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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, 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 August 3, 2001, there were 31,707,125 shares of the Company's Common
Stock outstanding, consisting of 7,265,387 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, 2001 and December 31, 2000 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 2001 and 2000 4
Six Months Ended June 30, 2001 and 2000
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Six Months Ended June 30, 2001 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 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 9
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1 through Item 6 17
Signatures 19
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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,
2001 2000
--------- -----------
ASSETS
Cash and cash equivalents $ 93,236 $ 72,351
Management and distribution fees receivable 59,318 92,000
Other receivables 27,020 35,427
Securities owned (trading account), at market value:
Nuveen defined portfolios 31,185 27,722
Bonds and notes 79 818
Deferred income tax asset, net 7,133 4,129
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $30,147 and $33,126, respectively 25,011 23,954
Other investments 63,904 72,476
Goodwill, at cost less accumulated amortization of $29,899 and $25,911, respectively 206,898 208,100
Prepaid expenses and other assets 38,899 37,523
--------- ---------
$ 552,683 $ 574,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued compensation and other expenses 24,770 48,640
Deferred compensation 29,983 29,680
Security purchase obligations 14,321 4,172
Other liabilities 37,585 44,107
--------- ---------
Total liabilities $ 106,659 $ 126,599
--------- ---------
Redeemable preferred stock, at redemption value; 5,000,000 shares
authorized, 900,000 and 1,800,000 shares issued, respectively 22,500 45,000
Common stockholders' equity:
Class A Common stock, $.01 par value; 150,000,000 shares
authorized, 15,037,397 and 14,212,618 shares issued, respectively 150 142
Class B Common stock, $.01 par value; 40,000,000 shares
authorized, 24,441,738 shares issued 245 245
Additional paid-in capital 100,070 70,081
Retained earnings 594,933 564,675
Unamortized cost of restricted stock awards (1,375) (939)
Accumulated other comprehensive income/(loss) (3,636) (1,721)
--------- ---------
690,387 632,483
Less common stock held in treasury, at cost (7,723,410 and 7,340,660 shares, respectively) (266,863) (229,582)
--------- ---------
Total common stockholders' equity 423,524 402,901
--------- ---------
$ 552,683 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------------
2001 2000 2001 2000
------- -------- ------- --------
Operating Revenues:
Investment advisory fees from assets under management $ 79,029 $ 75,927 $ 158,555 $151,922
Underwriting and distribution of investment products 5,004 8,713 9,262 23,161
Positioning profits 278 (1,186) 178 (22)
Other operating revenue 1,914 1,625 3,931 2,557
-------- -------- --------- --------
Total operating revenues 86,225 85,079 171,926 177,618
Operating Expenses:
Compensation and benefits 21,436 21,961 42,906 46,215
Advertising and promotional costs 4,025 7,085 8,467 18,738
Occupancy and equipment costs 3,510 3,403 6,679 6,915
Amortization of goodwill and deferred offering costs 2,041 1,916 4,083 4,103
Travel and entertainment 2,264 3,050 4,420 5,810
Other operating expenses 7,579 6,455 15,303 13,898
-------- -------- --------- --------
Total operating expenses 40,855 43,870 81,858 95,679
Operating Income 45,370 41,209 90,068 81,939
Non-Operating Income/(Expense) 1,016 2,447 2,091 5,046
-------- -------- --------- --------
Income before taxes 46,386 43,656 92,159 86,985
Income taxes 18,371 17,353 36,185 34,576
-------- -------- --------- --------
Net income $ 28,015 $ 26,303 $ 55,974 $ 52,409
======== ======== ========= ========
Average common and common equivalent shares outstanding:
Basic 31,273 31,269 31,251 31,219
======== ======== ========= ========
Diluted 33,917 33,891 34,062 33,750
======== ======== ========= ========
Earnings per common share:
Basic $ 0.89 $ 0.82 $ 1.76 $ 1.64
======== ======== ========= ========
Diluted $ 0.83 $ 0.78 $ 1.64 $ 1.55
======== ======== ========= ========
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 55,974 55,974
Cash dividends paid (22,264) (22,264)
Amortization of restricted
stock awards 306 306
Purchase of treasury stock (60,284) (60,284)
Exercise of stock options (3,749) 22,450 18,701
Issuance of restricted/deferred stock 297 (742) 553 108
Conversion of preferred to common 8 22,492 22,500
Other 7,497 (1,915) 5,582
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2001 $ 150 $ 245 $ 100,070 $ 594,933 $ (1,375) $ (3,636) $(266,863) $423,524
========= ========= ========= ========= ========= ========= ========= =========
Total comprehensive income was $54,059 for the six-month period ended
June 30, 2001.
