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EX-99.1 - EX-99.1 - NUVEEN INVESTMENTS INC | c61197exv99w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 12, 2010
NUVEEN INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
1-11123 | 36-3817266 | ||
(State or other
|
(Commission File Number) | (IRS Employer | ||
jurisdiction of
|
Identification | |||
incorporation)
|
Number) |
333 West Wacker Drive, Chicago, Illinois
|
60606 | |||
(Address of principal executive offices)
|
(Zip Code) |
(312) 917-7700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
TABLE OF CONTENTS
Item 2.02 Results of Operations and Financial Condition | ||||||||
Item 9.01 Financial Statements and Exhibits | ||||||||
SIGNATURES | ||||||||
EXHIBIT INDEX | ||||||||
EX-99.1 |
Table of Contents
Section 2 Financial Information
Item 2.02 Results of Operations and Financial Condition.
The information in Item 2.02 of this Report and the Exhibit attached hereto shall be
deemed furnished and shall not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934 (the Exchange Act) or otherwise subject to the liabilities
of that section, nor shall they be deemed incorporated by reference in any filing under the
Securities Act of 1933, except as shall be expressly set forth by specific reference in such
filing. Unless otherwise indicated, the terms we, us, our and Nuveen Investments
refer to Nuveen Investments, Inc. and, where appropriate, its subsidiaries.
While Nuveen Investments is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act, we are required to file, pursuant to the terms of our outstanding
10.5% Senior Notes due 2015, a copy of substantially the same quarterly financial
information that would be required to be contained in a filing by us with the Securities and
Exchange Commission on Form 10-Q, including a Managements Discussion and Analysis of
Financial Condition and Results of Operations. In order to satisfy our contractual
obligations under the notes, we are publishing our unaudited consolidated balance sheets as
of September 30, 2010 and December 31, 2009, unaudited consolidated statements of income for
the three-month and nine-month periods ended September 30, 2010 and 2009, unaudited
consolidated statement of changes in shareholders equity for the nine-month period ended
September 30, 2010, and unaudited consolidated statements of cash flows for the nine-month
periods ended September 30, 2010 and 2009 (collectively, the Consolidated Financial
Statements) via this Report on Form 8-K. The Consolidated Financial Statements and notes
thereto are attached hereto as Exhibit 99.1.
In addition, set forth below is our Managements Discussion and Analysis of Financial
Condition and Results of Operations for the three and nine-month periods ended September 30,
2010 and 2009, which should be read in conjunction with the Consolidated Financial
Statements and related notes, as well as a discussion of Quantitative and Qualitative
Disclosures About Market Risks.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
Consolidated Financial Statements filed with this Form 8-K as Exhibit 99.1, including the
notes thereto. The statements in this discussion and analysis regarding industry outlook,
our expectations regarding our future performance and our liquidity and capital resources
and other non-historical statements in this discussion are forward-looking statements. See
Forward-Looking Information and Risks below. Our actual results may differ materially from
those contained in or implied in any forward-looking statements due to numerous risks and
uncertainties, including, but not limited to, the risk and uncertainties described in
Forward-Looking Information and Risks below.
Description of the Business
The principal businesses of Nuveen Investments are investment management and related
research, as well as the development, marketing and distribution of investment products and
services for the high-net-worth and institutional market segments. We distribute our
investment products and services, which include managed accounts, closed-end exchange-traded
funds (closed-end funds), and open-end mutual funds (open-end funds or mutual funds)
primarily to high-net-worth and institutional investors through intermediary firms,
including broker-dealers, commercial banks, private banks, affiliates of insurance
providers, financial planners, accountants, consultants and investment advisors.
We derive a substantial portion of our revenue from investment advisory fees, which are
recognized as services are performed. These fees are directly related to the market value
of the assets we manage. Advisory fee revenue generally will increase with a rise in the
level of assets under management. Assets
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under management will rise through sales of our
investment products or through increases in the value of portfolio
investments. Assets under management may also increase as a result of reinvestment of distributions from funds
and accounts. Fee income generally will decline when assets under management decline, as
would occur when the values of fund portfolio investments decrease or when managed account
withdrawals or mutual fund redemptions exceed gross sales and reinvestments.
In addition to investment advisory fees, we have two other main sources of operating
revenue: performance fees and distribution and underwriting revenue. Performance fees are
earned when investment performance on certain institutional accounts and 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. Generally,
distribution revenue will rise and fall with the level of our sales of mutual fund products.
Underwriting fees are earned on the initial public offerings of our closed-end funds. The
level of underwriting fees earned in any given year will fluctuate depending on the number
of new funds offered, the size of the funds offered and the extent to which we participate
as a member of the syndicate group underwriting the fund. Also included in distribution and
underwriting revenue is revenue relating to our MuniPreferred® and FundPreferred®. These
are types of auction rate preferred stock (ARPS) issued by our closed-end funds, shares of
which have historically been bought and sold through a secondary market auction process. A
participation fee has been paid by the fund to the auction participants based on shares
traded. Access to the auction must be made through a participating broker. We have offered
non-participating brokers access to the auctions, for which we earned a portion of the
participation fee. Beginning in mid-February 2008, the auctions for our ARPS, for the ARPS
issued by other closed-end funds and other auction rate securities began to fail on a
widespread basis and have continued to fail. As we have described in several public
announcements, we and the Nuveen closed-end funds have been working on various forms of debt
and equity financing to redeem all of the approximately $15.4 billion of ARPS issued by our
closed-end funds. As of September 30, 2010, the Nuveen funds have completed the redemption
of approximately $9.9 billion of ARPS issued by them. As we have also previously disclosed
in April 2010, 26 of the 101 Nuveen leveraged closed end funds that had ARPS outstanding
when the auctions began to fail in February 2008 received demand letters from a law firm
representing common shareholders of such funds. These demand letters alleged that the
funds advisor, Nuveen Asset Management, and the funds officers and Board of Directors
breached their fiduciary duties in connection with the redemption at par of the funds ARPS.
