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, 1998
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, 1998 there were 31,609,186 shares of the Company's Common
Stock outstanding, consisting of 7,167,448 shares of Class A Common Stock,
$.01 par value, and 24,441,738 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, 1998 and December 31, 1997 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 1998 and 1997 4
Six Months Ended June 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Six Months Ended June 30, 1998 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1998 and 1997 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 4 17
Item 5 through Item 6 18
Signatures 19
(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)
JUNE 30, DECEMBER 31,
ASSET 1998 1997
- ----- --------- -----------
Cash $ 11,366 $ 8,771
Securities purchased under agreements
to resell 23,500 -
Temporary investments arising from
remarketing obligations 6,025 97,705
Management and distribution fees receivable 24,258 27,169
Other receivables 14,894 13,548
Securities owned (trading account), at market value:
Nuveen defined portfolios 29,870 31,926
Tax-exempt bonds and notes 7,707 572
Deferred income tax asset, net 6,268 7,096
Furniture, equipment, and leasehold improvements,
at cost less accumulated depreciation
and amortization of $28,586 and $26,133,
respectively 13,919 14,788
Other investments 43,546 55,339
Goodwill, at cost less accumulated amortization
of $7,591 and $3,956, respectively 206,733 209,300
Prepaid expenses and other assets 29,211 26,018
-------- ---------
Total assets $417,297 $ 492,232
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable $ 2,000 $ 15,000
Secured short-term bank loans supporting
remarketing obligations - 69,500
Accrued compensation and other expenses 31,267 42,111
Deferred compensation 27,497 27,414
Security purchase obligations 4,562 -
Other liabilities 19,382 20,087
-------- ---------
Total liabilities 84,708 174,112
======== =========
Redeemable preferred stock, at redemption value;
5,000,000 shares authorized,
1,800,000 shares issued 45,000 45,000
-------- ---------
Common stockholders' equity:
Class A common stock, $.01 par value;
150,000,000 shares authorized,
14,212,618 shares issued 142 142
Class B common stock, $.01 par value;
40,000,000 shares authorized,
24,441,738 shares issued 245 245
Additional paid-in capital 54,551 52,963
Retained earnings 425,489 403,635
Unamortized cost of restricted stock awards (132) (185)
-------- ---------
480,295 456,800
Less common stock held in treasury, at cost
(7,041,970 and 6,871,805 shares,
respectively) (192,706) (183,680)
-------- ---------
Total common stockholders' equity 287,589 273,120
-------- ---------
Total liabilities and
stockholders' equity $ 417,297 $ 492,232
========= =========
See accompanying notes to consolidated financial statements.
(3)
4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PE SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
Revenues:
Investment advisory fees from
assets under management $ 67,402 $ 51,243 $ 131,862 $ 101,600
Underwriting and distribution
of investment products 2,234 3,275 4,728 7,367
Positioning profits (losses) (182) 63 (325) (425)
Investment banking 3,877 3,269 6,776 5,813
Interest and dividends 1,592 2,924 3,049 5,931
Other 1,437 1,072 2,739 4,144
---------- ---------- ----------- ----------
Total revenues 76,360 61,846 148,829 124,430
---------- ---------- ----------- ----------
Expenses:
Compensation and benefits 21,666 17,982 42,262 36,661
Advertising and promotional costs 5,695 3,898 10,597 8,304
Occupancy and equipment costs 3,081 2,888 6,302 5,725
Amortization of goodwill and
deferred offering costs 3,555 2,170 7,113 4,237
Travel and entertainment 2,563 1,756 4,710 3,094
Interest 645 814 1,447 1,382
Other operating expenses 5,873 3,472 11,463 6,967
---------- ---------- ----------- ----------
Total expenses 43,078 32,980 83,894 66,370
