markets, particularly emerging markets, are
often smaller, may not have the liquidity of established markets, may lack established regulations
and may experience significantly more volatility than established markets.
Reduction in attractive investments. Fluctuations in securities markets may adversely affect
the ability of our managers to find appropriate investments. If any of our investment managers is
not able to find sufficient appropriate investments for new client assets in a timely manner, the
investment managers investment performance could be adversely affected.
We face substantial competition in the investment management business.
The asset management industry in which we are engaged is extremely competitive, and we face
substantial competition in all aspects of our business. We compete with numerous international and
domestic asset management firms and broker-dealers, mutual fund companies, hedge funds, commercial
banks, insurance companies and other investment companies and financial institutions. Many of these
organizations offer products and services that are similar to, or compete with, those offered by
us, and some have substantially more personnel and greater financial resources and/or assets under
management than we do. Some of our competitors have proprietary products and distribution channels
that may make it more difficult for us to compete with them.
A sizable number of new asset management firms and mutual funds have been established in the
last ten years, increasing our competition. In addition, the asset management industry has
experienced consolidation as numerous asset management firms have either been acquired by other
financial services firms or have ceased operations. In many cases, this has resulted in firms
having greater financial resources than us. In addition, a number of heavily capitalized companies,
including commercial banks and foreign entities, have made investments in and acquired asset
management firms. Access to brokerage firms retail distribution systems, wrap fee retail
managed account programs, and mutual fund and other distribution channels has also become
increasingly competitive. Despite the recent problems of certain of these competitors, all of these
factors could make it more difficult for us to compete and no assurance can be given that we will
be successful in competing and growing or maintaining our assets under management and business. If
clients and potential clients decide to use the services of competitors, it could reduce our
revenues and growth rate, and if our revenues decrease without a commensurate reduction in our
expenses, our net income will be reduced.
In addition, in part as a result of the substantial competition in the asset management
industry, there has been a trend toward lower fees in some segments of the asset management
business. In order for us to maintain our fee structure in a competitive environment, we must be
able to provide clients with investment returns and service that will encourage them to be willing
to pay such fees. There can be no assurance that we will be able to maintain our current fee
structure or provide our clients with attractive investment returns, or that we will be able to
develop new products that are desirable to the market or our registered representatives. Fee
reductions on existing or future business could have an adverse impact on our revenue and
profitability.
Our business relies on third-party distributors who may choose not to sell or recommend our
products or increase the costs of distribution.
Our ability to distribute our products is highly dependent on access to the client base of
financial advisors that also offer competing investment products. Registered representatives who
recommend our products may reduce or eliminate their involvement in marketing our products at any
time, or may elect to emphasize the investment products of competing sponsors, or the proprietary
products of their own firms. In addition, registered representatives may receive compensation
incentives to sell their firms investment products or may choose to recommend to their customers
investment products sponsored by firms other than us. Further, expenses associated with maintaining
access to third-party distribution programs may increase in the future as a result of efforts by
registered representatives to defray a portion of their costs of internal customer account related
services in connection with their customers investments in our products. Finally, a registered
representatives ability to distribute our mutual funds is subject to the continuation of a selling
agreement between the firm with which the representative is affiliated and us. We cannot be sure
that we will continue to gain access to these financial advisors. The inability to have this access
could have a material adverse effect on our business.
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In addition, certain financial institutions through which we distribute our products have
experienced difficulties in the current ongoing economic downturn. Some of these distributors have
been acquired and others have obtained funding from the United States government. The resulting
disruptions within these third party distributors could adversely impact our business.
The firms through which we distribute closed-end funds charge structuring fees in connection
with bringing closed-end funds to market. These fees have significantly increased our costs for new
closed-end funds, thereby reducing our margins on these products.
If our asset mix changes, our revenues and operating margins could be reduced.