The funds independent board of directors evaluated the demand letters and determined that
it was not in the best interests of the funds or its shareholders to take the actions
suggested in the demand letters. The law firm that made the demand subsequently brought
suits against Nuveen Investments, Nuveen Asset Management and specific individuals making
allegations similar to those in the demand letters. In addition, the law firm has sent
demand letters and may file lawsuits on behalf of common shareholders of 7 additional closed
end funds. That law firm has also filed a motion for a preliminary injunction to stop
further redemptions of ARPS by the Nuveen funds. We believe that the lawsuit is without
merit and we will vigorously defend against the lawsuit and the motion. If the Nuveen funds
are unable to redeem their remaining outstanding ARPS, we do not expect this failure to have
a direct adverse impact on the financial position, operating results or liquidity of Nuveen
Investments because ARPS are obligations of the Nuveen funds and neither Nuveen Investments
nor the Nuveen funds are contractually obligated to redeem, or provide liquidity to redeem,
ARPS. However, Nuveen Investments continues to believe that the refinancings have been and
continue to be in the best interests of the funds common and preferred
shareholders. The
Nuveen funds are continuing to redeem ARPS. Any future redemptions of ARPS and certain
related financings may result in lower advisory fees. We also expect distribution and
underwriting revenue relating to ARPS to continue to decrease.
Sales of our products, and our profitability, are directly affected by many variables,
including investor preferences for equity, fixed-income or other investments, the
availability and attractiveness of competing products, market performance, continued access
to distribution channels, changes in interest rates, inflation, and income tax rates and
laws.
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Acquisition of the Company
On June 19, 2007, Nuveen Investments, Inc. (the Predecessor) entered into an agreement
(the merger agreement) under which a group of private equity investors led by Madison
Dearborn Partners, LLC (MDP) agreed to acquire all of the outstanding shares of the
Predecessor for $65.00 per share in cash. The Board of Directors and shareholders of the
Predecessor approved the merger agreement (the MDP transaction). The MDP transaction
closed on November 13, 2007.
Recent Events
Strategic Combination with FAF Advisors
On July 29, 2010, we entered into an agreement with U.S. Bancorp to acquire U.S. Bancorps
long-term asset business, FAF Advisors, in exchange for a 9.5% stake in the parent company
of Nuveen Investments and cash consideration. FAF Advisors manages approximately $27
billion of long-term assets and serves as the advisor of the First American Funds. FAF
Advisors long-term asset business will be combined with Nuveen Asset Management. The
transaction is expected to close at the end of this year, subject to customary conditions.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance which amends
the criteria for determining whether the consolidation of a variable interest entity (VIE)
is required (ASC Codification Topic 810). A VIE is a term used by FASB to refer to an
entity (the investee) in which the investor holds a controlling interest which is not based
on the majority of voting rights. The importance of identifying a VIE is that companies
need to consolidate such entities if they are the primary beneficiary of the VIE.
The new accounting guidance for VIEs changes the approach for determining the primary
beneficiary of a VIE from a quantitative risk and reward model to a qualitative model based
on control and economics. The new accounting guidance for VIEs was effective for Nuveen
Investments on January 1, 2010, and is being applied prospectively.
Symphony Asset Management, LLC (Symphony), one of our subsidiaries, acts as a collateral
manager for several collateralized loan and debt obligations (CLOs and CDOs). Under
U.S. GAAP, these CLOs and CDOs are considered VIEs. Under the provisions of ASC Topic 810,
we have determined that we are required to consolidate these CLOs and CDOs. (See Note 2,
Consolidated Variable Interest Entities, to our Consolidated Financial Statements attached
hereto as Exhibit 99.1 for additional detail).
As we did not elect to apply the provisions of ASC Topic 810 for VIEs retrospectively, our
financial statements as of September 30, 2010 and for the three-month and nine-month periods
ended September 30, 2010 include nine newly consolidated entities which are not included in
our consolidated balance sheet as of December 31, 2009, nor in our consolidated statements
of income for the three-month and nine-month periods ended September 30, 2009. (See Note 2,
Consolidated Variable Interest Entities, to our Consolidated Financial Statements attached
hereto as Exhibit 99.1 for additional information, including basis of assets and liabilities
for newly consolidated entities).
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Summary of Operating Results
The table presented below highlights the results of our operations for the three-month and
nine-month periods ended September 30, 2010 and 2009:
Financial Results Summary
Company Operating Statistics
(dollars in millions)
Company Operating Statistics
(dollars in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 |
2009 |
% Change |
2010 |
2009 |
% Change |
|||||||||||
Gross sales of investment products |
$8,177 | $6,450 | 27% | $27,373 | $18,424 | 49% | ||||||||||
Net flows of investment products |
2,460 | (725) | +++ | 10,257 | (1,735) | +++ | ||||||||||
Assets under management(1) |
162,847 | 140,979 | 16 | 162,847 | 140,979 | 16 | ||||||||||
Operating revenues |
187.3 | 161.6 | 16 | 548.4 | 457.7 | 20 | ||||||||||
Operating expenses |
137.2 | 126.5 | 9 | 414.2 | 348.5 | 19 | ||||||||||
Other income/(expense) |
7.3 | (5.0) | +++ | 21.2 | (2.3) | +++ | ||||||||||
Other income/(expense) VIEs |
52.4 | 22.1 | +++ | (34.1) | 93.8 | +++ | ||||||||||
Net interest (expense) |
(79.1) | (82.1) | (4) | (235.6) | (219.2) | 8 | ||||||||||
Net interest income VIEs |
21.6 | 7.9 | +++ | 73.0 | 19.4 | +++ | ||||||||||
Income tax expense/(benefit) |
(7.5) | (19.0) | +++ | (27.0) | (34.0) | (16) | ||||||||||
Noncontrolling interest net income/(loss) |
65.3 | 0.4 | +++ | 26.9 | 1.1 | +++ | ||||||||||
Net income/(loss) attributable to Nuveen |
(5.6) | (3.4) | +++ | (41.2) | 33.7 | +++ | ||||||||||
(1) At period end.
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 attached hereto as
Exhibit 99.1.
Gross sales of investment products (which include new managed accounts, deposits into
existing managed accounts and the sale of open-end and closed-end fund shares) for the
three-month and nine-month periods ended September 30, 2010 and 2009 are shown below:
Gross Investment Product Sales
(in millions)
(in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Closed-End Funds |
$ | 225 | $ | 254 | $ | 1,154 | $ | 561 | ||||||||
Mutual Funds |
2,403 | 2,348 | 6,853 | 5,677 | ||||||||||||
Retail Managed Accounts |
1,742 | 2,044 | 5,689 | 6,898 | ||||||||||||
Institutional Managed Accounts |
3,807 | 1,804 | 13,677 | 5,288 | ||||||||||||
Total |
$ | 8,177 | $ | 6,450 | $ | 27,373 | $ | 18,424 | ||||||||
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For the three-month period ended September 30, 2010, gross sales increased $1.7
billion, or 27%, versus sales in the same period of the prior year. In the third quarter of
2010, we completed the initial public offering of the Nuveen Diversified Commodity Fund,
raising over $200 million in assets with this closed-end fund offering. Institutional
account sales increased $2.0 billion, or 111%, versus sales in the third quarter of 2009.
