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 SEPTEMBER 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 November 11, 1996 there were 33,897,027 shares of the Company's
Common Stock outstanding, consisting of 7,434,827 shares of Class A Common
Stock, $.01 par value, and 26,462,200 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),
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income (Unaudited),
Three Months Ended September 30, 1996 and 1995 4
Nine Months Ended September 30, 1996 and 1995
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Nine Months Ended September 30, 1996 5
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 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 19
Signatures 21
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3
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE JOHN NUVEEN COMPANY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
Cash $ 5,913 $ 5,036
Securities purchased under agreements to resell 95,000 11,000
Short term investments, at cost which approximates market value 34,948 0
Temporary investments arising from remarketing obligations 53,290 198,285
U.S. government securities purchased for municipal bond escrow accounts 43,388 1,385
Investment in U.S. government securities, at fair value 0 60,039
Receivables:
Nuveen management investment companies 17,469 19,633
Brokers and dealers 392 283
Customers 3,885 8,828
Interest and dividends 1,571 2,694
Other 5,897 3,387
Securities owned (trading account), at market value:
Nuveen tax-exempt unit trusts 39,435 39,069
Tax-exempt bonds and notes 2,983 12,308
Deferred income tax charges 13,310 12,919
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation and amortization of $18,205
and $14,413, respectively 14,480 16,337
Long term investments and other assets 54,580 11,309
----------- -----------
$ 386,541 $ 402,512
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Securities sold under agreements to repurchase $ 0 $ 25,000
Security purchase obligations 993 7,174
Payables:
Brokers and dealers 759 767
Customers 378 524
Income taxes 3,815 4,355
Accrued compensation and other expenses 35,878 14,489
Deferred compensation 22,678 22,816
Other liabilities 14,207 4,531
----------- -----------
Total liabilities 78,708 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, issued 11,485,556 shares and 10,094,356 shares,
respectively 115 101
Class B Common stock, $.01 par value; 40,000,000 shares
authorized, issued 27,168,800 shares and 28,560,000 shares,
respectively 272 286
Additional paid-in capital 50,517 50,122
Retained earnings 351,078 319,705
Unamortized cost of restricted stock awards (845) (1,611)
----------- -----------
401,137 368,603
Less common stock held in treasury, at cost (3,807,729 and
1,978,829 shares, respectively) (93,304) (45,747)
----------- -----------
Total stockholders' equity 307,833 322,856
----------- -----------
$ 386,541 $ 402,512
=========== ===========
See accompanying notes to consolidated financial statements.
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4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------
1996 1995 1996 1995
------------ -------------- ------------ ------------
Revenues:
Investment advisory fees from
assets under management $ 46,391 $ 46,252 $ 138,826 $ 136,142
Underwriting and distribution
of investment products 3,912 4,060 11,213 11,827
Positioning profits (losses) 956 525 (602) 2,930
Investment banking 2,303 2,407 5,435 6,450
Interest 4,464 4,946 14,698 14,291
All other 588 682 1,817 2,168
------------ -------------- --------- ---------
Total revenues 58,614 58,872 171,387 173,808
------------ --------------- --------- ---------
Expenses:
Compensation and benefits 18,041 18,856 53,721 60,200
Advertising and promotional costs 3,069 3,719 10,010 12,723
Occupancy and equipment costs 3,143 2,986 8,947 8,738
Interest 608 618 1,812 2,051
Other operating expenses 3,891 4,024 11,684 11,121
------------ -------------- --------- ---------
Total expenses 28,752 30,203 86,174 94,833
------------ -------------- --------- ---------
Income before taxes 29,862 28,669 85,213 78,975
Income taxes 11,365 10,819 32,562 29,863
------------ -------------- -------- ---------
Net income $ 18,497 $ 17,850 $ 52,651 $ 49,112
============ ============== ========= =========
Average common and common equivalent
shares outstanding 36,794 37,680 37,299 37,712
