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, 1999
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 10, 1999 there were 31,350,406 shares of the Company's Common
Stock outstanding, consisting of 6,908,668 shares of Class A Common Stock, $.01
par value, and 24,441,738 shares of Class B Common Stock, $.01 par value.
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THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) , Three Months Ended March 31, 1999 5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1 through Item 6 19
Signatures 20
(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 1999 1998
--------- ------------
Cash $ 8,127 $ 5,148
Securities purchased under agreements to resell 60,500 6,000
Temporary investments arising from remarketing obligations 795 66,750
Management and distribution fees receivable 42,893 33,908
Other receivables 12,936 12,925
Securities owned (trading account), at market value:
Nuveen defined portfolios 39,936 37,447
Municipal bonds and notes 3,405 2,630
Deferred income tax asset, net 6,743 4,236
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $30,954 and $29,680, respectively 12,175 12,824
Other investments 48,113 48,404
Goodwill, at cost less accumulated amortization of $12,973 and $11,186, respectively 204,127 203,380
Prepaid expenses and other assets 35,453 34,309
--------- ---------
Total assets $ 475,203 $ 467,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term loans secured by remarketing obligations $ -- $ 10,000
Accrued compensation and other expenses 22,600 46,400
Deferred compensation 31,138 28,816
Security purchase obligations 6,964 7,413
Other liabilities 51,514 26,224
--------- ---------
Total liabilities 112,216 118,853
--------- ---------
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 55,948 55,139
Retained earnings 465,856 451,529
Unamortized cost of restricted stock awards (53) (79)
--------- ---------
522,138 506,976
Less common stock held in treasury, at cost (7,308,800 and 7,298,720 shares, respectively) (204,151) (202,868)
--------- ---------
Total common stockholders' equity 317,987 304,108
--------- ---------
Total liabilities and stockholders' equity $ 475,203 $ 467,961
========= =========
See accompanying notes to consolidated financial statements.
(3)
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
---------------------
Revenues:
Investment advisory fees from
assets under management $ 73,041 $ 64,461
Underwriting and distribution
of investment products 5,493 2,494
Positioning profits (losses) (198) (143)
Investment banking 2,109 2,900
Interest and dividends 1,651 1,456
Other 762 1,301
-------- --------
Total revenues 82,858 72,469
-------- --------
Expenses:
Compensation and benefits 23,403 20,986
Advertising and promotional costs 5,623 4,902
Occupancy and equipment costs 3,125 3,221
Amortization of goodwill and
deferred offering costs 3,471 3,559
Travel and entertainment 2,200 2,147
Interest 592 802
Other operating expenses 6,259 5,199
-------- --------
Total expenses 44,673 40,816
-------- --------
Income before taxes 38,185 31,653
Income taxes 14,784 12,379
-------- --------
Net income $ 23,401 $ 19,274
======== ========
Average common and common equivalent
shares outstanding:
Basic 31,365 31,859
======== ========
Diluted 34,243 34,570
======== ========
Earnings per common share:
Basic $ 0.73 $ 0.59
======== ========
Diluted $ 0.68 $ 0.56
======== ========
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, 1998 $142 $ 245 $55,139 $451,529 $ (79) $(202,868) $ 304,108
Net income -- -- -- 23,401 -- -- 23,401
Cash dividends paid -- -- -- (8,704) -- -- (8,704)
Issuance of earnout shares -- -- 461 -- -- 1,349 1,810
Amortization of restricted
stock awards -- -- -- -- 26 -- 26
Purchase of treasury stock -- -- -- -- -- (3,760) (3,760)
Exercise of stock options -- -- -- (364) -- 1,230 866
Other -- -- 348 (6) -- (102) 240
---- ----- ------- -------- ----- --------- ---------
Balance at March 31, 1999 $142 $ 245 $55,948 $465,856 $ (53) $(204,151) $ 317,987
==== ===== ======= ======== ===== ========= =========
See accompanying notes to consolidated financial statements.