Higher institutional account sales were primarily driven by a $1.6 billion increase in
growth account sales and a $0.4 billion increase in international/global value account
sales. Partially offsetting the increase in institutional account sales were lower retail
managed account sales. Retail managed account sales declined $0.3 billion, or 15%, for the
period. With the exception of our growth style accounts, retail managed account sales
declined across all investment styles.
For the nine-month period ended September 30, 2010, gross sales increased $8.9 billion, or
49%, versus sales in the same period of the prior year. Institutional managed account
sales, which increased $8.4 billion, or 159%, accounted for the majority of the increase. Of
this increase, $3.1 billion was due to a new agreement with State Street Global Advisors
(SSgA). Effective April 1, 2010, Nuveen became a sub-advisor for passively managed
municipal bond SPDR exchange traded funds (ETFs) (SPDR funds are shares of a family of
exchange-traded funds traded in the United States and managed by SSgA; SPDR is an acronym
for Standard & Poors Depository Receipt) along with other municipal bond strategies managed
by SSgA. The remainder of the increase in institutional account sales was driven by $3.6
billion of higher growth account sales and $1.5 billion of higher international/global
account sales. For the nine month period ended September 30, 2010, mutual fund gross sales
increased $1.2 billion, or 21%, driven largely by higher municipal and international/global
value fund sales compared to the same period of the prior year.
Year-to-date, we raised $1.2 billion through the initial public
offering of three closed-end funds, $0.6 billion of which was
the result of our successful second quarter Nuveen Build America Bond
Fund offering. This compares favorably to the same
period of the prior year where we raised $0.6 billion through the issuance of six municipal closed-end funds.
Partially
offsetting these increases were lower retail managed account gross sales of $1.2 billion, a
decline of 18% over the prior period.
Net flows of investment products for the three-month and nine-month periods ended September
30, 2010 and 2009 are shown below:
Net Flows
(in millions)
(in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Closed-End Funds |
$ | 240 | $ | 377 | $ | 1,182 | $ | (178 | ) | |||||||
Mutual Funds |
1,055 | 1,395 | 3,098 | 2,756 | ||||||||||||
Retail Managed Accounts |
(340 | ) | (338 | ) | (824 | ) | (2,153 | ) | ||||||||
Institutional Managed Accounts |
1,505 | (2,159 | ) | 6,801 | (2,160 | ) | ||||||||||
Total |
$ | 2,460 | $ | (725 | ) | $ | 10,257 | $ | (1,735 | ) | ||||||
For the three-month period ended September 30, 2010, we experienced $2.5 billion of net
inflows, an increase of $3.2 billion versus outflows of $0.7 billion in the same quarter of
the prior year. Institutional managed account net inflows were $1.5 billion for the quarter,
versus outflows of $2.2 billion in the third quarter of 2009. Institutional outflows in the
third quarter of the prior year were driven almost entirely by the loss of one large
institutional account, which accounted for $2.2 billion in redemptions during the period.
The institutional managed account net inflows for the current year were driven by continued
strong
flows into both our growth and international/global value style accounts. Closed-end funds
experienced $0.2 billion of net inflows as a result of the Diversified Commodity Fund
initial public offering. Although declining slightly versus the same period of the prior
year, mutual fund net flows
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continue to be strong. Mutual fund flows for the third quarter
were $1.1 billion with $0.8 billion of flows into municipal funds and $0.2 billion into
international/global value funds. Partially offsetting inflows on all other products,
retail managed accounts experienced $0.3 billion of net outflows for the quarter.
For the nine-month period ended September 30, 2010, we experienced $10.3 billion of net
inflows, a $12.0 billion improvement versus the same period of the prior year. This
improvement was seen across all product types, but most notably in institutional managed
accounts. Of the $6.8 billion in institutional inflows, $2.9 billion resulted from the SSgA
agreement, $3.4 billion from growth accounts and $1.7 billion from international/global
value accounts. These inflows more than offset municipal account outflows as a result of
the loss of one large insurance account in the first quarter of 2010. For the nine month
period ended September 30, 2010, closed-end fund net inflows of $1.2 billion were an
improvement of $1.4 billion versus the same period of the prior year. We raised $1.2 billion
through three closed-end fund offerings in the current year. This compares favorably to the
prior year when a significant amount of taxable fixed income and equity fund deleveraging
occurred. For the nine month period ended September 30, 2010, mutual fund net inflows were
$3.1 billion, an increase of $0.3 billion versus the same period of the prior year with
improvements across all investment styles (most notably traditional value and municipal).
Retail managed accounts experienced $0.8 billion of net outflows for the period, but
improved significantly versus the $2.2 billion of net outflows in the same period of 2009.
This improvement was primarily driven by lower redemptions in our traditional value accounts
and international/global value accounts in addition to higher growth account sales.
The following table summarizes net assets under management:
Net Assets Under Management
(in millions)
(in millions)
September 30, | December 31, | September 30, | ||||||||||
2010 |
2009 |
2009 |
||||||||||
Closed-End Funds |
$ | 48,588 | $ | 45,985 | $ | 45,629 | ||||||
Mutual Funds |
25,689 | 21,370 | 20,571 | |||||||||
Retail Managed Accounts |
39,986 | 38,481 | 38,336 | |||||||||
Institutional Managed Accounts |
48,584 | 38,960 | 36,443 | |||||||||
Total |
$ | 162,847 | $ | 144,796 | $ | 140,979 | ||||||
Assets under management ended the quarter at approximately $163 billion, an increase of 12%
versus assets under management at the end of the prior year and an increase of 16% versus
September 30, 2009. At September 30, 2010, 47% of our assets were in municipal portfolios,
44% in equity portfolios and 9% in taxable fixed income portfolios; the same asset mix
allocation as December 31, 2009.