============ ============== ========= =========
Earnings per common share $ 0.50 $ 0.47 $ 1.41 $ 1.30
============ ============== ========= =========
See accompanying notes to consolidated 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 -- -- -- -- 52,651 -- -- 52,651
Cash dividends paid -- -- -- -- (20,626) -- -- (20,626)
Issuance of restricted stock -- -- -- 55 -- (750) 695 --
Amortization of restricted
stock awards -- -- -- -- -- 1,516 -- 1,516
Purchase of treasury stock -- 14 (14) -- -- -- (51,262) (51,262)
Exercise of stock options -- -- -- (55) (652) -- 3,010 2,303
Other -- -- -- 395 -- -- -- 395
-------- ------ ----- ------ ------- ----- ------ -------
Balance at September 30, 1996 $ -- 115 272 50,517 351,078 (845) (93,304) 307,833
======== ====== ===== ====== ======= ===== ====== =======
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Nine Months Ended September 30
------------------------------
1996 1995
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,651 $ 49,112
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes (392) (3,830)
Depreciation and amortization 3,792 3,356
Net (increase) decrease :
Accrued investment advisory fees 2,164 2,970
Accrued interest receivable 671 (1,261)
Accounts receivable other (1,294) 1,606
Net increase (decrease) :
Current taxes payable (145) 2,943
Accrued compensation and other expenses 21,388 28,957
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities 10,584 3,164
Amortization of restricted stock awards 1,516 5,128
Net (increase) decrease in assets:
Temporary investments arising from remarketing obligations 144,995 44,425
U.S. government securities (escrow accounts) (42,003) -
Securities owned (trading account) 8,959 (2,770)
Net increase (decrease) in liabilities:
Security purchase obligations (6,181) (1,574)
Deferred compensation (138) 453
------------- ---------------
Net cash provided from operating activities 196,567 132,679
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term borrowings-
Securities sold under agreements to repurchase (25,000) --
Dividends paid (20,626) (18,500)
Proceeds from stock options exercised 2,031 846
Acquisition of treasury stock (45,048) (10,487)
------------- ---------------
Net cash used for financing activities (88,643) (28,141)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of U.S. treasury securities and other short
term investments (103,422) (126,854)
Proceeds from maturity of U.S. treasury securities and
other short term investments 128,965 38,453
Purchases of office furniture and equipment (1,935) (2,582)
Proceeds from sale of office furniture and equipment -- 29
Other (46,655) (94)
------------- ---------------
Net cash used for investing activities (23,047) (91,048)
------------- ---------------
Increase/(decrease) in cash and cash equivalents 84,877 13,490
Cash and cash equivalents:
Beginning of year 16,036 118,777
------------- ---------------
End of period $ 100,913 $ 132,267
============= ===============
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 September 30, 1996 its net capital ratio
was .29 to 1 and its net capital was $212,300,000, which is
$208,200,000 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.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE JOHN NUVEEN COMPANY
SEPTEMBER 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; 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
During the third quarter, a major preoccupation of the fixed-income markets was
speculation over whether the Federal Reserve Board would raise short-term
interest rates. The main reason for this speculation was the accelerating pace
of economic growth. During the second quarter, Gross Domestic Product expanded
at an annual rate of 4.7%, which was up from 2.0% in the first quarter and 0.7%
a year ago.
The Federal Reserve Board elected to hold rates steady in early July.
Although immediately questioned by the markets, this decision ultimately
proved to be prudent as economic statistics released later in the quarter
reported a marked slowdown in economic activity.
In contrast, throughout the first three quarters of 1995, interest rates
declined based on 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. The stock market experienced
strong performance during both of the nine month periods.
The movement of interest rates for the nine months ended September 30, 1996 and
1995 is shown in the following graphs.
