<PAGE> 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, 1997
Commission file number 1-11123
THE JOHN NUVEEN COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3817266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 917-7700
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------
At November 10, 1997 there were 31,792,315 shares of the Company's Common
Stock outstanding, consisting of 7,350,577 shares of Class A Common Stock,
$.01 par value, and 24,441,738 shares of Class B Common Stock, $.01 par value.
<PAGE> 2
THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income (Unaudited),
Three Months Ended September 30, 1997 and 1996 4
Nine Months Ended September 30, 1997 and 1996
Consolidated Statement of Changes in Common Stockholders'
Equity (Unaudited), Nine Months Ended September 30, 1997 5
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II.OTHER INFORMATION
Item 1 through Item 6 19
Signatures 20
</TABLE>
(2)
<PAGE> 3
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE JOHN NUVEEN COMPANY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ----------------
<S> <C> <C>
ASSETS
Cash $ 14,766 $ 6,348
Securities purchased under agreements to resell 12,000 72,000
Short term investments, at cost which approximates market value 1,104 -
Temporary investments arising from remarketing obligations 15,990 99,835
Receivables:
Management and distribution fees 25,241 20,767
Brokers and dealers 511 428
Taxes - 568
Customers 4,464 5,141
Interest 379 909
Other 8,759 7,749
Securities owned (trading account), at market value:
Nuveen unit trusts 43,381 39,206
Tax-exempt bonds and notes 119 4,553
Deferred income tax asset, net 8,304 9,778
Furniture, equipment, and leasehold improvements, at cost less
accumulated depreciation and amortization of
$23,294 and $19,363 respectively 15,888 14,073
Other investments 48,868 52,094
Goodwill 202,614 -
Prepaid expenses and other assets 28,082 21,802
----------------- ----------------
$ 430,470 $ 355,251
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Notes payable $ 25,000 $
Security purchase obligations 6,634 2,227
Payables:
Brokers and dealers 1,476 1,326
Customers 564 165
Income taxes 4,669 -
Amount due on Rittenhouse purchase 16,410 -
Accrued compensation and other expenses 34,574 47,789
Deferred compensation 26,376 23,414
Other liabilities 9,888 8,436
----------------- ----------------
Total liabilities 125,591 83,357
----------------- ----------------
Redeemable preferred stock, at redemption value; 5,000,000 shares
authorized, 1,800,000 shares issued 45,000 -
----------------- ----------------
Common stockholders' equity:
Class A common stock, $.01 par value; 150,000,000 shares
authorized, issued 14,212,618 shares and 12,828,199
shares, respectively 142 128
Class B common stock, $.01 par value; 40,000,000 shares
authorized, issued 24,441,738 shares and 25,826,157
shares, respectively 245 259
Additional paid-in capital 52,494 50,649
Retained earnings 392,033 363,715
Unamortized cost of restricted stock awards (306) (705)
----------------- ----------------
444,608 414,046
Less common stock held in treasury, at cost
(6,918,041 and 5,535,122 shares, respectively) (184,729) (142,152)
----------------- ----------------
259,879 271,894
----------------- ----------------
Total redeemable preferred stock and common stockholders' equity 304,879 271,894
----------------- ----------------
$ 430,470 $ 355,251
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
(3)
<PAGE> 4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenues:
Investment advisory fees from
assets under management $ 56,543 $ 46,391 $ 158,144 $ 138,826
Underwriting and distribution
of investment products 3,228 3,912 10,595 11,213
Positioning profits (losses) 1,246 956 821 (602)
Investment banking 3,461 2,303 9,274 5,435
Interest, dividends and all other, net 3,335 5,052 13,409 16,515
---------- ---------- ---------- -------------
Total revenues 67,813 58,614 192,243 171,387
---------- ---------- ---------- -------------
Expenses:
Compensation and benefits 19,620 18,041 56,282 53,721
Advertising and promotional costs 4,478 3,069 12,782 10,010
Amortization of deferred offering costs 1,751 - 4,779 -
Amortization of goodwill 1,072 - 2,280 -
Other operating expenses 10,287 7,642 27,455 22,443
---------- ---------- ---------- -------------
Total expenses 37,208 28,752 103,578 86,174
---------- ---------- ---------- -------------
Income before taxes 30,605 29,862 88,665 85,213
Income taxes 12,037 11,365 34,553 32,562
---------- ---------- ---------- -------------
Net income $ 18,569 $ 18,497 $ 54,112 $ 52,651
========== ========== =========== ==============
Average common and common equivalent
shares outstanding:
Primary 32,943 36,794 33,361 37,299
