SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 November 7, 2001, there were 46,914,048 shares of the Company's
Common Stock outstanding, consisting of 10,251,441 shares of Class A Common
Stock, $.01 par value, and 36,662,607 shares of Class B Common Stock, $.01 par
value.
THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Income (Unaudited),
Three Months Ended September 30, 2001 and 2000 4
Nine Months Ended September 30, 2001 and 2000
Consolidated Statement of Changes in Common Stockholders'
Equity (Unaudited), Nine Months Ended September 30, 2001 5
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 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 11
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1 through Item 6 20
Signatures 22
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE JOHN NUVEEN COMPANY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
---- ----
ASSETS
Cash and cash equivalents $ 78,288 $ 72,351
Management and distribution fees receivable 56,051 92,000
Other receivables 21,234 35,427
Securities owned (trading account), at market value:
Nuveen defined portfolios 31,709 27,722
Bonds and notes 404 818
Deferred income tax asset, net 5,036 4,129
Furniture, equipment, and leasehold improvements, at cost
less accumulated depreciation and amortization of
$30,835 and $33,126, respectively 27,770 23,954
Other investments 58,439 72,476
Goodwill and Other Intangible Assets, at cost less accumulated
amortization of $32,133 and $26,101, respectively 406,579 208,369
Prepaid expenses and other assets 35,921 37,254
--------- ---------
$ 721,431 $ 574,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable 173,000 --
Accrued compensation and other expenses 37,279 48,640
Deferred compensation 28,310 29,680
Security purchase obligations 8,612 4,172
Other liabilities 47,972 44,107
--------- ---------
Total liabilities $ 295,173 $ 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, 22,556,095 and 21,318,927 shares issued, respectively 226 142
Class B Common stock, $.01 par value; 40,000,000 shares
authorized, 36,662,607 shares issued 367 245
Additional paid-in capital 110,383 70,081
Retained earnings 605,792 564,675
Unamortized cost of restricted stock awards (1,708) (939)
Accumulated other comprehensive income/(loss) (4,759) (1,721)
--------- ---------
710,301 632,483
Less common stock held in treasury, at cost (12,009,730
and 11,010,990 shares, respectively) (306,543) (229,582)
--------- ---------
Total common stockholders' equity 403,758 402,901
--------- ---------
$ 721,431 $ 574,500
========= =========
See accompanying notes to consolidated financial statements.
3
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Operating Revenues:
Investment advisory fees from assets under management $ 86,124 $ 79,155 $244,679 $231,077
Underwriting and distribution of investment products 5,085 7,593 14,347 30,754
Positioning profits, net 1,991 433 2,168 411
Other operating revenue 4,340 1,799 8,271 4,356
-------- -------- -------- --------
Total operating revenues 97,540 88,980 269,465 266,598
Operating Expenses:
Compensation and benefits 24,026 22,535 66,933 68,751
Advertising and promotional costs 4,650 8,417 13,117 27,155
Occupancy and equipment costs 3,767 2,885 10,446 9,800
Amortization of goodwill and other intangible assets 2,139 1,887 6,221 5,990
Travel and entertainment 2,152 2,566 6,572 8,376
Other operating expenses 11,751 9,089 27,054 22,986
-------- -------- -------- --------
Total operating expenses 48,485 47,379 130,343 143,058
Operating Income 49,055 41,601 139,122 123,540
Non-Operating Income/(Expense) (1,129) 2,532 963 7,577
-------- -------- -------- --------
Income before taxes 47,926 44,133 140,085 131,117
Income taxes 19,163 17,666 55,348 52,242
-------- -------- -------- --------
Net income $ 28,763 $ 26,467 $ 84,737 $ 78,875
======== ======== ======== ========
Average common and common equivalent shares outstanding:
Basic 47,608 46,952 47,123 46,871
======== ======== ======== ========
Diluted 50,865 51,182 51,023 50,811
======== ======== ======== ========
Earnings per common share:
Basic $ 0.60 $ 0.55 $ 1.77 $ 1.65
======== ======== ======== ========
