-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ms9YgS1ikc0P28gVyh7FZpF8wC+5s/SrS7m5wRNuL/zuZx/hn3u7QMmmy79dwAK4 xyiDVFYUm/StrbR5NeoQlA== 0000950137-06-002942.txt : 20060313 0000950137-06-002942.hdr.sgml : 20060313 20060313171144 ACCESSION NUMBER: 0000950137-06-002942 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060313 DATE AS OF CHANGE: 20060313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUVEEN INVESTMENTS INC CENTRAL INDEX KEY: 0000885708 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 363817266 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11123 FILM NUMBER: 06682794 BUSINESS ADDRESS: STREET 1: 333 W WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129177700 MAIL ADDRESS: STREET 1: 333 WEST WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: NUVEEN JOHN COMPANY DATE OF NAME CHANGE: 19930328 10-K 1 c03246e10vk.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2005. [ ] 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 of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 WEST WACKER DRIVE 60606 CHICAGO, ILLINOIS (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 312-917-7700 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock, New York Stock Exchange $.01 par value (Name of each exchange on (Title of Class) which registered) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No ----- ----- Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X ----- ----- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ---- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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 Act). Yes No X ----- ----- The aggregate market value of the outstanding Common Stock held by non-affiliates of the Registrant as of June 30, 2005 was $2,244,862,822. This calculation does not reflect a determination that persons are affiliates for any other purposes. The number of shares of the Registrant's Common Stock outstanding at March 3, 2006 was 79,070,234 shares of Class A Common Stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement (the "2006 Proxy Statement") relating to the annual meeting of stockholders to be held May 11, 2006 are incorporated by reference into Part III of this report. PART I ITEM I. BUSINESS GENERAL The principal businesses of Nuveen Investments, Inc. (the "Company" or "we" or "Nuveen Investments" or "our" where applicable) are asset management and related research, as well as the development, marketing and distribution of investment products and services for the affluent, high-net-worth and institutional market segments. We distribute our investment products and services, including individually managed accounts, closed-end exchange-traded funds ("closed-end funds") and open-end mutual funds ("open-end funds" or "mutual funds"), to affluent and high-net-worth market segments through unaffiliated intermediary firms including broker-dealers, commercial banks, affiliates of insurance providers, financial planners, accountants, consultants and investment advisors. We also provide managed account services, including privately offered partnerships, to several institutional market segments and channels. The Company and its subsidiaries offer high-quality investment capabilities through five branded investment teams: NWQ, specializing in value-style equities; Nuveen Investments ("Nuveen"), managing fixed-income investments; Santa Barbara, committed to growth equities; Rittenhouse, focused on "blue-chip" growth equities, and Symphony, with expertise in alternative investments as well as equity and income portfolios. Our operations are organized around our principal advisory subsidiaries, which are registered investment advisers under The Investment Advisers Act of 1940. Certain of these advisory subsidiaries manage various Nuveen Investments mutual funds and closed-end funds and others provide investment management services for individual and institutional managed accounts. Additionally, Nuveen Investments, LLC, a registered broker and dealer in securities under The Securities Exchange Act of 1934, provides investment product distribution and related services for the Company's managed funds and, through March of 2002, sponsored and distributed the Company's defined portfolios. Various disclosures contained in this report constitute "forward-looking statements" that are subject to certain risks and uncertainties. See Item 1A. "Risk Factors" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Information and Risks" for more information on such risks and uncertainties. COMPANY HISTORY AND ACQUISITIONS The Company, headquartered in Chicago, is the successor to a business formed in 1898 by Mr. John Nuveen that served as an underwriter and trader of municipal bonds. This core business was augmented in 1961 when the Company developed and introduced its first municipal defined portfolio, which is a fixed portfolio of municipal securities selected and purchased by the Company and deposited in a trust. The Company introduced its first municipal mutual fund in 1976, its first municipal money market fund in 1981, and its first municipal closed-end fund in 1987. The Company began providing individual managed account services to investors in early 1995, and since 1996 the Company has offered an increasingly wider range of equity-based managed funds and accounts to its target markets. On January 2, 1997, the Company completed the acquisition of Flagship Resources Inc. a manager of both municipal mutual funds and municipal managed accounts for individual investors. On August 31, 1997, the Company completed the acquisition of all of the outstanding stock of Rittenhouse Financial Services, Inc. ("Rittenhouse"), which specializes in managing individual equity and balanced portfolios primarily for high-net-worth individuals served by financial advisors. Rittenhouse provided the Company with a high-quality scalable distribution and service platform focused on the growing retail managed account markets. 1 On September 17, 1999, the Company completed the sale of its investment banking business to US Bancorp Piper Jaffray. In conjunction with the sale, the Company ceased underwriting and distributing municipal bonds and serving as remarketing agent for variable rate bonds. On July 16, 2001, the Company completed the acquisition of Symphony Asset Management, LLC ("Symphony"). Symphony is an institutional investment manager based in San Francisco. As a result of the acquisition, the Company's product offerings expanded to include alternative investments designed to reduce risk through market-neutral and other strategies in several equity and fixed-income asset classes. Symphony also manages several long-only portfolios for the Company. In the first quarter of 2002, the Company exited the defined portfolio product line. As a result, the Company no longer creates and distributes new defined portfolios. Defined portfolios previously sponsored by the Company that are still outstanding continue to be administered by the Company. On August 1, 2002, the Company completed the acquisition of NWQ Investment Management ("NWQ"), an asset management firm that specializes in value-oriented equity investments with significant relationships among institutions and financial advisors serving high-net-worth investors. NWQ has a product line that includes large-cap, mid-cap and small-cap value products as well as international value portfolios. On October 3, 2005, the Company completed the acquisition of Santa Barbara Asset Management ("Santa Barbara"). Santa Barbara specializes in mid- to large-cap and small- to mid-cap growth equities, primarily with institutions and high-net-worth investors. In the first quarter of 2006, a separate investment management platform was established 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 and platform that comprises Nuveen Investments. 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. The Company was incorporated in the State of Delaware on March 23, 1992, as a wholly owned subsidiary of The St. Paul Companies, Inc. (now The St. Paul Travelers Companies, Inc. ("St. Paul Travelers" or "STA")). John Nuveen & Co. Incorporated, the predecessor of the Company (now named Nuveen Investments, LLC), had been a wholly owned subsidiary of St. Paul Travelers since 1974. During 1992, St. Paul Travelers sold a portion of its ownership interest in the Company through a public offering. On April 7, 2005, St. Paul Travelers sold approximately 40 million shares of our common stock in a secondary underwritten public offering at $34.00 per share. Concurrent with the secondary offering, St. Paul Travelers sold to Merrill Lynch and Morgan Stanley on a forward basis approximately 12 million shares of Nuveen Investments, Inc. common stock. In addition, the Company repurchased $600 million (or approximately 18 million shares) of Nuveen Investments' common stock directly from St. Paul Travelers at a price of $32.98 per share. Upon the closing of the secondary offering on April 7, 2005, the Company was no longer a majority-owned subsidiary of St. Paul Travelers, and as of the end of September 2005, all of St. Paul Travelers' remaining ownership interest in us had been sold. LINES OF BUSINESS We derive substantially all of our revenues from providing investment advisory, investment management, distribution and administration services to our family of funds and high-net-worth and institutional investors. This is our main business activity and only operating segment. The following series of tables, including Gross Sales of Investment Products, Net Flows, and Net Assets Under Management, provide data that should be helpful in understanding the Company's business and should be referred to while reading the separate discussions that follow the tables. 2 GROSS SALES OF INVESTMENT PRODUCTS The following table summarizes gross sales for the Company's products for the past three years: GROSS SALES OF INVESTMENT PRODUCTS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------------------- 2005 2004 2003 ----------- ----------- ----------- Managed Accounts: Retail $15,602,815 $15,497,165 $ 7,943,426 Institutional 6,297,292 5,939,308 2,335,561 ----------- ----------- ----------- Total 21,900,107 21,436,473 10,278,987 Mutual Funds: Municipal 2,497,685 1,381,353 1,428,389 Equity and Income 693,359 243,445 107,347 ----------- ----------- ----------- Total 3,191,044 1,624,798 1,535,736 Closed-End Exchange-Traded Funds: Municipal 14 161,004 594,626 Taxable Fixed Income 274,270 1,706,036 5,688,775 Equity and Income 2,027,659 1,021,154 - ----------- ----------- ----------- Total 2,301,943 2,888,194 6,283,401 ----------- ----------- ----------- Total Sales $27,393,094 $25,949,465 $18,098,124 =========== =========== ===========
NET FLOWS OF INVESTMENT PRODUCTS The following table summarizes net flows (equal to the sum of sales, reinvestments and exchanges less redemptions) for the Company's products for the past three years: NET FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------------------- 2005 2004 2003 ----------- ----------- ----------- Managed Accounts: Retail $ 6,561,967 $ 8,367,137 $ 2,921,607 Institutional 2,829,633 3,455,259 (20,835) ----------- ----------- ----------- Total 9,391,600 11,822,396 2,900,772 Mutual Funds: Municipal 1,390,945 280,449 372,709 Equity and Income 443,566 7,437 (140,007) ----------- ----------- ----------- Total 1,834,511 287,886 232,702 Closed-End Exchange-Traded Funds 2,358,952 2,911,406 6,304,661 ----------- ----------- ----------- Total $13,585,063 $15,021,688 $ 9,438,135 =========== =========== ===========
3 NET ASSETS UNDER MANAGEMENT The following table shows net assets managed by the Company at December 31 for each of the past three years: NET ASSETS UNDER MANAGEMENT (IN MILLIONS)
DECEMBER 31, ------------------------------------ 2005 2004 2003 -------- -------- -------- Managed Accounts: Retail $ 47,675 $ 36,975 $ 25,676 Institutional 21,950 15,582 10,301 -------- -------- -------- Total 69,625 52,557 35,977 Mutual Funds: Municipal 12,675 11,381 11,101 Equity and Income 1,820 1,299 1,184 -------- -------- -------- Total 14,495 12,680 12,285 Closed-End Exchange-Traded Funds: Municipal 35,682 35,934 35,743 Taxable Fixed Income 12,352 12,414 11,351 Equity and Income 3,963 1,868 - -------- -------- -------- Total 51,997 50,216 47,094 -------- -------- -------- Total $136,117 $115,453 $ 95,356 ======== ======== ========
ASSET MANAGEMENT INVESTMENT CAPABILITIES OVERVIEW The Company, through its advisory subsidiaries, offers five primary investment styles: value equities through NWQ; fixed-income through Nuveen; growth equities through Santa Barbara; "blue-chip" growth equities through Rittenhouse; and core equity, fixed-income and hedged alternative investments through Symphony. Within these primary investment styles, the Company sponsors several product structures, including separately managed accounts, closed-end funds and mutual funds. In its capacity as an adviser, the Company is responsible for the execution of the investment policies of the various funds or managed accounts it advises. Investment decisions for each fund or account are made by the portfolio management teams responsible for the fund or managed account. Our NWQ portfolio team specializes in value-oriented equity investments with a philosophy of investing in undervalued companies with identified catalysts to improve profitability and/or unlock value. Nuveen's fixed-income style concentrates primarily on the research, selection and management of municipal bond portfolios as well as a number of taxable strategies with the goal of generating attractive current income. Our Santa Barbara portfolio team primarily invests in mid- to large-cap and small- to mid-cap companies that exhibit stable and consistent earnings growth. Our Rittenhouse portfolio team follows a "blue-chip" growth stock strategy that centers generally on identifying large capitalization companies that are financially strong, are global leaders in their industries and generally have demonstrated consistent and predictable above-average long-term growth in earnings and, if applicable, in dividends. Symphony's hedged alternative investment disciplines are designed to reduce the systematic risk of investing in several equity and fixed-income asset classes with the goal of producing positive returns regardless of broad market direction. Symphony also manages a number of "core" equity long-only portfolios that leverage Symphony's unique multi-style process that combines quantitative analysis with qualitative insight. The Company also offers investment products in a variety of taxable income styles including preferred securities, convertible securities, real estate investment trusts ("REITs"), senior loans 4 and emerging market debt. Several of these styles provide access to other specialized, unaffiliated investment managers through sub-advisory arrangements. The Company has traditionally had a very low employment turnover rate among its portfolio managers. The majority of the Company's portfolio managers, as well as those employed by sub-advisers, have devoted most of their professional careers to the analysis, selection and surveillance of the types of securities held in the funds or accounts they manage. SPONSORED PRODUCTS MANAGED ACCOUNTS The Company provides tailored investment management services for individuals and institutions through traditional managed accounts. Managed accounts are individual portfolios of stocks and bonds that offer investors the opportunity for a greater degree of tax planning and customization than packaged products. Our managed account offerings include large-cap growth and value accounts, small-cap and mid-cap growth and value accounts, small-cap core accounts, international equity accounts, blends of stocks and bonds, and market-neutral as well as tax-free and taxable fixed-income accounts. Accounts managed by Symphony include privately offered hedge funds. Symphony offers single- and multi-strategy market-neutral hedged portfolios across different asset classes and capitalization ranges: Large Cap U.S. Equities, Small Cap U.S. Equities, Convertible-Bond Arbitrage, Credit Arbitrage and Senior Loans. Portfolios are managed through privately offered on-shore limited partnerships, off-shore funds, and separately managed accounts. Some separate accounts, partnerships and funds employ investment leverage. In addition, some clients may choose to overlay Symphony's strategies with futures contracts. CLOSED-END FUNDS As of December 31, 2005, the Company sponsored 114 closed-end funds that are actively managed. Of these funds, 98 invest exclusively in municipal securities. Of the remaining 16 funds, three invest primarily in senior loans, one invests in REITs, two invest in a blend of income and equity strategies, two invest in preferred and convertible securities, three invest solely in preferred securities, four invest in equity index and option securities and one invests primarily in adjustable rate securities. Closed-end funds do not continually offer to sell and redeem their shares. Rather, daily liquidity is provided by the ability to trade the shares of these funds on the New York Stock Exchange, the American Stock Exchange and the NASDAQ, at prices that may be above or below the shares' net asset value. The municipal closed-end funds include insured and uninsured national and single-state funds. Most of these funds have a "leveraged" capital structure through the issuance of both common and preferred shares. The dividends paid to preferred shareholders are based on short-term tax-free interest rates, while the proceeds from the issuance of preferred shares are invested by the funds in longer-term municipal securities. This leveraged capital structure is designed to generate additional dividend potential for the common shareholders based on the historically observed differences between short-term and long-term interest rates. The closed-end funds that invest in senior loans, REITs, taxable income and equity strategies, preferred and convertible securities and preferred securities also have leveraged capital structures. They use preferred shares or short-term borrowings in a manner consistent with the municipal closed-end funds, in an attempt to generate additional incremental income for common shareholders. If the preferred share dividend rate or short-term borrowing rate were to exceed the net rate of return earned by a fund's investment portfolio for an extended period, the fund's Board of Directors may consider redeeming the outstanding preferred shares or reducing the short-term borrowings. In addition, the fund's Board may consider repurchasing shares or converting the fund from its closed-end exchange-traded status into an open-end fund if the fund persistently trades on the stock exchange at deep discounts to its net asset value per share. Either of these situations may negatively affect total assets under management. MUTUAL FUNDS As of December 31, 2005, the Company offered 39 equity, balanced and municipal open-end mutual funds. These funds are actively managed and continuously offered to sell their shares at prices based on the daily net asset values of their portfolios. Daily redemption at net asset value is offered by all 39 funds. Of the 39 mutual funds, the Company offers 30 national and state-specific municipal funds that invest substantially all of 5 their assets in diversified portfolios of limited-term, intermediate-term or long-term municipal bonds. The Company offers 9 mutual funds that invest exclusively in U.S. equities, international equities, or in portfolios combining equity with taxable fixed-income or municipal securities. OVERVIEW The relative attractiveness of the Company's managed accounts, mutual funds and closed-end funds to investors depends upon many factors, including current and expected market conditions, the performance histories of the funds, their current yields, the availability of viable alternatives and the level of continued participation by the unaffiliated, third party firms that distribute the Company's funds to their customers. The assets under management of managed accounts, mutual funds and closed-end funds are affected by changes in the market values of the underlying securities. Changing market conditions may cause positive or negative shifts in valuation, and subsequently in the advisory fees earned from these assets. At December 31, 2005, Nuveen, NWQ, Santa Barbara, Rittenhouse and Symphony managed 55%, 34%, 3%, 4% and 4% of the Company's total assets, respectively. ADVISORY FEES The Company provides investment management services to funds, accounts and portfolios pursuant to investment management agreements. With respect to managed accounts, Rittenhouse, Santa Barbara, Nuveen, Symphony and NWQ generally receive fees, on a quarterly basis, based on the value of the assets managed on a particular date, such as the first or last calendar day of a quarter, or on the average asset value for the period. Symphony also receives performance fees earned on certain institutional accounts and hedge funds based on the performance of the accounts. With respect to mutual funds and closed-end funds, the Company receives fees based either on each fund's average daily net assets or on a combination of the average daily net assets and gross interest income. Pursuant to sub-advisory agreements: Institutional Capital Corporation ("ICAP") performs portfolio management services on behalf of three of the equity-based mutual funds; Security Capital Research & Management Incorporated ("SC") performs portfolio management services for our REIT closed-end fund and diversified dividend and income closed-end fund; Wellington Management Company, LLP ("WM") performs portfolio management services for the diversified dividend and income closed-end fund; Spectrum Asset Management, Inc. ("SM") performs portfolio management services for the three preferred securities closed-end funds, two preferred and convertible income closed-end funds and the tax-advantaged floating rate closed-end fund; Froley, Revy Investment Co., Inc. ("FR") performs portfolio management services for the two preferred and convertible income closed-end funds; and Gateway Advisors ("GA") performs portfolio management services for four equity index and option funds. The Company has a 23% non-voting minority equity ownership interest in ICAP, but has no equity ownership interest in SC, WM, SM, FR or GA. 6 Advisory fees, net of sub-advisory fees and expense reimbursements, earned on managed assets for each of the past three years are shown in the following table: NET INVESTMENT ADVISORY FEES (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------------- 2005 2004 2003 --------- --------- --------- Managed Accounts $ 239,612 $ 173,094 $ 122,961 Closed-End Exchange-Traded Funds 249,523 239,295 220,701 Mutual Fund Advisory Fees 70,615 63,578 61,612 Less: Reimbursed Expenses (87) (153) (427) --------- --------- --------- Net Advisory Fees 70,528 63,425 61,185 Total $ 559,663 $ 475,814 $ 404,847 ========= ========= =========
The Company's advisory fee schedules currently provide for maximum annual fees ranging from 0.45% to 0.60% in the case of the municipal mutual funds, and 0.75% to 1.05% in the case of the equity and income mutual funds. Maximum fees in the case of the closed-end funds currently range from 0.35% to 0.90% of total net assets, except with respect to five select portfolios. The investment management agreements for these select portfolios provide for annual advisory fees ranging from 0.25% to 0.30%. Additionally, for 57 funds offered since 1999, the investment management agreement specifies that for at least the first five years the Company will waive a portion of management fees or reimburse other expenses. The investment management agreement provides for waived management fees or reimbursements of other expenses ranging from 0.20% to 0.45% for the first five years. In each case, the management fee schedules provide for reductions in the fee rate at increased asset levels. In August 2004, the Company implemented a complex-wide fund pricing structure for all of its managed funds. The complex-wide pricing structure separates traditional portfolio management fees into two components - a fund specific component and an aggregate complex-wide component. The aggregate complex-wide component introduces breakpoints related to the entire complex of managed funds, rather than utilizing breakpoints only within individual funds. For the separately managed accounts, fees are negotiated and are based primarily on asset size, portfolio complexity and individual needs. These fees can range from 0.17% to 1.19% of net asset value annually, with the majority of the assets falling between 0.27% and 0.60%. The Company, through its Symphony subsidiary, earns performance fees for performance above specifically defined benchmarks. These fees are generally measured annually and are recognized only at the performance measurement date contained in the individual account management agreement. The underlying measurement dates for approximately 80% of investors' capital fall in the second half of the year. The Company pays ICAP, SC, WM, SM, FR and GA a portfolio advisory fee for sub-advisory services. The sub-advisory fees are based on the percentage of the aggregate amount of average daily net assets in the funds they sub-advise. The fee schedules provide for rate declines as asset levels increase. Pursuant to sub-advisory agreements, the Company, through its advisory subsidiaries, performs portfolio management services on behalf of two equity-based closed-end funds and a Canadian senior loan fund traded on the Toronto Stock Exchange. These sub-advisory agreements are with IQ Investment Advisors, a subsidiary of Merrill Lynch, and Fairway Capital Management, respectively. The Company earns sub-advisory fees based on the assets in the funds it sub-advises. 