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, 1997
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, 1997 there were 32,309,269 shares of the Company's Common Stock
outstanding, consisting of 7,292,627 shares of Class A Common Stock, $.01 par
value, and 25,016,642 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),
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II.OTHER INFORMATION
Item 1 through Item 6 19
Signatures 21
(2)
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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)
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
- ------ --------- ------------
Cash $ 16,564 $ 6,348
Securities purchased under agreements to resell 30,000 72,000
Short term investments, at cost which approximates market value 1,326 -
Temporary investments arising from remarketing obligations 95,810 99,835
Receivables:
Management and distribution fees 21,615 20,767
Brokers and dealers 4,396 428
Customers 7,855 5,141
Income taxes - 568
Interest 669 909
Other 6,147 7,749
Securities owned (trading account), at market value:
Nuveen tax-exempt unit trusts 44,839 39,206
Tax-exempt bonds and notes 1,038 4,553
Deferred income tax asset, net 8,488 9,778
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation and amortization of $21,248
and $19,363 respectively 14,520 14,073
Other investments 52,464 52,094
Goodwill 61,800 -
Prepaid expenses and other assets 22,796 21,802
------------ ----------
$ 390,327 $ 355,251
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Security purchase obligations $ 973 $ 2,227
Payables:
Brokers and dealers 5,361 1,326
Customers 478 165
Income taxes 8,708 -
Accrued compensation and other expenses 20,295 47,789
Deferred compensation 26,664 23,414
Other liabilities 6,515 8,436
------------ ----------
Total liabilities 68,994 83,357
------------ ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 1,800,000 shares issued 18 -
Class A common stock, $.01 par value; 150,000,000 shares authorized,
issued 13,051,652 shares and 12,828,199 shares, respectively 131 128
Class B common stock, $.01 par value; 40,000,000 shares authorized,
issued 25,602,704 shares and 25,826,157 shares, respectively 256 259
Additional paid-in capital 95,754 50,649
Retained earnings 373,846 363,715
Unamortized cost of restricted stock awards (566) (705)
------------ ----------
469,439 414,046
Less common stock held in treasury, at cost (5,732,325 and
5,535,122 shares, respectively) (148,106) (142,152)
------------ ----------
Total stockholders' equity 321,333 271,894
------------ ----------
$ 390,327 $ 355,251
============ ==========
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
MARCH 31,
-------------------------
1997 1996
---- ----
Revenues:
Investment advisory fees from
assets under management $ 50,357 $ 46,835
Underwriting and distribution
of investment products 2,630 3,224
Positioning losses (488) (1,236)
Investment banking 2,544 2,036
Interest, dividends and all other, net 6,079 6,201
---------- ----------
Total revenues 61,122 57,060
---------- ----------
Expenses:
Compensation and benefits 18,679 18,574
Advertising and promotional costs 4,407 3,547
Other operating expenses 8,842 7,338
---------- ----------
Total expenses 31,928 29,459
---------- ----------
Income before taxes 29,194 27,601
Income taxes 11,392 10,596
---------- ----------
Net income $ 17,802 $ 17,005
========== ==========
Average common and common equivalent
shares outstanding:
Primary 33,925 37,547
========== ==========
Fully diluted 35,631 37,571
========== ==========
Earnings per common share:
Primary $ 0.51 $ 0.45
========== ==========
Fully diluted $ 0.50 $ 0.45
========== ==========
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)
Class A Class B Additional
Preferred Common Common Paid-In Retained
Stock Stock Stock Capital Earnings
----------- ------- -------- ----------- ----------
Balance at December 31, 1996 $ - $ 128 $ 259 $ 50,649 $ 363,715
Net income - - - - 17,802
Cash dividends paid - - - - (7,489)
Issuance of restricted stock - - - 68 -
Amortization of restricted
stock awards - - - - -
Purchase of treasury stock - 3 (3) - -
Exercise of stock options - - - (68) (182)
