UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to _________________
Commission file number 1-11123
NUVEEN INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3817266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 917-7700
NO CHANGES
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer X Accelerated filer Non-accelerated filer
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
----- -----
At May 5, 2006, there were 79,208,371 shares of the Company's Class A
Common Stock outstanding, $0.01 par value.
NUVEEN INVESTMENTS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
March 31, 2006 and December 31, 2005 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2006 and 2005 4
Consolidated Statement of Changes in Common Stockholders'
Equity (Unaudited), Three Months Ended March 31, 2006 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2006 and 2005 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26
ITEM 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1 through Item 6 28
Signatures 31
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUVEEN INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
ASSETS
Cash and cash equivalents $ 122,476 $ 128,933
Management and distribution fees receivable 65,285 61,932
Other receivables 33,952 22,387
Furniture, equipment, and leasehold improvements,
at cost less accumulated depreciation
and amortization of $61,097 and $58,950, respectively 31,529 31,926
Investments 129,235 121,273
Goodwill 647,767 625,267
Other intangible assets, at cost less accumulated
amortization of $22,458 and $20,785, respectively 60,634 62,307
Current taxes receivable -- 4,377
Other assets 23,534 18,815
------------- -------------
$ 1,114,412 $ 1,077,217
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-Term Obligations:
Notes payable $ 150,000 $ 150,000
Accounts payable 15,648 15,990
Current taxes payable 9,686 --
Accrued compensation and other expenses 27,340 86,644
Other short-term liabilities 28,214 12,930
------------- -------------
Total Short-Term Obligations 230,888 265,564
------------- -------------
Long-Term Obligations:
Senior term notes $ 543,924 $ 543,733
Deferred compensation 39,360 36,585
Deferred income tax liability, net 28,293 26,319
Other long-term liabilities 24,001 23,186
------------- -------------
Total Long-Term Obligations 635,578 629,823
------------- -------------
Total liabilities 866,466 895,387
Minority interest 23,111 25,007
Common stockholders' equity:
Class A Common stock, $0.01 par value; 160,000,000 shares authorized; 1,209 1,209
120,911,480 shares issued at March 31, 2006 and December 31, 2005
Additional paid-in capital 254,154 246,565
Retained earnings 1,004,234 965,058
Unamortized cost of restricted stock awards (30,437) (18,337)
Accumulated other comprehensive gain/(loss) 428 864
------------- -------------
1,229,588 1,195,359
Less common stock held in treasury, at cost
(41,715,656 and 43,196,377 shares, respectively) (1,004,753) (1,038,536)
------------- -------------
Total common stockholders' equity 224,835 156,823
------------- -------------
$ 1,114,412 $ 1,077,217
============= =============
See accompanying notes to consolidated financial statements.
3
NUVEEN INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
------------- -------------
Operating revenues:
Investment advisory fees from assets under management $ 156,331 $ 131,209
Product distribution 1,237 2,803
Performance fees / other revenue 2,578 856
------------- -------------
Total operating revenues 160,146 134,868
Operating expenses:
Compensation and benefits 53,821 43,038
Advertising and promotional costs 2,670 2,669
Occupancy and equipment costs 5,931 5,400
Amortization of intangible assets 1,673 1,273
Travel and entertainment 2,108 1,686
Outside and professional services 7,144 5,829
Minority interest expense 1,481 1,406
Other operating expenses 5,758 4,544
------------- -------------
Total operating expenses 80,586 65,845
Other income/(expense) 2,329 1,858
------------- -------------
Net interest expense (8,345) (989)
------------- -------------
Income before taxes 73,544 69,892
Income taxes 28,682 26,699
------------- -------------
Net income $ 44,862 $ 43,193
============= =============
Average common and common equivalent shares outstanding:
Basic 78,670 93,757
============= =============
Diluted 83,688 98,913
============= =============
Earnings per common share:
Basic $ 0.57 $ 0.46
============= =============
Diluted $ 0.54 $ 0.44
============= =============
See accompanying notes to consolidated financial statements.
4
NUVEEN INVESTMENTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
UNAMORTIZED ACCUMULATED
CLASS A ADDITIONAL COST OF OTHER
COMMON PAID-IN RETAINED RESTRICTED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS STOCK AWARDS INCOME/(LOSS) STOCK TOTAL
----------- ----------- ----------- ------------ ------------- ----------- -----------
Balance at December 31, 2005 $ 1,209 $ 246,565 $ 965,058 $ (18,337) $ 864 $(1,038,536) $ 156,823
Net income 44,862 44,862
Cash dividends paid (16,549) (16,549)
Purchase of treasury stock (3,726) (3,726)
Compensation expense on options 3,792 3,792
Exercise of stock options (5,014) 4,202 29,847 29,035
Grant of restricted stock 6,661 (14,436) 7,775 --
Forfeit of restricted stock 113 (113) --
Amortization of restricted
stock awards 2,223 2,223
Tax effect of options exercised 8,807 8,807
Tax effect of restricted stock 4 4
Other comprehensive income (436) (436)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2006 $ 1,209 $ 254,154 $ 1,004,234 $ (30,437) $ 428 $(1,004,753) $ 224,835
=========== =========== =========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
THREE MONTHS
Comprehensive Income (in 000s): ENDING 3/31/06
- ------------------------------ --------------
Net income $ 44,862
Other comprehensive income:
Unrealized gains/(losses) on marketable equity securities, net of tax 658
Reclassification adjustments for realized gains/(losses) (456)
Amortization of terminated cash flow hedge (59)
Deferred tax impact of terminated cash flow hedge (574)
Foreign currency translation adjustment (5)
----------
Subtotal: other comprehensive income (436)
----------
Comprehensive Income $ 44,426
==========
THREE MONTHS
Change in Shares Outstanding (in 000s): ENDING 3/31/06
- --------------------------------------- --------------
Shares outstanding at the beginning of the year 77,715
Shares issued under equity incentive plans 1,564
Shares acquired (81)
Forfeit of restricted stock (2)
-------------
Shares outstanding at March 31, 2006 79,196
=============
See accompanying notes to consolidated financial statements.
5
NUVEEN INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2006 2005
------------- -------------
Cash flows from operating activities:
Net income $ 44,862 $ 43,193
Adjustments to reconcile net income to net cash
provided from operating activities:
Deferred income taxes 1,272 1,500
Depreciation of office property and equipment 2,318 2,060
Amortization of intangible assets 1,673 1,273
Amortization of debt related costs, net 132 (247)
Compensation expense for options and restricted stock 6,008 4,964
Net (increase) decrease in assets:
Management and distribution fees receivable (3,353) 417
Other receivables 4,534 2,715
Other assets (4,718) (4,664)
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (59,323) (47,037)
Deferred compensation 2,775 746
Accounts payable (342) (277)
Current taxes payable 14,063 19,107
Other liabilities (3,298) 1,122
Other (2,642) 3,190
------------- -------------
Net cash provided from operating activities 3,961 28,062
------------- -------------
Cash flows from financing activities:
Dividends paid (16,549) (16,883)
Proceeds from stock options exercised 29,035 13,203
Acquisition of treasury stock (3,726) (3,651)
Net deferred debt issuance related items 50 --
Tax effect of options and restricted stock 8,810 --
------------- -------------
Net cash provided from/(used for) financing activities 17,620 (7,331)
------------- -------------
Cash flows from investing activities:
Purchase of office property and equipment (2,095) (4,330)
Proceeds from sales of investment securities 7,722 18,234
Purchases of investment securities (11,814) (4,585)
Repurchase of NWQ minority members' interests (22,500) (24,675)
Net change in consolidated mutual funds 682 (4,578)
Other (33) (17)
------------- -------------
Net cash used for investing activities (28,038) (19,951)
------------- -------------
Increase/(decrease) in cash and cash equivalents (6,457) 780
Cash and cash equivalents:
Beginning of year 128,933 209,360
------------- -------------
End of period $ 122,476 $ 210,140
------------- -------------
Supplemental Information:
Taxes paid $ 6,565 $ 1,079
Interest paid $ 16,570 $ 7,063
See accompanying notes to consolidated financial statements.
