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 MARCH 31, 2001
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 May 4, 2001, there were 30,962,846 shares of the Company's Common
Stock outstanding, consisting of 6,521,108 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Three Months Ended March 31, 2001 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1 through Item 6 16
Signatures 18
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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)
MARCH 31, DECEMBER 31,
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents $ 75,204 $ 72,351
Management and distribution fees receivable 71,518 92,000
Other receivables 23,242 35,427
Securities owned (trading account), at market value:
Nuveen defined portfolios 27,937 27,722
Bonds and notes 4,272 818
Deferred income tax asset, net 5,993 4,129
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $28,988 and $33,126, respectively 23,532 23,954
Other investments 60,999 72,476
Goodwill, at cost less accumulated amortization of $27,905 and $25,911, respectively 208,892 208,100
Prepaid expenses and other assets 38,982 37,523
--------- ---------
$ 540,571 $ 574,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued compensation and other expenses 20,421 48,640
Deferred compensation 29,981 29,680
Security purchase obligations 987 4,172
Other liabilities 49,412 44,107
--------- ---------
Total liabilities $ 100,801 $ 126,599
--------- ---------
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 75,592 70,081
Retained earnings 579,333 564,675
Unamortized cost of restricted stock awards (1,528) (939)
Accumulated other comprehensive income/(loss) (3,618) (1,721)
--------- ---------
650,166 632,483
Less common stock held in treasury, at cost (7,596,910 and 7,340,660 shares, respectively) (255,396) (229,582)
--------- ---------
Total common stockholders' equity 394,770 402,901
--------- ---------
$ 540,571 $ 574,500
========= =========
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
March 31,
--------------------
2001 2000
-------- --------
Operating Revenues:
Investment advisory fees from assets under management $ 79,527 $ 75,995
Underwriting and distribution of investment products 4,258 14,448
Positioning profits (100) 1,165
Other operating revenue 2,017 933
-------- --------
Total operating revenues 85,702 92,541
Operating Expenses:
Compensation and benefits 21,470 24,254
Advertising and promotional costs 4,442 11,653
Occupancy and equipment costs 3,169 3,512
Amortization of goodwill and deferred offering costs 2,041 2,188
Travel and entertainment 2,156 2,760
Other operating expenses 7,726 7,444
-------- --------
Total operating expenses 41,004 51,811
Operating Income 44,698 40,730
Non-Operating Income/(Expense) 1,075 2,599
-------- --------
Income before taxes 45,773 43,329
Income taxes 17,814 17,223
-------- --------
Net income $ 27,959 $ 26,106
======== ========
Average common and common equivalent shares outstanding:
Basic 31,227 31,170
======== ========
Diluted 34,206 33,609
======== ========
Earnings per common share:
Basic $ 0.88 $ 0.82
======== ========
Diluted $ 0.82 $ 0.78
======== ========
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)
Unamortized Accumulated
Class A Class B Additional Cost of Other
Common Common Paid-In Retained Restricted Comprehensive Treasury
Stock Stock Capital Earnings Stock Awards Income/(Loss) Stock Total
-------- -------- ---------- ----------- ------------ ------------- ------------ ---------
Balance at December 31, 2000 $ 142 $ 245 $ 70,081 $ 564,675 $ (939) $ (1,721) $ (229,582) $ 402,901
Net income 27,959 27,959
Cash dividends paid (10,538) (10,538)
Amortization of restricted
stock awards 153 153
Purchase of treasury stock (41,588) (41,588)
Exercise of stock options (3,060) 15,221 12,161
Issuance of restricted/deferred
stock 297 (742) 553 108
Other 5,511 (1,897) 3,614
-------- -------- ---------- ---------- -------- ------------ ----------- ---------
Balance at March 31, 2001 $ 142 $ 245 $ 75,592 $ 579,333 $ (1,528) $ (3,618) $ (255,396) $ 394,770
======== ======== ========== ========== ======== ============ =========== =========
Total comprehensive income was $26,062 for the period ended March 31, 2001.
