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, 2002
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 10, 2002, there were 47,285,400 shares of the Company's Common Stock
outstanding, consisting of 10,622,793 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),
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statement of Changes in Common Stockholders'
Equity (Unaudited), Three Months Ended March 31, 2002 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2002 and 2001 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 18
PART II. OTHER INFORMATION
Item 1 through Item 6 19
Signatures 20
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,
2002 2001
--------- -----------
ASSETS
Cash and cash equivalents $ 129,759 $ 83,659
Management and distribution fees receivable 42,121 53,803
Other receivables 9,249 12,537
Securities owned (trading account), at market value:
Nuveen defined portfolios - 15,901
Bonds and notes - 1,445
Deferred income tax asset, net - 164
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $33,451 and $31,823, respectively 27,967 28,372
Other investments 60,526 59,651
Goodwill 360,925 353,598
Other intangible assets, at cost less accumulated amortization of $2,337 and $1,623, respectively 43,913 51,876
Prepaid expenses and other assets 39,444 35,605
--------- ---------
$ 713,904 $ 696,611
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable 183,000 183,000
Accrued compensation and other expenses 26,132 44,973
Deferred compensation 28,880 28,398
Security purchase obligations - 739
Deferred income tax liability, net 1,582 -
Other liabilities 30,819 27,611
--------- ---------
Total liabilities $ 270,413 $ 284,721
--------- ---------
Redeemable preferred stock, at redemption value; 5,000,000 shares authorized,
225,000 shares issued and outstanding 5,625 5,625
Minority interest 40,930 -
Common stockholders' equity:
Class A Common stock, $.01 par value; 150,000,000 shares authorized, 235 235
23,483,841 shares issued and outstanding
Class B Common stock, $.01 par value; 40,000,000 shares authorized, 367 367
36,662,607 shares issued and outstanding
Additional paid-in capital 142,985 132,018
Retained earnings 632,108 620,853
Unamortized cost of restricted stock awards (1,340) (1,537)
Accumulated other comprehensive loss (3,624) (3,713)
--------- ---------
770,731 748,223
Less common stock held in treasury, at cost (12,766,423 and 12,575,334 shares, respectively) (373,795) (341,958)
--------- ---------
Total common stockholders' equity 396,936 406,265
--------- ---------
$ 713,904 $ 696,611
========= =========
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
MARCH 31,
----------------------
2002 2001
-------- --------
Operating revenues:
Investment advisory fees from assets under management $ 85,155 $ 79,527
Underwriting and distribution of investment products 4,871 4,258
Positioning losses, net (114) (100)
Other operating revenue 2,697 2,017
-------- --------
Total operating revenues 92,609 85,702
Operating expenses:
Compensation and benefits 22,852 21,470
Advertising and promotional costs 3,467 4,442
Occupancy and equipment costs 4,019 3,169
Amortization of goodwill and intangible assets 713 2,041
Travel and entertainment 1,981 2,156
Other operating expenses 10,000 7,726
-------- --------
Total operating expenses 43,032 41,004
Operating income 49,577 44,698
Non-operating income/(expense) (172) 1,075
-------- --------
Income before taxes 49,405 45,773
Income taxes 19,416 17,814
-------- --------
Net income $ 29,989 $ 27,959
======== ========
Average common and common equivalent shares outstanding:
Basic 47,461 46,841
======== ========
Diluted 49,792 51,309
======== ========
Earnings per common share:
Basic $ 0.63 $ 0.58
======== ========
Diluted $ 0.60 $ 0.54
======== ========
See accompanying notes to consolidated financial statements.
4
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, 2001 $ 235 $ 367 $ 132,018 $ 620,853 $ (1,537) $ (3,713) $ (341,958) $ 406,265
Net income 29,989 29,989
Cash dividends paid (11,444) (11,444)
Amortization of restricted
stock awards 197 197
Purchase of treasury stock (56,810) (56,810)
Exercise of stock options (7,290) 24,973 17,683
Tax effect of options exercised 10,967 10,967
Other 89 89
-------- --------- ---------- --------- ------------ -------------- ---------- ---------
Balance at March 31, 2002 $ 235 $ 367 $ 142,985 $ 632,108 $ (1,340) $ (3,624) $ (373,795) $ 396,936
======== ========= ========== ========= ============ ============== ========== =========
See accompanying notes to consolidated financial statements.