Our assets under management can generate different revenues per dollar of assets under
management based on factors such as the type of asset managed by us (equity assets generally
produce greater revenues than fixed income assets), the type of client, the type of asset
management product or service provided and the fee schedule of the asset manager providing the
service. A shift in the mix of our assets under management from higher revenue-generating assets to
lower revenue-generating assets may result in a decrease in our revenues even if our aggregate
level of assets under management remains unchanged or increases.
Our business is dependent upon our retaining our key personnel, the loss of whom would harm our
ability to operate efficiently.
Our executive officers, investment professionals and senior relationship personnel are
important to the success of our business. The market for qualified personnel to fill these roles is
extremely competitive. We anticipate that we will need to recruit and retain qualified investment
and other professionals. However, we may not be successful in our efforts to recruit and retain the
required personnel. Due to the competitive market for these professionals and the success of some
of our personnel, our costs associated with providing compensation incentives necessary to attract
and retain key personnel are significant and will likely increase over time. We anticipate needing
to offer additional incentive programs to retain our key personnel. Moreover, since certain of our
key personnel contribute significantly to our revenues and net income, the loss of even a small
number of key personnel could have a disproportionate impact on our business. From time to time we
may work with key employees to revise equity-based incentives and other employment-related terms to
reflect current circumstances. In addition, since the investment track record of many of our
products and services may be attributed to a small number of employees, the departure of one or
more of these employees could cause the business to lose client accounts or managed assets, which
could have a material adverse effect on our results of operations and financial condition.
The failure of the auctions for Auction Rate Preferred Stock that began in February 2008 could have
an adverse effect on our business.
We sponsor 126 closed-end funds of which 101 were leveraged through the issuance of an
auction-rate preferred stock (ARPS). Our leveraged closed-end funds had $15.4 billion of ARPS
outstanding as of December 31, 2007. This leverage seeks to enhance income for common shareholders
of the fund in accordance with the funds investment objectives and policies. Beginning on February
12, 2008, the $342 billion auction-rate securities market, including approximately $65 billion of
ARPS issued by closed-end funds, began to experience widespread auction failures. Since February
14, 2008,virtually all auctions for ARPS issued by closed-end funds, and all ARPS of our funds,
have failed. As a result of the auction failures, investors in ARPS of our funds have been unable
to sell their ARPS in these auctions. Although our funds have refinanced $6.6 billion of their
outstanding ARPS as of September 30, 2009, $8.8 billion remained outstanding as of such date. All
of these outstanding ARPS were issued by our municipal funds and pay tax-exempt dividends which
limits the refinancing options available for these ARPS. Our inability to arrange for the
refinancing of the remaining outstanding ARPS of our funds may damage our relationships with the
third party distributors through which we distribute the closed-end funds we sponsor and other
investment products. It may also damage our reputation in the marketplace making it more difficult
for us to distribute new closed-end funds and other investment products sponsored by us which could
result in an adverse affect on our business. In addition, FINRA and other regulatory authorities
have requested information about our marketing and distribution of our funds ARPS (the FINRA
Enforcement Inquiry). We are producing documents and being interviewed in the FINRA Enforcement
Inquiry. The FINRA Enforcement Inquiry or action by other regulatory authorities could result in
fines or other action which could adversely affect us.
Our business is subject to extensive regulation, and compliance failures and changes in laws and
regulations could adversely affect us.
Our business is also subject to extensive regulation, including by the SEC and FINRA. Our
failure to comply with applicable laws, regulations or rules of self-regulatory organizations could
cause regulatory authorities to institute proceedings against us or our subsidiaries and could
result in the imposition of sanctions ranging from censure and fines to termination of an
investment advisor or broker-dealers registration and otherwise prohibiting an investment advisor
from acting as an investment advisor. Changes in laws, regulations, rules of self-regulatory
organizations or in governmental policies, and unforeseen developments in litigation targeting the
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securities industry generally or us, could have a material adverse effect on us. The impact of
future accounting pronouncements could also have a material adverse affect upon us.