(5)
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1999 1998
--------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,401 $ 19,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (2,507) (189)
Amortization/Depreciation:
Furniture, equipment, and leasehold improvements 1,274 1,069
Goodwill 1,787 1,809
Net (increase) decrease in assets:
Accrued management and distribution fees receivable (8,985) 2,270
Accrued other receivables (11) 2,183
Temporary investments arising from remarketing obligations 65,955 76,995
Nuveen defined portfolios (2,489) (1,058)
Municipal bonds and notes (775) (3,851)
Prepaid expenses and other assets (1,144) (898)
Net increase (decrease) in liabilities:
Other liabilities 25,290 9,718
Accrued compensation and other expenses (23,800) (22,686)
Security purchase obligations (449) 7,611
Deferred compensation 2,322 40
Other 374 773
-------- --------
Net cash provided from operating activities 80,243 93,060
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable:
New loans -- 7,000
Payments on loans -- (22,000)
Net payments on secured short-term bank loans (10,000) (69,500)
Dividends paid (8,704) (7,892)
Proceeds from stock options exercised 866 2,133
Acquisition of treasury stock (3,760) --
Other (109) --
-------- --------
Net cash used for financing activities (21,707) (90,259)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of office furniture and equipment (625) (929)
Other investments 291 14,952
Other (723) --
-------- --------
Net cash provided from (used for) investing activities (1,057) 14,023
-------- --------
Increase/(decrease) in cash and cash equivalents 57,479 16,824
Cash and cash equivalents:
Beginning of year 11,148 8,771
-------- --------
End of period $ 68,627 $ 25,595
======== ========
See accompanying notes to consolidated financial statements.
(6)
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
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 1999 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 three
month period ended March 31, 1999.
- -----------------------------------------------------------------------------------------------------------------
In thousands, For the three months ended
except per share data March 31, 1999 March 31, 1998
- -----------------------------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
--------- --------- --------- --------- -------- ----------
Net income $ 23,401 $ 19,274
Less: Preferred stock dividends (563) (563)
Basic EPS 22,838 31,365 $ .73 18,711 31,859 $ .59
Dilutive effect of:
Deferred stock -- 176 -- 182
Employee stock options -- 1,052 -- 879
Assumed conversion of
preferred stock 563 1,650 563 1,650
-------- ------ -------- ------
Diluted EPS $ 23,401 34,243 $ .68 $ 19,274 34,570 $ .56
- -----------------------------------------------------------------------------------------------------------------
Options to purchase 86,500 and 400,580 shares of the Company's common stock were
outstanding at March 31, 1999 and 1998, respectively, but were not included in
the computation of diluted earnings per share because the options' respective
weighted average exercise prices of $41.57 and $36.28 per share were greater
than the average market price of the Company's common shares during the
applicable period.
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, 1999 its net
capital ratio was 1.01 to 1 and its net capital was $37,265,000 which is
$34,754,290 in excess of the required net capital of $2,510,710.
(7)
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 1999
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related research;
development, marketing, and distribution of investment products and services;
and municipal and corporate investment banking services. The Company distributes
its investment products, including mutual funds, exchange-traded funds
(closed-end funds), defined portfolios (unit trusts), and individually managed
accounts through registered representatives associated with unaffiliated firms
including broker-dealers, commercial banks, affiliates of insurance providers,
financial planners, accountants, consultants and investment advisers.
The Company provides individually managed accounts primarily through its
Rittenhouse Financial Services, Inc. (Rittenhouse) operating unit as well as
through Nuveen Asset Management, and distributes its mutual funds and defined
portfolios through its John Nuveen & Co., Incorporated (Nuveen & Co.) operating
unit.
The Company's primary business activities generate three principal sources of
revenue: (1) ongoing advisory fees earned on assets under management, including
mutual funds, exchange-traded 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 advisory fees.
The volume of sales of the Company's products, and the profitability of each of
these lines of business, are directly affected by many variables, including
investor preferences for equity, fixed-income or other investments, the
availability and attractiveness of competing products, equity market
performance, changes in interest rates, the rate of inflation, changes in income
tax rates and laws, and municipal bond new issue supply.
Assets under management include equity, taxable fixed-income and municipal
securities. Municipal assets represented 69% of assets under management in
managed funds and accounts at March 31, 1999, compared with 74% at March 31,
1998.
