.
.
.
FINANCIAL HIGHLIGHTS
(in millions, except per share data)
December 31, 2003 2002 2001 2000 1999
Gross Sales $18,098 $15,594 $14,234 $10,809 $14,066
Assets Under Management 95,356 79,719 68,485 62,011 59,784
Operating Revenues 452 396 371 358 339
Net Income 144 126 115 107 97
Earnings Per Share (diluted) 1.50 1.29 1.13 1.05 0.95
Total Dividends Per Share 0.56 0.50 0.47 0.40 0.38
GROSS SALES ASSETS UNDER MANAGEMENT EARNINGS PER SHARE DIVIDENDS PER SHARE
(dollars in billions) (dollars in billions) (diluted) (BAR CHART)
(BAR CHART) (BAR CHART) (BAR CHART)
Nuveen Investments, Inc. - Annual Report 2003 1
LETTER TO OUR SHAREHOLDERS
[PHOTO]
Nuveen Investments, Inc. - Annual Report 2003 2
"Our financial solutions are developed purposefully to help advisors secure the
long-term life and financial goals of investors."
LEADING WITH QUALITY
In striving to provide our shareholders with attractive long-term total
returns, we stayed true to our belief that when we serve our customers well, our
shareholders, in turn, will be rewarded. It is in this context that we are proud
to report our 9th consecutive year of record earnings.
During the last nine years, world affairs, economic events and financial
markets all have been highly volatile. Nine consecutive years of record
earnings, in the context of such a dynamic environment, speaks to the stability
and quality of our business. We are pleased that Nuveen Investments has again
delivered consistent results, while providing high-quality and specialized
investment expertise and adhering to the conservative principles that have
guided our business decisions for more than a century.
2003 was a year that began with war, considerable investor uncertainty and
widespread expectations of higher interest rates. The year ended with
surprisingly robust equity markets and renewed interest in higher-yielding
securities. This is not an environment that historically has created strong
growth opportunities for our firm. However, our record earnings and significant
growth in assets say much about the transformation of our business--as we've
moved from a leading municipal bond firm to a high-quality investment management
and service company. This transformation, and the resulting growth and
diversification of our assets under management, have provided us today with very
strong foundation for future growth under a broad range of market conditions.
Our competitive advantage rests in our ability to continuously adapt and
innovate. The financial solutions we recommend to advisors and consultants are
developed purposefully with a view to helping these experienced professionals
better serve wealthy individuals and institutional investors. In our mission to
secure the long-term life and financial goals of investors and deepen the
business relationships of financial advisors, we emphasize customization and
flexibility in creating the high-quality investment portfolios that address
these aims. Throughout our transformation, we've worked hard to develop our
business in a manner that is consistent with our heritage and that reinforces
our strong reputation for conservatism, innovation, and quality service--all
hallmarks of the Nuveen Investments brand. The trust that is embedded in the
name Nuveen Investments, as well as in each of our distinctly branded investment
teams, remains the key driver of our success. Our evolution into a diversified
investment management firm continues, and the message that Nuveen Investments
provides disciplined investment services and continuous innovation, resonates
more and more broadly each year.
The integrity and value of Nuveen Investments have never been stronger.
2003 COMPANY RESULTS
We are delighted to report record earnings for 2003 with net income up 14%
versus a year ago. Our sales of investment products reached $18.1 billion in
2003--up 16% year-over-year and up six-fold since 1997. In particular, sales of
our equity offerings grew 45% over the previous year to $6.4 billion. These
record sales contributed to a 20% increase in our assets under management--which
reached more than $95 billion at year end.
The growth in our assets reflects $9.4 billion of positive net flows and $6.2
billion of stock and bond market appreciation. Strong sales and asset growth,
along with disciplined cost management, enabled us to achieve another very good
year of results on several measures--sales growth, asset growth, revenue growth
and earnings growth. These results paint a picture of consistency about Nuveen
Investments. In fact, over the last 3-, 5- and 7-year periods, your Company has
been top-decile or top-quartile among publicly-traded investment firms in
consistency of growth in assets under management, consistency in growth
Nuveen Investments, Inc. - Annual Report 2003 3
SUSTAINED SHAREHOLDER RETURNS
(% growth)
(LINE GRAPH)
of earnings and consistency in annual returns to shareholders based on price
appreciation plus dividends. In addition, over the past 30 years, we have
averaged an after-tax return on equity of nearly 25%.
Our sales mix was nicely balanced, with 36% of our sales in equity products,
32% in taxable income-oriented products and another 32% in municipals. Now $40
billion, or approximately 40% of our total assets, are invested in equities,
preferred securities, taxable fixed-income, real estate and alternative
investments. Our success in broadening our business beyond its municipal
foundation has enabled us to participate substantially in the recovery of the
equity markets through increased market share, positive flows and market
appreciation.
In 2002, we broadened our leadership in the closed-end exchange-traded fund
category by introducing the industry's first preferred securities funds. In
2003, we extended that leadership as well as our reputation for CONSERVATIVE
INGENUITY AND INNOVATION by creating several new products that blend various
stock and bond investment strategies. In total, we raised $6.3 billion in
closed-end exchange-traded fund assets, 90% of which were in asset classes other
than municipals.
We are also pleased with the sales of our managed accounts and mutual funds,
which were $11.8 billion for the full year, growing by 38% over the prior year.
We are particularly proud of our institutional accounts, which experienced $2.3
billion in sales--an impressive growth of more than 70% from the prior year. Our
three-pronged approach to retail managed accounts with NWQ value, Rittenhouse
conservative growth and Nuveen municipals continues to position us well as a
category leader, with growth potential under a variety of market conditions.
Within the retail managed account category, our Nuveen municipal accounts
continue to solidify our number-one share of the market with more than $8
billion in assets under management. Nuveen ended the year with an increase of
40% in the number of municipal managed accounts we service. Also of note, our
NWQ value equity strategies have rapidly gained market share, having added
nearly 12,000 new retail managed accounts since we acquired NWQ in August
2002--an increase of more than 60%.
EXPERTISE
To deliver the well-diversified portfolios investors need to fulfill their
long-term goals, we have combined the best thinking of deeply specialized
investment teams with a shared belief in active risk management.
During 2003, we began to experience more fully the positive impact of our
relationship with NWQ Investment Management. NWQ's talented investment team adds
depth and breadth to our business. With a conservative approach to value
investing, NWQ nicely complements Nuveen's traditional investment philosophy. In
addition to extending our range of "core" portfolio offerings, they have
enhanced our institutional presence as well as our distribution relationships in
high-net-worth managed accounts. Additionally, NWQ's strong investment
performance was uniform across all styles and added to their outstanding short-
and long-term performance records.
Our Symphony investment team achieved particularly strong investment results
in their income-oriented strategies. Symphony's convertible arbitrage and credit
strategies were up 27% and 30%, respectively, compared to their peer group
benchmarks of 13% and 8%. During the past year, Symphony also brought their
considerable institutional expertise to the retail closed-end exchange-traded
fund arena in their capacity as sub-adviser to three Nuveen closed-end ETFs.
Further, Nuveen's senior loan fund was up 20% while peer funds were averaging
returns of 13%.
Nuveen Investments, Inc. - Annual Report 2003 4
The Nuveen Senior Income Fund ranks as the industry's top performer since being
managed by Symphony.
Nuveen Asset Management was a model of consistency in a volatile fixed-income
market, protecting capital and providing stable and consistent returns in their
portfolios. Respected throughout the industry, our municipal investment team
enjoys great depth in their expertise, which translates into a high-quality
experience for our municipal investors.
Our closed-end exchange-traded funds provided investors with access to new
combinations of asset classes. We were able to meet their need for diverse
investing tools with funds that combined different investment strategies to
provide both income and total return in blends less sensitive to U.S. interest
rates. Additionally, we were able to build on our expertise in the preferred
securities market by offering our Preferred and Convertible Income Funds.
Combining preferred securities with convertibles, the funds address the
continued desire by investors to include quality-oriented income investments in
their portfolios while taking advantage of a recovering equities market.
Our preferred closed-end ETFs, designed for investors seeking high-quality
income, nicely fulfilled expectations with stable dividends in the range of 8%,
and total returns ranging from 16--20%, well ahead of the more than 9% return of
their benchmark. Our real estate closed-end ETF provided a 43% return versus a
37% return for its benchmark.
GROWTH IN MANAGED ACCOUNTS
(in thousands)
(BAR GRAPH)
Investors appeared to be following two divergent themes throughout the
year. Some continued to rebalance their portfolios, adding to their high-quality
fixed-income commitments, predominantly with shorter durations. Others focused
on the rebounding valuations of small-cap and technology stocks as recession and
war threats subsided. While these themes benefited NWQ and Nuveen, they
challenged the Rittenhouse growth style of investing, even though the more
conservative Rittenhouse portfolios enjoyed a return of more than 20% for the
year.
Our Rittenhouse assets at year-end were $11.7 billion--flat with the
beginning of the year as negative outflows were offset by market appreciation.
While we were disappointed to have outflows for the year, we are confident that
Rittenhouse will do well as investors continue moving back into the equity
market with well-balanced portfolios and allocating investments into
high-quality stocks which now have relatively attractive valuations and strong
earnings growth potential. Our primary focus with our Rittenhouse team is to
continue to emphasize the benefit of a disciplined conservative growth
investment strategy.
WELL-POSITIONED FOR FUTURE GROWTH
Our success in broadening Nuveen's business beyond a municipal bond
foundation has enabled us to take better advantage of a broader array of market
conditions, and to participate substantially in the recovery of the equity
markets through both positive flows and market appreciation. Delivering record
sales, net flows and earnings, along with strong asset growth in 2003, reflects
our commitment to a core long-term investment discipline, product innovation and
strong relationships with financial advisors to affluent and high-net-worth
investors as well as our institutional clients. This level of customer-focused
support has enabled us to strengthen our relationships with advisors and
differentiates us from our competition.
We remain focused on helping our growing array of financial advisors to
secure their clients' financial goals by building well-constructed, high-quality
portfolios that can help investors stay committed to long-term investment
strategies through a full range of market cycles.
We believe we are well-positioned for the future. Our greatest asset
continues to be our ability to evolve and expand our business with quality and
integrity, staying true to our core values and principles. Our conservative
investment philosophy, expanded investment capabilities, committed team of
employees and fiscal discipline positions Nuveen Investments to extend our
leadership and better serve our shareholders for many years to come.
/s/ Tim S. Schwertfeger
Timothy R. Schwertfeger
Chairman and Chief Executive Officer
Nuveen Investments, Inc. - Annual Report 2003 5
FINANCIAL TABLE OF CONTENTS
Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Consolidated Balance Sheets 14
Consolidated Statements of Income 15
Consolidated Statements of Changes in Common Stockholders' Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Five Year Financial Summary 32
Independent Auditors' Report 33
Corporate and Shareholder Information 34
Nuveen Investments, Inc. - Annual Report 2003 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
December 31, 2003
DESCRIPTION OF THE BUSINESS
Our principal businesses are asset management and related research as well as
the development, marketing and distribution of investment products and services
for the affluent, high-net-worth and the institutional market segments. We
distribute our investment products and services, which include individually
managed accounts, closed-end exchange-traded funds, and mutual funds, to the
affluent and high-net-worth market segments through unaffiliated intermediary
firms, including broker/dealers, commercial banks, affiliates of insurance
providers, financial planners, accountants, consultants and investment advisors.
We also provide managed account services, including privately offered
partnerships, to several institutional market segments and channels.
We derive a substantial portion of our revenue from investment advisory
fees, which are recognized as services are performed. These fees are directly
related to the market value of the assets we manage. Advisory fee revenues
generally will increase with a rise in the level of assets under management.
Assets under management will rise through sales of our investment products or
through increases in the value of portfolio investments. Assets under management
may also increase as a result of reinvestment of distributions from funds and
accounts, and from reinvestment of distributions from company-sponsored defined
portfolio (unit investment trust) products we have sponsored into shares of
mutual funds. Fee income generally will decline when assets under management
decline, as would occur when the values of portfolio investments decrease or
when managed account withdrawals or mutual fund redemptions exceed gross sales
and reinvestments.
In addition to investment advisory fees, we have two other sources of
revenue: (1) performance fees and (2) underwriting and distribution revenue.
Performance fees are earned when investment performance on certain institutional
accounts exceeds a contractual threshold. Accordingly, performance fee revenue
will rise and fall with the performance of these accounts. These fees are
recognized only at the performance measurement date contained in the individual
account management agreement. Distribution revenue is earned when certain funds
are sold to the public through financial advisors. Correspondingly, distribution
revenue will rise and fall with the level of our sales of mutual fund products.
Underwriting fees are earned on the distribution of shares of our
exchange-traded funds through initial public offerings. The level of
underwriting fees earned in any given year will fluctuate depending on the
number of new funds offered, the size of the funds offered and the extent to
which we participate as a member of the syndicate group underwriting the fund.
Sales of our products, and our profitability, are directly affected by
many variables, including investor preferences for equity, fixed income or other
investments, the availability and attractiveness of competing products, market
performance, continued access to distribution channels, changes in interest
rates, inflation, and income tax rates and laws.