In addition, changes in regulations or industry-wide or specifically targeted regulatory or
court decisions may require us to reduce our fee levels, or restructure the fees we charge. For
example, distribution fees paid to mutual fund distributors in accordance
with SEC Rule 12b-1 are a significant element of revenues for a number of the mutual funds
that we manage. There have been suggestions from regulatory agencies and other industry
participants that Rule 12b-1 distribution fees in the mutual fund industry should be reconsidered
and, potentially, reduced or eliminated. Any industry-wide reduction or restructuring of Rule 12b-1
distribution fees could have an adverse effect on our revenues and net income.
Our investment advisor subsidiaries are registered with the SEC as investment advisors under
the Investment Advisers Act of 1940, as amended (the Investment Advisers Act). The Investment
Advisers Act imposes numerous obligations on registered investment advisors, including fiduciary,
recordkeeping, operational and disclosure obligations. In light of recent allegations of fraud
against certain other investment advisors, we anticipate substantially increased regulation of
investment advisors.
Each of our closed-end funds and open-end funds is registered with the SEC under the
Investment Company Act of 1940, as amended (the Investment Company Act), and the shares of each
closed-end fund and open-end fund are registered with the SEC under the Securities 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.
Our subsidiary, Nuveen Investments, LLC, is registered as a broker-dealer under the Exchange
Act and is subject to regulation by the SEC, FINRA and federal and state agencies. Our
broker-dealer subsidiary is subject to the SECs net capital rules and certain state securities
laws designed to enforce minimum standards regarding the general financial condition and liquidity
of a broker-dealer. Under certain circumstances, theses rules would limit our ability to make
withdrawals of capital and receive dividends from our broker-dealer subsidiary. The securities
industry is one of the most highly regulated in the United States, and failure to comply with the
related laws and regulations can result in revocation of broker-dealer licenses, the imposition of
censures or fines and the suspension or expulsion from the securities business of a firm, its
officers or employees.
Our investment management subsidiaries are subject to the Employee Retirement Income Security
Act of 1974 (ERISA) and to regulations promulgated thereunder, insofar as they act as a
fiduciary under ERISA with respect to benefit plan clients. ERISA and applicable provisions of
the Internal Revenue Code impose duties on persons who are fiduciaries under ERISA, prohibit
specified transactions involving ERISA plan clients and provide monetary penalties for violations
of these prohibitions. The failure of any of our subsidiaries to comply with these requirements
could result in significant penalties that could reduce our net income.
Changes in the status of tax deferred retirement plan investments and tax-free municipal
bonds, the capital gains and corporate dividend tax rates, and other individual and corporate tax
rates and regulations could affect investor behavior and cause investors to view certain investment
offerings less favorably, thereby decreasing our assets under management.
Our business involves risk of being engaged in litigation that could increase our expenses and
reduce our net income.
There has been an increased incidence of litigation and regulatory investigations in the asset
management industry in recent years, including customer claims as well as class action suits
seeking substantial damages. In addition, we, along with other industry participants, are subject
to risks related to litigation, settlements and regulatory investigations arising from market
events such as the ARPS auction failures described above. We could become involved in such
litigation or the subject of such a regulatory investigation, such as the FINRA Enforcement Inquiry
described above, which could adversely affect us.
Our revenues will decrease if our investment advisory contracts are terminated.
A substantial portion of our revenues are derived from investment advisory agreements. Our
investment advisory agreements with registered fund clients must be approved annually by the
trustees of the respective funds, including a majority of the trustees who are not interested
persons of our relevant advisory subsidiary or the fund, as defined in the Investment Company
Act. Amendments to these agreements typically must be approved by the funds boards of trustees
and, if material, by its shareholders. Each agreement may be terminated without penalty by either
party upon 60 days written notice. Our investment advisory agreements with advisory clients, other
than registered fund clients, also generally provide that they can be terminated without penalty
upon 60 days written notice.
Any adverse public disclosure, our failure to follow client guidelines or any other matters could
harm our reputation and have an adverse effect on us.
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Maintaining the trust and confidence of clients and other market participants, and the
resulting good reputation, is important to our business. Our reputation is vulnerable to many
threats that can be difficult or impossible to control, and difficult and costly to remediate.