GENERAL INDUSTRY TRENDS
The U.S. continued to grow during the first quarter, with the Gross Domestic
Product increasing by 4.5%. Strong growth in consumer spending, coupled with
increasing productivity, helped maintain the economic expansion while holding
overall inflation in check.
In the financial markets, yields on 30-year Treasury bonds during the first
quarter increased to 5.58% by the end of March from 5.08% at the beginning of
the year. Municipal bond yields ended the quarter about where they started, with
the benchmark Bond Buyer 20 rising
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to 5.08% from 5.00%. Major stock indices continued to set record highs as
volatility among technology issues was balanced by gains in cyclical and value
stocks. The widely followed S&P 500 Index rose 5% during the period.
Continued equity market uncertainty resulted in a 50% decrease in net flows
(equal to the sum of sales, reinvestment and exchanges less redemptions) into
equity and taxable fixed-income mutual funds industry-wide during the first
quarter when compared with the same period of the previous year. However, equity
managed accounts and equity defined portfolio products continued to attract
increased cash flows across the industry. Municipal bond funds posted a 28%
increase in net flows industry-wide in the first quarter over the first quarter
of 1998, due primarily to equity market concerns and the relatively favorable
pricing of municipals compared with fixed income alternatives. Industry sales of
municipal defined portfolio products declined in the first quarter of 1999 when
compared with the same period of 1998 as a result of less competitive current
returns.
RECENT EVENTS
- - During the first four months of the year, the Company expanded its defined
portfolio product line with the introduction of four new products,
including portfolios consisting of e-commerce companies, the companies in
the Nasdaq 100 Index, communications bandwidth companies and the top ten
companies in Fortune magazine's 1999 list of the Most Admired Companies in
America.
- - In February, the Company began offering the Nuveen Income Fund, a new
open-end mutual fund designed to provide attractive current income and
capital preservation from a portfolio of primarily investment-grade quality
corporate bonds. The Company also completed the repositioning of the Nuveen
Utility Income Fund, renaming it the Nuveen Dividend and Growth Fund and
expanding its universe of potential investments to include a wider range of
fixed-income and dividend-paying equity securities.
- - In March, three new municipal bond exchange-traded funds sponsored by the
Company filed registration statements with the Securities and Exchange
Commission for the initial public offering of their common shares. The
Company expects the offering for these funds - the Nuveen Dividend
Advantage Municipal Fund, the Nuveen California Dividend Advantage
Municipal Fund and the Nuveen New York Dividend Advantage Municipal Fund -
to be completed during the second quarter.
- - In April, the Company announced its intention to offer as much as $1
billion in additional MuniPreferred(TM) stock in various offerings for as
many as 29 of the Company's existing exchange-traded funds. The Company
expects the majority of these offerings to be completed during the second
quarter.
- - In May, the Company announced an increase in its quarterly dividend to
$0.29 per share from the current $0.26 per share, an increase of 12%. The
Company also announced that it had approved a new common share buyback
program which authorizes the purchase of up to two million shares.
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The following table compares key operating information of the Company for the
first quarter of 1999 and 1998:
- -------------------------------------------------------------------------------------------------
FINANCIAL RESULTS SUMMARY
(in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 1999 1998 % CHANGE
---- ---- --------
Gross sales of investment products $ 3,163 $ 1,727 83%
Assets under management (1) (2) 57,315 51,176 11
Gross revenues 82.9 72.5 14
Operating expenses 44.7 40.8 10
Pretax operating income 38.2 31.7 21
Net income 23.4 19.3 21
Basic earnings per share .73 .59 24
Diluted earnings per share .68 .56 21
Dividends per share .26 .23 13
- -------------------------------------------------------------------------------------------------
(1) Excludes defined portfolio products sponsored by the company.
(2) At period end.
SUMMARY OF OPERATING RESULTS
- - Gross sales for the quarter ended March 31, 1999, reached more than $3.1
billion, an increase of 83% over the quarter ended March 31, 1998.
Approximately three-fourths of the Company's sales in the first quarter of
1999 were in equity-based products that have been added to the Company's
product line since 1996.
