1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
Commission file number 1-11123
THE JOHN NUVEEN COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3817266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 917-7700
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At November 9, 1998 there were 31,354,386 shares of the Company's Common
Stock outstanding, consisting of 6,912,648 shares of Class A Common Stock, $.01
par value, and 24,441,738 shares of Class B Common Stock, $.01 par value.
2
THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income (Unaudited),
Three Months Ended September 30, 1998 and 1997 4
Nine Months Ended September 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Nine Months Ended September 30, 1998 5
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1 through Item 6 18
Signatures 19
(2)
3
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE JOHN NUVEEN COMPANY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- ------ ------------- ------------
Cash $ 9,181 $ 8,771
Securities purchased under agreements to resell 42,000 -
Temporary investments arising from remarketing obligations 18,255 97,705
Management and distribution fees receivables 25,070 27,169
Other receivables 15,768 13,548
Securities owned (trading account), at market value:
Nuveen defined portfolios 29,901 31,926
Municipal bonds and notes 3,853 572
Deferred income tax asset, net 4,894 7,096
Furniture, equipment, and leasehold improvements, at cost less accumulated
depreciation and amortization of $29,849 and $26,133, respectively 13,890 14,788
Other investments 43,484 55,339
Goodwill, at cost less accumulated amortization of $9,399 and $3,956,
respectively 205,168 209,300
Prepaid expenses and other assets 30,521 26,018
----------- ----------
Total assets $ 441,985 $ 492,232
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------
Liabilities:
Notes payable $ - $ 15,000
Secured short-term bank loans supporting remarketing obligations 4,000 69,500
Accrued compensation and other expenses 40,191 42,111
Deferred compensation 28,594 27,414
Securities sold under agreements to repurchase 3,000 -
Security purchase obligations 9,293 -
Other liabilities 20,231 20,087
----------- ----------
Total liabilities 105,309 174,112
----------- ----------
Redeemable preferred stock, at redemption value;
5,000,000 shares authorized, 1,800,000 shares issued 45,000 45,000
----------- ----------
Common stockholders' equity:
Class A common stock, $.01 par value; 150,000,000 shares authorized,
14,212,618 shares issued 142 142
Class B common stock, $.01 par value; 40,000,000 shares authorized,
24,441,738 shares issued 245 245
Additional paid-in capital 54,938 52,963
Retained earnings 437,265 403,635
Unamortized cost of restricted stock awards (106) (185)
----------- ----------
492,484 456,800
Less common stock held in treasury, at cost (7,242,770 and 6,871,805
shares, respectively) (200,808) (183,680)
----------- ----------
Total common stockholders' equity 291,676 273,120
----------- ----------
Total liabilities and stockholders' equity $ 441,985 $ 492,232
=========== ==========
See accompanying notes to consolidated financial statements.
(3)
4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Investment advisory fees from
assets under management $ 69,217 $ 55,439 $ 201,079 $ 157,039
Underwriting and distribution
of investment products 2,583 3,228 7,311 10,595
Positioning profits (losses) 42 1,246 (283) 821
Investment banking 2,886 3,461 9,663 9,274
Investment and dividends 1,682 2,808 4,730 8,739
Other 592 1,631 3,330 5,775
--------- --------- --------- ---------
Total revenues 77,002 67,813 225,830 192,243
--------- --------- --------- ---------
Expenses:
Compensation and benefits 22,561 19,620 64,822 56,282
Advertising and promotional costs 4,709 4,478 15,306 12,782
Occupancy and equipment costs 2,911 3,114 9,213 8,839
Amortization of goodwill and
deferred offering costs 3,503 2,823 10,617 7,059
Travel and entertainment 2,504 1,978 7,213 5,072
Interest 641 1,103 2,087 2,485
Other operating expenses 6,016 4,092 17,480 11,059
--------- --------- --------- ---------
Total expenses 42,845 37,208 126,738 103,578
--------- --------- --------- ---------
Income before taxes 34,157 30,605 99,092 88,665
Income taxes 13,187 12,037 38,616 34,553
--------- --------- --------- ---------
Net income $ 20,970 $ 18,568 $ 60,476 $ 54,112
