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, 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 August 6, 1999 there were 31,470,956 shares of the Company's Common
Stock outstanding, consisting of 7,029,218 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, 1999 and December 31, 1998 3
Consolidated Statements of Income (Unaudited),
Three Months Ended June 30, 1999 and 1998 4
Six Months Ended June 30, 1999 and 1998
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Six Months Ended June 30, 1999 5
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 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 21
(2)
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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE JOHN NUVEEN COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ------ ---------- -----------
Cash $ 7,715 5,148
Securities purchased under agreements to resell 14,600 6,000
Temporary investments arising from
remarketing obligations 25,165 66,750
Management and distribution fees receivable 52,997 33,908
Other receivables 20,690 12,925
Securities owned (trading account), at
market value:
Nuveen defined portfolios 39,616 37,447
Bonds and notes 1,808 2,630
Deferred income tax asset, net 4,840 4,236
Furniture, equipment, and leasehold improvements,
at cost less accumulated depreciation
and amortization of $33,524 and $29,680,
respectively 11,816 12,824
Other investments 53,638 48,404
Goodwill, at cost less accumulated
amortization of $14,807 and $11,186,
respectively 202,294 203,380
Prepaid expenses and other assets 37,520 34,309
---------- ----------
Total assets $ 472,699 $ 467,961
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Short-term loans secured by
remarketing obligations $ - $ 10,000
Accrued compensation and other expenses 30,662 46,400
Deferred compensation 31,654 28,816
Security purchase obligations 4,362 7,413
Other liabilities 30,451 26,224
---------- ----------
Total liabilities 97,129 118,853
---------- ----------
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 57,829 55,139
Retained earnings 478,122 451,529
Unamortized cost of restricted stock awards (26) (79)
---------- ----------
536,312 506,976
Less common stock held in treasury, at cost
(7,278,200 and 7,298,720 shares, respectively) (205,742) (202,868)
---------- ----------
Total common stockholders' equity 330,570 304,108
---------- ----------
Total liabilities and stockholders' equity $ 472,699 $ 467,961
========== ==========
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,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Investment advisory fees from
assets under management $ 75,918 $ 67,402 $148,960 $131,862
Underwriting and distribution
of investment products 5,921 2,234 11,413 4,728
Positioning profits (losses) (817) (182) (1,015) (325)
Investment banking 2,902 3,877 5,011 6,776
Interest and dividends 1,834 1,592 3,484 3,049
Other 1,209 1,437 1,971 2,739
--------- -------- -------- -------
Total revenues 86,967 76,360 169,824 148,829
--------- -------- -------- --------
Expenses:
Compensation and benefits 23,589 21,666 46,992 42,262
Advertising and
promotional costs 7,074 5,695 12,696 10,597
Occupancy and equipment costs 3,090 3,081 6,215 6,302
Amortization of goodwill and
deferred offering costs 3,515 3,555 6,985 7,113
Travel and entertainment 2,715 2,563 4,914 4,710
Interest 868 645 1,460 1,447
Other operating expenses 6,634 5,873 12,895 11,463
--------- -------- -------- --------
Total expenses 47,485 43,078 92,157 83,894
--------- -------- -------- --------
Income before taxes 39,482 33,282 77,667 64,935
Income taxes 15,602 13,050 30,386 25,429
-------- -------- -------- --------
Net income $ 23,880 $ 20,232 $ 47,281 $ 39,506
======== ======== ======== ========
Average common and common
equivalent shares
outstanding:
Basic 31,365 31,810 31,365 31,824
======== ======== ======== ========
Diluted 34,349 34,634 34,296 34,602
======== ======== ======== ========
Earnings per common share:
Basic $ 0.74 $ 0.62 $ 1.47 $ 1.21
======== ======== ======== ========
Diluted $ 0.70 $ 0.58 $ 1.38 $ 1.14
======== ======== ======== ========
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 - - - 47,281 - - 47,281
Cash dividends paid - - - (18,364) - - (18,364)
Issuance of earnout shares - - 461 - - 1,349 1,810
Amortization of restricted
stock awards - - - - 53 - 53
Purchase of treasury stock - - - - (11,211) (11,211)
Exercise of stock options - - - (2,319) - 7,090 4,771
Other - - 2,229 (5) - (102) 2,122
------ ------- --------- --------- ---------- ---------- ----------
Balance at June 30, 1999 $ 142 $ 245 $ 57,829 $ 478,122 $ (26) $ (205,742) $ 330,570
