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, 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 August 11, 1997 there were 32,043,277 shares of the Company's Common
Stock outstanding, consisting of 7,296,027 shares of Class A Common Stock, $.01
par value, and 24,747,250 shares of Class B Common Stock, $.01 par value.
2
THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 1997 and 1996 4
Six Months Ended June 30, 1997 and 1996
Consolidated Statement of Changes in Common
Stockholders' Equity (Unaudited), Six Months Ended
June 30, 1997 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 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)
3
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 1997 1996
- ------ --------- ---------
Cash $ 14,671 $ 6,348
Securities purchased under agreements to resell 96,000 72,000
Short term investments, at cost which approximates market value 1,324 -
Temporary investments arising from remarketing obligations 4,145 99,835
U.S. government securities purchased for municipal bond escrow accounts 941 -
Receivables:
Management and distribution fees 22,579 20,767
Brokers and dealers 559 428
Customers 4,092 5,141
Income taxes - 568
Interest 379 909
Other 6,499 7,749
Securities owned (trading account), at market value:
Nuveen unit trusts 51,068 39,206
Tax-exempt bonds and notes 1,448 4,553
Deferred income tax asset, net 9,095 9,778
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation and amortization of $22,271
and $19,363 respectively 14,441 14,073
Other investments 52,470 52,094
Goodwill 61,302 -
Prepaid expenses and other assets 25,508 21,802
--------- ---------
$ 366,521 $ 355,251
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Security purchase obligations $ 2,840 $ 2,227
Payables:
Brokers and dealers 1,233 1,326
Customers 1,124 165
Income taxes 1,625 -
Accrued compensation and other expenses 23,994 47,789
Deferred compensation 26,497 23,414
Other liabilities 5,189 8,436
--------- ---------
Total liabilities 62,529 83,357
--------- ---------
Redeemable preferred stock, at redemption value; 5,000,000 shares
authorized, 1,800,000 shares issued 45,0000 -
--------- ---------
Common Stockholders' Equity:
Class A common stock, $.01 par value; 150,000,000 shares authorized,
issued 13,907,106 shares and 12,828,199 shares, respectively 139 128
Class B common stock, $.01 par value; 40,000,000 shares authorized,
issued 24,747,250 shares and 25,826,157 shares, respectively 248 259
Additional paid-in capital 51,917 50,649
Retained earnings 382,252 363,715
Unamortized cost of restricted stock awards (427) (705)
--------- ---------
434,129 414,046
Less common stock held in treasury, at cost (6,619,079 and
5,535,122 shares, respectively) (175,137) (142,152)
--------- ---------
258,992 271,894
--------- ---------
Total redeemable preferred stock and common stockholders' equity 303,992 271,894
--------- ---------
$ 366,521 $ 355,251
========= =========
See accompanying notes to consolidated financial statements.
(3)
4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Investment advisory fees from $51,243 $45,599 $101,600 $ 92,434
assets under management
Underwriting and distribution
of investment products 1,708 4,077 4,338 7,301
Positioning profits (losses) 63 (323) (425) (1,558)
Investment banking 3,269 1,097 5,813 3,132
Interest, dividends and all other, net 3,996 5,264 10,075 11,464
------- ------- -------- ---------
Total revenues 60,279 55,714 121,401 112,773
------- ------- -------- ---------
Expenses:
Compensation and benefits 17,982 17,106 36,661 35,680
Advertising and promotional costs 3,898 3,394 8,304 6,941
Other operating expenses 9,533 7,462 18,376 14,801
------- ------- -------- ---------
Total expenses 31,413 27,962 63,341 57,422
------- ------- -------- ---------
Income before taxes 28,866 27,752 58,060 55,351
Income taxes 11,124 10,602 22,517 21,197
------- ------- -------- ---------
Net income $17,742 $17,150 $ 35,543 $ 34,154
======= ======= ======== =========
Average common and common equivalent
shares outstanding:
Primary 33,227 37,561 33,574 37,554
======= ======= ======== =========
Fully diluted 34,970 37,567 35,351 37,569
======= ======= ======== =========
Earnings per common share:
Primary $ 0.52 $ 0.46 $ 1.03 $ 0.91
======= ======= ======== =========
Fully diluted $ 0.51 $ 0.46 $ 1.01 $ 0.91
======= ======= ======== =========
See accompanying notes to consolidated financial statements.