========= ========= ========= =========
Average common and common equivalent
shares outstanding:
Basic 31,545 31,940 31,730 32,443
========= ========= ========= =========
Diluted 34,387 34,589 34,530 35,009
========= ========= ========= =========
Earnings per common share:
Basic $ 0.65 $ 0.56 $ 1.85 $ 1.62
========= ========= ========= =========
Diluted $ 0.61 $ 0.54 $ 1.75 $ 1.55
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
(4)
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
Unamortized
Class A Class B Additional Cost of
Common Common Paid-In Retained Restricted Treasury
Stock Stock Capital Earnings Stock Awards Stock Total
------- ------- ---------- -------- ------------ --------- --------
Balance at December 31, 1997 $ 142 $ 245 $ 52,963 $403,635 $ (185) $(183,680) $273,120
Net income - - - 60,476 - - 60,476
Cash dividends paid - - - (24,515) - - (24,515)
Amortization of restricted
stock awards - - - - 79 - 79
Purchase of treasury stock - - - - - (25,297) (25,297)
Exercise of stock options - - - (2,509) - 7,607 5,098
Other - - 1,975 178 - 562 2,715
------- ------- ---------- -------- ------------ --------- --------
Balance at September 30, 1998 $ 142 $ 245 $ 54,938 $437,265 $ (106) $(200,808) $291,676
======= ======= ========== ======== ============ ========= ========
See accompanying notes to consolidated financial statements.
(5)
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,476 $ 54,112
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 2,202 2,084
Amortization/Depreciation:
Furniture, equipment, and leasehold improvements 3,716 3,068
Goodwill 5,443 2,094
Net (increase) decrease in assets:
Accrued management and distribution fees receivable 2,099 (3,200)
Accrued other receivables (2,220) 1,824
Temporary investments arising from remarketing obligations 79,450 83,845
Nuveen defined portfolios 2,025 (4,175)
Municipal bonds and notes (3,281) 4,435
Prepaid expenses and other assets (4,503) (1,351)
Net increase (decrease) in liabilities:
Other liabilities 144 5,302
Accrued compensation and other expenses (1,920) (16,177)
Security purchase obligations 9,293 4,406
Deferred compensation 1,180 2,796
Other 2,052 2,243
----------- -----------
Net cash provided from operating activities 156,156 141,306
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable:
New loans 9,000 40,000
Payments on loans (24,000) (15,000)
Net receipts (payments) on short-term borrowings:
Securities sold under agreements to repurchase 3,000 -
Secured short-term bank loans (65,500) -
Dividends paid (24,515) (22,715)
Proceeds from stock options exercised 5,098 6,948
Acquisition of treasury stock (25,297) (54,136)
----------- -----------
Net cash (used for) financing activities (122,214) (44,903)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Flagship, net of cash received - (17,343)
Purchase of Rittenhouse, net of cash received - (128,681)
Purchase of office furniture and equipment (2,818) (4,563)
Other investments 11,855 2,702
Other (569) -
----------- -----------
Net cash provided from (used for) investing activities 8,468 (147,885)
----------- -----------
Increase/(decrease) in cash and cash equivalents 42,410 (51,482)
Cash and cash equivalents:
Beginning of year 8,771 78,348
End of period $ 51,181 $ 26,866
=========== ===========
See accompanying notes to consolidated financial statements.
(6)
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The John Nuveen
Company and its wholly owned subsidiaries ("the Company"), and have been
prepared in conformity with generally accepted accounting principles.
These financial statements rely, in part, on estimates. In the opinion of
management, all necessary adjustments (consisting of normal recurring accruals)
have been reflected for a fair presentation of the results of operations,
financial position and cash flows in the accompanying unaudited consolidated
financial statements. The results for the period are not necessarily indicative
of the results to be expected for the entire year.
Certain amounts in the prior period financial statements have been reclassified
to correspond to the 1998 presentation. These reclassifications have no effect
on net income or retained earnings as previously reported for those periods.
NOTE 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 nine month
period ended September 30, 1998.