SUMMARY OF OPERATING RESULTS
The table below presents the highlights of our operations for the last three
fiscal years:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions, except per share amounts)
For the year ended December 31, 2003 2002 2001
- ------------------------------- -------- --------- ---------
Gross sales of investment products $ 18,098 $ 15,594 $ 14,234
Net flows 9,438 7,302 7,740
Assets under management (1) (2) 95,356 79,719 68,485
Operating revenues 452.0 396.4 371.1
Operating expenses 211.6 184.6 182.4
Pretax income 235.3 206.9 189.6
Net income 144.0 126.2 114.7
Basic earnings per share (3) 1.55 1.34 1.20
Diluted earnings per share (3) 1.50 1.29 1.13
Dividends per share (3) 0.56 0.50 0.47
(1) At year end.
(2) Excludes defined portfolio assets under surveillance.
(3) Prior periods have been adjusted to reflect the 3-for-2 stock split
that occurred in September of 2001 and the 2-for-1 split that occurred
in June of 2002.
Gross sales for 2003 reached an all-time record level of $18.1 billion,
up 16% from the prior year. Our sales were relatively balanced with 36% in
equity-based products, 32% in municipal products and 32% in taxable
income-oriented products.
Net flows (equal to the sum of sales, reinvestments and exchanges less
redemptions) of $9.4 billion were also at a record level, with positive flows
across all product lines: managed accounts, exchange-traded funds and mutual
funds. Assets under management rose $15.6 billion to over $95 billion as
positive net flows were coupled with market appreciation of both equity and
fixed income assets.
Operating revenues grew 14% for the year to $452 million. Growth in
advisory fees of 14% and performance fees earned on Symphony institutional
accounts were partially offset by a continuing reduction in distribution revenue
as a result of our decision to exit the defined portfolio business in early
2002.
Nuveen Investments, Inc. - Annual Report 2003 7
Operating expenses for the year increased 15%. Excluding the impact of
the August 2002 NWQ acquisition, operating expenses increased approximately 6%,
largely driven by an increase in compensation and benefits as a result of an
increase in incentive compensation due to increases in performance fees and the
Company's overall profit.
RESULTS OF OPERATIONS
The following discussion and analysis contains important information that should
be helpful in evaluating our results of operations and financial condition, and
should be read in conjunction with the consolidated financial statements and
related notes.
Gross sales (which include new managed accounts, deposits into existing
managed accounts and the sale of open-end and exchange-traded fund shares) of
investment products for the years ending December 31, 2003, 2002 and 2001 are
shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
For the year ended December 31, 2003 2002 2001
- ------------------------------- -------- -------- --------
Managed Assets:
Exchange-Traded Funds $ 6,283 $ 6,848 $ 3,937
Mutual Funds 1,536 1,512 1,246
Retail Managed Accounts 7,943 5,693 6,883
Institutional Managed Accounts 2,336 1,347 687
-------- -------- --------
Total Managed Assets 18,098 15,400 12,753
Defined Portfolios -- 194 1,481
-------- -------- --------
Total $ 18,098 $ 15,594 $ 14,234
======== ======== ========
Gross sales increased 16% during 2003 to a record high $18.1 billion.
Managed account sales, both retail and institutional, were the main drivers of
the increase as we experienced growing momentum in our value-based equity
strategies and continued strong growth in municipal managed accounts. Although
sales of exchange-traded funds dropped slightly versus the prior year due to
fewer new fund issuances, we raised $6.3 billion in new exchange-traded fund
assets during 2003, with 90% of those assets coming from taxable income and
blended income and equity investment strategies.
Gross sales increased 10% during 2002, to $15.6 billion. The main
driver of the increase was a $2.9 billion increase in sales of exchange-traded
products. Partially offsetting this increase was a decline in defined portfolio
product sales due to our decision to discontinue offering new defined portfolios
in 2002.
Net flows of investment products for the years ending December 31,
2003, 2002, and 2001 are shown below:
NET FLOWS
(in millions)
For the year ended December 31, 2003 2002 2001
- ------------------------------- ------- ------- -------
Managed Assets:
Exchange-Traded Funds $ 6,305 $ 6,868 $ 3,955
Mutual Funds 232 178 247
Managed Accounts 2,901 62 2,057
------- ------- -------
Total Managed Assets 9,438 7,108 6,259
Defined Portfolios -- 194 1,481
------- ------- -------
Total $ 9,438 $ 7,302 $ 7,740
======= ======= =======
Net flows reached a record level in 2003 totaling $9.4 billion, an
increase of 29% versus 2002. Managed account flows were particularly strong,
with value equity accounts contributing $2.9 billion in flows and municipal
managed accounts another $2.2 billion. Partially offsetting the $5.1 billion in
equity value and municipal account flows were $1.7 billion in growth equity
account outflows and $0.5 billion in outflows from alternative investment
accounts. Flows into exchange-traded funds are always positive, as these assets
do not redeem. Net flows for 2002 were also positive across all product
categories, totaling $7.3 billion.
The following table summarizes net assets under management by product
type:
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
December 31, 2003 2002 2001
- ------------ -------- -------- --------
Exchange-Traded Funds $ 47,094 $ 39,944 $ 32,000
Mutual Funds 12,285 11,849 11,814
Retail Managed Accounts 25,676 19,403 18,959
Institutional Managed Accounts 10,301 8,523 5,712
-------- -------- --------
Total $ 95,356 $ 79,719 $ 68,485
======== ======== ========
(1) Excludes defined portfolio assets under surveillance.
8 Nuveen Investments, Inc. - Annual Report 2003
The components of the change in our assets under management were as
follows:
NET ASSETS UNDER MANAGEMENT
(in millions)
Year ended December 31, 2003 2002 2001
- ----------------------- -------- -------- --------
Beginning Assets
Under Management $ 79,719 $ 68,485 $ 61,540
Gross Sales 18,098 15,400 12,753
Reinvested Dividends 413 435 442
Redemptions (9,073) (8,727) (6,936)
-------- -------- --------
Net Flows into
Managed Assets 9,438 7,108 6,259
Acquisitions -- 6,904 4,064
Appreciation/(Depreciation) 6,199 (2,778) (3,378)
-------- -------- --------
Ending Assets
Under Management $ 95,356 $ 79,719 $ 68,485
======== ======== ========
Assets under management increased $15.6 billion, or 20% to over $95
billion at December 31, 2003. The growth in assets under management was
attributable to increases of $7.2 billion or 18% in exchange-traded fund assets,
$0.4 billion or 4% in mutual fund assets and $8.1 billion or 29% in managed
account assets. The increase in exchange-traded fund assets was the result of
$6.3 billion in new assets and market appreciation of $0.9 billion. New assets
of $2.9 billion and market appreciation (primarily equity appreciation) of $5.2
billion accounted for the increase in managed account assets.
We ended 2002 with assets under management of $79.7 billion, 16% higher
than 2001. Assets under management increased $11.2 billion primarily as a result
of strong net flows during the year and the NWQ acquisition, which added
approximately $7 billion to our asset base. Partially offsetting the positive
impact of flows and the NWQ acquisition was $4.5 billion of equity depreciation
due to an overall decline in equity markets during 2002.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
For the year ended December 31, 2003 2002 2001
- ------------------------------- -------- -------- --------
Exchange-Traded Funds $220,701 $191,567 $174,543
Mutual Funds 61,185 59,429 57,015
Managed Accounts 122,961 104,480 97,956
Money Market Funds -- -- 1,074
-------- -------- --------
Total $404,847 $355,476 $330,588
======== ======== ========
Higher asset levels drove a 14% increase in advisory fees during 2003.
Advisory fees on exchange-traded funds increased 15% while managed account fees
increased 18%. A portion of the increase in fees on managed accounts is the
result of including NWQ for a full year; however, strong net flows and market
appreciation since the acquisition resulted in an increase of 54% for the
comparable year-over-year results. Advisory fees increased 8% during 2002 driven
mainly by the inclusion of a partial year of NWQ advisory fees and a full year
of Symphony fees.
Underwriting and distribution revenue for the years ended December 31,
2003, 2002 and 2001 is shown in the following table:
PRODUCT DISTRIBUTION
(in thousands)
For the year ended December 31, 2003 2002 2001
- ------------------------------- -------- -------- --------
Exchange-Traded Funds $ 5,819 $ 5,453 $ 1,732
Muni/Fund Preferred(TM) 2,578 1,633 1,428
Mutual Funds 843 2,399 3,252
Defined Portfolios (34) 2,598 13,101
-------- -------- -------
Total $ 9,206 $ 12,083 $19,513
======== ======== =======
Underwriting and distribution revenue declined 24% in 2003 mainly as a
result of our decision in early 2002 to discontinue the defined portfolio
product line. In addition, distribution revenue declined on our mutual fund
products as a result of a reduction in assets on which rule 12b-1 fees are
earned and an increase in commissions paid to brokers on high dollar value
sales. These declines were partially offset by an increase in underwriting
revenue on our exchange-traded funds and an increase in Muni/Fund Preferred fees
as a result of an increase in the number of preferred shares outstanding.
Underwriting and distribution revenue in 2002 declined 38%, mainly as a result
of our decision to discontinue the defined portfolio product line.
PERFORMANCE FEES/OTHER REVENUE. Performance fees/other revenue consists of
various fees earned in connection with services provided on behalf of our
defined portfolio assets under surveillance and performance fees earned on
institutional assets managed by Symphony. The increase in this area for 2003 is
due to an increase of $11.2 million in Symphony performance fees. This increase
was partially offset by a decline in fees earned on defined portfolio assets
under surveillance as a result of a decline in the overall level of defined
portfolio assets.
Nuveen Investments, Inc. - Annual Report 2003 9
OPERATING EXPENSES. Operating expenses for the years ended December 31, 2003,
2002 and 2001 are shown in the following table:
OPERATING EXPENSES
(in thousands)
For the year ended December 31, 2003 2002 2001
- ------------------------------- -------- -------- --------
Compensation and benefits $130,057 $103,570 $ 93,134
Advertising and
promotional costs 11,627 12,608 17,751
Occupancy and
equipment costs 19,321 17,912 14,512
Amortization of goodwill
and intangibles 5,208 3,803 9,409
Travel and entertainment 7,726 8,539 9,078
Outside services/
professional services 20,331 19,419 18,166
Other operating expenses 17,299 18,744 20,139
-------- -------- --------
Total $211,569 $184,595 $182,369
======== ======== ========
As a % of Operating Revenue 46.8% 46.6% 49.1%
SUMMARY. Operating expenses in 2003 increased $27.0 million, or 15%, driven
mainly by the impact of the inclusion of a full year of operating expenses for
NWQ. Excluding the impact of the NWQ acquisition, operating expenses grew
approximately 6%, due almost entirely to an increase in compensation and
benefits.
COMPENSATION AND BENEFITS. Compensation and related benefits for the year 2003
increased $26.5 million due to the inclusion of NWQ for a full year
(approximately $13 million) and an increase in overall incentive compensation
due to the Company's higher profit level.
Compensation and related benefits for the year 2002 increased $10.4
million due to the inclusion of NWQ for a partial year and Symphony for a full
year. Excluding NWQ and Symphony, compensation and benefits declined 2%,
primarily as a result of headcount reductions associated with our exit from the
defined portfolio business.
ADVERTISING AND PROMOTIONAL COSTS. Advertising and promotional expenditures for
2003 decreased $1.0 million for the year due to a reduction in spending as a
result of a more focused deployment of our marketing resources.
During 2002, advertising and promotional expenditures decreased $5.1
million for the year due mainly to a reduction in spending as a result of the
discontinuation of our defined portfolio business.
AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization of goodwill and
intangibles increased $1.4 million during 2003 as a result of a full year of
amortization on intangible assets associated with the NWQ acquisition.
Amortization of goodwill and intangibles declined $5.6 million during
2002, due to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002.
Under this new standard, we ceased to amortize goodwill, but we continue to
amortize intangible assets. A reduction of $8.0 million in goodwill amortization
expense for the year was partially offset by an increase in amortization of
intangible assets related to the NWQ and Symphony acquisitions.
ALL OTHER OPERATING EXPENSES. During 2003, all other operating expenses were
consistent with the prior year as increases as a result of the inclusion of a
full year of NWQ expenses were offset by declines in employee related costs
(such as severance and outplacement) as a result of increased expense in 2002
due to the discontinuation of the defined portfolio business.
During 2002, all other operating expenses, including occupancy and
equipment costs, travel and entertainment, fund organization costs and other
expenses increased $2.6 million due mainly to the inclusion of NWQ and Symphony.
NON-OPERATING INCOME/(EXPENSE). Non-operating income/(expense) includes
investment and other income and interest expense. Investment and other income is
comprised primarily of dividends and interest income from investments, realized
gains and losses on investments and miscellaneous income, including gain or loss
on the disposal of property.
Total non-operating expense in 2003 increased $0.2 million compared to
2002. Net interest expense increased $3.3 million as a result of the
restructuring of our debt from short-term variable rate debt to long-term fixed
rate debt. Partially offsetting this increase was an increase in other
non-operating income as a result of non-recurring losses of $2.7 million
recorded in 2002 compared to gains of $0.8 million recorded in 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
provides new accounting guidance on when to consolidate a variable interest
entity. A variable interest entity exists when either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one
10 Nuveen Investments, Inc. - Annual Report 2003
of three characteristics associated with owning a controlling financial
interest. Those characteristics include the direct or indirect ability to make
decisions about an entity's activities through voting rights or similar rights,
the obligation to absorb the expected losses of an entity if they occur, and the
right to receive the expected residual returns of the entity if they occur. We
have completed our evaluation and have concluded that we do not have any
variable interest entities as defined by the standard.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
On September 19, 2003, we issued $300 million of senior unsecured notes (the
"private placement debt"), which mature on September 19, 2008, and carry a fixed
coupon rate of 4.22%, payable semi-annually. These notes, which were issued at
100% of par, are unsecured and are prepayable at any time in whole or in part.