(4)
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
Unamortized
Class A Class B Additional Cost of
Common Common Paid-In Retained Restricted Treasury
Stock Stock Capital Earnings Stock Awards Stock Total
------ ----- -------- --------- ----------- ---------- --------
Balance at December 31, 1996 $ 128 $ 259 $ 50,649 $ 363,715 $ (705) $ (142,152) $ 271,894
Net income - - - 35,543 - - 35,543
Cash dividends paid - - - (14,781) - - (14,781)
Issuance of restricted stock - - 68 - - 1,464 1,532
Amortization of restricted
stock awards - - - - 278 - 278
Purchase of treasury stock 11 (11) - - - (41,864) (41,864)
Exercise of stock options - - (68) (2,226) - 7,415 5,121
Other - - 1,268 - - - 1,268
Balance at June 30, 1997 ------ ------ -------- --------- ------- ---------- ---------
$ 139 $ 248 $ 51,917 $ 382,252 $ (427) $ (175,137) $ 258,992
====== ====== ========= ========= ======= ========== =========
See accompanying notes to consolidated financial statements.
(5)
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Six Months Ended June 30,
--------------------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,543 $ 34,154
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 1,293 (2,047)
Depreciation and amortization 2,046 2,488
Amortization of goodwill 1,125
Net (increase) decrease:
Accrued management and distribution fees (538) 3,634
Accrued interest receivable 530 915
Accounts receivable, other 2,972 963
Net increase (decrease):
Current taxes payable 2,631 (566)
Accrued compensation and other expenses (26,757) 16,064
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities (5,837) (1,108)
Amortization of restricted stock awards 278 1,375
Net (increase) decrease in assets:
Temporary investments arising from remarketing obligations 95,690 179,615
U.S. government securities (escrow accounts) (942) 1,385
Securities owned (trading account) (8,757) 5,110
Net increase (decrease) in liabilities:
Security purchase obligations 613 3,656
Deferred compensation 2,917 1,355
-------- --------
Net cash provided from operating activities 102,807 246,993
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on securities sold under-
agreements to repurchase - (25,000)
Dividends paid (14,218) (13,168)
Proceeds from stock options exercised 5,009 1,487
Acquisition of treasury stock (41,864) (5,797)
-------- --------
Net cash used for financing activities (51,073) (42,478)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash received 16,209 -
Purchase of U.S. Treasury securities (1,324) (38,792)
Proceeds from maturity of U.S. Treasury securities - 68,965
Purchases of office furniture and equipment (2,092) (1,190)
Other 214 (30,138)
-------- --------
Net cash used for investing activities (19,411) 1,155
-------- --------
Increase/(decrease) in cash and cash equivalents 32,323 203,360
Cash and cash equivalents:
Beginning of year 78,348 16,036
-------- --------
End of period $ 110,671 $ 219,396
======== ========
See accompanying notes to consolidated financial statements.
(6)
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 June 30, 1997, its net capital ratio was .47 to 1 and its net
capital was $106,900,000 which is $103,600,000 in excess of the
required net capital of $3,300,000.
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
(together, "Flagship"). At December 31, 1996, Flagship had over
$4.6 billion in assets under management including $4.2 billion of
mutual funds and $400 million of managed account products and
serviced approximately 100,000 investors and their financial
advisers. In connection with its integration program, the Company
changed the name of Flagship Financial Inc. to Nuveen Asset
Management Inc. and consolidated its retail and institutional
managed
(7)
8
NOTE 5 ACQUISITION (CONTINUED)
account operations into this company.
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 June 30, 1997 reflect the full impact
of the acquired business. The following unaudited pro forma
information for the three month and six month periods ended June 30,
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:
June 30, 1996
-------------
Quarter Ended Six Months Ended
------------- ----------------
Revenues $60,318 $121,455
Net Income 17,910 35,645
Earnings per Common Share $.44 $.87
---- ----
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 the 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.
NOTE 7 SUBSEQUENT EVENT
On July 15, the Company entered into an agreement to acquire
Rittenhouse Financial Services, Inc. (Rittenhouse), a nationally
known equity and balanced account manager, for $145 million.