- ----------------------------------------------------------------------------------------------------------------
In thousands, For the nine months ended
except per share data September 30, 1998 September 30, 1997
- ----------------------------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
--------------------------------------------------------------------------
Net income $ 60,476 $ 54,112
Less: Preferred stock dividends (1,688) (1,688)
-------- ---------
Basic EPS 58,788 31,730 $ 1.85 52,424 32,443 $1.62
Dilutive effect of:
Deferred stock - 179 - 182
Employee stock options - 971 - 734
Assumed conversion of
preferred stock 1,688 1,650 1,688 1,650
-------- ------ --------- ------
Diluted EPS $ 60,476 34,530 $ 1.75 $ 54,112 35,009 $1.55
======== ====== ====== ========= ====== =======
Options to purchase 260,500 and 122,500 shares of the Company's common stock
were outstanding at September 30, 1998 and 1997, respectively, but were not
included in the computation of diluted earnings per share because the options'
respective weighted average exercise prices of $39.00 and $37.00 per share were
greater than the average market price of the Company's common shares during the
applicable year.
NOTE 3 NET CAPITAL REQUIREMENT
John Nuveen & Co. Incorporated, the Company's wholly owned broker/dealer
subsidiary, is subject to the Securities and Exchange Commission Rule 15c3-1,
the "Uniform Net Capital Rule", which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital, as
these terms are defined, shall not exceed 15 to 1. At September 30, 1998 its
net capital ratio was 1.64 to 1 and its net capital was $29,200,000 which is
$26,002,000 in excess of the required net capital of $3,198,000.
(7)
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE JOHN NUVEEN COMPANY
SEPTEMBER 30, 1998
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related research;
the development, marketing, and distribution of investment products and
services; and municipal and corporate investment banking services. The Company
markets its investment products, including mutual funds, closed-end funds,
defined portfolio products (unit trusts), and managed accounts through a network
of registered representatives associated with unaffiliated firms including
broker-dealers, commercial banks, affiliates of insurance providers, financial
planners, accountants, consultants and investment advisers.
The Company's primary business activities generate three principal sources of
revenue: (1) ongoing advisory fees earned on assets under management, including
mutual funds, closed-end funds, and individually managed accounts; (2)
transaction-based revenue earned upon the distribution of mutual fund and
defined portfolio products; and, (3) investment banking revenues, consisting of
underwriting and other advisory fees.
The profitability of each of these lines of business, and the volume of sales of
the Company's products, are directly affected by many variables, including
investor preferences for equity, fixed-income or other investments, the
availability and attractiveness of competing products, current and expected
changes in interest rate levels, the rate of inflation, changes or expected
changes in income tax rates and laws, and municipal bond new issue supply.
Assets under management include equities, taxable fixed-income and municipal
securities. Municipal assets represent 74% of assets under management in
managed funds and accounts at September 30, 1998 compared with 78% at September
30, 1997.
GENERAL INDUSTRY TRENDS
During the third quarter, the U.S. economy finally began to feel the effects of
the financial crisis that began in southeast Asia a year ago. This was most
noticeable in manufacturing, where the purchasing managers' index in June
slipped below the 50% mark, thereby signifying a decline in manufacturing
activity. Foreign demand for the safety of U.S. Treasury securities did not
extend to tax-exempt municipals. Consequently, while long Treasury yields
declined by 0.70% to 4.95%, municipal rates edged down only 0.20%. The stock
market, which peaked on July 17, later sank beneath concerns over the future
state of the economy and corporate profits. The S&P 500 declined 10% during the
third quarter resulting in a year-to-date return of 6%.
The volatility in the stock market during the third quarter of 1998 resulted in
a decrease in the level of net flows (equal to the sum of sales, reinvestment
and exchanges less redemptions) into equity mutual funds industry-wide for the
quarter compared to previous
(8)
9
quarters. Although equity mutual funds are still attracting significant
positive net flows, sales of equity mutual funds for the first nine months of
the year are down approximately 20% when comparing the same period of the prior
year. Equity managed accounts and equity defined portfolio products have
continued to attract increased cash flows across the industry. The sales
momentum that started in 1997 for fixed-income mutual funds has continued into
1998 with municipal bond funds posting substantial increases industry-wide in
net flows during the first nine months of the year. This is primarily due to
increased volatility in the equity markets, the relative price stability of
high-quality fixed income products and favorable pricing of municipals compared
with treasury securities. Industry sales of municipal defined portfolio
products have declined in 1998 as a result of less competitive current returns.