7 INVESTMENT MANAGEMENT AGREEMENTS Each managed fund has entered into an investment management agreement with a Nuveen Investments advisory subsidiary (each, an "Adviser"). Although the specific terms of each agreement vary, the basic terms are similar. Pursuant to the agreements, the Adviser provides overall management services to each of the funds, subject to the supervision of each fund's Board of Directors and in accordance with each fund's investment objectives and policies. The investment management agreements are approved initially by fund shareholders and their continuance must be approved annually by the directors of the respective funds, including a majority of the directors who are not "interested persons" of the Adviser, as defined in the Investment Company Act of 1940. Amendments to such agreements typically must be approved by fund shareholders. Each agreement may be terminated without penalty by either party upon 60 days' written notice, and terminates automatically upon its assignment (as defined in the Investment Company Act of 1940). Such an "assignment" will take place in the event of a change in control of the Adviser. Under the Investment Company Act of 1940, a change in control of the Adviser would be deemed to occur in the event of certain changes in the ownership of the Company's voting stock. The termination of all or a portion of the investment management agreements, for any reason, could have a material adverse effect on the Company's business and results of operations. Each fund bears all expenses associated with its operations, including the costs associated with the issuance and redemption of securities, where applicable. The fund does not bear compensation expenses of directors and officers of the fund who are employed by the Company or its subsidiaries. Some of the Company's investment management agreements provide that, to the extent certain enumerated expenses exceed a specified percentage of a fund's or a portfolio's average net assets for a given year, the Adviser will absorb such excess through a reduction in the management fee and, if necessary, pay such expenses so that the year-to-date net expense will not exceed the specified percentage. In addition, the Company may voluntarily waive all or a portion of its advisory fee from a fund, and/or reimburse expenses, for competitive reasons. Reimbursed expenses for mutual funds, including voluntary waivers, totaled $0.1 million during the year ended December 31, 2005. The Company expects to continue voluntary waivers at its discretion. The amount of such waivers may be more or less than historical amounts. Services provided by NWQ, Santa Barbara, Rittenhouse, Nuveen and Symphony to each of the individual accounts are also governed by management contracts, which are customized to suit a particular account. A majority of these contracts and of Rittenhouse's, Nuveen's and NWQ's assets under management involve investment management services provided to clients who are participants in "wrap-fee" programs sponsored by unaffiliated investment advisers or broker-dealers. Such agreements, and the other investment agreements to which Rittenhouse, NWQ and Nuveen are parties, generally provide that they can be terminated without penalty upon written notice by either party within any specified period. Under the provisions of the Investment Advisers Act of 1940, such investment management agreements may not be assigned to another manager without the client's consent. The term "assignment" is broadly defined under this Act to include any direct or indirect transfer of the contract or of a controlling block of the adviser's stock by a security holder. OVERVIEW OF DISTRIBUTION AND RELATIONSHIPS WITH DISTRIBUTORS The Company distributes its investment products and services, including separately managed accounts, closed-end funds and mutual funds, through registered representatives associated with unaffiliated national and regional broker-dealers, commercial banks and thrifts, broker-dealer affiliates of insurance agencies and independent insurance dealers, financial planners, accountants, and tax consultants ("retail distribution firms") and through unaffiliated consultants serving institutional markets. The Company also provides investment products and services directly to institutional markets. The Company's distribution strategy is to maximize the accessibility and distribution potential of its investment products by maintaining strong relationships with a broad array of registered representatives and independent advisors and consultants. The Company has well-established relationships with registered representatives in retail distribution firms throughout the country. These registered representatives participate to varying degrees in the Company's marketing programs, depending upon any one or more of the following factors: their interest in distributing investments provided by 8 the Company; their perceptions of the relative attractiveness of the Company's managed funds and accounts; the profiles of their customers and their clients' needs; and the conditions prevalent in financial markets. Registered representatives may reduce or eliminate their involvement in marketing the Company's products at any time, or may elect to emphasize the investment products of competing sponsors, or the proprietary products of their own firms. Registered representatives may receive compensation incentives to sell their firm's investment products or may choose to recommend to their customers investment products sponsored by firms other than the Company. This decision may be based on such considerations as investment performance, types and amount of distribution compensation, sales assistance and administrative service payments, and level and quality of customer service. In addition, a registered representative's ability to distribute the Company's mutual funds is subject to the continuation of a selling agreement between the firm with which the representative is affiliated and the Company. A selling agreement does not obligate the retail distribution firm to sell any specific amount of products and typically can be terminated by either party upon 60 days notice. Redeemable managed assets (consisting of managed accounts and mutual funds) held in accounts at Merrill Lynch produced 7% of consolidated operating revenue in 2005, the largest percentage of any of our distribution firms. The Company employs external and internal sales and service professionals who work closely with intermediary distribution partner firms and consultants to offer customized solutions for high-net-worth and institutional investors. These professionals regularly meet with independent advisors and consultants, who distribute the Company's products, to help them develop investment portfolio and risk-management strategies designed around the core elements of a diversified portfolio. The Company also employs several professionals who provide education and training to the same independent advisors and consultants. These professionals offer expertise and guidance on a number of topics including wealth management strategies, practice management development, asset allocation and portfolio construction. DISTRIBUTION REVENUE As part of the Company's asset management business, the Company earns revenue upon the distribution of the Company's mutual funds and upon the public offering of new closed-end exchange-traded funds. The Company does not earn distribution revenue upon the establishment of individual or institutional managed accounts. Common shares of closed-end funds are initially sold to the public in offerings that are underwritten by a syndication group, including the Company, through our Nuveen Investments, LLC broker-dealer. Underwriting fees earned are dependent upon our level of participation in the syndicate. During the year ended December 31, 2005, there were four new closed-end fund offerings. All of the Company's mutual funds have adopted a Flexible Sales Charge Program that provides investors with alternative ways of purchasing fund shares based upon their individual needs and preferences. Class A shares may be purchased at a price equal to the fund's net asset value plus an up-front sales charge ranging from 2.5% of the public offering price for limited-term municipal funds to 5.75% for equity funds. At the maximum sales charge level, approximately 90% to 95% of the sales charge is typically reallowed as a concession to the retail distribution firms. From time to time, the Company may reallow all of the sales charge to retail distribution firms or waive the sales charge and advance a sales commission to such firms in connection with marketing programs or special promotions. Additionally, purchases of Class A shares that equal or exceed $1 million may be made without an up-front sales charge, but are subject to a Contingent Deferred Sales Charge ("CDSC") ranging from 0.50% to 1% for shares redeemed within 18 months. In order to compensate retail distribution firms for Class A share sales that are $1 million or greater, the Company advances a sales commission ranging from 0.50% to 1.75% at the time of sale. Class A shares are also subject to an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets, which is used to compensate securities dealers for providing on-going financial advice and other services to investors. 9 Class B shares may be purchased at a price equal to the fund's net asset value without an up-front sales charge. Class B shares are subject to an annual SEC Rule 12b-1 distribution fee of 0.75% of assets to compensate the Company for costs incurred in connection with the sale of such shares, an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets for the on-going services of securities dealers, and a CDSC which declines from 5% to 1% for shares redeemed within a period of 5 or 6 years. The Company compensates retail distribution firms for sales of Class B shares at the time of sale at the rate of 4% of the amount of Class B shares sold, which represents a sales commission plus an advance of the first year's annual SEC Rule 12b-1 service fee. Class B shares convert to Class A shares after they are held for eight years. Class C shares may be purchased without an up-front sales charge at a price equal to the fund's net asset value. However, these shares are subject to an annual SEC Rule 12b-1 distribution fee of 0.35% to 0.75% of assets designed to compensate securities dealers over time for the sale of the fund shares, an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets used to compensate securities dealers for providing continuing financial advice and other services, and a 1% CDSC for shares redeemed within 12 months of purchase. In addition, the Company advances a 1% sales commission to retail distribution firms at the time of sale and, in return, receives the first year's SEC Rule 12b-1 distribution fee and SEC Rule 12b-1 service fee. Class R shares are available for purchase at a price equal to the fund's net asset value with no on-going fees or CDSCs. These shares are available primarily to clients of fee-based advisers, wrap programs and others under certain limited circumstances. The markets for mutual funds are highly competitive, with many participating sponsors. Based upon the information available, the Company believes that it held significantly less than a 5% share of the market with respect to net sales of mutual funds in each of the last three years. GENERAL BUSINESS DISCUSSIONS ADVERTISING AND PROMOTION The Company provides individual registered representatives with daily prices, weekly, monthly and quarterly sales bulletins, monthly product, statistical and performance updates, product education programs, product training seminars, and promotional programs coordinated with its advertising campaigns. In addition, the Company regularly coordinates its marketing and promotional efforts with individual registered representatives. The Company also augments its marketing efforts through magazine, newspaper and television advertising, targeted direct mail and telemarketing sales programs, web-based marketing and sponsorship of certain sports and civic activities. EMPLOYEES At December 31, 2005, the Company had 743 full-time employees. Employees are compensated with a combination of salary, cash bonus and fringe benefits. In addition, the Company has sought to retain its key and senior employees through competitive compensation arrangements, which include equity-based incentive awards. The Company considers its relations with its employees to be good. COMPETITION The Company is subject to substantial competition in all aspects of its business. The registered representatives that distribute the Company's investment products also distribute numerous competing products, often including products sponsored by the retail distribution firms where they are employed. There are relatively few barriers to entry for new investment management firms. The Company's managed account business is also subject to substantial competition from other investment management firms seeking to be approved as managers in the various "wrap-fee" programs. The sponsor firms have a limited number of approved managers at the highest and most attractive levels of their programs and closely monitor the investment performance of such firms on an on-going basis as they evaluate which firms are eligible for continued 10 participation in these programs. The Company is also subject to competition in obtaining the commitment of underwriters to underwrite its closed-end fund offerings. To the extent the increased competition for underwriting and distribution causes higher distribution costs, the Company's net revenue and earnings will be reduced. Investment products are sold to the public by broker-dealers, banks, insurance companies and others, and many competing investment product sponsors offer a broader array of investment products. Many of these institutions have substantially greater resources than the Company. In addition, continuing consolidation in the financial services industry is altering the landscape in which the Company's distributors compete and the economics of many of the products they offer. The effect that these continuing changes in the brokerage and investment management industries will have on the Company and its competitors cannot be predicted. The Company competes with other providers of products primarily on the basis of the range of products offered, the investment performance of such products, quality of service, fees charged, the level and type of broker compensation, the manner in which such products are marketed and distributed, and the services provided to registered representatives and investors. REGULATORY Nuveen Investments, LLC is registered as a broker-dealer under the Securities Exchange Act of 1934 and is subject to regulation by the Securities and Exchange Commission (the "SEC"), the NASD Regulation, Inc. (the "NASD") and other federal and state agencies and self-regulatory organizations. Nuveen Investments, LLC is subject to the SEC's Uniform Net Capital Rule, designed to enforce minimum standards regarding the general financial condition and liquidity of a broker-dealer. Under certain circumstances, this rule may limit the ability of the Company to make withdrawals of capital and receive dividends from Nuveen Investments, LLC. Nuveen Investments, LLC's regulatory net capital has consistently exceeded such minimum net capital requirements. At December 31, 2005, Nuveen Investments, LLC had aggregate net capital, as defined, of approximately $20.1 million, which exceeded the regulatory minimum by approximately $18.5 million. The securities industry is one of the most highly regulated in the United States, and failure to comply with related laws and regulations can result in the revocation of broker-dealer licenses, the imposition of censures or fines, and the suspension or expulsion of a firm and/or its employees from the securities business. Each of our investment adviser subsidiaries (and each of the previously identified unaffiliated sub-advisers to certain of the Company's funds) is registered with the SEC under the Investment Advisers Act. Each closed-end fund, open-end fund and defined portfolio is registered with the SEC under the Investment Company Act. Each national open-end fund is qualified for sale (or not required to be so qualified) in all states in the United States and the District of Columbia. Each single-state open-end fund is qualified for sale (or not required to be so qualified) in the state for which it is named and other designated states. Virtually all aspects of the Company's investment management business, including the business of the sub-advisers, are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit the investment product holder and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict the Company (and any sub-adviser) from carrying on its investment management business in the event that it fails to comply with such laws and regulations. In such event, the possible sanctions, which may be imposed, include the suspension of individual employees, limitations on the Company's engaging in the investment management business for specified periods of time, the revocation of the Advisers' registrations as investment advisers or other censures and fines. The Company's officers, directors, and employees may, from time to time, own securities that are also held by one or more of the funds. The Company's internal policies with respect to individual investments require prior clearance of all transactions in securities of the Company and other restrictions are imposed with respect to transactions in the Company's closed-end fund securities. Employees who are access persons of the Rittenhouse, Symphony, NWQ, Santa Barbara or Nuveen investment disciplines are subject to additional restrictions with respect to the pre-clearance of the purchase or sale of securities held in, or considered for, investor accounts and funds. These restrictions are based on the position of the employee and his or her access to, or participation in, the investment process of the adviser. The Company also requires employees to report transactions in certain covered securities and restricts certain transactions so as to seek to avoid the possibility of improper use of information relating to management of client accounts. 11 Regulatory authorities, including the NASD and the SEC, examine our registered broker-dealer and investment adviser subsidiaries, or the registered investment companies managed by our affiliates, from time to time in the regular course of their businesses. In addition, from time to time the Company or one or more of its registered subsidiaries receives information requests from a regulatory authority as part of an industry-wide "sweep" examination of particular topics or industry practices. AVAILABLE INFORMATION The Company's website is www.nuveen.com. The Company makes available free of charge through its internet site, via a link to a third party provider, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers, and any amendments to these reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. ITEM 1A. RISK FACTORS RISKS RELATING TO OUR BUSINESS WE FACE SUBSTANTIAL COMPETITION IN THE INVESTMENT MANAGEMENT BUSINESS. All aspects of our business are subject to substantial competition. This includes competition for continued access to brokerage firms' retail distribution systems and "wrap fee" managed account programs. The loss of such access could result in a loss of assets under management, which could adversely affect our revenues. In addition, in part as a result of the substantial competition in the asset management industry, there has been a trend toward lower fees in some segments of the asset management business. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. There can be no assurance that we will be able to maintain our current fee structure or that we will be able to develop new products that the market or our registered representatives find attractive. Fee reductions on existing or future business could have an adverse impact on our revenue and profitability. OUR BUSINESS RELIES ON THIRD-PARTY DISTRIBUTION PROGRAMS. Our ability to distribute our products is highly dependent on access to the client base of financial advisors that also offer competing investment products. Registered representatives who recommend our products may reduce or eliminate their involvement in marketing our products at any time, or may elect to emphasize the investment products of competing sponsors, or the proprietary products of their own firms. In addition, registered representatives may receive compensation incentives to sell their firm's investment products or may choose to recommend to their customers investment products sponsored by firms other than us. In addition, a registered representative's ability to distribute our mutual funds is subject to the continuation of a selling agreement between the firm with which the representative is affiliated and us. We cannot be sure that we will continue to gain access to these financial advisors. The inability to have this access could have a material adverse effect on our business. DECLINES IN SECURITIES MARKETS OR POOR INVESTMENT PERFORMANCE MAY ADVERSELY AFFECT OUR ASSETS UNDER MANAGEMENT AND OUR FUTURE OFFERINGS. Securities markets are inherently volatile and may be impacted by factors beyond our control, including such factors as global, national and local political and economic conditions, inflation, investor preferences and legal and regulatory changes. Declines in securities markets may reduce our assets under management and sales of our products, and, as a result, adversely affect our revenues. In addition, our investment performance is one of 12 the primary factors associated with the success of our business. Poor investment performance by our managers could adversely affect our revenue and growth as a result of a reduction in assets under management and redemptions by existing clients, which would result in lower investment management fees, reduction in performance fees earned by our businesses, as well as a diminished ability to sell our products and attract new funds in future offerings. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR ASSETS UNDER MANAGEMENT. A substantial portion of our assets under management are invested in fixed-income securities. Increases in interest rates from their present levels may adversely affect the net asset values of these assets. In addition, increases in interest rates may have a magnified adverse effect on our leveraged closed-end funds. Moreover, fluctuations in interest rates may have a significant impact on securities markets, which may adversely affect our assets under management. OUR BUSINESS IS DEPENDENT UPON OUR RETAINING OUR KEY PERSONNEL. Our executive officers, investment professionals and senior marketing personnel are highly important elements of the success of our business. The market for qualified personnel to fill these roles is extremely competitive. We anticipate that we will need to recruit and retain qualified investment professionals and marketing personnel. However, we may not be successful in our efforts to recruit and retain the required personnel. The loss of key personnel or the inability to recruit and retain portfolio managers or marketing personnel could have a material adverse effect on our business. OUR BUSINESS IS SUBJECT TO EXTENSIVE REGULATION, AND COMPLIANCE FAILURES AND CHANGES IN REGULATION COULD ADVERSELY AFFECT US. Our investment advisory business is subject to client guidelines and contractual and other requirements. A failure to adhere to these guidelines or satisfy these requirements could result in client withdrawals and could result in losses which could be recovered by the client from us in certain circumstances. Our businesses are also subject to extensive regulation, including by the SEC and the NASD. Our failure to comply with applicable laws, regulations or rules of self-regulatory organizations could cause regulatory authorities to institute proceedings against us or our subsidiaries and could result in the imposition of sanctions ranging from censure and fines to termination of an investment adviser or broker-dealer's registration and otherwise prohibiting an investment adviser from acting as an investment adviser. Changes in laws, regulations, rules of self-regulatory organizations or in governmental policies, and unforeseen developments in litigation targeting the securities industry generally or us, could have a material adverse effect on us. The impact of future accounting pronouncements could also have a material adverse affect upon us. OUR REVENUES WILL DECREASE IF OUR INVESTMENT ADVISORY CONTRACTS ARE TERMINATED. A substantial portion of our revenues are derived from investment advisory agreements. Our investment advisory agreements with registered fund clients are approved initially by the sole fund shareholder and their continuance must be approved annually by the trustees of the respective funds, including a majority of the trustees who are not "interested persons" of our relevant advisory subsidiary or the fund, as defined in the Investment Company Act of 1940, as amended, to which we refer as the "Investment Company Act". Amendments to these agreements typically must be approved by funds' boards of trustees and, if material, by the shareholders. Each agreement may be terminated without penalty by either party upon 60 days written notice. In addition, under the Investment Company Act, each of the investment advisory agreements of our advisory subsidiaries with registered fund clients would terminate automatically upon its assignment (as 13 defined in the Investment Company Act). Our investment advisory agreements with advisory clients other than registered fund clients generally provide that they can be terminated without penalty upon written notice by either party within any specified period. Under the provisions of the Investment Advisers Act of 1940, as amended, to which we refer as the "Investment Advisers Act", those investment advisory agreements may not be assigned without the client's consent. The term "assignment" is broadly defined under the Investment Company Act and the Investment Advisers Act to include any direct or indirect transfer of the contract or of a controlling block of the adviser's stock by a security holder. The termination of all or a portion of the investment advisory agreements, for any reason, could have a material adverse effect on our business and results of operations. FAILURE TO COMPLY WITH CLIENT CONTRACTUAL REQUIREMENTS AND/OR GUIDELINES COULD HAVE NEGATIVE CONSEQUENCES WHICH COULD CAUSE OUR EARNINGS OR STOCK PRICE TO DECLINE. When clients retain us to manage assets or provide products or services on their behalf, they specify guidelines or contractual requirements that we are required to observe in the provision of our services. A failure to comply with these guidelines or contractual requirements could result in damage to our reputation or to the client seeking to recover losses from us, reducing its assets under management, or terminating its contract with us, any of which could cause our earnings or stock price to decline. WE MAY CONTINUE TO ACQUIRE OTHER COMPANIES, AND THE EXPECTED BENEFITS OF SUCH ACQUISITIONS MAY NOT MATERIALIZE. Acquisitions of complementary businesses and development of strategic alliances have been and may continue to be an active part of our overall business strategy. Services, key personnel or businesses of acquired companies may not be effectively assimilated into our business or service offerings and our alliances may not be successful. Moreover, we may be unable to retain the clients of the companies we acquire, or achieve expected cost reductions or economies of scale. RECENT INCREASES IN INDEBTEDNESS COULD INCREASE THE COSTS OF OUR BORROWING AND MAKE IT MORE DIFFICULT TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. In 2005, we issued $550 million of senior unsecured notes, and incurred $150 million in outstanding borrowings under our $400 million credit facility, principally to refinance existing debt and to finance the repurchase of $600 million of our common stock from STA. See "Item 1. "Business - Company History and Acquisitions." These obligations have resulted in a significant increase in leverage compared to our capital structure prior to their incurrence, which will increase our borrowing costs and could adversely affect our ability to raise additional capital in the future. WE ARE DEPENDENT UPON ACCESS TO THE REVENUES OF OUR SUBSIDIARIES. Our cash flow and our ability to service our debt are dependent upon access to the revenues of our subsidiaries. Our subsidiaries are separate and distinct legal entities and generally have no obligation to pay the indebtedness or other obligations of Nuveen Investments, Inc. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company is headquartered in Chicago, and has other primary offices in Los Angeles, CA, San Francisco, CA, Santa Barbara, CA and Radnor, PA. The company also has sales representatives located nationally. The Company leases approximately 315,000 square feet of office space across the country. Management believes that the Company's facilities are adequate to serve its currently anticipated business needs. The Company has also used, registered, and/or applied to register certain service marks to distinguish its investment products and services from its competitors in the U.S. and in foreign countries and jurisdictions. The Company enforces its service marks and other intellectual property rights in the U.S. and abroad. ITEM 3. LEGAL PROCEEDINGS 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 14 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended December 31, 2005. SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of the executive officers of the Company as of December 31, 2005, are set forth below. Unless otherwise indicated in the following descriptions, each of the following executive officers and other key officers has held his or her current position with the Company or its predecessor for more than the past five years.