Diluted $ 0.57 $ 0.52 $ 1.66 $ 1.55
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
Unamortized
Class A Class B Additional Cost of
Common Common Paid-In Retained Restricted
Stock Stock Capital Earnings Stock Awards
--------- --------- --------- --------- ------------
Balance at December 31, 2000 $ 142 $ 245 $ 70,081 $ 564,675 $ (939)
Net income 84,737
Cash dividends paid (34,002)
Amortization of restricted
stock awards 481
Purchase of treasury stock
Exercise of stock options (9,939)
Issuance of restricted/deferred stock 519 (1,250)
Conversion of preferred to common 8 22,492
Common stock dividend 76 122 (198)
Other 17,810
--------- --------- --------- --------- ---------
Balance at September 30, 2001 $ 226 $ 367 $ 110,383 $ 605,792 $ (1,708)
========= ========= ========= ========= =========
Accumulated
Other
Comprehensive Treasury
Income/(Loss) Stock Total
---------- ---------- ---------
Balance at December 31, 2000 $ (1,721) $(229,582) $ 402,901
Net income 84,737
Cash dividends paid (34,002)
Amortization of restricted
stock awards 481
Purchase of treasury stock (127,786) ( 127,786)
Exercise of stock options 49,987 40,048
Issuance of restricted/deferred stock 838 107
Conversion of preferred to common 22,500
Common stock dividend --
Other (3,038) 14,772
--------- --------- ---------
Balance at September 30, 2001 $ (4,759) $(306,543) $ 403,758
========= ========= =========
Total comprehensive income was $81,699 for the nine-month period ended
September 30, 2001.
See accompanying notes to consolidated financial statements.
5
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 84,737 $ 78,875
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 1,097 1,372
Depreciation of fixed assets 3,736 3,339
Amortization of goodwill and other intangible assets 6,221 5,990
Net (increase) decrease in assets:
Management and distribution fees receivable 42,521 (32,847)
Other receivables 14,193 13,217
Nuveen defined portfolios (3,987) 15,594
Bonds and notes 414 (109)
Prepaid expenses and other assets 1,420 390
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (17,498) (17,244)
Deferred compensation (1,370) (2,833)
Security purchase obligations 4,440 4,769
Other liabilities 3,417 (32,490)
Other 18,957 246
--------- ---------
Net cash provided from operating activities 158,298 38,269
--------- ---------
Cash flows from financing activities:
Notes Payable:
Proceeds from new loans 173,000 --
Dividends paid (34,002) (29,820)
Proceeds from stock options exercised 40,048 20,613
Acquisition of treasury stock (127,786) (28,697)
--------- ---------
Net cash provided from (used for) financing activities 51,260 (37,904)
--------- ---------
Cash flows from investing activities:
Symphony acquisition, net of cash received (203,179) --
Net purchase of office furniture and equipment (6,704) (13,029)
Proceeds from sales of investment securities 20,623 16,896
Purchases of investment securities (5,805) (1,626)
Proceeds from Rittenhouse stock options exercised -- 32,685
Repurchase of Rittenhouse stock -- (46,454)
Other (8,556) 972
--------- ---------
Net cash used for investing activities (203,621) (10,556)
--------- ---------
Increase/(decrease) in cash and cash equivalents 5,937 (10,191)
Cash and cash equivalents:
Beginning of year 72,351 28,373
--------- ---------
End of period $ 78,288 $ 18,182
--------- ---------
Supplemental Information:
Taxes paid $ 30,404 $ 44,239
Interest paid $ 1,711 $ 2,660
See accompanying notes to consolidated financial statements
6
THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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.
7
NOTE 2 EARNINGS PER COMMON SHARE
On August 9, 2001, the Company's Board of Directors authorized a
3-for-2 stock split of its common stock to shareholders of record on
September 20, 2001. All references in the consolidated financial
statements and notes to number of shares, per share amounts and market
prices of the Company's common stock have been restated to reflect the
increased number of shares outstanding.
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 nine-month periods and the three-month periods
ended September 30, 2001 and September 30, 2000.