6
NUVEEN INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2006
NOTE 1 BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Nuveen
Investments, Inc. and its majority-owned subsidiaries (the "Company" or "Nuveen
Investments") and have been prepared in conformity with accounting principles
generally accepted in the United States of America. These financial statements
have also been prepared in accordance with the instructions to Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures have been omitted pursuant
to such rules and regulations. As a result, these financial statements should be
read in conjunction with the audited consolidated financial statements and
related notes included in the Company's latest annual report on Form 10-K.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
is a revision of SFAS No. 123, and supersedes APB Opinion No. 25 and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No. 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005. SFAS No. 123R requires the use of a slightly different method of
accounting for forfeitures. Beginning in 2006, the Company adopted SFAS No.
123R. No cumulative accounting adjustment was required. This change in
methodology did not have a material impact on the Company's consolidated
financial statements.
In 2005, the Company repurchased $600 million of Nuveen Investments' common
stock directly from The St. Paul Travelers Companies, Inc. ("STA") at a price of
$32.98 per share, or approximately 18.2 million shares. The repurchase of these
shares was completed in two steps: 1) a $200 million (6.0 million shares)
repurchase was completed on April 7, 2005, and a $400 million forward purchase
(plus interest) that settled on July 28, 2005. The entire $600 million
repurchase was recorded by Nuveen Investments as if it were completed in its
entirety on April 7, 2005. As such, effective April 7, 2005 Nuveen Investments
had approximately 75.9 million shares of common stock outstanding for the
purposes of computing basic earnings per share.
These financial statements rely, in part, on estimates. In the opinion of
management, all necessary adjustments (consisting of normal recurring accruals)
have been reflected for a fair presentation of the results of operations,
financial position and cash flows in the accompanying unaudited consolidated
financial statements. The results for the period are not necessarily indicative
of the results to be expected for the entire year.
7
NOTE 2 EARNINGS PER COMMON SHARE
The following table sets forth a reconciliation of net income and the weighted
average common shares used in the basic and diluted earnings per share
computations for the three-month periods ended March 31, 2006 and 2005.
For the three months ended
------------------------------------------------------------------------------------------
March 31, 2006 March 31, 2005
------------------------------------------- -------------------------------------------
In thousands Net Per-share Net Per-share
except per share data income Shares amount income Shares amount
- --------------------- ----------- ----------- ----------- ----------- ----------- -----------
Basic EPS $ 44,862 78,670 $ 0.57 $ 43,193 93,757 $ 0.46
Dilutive effect of:
Deferred stock awards -- 464 -- 459
Employee stock options -- 4,554 -- 4,697
----------- ----------- ----------- -----------
Diluted EPS $ 44,862 83,688 $ 0.54 $ 43,193 98,913 $ 0.44
Options to purchase 46,860 and 9,074 shares of the Company's common stock were
outstanding as of March 31, 2006 and 2005, respectively, but were not included
in the computation of diluted earnings per share because their inclusion would
have been antidilutive since the options' weighted average exercise price of
$46.39 and $39.88 per share, respectively, was greater than the average market
price of the Company's common shares during the applicable period.
NOTE 3 NET CAPITAL REQUIREMENT
Nuveen Investments, LLC, the Company's wholly-owned broker/dealer subsidiary, is
subject to SEC Rule 15c3-1, the "Uniform Net Capital Rule," which requires the
maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, as these terms are defined in the Rule, shall not
exceed 15 to 1. At March 31, 2006, Nuveen Investments, LLC's net capital ratio
was 1.34 to 1 and its net capital was approximately $20.8 million which was
$18.9 million in excess of the required net capital of $1.9 million.
NOTE 4 GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of activity in the balance of
goodwill from December 31, 2005 to March 31, 2006 presented on our consolidated
balance sheets (in thousands):
Goodwill
- --------
Balance at December 31, 2005 $ 625,267
Repurchase of NWQ minority interests 22,500
----------
Balance at March 31, 2006 $ 647,767
==========
As part of the acquisition of NWQ Investment Management ("NWQ") in 2002, key
employees purchased three classes of non-controlling member interests in NWQ.
The purchase allows NWQ key employees to participate in profits of NWQ above
specified levels beginning January 1, 2003. Beginning in 2004 and continuing
through 2008, the Company has the right to purchase the non-controlling members'
respective interests in NWQ at fair market value. On February 13, 2004, the
Company exercised its right to call 100% of the NWQ Class 2 minority members'
interests for
8
$15.4 million. Of the total amount paid, approximately $12.9 million was
recorded as goodwill. On February 15, 2005, the Company exercised its right to
call 100% of the NWQ Class 3 minority members' interests for $22.8 million. Of
the total amount paid, approximately $22.5 million was recorded as goodwill. On
February 15, 2006, the Company exercised its right to purchase 25% of the NWQ
Class 4 minority members' interests for $22.6 million. Of the total amount paid,
approximately $22.5 million was recorded as goodwill, with the remainder being
recorded as a return of capital.
Although the Company has engaged external valuation experts to determine the
appropriate purchase price allocation for the Santa Barbara Asset Management
("SBAM") acquisition completed in October 2005, a final valuation is not yet
complete. The purchase price allocation presented within this 10-Q filing is
preliminary. The Company does not expect to make any material modifications to
its initial estimates relating to the SBAM acquisition. Generally accepted
accounting principles allow for purchase price adjustments for one year from the
time of an acquisition. Our preliminary estimate indicates that approximately
$14.4 million of the purchase price in excess of the net book value of assets
acquired is assignable to intangible assets, all of which relates to existing
contractual customer relationships.
SFAS No. 142, "Goodwill and Other Intangible Assets," requires an annual
goodwill impairment test. The results of our last annual test indicated that, as
of May 31, 2005, there was no indication of potential impairment of goodwill.
The following table presents gross carrying amounts and accumulated amortization
amounts for intangible assets presented on our consolidated balance sheets at
March 31, 2006 and December 31, 2005 (in thousands):
At March 31, 2006 At December 31, 2005
---------------------- ----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amortizable Intangible Assets Amount Amortization Amount Amortization
- ----------------------------- -------- ------------ -------- ------------
Symphony-
Customer relationships $43,800 $10,446 $43,800 $ 9,891
Internally developed software 1,622 1,513 1,622 1,432
Favorable lease 369 369 369 369
NWQ customer contracts 22,900 9,330 22,900 8,693
SBAM - estimated intangibles 14,400 800 14,400 400
------- ------- ------- -------
Total $83,091 $22,458 $83,091 $20,785
======= ======= ======= =======
</Table>
The projected amortization for the next five years is approximately $4.9 million
for the remaining nine months of 2006, and annual amortization of $6.4 million
for each of 2007, 2008, 2009, and 2010.