Regulatory inquiries, employee misconduct and rumors, among other things, can substantially damage
our reputation, even if they are baseless or satisfactorily addressed. Any damage to our reputation
could impede our ability to attract and retain clients and
key personnel, and lead to a reduction in the amount of our assets under management, any of
which could have a material adverse effect on our revenues and net income.
When clients retain us to manage assets or provide products or services on their behalf, they
specify guidelines or contractual requirements that we are required to observe in the provision of
our services. In addition, we are required to abide by certain conflict of interest policies and
regulations. A failure to comply with these guidelines, contractual requirements, policies and
regulations could result in damage to our reputation or to the client seeking to recover losses
from us, reducing assets under management, or terminating its contract with us, any of which could
have an adverse impact on our business.
We may continue to acquire other companies, and the expected benefits of such acquisitions may not
materialize.
The acquisition of complementary businesses has been and may continue to be an active part of
our overall business strategy. There can be no assurance that we will find suitable candidates for
strategic transactions at acceptable prices, have sufficient capital resources to accomplish our
strategy, or be successful in entering into agreements for desired transactions. Acquisitions also
pose the risk that any business we acquire may lose customers or employees or could underperform
relative to expectations. We could also experience financial or other setbacks if transactions
encounter unanticipated problems, including problems related to execution or integration. Finally,
services, key personnel or businesses of acquired companies may not be effectively integrated into
our business or be successful.
We may explore strategic transactions such as a potential merger or a sale of some or all of our
assets. We may not be able to complete any such strategic transactions or the expected benefits of
such strategic transactions may not materialize, which may prevent us from implementing strategies
to grow our business.
We may explore potential strategic transactions such as a merger or a sale of some or all of
our assets. We cannot provide assurances that we will be able to complete such a transaction on
terms acceptable to us, or at all. Successful completion of any strategic transaction we identify
depends on a number of factors that are not entirely within our control, including our ability to
negotiate acceptable terms, conclude satisfactory agreements and obtain all necessary regulatory
approvals and investment advisory agreement consents. In addition, we may need to finance any
strategic transaction that we identify, and may not be able to obtain the necessary financing on
satisfactory terms and within the timeframe that would permit a transaction to proceed. We could
experience adverse accounting and financial consequences, such as the need to make large provisions
against the acquired assets or to write down the acquired assets. We might also experience a
dilutive effect on our earnings. In addition, depending on how any such transaction is structured,
there may be an adverse impact on our capital structure. We may incur significant costs arising
from our efforts to engage in strategic transactions, and such costs may exceed the returns that we
realize from a given transaction. Moreover, these expenditures may not result in the successful
completion of a transaction.
Our business is subject to numerous operational risks, any of which could disrupt our ability to
function effectively.
We must be able to consistently and reliably obtain securities pricing information, process
client and investor transactions and provide reports and other customer service to our clients and
investors. Any failure to keep current and accurate books and records can render us liable to
disciplinary action by governmental and self-regulatory authorities, as well as to claims by our
clients. If any of our financial, portfolio accounting or other data processing systems do not
operate properly or are disabled or if there are other shortcomings or failures in our internal
processes, people or systems, we could suffer an impairment to our liquidity, a financial loss, a
disruption of our businesses, liability to clients, regulatory problems or damage to our
reputation. These systems may fail to operate properly or become disabled as a result of events
that are wholly or partially beyond our control, including a disruption of electrical or
communications services or our inability to occupy one or more of our buildings. In addition, our
operations are dependent upon information from, and communications with, third parties, and
operational problems at third parties may adversely affect our ability to carry on our business.