Stock issued in connection with acquisition 18 - - 44,982 -
Other - - - 123 -
-------- --------- ------- --------- ---------
Balance at March 31, 1997 $ 18 $ 131 $ 256 $ 95,754 $ 373,846
======== ========= ======= ========= =========
Unamortized
Cost of
Restricted Treasury
Stock Awards Stock Total
------------ --------- -----
Balance at December 31, 1996 $ (705) $ (142,152) $ 271,894
Net income - - 17,802
Cash dividends paid - - (7,489)
Issuance of restricted stock - 1,464 1,532
Amortization of restricted
stock awards 139 - 139
Purchase of treasury stock - (8,253) (8,253)
Exercise of stock options - 835 585
Stock issued in connection with acquisition - - 45,000
Other - - 123
---------- ---------- ----------
Balance at March 31, 1997 $ (566) $ (148,106) $ 321,333
========== ========== ==========
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
Three Months Ended March 31,
----------------------------
1997 1996
--------- ---------------
Cash flows from operating activities:
Net income $ 17,802 $ 17,005
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 1,900 (741)
Depreciation and amortization 1,023 1,234
Amortization of goodwill 563 -
Net (increase) decrease :
Accrued management and distribution fees 426 1,877
Accrued interest receivable 240 (378)
Accounts receivable other 3,212 860
Net increase (decrease) :
Current taxes payable 8,540 9,747
Accrued compensation and other expenses (30,457) 7,195
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities (5,909) 1,574
Amortization of restricted stock awards 139 688
Net (increase) decrease in assets:
Temporary investments arising from remarketing obligations 4,025 181,500
U.S. government securities (escrow accounts) - 1,385
Securities owned (trading account) (2,119) (2,819)
Net increase (decrease) in liabilities:
Security purchase obligations (1,254) 3,377
Deferred compensation 3,084 744
---------- ---------
Net cash provided from operating activities 1,215 223,248
---------- ---------
Cash flows from financing activities:
Net payments on securities sold under agreements to repurchase - (25,000)
Dividends paid (6,926) (6,591)
Proceeds from stock options exercised 585 918
Acquisition of treasury stock (8,253) (4,177)
---------- ---------
Net cash used for financing activities (14,594) (34,850)
---------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired (16,144) -
Purchase of U.S. treasury securities (1,326) -
Proceeds from maturity of U.S. treasury securities - 20,000
Purchases of office furniture and equipment (1,149) (284)
Other 214 (69)
---------- ---------
Net cash provided from (used for) investing activities (18,405) 19,647
---------- ---------
Increase/(Decrease) in cash and cash equivalents (31,784) 208,045
Cash and cash equivalents:
Beginning of period 78,348 16,036
---------- ---------
End of period $ 46,564 $ 224,081
========== =========
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
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 & Co."), Nuveen Advisory Corp.("Nuveen Advisory"), Nuveen Asset
Management Inc. 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.
Certain amounts in the prior period financial statements have been reclassified
to correspond to the 1997 presentation. These reclassifications have no effect
on net income or retained earnings as previously reported for those periods.
NOTE 2 EARNINGS PER COMMON SHARE
Primary earnings per common share amounts were computed by dividing earnings
after deduction of preferred stock dividends (in 1997) by the average number of
common and common equivalent shares outstanding. Fully diluted per-common-share
amounts assume conversion of the preferred stock, the elimination of the related
preferred stock dividend requirement, and the issuance of common stock for all
other potentially dilutive equivalents outstanding. Common equivalent shares
include the dilutive effect of shares issuable under the Company's Equity
Incentive Plan.
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, 1997 its net
capital ratio was .44 to 1 and its net capital was $127,800,000, which is
$124,100,000 in excess of the required net capital of $3,700,000.
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.
