1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
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 13, 1996 there were 36,569,827 shares of the Company's Common Stock
outstanding, consisting of 8,009,827 shares of Class A Common Stock, $.01 par
value, and 28,560,000 shares of Class B Common Stock, $.01 par value.
2
THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Three Months Ended March 31, 1996 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II.OTHER INFORMATION
Item 1 through Item 6 18
Signatures 20
(2)
3
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,
ASSETS 1996 1995
------------- -------------
Cash $ 12,081 $ 5,036
Securities purchased under agreements to resell 212,000 11,000
Temporary investments arising from remarketing obligations 16,785 198,285
U.S. government securities purchased for municipal bond escrow accounts - 1,385
Investment in U.S. government securities, at fair value 30,012 60,039
Other participants' interest in securities in joint accounts 745 -
Receivables:
Nuveen management investment companies 17,756 19,633
Brokers and dealers 1,917 283
Customers 7,938 8,828
Interest 3,098 2,694
Other 12,526 3,387
Securities owned (trading account), at market value:
Nuveen tax-exempt unit trusts 48,048 39,069
Tax-exempt bonds and notes 6,147 12,308
Deferred income tax charges 13,660 12,919
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation and amortization of $15,646
and $14,413, respectively 15,388 16,337
Other assets 11,868 11,309
------------- -------------
$ 409,969 $ 402,512
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Securities sold under agreements to repurchase $ - $ 25,000
Security purchase obligations 10,551 7,174
Payables:
Brokers and dealers 120 767
Customers 322 524
Income taxes 13,964 4,355
Accrued compensation and other expenses 21,685 14,489
Deferred compensation 23,559 22,816
Other liabilities 9,831 4,531
------------- -------------
Total liabilities 80,032 79,656
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued -- --
Class A Common stock, $.01 par value; 150,000,000 shares
authorized, 10,094,356 shares issued 101 101
Class B Common stock, $.01 par value; 40,000,000 shares
authorized, 28,560,000 shares issued 286 286
Additional paid-in capital 50,260 50,122
Retained earnings 329,906 319,705
Unamortized cost of restricted stock awards (1,674) (1,611)
------------- -------------
378,879 368,603
Less common stock held in treasury, at cost (2,104,529 and
1,978,829 shares, respectively) (48,942) (45,747)
------------- -------------
Total stockholders' equity 329,937 322,856
------------- -------------
$ 409,969 $ 402,512
============= =============
See accompanying notes to consolidated financial statements.
(3)
4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
--------------------------------
1996 1995
---------- ----------
Revenues:
Investment advisory fees from
assets under management $ 46,835 $ 44,142
Underwriting and distribution
of investment products 3,414 3,895
Positioning profits (losses) (1,426) 2,033
Investment banking 2,036 1,654
Interest 5,580 4,529
All other 621 758
---------- ----------
Total revenues 57,060 57,011
---------- ----------
Expenses:
Compensation and benefits 18,574 20,402
Advertising and promotional costs 3,547 4,498
All other 7,338 7,089
---------- ----------
Total expenses 29,459 31,989
---------- ----------
Income before taxes 27,601 25,022
Income taxes 10,596 9,494
---------- ----------
Net income $ 17,005 $ 15,528
========== ==========
Average common and common equivalent
shares outstanding 37,478 37,840
========== ==========
Earnings per common share $ 0.45 $ 0.41
========== ==========
See accompanying notes to consolidated financial statements.
(4)
5
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS )
Unamortized
Class A Class B Additional Cost of
Preferred Common Common Paid-In Retained Restricted Treasury
Stock Stock Stock Capital Earnings Stock Awards Stock Total
----------- --------- -------- ---------- ---------- ------------- --------- ----------
Balance at December 31, 1995 $ 101 286 50,122 319,705 (1,611) (45,747) 322,856
Net income -- -- -- -- 17,005 -- -- 17,005
Cash dividends paid -- -- -- -- (6,596) -- -- (6,596)
Issuance of restricted stock -- -- -- 55 (750) 695
Amortization of restricted
stock awards -- -- -- -- -- 687 -- 687
Purchase of treasury stock -- -- -- -- -- -- (5,071) (5,071)
Exercise of stock options -- -- -- (55) (208) -- 1,181 918
Other -- -- -- 138 -- -- -- 138
----------- --------- -------- ---------- ---------- ------------- --------- ----------
Balance at March 31, 1996 $ 101 286 50,260 329,906 (1,674) (48,942) 329,937
=========== ========= ======== ========== ========== ============= ========= ==========
See accompanying notes to consolidated financial statements.