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The following table presents the component changes in our assets under management for the
three-month and nine-month periods ended September 30, 2010 and 2009:
Change in Net Assets Under Management
(in millions)
(in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Gross Sales |
$ | 8,176 | $ | 6,450 | $ | 27,373 | $ | 18,424 | ||||||||
Reinvested Dividends |
149 | 118 | 388 | 295 | ||||||||||||
Redemptions |
(5,865 | ) | (7,293 | ) | (17,504 | ) | (20,454 | ) | ||||||||
Net Flows |
2,460 | (725 | ) | 10,257 | (1,735 | ) | ||||||||||
Appreciation/(Depreciation) |
10,153 | 13,889 | 7,794 | 23,490 | ||||||||||||
Increase/(Decrease) in Assets |
$ | 12,613 | $ | 13,164 | $ | 18,051 | $ | 21,755 | ||||||||
Assets under management rose $12.6 billion during the three-month period ended September 30,
2010 as a result of strong market appreciation and net inflows on institutional managed
accounts and mutual funds for the period. Market movement during the quarter was comprised
of $7.7 billion of equity market appreciation, $0.5 billion of taxable fixed-income market
appreciation, and $1.9 billion of municipal market appreciation.
Assets under management increased $18.1 billion for the nine month period ended September
30, 2010, as a result of net inflows of $10.3 billion and market appreciation of $7.8
billion. For the nine month period ended September 30, 2010, market movement was comprised
of $4.4 billion of equity market appreciation, $0.6 billion of taxable fixed-income market
appreciation and $2.8 billion of municipal market appreciation.
Investment advisory fee revenue, net of sub-advisory fees and expense reimbursements, for
the three-month and nine-month periods ended September 30, 2010 and 2009 is shown in the
following table:
Investment Advisory Fees (1)
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Closed-End Funds |
$ | 70,327 | $ | 62,798 | $ | 204,453 | $ | 175,748 | ||||||||
Mutual Funds |
33,361 | 26,161 | 97,093 | 68,917 | ||||||||||||
Managed Accounts |
82,110 | 71,228 | 243,835 | 200,969 | ||||||||||||
Total |
$ | 185,798 | $ | 160,187 | $ | 545,381 | $ | 445,634 | ||||||||
(1)
Sub-advisory fee expense for the three-month periods ended
September 30, 2010 and 2009 were $6.1 million and $4.2 million. For the nine-month
periods ended September 30, 2010 and 2009, sub-advisory fee expense was $17.6 million
and $11.3 million.
Advisory fee revenue of $185.8 million for the three-month period ended September 30,
2010 increased $25.6 million, or 16%, from the third quarter of the prior year. Advisory
fees increased across all product categories driven by higher asset levels, as the result of
both net inflows and significant market appreciation. Closed-end fund advisory fees
increased $7.5 million, or 12%, from the same quarter of
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2009. Advisory fees on mutual funds increased $7.2 million, or 28%, and managed account
advisory fees increased $10.9 million, or 15%, from the same period of the prior year.
Advisory fees of $545.4 million for the nine-month period ended September 30, 2010 increased
$99.7 million, or 22%, from the same period of 2009. Consistent with the third quarter,
advisory fees increased across all product categories as a result of increased assets under
management. For the nine month period ended September 30, 2010, closed-end fund advisory
fees increased $28.7 million, or 16%; mutual fund fees increased $28.2 million, or 41%; and
managed account fees increased $42.9 million, or 21%, from the same period of the prior
year.
Product distribution revenue for the three-month and nine-month periods ended September 30,
2010 and 2009 is shown in the following table:
Product Distribution
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Closed-End Funds |
$ | 471 | $ | 492 | $ | 1,041 | $ | 917 | ||||||||
Muni/Fund Preferred® |
94 | 127 | 290 | 1,165 | ||||||||||||
Mutual Funds |
(357 | ) | (548 | ) | (1,515 | ) | (1,326 | ) | ||||||||
Total |
$ | 208 | $ | 71 | $ | (184 | ) | $ | 756 | |||||||
Product distribution revenue increased $0.1 million for the three-month period ended
September 30, 2010 from the same period of the prior year. This increase was due to a
decrease in commissions paid to third party distribution firms on large dollar value mutual
fund sales.
Product distribution revenue declined $0.9 million for the nine-month period ended September
30, 2010 from the same period of the prior year. The decline was largely due to the
continued decline in MuniPreferred® and FundPreferred® fees as a result of the continued
decline in ARPS outstanding as a result of the redemption of these shares.
Performance Fees/Other Revenue
Performance fees/other revenue consists of performance fees earned on certain institutional
assets managed, consulting revenue and various fees earned in connection with services
provided on behalf of our defined portfolio assets under surveillance. Consistent with the
prior year, performance fees/other revenue was $1.3 million.
For the nine-month period ended September 30, 2010, performance fees/other revenue was $3.2
million, down from $11.3 million in the same period of the prior year. The $8.1 million
decline was a result of lower performance fees due to the loss of one large international
account in 2009.
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Operating Expenses
The following table summarizes operating expenses for the three-month and nine-month periods
ended September 30, 2010 and 2009:
Operating Expenses
(dollars in thousands)
(dollars in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Compensation and benefits |
$ | 74,287 | $ | 70,995 | $ | 227,248 | $ | 188,142 | ||||||||
Severance |
3,399 | 764 | 9,998 | 7,459 | ||||||||||||
Advertising and promotional costs |
4,686 | 2,513 | 12,082 | 6,619 | ||||||||||||
Occupancy and equipment costs |
8,413 | 9,005 | 25,461 | 25,410 | ||||||||||||
Amortization of intangible assets |
17,545 | 20,302 | 52,635 | 52,722 | ||||||||||||
Travel and entertainment |
2,689 | 2,144 | 8,161 | 6,905 | ||||||||||||
Outside and professional services |
13,183 | 10,096 | 38,205 | 30,710 | ||||||||||||
Other operating expenses |
12,996 | 10,650 | 40,430 | 30,537 | ||||||||||||
Total |
$ | 137,198 | $ | 126,469 | $ | 414,220 | $ | 348,504 | ||||||||
Compensation and Benefits
For the three-month period ended September 30, 2010, compensation and related benefits
increased $3.3 million, or 5%, from the same period of the prior year. Approximately $2.3
million of the increase was a result of higher base compensation and benefits as a result of
incremental headcount investments. The remaining increase is driven by an increase in
incentive compensation and commissions as a result of higher earnings for the period.
For the nine-month period ended September 30, 2010, compensation and related benefits
increased $39.1 million, or 21%, from the same period of the prior year. The increase was a
result of increased incentive compensation and amortization expense related to a new mutual
fund incentive program which was not in place throughout the same period of the prior year.
Base compensation and benefits were unchanged versus the same period of the prior year.
Advertising and Promotional Costs
Advertising and promotional costs increased $2.2 million and $5.5 million, respectively, for
the three-month and nine-month periods ending September 30, 2010, driven mainly by an
increase in mutual fund marketing expense.