Rittenhouse specializes in managing individual portfolios for high
net worth individuals. Rittenhouse's main products are equity and
balanced portfolios that seek attractive long-term capital
appreciation with moderate risk through investments in quality,
large-capitalization companies and currently has $9 billion in
assets under management. The Company will account for the
acquisition under the purchase method of accounting.
(8)
9
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE JOHN NUVEEN COMPANY
JUNE 30, 1997
DESCRIPTION OF THE BUSINESS
The Company's core businesses are asset management and related
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
Early in the second quarter of 1997, interest rates stood at their
highest levels for the year as the markets reacted to the Federal
Reserve Board's 25 basis point increase in the Federal Funds rate
and expected further tightening in response to concerns that the
pace of economic growth during the first quarter would increase
inflationary pressures. However, through the second quarter, there
were indications that inflation remained under control.
Accordingly, interest rates began to march steadily lower.
Municipal bonds modestly outperformed their Treasury counterparts
throughout the period due to lagging municipal bond issuances
through April and May. The yield on the 30-year U.S. Treasury bond
declined a total of 31 basis points for the quarter while the yield
on the Bond Buyer 20, a popular index of long term municipal bonds,
declined 35 basis points.
Cash continued to flow into equity mutual funds during the second
quarter as these funds, on average, delivered their best quarterly
returns since the first quarter of 1991. Cash flows into fixed-
income funds remained relatively flat, continuing the trend over the
last few years, as the fixed income markets competed with the robust
equity market. Industry data reported net outflows for municipal
bond funds for the quarter.
The movement of interest rate levels for the first half of 1997 and
1996 is shown in the accompanying graph.
(9)
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YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND VS. THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1996 THROUGH JUNE 30, 1996
1/4/96 1/11/96 1/18/96 1/25/96 2/1/96 2/8/25 2/15/96 2/22/96 2/29/96 3/7/96 3/14/96 3/21/96 3/28/96
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
30 Year U.S. 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
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND VS. THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1997 THROUGH JUNE 30,1997
1/3/97 1/10/97 1/17/97 1/24/97 1/31/97 2/7/97 2/14/97 2/21/97 2/28/97 3/7/97 3/14/97 3/21/97 3/27/97
Bond Buyer 20 5.70 5.71 5.72 5.72 5.73 5.70 5.62 5.58 5.65 5.70 5.75 5.78 5.81
30 Year U.S.
Treasury 6.74 6.75 6.63 6.85 6.88 6.75 6.63 6.65 6.81 6.87 6.96 6.96 6.99
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND VS. THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1996 THROUGH JUNE 30, 1996
4/4/96 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
Bond Buyer 20 5.86 6.03 5.94 5.91 6.06 5.96 5.96 5.87 5.94 5.94 6.12 6.06 5.97
30 Year U.S. Treasury 6.63 6.93 6.83 6.81 7.04 7.02 6.92 6.87 6.94 6.91 7.12 7.12 7.00
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND VS. THE BOND BUYER 20
FOR THE PERIOD JANUARY 1, 1997 THROUGH JUNE 30,1997
4/4/97 4/11/97 4/18/97 4/25/97 5/2/97 5/9/97 5/16/97 5/23/97 5/30/97 6/6/97 6/13/97 6/20/97 6/27/97
Bond Buyer 20 5.88 5.88 5.87 5.87 5.77 5.71 5.67 5.66 5.67 5.60 5.52 5.48 5.53
30 Year U.S. Treasury 7.07 7.10 7.07 7.12 6.91 6.93 6.87 6.99 6.98 6.88 6.76 6.68 6.78
YIELD (%) 8.00 7.50 7.00 6.50 6.00 5.50 5.00
YIELD (%) 8.00 7.50 7.00 6.50 6.00 5.50 5.00
(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 $94 billion in the first six
months of 1997 compared with $92 billion in the same period of 1996.