Our operations rely on the secure processing, storage and transmission of confidential and
other information in our computer systems and networks. Although we take protective measures and
endeavor to modify them as circumstances warrant, our computer systems, software and networks may
be vulnerable to unauthorized access, computer viruses or other malicious code, and other events
that have a security impact. If one or more of such events occur, it potentially could jeopardize
our or our clients or counterparties confidential and other information processed and stored in,
and transmitted through, our computer systems and networks, or otherwise cause interruptions or
malfunctions in our, our clients, our counterparties or third parties operations. We may be
required to spend
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significant additional resources to modify our protective measures or to
investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation
and financial losses that are either not insured against fully or not fully covered through any
insurance that we maintain.
A disaster or a disruption in the infrastructure that supports our asset managers, or an event
disrupting the ability of our employees to perform their job functions, including terrorist attacks
or a disruption involving electrical communications,
transportation or other services used by us or third parties with whom we conduct business,
directly affecting any of our operations could have a material adverse impact on our ability to
continue to operate our business without interruption. Although we have disaster recovery programs
in place, there can be no assurance that these will be sufficient to mitigate the harm that may
result from such a disaster or disruption. In addition, insurance and other safeguards might only
partially reimburse us for our losses.
We are highly leveraged and our substantial indebtedness could adversely affect our financial
condition.
We are highly leveraged and have a substantial amount of indebtedness, which requires
significant interest and principal payments. As of September 30, 2009, we had approximately $4.1
billion in aggregate principal amount of indebtedness, which included borrowings of the full $250
million available under the revolving credit facility that is part of our senior secured credit
facilities as well as borrowings under the new second lien debt. On July 28, 2009, pursuant to an
amendment to our senior secured credit facilities, we obtained a new $450 million second-lien term
loan facility, which was subsequently increased to $500 million on August 11, 2009 (the Additional
Term Loans). We used approximately $198.9 million of the net proceeds of the Additional Term Loans
to prepay existing first-lien term loans under our senior secured credit facilities. In addition,
we placed $222.7 million of the net proceeds of the Additional Term Loans into escrow to retire at
maturity all of our 5% senior notes due in September 2010.
Our and our subsidiaries substantial amount of indebtedness could have important consequences,
including:
| continuing to require us and certain of our subsidiaries to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the funds available for operations and any future business opportunities; | ||
| limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; | ||
| placing us at a competitive disadvantage compared to our competitors that have less indebtedness; | ||
| increasing our vulnerability to adverse general economic or industry conditions; | ||
| making us and our subsidiaries more vulnerable to increases in interest rates, as borrowings under our senior secured credit facilities are at variable rates; and | ||
| limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing. |
Our debt agreements contain restrictions that could limit our flexibility in operating our
business.
The operating and financial covenants and restrictions in our senior secured credit facilities
and our other debt may adversely affect our ability to finance our future operations or capital
needs or engage in other business activities that may be in our interest. The agreements governing
our indebtedness restrict, subject to certain exceptions, our and our subsidiaries ability to,
among other things:
| incur additional indebtedness or guarantees; | ||
| pay dividends or make distributions in respect of our capital stock or make certain other restricted payments or redeem or repurchase capital stock; | ||
| make certain investments; | ||
| create liens on our or our subsidiary guarantors assets; | ||
| sell assets and subsidiary stock; | ||
| enter into transactions with affiliates; | ||
| alter the business that we conduct; | ||
| designate our subsidiaries as unrestricted subsidiaries; and | ||
| enter into mergers, consolidations and sales of substantially all assets. |
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Our and our subsidiaries ability to comply with these covenants and restrictions may be
affected by events beyond our control. If we fail to make any required payment under our senior
secured credit facilities or to comply with any of the financial and operating covenants in our
senior secured credit facilities we will be in default. In the event of any default under our
senior secured credit facilities, the applicable lenders could elect to terminate borrowing
commitments and declare all borrowings outstanding, together with accrued and unpaid interest and
other fees, to be due and payable, to require us to apply all available cash to repay these
borrowings or to prevent us from making or permitting subsidiaries to make distributions or
dividends, the proceeds of which are used
by us to make debt service payments on our other indebtedness, any of which would be an event
of default under the terms of the documents governing our other indebtedness. If any of our
creditors accelerate the maturity of their indebtedness, we may not have sufficient assets to
satisfy our obligations under our senior secured credit facilities or our other indebtedness.