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,
--------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 55,974 $ 52,409
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes (1,741) 569
Depreciation of fixed assets 2,321 2,325
Amortization of goodwill 3,988 3,679
Net (increase) decrease in assets:
Management and distribution fees receivable 32,683 (33,722)
Other receivables 8,407 7,852
Nuveen defined portfolios (3,463) 5,764
Bonds and notes 739 100
Prepaid expenses and other assets (1,376) 170
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (23,870) (20,755)
Deferred compensation 303 (2,993)
Security purchase obligations 10,149 4,611
Other liabilities (6,522) (31,199)
Other 8,189 (905)
-------- --------
Net cash provided from (used for) operating activities 85,781 (12,095)
-------- --------
Cash flows from financing activities:
Dividends paid (22,264) (19,221)
Proceeds from stock options exercised 18,701 12,675
Acquisition of treasury stock (60,284) (23,873)
-------- --------
Net cash used for financing activities (63,847) (30,419)
-------- --------
Cash flows from investing activities:
Proceeds from Rittenhouse stock options exercised - 32,685
Net purchase of office furniture and equipment (3,378) (8,105)
Proceeds from sales of investment securities 13,288 7,902
Purchases of investment securities (3,203) (1,158)
Other (7,756) 1,202
-------- --------
Net cash provided from (used for) investing activities (1,049) 32,526
-------- --------
Increase/(decrease) in cash and cash equivalents 20,885 (9,988)
Cash and cash equivalents:
Beginning of year 72,351 28,373
-------- --------
End of period $ 93,236 $ 18,385
-------- --------
Supplemental Information:
Taxes paid $ 28,759 $ 25,964
Interest paid $ 1,053 $ 2,390
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 have also been
prepared in accordance with the instructions to Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures have been omitted pursuant to
such rules and regulations. As a result, these financial statements should
be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's latest annual report on Form
10-K.
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.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001,
thereby eliminating the pooling-of-interest method. SFAS No. 141 also
provides new criteria that determine whether an acquired intangible asset
should be recognized separately from goodwill. SFAS No. 142 provides
guidance on how to account for goodwill and intangible assets after a
business combination has been completed. Under SFAS No. 142, goodwill and
certain other intangible assets will no longer be amortized and will be
tested for impairment at least annually. Intangible assets with a definite
life will continue to be amortized. The nonamortization and impairment
rules will apply to existing goodwill and intangible assets beginning
January 1, 2002. The Company currently carries approximately $200 million
of goodwill on its balance sheet, which is amortized at an annual rate of
$8 million. The Company is currently evaluating the effect that
implementation of SFAS No. 142 will have on its financial statements.
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NOTE 2 EARNINGS PER COMMON SHARE
The following set of tables sets forth a reconciliation of net income and
common shares used in the basic and diluted earnings per share computations
for the six-month periods and the three-month periods ended June 30, 2001
and June 30, 2000.
--------------------------------------- ----------------------------------------------------------------------
In thousands, For the six months ended
except per share data June 30, 2001 June 30, 2000
--------------------------------------- --------------------------------- ------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
-------- ------- ---------- ---------- ------- --------
Net income $ 55,974 $ 52,409
Less: Preferred stock dividends (844) (1,125)
-------- --------
Basic EPS 55,130 31,251 $1.76 51,284 31,219 $ 1.64
Dilutive effect of:
Restricted/deferred stock - 91 - 97
Employee stock options - 1,208 - 784
Assumed conversion of
preferred stock 844 1,512 1,125 1,650
-------- ------- -------- ------
Diluted EPS $ 55,974 34,062 $1.64 $ 52,409 33,750 $ 1.55
--------------------------------------- ---------------------------------------------------------------------
--------------------------------------- ------------------------------------------------------------------------
In thousands, For the three months ended
except per share data June 30, 2001 June 30, 2000
--------------------------------------- ----------------------------------- ------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
----------- -------- --------- ------- -------- ---------
Net income $28,015 $26,303
Less: Preferred stock dividends (281) (563)
------- -------
Basic EPS 27,734 31,273 $.89 25,740 31,269 $.82
Dilutive effect of:
Restricted/deferred stock - 91 - 90
Employee stock options - 1,186 - 882
Assumed conversion of
preferred stock 281 1,375 563 1,650
------- ------ ------- ------
Diluted EPS $28,015 33,917 $.83 $26,303 33,891 $.78
--------------------------------------- ----------------------------------- -----------------------------------
In the second quarter of 2001, 50% of the outstanding preferred stock
shares were converted to common shares pursuant to the preferred stock
agreement.