EXECUTIVE OFFICERS AGE PRINCIPAL POSITION ------------------ --- ------------------ Timothy R. Schwertfeger................. 56 Chairman, Chief Executive Officer and Director John P. Amboian......................... 44 President and Director William Adams IV........................ 50 Executive Vice President, U.S. Structured Products Alan G. Berkshire....................... 45 Senior Executive Vice President and Secretary Alan A. Brown........................... 43 Executive Vice President, Mutual Funds John L. MacCarthy....................... 46 Senior Vice President and General Counsel Margaret E. Wilson...................... 50 Senior Vice President, Finance
All executive officers of the Company serve at the pleasure of the Company's board of directors. There are no family relationships between any of the Company's executive officers, key officers and directors, and there are no arrangements or understandings between any of these executive officers and any other persons pursuant to which the executive officer was appointed. Each of Mr. Schwertfeger and Mr. Amboian is party to an employment agreement with the Company that is subject to automatic one-year extensions if the executive remains employed by the Company. Mr. Schwertfeger has been Chairman and Chief Executive of the Company and its various subsidiaries since 1996. He also served as Chairman of the Nuveen Investments Funds and as a Director of Institutional Capital Corporation for the same period. Mr. Amboian has been President of the Company and its various subsidiaries since May 1999. Prior thereto, he served as Executive Vice President of the Company and its various subsidiaries since June 1995. Mr. Adams has been Executive Vice President, U.S. Fund Products of the Company since December 1999. Prior thereto, Mr. Adams was Managing Director of Structured Investments effective September 1997 and Vice President and Manager, Corporate Marketing effective August 1994. Mr. Berkshire has been Senior Executive Vice President, Institutional Business Development since March 2006. Prior to that time, he was Senior Vice President and General Counsel of the Company since April 1999 and Secretary since May 1998. He joined the Company in September 1997 as Vice President and General Counsel. Mr. Brown has been Executive Vice President since October of 2005. He joined the Company in November of 2001 as Managing Director, Chief Marketing Officer. Prior thereto, he served as Chief Marketing Officer at Amazon.com effective September 2000. Mr. MacCarthy became Senior Vice President and General Counsel when he joined the Company in March 2006. Prior to that time, he was a partner at the law firm of Winston & Strawn LLP since 1993. Mrs. Wilson has been Senior Vice President, Finance since April of 1999. She joined the Company as Vice President and Controller in February 1998. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ISSUER PURCHASES OF EQUITY SECURITIES
Total Maximum Number Number of Shares of Shares Purchased that May Total as Part of Yet Be Number Average Publicly Purchased of Shares Price Paid Announced Under the Period Purchased per Share Program Program - -------------------------------------------------------------------------------------------------------------- Share purchases prior to October 1, 2005 (1) 4,685,251 $ 26.59 4,685,251 2,314,749 Fourth quarter purchases: October 1, 2005 - October 31, 2005 563,449 40.40 563,449 1,751,300 November 1, 2005 - November 30, 2005 -- -- -- 1,751,300 December 1, 2005 - December 31, 2005 224,700 43.09 224,700 1,526,600 ----------- ----------- Total fourth quarter purchases 788,149 $ 41.16 788,149 ----------- ----------- Total share repurchases (1) 5,473,400 $ 28.69 5,473,400 1,526,600 ----------- ------- ----------- ---------
(1) Excludes 18,192,843 shares repurchased from St. Paul Travelers for $32.98 per share during April 2005. See Item 1. "Business - Company History and Acquisition." As part of the Company's current share repurchase program announced and approved on August 9, 2002, the Company is authorized to purchase up to 7.0 million shares of the Company's common stock. As of December 31, 2005, there were approximately 1.5 million shares that may yet be purchased under the share repurchase program, which has no expiration date. At December 31, 2005, there were approximately 21,925 shareholders of record of the Company's common stock. Other information required by this item is contained in footnote 14 in Part II, Item 8 of this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data table is set forth in Part II, Item 8 of this Annual Report on Form 10-K, following the footnotes to the financial statements. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF THE BUSINESS Our principal businesses are asset management and related research, as well as the development, marketing and distribution of investment products and services for the affluent, high-net-worth and institutional market segments. We distribute our investment products and services, which include individually managed accounts, closed-end exchange-traded funds ("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. 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 MuniPreferred(R) and FundPreferred(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. DISPOSITION OF STA INTEREST On April 7, 2005, The St. Paul Travelers Companies, Inc. ("STA") sold approximately 40 million shares of our common stock in a secondary underwritten public offering at $34.00 per share. Concurrent with the secondary offering, STA sold to Merrill Lynch and Morgan Stanley, on a forward basis, approximately 12 million shares of Nuveen Investments, Inc. common stock. In addition, the Company repurchased $600 million of Nuveen Investments' common stock directly from 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 2) 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 17 such, effective April 7, 2005, Nuveen Investments had approximately 75.9 million shares of common stock outstanding for the purpose of computing basic earnings per share. Upon the closing of the secondary offering on April 7, 2005, the Company was no longer a majority-owned subsidiary of STA, and as of the end of September 2005, all of STA's remaining ownership interest had been sold. 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. SUBSEQUENT EVENTS In the first quarter of 2006, a separate investment management platform was established, 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 and platform that comprises Nuveen Investments. 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 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, 2005 2004 2003 ---- ---- ---- Gross sales of investment products $27,393 $25,949 $18,098 Net flows 13,585 15,021 9,438 Assets under management (1) (2) 136,117 115,453 95,356 Operating revenues 589.1 505.6 452.0 Operating expenses 299.2 252.8 225.7 Income before net interest and taxes(3) 297.8 260.4 227.2 Net interest expense 18.9 7.9 6.0 Income taxes 107.7 96.1 86.2 Net income 171.2 156.4 135.0 Basic earnings per share 2.10 1.69 1.46 Diluted earnings per share 1.99 1.63 1.41 Dividends per share 0.78 0.69 0.56 -------------------------------------------------------------------------------------------
(1) At year 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. 18 Gross sales for the year of $27 billion were the highest level of sales in the Company's history. For the year, 71% of our sales were in equity-based products, 25% in municipal products and 4% in taxable, income-oriented products. Net flows (equal to the sum of sales, reinvestments and exchanges less redemptions) for the year were approximately $14 billion, down $1 billion from last year's record level. All product lines (managed accounts, closed-end funds and mutual funds) experienced positive net flows. We ended the year with more than $136 billion in assets under management, up $21 billion, or 18% for the year. At year-end, 45% of our assets were in equity-based products, 44% in municipal products, and 11% in taxable, income-oriented products. Operating revenues grew 17% for the year to $589 million. Fueled by higher asset levels, advisory fees grew 18% for the year. Operating expenses for the year increased $46 million or 18%. Higher compensation expense accounted for the majority of the increase as we continued to invest in expanding and developing our investment and distribution capabilities as well as legal, compliance and administrative resources. 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 mutual fund and closed-end fund shares) for the years ending December 31, 2005, 2004 and 2003 are shown below: - -------------------------------------------------------------------------------- GROSS INVESTMENT PRODUCT SALES (in millions) For the year ended December 31,
2005 2004 2003 ------- -------- ------- Closed-End Exchange-Traded Funds $ 2,302 $ 2,888 $ 6,283 Mutual Funds 3,191 1,625 1,536 Retail Managed Accounts 15,603 15,497 7,943 Institutional Managed Accounts 6,297 5,939 2,336 ------- ------- ------- Total $27,393 $25,949 $18,098 ======= ======= =======
- -------------------------------------------------------------------------------- Our gross sales for the year of $27 billion were up 6% over sales in 2004. Growth year-over-year was driven mainly by mutual funds sales which were up 96% versus the prior year due to high demand for the Nuveen High Yield Municipal Bond Fund as well as the NWQ Multi-Cap Value Fund and the NWQ International Value Fund. Retail managed account sales were fairly consistent with the prior year as increased municipal-style account sales, and an increase due to the launch of a new small-cap core product, were offset by a decline in growth-style equity account sales of Rittenhouse. Despite the closing of our large-cap value-style equity managed account product in 2004, value-style equity sales continued to be strong, reflecting increased demand for international and global products. During the fourth quarter of 2005, we raised $0.4 billion with our first institutional offering of a CLO (Collateralized Loan Obligation) investing in senior bank loans. This helped drive a 6% increase in institutional managed account sales for the year. 19 Gross sales increased 43% during 2004 to $25.9 billion. Growth in managed account sales was the main driver as sales of retail and institutional accounts more than doubled versus the prior year. We experienced considerable strength in value-style equity account sales, as both retail and institutional value-style equity account sales more than tripled for the year. Despite rising short-term interest rates, municipal-style account sales continued to grow, ending the year up 4%. Partially offsetting the increase in value-style equity and municipal-style account sales was a decline in sales of growth-style equity accounts. Also showing growth for the year were mutual fund sales, which increased 6%, driven by an increase in sales of equity funds. Sales of closed-end products declined versus the prior year due to fewer fund issuances in 2004. Net flows of investment products for the years ending December 31, 2005, 2004 and 2003 are shown below: - -------------------------------------------------------------------------------- NET FLOWS (in millions) For the year ended December 31,
2005 2004 2003 ------- ------- ------- Closed-End Exchange-Traded Funds $ 2,359 $ 2,911 $ 6,305 Mutual Funds 1,834 288 232 Retail Managed Accounts 6,562 8,367 2,922 Institutional Managed Accounts 2,830 3,455 (21) ------- ------- ------- Total Managed Assets $13,585 $15,021 $ 9,438 ======= ======= =======
- -------------------------------------------------------------------------------- Net flows for 2005 were $13.6 billion, down 10% from the prior year's record level. This decline can be attributed primarily to an acceleration of flows late in 2004 in advance of the closing of the large-cap value-style equity managed account product. Managed account flows (both retail and institutional) continue to be strong, with our value-style equity accounts contributing $9.9 billion in flows and our municipal-style accounts another $1.4 billion. Partially offsetting the positive flows were $3.2 billion in growth-style equity account outflows. Mutual fund flows in 2005 were more than six times flows in 2004, driven by both municipal and equity flows. Net flows for 2004 totaled $15.0 billion, an increase of 59% versus 2003. Managed account flows were particularly strong. The announcement of the closing of our large-cap value-style equity product in the fourth quarter of 2004 helped drive value-style equity account flows to $12.6 billion. Our municipal-style account flows added another $1.9 billion. Partially offsetting the positive flows were $2.8 billion in growth-style equity account outflows. The following table summarizes net assets under management by product type: - -------------------------------------------------------------------------------- NET ASSETS UNDER MANAGEMENT (1) (in millions)
DECEMBER 31, 2005 2004 2003 -------- -------- -------- Closed-End Exchange-Traded Funds $ 51,997 $ 50,216 $ 47,094 Mutual Funds 14,495 12,680 12,285 Managed Accounts - Retail 47,675 36,975 25,676 Managed Accounts - Institutional 21,950 15,582 10,301 -------- -------- -------- Total $136,117 $115,453 $ 95,356 ======== ======== ========
(1) Excludes defined portfolio assets under surveillance. - -------------------------------------------------------------------------------- 20 The components of the change in our assets under management were as follows: - -------------------------------------------------------------------------------- NET ASSETS UNDER MANAGEMENT (1) (in millions)
For the year ended December 31, 2005 2004 2003 --------- --------- --------- Beginning Assets Under Management $ 115,453 $ 95,356 $ 79,719 Gross Sales 27,393 25,949 18,098 Reinvested Dividends 445 389 413 Redemptions (14,253) (11,317) (9,073) --------- --------- --------- Net Flows into Managed Assets 13,585 15,021 9,438 Acquisitions 3,379 - - Appreciation/(Depreciation) 3,700 5,076 6,199 --------- --------- --------- Ending Assets Under Management $ 136,117 $ 115,453 $ 95,356 ========= ========= =========
(1) Excludes defined portfolio assets under surveillance. - -------------------------------------------------------------------------------- Assets under management grew to just over $136 billion in 2005. Strong flows, the acquisition of Santa Barbara, and market appreciation were key drivers. Closed-end fund assets grew $1.8 billion, driven by $2.4 billion in net flows, offset by $0.6 billion in fixed-income market depreciation. Mutual fund assets grew $1.8 billion driven entirely by new flows. Managed account assets increased $17.1 billion driven by $9.4 billion in new flows and $4.3 billion in equity market appreciation. The acquisition of Santa Barbara added an additional $3.4 billion. Assets under management increased $20.1 billion, or 21% to over $115 billion at December 31, 2004. The growth in assets under management was attributable to increases of $3.1 billion or 7% in closed-end fund assets, $0.4 billion or 3% in mutual fund assets and $16.6 billion or 46% in managed account assets. The increase in closed-end fund assets was the result of $2.9 billion in new assets and market appreciation of $0.2 billion. New assets of $11.8 billion and market appreciation (primarily equity appreciation) of $4.8 billion accounted for the increase in managed account assets. Investment advisory fee income, net of sub-advisory fees and expense reimbursements, is shown in the following table: - -------------------------------------------------------------------------------- NET INVESTMENT ADVISORY FEES (in thousands)
For the year ended December 31, 2005 2004 2003 -------- -------- -------- Closed-End Exchange-Traded Funds $249,523 $239,295 $220,701 Mutual Funds 70,528 63,425 61,185 Managed Accounts (Retail and Institutional) 239,612 173,094 122,961 -------- -------- -------- Total $559,663 $475,814 $404,847 ======== ======== ========
- -------------------------------------------------------------------------------- Higher asset levels and the Santa Barbara acquisition drove an 18% increase in advisory fees for the year. Advisory fees on mutual funds increased 11% while managed account fees increased 38%, or 35% excluding the impact of the Santa Barbara acquisition. Within the managed account product line, advisory fee revenue increased on both value-style equity and municipal-style accounts, while declining on growth-style equity accounts. Advisory fees on closed-end funds increased 4% for the year. 21 Advisory fees increased 18% during 2004, driven mainly by higher asset levels for both closed-end funds and managed accounts. Advisory fees on closed-end funds increased 8%, while managed account fees increased 41%. Product distribution revenue for the years ended December 31, 2005, 2004 and 2003 is shown in the following table: - -------------------------------------------------------------------------------- PRODUCT DISTRIBUTION (in thousands)
For the year ended December 31, 2005 2004 2003 ------- ------- ------- Closed-End Exchange-Traded Funds $ 2,574 $ 3,057 $ 5,819 Muni/Fund Preferred(R) 5,354 3,907 2,578 Mutual Funds 428 1,995 843 Other - - (34) ------- ------- ------- Total $ 8,356 $ 8,959 $ 9,206 ======= ======= =======
- -------------------------------------------------------------------------------- Product distribution revenue declined slightly in 2005 when compared with the prior year. Underwriting revenue on closed-end funds declined $0.5 million due to fewer fund assets raised in 2005. Mutual fund distribution revenue declined $1.6 million despite an increase in mutual fund sales as a result of an increase in commissions paid on large dollar value sales. These declines were almost completely offset by an increase in MuniPreferred(R) and FundPreferred(R) fees. These fees increased as a result of an increase in preferred shares outstanding and an increase in shares traded by non-participating brokers who access the auction through the Company's trading desk. Product distribution revenue in 2004 was fairly consistent with the prior year as a decline in underwriting revenue on closed-end funds was offset by an increase in mutual fund distribution revenue and an increase in MuniPreferred(R) and FundPreferred(R) fees. 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 2005 were $19.8 million, up from the $18.1 million in performance fees in 2004. 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. Performance fees in 2004 were $16.3 million lower at Symphony than in 2003. 22 OPERATING EXPENSES Operating expenses for the years ended December 31, 2005, 2004 and 2003 are shown in the following table: - -------------------------------------------------------------------------------- OPERATING EXPENSES (in thousands)
For the year ended December 31, 2005 2004 2003 -------- -------- -------- Compensation and Benefits $195,194 $165,321 $144,190 Advertising and Promotional Costs 12,495 12,158 11,627 Occupancy and Equipment Costs 21,648 19,740 19,321 Amortization of Intangible Assets 5,492 5,118 5,208 Travel and Entertainment 8,357 7,981 7,726 Outside and Professional Services 25,002 22,216 20,331 Minority Interest Expense 5,809 1,875 1,077 Other Operating Expenses 25,242 18,353 16,222 -------- -------- -------- Total $299,239 $252,762 $225,702 ======== ======== ======== As a % of Operating Revenue 50.8% 50.0% 49.9%
- -------------------------------------------------------------------------------- SUMMARY Operating expenses increased $46.5 million or 18% in 2005 and $27.1 million or 12% in 2004, driven mainly by increases in compensation and benefits as we continue to invest in the further growth and development of our business. As a result of this targeted investment, we saw expenses as a percent of revenue increase from 50.0% to 50.8% in 2005. COMPENSATION AND BENEFITS Compensation and related benefits for 2005 increased $29.9 million. Approximately 50% of the increase is attributable to higher profit levels as our annual incentive compensation is tied to profitability. The remaining increase is due to annual salary increases and higher health care expenses as well as the cost of increased staffing levels, as we invested in virtually all aspects of our operations. Compensation and related benefits for 2004 increased $21.1 million due to an increase in base compensation as a result of new positions and salary increases, an increase in option expense, and an increase in overall incentive compensation due to the Company's higher profit level. ADVERTISING AND PROMOTIONAL COSTS Advertising and promotional expenditures increased $0.3 million in 2005 and $0.5 million in 2004 due to expanded product launches in both years. AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets increased $0.4 million during 2005 as a result of amortization of intangible assets associated with the Santa Barbara acquisition. Amortization of intangible assets decreased $0.1 million during 2004 as a result of the completion of the amortization period for certain definite-lived intangible assets associated with our acquisition of Symphony in 2001. OUTSIDE AND PROFESSIONAL SERVICES Outside and professional services increased $2.8 million during 2005 due mainly to an increase in electronic information expenses. 23 Outside and professional services increased $1.9 million during 2004 as a result of higher legal expenses as we responded to regulatory requests for information on compliance policies and practices. MINORITY INTEREST EXPENSE Minority interest expense results from key employees having purchased non-controlling member interests in NWQ and Santa Barbara at the time of the acquisitions. Given the growth in NWQ's business, the value associated with the non-controlling member interests also has increased. For additional information on minority interest expense, please refer to the Capital Resources, Liquidity and Financial Condition section. ALL OTHER OPERATING EXPENSES All other operating expenses increased $9.2 million during 2005. Approximately $3.3 million of the increase is due to structuring fees paid on the initial offering of two of our closed-end funds - the Equity Premium Advantage Fund and the Equity Premium and Growth Fund. Occupancy and equipment costs increased $1.9 million as a result of an increase in leased space. The remainder of the increase relates to higher insurance costs and higher bank facility costs related to our new bank line of credit. All other operating expenses increased $2.8 million during 2004 due mainly to increases in recruiting and relocation. Recruiting and relocation expense increased as we invested in our investment and distribution capabilities as well as legal, compliance and administrative resources. 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 years ended December 31, 2005, 2004 and 2003: - -------------------------------------------------------------------------------- OTHER INCOME/(EXPENSE) (in thousands)
For the year ended December 31, 2005 2004 2003 ------- ------- ------- Gains/(Losses) on Investments $ 4,802 $ 4,128 $ 1,440 Gains/(Losses) on Fixed Assets (442) (10) (635) Miscellaneous Income/(Expense) 3,528 3,430 21 ------- ------- ------- Total $ 7,888 $ 7,548 $ 826 ======= ======= =======
- -------------------------------------------------------------------------------- Total other income/(expense) for 2005 was $7.9 million. As a result of the early repayment of the Company's previously outstanding $300 million of private placement debt, the Company accelerated the recognition of unamortized deferred gains and losses resulting from various interest rate hedging activity associated with the private placement debt. This accelerated recognition resulted in $3.6 million of miscellaneous income for the year. Supplementing this other income was $4.8 million in gains recognized on the sale of seed investments in new products and portfolios. Total other income/(expense) of $7.5 million in 2004 was comprised of realized gains on the sale of seed investments and income recorded on non-recurring items. 24 NET INTEREST EXPENSE The following is a summary of Net Interest Expense for the years ended December 31, 2005, 2004 and 2003: - -------------------------------------------------------------------------------- NET INTEREST EXPENSE (in thousands)
For the year ended December 31, 2005 2004 2003 -------- -------- -------- Dividends and Interest Income $ 8,978 $ 4,597 $ 1,438 Interest Expense (27,917) (12,513) (7,435) Total $(18,939) $ (7,916) $ (5,997) ======== ======== ========