NOTE 5 ACQUISITION
On January 2, 1997, the Company completed the acquisition of Flagship Resources
Inc. and its wholly owned subsidiaries, Flagship Financial Inc., a registered
investment adviser under the Investment Advisors Act of 1940 and Flagship Funds
Inc., a registered broker/dealer under the Securities and Exchange Act of 1934
(collectively "Flagship"). As of December 31, 1996, Flagship managed over $4.6
billion in assets and serviced approximately 100,000 investors and their
financial advisers through its mutual fund and managed account products. Prior
to completion of the acquisition, the shareholders of the Flagship sponsored
mutual funds approved the assignment of their investment advisory and
distribution contracts to Nuveen Advisory and Nuveen & Co. As
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NOTE 5 ACQUISITION (CONTINUED)
part of the integration process, the Company changed the name of Flagship
Financial Inc. to Nuveen Asset Management Inc. and consolidated its retail and
institutional managed account operations under such entity. The base purchase
price paid at closing of $63 million consisted of $18 million cash and
1,800,000 shares of 5% cumulative preferred stock valued at $45 million. The
preferred stock is convertible to 1,650,000 shares of the Company's Class A
common stock, at the option of the holders, after two years. The acquisition
was accounted for using the purchase method of accounting, and accordingly, a
portion of the purchase price paid was allocated to the acquired net assets
based on their estimated fair values at the date of purchase. The excess of
the purchase price over assets acquired approximating $62 million is being
amortized over 30 years. The Agreement and Plan of Merger also provides for
contingent payments of up to $20 million to be allocated between cash and
common stock in the same proportion as the base purchase price if certain sales
growth and profitability targets are satisfied over the next four years. Any
contingent payments will be accounted for as additional goodwill and amortized
over the remaining useful life of the initial goodwill.
The operating results through March 31, 1997 reflect the full impact of the
acquired business. The following unaudited pro forma information for the three
months ended March 31, 1996 presents a summary of consolidated results of
operations of the Company and the acquired business as if the acquisition had
occurred January 1, 1996:
Revenues $61,137
Net Income $17,735
Earnings Per Common Share $ .46
=======
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as revised management fee structure,
additional goodwill amortization, increased profit sharing costs, and estimated
cost reductions. They do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in
effect on January 1, 1996 or of future results of operations of the consolidated
entity.
NOTE 6 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128 "Earnings Per Share," which
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share and requires dual disclosure of basic and diluted
earnings per share. The statement also calls for a reconciliation of the basic
earnings per share calculation to the diluted earnings per share calculation.
Statement 128 is required for periods ending after December 15, 1997, and does
not allow for early adoption. The Company will adopt Statement 128 in the
fourth quarter of 1997. The Company does not expect that reported earnings per
share under the new accounting standard will differ materially from that
currently reported.
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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
MARCH 31, 1997
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 services; 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 investor preferences for fixed-income, equity or other investments,
municipal bond new issue supply, current and expected changes in interest rate
levels, the rate of inflation, and changes or expected changes in income tax
rates and laws.
MARKET OVERVIEW
Interest rates rose during most of the first quarter as economic indicators
pointed to higher growth in the U. S. economy. Driven by renewed concerns that
such growth would increase inflationary pressures, the Federal Reserve Board
acted in March by increasing short term interest rates 25 basis points. In
general, municipal bonds outperformed their Treasury counterparts throughout
the period with yields on the 30-year U. S. Treasury bond rising a total of 51
basis points for the quarter while the yield on the Bond Buyer 20, a popular
index of long term municipal bonds, increased only 15 basis points. One reason
for the municipals' strong performance during the quarter was the lack of new
supply. New issue volume was down 10% for the first quarter of 1997 over the
same period of the prior year. Despite a sell-off late in the quarter, the U.S.
stock market continued to experience solid performance.
In general, equity mutual funds continued to exhibit growth during the first
quarter of 1997. Demand for tax-free products remained relatively flat,
continuing the trend from last year, as the fixed income markets competed with a
strong equity market and investors anticipated further increases in interest
rates. Industry data reported net outflows for municipal bond funds for the
quarter.
The movement of interest rate levels for the first quarter of 1997 and 1996 is
shown in the accompanying graph.