- - Gross revenues for the quarter ended March 31, 1999, increased 14% over the
quarter ended March 31, 1998, due to higher advisory fee revenues and an
increase in distribution revenues. Increases in advisory fees earned on
managed accounts and mutual funds were due to higher average assets under
management. Distribution revenue increases were the result of increased
sales of equity defined portfolios.
- - Operating expenses for the period increased when compared to the same
period of the prior year due to an increase in advertising and promotional
costs and higher salary and benefit costs.
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.
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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, the addition of new managed accounts or deposits into
existing managed accounts, the acquisition of assets under management from other
advisory companies, or through increases in the value of portfolio investments.
Assets under management may also increase as a result of reinvestment of
distributions from funds and accounts, and from 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
values of fund or managed account portfolio investments decrease or when mutual
fund redemptions or managed account withdrawals exceed sales and reinvestments.
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)
QUARTER ENDED MARCH 31, 1999 1998
-------- --------
Managed Funds:
Mutual Funds $ 14,255 $ 12,276
Exchange-Traded Funds 39,377 39,396
Money Market Funds 804 941
Managed Accounts 18,605 11,848
-------- --------
Total $ 73,041 $ 64,461
======== ========
- --------------------------------------------------------------------------------
The following table summarizes net assets under management:
- --------------------------------------------------------------------------------
NUVEEN MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------- ----------- ---------
Managed Funds:
Mutual Funds $12,077 $11,883 $11,247
Exchange-Traded Funds 26,104 26,223 26,084
Money Market Funds 736 824 892
Managed Accounts 18,398 16,337 12,953
------- ------- -------
Total $57,315 $55,267 $51,176
======= ======= =======
- --------------------------------------------------------------------------------
(1) Excludes defined portfolio assets under surveillance.
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Total advisory fees increased during the first quarter of 1999 to $73.0 million
from $64.5 million earned in the comparable period of 1998. This increase is the
result of higher levels of average assets under management. Managed account
average assets under management at March 31, 1999, increased $5.9 billion from
March 31, 1998, and mutual fund average assets under management increased $0.9
billion over the same time frame. These increases reflect net sales of fund
shares and accounts over the periods and appreciation in the underlying value of
the portfolio investments. Average money market fund net assets under management
decreased in 1999 due to redemptions, which were driven by relatively low
short-term interest rates and strong competition from sponsors of competing
money market products.
Gross sales of investment products for the first quarter of 1999 and 1998 are
shown below:
- --------------------------------------------------------------------------------
GROSS INVESTMENT PRODUCT SALES
(in millions)
QUARTER ENDED MARCH 31, 1999 1998
------ ------
Mutual Funds $ 429 $ 419
Defined Portfolios 497 167
Managed Accounts 2,237 1,141
------ ------
Total $3,163 $1,727
====== ======
- --------------------------------------------------------------------------------
Overall, gross sales of the Company's products for the three-month period ended
March 31, 1999, increased 83% over the same period of the prior year. Net flows
(equal to the sum of sales, reinvestment and exchanges less redemptions) were
$2.4 billion for the three-month period ended March 31, 1999, and $1.3 billion
for the three-month period ended March 31, 1998, an increase of 85%.
MUTUAL FUNDS
Growing concern regarding volatility in the equity markets and investors'
desires to rebalance their portfolios resulted in an increase in the Company's
municipal mutual fund sales in the first quarter of 1999. Sales of the Company's
municipal mutual funds increased 17% in the first quarter of 1999 when compared
with the same period in 1998. This increase in sales of municipal mutual funds
also helped fund an increase in mutual fund distribution revenue earned for the
period ended March 31, 1999, when compared with the same period of the prior
year.
DEFINED PORTFOLIOS
The increase in sales of defined portfolio products for the three-month period
ended March 31, 1999, compared with the prior year was primarily the result of
increased sales of equity defined portfolio products. Distribution revenue for
the equity and taxable fixed-income defined portfolio products increased by $2.5
million for the quarter ended March 31, 1999 as compared with the same quarter
of the previous year. Distribution revenue
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for the longer term-municipal defined portfolio products was flat when compared
with the same period in 1998.