9
NOTE 5 DEBT
At March 31, 2006 and December 31, 2005, debt on the accompanying consolidated
balance sheets was comprised of the following (in thousands):
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
Short-Term Obligations:
Notes payable $150,000 $150,000
-------- --------
Long-Term Obligations:
Senior Term Notes:
Senior term notes - 5 Year $250,000 $250,000
Net unamortized discount (623) (654)
Senior term notes - 10 Year 300,000 300,000
Net unamortized discount (1,444) (1,473)
Net unamortized debt issuance costs (4,009) (4,140)
-------- --------
subtotal $543,924 $543,733
-------- --------
Total $693,924 $693,733
======== ========
SENIOR TERM NOTES
On September 12, 2005, Nuveen Investments issued $550 million of senior
unsecured notes, comprised of $250 million of 5-year notes and $300 million of
10-year notes. The Company received approximately $544 million in net proceeds
after discounts and other debt issuance costs. The five-year notes bear interest
at an annual fixed rate of 5.0% payable semi-annually beginning March 15, 2006.
The 10-year senior notes bear interest at an annual fixed rate of 5.5% payable
semi-annually also beginning March 15, 2006. The net proceeds from the notes
were used to repay a portion of the outstanding debt under the Company's then
outstanding $750 million bridge credit agreement. The costs related to the
issuance of the senior term notes are being capitalized and amortized to expense
over their term. At March 31, 2006, the fair value of the five-year and ten-year
senior term notes was approximately $243.3 million and $291.0 million,
respectively.
SENIOR REVOLVING CREDIT FACILITY
In addition to the senior term notes, the Company has a $400 million senior
revolving credit facility that expires on September 15, 2010. As of March 31,
2006 and December 31, 2005, the Company borrowed $150 million of the total
amount available under the senior revolving credit facility. The proceeds under
this borrowing were used to repay the remaining amount due under the then
outstanding bridge credit agreement. The rate of interest payable under the
agreement is, at the Company's option, a function of either one of various
floating rate indices or the Federal Funds rate. For the three months ended
March 31, 2006, the weighted average interest rate was 5.01%. The agreement
requires the Company to pay a facility fee at an annual rate of a range of 0.08%
to 0.15% that is dependent on our debt rating. 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.
OTHER
Our broker-dealer subsidiary occasionally utilizes available, uncommitted lines
of credit, which approximate $100 million, with no annual facility fees to
satisfy periodic, short-term liquidity needs. At March 31, 2006 and December 31,
2005, no borrowings were outstanding on these uncommitted lines of credit.
10
NOTE 6 DERIVATIVE FINANCIAL INSTRUMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of FASB Statement No. 133" and further
amended by SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," states that, unless a derivative qualifies as a hedge,
the gain or loss from a derivative instrument must be recorded into current
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.
In anticipation of the issuance of the senior term notes (refer to Note 5,
"Debt"), the Company entered into a series of treasury rate lock transactions
with an aggregate notional amount of $550 million. These treasury rate locks
were accounted for as cash-flow hedges, as they hedged against the variability
in future projected interest payments on the forecasted issuance of fixed rate
debt (the longer-term senior term notes that replaced the bridge credit
agreement) attributable to changes in interest rates. The prevailing treasury
rates had increased by the time of the issuance of the senior term notes and the
locks were settled for a net payment to the Company of approximately $1.6
million. The Company has recorded this gain in "Accumulated Other Comprehensive
Income/(Loss)" on the accompanying consolidated balance sheets as of March 31,
2006 and December 31, 2005, as the treasury rate locks were considered highly
effective for accounting purposes in mitigating the interest rate risk on the
forecasted debt issuance. The $1.6 million is being reclassified into current
earnings commensurate with the recognition of interest expense on the 5-year and
10-year term debt. At March 31, 2006, the unamortized gain on the treasury rate
lock transactions was approximately $1.5 million. For the remaining nine months
of 2006, the Company expects to reclassify approximately $0.2 million,
respectively, of the gain on the treasury rate lock transactions as an offset to
interest expense.
Also included in the accompanying consolidated balance sheets as of March 31,
2006 and December 31, 2005 are certain swap agreements and futures contracts
that have not been designated as hedging instruments. The swap agreements and
futures contracts are being used to mitigate overall market risk of certain
recently created product portfolios that are not yet being marketed. At March
31, 2006, the net fair value of these open non-hedging derivatives was a net
liability of approximately $0.2 million and is reflected as approximately $0.3
million in "Other Assets" and $0.5 million in "Other Short-Term Liabilities" on
the accompanying consolidated balance sheet. At December 31, 2005, the net fair
value of these open non-hedging derivatives was approximately $0.3 million and
is reflected in "Other Short-Term Liabilities" on the accompanying consolidated
balance sheet. For the three months ended March 31, 2006, the net fair value
adjustment resulted in a gain of approximately $0.1 million, of which
approximately $0.1 million was realized, with the remainder in unrealized
gains/losses, both reflected in "Other Income/(Expense" in the accompanying
consolidated statement of income for the three months ended March 31, 2006. For
the three months ended March 31, 2005, the net fair value adjustment resulted in
a gain of approximately $0.5 million, of which approximately $0.2 million was
realized, with the remainder
11
in unrealized gains/losses, both reflected in "Other Income/(Expense)" in the
accompanying consolidated statement of income for the three months ended March
31, 2005.
NOTE 7 RETIREMENT PLANS
On December 23, 2003, the FASB released a revised version of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." The
revised version of SFAS No. 132 includes new interim disclosure requirements
regarding components of net periodic benefit cost as well as estimated
contributions. The following table presents the components of the net periodic
retirement plans' benefit costs for the three months ended March 31, 2006 and
2005, respectively:
Three Months Three Months
Ended March 31, 2006 Ended March 31, 2005
---------------------------------- ----------------------------------
Total Post- Total Post-
Pension Retirement Pension Retirement
-------------- -------------- -------------- --------------
Service Cost $ 436,250 $ 60,000 $ 392,750 $ 63,000
Interest Cost 522,250 145,250 450,500 128,250
Expected Return on Assets (561,750) -- (541,000) --
Amortization of:
Unrecognized Prior Service Cost -- (66,250) -- (66,250)
Unrecognized (Gain)/Loss 106,250 29,250 31,500 14,750
-------------- -------------- -------------- --------------
Total $ 503,000 $ 168,250 $ 333,750 $ 139,750
============== ============== ============== ==============
During 2006, the Company expects to contribute approximately $0.1 million to its
excess pension plan and approximately $0.5 million for benefit payments to its
post-retirement benefit plan. For the first three months of 2006, the Company
has paid out approximately $0.1 million in post-retirement benefits.
NOTE 8 STOCK-BASED COMPENSATION
Effective January 1, 2006, we adopted Statement of Financial Accounting Standard
("SFAS") No. 123(R), "Share Based Payment." Because the fair value recognition
provisions of SFAS No. 123, "Stock-Based Compensation," and SFAS No. 123(R) were
materially consistent under our equity plans, the adoption of SFAS No. 123(R)
did not have a significant impact on our financial position or our results of
operations.
The Company currently maintains two stock-based compensation plans: the Second
Amended and Restated Nuveen 1996 Equity Incentive Award Plan (the "1996 Plan")
and the 2005 Equity Incentive Plan (the "2005 Plan"). Under the 1996 Plan, the
Company had reserved an aggregate of 30,900,000 shares of Class A common stock
for awards. Under the 2005 Plan, the Company has reserved an aggregate of
7,000,000 shares of Class A common stock for awards. Under both plans, options
may be awarded at exercise prices not less than 100% of the fair market value of
the stock on the grant date, and maximum option terms may not exceed ten years.
A Black-Scholes option-pricing model is used to determine the fair value of
stock-based compensation awards. Awards that
12
expire or are cancelled without delivery of shares generally become available
for reissuance under the plans.
Options awarded pursuant to the 1996 Plan and the 2005 Plan are generally
subject to three-year cliff vesting and expire ten years from the award date.