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Yield Comparisons of the
30 Year Treasury Bond and the Bond Buyer 20
for the period January 1, 1996 to March 31, 1996
[LINE GRAPH]
1/4/96 1/11/96 1/18/96 1/25/96 2/1/96 2/8/96 2/15/96 2/22/96
Bond Buyer 20 5.37 5.50 5.40 5.46 5.40 5.37 5.33 5.48
30 Year Treasury 6.04 6.14 5.97 6.11 6.07 6.15 6.16 6.33
2/29/96 3/7/96 3/14/96 3/21/96 3/28/96
Bond Buyer 20 5.57 5.59 5.81 5.86 5.90
30 Year Treasury 6.48 6.46 6.68 6.61 6.72
Yield Comparisons of the
30 Year Treasury Bond and the Bond Buyer 20
for the period January 1, 1997 to March 31, 1997
[LINE GRAPH]
1/3/97 1/10/97 1/17/97 1/24/97 1/31/97 2/7/97 2/14/97
Bond Buyer 20 5.70 5.71 5.72 5.72 5.73 5.70 5.62
30 Year Treasury 6.74 6.75 6.63 6.85 6.88 6.75 6.63
2/21/97 2/28/97 3/7/97 3/14/97 3/21/97 3/27/97
Bond Buyer 20 5.58 5.65 5.70 5.75 5.78 5.81
30 Year Treasury 6.65 6.81 6.87 6.96 6.96 6.99
(10)
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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 $38 billion in the first
quarter of 1997 compared with $42 billion underwritten in the same
period of 1996. New-money financings by issuers were $26 billion and
$25 billion for the first quarter of 1997 and 1996, respectively.
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
$9 billion in the first quarter of 1997 compared with $12 billion in
the first quarter of 1996. The accompanying graph shows new issue
volume for the first quarter of 1997 and 1996:
Long-Term Municipal Bonds
New Issue Volume
First Quarter 1997 and 1996
[BAR GRAPH]
1997
Total New Issue Volume 38,000,000,000
New-Money Financing 26,000,000,000
Refundings 9,000,000,000
1996
Total New Issue Volume 42,000,000,000
New-Money Financing 25,000,000,000
Refundings 12,000,000,000
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The following table compares key operating information of the
Company for the first quarter of 1997 and 1996.
NUVEEN OPERATING STATISTICS
(in millions except per share amounts)
FOR THE FIRST QUARTER OF
1997 1996 % CHANGE
---- ---- --------
Gross revenues $ 61.1 $ 57.1 7.0%
Operating expenses 32.0 29.5 8.5
Pretax operating income 29.2 27.6 5.8
Net income 17.8 17.0 4.7
Primary earnings per share 0.51 0.45 13.3
Fully diluted earnings per share 0.50 0.45 11.1
Dividend per share 0.21 0.18 16.7
Book value per share 9.80 9.03 8.5
Consolidated stockholders' equity 321.3 330.0 (2.6)
Gross Sales 492.5 288.8 70.5
Assets under management 36,827 32,368 13.8
BUSINESS HIGHLIGHTS
- - On January 2, 1997, the Company completed the acquisition of Flagship
Resources Inc. (Flagship), a municipal mutual fund sponsor and asset
manager, for cash and preferred stock with a total value of approximately
$63 million. Additional payments, which are contingent on the significant
future growth in the Company's tax-free mutual funds, could amount to as
much as $20 million over the next four years. With the merging of
Flagship and the Company's tax-free mutual fund businesses, the Company
has expanded the range of conservative municipal investments offered to
investors. As a result of the merger, the Company now offers mutual
funds, exchange-traded funds or unit trusts in 28 states, in addition to
national funds and trusts.
- - Effective February 1, 1997, the Company introduced a unified pricing
structure for all tax-free mutual funds offering class A, B, C and R
shares. B shares, which are sold without an up-front sales charge but
incur an annual asset-based sales charge, were first offered on February
1, 1997.
- - The integration of the Flagship mutual funds and managed retail accounts
together with the refocusing of the institutional managed account
business, contributed to the majority of the increase in gross revenues
for the period when compared to the same period of the prior year. This
increase was partially offset by a decline in interest income earned on
short-term investments.
- - Expenses for the period increased when compared to the same period of the
prior year primarily due to an increase in advertising and promotional
costs, goodwill amortization, and incremental operating expenses
resulting from the acquisition of Flagship .
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- - Investment advisory fees increased in the first quarter of 1997 when
compared with the same period of 1996 for all of the Company's managed
products with the exception of the money market and exchange-traded funds.
The increase was primarily the result of an increase in assets under
management for the mutual funds with the addition of $4.2 billion in
assets acquired from Flagship, the sale of new fund shares, and the
introduction of the new Growth and Income Funds in late 1996 and early
1997. This increase in assets was partially offset by fund share
redemptions and the decline in value of the funds' portfolio investments
as interest rates rose during the quarter.
