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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 JUNE 30, 2000
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 August 4, 2000, there were 31,288,235 shares of the Company's Common
Stock outstanding, consisting of 6,846,497 shares of Class A Common Stock, $.01
par value, and 24,441,738 shares of Class B Common Stock, $.01 par value.
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THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 2000 and 1999
Six Months Ended June 30, 2000 and 1999 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Six Months Ended June 30, 2000 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1 through Item 6 18
Signatures 20
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
THE JOHN NUVEEN COMPANY
Consolidated Balance Sheets
Unaudited
(in thousands, except share data)
June 30, December 31,
2000 1999
--------- ----------
ASSETS
Cash and cash equivalents $ 18,385 $ 28,373
Management and distribution fees receivable 102,606 68,884
Other receivables 46,614 54,466
Securities owned (trading account), at market value:
Nuveen defined portfolios 38,499 44,263
Bonds and notes 479 579
Deferred income tax asset, net 5,844 5,826
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $31,925 and $29,610, respectively 20,327 14,547
Other investments 82,232 85,774
Goodwill, at cost less accumulated amortization of $22,105 and $18,426, respectively 198,138 198,674
Prepaid expenses and other assets 39,409 39,579
--------- ---------
$ 552,533 $ 540,965
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued compensation and other expenses 31,666 52,421
Deferred compensation 29,285 32,278
Security purchase obligations 4,907 296
Other liabilities 33,709 64,908
--------- ---------
Total liabilities 99,567 149,903
--------- ---------
Redeemable preferred stock, at redemption value; 5,000,000 shares
authorized, 1,800,000 shares issued 45,000 45,000
Minority interest - Rittenhouse Class B stock 32,685 --
--------- ---------
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 64,504 60,380
Retained earnings 534,603 506,136
Accumulated other comprehensive income (699) 189
--------- ---------
598,795 567,092
Less common stock held in treasury, at cost (7,487,721 and 7,591,180 shares, respectively) (223,514) (221,030)
--------- ---------
Total common stockholders' equity 375,281 346,062
--------- ---------
$ 552,533 $ 540,965
========= =========
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
Consolidated Statements of Income
Unaudited
(in thousands, except per share data)
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Operating Revenues:
Investment advisory fees from assets under management $ 75,927 $ 75,918 $ 151,922 $ 148,960
Underwriting and distribution of investment products 8,713 5,921 23,161 11,413
Positioning profits (1,186) (817) (22) (1,015)
Investment banking -- 2,902 -- 5,011
Other operating revenue 1,625 896 2,557 1,346
--------- --------- --------- ---------
Total operating revenues 85,079 84,820 177,618 165,715
Operating Expenses:
Compensation and benefits 21,961 22,230 46,215 44,623
Advertising and promotional costs 7,085 7,074 18,738 12,696
Occupancy and equipment costs 3,403 3,090 6,915 6,215
Amortization of goodwill and deferred offering costs 1,916 3,515 4,103 6,985
Travel and entertainment 3,050 2,715 5,810 4,914
Other operating expenses 6,455 7,993 13,898 15,263
--------- --------- --------- ---------
Total operating expenses 43,870 46,617 95,679 90,696
Operating Income 41,209 38,203 81,939 75,019
Non-Operating Income/(Expense) 2,447 1,279 5,046 2,648
--------- --------- --------- ---------
Income before taxes 43,656 39,482 86,985 77,667
Income taxes 17,353 15,602 34,576 30,386
--------- --------- --------- ---------
Net income $ 26,303 $ 23,880 $ 52,409 $ 47,281
========= ========= ========= =========
Average common and common equivalent shares outstanding:
Basic 31,269 31,365 31,219 31,365
========= ========= ========= =========
Diluted 33,891 34,349 33,750 34,296
========= ========= ========= =========
Earnings per common share:
Basic $ 0.82 $ 0.74 $ 1.64 $ 1.47
========= ========= ========= =========
Diluted $ 0.78 $ 0.70 $ 1.55 $ 1.38
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
Consolidated Statement of Changes in Common Stockholders' Equity
Unaudited
(in thousands)
Class A Class B Additional Other
Common Common Paid-In Retained Comprehensive Treasury
Stock Stock Capital Earnings Income Stock Total
------------ ------------ ------------ ------------- ------------- ----------- -----------
Balance at December 31, 1999 $ 142 $ 245 $ 60,380 $ 506,136 $ 189 $ (221,030) $ 346,062
Net income 52,409 52,409
Cash dividends paid (19,221) (19,221)
Issuance of earnout shares 392 1,847 2,239
Purchase of treasury stock (23,873) (23,873)
Exercise of stock options (4,400) 17,075 12,675
Other 3,732 (321) (888) 2,467 4,990
------------ ------------ ------------ ------------- ------------- ----------- -----------
Balance at June 30, 2000 $ 142 $ 245 $ 64,504 $ 534,603 $ (699) $ (223,514) $ 375,281
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 52,409 $ 47,281
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 569 (604)
Depreciation of Fixed Assets 2,325 2,581
Amortization of Goodwill 3,679 3,620
Net (increase) decrease in assets:
Temporary invesments arising from remarketing obligations -- 41,585
Management and distribution fees receivable (33,722) (19,089)
Other receivables 7,852 (7,766)
Nuveen defined portfolios 5,764 (2,169)
Bonds and notes 100 822
Prepaid expenses and other assets 170 (3,212)
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (20,755) (15,738)
Deferred compensation (2,993) 2,838
Security purchase obligations 4,611 (3,051)
Other liabilities (31,199) 4,227
Other 3,732 2,284
-------- --------
Net cash provided from (used for) operating activities (7,458) 53,609
-------- --------
Cash flows from financing activities:
Net payments on short-term borrowings -- (10,000)
Dividends paid (19,221) (18,364)
Proceeds from stock options exercised 12,675 4,771
Proceeds from Rittenhouse stock options exercised 32,685 --
Acquisition of treasury stock (23,873) (11,211)
Other -- (107)
-------- --------
Net cash provided from (used for) financing activities 2,266 (34,911)
-------- --------
Cash flows from investing activities:
Net purchase of office furniture and equipment (8,105) (1,573)
Other investments 2,066 (5,235)
Other 1,243 (724)
-------- --------
Net cash used for investing activities (4,796) (7,532)
-------- --------
Increase/(decrease) in cash and cash equivalents (9,988) 11,166
Cash and cash equivalents:
Beginning of year 28,373 12,126
-------- --------
End of year $ 18,385 $ 23,292
-------- --------
Supplemental Information:
Taxes paid $ 25,964 $ 31,512
Interest paid $ 2,390 $ 811
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
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 2000 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 six month
period ended June 30, 2000.
- -----------------------------------------------------------------------------------------------------------------
In thousands, For the six months ended
except per share data June 30, 2000 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
----------- ---------- ----------- ----------- ---------- -------------
Net income $52,409 $47,281
Less: Preferred stock dividends (1,125) (1,125)
------- -------
Basic EPS 51,284 31,219 $1.64 46,156 31,365 $1.47
Dilutive effect of:
Deferred stock - 97 - 176
Employee stock options - 784 - 1,105
Assumed conversion of
preferred stock 1,125 1,650 1,125 1,650
------- ------ ------- ------
Diluted EPS $52,409 33,750 $1.55 $47,281 34,296 $1.38
- -----------------------------------------------------------------------------------------------------------------
Options to purchase 345,000 and 264,000 shares of the Company's common stock
were outstanding at June 30, 2000 and 1999, respectively, but were not included
in the computation of diluted earnings per share because the options' respective
weighted average exercise prices of $42.46 and $42.96 per share were greater
than the average market price of the Company's common shares during the
applicable period.