---------- ---------- ----------- ----------
Income before taxes 33,282 28,866 64,935 58,060
Income taxes 13,050 11,124 25,429 22,517
---------- ---------- ----------- ----------
Net income $ 20,232 $ 17,742 $ 39,506 $ 35,543
========== ========== =========== ==========
Average common and common equivalent
shares outstanding:
Basic 31,810 32,344 31,824 32,698
========== ========== =========== ==========
Diluted 34,634 34,872 34,602 35,220
========== ========== =========== ==========
Earnings per common share:
Basic $ 0.62 $ 0.53 $ 1.21 1.05
========== ========== =========== ==========
Diluted $ 0.58 $ 0.51 $ 1.14 1.01
========== ========== =========== ==========
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, 1997 $ 142 $ 245 $ 52,963 $ 403,635 $ (185) $ (183,680) $ 273,120
Net income -- -- -- 39,506 -- -- 39,506
Cash dividends paid -- -- -- (15,763) -- -- (15,763)
Amortization of restricted
stock awards -- -- -- -- 53 -- 53
Purchase of treasury stock -- -- -- -- -- (15,868) (15,868)
Exercise of stock options -- -- -- (2,067) -- 6,279 4,212
Other -- -- 1,588 178 -- 563 2,329
------ ------ --------- ---------- --------- ----------- ----------
Balance at June 30, 1998 $ 142 $ 245 $ 54,551 $ 425,489 $ (132) $ (192,706) $ 287,589
====== ====== ========= ========== ========= =========== ==========
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,
---------------------------
1998 1997
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,506 $ 35,543
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 827 1,293
Depreciation and amortization 2,454 2,046
Amortization of goodwill 3,635 1,125
Net (increase) decrease:
Investment advisory fee receivable 2,911 (538)
Interest and dividend receivable 831 530
Accounts receivable, other 962 2,972
Net increase (decrease):
Current taxes payable 668 2,631
Accrued compensation and other expenses (10,844) (26,757)
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities (6,458) (5,837)
Net (increase) decrease in assets:
Temporary investments arising from remarketing obligations 91,680 95,690
U.S. government securities (escrow accounts) -- (942)
Securities owned (trading account) (5,079) (8,757)
Net increase (decrease) in liabilities:
Secured short-term bank loans (69,500) --
Security purchase obligations 4,562 613
Deferred compensation 83 2,917
Other 136 278
--------- -----------
Net cash provided from operating activities 56,374 102,807
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable:
Proceeds from revolving credit facility 9,000 --
Repayment of loans (22,000) --
Dividends paid (15,763) (14,218)
Proceeds from stock options exercised 4,212 5,009
Acquisition of treasury stock (15,868) (41,864)
--------- -----------
Net cash used for financing activities (40,419) (51,073)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of other companies, net of cash received -- (16,209)
Purchase of U.S. Treasury securities (1) (1,324)
Proceeds from maturity of U.S. Treasury securities -- --
Purchases of office furniture and equipment (1,585) (2,092)
Net decrease in other investments 11,726 214
--------- -----------
Net cash used for investing activities 10,140 (19,411)
--------- -----------
Increase/(decrease) in cash and cash equivalents 26,095 32,323
Cash and cash equivalents:
Beginning of year 8,771 78,348
--------- -----------
End of period $ 34,866 $ 110,671
========= ===========
See accompanying notes to consolidated financial statements.
(6)
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The John Nuveen
Company and its wholly owned subsidiaries ("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 1998 presentation. These reclassifications have no effect
on net income or retained earnings as previously reported for those periods.
NOTE 2 EARNINGS PER COMMON SHARE
The following table sets forth a reconciliation of net income and common shares
used in the basic and diluted earnings per share computations for the six month
period ended June 30, 1998.