In the event of prepayment, we will pay an amount equal to par plus accrued
interest plus a "make-whole premium," if applicable. Proceeds from the private
placement debt were used to refinance existing debt and for general corporate
purposes.
In addition to the private placement debt, we have a committed line of
credit in place to provide liquidity. On August 7, 2003, we entered into a $250
million revolving line of credit with a group of banks. This committed line is
divided into two equal facilities -- one with a three-year term that expires in
August 2006 and one with a term of 364 days that expires in August 2004.
Proceeds from borrowings under this facility may be used for fulfilling day to
day cash requirements and for general corporate purposes, including
acquisitions, share repurchases and asset purchases. The rate of interest
payable under the agreement is, at our option, a function of one of various
floating rate indices. As of December 31, 2003, there were no amounts
outstanding under either part of the line of credit.
On July 31, 2002, we entered into, and borrowed the total amount
available under, a $250 million revolving loan agreement with our majority
shareholder, The St. Paul Companies, Inc. ("St. Paul"). This loan facility was
originally set to expire on July 15, 2003; however, it was amended prior to this
expiration date to provide for no scheduled expiration date, but to specify that
borrowings would be required to be repaid within 30 days demand by St. Paul. A
portion of the proceeds from this $250 million loan was used to repay $128
million of the previous outstanding debt of $183 million (at December 31, 2001)
under the bank facility discussed above, while the remainder of the proceeds was
used to help fund the NWQ acquisition. During March 2003, we paid down $145
million of the total debt that was outstanding under the St. Paul debt facility.
The remaining balance of $105 million was repaid on September 19, 2003. This
loan facility currently carries a floating interest rate of LIBOR plus a margin
of up to 0.25%.
In addition to the above facilities, our broker/dealer subsidiary
occasionally utilizes available, uncommitted lines of credit with no annual
facility fees, which approximate $100 million, to satisfy periodic, short-term
liquidity needs. As of December 31, 2003 and 2002, no borrowings were
outstanding under these uncommitted lines of credit.
Options to purchase 391,122 and 395,142 shares of Rittenhouse
non-voting Class B common stock were exercised by current and former employees
on April 11, 2003, and March 28, 2002, respectively, under the Rittenhouse
Financial Services, Inc. 1997 Equity Incentive Award Plan. Rittenhouse accounted
for these options in accordance with APB No. 25; therefore, no expense was
recognized. As a result of these exercises, we recorded $42.5 million and $40.5
million, respectively, of minority interest on our consolidated balance sheet.
The stock was repurchased on October 14, 2003, and September 30, 2002,
respectively, thereby eliminating the minority interest position. Purchase price
in excess of the exercise price of $11.1 million and $16.3 million,
respectively, was added to goodwill associated with our acquisition of
Rittenhouse. Consistent with SFAS No. 142, as of January 1, 2002, goodwill is no
longer being amortized.
As part of the NWQ acquisition, key employees purchased a
non-controlling, member interest in NWQ Investment Management Company, LLC. The
non-controlling interest of $3.0 million as of December 31, 2003, is reflected
in minority interest on the consolidated balance sheets. This purchase allows
management to participate in profits of NWQ above specified levels beginning
January 1, 2003. During 2003, we recorded approximately $1.1 million of minority
interest expense, which reflects the portion of profits applicable to the
minority shareholders. Beginning in 2004 and continuing through 2008, the
Company has the right to purchase the non-controlling members' respective
interests in NWQ. (See Note 15 to consolidated financial statements.)
At December 31, 2003, we held in treasury 28,405,108 shares of Class A
common stock acquired in open market transactions. During 2003, we repurchased
1,664,062 shares of Class A common stock in open market transactions. As part of
a new share repurchase program approved on August 9, 2002, we are authorized to
purchase up to 7.0 million shares of Class A common stock. As of December 31,
2003, the remaining authorization covered 4.2 million shares.
Nuveen Investments, Inc. - Annual Report 2003 11
During 2003, we paid out dividends totaling $51.9 million on common
shares.
Our broker/dealer subsidiary is subject to requirements of the
Securities and Exchange Commission relating to liquidity and capital standards.
(See Note 13 to consolidated financial statements.)
Management believes that cash provided from operations and borrowings
available under its uncommitted and committed credit facilities will provide the
Company with sufficient liquidity to meet our operating and other financing
needs for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires us to make
estimates and assumptions that impact our financial position and results of
operations. These estimates and assumptions are affected by our application of
accounting policies. Below we describe certain critical accounting policies that
we believe are important to the understanding of our results of operations and
financial position. In addition, please refer to Note 1 to the consolidated
financial statements for further discussion of our accounting policies.
INTANGIBLE ASSETS. At December 31, 2003, our assets included $535 million of
goodwill and $59 million of other definite-lived intangible assets. Under SFAS
No. 142, "Goodwill and Other Intangible Assets," we are required to test the
fair value of goodwill and indefinite-lived intangibles for impairment at least
once a year. We completed the impairment testing of goodwill and determined that
there was no impairment to the goodwill recorded in our books and records as of
May 31, 2003. The recognition of any such impairment would have resulted in a
charge to income in the period in which the impairment was determined. We do not
have any indefinite-lived assets. While we believe that our testing was
appropriate, it involved the use of estimates and assumptions. Using different
assumptions may have resulted in recognizing some impairment of goodwill in our
financial statements.
VALUATION OF INVESTMENTS. Investments in Company-sponsored mutual funds and
exchange-traded funds are classified as available-for-sale and are valued at
market value. Unrealized gains and losses are reflected net of tax as part of
accumulated other comprehensive income/(loss) until realized. We periodically
evaluate our investments for other-than-temporary declines in value. These may
exist when the fair value of an investment security has been below the current
value for an extended period of time. If an other-than-temporary decline in
value is determined to exist, the unrealized investment loss net of tax in
accumulated other comprehensive income is realized as a charge to net income, in
the period in which the other-than-temporary decline in value is determined. See
Note 1 to the consolidated financial statements for further information.
ACCOUNTING FOR STOCK OPTIONS. As allowed under the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148, we have
elected to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost is recognized with respect to stock options we
have granted. Pro forma disclosure of net income and earnings per share has been
presented in Note 8 in the consolidated financial statements as required under
SFAS No. 123 (as amended by SFAS No. 148), as if SFAS No. 123 methodology had
been applied to the employee awards.
OTHER MATTERS
MARKET RISK. The following information, together with other information included
in this report, describes the key aspects of certain financial instruments that
have market risk.
INTEREST RATE SENSITIVITY. As of December 31, 2003, all of our long-term debt
was at a fixed interest rate. However, we periodically enter into receive-fixed,
pay-floating interest rate swap agreements. The agreements effectively increase
our exposure to fluctuations in interest rates. At December 31, 2003, the
interest rate on approximately 16% of our fixed rate debt was converted to
variable rate debt through interest rate swaps. These swaps mature in September
of 2008 and had a fair value of $0.1 million at December 31, 2003. During the
year ended December 31, 2003, we utilized interest rate lock contracts to hedge
the reference rate component of our then anticipated private placement debt
issuance. The contracts were closed during the third quarter and no interest
rate lock contracts were outstanding at December 31, 2003. For further
information regarding interest rate contracts, refer to Note 5 to the
consolidated financial statements -- Derivative Financial Instruments.
INVESTMENT SENSITIVITY. We invest in short-term debt instruments, classified as
"Cash and cash equivalents" on our consolidated balance sheets. The investments
are treated as collateralized financing transactions and are carried at the
12 Nuveen Investments, Inc. - Annual Report 2003
amounts at which they will be subsequently resold, including accrued interest.
We also invest in certain Company-sponsored managed investment funds that invest
in a variety of asset classes. These investments are carried on our consolidated
financial statements at fair market value and are subject to the investment
performance of the underlying sponsored fund. Any unrealized gain or loss is
recognized upon the sale of the investment.
INFLATION. Our assets are, to a large extent, liquid in nature and therefore not
significantly affected by inflation. However, inflation may result in increases
in our expenses, such as employee compensation, advertising and promotional
costs, and office occupancy costs. To the extent inflation, or the expectation
thereof, results in rising interest rates or has other adverse effects upon the
securities markets and on the value of financial instruments, it may adversely
affect our financial condition and results of operations. A substantial decline
in the value of fixed income or equity investments could adversely affect the
value of assets we manage, which in turn would result in a decline in investment
advisory and performance fee revenue.
FORWARD-LOOKING INFORMATION. From time to time, information we provide or
information included in our filings with the SEC (including Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Notes to Consolidated Financial Statements in this annual report) may contain
statements that are not historical facts, but are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements relate to future events or future financial
performance and reflect management's expectations and opinions. In some cases,
one can identify forward-looking statements by terminology such as "may,"
"will," "could," "would," "should," "expect," "plan," "anticipate," "intend,"
"believe," "estimate," "predict" or "potential" or comparable terminology. These
statements are only predictions, and our actual future results may differ
significantly from those anticipated in any forward-looking statements due to
numerous known and unknown risks, uncertainties and other factors. All of the
forward-looking statements are qualified in their entirety by reference to the
factors discussed below. These factors may not be exhaustive, and we cannot
predict the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those predicted in any forward-looking
statements. We undertake no responsibility to update publicly or revise any
forward-looking statements.
Risks, uncertainties and other factors that pertain to our business and
the effects of which may cause our assets under management, earnings, revenues,
profit margin, and/or our stock price to decline include: (1) the effects of the
substantial competition that we, like all market participants, face in the
investment management business, including competition for continued access to
the brokerage firms' retail distribution systems and "wrap fee" managed account
programs where the loss of such access would cause a resulting loss of assets;
(2) the adverse effects of declines in securities markets on our assets under
management and future offerings; (3) the adverse effects of increases in
interest rates from their present levels on the net asset value of our assets
under management that are invested in fixed income securities and the magnifying
effect such increases in interest rates may have on our leveraged closed-end
exchange-traded funds; (4) the adverse effects of poor investment performance by
our managers or declining markets resulting in redemptions, loss of clients, and
declines in asset values; (5) our failure to comply with contractual
requirements and/or guidelines in our client relationships, which could result
in losses that the client could seek to recover from us and in the client
withdrawing its assets from our management; (6) the competitive pressures on the
management fees we charge; (7) our failure to comply with various government
regulations such as the Investment Advisers Act and the Investment Company Act
of 1940 and other federal and state securities laws that impose, or may in the
future impose, numerous obligations on our investment advisers and managed funds
and accounts and the Securities Exchange Act of 1934 and other federal and state
securities laws and the rules of the National Association of Securities Dealers
that impose, or may in the future impose, numerous obligations on our
broker/dealer Nuveen Investments, LLC, where the failure to comply with such
requirements could cause the SEC or other regulatory authorities to institute
proceedings against our investment advisers and/or broker/dealer and impose
sanctions ranging from censure and fines to termination of an investment adviser
or broker/dealer's registration and otherwise prohibiting an adviser from
serving as an adviser; (8) our reliance on revenues from investment management
contracts that are subject to annual renewal by the independent board of
trustees overseeing the related funds according to their terms; (9) the loss of
key employees that could lead to loss of assets; (10) burdensome regulatory
developments including the adoption of regulations governing the amount of
investment management fees charged by investment advisers; (11) the impact of
recent accounting pronouncements; and (12) unforeseen developments in litigation
involving the securities industry or the Company.
Nuveen Investments, Inc. - Annual Report 2003 13
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
December 31,
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 161,584 $ 70,480
Management and distribution fees receivable 54,972 54,105
Other receivables 10,103 13,790
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $44,543 and $38,526, respectively 29,973 31,279
Other investments 70,721 58,918
Goodwill 535,271 511,851
Other intangible assets, at cost less accumulated amortization of
$10,634 and $5,426, respectively 58,516 63,724
Other assets 33,253 36,895
--------- ---------
$ 954,393 $ 841,042
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 302,113 $ 305,000
Accounts payable 33,242 23,761
Accrued compensation and other expenses 67,915 56,619
Deferred compensation 30,707 27,976
Deferred income tax liability, net 28,526 12,083
Other liabilities 23,709 26,777
--------- ---------
Total liabilities 486,212 452,216
--------- ---------
Minority interest 4,228 3,063
--------- ---------
Common stockholders' equity:
Class A common stock, $.01 par value, 160,000,000 shares authorized,
47,586,266 shares issued 476 476
Class B common stock, $.01 par value, 80,000,000 shares authorized,
73,325,214 shares issued 733 733
Additional paid-in capital 162,484 155,188
Retained earnings 774,689 688,325
Unamortized cost of restricted stock awards (50) (748)
Accumulated other comprehensive loss (2,641) (4,859)
--------- ---------
935,691 839,115
Less common stock held in treasury, at cost (28,405,108 and
28,184,996 shares, respectively) (471,738) (453,352)
--------- ---------
Total common stockholders' equity 463,953 385,763
--------- ---------
$ 954,393 $ 841,042
========= =========
See accompanying notes to consolidated financial statements.