NOTE 3 NET CAPITAL REQUIREMENT
Nuveen Investments, 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 June 30, 2000, its net capital ratio
was 3.01 to 1 and its net capital was $19,844,000 which is $15,857,000 in excess
of the required net capital of $3,987,000.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
NOTE 4 NOTES PAYABLE
On August 8, 1997 the Company entered into a revolving credit facility with a
group of banks that extends through August 2000. As of June 30, 2000, $160
million was available under this committed credit line.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related research as
well as the development, marketing, and distribution of investment products and
services for advisers to the affluent and high-net-worth market segments. The
Company distributes its investment products, including mutual funds,
exchange-traded funds, defined portfolios, and individually managed accounts
through registered representatives associated with unaffiliated firms including
broker-dealers, commercial banks, affiliates of insurance providers, financial
planners, accountants, consultants and investment advisors.
The Company provides consultative services to financial advisors with a primary
focus on managed assets for fee-based customers and structured investment
services for transaction based advisors. The financial advisors supported by the
Company serve affluent and high-net-worth investors.
The Company's primary business activities generate two principal sources of
revenue: (1) ongoing advisory fees earned on assets under management, including
mutual funds, exchange-traded funds, and individually managed accounts and (2)
distribution revenues earned upon the sale of defined portfolio and mutual fund
products.
Sales of the Company's products, and their 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, changes in interest rates, inflation, and income tax rates
and laws.
Assets under management include equity, fixed-income and floating-rate
portfolios. Municipal securities represented 65% of assets under management in
managed funds and accounts on June 30, 2000, compared with 68% on June 30, 1999.
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SUMMARY OF OPERATING RESULTS
The following table compares key operating information of the Company for the
three-month and six-month periods ended June 30, 2000 and 1999:
Financial Results Summary
Company Operating Statistics
($ in millions except per share amounts)
- -------------------------------------------------------------------------------------------------------
For the second quarter of For the first six months of
2000 1999 % change 2000 1999 % change
---- ---- -------- ---- ---- --------
Gross sales of investment products $2,744 $4,892 (44)% $5,921 $8,054 (26)%
Assets under management (1)(2) 60,299 59,538 1 60,299 59,538 1
Operating revenues 85.1 84.8 - 177.6 165.7 7
Operating expenses 43.9 46.6 (6) 95.7 90.7 6
Pretax income 43.7 39.5 11 87.0 77.7 12
Net income 26.3 23.9 10 52.4 47.3 11
Basic earnings per share 0.82 0.74 11 1.64 1.47 12
Diluted earnings per share 0.78 0.70 11 1.55 1.38 12
Dividends per share 0.29 0.29 - 0.58 0.55 5
- -------------------------------------------------------------------------------------------------------
(1) At period end
(2) Excludes approximately $12 billion of defined portfolio product assets
under surveillance.
Gross sales of investment products for the second quarter totaled $2.7 billion
which was a decline versus sales in the second quarter of the previous year.
Excluding one-time sales of exchange-traded funds ($1.9 billion) in the second
quarter of 1999, gross sales were down 10% for the three-month period and 5% for
the six-month period ended June 30, 2000. This net decrease was driven by
declines in managed asset gross sales offset by increased sales of defined
portfolio products.
Operating revenues for the quarter ended June 30, 2000, were up slightly with
the same period of the prior year as higher distribution revenue was offset by a
decrease in revenue due to the sale of the investment banking business in the
third quarter of 1999. Excluding the impact of the investment banking business,
operating revenues increased 4% in the second quarter of 2000 when compared with
the same quarter of the previous year. For the six-month period, operating
revenues were up 11%, excluding the impact of the investment banking business,
due to higher advisory fees and distribution revenue.
Operating expenses for the second quarter of 2000 declined when compared with
the same quarter of 1999 due to the sale of the investment banking business and
to a decrease in amortization expense. Operating expenses increased 6% for the
six-month period ended June 30, 2000, due to an increase in advertising offset
by a decrease in amortization expense.
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RESULTS OF OPERATIONS
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.
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. Assets under
management rise with the sale of fund shares, the addition of new managed
accounts or deposits into existing managed accounts, the acquisition of assets
under management from other advisory companies, or through increases in the
value of portfolio investments. Assets under management may also increase as a
result of reinvestment of distributions from funds and accounts, and from
reinvestment of distributions from 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 and
reinvestments.