- --------------------------------------------------------------------------------------------------------------
In thousands, For the six months ended
except per share data June 30, 1998 June 30, 1997
- --------------------------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
- --------------------------------------------------------------------------------------------------------------
Net income $39,506 $35,543
Less: Preferred stock dividends (1,125) (1,125)
---------- ------------
Basic EPS 38,381 31,824 $1.21 34,418 32,698 $1.05
Dilutive effect of:
Deferred stock - 179 - 174
Employee stock options - 949 - 698
Assumed conversion of
preferred stock 1,125 1,650 1,125 1,650
---------- ------ ------------ ------
Diluted EPS $39,506 34,602 $1.14 $35,543 35,220 $1.01
========== ====== ===== ============ ====== ======
- --------------------------------------------------------------------------------------------------------------
Options to purchase 238,500 and 1,079,500 shares of the Company's common stock
were outstanding at June 30, 1998 and 1997, respectively, but were not included
in the computation of diluted earnings per share because the options' respective
weighted average exercise prices of $38.22 and $30.00 per share were greater
than the average market price of the Company's common shares during the
applicable year.
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, 1998 its net
capital ratio was 1.31 to 1 and its net capital was $28,920,000, which is
$26,395,000 in excess of the required net capital of $2,525,000.
(7)
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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
JUNE 30, 1998
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related research;
the development, marketing, and distribution of investment products and
services; and municipal and corporate investment banking services. The Company
markets its investment products, including mutual funds, defined portfolio
products (unit trusts), and managed accounts, 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.
The Company's primary business activities generate three principal sources of
revenue: (1) ongoing advisory fees earned on assets under management, including
mutual funds and individually managed accounts; (2) transaction-based revenue
earned upon the distribution of mutual fund and defined portfolio products; and,
(3) investment banking revenues, consisting of underwriting and other advisory
fees.
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 equity, fixed-income or other investments, the
availability and attractiveness of competing products, current and expected
changes in interest rate levels, the rate of inflation, changes or expected
changes in income tax rates and laws, and municipal bond new issue supply.
Assets under management include equities, taxable fixed-income and municipal
securities. Municipal assets represent 73% of assets under management in
managed funds and accounts at June 30, 1998 compared with 97% at June 30, 1997.
GENERAL INDUSTRY TRENDS
U.S. economic statistics in the second quarter again reflected growth, with few
signs of inflation. While most domestic indicators remained healthy, there were
renewed fears that the Asian crisis may be slowing U.S. markets. Owing to its
safe haven status, the Treasury market benefited from foreign buying, which
pushed the yield of the long bond to the lowest level seen since the U.S.
Government started selling 30-year Treasury bonds in 1977. Municipals, however,
generally lagged beneath the weight of heavy supply. The U.S. equity markets
had another positive quarter with an increase in the S&P 500 of 2.8% resulting
in an overall increase for the year of 16.3%.
(8)
9
Consistent with the past few years, significant cash continued to flow into
equity investment products industry-wide. Although the pace of sales slowed
during the second quarter of 1998, sales of equity mutual funds for the year
are tracking 10% higher than 1997 levels. Equity managed accounts and equity
defined portfolio products also have been attracting increased cash flows. The
sales momentum that started in 1997 for fixed income mutual funds has continued
into 1998 with municipal bond funds posting substantial increases industry-wide
in net flows (equal to the sum of sales, reinvestment and exchanges less
redemptions) during the first six months of the year. This is due, in part, to
increased volatility in the equity markets. Sales of municipal defined
portfolio products have declined in 1998 as a result of less competitive
current returns.
RECENT COMPANY EVENTS
In June 1998, the Company introduced its first international fund, the Nuveen
European Value Fund, which is subadvised by Institutional Capital Corporation
(ICAP). ICAP is a research-driven investment management company with more than
$12 billion in total assets under management and 28 years of investment
management experience. The Company has an equity interest in ICAP in the form
of preferred stock convertible after several years into a 20% common stock
interest. ICAP also serves as sub-advisor to three other equity funds
sponsored by the Company - the Nuveen Growth and Income Stock Fund, the Nuveen
Balanced Stock and Bond Fund and the Nuveen Balanced Municipal Bond and Stock
Fund.