--------------------------------------- -----------------------------------------------------------------------
In thousands, For the nine months ended
except per share data September 30, 2001 September 30, 2000
--------------------------------------- ----------------------------------- -----------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
----------- ---------- ------------ ---------- ---------- -------------
Net income $84,737 $78,875
Less: Preferred stock dividends (1,125) (1,688)
------- -------
Basic EPS 83,612 47,123 $1.77 77,187 46,871 $1.65
Dilutive effect of:
Restricted/deferred stock - 136 - 143
Employee stock options - 1,840 - 1,322
Assumed conversion of
preferred stock 1,125 1,924 1,688 2,475
------- ------ ------- -------
Diluted EPS $84,737 51,023 $1.66 $78,875 50,811 $1.55
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
In thousands, For the three months ended
except per share data September 30, 2001 September 30, 2000
--------------------------------------- ----------------------------------- -----------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
----------- ---------- ------------ ---------- ---------- -------------
Net income $28,763 $26,467
Less: Preferred stock dividends (281) (563)
------- -------
Basic EPS 28,482 47,608 $.60 $25,904 46,952 $.55
Dilutive effect of:
Restricted/deferred stock - 137 - 137
Employee stock options - 1,883 - 1,618
Assumed conversion of
Preferred stock 281 1,237 563 2,475
------- ------ ------- ------
Diluted EPS $28,763 50,865 $.57 $26,467 51,182 $.52
---------------------------------------------------------------------------------------------------------------
Options to purchase 45,000 and 24,000 shares of the Company's common
stock were outstanding at September 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
$43.41 and $30.85 per share were greater than the average market price
of the Company's common shares during the applicable period.
8
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 September 30, 2001, its net capital ratio was 1.77
to 1 and its net capital was $29,340,000, which is $25,875,000 in
excess of the required net capital of $3,464,000.
NOTE 4 ACQUISITION OF SYMPHONY ASSET MANAGEMENT
On July 16, 2001, Nuveen acquired Symphony Asset Management, LLC
("Symphony"). Symphony is an institutional investment manager based in
San Francisco. As a result of the acquisition, Nuveen's product
offerings have expanded to include alternative investments for
institutional investors.
The aggregate purchase price was $210 million, of which approximately
$11.2 million was allocated to the net book value of assets acquired.
Net book value consisted primarily of cash, fee receivables and
payables. The remaining purchase price has been allocated to
identifiable intangible assets and goodwill.
SFAS No. 141 specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill. Intangible assets determined to have an
indefinite useful life and goodwill acquired in a purchase business
combination completed after June 30, 2001, but before SFAS No. 142 is
adopted in full, will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-SFAS
No. 142 accounting literature. Intangible assets with estimable useful
lives must be amortized over their respectful useful lives and
evaluated for impairment.
Nuveen has engaged external valuation experts to value the business to
determine the final purchase price allocation; thus, the allocation in
the accompanying September 30, 2001 balance sheet is subject to
modification. In addition, the FASB continues to issue guidance
regarding the implementation of SFAS No. 141 and SFAS No. 142,
including the evaluation and determination of the lives of intangible
assets. This guidance will be considered in arriving at the final
purchase price allocation of Symphony and may result in incremental
amortization expense in the fourth quarter of 2001 to the extent that
certain intangible assets are determined to have definite lives.
The following unaudited pro forma information for the nine-month
periods ended September 30, 2001 and 2000 reflect a summary of the
consolidated results of operations of Nuveen and the acquired business
as if the acquisition had occurred on January 1, 2000. (In thousands,
except per share data).
-----------------------------------------------------------------------
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
-----------------------------------------------------------------------
Revenues $285,576 $308,057
-------------------------------- -------- --------
Net Income $ 84,489 $ 91,139
-------------------------------- -------- --------
Earnings per common share (fully
diluted) $ 1.66 $ 1.79
-----------------------------------------------------------------------
Revenues for the nine months ended September 30, 2000 include above
average performance fees. At the time of the Symphony acquisition, it
was not anticipated that Symphony would generate the same level of fees
in 2001.
9
NOTE 5 NOTES PAYABLE
On August 10, 2000, the Company entered into a $250 million revolving
line of credit with a group of banks that extends through August 2003.
The committed line is divided into two equal facilities, one of which
has a three-year term, the other is renewable in 364 days. Proceeds
from borrowings under the facility are used for fulfilling day to day
cash requirements and general corporate purchases including
acquisitions, share repurchases and asset purchases. The rate of
interest payable under the agreement is, at the Company's option, a
function of one of various floating rate indices. The agreement
requires the Company to pay a facility fee at an annual rate of .095%
of the committed amount for the three-year facility and .08% of the
committed amount for the 364-day facility. The Company has the option
to provide collateral to secure borrowings under this line of credit.