During the three months ended March 31, 2006, the Company awarded options to
employees to purchase 859,695 shares of common stock and 323,398 shares of
restricted stock. As of March 31, 2006, there were 5,807,329 shares available
for future equity awards. During the first three months of 2006, no stock
options expired unexercised.
Options awarded during the first three months of 2006 had a weighted-average
fair value of $10.23 per share, which was determined at the date of grant using
a Black-Scholes option-pricing model with the following assumptions: a dividend
yield of 2.1%, expected volatility of 23%, a risk-free interest rate ranging
from 4.24% to 4.51%, and an expected life of 5.1 years. Options awarded during
the first three months of 2005 had a weighted-average fair value of $7.52 per
share, which was determined at the date of grant using a Black-Scholes
option-pricing model with the following assumptions: a dividend yield of 2.3%,
expected volatility of 22%, a risk-free interest rate of 3.56%, and an expected
life of 5.1 years. A summary of the Company's stock option activity for the
three months ended March 31, 2006 is presented in the following table:
WEIGHTED-
AVERAGE AGGREGATE
WEIGHTED- REMAINING INTRINSIC
AVERAGE CONTRACTUAL VALUE
(IN 000S, EXCEPT PER SHARE DATA) OPTIONS EXERCISE PRICE TERM (YEARS) (IN MILLIONS)
------------- -------------- ------------- --------------
Options outstanding at December 31, 2005 17,683 $ 25.42
Awarded 860 44.68
Exercised (1,241) 23.40
Forfeited (38) 30.70
-------------
Options outstanding at March 31, 2006 17,264 $ 26.52 6.3 $ 366
=============
Options exercisable at March 31, 2006 10,620 $ 21.57 5.0 $ 277
Recorded compensation expense for share based payment awards was $6.3 million
and $5.2 million for the three months ended March 31, 2006 and 2005,
respectively. Tax benefits related to compensation expense for share based
payment awards totaled $2.4 million and $2.0 million for the three months ended
March 31, 2006 and 2005, respectively. As of March 31, 2006, there was $41.5
million of total unrecognized compensation costs related to stock options and
restricted stock awards, not including long-term equity performance awards
discussed below. These costs are expected to be recognized over a weighted
average period of 2.4 years.
In January 2005, the Company granted long-term equity performance awards
including 269,300 restricted shares and 1,443,000 options to senior managers.
These grants will be awarded only if specified Company-wide performance criteria
are met by the end of 2007, and are subject to additional time-based vesting if
the performance criteria are met. As of March 31, 2006, the Company has not
recorded any compensation expense related to these awards.
During the first three months of 2006, the total intrinsic value of stock
options exercised was $27.8 million and the total fair value of stock awards
vested was $12.6 million. For the first three months of 2005, the total
intrinsic value of stock options exercised was $15.4 million and the total fair
value of stock awards vested was $11.2 million.
13
Share repurchases are utilized to reduce the dilutive impact of our stock-based
plans. The Company has an approved share repurchase plan in place with 1.4
million shares remaining to be purchased. Repurchased shares are converted to
Treasury shares and are used to satisfy stock option exercises, as needed. Share
repurchase activity is dependent on the availability of excess cash after
meeting business and capital requirements. Therefore, the timing and amount of
repurchases is not known and we do not have an estimate of the number of shares
expected to be repurchased during 2006.
14
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 2006
DESCRIPTION OF THE BUSINESS
Our principal businesses are asset management and related research, as well as
the development, marketing and distribution of investment products and services
for the affluent, high-net-worth and institutional market segments. We
distribute our investment products and services, which include individually
managed accounts, closed-end exchange-traded funds ("closed-end funds"), and
open-end mutual funds ("open-end funds" or "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.
The Company and its subsidiaries offer high-quality investment capabilities
through six branded investment teams: NWQ, specializing in value-style equities;
Nuveen Investments ("Nuveen"), managing fixed-income investments; Santa Barbara,
committed to growth equities; Tradewinds NWQ, specializing in global equities;
Rittenhouse, dedicated to "blue-chip" growth equities , and Symphony, with
expertise in alternative investments as well as equity and income products.
We derive a substantial portion of our revenue from investment advisory fees,
which are recognized as services are performed. These fees are directly related
to the market value of the assets we manage. Advisory fee revenues generally
will increase with a rise in the level of assets under management. Assets under
management will rise through sales of our investment products or through
increases in the value of portfolio investments. Assets under management may
also increase as a result of reinvestment of distributions from funds and
accounts. Fee income generally will decline when assets under management
decline, as would occur when the values of fund portfolio investments decrease
or when managed account withdrawals or mutual fund redemptions exceed gross
sales and reinvestments.
In addition to investment advisory fees, we have two other main sources of
operating revenue: 1) performance fees and 2) distribution and underwriting
revenue. Performance fees are earned when investment performance on certain
institutional accounts and hedge funds exceeds a contractual threshold. These
fees are recognized only at the performance measurement date contained in the
individual account management agreement. Distribution revenue is earned when
certain funds are sold to the public through financial advisors.
Correspondingly, distribution revenue will rise and fall with the level of our
sales of mutual fund products. Underwriting fees are earned on the initial
public offerings of our closed-end funds. The level of underwriting fees earned
in any given year will fluctuate depending on the number of new funds offered,
the size of the funds offered and the extent to which we participate as a member
of the syndicate group underwriting the fund. Also included in distribution and
underwriting revenue is Muni Preferred(R) and Fund Preferred(R) revenue.
Preferred shares of our closed-end funds are bought and sold through a secondary
market auction. A participation fee is paid by the fund to the auction
participants based on shares traded. Access to the auction must be made through
a participating broker. We offer non-participating brokers access to the
auctions, for which we earn a portion of the participation fee.
Sales of our products, and our profitability, are directly affected by many
variables, including investor preferences for equity, fixed-income or other
investments, the availability and attractiveness of competing products, market
performance, continued access to distribution channels, changes in interest
rates, inflation, and income tax rates and laws.
15
RECENT ACQUISITIONS
On October 3, 2005, the Company finalized the acquisition of Santa Barbara Asset
Management ("Santa Barbara") for approximately $50 million in cash. Santa
Barbara, an asset management firm based in California, specializes in mid- to
large-cap and small- to mid-cap growth equities primarily with institutions and
high-net-worth investors. At the time of the acquisition, Santa Barbara managed
approximately $3 billion in assets.
OTHER RECENT EVENTS
In the first quarter of 2006, the Company established a separate investment
management platform, dedicated to international and global investing. This new
unit was named Tradewinds NWQ Global Investors, LLC, and is another distinct,
independent and separately branded investment team on the Nuveen Investments'
platform. This team previously managed international and global value portfolios
as part of NWQ. Of the assets managed by NWQ at December 31, 2005, approximately
$15 billion are now part of Tradewinds.
SUMMARY OF OPERATING RESULTS
The table presented below highlights the results of our operations for the first
quarters of 2006 and 2005:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions, except per share amounts)
QUARTER ENDED MARCH 31, 2006 2005 % CHANGE
----------- ----------- --------
Gross sales of investment products $ 10,109 $ 7,682 32%
Net flows of investment products 5,903 4,297 37
Assets under management (1) (2) 145,017 118,505 22
Operating revenues 160.1 134.9 19
Operating expenses 80.6 65.8 22
Income before net interest and taxes(3) 81.9 70.9 16
Net interest expense 8.3 1.0 744
Income taxes 28.7 26.7 7
Net income 44.9 43.2 4
Basic earnings per share .57 .46 24
Diluted earnings per share .54 .44 23
Dividends per share .21 .18 17
(1) At period end.
(2) Excludes defined portfolio assets under surveillance.