5
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
---------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 29,989 $ 27,959
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 1,688 (613)
Depreciation of fixed assets 1,627 1,123
Amortization of goodwill and other intangible assets 713 1,994
Net (increase) decrease in assets:
Management and distribution fees receivable 11,681 20,482
Other receivables 3,288 12,185
Nuveen defined portfolios 16,202 (215)
Bonds and notes 1,445 (3,454)
Prepaid expenses and other assets (3,837) (1,459)
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (18,841) (28,219)
Deferred compensation 482 301
Security purchase obligations (739) (3,185)
Other liabilities 3,331 5,305
Other 11,043 5,870
--------- ---------
Net cash provided from operating activities 58,072 38,074
--------- ---------
Cash flows from financing activities:
Dividends paid (11,444) (10,538)
Proceeds from stock options exercised 17,683 12,161
Proceeds from Rittenhouse stock options exercised 40,504 -
Acquisition of treasury stock (56,810) (41,588)
--------- ---------
Net cash used for financing activities (10,067) (39,965)
--------- ---------
Cash flows from investing activities:
Net purchase of office furniture and equipment (1,222) (702)
Proceeds from sales of investment securities 526 10,364
Purchases of investment securities (802) (2,703)
Other (407) (2,215)
--------- ---------
Net cash (used for)/provided from investing activities (1,905) 4,744
--------- ---------
Increase in cash and cash equivalents 46,100 2,853
Cash and cash equivalents:
Beginning of year 83,659 72,351
--------- ---------
End of period $ 129,759 $ 75,204
--------- ---------
Supplemental Information:
Taxes paid $ 1,729 $ 1,456
Interest paid $ 1,392 $ 681
See accompanying notes to consolidated financial statements.
6
THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2002
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.
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 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 periods ended March 31, 2002 and March 31, 2001.
- -----------------------------------------------------------------------------------------------
In thousands, For the three months ended
except per share data March 31, 2002 March 31, 2001
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
---------------------------------------------------------
Net income $29,989 $27,959
Less: Preferred stock dividends (70) (563)
------- -------
Basic EPS 29,919 47,461 $0.63 27,396 46,841 $0.58
Dilutive effect of:
Restricted/deferred stock - 137 - 136
Employee stock options - 1,885 - 1,857
Assumed conversion of
preferred stock 70 309 563 2,475
------- ------ ------- ------
Diluted EPS $29,989 49,792 $0.60 $27,959 51,309 $0.54
- ------------------------------------------------------------------------------------------------
7
Options to purchase 1,486,000 and 7,500 shares of the Company's common stock
were outstanding at March 31, 2002 and 2001, respectively, but were not included
in the computation of diluted earnings per share because the options' respective
weighted average exercise prices of $54.23 and $38.30 per share were greater
than the average market price of the Company's common shares during the
applicable period.
Subsequent to quarter-end, the Company announced that its Board of Directors
had declared a stock split (see Note 7). No references in the consolidated
financial statements or notes thereto for this filing as to number of shares,
per share amounts, or market prices of the Company's common stock have been
restated to reflect the increased number of shares that will be outstanding
after June 3, 2002; such restatement will be reflected in our filing for the
quarter ended June 30, 2002.
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, 2002, Nuveen Investments'
net capital ratio was 0.68 to 1 and its net capital was $40,306,000, which is
$38,470,000 in excess of the required net capital of $1,836,000.
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. The
results of Symphony's operations have been included in Nuveen's consolidated
financial statements from that date. As a result of the acquisition, Nuveen's
product offerings have expanded to include alternative investments for
institutional investors designed to reduce risk through market-neutral and other
strategies in several equity and fixed-income asset classes.
The aggregate purchase price was $208.3 million, of which approximately $4.5
million was allocated to the net book value of assets acquired. Net book value
consisted primarily of cash, fee receivables and payables. The remaining
purchase price has been allocated to identifiable intangible assets and
goodwill.