(5)
6
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1996 1995
--------- ----------
Cash flows from operating activities:
Net income $ 17,005 $ 15,528
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes (741) (1,346)
Depreciation and amortization 1,234 966
Net (increase) decrease :
Accrued investment advisory fees 1,877 1,251
Accrued interest receivable (378) (993)
Accounts receivable other 860 1,376
Net increase (decrease) :
Current taxes payable 9,747 10,775
Accrued compensation and other expenses 7,195 8,552
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities 1,574 3,835
Amortization of restricted stock awards 688 2,246
Net (increase) decrease in assets:
Temporary investments arising from remarketing obligations 181,500 46,250
U.S. government securities (escrow accounts) 1,385 -
Securities owned (trading account) (2,819) (34,968)
Net increase (decrease) in liabilities:
Security purchase obligations 3,377 7,204
Deferred compensation 744 109
--------- ----------
Net cash provided from operating activities 223,248 60,785
--------- ----------
Cash flows from financing activities:
Net payments on short-term borrowings:
Securities sold under agreements to repurchase (25,000) -
Dividends paid (6,591) (5,931)
Proceeds from stock options exercised 918 378
Acquisition of treasury stock (4,177) (7,531)
--------- ----------
Net cash used for financing activities (34,850) (13,084)
--------- ----------
Cash flows from investing activities:
Purchase of U.S. treasury securities (126,854)
Proceeds from maturity of U.S. treasury securities 20,000 -
Purchases of office furniture and equipment (284) (1,149)
Other (69) 6
--------- ----------
Net cash provided from (used for) investing activities 19,647 (127,997)
--------- ----------
Increase/(decrease) in cash and cash equivalents 208,045 (80,296)
Cash and cash equivalents:
Beginning of year 16,036 118,777
--------- ----------
End of year $ 224,081 $ 38,481
========= ==========
See accompanying notes to consolidated financial statements.
(6)
7
THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
John Nuveen Company and its wholly owned subsidiaries, John Nuveen &
Co. Incorporated, Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp. (together "the Company"), and have been prepared in
conformity with generally accepted accounting principles.
These financial statements rely, in part, on estimates. In the
opinion of management, all necessary adjustments (consisting of
normal recurring accruals) have been reflected for a fair
presentation of the results of operations, financial position and
cash flows in the accompanying unaudited consolidated financial
statements. The results for the period are not necessarily
indicative of the results to be expected for the entire year.
NOTE 2 EARNINGS PER COMMON SHARE
Earnings per common share are computed based on the weighted average
number of common and common equivalent shares outstanding. Common
equivalent shares include the dilutive effect of shares issuable
under the Company's stock option programs.
NOTE 3 NET CAPITAL REQUIREMENT
John Nuveen & Co. Incorporated, 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, 1996 its net
capital ratio was .23 to 1 and its net capital was $268,200,000,
which is $264,100,000 in excess of the required net capital of
$4,100,000.
NOTE 4 CONTINGENCIES
As noted in Part II, Item 1, Legal Proceedings, the Company and its
subsidiaries have been named as defendants in certain legal actions
having arisen in the normal course of business. In the opinion of
management, based on current knowledge and after discussions with
legal counsel, the outcome of such litigation will not have a
material adverse effect on the Company's financial condition,
results of operations or liquidity.
(7)
8
PART I. FINANCIAL INFORMATION
PART II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE JOHN NUVEEN COMPANY
MARCH 31, 1996
DESCRIPTION OF THE BUSINESS
The Company's core businesses are asset management and the related
credit research and surveillance; the development, marketing, and
distribution of investment products; and investment banking. The
profitability of each of these lines of business, and the volume of
sales of the Company's products, are directly affected by many
variables, including municipal bond new issue supply, current and
expected changes in interest rate levels, investor preferences for
fixed-income investments versus equity or other investments, the
rate of inflation, and changes or expected changes in income tax
rates and laws.
