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 JUNE 30, 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 August 6, 1996 there were 35,480,627 shares of the Company's Common
Stock outstanding, consisting of 7,791,527 shares of Class A Common Stock, $.01
par value, and 27,689,100 shares of Class B Common Stock, $.01 par value.
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THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 1996 and 1995
Six Months Ended June 30, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Six Months Ended June 30, 1996 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 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
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
THE JOHN NUVEEN COMPANY
Consolidated Balance Sheets
Unaudited
(in thousands, except share data)
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
------------------- -------------------
Cash $ 4,396 $ 5,036
Securities purchased under agreements to resell 215,000 11,000
Short term investments, at cost which approximates market value 19,985 --
Temporary investments arising from remarketing obligations 18,670 198,285
U.S. government securities purchased for municipal bond escrow accounts -- 1,385
Investment in U.S. government securities, at fair value -- 60,039
Receivables: --
Nuveen management investment companies 15,999 19,633
Brokers and dealers 1,551 283
Customers 8,862 8,828
Interest and dividends 1,659 2,694
Other 12,323 3,387
Securities owned (trading account), at market value:
Nuveen tax-exempt unit trusts 44,813 39,069
Tax-exempt bonds and notes 1,454 12,308
Deferred income tax charges 14,966 12,919
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation and amortization of $16,900
and $14,413, respectively 15,040 16,337
Other assets 42,111 11,309
------------------- -------------------
$ 416,829 $ 402,512
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Securities sold under agreements to repurchase $ -- $ 25,000
Security purchase obligations 10,829 7,174
Payables:
Brokers and dealers 2,998 767
Customers 321 524
Income taxes 3,571 4,355
Accrued compensation and other expenses 30,554 14,489
Deferred compensation 24,170 22,816
Other liabilities 2,646 4,531
------------------- -------------------
Total liabilities 75,089 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 50,340 50,122
Retained earnings 340,336 319,705
Unamortized cost of restricted stock awards (986) (1,611)
------------------- -------------------
390,077 368,603
Less common stock held in treasury, at cost (2,078,529 and
1,978,829 shares, respectively) (48,337) (45,747)
------------------- -------------------
Total stockholders' equity 341,740 322,856
------------------- -------------------
$ 416,829 $ 402,512
=================== ===================
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
Consolidated Statements of Income
Unaudited
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- --------- --------- ----------
Revenues:
Investment advisory fees from
assets under management $ 45,599 $ 45,748 $ 92,434 $ 89,890
Underwriting and distribution
of investment products 4,077 3,872 7,301 7,767
Positioning profits (losses) (323) 372 (1,558) 2,405
Investment banking 1,097 2,389 3,132 4,043
Interest 4,654 4,816 10,234 9,345
All other 610 729 1,230 1,486
-------- --------- --------- ----------
Total revenues 55,714 57,926 112,773 114,936
-------- --------- --------- ----------
Expenses:
Compensation and benefits 17,106 20,767 35,680 41,344
Advertising and promotional costs 3,394 4,506 6,941 9,004
All other 7,462 7,369 14,801 14,282
-------- --------- --------- ----------
Total expenses 27,962 32,642 57,422 64,630
-------- --------- --------- ----------
Income before taxes 27,752 25,284 55,351 50,306
Income taxes 10,602 9,550 21,197 19,044
-------- --------- --------- ----------
Net income $ 17,150 $ 15,734 $ 34,154 $ 31,262
======== ========= ========= ==========
Average common and common equivalent
shares outstanding 37,561 37,619 37,554 37,729
======== ========= ========= ==========
Earnings per common share $ 0.46 $ 0.42 $ 0.91 $ 0.83
======== ========= ========= ==========
See accompanying notes to consolidtaed financial statements.