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 27,959 $ 26,106
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes (613) 827
Depreciation of fixed assets 1,123 1,194
Amortization of goodwill 1,994 1,810
Net (increase) decrease in assets:
Management and distribution fees receivable 20,482 (25,029)
Other receivables 12,185 (11,263)
Nuveen defined portfolios (215) (20,006)
Bonds and notes (3,454) (57)
Prepaid expenses and other assets (1,459) (1,581)
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (28,219) (22,479)
Deferred compensation 301 (2,909)
Security purchase obligations (3,185) 10,001
Other liabilities 5,305 6,237
Other 5,870 (3,920)
-------- --------
Net cash provided from (used for) operating activities 38,074 (41,069)
-------- --------
Cash flows from financing activities:
Net payments on short-term borrowings -- 2,000
Dividends paid (10,538) (9,586)
Proceeds from stock options exercised 12,161 7,852
Acquisition of treasury stock (41,588) (11,095)
-------- --------
Net cash used for financing activities (39,965) (10,829)
-------- --------
Cash flows from investing activities:
Proceeds from Rittenhouse stock options exercised -- 32,685
Net purchase of office furniture and equipment (702) (3,477)
Proceeds from sales of investment securities 10,364 9,237
Purchases of investment securities (2,703) --
Other (2,215) 912
-------- --------
Net cash provided from investing activities 4,744 39,357
-------- --------
Increase/(decrease) in cash and cash equivalents 2,853 (12,541)
Cash and cash equivalents:
Beginning of year 72,351 28,373
-------- --------
End of period $ 75,204 $ 15,832
-------- --------
Supplemental Information:
Taxes paid $ 1,456 $ 4,245
Interest paid $ 681 $ 1,781
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
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 accounting principles generally accepted in the United States
of America.
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 2001 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
three-month period ended March 31, 2001.
- -------------------------------------------------------------------------------------------------------------------------------
In thousands, For the three months ended
except per share data March 31, 2001 March 31, 2000
- -------------------------------------------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
--------------------------------------------------------------------------------
Net income $ 27,959 $ 26,106
Less: Preferred stock dividends (563) (563)
-------- --------
Basic EPS 27,396 31,227 $ .88 25,543 31,170 $ .82
Dilutive effect of:
Restricted/deferred stock -- 91 -- 104
Employee stock options -- 1,238 -- 685
Assumed conversion of
preferred stock 563 1,650 563 1,650
-------- ------ -------- ------
Diluted EPS $ 27,959 34,206 $ .82 $ 26,106 33,609 $ .78
- -------------------------------------------------------------------------------------------------------------------------------
Options to purchase 5,000 and 2,460,624 shares of the Company's common stock
were outstanding at March 31, 2001 and 2000, respectively, but were not included
in the computation of diluted earnings per share because the options' respective
weighted average exercise prices of $57.45 and $37.69 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 March 31, 2001, its net capital ratio
was .83 to 1 and its net capital was $56,586,684, which is $53,440,357 in excess
of the required net capital of $3,146,327.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2001
DESCRIPTION OF THE BUSINESS
Our principal businesses are asset management and related research as well as
the development, marketing, and distribution of investment products and services
for advisors to the affluent and high-net-worth market segments. We distribute
our 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.
We provide 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 we support serve affluent and
high-net-worth investors.
Our 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 our 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.
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SUMMARY OF OPERATING RESULTS
The table below presents the highlights of our operations for the first quarters
of 2000 and 2001:
- ------------------------------------------------------------------------------
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions, except per share amounts)
- ------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 2001 2000 % CHANGE
--------- ---------- --------
Gross sales of investment products $ 3,811 $ 3,177 20
Assets under management (1) (2) 61,289 59,965 2
Operating revenues 85.7 92.5 (7)
Operating expenses 41.0 51.8 (21)
Operating income 44.7 40.7 10
Net income 28.0 26.1 7
Basic earnings per share .88 .82 7
Diluted earnings per share .82 .78 5
Dividends per share .32 .29 10
- ------------------------------------------------------------------------------
(1) At period end
(2) Excludes defined portfolio assets under surveillance.
