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 SEPTEMBER 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 November 8, 1999 there were 31,153,526 shares of the Company's
Common Stock outstanding, consisting of 6,711,788 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.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income (Unaudited),
Three Months Ended September 30, 1999 and 1998 4
Nine Months Ended September 30, 1999 and 1998
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited), Nine Months Ended September 30, 1999 5
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 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 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)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
- ------ ------------ -----------
Cash $ 8,278 $ 5,148
Securities purchased under agreements to resell 50,600 6,000
Temporary investments arising from remarketing obligations - 66,750
Management and distribution fees receivable 56,617 33,908
Other receivables 25,304 12,925
Securities owned (trading account), at market value:
Nuveen defined portfolios 51,489 37,447
Bonds and notes 835 2,630
Deferred income tax asset, net 5,032 4,236
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $33,481 and $29,680, respectively 11,962 12,824
Other investments 55,125 48,404
Goodwill, at cost less accumulated amortization of $16,616 and $11,186, respectively 200,484 203,380
Prepaid expenses and other assets 36,096 34,309
------------ -----------
Total assets $ 501,822 $ 467,961
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term loans secured by remarketing obligations $ - $ 10,000
Accrued compensation and other expenses 44,362 46,400
Deferred compensation 31,908 28,816
Security purchase obligations 15,243 7,413
Other liabilities 28,902 26,224
------------ -----------
Total liabilities 120,415 118,853
------------ -----------
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 60,116 55,139
Retained earnings 490,282 451,529
Unamortized cost of restricted stock awards - (79)
------------ -----------
550,785 506,976
Less common stock held in treasury, at cost (7,417,830 and 7,298,720 shares, respectively) (214,378) (202,868)
------------ -----------
Total common stockholders' equity 336,407 304,108
------------ -----------
Total liabilities and stockholders' equity $ 501,822 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Investment advisory fees from
assets under management $ 77,480 $ 69,217 $ 226,440 $ 201,079
Underwriting and distribution
of investment products 4,949 2,583 16,363 7,311
Positioning profits (losses) (615) 42 (1,630) (283)
Investment banking 1,202 2,886 6,213 9,663
Interest and dividends 1,929 1,682 5,414 4,730
Other 4,607 592 6,577 3,330
-------- --------- --------- ----------
Total operating revenues 89,552 77,002 259,377 225,830
-------- --------- --------- ----------
Expenses:
Compensation and benefits 24,580 22,561 71,572 64,822
Advertising and promotional costs 7,002 4,709 19,699 15,306
Occupancy and equipment costs 3,207 2,911 9,421 9,213
Amortization of goodwill and
deferred offering costs 3,492 3,503 10,477 10,617
Travel and entertainment 1,991 2,504 6,906 7,213
Interest 790 641 2,250 2,087
Other operating expenses 8,582 6,016 21,477 17,480
-------- --------- --------- ----------
Total operating expenses 49,644 42,845 141,802 126,738
-------- --------- --------- ----------
Income before taxes 39,908 34,157 117,575 99,092
Income taxes 15,756 13,187 46,142 38,616
-------- --------- --------- ----------
Net income $ 24,152 $ 20,970 $ 71,433 $ 60,476
======== ========= ========= ==========
Average common and common equivalent
shares outstanding:
Basic 31,373 31,545 31,368 31,730
======== ========= ========= ==========
Diluted 34,182 34,387 34,258 34,530
======== ========= ========= ==========
Earnings per common share:
Basic $ 0.75 $ 0.65 $ 2.22 $ 1.85
======== ========= ========= ==========
Diluted $ 0.71 $ 0.61 $ 2.09 $ 1.75
======== ========= ========= ==========
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 - - - 71,433 - - 71,433
Cash dividends paid - - - (28,021) - - (28,021)
Issuance of earnout shares - - 461 - - 1,349 1,810
Amortization of restricted
stock awards - - - - 79 - 79
Purchase of treasury stock - - - - - (27,915) (27,915)
Exercise of stock options - - - (4,654) - 15,159 10,505
Other - - 4,516 (5) - (103) 4,408
-------- ------- ---------- ----------- ------------ --------- ----------
Balance at September 30, 1999 $ 142 $ 245 $ 60,116 $ 490,282 $ - $(214,378) $ 336,407
======== ======= ========== =========== ============ ========= ==========
See accompanying notes to consolidated financial statements.