In January 1998, the Company introduced the Nuveen Rittenhouse Growth Fund, an
equity mutual fund subadvised by Rittenhouse Financial Services Inc.
(Rittenhouse). Headquartered in Radnor, PA, Rittenhouse is a nationally-known
equity and balanced account manager. Rittenhouse is a wholly-owned subsidiary
of the Company, and specializes in managing individual portfolios offered
through financial advisers to high net worth individuals and in providing
investment management services to institutional clients. Rittenhouse's
investment strategy focuses on providing attractive long-term capital
appreciation with moderate risk by purchasing the common stocks of large-cap,
blue-chip companies exhibiting sustained earnings and dividend growth, as well
as investment-grade quality intermediate bonds.
In August 1998, the Company announced a 13% increase in its third quarter
dividend, to $0.26 per common share, from the second quarter amount of $0.23 per
common share.
(9)
10
The following table compares key operating information of the
Company for the three month periods and six month periods ended June
30, 1998 and 1997.
FINANCIAL RESULTS SUMMARY
NUVEEN OPERATING STATISTICS
(in millions except per share
amounts)
- ---------------------------------------------------------------------------------------------------
FOR THE SECOND QUARTER OF FOR THE FIRST SIX MONTHS OF
1998 1997 % CHANGE 1998 1997 % CHANGE
--------- --------- --------- --------- --------- ---------
Gross sales of investment products $1,831 $611 200% $3,559 $1,104 222%
Assets under management (1) (2) 52,173 37,596 39 52,173 37,596 39
Gross revenues 76.4 61.8 24 148.8 124.4 20
Operating expenses 43.1 33.0 31 83.9 66.4 26
Pretax operating income 33.3 28.9 15 64.9 58.1 12
Net income 20.2 17.7 14 39.5 35.5 11
Basic earnings per share (3) 0.62 0.53 17 1.21 1.05 15
Diluted earnings per share (3) 0.58 0.51 14 1.14 1.01 13
Operating cash flows per share (4) 0.72 0.60 20 1.42 1.19 19
Dividends per share 0.23 0.21 10 0.46 0.42 10
- ---------------------------------------------------------------------------------------------------
(1) Excludes defined portfolio products sponsored by the
Company.
(2) At period end.
(3) Computed in accordance with Statement of Financial
Accounting Standards No. 128 Earnings Per Share.
(4) Operating cash flows (net income plus amortization and
depreciation) on a per-share basis is calculated under the
same method used for diluted earnings per share and is
presented as an additional measurement of operating
performance, not as a substitute for earnings per share.
SUMMARY OF OPERATING RESULTS
o Gross revenues for the six month period ended June 30, 1998 increased 20%
over the six month period ended June 30, 1997 primarily due to higher
advisory fee revenues. The increase in advisory fee revenues is the
result of a higher level of average assets under management in funds and
accounts due to the acquisition of managed account assets from Rittenhouse
in August 1997, the sale of funds and accounts throughout 1997 and the
first half of 1998, and appreciation in the underlying assets over the
same periods. These increases were partially offset by a decline in
interest income earned on short-term investments as the Company deployed
its capital, and a decline in distribution revenues earned on sales of
municipal defined portfolio products.
o Operating expenses for the first six months of 1998 increased over the
same period of the prior year primarily due to goodwill amortization and
the incremental personnel and operating expenses resulting from the
acquisition of Rittenhouse in August 1997.
(10)
11
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 period is directly related to the
market value of the assets managed by the Company. 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 individually managed accounts, the
acquisition of assets under management from other advisory companies, or
through increases in the value of portfolio investments. Sales include shares
of new and existing funds or managed accounts. Assets under management may
also increase as a result of reinvestment of distributions from defined
portfolio products sponsored by the Company into shares of 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.