The following table compares key operating information of the Company for the
three month periods and nine month periods ended September 30, 1998 and 1997.
FINANCIAL RESULTS SUMMARY
NUVEEN OPERATING STATISTICS
(in millions except per share
amounts)
----------------------------------------------------------------------------------------------------
FOR THE THIRD QUARTER OF FOR THE FIRST NINE MONTHS OF
1998 1997 % CHANGE 1998 1997 % CHANGE
-------- -------- -------- ---------- ---------- ----------
Gross sales of investment products $1,999 $ 804 149% $ 5,558 $ 1,907 191%
Assets under management (1) (2) 52,736 47,845 10 52,736 47,845 10
Gross revenues 77.0 67.8 14 225.8 192.2 17
Operating expenses 42.8 37.2 15 126.7 103.6 22
Pretax operating income 34.2 30.6 12 99.1 88.7 12
Net income 21.0 18.6 13 60.5 54.1 12
Basic earnings per share (3) 0.65 0.56 16 1.85 1.62 14
Diluted earnings per share (3) 0.61 0.54 13 1.75 1.55 13
Operating cash flows per share (4) 0.75 0.64 17 2.17 1.84 18
Dividends per share 0.26 0.23 13 0.72 0.65 11
----------------------------------------------------------------------------------------------------
(1) Excludes defined portfolio products sponsored by the Company.
(2) At period end.
(3) Computed in accordance with Statement of Financial Accounting Standards
No. 128 Earnings Per Share.
(4) Operating cash flows (net income plus amortization and depreciation) on
a per-share basis is calculated under the same method used for diluted
earnings per share and is presented as an additional measurement of
operating performance, not as a substitute for earnings per share.
(9)
10
SUMMARY OF OPERATING RESULTS
* Gross revenues for the nine month period ended September 30, 1998 increased
17% over the nine month period ended September 30, 1997 primarily due to
higher advisory fee revenues. The increase in advisory fee revenues is the
result of a higher level of average assets under management in funds and
accounts due to the acquisition of managed account assets from Rittenhouse
in August 1997 and the sale of funds and accounts throughout 1997 and the
first nine months of 1998. These increases were partially offset by a
decline in interest income earned on short-term investments as the Company
deployed its capital, and a decline in distribution revenues earned on
sales of municipal defined portfolio products.
* Operating expenses for the first nine months of 1998 increased over the
same period of the prior year primarily due to goodwill amortization and
the incremental personnel and operating expenses resulting from the
acquisition of Rittenhouse in August 1997.
The following discussion and analysis contains important information that should
be helpful in evaluating the Company's results of operations and financial
condition, and should be read in conjunction with the consolidated financial
statements and related notes.
RESULTS OF OPERATIONS
Total advisory fee income earned during any period is directly related to the
market value of the assets managed by the Company. Advisory fee income will
increase with a rise in the level of assets under management, which occurs with
the sale of fund shares, deposits into individually managed accounts, the
acquisition of assets under management from other advisory companies, or through
increases in the value of portfolio investments. Sales include shares of new
and existing funds or managed accounts. Assets under management may also
increase as a result of reinvestment of distributions from defined portfolio
products sponsored by the Company into shares of mutual funds. Fee income will
decline when managed assets decline, as would occur when the values of fund
portfolio investments decrease or when mutual fund redemptions or managed
account withdrawals exceed sales.
(10)
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Investment advisory fee income, net of subadvisory fees and expense
reimbursements, from assets managed by the Company is shown in the following
table:
- -----------------------------------------------------------------------------------------
NUVEEN MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
Managed Funds:
Mutual Funds $ 13,160 $ 12,034 $ 37,819 $ 33,694
Exchange-Traded Products 40,207 39,611 119,220 116,476
Money Market Funds 826 961 2,616 2,872
Managed Accounts (1) 15,024 2,833 41,424 3,998
--------- --------- ---------- ----------
Total $ 69,217 $ 55,439 $ 201,079 $ 157,040
========= ========= ========== ==========
- -----------------------------------------------------------------------------------------
(1) For the 1998 period and for the month of September 1997, includes advisory
fee income earned on assets managed by Rittenhouse.