- -------------------------------------------------------------------------------- Total net interest expense increased $11.0 million for the year, due to increased interest expense associated with the repurchase of shares from STA and the related increase in outstanding debt. Partially offsetting this increase was an increase in dividends and interest income due to dividends received during 2005 and interest earned on the Company's cash position, or consolidated funds (See Note 11 to the Consolidated Financial Statements "Consolidated Funds"). Net interest expense increased $1.9 million in 2004 as a result of the restructuring of our debt from short-term variable rate debt to long-term fixed rate debt late in 2003. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R is a revision of SFAS No. 123, and supersedes APB Opinion No. 25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS No. 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. While the Company currently follows SFAS No. 123, resulting in the recognition of option expense in the accompanying consolidated statements of income, the adoption of SFAS No. 123R will require the use of a slightly different method of accounting for forfeitures beginning in 2006. This change in methodology will not have a material impact on the Company's consolidated financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error Corrections ("SFAS No. 154") - a Replacement of APB Opinion No. 20 and FASB Statement No. 3". APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. The Company does not expect to make any changes in accounting principles in the near future. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowings under available credit facilities and long-term notes. 25 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 (refer to Note 1 to the Consolidated Financial Statements "Basis of Presentation"). 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. 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. 26 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 amount under the new senior revolving credit facility in order to repay the remaining amount due under the bridge credit facility. As of December 31, 2005, 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 December 31, 2005. 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 December 31, 2005 and 2004, no borrowings were outstanding on these uncommitted lines of credit. AGGREGATE CONTRACTUAL OBLIGATIONS The Company has contractual obligations to make future payments under long-term debt and long-term non-cancelable lease agreements. The following table summarizes these contractual obligations at December 31, 2005: - --------------------------------------------------------------------------------
LONG-TERM OPERATING (in thousands) DEBT (1) LEASES (2) TOTAL --------- ---------- -------- 2006 $ - $ 11,048 $ 11,048 2007 - 11,366 11,366 2008 - 12,243 12,243 2009 - 12,654 12,654 2010 250,000 13,046 263,046 Thereafter 300,000 33,225 333,225
(1) Amounts represent the expected cash principal re-payments on the Company's long-term debt. (2) Operating leases represent the minimum rental commitments under non-cancelable operating leases. The Company has no significant capital lease obligations. - -------------------------------------------------------------------------------- The Company also has a $400 million senior revolving credit facility. As of December 31, 2005, the Company had $150 million outstanding under this facility. The Company may prepay amounts outstanding under this facility at any time; however, any amounts outstanding on September 15, 2010 must be paid in full on that date. 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 27 needs, planned capital expenditures, future contractual obligations and payment of its anticipated quarterly dividends. EQUITY AND DIVIDENDS As part of the NWQ acquisition, key management purchased a non-controlling, member interest in NWQ Investment Management Company, LLC. The non-controlling interest of $0.4 million as of December 31, 2005, and $0.7 million as of December 31, 2004, is reflected in minority interest on the consolidated balance sheets. This purchase allows management to participate in profits of NWQ above specified levels beginning January 1, 2003. During 2005 and 2004, we recorded approximately $5.6 million and $1.9 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 $22.5 million. Of the total amount paid on March 1, 2006, approximately $22.5 million was recorded as goodwill. As part of the Santa Barbara acquisition, an equity opportunity was put in place to allow key individuals to participate in Santa Barbara's earnings growth over the next five years (Class 2 Units, Class 5A Units, Class 5B Units, and Class 6 Units, collectively referred to as "Units"). The Class 2 Units were fully vested upon issuance. The Class 5A Units 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 Class 5B Units vested upon issuance, one third on June 30, 2007, and one third on June 30, 2009. The Class 6 Units shall vest on June 30, 2009. During 2005, we recorded approximately $0.5 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 December 31, 2005, we held in treasury 43,196,377 shares of the Company's common stock. During 2005, the Company repurchased 885,088 common stock shares in open market transactions as part of an on-going repurchase program. As part of a share repurchase program approved on August 9, 2002, we are authorized to purchase up to 7.0 million shares of common stock. As of December 31, 2005, the remaining authorization covered 1.5 million shares. During 2005, we paid out dividends on common shares totaling $62.8 million. See Note 14 to the Consolidated Financial Statements, "Quarterly Results (Unaudited)," for a summary of our dividends paid during the last two fiscal years. BROKER-DEALER Our broker-dealer subsidiary is subject to requirements of the Securities and Exchange Commission relating to liquidity and capital standards (See Note 13 to the Consolidated Financial Statements "Net Capital Requirement"). CRITICAL ACCOUNTING POLICIES Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that impact our financial position and results of operations. These estimates 28 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, 2005, our assets included $625 million of goodwill and $62 million of other definite-lived intangible assets. Under Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we are required to test the fair value of goodwill and indefinite-lived intangibles on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate market multiples and other assumptions. We completed the impairment testing of goodwill and determined that there was no impairment to the goodwill recorded in our books and records as of May 31, 2005, the date that we have selected as an annual date. The recognition of any such impairment would have resulted in a charge to income in the period in which the impairment was determined. While we believe that our testing was appropriate, the use of different assumptions may result in recognizing some impairment of goodwill in our financial statements. IMPAIRMENT OF INVESTMENT SECURITIES SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and Securities and Exchange Commission ("SEC") Staff Bulletin ("SAB") 59, "Accounting for Noncurrent Marketable Equity Securities" and FASB Emerging Issues Task Force 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" provide guidance on determining when an investment is other-than-temporarily impaired. We periodically evaluate our investments for other-than-temporary declines in value. To determine if an other-than-temporary decline exists, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as our intent and ability to hold the investment. Additionally, we consider the financial health of and near-term business outlook for an investee, including factors such as industry performance and operational cash flow. If an other-than-temporary decline in value is determined to exist, the unrealized investment loss net of tax, in accumulated other comprehensive income, is realized as a charge to net income in that period. See Note 1 to the Consolidated Financial Statements for further information. ACCOUNTING FOR INCOME TAXES SFAS No. 109, "Accounting for Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our financial position or our results of operations. FORWARD-LOOKING INFORMATION AND RISKS From time to time, information we provide or information included in our filings with the SEC (including Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to Consolidated Financial Statements in this Form 10-K) may contain statements that are not historical facts, but are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or future financial performance and reflect management's expectations and opinions. In some cases, you can identify forward-looking statements by 29 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, 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 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 repurchase of shares from STA in 2005; and (13) unforeseen developments in litigation involving the securities industry or the Company. See Item 1A. "Risk Factors". ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK The following information and information included elsewhere in this report, describe the key aspects of certain financial instruments that have market risk. INTEREST RATE SENSITIVITY As of December 31, 2005, 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 December 31, 2005, 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 December 31, 2005. 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 will bear interest at an annual fixed rate of 5.0% payable semi-annually, beginning March 15, 2006. The 10-year senior notes will 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 December 31, 2005, would have resulted in a net decrease in the fair value of our debt of approximately $31 million at December 31, 2005. As of December 31, 2004, 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 30 on the fair value of the debt. We estimate that a 100 basis point increase in interest rates from the levels at December 31, 2004, would have resulted in a net decrease in the fair value of our debt of approximately $10 million at December 31, 2004. 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 $45 million and $43 million at December 31, 2005 and 2004, respectively. We estimate that a 100 basis point increase in interest rates from the levels at December 31, 2005, would result in a net decrease of approximately $1.7 million in the fair value of the fixed income investments at December 31, 2005. We estimate that a 100 basis point increase in interest rates from the levels at December 31, 2004, would have resulted in a net decrease of approximately $1.5 million in the fair value of the fixed-income investments at December 31, 2004. Also included in investments at December 31, 2005, 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 $0.3 million at December 31, 2005. We estimate that a 100 basis point increase in interest rates from the levels at December 31, 2005, would have resulted in a net increase in the fair market value of the open derivatives of $1.6 million. There were no such instruments at December 31, 2004. See Note 5 "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 $45 million and $44 million, at December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004, we estimate that a 10% adverse change in equity prices would have resulted in decreases of approximately $5 million and $4 million, respectively, in the fair value of our equity securities. The model to determine sensitivity assumes a corresponding shift in all equity prices. An adverse movement in the equity price of our holdings in privately-held companies cannot be easily quantified as our ability to realize returns on our investment depends on the investees' ability to raise additional capital and/or derive cash inflows from continuing operations. INFLATION Our assets are, to a large extent, liquid in nature and therefore not significantly affected by inflation. However, inflation may result in increases in our expenses, such as employee compensation, advertising and promotional costs, and office occupancy costs. To the extent inflation, or the expectation thereof, results in rising interest rates or has other adverse effects upon the securities markets and on the value of financial instruments, it may adversely affect our financial condition and results of operations. A substantial decline in the value of fixed-income or equity investments could adversely affect the net asset value of funds and accounts we manage, which in turn would result in a decline in investment advisory and performance fee revenue. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS (in thousands, except for share data)
DECEMBER 31, -------------------------- 2005 2004 ----------- ----------- ASSETS Cash and cash equivalents $ 128,933 $ 209,360 Management and distribution fees receivable 61,932 50,902 Other receivables 22,387 18,754 Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation and amortization of $58,950 and $51,942, respectively 31,926 27,694 Investments 121,273 138,820 Goodwill 625,267 549,811 Other intangible assets, at cost less accumulated amortization of $20,785 and $15,293, respectively 62,307 53,398 Current taxes receivable 4,377 -- Other assets 18,815 22,854 ----------- ----------- $ 1,077,217 $ 1,071,593 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-Term Obligations: Notes payable $ 150,000 $ -- Accounts payable 15,990 14,429 Current taxes payable -- 4,255 Accrued compensation and other expenses 86,644 67,311 Other short-term liabilities 12,930 8,788 ----------- ----------- Total Short-Term Obligations 265,564 94,783 ----------- ----------- Long-Term Obligations: Notes payable -- 305,047 Senior term notes 543,733 -- Deferred compensation 36,585 34,547 Deferred income tax liability, net 26,319 23,959 Other long-term liabilities 23,186 25,177 ----------- ----------- Total Long-Term Obligations 629,823 388,730 ----------- ----------- Total Liabilities 895,387 483,513 Minority interest 25,007 2,602 Common stockholders' equity: Class A common stock, $.01 par value, 160,000,000 shares authorized, 120,911,480 and 47,586,266 shares issued at December 31, 2005 and 2004, respectively 1,209 476 Class B common stock, $.01 par value, 80,000,000 shares authorized, no shares issued at December 31, 2005 and 73,325,214 shares issued at December 31, 2004 -- 733 Additional paid-in capital 246,565 215,102 Retained earnings 965,058 854,549 Unamortized cost of restricted stock awards (18,337) (77) Accumulated other comprehensive income/(loss) 864 892 ----------- ----------- 1,195,359 1,071,675 Less common stock held in treasury, at cost (43,196,377 and 28,006,208 shares, respectively) (1,038,536) (486,197) ----------- ----------- Total common stockholders' equity 156,823 585,478 ----------- ----------- $ 1,077,217 $ 1,071,593 =========== ===========
See accompanying notes to consolidated financial statements 32 CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 2005 2004 2003 --------- --------- --------- Operating revenues: Investment advisory fees from assets under management $ 559,663 $ 475,814 $ 404,847 Product distribution 8,356 8,959 9,206 Performance fees/other revenue 21,110 20,864 37,975 --------- --------- --------- Total operating revenues 589,129 505,637 452,028 --------- --------- --------- Operating expenses: Compensation and benefits 195,194 165,321 144,190 Advertising and promotional costs 12,495 12,158 11,627 Occupancy and equipment costs 21,648 19,740 19,321 Amortization of intangible assets 5,492 5,118 5,208 Travel and entertainment 8,357 7,981 7,726 Outside and professional services 25,002 22,216 20,331 Minority interest expense 5,809 1,875 1,077 Other operating expenses 25,242 18,353 16,222 --------- --------- --------- Total operating expenses 299,239 252,762 225,702 --------- --------- --------- Other income/(expense) 7,888 7,548 826 Net interest expense (18,939) (7,916) (5,997) --------- --------- --------- Income before taxes 278,839 252,507 221,155 --------- --------- --------- Income taxes: Current 103,597 87,723 76,097 Deferred 4,086 8,376 10,053 --------- --------- --------- Total income taxes 107,683 96,099 86,150 --------- --------- --------- Net income $ 171,156 $ 156,408 $ 135,005 ========= ========= ========= Average common and common equivalent shares outstanding: Basic 81,356 92,671 92,612 ========= ========= ========= Diluted 86,111 96,121 95,944 ========= ========= ========= Earnings per common share: Basic $ 2.10 $ 1.69 $ 1.46 ========= ========= ========= Diluted $ 1.99 $ 1.63 $ 1.41 ========= ========= =========
See accompanying notes to consolidated financial statements. The Company began expensing the cost of stock options on April 1, 2004. All prior period financial information has been restated. 33 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (in thousands)
UNAMORTIZED ACCUMULATED CLASS A CLASS B ADDITIONAL COST OF OTHER COMMON COMMON PAID-IN RETAINED RESTRICTED COMPREHENSIVE TREASURY STOCK STOCK CAPITAL EARNINGS STOCK AWARDS INCOME/(LOSS) STOCK TOTAL ------- ------ ---------- --------- ------------ ------------- ----------- --------- Balance at December 31, 2002 $ 476 $ 733 $ 172,198 $ 682,278 $ (748) $ (4,859) $ (453,352) $ 396,726 ======= ====== ========== ========= ============ ============= =========== ========= Net income 135,005 135,005 Cash dividends paid (51,880) (51,880) Purchase of treasury stock (41,946) (41,946) Compensation expense on options 14,132 14,132 Exercise of stock options (3,649) (2,151) 23,480 17,680 Issuance of restricted stock 49 (129) 80 -- Amortization of restricted stock awards 827 827 Tax effect of options exercised 6,218 6,218 Other comprehensive income 2,218 2,218 ------- ------ ---------- --------- ------------ ------------- ----------- --------- Balance at December 31, 2003 $ 476 $ 733 $ 188,899 $ 763,301 $ (50) $ (2,641) $ (471,738) $ 478,980 ======= ====== ========== ========= ============ ============= =========== ========= Net income 156,408 156,408 Cash dividends paid (63,979) (63,979) Purchase of treasury stock (52,076) (52,076) Compensation expense on options 20,417 20,417 Exercise of stock options (5,857) (1,144) 37,257 30,256 Issuance of deferred stock (66) 300 234 Grant of restricted stock 29 (89) 60 -- Amortization of restricted stock awards 62 62 Tax effect of options exercised 11,643 11,643 Other comprehensive income 3,533 3,533 ------- ------ ---------- --------- ------------ ------------- ----------- --------- Balance at December 31, 2004 $ 476 $ 733 $ 215,102 $ 854,549 $ (77) $ 892 $ (486,197) $ 585,478 ======= ====== ========== ========= ============ ============= =========== ========= Net income 171,156 171,156 Cash dividends paid (62,805) (62,805) Conversion of B shares to A 733 (733) -- Purchase of treasury stock (636,112) (636,112) Compensation expense on options 14,520 14,520 Exercise of stock options (9,754) (10,399) 73,852 53,699 Grant of restricted stock 12,557 (23,197) 10,640 -- Forfeit of restricted stock 719 (719) -- Amortization of restricted stock awards 4,218 4,218 Tax effect of options exercised 26,022 26,022 Tax effect of restricted stock granted 675 675 Other comprehensive income/(loss) (28) (28) ------- ------ ---------- --------- ------------ ------------- ----------- --------- Balance at December 31, 2005 $ 1,209 $ -- $ 246,565 $ 965,058 $ (18,337) $ 864 $(1,038,536) $ 156,823 ======= ====== ========== ========= ============ ============= =========== =========
Comprehensive Income (in 000s): 2005 2004 2003 --------- --------- --------- Net income ............................................................ $ 171,156 $ 156,408 $ 135,005 Other comprehensive income: Unrealized gains/(losses) on marketable equity securities, net of tax (566) 3,176 3,605 Reclassification adjustments for realized gains/(losses) ............ 218 80 30 Acceleration of terminated cash flow hedge .......................... 1,141 -- -- Terminated cash flow hedge .......................................... 1,529 276 (1,417) Funded status of qualified pension plan ............................. (2,351) -- -- Foreign currency translation adjustments ............................ 1 1 -- --------- --------- --------- Subtotal: other comprehensive income/(loss) .................... (28) 3,533 2,218 --------- --------- --------- Comprehensive Income ......................................... $ 171,128 $ 159,941 $ 137,223 ========= ========= =========
Change in Shares Outstanding (in 000s): 2005 2004 2003 --------- --------- --------- Shares outstanding at the beginning of the year ................. 92,905 92,506 92,726 Shares issued under equity incentive plans ...................... 3,907 2,219 1,444 Shares acquired ................................................. (904) (1,820) (1,664) Repurchase from STA ............................................. (18,193) -- -- --------- --------- --------- Shares outstanding at the end of the year ....................... 77,715 92,905 92,506 ========= ========= =========
See accompanying notes to consolidated financial statements. The Company began expensing the cost of stock options on April 1, 2004. All prior period financial information has been restated. 34 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, ----------------------------------------- 2005 2004 2003 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 171,156 $ 156,408 $ 135,005 Adjustments to reconcile net income to net cash provided from operating activities: Deferred income taxes 4,086 8,376 10,053 Depreciation of office property, equipment, and leaseholds 8,745 7,900 7,650 Unrealized (gains)/losses from available-for-sale investments (1,549) (388) 63 Amortization of intangible assets 5,492 5,118 5,208 Amortization of debt related items, net (3,753) (637) 14 Compensation expense for options and restricted stock 18,738 20,479 14,959 Net (increase) decrease in assets: Management and distribution fees receivable (8,995) 4,069 (867) Other receivables (1,886) (7,476) 3,687 Other assets 1,625 1,221 2,353 Net increase (decrease) in liabilities: Accrued compensation and other expenses 18,888 11,825 11,296 Deferred compensation 2,037 3,840 2,731 Current taxes payable (8,632) (15,415) 8,719 Accounts payable 494 858 762 Other liabilities 5,358 (4,193) 1,359 Other (3,245) 4 1 ----------- ----------- ----------- Net cash provided from operating activities 208,559 191,989 202,993 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from loans and notes payable 860,000 -- 300,000 Proceeds from senior term notes 550,000 -- -- Repayments of notes and loans payable (1,010,000) -- (305,000) Net deferred debt issuance related items (4,661) 3,846 610 Dividends paid (62,805) (63,979) (51,880) Proceeds from stock options exercised 53,699 30,256 17,679 Acquisition of treasury stock (636,112) (52,076) (41,946) Other, consisting primarily of the tax effect of options exercised 26,697 11,643 6,218 ----------- ----------- ----------- Net cash used for financing activities (223,182) (70,310) (74,319) ----------- ----------- ----------- Cash flows from investing activities: Santa Barbara acquisition (49,765) -- -- Purchase of office property and equipment (13,494) (5,634) (6,964) Proceeds from sales of investment securities 29,452 2,543 1,416 Purchases of investment securities (13,477) (54,718) (1,808) Net change in consolidated mutual funds (6,604) -- -- Contingent consideration for Symphony acquisition -- (1,639) (14,264) Proceeds from Rittenhouse stock options exercised -- -- 42,474 Repurchase of Rittenhouse stock -- -- (53,531) Repurchase of NWQ minority members' interests (22,800) (15,424) -- Other, consisting primarily of the change in other investments 10,883 968 (4,893) ----------- ----------- ----------- Net cash used for investing activities (65,805) (73,904) (37,570) ----------- ----------- ----------- Effect of exchange rate changes on cash and cash equivalents 1 1 -- Increase/(decrease) in cash and cash equivalents (80,427) 47,776 91,104 Cash and cash equivalents: Beginning of year 209,360 161,584 70,480 ----------- ----------- ----------- End of year $ 128,933 $ 209,360 $ 161,584 =========== =========== ===========