MANAGED ACCOUNTS
Sales of managed accounts increased 96% during the three-month period ended
March 31, 1999, when compared with the same period of the prior year. Sales of
Rittenhouse's equity and balanced managed accounts increased $860 million or
89%. Sales of Nuveen's municipal managed accounts increased $235 million, an
increase of 137%.
OTHER REVENUES
The Company records positioning profits or losses from changes in the market
value of the inventory of unsold investment products and other securities held.
The Company hedges certain of these holdings against fluctuations in interest
rates using financial futures. During the first quarter of 1999, the Company
realized net positioning losses of $0.2 million compared with losses of $0.1
million during the first quarter of the prior year.
Investment banking revenues include both net new issue underwriting revenues and
fee income earned from various financial advisory activities. Investment banking
revenues declined in the first quarter of 1999 when compared with the same
period in 1998 to $2.1 million from $2.9 million primarily due to lower
underwriting revenues as the industry experienced a reduction in both
refinancing and the new issue supply of municipal bonds.
Interest and dividend revenue increased $0.2 million when comparing the
three-month period ended March 31, 1999, with the same period of the prior year
due to higher cash balances on hand.
OPERATING EXPENSES
Operating expenses increased $3.9 million in the first quarter of 1999 over the
first quarter of 1998.
Compensation and related benefits, the largest component of operating expense,
increased $2.4 million, or 12% when comparing the three-month period ended March
31, 1999 with the same period of the prior year. This increase is driven by
increases in both profit sharing and salary costs. Profit sharing expense, which
is derived by a formula as a percentage of pretax operating income, increased as
a result of increased operating income for the three-month period. The increase
in salary costs was driven by new staff additions and annual merit increases.
Advertising and promotional expenditures increased $0.7 million or 15% for the
first three months of 1999 when compared with the same period of 1998 primarily
due to the incremental costs to support the expanded product line offered by the
Company.
Occupancy and equipment, travel and entertainment, and other operating expenses
increased $1.0 million for the three-month period ended March 31, 1999, when
compared with the same period of the prior year.
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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). As of March 31,
1999, there was no outstanding balance due on these uncommitted lines of credit.
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
March 31, 1999, there was no outstanding balance due on the committed credit
line.
At March 31, 1999, the Company held in its treasury 7,308,800 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. As part of an ongoing repurchase program, the Company has
approximately 2.0 million shares remaining to be purchased.
During the first quarter of 1999, the Company paid out dividends on common
shares totaling $8.1 million and on preferred shares totaling $0.6 million.
The Company is remarketing agent for various issuers of VRDOs with an aggregate
principal value of $1.6 billion as of March 31, 1999. Although remarketing
agents, including the Company, are only generally 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. The Company has come to expect
such imbalances at year-end and, to a lesser extent, at each calendar
quarter-end. 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.
On March 31, 1999, and December 31, 1998, the Company held $0.8 million and
$66.8 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 $8.7 million during the first
three months of 1999 and $14.9 million for twelve months ended December 31,
1998.
To minimize interest rate risk on fixed-income defined portfolio product
inventories and securities held by the Company, the Company entered into hedging
transactions using futures contracts during the first quarter of 1999 and
expects to continue to do so periodically. 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.
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John Nuveen & Co. Incorporated, the Company's wholly owned broker-dealer
subsidiary, is subject to the Securities and Exchange Commission Rule 15c3-1,
the "Uniform Net Capital Rule," which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital, as
these terms are defined, shall not exceed 15 to 1. At March 31, 1999, its net
capital ratio was 1.01 to 1 and its net capital was $37.3 million which is $34.8
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
The Company has taken a number of steps to address the Year 2000 challenge. As
background, the Company first addressed this challenge in the early 1980's
because of the historical focus of the Company's broker-dealer and investment
adviser subsidiaries on municipal bonds, which typically mature 20 to 30 years
after the date of issuance. As a result, in the early 1980's the Company began
developing internal software standards and other information technology systems
that required the use of four digits to represent a year. These systems have
been improved and tested over the years and remain in place, thus providing the
Company with a base of internally developed, Year 2000 ready software. The
Company outsources to service providers many administrative functions relating
to its funds and investment products, and an outside service provider serves as
transfer agent and custodian for all of the funds sponsored by the Company.