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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 -- -- -- -- 34,154 -- -- 34,154
Cash dividends paid -- -- -- -- (13,179) -- -- (13,179)
Issuance of restricted stock -- -- -- 55 -- (750) 695 0
Amortization of restricted
stock awards -- -- -- -- -- 1,375 -- 1,375
Purchase of treasury stock -- -- -- -- -- -- (5,071) (5,071)
Exercise of stock options -- -- -- (55) (344) -- 1,786 1,387
Other -- -- -- 218 -- -- -- 218
--------- ------- ------- ------- -------- --------- --------- ---------
Balance at June 30, 1996 $ 0 101 286 50,340 340,336 (986) (48,337) 341,740
========= ======= ======= ======= ======== ========= ========= =========
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Six Months Ended June 30,
--------------------------------------
1996 1995
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,154 $ 31,262
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes (2,047) (3,324)
Depreciation and amortization 2,488 2,197
Net (increase) decrease :
Accrued investment advisory fees 3,634 2,904
Accrued interest receivable 915 (188)
Accounts receivable other 963 2,593
Net increase (decrease) :
Current taxes payable (566) 2,661
Accrued compensation and other expenses 16,064 17,233
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities (1,108) 485
Amortization of restricted stock awards 1,375 4,533
Net decrease in assets:
Temporary investments arising from remarketing obligations 179,615 79,660
U.S. government securities (escrow accounts) 1,385 0
Securities owned (trading account) 5,110 8,753
Net increase (decrease) in liabilities:
Security purchase obligations 3,656 (13,280)
Deferred compensation 1,355 339
----------------- -----------------
Net cash provided from operating activities 246,993 135,828
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term borrowings-
Securities sold under agreements to repurchase (25,000) --
Dividends paid (13,168) (11,842)
Proceeds from stock options exercised 1,487 648
Acquisition of treasury stock (5,797) (7,531)
----------------- -----------------
Net cash used for financing activities (42,478) (18,725)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. treasury securities (38,792) (126,854)
Proceeds from maturity of U.S. treasury securities 68,965 9,700
Purchases of office furniture and equipment (1,190) (1,645)
Proceeds from sale of office furniture and equipment -- 23
Other (30,138) (24)
----------------- -----------------
Net cash used for investing activities (1,155) (118,800)
----------------- -----------------
Increase/(decrease) in cash and cash equivalents 203,360 (1,697)
Cash and cash equivalents:
Beginning of year 16,036 118,777
----------------- -----------------
End of year $ 219,396 $ 117,080
================= =================
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 June 30, 1996 its net
capital ratio was .22 to 1 and its net capital was $250,500,000,
which is $246,900,000 in excess of the required net capital of
$3,600,000.
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.
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PART I. FINANCIAL INFORMATION
PART II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE JOHN NUVEEN COMPANY
JUNE 30, 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 for conservative investors; and
municipal and corporate investment banking services. 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
Economic data during the first quarter of 1996 suggested that the
economy was expanding at a quicker pace than previously thought.
Fearing a rise in inflation, the bond market reacted by increasing
long-term interest rates. During the second quarter of 1996,
however, conflicting data caused interest rates to change direction
on seven separate occasions resulting in bonds trading in a
relatively narrow range during the period. In contrast, throughout
the first half of 1995 interest rates declined in response to the
perception that the economy was slowing and consumer confidence was
declining, and a general expectation that the Federal Reserve Board
would lower short-term interest rates. Equity markets were
generally strong during both semi-annual periods.
The relative strength of the municipal market is often shown by the
relationship between long-term tax-exempt and taxable interest
rates. The ratio between the Bond Buyer 20, a frequently quoted
index of long-term municipal yields, and the benchmark 30-year
Treasury bond declined from 91% at the beginning of the year to 88%
at the end of the first quarter and 85% at the end of the second
quarter, reflecting in part the reduced concern over the direction
of discussions on tax reform, particularly relating to flat tax
proposals.
The movement of interest rates for the six month period ended June
30, 1996 and 1995 is shown in the following graphs.