See accompanying notes to consolidated financial statements. The Company began expensing the cost of stock options on April 1, 2004. All prior period financial information has been restated. 35 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Information and Basis of Presentation The consolidated financial statements include the accounts of Nuveen Investments, Inc. ("the Company" or "Nuveen Investments") and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Nuveen Investments markets its highly specialized investment teams, each with its own brand name and area of expertise: NWQ, specializing in value-style equities; Nuveen, managing fixed-income investments; Santa Barbara, committed to growth equities; Rittenhouse, focused on "blue-chip" growth equities; and Symphony, with expertise in alternative investments as well as equity and income portfolios. Operations of Nuveen Investments are organized around its principal advisory subsidiaries, which are registered investment advisers under the Investment Advisers Act of 1940. These advisory subsidiaries manage the Nuveen mutual funds and closed-end funds and provide investment services for individual and institutional managed accounts. Additionally, Nuveen Investments, LLC, a registered broker and dealer in securities under the Securities Exchange Act of 1934, provides investment product distribution and related services for the Company's managed funds. Sale of The St. Paul Travelers Companies, Inc.'s Ownership Interest in Nuveen Investments On April 7, 2005, The St. Paul Travelers Companies, Inc. ("STA") sold approximately 40 million shares of Nuveen Investments' common stock in a secondary underwritten public offering at $34.00 per share. In addition, the Company repurchased $600 million of Nuveen Investments common stock directly from STA at a price of $32.98 per share, or approximately 18.2 million shares. The repurchase of these shares was completed through two steps - a $200 million (6.0 million shares) repurchase was completed on April 7, 2005, and a $400 million forward purchase (plus interest) was settled on July 28, 2005. The entire $600 million repurchase has been 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 purpose of computing basic earnings per share. Upon the closing of the secondary offering, the Company was no longer a majority-owned subsidiary of STA, and, as of the end of September 2005, all of STA's remaining ownership interest had been sold. Expensing Stock Options Effective April 1, 2004, the Company began expensing the cost of stock options in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the lesser of the options' vesting period or the related employee service period. A Black-Scholes option-pricing model was used to determine the fair value of each award at the time of the grant. The retroactive restatement method described in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" was adopted and the results for prior years have been restated. Compensation cost recognized is the same as that which would have been recognized had the fair value method of SFAS No. 123 been applied from its original effective date. Prior to April 1, 2004, the Company accounted for stock option plans under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. 36 Other Certain other amounts in the prior year financial statements have been reclassified to conform to the 2005 presentation. These reclassifications had no effect on net income or stockholders' equity. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the consolidated financial statements. Actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, investment instruments with maturities of three months or less and other highly liquid investments, including commercial paper and money market funds, which are readily convertible to cash. Amounts presented on our consolidated balance sheets approximate fair value. Included in cash and cash equivalents are approximately $5 million of treasury bills segregated in a special reserve account for the benefit of customers under rule 15c3-3 of the Securities and Exchange Commission. 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, 2005, the Company had approximately $20 million in securities purchased under agreements to resell. At December 31, 2004, there were no securities purchased under agreements to resell. The Company utilizes resale agreements to invest cash not required to fund daily operations. The level of such investments will fluctuate on a daily basis. Such resale agreements typically mature on the day following the day on which the Company enters into such agreements. Since these agreements are highly liquid investments, readily convertible to cash, and mature in less than three months, the Company includes these amounts in cash equivalents for balance sheet and cash flow purposes. Securities Transactions Securities transactions entered into by the Company's broker-dealer subsidiary are recorded on a settlement date basis, which is generally three business days after the trade date. Securities owned are valued at market value with profit and loss accrued on unsettled transactions based on the trade date. Furniture, Equipment and Leasehold Improvements Furniture and equipment, primarily computer equipment, is depreciated on a straight-line basis over estimated useful lives ranging from three to ten years. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the remaining term of the lease. The Company capitalizes certain costs incurred in the development of internal-use software. Software development costs are amortized over a period of not more than five years. Investments Investments consist of securities classified as either: non-marketable, trading, or available-for-sale. Also included are investments resulting from the consolidation of three funds managed by the Company but not yet offered for sale. As a result of being the sole investor in these three funds, the Company is required to consolidate these funds in its consolidated financial statements (see Note 11, "Consolidated Funds," for 37 additional information). Of the approximate total of $121 million in investments at December 31, 2005, approximately $45 million relates to equity-based funds and accounts, another $45 million to fixed-income funds or accounts, and the remaining $31 million is considered "other" which consists primarily of our investment in Institutional Capital Corporation. The following information related to investments does not include information related to the consolidated fund investments of approximately $28 million. Non-marketable securities are investments that are saleable, but for which no ready market exists. These investments are carried at cost. At December 31, 2005, approximately $30 million of investments are classified as non-marketable and represent non-voting common stock in a privately held institutional equity manager (Institutional Capital Corporation). Trading securities are securities bought and held principally for the purpose of selling them in the near term. These investments are reported at fair value, with unrealized gains and losses included in earnings. At December 31, 2005, approximately $22 million of investments are classified as trading securities. Approximately $11 million of these securities are in products or portfolios that are not currently marketed by the Company but may be offered to investors in the future. The fair value for these products is determined through a combination of quoted market prices as well as a valuation of any derivatives employed by means of discounted cash flow analysis. The remaining balance of approximately $10 million included as trading securities is our investment in certain Company-sponsored mutual funds. The purpose of these investments is to mitigate interest rate exposure for those participants in the Company's deferred compensation program who have elected to defer compensation with such deferred compensation earning interest based on the rate of return of one of several managed funds sponsored by the Company. To mitigate exposure and to minimize the volatility of the Company's deferred compensation liability, the Company purchases shares of the underlying funds at the time of the deferral. Investments not classified as either non-marketable or trading are classified as available-for-sale securities. These investments are carried at fair value with unrealized holding gains and losses reported net of tax as a separate component of accumulated other comprehensive income until realized. Realized gains and losses are reflected as a component of non-operating income/(expense). At December 31, 2005, approximately $40 million of investments are classified as available-for-sale and consist primarily of Company-sponsored products or portfolios that are not currently being marketed by the Company but may be offered to investors in the future. These marketable securities are carried at fair value, which is based on quoted market prices. The cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of available-for-sale equity securities by major security type and class of security at December 31, 2005 and 2004, are as follows:
(in 000s) GROSS UNREALIZED GROSS UNREALIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE -------- ---------------- ---------------- ---------- At December 31, 2005 Available-for-Sale: Incubation strategies $ 24,249 $ 2,479 $ (28) $ 26,700 Sponsored funds 8,620 479 (143) 8,956 Other equity securities 4,203 - (26) 4,177 --------- ---------- --------- --------- $ 37,072 $ 2,958 $ (197) $ 39,833 ========= ========== ========= =========
38
(in 000s) GROSS UNREALIZED GROSS UNREALIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE -------- ---------------- ---------------- ---------- At December 31, 2004 Available-for-Sale: Incubation strategies $ 16,422 $ 3,019 $ (214) $ 19,227 Sponsored funds 17,664 468 (25) 18,107 Other equity securities 3,871 142 (40) 3,973 --------- ---------- --------- --------- $ 37,957 $ 3,629 $ (279) $ 41,307 ========= ========== ========= =========
The Company periodically evaluates its investments for other-than-temporary declines in value. Other-than-temporary declines in value may exist when the fair value of an investment security has been below the carrying value for an extended period of time. If an other-than-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 that period. At December 31, 2005, for the five investments that have unrealized losses for greater than 12 months, the Company believes that all of these unrealized losses are only temporary and are due to temporary market conditions. Supporting this conclusion is the increase in the value of these investments, and commensurate decline in total unrealized losses at December 31, 2005, compared to total unrealized losses at December 31, 2004. The following table presents information about the Company's investments with unrealized losses at December 31, 2005 and 2004 (in 000s):
- ------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2005 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL --------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses - ------------------------------------------------------------------------------------------------------------- Sponsored funds $ 5,125 $ (139) $ 296 $ (30) $ 5,421 $ (169) Incubation strategies 987 (28) -- -- 987 (28) ------- ------ ------ ----- ------- ------ Total temporarily impaired securities $ 6,112 $ (167) $ 296 $ (30) $ 6,408 $ (197) - -------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2004 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL --------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses - ------------------------------------------------------------------------------------------------------------- Sponsored funds $ 477 $ (25) $ 49 $ (1) $ 526 $ (26) Incubation strategies 2,022 (5) 1,376 (248) 3,398 (253) -------- ---------- -------- ----- ------- ----- Total temporarily impaired securities $ 2,499 $ (30) $ 1,425 $(249) $ 3,924 $ (279) - -------------------------------------------------------------------------------------------------------------
Revenue Recognition Investment advisory fees from assets under management are recognized ratably over the period that assets are under management. Performance fees are recognized only at the performance measurement dates contained in the individual account management agreements and are dependent upon performance of the account exceeding agreed-upon benchmarks over the relevant period. Some of the Company's investment management agreements provide that, to the extent certain enumerated expenses exceed a specified percentage of a fund's or a portfolio's average net assets for a given year, the advisor will absorb such expenses through a reduction in management fees. Investment advisory fees are recorded net of any such expense reductions. Investment advisory fees are also recorded net of any sub-advisory fees paid by the Company based on the terms of those arrangements. 39 Accumulated Other Comprehensive Income/(Loss) The Company's other comprehensive income/(loss) consists of: changes in unrealized gains and losses on certain investment securities classified as available-for-sale (recorded net of tax); reclassification adjustments for realized gains/(losses) on those investment securities classified as available-for-sale; activity from terminated cash flow hedges; activity related to the Company's qualified pension plan; and foreign currency translation adjustments. The changes in unrealized gains and losses (net of tax) on certain investment securities classified as available-for-sale were approximately ($0.3 million), $3.2 million and $3.6 million for the years ended December 31, 2005, 2004, and 2003, respectively. The related cumulative tax effects of the changes in unrealized gains and losses on those investment securities classified as available-for-sale were deferred tax benefits/(liabilities) of $0.2 million in 2005, ($2.1 million) in 2004 and ($2.3 million) in 2003. The reclassification adjustments for realized gains/(losses) for those investment securities classified as available-for-sale resulted in gains of approximately $0.2 million, $0.1 million and less than $0.1 million in 2005, 2004 and 2003, respectively. During 2005, the Company had two different sources of activity from terminated cash flow hedges: (1) the acceleration of the amortization of the deferred loss resulting from a series of Treasury rate lock transactions related to the private placement debt; and (2) the deferral of a gain and its related amortization resulting from a series of Treasury rate lock transactions related to the Senior Term Notes. The first source of 2005 activity from terminated cash flow hedges relates to the private placement debt. As discussed further in Note 5, "Derivative Financial Instruments," the Company had incurred a deferred loss during 2003 in connection with a series of Treasury rate lock transactions that had been entered into in anticipation of the private placement debt (see Note 4, "Debt"). This loss was being reclassified into current earnings commensurate with the recognition of interest expense on the private placement debt. The amortization of this loss was approximately $0.1 million and $0.3 million for the years ended December 31, 2003 and 2004, respectively. At December 31, 2004, the remaining unamortized loss from these Treasury rate lock transactions was approximately $1.1 million. On April 6, 2005, the Company made an early repayment of the entire $300 million of private placement debt. As a result of this early repayment, the Company accelerated the recognition of the remaining $1.1 million of unamortized deferred loss relating to those Treasury rate lock transactions. At December 31, 2005, there was no remaining unamortized loss relating to these Treasury rate lock transactions. The second source of 2005 activity from terminated cash flow hedges relates to the Senior Term Notes. As discussed further in Note 5, "Derivative Financial Instruments," during 2005, the Company deferred a $1.6 million gain that resulted from another series of Treasury rate lock transactions; these Treasury rate lock transactions were entered into in anticipation of the issuance of the Senior Term Notes (see Note 4, "Debt," for additional information). This $1.6 million gain will be reclassified into current earnings commensurate with the recognition of interest expense on the 5-year and 10-year term debt. As the gain resulting from these Treasury rate lock transactions did not occur until 2005, there was no amortization for the years ended December 31, 2003 or 2004. For the year ended December 31, 2005, approximately $0.1 million of income was reclassified into interest expense. At December 31, 2005, the remaining unamortized gain on these Treasury rate lock transactions approximated $1.5 million. During 2006, the Company expects to reclassify approximately $0.2 million of the deferred gain into interest expense. For the year ended December 31, 2005, the Company updated certain actuarial assumptions used to determine the accumulated benefit obligation ("ABO") for its qualified pension plan. As a result, the Company's qualified pension plan was determined to be underfunded on an ABO basis as of December 31, 2005. Consequently, a charge was recorded to stockholders' equity, net of income tax benefits, as a component of other comprehensive loss of approximately $2.4 million. Effective March 24, 2003, the retirement plan was amended to provide that: (1) participation in the retirement plan was frozen such that no new employees will enter the plan, and (2) existing plan participants will not accrue any new benefits after March 31, 2014. 40 Finally, the last component of the Company's other comprehensive income/(loss) relates to foreign currency translation adjustments. Although there were no foreign currency translation gains/losses for the year ended December 31, 2003, the Company recorded approximately $1,000 of foreign currency translation gains for each of the years ended December 31, 2005 and 2004. The Company's total comprehensive income was approximately $171.1 million in 2005, $159.9 million in 2004 and $137.2 million in 2003. Goodwill In July 2001, the FASB issued Statement SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead that they be tested for impairment at least annually using a two-step process. Other intangible assets continue to be amortized over their useful lives. The Company has chosen May 31 as its measurement date for the annual SFAS No. 142 impairment test. Neither the initial SFAS No. 142 impairment test (as of January 1, 2002), nor any of the subsequent, ongoing annual SFAS No. 142 impairment tests (as of May 31) indicate any impairment of goodwill. The Company's SFAS No. 142 goodwill impairment test involves the use of estimates. Specifically, estimates are used in assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of reporting units. While we believe that our testing was appropriate, the use of different assumptions may have resulted in recognizing some impairment of goodwill in our financial statements. The following table presents a reconciliation of activity in goodwill from December 31, 2003, to December 31, 2005, as presented on our consolidated balance sheets: (in 000s) Balance at December 31, 2003 $ 535,271 Repurchase of 100% of NWQ Class 2 interests (see Note 9) 12,923 Symphony contingent consideration 1,639 Other (22) ----------- Balance at December 31, 2004 $ 549,811 ----------- Repurchase of 100% of NWQ Class 3 interests (see Note 9) 22,500 Santa Barbara acquisition (see Note 10) 52,956 ----------- Balance at December 31, 2005 $ 625,267 ===========
Intangible Assets Intangible assets consist primarily of the estimated value of customer relationships resulting from our Symphony, NWQ, and Santa Barbara acquisitions. We do not have any intangible assets with indefinite lives. We amortize our intangible assets over their estimated useful lives. 41 The following table presents a reconciliation of activity in other intangible assets from December 31, 2003, to December 31, 2005, as presented on our consolidated balance sheets: (in 000s) Balance at December 31, 2003 $ 58,516 Amortization of: Symphony customer relationships (2,223) Symphony internally developed software (324) Symphony favorable lease (26) NWQ contractual relationships (2,545) ---------- Balance at December 31, 2004 $ 53,398 ========== Santa Barbara acquisition (see Note 10) 14,400 Amortization of: Symphony customer relationships (2,223) Symphony internally developed software (324) NWQ contractual relationships (2,544) Santa Barbara contractual relationships (see Note 10) (400) --- ---- ---------- Balance at December 31, 2005 $ 62,307 ==========
The following table reflects the gross carrying amounts and the accumulated amortization amounts for the Company's intangible assets as of December 31, 2005 and 2004: (in 000s)
AS OF DECEMBER 31, 2005 AS OF DECEMBER 31, 2004 ----------------------------- ------------------------------ GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------- -------- ------------ Symphony acquisition- Customer relationships $43,800 $ 9,891 $43,800 $ 7,668 Internally developed software 1,622 1,432 1,622 1,107 Favorable lease 369 369 369 369 NWQ acquisition- Contractual customer relationships 22,900 8,693 22,900 6,149 Santa Barbara - estimated intangibles 14,400 400 -- -- ------- ------- ------- ------- Total $83,091 $20,785 $68,691 $15,293 ======= ======= ======= =======
For the years ended December 31, 2005 and 2004, the aggregate amortization expense relating to the Company's amortizable intangible assets was approximately $5.5 million and $5.1 million, respectively. There were no unamortizable intangible assets at December 31, 2005 and 2004. The approximate useful lives of these intangible assets are as follows: Symphony customer relationships - 19 years; Symphony internally developed software - 5 years; NWQ contractual relationships - 9 years; and Santa Barbara contractual relationships - - 9 years (estimated). The estimated aggregate amortization expense for each of the next five years is approximately: $6.6 million for 2006, and $6.4 million for each of 2007, 2008, 2009 and 2010. 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 $9.0 million and $8.7 million, and these payables were approximately $4.6 million and $5.0 million at December 31, 2005 and 2004, respectively. 42 Other Assets At December 31, 2005 and 2004, other assets consist primarily of approximately $14.6 million and $16.9 million, respectively, in commissions advanced by the Company on sales of certain mutual fund shares. Advanced sales commission costs are being amortized over the lesser of the Securities and Exchange Commission Rule 12b-1 revenue stream period (one to eight years) or the period during which the shares of the fund upon which the commissions were paid remain outstanding. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of the estimated fair value of financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. In determining the fair value of its financial instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risk existing at each balance sheet date. For the majority of financial instruments, including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost are used to determine fair value. Dealer quotes are used for the remaining financial instruments. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. Cash and cash equivalents, marketable securities, notes and other accounts receivable and investments are financial assets with carrying values that approximate fair value because of the short maturity of those instruments. Accounts payable and other accrued expenses are financial liabilities with carrying values that also approximate fair value because of the short maturity of those instruments. The fair value of long-term debt is based on market prices. A comparison of the fair values and carrying amounts of these instruments is as follows: (in 000s)
DECEMBER 31, 2005 2004 ------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- --------- -------- Assets: Cash and cash equivalents $128,933 $128,933 $209,360 $209,360 Fees receivable 61,932 61,932 50,902 50,902 Other receivables 22,387 22,387 18,754 18,754 Investment in consolidated funds 28,377 28,377 31,023 31,023 Marketable securities 61,526 61,526 65,670 65,670 Non-marketable securities 30,434 30,600 41,287 66,450 Liabilities: Senior term notes $550,000 $541,047 $ -- $ -- Notes payable 150,000 150,000 305,047 299,000 Accounts payable 15,990 15,990 14,429 14,429 Open derivatives 303 303 66 66
Equity Incentive Plans Effective April 1, 2004, the Company began expensing the cost of stock options per the fair value provisions of SFAS No. 123 using the retroactive restatement method described in SFAS No. 148. Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the lesser of the options' vesting period or the related 43 employee service period. A Black-Scholes option pricing model was used to determine the fair value of each award at the time of the grant. The following table provides the effect of the restatement on net income and earnings per share for the year ended December 31, 2003: (in 000s, except per share data)
AS REPORTED AS RESTATED ----------- ----------- Net Income $143,996 $135,005 Basic EPS $1.55 $1.46 Diluted EPS $1.50 $1.41
Leases The Company leases its various office locations under cancelable and non-cancelable operating leases, whose initial terms typically range from month-to-month to fifteen years, along with options that permit renewals for additional periods. Minimum rent is expensed on a straight-line basis over the term of the lease, with any applicable leasehold incentives applied as a reduction to monthly lease expense. 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. 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 years ended December 31, 2005, 2004 and 2003: (in 000s)
For the year ended December 31, 2005 2004 2003 -------- ------- ------- Gains/(Losses) on Investments $ 4,802 $ 4,128 $ 1,440 Gains/(Losses) on Fixed Assets (442) (10) (635) Miscellaneous Income/(Expense) 3,528 3,430 21 -------- ------- ------- Total $ 7,888 $ 7,548 $ 826 ======== ======= =======
Total other income/(expense) for 2005 was $7.9 million. As a result of the early repayment of the private placement debt, the Company accelerated the recognition of unamortized deferred gains and losses resulting from various interest rate hedging activity associated with the private placement debt. This accelerated recognition resulted in $3.6 million of miscellaneous income for the year. Supplementing this other income was $4.8 million in gains recognized on the sale of seed investments. Total other income/(expense) was $7.5 million in 2004. This income was comprised of realized gains on the sale of investments and income recorded on non-recurring items. 44 Net Interest Expense The following is a summary of Net Interest Expense for the years ended December 31, 2005, 2004 and 2003: (in 000s)
For the year ended December 31, 2005 2004 2003 -------- -------- -------- Dividends and Interest Income $ 8,978 $ 4,597 $ 1,438 Interest Expense (27,917) (12,513) (7,435) -------- -------- -------- Total $(18,939) $ (7,916) $ (5,997) ======== ======== ========