Gross sales were up 20% for the quarter while net flows (equal to the sum of
sales, reinvestments and exchanges less redemptions) were $2.6 billion, an
increase of $1.6 billion versus net flows for the first quarter of 2000. Assets
under management at the end of the quarter were $61.3 billion, an increase of 2%
from assets at the end of the first quarter in 2000.
Operating revenues for the quarter totaled $85.7 million, a decline of 7% over
the $92.5 million in operating revenues recorded in the first quarter of 2000.
An increase in average assets under management resulted in a 5% increase in
advisory fees, however, this increase was more than offset by a decline in
distribution revenue as a result of declining sales of equity defined portfolio
products.
Operating expenses for the quarter declined 21% when compared with the prior
year as a result of lower compensation and benefits as well as advertising and
promotion expense. As a percent of operating revenue, operating expenses
declined over 8 percentage points.
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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.
Total advisory fee income earned during any period is directly related to the
market value of the assets we manage. 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 we sponsor 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 defined portfolio and mutual fund products are
sold. Correspondingly, distribution revenue will rise and fall with the level of
our sales of these products.
Gross sales of investment products for the first quarters of 2001 and 2000 are
shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
QUARTER ENDED MARCH 31, 2001 2000
------ ------
Managed Assets:
Mutual Funds $ 305 $ 337
Managed Accounts 1,935 1,428
Exchange Traded Funds 1,160 0
------ ------
Total Managed Assets 3,400 1,765
Defined Portfolios 411 1,412
------ ------
Total $3,811 $3,177
====== ======
Gross sales of investment products increased 20% for the quarter ended March 31,
2001 when compared with the same quarter in 2000. Driving this increase was the
issuance of approximately $1.2 billion of new municipal exchange-traded funds
common and MuniPreferred(TM) shares. Managed account sales were also strong,
growing 36% for the quarter reflecting both strong Rittenhouse equity
performance in 2000 and high-net-worth investors' balancing of their portfolios
with municipals. Our strong sales in exchange-traded funds and managed accounts
were partially offset by lower equity defined portfolio sales as a result of
equity market volatility, particularly in the technology sector.
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The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
MARCH 31, DECEMBER 31, MARCH 31,
2001 2000 2000
------- ------- -------
Managed Assets:
Mutual Funds $11,401 $11,485 $11,378
Exchange-Traded Funds 29,630 28,355 27,306
Managed Accounts 19,816 21,699 20,718
Money Market Funds 442 472 563
------- ------- -------
Total $61,289 $62,011 $59,965
======= ======= =======
(1) Excludes defined portfolio product assets under surveillance
Assets under management remained relatively stable, ending the quarter at $61.3
billion, an increase of $1.3 billion from the end of March 2000 and down just 1%
from the end of December 2000. Strong net flows in both our equity and municipal
products helped to offset equity market declines.
Assets under management include equity, fixed-income and floating-rate
portfolios. Municipal securities represent approximately 70% of assets under
management in managed funds and accounts on March 31, 2001.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
QUARTER ENDED MARCH 31, 2001 2000
-------- --------
Mutual Funds $ 13,877 $ 13,273
Exchange-Traded Funds 41,701 39,544
Managed Accounts 23,578 23,205
Money Market Funds 371 (27)
-------- --------
Total $ 79,527 $ 75,995
Advisory fees for the period ended March 31, 2001, increased 5% over the same
period in 2000. Advisory fee increases for the quarter were recorded across all
product categories. The increase in exchange-traded fund and managed account
advisory fees was driven by an increase in average assets under management. The
increase in mutual fund and money market fund fees was due to a reduction in
reimbursed expenses as a result of significant one-time expense reimbursements
recorded in the first quarter of 2000.