Occupancy and Equipment Costs
Occupancy and equipment costs were $0.6 million lower for the three-month period ended
September 30, 2010 from the same period of the prior year. This decrease was a result of
lower lease expense at the Chicago headquarters and Radnor, Pennsylvania locations, with the
latter due to the relocation of our Pennsylvania-based operations organization to Chicago.
For the nine-month period ended September 30, 2010, occupancy and equipment costs were flat
compared to the same period of the prior year. Higher depreciation expense on computer
equipment and software was offset by lower rent expense at the Radnor, Pennsylvania and
Chicago headquarters locations.
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Amortization of Intangible Assets
For the three-month period ended September 30, 2010, amortization of intangible assets
expense decreased by $2.8 million compared to the same period of the prior year. The change
resulted from an adjustment made during the third quarter of the prior year related to
finalizing the intangible asset valuation for the Winslow Capital Management acquisition.
For the nine-month period ended September 30, 2010, amortization of intangible assets
expense was consistent with the same period of the prior year.
Outside and Professional Services
Outside and professional services expense increased $3.1 million and $7.5 million,
respectively, for the three-month and nine-month periods ending September 30, 2010 from the
same periods of the prior year. The primary driver of this increase is higher consulting
expense largely associated with technology projects. The remaining increases were due to
higher electronic data and research costs for our investment teams and an increase in legal
and audit expenses.
All Other Operating Expenses
For the three-month period ended September 30, 2010, all other operating expenses, including
severance, travel and entertainment, structuring fees, fund organization costs, recruiting
costs and other expenses increased approximately $5.5 million compared to the same period of
the prior year. Increases in structuring fees (related to closed-end fund offerings),
severance expense and recruiting expenses were the key drivers.
All other operating expenses increased approximately $13.7 million for the nine-month period
ended September 30, 2010 compared to the same period of the prior year. Similar to the third
quarter, the increased spending was a result of higher structuring fees, higher recruiting
expenses and an increase in severance expense.
Other Income/(Expense)
Other income/(expense) includes realized gains and losses on investments and miscellaneous
income/(expense), including the gain or loss on the disposal of property.
The following is a summary of other income/(expense) for the three-month and nine-month
periods ended September 30, 2010 and 2009:
Other Income/(Expense)
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Gains/(Losses) on Investments |
$ | 8,448 | $ | 1,361 | $ | 23,074 | $ | 2,102 | ||||||||
Gains/(Losses) on Fixed Assets |
8 | (967 | ) | (44 | ) | (968 | ) | |||||||||
Miscellaneous Income/(Expense) |
(1,206 | ) | (5,361 | ) | (1,859 | ) | (3,438 | ) | ||||||||
Total |
$ | 7,250 | $ | (4.967 | ) | $ | 21,171 | $ | (2,304 | ) | ||||||
Other income/(expense) increased $12.2 million for the three-month period ended September 30,
2010 compared with the same period in the prior year. Gains/(losses) on investments increased
favorably $7.1 million, driven by a $4.1 million increase in the unrealized mark-to-market
gains on derivative transactions
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entered into as a result of the MDP transaction and $3.6
million of increased gains on investments. There were no material gains or losses recorded on
the sale or retirement of fixed assets during the third quarter of 2010. This compares
favorably to the third quarter of the prior year when we recorded a fairly large loss as a
result of the retirement of assets associated with the significant downsizing of our office in
Radnor, Pennsylvania. Similarly miscellaneous income/(expense) compares favorably with
the prior year due to a one-time charge in the prior year related to the downsizing of the
Radnor office.
Other income/(expense) increased $23.5 million during the nine-month period ended September 30,
2010. Gains/(losses) on investments increased favorably
$21.0 million driven by a $11.4 million
increase in the unrealized market-to-market gains on derivative transactions entered into as a
result of the MDP transaction and $10.0 million of increased gains on investments. Similar to
the third quarter, both gains/(losses) on fixed assets and miscellaneous income/(expense)
compare favorably to the prior year as a result of charges taken in the prior year related to
the significant downsizing of our office in Radnor, PA.
Other Income/(Expense) VIEs
Other
income from consolidated VIEs increased from $22.1 million of income in the third
quarter of 2009 to $52.4 million in the quarter ended September 30, 2010 driven by the
consolidation of the nine new variable interest entities in 2010 and the impact of changes to
fair value of VIE investments and debt.
Other
income from consolidated VIEs decreased from $93.8 million of income in the nine-month
period ended September 30, 2009 to a $34.1 million loss in the nine-month period ended
September 30, 2010, driven by the consolidation of the new variable interest entities in 2010
and the impact of changes to fair value of VIE investments and debt.
Net Interest Expense
The following is a summary of net interest expense for the three-month and nine-month periods
ended September 30, 2010 and 2009:
Net Interest Expense
(in thousands)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 |
2009 |
2010 |
2009 |
|||||||||||||
Dividend and Interest Revenue |
$ | 1,017 | $ | 1,161 | $ | 3,840 | $ | 3,447 | ||||||||
Interest Expense |
(80,135 | ) | (83,287 | ) | (239,449 | ) | (222,633 | ) | ||||||||
Total |
$ | (79,118 | ) | $ | (82,126 | ) | $ | (235,609 | ) | $ | (219,186 | ) | ||||
Net interest expense decreased $3.0 million for the three-month period ended September 30,
2010 and increased $16.4 million for the nine-month period ended September 31, 2010. The
decrease for the third quarter 2010 is due to a decline in outstanding debt as well as a
reduction in the overall interest rate on the outstanding debt. For the nine months ended
September 30, 2010, the increase in net interest expense over
the nine months ended September 30, 2009 is due to a full nine months of interest expense
associated with the second lien debt that was taken out during the end of July and early
August 2009.
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Net Interest Income VIEs
Net
interest income from consolidated VIEs increased $13.7 million for the three-month period
and $53.6 million for the nine-month period ended September 30, 2010 driven by the
consolidation of the new VIEs in the first quarter of 2010.
Recent Updates to Authoritative Accounting Literature
As discussed in Recent Events, in June 2009, the FASB issued guidance which amends the
criteria for determining whether the consolidation of a VIE is required. As a result of
this new guidance, which is effective for Nuveen Investments as of January 1, 2010, nine
newly consolidated VIEs are included in our consolidated balance sheet as of September 30,
2010 and our consolidated statements of income for the three and nine months ended September
30, 2010.