MARKET OVERVIEW
During the first quarter of 1996, technical information regarding
the state of the economy was subject to an unusual combination of
delays and distortions as a result of the temporary shut-down of
the federal government and severe weather on the East Coast. In the
face of these uncertainties, interest rates remained in a narrow
range for the first half of the quarter. As the streams of economic
information began to flow again at mid-quarter, they showed that the
economy had more strength than had previously been thought.
Consequently, interest rate levels began to rise. This is in
contrast to the economic environment of the first quarter of 1995
when the economy showed signs of a slow down and interest rates were
declining. During the three month period ended March 31, 1996,
yields on the benchmark 30-year U.S. Treasury bond increased 74
basis points to 6.72% from 5.98% at December 31, 1995. Conversely,
in the first quarter of 1995, yields decreased 46 basis points to
7.41%. The Bond Buyer 20, a frequently quoted index of long-term
municipal yields, increased 46 basis points to 5.90% in the first
quarter of 1996 from 5.44% at December 31, 1995, while this index
fell 64 basis points during the first three months of 1995 to 6.07%.
The movement of interest rates for the periods January 1 through
March 31, 1996 and 1995, is shown in the following graphs.
8
9
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
6-JAN 13-JAN 20-JAN 27-JAN 3-FEB 10-FEB 17-FEB 24-FEB 3-MAR 10-MAR 17-MAR 24-MAR 31-MAR
First Quarter 1996 6.04 6.14 5.97 6.11 6.07 6.15 6.16 6.33 6.48 6.46 6.68 6.61 6.72
First Quarter 1995 7.85 7.78 7.88 7.71 7.61 7.66 7.58 7.52 7.54 7.46 7.36 7.44 7.41
YIELD COMPARISONS OF THE
BOND BUYER 20
6-JAN 13-JAN 20-JAN 27-JAN 3-FEB 10-FEB 17-FEB 24-FEB 3-MAR 10-MAR 17-MAR 24-MAR 31-MAR
First Quarter 1996 5.37 5.50 5.40 5.46 5.40 5.37 5.33 5.48 5.57 5.59 5.81 5.86 5.90
First Quarter 1995 6.66 6.53 6.44 6.49 6.40 6.18 6.18 6.11 6.08 6.18 6.06 6.09 6.07
9
10
Growth in mutual funds continued through the first three months of
1996. Equity mutual funds experienced significant increases while
the growth in bond mutual funds was moderate due to investors'
anxieties over rising interest rates, the uncertainty over the
Federal budget discussions in Washington and, for the municipal
markets, discussions of tax reform including "flat tax" proposals.
Municipal bond new issue volume, which is comprised of new-money
financings, refunding transactions, and issues that have an element
of both new-money and refunding was $39 billion in the first quarter
of 1996 compared with $29 billion underwritten in the same period of
1995. New-money financings by issuers were $25 billion for the three
month period in 1996 and $23 billion for the same period in 1995.
Refunding transactions, which are generally entered into for the
purpose of redeeming outstanding bond issues under conditions more
favorable to the issuer, such as lowering financing costs, totaled
$11 billion in the first quarter of 1996 compared with $4 billion in
1995. The accompanying graph contrasts new issue volume in the
first quarter for the past two years:
LONG-TERM MUNICIPAL BONDS
NEW ISSUE VOLUME - FIRST QUARTER 1996 AND 1995
1996
- ----
Total New Issue Volume 39,000,000,000
New-Money Financing 25,000,000,000
Refundings 11,000,000,000
1995
- ----
Total New Issue Volume 29,000,000,000
New-Money Financing 23,000,000,000
Refundings 4,000,000,000
10
11
The following table sets forth key operating information of the
Company for the first quarter of 1996 and 1995.