At September 30, 2001, $77 million was available under this committed
credit line.
10
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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 the affluent, high-net-worth and the institutional market segments. We
distribute our investment products and services, including mutual funds,
exchange-traded funds, defined portfolios, and individually managed accounts, to
the affluent and high-net-worth market segments through unaffiliated
intermediary firms including broker-dealers, commercial banks, affiliates of
insurance providers, financial planners, accountants, consultants and investment
advisors. We provide investment products and services directly to the
institutional market.
The financial advisors we support serve affluent and high-net-worth investors.
We provide consultative services to these financial advisors with a primary
focus on managed assets for fee-based customers and structured investment
services for transaction based advisors.
Our primary business activities generate three principal sources of revenue: (1)
ongoing advisory fees earned on assets under management, including mutual funds,
exchange-traded funds, and individually managed accounts, (2) distribution
revenues earned upon the sale of defined portfolio and mutual fund products and
(3) incentive fees earned on certain institutional accounts based on performance
of such accounts.
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.
RECENT EVENTS
On July 16, 2001, we completed the acquisition of Symphony Asset Management LLC
("Symphony") 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
of up to a maximum of $180 million based on Symphony reaching specified
performance and growth targets for its business. Any future payments would be
accounted for as additional goodwill. Symphony, an institutional investment
manager based in San Francisco, manages approximately $4 billion in portfolios
designed to reduce risk through market-neutral and other strategies in several
equity and fixed-income asset classes. Symphony's business generates two
principal sources of revenue: (1) ongoing advisory fees based on assets under
management, and (2) incentive fees earned on certain institutional accounts
based on performance of the accounts.
11
On August 9, 2001, we announced a 3-for-2 stock split of our common stock.
The stock split was effected as a dividend to shareholders of record as of
September 20, 2001. Shareholders received one additional share of Nuveen common
stock for every two shares that they owned as of the record date. For
comparability, prior period share information has been restated for the split.
The Board of Directors for each of the Nuveen Money Market Funds decided to
close all of the Funds effective August 24, 2001. Due to shrinking demand from
investors who increasingly use brokerage sweep accounts for their cash
management needs, the Funds did not maintain a self-sustaining level of assets.
The closing of the Nuveen Money Market Funds is not expected to have a material
effect on our business, as the Money Market Fund assets under management were
relatively immaterial.
SUMMARY OF OPERATING RESULTS
The table below presents the highlights of our operations for the three-month
and nine-month periods ended September 30, 2001 and 2000:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
($ in millions except per share amounts)
---------------------------------------------------------------------------------------------------------
For the third quarter of For the first nine months of
2001 2000 % change 2001 2000 % change
---- ---- -------- ---- ---- --------
Gross sales of investment products $ 3,227 $ 2,371 36% $10,294 $ 8,292 24 %
Assets under management (1)(2) 66,477 61,003 9 66,477 61,003 9
Operating revenues 97.5 89.0 10 269.5 266.6 1
Operating expenses 48.5 47.4 2 130.3 143.1 (9)
Pretax income 47.9 44.1 9 140.1 131.1 7
Net income 28.8 26.5 9 84.7 78.9 7
Basic earnings per share (3) 0.60 0.55 9 1.77 1.65 7
Diluted earnings per share (3) 0.57 0.52 10 1.66 1.55 7
Dividends per share (3) 0.24 0.21 14 0.69 0.60 15
---------------------------------------------------------------------------------------------------------
(1) At period end
(2) Excludes defined portfolio assets under surveillance
(3) Prior period have been adjusted to reflect the 3-for-2 stock split
Gross sales were up 36% for the quarter while net flows (equal to the sum of
sales, reinvestments and exchanges less redemptions) were $1.5 billion, an
increase of $0.4 billion versus net flows for the third quarter of 2000. Driven
by the inclusion of approximately $4.0 billion in Symphony assets and an
increase in average assets under management, total assets at the end of the
quarter grew $5.5 billion to $66.5 billion.