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[GRAPH]
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1995 TO SEPTEMBER 30, 1995
1/6/95 1/13/95 1/20/95 1/27/95 2/3/95 2/10/95 2/17/95 2/24/95 3/3/95 3/10/95 3/17/95 3/24/95 3/31/95 4/7/95
Bond Buyer 20 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 6.03
30 Year Treasury 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 7.35
4/13/95 4/21/95 4/28/95 5/5/95 5/12/95 5/19/95 5/26/95 6/2/95 6/9/95 6/16/95 6/23/95 6/30/95 7/7/95 7/14/95
Bond Buyer 20 6.01 5.96 6.06 6.10 5.96 5.92 5.83 5.79 5.75 5.86 5.82 5.97 5.91 5.81
30 Year Treasury 7.33 7.33 7.33 7.17 6.98 6.92 6.75 6.53 6.72 6.61 6.53 6.64 6.52 6.6
7/21/95 7/28/95 8/4/95 8/11/95 8/18/95 8/25/95 9/1/95 9/8/95 9/15/95 9/22/95 9/29/95
Bond Buyer 20 5.99 5.97 6.03 6.07 6.12 6.08 5.98 5.90 5.83 5.91 6.00
30 Year Treasury 6.95 6.90 6.91 6.99 6.90 6.70 6.60 6.59 6.48 6.59 6.49
[GRAPH]
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996
1/4/96 1/11/96 1/18/96 1/25/96 2/1/96 2/8/96 2/15/96 2/22/96 2/29/96 3/7/96 3/14/96 3/21/96 3/28/96 4/4/96
Bond Buyer 20 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 5.86
30 Year Treasury 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 6.63
4/11/96 4/18/96 4/25/96 5/2/96 5/9/96 5/16/96 5/23/96 5/30/96 6/6/96 6/13/96 6/20/96 6/27/96 7/4/96 7/11/96
Bond Buyer 20 6.03 5.94 5.91 6.06 5.96 5.96 5.87 5.94 5.94 6.12 6.06 5.97 5.94 6.00
30 Year Treasury 6.93 6.83 6.81 7.04 7.02 6.92 6.87 6.94 6.91 7.12 7.12 7.00 6.93 7.06
7/18/96 7/25/96 8/2/96 8/9/96 8/16/96 8/23/96 8/30/96 9/6/96 9/13/96 9/20/96 9/27/96
Bond Buyer 20 5.88 5.86 5.79 5.67 5.74 5.75 5.86 5.95 5.89 5.88 5.76
30 Year Treasury 6.92 7.06 6.84 6.79 6.81 6.84 7.04 7.16 7.07 7.05 6.88
9
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Both stock and bond mutual funds generally continued to experience growth in
the third quarter of 1996. Stock funds reported significant sales during the
quarter, although the inflow of money slowed dramatically in July following the
steep downfall in small capitalization stocks. Fixed income funds experienced
growth during the first nine months of 1996, however, the sales levels in the
third quarter of 1996 were at half the level of the third quarter of 1995.
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 $128 billion during the first nine months of 1996 compared with
$107 billion in the same period of 1995. New-money financings by issuers were
$87 billion for the first three quarters of 1996 and $78 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 $31 billion
in the first nine months of 1996 compared with $21 billion in 1995. The
accompanying graph contrasts new issue volume in the first three quarters of
1996 and 1995:
[BAR GRAPH]
LONG-TERM MUNICIPAL BONDS
NEW ISSUE VOLUME
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1995
1996
Total New Issue Volume 128,000,000,000
New-Money Financing 87,000,000,000
Refundings 31,000,000,000
1995
Total New Issue Volume 107,000,000,000
New-Money Financing 78,000,000,000
Refundings 21,000,000,000
11
The following table compares key operating information of the Company for the
three month period and nine month period ended September 30, 1996 and 1995.
NUVEEN OPERATING STATISTICS
(in millions except per share
amounts and assets under
management)
FOR THE THIRD QUARTER OF FOR THE FIRST NINE MONTHS OF
1996 1995 % CHANGE 1996 1995 % CHANGE
---- ---- -------- ---- ---- --------
Gross revenues $58.6 $58.9 -0.5% $171.4 $173.8 -1.4%
Operating expenses 28.8 30.2 -4.6 86.2 94.8 -9.1
Pretax operating income 29.9 28.7 4.2 85.2 79.0 7.8
Net income 18.5 17.9 3.4 52.7 49.1 7.3
Earnings per share 0.50 0.47 6.4 1.41 1.30 8.5
Dividend per share 0.21 0.18 16.7 0.57 0.50 14.0
Book value per share 8.83 8.44 4.6 8.83 8.44 4.6
Consolidated stockholders' equity 307.8 312.2 -1.4 307.8 312.2 -1.4
Sales (net of redemptions) 361.0 432.0 -16.4 900.0 1,244.0 -27.7
Assets under management (in 32.5 32.2 0.9 32.5 32.2 0.9
billions)
BUSINESS HIGHLIGHTS
- - Investment advisory fees for the first nine months of 1996
increased when compared to the same period of the prior year.
Increases in advisory fees earned on long-term mutual funds, exchange
traded funds, managed accounts were offset by declines in advisory
fees earned on money market funds. When comparing the three month
periods ended September 30, 1996 and 1995, overall advisory fees
remained relatively flat with increases in fees on long term mutual
funds and managed accounts offset by decreases on money market and
exchange traded funds.
- - The continued strength of the stock market coupled with
investors' uncertainty over the direction of interest rates in 1996
led to a lower level of sales for fixed income products in the
industry. Consistent with these trends, the Company experienced a
decline in the demand for municipal bond funds and trusts. As a
result, the Company experienced a reduction in distribution revenues
for the first nine months of 1996 when compared to the first nine
months of the prior year.