The following table summarizes net assets under management:
- -----------------------------------------------------------------------------------------
NUVEEN MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
---- ---- ----
Managed Funds:
Mutual Funds $ 11,503 $ 10,885 $ 10,705
Exchange-Traded Products 26,439 26,117 25,799
Money Market Funds 839 970 967
Managed Accounts 13,955 11,622 10,374
--------- --------- ---------
Total $ 52,736 $ 49,594 $ 47,845
========= ========= =========
(1) Excludes defined portfolio product assets under surveillance.
- -----------------------------------------------------------------------------------------
Total advisory fees for the first nine months of 1998 increased from the first
nine months of 1997 as a result of higher levels of average assets under
management relating principally to the Rittenhouse acquisition on August 31,
1997. Mutual fund assets under management at September 30, 1998 increased 7%
from September 30, 1997. This increase reflects the net sales of fund shares
over the periods and appreciation in the underlying value of the municipal
portfolio investments. Managed account assets under management at September 30,
1998 increased $3.6 billion from September 30, 1997. Average money market net
assets under management decreased due to relatively low short-term interest
rates and strong competition from sponsors of competing money market products.
(11)
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Gross sales of investment products for the third quarters and first nine months
of 1998 and 1997 are shown below.
- --------------------------------------------------------------------------------
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
Mutual Funds $ 366 $253 $ 1,140 $ 756
Defined Portfolios 189 195 536 611
Managed Accounts (1) 1,444 356 3,882 540
-------- ------- -------- --------
Total $ 1,999 $ 804 $ 5,558 $ 1,907
======== ======= ======== ========
- --------------------------------------------------------------------------------
(1) For the 1998 period and the month of September 1997, includes sales of
Rittenhouse accounts.
Overall, gross sales of the Company's products for the three month and nine
month periods ended September 30, 1998 increased 149% and 191%, respectively
over the same periods of the prior year. Net sales were $1.5 billion for the
third quarter of 1998, a 183% increase over the same period of the prior year,
and $3.9 billion for the first nine months of 1998, a 226% increase over the
same period of 1997.
MUTUAL FUNDS
Increased concern regarding volatility in the equity markets resulted in an
increase in the Company's municipal mutual fund sales in the first nine months
of 1998 as investors turned to more conservative investments. Municipal mutual
fund redemptions in the first nine months of 1998 were also 10% lower than the
same period of the prior year. Sales of the Company's equity mutual funds also
increased over the prior year with two new fund introductions. In January 1998,
the Company introduced a new growth fund subadvised by Rittenhouse and in June
1998, a new European fund subadvised by ICAP was launched. Distribution revenue
earned on the municipal mutual fund sales declined, however, compared to the
prior year. This decrease is primarily the result of the inclusion, for the 1997
period only, of 12b-1 fees earned in January 1997 under Flagship's former mutual
fund pricing structure. On February 1, 1997 the Flagship and Nuveen municipal
funds merged and adopted pricing structures more similar to the Nuveen funds.
Additionally, commissions paid by the Company on municipal mutual funds sales in
excess of $1.0 million have increased over the prior year.
DEFINED PORTFOLIOS
The decrease in sales of defined portfolio products is primarily the result of
lower municipal defined portfolio sales, which is due to less competitive
current returns on these products. This decrease is partially offset by sales
of equity, corporate and treasury defined portfolio products introduced in May
1997. As such, distribution revenue for the longer term municipal defined
portfolio products is down $2.4 million in the first nine months of 1998
compared with the first nine months of 1997, partially offset by an increase of
$.3 million in
(12)
13
distribution revenue earned on the shorter term equity, corporate and treasury
defined portfolio products.
MANAGED ACCOUNTS
Sales of managed accounts increased during the first nine months of 1998 when
compared to the same period of 1997 as Rittenhouse's managed account business
was combined with the Company's on August 31, 1997. Sales of Nuveen's municipal
managed accounts increased 97% when compared to the same period of the prior
year. Sales of managed accounts do not impact the Company's underwriting and
distribution revenue as there are no transaction-based revenues associated with
those products.