The acquisition has been accounted for under the purchase method of accounting.
Accordingly, the Company has allocated the purchase cost to Symphony's assets
and liabilities as of July 16, 2001. The purchase accounting allocations were
finalized during the quarter ended March 31, 2002. A summary of Symphony assets
acquired and liabilities assumed at July 16, 2001, after reflecting the purchase
accounting allocations, is set forth below ($ in millions):
-----------------------------------------------------------
AT JULY 16, 2001
----------------
-----------------------------------------------------------
Current assets $9.4
-----------------------------------------------------------
Net fixed assets 0.9
-----------------------------------------------------------
Other assets 0.9
-----------------------------------------------------------
Intangible assets 45.8
-----------------------------------------------------------
Goodwill 158.0
-----
-----------------------------------------------------------
Total assets acquired 215.0
------------------------------------------------------------
Total liabilities assumed (6.7)
-----
------------------------------------------------------------
Net assets acquired $208.3
------
------------------------------------------------------------
Of the $45.8 million of acquired intangible assets, $43.8 million was assigned
to existing contractual customer relationships (19.7-year estimated useful
life), $1.6 million to internal use software (5-year estimated useful life), and
the remaining $0.4 million to a favorable lease (38-month useful life). Of the
$158.0 million assigned to non-amortizable goodwill, approximately $10.5 million
is expected to be deductible for 2002 tax purposes.
8
ACQUIRED INTANGIBLE ASSETS
(IN THOUSANDS)
GROSS
CARRYING ACCUMULATED
AS OF MARCH 31, 2002 AMOUNT AMORTIZATION
- -------------------- -------- ------------
Amortized Intangible Assets:
Customer relationships....................... $ 43,800 $ 1,556
Internal use software........................ 1,622 215
Favorable lease.............................. 369 139
----------- -----------
Total.................................... $ 45,791 $ 1,910
=========== ===========
For the three months ended March 31, 2002, the aggregate amortization expense
relating to amortizable intangible assets acquired in the Symphony acquisition
was approximately $0.7 million. There were no unamortizable intangible assets
acquired during the Symphony acquisition.
The estimated aggregate annual amortization expense for each of the next five
years is approximately $2.7 million.
The transaction price will have potential additional future payments up to a
maximum of $180 million based on Symphony's reaching specified performance and
growth targets for its business. Any future payments will be recorded as
additional goodwill. There were no such payments during the three months ended
March 31, 2002.
The following unaudited actual information for the three-month period ended
March 31, 2002 and unaudited pro-forma information for the three-month period
ended March 31, 2001 reflect a summary of the consolidated results of operations
of Nuveen and the acquired business as if the acquisition had occurred on
January 1, 2001. (In thousands, except per share data).
- -------------------------------------------------------------------------
As Reported Pro-forma
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
- -------------------------------------------------------------------------
Revenues $92,609 $93,499
- -------------------------------------------------------------------------
Net Income $29,989 $28,598
- -------------------------------------------------------------------------
Earnings per common share
(fully diluted) $0.60 $0.56
- -------------------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead that they be tested for impairment at least annually using a two-step
process. The first step is to identify a potential impairment and, in the year
of adoption, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step (in the case of Nuveen, we have until June 30, 2002 to complete this
first step). The second step of the goodwill impairment test measures the amount
of the impairment loss (measured as of the beginning of the year of adoption),
if any, and must be completed by the end of a company's fiscal year. We do not
expect that the results of our SFAS No. 142 analyses will indicate that an
impairment charge will be necessary.
9
NOTE 5 GOODWILL - ADOPTION OF SFAS NO. 142
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line
basis over the estimated future periods to be benefited. Effective January 1,
2002 (adoption date of SFAS No. 142), goodwill is no longer being amortized, but
is subject to the impairment rules of SFAS No. 142.
In 2001 (prior to the adoption of SFAS No. 142), we incurred an aggregate annual
goodwill amortization expense of approximately $8 million ($2.0 million for the
three months ended March 31, 2001). The following table presents what reported
income before extraordinary items and net income would have been for the three
months ended March 31, 2001 exclusive of amortization expense (net of tax)
recognized in that period related to goodwill that is no longer being amortized
under the new accounting rules effective January 1, 2002. Adjusted per-share
amounts are also presented.