- - The increase in sales of the mutual funds resulted in an increase in
distribution revenue for the first quarter when compared to the same
quarter of the prior year. However, this increase was offset by the
amortization of costs associated with load-waived introductory programs
for the Nuveen Growth and Income Fund, the Nuveen Balanced Stock and Bond
Fund, and the Nuveen Balanced Municipal and Stock Fund.
- - In February 1997, the Company's Board of Directors authorized the purchase
of 3.5 million of its outstanding common shares to be prorated between
Class A and Class B shares.
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 earned during any fiscal year is directly related to
the weighted average market value of the assets managed by the Company's three
investment advisory subsidiaries, Nuveen Advisory Corp., Nuveen Institutional
Advisory Corp. and Nuveen Asset Management. Advisory fee income will increase
with a rise in the level of assets under management, which occurs with the sale
of fund shares, deposits into private investment accounts managed by the
Company, the acquisition of assets under management from other advisory
companies, or through increases in the value of portfolio investments. Sales
may include shares of new funds or existing funds. Fund shares may be sold
either to new or existing shareholders. Assets under management may also
increase as a result of reinvestment of distributions from unit trusts
sponsored by the Company. Fee income will decline when managed assets decline,
as would occur when the value of fund portfolio investments decrease or when
mutual fund redemptions or managed account withdrawals exceed sales.
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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,
-------------------
1997 1996
--------- --------
Managed Funds:
Mutual Funds $10,518 $ 6,392
Exchange-Traded Funds 38,292 39,043
Money Market Funds 999 1,222
Managed Accounts 548 178
------- -------
Total $50,357 $46,835
======= =======
Total advisory fees for the first quarter of 1997 increased from the first
quarter of 1996 as a result of the higher levels of average assets under
management. Assets under management at March 31, 1997 increased 10% from
December 31, 1996 and 14% from March 31, 1996. Managed funds and accounts with
investment portfolios investing primarily in tax-free securities represent
92.5% of assets under management at March 31, 1997.
Assets under management for the mutual funds increased as a result of the
acquisition of $4.2 billion in assets under management from Flagship on January
2, 1997, the introduction of the Nuveen Growth and Income Fund and two Nuveen
balanced equity funds in late 1996 and early 1997, sales of fund shares and
reinvestment of distributions from unit trusts. This increase was partially
offset by share redemptions and depreciation in the value of the funds'
portfolio investments as interest rates rose during the quarter. The decrease in
fees earned on exchange-traded funds reflects the impact of the movement of
interest rates on the value of the investment portfolios. Average money market
net assets under management continued to decrease due to relatively low
short-term interest rates, a strong equity market and strong competition from
sponsors of competing money market products. Advisory fees on the managed
accounts increased from the first quarter of the prior year due to the shift in
composition of the average assets under management from lower fee institutional
accounts to higher fee retail accounts in connection with the acquisition of
$400 million in managed retail account assets from Flagship and the sale of all
but three institutional accounts to Duff & Phelps.
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The following table summarizes net assets under management:
NUVEEN MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT
(in millions)
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
---- ---- ----
Managed Funds:
Mutual Funds $ 9,994 $ 5,930 $ 5,306
Exchange-Traded Funds 25,067 25,434 25,154
Money Market Funds 1,060 1,004 1,189
Managed Accounts 706 823 719
-------- ---------- ---------
Total $ 36,827 $ 33,191 $ 32,368
======== ========== =========
Sales of investment products for the first quarter of 1997 and 1996 are shown
below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
MARCH 31,
----------------
1997 1996
----- ----
Unit trusts $ 208 $ 215
Mutual funds 208 43
Managed accounts 77 31
------ ------
Total $ 493 $ 289
====== ======
The Company markets its 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. Demand for tax-free 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. The integration of the Flagship mutual funds and
the Flagship distribution systems led to an increase in the sale of mutual funds
for the first quarter of 1997 over the first quarter of 1996 and a resultant
increase in distribution revenue for the period. This increase in distribution
revenue was offset by the amortization of costs incurred in connection with the
introductory load-waived programs for the Nuveen Growth and Income Fund and two
Nuveen balanced equity funds, as described below. Demand for tax-free mutual
funds remained flat for the quarter, continuing last year's trend, resulting in
net redemptions in the first quarter of the year. This trend is primarily due
to competition from strong equity markets and investor concerns that interest
rates will continue to climb. Likewise, sales of unit trusts were lower in the
first quarter of 1997 when compared to the first quarter of 1996. Sales of
managed accounts increased in the first quarter of 1997 as
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compared to the same period last year as Flagship's managed account business was
rolled into the Company's managed account business, and overall market share was
increased.