========== ========== =========== ==============
Fully diluted 34,719 36,874 35,253 37,467
========== ========== =========== ==============
Earnings per common share:
Primary $ 0.55 $ 0.50 $ 1.57 $ 1.41
========== ========== =========== ==============
Fully diluted $ 0.53 $ 0.50 $ 1.53 $ 1.41
========== ========== =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
(4)
<PAGE> 5
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS )
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<CAPTION>
Class A Class B Additional
Common Common Paid-In Retained
Stock Stock Capital Earnings
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 128 $ 259 $ 50,649 $ 363,715
Net income -- -- -- 54,112
Cash dividends paid -- -- -- (22,715)
Issuance of restricted stock -- -- 62 --
Amortization of restricted
stock awards -- -- -- --
Purchase of treasury stock 14 (14) -- --
Exercise of stock options -- -- (62) (3,079)
Other -- -- 1,845 --
----------- ----------- ----------- ------------
Balance at September 30, 1997 $ 142 $ 245 $ 52,494 $ 392,033
=========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Unamortized
Cost of
Restricted Treasury
Stock Awards Stock Total
------------------ -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (705) $ (142,152) $ 271,894
Net income -- -- 54,112
Cash dividends paid -- -- (22,715)
Issuance of restricted stock -- 1,342 1,404
Amortization of restricted
stock awards 399 -- 399
Purchase of treasury stock -- (54,008) (54,008)
Exercise of stock options -- 10,089 6,948
Other -- -- 1,845
------------------ -------------- -------------
Balance at September 30, 1997 $ (306) $ (184,729) $ 259,879
================== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
(5)
<PAGE> 6
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54,112 $ 52,651
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 2,084 (392)
Depreciation and amortization 3,068 3,792
Amortization of goodwill 2,094 -
Net (increase) decrease:
Accrued management and distribution fees (3,200) 2,164
Accrued interest receivable 530 671
Accounts receivable, other 1,076 (1,294)
Net increase (decrease):
Current taxes payable 6,224 (145)
Accrued compensation and other expenses (16,177) 21,388
Net change in receivables and payables from/to brokers,
dealers, customers and other assets/other liabilities (424) 10,584
Amortization of restricted stock awards 399 1,516
Net (increase) decrease in assets:
Temporary investments arising from remarketing
obligations 83,845 144,995
U.S. government securities (escrow accounts) - (42,003)
Securities owned (trading account) 260 8,959
Net increase (decrease) in liabilities:
Security purchase obligations 4,406 (6,181)
Deferred compensation 2,796 (138)
-------------- ---------------
Net cash provided from operating activities 141,093 196,567
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 40,000 -
Repayment of bank borrowing (15,000) -
Net payments on securities sold under-
agreements to repurchase - (25,000)
Dividends paid (22,139) (20,626)
Proceeds from stock options exercised 6,572 2,031
Acquisition of treasury stock (54,136) (45,048)
-------------- ---------------
Net cash used for financing activities (44,703) (88,643)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Flagship, net of cash received (17,343) -
Purchase of Rittenhouse, net of cash received (128,681) -
Purchase of U.S. Treasury securities (1,104) (103,422)
Proceeds from maturity of U.S. Treasury securities - 128,965
Purchases of office furniture and equipment (4,563) (1,935)
Other 3,819 (46,655)
-------------- ---------------
Net cash used for investing activities (147,872) (23,047)
-------------- ---------------
Increase/(decrease) in cash and cash equivalents (51,482) 84,877
Cash and cash equivalents:
Beginning of year 78,348 16,036
-------------- ---------------
End of period $ 26,866 $ 100,913
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
(6)
<PAGE> 7
THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
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 1997 presentation. These
reclassifications have no effect on net income or retained earnings
as previously reported for those periods.
NOTE 2 EARNINGS PER COMMON SHARE
Primary earnings per common share amounts were computed by dividing
earnings after deduction of preferred stock dividends (in 1997) by
the average number of common and common equivalent shares
outstanding. Fully diluted per-common-share amounts assume
conversion of the preferred stock, the elimination of the related
preferred stock dividend requirement, and the issuance of common
stock for all other potentially dilutive equivalents outstanding.
Common equivalent shares include the dilutive effect of shares
issuable under the Company's stock option programs.