- - As a consequence of rising interest rates earlier in the year, the
Company realized positioning losses from holding municipal bonds and
unit investment trusts (UITs) during the nine month period ended
September 30, 1996. Positioning losses for the nine month period
ended September 30, 1996, were $602,000 in contrast to gains of $2.9
million for the comparable period of the prior year when interest
rates were declining. The decline
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in interest rates during the third quarter of 1996 contributed to
positioning gains for the third quarter of almost $1 million.
- - Operating expenses for the third quarter of the current year
decreased 4.6% when compared to the same period of the prior year
primarily due to lower compensation and benefit costs, and reduced
advertising and promotion 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 and the decrease in the profit sharing component
of compensation and benefits. Advertising and promotion expenditures
were lower during 1996 as the Company carefully selected and targeted
its activities in light of current market conditions.
- - In early July, the Company announced an agreement to acquire Flagship
Resources Inc., a Dayton, Ohio-based municipal mutual fund sponsor and
asset manager, for cash and preferred stock with a total value of
approximately $65 million. With the merging of Flagship and the
Company's tax-exempt mutual fund businesses, the Company will expand
the range of conservative municipal investments offered to 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 corporate merger is expected to be completed at the end
of 1996.
- - Also in July 1996, the Company announced 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. As of
September 30, 1996, this repurchase program was approximately 50%
completed.
- - The Company increased its third quarter dividend 17%, to $0.21 from
$0.18 per common share.
- - In October, the Company announced an exclusive introductory program
for the new Nuveen Growth and Income Stock Fund. The Fund will be
available for a limited time exclusively to current Nuveen unit trust,
mutual fund and exchange traded fund investors and to Flagship mutual
fund investors on a load waived basis. The Company will compensate
registered representatives directly for services they provide their
clients.
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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 may include reinvestment of fund dividends. Shares
may also be sold as a result of reinvestment of distributions from UITs
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, from our various
investment products is shown in the following table:
NUVEEN MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
Managed Funds:
Mutual Funds $ 6,358 $ 6,029 $ 18,972 $ 17,639
Exchange-Traded Products 38,786 38,856 115,939 114,374
Money Market Funds 1,067 1,260 3,372 3,862
Managed Accounts 180 107 543 267
-------- ------- -------- --------
Total $ 46,391 $ 46,252 $ 138,826 $ 136,142
========= ========= ========= =========
Total advisory fees for the three month and nine month periods ended September
30, 1996 increased over the comparable periods of the prior year. The increase
in fees for mutual funds for both periods resulted from the higher levels of
assets under management. The small increase in fees earned on exchange traded
funds for the first nine months of the year and the decrease in fees earned
during the third quarter when compared to the same periods of the prior year
reflect the impact of the movement of interest rates on the value of portfolio
investments as there were no new exchange traded funds offered during 1995 or
1996. Average money market net assets under management decreased during the
third quarter of
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14
1996 caused by relatively low short-term interest rates, a strong equity
market and strong competition from sponsors of competing money market 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, rose during the first nine
months of 1996 when compared to the same period of the prior year due to the
growing base of assets under management in all of 1995 and in the first nine
months of 1996.
The following table summarizes net assets under management:
NUVEEN TAX-FREE MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT
(in millions)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
---- ---- ----
Managed Funds:
Mutual Funds $ 5,409 $ 5,457 $ 5,189
Exchange-Traded Products 25,267 25,784 25,183
Money Market Funds 1,061 1,113 1,153
Managed Accounts 773 688 648
----------- --------- ----------
Total $ 32,510 $ 33,042 $ 32,173
=========== ========= ==========
Sales of tax-free investment products are shown below:
NUVEEN TAX-FREE INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
Unit investment trusts $ 275 $ 300 $ 766 $ 870
Managed Funds:
Mutual funds (1) 53 66 74 143
Exchange-traded funds (3) 8 2 28 13
Money market funds (2) (5) (85) (52) (88)
Managed accounts 30 149 84 306
--------- ------- ---------- --------
Total $ 361 $ 432 $ 900 $ 1,244
========= ======= ========= ========
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.
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Demand for tax-exempt investment products is 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 during the first nine months of 1996 as compared to 1995 primarily due to
the interest rate environment during each period, investor concerns that
interest rates would continue to climb, and continued competition with the
robust equity markets. Sales of UITs and mutual funds in the third 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. Sales of managed accounts declined
in the nine month and three month periods ended September 30, 1996 from the
levels of the previous year.