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YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1995 TO JUNE 30, 1995
YIELDS(%)
[LINE CHART]
01/06/95 01/13/95 01/20/95 01/27/95 02/03/95 02/10/95 02/17/95 02/24/95
Bond Buyer 20 6.66 6.53 6.44 6.49 6.40 6.18 6.18 6.11
30 Year Treasury 7.85 7.78 7.88 7.71 7.61 7.66 7.58 7.52
03/03/95 03/10/95 03/17/95 03/24/95 03/31/95 04/07/95 04/13/95 04/21/95 04/28/95
Bond Buyer 20 6.08 6.18 6.06 6.09 6.07 6.03 6.01 5.96 6.06
30 Year Treasury 7.54 7.46 7.36 7.44 7.41 7.35 7.33 7.33 7.33
05/05/95 05/12/95 05/19/95 05/26/05 06/02/95 06/09/95 06/16/95 06/23/95 06/30/95
Bond Buyer 20 6.10 5.96 5.92 5.83 5.79 5.75 5.86 5.82 5.97
30 Year Treasury 7.17 6.98 6.92 6.75 6.53 6.72 6.61 6.53 6.64
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND VS. THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1996 THROUGH JUNE 30, 1996
YIELD(%)
[LINE CHART]
01/04/96 01/11/96 01/18/96 01/25/96 02/01/96 02/08/96 02/15/96 02/22/96 02/29/96 03/07/96
Bond Buyer 20 5.37 5.50 5.40 5.46 5.40 5.37 5.33 5.48 5.57 5.59
30 Year Treasury 6.04 6.14 5.97 6.11 6.07 6.15 6.16 6.33 6.48 6.46
03/14/96 03/21/96 03/28/96 04/04/96 04/11/96 04/18/96 04/25/96 05/02/96 05/09/96 05/16/96
Bond Buyer 20 5.81 5.86 5.90 5.86 6.03 5.94 5.91 6.06 5.96 5.96
30 Year Treasury 6.68 6.61 6.72 6.63 6.93 6.83 6.81 7.04 7.02 6.92
05/23/96 05/30/96 06/06/96 06/13/96 06/20/96 06/27/96
Bond Buyer 20 5.87 5.94 5.94 6.12 6.06 5.97
30 Year Treasury 6.87 6.94 6.91 7.12 7.12 7.00
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While stock and bond mutual funds generally continued to experience
solid growth in the second quarter of 1996, sales were at levels
slightly lower than the prior quarter. Stock funds experienced
significant increases for the quarter with April posting the second
largest monthly inflow ever into stock funds. Fixed income funds
also experienced growth during the quarter at more moderate levels.
Fixed income investors continue to face a degree of uncertainty
about the pace of growth in the economy, the potential for renewed
inflationary pressures and higher interest rates.
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 $89 billion during the first
half of 1996 compared with $69 billion in the same period of 1995.
New-money financings by issuers were $60 billion for the first six
months in 1996 and $53 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
$22 billion in the first two quarters of 1996 compared with $12
billion in 1995. The accompanying graph contrasts new issue volume
in the first half of the year for the past two years:
LONG TERM MUNICIPAL BONDS
NEW ISSUE VOLUME
SIX MONTH PERIOD ENDED JUNE 30, 1996 AND 1995
[BAR GRAPH]
1996 1995
Total New Issue Volume 88,625,500,000 68,846,200,000
New-Money Financings 59,537,000,000 52,978,500,000
Refundings 21,562,000,000 12,172,800,000
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The following table compares key operating information of the
Company for the three month period and six month period ending June
30, 1996 and 1995.