Investment advisory fee income, net of subadvisory fees and expense
reimbursements, from assets managed 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,
1998 1997 1998 1997
--------- ------------ ----------- ----------
Managed Funds:
Mutual Funds $12,383 $11,142 $ 24,659 $ 21,660
Exchange-Traded Products 39,616 38,573 79,012 76,865
Money Market Funds 850 911 1,791 1,910
Managed Accounts (1) 14,553 617 26,400 1,165
------- ------- -------- --------
Total $67,402 $51,243 $131,862 $101,600
======= ======= ======== ========
- ----------------------------------------------------------------------------------------
(1) For the 1998 period, includes advisory fee income earned on assets
managed by Rittenhouse, which was acquired August 31, 1997.
(11)
12
The following table summarizes net assets under management:
- --------------------------------------------------------------------------------
NUVEEN MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
----------- ------------ -----------
Managed Funds:
Mutual Funds $ 11,325 $ 10,885 $ 10,386
Exchange-Traded Products 26,099 26,117 25,448
Money Market Funds 849 970 940
Managed Accounts 13,900 11,622 822
----------- ------------ -----------
Total $ 52,173 $ 49,594 $ 37,596
=========== ============ ===========
(1) Excludes defined portfolio product assets under surveillance.
- --------------------------------------------------------------------------------
Total advisory fees for the first six months of 1998 increased from the first
six months of 1997 as a result of higher levels of average assets under
management relating principally to the Rittenhouse acquisition. Mutual fund
assets under management at June 30, 1998 increased 9% from June 30, 1997. This
increase reflects the net sales of fund shares over the periods and
appreciation in the underlying value of the portfolio investments. Managed
account assets under management at June 30, 1998 increased $13.1 billion from
June 30, 1997 due to the acquisition of $9.1 billion in managed account assets
from Rittenhouse, sales of accounts over the periods and appreciation in the
underlying value of investments. Average money market net assets under
management decreased due to relatively low short-term interest rates, a strong
equity market and strong competition from sponsors of competing money market
products.
Gross sales of investment products for the second quarter and first six months
of 1998 and 1997 are shown below.
- -------------------------------------------------------------------------------
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------- --------------- --------------- ---------------
Mutual Funds $ 355 $295 $ 774 $ 503
Defined Portfolio
Products 180 208 347 416
Managed Accounts (1) 1,296 108 2,438 185
------ ---- ------ ------
Total $1,831 $611 $3,559 $1,104
====== ==== ====== ======
- --------------------------------------------------------------------------------
(1) For the 1998 period, includes sales of Rittenhouse accounts.
Overall, gross sales of the Company's products for the three month and six
month periods ended June 30, 1998 increased 200% and 222%, respectively over
the same periods of the
(12)
13
prior year. Net sales increased $.8 billion, or 184%, for the second quarter of
1998 and $1.8 billion, or 260% for the first half of 1998, over the same periods
of 1997. Increased concern regarding volatility in the equity markets resulted
in an increase in the Company's municipal mutual fund sales in the first six
months of 1998 as investors turned to more conservative investments. Municipal
mutual fund redemptions in the first six months of 1998 were also 10% lower than
the same period of the prior year. Sales of the Company's equity mutual funds
also increased over the prior year with two new fund introductions. In January
1998, the Company introduced a new growth fund subadvised by Rittenhouse and in
June 1998, a new European fund subadvised by ICAP was launched. Distribution
revenue earned on the municipal mutual fund sales declined, however, compared
to the prior year. This decrease is primarily the result of the inclusion, for
the 1997 period only, of 12b-1 fees earned in January 1997 under Flagship's
former mutual fund pricing structure. On February 1, 1997 the Flagship and
Nuveen municipal funds merged and adopted pricing structures more similar to
the Nuveen funds. Additionally, commissions paid by the Company on municipal
mutual funds sales in excess of $1.0 million have increased over the prior year.
The decrease in sales of defined portfolio products is primarily the result of
lower municipal defined portfolio sales, which is due to less competitive
current returns on these products. This decrease is partially offset by sales
of equity, corporate and treasury defined portfolio products introduced in May
1997. As such, distribution revenue for the municipal defined portfolio
products is down $2.0 million in the first half of 1998 compared with the first
half of 1997, partially offset by an increase of $.5 million in distribution
revenue earned on the equity, corporate and treasury defined portfolio products.