(3) In addition to net income, income before net interest and taxes is reported
to help the reader in assessing the results from operations relative to
prior periods given the increased debt on our balance sheet - and the
accompanying higher interest expense - as a result of a $600 million share
repurchase.
16
RESULTS OF OPERATIONS
The following discussion and analysis contains important information that should
be helpful in evaluating our results of operations and financial condition, and
should be read in conjunction with the consolidated financial statements and
related notes.
Gross sales of investment products (which include new managed accounts, deposits
into existing managed accounts and the sale of open-end and closed-end fund
shares) for the quarter ended March 31, 2006 and 2005 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
QUARTER ENDED MARCH 31, 2006 2005
------- -------
Closed-End Funds $ -- $ 1,414
Mutual Funds 1,347 702
Retail Managed Accounts 7,230 3,684
Institutional Managed Accounts 1,532 1,882
------- -------
Total $10,109 $ 7,682
======= =======
First quarter gross sales increased 32% year over year, reaching $10.1 billion.
Retail and institutional managed account sales were $8.8 billion, up 57% versus
sales in the first quarter of last year. The largest driver of the increase was
a $2.8 billion increase in value-style equity managed account sales, primarily
international value-style accounts. Mutual fund gross sales nearly doubled,
driven by increases in both municipal and equity fund sales. Municipal mutual
fund sales were up over 50% due to high demand for the Nuveen High Yield
Municipal Bond Fund. Equity fund sales more than tripled, driven by sales of our
NWQ Multi-Cap Value Fund and the NWQ International Value Fund. There were no
closed-end fund sales this quarter. During the first quarter of the prior year
we raised just over $1.2 billion in our second equity option strategy fund and
another $0.2 billion in our first Tax Advantaged Floating Rate Fund.
Net flows of investment products for first quarters of 2006 and 2005 are shown
below:
NET FLOWS
(in millions)
QUARTER ENDED MARCH 31, 2006 2005
------- -------
Closed-End Funds $ (7) $ 1,424
Mutual Funds 864 350
Retail Managed Accounts 4,114 1,195
Institutional Managed Accounts 932 1,328
------- -------
Total $ 5,903 $ 4,297
======= =======
Net flows increased $1.6 billion versus the prior year to $5.9 billion. Retail
managed account flows of $4.1 billion were more than three times the level of
flows in the same quarter of the prior year. Contributing to this growth was an
acceleration of flows due to the announcement of the soft-closing of our
Tradewinds international strategy in retail managed accounts. Mutual fund flows
showed continued strength with growth in both municipal and equity fund flows.
17
The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT(1)
(in millions)
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
-------- ------------ --------
Closed-End Funds $ 51,813 $ 51,997 $ 51,050
Mutual Funds 15,398 14,495 12,887
Retail Managed Accounts 53,652 47,675 37,715
Institutional Managed Accounts 24,154 21,950 16,853
-------- -------- --------
Total $145,017 $136,117 $118,505
======== ======== ========
(1) Excludes defined portfolio product assets under surveillance.
Assets under management ended the quarter at just over $145 billion, an increase
of 22% versus assets under management at the end of the first quarter of 2005
and an increase of 7% versus assets under management at the end of the prior
year. At March 31, 2006, 48% or our assets were in equity-style products, 42% in
municipal-style products and 10% in taxable income style products.
The components of the change in our assets under management were as follows:
NET ASSETS UNDER MANAGEMENT(1)
(in millions)
MARCH 31, MARCH 31,
2006 2005
--------- ---------
QUARTER ENDED
Beginning Assets Under Management $ 136,117 $ 115,453
Gross Sales 10,109 7,682
Reinvested Dividends 63 62
Redemptions (4,269) (3,447)
--------- ---------
Net Flows into Managed Assets 5,903 4,297
Appreciation/(Depreciation) 2,997 (1,245)
--------- ---------
Ending Assets Under Management $ 145,017 $ 118,505
========= =========
(1) Excludes defined portfolio product assets under surveillance.
Assets were up $8.9 billion versus the end of the year as net flows for the
quarter of $5.9 billion were coupled with market appreciation of $3.0 billion.
Equity and income-oriented assets appreciated $3.3 billion and $0.2 billion
during the quarter, respectively, while market depreciation caused a $0.5
billion decline in municipal assets.
18
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
QUARTER ENDED MARCH 31, 2006 2005
-------- --------
Closed-End Funds $ 61,843 $ 61,151
Mutual Funds 19,877 16,432
Managed Accounts 74,611 53,626
-------- --------
Total $156,331 $131,209
======== ========
Advisory fees increased 19% for the quarter driven by an increase in fees across
all product lines. Fees on managed accounts increased due mainly to an increase
in fees on value, international and municipal accounts as a result of an
increase in assets under management, while fees on our growth accounts declined
slightly as a result of a decline in assets under management.
Product distribution revenue for the three-month periods ended March 31, 2006
and 2005 is shown in the following table:
PRODUCT DISTRIBUTION
(in thousands)
QUARTER ENDED MARCH 31, 2006 2005
------- -------
Closed-End Funds $ (10) $ 1,441
Muni/Fund Preferred(R) 1,174 1,151
Mutual Funds 73 211
------- -------
Total $ 1,237 $ 2,803
======= =======
Product distribution revenue declined $1.6 million for the quarter due mainly to
a reduction in closed-end fund underwriting revenue. We did not complete any
closed-end fund offerings in the first quarter of 2006. Mutual fund distribution
revenue declined slightly as a result of an increase in commissions paid to
distributors on high dollar value sales.
PERFORMANCE FEES/OTHER REVENUE
Performance fees/other revenue consists of performance fees earned on
institutional assets managed by Symphony and various fees earned in connection
with services provided on behalf of our defined portfolio assets under
surveillance. Performance fees for 2006 were $2.4 million, up from the $0.4
million in performance fees in the first quarter of 2005. Partially offsetting
this increase, fees earned on services provided on behalf of our defined
portfolio assets under surveillance declined due to an overall decline in these
assets.
19
OPERATING EXPENSES
The following table summarizes operating expenses for the three-month periods
ended March 31, 2006 and 2005:
OPERATING EXPENSES
(in thousands)
QUARTER ENDED MARCH 31, 2006 2005
------- -------
Compensation and benefits $53,821 $43,038
Advertising and promotional costs 2,670 2,669
Occupancy and equipment costs 5,931 5,400
Amortization of intangible assets 1,673 1,273
Travel and entertainment 2,108 1,686
Outside and professional services 7,144 5,829
Minority interest expense 1,481 1,406
Other operating expenses 5,758 4,544
------- -------
Total $80,586 $65,845
======= =======
As a % of Operating Revenues 50.3% 48.8%
SUMMARY
Operating expenses for the quarter increased 22% due mainly to an increase in
compensation and benefits.
COMPENSATION AND BENEFITS
Compensation and related benefits for the first quarter of 2006 increased $10.8
million due to an increase in base compensation as a result of new positions and
salary increases and an increase in overall incentive compensation due to the
Company's higher profit level. A portion of the increase in overall incentive
compensation relates to expense recognized on various profits interests awarded
to affiliates. The fair market value of unvested profits interests is being
expensed over the appropriate vesting period of the related units as a
compensation charge with a corresponding increase in minority interest
outstanding (see also Capital Resources, Liquidity and Financial Condition for
further information).
OCCUPANCY AND EQUIPMENT COSTS
Occupancy and equipment costs increased $0.5 million due to an increase in
leased space for NWQ and Santa Barbara.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased $0.4 million during the first quarter of
2006 as a result of amortization of intangible assets associated with the Santa
Barbara acquisition (See Note 4 to the Consolidated Financial Statements,
"Goodwill and Intangible Assets" for further information).