New-money financings by issuers were $68 billion and $60 billion for
the first half 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 $18 billion in
the first two quarters of 1997 compared with $23 billion in the
first two quarters of 1996. The accompanying graph shows new issue
volume for the first six months of 1997 and 1996:
LONG-TERM MUNICIPAL BONDS
NEW ISSUE VOLUME - FIRST HALF OF 1997 AND 1996
1997 1996
---- ----
(volume in billions)
TOTAL NEW ISSUE VOLUME 93 91
NEW-MONEY FINANCINGS 68 60
REFUNDINGS 19 23
100 90 80 70 60 50 40 30 20 10 0
(11)
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The following table compares key operating information of the
Company for the three month periods and six month periods ended June
30, 1997 and 1996.
NUVEEN OPERATING STATISTICS
(in millions except per share amounts)
- ----------------------------------------------------------------------------------------------------
FOR THE SECOND QUARTER OF FOR THE FIRST SIX MONTHS OF
1997 1996 % CHANGE 1997 1996 % CHANGE
---- --- -------- ---- ---- --------
Gross revenues $60.3 $55.7 8.3% $121.4 $112.8 7.6%
Operating expenses 31.4 28.0 12.1 63.3 57.4 10.3
Pretax operating income 28.9 27.8 4.0 58.1 55.4 4.9
Net income 17.7 17.2 2.9 35.5 34.2 3.8
Primary earnings per share 0.52 0.46 13.0 1.03 0.91 13.2
Fully diluted earnings per share 0.51 0.46 10.9 1.01 0.91 11.0
Operating cash flow per share (1) 0.60 0.49 22.4 1.18 .97 21.6
Dividend per share 0.21 0.18 16.7 0.42 0.36 16.7
Book value per share 9.49 9.34 1.6 9.49 9.34 1.6
Consolidated stockholders' equity 304.0 341.7 -11.0 304.0 341.7 -11.0
Gross Sales 638.4 341.8 86.8 1,130.9 630.6 79.3
Assets under management 37,596 32,116 17.1 37,596 32,116 17.1
- ----------------------------------------------------------------------------------------------------
(1) Operating cash flow (net income plus amortization and
depreciation) on a per-share basis is calculated under the
same method used for fully diluted earnings per share and is
presented as an additional measure of operating performance,
not as a substitute for earnings per share.
BUSINESS HIGHLIGHTS
- - As part of an ongoing program to broaden the range of investment products
and services offered to investors, the Company entered into an agreement
in July 1997 to acquire Rittenhouse Financial Services, Inc.
(Rittenhouse), a nationally-known equity and balanced account manager, for
$145 million. Rittenhouse specializes in managing individual portfolios
for high net worth individuals. Rittenhouse's main products are equity
and balanced portfolios that seek to provide attractive long-term capital
appreciation with moderate risk through investments in quality,
large-capitalization companies and investment-grade quality intermediate
bonds, and currently has $9 billion in assets under management.
- - The Company expanded its unit trust product offerings in May 1997 with the
launch of taxable unit trusts including Equity, U.S. Treasury and Insured
Corporate unit trusts.
- - 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 municipal mutual funds,
(12)
13
could amount to as much as $20 million over the next four years. With the
merging of Flagship and the Company's municipal mutual fund businesses, the
Company has expanded the range of municipal investments offered to
investors and strengthened its mutual fund sales capabilities. As a
result of the merger, the Company now offers municipal bond mutual funds,
exchange-traded funds or unit trusts in 28 states, in addition to national
funds and trusts.
- - The addition of the Flagship mutual funds and retail managed accounts,
together with the benefits of a restructuring of the Company's existing
institutional managed account business, provided most of the increase in
gross revenues for the three month and six month periods ended June 30,
1997 when compared to the same periods of the prior year. This increase
was partially offset by a decline in interest income earned on short-term
investments and a decrease in distribution revenue earned on the sale of
unit trusts.
- - 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 personnel and operating
expenses resulting from the acquisition of Flagship.
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 Inc. 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 or managed accounts.
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 into shares of the mutual funds. Fee
income will decline when managed assets decline, as would occur when the values
of fund portfolio investments decrease or when mutual fund redemptions or
managed account withdrawals exceed sales.