Sales of managed accounts increased during the first six months of 1998 when
compared to the same period of 1997 as Rittenhouse's managed account business
was combined with the Company's on August 31, 1997. Sales of Nuveen's municipal
managed accounts increased 126% when compared to the same period of the prior
year. Sales of managed accounts do not impact the Company's underwriting and
distribution revenue as there are no transaction-based revenues associated with
those products.
The Company records positioning profits or losses from changes in the market
value of investment products and securities held temporarily. The Company hedges
certain of these holdings against fluctuations in interest rates using financial
futures. During the first six months of 1998, the Company realized net
positioning losses of $0.3 million compared to losses of $0.4 million during the
first half of 1997.
Investment banking revenues include both new issue underwriting profits and fee
income earned from various financial advisory activities. Investment banking
revenues increased $1.0 million in the first six months of 1998 over the same
period in 1997 due to an increase in both negotiated underwritings and financial
advisory activity.
Interest and dividend revenue declined 49% or $2.9 million when comparing the
six month period ended June 30, 1998 with the same period of the prior year as
cash balances were deployed in the last three quarters of 1997 for the
acquisition of Rittenhouse, for repurchases of a portion of the Company's
outstanding common shares and for investments in new products.
Operating expenses increased 26% in the first half of 1998 over the same period
of the prior year. This increase is principally due to the inclusion of
Rittenhouse in the 1998 results.
(13)
14
When comparing the Company's expenses excluding Rittenhouse for the same
periods, the increase in expenses is 5%.
Compensation and related benefits for the first six months ended June 30, 1998
increased 15% over the same period of the prior year. This increase is the
result of the inclusion of approximately 95 Rittenhouse employees in the first
half of 1998, which is partially offset by headcount reductions in the Company's
municipal business.
Advertising and promotional expenditures increased for the first six months of
1998 when compared to the same period of 1997 primarily due to the inclusion of
Rittenhouse advertising and promotional expenditures and an expansion in the
product line offered by the Company.
The increase in amortization of goodwill and deferred offering costs when
comparing the first six months of 1998 with the first six months of 1997 also
relates principally to the acquisition of Rittenhouse. The Company recorded
$2.4 million of Rittenhouse-related goodwill amortization expense in the first
half of 1998. The Company is amortizing the goodwill associated with
Rittenhouse over approximately 30 years.
Occupancy and equipment, travel and entertainment, and other operating expenses
increased $6.7 million for the six month period ended June 30, 1998 compared to
the same period of the prior year primarily due to the addition of the
Rittenhouse operations and the severance-related expenses of $1.3 million
associated with an organizational restructuring.
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
The Company's principal businesses are not capital intensive and, historically,
the Company has met its liquidity requirements through cash flow generated by
the Company's operations. The Company's broker/dealer subsidiary occasionally
utilizes available, uncommitted lines of credit, which exceed $400 million, to
satisfy additional periodic, short-term liquidity requirements generally for the
purpose of carrying variable rate demand obligations (VRDOs). Additionally, in
August 1997, the Company entered into a $200 million committed, three-year
revolving credit facility with a group of banks to ensure an ongoing liquidity
source for general corporate purposes including acquisitions. As of June 30,
1998, the outstanding balance of indebtedness under this borrowing facility was
$2 million.
On August 31, 1997, the Company acquired Rittenhouse, a nationally-known equity
and balanced account manager, for a cash purchase price of $145 million. To
finance the transaction the Company used $95 million of cash on hand and, for
the remainder, utilized the aforementioned committed credit line, which was
subsequently paid down during the first quarter of 1998. The acquisition has
been accounted for using the purchase method of accounting resulting in
approximately $143 million in goodwill for financial reporting purposes, which
will be amortized against earnings over approximately 30 years.