OUTSIDE AND PROFESSIONAL SERVICES
Outside and professional services expense increased $1.3 million primarily due
to an increase in electronic information expense as we provide our investment
and research teams with more data and other tools to better manage their
portfolios.
ALL OTHER OPERATING EXPENSES
All other operating expenses, including advertising and product promotion,
travel and entertainment, minority interest expense, fund organization costs and
other expenses increased approximately $1.7 million, due primarily to higher
insurance costs and increased recruiting and relocation.
20
OTHER INCOME/(EXPENSE)
Other income/(expense) includes realized gains and losses on investments and
miscellaneous income, including gain or loss on the disposal of property.
The following is a summary of other income/(expense) for the quarters ended
March 31, 2006 and 2005:
OTHER INCOME/(EXPENSE)
(in thousands)
QUARTER ENDED MARCH 31, 2006 2005
------- -------
Gains/(Losses) on Investments $ 2,388 $ 1,915
Miscellaneous Income/(Expense) (59) (57)
------- -------
Total $ 2,329 $ 1,858
======= =======
Total other income/(expense) increased $0.5 million in the first quarter of 2006
compared to the first quarter of 2005, due to an increase in investment gains
for the quarter.
NET INTEREST EXPENSE
The following is a summary of net interest expense for the quarters ended March
31, 2006 and 2005:
NET INTEREST EXPENSE
(in thousands)
QUARTER ENDED MARCH 31, 2006 2005
-------- --------
Dividend and Interest Revenue $ 1,852 $ 2,266
Interest Expense (10,197) (3,255)
-------- --------
Total $ (8,345) $ (989)
======== ========
Total net interest expense increased $7.4 million in the first quarter of 2006
compared to the first quarter of 2005, due to increased interest expense
associated with the repurchase of shares from STA and the related increase in
outstanding debt.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
is a revision of SFAS No. 123, and supersedes APB Opinion No. 25 and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No. 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005. SFAS No. 123R requires the use of a slightly different method of
accounting for forfeitures. Beginning in 2006, the Company adopted SFAS No.
123R.
21
This change in methodology did not have a material impact on the Company's
consolidated financial statements.
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
Our primary liquidity needs are to support working capital requirements, service
indebtedness and fund capital expenditures. Our principal sources of liquidity
are cash flows from operating activities and borrowings under available credit
facilities and long-term notes.
PRIVATE PLACEMENT DEBT
On September 19, 2003, the Company issued $300 million of senior unsecured notes
(the "private placement debt"). Proceeds from the private placement debt were
used to refinance existing debt and for general corporate purposes. These notes,
which carried a fixed coupon rate of 4.22%, payable semi-annually, were issued
at 100% of par, were unsecured and were prepayable at any time in whole or in
part. These notes were originally scheduled to mature on September 19, 2008, but
were repaid on April 6, 2005, with borrowings made under a new bridge credit
agreement (discussed below). At the time of the repayment, the Company also paid
approximately $1.5 million in accrued interest. Under the terms of the private
placement debt, no "make-whole premium" amounts were due.
BANK CREDIT FACILITIES
Since 2003, the Company maintained a line of credit with a group of banks. This
$250 million credit line was divided into two equal facilities: one with a
three-year term that was scheduled to expire in August of 2006, and one with a
term of 364 days that was scheduled to expire in August of 2005. During the
second quarter of 2005, the Company terminated the 364-day line of credit, and
amended the three-year line of credit to permit the borrowings under a new
bridge financing agreement and the use of those borrowings as described below.
During the third quarter of 2005, the Company terminated the three-year term
facility and replaced it with a new senior revolving credit facility (discussed
below).
BRIDGE CREDIT FACILITY
In April 2005, the Company entered into a $750 million bridge credit agreement
with various financial institutions. The original maturity date of this credit
agreement was March 31, 2006. Borrowings under this facility bore an interest
rate, at Nuveen Investments' option, of either LIBOR or the Federal Funds rate
plus a spread equal to 0.335% to 0.470% based on Nuveen Investments' leverage,
with such applicable spread increasing by 0.25% on September 30, 2005, and by an
additional 0.25% on December 31, 2005. The bridge credit agreement required
Nuveen Investments to pay a facility fee quarterly in arrears in an annual
amount ranging from 0.09% to 0.13%, depending on Nuveen Investments' leverage
ratio, and, when applicable, a utilization fee. During the second quarter of
2005, the Company used approximately $300 million of the amount available under
the facility to prepay the holders of the Company's 4.22% senior unsecured notes
due September 19, 2008. During the third quarter of 2005, the Company used an
additional $410 million of the remaining amount available under the bridge
credit agreement primarily to fulfill its forward contract obligation to
repurchase shares of its common stock owned by STA. During the third quarter of
2005, the entire $710 million borrowed under the bridge credit agreement was
repaid with borrowings made under a new senior revolving credit facility and the
issuance of senior notes (both discussed below) and the bridge credit facility
was terminated.
22
SENIOR TERM NOTES
On September 12, 2005, Nuveen Investments issued $550 million of senior
unsecured notes, consisting of $250 million of 5-year notes and $300 million of
10-year notes. The Company received approximately $544.4 million in net proceeds
after discounts. The five-year notes bear interest at an annual fixed rate of
5.0%, payable semi-annually beginning March 15, 2006. The 10-year senior notes
bear interest at an annual fixed rate of 5.5%, payable semi-annually also
beginning March 15, 2006. The net proceeds from the notes were used to repay a
portion of the outstanding debt under the bridge credit facility. The costs
related to the issuance of the senior term notes were capitalized and are being
amortized to expense over their respective terms.
SENIOR REVOLVING CREDIT FACILITY
In addition to the senior term notes, the Company has a new $400 million senior
revolving credit facility that expires on September 15, 2010. On September 30,
2005, the Company borrowed $140 million of the total amount available under the
new senior revolving credit facility in order to repay the remaining amount due
under the bridge credit facility. As of March 31, 2006, the Company had $150
million outstanding under this facility. The rate of interest payable under the
agreement is, at the Company's option, a function of either one of various
floating rate indices or the Federal Funds rate. The agreement requires the
Company to pay a facility fee at an annual rate of a range of 0.08% to 0.15%
that is dependent on our debt rating. 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. There are conventional financial covenants associated with this
credit facility, including a minimum net worth requirement and a maximum
leverage ratio. We were in compliance with those covenants as of March 31, 2006.
We do not believe that the bank facility requirements will have any impact on
our ability to use the credit facility in the future.
OTHER
In addition to the above facilities, our broker-dealer subsidiary may utilize
available, uncommitted lines of credit with no annual facility fees, which
approximate $100 million, to satisfy periodic, short-term liquidity needs. As of
March 31, 2006 and December 31, 2005, no borrowings were outstanding on these
uncommitted lines of credit.
EQUITY AND DIVIDENDS
As part of the NWQ acquisition, key individuals of NWQ purchased a
non-controlling, member interest in NWQ Investment Management Company, LLC. The
non-controlling interest of $0.3 million as of March 31, 2006, and $0.7 million
as of March 31, 2005, is reflected in minority interest on the consolidated
balance sheets. This purchase allows management to participate in NWQ's profits
above specified levels beginning January 1, 2003. During the first quarter of
2006 and 2005, we recorded approximately $0.9 million and $1.4 million,
respectively, of minority interest expense, which reflects the portion of
profits applicable to the minority owners. Beginning in 2004 and continuing
through 2008, the Company has the right to purchase the non-controlling members'
respective interests in NWQ at fair value. On February 13, 2004, the Company
exercised its right to call 100% of the Class 2 minority members' interests for
$15.4 million. Of the total amount paid, approximately $12.9 million was
recorded as goodwill. On February 15, 2005, the Company exercised its right to
call 100% of the Class 3 NWQ minority members' interests for $22.8 million. Of
the total amount paid, approximately $22.5 million was recorded as goodwill. On
February 15, 2006, the Company exercised its right to call 25% of the Class 4
NWQ minority members' interests for $22.6 million. Of the total amount paid on
March 1, 2006, approximately $22.5 million was recorded as goodwill.