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THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended September 30,
------------------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 71,433 $ 60,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (796) 2,202
Amortization/Depreciation:
Furniture, equipment, and leasehold improvements 3,801 3,716
Goodwill 5,430 5,443
Net (increase) decrease in assets:
Accrued management and distribution fees receivable (22,709) 2,099
Accrued other receivables (12,379) (2,220)
Temporary investments arising from remarketing obligations 66,750 79,450
Nuveen defined portfolios (14,042) 2,025
Municipal bonds and notes 1,795 (3,281)
Prepaid expenses and other assets (1,787) (4,503)
Net increase (decrease) in liabilities:
Other liabilities 2,678 144
Accrued compensation and other expenses (2,038) (1,920)
Security purchase obligations 7,830 9,293
Deferred compensation 3,092 1,180
Other 4,595 2,052
---------- ----------
Net cash provided from operating activities 113,653 156,156
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable:
New loans - 9,000
Payments on loans - (24,000)
Net payments on secured short-term bank loans (10,000) (65,500)
Dividends paid (28,021) (24,515)
Proceeds from stock options exercised 10,505 5,098
Acquisition of treasury stock (27,915) (25,297)
Other (108) -
---------- ----------
Net cash used for financing activities (55,539) (125,214)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of office furniture and equipment (2,939) (2,818)
Other investments (6,721) 11,855
Other (724) (569)
---------- ----------
Net cash provided from (used for) investing activities (10,384) 8,468
---------- ----------
Increase in cash and cash equivalents 47,730 39,410
Cash and cash equivalents:
Beginning of year 11,148 8,771
---------- ----------
End of period $ 58,878 $ 48,181
========== ==========
See accompanying notes to consolidated financial statements.
(6)
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THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine month periods ended September 30, 1999 and
1998.
--------------------------------------------------------------------------------------------------------
In thousands, For the nine months ended
except per share data September 30, 1999 September 30, 1998
--------------------------------------------------------------------------------------------------------
Net Per-share Net Per-share
income Shares amount income Shares amount
--------------------------------------------------------------------
Net income $71,433 $60,476
Less: Preferred stock dividends (1,688) (1,688)
------- -------
Basic EPS 69,745 31,368 $2.22 58,788 31,730 $1.85
Dilutive effect of:
Deferred restricted stock - 176 - 179
Employee stock options - 1,065 - 971
Assumed conversion of
preferred stock 1,688 1,650 1,688 1,650
------- ------ ------- ------
Diluted EPS $71,433 34,258 $2.09 $60,476 34,530 $1.75
======= ====== ===== ======= ====== =====
--------------------------------------------------------------------------------------------------------
Options to purchase 399,500 and 260,500 shares of the Company's common
stock were outstanding at September 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
$42.18 and $39.00 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 September 30, 1999, the broker-dealer's
net capital ratio was 1.92 to 1 and its net capital was $32,240,132
which is $28,109,021 in excess of the required net capital of
$4,131,110.
(7)
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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
that serve the affluent and high-net-worth market segments. 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
and changes in interest rates, inflation and income tax rates and laws.
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 September 30, 1999, compared with 74% at September
30, 1998.
GENERAL ECONOMIC AND INDUSTRY TRENDS
During the past summer, rising consumer demand coupled with wage pressures
raised concerns over inflation. The Federal Reserve Board responded in June and
again in August with one-quarter point increases in short-term interest rates.
The stock market did not react favorably, with the S&P 500 Index posting a 6.2%
decline for the third quarter.
During the third quarter, the municipal market underperformed Treasuries.