In light of the above, the Company's preparations for Year 2000 consist
essentially of examination and testing of the software packages and hardware
provided by third parties and of the systems and software of service partners,
with particular emphasis on its key service providers, to determine their degree
of Year 2000 compliance. The Company has compiled a detailed inventory of all
third-party software and hardware used in processing at Nuveen, and Rittenhouse
and is in the process of obtaining certifications of the Year 2000 compliance
for each item of software and hardware (which the Company expects to complete by
the end of the second quarter in 1999). The certification process may require
follow up, which will be done as needed throughout 1999.
The most significant service providers include Chase Manhattan Bank, Check Free
Investment Services (formerly Security APL), and JJ Kenny, a subsidiary of
Standard & Poor's Corporation. Chase serves as transfer agent and custodian for
the Company's funds and serves as trustee of the defined portfolios sponsored by
the Company. Check Free provides the portfolio accounting system for both
Rittenhouse and Nuveen Asset Management. Kenny serves as pricing agent for the
municipal securities held by the Company's funds.
The Company is coordinating with, and monitoring the Year 2000 readiness plans
of each of these service providers, who have shared detailed information with
the Company regarding their respective Year 2000 plans and initiatives. Chase
has certified to the Company that it has completed its internal testing and
remediation and that its systems are Year 2000
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compliant. Chase has begun testing system interfaces with its business partners,
including the Company, and this testing is expected to be completed during the
second quarter of 1999. JJ Kenny and the Company are scheduled to begin testing
system interfaces during the second quarter of 1999.
Year 2000 compliance of the CheckFree Investment Services APL Wrap host system
is the most critical Rittenhouse Year 2000 readiness matter. CheckFree has
tested and put into production its Year 2000 remediated systems. CheckFree has
also successfully completed testing the system interfaces with certain business
partners, which include major brokers using Rittenhouse's individual managed
account services, and also participated in the Securities Industry Association
testing program with respect to settlement clearinghouses. Rittenhouse has
completed the testing of all of its critical internal systems that currently
exist, and they appear to be Year 2000 ready. Rittenhouse does not engage in any
in-house system application development.
The Company participated in the industry wide testing of securities trade
processing systems sponsored by the Securities Industry Association. As part of
this initiative, the Company partnered with three other firms over a four-week
period to simulate post-Year 2000 settlement of securities trades through
settlement clearinghouses used by industry participants and encountered no
problems. All of the Company's critical systems involved in trade processing
were tested as part of this effort. The results of this testing initiative are
being reviewed by the Securities Industry Association and are expected to be
available in May, 1999. The testing of the Company's critical systems that are
not involved in securities trade processing, including general ledger and
portfolio management systems, are scheduled to be completed by June 30, 1999.
The Company is confident that these critical system testing initiatives will be
successfully completed, and the Company will address promptly any Year 2000
readiness issues identified through these efforts. The Company's goal is to
have all of its other systems and all significant business partner interfaces
tested, and all of its systems Year 2000 ready, by September 30, 1999.
Given the Company's prior development work, the Company and its subsidiaries do
not anticipate facing the prospect of costly and time consuming redesign of
internal information technology systems, and the costs of the Company's
compliance program are not expected to be significant and are being incurred as
part of normal operations. The costs presently consist of the cost of upgrades
of software and of travel expenses to coordinate with our affiliates and service
partners. Therefore, the Company has not to date specially allocated a budget
for the Company's Year 2000 initiatives.
While the Company does not presently believe that challenges associated with
Year 2000 are likely to have a material effect on the Company's operations,
liquidity and financial condition, the Company has not completed the process of
assessing the compliance of all of its third-party software suppliers and key
service providers or of testing interfaces with certain business partners. These
outside parties are at various stages of readiness for Year 2000 and depending
on the result of such assessments, it is possible the Company could conclude
that the Year 2000 challenge could affect the Company's business to a greater
extent than it currently believes likely. It is also possible that certain
service providers, despite assurances to the contrary, may not in fact
successfully modify all their key systems on a timely basis for Year 2000 and
that the Company's testing of such firms' compliance may not allow the Company
to detect such problems on a timely basis. Further, there can be no assurance
that entities such as public utilities will be fully Year 2000 compliant and any
interruption in basic services, such as telephone or electrical service, would
disrupt the Company's operations.