Total net interest expense increased $11.0 million for the year due to increased interest expense as a result of increased debt associated with the repurchase of shares from STA. Partially offsetting this increase was an increase in dividends and interest income due to dividends received during 2005 and interest earned on the consolidated funds. Net interest expense increased $1.9 million in 2004 as a result of the restructuring of our debt from short-term variable rate debt to long-term fixed rate debt late in 2003. Taxes The Company and its subsidiaries file a consolidated federal income tax return. The Company provides for income taxes on a separate return basis. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are applicable to periods in which the differences are expected to affect taxable income. Although valuation allowances may be established, when necessary, to reduce deferred tax assets to amounts expected to be realized, there were no deferred tax asset valuation allowances at December 31, 2005 or 2004. Supplemental Cash Flow Information The Company paid cash interest of $21.7 million in 2005, $12.6 million in 2004 and $6.1 million in 2003. This compares with interest expense reported in the Company's consolidated statements of income of $27.9 million, $12.5 million and $7.4 million for the respective reporting years. Federal and state income taxes paid in the years ending December 31, 2005, 2004 and 2003, amounting to approximately $85.9 million, $92.6 million and $63.5 million, respectively, include required payments on estimated taxable income and final payments of prior year taxes required to be paid upon filing the final federal and state tax returns, reduced by refunds received. 45 2. EARNINGS PER COMMON SHARE The following table sets forth a reconciliation of net income and common shares used in the basic and diluted earnings per share computations for the three years ended December 31, 2005, 2004 and 2003:
(in 000s, except per share data) NET AVERAGE PER SHARE INCOME SHARES AMOUNT ---------- ---------- --------- 2003: Basic EPS......................................................... $ 135,005 92,612 $ 1.46 Dilutive effect of: Deferred restricted stock grants............................... -- 465 Employee stock options......................................... -- 2,867 ----------- --------- Diluted EPS....................................................... $ 135,005 95,944 $ 1.41 =========== ========= ======= 2004: Basic EPS......................................................... $ 156,408 92,671 $ 1.69 Dilutive effect of: Deferred restricted stock grants .............................. -- 457 Employee stock options......................................... -- 2,993 ----------- --------- Diluted EPS....................................................... $ 156,408 96,121 $ 1.63 =========== ========= ======= 2005: Basic EPS......................................................... $ 171,156 81,356 $ 2.10 Dilutive effect of: Deferred restricted stock grants............................... -- 463 Employee stock options......................................... -- 4,292 ----------- --------- Diluted EPS....................................................... $ 171,156 86,111 $ 1.99 =========== ========= =======
At December 31, 2005, all options to purchase shares of the Company's common stock outstanding were included in the computation of diluted earnings per share because all of the options' respective exercise price per share was less than the average market price of the Company's common shares. At December 31, 2004, options to purchase 103,437 shares of the Company's common stock at a range of $34.40 to $39.47 were outstanding, but were not included in the computation of diluted earnings per share because the options' respective exercise price per share was greater than the average market price of the Company's common shares. At December 31, 2003, options to purchase 4,990,800 shares of the Company's common stock at a range of $27.10 to $27.50 were outstanding, but were not included in the computation of diluted earnings per share because the options' respective exercise price per share was greater than the average market price of the Company's common shares. 3. INCOME TAXES The provision for income taxes on earnings for the three years ended December 31, 2005, 2004 and 2003 is:
(in 000s) 2005 2004 2003 ----------- ----------- ----------- Current: Federal........................................................ $ 85,985 $ 73,893 $ 63,979 State.......................................................... 17,612 13,830 12,118 ----------- ----------- ----------- 103,597 87,723 76,097 ----------- ----------- ----------- Deferred: Federal........................................................ 5,047 9,103 8,471 State.......................................................... (961) (727) 1,582 ------------ ------------ ----------- $ 4,086 $ 8,376 $ 10,053 =========== =========== ===========
46 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:
2005 2004 2003 ---- ---- ----- 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... 4.4 3.4 4.5 Tax-exempt interest income, net of disallowed interest expense.... (0.1) (0.1) (0.1) Other, net........................................................ (0.7) (0.2) (0.4) ---- ---- ---- Effective tax rate................................................ 38.6% 38.1% 39.0% ==== ==== ====
The tax effects of significant items that give rise to the net deferred tax liability recorded on the Company's consolidated balance sheets are shown in the following table: (in 000's)
DECEMBER 31, 2005 2004 -------- -------- Gross deferred tax asset: Stock options ................................................... $ 24,164 $ 21,848 Deferred compensation ........................................... 13,157 12,405 Accrued post-retirement benefit obligation ...................... 3,953 3,888 Unfunded accrued pension cost (non-qualified plan) .............. 1,454 1,238 Book depreciation in excess of tax depreciation ................. 4,131 3,978 State net operating loss carryforwards .......................... 3,819 1,589 Restricted stock ................................................ 1,725 400 Deferred stock .................................................. 3,050 2,306 Qualified pension plan costs .................................... 487 -- Other ........................................................... 5,495 3,697 -------- -------- Gross deferred tax asset ........................................... 61,435 51,349 -------- -------- Gross deferred tax liability: Deferred commissions and fund offering costs .................... (5,924) (6,396) Goodwill amortization ........................................... (74,471) (59,310) Prepaid pension costs ........................................... -- (1,361) Other, consisting primarily of internally developed software .... (7,359) (8,241) -------- -------- Gross deferred tax liability ....................................... (87,754) (75,308) -------- -------- Net deferred tax liability ...................................... $(26,319) $(23,959) ======== ========
The future realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes it is more likely than not the Company will realize the benefits of these future tax deductions. Not included in income tax expense for 2005, 2004 and 2003 are income tax benefits of $26.7 million, $11.6 million and $6.2 million, respectively, attributable to the vesting of restricted stock and the exercise of stock options. Such amounts are reported on the consolidated balance sheets in additional paid-in capital and as a reduction of taxes payable included in other liabilities on our consolidated balance sheets. At December 31, 2005, the Company had state tax loss carryforward benefits of approximately $3.8 million that will expire between 2022 and 2025. The Company believes that all state tax loss carryforwards will be utilized prior to expiration. 47 4. DEBT At December 31, 2005 and 2004, debt on the accompanying consolidated balance sheets was comprised of the following:
(in 000s): DECEMBER 31, DECEMBER 31, 2005 2004 ----------- ----------- Short-Term Obligations: Notes payable $ 150,000 -- --------- --------- Long-Term Obligations: Notes Payable: Private placement debt -- $ 300,000 Net unamortized private placement fees -- (1,568) Net unamortized gains on unwinding of swaps -- 6,615 --------- --------- Subtotal -- $ 305,047 --------- --------- Senior Term Notes: Senior term notes - 5 Year $ 250,000 -- Net unamortized discount (654) -- Senior term notes - 10 Year 300,000 -- Net unamortized discount (1,473) -- Net unamortized debt issuance costs (4,140) -- --------- --------- $ 543,733 -- Subtotal --------- --------- Total $ 693,733 $ 305,047 ========= =========
Private Placement Debt On September 19, 2003, the Company issued $300 million of senior unsecured notes (the "private placement debt"). These notes carried a fixed coupon rate of 4.22%, payable semi-annually and were issued at 100% of par, unsecured, and prepayable at any time in whole or in part. In the event of prepayment, the Company would 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. 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. At December 31, 2004, the fair value of the outstanding private placement debt was $299.0 million. As a result of the repayment, there were no amounts outstanding at December 31, 2005. Bridge Credit Facility On April 1, 2005, Nuveen Investments entered into a $750 million bridge credit agreement with various financial institutions. The maturity date of this credit agreement was March 31, 2006. Borrowings under this facility bore an interest rate, at the Company's 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. During the second quarter of 2005, the Company had 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 approximately $410 million of the remaining amount available under the bridge credit agreement primarily to fulfill its forward contract obligation to repurchase shares of its capital stock owned by STA (refer to Note 1, "Sale of The St. Paul Travelers Companies, Inc.'s Ownership Interest in Nuveen Investments"). During the third quarter of 2005, the entire $710 million borrowed under the bridge credit agreement was repaid with borrowings made under a new revolving credit facility and the issuance of senior notes (both discussed below) and the bridge credit agreement was terminated. 48 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 senior 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 are being capitalized and amortized to expense over their term. At December 31, 2005, the fair value of the five-year and ten-year senior term notes was approximately $247.4 million and $293.7 million, respectively. 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. As of December 31, 2005, the Company has borrowed $150 million of the total amount available under the new senior revolving credit facility, with the majority of the proceeds being used to repay the amount due under the bridge credit facility (refer to discussion above). The rate of interest payable under the new senior revolving credit facility is, at the Company's option, a function of either one of various floating rate indices or the Federal Funds rate. For the year ended December 31, 2005, the weighted-average interest rate on the amount borrowed under the senior revolving credit facility was 4.54%. The agreement also 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 December 31, 2005 and 2004, no borrowings were outstanding on these uncommitted lines of credit. 5. DERIVATIVE FINANCIAL INSTRUMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133" and further amended by SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," (collectively, "SFAS No. 133") states that, unless a derivative qualifies as a hedge, the gain or loss from a derivative instrument must be recorded currently into earnings. Under SFAS No. 133, three types of hedges are recognized: fair value hedges, cash flow hedges, and hedges of a corporation's net investments in foreign operations. Fair value hedges - An entity may designate a derivative instrument as hedging the exposure to changes in the fair value (market value) of financial assets or liabilities. For example, a fixed-rate bond's market value changes when prevailing market interest rates change. Hedging the fixed-rate bond's price risk with a derivative would be considered a fair value hedge. Cash flow hedges - An entity may also designate a derivative instrument as hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. That exposure may be associated with an existing recognized asset or liability or a forecasted transaction. Derivative Financial Instruments Related to Private Placement Debt In August 2004, 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 were 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 49 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 had 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 were to be reclassified into earnings commensurate with the recognition of the interest expense on the private placement debt. During the year ended December 31, 2004, the Company reclassified approximately $0.3 million of the loss on the Treasury rate lock transactions into interest expense. At December 31, 2004, the remaining unamortized loss on these Treasury rate lock transactions was approximately $1.1 million. On April 6, 2005, the Company repaid the entire $300 million of private placement debt (refer to Note 4, "Debt"). As a result of the early repayment of the private placement debt, the Company accelerated the recognition of the remaining approximate $1.1 million of unamortized deferred loss resulting from these Treasury rate lock transactions. Due to the accelerated recognition of the deferred loss, there was no remaining unamortized loss on these Treasury rate lock transactions at December 31, 2005. Also related to the private placement debt, the Company entered into a series of interest rate swap transactions. The Company entered into forward-starting interest rate swap transactions as hedges against changes in a portion of the fair value of the private placement debt. Under the agreements, payments were to be exchanged at specified intervals based on fixed and floating interest rates. All of the interest rate swap transactions were designated as fair value hedges to mitigate the changes in fair value of the hedged portion of the private placement debt. The Company determined that these interest rate swap transactions qualified for treatment under the short-cut method of SFAS No. 133 of measuring effectiveness. All of these interest rate swap transactions were cancelled. The cancellation of these interest rate swap transactions resulted in a total gain to the Company of $8.1 million. These gains were being amortized over the term of the private placement debt, lowering the effective interest rate of the private placement debt. The amortization of the gains resulting from the cancellation of these interest rate swap transactions is reflected in "Interest Expense" on the accompanying consolidated statements of income. Approximately $1.3 million of these gains were amortized as a reduction to interest expense for the year ended December 31, 2004. As a result of the early repayment of the private placement debt on April 6, 2005, the Company accelerated the recognition of the remaining unamortized gains resulting from the interest rate swap transactions. For the year ended December 31, 2005, approximately $6.6 million of gains from the cancellation of interest rate swap agreements was recognized as current income. Due to the accelerated recognition of these gains, there was no remaining unamortized gain on interest rate swap transactions at December 31, 2005. In addition to amortizing the deferred gains and losses on the derivative transactions, the Company was amortizing debt issuance costs related to the private placement debt. On April 6, 2005, there was a total of $1.5 million in unamortized private placement fees. Due to the repayment of the private placement debt, the recognition of these fees was also accelerated. The total net resulting gain from the acceleration of the Treasury rate lock transactions, the cancellation of the interest rate swaps and the private placement fees was approximately $3.6 million. This gain was recorded as Other Income/(Expense) in the second quarter of 2005. Derivative Financial Instruments Related to Senior Term Notes In anticipation of the issuance of the senior term notes (refer to Note 4, "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 senior term notes issuance 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 sheet as of 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 will be reclassified into current earnings commensurate with the recognition of interest expense on the 5-year and 10-year term debt. For the year ended December 31, 2005, approximately $68,000 of the deferred gain was amortized into interest expense. At December 31, 2005, the unamortized gain 50 on the Treasury rate lock transactions was approximately $1.5 million. During 2006, the Company expects to reclassify approximately $241,000 of the deferred gain on the Treasury rate lock transactions into interest expense. Other Derivative Financial Instruments Included in "Investments" on the accompanying consolidated balance sheet as of December 31, 2004 are certain swap agreements that have not been designated as hedging instruments. At December 31, 2005, there were no such swap agreements. These swap agreements were being used to replicate certain fixed-income indices for purposes of establishing new fixed-income products that may be offered to investors in the future. The notional values and related expiration dates of these swap agreements were as follows: $2.0 million of positions expiring in August 2005 and $2.6 million of positions expiring in September 2009. For the years ended December 31, 2005 and 2004, the net gain on these instruments totaled approximately $13,000 and $14,000, respectively, and has been reflected in "Other Income/(Expense)" in the accompanying consolidated statements of income. Also included in the accompanying consolidated balance sheets as of December 31, 2005 and 2004 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 December 31, 2005 and 2004, the net fair value of these open non-hedging derivatives was approximately $0.3 million and $0.1 million, respectively, and is reflected in "Other Short-Term Liabilities" on the accompanying consolidated balance sheets. 6. COMMITMENTS AND CONTINGENCIES Rent expense for office space and equipment was $11.9 million, $10.6 million and $10.5 million for the years ended December 31, 2005, 2004 and 2003, respectively. Minimum rental commitments for office space and equipment, including estimated escalation for insurance, taxes and maintenance for the years 2006 through 2015, the last year for which there is a commitment, are as follows:
(in 000s) YEAR COMMITMENT ---- ---------- 2006........................................................... $ 11,048 2007........................................................... 11,366 2008........................................................... 12,243 2009........................................................... 12,654 2010........................................................... 13,046 Thereafter....................................................... 33,225
As part of the Symphony acquisition, the Company may be required to make future payments for substantially above average growth of the Symphony business over the next two years. As of December 31, 2005, the potential for future additional payments is up to a maximum of approximately $120 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. 51 7. RETIREMENT PLANS The Company maintains a non-contributory qualified pension plan, a non-contributory excess pension plan (described below), and a post-retirement benefit plan. The non-contributory qualified pension plan and the post-retirement benefit plan cover 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. Effective March 24, 2003, the pension plans were amended to only include employees who qualified as plan participants prior to such date. On March 31, 2004, the plans were amended to provide that existing plan participants will not accrue any new benefits under the plans after March 31, 2014. Additionally, the Company currently maintains a post-retirement benefit plan 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 non-contributory excess pension plan is maintained by the Company for certain employees who participate in the qualified pension plan and whose pension benefits exceed the Section 415 limitations of the Internal Revenue Code. Pension benefits for this plan follow the vesting provisions of the qualified plan with new participation frozen and benefit accruals ending as described in the prior paragraph. Funding is not made under this plan until benefits are paid, absent a change in control of the Company. 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. Whether vested or non-vested, they are attributed by the pension benefit formula to employee services rendered before a specified date using existing salary levels. As of December 31, 2005 and 2004, the accumulated benefit obligation for our pension plans was $31.7 million and $25.8 million, respectively. For our post-retirement plan, our accumulated benefit obligation at December 31, 2005 and 2004, was $9.5 million and $8.6 million, respectively. A projected benefit obligation represents the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service performed before that date. It is measured using assumptions as to future compensation levels, as the pension benefit formula is based on those future salary levels. The following tables provide a reconciliation of the changes in the plans' projected benefit obligations and fair value of plan assets over the two-year period ending December 31, 2005, and a statement of the funded status as of December 31 of both years:
PENSION POST-RETIREMENT BENEFITS BENEFITS ----------------------- --------------------- (in 000s) 2005 2004 2005 2004 -------- -------- ------- ------- CHANGE IN PROJECTED BENEFIT OBLIGATION: Obligation at January 1 $ 30,216 $ 28,238 $ 8,609 $ 7,465 Service cost 1,575 1,615 256 212 Interest cost 1,802 1,671 518 484 Actuarial loss 3,434 2,158 626 919 Benefit payments (615) (766) (555) (471) Curtailments -- (2,700) -- -- -------- -------- ------- ------- Obligation at December 31 $ 36,412 $ 30,216 $ 9,454 $ 8,609 ======== ======== ======= =======
52
PENSION POST-RETIREMENT BENEFITS BENEFITS -------------------- --------------------- (in 000s) 2005 2004 2005 2004 -------- -------- -------- --------- CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value of plan assets at January 1 $ 25,957 $ 24,702 $ -- $ -- Actual return on plan assets 1,597 2,021 -- -- Benefit payments (615) (766) (555) (471) Company contributions -- -- 555 471 -------- -------- -------- --------- Fair value of plan assets at December 31 $ 26,939 $ 25,957 $ -- $ -- ======== ======== ======== ======== RECONCILIATION OF PREPAID (ACCRUED) AND TOTAL AMOUNT RECOGNIZED: Funded status at December 31 $ (9,473) $ (4,259) $ (9,454) $ (8,609) Accumulated other comprehensive loss (3,855) -- -- -- Unrecognized prior service cost 49 49 (2,453) (2,719) Unrecognized net loss 4,509 2,447 1,886 -------- -------- -------- -------- 8,375 Prepaid (accrued) cost at December 31 $ (4,904) $ 299 $ (9,460) $ (9,442) ======== ======== ======== ========
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, and include small and large capitalizations with an emphasis on large capitalization stocks. Other assets such as real estate are used to enhance long-term returns while providing additional 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. For the year ended December 31, 2005, no derivatives were utilized. Investment risk is measured and monitored on an on-going basis through quarterly investment portfolio reviews and annual liability measurements. 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:
2005 2004 --------------------- -------------------- ASSET CLASS ACTUAL ALLOWABLE ACTUAL ALLOWABLE - ----------- ------ --------- ------ --------- Cash 5% 0-15% 2% 0-15% Fixed income 32 20-60 32 20-60 Equities 63 30-70 66 30-70 Other -- 0-10 -- 0-10 --- --- Total 100% 100% === ===
During 2006, the Company expects to contribute approximately $92,000 to its excess pension plan and approximately $515,000 for benefit payments to its post-retirement benefit plan. The following table provides the expected benefit payments for each of the plans in each of the next five years as well as for the aggregate of the five fiscal years thereafter: 53 (in 000s)
PENSION POST-RETIREMENT EXPECTED BENEFIT PAYMENTS BENEFITS BENEFITS -------- --------------- 2006 $1,410 $ 515 2007 1,407 551 2008 2,303 575 2009 1,746 607 2010 1,845 624 2011 - 2014 13,083 3,335
The following table provides the amounts recognized in the consolidated balance sheets as of December 31, 2005 and 2004. Prepaid benefit cost is recorded in other assets. Accrued benefit liability is recorded in accrued compensation and other expenses.