Another recent update to authoritative accounting literature, Accounting Standards Update
(ASU) Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about
Fair Value Measurements (ASU 820), was issued by the FASB in January 2010 and amends ASC
820-10. This ASU requires new disclosures of: (i) significant transfers in and out of
Levels 1 and 2 fair value measurements with reasons for the transfers and (ii) activity in
Level 3 fair value measurements, including purchases, sales, issuances, and settlements on a
gross basis. In addition, the reporting entity should provide fair value measurement
disclosures for each class of assets and liabilities, and disclosures about inputs and
valuation techniques used to measure fair value of both recurring and nonrecurring fair
value measurements. This ASU includes conforming amendments to the guidance on employers
disclosures about postretirement benefit plan assets (ASC 715-20). These amendments change
the terminology from major categories of assets to classes of assets and provide a cross
reference to ASC 820-10 on how to determine appropriate class to present fair value
disclosures. This ASU is effective for interim and annual periods beginning after December
15, 2009, except disclosures about purchases, sales, issuances and settlements in the roll
forward of Level 3 fair value measurements, which are effective for fiscal years beginning
after December 15, 2010 and interim periods within those years. This ASU requires
additional disclosures which will not have an impact on the Companys results of operations
or assets.
Capital Resources, Liquidity and Financial Condition
Our primary liquidity needs are to fund capital expenditures, service indebtedness and
support working capital requirements. Our principal sources of liquidity are cash flows
from operating activities and borrowings under our senior secured credit facilities and
long-term notes.
In connection with the MDP transaction, we significantly increased our level of debt. As of
September 30, 2010, we had approximately $3.8 billion in aggregate principal amount of
indebtedness outstanding and have limited additional existing borrowing capacity.
During July 2009, we obtained a $450 million six-year, second-lien term loan facility with a
fixed interest rate of 12.5%. A fee of 10% of the principal amount of the new term loans
was paid ratably to the new lenders. The new term loans were made under our amended senior
secured credit facility described below. We escrowed proceeds from our new term loans to
retire our 5% senior unsecured notes due 2010 (discussed below) at maturity. The remaining
net proceeds from the new term loans were used to pay down a portion of our existing $2.3
billion first-lien term loans. During August 2009, we elected to borrow an additional $50
million under this second-lien term loan facility. A fee of 7% of the principal
amount of these new term loans was paid ratably to the new lenders. The net proceeds from
these new term loans were used to pay down a portion of our existing $2.3 billion first-lien
term loans.
Senior Secured Credit Facilities
In connection with the MDP transaction, we entered into senior secured credit facilities,
consisting of a $2.3 billion term loan facility and a $250 million revolving credit
facility. At the time of the MDP
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transaction, we borrowed the full $2.3 billion term loan
facility. The amounts borrowed under the term loan facility were used as part of the
financing that was used to consummate the MDP transaction. During November 2008, we drew
down the full $250 million revolving credit facility.
All borrowings under our senior secured credit facilities, other than the new term loans
made in July and August 2009 described above (the Additional Term Loans), bear interest at
a rate per annum equal to LIBOR plus 3.0%. In addition to paying interest on outstanding
principal under our senior secured credit facilities, we are required to pay a commitment
fee to the lenders in respect of any unutilized loan commitments at a rate of 0.3750% per
annum. The Additional Term Loans bear interest at a rate per annum of 12.50%.
All obligations under our senior secured credit facilities are guaranteed by Windy City
Investments, Inc., our Parent, and each of our present and future, direct and indirect,
material domestic subsidiaries (excluding subsidiaries that are broker dealers). The
obligations under our senior secured credit facilities and these guarantees are secured,
subject to permitted liens and other specified exceptions, (i) on a first-lien basis, by all
the capital stock of Nuveen Investments and certain of its subsidiaries (excluding
significant subsidiaries and limited, in the case of foreign subsidiaries, to 100% of the
non-voting capital stock and 65% of the voting capital stock of the first tier foreign
subsidiaries) directly held by Nuveen Investments or any guarantor and (ii) on a first lien
basis by substantially all present and future assets of Nuveen Investments and each
guarantor, except that the Additional Term Loans are secured by the same capital stock and
assets on a second-lien basis.
The first-lien term loan facility matures on November 13, 2014 and the revolving credit
facility matures on November 13, 2013. The Additional Term Loans mature July 31, 2015.
We were required to make quarterly payments under the term loan facility in the amount of
approximately $5.8 million. We used a portion of the Additional Term Loans to prepay these
quarterly payments. Our senior secured credit facilities permit all or any portion of the
loans outstanding thereunder to be prepaid at par, except that the Additional Term Loans may
only be voluntarily prepaid with specified premiums prior to July 31, 2014.
Our senior secured credit facilities contain a number of covenants that, among other things,
limit or restrict our ability to dispose of assets, incur additional indebtedness, incur
guarantee obligations, prepay other indebtedness, make dividends and other restricted
payments, create liens, make equity or debt investments, make acquisitions, engage in
mergers or consolidations, change the line of business, change the fiscal year, or engage in
certain transactions with affiliates. The senior secured credit facilities contain a
financial maintenance covenant that will prohibit us from exceeding a specified ratio of (1)
funded senior secured indebtedness less unrestricted cash and cash equivalents to (2)
consolidated adjusted EBITDA, as defined under our senior secured credit facilities. The
senior secured credit facilities also contain customary events of default, limitations on
our incurrence of additional debt, and other limitations.
Notes
Also in connection with the MDP transaction, we issued $785 million of 10.5% senior notes.
The 10.5% senior notes mature on November 15, 2015 and pay a coupon of 10.5% based on par
value, payable semi-annually on May 15 and November 15 of each year. We received
approximately $758.9 million in net proceeds from the issuance of the 10.5% senior notes
after underwriting commissions and structuring fees. The net proceeds were used as part of
the financing that was used to consummate the MDP transaction. From time to time, we may,
in compliance with the covenants under our senior secured credit facilities
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and the
indenture for the 10.5% senior notes, redeem, repurchase or otherwise acquire for value the
10.5% senior notes.
Obligations under the 10.5% senior notes are guaranteed by the Parent and each of our
existing and subsequently acquired or organized direct or indirect domestic subsidiaries
(excluding subsidiaries that are broker-dealers) that guarantee the debt under our senior
secured credit facilities. These subsidiary guarantees are subordinated in right of payment
to the guarantees of our senior secured credit facilities.
Senior Term Notes
On September 12, 2005, we issued $550 million of senior unsecured notes, consisting of $250
million of 5-year notes and $300 million of 10-year notes. At September 30, 2010, only the
$300 million of 10-year notes remain outstanding, as the $250 million of 5-year notes were
repaid in full on September 14, 2010. The 5-year senior term notes bore interest at an
annual fixed rate of 5.0%, payable semi-annually on March 15 and September 15 of each year.