Underwriting and Distribution revenue for the periods ended March 31, 2001 and
2000 is shown in the following table:
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UNDERWRITING AND DISTRIBUTION REVENUE
(in thousands)
QUARTER ENDED MARCH 31, 2001 2000
------- -------
Mutual Funds $ 1,043 $ 813
Defined Portfolios 2,033 13,289
Exchange Traded Funds 1,182 346
------- -------
Total $ 4,258 $14,448
======= =======
Total underwriting and distribution revenue for the first quarter of 2001,
declined 70% when compared with the same quarter in 2000. Distribution revenue
for the equity defined portfolio products declined $11.4 million for this period
driven by lower equity product sales. Partially offsetting this decline, were
increases in exchange-traded fund underwriting revenue and mutual fund
distribution revenue. Underwriting revenue on the exchange-traded funds
increased as a result of our new municipal offerings in the first quarter of
2001. Mutual fund distribution revenue increased 28% driven by an increase in
municipal mutual fund sales and a reduction in commissions we pay to
distributors on high dollar value sales.
POSITIONING PROFITS/(LOSSES)
We record positioning profits or losses from changes in the market value of the
inventory of unsold investment products and other securities held by our
broker-dealer subsidiary, Nuveen Investments. At times, we hedge certain of our
fixed-income based holdings against fluctuations in interest rates using
financial futures. We recorded positioning losses of $0.1 million in the first
quarter of 2001 as compared with positioning gains of $1.2 million in the first
quarter of 2000.
OPERATING EXPENSES
Operating expenses declined $10.8 million in the first quarter of 2001 compared
to the first quarter of the prior year. This decrease is primarily due to a
reduction in advertising and promotional expenditures as well as a decline in
compensation and benefits expense.
Compensation and related benefits for the three-month period ended March 31,
2001 decreased $2.8 million compared to the same period in the prior year due
mainly to a reduction in base compensation due to headcount reductions and a
reduction in profit sharing expense. The reduction in profit sharing expense is
primarily the result of reduced sales commissions due to lower defined portfolio
sales in the first quarter of 2001.
Advertising and promotional expenditures decreased $7.2 million for the first
quarter of 2001 compared to the first quarter of 2000. This decrease is a result
of an increased level of spending in the first quarter of 2000, behind our brand
awareness campaign.
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Other operating expenses declined $0.8 million in the first quarter due
primarily to declines in amortization expense and travel and entertainment.
Amortization expense declined 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.
NON-OPERATING INCOME/(EXPENSE)
Non-operating income/(expense) is comprised primarily of net interest
income/(expense) and other miscellaneous non-operating revenue/(expense).
Interest and dividend revenue increased $0.4 million in the first quarter of
2001 when compared with the same period in 2000 as a result of higher available
cash balances to invest. Interest expense decreased $0.8 million in the first
quarter of 2001 compared to the prior year due to decreased interest expense on
deferred compensation funds.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
Our principal businesses are not capital intensive and, historically, we have
met our liquidity requirements through cash flow generated by operations. In
addition, our broker-dealer subsidiary occasionally utilizes available,
uncommitted lines of credit, which approximate $300 million, to satisfy
periodic, short-term liquidity needs. As of March 31, 2001, no borrowings were
outstanding on these uncommitted lines of credit. Additionally, in August 2000,
our three-year revolving credit facility entered into in August of 1997 expired.
The same month, we entered into a $250 million committed line of credit with a
group of banks to ensure an ongoing liquidity source for general corporate
purposes including acquisitions. The new committed line is divided into two
equal facilities, one of which has a three-year term, the other is renewable in
364 days. As of March 31, 2001, there was no outstanding balance under this
committed credit line.
At March 31, 2001, we held in treasury 7,596,910 shares of common stock acquired
in open market transactions and in transactions with our Class B shareholder,
The St. Paul Companies, Inc. As part of an ongoing repurchase program, we are
authorized to purchase approximately 0.8 million additional shares.
During the first three months of 2001, we paid out dividends on common shares
totaling $9.9 million and on preferred shares totaling $0.6 million.
Our 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).
Management believes that cash provided from operations and borrowings available
under its uncommitted and committed credit facilities will provide us with
sufficient liquidity to meet our operating needs for the foreseeable future.
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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 promotion 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 we manage, which in turn would result in a decline in
investment advisory fee revenue.