14 Nuveen Investments, Inc. - Annual Report 2003
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended December 31,
2003 2002 2001
-------- -------- --------
Operating revenues:
Investment advisory fees from assets under management $404,847 $355,476 $330,588
Product distribution 9,206 12,083 19,513
Performance fees/other revenue 37,975 28,888 21,002
-------- -------- --------
Total operating revenues 452,028 396,447 371,103
Operating expenses:
Compensation and benefits 130,057 103,570 93,134
Advertising and promotional costs 11,627 12,608 17,751
Occupancy and equipment costs 19,321 17,912 14,512
Amortization of goodwill and other intangible assets 5,208 3,803 9,409
Travel and entertainment 7,726 8,539 9,078
Outside services/professional services 20,331 19,419 18,166
Other operating expenses 17,299 18,744 20,319
-------- -------- --------
Total operating expenses 211,569 184,595 182,369
Operating income 240,459 211,852 188,734
Non-operating income/(expense):
Investment and other income/(expense) 2,264 (100) 4,618
Interest expense (7,435) (4,892) (3,798)
-------- -------- --------
Total non-operating income/(expense) (5,171) (4,992) 820
-------- -------- --------
Income before taxes 235,288 206,860 189,554
-------- -------- --------
Income taxes:
Current 77,175 67,770 69,558
Deferred 14,117 12,905 5,298
-------- -------- --------
Total income taxes 91,292 80,675 74,856
-------- -------- --------
Net income $143,996 $126,185 $114,698
======== ======== ========
Average common and common equivalent shares outstanding:
Basic 92,612 93,910 94,299
======== ======== ========
Diluted 95,944 98,042 101,687
======== ======== ========
Earnings per common share:
Basic $ 1.55 $ 1.34 $ 1.20
======== ======== ========
Diluted $ 1.50 $ 1.29 $ 1.13
======== ======== ========
See accompanying notes to consolidated financial statements.
Nuveen Investments, Inc. - Annual Report 2003 15
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(in thousands)
Unamortized Accumulated
Class A Class B Additional Cost of Other
Common Common Paid-In Retained Restricted Comprehensive
Stock Stock Capital Earnings Stock Awards Income/(Loss)
------- ------- ---------- ---------- ------------ -------------
Balance at December 31, 2000 $ 426 $ 733 $ 69,888 $ 564,096 $ (939) $ (1,721)
======= ======= ========== ========== =========== ==========
Net income 114,698
Cash dividends paid (45,552)
Common stock dividend (split) 197 (203)
Conversion of preferred
to common 44 39,331
Amortization of restricted
stock awards 677
Purchase of treasury stock
Exercise of stock options (13,297)
Issuance of restricted stock 552 (1,275)
Tax benefit of options exercised 22,580
Other (20) (1,992)
------- ------- ---------- ---------- ----------- ----------
Balance at December 31, 2001 $ 470 $ 733 $ 131,996 $ 620,274 $ (1,537) $ (3,713)
======= ======= ========== ========== =========== ==========
Net income 126,185
Cash dividends paid (47,103)
Conversion of preferred
to common 6 5,619
Amortization of restricted
stock awards 789
Purchase of treasury stock
Exercise of stock options (10,997)
Issuance of deferred stock (34)
Tax benefit of options exercised 17,573
Other (1,146)
------- ------- ---------- ---------- ----------- ----------
Balance at December 31, 2002 $ 476 $ 733 $ 155,188 $ 688,325 $ (748) $ (4,859)
======= ======= ========== ========== =========== ==========
Net income 143,996
Cash dividends paid (51,880)
Amortization of restricted
stock awards 827
Purchase of treasury stock
Exercise of stock options (5,801)
Issuance of restricted stock 49 (129)
Tax benefit of options exercised 7,296
Other 2,218
======= ======= ========== ========== =========== ==========
Balance at December 31, 2003 $ 476 $ 733 $ 162,484 $ 774,689 $ (50) $ (2,641)
======= ======= ========== ========== =========== ==========
Treasury
Stock Total
--------- ---------
Balance at December 31, 2000 $(229,582) $ 402,901
========= =========
Net income 114,698
Cash dividends paid (45,552)
Common stock dividend (split) (6)
Conversion of preferred
to common 39,375
Amortization of restricted
stock awards 677
Purchase of treasury stock (172,253) (172,253)
Exercise of stock options 59,025 45,728
Issuance of restricted stock 723 --
Tax benefit of options exercised 22,580
Other 129 (1,883)
--------- ---------
Balance at December 31, 2001 $(341,958) $ 406,265
========= =========
Net income 126,185
Cash dividends paid (47,103)
Conversion of preferred
to common 5,625
Amortization of restricted
stock awards 789
Purchase of treasury stock (150,663) (150,663)
Exercise of stock options 39,181 28,184
Issuance of deferred stock 88 54
Tax benefit of options exercised 17,573
Other (1,146)
--------- ---------
Balance at December 31, 2002 $(453,352) $ 385,763
========= =========
Net income 143,996
Cash dividends paid (51,880)
Amortization of restricted
stock awards 827
Purchase of treasury stock (41,946) (41,946)
Exercise of stock options 23,480 17,679
Issuance of restricted stock 80 --
Tax benefit of options exercised 7,296
Other 2,218
========= =========
Balance at December 31, 2003 (471,738) $ 463,953
========= =========
See accompanying notes to consolidated financial statements.
16 Nuveen Investments, Inc. - Annual Report 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income $143,996 $126,185 $114,698
Adjustments to reconcile net income to net cash
provided from operating activities:
Deferred income taxes 14,117 12,905 5,298
Depreciation of office property, equipment, and leaseholds 7,650 7,321 5,382
Amortization of goodwill and other intangible assets 5,208 3,803 9,409
Amortization of debt related costs, net 14 -- --
Net (increase) decrease in assets:
Management and distribution fees receivable (867) 8,940 44,770
Other receivables 3,687 (1,045) 22,890
Other assets 2,353 16,121 12,929
Net increase (decrease) in liabilities:
Accrued compensation and other expenses 11,296 10,871 (9,805)
Deferred compensation 2,731 (422) (1,282)
Security purchase obligations -- (739) (3,434)
Other liabilities 10,840 16,730 (16,942)
Other, consisting primarily of the tax effect of options exercised 8,186 19,426 23,921
-------- -------- --------
Net cash provided from operating activities 209,211 220,096 207,834
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable 300,000 250,000 183,000
Repayments of notes payable (305,000) (128,000) --
Net private placement related items 610 -- --
Dividends paid (51,880) (47,103) (45,552)
Proceeds from stock options exercised 17,679 28,184 45,728
Acquisition of treasury stock (41,946) (150,663) (172,253)
Other -- -- (6)
-------- -------- --------
Net cash (used for)/provided from financing activities (80,537) (47,582) 10,917
-------- -------- --------
Cash flows from investing activities:
Symphony acquisition, net of cash received -- -- (205,261)
Contingent consideration for Symphony acquisition (14,264) -- --
NWQ acquisition, net of cash received and liability due to Old Mutual -- (156,368) --
Proceeds from Rittenhouse stock options exercised 42,474 40,504 --
Repurchase of Rittenhouse stock (53,531) (56,811) --
Net purchase of office property and equipment (6,964) (8,947) (8,951)
Proceeds from sales of investment securities 1,416 1,451 21,388
Purchases of investment securities (1,808) (2,332) (6,489)
Other, consisting primarily of the change in other investments (4,893) (3,190) (8,130)
-------- -------- --------
Net cash used for investing activities (37,570) (185,693) (207,443)
-------- -------- --------
Increase/(decrease) in cash and cash equivalents 91,104 (13,179) 11,308
Cash and cash equivalents:
Beginning of year 70,480 83,659 72,351
-------- -------- --------
End of year $161,584 $ 70,480 $ 83,659
======== ======== ========
See accompanying notes to consolidated financial statements.
Nuveen Investments, Inc. - Annual Report 2003 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION AND BASIS OF PRESENTATION. The consolidated financial
statements include the accounts of Nuveen Investments, Inc. ("the Company" or
"Nuveen Investments") and its majority-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Certain amounts in the prior year financial statements have been reclassified to
conform to the 2003 presentation. These reclassifications had no effect on
previously reported net income or stockholders' equity. The Company's majority
stockholder is The St. Paul Companies, Inc. ("St. Paul").
The Company and its subsidiaries offer core investment management
capabilities through four branded investment teams: Rittenhouse growth, NWQ
value, Nuveen fixed income and Symphony market-neutral alternative investments.
Operations of Nuveen Investments, Inc. are organized around its
principal advisory subsidiaries, which are registered investment advisers under
The Investment Advisers Act of 1940: Nuveen Advisory Corp. ("NAC") and Nuveen
Institutional Advisory Corp. ("NIAC") manage various Nuveen mutual funds and
exchange-traded funds; Nuveen Asset Management, Inc. ("NAM"), Rittenhouse Asset
Management, Inc. ("Rittenhouse"), NWQ Investment Management Company, LLC
("NWQ"), and Symphony Asset Management, LLC ("Symphony") principally provide
investment management services for individual and institutional managed
accounts.
Additionally, Nuveen Investments, LLC, a registered broker and dealer
in securities under the Securities Exchange Act of 1934, provides investment
product distribution and related services for the Company's managed funds and,
through March of 2002, sponsored and distributed the Company's defined
portfolios (unit investment trusts).
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and related notes to the
consolidated financial statements. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand,
investment instruments with maturities of three months or less and other highly
liquid investments, including commercial paper and money market funds, which are
readily convertible to cash. Amounts presented on our consolidated balance
sheets approximate fair value.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. Securities purchased under
agreements to resell are treated as collateralized financing transactions and
are carried at the amounts at which such securities will be subsequently resold,
including accrued interest, and approximate fair value. The Company's exposure
to credit risks associated with the nonperformance of counterparties in
fulfilling these contractual obligations can be directly impacted by market
fluctuations that may impair the counterparties' ability to satisfy their
obligations. It is the Company's policy to take possession of the securities
underlying the agreements to resell or enter into tri-party agreements, which
include segregation of the collateral by an independent third party for the
benefit of the Company. The Company monitors the value of these securities daily
and, if necessary, obtains additional collateral to assure that the agreements
are fully secured. At December 31, 2003 and 2002, there were no securities
purchased under agreements to resell.
The Company utilizes resale agreements to invest cash not required to
fund daily operations. The level of such investments will fluctuate on a daily
basis. Such resale agreements typically mature on the day following the day in
which the Company enters into such agreements. Since these agreements are highly
liquid investments, readily convertible to cash, and mature in less than three
months, the Company includes these amounts in cash equivalents for balance sheet
and cash flow purposes.
SECURITIES TRANSACTIONS. Securities transactions entered into by the Company's
broker/dealer subsidiary are recorded on a settlement date basis, which is
generally three business days after the trade date. Securities owned are valued
at market value with profit and loss accrued on unsettled transactions based on
trade date.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Furniture and equipment,
primarily computer equipment, is depreciated on a straight-line basis over
estimated useful lives ranging from three to ten years. Leasehold improvements
are amortized over the lesser of the economic useful life of the improvement or
the remaining term of the lease. The Company capitalizes certain costs incurred
in the development of internal-use software. Software development costs are
amortized over a period of not more than five years.
OTHER INVESTMENTS. Other investments consist primarily of common stock in a
privately-held institutional equity manager (Institutional Capital Corporation),
investments in certain Company-sponsored mutual funds and exchange-traded funds,
and an investment in a private-equity investment partnership. The investments in
common stock and the
18 Nuveen Investments, Inc. - Annual Report 2003
private-equity investment partnership are carried at cost. The investments in
Company-sponsored mutual funds and exchange-traded funds of $27,564,000 at
December 31, 2003, and $21,225,000 at December 31, 2002, are classified as
available-for-sale and are valued at market value and unrealized gains and
losses are reflected net of tax as part of accumulated other comprehensive
income/(loss) until realized, at which time they are recorded on the income
statement. We periodically evaluate our investments for other-than-temporary
declines in value. These may exist when the fair market value of an investment
security has been below the current value for an extended period of time. If an
other-than-temporary decline in value is determined to exist, the unrealized
investment loss net of tax in accumulated other comprehensive income is realized
as a charge to net income in the period in which the other-than-temporary
decline in value occurs. At December 31, 2003, for the investments that have
unrealized losses, the Company believes that all of these unrealized losses are
only temporary and are due to temporary market conditions. The following table
presents information about the Company's investments with unrealized losses at
December 31, 2003 (in 000s):
Less than 12 months
- -------------------------------------------------------------
Fair Unrealized
Description of securities Value Losses
- -------------------------------------------------------------
Fund investments $ 482 $ 20
Other -- --
------ ------
Total temporarily impaired securities $ 482 $ 20
------ ------
12 months or longer
- -------------------------------------------------------------
Fair Unrealized
Description of securities Value Losses
- -------------------------------------------------------------
Fund investments $11,276 $3,456
Other 3,549 82
------- ------
Total temporarily impaired securities $14,825 $3,538
------- ------
Total
- -------------------------------------------------------------
Fair Unrealized
Description of securities Value Losses
- -------------------------------------------------------------
Fund investments $11,758 $3,476
Other 3,549 82
------- ------
Total temporarily impaired securities $15,307 $3,558
------- ------
REVENUE RECOGNITION. Investment advisory fees from assets under management are
recognized ratably over the period that assets are under management. Performance
fees are recognized only at the performance measurement dates contained in the
individual account management agreements and are typically dependent upon
performance of the account exceeding agreed-upon benchmarks.