The 10-year senior term notes bear interest at an annual fixed rate of 5.5%, also payable
semi-annually on March 15 and September 15 of each year. The net proceeds from the notes
were used to finance outstanding debt. The costs related to the issuance of the senior
unsecured notes were capitalized and are being amortized to expense over their respective
terms. From time to time we may, in compliance with the covenants under our senior secured
credit facilities and the indentures for the 10.5% senior notes and these notes, redeem,
repurchase or otherwise acquire for value these notes.
Adequacy of Liquidity
While we believe that funds generated from operations and existing cash reserves will be
adequate to fund debt service requirements, capital expenditures and working capital
requirements for the foreseeable future, our ability to continue to fund these items, to
service debt and to maintain compliance with covenants in our debt agreements may be
affected by general economic, financial, competitive, legislative, legal and regulatory
factors and by our ability to refinance or repay outstanding indebtedness with scheduled
maturities beginning in November 2013. On April 1, 2009, Moodys Investors Service lowered
our corporate family rating to Caa1, the rating for our senior secured credit facilities to
B3, and the rating for our senior unsecured notes to Caa3. In addition, on April 1, 2009,
Standard and Poors Ratings Services lowered our local currency long-term counterparty
credit rating to B-. While these ratings downgrades have not affected our financial
condition, results of operations or liquidity, they could make it more difficult for us to
obtain financing in the future. In the event that we are unable to repay any of our
outstanding indebtedness as it becomes due, we might need to explore alternative strategies
for funding, such as selling assets, refinancing or restructuring our indebtedness or
selling equity capital. However, securing alternative sources of funding may not be
feasible, which could result in further adverse effects on our financial condition.
Our senior secured credit facilities include a financial maintenance covenant requiring us
to maintain a maximum ratio of net senior secured indebtedness to adjusted EBITDA (as
defined in the credit agreement). As of September 30, 2010, this maximum ratio was
5.75:1.00. As of September 30, 2010, we were in compliance with this covenant, as our
actual ratio of senior secured indebtedness to adjusted EBITDA (as defined in the credit
agreement) was 4.75:1.00 based on $2.0 billion of senior secured indebtedness and adjusted
EBITDA (as defined in the credit agreement) of $425.4 million. In addition, as
of September 30, 2010, we were in compliance with all other covenants and other restrictions
under our debt agreements.
Equity
As part of the Santa Barbara acquisition in 2005, an equity opportunity was put in place to
allow key individuals to participate in Santa Barbaras earnings growth over the subsequent
five years (Class 2 Units, Class 5A Units, Class 5B Units, and Class 6 Units, collectively
referred to as Units). The Class 2 Units
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were fully vested upon issuance. One third of
the Class 5A Units vested on June 30, 2007, one third vested on June 30, 2008, and one third
vested on June 30, 2009. One third of the Class 5B Units vested upon issuance, one third on
June 30, 2007, and one third vested on June 30, 2009. The Class 6 Units vested on June 30,
2009. The Units entitle the holders to receive a distribution of the cash flow from Santa
Barbaras business to the extent such cash flow exceeds certain thresholds. The
distribution thresholds vary from year to year, reflecting Santa Barbara achieving certain
profit levels and the distributions of profits interests are also subject to a cap in each
year. During 2009, 2008 and 2007, we recorded approximately $38 thousand, $0.2 million and
$2.9 million, respectively, of income attributable to these non-controlling interests.
Beginning in 2008 and continuing through 2012, we have the right to acquire the Units of the
non-controlling members. During 2008, we exercised our right to call 100% of the Class 2
Units. During the first quarter of 2010, we exercised our right to call 100% of the Class 5
Units.
During 2006, equity opportunities were put in place covering NWQ, Tradewinds and Symphony.
These programs allow key individuals of these businesses to participate in the growth of
their respective businesses over the subsequent six years. Classes of interests were
established at each subsidiary (collectively referred to as Interests). Certain of these
Interests vested or vest on June 30, 2007, 2008, 2009, 2010 and 2011. The Interests entitle
the holders to receive a distribution of the cash flow from their business to the extent
such cash flow exceeds certain thresholds. The distribution thresholds increase from year
to year and the distributions of the profits interests are also subject to a cap in each
year. During the nine months ended September 30, 2010 and 2009, we recorded approximately
$1.1 million and $0.7 million, respectively, of income attributable to these non-controlling
interests. Beginning in 2008 and continuing through 2012, we have the right to acquire the
Interests of the non-controlling members. During the first quarter of 2008, we exercised
our right to call all of the Class 7 Interests. During the first quarter of 2009, we
exercised our right to call all the Class 8 Interests. During the first quarter of 2010, we
exercised our right to call all of the Class 9 Interests.
Broker/Dealer
Our broker-dealer subsidiary is subject to requirements of the Securities and Exchange
Commission relating to liquidity and capital standards. (See Note 5, Net Capital
Requirement, to our Consolidated Financial Statements attached hereto as Exhibit 99.1).
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide financing, liquidity, market
or credit risk support or engage in any leasing activities that expose us to any liabilities
that are not reflected in our Annual Financial Statements and Quarterly Financial
Statements.
Forward-Looking Information and Risks
From time to time, information we provide or information included in our filings with the
SEC (including Managements Discussion and Analysis of Financial Condition and Results of
Operations in this Form 8-K and the notes to the Consolidated Financial Statements) may
contain statements that are not historical facts, but are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These statements relate to future events or future financial performance
and reflect managements expectations and opinions. In some cases, you can identify
forward-looking statements by terminology such as may, will, could, would, should,
expect, plan, anticipate, intend, believe, estimate, predict, potential, or
comparable terminology. These statements are only predictions, and our actual future
results may differ significantly from those anticipated in any forward-looking statements
due to numerous known and unknown risks, uncertainties and other factors. All of the
forward-looking statements are qualified in their entirety by reference to the factors
discussed below and elsewhere in this report. These factors may not be exhaustive, and we
cannot predict the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those predicted in any forward-looking statements. We
undertake no responsibility to
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update publicly or revise any forward-looking statements,
whether as a result of new information, future events or any other reason.