PENSION POST-RETIREMENT BENEFITS BENEFITS ----------------------- -------------------- (in 000s) 2005 2004 2005 2004 --------- -------- --------- -------- Prepaid benefit cost $ $ 3,305 $ -- $ -- -- Accrued benefit liability (4,904) (3,006) (9,460) (9,442) --------- -------- --------- -------- Net amount recognized $ (4,904) $ 299 $ (9,460) $ (9,442) ======== ======== ========= ========
The Company's qualified and non-qualified pension plans' projected benefit obligations exceed the fair value of plan assets for the years ending December 31, 2005 and 2004. The Company's post-retirement benefits plan has no plan assets. The accumulated projected benefit obligation for the post-retirement plan is $9.5 million as of December 31, 2005 and $8.6 million as of December 31, 2004. The following table provides the components of net periodic benefit costs for the plans for the three years ending December 31, 2005, 2004 and 2003:
(in 000s) PENSION BENEFITS ------------------------------ 2005 2004 2003 ------- ------- -------- Service cost $ 1,575 $ 1,615 $ 1,660 Interest cost 1,802 1,671 1,661 Expected return on plan assets (2,164) (2,084) (1,930) Amortization of prior service cost 1 3 7 Amortization of net loss 135 139 175 Curtailments and settlements -- 41 -- ------- ------- ------- Net periodic benefit cost $ 1,349 $ 1,385 $ 1,573 ======= ======= =======
(in 000s) POST-RETIREMENT BENEFITS ------------------------------ 2005 2004 2003 ------- ------- -------- Service cost $ 256 $ 212 $ 268 Interest cost 518 484 493 Amortization of prior service cost (265) (265) (188) Amortization of unrecognized loss 64 35 -- ------- ------- ------- Net periodic benefit cost $ 573 $ 466 $ 573 ======= ======= =======
54 The assumptions used in the measurement of the Company's benefit obligation are shown in the following table:
PENSION POST-RETIREMENT BENEFITS BENEFITS -------- --------------- Weighted-average assumptions as of December 31, 2005 Discount rate 5.75% 5.75% Rate of compensation increase 4.50% N/A Weighted-average assumptions as of December 31, 2004 Discount rate 6.00% 6.00% Rate of compensation increase 4.50% N/A Weighted-average assumptions as of December 31, 2003 Discount rate 6.25% 6.25% Rate of compensation increase 4.50% N/A
The assumptions used in the determination of the Company's net cost for the three years ended December 31, 2005 are shown in the following table:
PENSION POST-RETIREMENT BENEFITS BENEFITS -------- --------------- Weighted-average assumptions as of December 31, 2005 Discount rate 6.00% 6.00% Return on plan assets 8.50% N/A Rate of compensation increase 4.50% N/A Weighted-average assumptions as of December 31, 2004 Discount rate 6.00% 6.25% Return on plan assets 8.50% N/A Rate of compensation increase 4.50% N/A Weighted-average assumptions as of December 31, 2003 Discount rate 6.75% 6.75% Return on plan assets 8.50% N/A Rate of compensation increase 5.00% N/A
The discount rates used in the determination of the Company's net cost for pension and post-retirement benefits were based on Moody's Corporate Aa Bond Index. For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2006 and gradually declines to a 5% annual rate of increase by the year 2010. 55 Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
(in 000s) 1% INCREASE 1% DECREASE ----------- ----------- Effect on total service and interest cost....................................... $ 146 $ (123) Effect on the health care component of the accumulated post-retirement benefit obligation........................................................... $ 1,322 $ (1,160)
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the "Act") became law. The Act provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to the benefit established by the Act. On May 19, 2004, the FASB issued Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "FSP"). The FSP provides guidance on accounting for the effects of the Act, which resulted in a reduction in the accumulated projected benefit obligation for the subsidy related to benefits attributed to past service. Treating the future subsidy under the Act as an actuarial experience gain, as required by the guidance, decreased the accumulated projected benefit obligation at the beginning of the third quarter of 2004 by approximately $0.6 million. The subsidy also decreased the net periodic post-retirement benefit cost for the last half of 2004 by less than $0.1 million. The Company has a 401(k)/profit sharing plan that covers all of its employees, including employees of its subsidiaries. Amounts determinable under the plan are contributed in part to a profit sharing trust qualified under the Internal Revenue Code with the remainder paid as cash bonuses, equity awards and matching 401(k) employee contributions. During the years ended December 31, 2005 and 2004, the Company made contributions of approximately $2.5 million and $3.2 million, respectively, to the profit sharing trust for profit sharing awards and matching 401(k) employee contributions. The Company has a non-qualified 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. At December 31, 2005 and 2004, the Company's deferred compensation liability was approximately $36.6 million and $34.5 million, respectively. 8. EQUITY INCENTIVE PLANS 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"). Through May 2002, the Company also maintained the Nuveen 1992 Special Incentive Plan (the "1992 Plan"). All awards under the 1992 Plan have been exercised or forfeited. 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. 56 In 2003, the Company granted 5,000 shares of restricted stock with a weighted- average fair value of $25.89. In 2004, the Company granted 9,208 shares of restricted stock with a weighted-average fair value of $25.86. In 2005, the Company granted 611,329 shares of restricted stock with a weighted-average fair value of $38.01. The Company awarded 262,537 shares of restricted stock with a weighted-average fair value of $44.58 in January 2006 to employees pursuant to the Company's incentive compensation program for 2005. 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 $5.2 million, $1.1 million and $1.9 million, for 2005, 2004 and 2003, respectively. The Company also awarded certain employees options to purchase the Company's common stock at exercise prices equal to or greater than the closing market price of the stock on the day the options were awarded. Options awarded pursuant to the 1996 Plan and the 2005 Plan are generally subject to three- and four-year cliff vesting and expire ten years from the award date. The Company awarded options to purchase 730,630 shares of common stock in January 2006 to employees pursuant to the Company's incentive compensation program for 2005. There were 7,801,231 shares available for future equity awards as of December 31, 2005, after consideration of the January 2006 incentive awards. Effective April 1, 2004, the Company began expensing the cost of stock options per the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (see "Equity Incentive Plans" in Note 1). The retroactive restatement method described in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" was adopted and the results for prior years have been restated. Compensation cost recognized is the same as that which would have been recognized had the fair value method of SFAS No. 123 been applied from its original effective date. Prior to April 1, 2004, the Company accounted for stock option plans under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. In accordance with SFAS No. 123, stock option compensation expense of approximately $14.5 million, $20.4 million and $14.1 million has been recognized for 2005, 2004 and 2003, respectively. Included in compensation expense for 2004 is approximately $4.3 million of stock option compensation expense recognized due to a change in the assumed vesting period for certain options that had a vesting period that was accelerated based on stock performance. 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 December 31, 2005, the Company has not recorded any compensation expense related to these awards. A summary of the Company's stock option activity for the years ended December 31, 2005, 2004 and 2003 is presented in the following table and narrative:
WEIGHTED- AVERAGE (in 000s, except per share data) OPTIONS EXERCISE PRICE ------- -------------- Options outstanding at December 31, 2002 ......... 15,872 $ 17.91 Awarded ....................................... 3,453 25.91 Exercised ..................................... (1,439) 12.29 Forfeited ..................................... (162) 25.99 Options outstanding at December 31, 2003 ......... 17,724 $ 19.85 Awarded ....................................... 3,524 29.09 Exercised ..................................... (2,198) 13.77 Forfeited ..................................... (314) 27.43 Options outstanding at December 31, 2004 ......... 18,736 $ 22.17 Awarded ....................................... 2,561 38.01 Exercised ..................................... (3,296) 16.29 Forfeited ..................................... (318) 29.90 Options outstanding at December 31, 2005 ......... 17,683 $ 25.42 Options exercisable at: December 31, 2003 ............................. 6,837 $ 12.06 December 31, 2004 ............................. 7,670 $ 14.61 December 31, 2005 ............................. 8,865 $ 20.37
57 All options awarded in 2005, 2004 and 2003 have exercise prices equal to the closing market price of the stock on the date of grant and have a weighted- average exercise price of $38.01, $29.09 and $25.91, respectively. The following table provides information about options outstanding as of December 31, 2005:
OPTIONS OUTSTANDING WEIGHTED-AVERAGE AS OF REMAINING RANGE OF EXERCISE DECEMBER 31, 2005 CONTRACTUAL LIFE PRICES ----------------- ---------------- ---------------- 158,560 0.7 years $ 5.00 - $10.00 4,453,574 3.8 $10.01 - $20.00 10,475,148 6.9 $20.01 - $30.00 2,592,181 9.0 $30.01 - $40.00 3,074 8.9 $40.01 - $50.00 ---------- 17,682,537 6.4 years $5.00 - $50.00 ==========
The options awarded during 2005 had weighted-average fair values as of the time of the grant of $8.90 per share. The options awarded during 2004 had weighted-average fair values as of the time of the grant of $5.46 per share. The options awarded during 2003 had weighted-average fair values of $4.24 per share. 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 2005, 2004 and 2003:
2005 2004 2003 ---- ---- ---- Dividend yield 2.30% to 2.31% 2.40% to 2.41% 2.70% Expected volatility 22.00% to 23.80% 22.00% 21.00% Risk-free interest rate 3.56% to 3.92% 3.08% to 3.90% 2.71% to 3.23% Expected life 5.1 to 5.2 years 5.2 years 5.0 to 5.2 years
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 specializes in value-oriented equity investments and has significant relationships with institutions and financial advisors serving high-net-worth investors. The acquisition 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 was recorded as both goodwill and a corresponding liability on the Company's consolidated balance sheet. During 2005 and 2004, $3.9 million and $3.1 million, respectively, were paid against this $20.5 million liability. As of December 31, 2005 and 2004, the remaining liability of $11.0 million and $14.9 million, respectively, is included as $4.9 million in other short-term liabilities and $6.1 million in other long-term liabilities on the accompanying consolidated balance sheet as of December 31, 2005, and $3.9 million in other short-term liabilities and $11.0 million in other long-term liabilities on the accompanying consolidated balance sheet as of December 31, 2004. As part of the NWQ acquisition, key management purchased a non-controlling member interest in NWQ Investment Management Company, LLC. The non-controlling interest of $0.4 million and $0.7 million as of 58 December 31, 2005 and 2004, respectively, is reflected in minority interest on the consolidated balance sheets. This purchase allows management to participate in profits of NWQ above specified levels beginning January 1, 2003. During 2005 and 2004, the Company recorded minority interest expense of approximately $5.6 million and $1.9 million, respectively. These amounts reflect 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 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 on March 2, 2005, approximately $22.5 million was recorded as goodwill (See Note 15, "Subsequent Events"). 10. SANTA BARBARA ASSET MANAGEMENT ACQUISITION On October 3, 2005, the Company completed the acquisition of Santa Barbara Asset Management ("Santa Barbara"), an investment manager with approximately $3 billion of assets under management at the time of the acquisition. Santa Barbara specializes in managing growth stock portfolios for institutions and high-net-worth investors. As a result of the acquisition, Nuveen Investments has further diversified its asset base. The Company paid approximately $50 million of cash consideration for Santa Barbara. The results of Santa Barbara operations are included in our consolidated statement of income since the acquisition date. Of the total purchase price, approximately $0.7 million has been allocated to the net book value of assets acquired. Net book value consisted primarily of fee receivables and payables. The purchase price plus the net book value of assets acquired were allocated to identifiable intangible assets and goodwill. Although the Company has engaged external valuation experts to determine the appropriate purchase price allocation, a final valuation is not yet complete. The purchase price allocation presented within this footnote is preliminary. Generally accepted accounting principles allow for purchase price adjustments for one year from the time of an acquisition. The Company does not expect to make any material modifications to its initial estimates related to the Santa Barbara 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 (the preliminary estimate is a 9-year useful life). There were no unamortizable intangible assets acquired in the Santa Barbara acquisition. As of December 31, 2005, and for the year then ended, accumulated amortization and amortization expense were $0.4 million. The estimated amortization expense for each of the next five years is $1.6 million. In addition, the Company expects to be able to deduct, for tax purposes, approximately $0.9 million for 2005 and $3.5 million for each of the following four years in goodwill amortization. As part of the Santa Barbara acquisition, an equity plan was put in place to allow key individuals to participate in Santa Barbara's earnings growth over the next five years (Class 2 Units, Class 5A Units, Class 5B Units, and Class 6 Units, collectively referred to as "Management LLC Units"). The Class 2 Units were fully vested upon issuance. The Class 5A Units 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 Class 5B Units vested upon issuance. The remaining Class 5B Units will vest one third on June 30, 2007, and one third on June 30, 2009. The Class 6 Units shall vest on June 30, 2009. The Management LLC 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 amounts of 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 Management LLC Units, the respective interests of the non-controlling members. Upon the closing of the Santa Barbara acquisition, approximately $18.3 million has been recorded as both goodwill and minority interest to reflect the fair market value of the vested profits interests. The fair market value of the unvested profits interests at the time of the acquisition was $5.5 million. This amount is being 59 expensed over the appropriate vesting period of the related units as a compensation charge with a corresponding increase in minority interest outstanding. For the year ended December 31, 2005, approximately $0.5 million has been recorded as accumulated amortization on these unvested units. During 2006, the Company expects to record $1.9 million in compensation expense related to these unvested units. For the year ended December 31, 2005, approximately $0.2 million has been recorded as minority interest expense. This amount reflects the portion of profits applicable to the minority interest. 11. CONSOLIDATED FUNDS During 2004, the Company created and invested in six new funds, all managed by two of the Company's subsidiaries. During 2005, three of these six funds were marketed to the public. It is anticipated that the remaining three funds will also be marketed to the public at a future date. For those funds in which the Company is the sole investor, the Company is required to consolidate those funds in its consolidated financial statements. At December 31, 2004, the Company was the sole investor in six funds. For three of these funds, the investment strategy is taxable fixed-income with various objectives: short duration, multi-strategy core and high yield. The remaining three funds are all of a value-oriented equity style/strategy. At December 31, 2004, the total assets of these six funds were approximately $39.1 million, including investments of $31.0 million, and the total liabilities were approximately $2.9 million. In addition, the funds' net income of approximately $0.2 million was included in the Company's consolidated financial results for the year ended December 31, 2004. At December 31, 2005, the Company was the sole investor in three of the original six funds. These three funds are all of a taxable fixed-income style/strategy. At December 31, 2005, the total assets of these three funds were approximately $31.6 million, including investments of $28.3 million, and the total liabilities were approximately $2.6 million. The net income for these three funds was approximately $0.7 million and has been included in the Company's consolidated financial results for the year ended December 31, 2005. 12. COMMON STOCK A summary of common stock activity for the three-year period ended December 31, 2005, 2004 and 2003, follows:
(in 000s) 2005 2004 2003 ------ ------ ------ Shares outstanding at the beginning of the year.................. 92,905 92,506 92,726 Shares issued under equity incentive plans....................... 3,907 2,219 1,444 Shares acquired.................................................. (904) (1,820) (1,664) Repurchase from STA.............................................. (18,193) - - ------ ------ ------ Shares outstanding at the end of the year........................ 77,715 92,905 92,506 ====== ====== ======
As part of a share repurchase program approved on August 9, 2002, the Company is authorized to purchase up to 7.0 million shares of Class A common stock. As of December 31, 2005, there were 1.5 million shares remaining under the share repurchase program. 13. NET CAPITAL REQUIREMENT Nuveen Investments, LLC, the Company's wholly owned broker-dealer subsidiary, is a Delaware limited liability company and is subject to the Securities and Exchange Commission Rule 15c3-1, the "Uniform Net 60 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, 2005, our broker-dealer's net capital ratio was 1.18 to 1 and its net capital was approximately $20.1 million, which is $18.5 million in excess of the required net capital of $1.6 million. 14. QUARTERLY RESULTS (UNAUDITED) The tables below set forth selected quarterly financial information for each quarter in the two-year period ending December 31, 2005 and 2004.
(in 000s, except per share data) FIRST SECOND THIRD FOURTH 2005 QUARTER QUARTER QUARTER QUARTER - ---- ----------- ----------- ----------- ----------- Total operating revenues............................... $ 134,868 $ 138,890 $ 158,252 $ 157,119 Net income............................................. 43,193 40,957 43,484 43,520 Per common share: Basic EPS........................................... 0.46 0.52 0.57 0.56 Diluted EPS......................................... 0.44 0.50 0.54 0.53 Cash dividends...................................... 0.18 0.18 0.21 0.21 Closing stock price range: High................................................ 42.210 37.620 39.390 44.340 Low................................................. 34.320 33.230 37.240 37.220
(in 000s, except per share data) FIRST SECOND THIRD FOURTH 2005 QUARTER QUARTER QUARTER QUARTER - ---- ----------- ----------- ----------- ----------- Total operating revenues............................... $ 119,694 $ 120,413 $ 131,617 $ 133,913 Net income............................................. 37,877 35,979 39,062 43,490 Per common share: Basic EPS........................................... 0.41 0.39 0.42 0.47 Diluted EPS......................................... 0.39 0.38 0.41 0.45 Cash dividends...................................... 0.15 0.18 0.18 0.18 Closing stock price range: High................................................ 29.920 28.010 30.550 39.470 Low................................................. 26.290 23.890 24.760 30.280
Nuveen Investments, Inc. common stock is listed on the New York Stock Exchange under the symbol "JNC." There are no contractual restrictions on the Company's present ability to pay dividends on its common stock. 15. SUBSEQUENT EVENTS On February 15, 2006, the Company exercised its right to call 25% of the Class 4 NWQ minority members' interests for $22.6 million. See Note 9, "Acquisition of NWQ Investment Management Company, Inc." Of the total amount paid on March 1, 2006, approximately $22.5 million was recorded as goodwill. In the first quarter of 2006, a separate investment management platform was established, 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 and platform that comprises Nuveen Investments. 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. 61 FIVE YEAR FINANCIAL SUMMARY (IN THOUSANDS, UNLESS OTHERWISE INDICATED)
DECEMBER 31, 2005 2004 2003 2002 2001 ----------- ---------- ---------- ---------- --------- Income Statement Data Operating Revenues: Investment advisory fees from assets under management $ 559,663 $ 475,814 $ 404,847 $ 355,476 $ 330,588 Product distribution 8,356 8,959 9,206 12,083 19,513 Performance fees/other revenue 21,110 20,864 37,975 28,888 21,002 ----------- ---------- ---------- ---------- ---------- Total operating revenues 589,129 505,637 452,028 396,447 371,103 Operating Expenses: Compensation and benefits 195,194 165,321 144,190 115,522 102,727 Advertising and promotional costs 12,495 12,158 11,627 12,608 17,751 All other operating expenses 91,550 75,283 69,885 68,417 71,484 ----------- ---------- ---------- ---------- ---------- Total operating expenses 299,239 252,762 225,702 196,547 191,962 Operating Income 289,890 252,875 226,326 199,900 179,141 Other Income/(Expense) 7,888 7,548 826 (2,732) (1,884) Net Interest Revenue/(Expense) (18,939) (7,916) (5,997) (2,260) 2,704 ----------- ---------- ---------- ---------- ---------- Income Before Taxes 278,839 252,507 221,155 194,908 179,961 Income Taxes 107,683 96,099 86,150 76,114 71,365 ----------- ---------- ---------- ---------- ---------- Net Income $ 171,156 $ 156,408 $ 135,005 $ 118,794 $ 108,596 =========== ========== ========== ========== ========== Earnings per Common Share: Basic $ 2.10 $ 1.69 $ 1.46 $ 1.26 $ 1.15 Diluted $ 1.99 $ 1.63 $ 1.41 $ 1.21 $ 1.07 Return on average equity 46.1% 29.4% 30.8% 29.1% 24.8% Total dividends per share $ 0.78 $ 0.69 $ 0.56 $ 0.50 $ 0.47 Balance Sheet Data Total assets $ 1,077,217 $1,071,593 $ 954,393 $ 841,042 $ 705,287 Total short-term obligations $ 265,564 $ 94,783 $ 96,508 $ 380,131 $ 119,461 Total long-term obligations $ 629,823 $ 388,730 $ 374,677 $ 61,385 $ 165,261 Minority interest $ 25,007 $ 2,602 $ 4,228 $ 2,800 $ -- Redeemable preferred stock $ -- $ -- $ -- $ -- $ 5,625 Common stockholders' equity $ 156,823 $ 585,478 $ 478,980 $ 396,726 $ 414,940 Net Assets Under Management (in millions) Mutual funds $ 14,495 $ 12,680 $ 12,285 $ 11,849 $ 11,814 Exchange-traded funds 51,997 50,216 47,094 39,944 32,000 Managed accounts 69,625 52,557 35,977 27,926 24,671 ----------- ---------- ---------- ---------- ---------- Total $ 136,117 $ 115,453 $ 95,356 $ 79,719 $ 68,485 =========== ========== ========== ========== ========== Gross Investment Product Sales (in millions) Mutual funds $ 3,191 $ 1,625 $ 1,536 $ 1,512 $ 1,246 Defined portfolios -- -- -- 194 1,481 Exchange-traded funds 2,302 2,888 6,283 6,848 3,937 Managed accounts 21,900 21,436 10,279 7,040 7,570 ----------- ---------- ---------- ---------- ---------- Total $ 27,393 $ 25,949 $ 18,098 $ 15,594 $ 14,234 =========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. Earnings per common share data have been restated for the 3-for-2 common stock dividend paid to shareholders of record on September 20, 2001, and restated for the 2-for-1 common stock dividend paid to shareholders of record on June 3, 2002. The Company began expensing the cost of stock options on April 1, 2004. All prior period financial information has been restated. 62 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Nuveen Investments, Inc., together with its consolidated subsidiaries (the "Company"), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's executive and financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. As of December 31, 2005, management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2005, is effective. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report appearing on pages 64 and 65 which expresses unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. 63 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Nuveen Investments, Inc.: We have audited the accompanying consolidated balance sheets of Nuveen Investments, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, 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, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nuveen Investments, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, effective April 1, 2004, the Company began expensing the cost of stock options per the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Chicago, Illinois March 8, 2006 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Nuveen Investments, Inc.: We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Nuveen Investments, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Nuveen Investments, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 8, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Chicago, Illinois March 8, 2006 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Effective as of December 31, 2005, 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 Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 were effective as of the end of the period covered by this report. In connection with management's evaluation, pursuant to Exchange Act Rule 13a-15(d), no changes during the quarter ended December 31, 2005 were identified that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. See page 63 for Management's Report on Internal Control over Financial Reporting. KPMG LLP, the registered public accounting firm that audited the consolidated financial statements included in this Report, has issued an attestation report on management's assessment on the Company's internal control over financial reporting. That attestation report on management's assessment of internal control over financial reporting is provided in Item 8. "Financial Statements and Supplementary Data." ITEM 9B. OTHER INFORMATION None. 66 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Registrant's executive officers is included under the caption "Supplementary Item - Executive Officers" in Part I of this report. Information concerning our directors is incorporated by reference to the 2006 Proxy Statement under the "Nominees for Directors" subsection and the "Nominees for Class B Directors" subsection in the "Election of Directors" section. Information concerning the compliance of our officers, directors and 10% stockholders with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained in the 2006 Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance". The information regarding Audit Committee members and "audit committee financial experts" is incorporated by reference to the information contained in the 2006 Proxy Statement under the "Audit Committee" subsection of the "Committees of the Board of Directors" subsection of the "Corporate Governance" Section. Information regarding the Company's Corporate Governance Guidelines is incorporated by reference to the information contained in the 2006 Proxy Statement under the "Corporate Governance Guidelines" subsection of the "Corporate Governance" section. The Company has adopted a Code of Business Conduct and Ethics, which applies broadly to all employees, officers and directors and also includes specific provisions applying to the Chief Executive Officer, Chief Financial Officer and other senior financial officers, in compliance with regulatory requirements. The Company also has a Code of Ethics and various related compliance procedures that apply to its business as an investment manager and sponsor of investment products, and the conduct of its employees and executives. The Company will promptly post on its website, www.nuveen.com, any amendments or waivers of its Code of Business Conduct and Ethics which apply to the Chief Executive Officer, Chief Financial Officer, and other senior financial officers. ITEM 11. EXECUTIVE COMPENSATION The "Executive Compensation", "Retirement Plans" and "Employment Agreements" sections, and the "Compensation of Directors" subsection in the "Election of Directors" section of the 2006 Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The "Beneficial Ownership of the Company's Common Stock" section of the 2006 Proxy Statement is incorporated herein by reference. The following table sets forth certain information as of December 31, 2005, about equity compensation plans that have been approved by security holders. The Company has no equity compensation plans at such date that have not been approved by security holders. 67 EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING AVAILABLE FOR TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) ------------------- ------------------- ------------------------- PLAN CATEGORY (a) (b) (c) Equity compensation plans approved by security holders................. 17,682,537(1) $25.42 7,801,231(2) Equity compensation plans not approved by security holders.................. N/A N/A N/A Total.............................. 17,682,537(1) $25.42 7,801,231(2)
(1) Excludes 1,043,833 shares of restricted stock granted under the Company's equity compensation plans, all of which have been approved by shareholders. Of such shares of restricted stock, 332,025 shares have not been delivered because the restrictive period has not yet lapsed, and an additional 261,600 shares have not yet been issued because certain performance criteria have not yet been met. The receipt of the remaining shares of restricted stock excluded from column (a) in the table above have been deferred by the recipients. (2) All such shares, which include forfeitures and share replenishments as provided by the applicable equity compensation plan, are available for future issuance pursuant to stock option awards. Of these shares, 3,499,472 may be issued pursuant to future restricted stock awards. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The "Certain Relationships and Related Transactions" section of the 2006 Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The "Fees and Services of Independent Auditors" section of the 2006 Proxy Statement is incorporated herein by reference. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) FILED DOCUMENTS. The following documents are filed as part of this report: 1. Consolidated Financial Statements: The consolidated financial statements required to be filed in the Annual Report on Form 10-K are in Part II, item 8 hereof. 2. Financial Statement Schedules: None 68 All schedules are omitted because they are not required, are not applicable or the information is otherwise shown in the financial statements or notes thereto. 3. Exhibits: See Exhibit Index on pages E-1 through E-4 hereof. The management contracts and compensatory plans and arrangements have been filed as Exhibits and are identified as such in the Exhibit Index which follows. 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of The Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 2006. NUVEEN INVESTMENTS, INC By: /s/ Margaret E. Wilson -------------------------- Margaret E. Wilson Senior Vice President, Finance Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 13, 2006.