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS). The Company's other comprehensive
income/(loss) consists of changes in unrealized gains and losses on certain
investment securities classified as available-for-sale and the unamortized loss
on terminated cash flow hedges. Other comprehensive income is recorded net of
tax. The related cumulative tax effects were deferred tax (liabilities)/benefits
of ($2,326,000) in 2003, $658,000 in 2002, and $1,314,000 in 2001. The changes
in net unrealized gains/(losses) on investment securities include
reclassification adjustments relating to net realized gains/(losses) on sales of
investment securities of $30,000 in 2003, ($534,000) in 2002, and ($389,000) in
2001. Total comprehensive income for the Company was $146,214,000 in 2003,
$125,039,000 in 2002, and $112,706,000 in 2001.
GOODWILL. In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead that
they be tested for impairment at least annually using a two-step process. Other
intangible assets continue to be amortized over their useful lives.
The Company has chosen May 31 as its measurement date for the ongoing
SFAS No. 142 impairment test. Neither the initial SFAS No. 142 impairment test
(as of January 1, 2002), nor any of the subsequent, ongoing SFAS No. 142
impairment tests (as of May 31, 2002 and 2003) indicate any impairment of
goodwill.
The following table presents a reconciliation of activity in goodwill
from December 31, 2001, to December 31, 2003, as presented on our consolidated
balance sheets:
Balance at December 31, 2001 $ 353,598
---------
Goodwill from exercise of Rittenhouse
stock options (see Note 8) 16,308
Symphony contingent consideration 1,901
Symphony acquisition -- finalization of valuation 7,340
NWQ acquisition (see Note 9) 132,704
---------
Balance at December 31, 2002 $ 511,851
---------
Goodwill from exercise of Rittenhouse
stock options (see Note 8) 11,057
Symphony contingent consideration 12,363
---------
Balance at December 31, 2003 $ 535,271
---------
Nuveen Investments, Inc. - Annual Report 2003 19
In 2001 (prior to the adoption of SFAS No. 142), we incurred annual goodwill
amortization expense of approximately $8 million. The following table presents
actual net income for the years ended December 31, 2003 and 2002, and what net
income would have been for year ended December 31, 2001, as if the new
accounting rules effective January 1, 2002, (goodwill is no longer being
amortized) were in effect as of January 1, 2001. Adjusted per share amounts are
also presented.
(in thousands, except for earnings per share amounts)
For the year ended
December 31, 2003 2002 2001
--------- --------- --------
Net income, as reported $ 143,996 $ 126,185 $114,698
Addback: goodwill
amortization, net of tax -- -- 4,841
--------- --------- --------
Adjusted net income $ 143,996 $ 126,185 $119,539
Basic earnings per share:
As reported $ 1.55 $ 1.34 $ 1.20
Goodwill amortization,
net of tax -- -- 0.05
--------- --------- --------
As adjusted $ 1.55 $ 1.34 $ 1.25
Diluted earnings per share:
As reported $ 1.50 $ 1.29 $ 1.13
Goodwill amortization,
net of tax -- -- 0.05
--------- --------- --------
As adjusted $ 1.50 $ 1.29 $ 1.18
========= ========= ========
INTANGIBLE ASSETS. Intangible assets consist primarily of the estimated value of
customer relationships resulting from our Symphony and NWQ acquisitions. We do
not have any intangible assets with indefinite lives. We amortize our intangible
assets over their estimated useful lives.
The following tables present a reconciliation of activity in other
intangible assets from December 31, 2001, to December 31, 2003, as presented on
our consolidated balance sheets:
Balance at December 31, 2001 $ 51,876
Symphony acquisition -- finalization of valuation
Customer relationships (6,800)
Internally developed software 17
Favorable lease (466)
NWQ acquisition -- contractual customer
relationships (see Note 9) 22,900
Amortization of:
Symphony customer relationships (2,223)
Symphony internally developed software (324)
Symphony favorable lease (117)
NWQ contractual relationships (1,060)
Miscellaneous -- prior acquisitions (79)
----------
Balance at December 31, 2002 $ 63,724
Amortization of:
Symphony customer relationships (2,223)
Symphony internally developed software (324)
Symphony favorable lease (117)
NWQ contractual relationships (2,544)
----------
Balance at December 31, 2003 $ 58,516
==========
The following table reflects the gross carrying amounts and the
accumulated amortization amounts for the Company's intangibles as of December
31, 2003 and 2002.
INTANGIBLE ASSETS
(in thousands)
As of December 31, 2003 2002
- -----------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------
Symphony acquisition --
Customer relationships $ 43,800 $ 5,445 $43,800 $ 3,223
Internally developed
software 1,622 783 1,622 458
Favorable lease 369 343 369 226
NWQ acquisition --
Contractual customer
relationships 22,900 3,604 22,900 1,060
-------- ------- ------- -------
Total $ 68,691 $10,175 $68,691 $ 4,967
======== ======= ======= =======
For the years ended December 31, 2003 and 2002, the aggregate
amortization expense relating to the Company's amortizable intangible assets was
$5.2 million and $3.8 million, respectively. There were no unamortizable
intangible assets at December 31, 2003 and 2002. The estimated aggregate
amortization expense for each of the next five years is approximately: $5.1
million for 2004 and 2005, $5.0 million for 2006, and $4.8 million for 2007 and
2008.
OTHER RECEIVABLES AND OTHER LIABILITIES. Included in other receivables and other
liabilities are receivables from and payables to broker/dealers and customers,
primarily in conjunction with unsettled trades. These receivables were
approximately $1,567,000 and $3,231,000, and these payables were approximately
$3,871,000 and $4,239,000 at December 31, 2003 and 2002, respectively.
OTHER ASSETS. Other assets consist primarily of commissions advanced by the
Company on sales of certain mutual fund shares. Such commissions are being
amortized over the lesser of the Securities and Exchange Commission Rule 12b-1
revenue stream period (one to eight years) or the period during
20 Nuveen Investments, Inc. - Annual Report 2003
which the shares of the fund upon which the commissions were paid remain
outstanding.
EQUITY INCENTIVE PLANS. The Company and its subsidiaries account for restricted
stock and options issued under its equity incentive plans using the accounting
methods prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and its related interpretations.
In accordance with APB No. 25, no compensation expense has been recognized for
any of the stock options awarded.
ADVERTISING AND PROMOTIONAL COSTS. Advertising and promotional costs include
amounts related to the marketing and distribution of specific products offered
by the Company as well as expenses associated with promoting the Company's
brands and image. The Company's policy is to expense such costs as incurred.
TAXES. The Company and its subsidiaries file consolidated federal income tax
returns. The Company provides for income taxes on a separate return basis. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and the tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
applicable to periods in which the differences are expected to affect taxable
income. Although valuation allowances may be established, when necessary to
reduce deferred tax assets to amounts expected to be realized, there were no
deferred tax asset valuation allowances at December 31, 2003 or 2002.
SUPPLEMENTAL CASH FLOW INFORMATION. The Company paid interest of $6.1 million in
2003, $5.7 million in 2002, and $3.3 million in 2001. This compares with
interest expense reported in the Company's consolidated statements of income of
$7.4 million, $4.9 million, and $3.8 million for the respective reporting years.
Federal and state income taxes paid for the years ending December 31, 2003,
2002 and 2001, amounting to $63,462,000, $41,671,000, and $46,732,000,
respectively, include required payments on estimated taxable income and final
payments of prior year taxes required to be paid upon filing the final federal
and state tax returns, reduced by refunds received.
2. EARNINGS PER COMMON SHARE
On August 9, 2001, the Company's Board of Directors authorized a 3-for-2 stock
split of its common stock to shareholders of record on September 20, 2001. On
May 9, 2002, the Company's Board of Directors declared a second, 2-for-1 stock
split to be effected as a dividend to shareholders of record as of June 3, 2002.
All references in the consolidated financial statements and notes as to number
of shares, per share amounts and market prices of the Company's common stock
have been restated to reflect these actions.
The following table sets forth a reconciliation of net income and common
shares used in the basic and diluted earnings per share computations for the
three years ended December 31, 2003:
(in thousands, Net Per Share
except per share data) Income Shares Amount
--------- --------- ---------
2001:
Net income $ 114,698
Less: Preferred stock dividends (1,195)
---------
Basic EPS $ 113,503 94,299 $1.20
Dilutive effect of:
Restricted stock -- 274
Employee stock options -- 3,764
Assumed conversion
of preferred stock 1,195 3,350
--------- ---------
Diluted EPS $ 114,698 101,687 $ 1.13
========= ========= ======
2002:
Net income $ 126,185
Less: Preferred stock dividends (141)
---------
Basic EPS $ 126,044 93,910 $ 1.34
Dilutive effect of:
Restricted stock -- 416
Employee stock options -- 3,304
Assumed conversion
of preferred stock 141 412
--------- ---------
Diluted EPS $ 126,185 98,042 $ 1.29
========= ========= ======
2003:
Basic EPS $ 143,996 92,612 $ 1.55
Dilutive effect of:
Restricted stock -- 465
Employee stock options -- 2,867
--------- ---------
Diluted EPS $ 143,996 95,944 $ 1.50
========= ========= ======
Options to purchase 4,990,800 shares of the Company's common stock at a
range of $27.10 to $27.50 were outstanding at December 31, 2003, but were not
included in the computation of diluted earnings per share because the options'
respective exercise prices per share were greater than the average market price
of the Company's common shares.
Nuveen Investments, Inc. - Annual Report 2003 21
At December 31, 2002, options to purchase 5,072,400 shares of the Company's
common stock at a range of $26.34 to $27.50 were outstanding, but were not
included in the computation of diluted earnings per share because the options'
respective exercise prices per share were greater than the average market price
of the Company's common shares. At December 31, 2001, all outstanding options
had a potentially dilutive effect and were included in the computation of
diluted earnings per share.
3. INCOME TAXES
The provision for income taxes on earnings for the three years ended December
31, 2003 is:
(in thousands) 2003 2002 2001
- -------------------------------------------------------------
Current:
Federal $ 64,901 $ 58,204 $ 57,608
State 12,274 9,566 11,950
- -------------------------------------------------------------
77,175 67,770 69,558
- -------------------------------------------------------------
Deferred:
Federal 11,889 10,221 4,416
State 2,228 2,684 882
- -------------------------------------------------------------
$ 14,117 $ 12,905 $ 5,298
=============================================================
The provision for income taxes is different from that which would be
computed by applying the statutory federal income tax rate to income before
taxes. The principal reasons for these differences are as follows:
2003 2002 2001
---- ---- ----
Federal statutory rate applied
to income before taxes 35.0% 35.0% 35.0%
State and local income taxes, net
of federal income tax benefit 4.3 4.3 5.0
Tax-exempt interest income, net
of disallowed interest expense (0.1) (0.1) (0.3)
Other, net (0.4) (0.2) (0.2)
==== ==== ====
Effective tax rate 38.8% 39.0% 39.5%
==== ==== ====
The tax effects of significant items that give rise to the net deferred
tax asset/(liability) recorded on the Company's consolidated balance sheets are
shown in the following table:
(in thousands)
December 31, 2003 2002
- ----------------------------------------------------------------
Gross deferred tax asset:
Deferred compensation $ 11,253 $ 11,200
Accrued post-retirement
benefit obligation 3,225 3,648
Unfunded accrued pension cost
(non-qualified plan) 922 822
Book depreciation in excess of
tax depreciation 3,119 3,554
Other, consisting primarily of Symphony
limited partnership income 11,491 19,319
-------- --------
Gross deferred tax asset 30,010 38,543
-------- --------
Gross deferred tax liability:
Deferred commissions and
fund offering costs (3,815) (6,103)
Goodwill amortization (47,478) (31,164)
Prepaid pension costs (1,360) (2,104)
Other, consisting primarily of
internally developed software (5,883) (11,255)
-------- --------
Gross deferred tax liability (58,536) (50,626)
-------- --------
Net deferred tax liability $(28,526) $(12,083)
======== ========
The future realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management believes it is more likely than not
the Company will generate the future taxable income necessary to realize the
benefits of these future tax deductions.
Not included in income tax expense for 2003, 2002 and 2001 are income
tax benefits of $7,296,000, $17,573,000, and $22,580,000, respectively,
attributable to the vesting of restricted stock and the exercise of stock
options. Such amounts are reported on the consolidated balance sheets in
additional paid-in capital and as a reduction of taxes payable included in other
liabilities on our consolidated balance sheets.
22 Nuveen Investments, Inc. - Annual Report 2003
4. NOTES PAYABLE
On September 19, 2003, the Company issued $300 million of senior unsecured notes
(the "private placement debt"). These notes mature on September 19, 2008, and
carry a fixed coupon rate of 4.22%, payable semi-annually. These notes, which
were issued at 100% of par, are unsecured and are prepayable at any time in
whole or in part. In the event of prepayment, the Company will pay an amount
equal to par plus accrued interest plus a "make-whole premium," if applicable.
Proceeds from the private placement debt were used to refinance existing debt
and for general corporate purposes.
Given the volatility of Treasury bond yields prior to the anticipated
pricing date (i.e., the date when the fixed coupon rate would be set), the
Company entered into a series of treasury rate lock transactions. The purpose of
the treasury rate lock was to hedge against the risk that interest rates would
rise prior to the pricing date. The prevailing treasury rate had declined by the
time the private placement debt was priced and the rate lock transactions were
settled for a payment by the Company of $1.5 million (See Note 5). The loss on
settlement of these transactions is being amortized over the term of the private
placement debt, resulting in an increase in interest expense above the fixed
rate of 4.22%.