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 during the first nine
months of 1996 resulted in a 5% decrease in distribution revenues relative to
the same period 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 nine months 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 third quarter and the first nine months of the year, when compared to the
prior year.
Compensation and related benefits decreased during the first nine months of
1996 when compared to the same period of 1995 due to the decrease in expense
associated with equity awards granted pursuant to the Company's 1992 Special
Incentive Plan and a decrease in the expense associated with the profit sharing
component of compensation and benefits. As the expense associated
with the awards granted under the Special Incentive Plan is tied to a vesting
schedule, with the majority of the awards being fully vested in July 1995 and
with substantially all awards being vested by July 1996, the related expense
decreased accordingly.
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In February 1996, the Company's Board of Directors approved an equity based
incentive compensation plan which shifts 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 even further 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 recipients), 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 operating income before profit sharing that is used to derive the profit
sharing expense component of compensation expense.
The Company also realized a decrease in advertising and promotion expenditures
when comparing the first nine months of 1996 and 1995. Advertising and
promotion expenditures were lower as the Company continued to carefully select
and target its activities in response to the current market conditions for
fixed income investments.
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 nine 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.
The Company is remarketing agent for various issuers of VRDOs with an aggregate
principal value in excess of $1.3 billion at September 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
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companies. At September 30, 1996, and December 31, 1995, the Company held $53
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 nine months 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 $43.4 million of such securities at
September 30, 1996 and $1.4 million at December 31, 1995.
At September 30, 1996, the Company held in its treasury 3,807,729 shares of its
Class A Common Stock acquired in open market transactions as part of stock
repurchase programs. Under the most recent stock buyback program
announced on July 16, 1996, the Company will repurchase up to 3.5 million
common shares outstanding. Through September 30, 1996, 1,986,900 shares have
been purchased, of which 1,780,200 shares were repurchased under this most
recent program.
During the second quarter of 1996, the Company made an equity investment in
Institutional Capital Corporation (ICAP), an institutional equity manager, in
the form of preferred stock convertible after several years into a 20% common
stock interest. ICAP serves as sub-advisor to three new Nuveen equity funds
which will be offered to the public during the fourth quarter of 1996 and the
first quarter of 1997. The Nuveen Growth and Income Stock Fund is being
offered in the fourth quarter of 1996 exclusively to existing Nuveen and
Flagship investors through a limited time load-waived introductory program.
The Company will advance a commission to registered representatives for sales
made in conjunction with this offer.
In July, 1996, the Company announced its intention to acquire all of the stock
of Flagship Resources, Inc. in exchange for cash and convertible preferred
stock. The total price of the transaction is $65 million, excluding contingent
payments which could amount to an additional $20 million over a four year
period. The transaction is expected to be completed by the end of the fourth
quarter of 1996.
The Company, while authorized to invest in derivative financial instruments,
did not purchase any derivative securities in managing its operations during
the first nine months 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.
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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 September 30, 1996, its
net capital ratio was .29 to 1 and its net capital was $212.3 million which is
$208.2 million in excess of the required net capital of $4.1 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 second quarter of 1996, consolidated and coordinated lawsuits
seeking unspecified damages are currently pending in federal district
court in Chicago against John Nuveen & Co. Incorporated ("Nuveen &
Co."), Nuveen Advisory, 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"), inside counsel to Nuveen & Co. (collectively the "Nuveen
Defendants") and the Funds' outside legal counsel making various
allegations with respect to the Funds' January, 1994 rights offerings.
As also previously reported, in July, 1995 Ivan Behm, an NUV
shareholder, filed a purported class action lawsuit making similar
allegations against the same defendants in the District Court, Fourth
Judicial District, Hennepin County, Minnesota which seeks unspecified
damages. The Minnesota case was dismissed in December, 1995 and such
dismissal was affirmed by the Minnesota appellate court on October 22,
1996.