NUVEEN OPERATING STATISTICS
(in millions except per share amounts
and assets under management) FOR THE FIRST QUARTER OF
1996 1995 % CHANGE
------------ ------------ --------
Gross revenues $57.1 $57.0 0.0%
Operating expenses 29.5 32.0 (7.8)
Pretax operating income 27.6 25.0 10.4
Net income 17.0 15.5 9.7
Earnings per share 0.45 0.41 9.8
Dividend per share 0.18 0.16 12.5
Book value per share 9.03 7.87 14.7
Consolidated stockholders' equity 330.0 291.0 13.4
Sales 354.0 457.0 (35.6)
Assets under management (in billions) 32.4 31.5 2.9
BUSINESS HIGHLIGHTS
- - Investment advisory fees increased from the prior year due to the sale of
fund shares during the first three months of 1996 and all of 1995 coupled
with the appreciation of the funds' investment portfolios during 1995,
offset by modest depreciation of fund portfolios in the first quarter of
1996.
- - Consistent with the industry, the overall sales volume of tax-free,
fixed-income investment products decreased during the quarter when
compared to the first quarter of 1995. This trend is due to continued
strong investor demand for equity products, the concern that interest
rates could continue to rise, and the effects that tax reform might have
on municipal bond investments. Consequently, the Company experienced a
reduction in distribution revenues for the quarter when compared with the
first quarter of the prior year.
- - As a consequence of rising interest rates, the Company realized
positioning losses from the municipal bonds and UITs it positions to
support ongoing UIT sales during the quarter. Realized and unrealized
positioning losses for the quarter ended March 31, 1996, were $1.4 million
in contrast to gains of $2.0 million for the comparable period of the
prior year when bond prices were rising.
- - Investment banking revenues increased with the rise in the volume of
underwritings the Company initiated and participated in during the first
quarter of 1996. Advisory fees also
11
12
increased as activity in the areas of health-care mergers
and acquisitions and financial advisory services increased.
- - Operating expenses for the first quarter decreased 7.8% due to lower
compensation and benefit costs, and reduced advertising expenditures. The
decrease in compensation and benefit costs resulted primarily from the
reduction in expense associated with the vesting of restricted stock
granted by the Company in 1992. Consistent with the lessened demand for
tax-exempt products, the Company reduced advertising expenditures for the
quarter.
- - On May 14, 1996, the Company announced its intention to introduce a family
of equity mutual funds in affiliation with Institutional Capital
Corporation (ICAP), an institutional equity manager. The Company has
filed registration statements with the Securities and Exchange Commission
for three new funds for which ICAP will serve as sub-advisor. The Company
expects the new funds to be introduced during the summer and fall of 1996.
Additionally, the Board of Directors of the Company has approved an
investment in preferred stock of ICAP that is convertible into a 20%
common stock interest.
The following discussion and analysis contains important information
that should be helpful in evaluating the Company's results of
operations and financial condition, and should be read in
conjunction with the consolidated financial statements and related
notes.
RESULTS OF OPERATIONS
Total advisory fee income realized during the fiscal year is
directly related to the weighted average market value of the assets
managed by the Company's two investment advisory subsidiaries,
Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp.
Advisory fee income will increase with an increase in the value of
managed assets, either as a result of increases in the value of
portfolio investments, as occur during periods of decreasing
interest rates, or as a result of additional sales of the Company's
products. Sales may include shares of new funds or existing funds.
Fund shares may be sold either to new or existing shareholders, and
may include reinvestment of fund dividends. Shares may also be sold
as a result of reinvestment of distributions from unit investment
trusts sponsored by the Company or the issuance of additional shares
pursuant to dividend reinvestment plans. Fee income will decline
when managed assets decline, as would occur when the value of fund
portfolio investments decrease in a rising interest-rate environment
or when open-end fund redemptions exceed sales.