Distribution revenue is earned as the Company's defined portfolio and mutual
fund products are sold. Distribution revenue will rise and fall with the level
of the Company's sales of these products.
Gross sales of investment products for three-month and six-month periods ended
June 30, 2000 and 1999 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 46 $ 1,859 $ 46 $ 1,859
Mutual Funds 216 421 555 849
Managed Accounts 1,449 2,054 2,876 4,291
------- ------- ------- -------
Total Managed Assets 1,711 4,334 3,477 6,999
Defined Portfolios 1,033 558 2,444 1,055
------- ------- ------- -------
Total $ 2,744 $ 4,892 $ 5,921 $ 8,054
======= ======= ======= =======
Excluding the impact of new and leveraged exchange-traded fund sales in 1999,
gross sales declined 5% for the six-month period ended June 30, 2000, when
compared with the same period in the prior year. This decrease is the result of
a decline in managed asset gross sales, offset by an increase in sales of
defined portfolio products.
Net flows (equal to the sum of sales, reinvestment and exchanges less
redemptions) across all products were $3.3 billion during the first six months
of 2000. For the three months ended June 30, 2000, net flows were $1.8 billion,
the highest level over the past four
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quarters, reflecting the increase in defined portfolio sales and the quality of
the Company's products in a volatile market environment.
Gross sales of defined portfolio products increased 132% for the six-month
period ended June 30, 2000, when compared with the same period in 1999. Sales of
equity defined portfolio products increased 179% over this period fueled by
strong technology sector portfolio sales in the first quarter and the
introduction of the Peroni Mid-Year 2000 Growth Fund in the second quarter.
Sales of municipal defined portfolio products increased 28% over the same period
in the prior year.
Gross sales of managed assets decreased 33% (excluding the impact of one-time
exchange-traded fund sales in 1999) during the six-month period ended June 30,
2000, when compared with the same period in 1999. This decrease is due to a
decrease in both managed account and mutual fund gross sales. Managed account
gross sales decreased 33% due to investors' shifting away from large-cap core
growth stocks in favor of aggressive growth stocks. Mutual fund gross sales were
down 35%, driven by municipal mutual funds which were down 54% due to higher
interest rates. Offsetting the decline in municipal fund gross sales was an
increase in gross sales of equity and income funds, which were up 10% due to the
addition of two new funds, the Nuveen Innovation Fund and the Nuveen
International Growth Fund, in the first quarter of 2000.
The following table summarizes net assets under management:
Net Assets Under Management (1)
(in millions)
June 30, December 31, June 30,
2000 1999 1999
---- ---- ----
Managed Assets:
Mutual Funds $ 11,207 $ 11,406 $ 12,038
Exchange-Traded Funds 27,324 26,846 27,284
Managed Accounts 21,269 20,895 19,575
Money Market Funds 499 637 641
-------- -------- --------
Total $ 60,299 $ 59,784 $ 59,538
======== ======== ========
(1) Excludes approximately $12 billion of defined portfolio product assets
under surveillance
Assets under management increased from $59.5 billion at June 30, 1999, to $60.3
billion at June 30, 2000. Although market conditions were volatile in the first
six-months of 2000, assets under management were up slightly from the $59.8
billion at December 31, 1999, due to positive net flows.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, from assets managed by the Company is shown in the following
table:
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Managed Assets
Investment Advisory Fees
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Mutual Funds $ 12,580 $ 14,213 $ 25,613 $ 28,470
Exchange-Traded Products 40,034 40,149 79,818 79,526
Managed Accounts 22,906 20,928 46,111 39,533
Money Market Funds 407 628 380 1,431
-------- -------- -------- --------
Total $ 75,927 $ 75,918 $151,922 $148,960
======== ======== ======== ========
Total advisory fees for the six-month period ended June 30, 2000, increased $3.0
million over the comparable period in 1999 as a result of higher levels of
average assets under management. Managed account average assets under management
increased $3.0 billion and exchange-traded fund average assets were up $0.4
billion during the first six months of 2000 when compared with the first six
months of 1999. Mutual fund average assets declined $1.0 billion during the same
period due to heavy municipal redemptions as a result of higher interest rates.