At June 30, 1998, the Company held in its treasury 7,041,970 shares of common
stock acquired in open market transactions and in transactions with its Class B
shareholder, The St. Paul Companies, Inc., as part of ongoing stock repurchase
programs. In February 1997, the Board of Directors authorized the purchase of
3.5 million shares. At June 30, 1998, the Company has 1,268,874 shares
remaining to be purchased under the February 1997 repurchase program.
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15
During the first half of 1998, the Company paid out dividends on common shares
totaling $14.6 million and on preferred shares totaling $1.1 million.
The Company is remarketing agent for various issuers of VRDOs with an aggregate
principal value of $1.8 billion at June 30, 1998. 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 than average 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, 1998, and December 31, 1997, the Company held $6 million
and $98 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 $20 million
during the first six months of 1998 and $32 million during 1997.
To minimize interest rate risk on fixed-income defined portfolio product
inventories and securities held by the Company, the Company entered into futures
contracts during the first half of 1998 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 issuers with
respect to transactions such as interest rate swaps and forward delivery
transactions.
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, 1998, its net
capital ratio was 1.31 to 1 and its net capital was $28.9 million which is $26.4
million in excess of the required net capital of $2.5 million.
Management believes that cash provided from operations and borrowings available
under its uncommitted and committed credit facilities will provide the Company
with sufficient liquidity to meet its operating needs for the foreseeable
future.
OTHER MATTERS
YEAR 2000
Like many others, the Company could be adversely affected if the computer
systems used by the Company or by the Company's service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. The Company has taken steps that are designed to ensure, to
the best of its abilities, that the Company is Year 2000 compliant with respect
to the computer systems it uses. The Company has also obtained assurances that
reasonable efforts are being taken by its service providers to address this
global issue. A Year 2000 problem experienced by a service provider could
adversely affect the Company's business.
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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 or equity
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
Not Applicable.
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 7, 1998, the eight
directors nominated in the Proxy Statement were elected for a
one-year term expiring at the annual meeting in 1999. 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-Vote
-------- ---------- -------- ---------------
Anthony T. Dean 31,309,785 185,620 0
Timothy R. Schwertfeger 31,314,885 180,520 0
John P. Amboian 31,320,385 175,020 0
Willard L. Boyd 31,314,410 180,995 0
Duane R. Kullberg 31,315,310 180,095 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-Vote
---------------- ---------- -------- ---------------
W. John Driscoll 24,441,738 0 0
Douglas W. Leatherdale 24,441,738 0 0
Paul J. Liska 24,441,738 0 0
Patrick A. Thiele 24,441,738 0 0
The proposal to ratify the selection of KPMG Peat Marwick as
independent auditors for the Company was approved by a vote of
31,482,958 shares in favor, 5,716 shares opposed and 6,731 shares
abstaining.
The proposal relating to the initiation of discussions by the
Directors with possible purchasers relating to the acquisition of the
Company was rejected by a vote of 1,136,918 shares in favor,
28,838,765 shares opposed and 662,312 shares abstaining.
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ITEM 5. OTHER INFORMATION
The 1999 annual shareholder meeting for The John Nuveen Company has
been set for Thursday, May 6, 1999 in Chicago, Illinois.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included herein:
(27) Financial Data Schedule
b) Report on Form 8-K. None.
(18)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: August 11, 1998 ----------------------------------------
John P. Amboian
Executive Vice President and
Chief Financial Officer
DATE: August 11, 1998 -----------------------------------------
Margaret E. Wilson
Vice President of Finance and
Corporate Controller
(Principal Accounting Officer)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: August 11, 1998 By /s/ John P. Amboian
--------------------------------------------
John P. Amboian
Executive Vice President and
Chief Financial Officer
DATE: August 11, 1998 By /s/ Margaret E. Wilson
--------------------------------------------
Margaret E. Wilson
Vice President of Finance and Corporate
Controller (Principal Accounting Officer)
(19)