12
13
Investment advisory fee income, net of expense reimbursements, is
shown in the following table for the first quarter of each of the
last two years:
NUVEEN MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
MARCH 31,
1996 1995
---------- ----------
Mutual Funds $ 6,392 $ 5,727
Exchange-Traded Funds 39,043 37,036
Managed Accounts 178 50
Money Market Funds 1,222 1,329
---------- ----------
Total $ 46,835 $ 44,142
========== ==========
Investment advisory fee income for the mutual funds and
exchange-traded funds in the first three months of 1996 was higher
than the same period of 1995 due to the higher average balance of
net assets under management. Sales of fund shares in 1995 and the
first quarter of 1996, coupled with the appreciation of the
investment portfolios of the funds during the declining interest
rate environment of 1995, allowed for an increase in the net assets
under management, offset by the recent depreciation of the
portfolios due to the rising interest rates in the last few months
preceding March 31, 1996. Average money market net assets under
management during the quarter remained level with the average during
the full year of 1995.
Advisory fees earned on the managed account assets, including both
institutional accounts managed by Nuveen-Duff & Phelps Investment
Advisors, and individual accounts managed by Nuveen Institutional
Advisory Corp., through the Nuveen Private Investment Management
(NPIM) program, experienced growth in the first quarter of 1996
when compared to the same period of the prior year due to an
increase in assets under management in all of 1995 and in the first
quarter of 1996.
The following table summarizes net assets under management:
NUVEEN TAX-FREE MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT
(in millions)
MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
----------- ------------ ----------
Mutual funds $ 5,306 $ 5,457 $ 5,049
Exchange-traded funds 25,154 25,784 24,804
Managed accounts 719 688 352
Money market funds 1,189 1,113 1,305
----------- ------------ ----------
Total $ 32,368 $ 33,042 $ 31,510
=========== ============ ==========
13
14
Sales of tax-free investment products are shown below.
NUVEEN TAX-FREE INVESTMENT PRODUCT SALES
(in millions)
MARCH 31,
1996 1995
------------ ------------
Unit investment trusts $215 $297
Mutual funds (1) 22 82
Money market funds (2) 76 63
Managed accounts 31 9
Exchange-traded funds (3) 10 6
------------ ------------
Total $354 $457
============ ============
(1) Mutual fund sales, reinvestment of UIT principal and income
distributions and mutual fund dividend reinvestments, and net
exchanges, less redemptions.
(2) Money market fund sales, dividend reinvestments, and net
exchanges less redemptions.
(3) Dividend reinvestments.
Demand for tax-exempt investment products, including UITs, mutual
funds and exchange-traded bond funds, are influenced by the level of
and relationship between taxable and tax-free interest rates, the
relationship between long-term and short-term rates, and the
expectations of market participants concerning the direction of
future interest-rate levels. In concert with industry trends, sales
of the Company's UITs and mutual funds were lower in the first
quarter of 1996 primarily due to the recent upturn in interest rates
and investor concerns that rates will continue to climb; uncertainty
about potential changes to the tax code; and continued competition
with the robust equity markets. Mutual fund sales include the
reinvestments of UIT principal and interest distributions and the
reinvestment by mutual fund shareholders of fund dividends. Shares
issued by the exchange-traded funds during both periods were limited
to reinvestment of fund dividends.
The Company markets its tax-free investment products through a
network of registered representatives associated with unaffiliated
firms including broker-dealers, commercial banks, affiliates of
insurance providers, financial planners, accountants, consultants
and financial advisers. Distribution revenues include the portion
of the sales charge the Company earns on UIT and mutual fund sales.
Lower sales of UITs and mutual funds in the first quarter of 1996
resulted in a 12% decrease in distribution revenues relative to the
same period of last year.
The Company realizes positioning profits or losses from changes in
the market value of UIT inventories and municipal bond inventories
held for future UIT products. These market values are directly
affected by the movement of interest rates during the period
beginning with the acquisition of a municipal bond for a future UIT
and ending with the sale of that UIT. In a declining interest rate
environment, the Company could realize gains from carrying
fixed-income securities in its inventory as it did in 1995 and,
conversely, in a rising interest-rate environment, the Company could
incur losses, which occurred in the first quarter of 1996. The
Company manages this interest-rate risk by controlling inventory
levels for both municipal bonds and UITs and by timing deposits of
new UITs to coincide closely with expected demand.
14
15
Investment banking revenues include both new issue underwriting
profits and fee income earned from various financial advisory
activities. Consistent with the industry, the Company experienced
an increase in underwriting activity of 18% in the first quarter of
1996 when compared to the same period of 1995. Year-to-date fee
income earned from mergers and acquisitions and financial advisory
activity increased 40% over the first quarter of the prior year.