(13)
14
Investment advisory fee income, net of expense reimbursements, from
investment products offered by the Company is shown in the following
table:
NUVEEN MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ---------- --------- ----------
Managed Funds:
Mutual Funds $11,142 $6,222 $21,660 $12,614
Exchange-Traded Products 38,573 38,110 76,865 77,153
Money Market Funds 911 1,082 1,910 2,304
Managed Accounts 617 185 1,165 363
------- ------- -------- -------
Total $51,243 $45,599 $101,600 $92,434
======= ======= ======== =======
Total advisory fees for the three month and six month periods ended
June 30, 1997 increased over the comparable periods of the prior
year as a result of the higher levels of average assets under
management. Assets under management at June 30, 1997 increased 13%
from December 31, 1996 and 17% from June 30, 1996. Managed funds
and accounts with investment portfolios investing primarily in
municipal securities represent 97% of assets under management at
June 30, 1997.
Assets under management for the mutual funds increased primarily as
a result of the acquisition of $4.2 billion in assets under
management from Flagship on January 2, 1997 and the introduction of
the equity and balanced funds in late 1996 and early 1997. This
increase was partially offset by share redemptions in the municipal
mutual funds and the decline in value of the municipal funds'
portfolio investments. The change in fees earned on exchange-traded
funds reflects the impact of the movement of interest rates on the
value of the investment portfolios as there were no new
exchange-traded funds offered during 1996 or 1997. 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 in the three and
six month periods ended June 30, 1997 from comparable periods 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, net sales of retail
managed accounts during those periods, and the sale of the rights to
manage all but three institutional accounts to Duff & Phelps.
(14)
15
The following table summarizes net assets under management:
NUVEEN MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT
(in millions)
JUNE 30, DECEMBER 31, JUNE 30,
1997 1996 1996
----------- ------------ ----------
Managed Funds:
Mutual Funds $10,386 $ 5,930 $ 5,280
Exchange-Traded Products 25,448 25,434 25,028
Money Market Funds 940 1,004 1,066
Managed Accounts 822 823 742
------- ------- -------
Total $37,596 $33,191 $32,116
======= ======= =======
Sales of investment products for the three month period and six
month period ended June 30, 1997 and 1996 are shown below.
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
Unit trusts $235 $276 $ 443 $491
Mutual Funds 295 43 503 86
Managed account 108 23 185 54
---- ---- ------ ----
Total $638 $342 $1,131 $631
==== ==== ====== ====
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
investment advisers. Demand for municipal 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 contributed significantly to an increase in the
sale of municipal mutual funds for the first half and second quarter
of 1997 over the first half and second 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 equity and balanced funds, as described below.
Demand for municipal mutual funds remained flat during the first six
months of the year, continuing last year's trend, resulting in net
redemptions for those funds in the first half of the year. This
trend is primarily due to competition from strong equity markets and
investor concerns that interest rates will increase with a
potentially expanding economy. Likewise, sales of unit trusts were
lower in the first six months of 1997 when compared to the first six
months of 1996 as absolute yields continue to be too low to attract
significant investor interest
(15)
16
in trusts. Sales of managed accounts increased in the first half
of 1997 as 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 fixed income
securities held for future sale. These market values are directly
affected by the movement of interest rates during the period
beginning with the acquisition of a fixed income security 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 second quarter of 1997, as interest rates
declined, the Company realized nominal net positioning gains.
However, during the rising interest rate environment in the first
quarter of the year the Company realized losses of $488,000
resulting in year-to-date losses of $425,000. This compares to
losses of $1,558,000 during the first half of 1996. The Company
manages this interest-rate risk by controlling inventory levels for
both unit trusts and fixed income securities, 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. During the first six months of 1997, the Company
experienced an overall increase of 85% or $2.7 million in investment
banking revenues primarily due to an increase in negotiated
underwritings, and in financial advisory and merger and acquisition
activity during the first six months of 1997 when compared to the
first six months of 1996.
Advertising and promotional expenditures increased for the first six
months of 1997 when compared to the same period of the prior year
with the introduction of an advertising and promotional campaign in
early March to support the launch of the equity and balanced mutual
funds.
Compensation and related benefits increased 3% when comparing the
first two 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 a new compensation plan introduced in 1996 which shifts a
portion of cash incentive awards to equity incentive awards in the
form of stock and options and a decline in expense associated with
equity awards granted pursuant to the Company's 1992 Special
Incentive Plan. Expense associated with the 1992 awards was tied
to a vesting schedule, with substantially all awards being vested by
July 1996.