Interest rates on the 30-year Government bond fluctuated within a narrow range
and ended the quarter just .04% higher than the 6.00% where they began. In
contrast, the yield on the Bond Buyer 20 municipal- bond index climbed to 5.73%
from 5.42%.
(8)
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Continued equity and bond market uncertainty in the third quarter resulted in an
industry-wide decrease in net flows (equal to the sum of sales, reinvestment and
exchanges less redemptions) into mutual funds when compared with the flows
experienced during the third quarter of 1998.
RECENT EVENTS
- - On September 17, 1999, the Company completed the sale of its investment
banking business to U.S. Bancorp Piper Jaffray.
- - In September, the Company announced the filing of registration statements
with the Securities and Exchange Commission for the initial public offering
of common shares by a new exchange-traded fund, The Nuveen Senior Income
Fund. This leveraged fund will invest primarily in senior floating-rate
loan obligations and expects to have over $400 million invested after
leveraging is completed in the year 2000.
The following table compares key operating information of the Company for the
three-month periods and the nine-month periods ended September 30, 1999 and
1998:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
(in millions except per share amounts)
------------------------------------------------------------------------------------------------------
FOR THE THIRD QUARTER OF FOR THE FIRST NINE MONTHS OF
1999 1998 % CHANGE 1999 1998 % CHANGE
---- ---- -------- ---- ---- --------
Gross sales of investment products $2,932 $1,999 47% $10,986 $5,558 98%
Assets under management (1) (2) 58,252 52,735 10 58,252 52,735 10
Operating revenues 89.6 77.0 16 259.4 225.8 15
Operating expenses 49.6 42.8 16 141.8 126.7 12
Pretax operating income 39.9 34.2 17 117.6 99.1 19
Net income 24.2 21.0 15 71.4 60.5 18
Basic earnings per share 0.75 0.65 15 2.22 1.85 20
Diluted earnings per share 0.71 0.61 16 2.09 1.75 19
Dividends per share 0.29 0.26 12 0.84 0.72 17
------------------------------------------------------------------------------------------------------
(1) Excludes defined portfolio products sponsored by the Company.
(2) At period end.
(9)
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SUMMARY OF OPERATING RESULTS
- - Gross sales for the third quarter rose 47% over the comparable quarter in
the prior year fueled by an increase in equity defined portfolios sales and
the leveraging of several exchange-traded funds. Sales for the nine months
ended September 30, 1999, reached approximately $11.0 billion, an increase
of 98% over the nine-month period ended September 30, 1998. This increase
is the result of a near tripling in defined portfolios sales, continued
strong managed account sales, and the issuance of approximately $1 billion
of new exchange traded funds and approximately $1.5 billion of new
MuniPreferred(TM) shares.
- - Gross revenues for the three-month and the nine-month periods ended
September 30, 1999, increased 12% and 14%, respectively, over the same
periods of the prior year. These increases are attributable to higher
advisory fee revenues and an increase in distribution revenues. Advisory
fees earned on managed accounts, exchange-traded funds and mutual funds
increased due to higher average assets under management, while distribution
revenue increases were the result of increased sales of equity defined
portfolios.
- - Operating expenses for both the three-month and the nine-month periods
increased when compared with the same periods 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 for
both the three-month and the nine-month periods when compared with the same
periods 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.
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.
(10)
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The following table summarizes net assets under management:
- --------------------------------------------------------------------------------
MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
---- ---- ----
Managed Funds:
Mutual Funds $ 11,663 $ 11,883 $ 11,503
Exchange-Traded Funds 27,210 26,223 26,439
Money Market Funds 625 824 838
Managed Accounts 18,754 16,337 13,955
-------- -------- --------
Total $ 58,252 $ 55,267 $ 52,735
======== ======== ========
- --------------------------------------------------------------------------------
(1) Excludes defined portfolio assets under surveillance.
Assets under management increased 5% from December 31, 1998 to September 30,
1999 due to an increase in net flows partially offset by depreciation of assets
due to the decline of stock and bond prices during the third quarter of 1999.