Average money market fund net assets under management decreased in the first
half of 2000 due to redemptions, which were driven by relatively low short-term
interest rates and strong competition from sponsors of competing money market
products. Money market fund advisory fees for the three-month period ended June
30, 2000, were greater than for the six-month period due to a negative level of
money market fund advisory fees in the first quarter of 2000 as a result of
significant one-time expense reimbursements relating to the 1999 reorganization
of the money market fund complex.
Underwriting and Distribution revenue for the three-month and six-month periods
ended June 30, 2000 and 1999 is shown in the following table:
Underwriting and Distribution Revenue
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------ -------- -------
Mutual Funds $ 1,005 $ 457 $ 1,819 $ 1,138
Defined Portfolios 7,368 4,654 20,656 9,127
Exchange-Traded Products 340 810 686 1,148
------- ------ -------- -------
Total $ 8,713 $5,921 $ 23,161 $11,413
======= ====== ======== =======
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Total underwriting and distribution revenue for the six-month period ended June
30, 2000, doubled when compared with the comparable period in 1999. Distribution
revenue for the equity defined portfolio products increased by $10.0 million for
this period, while distribution revenue for the longer-term municipal defined
portfolio products increased $1.5 million. Both increases were driven by
increases in gross sales. Although mutual fund gross sales were down for the
first six months of 2000, distribution revenue increased when compared with the
first six months of 1999 due to an increase in the base of assets on which Rule
12b-1 distribution fees are earned.
Positioning Profits/(Losses)
The Company records positioning profits or losses from changes in the market
value of the inventory of unsold investment products and other securities held
by Nuveen Investments. The Company hedges certain of its fixed-income based
holdings against fluctuations in interest rates using financial futures.
Positioning gains of $1.2 million in the first quarter of 2000 were completely
offset by positioning losses of $1.2 million in the second. This compares to
positioning losses of $1.0 million which were recorded during the first half of
1999.
Investment Banking
On September 17, 1999, the Company completed the sale of its investment banking
business to U.S. Bancorp Piper Jaffray. Correspondingly, there is no revenue
from the investment banking business in the first six months of 2000. Revenue
from the investment banking business in the first half of 1999 totaled $5.0
million.
Operating Expenses
Operating expenses increased $5.0 million for the six-month period ended June
30, 2000, over the same time period in the prior year. This increase is
primarily due to increased advertising and promotional expenditures, in
connection with the Company's new brand awareness campaign, as well as an
increase in salary and benefit costs.
Compensation and related benefits for the six-month period ended June 30, 2000,
increased $1.6 million, or 4%, over the same period in the prior year. This was
driven by increases in headcount driven by new staff additions and annual merit
increases. These increases were offset by declines due to the sale of the
investment banking business in the third quarter of 1999.
Advertising and promotional expenditures increased $6.0 million during the first
half of 2000 when compared with the first half of 1999. This increase is
primarily due to the incremental costs to support the new brand image campaign.
Amortization of goodwill and deferred offering costs decreased $2.9 million for
the six-month period ended June 30, 2000, when compared with the same period of
1999. The decrease is due to the completion of the amortization period of
capitalized commissions advanced in conjunction with the load-waived offerings
of certain equity and income mutual funds in late 1996 and early 1997.
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Occupancy and equipment, travel and entertainment, and other operating expenses
increased $0.2 million for the six-month period ended June 30, 2000, when
compared with the same period in the prior year.
Non-Operating Income/(Expense)
Included in non-operating income/(expense) is net interest income/(expense) and
other miscellaneous non-operating revenue/(expense).
Interest and dividend revenue for the first half was up $0.3 million compared
with the first half of 1999, while interest expense increased $0.2 million over
the same period.