OTHER
The Company records positioning profits or losses from changes in the market
value of investment products and securities held temporarily. The Company hedges
certain of these holdings against fluctuations in interest rates using financial
futures. During the first nine months of 1998, the Company realized net
positioning losses of $0.3 million compared to gains of $0.8 million during the
first nine months of 1997.
Investment banking revenues include both new issue underwriting profits and fee
income earned from various financial advisory activities. Investment banking
revenues increased $0.4 million in the first nine months of 1998 over the same
period in 1997 due to an increase in both negotiated underwritings and financial
advisory activity.
Interest and dividend revenue declined 46% or $4.0 million when comparing the
nine month period ended September 30, 1998 with the same period of the prior
year as cash balances were deployed in 1997 for the acquisition of Rittenhouse,
for repurchases of a portion of the Company's outstanding common shares and for
investments in new products.
Operating expenses increased 22% in the first nine months of 1998 over the same
period of the prior year. This increase is principally due to the inclusion of
Rittenhouse for nine months in the 1998 results and only one month in the 1997
results. When comparing the Company's expenses excluding Rittenhouse for the
same periods, expenses increased $2.8 million or 3%, including severance costs
of approximately $2.0 million.
Compensation and related benefits for the first nine months ended September 30,
1998 increased 15% over the same period of the prior year. This increase is the
result of the inclusion of approximately 98 Rittenhouse employees in the first
nine months of 1998, which is partially offset by headcount reductions in other
areas.
Advertising and promotional expenditures increased for the first nine months of
1998 when compared to the same period of 1997 primarily due to the inclusion of
Rittenhouse advertising and promotional expenditures to support the expanded
product line offered by the Company.
The increase in amortization of goodwill and deferred offering costs when
comparing the first nine months of 1998 with the first nine months of 1997 also
relates principally to the acquisition of Rittenhouse. The Company recorded
$3.7 million of Rittenhouse-related goodwill amortization expense in the first
nine months of 1998 compared to $.4 million in
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14
1997. The Company is amortizing the goodwill associated with Rittenhouse over
approximately 30 years.
Occupancy and equipment, travel and entertainment, and other operating expenses
increased $8.9 million for the nine month period ended September 30, 1998
compared to the same period of the prior year primarily due to the addition of
the Rittenhouse operations.
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
The Company's principal businesses are not capital intensive and, historically,
the Company has met its liquidity requirements through cash flow generated by
the Company's operations. The Company's broker/dealer subsidiary occasionally
utilizes available, uncommitted lines of credit, which exceed $400 million, to
satisfy additional periodic, short-term liquidity requirements generally for the
purpose of carrying variable rate demand obligations (VRDOs). Additionally, in
August 1997, the Company entered into a $200 million committed, three-year
revolving credit facility with a group of banks to ensure an ongoing liquidity
source for general corporate purposes including acquisitions. As of September
30, 1998, there was no outstanding balance due on the committed credit line.
On August 31, 1997, the Company acquired Rittenhouse, a nationally-known equity
and balanced account manager, for a cash purchase price of $145 million. To
finance the transaction the Company used $95 million of cash on hand and, for
the remainder, utilized the aforementioned committed credit line, which was
subsequently paid down during the first quarter of 1998. The acquisition has
been accounted for using the purchase method of accounting resulting in
approximately $144 million in goodwill for financial reporting purposes, which
will be amortized against earnings over approximately 30 years.
At September 30, 1998, the Company held in its treasury 7,242,770 shares of
common stock acquired in open market transactions and in transactions with its
Class B shareholder, The St. Paul Companies, Inc., as part of ongoing stock
repurchase programs. In February 1997, the Board of Directors authorized the
purchase of 3.5 million shares. At September 30, 1998, the Company has
approximately 1.0 million shares remaining to be purchased under the February
1997 repurchase program.
In August 1998, the Company announced a 13% increase in its third quarter
dividend, to $0.26 per common share, from the second quarter amount of $0.23 per
common share. During the first nine months of 1998, the Company paid out
dividends on common shares totaling $22.8 million and on preferred shares
totaling $1.7 million, compared with $21.0 million and $1.7 million,
respectively, for the same period of 1997.