Gross sales of investment products for the three-month and nine-month periods
ended September 30,1999 and 1998 are shown below:
- --------------------------------------------------------------------------------
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Exchange-Traded Funds $ 606 $ - $ 2,465 $ -
Mutual Funds 347 366 1,196 1,140
Defined Portfolio Products 488 189 1,542 536
Managed Accounts 1,491 1,444 5,783 3,882
------- -------- -------- -------
Total $ 2,932 $ 1,999 $ 10,986 $ 5,558
======= ======== ======== =======
- --------------------------------------------------------------------------------
Overall, gross sales of the Company's products for the nine-month period ended
September 30, 1999, increased 98% over the same period of the prior year. Net
flows (equal to the sum of sales, reinvestment and exchanges less redemptions
and withdrawls) were $8.1 billion for the nine-month period ended September 30,
1999, an increase of 108% over the $3.9 billion total for the nine-month period
ended September 30, 1998.
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Managed Funds:
Mutual Funds $ 14,555 $ 13,160 $ 43,024 $ 37,819
Exchange-Traded Products 41,242 40,207 120,768 119,220
Money Market Funds 494 826 1,926 2,616
Managed Accounts 21,189 15,024 60,722 41,424
-------- -------- -------- --------
Total $ 77,480 $ 69,217 $226,440 $201,079
======== ======== ======== ========
- --------------------------------------------------------------------------------
Total advisory fees increased during the first nine months of 1999 to $226.4
million from the $201.1 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 nine-month period ended
September 30, 1999, increased $7.7 billion from September 30, 1998, and mutual
fund average assets under management increased $0.5 billion over the same time
frame. These increases reflect net sales of fund shares and accounts over the
periods offset by depreciation 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
Primarily during the first half of 1999, a growing concern regarding volatility
in the equity markets and investors' desires to rebalance their portfolios
resulted in a 19% increase in the Company's municipal mutual fund sales in the
first nine months 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 nine-month period
ended September 30, 1999, when compared with the same period of the prior year.
DEFINED PORTFOLIOS
Sales of defined portfolio products for the nine-month period ended September
30, 1999, nearly tripled when compared with same period of the prior year
primarily as a result of increased sales of equity defined portfolio products,
including both industry-sector and thematic portfolios. Distribution revenue for
the equity and taxable fixed-income defined portfolio products increased to $9.2
million for the nine-month period ended September 30, 1999, from $1.1 million
for the same period of the previous year.
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MANAGED ACCOUNTS
Sales of managed accounts increased 49% during the nine-month period ended
September 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
48%. Sales of Nuveen's municipal managed accounts increased $353 million, an
increase of 53%.
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 nine months of 1999, the Company
realized net positioning losses of $1.6 million compared with losses of $0.3
million during the first nine months of 1998.
Interest and dividend revenue increased $0.7 million when comparing the
nine-month period ended September 30, 1999, with the same period of the prior
year due to higher cash balances on hand.
Included in other revenue is the gain recorded on the sale of the investment
banking business in the third quarter of 1999.
OPERATING EXPENSES
Operating expenses increased $12.1 million in the first nine months of 1999 over
the first nine months of 1998.
Compensation and related benefits, the largest component of operating expenses,
increased $6.8 million, or 10% when comparing the nine-month period ended
September 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 nine-month
period. The increase in salary costs was driven by new staff additions and
annual merit increases.
Advertising and promotional expenditures increased $4.4 million or 29% for the
first nine months of 1999 when compared with the same period of 1998. This
increase is primarily due to the incremental costs to support the expanded
product line offered by the Company, including new Exchange-Traded Fund
offerings.
Occupancy and equipment, travel and entertainment, and other operating expenses
increased $3.9 million for the nine-month period ended September 30, 1999, when
compared with the same period of the prior year as a result of increased new
product support and strong sales growth.