- -------------------------------------------------------------------------------
For the three months ended
- -------------------------------------------------------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
- -------------------------------------------------------------------------------
($000s except for earnings per share
amounts)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income, as reported $29,989 $27,959
- -------------------------------------------------------------------------------
Addback: goodwill amortization, net of tax - $1,211
- -------------------------------------------------------------------------------
Adjusted net income $29,989 $29,170
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
- -------------------------------------------------------------------------------
Net income, as reported $0.63 $0.58
- -------------------------------------------------------------------------------
Goodwill amortization - $0.03
- -------------------------------------------------------------------------------
Adjusted net income $0.63 $0.61
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
- -------------------------------------------------------------------------------
Net income, as reported $0.60 $0.54
- -------------------------------------------------------------------------------
Goodwill amortization - $0.02
- -------------------------------------------------------------------------------
Adjusted net income $0.60 $0.56
- -------------------------------------------------------------------------------
NOTE 6 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 March 31, 2002, there were two borrowings under
this committed line. The Company borrowed $125 million under the three-year
facility, and $58 million under the 364-day facility. For the three months ended
March 31, 2002, the weighted average interest rate on these two borrowings was
2.075% for the 364-day facility and 2.060% for the three-year facility.
NOTE 7 SUBSEQUENT EVENT
On May 9, 2002, the Company announced that its Board of Directors had declared
a 2-for-1 split in the Company's stock. The stock split will be effected as a
dividend to shareholders of record as of June 3, 2002. No references in the
consolidated financial statements or notes thereto for this filing as to number
of shares, per share amounts, or market prices of the Company's common stock
have been restated to reflect the increased number of shares that will be
outstanding after June 3, 2002; such restatement will be reflected in our
filing for the quarter ended June 30, 2002.
10
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 2002
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 separately managed accounts, (2) distribution
revenues earned upon the sale of certain investment products and (3) incentive
fees earned on certain institutional accounts based on the 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.
RELEVANT EVENTS
The following events reported in our 2001 annual report are relevant to the
interpretation of our first quarter 2002 results:
On July 16, 2001, we completed the acquisition of Symphony Asset Management LLC
("Symphony") for $208 million in cash. These funds were provided through a
combination of cash on hand and borrowings under our committed credit
facilities. Symphony, an institutional investment manager based in San
Francisco, manages portfolios designed to reduce risk through market-neutral and
other alternative-investment 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.
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.
11
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.
In early 2002, we announced our intention to stop depositing continuously
offered equity and fixed-income defined portfolio products. As anticipated, this
scale-back plan was completed by the end of the first quarter of 2002.
SUMMARY OF OPERATING RESULTS
The table presented below highlights the results of our operations for the first
quarters of 2002 and 2001:
- ------------------------------------------------------------------------
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions, except per share amounts)
- ------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 2002 2001 % CHANGE
---- ---- --------
Gross sales of investment products $3,389 $3,811 (11)%
Assets under management (1) (2) 69,538 61,289 13
Operating revenues 92.6 85.7 8
Operating expenses 43.0 41.0 5
Net income 30.0 28.0 7
Basic earnings per share (3) .63 .58 9
Diluted earnings per share(3) .60 .54 11
Dividends per share(3) .24 .21 14
- ------------------------------------------------------------------------
(1) At period end.
(2) Excludes defined portfolio assets under surveillance.
(3) The prior period has been adjusted to reflect the 3-for-2 stock split
that occurred in September of 2001.
Gross sales were down 11% for the quarter compared to the same period a year
earlier. The decline in sales was mainly due to a decline in defined portfolio
product sales as a result of our decision to stop depositing continuously
offered defined portfolio products. Net flows (equal to the sum of sales,
reinvestments and exchanges less redemptions) were positive across all product
categories totaling $1.9 billion for the quarter.
Total assets under management at the end of the first quarter of 2002 grew $8.2
billion to $69.5 billion. This increase in assets under management was driven by
the inclusion of Symphony assets ($4 billion) and as a result of net flows into
funds and accounts.