NUVEEN OPERATING STATISTICS
(in millions except per
share amounts and assets
under management)
FOR THE SECOND QUARTER OF FOR THE FIRST HALF OF
1996 1995 % CHANGE 1996 1995 % change
----- ----- -------- ------ -------- --------
Gross revenues $55.7 $57.9 -3.8% $112.8 $114.9 -1.8%
Operating expenses 28.0 32.6 -14.1 57.4 64.6 -11.1
Pretax operating income 27.8 25.3 9.9 55.4 50.3 10.1
Net income 17.2 15.7 9.6 34.2 31.3 9.3
Earnings per share 0.46 0.42 9.5 0.91 0.83 9.6
Dividend per share 0.18 0.16 12.5 0.36 0.32 12.5
Book value per share 9.34 8.20 13.9 9.34 8.20 13.9
Consolidated stockholders'
equity 342.0 303.1 12.8 342.0 303.1 12.8
Sales (net of redemptions) 186.0 354.0 -47.4 541.0 811.0 -33.3
Assets under management
(in billions) 32.1 31.9 0.6 32.1 31.9 0.6
BUSINESS HIGHLIGHTS
- - Total investment advisory fees for the six month and three month periods
ended June 30, 1996 remained relatively flat with the same periods of the
prior year. Increases in advisory fees earned on long-term mutual funds
and managed accounts were more than offset by declines in advisory fees
earned on exchange-traded funds and money market funds in the three month
period. During the six month period, the Company experienced increases in
advisory fee income for mutual funds, exchange-traded funds and managed
accounts which was partially offset by decreases in money market fund
advisory fee income.
- - Consistent with the industry, the overall sales volume of tax-free,
fixed-income investment products decreased during the first half of the
year when compared to the first half of 1995. This trend is due to
continued strong investor demand for equity products and the concern that
interest rates will continue to rise. Consequently, the Company
experienced a reduction in distribution revenues for the first half of the
year when compared to the first half 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 first half of the year. Realized and
unrealized positioning losses for the six month period ended June 30,
1996, were $1.6 million in contrast to gains of $2.4 million for the
comparable period of the prior year when bond prices were rising.
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- - Operating expenses for both the first half and second quarter of the year
decreased 11.1% and 14.1%, respectively, when compared to the prior year
primarily 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. Advertising
and promotion expenditures were lower during the first half of the year
due to the Company's continued responsiveness to market conditions.
- - The Company announced on May 16, 1996 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 fall of 1996. In
addition to the joint development of new products, the Company has made an
equity investment in ICAP in the form of preferred stock convertible into
a 20% common stock interest.
SIGNIFICANT SUBSEQUENT EVENTS
- - On July 16, 1996, the Company announced an agreement to acquire Flagship
Resources Inc., a Dayton, Ohio-based municipal mutual fund sponsor and
asset manager. With the merging of Flagship with the Company's tax-exempt
mutual fund business, the Company will widen the range of municipal
investments offered to conservative investors. Upon completion of the
merger, the Company will offer state-specific mutual funds,
exchange-traded funds or unit investment trusts in 28 states.
- - The Company announced on July 16, 1996 its intention to purchase up to 3.5
million of its outstanding common shares. The repurchase, which
represents nearly 10% of the outstanding shares, will be prorated between
the Company's class A and class B shares.
- - On July 16, 1996, the Company announced a 17% increase in its third
quarter dividend, to $0.21 from $0.18 per common share.
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 any 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 a rise 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
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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.
Investment advisory fee income, net of expense reimbursements to the
mutual funds and money market funds, is shown in the following table
for the both the second quarter and first half of each of the last
two years:
NUVEEN MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---------- ---------- --------- ----------
Managed Funds:
Mutual Funds $6,222 $5,883 $12,614 $11,610
Exchange-Traded Products 38,110 38,481 77,153 75,518
Money Market Funds 1,082 1,274 2,304 2,602
Managed Accounts 185 110 363 160
---------- ---------- --------- ----------
Total $45,599 $45,748 $92,434 $89,890
========== ========== ========= ==========
Investment advisory fee income for the mutual funds and
exchange-traded funds in the first half of 1996 was higher than the
same period of 1995 due to higher average net assets under
management. Sales of fund shares in 1995 and the first half 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 June 30, 1996.
Average money market net assets under management continued to
decrease during the second quarter of 1996 caused by relatively low
short-term interest rates, a strong equity market and strong
competition from sponsors of competing products.