Our ability to generate the significant amount of cash needed to pay interest and principal and
service our debt and financial obligations depends on many factors beyond our control, including
current economic conditions and conditions in the securities markets. If we cannot generate the
required cash, we may not be able to make the required payments under our indebtedness obligations.
We cannot provide assurances that our business will generate sufficient cash flow from
operations to enable us to pay our indebtedness or to fund our other liquidity needs. Our inability
to pay our debts would require us to pursue one or more alternative strategies, such as selling
assets, refinancing or restructuring our indebtedness or selling equity capital. However, we cannot
provide assurances that any alternative strategies will be feasible at the time or provide adequate
funds to allow us to pay our debts as they come due and fund our other liquidity needs. Our senior
secured credit facilities and the documentation governing our other indebtedness restrict our
ability to sell assets and use the proceeds from such sales. Additionally, we may not be able to
refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service
our indebtedness, it could impede the implementation of our business strategy or prevent us from
entering into transactions that would otherwise benefit our business.
Our ability to make scheduled payments or to refinance our obligations with respect to our
debt, which has scheduled maturities beginning in September 2010, will depend on our financial and
operating performance, which, in turn, is subject to prevailing economic, financial, competitive,
legislative, legal and regulatory factors and to the following financial and business factors, some
of which may be beyond our control:
| continuing overall declines in securities markets; | ||
| poor investment performance by our investment managers; | ||
| decreased demand for our products; | ||
| reductions in fees that we and our competitors charge for our products; | ||
| our inability to compete with other investment managers; | ||
| regulatory developments; | ||
| failure to successfully integrate acquisitions; and | ||
| delays in implementing our business strategy. |
Despite our substantial level of indebtedness, we and our subsidiaries may be able to incur
additional indebtedness. This could further exacerbate the risks associated with our substantial
indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future
in addition to the notes, our senior secured credit facilities and our other debt. We are able to
increase the amount available under our senior secured credit facilities by up to an aggregate
amount not to exceed the maximum amount at the time of such proposed credit increase that could be
incurred such that after giving pro forma effect to such credit increase, the Senior Secured Net
Leverage Ratio (as defined in the senior secured credit facilities) does not exceed 5:00:1.00.
Currently the maximum amount of additional debt we could incur under this provision of our senior
secured credit facilities is approximately $29 million. In addition, we may incur other additional
indebtedness. Although our senior secured credit facilities and the documentation governing our
other debt each contain restrictions on the incurrence of additional indebtedness, these
restrictions are subject to a number of qualifications and exceptions and the indebtedness incurred
in compliance with these restrictions could be substantial. Also, these restrictions do not prevent
us or our subsidiaries from incurring obligations that do not constitute indebtedness. To the
extent we and our subsidiaries incur further indebtedness, the substantial risks related to our
level of indebtedness would increase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits. Certain of the following exhibits were previously filed as exhibits to
registration statements or reports filed by the Company with the Commission and are incorporated by
reference to such statements or reports and made a part hereof. Exhibit numbers which are
identified with an asterisk (*) have such documents filed herewith. See exhibit index on page E-1.
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
31.2* | Certification of Principal Financial 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | filed herewith |
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NUVEEN INVESTMENTS, INC. (Registrant) |
||||
Date: November 12, 2009 | /s/ Glenn R. Richter | |||
Glenn R. Richter | ||||
Executive Vice President, Chief
Operating Officer and Principal Financial Officer |
||||
Date: November 12, 2009 | /s/ Sherri A. Hlavacek | |||
Sherri A. Hlavacek | ||||
Managing Director, Corporate Controller and Principal Accounting Officer | ||||
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EXHIBIT INDEX
Exhibit | ||
No. | Description | |
31.1*
|
Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 | |
31.2*
|
Certification of Principal Financial Officer pursuant to Rule 15d-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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | filed herewith |
E-1