The Company realizes positioning profits or losses from changes in the market
value of unit trust inventories and municipal bond inventories held for future
unit trust 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 unit trust and ending with the sale of that unit
trust. In a declining interest rate environment, the Company could realize gains
from carrying fixed-income securities in its inventory and, conversely, in a
rising interest-rate environment, the Company could incur losses. During the
first quarter of 1997, the Company realized net positioning losses of $488,000
compared to losses of $1,236,000 during the first quarter of 1996. The Company
manages this interest-rate risk by controlling inventory levels for both
municipal bonds and unit trusts, by timing deposits of new unit trusts to
coincide closely with expected demand, and, on occasion, by hedging these
inventories against fluctuations in interest rates using financial futures.
Investment banking revenues include both new issue underwriting profits and fee
income earned from various financial advisory activities. The Company
experienced an overall increase in investment banking revenues primarily due to
an increase in financial advisory and merger and acquisition activity during the
first quarter of 1997 when compared to the first quarter of 1996.
Advertising and promotional expenditures increased for the first quarter of 1997
when compared to the same period of the prior year with the introduction of a
new advertising campaign in early March in part to support the launch of equity
and balanced mutual funds.
Compensation and related benefits remained relatively flat when comparing the
first quarters of 1997 and 1996. Although the Company recognized an increase in
salary expense with the addition of approximately 60 former Flagship employees,
the increase was mostly offset by the decrease in profit sharing expense and a
decline in expense associated with equity awards granted pursuant to the
Company's 1992 Special Incentive Plan. Expense associated with the awards
granted under the Special Incentive Plan was tied to a vesting schedule, with
substantially all awards being vested by July 1996.
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 quarter of 1997 and 1996, 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.
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The Company is remarketing agent for various issuers of VRDOs with an aggregate
principal value in excess of $1.6 billion at March 31, 1997. 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 highly-rated third-party providers, including major commercial banks
and insurance companies. At March 31, 1997, and December 31, 1996, the Company
held $96 million and $100 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 $24
million during the first quarter of 1997 and $18 million during 1996.
At March 31, 1997, the Company held in its treasury 5,732,325 shares of common
stock acquired in open market transactions and from its parent company, The St.
Paul Companies, Inc. as part of ongoing stock repurchase programs. During
February 1997, the Board of Directors authorized the purchase of 3.5 million
shares to be prorated between Class A and Class B shares. During the first
quarter of the year, the Company repurchased a total of 286,703 of its
outstanding common shares, comprised of 63,250 Class A shares and 223,453 Class
B shares, which converted to Class A shares after repurchase.
During the first quarter of 1997 and extending to May 31, 1997, the Company has
offered shares of the Nuveen Balanced Stock and Bond Fund and the Nuveen
Balanced Municipal and Stock Fund, and during January of 1997 the Company
offered shares of the Nuveen Growth and Income Stock Fund, on a load-waived
basis. The Company is compensating selling firms directly with a 2% commission
on fund share sales.
In February 1997, the Company introduced a B-share pricing feature for the
mutual fund products. B shares require the advance of a dealer commission at
time of sale which is recouped over a six to eight year period through an
asset-based sales charge and a contingent deferred sales charge. The Company
also modified the pricing structure of C shares, effective February 1, 1997.
The Company advances a dealer commission on C share sales which will be recouped
over a one year period through an asset-based sales charge or a contingent
deferred sales charge. The Company has used and expects to continue to use
existing resources to fund the advances, and expects the new share classes to
contribute to an overall increase in assets under management.