The Company is remarketing agent for various issuers of VRDOs with an aggregate
principal value of $1.7 billion at September 30, 1998. Although remarketing
agents, including the Company, are only obligated to use their best efforts in
locating purchasers for the VRDOs, they frequently repurchase VRDOs for resale
to other buyers within a few days. During temporary periods of imbalance
between supply and demand for VRDOs, the Company may hold larger than average
balances of such obligations for resale. Substantially all VRDOs for which the
Company is remarketing agent are secured by letters of credit obtained by the
issuer from top-rated third-party providers, including major commercial banks
and insurance companies. At September 30, 1998, and December 31,
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1997, the Company held $18.3 million and $97.7 million, respectively, of VRDOs,
which are classified in its consolidated balance sheets as "Temporary
Investments Arising from Remarketing Obligations". The Company's average daily
inventory of VRDOs was $17 million during the first nine months of 1998 and $32
million during all of 1997.
To minimize interest rate risk on fixed-income defined portfolio product
inventories and securities held by the Company, the Company entered into hedging
transactions using futures contracts during the first nine months of 1998 and
expects to continue to do so. Additionally, the Company's investment banking
group will, on occasion, act as financial adviser, broker, or underwriter to
municipal or other issuers with respect to transactions such as interest rate
swaps and forward delivery transactions.
John Nuveen & Co. Incorporated, the Company's wholly owned broker/dealer
subsidiary, is subject to the Securities and Exchange Commission Rule 15c3-1,
the "Uniform Net Capital Rule", which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital, as
these terms are defined, shall not exceed 15 to 1. At September 30, 1998, its
net capital ratio was 1.64 to 1 and its net capital was $29.2 million which is
$26.0 million in excess of the required net capital of $3.2 million.
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 operating needs for the foreseeable
future.
OTHER MATTERS
YEAR 2000
The Company has taken a number of steps to address the Year 2000 Challenge. As
background, the Company first addressed this challenge in the early 1980's
because of the historical focus of the Company's broker dealer and investment
adviser subsidiaries on municipal bonds, which typically mature 20 to 30 years
after the date of issuance. As a result, in the early 1980's the Company began
developing internal software standards and other information technology systems
that required the use of four digits to represent a year. These systems have
been improved and tested over the years and remain in place, thus providing the
Company with a base of internally developed, Year 2000 ready software. The
Company outsources to service providers many administrative functions relating
to its funds and investment products, and an outside service provider serves as
transfer agent and custodian for all of the funds sponsored by the Company.
In light of the above, the Company's preparations for Year 2000 consist
essentially of examination and testing of the software packages and hardware
provided by third parties and of the systems and software of service partners,
with particular emphasis on its key service providers, to determine their
degree of Year 2000 compliance. The Company is compiling a detailed inventory
of all third party software and hardware used in processing at Nuveen (which the
Company expects to complete by the end of 1998) and is in the process of
obtaining certifications of the Year 2000 compliance for each item of software
and hardware (which the Company expects to complete by the end of the first
quarter in 1999). The certification process may require follow up, which will
be done as needed throughout 1999. As to its key service providers, the most
significant include Chase Manhattan Bank and JJ Kenny, a subsidiary of Standard
& Poors Corporation. Chase serves as transfer agent and custodian for the
Company's funds and serves as trustee of the defined portfolios
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sponsored by the Company. Kenny serves as pricing agent for the municipal
securities held by the Company's funds. Both of these service providers have
shared detailed information with the Company regarding their Year 2000 plans and
initiatives and the Company anticipates testing their respective systems in the
early part of 1999. Rittenhouse, one of the Company's subsidiaries, has
completed the testing of a majority of the internal software and hardware it
uses, which appears to be Year 2000 ready, and is addressing the compliance of
its key service providers and business partners. The most critical system for
Rittenhouse is a portfolio accounting system provided by a third party.
Rittenhouse is a major customer of this provider and is scheduled to test the
system for compliance in December, 1998.
Given the Company's prior development work, the Company and its subsidiaries do
not anticipate facing the prospect of costly and time consuming redesign of
internal information technology systems, and the costs of the Company's
compliance program are not expected to be significant and will be incurred as
part of normal operations. The costs presently consist of the cost of upgrades
of software and of traveling expenses to coordinate with our parent company,
subsidiaries and service partners. Therefore, the Company has not to date
specially allocated a budget for the Company's Year 2000 initiative.