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 half of 1996 when
compared to the same period of the prior year due to increases in
assets under management in all of 1995 and in the first half of
1996.
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The following table summarizes net assets under management:
NUVEEN TAX-FREE MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT
(in millions)
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
----------- ------------ ----------
Managed Funds:
Mutual Funds $5,280 $5,457 $5,084
Exchange-Traded Products 25,027 25,784 25,041
Money Market Funds 1,066 1,113 1,238
Managed Accounts 742 688 500
----------- ------------ ----------
Total $32,115 $33,042 $31,863
=========== ============ ==========
Sales of tax-free investment products are shown below:
NUVEEN TAX-FREE INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------------- ------------ ------------- ------------
Unit investment trusts $276 $272 $491 $570
Managed Funds:
Mutual funds (1) (1) (5) 22 77
Exchange-traded funds (3) 10 5 21 11
Money market funds (2) (122) (66) (47) (4)
Managed accounts 23 148 54 157
------------- ------------ ------------- ------------
Total $186 $354 $541 $811
============= ============ ============= ============
(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 half
of 1996 primarily due to the recent upturn in interest rates,
investor concerns that rates will continue to climb, and continued
competition with the robust equity markets. Sales of UITs and
mutual funds in the second quarter of 1996 were relatively stable
with those of the same period in the prior year. 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.
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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 half of 1996
resulted in a 6% 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 half 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.
Investment banking revenues include both new issue underwriting
profits and fee income earned from various financial advisory
activities. The Company experienced a decrease in underwriting and
financial advisory activity in both the first half and second
quarter of the year, when compared to the prior year.
Compensation and related benefits decreased during the first half 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 and six
month period.
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 was approved by
shareholders 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. The Company awarded 190,000
restricted shares of stock (of which 160,000 were deferred at the
election of the recipient), and 1,464,000 options which are subject
to three and four year cliff vesting, and are exercisable at prices
equal to 100% and 120% of the market value on the date of issuance.
Overall this program is expected to decrease the percentage of
pretax operating income used to derive the profit sharing expense
component of compensation expense.
The Company also realized a decrease in advertising expenditures
when comparing the first half of 1996 and 1995. Advertising and
promotion expenditures were lower during the first half of the year
due to the Company's continued responsiveness to market conditions.
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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 half 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.
The Company is remarketing agent for various issuers of VRDOs with
an aggregate principal value in excess of $1.2 billion at June 30,
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 June
30, 1996, and December 31, 1995, the Company held $18.7 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 $18 million during the first half 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 June 30, 1996 and $1.4 million at December 31,
1995.
At June 30, 1996, the Company held in its treasury 2,078,529 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 half of 1996, the
Company purchased 206,700 shares. On July 16, 1996, the Company
announced a new program to purchase up to 3.5 million common shares
outstanding.
In July, 1996, the Company announced its intention to acquire all of
the stock of Flagship Resources, Inc. in exchange for cash and
preferred stock that can be converted into 1.65 million shares of
Company Class A common stock. The total price of the transaction is
$63 million, excluding contingent payments which could be up to $20
million over a four year period. The transaction is expected to be
completed in the fourth quarter of 1996.
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The Company, while authorized to invest in derivative financial
instruments, did not purchase any derivative securities in managing
its operations during the first half 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 and accounts 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 June 30, 1996, its net
capital ratio was .22 to 1 and its net capital was $250.5 million
which is $246.9 million in excess of the required net capital of
$3.6 million.
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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-Q report
for the first quarter of 1996, 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. In addition, the Funds have filed a motion, which
is pending before the Court, to terminate or take over various
derivative claims asserted by the plaintiffs. 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
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PART II OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
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.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: August 7, 1996 By /s/ James J. Wesolowski
---------------------------------------------
James J. Wesolowski
Vice President, General Counsel and Secretary
(Authorized Signatory)
DATE: August 7, 1996 By /s/ O. Walter Renfftlen
---------------------------------------------
O. Walter Renfftlen
Vice President and Controller
(Principal Accounting Officer)
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