====== ======= ========= ========= ========== ========== ==========
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,
------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,281 $ 39,506
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes (604) 827
Amortization/Depreciation:
Furniture, equipment, and
leasehold improvements 2,581 2,263
Goodwill 3,620 3,635
Net (increase) decrease in assets:
Accrued management and distribution
fees receivable (19,089) 2,911
Accrued other receivables (7,766) (1,346)
Temporary investments arising from
remarketing obligations 41,585 91,680
Nuveen defined portfolios (2,169) 2,056
Municipal bonds and notes 822 (7,135)
Prepaid expenses and other assets (3,212) (3,533)
Net increase (decrease) in liabilities:
Other liabilities 4,227 (706)
Accrued compensation and other expenses (15,738) (10,845)
Security purchase obligations (3,051) 4,562
Deferred compensation 2,838 83
Other 2,284 1,725
--------- ---------
Net cash provided from
operating activities 53,609 125,683
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable:
New loans - 9,000
Payments on loans - (22,000)
Net payments on secured short-term bank loans (10,000) (69,500)
Dividends paid (18,364) (15,763)
Proceeds from stock options exercised 4,771 4,212
Acquisition of treasury stock (11,211) (15,868)
Other (107) -
--------- ---------
Net cash used for
financing activities (34,911) (109,919)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of office furniture and equipment (1,573) (1,395)
Other investments (5,234) 11,726
Other (724) -
--------- ---------
Net cash provided from (used for)
investing activities (7,531) 10,331
--------- ---------
Increase in cash and cash equivalents
11,167 26,095
Cash and cash equivalents:
Beginning of year 11,148 8,771
--------- ----------
End of period $ 22,315 $ 34,866
========= ==========
See accompanying notes to consolidated financial statements.
(6)
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 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 six month
period ended June 30, 1999.
- --------------------------------------- -----------------------------------------------------------------------
In thousands, For the six months ended
except per share data June 30, 1999 June 30, 1998
- --------------------------------------- ---------------------------------- ------------------------------------
- --------------------------------------- ----------- ---------- ----------- ----------- ---------- -------------
Net Per-share Net Per-share
income Shares amount income Shares amount
----------- ---------- ----------- ----------- ---------- -------------
Net income $47,281 $39,506
Less: Preferred stock dividends (1,125) (1,125)
------- -------
Basic EPS 46,156 31,365 $1.47 38,381 31,824 $1.21
Dilutive effect of:
Deferred restricted stock - 176 - 179
Employee stock options - 1,105 - 949
Assumed conversion of
preferred stock 1,125 1,650 1,125 1,650
------- ------- ------- ------
Diluted EPS $47,281 34,296 $1.38 $39,506 34,602 $1.14
======= ======= ===== ======= ====== =====
- --------------------------------------- ----------- ---------- ----------- ----------- ---------- -------------
Options to purchase 264,000 and 238,500 shares of the Company's common
stock were outstanding at June 30, 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
$42.96 and $38.22 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 June 30, 1999 the broker-dealer's net capital
ratio was 3.01 to 1 and its net capital was $19,787,071 which is $15,821,404 in
excess of the required net capital of $3,965,667.
(7)
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PART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1999
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related research and
the development, marketing, and distribution of investment products and
services. The Company distributes its investment products, including mutual
funds, exchange-traded 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, defined
portfolios and exchange-traded funds through its John Nuveen & Co., Incorporated
(Nuveen & Co.) broker-dealer unit.
The Company's primary business activities generate two 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 defined portfolio and
mutual fund products.
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 and changes in
income tax rates and laws.
Assets under management include equity, taxable fixed-income and municipal
securities. Municipal assets represented 68% of assets under management in
managed funds and accounts at June 30, 1999, compared with 73% at June 30, 1998.