On November 4, 1996, a Memorandum of Understanding was signed
on behalf of the plaintiffs by their counsel and on behalf of the
Nuveen Defendants by their counsel, pursuant to which the above
litigation will be settled contingent on agreement by the parties on
settlement documentation, approval by the Court of that final
settlement documentation, resolution of related claims involving the
Funds' former outside counsel, and certain other contingencies. A
similar agreement has been reached between plaintiffs and the Funds'
outside counsel. The settlements, which in no way constitute an
admission of liability by any defendant, will be paid one half each by
the insurer for the Funds' former outside counsel and by the insurer
for the Nuveen Defendants. The Memorandum of Understanding provides
that the settlement funds will be paid primarily to the Funds'
shareholders allegedly injured by the rights offering. A portion of
the settlement amounts will be paid to the Funds as reimbursement of
their expenses and the Funds will also receive amounts unclaimed by
shareholders.
A lawsuit is currently pending against John Nuveen & Co. Incorporated,
Nuveen Advisory Corp., six Nuveen investment companies, Nuveen
Massachusetts Premium Income Municipal Fund ticker symbol (NMT), Nuveen
Insured Municipal Opportunity Fund, Inc. (NIO), Nuveen Insured Premium
Income Municipal Fund, Inc. (NPE), Nuveen Premium Income Municipal Fund
2, Inc. (NPM), Nuveen Insured Premium Income Municipal Fund 2 (NPX),
and Nuveen Premium Income Municipal Fund, 4, Inc. (NPT) (the "Funds"),
and two of the Funds' former directors (Messrs. Franke and Sveen),
seeking unspecified damages, an injunction and other relief. The suit
also seeks certification of a defendant class consisting of all
Nuveen-managed leveraged funds. This lawsuit, brought in federal
district court in Boston, was filed on June 21, 1996 by Jack Green,
individually and as trustee (shareholder of NIO, NPE, NPM, NPX, and
NPT), Stantley Simon as trustee (shareholder of NPT), and Norma Evans
(shareholder of NMT).
The complaint is filed on behalf of a purported class of present and
former shareholders of all Nuveen leveraged investment companies,
including the Funds, which allegedly engaged in certain practices which
plaintiffs allege violated various provisions of the Investment Company
Act of 1940 and common law. Plaintiffs allege among other things,
breaches of fiduciary duty and various misrepresentations and omissions
in disclosures in connection with the use and maintenance of leverage
through the issuance and periodic auctioning of preferred stock and the
payment of management and brokerage fees to Nuveen Advisory Corp. and
John Nuveen & Co. Incorporated. The defendants are vigorously
contesting this action and have filed motions to dismiss the entire
action as well as motions to transfer which are pending.
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
At the Annual Meeting of Stockholders held on July 9, 1996, the eight
directors nominated in the Proxy Statement were elected for a
one-year term expiring at the annual meeting in 1997. The following
individuals were elected directors by the vote of holders of the
following number of shares of Class A and Class B Common Stock
represented at the meeting, voting together as a single class:
Director For Withheld Broker Non-Votes
-------- --- -------- ----------------
Anthony T. Dean 34,280,484 140,205 0
Timothy R. Schwertfeger 34,282,879 130,810 0
Willard L. Boyd 34,385,379 35,310 0
Duane R. Kullberg 34,384,859 35,830 0
The following individuals were elected Class B directors by the vote
of holders of the following number of shares of Class B Common Stock
represented at the meeting, voting as a separate class:
Class B Director For Withheld Broker Non-Votes
---------------- --- -------- ----------------
W. John Driscoll 28,560,000 0 0
Andrew I. Douglass 28,560,000 0 0
Douglas W. Leatherdale 28,560,000 0 0
Patrick A. Thiele 28,560,000 0 0
The proposal to ratify the Company's 1996 Equity Incentive Award
Plan and the Executive Officer Compensation Plan was approved by a
vote of 31,280,451 shares in favor, 1,029,332 shares opposed and
434,888 shares abstaining.
The proposal to ratify the selection of KPMG Peat Marwick LLP as
independent auditors for the Company was approved by a vote of
34,390,109 shares in favor, 14,344 shares opposed and 15,236 shares
abstaining.
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. A Form 8-K dated July 16, 1996 was filed
reporting under Item 5 Other Events the announcement that the
Company had entered into an Agreement and Plan of Merger with
Flagship Resources Inc. Also reported under Item 10 Financial
Statements, Pro Forma Financial Information and Exhibits was the
Agreement and Plan of Merger and the accompanying press release
dated July 16, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: November 13, 1996 By /s/ James J. Wesolowski
--------------------------
James J. Wesolowski
Vice President, General Counsel
and Secretary
(Authorized Signatory)
DATE: November 13, 1996 By /s/ John P. Amboian
-----------------------
John P. Amboian
Executive Vice President and
Chief Financial Officer
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