Risks, uncertainties and other factors that pertain to our business and the effects of which
may cause our assets under management, earnings, revenues, and/or profit margins to decline
include: (1) the adverse effects of declines in securities markets and/or poor investment
performance by us; (2) adverse effects of volatility in the equity markets and disruptions
in the credit markets, including the effects on our assets under management as well as on
our distribution partners; (3) our inability to access third-party distribution channels to
market our products or a reduction in fees we might receive for services provided in these
channels; (4) the effects of the substantial competition that we face in the investment
management business; (5) a change in our asset mix to lower revenue generating assets; (6) a
loss of key employees; (7) the effects on our business and financial results of the failure
of the auctions beginning in mid-February 2008 of the approximately $15.4 billion of auction
rate preferred stock (ARPS) issued by our closed-end funds (which has resulted in a loss
of liquidity for the holders of these ARPS) and our and the funds efforts to obtain
financing to redeem the ARPS at their par value of $25,000 per share and the effects of any
regulatory activity or litigation relating thereto, including the potential FINRA
disciplinary action with respect to ARPS discussed in our 2009 Form 10-K and the lawsuits
filed in the second half of 2010 on behalf of certain common shareholders of certain
Nuveen funds that have redeemed ARPS; (8) a decline in the market for closed-end funds,
mutual funds and managed accounts; (9) our failure to comply with various government
regulations, including federal and state securities laws, and the rules of FINRA; (10) the
impact of changes in tax rates and regulations; (11) developments in litigation involving
the securities industry or us; (12) our reliance on revenues from our investment advisory
contracts which generally may be terminated on sixty days notice and, with respect to our
closed-end and open-end funds, are also subject to annual renewal by the independent board
of trustees of such funds; (13) adverse public disclosure, failure to follow client
guidelines and other matters that could harm our reputation; (14) the effect on us of
increased leverage as a result of our incurrence of additional indebtedness in connection
with the MDP transaction and the Additional Term Loans issued by us in July and August 2009,
including that our business may not generate sufficient cash flow from operations or that
future borrowings may not be available in amounts sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs; (15) future acquisitions that are not
profitable for us; (16) the impact of accounting pronouncements; and (17) any failure of our
operating personnel and systems to perform effectively.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The following information, and information included elsewhere in this report, describes the
key aspects of certain financial instruments that have market risk.
Interest Rate Sensitivity
Although we have sought to mitigate our interest rate risk as discussed hereafter, our
obligations under the senior secured credit facilities will expose our earnings to changes
in short-term interest rates since the interest rate on this debt is variable. At September
30, 2010, the aggregate principal amount of our indebtedness (excluding the debt of the
consolidated variable interest entities) was approximately $3.8 billion, of which
approximately $2.3 billion is variable rate debt and approximately $1.5 billion is fixed
rate debt. For our variable rate debt, we estimate that a 100 basis point (one percentage
point) increase in variable interest rates would have resulted in a $23.4 million increase
in annual interest expense; however, it would not be expected to have a substantial impact
on the fair value of the debt at September 30, 2010. A change in interest rates would have
no impact on interest incurred on our fixed rate debt or cash flow, but would have an impact
on the fair value of the debt. We estimate that a 100 basis point increase in interest
rates from the levels at September 30, 2010 would result in a net decrease in the fair value
of our fixed debt of approximately $59.4 million.
The variable nature of our obligations under the senior secured facilities creates interest
rate risk. In order to mitigate this risk, we entered into certain derivative transactions
that effectively converted our variable rate debt arising from the MDP transaction into
fixed-rate borrowings (collectively, the New Debt Derivatives). As some of these
derivative transactions matured, we have occasionally entered into new, similar transactions
in order to continue to mitigate interest rate exposure on the variable rate debt. At
September 30, 2010, these derivative transactions were comprised of eight interest rate
swaps with a notional value totaling $1.2 billion. These derivatives were not accounted for
as hedges for accounting purposes. For additional information, see Note 8, Derivative
Financial Instruments of the accompanying consolidated financial statements attached hereto
as Exhibit 99.1. At September 30, 2010, the fair value of the New Debt Derivatives was a
net liability of $51.6 million, of which $3.1 million is reflected in Short-Term
Obligations and $48.5 million is reflected in Long-Term Obligations. We estimate that a
100 basis point change in interest rates would have a $11.7 million impact on the fair value
of the New Debt Derivatives.
Our investments consist primarily of company-sponsored managed investment funds that invest
in a variety of asset classes. Additionally, we periodically invest in new advisory
accounts to establish a performance history prior to a potential product launch. Company
sponsored funds and accounts are carried on our consolidated financial statements at fair
market value and are subject to the investment performance of the underlying securities in
the sponsored fund or account. Any unrealized gain or loss is recognized upon the sale of
the investment. The carrying value of our investments in fixed-income funds or accounts,
which expose us to interest rate risk, was approximately $28.0 million (which excludes
consolidated VIEs) at September 30, 2010. We estimate that a 100 basis point increase in
interest rates from the levels at September 30, 2010 would result in a net decrease of
approximately $1.4 million in the fair value of the fixed-income investments at September
30, 2010. A 100 basis point increase in interest rates is a hypothetical scenario used to
demonstrate potential risk and does not represent managements view of future market
changes.
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Equity Market Sensitivity
As discussed above in the Interest Rate Sensitivity section, we invest in certain company
sponsored managed investment funds and accounts that invest in a variety of asset classes.
The carrying value of our investments in funds and accounts subject to equity price risk is
approximately $100.8 million at September 30, 2010. We estimate that a 10% adverse change
in equity prices would result in a $10.1 million decrease in the fair value of our equity
securities. The model to determine sensitivity assumes a corresponding shift in all equity
prices.
We do not enter into foreign currency transactions for speculative purposes and currently
have no material investments that would expose us to foreign currency exchange risk.
In evaluating market risk, it is also important to note that most of our revenue is based on
the market value of assets under management. Declines of financial market values will
negatively impact our revenue and net income.
Inflation
Our assets are, to a large extent, liquid in nature and therefore not significantly affected
by inflation. However, inflation may result in increases in our expenses, such as employee
compensation, advertising and promotional costs, and office occupancy costs. To the extent
inflation, or the expectation thereof, results in rising interest rates or has other adverse
effects upon the securities markets and on the value of financial instruments, it may
adversely affect our financial condition and results of 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.
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Section 9 Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
Exhibit No. |
Description |
|||
99.1 | Consolidated Financial Statements of Nuveen Investments, Inc. and its
subsidiaries for the three and nine months ended September 30, 2010 and 2009. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 12, 2010 | NUVEEN INVESTMENTS,
INC. |
|||
By: | /s/ John L. MacCarthy | |||
Name: John L. MacCarthy | ||||
Title: Executive Vice President |
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