Operating revenues for the quarter totaled $92.6 million, an increase of 8% over
the $85.7 million in operating revenues recorded in the first quarter of 2001.
This increase was driven by an increase in advisory fees as a result of an
increase in average assets under management and the inclusion of Symphony.
12
Operating expenses for the quarter increased 5% when compared with the prior
year as a result of the inclusion of Symphony expenses. Excluding the impact of
Symphony, operating expenses declined 3% mainly as a result of decreased
amortization expense (due to new accounting rules effective 2002).
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 to the public through financial advisors. Correspondingly, distribution
revenue will rise and fall with the level of our sales of these products, and
will continue to be impacted as we scale back new defined portfolio trust
deposits in 2002.
Gross sales of investment products for first quarters of 2002 and 2001 are shown
below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
QUARTER ENDED MARCH 31, 2002 2001
---- ----
Managed Assets:
Mutual Funds $ 287 $ 305
Managed Accounts 1,801 1,935
Exchange-Traded Funds 1,108 1,160
------ ------
Total Managed Assets 3,196 3,400
Defined Portfolios 193 411
------ ------
Total $3,389 $ 3,811
====== =======
Gross sales of investment products decreased 11% for the three-month period
ended March 31, 2002 when compared with the same period in 2001. Sales of our
March 2002 ETF offerings combined with the leveraging of the November 2001
offerings totaled $1.1 billion, which was flat versus the prior year. Retail
managed account sales were down slightly ($0.1 billion) from a year ago,
reflecting volatility and general weakened equity market conditions. Defined
portfolio sales declined 53% as a result of our decision at the end of 2001 to
scale back our defined portfolio business.
13
The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT(1)
(in millions)
MARCH 31, DECEMBER 31, MARCH 31,
2002 2001 2001
---- ---- ----
Mutual Funds $ 11,775 $ 11,814 $ 11,401
Exchange-Traded Funds 32,965 32,000 29,630
Managed Accounts 24,798 24,671 19,816
Money Market Funds - - 442
-------- -------- --------
Total $ 69,538 $ 68,485 $ 61,289
======== ======== ========
(1) Excludes defined portfolio product assets under surveillance
Assets under management grew 13% to $69.5 billion, an increase of $8.2 billion
from the end of March 2001. 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)
QUARTER ENDED MARCH 31, 2002 2001
---- ----
Mutual Funds $ 14,219 $ 13,877
Exchange-Traded Funds 44,868 41,701
Managed Accounts 26,068 23,578
Money Market Funds - 371
-------- --------
Total $ 85,155 $ 79,527
Advisory fees for the three-month period ended March 31, 2002, increased 7% over
the same period in 2001. Symphony accounted for 5% of the increase, while
exchange-traded funds and other municipal products drove the remainder. These
increases were partially offset by a decline in fees as a result of the closing
of the money market funds in the third quarter of 2001.
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Underwriting and distribution revenue for the three-month periods ended March
31, 2002 and 2001 is shown in the following table:
UNDERWRITING AND DISTRIBUTION REVENUE
(in thousands)
QUARTER ENDED MARCH 31, 2002 2001
---- ----
Mutual Funds $ 814 $ 1,043
Defined Portfolios 2,556 2,033
Exchange-Traded Funds 1,501 1,182
------- -------
Total $ 4,871 $ 4,258
======= =======
Total underwriting and distribution revenue for the first quarter of 2002
increased $0.6 million when compared with the first quarter in 2001 as a result
of an increase in distribution revenue on defined portfolios and an increase in
underwriting fees on our exchange-traded fund offerings. Distribution revenue on
defined portfolio products increased despite a decline in sales due to a
reduction in development expense associated with new product deposits. Partially
offsetting these increases was a decline in mutual fund distribution revenue as
a result of a decline in equity product sales.
OTHER OPERATING REVENUE
Other operating revenue consists of various fees earned in connection with
services provided on behalf of our defined portfolio assets under surveillance
and incentive fees earned on institutional assets managed by Symphony. The
increase in other operating revenue for the quarter is due to the inclusion of
Symphony incentive fees.