The Company's various business and corporate support units are working to create
a contingency plan relating to important business processes that could be
affected by Year 2000 issues. As part of this effort, the Company is focusing on
any problems in achieving Year 2000 readiness that are revealed through the
Company's examination of the readiness of its third party software and service
providers. The Company is not aware of any such problems currently, but it has
not yet completed its examination of others. We anticipate that our specific
Year 2000 contingency plans will be developed in conjunction with an updating of
our normal disaster recovery plans.
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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.
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company or information included
in its filings with the SEC (including this report on Form 10-Q) may contain
statements which are not historical facts but are forward-looking statements
reflecting management's expectations and opinions. The Company's actual future
results may differ significantly from those anticipated in any forward-looking
statements due to numerous factors. These include, but are not limited to, the
effects of the substantial competition that the Company, like all market
participants, faces in the investment management business, including competition
for continued access to the brokerage firms' retail distribution systems, the
Company's reliance on revenues from investment management contracts which are
renewed annually according to their terms, burdensome regulatory developments,
recent accounting pronouncements, unforeseen developments in litigation and the
previously discussed risks with respect to Year 2000 compliance. The Company
undertakes no responsibility to update publicly or revise any forward-looking
statements.
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PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARCH 31, 1999
The Company is exposed to market risk from changes in interest rates which may
adversely affect its results of operations and financial condition. The Company
is exposed to interest rate risk primarily in its Defined Portfolio inventory
and seeks to minimize the risks from these interest rate fluctuations through
the use of derivative financial instruments. The Company does not use derivative
financial instruments for trading or other speculative purposes and is not party
to any leveraged financial instruments.
The Company regularly purchases and holds for resale municipal securities and
defined portfolio units. The level of inventory maintained by the Company will
fluctuate daily and is dependent upon the need to maintain municipal inventory
for future defined portfolios, and the need to maintain defined portfolio
inventory to support ongoing sales. To minimize interest rate risk on securities
held by the Company, the Company has entered into futures contracts.
The Company invests in short-term debt instruments, classified as Securities
Purchased Under Agreements to Resell. The investments are treated as
collateralized financing transactions and are carried at the amounts at which
they will be subsequently resold, including accrued interest. The Company often
holds temporary investments (VRDOs) arising from remarketing activities and
related debt to meet its short-term financing needs for this product.
Substantially all VRDOs are secured by letters of credit obtained by the issuer
from highly-rated third-party providers including commercial banks and insurance
companies. The Company also invests in certain Company-sponsored equity and
fixed-income mutual funds.
The company manages risk by restricting the use of derivative financial
instruments to hedging activities and by limiting potential interest rate
exposure. The Company does not believe that the effect of any reasonably
possible near-term changes in interest rates would be material to the Company's
financial position, results of operations or cash flows.
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PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-K for the year
ending December 31, 1998, a lawsuit brought in June, 1996 by certain
shareholders is currently pending in federal district court for the
Northern District of Illinois 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. A similar complaint was filed by the
Plaintiffs against another major leveraged-fund sponsor and adviser.
The Plaintiffs filed a motion to certify a plaintiff class (which
would include current and former shareholders of all Nuveen leveraged
closed-end funds). On March 30, 1999, the court entered a memorandum
opinion and order granting the Defendants' motion to dismiss four of
the Plaintiffs' counts; denying the Defendants' motion to dismiss the
remaining count (breach of fiduciary duty under Sections 36(b) of the
Investment Company Act of 1940) as to Nuveen Advisory, and granting
the same motion as to the remaining Defendants; and denying the
Plaintiffs' motion to certify a plaintiff class and a defendant
class. The remaining Defendant will continue to vigorously contest
this action.
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
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) Report on Form 8-K. None.
(19)
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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 10, 1999
By: /s/ JOHN P. AMBOIAN
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John P. Amboian
President
DATE: May 10, 1999
By: /s/ MARGARET E. WILSON
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Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
(20)