Compensation and related benefits decreased during the first quarter
of 1996 when compared to the same period of 1995 primarily due to
the decrease in expense associated with equity awards granted
pursuant to the Company's 1992 Special Incentive Plan. The majority
of such awards granted under the Plan have vested and the related
expense was recorded by the Company prior to the current quarter.
In February 1996, the Company's Board of Directors approved an
equity-based incentive compensation plan which will shift annual
compensation paid to key employees from a program that is
exclusively cash-based to one that includes equity awards in lieu of
certain cash awards. The purposes of the plan are to enable the
Company to attract and retain exceptionally qualified officers and
other key employees upon whom the sustained growth and profitability
of the Company will depend in large measure, to provide added
incentive for such individuals to enhance the value of the Company
for the benefit of its stockholders, and to strengthen the mutuality
of interests between the key employees and the Company's
stockholders. The incentive plan, which is subject to shareholder
approval at the annual shareholders' meeting on July 9, 1996,
reserves for award an aggregate of 3.8 million shares of Class A
common stock including up to 950,000 shares which may be issued in
the form of restricted stock grants. Overall this program is
expected to decrease compensation expense slightly in the current
year.
The Company also realized a decrease in advertising expenditures
when comparing the first quarters of 1996 and 1995. The Company
recognized that the demand for tax-exempt packaged products lessened
during the quarter due to the recent upturn in interest rates and
uncertainties about pending tax reform, and adjusted its advertising
costs accordingly.
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
Management believes that its capital resources are more than
adequate to finance its daily operations. The Company's primary
businesses are not capital intensive and the Company has no current
need to obtain long-term financing. During the first three months
of 1996 and throughout 1995, a large percentage of the Company's
assets were comprised of cash and cash equivalents, highly liquid
temporary investments in variable rate demand obligations (VRDOs)
arising from remarketing activities, and short-term receivables,
including amounts related to the Company's managed fund advisory
services. The financing requirements of the Company are almost
entirely satisfied from equity capital as reported in its
consolidated balance sheet. The Company, however, occasionally
utilizes available lines of credit, which exceed $400 million, to
satisfy additional periodic short-term financing requirements
arising from its obligations as remarketing agent for VRDOs and to
acquire U.S. government securities held for advance refunding escrow
accounts.
15
16
The Company is remarketing agent for various issuers of VRDOs with
an aggregate principal value in excess of $1.3 billion at March 31,
1996. Although remarketing agents, including the Company, are only
obligated to use their best efforts in locating purchasers for the
VRDOs, they frequently repurchase VRDOs for resale to other buyers
within a few days. During temporary periods of imbalance between
supply and demand for VRDOs, the Company may hold larger balances of
such obligations for resale. Substantially all VRDOs for which the
Company is remarketing agent are secured by letters of credit
obtained by the issuer from top-rated third-party providers,
including major commercial banks and insurance companies. At March
31, 1996, and December 31, 1995, the Company held $17 million and
$198 million, respectively, of VRDOs, which are classified in its
consolidated balance sheets as "Temporary investments arising from
remarketing obligations". The Company's average daily inventory of
VRDOs was $12 million during the first quarter of 1996 and $36
million during all of 1995.
As a function of its investment banking business, the Company
periodically acquires and temporarily holds U.S. government
securities pending delivery to municipal bond issuers' escrow
accounts established for the purpose of advance-refunding
outstanding debt obligations. The Company acquires such government
securities only after the bond issuer has agreed to purchase them
from the Company at a stated price upon completion of the refunding
transaction. The Company records such securities at the amounts due
from the bond issuers under these contracts. The Company held no
such securities at March 31, 1996 and $1.4 million at December 31,
1995.
At March 31, 1996, the Company held in its treasury 2,104,529 shares
of its Class A Common Stock acquired in open market transactions as
part of stock repurchase programs to provide shares for the firm's
employee stock option program. During the first quarter of 1996,
the Company purchased 206,700 shares.