Options to purchase 50,000 and 345,000 shares of the Company's common stock
were outstanding at June 30, 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 $56.74 and $42.46
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, 2001, its
net capital ratio was .67 to 1 and its net capital was $60,001,000, which
is $57,334,000 in excess of the required net capital of $2,667,000. 8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2001
DESCRIPTION OF THE BUSINESS
Our principal businesses are asset management and related research as well
as the development, marketing, and distribution of investment products and
services for advisors to the affluent and high-net-worth market segments.
We distribute our investment products, including mutual funds,
exchange-traded funds, defined portfolios, and individually managed
accounts, through registered representatives associated with unaffiliated
firms including broker-dealers, commercial banks, affiliates of insurance
providers, financial planners, accountants, consultants and investment
advisors.
We provide consultative services to financial advisors with a primary focus
on managed assets for fee-based customers and structured investment
services for transaction based advisors. The financial advisors we support
serve affluent and high-net-worth investors.
Our primary business activities generate two principal sources of revenue:
(1) ongoing advisory fees earned on assets under management, including
mutual funds, exchange-traded funds, and individually managed accounts and
(2) distribution revenues earned upon the sale of defined portfolio and
mutual fund products.
Sales of our products, and their profitability, are directly affected by
many variables, including investor preferences for equity, fixed-income or
other investments, the availability and attractiveness of competing
products, market performance, changes in interest rates, inflation, and
income tax rates and laws.
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SUMMARY OF OPERATING RESULTS
The table below presents the highlights of our operations for the three-month
and six-month periods ended June 30, 2001 and 2000:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
($ in millions except per share amounts)
FOR THE SECOND QUARTER OF FOR THE FIRST SIX MONTHS OF
2001 2000 % CHANGE 2001 2000 % CHANGE
---- ---- -------- ---- ---- --------
Gross sales of investment products $ 3,256 $2,744 19% $ 7,067 $5,921 19%
Assets under management (1)(2) 62,990 60,299 4 62,990 60,299 4
Operating revenues 86.2 85.1 1 171.9 177.6 (3)
Operating expenses 40.9 43.9 (7) 81.9 95.7 (14)
Pretax income 46.4 43.7 6 92.2 87.0 6
Net income 28.0 26.3 7 56.0 52.4 7
Basic earnings per share 0.89 0.82 9 1.76 1.64 7
Diluted earnings per share 0.83 0.78 6 1.64 1.55 6
Dividends per share 0.36 0.29 24 0.68 0.58 17
(1) At period end
(2) Excludes defined portfolio assets under surveillance.
Gross sales were up 19% for the quarter while net flows (equal to the sum of
sales, reinvestments and exchanges less redemptions) were $2.1 billion, an
increase of $0.9 billion versus net flows for the second quarter of 2000. Assets
under management at the end of the quarter were $63.0 billion, an increase of 4%
from assets at the end of the second quarter in 2000.
Operating revenues for the quarter totaled $86.2 million, an increase of 1% over
the $85.1 million in operating revenues recorded in the second quarter of 2000.
An increase in average assets under management resulted in a 4% increase in
advisory fees, however, this increase was almost completely offset by a decline
in distribution revenue as a result of declining sales of equity defined
portfolio products.
Operating expenses for the quarter declined 7% when compared with the prior year
as a result of lower compensation and benefits as well as a reduction in
advertising and promotion spending. As a percent of operating revenue, operating
expenses declined almost 4 percentage points.
RECENT EVENTS
On July 16, 2001, we completed the acquisition of Symphony Asset Management LLC
for $210 million in cash. These funds were provided through a combination of
cash on hand and borrowings under our committed credit facilities. The
transaction price will have potential additional future payments based on
Symphony reaching specified performance and growth targets for its business.
Symphony, an institutional money manager based in San Francisco, manages more
than $4 billion in portfolios designed to reduce risk through market-neutral and
other strategies in several equity and fixed-income styles. Symphony's
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business generates two principal sources of revenue: (1) ongoing advisory fees
based on assets under management, and (2) incentive fees earned on certain
institutional accounts based on performance of the accounts.
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 three-month and six-month periods ended
June 30, 2001 and 2000 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 579 $ 46 $ 1,740 $ 46
Mutual Funds 290 216 595 555
Managed Accounts 2,000 1,449 3,935 2,876
------ ------ ------ ------
Total Managed Assets 2,869 1,711 6,270 3,477
Defined Portfolios 387 1,033 797 2,444
------ ------ ------ ------
Total $3,256 $2,744 $7,067 $5,921
====== ====== ====== ======
Gross sales of investment products increased 19% for the six-month period ended
June 30, 2001 when compared with the same period in 2000. Driving this increase
was the issuance of approximately $1.1 billion of new municipal exchange-traded
fund common shares and $0.6 billion in MuniPreferred(TM) shares. Managed account
sales were also strong, growing 37% 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
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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.