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, 1997, its
net capital ratio was 1.63 to 1 and its net capital was $25,800,000
which is $23,000,000 in excess of the required net capital of
$2,800,000.
NOTE 4 NOTES PAYABLE
On August 8, 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. At
September 30, 1997, the Company had notes in the aggregate amount of
$25,000,000 outstanding which carried a weighted average interest
rate of 6.2%.
NOTE 5 CONTINGENCIES
As noted in Part II, Item 1, Legal Proceedings, the Company and its
subsidiaries have been named as defendants in certain legal actions
having arisen in the normal course of business. In the opinion of
management, based on current knowledge and after discussions with
legal counsel, the outcome of such litigation will not have a
material adverse effect on the Company's financial condition,
results of operations or liquidity.
NOTE 6 ACQUISITIONS
On January 2, 1997, the Company completed the acquisition of
Flagship Resources Inc. and its wholly owned subsidiaries, Flagship
Financial Inc., a registered investment adviser under the Investment
Advisors Act of 1940 and Flagship Funds Inc., a registered
broker/dealer under the Securities and Exchange Act of 1934
(together, "Flagship"). At December 31, 1996, Flagship had over
$4.6 billion in assets under management including $4.2 billion of
mutual funds and $400 million of managed account products and
serviced approximately 100,000 investors and their financial
advisers. In connection with its integration program, the Company
changed the name of Flagship Financial Inc. to Nuveen Asset
Management Inc. and consolidated its retail and institutional
managed
(7)
<PAGE> 8
NOTE 6 ACQUISITIONS (CONTINUED)
account operations into this company.
The base purchase price paid at closing of $63 million consisted of
$18 million cash and 1,800,000 shares of 5% cumulative preferred
stock valued at $45 million. The preferred stock is convertible to
1,650,000 shares of the Company's Class A common stock, at the
option of the holders, after two years. The acquisition was
accounted for using the purchase method of accounting, and
accordingly, a portion of the purchase price paid was allocated to
the acquired net assets based on their estimated fair values at the
date of purchase. The excess of the purchase price over assets
acquired approximating $62 million is being amortized over 30 years.
The Agreement and Plan of Merger also provides for contingent
payments of up to $20 million to be allocated between cash and
common stock in the same proportion as the base purchase price if
certain sales growth and profitability targets are satisfied over
the next four years. Any contingent payments will be accounted for
as additional goodwill and amortized over the remaining useful life
of the initial goodwill.
The operating results through September 30, 1997 reflect the full
impact of the acquired business. The following unaudited pro forma
information for the three month and nine month periods ended
September 30, 1996 presents a summary of consolidated results of
operations of the Company and the acquired business as if the
acquisition had occurred January 1, 1996:
<TABLE>
<CAPTION>
September 30, 1996
Quarter Ended Nine Months Ended
------------- -----------------
<S> <C> <C>
Revenues $ 64,392 $ 185,847
Net Income 19,199 54,844
Earnings per Common Share $ .48 $ 1.36
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as revised
management fee structure, additional goodwill amortization,
increased profit sharing costs, and estimated cost reductions. They
do not purport to be indicative of the results of operations which
actually would have resulted had the combination been in effect on
January 1, 1996 or of future results of operations of the
consolidated entity.
On July 15, 1997 the Company entered into an agreement to acquire
Rittenhouse Financial Services, Inc. (Rittenhouse), a nationally
known equity and balanced account manager, for $145 million cash.
Rittenhouse specializes in managing individual portfolios for high
net worth individuals. Rittenhouse's main products are equity and
balanced portfolios that seek attractive long-term capital
appreciation with moderate risk through investments in quality,
large-capitalization companies and currently has over $9 billion in
assets under management. The transaction closed on August 31, 1997.
This acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value
of assets acquired approximating $142 million will be amortized
over an estimated period of 30 years, subject to completion of an
independent appraisal.
The operating results of the consolidated business as reported in
the accompanying consolidated statement of income includes the
operating results of Rittenhouse for the month ending
September 30, 1997. The following unaudited pro forma information
for the nine month periods ended September 30, 1997 and 1996 reflect
a summary of the consolidated results of operations of the Company
and the acquired business as if the acquisition had occurred on
January 1, 1996:
<TABLE>
<Caption
Nine months ended
September 30,
------------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues $ 211,998 $187,250
========= ========
Net income $ 55,564 $ 51,922
========= ========
Earnings per common share $ 1.58 $ 1.39
========= ========
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments to reflect obligations
required under the Stock Purchase Agreement. They do not purport to be
indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1996 or of the future
results of operations of the consolidated entity.