Also amortized over the term of the private placement debt are gains
associated with several interest rate swap transactions entered into by the
Company. These interest rate swap transactions, under which the Company agreed
to pay variable rates of interest, hedged only a portion ($150 million) of the
$300 million in fixed-rate private placement debt. (See Note 5). Subsequently,
the spread between floating and fixed rates narrowed and these interest rate
swap transactions were terminated in September 2003 and December 2003 and
settled for a payment to the Company of $3.2 million and $1.7 million,
respectively. The resultant gains on settlement (net of interest accruals) of
$3.2 million and $0.8 million, are being amortized over the term of the private
placement debt, effectively reducing interest expense.
In late December, the Company entered into another interest rate swap
transaction whereby the Company agrees to pay variable rates of interest. This
swap only hedges a portion ($50 million) of the private placement debt. (See
Note 5). At December 31, 2003, the fair value of this interest rate swap
transaction was approximately $72,000. This interest rate swap reduced the
interest rate on one-sixth of the private placement debt from the fixed rate of
4.22% to a floating rate of 1.79% for the period ended December 31, 2003. (See
Note 5.) The aggregate effect of the associated rate locks and swaps has been to
reduce the effective borrowing cost for the Company relative to the 4.22% fixed
rate financing cost.
The total amount of notes payable at December 31, 2003, on the
consolidated balance sheet includes the amount of the $300 million private
placement debt plus the unamortized gains of $3.8 million related to the
terminated interest rate swaps and the fair value of the open interest rate swap
of approximately $72,000. Also included as a reduction in notes payable at
December 31, 2003, is $1.8 million in unamortized private placement debt
issuance costs. These costs are being amortized to interest expense over the
term of the private placement debt. At December 31, 2003, the fair value of our
outstanding debt was $299.2 million.
The Company also has lines of credit with a group of banks and a
revolving loan agreement with its majority shareholder, The St. Paul Companies
Inc. ("St. Paul"). The line of credit with a group of banks is a revolving
credit line of $250 million, entered into on August 7, 2003. This committed line
is divided into two equal facilities -- one with a three-year term that expires
in August 2006, and one with a term of 364 days that expires in August 2004.
Proceeds from borrowings under this facility may be used for fulfilling day to
day cash requirements and general corporate purposes, including acquisitions,
share repurchases and asset purchases. The rate of interest payable under the
agreement is, at the Company's option, a function of one of various floating
rate indices. The agreement requires the Company to pay a facility fee at an
annual rate of 0.12% of the committed amount for the three-year facility and for
the 364-day facility. As of December 31, 2003, there were no amounts outstanding
under these lines of credit. At December 31, 2002, there was $55 million
outstanding under these lines of credit. For the years ended December 31, 2003
and 2002, the weighted-average interest rate on the committed lines was 1.49%
and 2.03%, respectively, for the three-year facility and 1.49% and 1.96%,
respectively, for the 364-day facility.
The revolving loan agreement with St. Paul was entered into on July 31,
2002. At that time, Nuveen Investments borrowed the total amount available under
the $250 million agreement. This loan facility was originally set to expire on
July 15, 2003, however it was amended prior to this expiration date to provide
for no scheduled expiration date, but to specify that borrowings would be
required to be repaid within 30 days demand by St. Paul. During March 2003, the
Company paid down $145 million of the total debt that was outstanding under the
St. Paul debt facility. The remaining balance of $105 million was repaid on
September 19, 2003. This loan facility carries a floating interest rate of LIBOR
plus a margin of up to 0.25%. For the years ended December 31,
Nuveen Investments, Inc. - Annual Report 2003 23
2003 and 2002, the weighted-average annual interest rate on the St. Paul debt
facility was 1.51% and 1.96%, respectively.
Our broker/dealer subsidiary occasionally utilizes available,
uncommitted lines of credit with no annual facility fees, which approximate $100
million, to satisfy periodic, short-term liquidity needs. As of December 31,
2003 and 2002, no borrowings were outstanding on these uncommitted lines of
credit.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an Amendment of FASB Statement No. 133" and further amended by SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
(collectively, "SFAS No. 133") states that, unless a derivative qualifies as a
hedge, the gain or loss from a derivative instrument must be recorded currently
into earnings. Under SFAS No. 133, three types of hedges are recognized: fair
value hedges, cash flow hedges, and hedges of a corporation's net investments in
foreign operations.
FAIR VALUE HEDGES. An entity may designate a derivative instrument as hedging
the exposure to changes in the fair value (market value) of financial assets or
liabilities. For example, a fixed rate bond's market value changes when
prevailing market interest rates change. Hedging the fixed-rate bond's price
risk with a derivative would be considered a fair value hedge.
CASH FLOW HEDGES. An entity may also designate a derivative instrument as
hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk. That exposure may be associated with an
existing recognized asset or liability or a forecasted transaction.
As discussed in Note 4, in anticipation of the private placement debt
issuance, the Company entered into a series of treasury rate lock transactions
with an aggregate notional amount of $100 million. These treasury rate locks are
accounted for as cash-flow hedges, as they hedged against the variability in
future projected interest payments on the then-forecasted issuance of fixed rate
debt (the private placement debt) attributable to changes in interest rates. The
prevailing treasury rates had declined by the time of the private placement debt
issuance and the locks were settled for a payment by the Company of $1.5
million. The Company has recorded this loss in "Accumulated Other Comprehensive
Income/(Loss)" in the accompanying consolidated balance sheets, as the treasury
rate locks were considered highly effective (for accounting purposes) in
mitigating the interest rate risk on the forecasted debt issuance. Amounts
accumulated in other comprehensive loss will be reclassified into earnings
commensurate with the recognition of the interest expense on the newly issued
debt.
Also as discussed in Note 4, the Company entered into a series of
interest rate swap transactions as hedges against changes in a portion of the
fair value of the private placement debt. Under the agreements, payments were to
be exchanged at specified intervals based on fixed and floating interest rates.
All of the interest rate swap transactions were designated as fair value hedges
to mitigate the changes in fair value of the hedged of the private placement
debt. The Company determined that these interest rate swap transactions
qualified for treatment under the short-cut method of SFAS No. 133 of measuring
effectiveness. Certain of these interest rate swap transactions were terminated.
The cancellation of these interest rate swap transactions resulted in a total
gain to the Company of approximately $4.0 million. These gains are being
amortized over the term of the private placement debt, lowering the effective
interest rate of the private placement debt.
At December 31, 2003, the fair value of the one open interest rate swap
transaction is approximately $72,000 and is reflected in "Other Assets" on the
accompanying consolidated balance sheets, with a corresponding increase in
"Notes Payable" representing the change in fair value of the fixed rate debt. In
accordance with the short-cut method of SFAS No. 133, the fair value adjustment
had no earnings impact since the interest rate swap is considered "highly
effective" in eliminating the interest rate risk of the fixed rate debt that it
is hedging.
Finally, the Company holds stock purchase warrants of the National
Association of Securities Dealers ("NASD"), received in connection with our
purchase of NASD common stock. These stock purchase warrants are considered to
be derivatives, but are not designated as hedges. At December 31, 2003, these
warrants are carried at a market value of $375 and are included in "Other
Investments" on the accompanying consolidated balance sheets. For the year ended
December 31, 2003, the Company recorded approximately $48,000 of losses into
income from continuing operations relating to the change in the market value of
these derivatives during this period.
6. COMMITMENTS AND CONTINGENCIES
Rent expense for office space and equipment was $10,513,000, $9,630,000, and
$8,263,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
Minimum rental commitments for office space and equipment, including estimated
24 Nuveen Investments, Inc. - Annual Report 2003
escalation for insurance, taxes and maintenance for the years 2004 through 2013,
the last year for which there is a commitment, are as follows:
(in thousands)
Year Commitment
- ------------- ----------
2004 $ 9,694
2005 9,861
2006 9,460
2007 8,575
2008 7,574
Thereafter 33,272
As part of the Symphony acquisition, the Company may be required to
make future additional payments for substantially above average growth of the
Symphony business over an extended period. As of December 31, 2003, the
potential for future additional payments is up to a maximum of approximately
$121.2 million. Any future payments will be recorded as additional goodwill.
From time to time, the Company and its subsidiaries are named as
defendants in pending legal matters. In the opinion of management, based on
current knowledge and after discussions with legal counsel, the outcome of such
litigation will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
7. RETIREMENT PLANS
The Company has a noncontributory retirement plan and a post-retirement benefit
plan covering the majority of employees, excluding employees of certain of its
subsidiaries. Pension benefits are based on years of service and the employee's
average compensation during the highest consecutive five years of the employee's
last ten years of employment. The Company's funding policy is to contribute
annually at least the minimum amount that can be deducted for federal income tax
purposes. Additionally, the Company currently maintains plans providing certain
life insurance and health care benefits for retired employees and their eligible
dependents. The cost of these benefits is shared by the Company and the retiree.
The Company also maintains a noncontributory pension plan for certain
employees whose pension benefits exceed the Section 415 limitations of the
Internal Revenue Code. Pension benefits for this plan follow the vesting
provisions of the funded plan. Funding is not made under this plan until
benefits are paid.
For purposes of our consolidated financial statements, our plans'
measurement date is December 31. The market-related value of plan assets is
determined based on the fair value at measurement date. The projected benefit
obligation is determined based on the present value of projected benefit
distributions at an assumed discount rate. The discount rate used reflects the
rate at which we believe the pension plan obligations could be effectively
settled at the measurement date, as though the pension benefits of all plan
participants were determined as of that date.
An accumulated benefit obligation represents the actuarial present
value of benefits in the event of termination at a specified date. As of
December 31, 2003 and 2002, the accumulated benefit obligation for our pension
plans was $20,604,000 and $19,111,000, respectively; for our post-retirement
plan, our accumulated benefit obligation at December 31, 2003 and 2002 was
$7,465,000 and $9,072,000, respectively.
A projected benefit obligation represents the actuarial present value
of all benefits assuming that the plan is ongoing and will not terminate in the
foreseeable future. It is measured using assumptions as to future compensation
levels, as the pension benefit formula is based on those future salary levels.
The following tables provide a reconciliation of the changes in the plans'
projected benefit obligations and fair value of plan assets over the two-year
period ending December 31, 2003, and a statement of the funded status as of
December 31 of both years:
Pension Post-retirement
Benefits Benefits
- --------------------------------------------------------------------------------
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Obligation at January 1 $ 25,418 $21,374 $ 9,072 $ 7,498
Service cost 1,660 1,462 268 464
Interest cost 1,661 1,515 493 549
Plan amendments -- -- (3,534) --
Actuarial loss 1,596 2,227 1,499 1,085
Benefit payments (2,097) (841) (333) (321)
Curtailments -- (319) -- (203)
--------- ------- -------- -------
Obligation at December 31 $ 28,238 $25,418 $ 7,465 $ 9,072
========= ======= ======== =======
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair value of plan
assets at January 1 $ 23,212 $25,593 $ -- $ --
Actual return on plan assets 3,585 (1,540) -- --
Benefit payments (2,097) (841) (333) (321)
Company contributions 2 -- 333 321
========= ======= ======== =======
Fair value of plan assets
at December 31 $ 24,702 $23,212 $ -- $ --
========= ======= ======== =======
Nuveen Investments, Inc. - Annual Report 2003 25
Pension Post-retirement
Benefits Benefits
- --------------------------------------------------------------------------------
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
RECONCILIATION OF PREPAID (ACCRUED) AND
TOTAL AMOUNT RECOGNIZED
Funded status at December 31 $ (3,536) $(2,206) $ (7,465) $(9,072)
Unrecognized prior-service cost 93 99 (2,984) 362
Unrecognized net loss (gain) 5,128 5,363 1,002 (497)
--------- ------- -------- -------
Prepaid (accrued) cost $ 1,685 $ 3,256 $ (9,447) $(9,207)
========= ======= ======== =======
The Company employs a total return approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and corporate
financial condition. The investment portfolio contains a diversified blend of
equity and fixed-income investments. Furthermore, equity investments are
diversified across U.S. and non-U.S. stocks, as well as small and large
capitalizations. Other assets such as real estate are used judiciously to
enhance long-term returns while improving portfolio diversification. Derivatives
may be used to gain market exposure in an efficient and timely manner; however,
derivatives may not be used to leverage the portfolio beyond the market value of
the underlying investments. Investment risk is measured and monitored on an
on-going basis through quarterly investment portfolio reviews, annual liability
measurements, and periodic asset/liability studies.
The expected long-term rate of return on plan assets is estimated based
on the plan's actual historical return results, the allowable allocation of plan
assets by investment class, market conditions and other relevant factors. We
evaluate whether the actual allocation has fallen within an allowable range, and
we then evaluate actual asset returns in total and by asset class. The following
table presents actual allocation of plan assets, in comparison with the
allowable allocation range, both expressed as a percentage of total plan assets,
as of December 31:
December 31
2003 2002
- ---------------------------------------------------------
Asset Class Actual Allowable Actual Allowable
- ---------------------------------------------------------
Cash 3% 0 - 15% 2% 0 - 15%
Fixed maturities 36 20 - 60 44 20 - 60
Equities 61 30 - 70 54 30 - 70
Other -- 0 - 10 -- 0 - 10
- ---------------------------------------------------------
Total 100% 100%
=========================================================
The Company does not expect to make any contributions during 2004 for
its pension plans: however, for its post-retirement benefit plan, the Company
expects to contribute approximately $350,000 during 2004.
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31 of both years. Prepaid benefit cost is recorded
in other assets. Accrued benefit liability is recorded in accrued compensation
and other expenses.