Operating revenues for the quarter totaled $97.5 million, an increase of 10%
over the $89.0 million in operating revenues recorded in the third quarter of
2000. An increase in average assets under management and the inclusion of
Symphony resulted in a 9% increase in advisory fees. This increase was partially
offset by a decline in distribution revenue as a result of declining sales of
equity defined portfolio products.
12
Operating expenses for the quarter increased 2% when compared with the prior
year as a result of the inclusion of Symphony asset management expenses in the
third quarter of 2001. Excluding the impact of Symphony, operating expenses
declined 4% due to reduced compensation and benefits as well as a reduction in
advertising and promotion spending.
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 nine-month periods ended
September 30, 2001 and 2000 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 964 $ - $ 2,704 $ 46
Mutual Funds 294 211 888 766
Retail Managed Accounts 1,491 1,181 5,184 3,706
Institutional Managed Accounts 167 216 409 567
------- ------- ------- -------
Total Managed Assets 2,916 1,608 9,185 5,085
Defined Portfolios 311 763 1,108 3,207
------- ------- ------- -------
Total $ 3,227 $ 2,371 $10,293 $ 8,292
======= ======= ======= =======
Gross sales of investment products increased 24% for the nine-month period ended
September 30, 2001 when compared with the same period in 2000. Driving this
increase was the issuance of approximately $2.1 billion of new municipal
exchange-traded fund common shares and $0.6 billion in MuniPreferred(TM) shares.
Managed account sales were also strong, growing 31% reflecting both strong
Rittenhouse equity performance in 2000 and high-net-worth investors'
13
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.
The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
---- ---- ----
Managed Assets:
Mutual Funds $11,843 $11,485 $11,292
Exchange-Traded Funds 31,397 28,355 27,575
Managed Accounts 23,237 21,699 21,661
Money Market Funds -- 472 475
------- ------- -------
Total $66,477 $62,011 $61,003
======= ======= =======
(1) Excludes defined portfolio product assets under surveillance
Assets under management grew 9% to $66.5 billion, an increase of $5.5 billion
from the end of September 2000. Symphony assets accounted for approximately $4.0
billion of the increase, while strong net flows in both our equity and municipal
products more than offset equity market declines and a reduction in assets due
to the closing of the money market funds.
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Mutual Funds $ 14,470 $ 13,600 $ 42,630 $ 39,212
Exchange-Traded Funds 44,319 41,365 128,993 121,183
Managed Accounts 27,065 23,740 71,982 69,851
Money Market Funds 270 450 1,074 831
-------- -------- -------- --------
Total $ 86,124 $ 79,155 $244,679 $231,077
======== ======== ======== ========
Advisory fees for the nine-month period ended September 30, 2001, increased 6%
over the same period in 2000. Symphony accounted for 3% of the increase, while
exchange-traded funds and mutual funds drove the remainder. 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 and
appreciation of underlying municipal assets. The increase in mutual fund and
14
money market fund fees was due to an increase in average assets under management
coupled with a reduction in reimbursed expenses as a result of significant
one-time expense reimbursements recorded in 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 nine-month periods
ended September 30, 2001 and 2000 is shown in the following table:
Underwriting and Distribution Revenue
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Mutual Funds $ 495 $ 897 $ 2,357 $ 2,716
Defined Portfolios 3,506 6,366 9,323 27,022
MuniPreferred(TM) 441 330 1,066 1,016
Exchange-Traded Funds 643 -- 1,601 --
------- ------- ------- -------
Total $ 5,085 $ 7,593 $14,347 $30,754
======= ======= ======= =======
Total underwriting and distribution revenue for the first nine months of 2001
declined $16.4 million when compared with the same period in 2000. Distribution
revenue for the equity defined portfolio products declined $19.1 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 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 net positioning gains of $2.2 million in the
first nine months of 2001. This compares to net gains of $0.4 million recorded
in the first nine months of 2000.
OPERATING EXPENSES
Operating expenses declined $12.7 million for the nine-month period ended
September 30, 2001 compared to the nine-month period of the prior year. This
decrease is primarily due to a reduction in advertising and promotional
expenditures as well as declines in compensation and benefits and travel and
entertainment expense.
Compensation and related benefits for the nine-month period ended September 30,
2001 decreased $1.8 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
15
commissions due to lower defined portfolio sales in the first nine months of
2001. These declines were partially offset by an increase in expense due to the
inclusion of Symphony expenses.