GENERAL INDUSTRY TRENDS
The Gross Domestic Product continued to reflect a vibrant economy, while
quarterly earnings continued to exceed expectations. On June 29, the Federal
Reserve Board responded to the vigorous pace of economic growth with a
one-quarter percent increase in the Federal Funds Rate. At the same time it
shifted to a "neutral bias" in its stance on short-term interest rates. The
stock market reacted favorably rallying at the quarter end to post record highs
in both the S&P 500 and the Nasdaq indices.
After largely resisting the retreat of the Treasury market in the first quarter,
municipal bond prices finally succumbed in the second. As of July 1, the Bond
Buyer 20 yield stood at 5.42% which was 0.34% higher than when the second
quarter began. Since this essentially matched the rise in 30-year Treasury
rates, the ratio between the two remained steady at 91%.
(8)
9
Continued equity and bond market uncertainty in the second quarter resulted in
an industry-wide decrease in net flows (equal to the sum of sales, reinvestment
and exchanges less redemptions) into most mutual fund, defined portfolio and
managed account categories when compared with the flows experienced during the
second quarter of 1998. In particular, municipal bond funds recorded a 74%
decrease in second quarter net flows compared with 1998, although municipal
defined portfolios sales increased because higher market yields resulted in more
competitive current returns.
RECENT EVENTS
- - During the second quarter of the year, the Company continued to expand its
defined portfolio product line with the introduction of several new
products, including a portfolio consisting of digital sector companies and
another consisting of companies involved in internet banking and other
financial services. The Company also introduced a portfolio based on the
selections of stock analyst Eugene Peroni, who joined the Company in the
second quarter.
- - In May, three new Nuveen municipal bond exchange-traded funds completed
their initial public offerings of common stock. These offerings for the
Nuveen Dividend Advantage Municipal Fund, the Nuveen California Dividend
Advantage Municipal Fund and the Nuveen New York Dividend Advantage
Municipal Fund raised approximately $1 billion. These funds also issued a
combined total of more than $525 million of MuniPreferred(TM) stock in
July.
- - Through June 30, 26 of the Company's existing exchange-traded funds had
issued approximately $900 million of additional MuniPreferred(TM) stock in
various offerings. Two other funds issued an additional $100 million of
MuniPreferred(TM) stock in July.
- - On June 30, 1999, the Company announced an agreement in principle with U.S.
Bancorp Piper Jaffray, for the sale of the Company's Investment Banking
business. The transaction is expected to close in the third quarter of
1999. The divestiture is not expected to have a material impact on the
Company's financial position or results of operation.
- - In July, the Company announced the filing of registration statements with
the Securities and Exchange Commission for the initial public offerings of
common shares by 14 new exchange-traded funds. The Company intends to bring
these offerings to market as conditions warrant.
(9)
10
The following table compares key operating information of the Company for the
three-month periods and the six-month periods ended June 30, 1999 and 1998:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions except per share amounts)
- -------------------------------------------------------------------------------------------------------
For the second quarter of For the first six months of
1999 1998 % change 1999 1998 % change
---- ---- -------- ---- ---- --------
Gross sales of investment products $4,892 $1,831 167% $8,054 $3,559 126%
Assets under management (1) (2) 59,538 52,173 14 59,538 52,173 14
Gross revenues 87.0 76.4 14 169.8 148.8 14
Operating expenses 47.5 43.1 10 92.2 83.9 10
Pretax operating income 39.5 33.3 19 77.7 64.9 20
Net income 23.9 20.2 18 47.3 39.5 20
Basic earnings per share 0.74 0.62 19 1.47 1.21 21
Diluted earnings per share 0.70 0.58 21 1.38 1.14 21
Dividends per share 0.29 0.23 26 0.55 0.46 20
- --------------------------------------------------------------------------------------------------------
(1) Excludes defined portfolio products sponsored by the Company.
(2) At period end.
SUMMARY OF OPERATING RESULTS
- - Gross sales for the six months ended June 30, 1999, reached more than $8.0
billion, an increase of 126% over the six months ended June 30, 1998.
Second quarter gross sales include the issuance of approximately $1 billion
of new exchange-traded funds and approximately $900 million of
MuniPreferred(TM) stock to re-leverage existing Nuveen exchange traded
funds.