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. In addition, the Company's broker-dealer subsidiary
occasionally utilizes available, uncommitted lines of credit, which approximate
$300 million, to satisfy periodic, short-term liquidity needs. As of June 30,
2000, no borrowings were outstanding on these uncommitted lines of credit.
Additionally, in August 1997, the Company entered into a committed, three-year
revolving credit facility with a group of banks to ensure an ongoing liquidity
source for general corporate purposes including acquisitions. This committed
line of credit expires in August of 2000. The Company expects to put a new,
committed revolving credit facility in place during August 2000. As of June 30,
2000, there was $160 million available and there was no outstanding balance
under the committed credit line.
Options to purchase 399,088 shares of Rittenhouse non-voting Class B common
stock were exercised on March 22, 2000 under the Rittenhouse Financial Services,
Inc. 1997 Equity Incentive Award Plan. Rittenhouse accounted for these options
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." As a result of this exercise, the Company has recorded $32.7 million
of minority interest on its balance sheet. The minority interest will remain in
place as long as the stock is outstanding. In the event that the stock is
repurchased, any purchase price in excess of the exercise price will be added to
the goodwill associated with the Company's acquisition of Rittenhouse.
At June 30, 2000, the Company held in its treasury 7,487,721 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 an ongoing repurchase
program, the Company is authorized to purchase approximately 0.6 million
additional shares.
During the first six months of 2000, the Company paid out dividends on common
shares totaling $18.1 million and on preferred shares totaling $1.1 million.
The Company's broker-dealer subsidiary is subject to requirements of the
Securities and Exchange Commission relating to liquidity and capital standards
(See Notes to Consolidated Financial Statements).
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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.
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 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 report on Form 10-Q) may contain
statements which are not historical facts but are forward-looking statements
reflecting management's expectations and opinions. The Company's actual future
results may differ significantly from those anticipated in any forward-looking
statements due to numerous factors. These include, but are 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,
recent accounting pronouncements, and unforeseen developments in litigation. The
Company undertakes no responsibility to update publicly or revise any
forward-looking statements.
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PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
JUNE 30, 2000
The Company is exposed to market risk from changes in interest rates which may
adversely affect its results of operations and financial condition. The Company
is exposed to interest rates primarily in its fixed-income defined portfolio
inventory and seeks to minimize the risks from these interest rate fluctuations
through the use of derivative financial instruments. The Company does not use
derivative financial instruments for trading or other speculative purposes and
is not party to any leveraged financial instruments.
The Company regularly purchases and holds for resale municipal securities and
defined portfolio units. The level of inventory maintained by the Company will
fluctuate daily and is dependent upon the need to maintain municipal inventory
for future defined portfolios, and the need to maintain defined portfolio
inventory to support ongoing sales. To minimize interest rate risk on securities
held by the Company, the Company utilizes futures contracts.
The Company invests in short-term debt instruments, classified as Securities
Purchased Under Agreements to Resell. The investments are treated as
collateralized financing transactions and are carried at the amounts at which
they will be subsequently resold, including accrued interest. The Company also
invests in certain Company-sponsored equity, senior-loan and fixed-income mutual
funds.
The Company manages risk by restricting the use of derivative financial
instruments to hedging activities and by limiting potential interest rate
exposure. The Company does not believe that the effect of any reasonably likely
near-term changes in interest rates would be material to the Company's financial
position, results of operations or cash flows.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The registrant previously disclosed in its Report on Form10-Q for the first
quarter of 2000 (in the Notes to Consolidated Financial Statements) the
existence of inquiries which its broker dealer subsidiary John Nuveen & Co.