Although not prohibited from doing so, the Company does not use derivative
financial instruments to speculate on the direction of interest rates. However,
to minimize interest rate risk on the municipal bond and unit trust inventory
held by the Company, the Company purchased futures contracts during the period
and expects to continue to do so. Additionally, the Company's investment
banking group will, 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. 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
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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, 1997, its net capital ratio was .44 to 1
and its net capital was $127.8 million which is $124.1 million in excess of the
required net capital of $3.7 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-K report for the year
ended December 31, 1996, in February, 1997, the Court preliminarily approved the
settlement of litigation currently pending in federal district court in Chicago
and a similar lawsuit (dismissed in December, 1996) which was pending in state
court in Hennepin County, Minnesota, against Nuveen & Co., Nuveen Advisory,
current and former directors of two of the Nuveen exchange-traded investment
companies, Nuveen Municipal Value Fund, Inc. and Nuveen Premium Income Municipal
Fund, Inc. (the "Funds"), inside counsel to Nuveen & Co. (collectively the
"Nuveen Defendants") and the Funds' former outside legal counsel, making various
allegations with respect to the Funds' January, 1994 rights offerings. The
settlement, which in no way constitutes 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 Court
scheduled a hearing on June 3, 1997 to determine whether to grant final approval
of the settlement. Notice of the settlement has been provided to shareholders
of the Funds.
As previously reported in the Form 10-K for 1996, a lawsuit brought in
June, 1996 in federal district court in Boston by certain shareholders is
currently pending against Nuveen & Co., Nuveen Advisory, six Nuveen investment
companies and two of the Funds' former directors seeking unspecified damages, an
injunction and other relief. The suit also seeks certification of a defendant
class consisting of all Nuveen-managed leveraged funds. 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 and Nuveen & Co. 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
On January 2, 1997, pursuant to the Company's acquisition of Flagship
and in accordance with the terms of the Agreement and Plan of Merger, dated as
of July 16, 1996, as amended, by and among the Company, Flagship, and the
shareholders of Flagship, the Company issued 1,800,000 shares of preferred
stock, par value $0.01 per share, designated as 5% cumulative convertible
preferred stock ("preferred stock"). The preferred stock is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
The preferred stock is convertible, at the option of the holders at any
time after January 2, 1999, into shares of Class A common stock at a conversion
price of $27.28 per share of Class A common stock, subject to adjustment. The
preferred stock has a stated value of $25.00 per share. The number of class A
shares to be received upon conversion is obtained by dividing the aggregate
stated value of the preferred stock by the conversion price. Holders of the
preferred stock are entitled to receive cumulative dividends at a rate of 5% of
stated value per annum payable quarterly in arrears. With respect to dividend
rights and rights of liquidation, dissolution and winding up, preferred stock
ranks senior to Class A common stock and Class B common stock. The liquidation
preference of the preferred stock is $25.00 per share, plus an amount equal to
all dividends accrued and unpaid on the preferred stock up to the date fixed
for the redemption.
Except as otherwise required by applicable law, the preferred
stock does not have any relative, participating, optional or other special
voting rights and powers and the consent of the holders is not required for the
taking of any corporate action.
The preferred stock is redeemable at the option of the Company, in
whole, or, from time to time, in part, out of funds legally available for such
purpose, at any time on or after January 2, 2001. The Company must in any
event redeem all of the preferred stock as of January 2, 2007. In each case,
the redemption price is $25.00 per share, plus an amount equal to all dividends
accrued and unpaid on the preferred stock up to the date fixed for the
redemption.
Holders may not directly or indirectly sell, transfer or assign the
preferred stock, except that in certain circumstances, holders of
preferred stock may transfer preferred stock to certain trusts.
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PART II OTHER INFORMATION (CONTINUED)
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
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 report on Form 8-K was filed with the
Securities and Exchange Commission on January 6, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: May 13, 1997 By /s/ John P. Amboian
------------------------------
John P. Amboian
Executive Vice President,
Chief Financial Officer
DATE: May 13, 1997 By /s/ O. Walter Renfftlen
-------------------------------
O. Walter Renfftlen
Vice President and Controller
(Principal Accounting Officer)
(21)