The Company, while authorized to invest in derivative financial
instruments, did not purchase any derivative securities in managing
its operations during the first quarter of 1996 or throughout 1995
and, therefore, had no exposure to market risk from derivative
financial instruments. The Company's investment banking group did,
on occasion, act as financial adviser, broker, or underwriter to
municipal or other not-for-profit issuers with respect to
transactions such as interest rate swaps and forward delivery
transactions. Also, the Company's investment advisory subsidiaries
did not invest in derivative securities, other than high quality
synthetic money market securities, for the funds they manage.
John Nuveen & Co. Incorporated, 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, 1996, its net
capital ratio was .23 to 1 and its net capital was $268.2 million
which is $264.1 million in excess of the required net capital of
$4.1 million.
During the quarter ended March 31, 1996, the Company's net worth
increased by $7.1 million after payment of dividends of $6.6 million
and the purchase of treasury stock of $5.1 million.
16
17
INFLATION
The Company's assets are, to a large extent, liquid in nature and
therefore not significantly affected by inflation. However,
inflation may result in increases in the Company's expenses, such as
employee compensation, advertising and promotional costs, and office
occupancy costs. To the extent inflation, or the expectation
thereof, results in rising interest rates or has other adverse
effects upon the securities markets and on the value of financial
instruments, it may adversely affect the Company's financial
condition and results of operations. A substantial decline in the
value of fixed income investments could adversely affect the net
asset value of funds managed by the Company, which in turn would
result in a decline in investment advisory fee income.
17
18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-K report
for 1995, a consolidated lawsuit is currently pending in federal
district court in Chicago against John Nuveen & Co. Incorporated,
Nuveen Advisory, and current and former directors of two of the
Nuveen exchange-traded investment companies, Nuveen Municipal Value
Fund, Inc. (NUV) and Nuveen Premium Income Municipal Fund, Inc.
(NPI) (the "Funds"). The complaint, which is filed as both a direct
and a derivative action, alleges, among other things, that the
defendants violated the Investment Company Act of 1940, the
Minnesota Business Corporation Act and the Funds' articles of
incorporation in announcing, implementing, and completing (in
January 1994) rights offerings for the Funds, and seeks damages in
unspecified amounts. As also previously reported, plaintiffs
subsequently brought additional lawsuits on behalf of NUV and NPI
against the Funds' outside legal counsel and inside counsel to
Nuveen & Co. alleging, among other things, negligence, professional
malpractice and breach of fiduciary duty and seeking unspecified
damages. As also previously reported, on July 1995 Ivan Behm, an
NUV shareholder represented by the same lawyers who brought the
earlier lawsuit in Chicago and other lawyers, filed a lawsuit making
similar allegations in the District Court, Fourth Judicial District,
Hennepin County, Minnesota on behalf of a purported class of certain
of the shareholders of the NUV Fund which names as defendants the
same companies and individuals who were made defendants in the
Chicago lawsuits, and seeks damages in unspecified amounts. The
Minnesota case was dismissed in December 1995; the plaintiffs have
filed an appeal seeking reinstatement.
As previously reported, the defendants in the above-noted
Chicago actions have moved to dismiss, filed responsive pleadings in
opposition to plaintiffs' motions for partial summary judgment, and
are otherwise defending the lawsuits. In March, 1996, the Court
entered orders denying most of defendants' motions to dismiss.
Further, the Court has received but taken no action on a
magistrate's report recommending dismissal of plaintiffs' motion for
summary judgment. While the outcome of this litigation cannot be
predicted with any certainty, based on current knowledge, the
Company is of the opinion that such litigation will not have a
material adverse effect on the Company's financial condition,
results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
(18)
19
PART II OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included herein:
(27) Financial Data Schedule
b) Reports on Form 8-K. Not Applicable.
(19)
20
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 15, 1996 By /s/ James J. Wesolowski
-----------------------------------
James J. Wesolowski
Vice President, General Counsel and
Secretary
(Authorized Signatory)
DATE: May 15, 1996 By /s/ O. Walter Renfftlen
-----------------------------------
O. Walter Renfftlen
Vice President and Controller
(Principal Accounting Officer)
(20)