23
In the first quarter of 2006 in connection with the establishment of the
Tradewinds NWQ Global Investors platform, a new equity opportunity was put in
place. The Company established two separate programs, one covering Tradewinds
and the other covering the traditional NWQ business. These programs allow key
individuals of these businesses to participate in the growth of either
Tradewinds or NWQ over the next five years. Four classes of units were
established at each of Tradewinds and NWQ, (collectively referred to as
"Units"). One of the classes of Units at each of NWQ and Tradewinds vests on
June 30 of each of 2007, 2008, 2009 and 2010. During the first quarter of 2006,
we recorded approximately $0.2 million of minority interest expense, which
reflects the portion of profits applicable to minority owners. The Units entitle
the holders to receive a distribution of the cash flow from either Tradewinds'
or NWQ's business to the extent such cash flow exceeds certain thresholds. The
distribution thresholds vary from year to year, reflecting Tradewinds' or NWQ's
achievement of certain profit levels. The profits interest distributions are
also subject to a cap in each year. Beginning in 2008 and continuing through
2011, the Company has the right to acquire the Units of the non-controlling
members.
As part of the Santa Barbara acquisition, an equity opportunity was put in place
to allow key individuals of SBAM to participate in Santa Barbara's earnings
growth over the next five years. Four classes of units were issued (collectively
referred to as "SB Units"). The first class of SB Units was fully vested upon
issuance. The second class shall vest one third on June 30, 2007, one third on
June 30, 2008, and one third on June 30, 2009. One third of the third class of
SB Units vested upon issuance, one third will vest on June 30, 2007, and one
third will vest on June 30, 2009. The final class shall vest on June 30, 2009.
During the first quarter of 2006, we recorded approximately $0.4 million of
minority interest expense, which reflects the portion of profits applicable to
the minority owners. The Units entitle the holders to receive a distribution of
the cash flow from Santa Barbara's business to the extent such cash flow exceeds
certain thresholds. The distribution thresholds vary from year to year,
reflecting Santa Barbara achieving certain profit levels. The profits interest
distributions are also subject to a cap in each year. Beginning in 2008 and
continuing through 2012, the Company has the right to acquire the Units of the
non-controlling members.
At March 31, 2006, we held in treasury 41,715,656 shares of Nuveen Investments
common stock. During the first quarter of 2006, the Company repurchased 80,870
shares of common stock in open market transactions as part of an on-going
repurchase program. As part of that share repurchase program approved on August
9, 2002, we are authorized to purchase up to 7.0 million shares of common stock.
As of March 31, 2006, the remaining authorization covered 1.4 million shares.
During the first quarter of 2006, we paid out dividends on common shares
totaling approximately $16.5 million.
BROKER/DEALER
Our broker/dealer subsidiary is subject to requirements of the Securities and
Exchange Commission relating to liquidity and capital standards (See Note 3 to
Consolidated Financial Statements, "Net Capital Requirement").
ADEQUACY OF LIQUIDITY
Management believes that cash provided from operations and borrowings available
under its uncommitted and committed credit facilities will provide the Company
with sufficient liquidity to meet its working capital needs, planned capital
expenditures, future contractual obligations and payment of its anticipated
quarterly dividends.
24
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 AND RISKS
From time to time, information we provide or information included in our filings
with the SEC (including Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Notes to Consolidated Financial
Statements in this Form 10-Q) may contain statements that are not historical
facts, but are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. These statements relate to
future events or future financial performance and reflect management's
expectations and opinions. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "could," "would," "should,"
"expect," "plan," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," or comparable terminology. These statements are only predictions,
and our actual future results may differ significantly from those anticipated in
any forward-looking statements due to numerous known and unknown risks,
uncertainties and other factors. All of the forward-looking statements are
qualified in their entirety by reference to the factors discussed below and
elsewhere in this report. These factors may not be exhaustive, and we cannot
predict the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those predicted in any forward-looking
statements. We undertake no responsibility to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason.
Risks, uncertainties and other factors that pertain to our business and the
effects of which may cause our assets under management, earnings, revenues,
profit margins, and/or our stock price to decline include: (1) the effects of
the substantial competition that we, like all market participants, face in the
investment management business; (2) our inability to access third-party
distribution channels to market our products; (3) the adverse effects of
declines in securities markets and/or poor investment performance by our
managers on our assets under management and future offerings; (4) a decline in
the market for closed-end funds, mutual funds and managed accounts; (5) the
adverse effect 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; (6) our failure to comply with contractual requirements and/or
guidelines in our client relationships; (7) our failure to comply with various
government regulations, including federal and state securities laws, and the
rules of the National Association of Securities Dealers; (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 the loss of
assets; (10) burdensome regulatory developments; (11) the impact of accounting
pronouncements; (12) the effect of increased leverage on us as a result of our
incurrence of additional indebtedness as a result of our share repurchase from
STA; (13) unforeseen developments in litigation involving the securities
industry or the Company; and (14) other risks described from time to time in our
SEC filings.
25
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARCH 31, 2006
MARKET RISK
The following information, and information included elsewhere in this report,
describes the key aspects of certain financial instruments that have market
risk.
INTEREST RATE SENSITIVITY
As of March 31, 2006, we had $150 million outstanding under our senior revolving
credit facility. The rate of interest payable under the agreement is, at the
Company's option, a function of either one of various floating rate indices or
the Federal Funds rate. We estimate that a 100 basis point increase (1
percentage point) in interest rates from the level at March 31, 2006, would
result in a $1.5 million increase in annual interest expense; however, it would
have no impact on the fair value of the debt at March 31, 2006. In addition to
the $150 million of debt outstanding under our revolving credit facility at
December 31, 2005, we also had $550 million of senior unsecured notes, including
$250 million of 5-year notes and $300 million of 10-year notes. The five-year
notes bear interest at an annual fixed rate of 5.0% payable semi-annually,
beginning March 15, 2006. The 10-year senior notes bear interest at an annual
fixed rate of 5.5% payable semi-annually, also beginning March 15, 2006. A
change in interest rates would have had no impact on interest incurred on our
fixed rate debt or cash flow, but would have had an impact on the fair value of
the debt. We estimate that a 100 basis point increase in interest rates from the
levels at March 31, 2006, would have resulted in a net decrease in the fair
value of our debt of approximately $29.2 million at March 31, 2006.
As of March 31, 2005, all of our long-term debt was at a fixed interest rate. A
change in interest rates would have had no impact on interest incurred on our
fixed debt or cash flow, but would have had an impact on the fair value of the
debt. We estimate that a 100 basis point increase in interest rates from the
levels at March 31, 2005, would have resulted in a net decrease in the fair
value of our debt of approximately $9 million at March 31, 2005.