The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
June 30, December 31, June 30,
2001 2000 2000
---- ---- -----
Managed Assets:
Mutual Funds $11,491 $11,485 $11,207
Exchange-Traded Funds 30,012 28,355 27,324
Managed Accounts 21,058 21,699 21,269
Money Market Funds 429 472 499
------- ------- -------
Total $62,990 $62,011 $60,299
======= ======= =======
(1) Excludes defined portfolio product assets under surveillance
Assets under management grew 4% to $63.0 billion, an increase of $2.7 billion
from the end of June 2000. Strong net flows in both our equity and municipal
products more than offset equity market declines.
Assets under management include equity, fixed-income and floating-rate
portfolios. Municipal securities represent approximately 69% of assets under
management in managed funds and accounts on June 30, 2001.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Mutual Funds $14,283 $12,580 $ 28,160 $ 25,613
Exchange-Traded Products 42,973 40,034 84,674 79,818
Managed Accounts 21,339 22,906 44,917 46,111
Money Market Funds 434 407 804 380
------- ------- -------- --------
Total $79,029 $75,927 $158,555 $151,922
======= ======= ======== ========
Advisory fees for the six-month period ended June 30, 2001, increased 4% over
the same period in 2000. Advisory fee increases for the half were driven by
exchange-traded funds and mutual funds. The increase in fees on exchange-traded
funds was the result of an increase in average assets under management, which
was driven by the issuance of new shares in 2001. The increase in mutual fund
and money market fund fees was due to an
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increase in average assets under management coupled with a reduction in
reimbursed expenses as a result of significant one-time expense reimbursements
recorded in the first half of 2000. These increases were partially offset by a
decline in advisory fees on managed accounts as a result of equity market
declines.
Underwriting and distribution revenue for the three-month and six-month periods
ended June 30, 2001 and 2000 is shown in the following table:
UNDERWRITING AND DISTRIBUTION REVENUE
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Mutual Funds $ 819 $1,005 $1,862 $ 1,819
Defined Portfolios 3,784 7,368 5,817 20,656
Exchange-Traded Products 401 340 1,583 686
------ ------ ------ -------
Total $5,004 $8,713 $9,262 $23,161
====== ====== ====== =======
Total underwriting and distribution revenue for the first half of 2001 declined
60% when compared with the same period in 2000. Distribution revenue for the
equity defined portfolio products declined $15.6 million for this period driven
by lower equity product sales. Partially offsetting this decline were increases
in exchange-traded fund underwriting revenue as a result of our new municipal
offerings in the first quarter of 2001.
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 gains of $0.2 million in the first
half of 2001. In the first half of 2000, net losses directly offset net gains.
OPERATING EXPENSES
Operating expenses declined $13.8 million in the first half of 2001 compared to
the first half 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 six-month period ended June 30, 2001
decreased $3.3 million compared to the same period in the prior year. This
decrease is due to a reduction in base compensation as a result of 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 half of 2001.
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Advertising and promotional expenditures decreased $10.3 million for the first
half of 2001 compared to the first half of 2000. This decrease is due to an
increased level of spending in the first half of 2000 resulting from our brand
awareness campaign.
Other operating expenses declined $0.2 million in the first half of 2001 as a
reduction in travel and entertainment expenditures was partially offset by an
increase in fund organization expenses as a result of our new exchange-traded
fund offerings in the first half of 2001.
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 was flat in the first half of 2001 when compared
with the same period in 2000. Interest expense decreased $0.9 million in the
first half 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 June 30, 2001, no borrowings were
outstanding on these uncommitted lines of credit. In August 2000 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 June 30, 2001, there
was no outstanding balance under this committed credit line.
At June 30, 2001, we held in treasury 7,723,410 shares of Class A 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 0.5 million additional
shares.
During the first six months of 2001, we paid out dividends on common shares
totaling $21.4 million and on preferred shares totaling $0.8 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
JUNE 30, 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 June 30, 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-Q for March 31,
2001, 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 10, 2001, 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 29,306,895 796,725 0
John P. Amboian 30,059,927 43,693 0
Willard L. Boyd 30,057,905 45,715 0
Duane R. Kullberg 30,058,905 44,715 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
Edward G. Pendergast 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 29,414,533 shares
in favor, 687,169 shares opposed and 1,918 shares abstaining.
ITEM 5. OTHER INFORMATION
The 2001 annual shareholder meeting for The John Nuveen Company has
been set for Thursday, May 9, 2002 in Chicago, Illinois.
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: August 10, 2001 By /s/ John P. Amboian
----------------------
John P. Amboian
President
DATE: August 10, 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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