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. We recorded net positioning losses
of $0.1 million in the first quarter of 2002, which is consistent with the net
loss recorded in the first quarter of 2001.
OPERATING EXPENSES
Operating expenses increased $2.0 million during the first quarter of 2002
compared to the first quarter of 2001. This increase is primarily due to the
inclusion of Symphony operating expenses. Excluding Symphony, operating expenses
for the first quarter of 2002 were down $1.1 million (3%), driven mainly by a
reduction in goodwill amortization expense as a result of new accounting rules
effective January 1, 2002.
Compensation and related benefits for the first quarter of 2002 increased $1.4
million compared to the first quarter in the prior year, primarily as a result
of the inclusion of Symphony. Excluding the impact of Symphony, compensation
expense was flat to the prior year as salary increases were offset by 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 2002.
15
Advertising and promotional expenditures decreased $1.0 million for the first
quarter of 2002 compared to the first quarter of 2001. This decrease is due to a
reduction in spending behind our defined portfolio business.
All other operating expenses, including occupancy and equipment costs, travel
and entertainment and other, increased $2.9 million during the first quarter of
2002 compared to the first quarter of 2001. This increase was partly driven by
the inclusion of Symphony. The remainder of the increase was driven mainly by
increased severance due to the scale back of our defined portfolio business and
fund organization costs related to our March exchange-traded fund offering.
NON-OPERATING INCOME/(EXPENSE)
Non-operating income/(expense) is comprised primarily of net interest
income/(expense) and other miscellaneous non-operating revenue/(expense).
Net interest income was down $2.2 million in the first quarter of 2002 compared
to the first quarter of 2001. This decline was partially caused by a decrease in
interest income resulting from the use of cash on hand for the Symphony
acquisition, and partially because of an increase in interest expense as a
result of the debt incurred in connection with the Symphony acquisition. This
decline in net interest income was partially offset by a decrease in interest
expense on deferred compensation.
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 $200 million, to satisfy
periodic, short-term liquidity needs. As of March 31, 2002, 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 March 31, 2002, the
outstanding balance under this committed credit line was $183 million. The
proceeds from these facilities were used in part to fund the Symphony
acquisition.
Options to purchase 395,142 shares of Rittenhouse non-voting Class B common
stock were exercised on March 28, 2002 under the Rittenhouse Financial Services,
Inc. 1997 Equity Incentive Award Plan. Rittenhouse accounted for these options
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." As a result of this exercise, the Company has recorded $40.5 million
of minority interest on its consolidated balance sheet. The minority interest
will remain in place as long as the stock is outstanding. In the event that the
stock is repurchased, any purchase price in excess of the exercise price will be
added to goodwill associated with the Company's acquisition of Rittenhouse.
At March 31, 2002, we held in treasury 12,766,423 shares of Class A common stock
acquired in open market transactions. As part of an ongoing repurchase program,
we are authorized to purchase approximately 1.3 million additional shares.
During the first quarter of 2002, we paid out dividends on common shares
totaling $11.4 million and on preferred shares totaling $0.1 million.
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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 promotional
costs, and office occupancy costs. To the extent inflation, or the expectation
thereof, results in rising interest rates or has other adverse effects upon the
securities markets and on the value of financial instruments, it may adversely
affect 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 that
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 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.
17
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARCH 31, 2002
We are exposed to market risk from changes in interest rates, which may
adversely affect our results of operations and financial condition. In the past,
we were exposed to this risk primarily in our fixed-income defined portfolio
inventory and, at times, sought to minimize the risks from these interest rate
fluctuations through the use of derivative financial instruments. As a result of
our decision to scale back our defined portfolio business, we no longer
regularly purchase and hold for resale municipal securities and defined
portfolio units. Therefore, it is no longer necessary to utilize futures
contracts to minimize risk. Correspondingly, there were no open derivative
financial instruments at March 31, 2002.
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 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
There have been no developments in the matter previously reported most
recently under Item 3 Legal Proceedings in the Company's Report on Form
10-K for 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.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
None
b) 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 10, 2002 By /s/ John P. Amboian
----------------------
John P. Amboian
President
DATE: May 10, 2002 By /s/ Margaret E. Wilson
-------------------------
Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
20