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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. In addition, the Company's broker-dealer subsidiary
occasionally utilizes available, uncommitted lines of credit, which exceed $400
million, to satisfy periodic, short-term liquidity. As of September 30, 1999,
there was no outstanding balance due on these uncommitted lines of credit. 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 September
30, 1999, there was no outstanding balance due on the committed credit line.
At September 30, 1999, the Company held in its treasury 7,417,830 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 1.5
million additional shares.
During the third quarter of 1999, the Company paid out dividends on common
shares totaling $9.1 million and on preferred shares totaling $0.6 million.
As noted earlier, the Company's investment banking business, including its
Variable Rate Demand Obligation (VRDO) business, was sold to U.S. Bancorp Piper
Jaffrey in the third quarter of 1999. On December 31, 1998, the Company held
$66.8 million of VRDOs, which were classified in its consolidated balance sheets
as "Temporary Investments Arising from Remarketing Obligations." Due to the
sale, the Company did not hold any VRDO's on September 30, 1999.
The Company's broker-dealer subsidiary is subject to requirements of the
Securities and Exchange Commission relating to liquidity and capital standards
(See Notes to Consolidated Financial Statements).
To minimize interest rate risk on fixed-income defined portfolio inventories and
securities held by the Company, the Company entered into hedging transactions
using futures contracts during the first nine months 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.
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
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15
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 with particular emphasis on its key service providers,
continued final testing to confirm the readiness of internal systems and
continued contingency planning.
With regard to third party readiness, the Company has compiled a detailed
inventory of all third-party software and hardware used in processing at Nuveen
and Rittenhouse and has reviewed each for Year 2000 readiness. This review
process will continue as needed throughout the remainder of 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.. JJ Kenny and the Company tested system interfaces during the second
quarter of 1999 and no problems were discovered. Subsequent follow up testing
has also 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 appear to be Year 2000 ready. Rittenhouse does not engage in any
in-house system application development.
Earlier this year, 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
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involved in trade processing were tested as part of this effort. The initial
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 major problems, 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. Testing of non-critical systems
continues, and the iterative nature of the process requires additional testing
of systems where upgrades, enhancements or Year 2000 changes are implemented.
For these reasons, some ongoing testing of systems (both critical and
non-critical) and monitoring of service partner systems is expected to continue
through the rest of the year.
Contingency planning is a formal, organization wide process that considers
issues such as business risk, impact of failure of service partners, and
business resumption strategies. The Company has created a detailed process map
with respect to each of our critical systems and partners and are determining
alternate ways to continue our businesses without interruption in the event of a
disruption to normal business activities, including the possibility of not
having access to our facilities. Communications planning is a significant
component of our contingency planning. This has included both developing an
understanding of the parties with whom we will need to communicate in case of
disruptions to normal operating procedures and the development of a
communications strategy for our investors and advisers to inform them of our
readiness and of the industry perspective on various Year 2000 preparedness
issues. Contingency planning for non-critical systems is also underway, and our
contingency planning process will necessarily continue until Year 2000 arrives.
Given the Company's prior development work and its reliance on outside service
providers, the Company and its subsidiaries have not had to undergo a 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 have consisted of the cost of upgrades of
software, of travel expenses to coordinate with our affiliates and service
partners, of two consultants hired to assist the Company in the readiness of all
desktop computers and assistance in creating a thorough contingency plan as
previously discussed. 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 continues the process of assessing the
compliance of all of its third-party software suppliers and key service
providers or 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. No testing
system or contingency plan can perfectly predict the problems that may arise
later and there can be no assurance that other companies, including public
utilities, will not experience Year 2000 problems that may have widespread
ripple effects on other businesses and which would disrupt the Company's
operations.
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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
SEPTEMBER 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 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. There has been no material change in the Company's exposure in the
period from December 31, 1998 to September 30, 1999 and 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
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
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.
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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: November 10, 1999 By: /s/ John P. Amboian
--------------------------------
John P. Amboian
President
DATE: November 10, 1999 By: /s/ Margaret E. Wilson
--------------------------------
Margaret E. Wilson
Senior Vice President of Finance
(Principal Accounting Officer)
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