Our investments consist primarily of Company-sponsored managed investment funds
that invest in a variety of asset classes. Additionally, the Company
periodically invests in new advisory accounts to establish a performance history
prior to a potential product launch. Company-sponsored funds and accounts are
carried on our consolidated financial statements at fair market value and are
subject to the investment performance of the underlying sponsored fund or
account. Any unrealized gain or loss is recognized upon the sale of the
investment. The carrying value of the Company's investments in fixed-income
funds or accounts, which expose us to interest rate risk, was approximately $49
million and $45 million at March 31, 2006 and 2005, respectively. We estimate
that a 100 basis point increase in interest rates from the levels at March 31,
2006, would result in a net decrease of approximately $1.8 million in the fair
value of the fixed income investments at March 31, 2006. We estimate that a 100
basis point increase in interest rates from the levels at March 31, 2005, would
have resulted in a net decrease of approximately $2 million in the fair value of
the fixed-income investments at March 31, 2005.
Also included in investments at March 31, 2006 are certain swap agreements and
futures contracts that are sensitive to changes in interest rates. The futures
contracts and swap agreements are being used to mitigate overall market risk
related to our investments in recently created product portfolios that are not
yet marketed. The fair value of these instruments totaled approximately $0.2
million and $0.5 million at
26
March 31, 2006 and 2005, respectively. We estimate that a 100 basis point
increase in interest rates from the levels at March 31, 2006, would have
resulted in a net increase in the fair market value of the open derivatives of
$1.6 million. We estimate that a 100 basis point increase in interest rates from
the levels at March 31, 2005, would have resulted in a net increase in the fair
market value of the open derivatives of $2 million. See Note 6 "Derivative
Financial Instruments" to our Consolidated Financial Statements for more
information.
EQUITY MARKET SENSITIVITY
As discussed above in the interest rate sensitivity section, we invest in
certain Company-sponsored managed investment funds and accounts that invest in a
variety of asset classes. The carrying value of the Company's investments in
funds and accounts subject to equity price risk is approximately $49 million and
$45 million, at March 31, 2006 and 2005, respectively. As of March 31, 2006 and
2005, we estimate that a 10% adverse change in equity prices would have resulted
in decreases of approximately $5 million, in the fair value of our equity
securities. The model to determine sensitivity assumes a corresponding shift in
all equity prices.
An adverse movement in the equity prices of our holdings in privately held
companies cannot be easily quantified as our ability to realize returns on
investment depends on the investees' ability to raise additional capital and/or
derive cash inflows from continuing operations.
ITEM 4. CONTROLS AND PROCEDURES
Effective as of March 31, 2006, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chairman and Chief Executive Officer, President, and Senior Vice
President, Finance, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon that evaluation, the Company's Chairman and Chief
Executive Officer, President, and Senior Vice President, Finance concluded that
the Company's disclosure controls and procedures are effective and no changes
are required at this time. In connection with management's evaluation, pursuant
to the Exchange Act Rule 13a-15(d), no changes during the quarter ended March
31, 2006 were identified that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal matters relating to
claims arising in the ordinary course of business such as disputes with
employees or customers, and in regulatory inquiries that may involve the
industry generally or be specific to the Company. There are currently no
such matters or inquiries pending that the Company believes would have a
material adverse effect on our business or financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors as previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------------
(c) Total (d) Maximum
Number Number
of Shares of Shares
Purchased that May
(a) Total as Part of Yet Be
Number (b) Average a Publicly Purchased
of Shares Price Paid Announced Under the
Period Purchased per Share Program Program
- ------ --------- ---------- ---------- ---------
Share purchases prior to January 1, 2006 under
current repurchase program: 5,473,400 $28.69 5,473,400 1,526,600
January 1, 2006 - January 31, 2006 -- -- --
February 1, 2006 - February 28, 2006 25,370 45.02 25,370 1,501,230
March 1, 2006 - March 31, 2006 55,500 46.55 55,500 1,445,730
--------- ------ --------- ---------
Total 5,554,270 $28.94 5,554,270 1,445,730
--------- ------ --------- ---------
As part of a share repurchase program approved and publicly announced on
August 9, 2002, we are authorized to purchase up to 7.0 million shares of
Class A common stock. As of March 31, 2006, there are approximately 1.4
million shares that may yet be purchased under the share repurchase
program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
ITEM 5. OTHER INFORMATION
On January 20, 2006, the Company filed a Current Report on Form 8-K (the
"Original Report") disclosing that the Company had, among other things,
granted options to its executive officers pursuant to a Form of
Non-Qualified Stock Option Agreement. The Original Report had disclosed
that the Form of the Non-Qualified Stock Option Agreement contains
non-compete, non-disclosure and non-solicitation restrictions on the
optionee, breaches of which would cause forfeiture of the options. On April
5, 2006, the Company corrected Annex A to the Form of Non-Qualified Stock
Option Agreement to reflect the intended restricted period during which
recipients may forfeit their vested options if they compete with the
Company. The other terms of the agreement have not been materially revised.
The foregoing summary of the Form of Non-Qualified Stock Option Agreement
is qualified in its entirety to the terms of such contract, a copy of
which, as revised, is attached hereto as Exhibit 10.3 and incorporated
herein as reference.
ITEM 6. EXHIBITS
a.) Exhibits. Certain of the following exhibits were previously filed as
exhibits to registration statements or reports filed by the Company with the
Commission and are incorporated herein by reference to such statements or
reports and made a part hereof. Exhibit numbers which are identified with an
asterisk (*) have such documents filed herewith. See exhibit index on page E-1.
+10.1 Amendment and Award Agreement effective as of December 30,
2005 between Nuveen Investments, Inc. and Timothy R.
Schwertfeger, incorporated by reference herein to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on January
10, 2006.
+10.2 Form of Restricted Stock Award Agreement with executive
officers regarding the Nuveen Investments, Inc. 2005 Equity
Incentive Plan, incorporated by reference herein to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on
January 20, 2006.
+10.3* Form of Non-Qualified Stock Option Agreement with executive
officers regarding the Nuveen Investments, Inc. 2005 Equity
Incentive Plan.
+10.4 Employment Terms dated as of January 13, 2006 regarding Alan
Brown, incorporated by reference herein to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed on January 20,
2006.
+10.5 Restricted Stock Award Agreement dated as of January 13, 2006
by and between Nuveen Investments, Inc. and Alan Brown,
incorporated by reference to the Company's Current Report on
Form 8-K filed on January 20, 2006.
31.1* Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2* Certification of President pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
31.3* Certification of Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
29
32.1* Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2* Certification of President pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.3* Certification of Principal Financial and Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUVEEN INVESTMENTS, INC.
(Registrant)
DATE: May 9, 2006 /s/ John P. Amboian
---------------------------------------
John P. Amboian
President
DATE: May 9, 2006 /s/ Margaret E. Wilson
---------------------------------------
Margaret E. Wilson
Senior Vice President, Finance
(Principal Financial and Accounting
Officer)
31
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
+10.1 Amendment and Award Agreement effective as of December 30,
2005 between Nuveen Investments, Inc. and Timothy R.
Schwertfeger, incorporated by reference herein to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on January
10, 2006.
+10.2 Form of Restricted Stock Award Agreement with executive
officers regarding the Nuveen Investments, Inc. 2005 Equity
Incentive Plan, incorporated by reference herein to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on
January 20, 2006.
+10.3* Form of Non-Qualified Stock Option Agreement with executive
officers regarding the Nuveen Investments, Inc. 2005 Equity
Incentive Plan.
+10.4 Employment Terms dated as of January 13, 2006 regarding Alan
Brown, incorporated by reference herein to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed on January 20,
2006.
+10.5 Restricted Stock Award Agreement dated as of January 13, 2006
by and between Nuveen Investments, Inc. and Alan Brown,
incorporated by reference to the Company's Current Report on
Form 8-K filed on January 20, 2006.
31.1* Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2* Certification of President pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
31.3* Certification of Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
32.1* Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2* Certification of President pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3* Certification of Principal Financial and Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
* filed herewith
+ Management contracts and compensatory plans and arrangements
E-1