- - Gross revenues for the six months ended June 30, 1999, increased 14% over
the six month period ended June 30, 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 six-month period increased when compared with
the same period of the prior year due to an increase in advertising and
promotional costs and higher salary and benefit costs. However, as a
percent of revenue, operating expenses were down two percentage points for
the six-month period when compared with the same period of the prior year.
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.
(10)
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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.
The following table summarizes net assets under management:
MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
-------- ------------ ---------
Managed Funds:
Mutual Funds $ 12,038 $ 11,883 $ 11,325
Exchange-Traded Funds 27,284 26,223 26,099
Money Market Funds 641 824 849
Managed Accounts 19,575 16,337 13,900
-------- -------- --------
Total $ 59,538 $ 55,267 $ 52,173
======== ======== ========
(1) Excludes defined portfolio assets under surveillance.
Gross sales of investment products for the three-month and six-month periods
ended June 30,1999 and 1998 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
Exchange-Traded Funds $ 1,859 $ - $ 1,859 $ -
Mutual Funds 421 355 848 774
Defined Portfolio Products 558 180 1,055 347
Managed Accounts 2,054 1,296 4,292 2,438
------- ------ ------- -------
Total $ 4,892 $ 1,831 $ 8,054 $ 3,559
======= ======== ======= =======
Overall, gross sales of the Company's products for the six-month period ended
June 30, 1999, increased 126% over the same period of the prior year. Net flows
(equal to the sum of sales, reinvestment and exchanges less redemptions) were
$6.4 billion for the six-month
(11)
12
period ended June 30, 1999, an increase of 156% over the $2.5 billion total for
the six-month period ended June 30, 1998.
Investment advisory fee income, net of subadvisory fees and expense
reimbursements from assets managed by the Company, is shown in the following
table:
MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
Managed Funds:
Mutual Funds $ 14,213 $ 12,383 $ 28,470 $ 24,659
Exchange-Traded Products 40,149 39,616 79,526 79,012
Money Market Funds 628 850 1,431 1,791
Managed Accounts 20,928 14,553 39,533 26,400
-------- -------- -------- --------
Total $ 75,918 $ 67,402 $148,960 $131,862
======== ======== ======== ========
Total advisory fees increased during the first six months of 1999 to $149.0
million from $131.9 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 for the six-month period ended
June 30, 1999, increased $8.4 billion from June 30, 1998, and mutual fund
average assets under management increased $0.8 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.
MUTUAL FUNDS
Growing concern regarding volatility in the equity markets and investors'
desires to rebalance their portfolios resulted in a 23% increase in the
Company's municipal mutual fund sales in the first half of 1999, when compared
with the same period in 1998. This increase in sales of municipal mutual funds
helped fuel the increase in mutual fund advisory fee and distribution revenue
earned for the six-month period ended June 30, 1999, when compared with the same
period of the prior year.
(12)
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DEFINED PORTFOLIOS
The increase in sales of defined portfolio products for the six-month period
ended June 30, 1999, compared with the prior year was primarily the result of
increased sales of equity defined portfolio products, including several
industry-sector and thematic portfolios. Distribution revenue for the equity and
taxable fixed-income defined portfolio products increased to $5.8 million for
the six-month period ended June 30, 1999, from $0.5 million for the same period
of the previous year.
MANAGED ACCOUNTS
Sales of managed accounts increased 76% during the six-month period ended June
30, 1999, when compared with the same period of the prior year. Sales of
Rittenhouse's equity and balanced managed accounts increased $1.5 billion or
76%. Sales of Nuveen's municipal managed accounts increased $312 million, an
increase of 77%.
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 half of 1999, the Company
realized net positioning losses of $1.0 million compared with losses of $0.3
million during the first half 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 to $5.0 million in the first half of 1999 when compared with
$6.8 million during the same period in 1998, 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 $0.4 million when comparing the
six-month period ended June 30, 1999, with the same period of the prior year due
to higher cash balances on hand.
OPERATING EXPENSES
Operating expenses increased $8.3 million in the first half of 1999 over the
first half of 1998.
Compensation and related benefits, the largest component of operating expenses,
increased $4.7 million, or 11% when comparing the six-month period ended June
30, 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 six-month period. The increase in
salary costs was driven by new staff additions and annual merit increases.