Pension Post-retirement
Benefits Benefits
- ---------------------------------------------------------------------
(in thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------
Prepaid benefit cost $ 4,158 $ 5,311 $ -- $ --
Accrued benefit liability (2,473) (2,055) (9,447) (9,207)
-------- ------- -------- --------
Net amount recognized $ 1,685 $ 3,256 $ (9,447) $ (9,207)
======== ======= ======== ========
The Company's qualified and non-qualified pension plans' projected
benefit obligation exceeds the fair value of plan assets for the years ending
December 31, 2003 and 2002. The Company's post-retirement benefits plan has no
plan assets. The aggregate benefit obligation for the post-retirement plan is
$7,465,000 as of December 31, 2003, and $9,072,000 as of December 31, 2002.
The following table provides the components of net periodic benefit
costs for the plans for the three years ending December 31, 2003:
Pension Benefits
- ------------------------------------------------------------------
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------
Service cost $ 1,660 $ 1,462 $ 1,312
Interest cost 1,661 1,515 1,392
Expected return on plan assets (1,930) (2,239) (2,380)
Amortization of
unrecognized net asset -- -- (184)
Amortization of prior-service cost 7 7 8
Amortization of net loss (gain) 175 9 (130)
Curtailments and settlements -- (108) (290)
------- ------- -------
Net periodic benefit cost $ 1,573 $ 646 $ (272)
======= ======= =======
Post-retirement Benefits
- ------------------------------------------------------------------
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------
Service cost $ 268 $ 464 $ 420
Interest cost 493 549 510
Amortization of prior-service cost (188) 43 50
Amortization of net gain -- (20) (49)
Curtailments and settlements -- (174) (167)
------- ------- -------
Net periodic benefit cost $ 573 $ 862 $ 764
======= ======= =======
26 Nuveen Investments, Inc. - Annual Report 2003
The assumptions used in the measurement of the Company's benefit
obligation are shown in the following table:
Pension Benefits Post-retirement Benefits
- -----------------------------------------------------------------
Weighted-average
assumptions as
of December 31, 2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Expected return
on plan assets 8.50% 8.50% 9.00% N/A N/A N/A
Rate of compen-
sation increase 4.50% 5.00% 5.50% N/A N/A N/A
For measurement purposes, a 10% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2004 and gradually
declines to a 5% annual rate of increase by the year 2008.
Assumed health care trend rates have a significant effect on the
amounts reported for the health care plans. A 1% change in assumed health care
cost trend rates would have the following effects:
(in thousands) 1% Increase 1% Decrease
- -------------------------------------------------------------
Effect on total service
and interest cost $ 148 $ (122)
Effect on the health care
component of the accumulated
post-retirement benefit obligation $ 1,083 $ (923)
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The company anticipates that the benefits it pays
after 2006 will be lower as a result of the new Medicare provisions; however,
the retiree medical obligations and costs reported do not reflect the impact of
this legislation. Deferring the recognition of the new Medicare provisions'
impact is permitted by Financial Accounting Standards Board Staff Position 106-1
due to open questions about some of the new Medicare provisions and a lack of
authoritative accounting guidance about certain matters. The final accounting
guidance could require changes to previously reported information.
The Company has a profit sharing plan that covers the majority of its
employees, including employees of certain of its subsidiaries. Amounts
determinable under the plan are contributed in part to a profit sharing trust
qualified under the Internal Revenue Code with the remainder paid as cash
bonuses, equity awards and matching 401(k) employee contributions.
The Company has a nonqualified deferred compensation program whereby
certain key employees can elect to defer receipt of all or a portion of their
cash bonuses until a certain date or until retirement, termination, death or
disability. The deferred compensation liabilities incur interest expense at the
prime rate or at a rate of return of one of several managed funds sponsored by
the Company, as selected by the participant. The Company mitigates its exposure
relating to participants who have selected a fund return by investing in the
underlying fund at the time of the deferral.
8. EQUITY INCENTIVE PLANS
The Company currently maintains one stock-based compensation plan, the Second
Amended and Restated Nuveen 1996 Equity Incentive Award Plan (the "1996 Plan").
Through May 2002, the Company also maintained the Nuveen 1992 Special Incentive
Plan (the "1992 Plan"). The 1992 Plan was developed in connection with the
Company's initial public offering of stock and authorized the issuance of an
aggregate of 17,940,000 shares of Class A common stock for the grant of equity
awards, including up to 7,020,000 shares of restricted common stock and deferred
units. Under the 1996 Plan, the Company has reserved an aggregate of 30,900,000
shares of Class A common stock for awards. Under the existing plan, options may
be awarded at exercise prices not less than 100% of the fair market value of the
stock on the grant date, and maximum option terms may not exceed ten years.
In 2001, the Company awarded 79,042 shares of restricted stock with
cliff vesting and a weighted-average fair value of $19.35. In 2002, the Company
granted 200,000 shares of restricted stock with a weighted-average fair value of
$29.45. In 2003, the Company granted 5,000 shares of restricted stock with a
weighted-average fair value of $25.89. All awards are subject to restrictions on
transferability, a risk of forfeiture, and certain other terms and conditions.
The value of such awards is reported as compensation expense over the shorter of
the period beginning on the date of grant and ending on the last vesting date,
or the period in which the related employee services are rendered. Recorded
compensation expense for restricted stock awards, including the amortization of
prior year awards, was $1.9 million, $1.5 million, and $0.8 million for 2003,
2002 and 2001, respectively.
The Company also awarded certain employees options to purchase the
Company's Class A common stock at exercise prices equal to or greater than the
closing market price of the stock on the day the options were awarded. All
options awarded under the 1992 Plan have been exercised or forfeited as of May
2002. Options awarded during 1996 through 2003, pursuant to the 1996 Plan, are
generally subject to three- and four-year cliff vesting and expire after ten
years
Nuveen Investments, Inc. - Annual Report 2003 27
from the award date. The Company awarded options to purchase 2,910,602 shares of
Class A common stock in January 2004 to employees pursuant to the Company's
incentive compensation program for 2003. In accordance with APB No. 25, no
compensation expense has been recognized for any of the stock options awarded.
There were 1,185,000 Class A shares available for future equity awards as of
December 31, 2003, after consideration of the January 2004 incentive awards.
A summary of the Company's stock option activity for the years ended
December 31, 2003, 2002 and 2001 is presented in the following table and
narrative:
Weighted-
Average
(in thousands, except per share data) Options Exercise Price
- --------------------------------------------------------------
Options outstanding at
December 31, 2000 15,766 $ 10.49
Awarded 3,227 18.76
Exercised (5,045) 9.07
Forfeited (330) 14.76
Options outstanding at
December 31, 2001 13,618 $ 12.87
Awarded 5,280 27.19
Exercised (2,707) 10.41
Forfeited (318) 20.21
Options outstanding at
December 31, 2002 15,873 $ 17.91
Awarded 3,453 25.91
Exercised (1,439) 12.29
Forfeited (162) 25.99
Options outstanding at
December 31, 2003 17,725 $ 19.85
Options exercisable at:
December 31, 2001 6,215 $ 10.22
December 31, 2002 5,552 $ 11.48
December 31, 2003 6,837 $ 12.06
All options awarded in 2003, 2002 and 2001 have exercise prices equal
to the closing market price of the stock on the date of grant and have
weighted-average exercise prices of $25.91, $27.19, and $18.76, respectively.
Exercise prices for options outstanding as of December 31, 2003, ranged from
$8.33 to $27.50 per share. The weighted-average remaining contractual life of
those options is approximately seven years. SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide for alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company continues to account for its stock-based compensation plans
in accordance with APB No. 25, "Accounting for Stock Issued to Employees."
However, the amended disclosure requirements of SFAS No. 123 are applicable to
the Company and are reflected in the next table.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require, the use of a fair value-based method of accounting for
stock-based compensation plans under which the fair value of stock options is
determined on the date of grant and is amortized to expense over the lesser of
the options' vesting period or the related employee service period. While the
Company has elected to account for its stock-based compensation plans in
accordance with APB No. 25, SFAS No. 123 (as amended by SFAS No. 148) requires
disclosure of pro forma information regarding net income and earnings per share
as if the provisions of SFAS No. 123 (as amended by SFAS No. 148) had been
applied and the Company accounted for its employee stock option awards under the
fair value method of SFAS No. 123 (as amended by SFAS No. 148).
Accordingly, if the compensation cost for employee stock options
awarded had been determined in this manner, 2003 net income would have been
reduced by $10.2 million, or $0.11 per basic and $0.11 per diluted earnings per
share. 2002 and 2001 net income would have been reduced by $9.1 million and $6.6
million, respectively, translating into a reduction of $0.10 and $0.09 per 2002
basic and diluted earnings per share and a reduction of $0.07 and $0.06 per 2001
basic and diluted earnings per share. The options awarded during 2003 have a
weighted-average fair value of $4.24 per share. The options awarded during 2002
have a weighted-average fair value of $4.77 per share. Options awarded during
2001 have a weighted-average fair value of $3.53 per share. The fair value of
stock option awards was estimated at the date of grant using a Black-Scholes
option-pricing model with the following assumptions for 2003, 2002 and 2001,
respectively: weighted-average risk-free interest rates of 3.2%, 3.9%, and 4.6%;
dividend yields of 2.7%, 2.7%, and 3%; weighted-average expected option lives of
5.2, 5 and 5.5 years; and volatility factors of the expected market price of our
common stock of 21%, 20% and 19%. SFAS No. 123 only applies to those equity
instruments awarded in fiscal years that begin after December 15, 1994.
The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition
28 Nuveen Investments, Inc. - Annual Report 2003
provisions of SFAS No. 123 (as amended by SFAS No. 148 and SFAS No. 149):
Year Ended December 31,
(in thousands, except per share data) 2003 2002 2001
- -------------------------------------------------------------------
Net income, as reported $143,996 $126,185 $114,698
Deduct: Total stock-based
employee compensation
expense determined under
fair value-based method
for all awards, net of
related tax effects (10,249) (9,068) (6,625)
-------- -------- --------
Pro forma net income $133,747 $117,117 $108,073
-------- -------- --------
Earnings per share:
Basic -- as reported $ 1.55 $ 1.34 $ 1.20
Basic -- pro forma $ 1.44 $ 1.24 $ 1.13
Diluted -- as reported $ 1.50 $ 1.29 $ 1.13
Diluted -- pro forma $ 1.39 $ 1.20 $ 1.07
Through October 2003, Rittenhouse maintained the Rittenhouse Financial
Services, Inc., 1997 Equity Incentive Award Plan ("1997 Plan"). This plan was
established subsequent to the acquisition in order to attract and retain
officers and other employees. The 1997 Plan authorized the issuance to
Rittenhouse employees of non-qualified options to purchase shares of a newly
created series of Rittenhouse common stock, the non-voting Class B common stock.
The exercise price for any options granted under the 1997 Plan was equal to or
greater than the fair market value of the Rittenhouse common stock on the date
of grant, as determined and fixed by a committee serving the Rittenhouse board
of directors on the relevant valuation date. The term of each option was no more
than four years from the date of grant. In accordance with APB No. 25, no
compensation expense has been recognized for any of the stock options awarded
under the 1997 Plan. Each option awarded under the 1997 Plan provided that
Rittenhouse, or its designee, had the right to purchase any or all shares of
Rittenhouse Class B Common Stock issued upon exercise of such option at any time
following the six-month period subsequent to the date of exercise, at a price
per share equal to the fair market value most recently determined by the
committee on the valuation date last preceding the date of purchase. As of
December 31, 2003, all of the options to acquire the 1,200,000 shares of
Rittenhouse Class B Common Stock (the total number of options authorized under
the 1997 Plan) have been exercised. Of these awards, 391,122 and 395,142 options
were exercised during 2003 and 2002, respectively. No options were exercised
during 2001. No options were forfeited during 2003. Of the 4,180 options that
were forfeited in 2002, none were reissued. The shares exercised in 2003 were
repurchased by the Company on October 14, 2003. Purchase price in excess of the
exercise price of $11.1 million was added to goodwill. The shares exercised in
2002 were repurchased by the Company on September 30, 2002. Purchase price in
excess of the exercise price of $16.3 million was added to goodwill. Effective
January 1, 2002, goodwill is no longer being amortized but will be tested for
impairment at least annually. (See "Goodwill" in Note 1.)
9. ACQUISITION OF NWQ INVESTMENT MANAGEMENT COMPANY, INC.
On August 1, 2002, Nuveen Investments completed the acquisition of NWQ
Investment Management Company, Inc. ("NWQ"). NWQ is an asset management firm
based in Los Angeles, California, with approximately $13.5 billion of assets
under management as of December 31, 2003. NWQ specializes in value-oriented
equity investments and has significant relationships with institutions and
financial advisors serving high-net-worth investors. As a result of the
acquisition, Nuveen Investments has broadened its asset base, enabling it to
meet the needs of its customers with core value, growth, and fixed income
components of a conservative, well-diversified portfolio.
The aggregate NWQ purchase price was $145.4 million, of which
approximately $10.2 million was allocated to the net liabilities assumed in the
transaction. Net book value consisted primarily of cash, fee receivables and
payables. The purchase price plus the net liabilities assumed were allocated to
identifiable intangible assets and goodwill. The transaction price includes
potential additional future payments up to a maximum of $20.5 million over a
five-year period that can be offset by fees paid to seller affiliates under a
strategic alliance agreement. As these future payments relate to a take-or-pay
type of contract, the $20.5 million has been recorded as both goodwill and a
corresponding liability on the accompanying December 31, 2002, consolidated
balance sheet. No cash payments were made during 2002. During 2003, $2.5 million
was paid on this $20.5 million liability.