Incorporated ( now "Nuveen Investments" and hereafter referred to "Nuveen") had
received as part of an industry wide investigation by NASD Regulation, Inc. of
the pricing of government securities sold to escrow accounts for advance
refunded municipal bond issues. In the beginning of August 2000, Nuveen entered
into a comprehensive settlement of this investigation and of related litigation,
which had previously been under seal as to Nuveen from the time of its filing
until the entry of the settlement. The litigation, captioned United States of
America ex rel. Lissack v. John Nuveen & Company, which had been pending under
seal in federal district court for the Southern District of New York and
involved a number of industry participants, alleged in substance that the
registrant's broker dealer subsidiary had engaged, as an underwriter of
municipal bonds, in a practice referred to as "yield burning" in connection with
its pricing of government securities sold by it to escrow accounts for advance
refunded municipal issues. The lawsuit was filed by Michael Lissack (the
"Relator") as a relator under the qui tam provisions of the United States False
Claims Act. As part of the settlement of the NASD Regulation investigation and
this lawsuit, Nuveen entered into a Stipulation and Order of Settlement and
Dismissal of the lawsuit and a Letter of Acceptance, Waiver and Consent with
NASD Regulation, Inc. The Letter of Acceptance, Waiver and Consent provided in
pertinent part that Nuveen accepted and consented, without admitting or denying,
to the entry of various findings by NASD Regulation, Inc., including findings
that (1) prior to 1997 Nuveen sold portfolios of U.S. Treasury securities for
defeasance escrows at excessive, undisclosed markups in connection with advance
refundings, (2) such pricing practices violated Sections 17(a)(2) and 17(a)(3)
of the Securities Act, (3) Nuveen knew or should have known that the prices it
charged were not reasonably related to the prevailing wholesale market prices of
the securities, and (4) such acts, practices and conduct constitute separate and
distinct violations of NASD Conduct Rule 2110 by Nuveen. Nuveen also consented
to the following sanctions: (1) censure by NASD Regulation, Inc.; (2) payments
to specified municipal issuers totaling $3,614,774; (3) payment to the United
States Treasury of $2,679,290 and (4) payment to NASD Regulation, Inc. of
$338,500. The net cost to Nuveen of these payments after reimbursement was
approximately $3,500,000.
The settlement of the above noted lawsuit was entered into and/or joined by the
United States Attorney for the Southern District of New York, the Relator, and
the Internal Revenue Service. The settlement expressly provides that the
Internal Revenue Service will not challenge the tax exempt status of the various
municipal bond issues underwritten by Nuveen during the settlement period based
upon the pricing of the escrow securities. The issues are identified in an
attachment to the settlement documents.
As disclosed in the Notes to Consolidated Financial Statements for the first
quarter of 2000, the registrant previously established a reserve in an amount
sufficient to cover the net cost of this settlement to its broker dealer
affiliate and thus the payment of the amounts set forth above will have no
effect on the registrant's financial condition or results of operations. The
registrant sold its municipal underwriting business in September of 1999 and
exited this business.
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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
At the Annual Meeting of Stockholders held on May 4, 2000, the seven
directors nominated in the Proxy Statement were elected for a one-year
term expiring at the annual meeting to be held in 2001. The following
individuals were elected directors by the vote of holders of the
following number of shares of Class A and Class B Common Stock
represented at the meeting, voting together as a single class:
Director For Withheld Broker Non-Vote
-------- --- -------- ---------------
Timothy R. Schwertfeger 30,237,274 107,489 0
John P. Amboian 30,273,705 71,058 0
Willard L. Boyd 30,233,415 111,348 0
Duane R. Kullberg 30,236,815 107,948 0
The following individuals were elected Class B directors by the vote of
holders of the following number of shares of Class B Common Stock
represented at the meeting, voting as a separate class:
Class B Director For Withheld Broker Non-Vote
---------------- --- -------- ---------------
W. John Driscoll 24,441,738 0 0
Douglas W. Leatherdale 24,441,738 0 0
Paul J. Liska 24,441,738 0 0
The proposal to ratify the selection of KPMG LLP as independent auditors
for the Company was approved by a vote of 30,303,720 shares in favor,
39,076 shares opposed and 1,967 shares abstaining.
ITEM 5. OTHER INFORMATION
The 2001 annual shareholder meeting for the John Nuveen Company has
been set for Thursday, May 10, 2001 in Chicago, Illinois.
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: August 11, 2000 /s/ John P. Amboian
-----------------------
John P. Amboian
President
DATE: August 11, 2000 /s/ Margaret E. Wilson
-----------------------
Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
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