Advertising and promotional expenditures increased $2.1 million or 20% for the
first six 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, including the new Exchange-Traded Fund offerings in the second quarter
of 1999.
(13)
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Occupancy and equipment, travel and entertainment, and other operating expenses
increased $1.4 million for the six-month period ended June 30, 1999, when
compared with the same period of the prior year in support of new products and
strong sales growth.
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 June 30,
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
June 30, 1999, there was no outstanding balance due on the committed credit
line.
At June 30, 1999, the Company held in its treasury 7,278,200 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 an ongoing repurchase
program, the Company is authorized to purchase approximately 1.9 million
additional shares.
During the second quarter of 1999, the Company paid out dividends on common
shares totaling $9.1 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 $1.7 billion as of June 30, 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 June 30, 1999, and December 31, 1998, the Company held $25.2 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 $12.6 million during the
first six months of 1999 and $14.9 million for twelve months ended December 31,
1998. As noted earlier, the Company has announced an agreement in principle with
U.S. Bancorp Piper Jaffrey for the sale of the Company's investment banking
business, including the VRDO business.
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 half of 1999 and expects
to continue to do so periodically.
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.
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15
OTHER MATTERS
Year 2000
The Company has maintained a comprehensive program 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. The certification process will require
follow up, and will be done as needed throughout 1999.
The most significant service providers include Chase Manhattan Bank, CheckFree
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. CheckFree provides the portfolio accounting system for both
Rittenhouse and Nuveen Asset Management. JJ 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 compliant. Chase substantially
completed testing system interfaces with its business partners, including the
Company, during the second quarter of 1999 and no problems have been discovered.
Testing of non-critical systems will continue in the third quarter. JJ Kenny and
the Company began testing system interfaces during the second quarter of 1999.
To date, the testing has not revealed any problems.
Year 2000 compliance of the CheckFree Investment Services APL Wrap host system
is the most critical Rittenhouse Year 2000 readiness matter. CheckFree has also
successfully tested and put into production its Year 2000 remediated systems.
CheckFree has 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
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16
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 and the
results of the testing revealed no Year 2000 problems with the Company's
systems. 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 testing of
the Company's critical systems that are not involved in securities trade
processing, including general ledger and portfolio management systems, was
completed by June 30, 1999. While this testing revealed no problems with mission
critical systems, the Company will continue to test and examine its mission
critical systems both individually and as a whole and 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
have not faced the prospect of costly redesign of internal information
technology systems, and the costs of the Company's readiness program have not
been significant and are being incurred as part of normal operations. The costs
presently consist of the cost of upgrades of software, of travel expenses to
coordinate with our affiliates and service partners and of two consultants hired
to assist the Company in the readiness of all desktop computers. Therefore, the
Company has not specially allocated a budget for the Company's Year 2000
initiatives.
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. As the Company completes 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, 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 contingency planning process and examination of others.
Our specific Year 2000 contingency plans are being developed in conjunction with
an updating of our normal disaster recovery plans.
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17
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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18
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
JUNE 30, 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,
corporate bonds 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 utilizes 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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19
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 6, 1999, the seven
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
-------- ----------- -------- ---------------
Timothy R. Schwertfeger 29,987,693 144,143 0
John P. Amboian 30,082,732 49,104 0
Willard L. Boyd 30,076,618 55,218 0
Duane R. Kullberg 30,081,522 50,314 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
The proposal to ratify the selection of KPMG LLP as independent
auditors for the Company was approved by a vote of 31,124,439 shares
in favor, 4,595 shares opposed and 2,802 shares abstaining.
The proposal relating to the Company's Amended and Restated 1996
Equity Incentive Plan and the 1999 Executive Officer Compensation
Plan were approved by votes of 27,628,391 shares in favor, 976,464
shares opposed and 413,827 shares abstaining and 28,006,534 shares in
favor, 697,731 shares opposed and 415,417 shares abstaining,
respectively.
ITEM 5. OTHER INFORMATION
Not Applicable.
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20
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.
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21
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 10, 1999 /s/ John P. Amboian
----------------------------------
John P. Amboian
President
DATE: August 10, 1999 /s/ Margaret E. Wilson
----------------------------------
Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
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