As part of the NWQ acquisition, key employees purchased three classes
of non-controlling member interests in NWQ Investment Management Company, LLC
(Class 2, Class 3 and Class 4 interests). The non-controlling interest of $3.0
million and $2.8 million as of December 31, 2003 and 2002, respectively, is
reflected in minority interest on the consolidated balance sheets. The purchase
allows NWQ management to participate in profits of NWQ above specified levels
beginning January 1, 2003. During 2003, the Company recorded minority interest
expense of approximately $1.1
Nuveen Investments, Inc. - Annual Report 2003 29
million. This amount reflects the portion of profits applicable to the minority
interest. Beginning in 2004 and continuing through 2008, the Company has the
right to acquire the respective interests of the non-controlling members.
The Company engaged external valuation experts to determine the
appropriate purchase price allocation. Final valuation results indicate that
approximately $22.9 million of the purchase price in excess of the net book
value of the assets acquired was assignable to intangible assets, all of which
relates to existing contractual customer relationships (the preliminary
valuation estimates a 9-year useful life). There were no unamortizable
intangible assets acquired in the NWQ acquisition. As of December 31, 2003 and
2002, and for the years then ended, accumulated amortization and amortization
expense were $3.6 million and $1.1 million, and $2.5 million and $1.1 million,
respectively. The estimated aggregate amortization expense for each of the next
five years is $2.5 million.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition.
(in millions) At August 1, 2002
- ------------------------------------------------
Net fixed assets $ 1.3
Other assets 0.2
Intangible assets 22.9
Goodwill 132.7
---------
Total assets acquired $ 157.1
Total liabilities assumed (11.7)
---------
Net cash paid $ 145.4
=========
Of the $132.7 million assigned to non-amortizable goodwill,
approximately $8.8 million is expected to be deductible for 2003 tax purposes;
for 2002, $4.2 million was deducted for tax purposes.
The results of NWQ operations are included in our consolidated
statements of income since August 1, 2002, the date of the NWQ acquisition. The
following actual and unaudited pro forma information for the year ended
December 31, 2002, reflects a summary of the consolidated results of operations
of Nuveen Investments and NWQ as if the acquisition had occurred on January 1,
2002.
As Reported Pro Forma
(in thousands, except Year Ended Year Ended
per share data) Dec. 31, 2002 Dec. 31, 2002
- -----------------------------------------------------------
Revenues $ 396,447 $ 417,044
Net Income $ 126,185 $ 128,014
Earnings per common
share (diluted) $ 1.29 $ 1.31
10. REDEEMABLE PREFERRED STOCK
On January 2, 1997, in connection with its acquisition of Flagship Resources,
Inc., the Company issued 1.8 million shares of 5% Cumulative Convertible
Preferred Stock to former Flagship shareholders with a redemption value of $45
million. Shares of preferred stock were convertible into approximately 5.0
million split adjusted shares (see Note 2) of the Company's Class A common stock
on or after January 2, 1999, and were redeemable at the option of the Company at
any time on or after January 2, 2001, but not later than January 2, 2007.
As of December 31, 2003 and 2002, all shares of convertible preferred
stock have been converted.
11. RELATED PARTY TRANSACTIONS
On June 30, 2002, we made a loan to one of Symphony's prior owners, Maestro LLC,
for approximately $2.1 million. The members of Maestro LLC also are employees of
Symphony. This uncollateralized, interest-bearing loan is payable on or before
December 31, 2006, and carries a variable interest rate equal to the Applicable
Federal Rate published by the Secretary of the Treasury (as of December 2003,
the applicable interest rate was 3.55% per annum). Any contingent consideration
payments required to be made by the Company relating to the Symphony acquisition
may be used to offset this loan obligation. As of December 31, 2003 and 2002,
the net remaining note receivable of approximately $828,000 and $2.1 million,
respectively, is included in other assets on our consolidated balance sheets.
12. COMMON STOCK
A summary of common stock activity for the three-year period ended December 31,
2003, follows:
(in thousands) 2003 2002 2001
- ----------------------------------------------------------------
Shares outstanding at
beginning of year 92,726 95,142 93,942
Shares issued under stock options
and other incentive plans 1,444 2,713 5,120
Shares acquired (1,664) (5,747) (8,250)
Conversion of preferred
to common -- 618 4,330
------- ------- -------
Shares outstanding at end of year 92,506 92,726 95,142
------- ------- -------
On August 9, 2002, the Board of Directors authorized a share repurchase
program of up to 7.0 million shares. At December 31, 2003, there were 4.2
million shares remaining to be purchased under the program.
30 Nuveen Investments, Inc. - Annual Report 2003
13. NET CAPITAL REQUIREMENT
Effective December 31, 2002, Nuveen Investments, LLC the Company's wholly owned
broker/dealer subsidiary, converted from a Delaware corporation to a Delaware
limited liability company named "Nuveen Investments, LLC." This broker/dealer
subsidiary is subject to the Securities and Exchange Commission Rule 15c3-1, the
"Uniform Net Capital Rule," which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital, as
these terms are defined, shall not exceed 15-to-1. At December 31, 2003, our
broker/dealer's net capital ratio was 1.94 to 1 and its net capital was
approximately $14,755,000, which is $12,842,000 in excess of the required net
capital of $1,913,000.
14. QUARTERLY RESULTS (UNAUDITED)
The following tables set forth selected quarterly financial information for each
quarter in the two-year period ending December 31, 2003:
(in thousands, except per share data)
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------
Total operating revenues $ 101,547 $106,097 $120,827 $ 123,557
Net income 32,634 34,009 37,368 39,985
Per common share:
Basic EPS 0.35 0.37 0.40 0.43
Diluted EPS 0.34 0.36 0.39 0.42
Cash dividends 0.13 0.13 0.15 0.15
Closing stock price range:
High 26.840 28.150 30.300 29.000
Low 19.990 22.380 25.800 25.650
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------
Total operating revenues $ 92,609 $ 90,348 $102,406 111,084
Net income 29,989 30,452 32,008 33,736
Per common share:
Basic EPS 0.32 0.32 0.34 0.36
Diluted EPS 0.30 0.31 0.33 0.35
Cash dividends 0.12 0.12 0.13 0.13
Closing stock price range:
High 27.645 30.785 25.870 27.600
Low 25.445 25.700 20.180 21.190
Nuveen Investments, Inc., Class A common stock, representing
approximately 21% of the Company's issued and outstanding common stock at
December 31, 2003, is listed on the New York Stock Exchange under the symbol
"JNC." There are no contractual restrictions on the Company's present ability to
pay dividends on its common stock, although the credit agreement underlying the
bank debt facilities does require maintenance of stockholders' equity at certain
levels.
15. SUBSEQUENT EVENTS
In January 2004, the Company entered into a pair of interest rate swap
transactions with an aggregate notional amount of $100 million. These interest
rate swap transactions, under which the Company agreed to pay variable rates of
interest, were designated and accounted for as fair value hedges to mitigate
changes in the fair value of the hedged portion ($ 100 million) of the
fixed-rate private placement debt.These swaps qualified for the short-cut method
under SFAS No. 133.
Subsequently, these interest rate swap transactions as well as the one
interest rate swap transaction that remained open at December 31, 2003, (see
Notes 4 and 5) were terminated and settled for a total payment to the Company of
approximately $1.8 million. Net of interest accruals, the resultant gain on
settlement was approximately $1.8 million. This gain is being amortized over the
term of the private placement debt, lowering the effective interest rate.
On February 13, 2004, the Company exercised its right to call 100% of
the Class 2 NWQ minority members' interests (see Note 9) for $15.4 million. Of
the total amount paid, approximately $12.9 million was recorded as goodwill.
Nuveen Investments, Inc. - Annual Report 2003 31
Five Year Financial Summary
(in thousands, unless otherwise indicated)
December 31,
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Operating Revenues:
Investment advisory fees from
assets under management $ 404,847 $ 355,476 $ 330,588 $ 311,075 $ 302,200
Product distribution 9,206 12,083 19,513 38,160 27,224
Investment banking -- -- -- -- 6,213
Performance fees/other revenue 37,975 28,888 21,002 9,158 3,123
--------- --------- --------- --------- ---------
Total operating revenues 452,028 396,447 371,103 358,393 338,760
Operating Expenses:
Compensation and benefits 130,057 103,570 93,134 91,056 90,936
Advertising and promotional costs 11,627 12,608 17,751 34,992 29,317
All other operating expenses 69,885 68,417 71,484 64,227 68,436
--------- --------- --------- --------- ---------
Total operating expenses 211,569 184,595 182,369 190,275 188,689
Operating Income 240,459 211,852 188,734 168,118 150,071
Non-Operating Income/(Expense) (5,171) (4,992) 820 9,248 10,940
Income Before Taxes 235,288 206,860 189,554 177,366 161,011
--------- --------- --------- --------- ---------
Income Taxes 91,292 80,675 74,856 70,700 63,701
Net Income $ 143,996 $ 126,185 $ 114,698 $ 106,666 $ 97,310
========= ========= ========= ========= =========
EARNINGS PER COMMON SHARE
Basic $ 1.55 $ 1.34 $ 1.20 $ 1.12 $ 1.01
Diluted $ 1.50 $ 1.29 $ 1.13 $ 1.05 $ 0.95
Return on average equity 33.9% 31.6% 26.7% 25.4% 26.3%
Total dividends per share $ 0.56 $ 0.50 $ 0.47 $ 0.40 $ 0.38
BALANCE SHEET DATA
Total assets $ 954,393 $ 841,042 $ 696,611 $ 574,500 $ 540,965
Total liabilities and minority interest $ 490,440 $ 455,279 $ 284,721 $ 126,599 $ 149,903
Redeemable preferred stock $ -- $ -- $ 5,625 $ 45,000 $ 45,000
Common stockholders' equity $ 463,953 $ 385,763 $ 406,265 $ 402,901 $ 346,062
NUVEEN NET ASSETS UNDER MANAGEMENT (IN MILLIONS)
Mutual funds $ 12,285 $ 11,849 $ 11,814 $ 11,485 $ 11,406
Exchange-traded funds 47,094 39,944 32,000 28,355 26,846
Money market funds -- -- -- 472 637
Managed accounts 35,977 27,926 24,671 21,699 20,895
--------- --------- --------- --------- ---------
Total $ 95,356 $ 79,719 $ 68,485 $ 62,011 $ 59,784
GROSS INVESTMENT PRODUCT SALES (IN MILLIONS)
Mutual funds $ 1,536 $ 1,512 $ 1,246 $ 1,022 $ 1,535
Defined portfolios -- 194 1,481 4,047 2,660
Exchange-traded funds 6,283 6,848 3,937 46 2,770
Managed accounts 10,279 7,040 7,570 5,694 7,101
--------- --------- --------- --------- ---------
Total $ 18,098 $ 15,594 $ 14,234 $ 10,809 $ 14,066
Earnings per common share data have been restated for the 3-for-2 common stock
dividend paid to shareholders of record on September 20, 2001, and for the
2-for-1 common stock dividend paid to shareholders of record on June 3, 2002.
32 Nuveen Investments, Inc. - Annual Report 2003
Independent Auditors' Report
The Board of Directors and Stockholders
Nuveen Investments, Inc.:
We have audited the accompanying consolidated balance sheets of Nuveen
Investments, Inc. (the Company) and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in common
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nuveen
Investments, Inc. and subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of the Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," in 2002.
[KPMG LLP]
Chicago, Illinois
February 16, 2004
Nuveen Investments, Inc. - Annual Report 2003 33
Corporate and Shareholder Information
Board of Directors Shareholder Information
TIMOTHY R. SCHWERTFEGER CORPORATE HEADQUARTERS
Chairman and Chief Executive Officer Nuveen Investments, Inc.
Nuveen Investments, Inc. 333 West Wacker Drive
Chicago, IL 60606
JOHN P. AMBOIAN 312-917-7700
President www.nuveen.com
Nuveen Investments, Inc.
WILLARD L. BOYD Market Listing
President Emeritus New York Stock Exchange
Field Museum of Natural History Trading Symbol: JNC
THOMAS A. BRADLEY
Executive Vice President and Form 10-K
Chief Financial Officer For a complimentary copy of Nuveen's
The St. Paul Companies, Inc. Annual Report on Form 10-K, please
contact the Investor Relations department
at the Company's corporate headquarters.
JOHN L. CARL
Sr. Vice President and CFO/Retired
Allstate Insurance Company
Transfer Agent and Registrar
W. JOHN DRISCOLL The Bank of New York
Chairman/Retired Shareholder Relations
Rock Island Company Church Street Station
P.O. Box 11258
JAY S. FISHMAN New York, NY 10286-1258
Chairman, Chief Executive Officer 800-524-4458
and President www.stockbny.com
The St. Paul Companies, Inc.
WILLIAM H. HEYMAN Annual Shareholders' Meeting
Executive Vice President and The annual shareholders' meeting for
Chief Investment Officer Nuveen Investments, Inc. will be held
The St. Paul Companies, Inc. Friday, May 14, 2004, at 10:30 a.m.
at The Northern Trust Company,
50 South LaSalle Street, Chicago, IL.
DUANE R. KULLBERG
Managing Partner/Chief Executive
Officer/Retired
Andersen Worldwide
RODERICK A. PALMORE
Senior Vice President,
General Counsel and Secretary
Sara Lee Corporation
34 Nuveen Investments, Inc. - Annual Report 2003