(16)
17
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.. During the first half 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, uncommitted lines
of credit, which exceed $400 million, to satisfy additional periodic,
short-term financing requirements. In anticipation of consummating the
acquisition of Rittenhouse, the Company deposited $95 million of its
capital together with $35 million drawn down on these lines of
credit, into an escrow account in July 1997. Additionally, in
early August, the Company entered into a $200 million committed,
three-year revolving credit facility with a group of key banks to
ensure an ongoing liquidity source for general corporate purposes.
The Company is remarketing agent for various issuers of VRDOs with
an aggregate principal value in excess of $1.7 billion at June 30,
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 top-rated third-party providers,
including major commercial banks and insurance companies. At June
30, 1997, and December 31, 1996, the Company held $4 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 $40 million during the first six months of 1997 and $18
million during all of 1996.
At June 30, 1997, the Company held in its treasury 6,619,079 shares
of common stock acquired in open market transactions and in
transactions with 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 six months of 1997, the Company repurchased a total of
1,425,457 of its outstanding common shares, comprised of 346,550
Class A shares and 1,078,907 Class B shares, which converted to
Class A after repurchase.
On January 2, 1997, the Company completed the acquisition of
Flagship 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
municipal mutual funds, could amount to as much as $20 million over
the next four years.
The Company has 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 of the
Company's equity and balanced mutual funds.
(17)
18
During the first five months of 1997, the Company 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. During this period, the
Company compensated the selling firms with a commission on approximately
$157 million of fund share sales.
In February 1997, the Company introduced a B-share pricing feature for
the majority of its mutual funds. B shares require the advance of a dealer
commission of 4% at the time of sale, which is recouped in whole or in part
over a six to eight year period through an asset-based sales charge paid by the
fund class in the form of a 12b-1 fee and/or a contingent deferred sales charge
paid by a redeeming shareholder. The Company also modified the pricing
structure of C shares, effective February 1, 1997. The Company advances a
dealer commission of 1% on C share sales which will be recouped in whole or in
part 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 its
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 unit trust inventories
and fixed income securities held by the Company, the Company entered into
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 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, 1997, its net
capital ratio was .47 to 1 and its net capital was $106.9 million
which is $103.6 million in excess of the required net capital of
$3.3 million. In order to finance the Rittenhouse acquisition, the
Company withdrew $90 million of the broker/dealer's excess net
capital in July 1997, whereupon its net capital was $19.8 million,
its excess net capital was $16.4 million and its net capital ratio
was 2.60 to 1.
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.
(18)
19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-Q report for the
quarter ended March 31, 1997, in February, 1997, the Court preliminarily
approved the settlement of litigation currently brought in federal district
court in Chicago and a similar lawsuit (dismissed in December, 1996) which was
brought 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 counsel, making various allegations with respect to the Funds' January,
1994 rights offerings. This matter has now been concluded as the court, on
June 3, 1997, issued its final approval on the settlement, and the time for
appeal of such approval has expired with no action having been taken.
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 which are pending. In
June, 1997, the Court granted defendants' motion to transfer the case to the
federal district court for the Northern District of Illinois.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 9, 1997, the eight
directors nominated in the Proxy Statement were elected for a
one-year term expiring at the annual meeting in 1998. 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 32,098,980 148,724 0
Timothy R. Schwertfeger 32,098,903 148,801 0
Willard L. Boyd 32,094,630 153,074 0
Duane R. Kullberg 32,097,553 150,151 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 25,602,704 0 0
Douglas W. Leatherdale 25,602,704 0 0
Paul J. Liska 25,602,704 0 0
Patrick A. Thiele 25,602,704 0 0
The proposal to ratify the selection of KPMG Peat Marwick as
independent auditors for the Company was approved by a vote of
32,231,052 shares in favor, 9,564 shares opposed and 7,088 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. None
(19)
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: August 12, 1997 By /s/ John P. Amboian
------------------------------------------
John P. Amboian
Executive Vice President,
Chief Financial Officer
DATE: August 12, 1997 By /s/ O. Walter Renfftlen
------------------------------------------
O. Walter Renfftlen
Vice President and Controller
(Principal Accounting Officer)
(20)