FORWARD-LOOKING INFORMATION
From time to time, information we provide or information included in our 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. Our 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 we, like all market participants, face in the
investment management business, including competition for continued access to
the brokerage firm's retail distribution systems, our 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. We undertake 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
MARCH 31, 2001
We are exposed to market risk from changes in interest rates, which may
adversely affect our results of operations and financial condition. We are
exposed to this risk primarily in our fixed-income defined portfolio inventory
and at times, seek to minimize the risks from these interest rate fluctuations
through the use of derivative financial instruments. We do not use derivative
financial instruments for trading or other speculative purposes and are not
party to any leveraged financial instruments. There were no open derivative
financial instruments at March 31, 2001.
We regularly purchase and hold for resale municipal securities and defined
portfolio units as well as equity defined portfolio units. The level of
inventory we maintain 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 we hold, we will at times utilize futures
contracts.
The level of equity units in defined portfolio inventory tends to be immaterial
when compared to municipal holdings. However, there is price risk associated
with changes in the market. Our goal is to hold equity inventory for no more
than one business day, therefore limiting our exposure to adverse changes in
price.
We invest in short-term debt instruments, classified as "Cash and cash
equivalents" on our consolidated balance sheet. The investments are treated as
collateralized financing transactions and are carried at the amounts at which
they will be subsequently resold, including accrued interest. We also invest in
certain Company-sponsored equity, senior-loan and fixed-income mutual funds.
We manage risk by restricting the use of derivative financial instruments to
hedging activities and by limiting potential interest rate exposure. We do not
believe that the effect of any reasonably likely near-term changes in interest
rates would be material to our financial position, results of operations or cash
flows.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-K for 2000, a
lawsuit (Civil Action No. 97 C 5255) brought in June, 1996 by certain
shareholders is currently pending in federal district court for the
Northern District of Illinois against Nuveen Advisory. The suit was
originally brought against John Nuveen & Co. Incorporated, Nuveen
Advisory, six Nuveen investment companies (the "Funds") managed by
Nuveen Advisory and two of the Funds' former directors seeking
unspecified damages, an injunction and other relief. The suit also
sought certification of a defendant class consisting of all
Nuveen-managed leveraged funds.
The complaint was 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 that
plaintiffs allege violated provisions of the Investment Company Act of
1940 and common law. Plaintiffs have alleged, 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 John
Nuveen & Co. A similar complaint was filed by the Plaintiffs at the same
time against another major leveraged-fund sponsor and adviser. The
Plaintiffs filed a motion to certify a plaintiff class (which would
include current and former shareholders of all Nuveen leveraged
closed-end funds).
On March 30, 1999, the court entered a memorandum opinion and order (1)
granting the Defendants' motion to dismiss all of Plaintiffs' counts
against the defendants other than Nuveen Advisory, (2) granting Nuveen
Advisory's motion to dismiss all of Plaintiffs' against it other than
breach of fiduciary duty under Sections 36(b) of the Investment Company
Act of 1940, and (3) denying the Plaintiffs' motion to certify a
plaintiff class and a defendant class. No appeal was made by Plaintiffs
of this decision, and the remaining Section 36(b) count against Nuveen
Advisory has proceeded through the discovery phase.
As to alleged damages, Plaintiffs have claimed as damages the portion of
all advisory compensation received by Nuveen Advisory from the Funds
during the period from June 21, 1995 to the present that is equal to the
proportion of each Fund's preferred stock to its total assets. The
preferred stock constitutes approximately one third of the Funds' assets
so the amount claimed would equal approximately one third of management
fees received by Nuveen Advisory for managing the Funds during this
period, or more than $60 million. Nuveen Advisory believes that it has
no liability and that Plaintiffs have suffered no damages and has filed
a motion for summary judgement as to both liability and damages.
Plaintiffs have filed a partial motion for summary judgement as to
liability only. Both motions are fully briefed and are awaiting
decisions by the Court. At a hearing on March 30, 2001, the judge set
the case for trial on December 3, 2001. Nuveen Advisory will continue to
vigorously contest the remaining count of this 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.
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ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS 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: May 11, 2001 By: /s/ John P. Amboian
------------------------------------
John P. Amboian
President
DATE: May 11, 2001 By: /s/ Margaret E. Wilson
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Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
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