Advertising and promotional expenditures decreased $14.0 million for the first
nine months of 2001 compared to the first nine months of 2000. This decrease is
due to an increased level of spending in the first nine months of 2000 resulting
from our brand awareness campaign and a reduction in 2001 spending behind our
defined portfolio business.
All other operating expenses, including occupancy and equipment costs, travel
and entertainment and other, increased $3.1 million in the first nine months of
2001 as a result of the inclusion of Symphony expenses and an increase in fund
organization expenses as a result of our new exchange-traded fund offerings in
the first nine months 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 down $0.8 million in the first nine months of
2001 when compared with the same period in 2000. This decrease is a result of a
decline in cash on hand as a result of the Symphony acquisition. Interest
expense decreased $0.3 million in the first nine months of 2001 compared to the
prior year as a result of a decline in interest expense on deferred
compensation, offset partially by an increase due to the debt incurred in
association with the acquisition of Symphony.
RECENT ACCOUNTING PRONOUNCEMENTS
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 as well as the purchase
method for business combinations completed after June 30, 2001. SFAS No. 142
provides guidance on how to account for goodwill and intangible assets acquired
individually or as part of a group of assets not acquired in a business
combination and the subsequent accounting and measurement for goodwill and
intangibles, regardless of how acquired. 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. Effective January 1, 2001, the nonamortization and
impairment rules will apply to existing goodwill and intangible assets. The
Company currently carries approximately $200 million of goodwill on its balance
sheet, which is amortized at an annual rate of $8 million.
Upon adoption of SFAS No. 142, the Company will be required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by March 31, 2002. In addition, to the
extent an intangible asset is identified as having an indefinite useful life,
the Company will be required to test the intangible asset for impairment in
accordance with the provisions of SFAS No. 142 by March 31, 2002. Any impairment
loss will be measured as of January 1, 2002 and recognized as a cumulative
effect of a change in accounting principle in the first quarter of 2002.
Further, SFAS No. 142's transitional goodwill impairment evaluation requires the
Company to perform an assessment of whether there is an indication that goodwill
is impaired as of January 1, 2002. Because of the extensive effort needed to
comply with adopting SFAS No. 142, it is not practicable to reasonably estimate
the impact of adopting this Statement on the Company's financial statements at
the date of this report, including whether it will
16
be required to recognize any transitional impairment losses as a cumulative
effect of a change in accounting principle.
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 September 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 September 30, 2001,
the outstanding balance under this committed credit line was $173 million. The
proceeds from these facilities were used in part to fund the Symphony
acquisition.
At September 30, 2001, we held in treasury 12,009,730 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 3.3 million additional
shares.
During the first nine months of 2001, we paid out dividends on common shares
totaling $32.9 million and on preferred shares totaling $1.1 million. In the
second quarter of 2001, 50% of the outstanding preferred stock shares were
converted to common shares, pursuant to the terms of the charter provision of
the preferred stock agreement, resulting in an increase in dividends on common
shares and a corresponding decline in preferred dividends in the third quarter.
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.
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
17
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 firms' 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
SEPTEMBER 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 September 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 June 30,
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' counts 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 liability only. In a
memorandum opinion dated September 6, 2001, the court granted Nuveen
Advisory's motion for summary judgment, thereby terminating the
litigation before the court. Plaintiffs appealed this decision on
October 8, 2001.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
Jay S. Fishman was appointed to the Company's Board of Directors
effective October 31, 2001. Mr. Fishman is the Chairman and Chief
Executive Officer of The St. Paul Companies, Inc., the majority
shareholder of the registrant. His appointment fills a vacancy on
the board and increases the number of current directors to eight.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
None
b) Reports on Form 8-K.
A report on Form 8-K was filed with the Securities and Exchange
Commission on June 15, 2001. Amendment No. 1 to this Form 8-K was
filed on August 13, 2001. Amendment No. 2 to this Form 8-K was filed
on August 15, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: November 14, 2001
By /s/ JOHN P. AMBOIAN
--------------------------------
John P. Amboian
President
DATE: November 14, 2001
By /s/ MARGARET E. WILSON
--------------------------------
Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
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