SIGNATURE TITLE --------- ----- * Chairman, Chief Executive Officer and ------------------------------------- Director (Principal Executive Officer) Timothy R. Schwertfeger President, and Director * Director ------------------------------------- John P. Amboian * Director ------------------------------------- Willard L. Boyd * Director ------------------------------------- W. John Driscoll * Director ------------------------------------- Connie Duckworth * Director ------------------------------------- Duane R. Kullberg * Director ------------------------------------- Roderick A. Palmore /s/ Margaret E. Wilson Senior Vice President, Finance ------------------------------------- (Principal Financial and Accounting Officer) Margaret E. Wilson *By /s/ Alan G. Berkshire ---------------------------------- Alan G. Berkshire As Attorney-in-Fact for each of the persons indicated
70 EXHIBIT INDEX to ANNUAL REPORT ON FORM 10-K for the FISCAL YEAR ENDED DECEMBER 31, 2005 Copies of the documents listed below which are identified with an asterisk (*) have heretofore been filed with the Commission as exhibits to registration statements or reports filed with the Commission and are incorporated herein by reference and made a part hereof; the exhibit number and location of each document so filed and incorporated herein by reference are set forth opposite each such exhibit. Exhibits not so identified are filed herewith.
Exhibit Exhibit No. Designation Exhibit and Location - ----------- ------- ------------ *3.1 Restated Certificate of Incorporation of the Exhibit 3.1 to Registration Statement on Form Company S-1 filed on April 2, 1992, File No. 33-46922 (the "S-1 Registration Statement") *3.2 Certificate of Designations, Preferences and Exhibit 3.1(a) to the Company's Form 10-Q for Rights of 5% Cumulative convertible Preferred quarter ended September 30, 2000 filed on Stock of the Company November 11, 2000 *3.3 Amendment to Restated Certificate of Exhibit 3.1(b) to the Company's Form 10-K for Incorporation of the Company year ended December 31, 2002 *3.4 Certificate of Ownership and Merger Exhibit 3.1(c) to the Company's Form 10-K for year ended December 31, 2002 *3.5 Amended and Restated By-Laws of the Company Exhibit 3.2 to the Company's Form 10-K for year ended December 31, 1993 filed on March 29, 1994 *4.1 Indenture, dated as of September 12, 2005, Exhibit 4.1 to the Company's Form 8-K filed on between the Company and The Bank of New York September 13, 2005 Trust Company, N.A., as Trustee *4.2 First Supplemental Indenture, dated as of Exhibit 4.2 to the Company's Form 8-K filed on September 12, 2005, between the Company and The September 13, 2005 Bank of New York Trust Company, N.A., as Trustee *+10.1 Amended and Restated Nuveen 1996 Equity Exhibit A to Company's Schedule 14A, Incentive Award Plan Definitive Proxy Statement filed on March 31, 1999 *+10.1(a) Second Amendment and Restatement of the Exhibit 10.1(c) to the Company's Form 10-K for Company's 1996 Equity Incentive Award Plan year ended December 31, 2001
E-1
Exhibit Exhibit No. Designation Exhibit and Location - ----------- ------- ------------ *+10.2 Employment Agreement between the Company and Exhibit 10.1 to the Company's 2002 Third Timothy R. Schwertfeger, dated November 1, 2002 Quarter Form 10-Q *+10.3 Employment Agreement between the Company and Exhibit 10.2 to the Company's 2002 Third John P. Amboian, dated November 1, 2002 Quarter Form 10-Q *+10.4 Nuveen 2002 Executive Officer Performance Plan Exhibit 10.3(a) to the Company's Form 10-K for year ended December 31, 2001 *+10.5 Amended and Restated Profit Sharing Plan Exhibit 10.4 to the Company's Form 10-K for year ended December 31, 1996 *+10.6 Nuveen Investments, LLC Employees' Retirement Exhibit 10.5 to the Company's Form 10-K for Plan, as amended and restated effective January year ended December 31, 2001 1, 1997 *+10.7 Excess Benefit Retirement Plan Exhibit 10.6 to the S-1 Registration Statement filed on May 19, 1992 *+10.8 The Company Deferred Bonus Plan Exhibit 10.7(a) to the Company's Form 10-K for year ended December 31, 1999 *10.9 Lease dated January 22, 1998 between Overseas Exhibit 10.8(c) to the Company's Form 10-K Partners (333), Inc. and Nuveen Investments, LLC for year ended December 31, 1998 *10.10 Acquisition Agreement, dated as of June 15, Exhibit 2.1 to the Company's Form 8-K filed on 2001, by and among the Company, Barra, Inc., June 20, 2001 Symphony Asset Management, Inc., Maestro, LLC, Symphony Asset Management LLC, Praveen K. Gottipalli, Michael J. Henman, Neil L. Rudolph and Jeffrey L. Skelton *10.11 Amendment to Acquisition Agreement, dated as of Exhibit 10.4 to the Company's 2003 First February 1, 2003, by and among the Company, Quarter 10-Q Barra, Inc., Symphony Asset Management, Inc., Maestro, LLC, Symphony Asset Management LLC, Praveen K. Gottipalli, Michael J. Henman, Neil L. Rudolph and Jeffrey L. Skelton
E-2
Exhibit Exhibit No. Designation Exhibit and Location - ----------- ------- ------------ *10.12 Stock Purchase Agreement, dated as of May 28, Exhibit 2.1 to the Company's Form 8-K filed on 2002, by and among Old Mutual (US) Holdings August 14, 2002 Inc., NWQ Investment Management Company, Inc. and the Company *10.13 Note Purchase Agreement, dated as of September Exhibit 10.8 to the Company's 2003 Third 19, 2003, relating to $300,000,000 principal Quarter 10-Q amount of 4.22% Senior Notes Due September 19, 2008. *10.14 Description of Investment Management Contracts Exhibit 10.21 to the Company's Form 10-K for year ended December 31, 2004 *10.15 Repurchase Agreement by and between the Company Exhibit 10.1 to the Company's Form 8-K filed and The St. Paul Travelers Companies, Inc., on April 1, 2005 dated as of March 29, 2005 *10.16 Separation Agreement by and between the Company Exhibit 10.2 to the Company's Form 8-K filed and The St. Paul Travelers Companies, Inc., on April 1, 2005 dated as of April 1, 2005 *10.17 Indemnity Agreement among The St. Paul Travelers Exhibit 10.2 to the Company's Form 8-K filed Companies, Inc., the Company, Merrill Lynch & on April 12, 2005 Co. Inc., Merrill Lynch Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Merrill Lynch International Limited, dated as of April 6, 2005 *10.18 Indemnity Agreement among The St. Paul Travelers Exhibit 10.3 to the Company's Form 8-K filed Companies, Inc., the Company, Morgan Stanley, on April 12, 2005 Morgan Stanley & Co. Incorporated, Merrill Lynch Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. International Limited, dated as of April 6, 2005 *+10.19 Nuveen Investments, Inc. 2005 Equity Incentive Exhibit A to the Company's Schedule A Plan. Definitive Proxy Statement filed on April 15, 2005
E-3
Exhibit Exhibit No. Designation Exhibit and Location - ----------- ------- ------------ *+10.20 Nuveen Investments, Inc. Executive Performance Exhibit B to the Company's Schedule A Plan Definitive Proxy Statement filed on April 15, 2005 *10.21 Credit Agreement, entered into as of September Exhibit 10.1 to the Company's Form 8-K filed 30, 2005, among the Company, the several on October 5, 2005 financial institutions from time to time party thereto as lenders, Bank of America, N.A., as administrative agent, and Citibank, N.A., as syndication agent *+10.22 Amendment and Award Agreement effective as of Exhibit 10.1 to the Company's Form 8-K filed December 30, 2005 between the Company and on January 10, 2006 Timothy R. Schwertfeger. *+10.23 Form of Restricted Stock Award Agreement with Exhibit 10.1 to the Company's Form 8-K filed executive officers regarding the Nuveen on January 20, 2006 Investments, Inc. 2005 Equity Incentive Plan. *+10.24 Form of Non-Qualified Stock Option Agreement Exhibit 10.2 to the Company's Form 8-K filed with executive officers regarding the Nuveen on January 20, 2006 Investments, Inc. 2005 Equity Incentive Plan. *+10.25 Employment Terms dated as of January 13, 2006 Exhibit 10.3 to the Company's Form 8-K filed regarding Alan Brown. on January 20, 2006 *+10.26 Restricted Stock Award Agreement dated as of Exhibit 10.4 to the Company's Form 8-K filed January 13, 2006, by and between the Company and on January 20, 2006 Alan Brown 12.1 Ratio of Earnings to Fixed Charges -- 21 Subsidiaries of the Company -- 23 Independent Auditors' Consent -- 24 Powers of Attorney -- 31.1 Certification of Chief Executive Officer -- pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.2 Certification of President pursuant to Rule -- 13a-14(a) of the Securities Exchange Act of 1934
E-4
Exhibit Exhibit No. Designation Exhibit and Location - ----------- ------- ------------ 31.3 Certification of Principal Financial and -- Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer -- pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of President pursuant to 18 U.S.C. -- Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.3 Certification of Principal Financial and -- Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Previously filed; incorporated herein by reference. + Management contracts and compensatory plans and arrangements. E-5 EX-12.1 2 c03246exv12w1.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth our ratio of earnings to fixed charges and our ratio of earnings to combined fixed charges and preferred stock dividend requirements for the periods indicated:
Year Ended December 31, ----------------------------------------- 2001 2002 2003 2004 2005 ------ ------ ------ ------ ----- Ratio of earnings to fixed charges (1) 28.47x 25.05x 21.20x 16.72x 9.72x Ration of earnings to combined fixed charges and preferred stock dividend requirements (1) 24.07x 24.62x 21.20x 16.72x 9.72x
(1) For this purpose, "earnings" means net income before (a) taxes, (b) adjustment for minority interest of $1,077,000 in 2003, $1,875,000 in 2004 and $5,809,480 in 2005, (c) interest expense and amortization of debt issuance costs on all indebtedness, and (d) interest portion of rental expense. For this purpose, "fixed charges" means interest expense and amortization of debt issuance costs on all indebtedness, and interest portion of rental expense. Effective April 1, 2004, we began recognizing expense for stock-based compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended. We have chosen the retroactive restatement method described in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amended SFAS No. 123. As a result, financial information for all prior periods presented above have been restated to reflect the salaries and employee benefits expense that would have been recognized had the recognition provisions of SFAS No. 123 been applied from its original effective date. EX-21 3 c03246exv21.txt SUBSIDIARIES . . . EXHIBIT 21 LIST OF SUBSIDIARIES* (AS OF MARCH 1, 2006)
STATE OR JURISDICTION SUBSIDIARY OF ORGANIZATION - ---------- --------------------- Nuveen Asia Investments, Inc. Delaware Nuveen Asset Management Delaware Nuveen Commodities Asset Management, LLC Delaware Nuveen Investments Canada Co. Nova Scotia Nuveen Investments Advisers Inc. Delaware Nuveen Investments Holdings, Inc. Delaware Nuveen Investments, LLC Delaware Nuveen Investments Institutional Services Group LLC Delaware NWQ Holdings, LLC Delaware NWQ Investment Management Company, LLC Delaware Rittenhouse Asset Management, Inc. Delaware Santa Barbara Asset Management, LLC Delaware Symphony Asset Management LLC California Tradewinds NWQ Global Investors, LLC Delaware
* All subsidiaries are 100% owned, directly or indirectly, by the Registrant, except NWQ Investment Management Company, LLC, Santa Barbara Asset Management, LLC, Symphony Asset Management, LLC and Tradewinds NWQ Global Investors, LLC (collectively, the "Designated Subsidiaries"). Key managers of each of the Designated Subsidiaries own a non-controlling member interest in that Designated Subsidiary. These interests allow their owners to participate in the growth of profits of the Designated Subsidiary above specified levels during specified periods. The Registrant has the right to acquire these interests in the future. EX-23 4 c03246exv23.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 Consent of Independent Registered Public Accounting Firm The Board of Directors Nuveen Investments, Inc: We consent to the incorporation by reference in the registration statement on Form S-8 of Nuveen Investments, Inc. of our report dated March 8, 2006, with respect to the consolidated balance sheets of Nuveen Investments, Inc. as of December 31, 2005 and 2004, 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, 2005, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005, annual report on Form 10-K of Nuveen Investments, Inc. Our report refers to the Company's expensing the cost of stock options per the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, effective April 1, 2004. /s/ KPMG LLP Chicago, Illinois March 8, 2006 EX-24 5 c03246exv24.txt POWERS OF ATTORNEY EXHIBIT 24 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints JOHN P. AMBOIAN and ALAN G. BERKSHIRE, and each of them (with full power to each of them to act alone) his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 6th day of March 2006. /s/ Timothy R. Schwertfeger ---------------------------------------- Timothy R. Schwertfeger STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) On this 6th day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. (SEAL) /s/ Jose A. Visaya ---------------------------------------- Notary Public My Commission Expires: May 15, 2009 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints ALAN G. BERKSHIRE, (with full power to act alone) his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 3rd day of March 2006. /s/ John P. Amboian ---------------------------------------- John P. Amboian STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) On this 3rd day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. (SEAL) /s/ Jose A. Visaya ---------------------------------------- Notary Public My Commission Expires: May 15, 2009 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints JOHN P. AMBOIAN and ALAN G. BERKSHIRE, and each of them (with full power to each of them to act alone) his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 3rd day of March 2006. /s/ W. John Driscoll ---------------------------------------- W. John Driscoll STATE OF MINNESOTA ) ) SS COUNTY OF RAMSEY ) On this 3rd day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. (SEAL) /s/ Cheryl M. McNary ---------------------------------------- Notary Public My Commission Expires: January 31, 2010 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints JOHN P. AMBOIAN and ALAN G. BERKSHIRE, and each of them (with full power to each of them to act alone) his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 4th of March 2006. /s/ Duane R. Kullberg ---------------------------------------- Duane R. Kullberg STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) On this 4th day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. (SEAL) /s/ Jose A. Visaya ---------------------------------------- Notary Public My Commission Expires: May 15, 2009 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints JOHN P. AMBOIAN and ALAN G. BERKSHIRE, and each of them (with full power to each of them to act alone) his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 8th day of March 2006. /s/ Connie K. Duckworth ---------------------------------------- Connie K. Duckworth STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) On this 8th day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. /s/ Olivia Rubio (SEAL) --------------------------------------- Notary Public My Commission Expires: April 14, 2009 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints JOHN P. AMBOIAN and ALAN G. BERKSHIRE, and each of them (with full power to each of them to act alone) his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 7th day of March 2006. /s/ Roderick A. Palmore ---------------------------------------- Roderick A. Palmore STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) On this 7th day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. (SEAL) /s/ Rosemarie Pisowicz ---------------------------------------- Notary Public My Commission Expires: October 5, 2207 NUVEEN INVESTMENTS, INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Nuveen Investments, Inc., hereby constitutes and appoints JOHN P. AMBOIAN and ALAN G. BERKSHIRE, and each of them (with full power to each of them to act alone) his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to execute any such annual, periodic or special report pursuant to the requirements of the Securities Exchange Act of 1934, as amended, including any and all amendments thereto, with all exhibits thereto, and any and all other documents in connection therewith, and to file the same with the Securities and Exchange Commission and any regulatory authority, federal or state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned director of Nuveen Investments, Inc. has hereunto set his hand this 3rd day of March 2006. /s/ Willard L. Boyd ---------------------------------------- Willard L. Boyd STATE OF IOWA ) ) SS COUNTY OF JOHNSON ) On this 3rd day of March 2006, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledges the same to be his voluntary act and deed for the intent and purposes therein set forth. (SEAL) /s/ Grace Tully ---------------------------------------- Notary Public My Commission Expires: October 27, 2008 EX-31.1 6 c03246exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Timothy R. Schwertfeger, certify that: 1. I have reviewed this report on Form 10-K of Nuveen Investments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2006 /s/ Timothy R. Schwertfeger ---------------------------------------- Chief Executive Officer EX-31.2 7 c03246exv31w2.txt CERTIFICATION OF PRESIDENT EXHIBIT 31.2 CERTIFICATION I, John P. Amboian, certify that: 1. I have reviewed this report on Form 10-K of Nuveen Investments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2006 /s/ John P. Amboian ---------------------------------------- President EX-31.3 8 c03246exv31w3.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.3 CERTIFICATION I, Margaret E. Wilson, certify that: 1. I have reviewed this report on Form 10-K of Nuveen Investments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2006 /s/ Margaret E. Wilson ---------------------------------------- Senior Vice President, Finance (Principal Financial and Accounting Officer) EX-32.1 9 c03246exv32w1.txt 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission (the "Report") of Nuveen Investments, Inc. (the "Company") and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of the Company, hereby certifies that: (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated as of this 13th day of March, 2006. /s/ Timothy R. Schwertfeger ---------------------------------------- Timothy R. Schwertfeger Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 10 c03246exv32w2.txt 906 CERTIFICATION OF PRESIDENT EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission (the "Report") of Nuveen Investments, Inc. (the "Company") and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President of the Company, hereby certifies that: (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated as of this 13th day of March, 2006. /s/ John P. Amboian ---------------------------------------- John P. Amboian President A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.3 11 c03246exv32w3.txt 906 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 32.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission (the "Report") of Nuveen Investments, Inc. (the "Company") and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Senior Vice President, Finance of the Company, hereby certifies that: (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated as of this 13th day of March, 2006. /s/ Margaret E. Wilson ---------------------------------------- Margaret E. Wilson Senior Vice President, Finance (Principal Financial and Accounting Officer) A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----