While the Company does not presently believe that challenges associated with
Year 2000 are likely to have a material effect on the Company's operations,
liquidity and financial condition, the Company has not completed the process of
assessing the compliance of all of its third party software suppliers and key
service providers and business partners. These outside parties are at various
stages of readiness for Year 2000 and depending on the result of such
assessments, it is possible the Company could conclude that the Year 2000
Challenge could affect the Company's business to a greater extent than it
currently believes likely. It is also possible that certain service providers
or partners, despite assurances to the contrary, may not in fact successfully
modify all their key systems on a timely basis for Year 2000 and that the
Company's testing of such firms' compliance may not allow the Company to detect
such problems on a timely basis. Further, there can be no assurance that
entities such as public utilities will be fully Year 2000 compliant and any
interruption in basic services, such as telephone or electrical service, would
disrupt the Company's operations.
The Company has begun to develop Year 2000 contingency plans. The Company's
Year 2000 contingency plans will be based on the extent to which the Company's
examination of the Year 2000 compliance of its third party software and service
providers and key business partners reveals problems in achieving readiness.
The Company is not aware of any such problems presently but it has not yet
completed its due diligence examination. Once this examination is completed,
the Company will address any specific concerns with providers or key business
partners and seek to take appropriate remedial action. We anticipate that the
majority of any specific contingency plans will be developed in accordance with
our normal disaster recovery plans. It may not be possible to develop adequate
contingency plans relating to Year 2000 challenges at service providers that are
not identified sufficiently in advance of January 1, 2000.
INFLATION
The Company's assets are, to a large extent, liquid in nature and therefore not
significantly affected by inflation. However, inflation may result in increases
in the Company's expenses, such as employee compensation, advertising and
promotional costs, and office occupancy
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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 the Company's
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 managed by the Company, which in turn would result in a decline
in investment advisory fee income.
FORWARD LOOKING INFORMATION
From time to time, information provided by the Company or information included
in its filings with the SEC (including this Quarterly Report on Form 10-Q) may
contain statements which are not historical facts but are forward-looking
statements reflecting management's expectations. The Company's actual future
results may differ significantly from those anticipated in any forward-looking
statements due to numerous factors including but not limited to the effects of
the substantial competition that the Company, like all market participants,
faces in the investment management business, including competition for continued
access to the brokerage firm's retail distribution systems, the Company's
reliance on revenues from investment management contracts which are renewed
annually according to their terms, burdensome regulatory developments and the
previously discussed risks with respect to Year 2000 compliance. The Company
undertakes no responsibility to update publicly or revise any forward looking
statements.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-K for the year
ending December 31, 1997, a lawsuit brought in June, 1996 by certain
shareholders is currently pending in federal district court for the
Northern District of Illinois against Nuveen & Co., Nuveen Advisory, six
Nuveen investment companies and two of the Funds' former directors
seeking unspecified damages, an injunction and other relief. The suit
also seeks certification of a defendant class consisting of all
Nuveen-managed leveraged funds. The complaint is filed on behalf of a
purported class of present and former shareholders of all Nuveen
leveraged investment companies, including the Funds, which allegedly
engaged in certain practices which plaintiffs allege violated various
provisions of the Investment Company Act of 1940 and common law.
Plaintiffs allege among other things, breaches of fiduciary duty and
various misrepresentations and omissions in disclosures in connection
with the use and maintenance of leverage through the issuance and
periodic auctioning of preferred stock and the payment of management and
brokerage fees to Nuveen Advisory and Nuveen & Co. Plaintiffs filed a
motion for class certification on August 10, 1998. Defendants are
opposing certification of either a plaintiff or defendant class. The
defendants are vigorously contesting this action and have filed motions,
which are pending, to dismiss the entire action.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included herein:
(27) Financial Data Schedule
b) Report on Form 8-K. None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: November 9, 1998 By /s/ John P. Amboian
---------------------------------
John P. Amboian
Executive Vice President and
Chief Financial Officer
DATE: November 9, 1998 By /s/ Margaret E. Wilson
----------------------------------
Margaret E. Wilson
Vice President of Finance and
Corporate Controller
(Principal Accounting Officer)
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