NOTE 7 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128 "Earnings Per
Share," which replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires
dual disclosure of the basic and diluted earnings per share. The
statement also calls for a reconciliation of the basic earnings per
share calculation to the diluted earnings per share calculation.
Statement 128 is required for periods ending after December 15,
1997, and does not allow for early adoption. The Company will
adopt Statement 128 in the fourth quarter of 1997. The Company does
not expect that reported earnings per share under the new
accounting standard will differ materially from that currently
reported.
(8)
<PAGE> 9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
THE JOHN NUVEEN COMPANY
September 30, 1997
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related
research and surveillance; the development, marketing, and
distribution of investment products and services; and municipal and
corporate investment banking services. The Company markets its
investment products, including mutual funds, unit trusts, and
managed accounts, through a network of registered representatives
associated with unaffiliated firms including broker-dealers,
commercial banks, affiliates of insurance providers, financial
planners, accountants, consultants and investment advisers.
The Company has three principal sources of revenue which include
ongoing advisory fees earned on assets under management,
including mutual funds and individually managed accounts;
transaction-based revenue earned upon the distribution of mutual
fund and unit trust products; and investment banking revenues,
consisting of underwriting and other advisory fees.
The profitability of each of these lines of business, and the
volume of sales of the Company's products, are directly affected by
many variables, including investor preferences for fixed-income,
equity or other investments, municipal bond new issue supply,
current and expected changes in interest rate levels, the rate of
inflation, and changes or expected changes in income tax rates and
laws.
Assets under management include investments in equity, taxable fixed
income and municipal securities. Managed funds and accounts with
portfolios invested primarily in municipal securities represented
77.6% of assets under management at September 30, 1997 compared
with 98.5% at December 31, 1996.
MARKET OVERVIEW
Throughout 1997, the economy remained relatively strong showing few
significant signs of inflationary pressure. After the 25 basis
point increase in the Federal Funds rate early in the second
quarter, the Federal Reserve Board has not taken any further
tightening action. Interest rates fluctuated within a narrow range
during the third quarter and throughout the first nine months of
the year. The U.S. equity markets reacted favorably to these
conditions, continuing their upward course.
During 1997, significant cash continued to flow into equity investments
including mutual funds. Industry data reported that fixed-income funds
began attracting higher levels of cash flows in the third quarter with
municipal bond funds
(9)
<PAGE> 10
experiencing positive net flows (equal to the sum of sales, reinvestments and
exchanges less redemptions) for the quarter.
Municipal bonds modestly outperformed their Treasury counterparts
throughout most of the first three quarters. At the end of the
third quarter, municipals underperformed Treasuries slightly. The
yield on the 30-year U. S. Treasury bond declined a total of 38
basis points for the quarter while the yield on the Bond Buyer 20,
a popular index of long term municipal bonds, declined 17 basis
points. The movement of interest rate levels for the first three
quarters of 1997 is shown in the accompanying graph.
<TABLE>
<CAPTION>
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YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1996 TO SEPTEMBER 30, 1996
1/4/96 1/11/96 1/18/96 1/25/96 2/1/96 2/8/96 2/15/96 2/22/96
Bond Buyer 20 5.37 5.50 5.40 5.46 5.40 5.37 5.33 5.48
30 Year Treasury 6.04 6.14 5.97 6.11 6.07 6.15 6.16 6.33
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1996 TO SEPTEMBER 30, 1996
2/29/96 3/7/96 3/14/96 3/21/96 3/28/96 4/4/96 4/11/96 4/18/96
Bond Buyer 20 5.57 5.59 5.81 5.86 5.90 5.86 6.03 5.94
30 Year Treasury 6.48 6.46 6.68 6.61 6.72 6.63 6.93 6.83
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1996 TO SEPTEMBER 30, 1996
4/25/96 5/2/96 5/9/96 5/16/96 5/23/96 5/30/96
Bond Buyer 20 5.91 6.06 5.96 5.96 5.87 5.94
30 Year Treasury 6.81 7.04 7.02 6.92 6.87 6.94
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1997 TO SEPTEMBER 30, 1997
1/3/97 1/10/97 1/17/97 1/24/97 1/31/97 2/7/97 2/14/97 2/21/97
Bond Buyer 20 5.70 5.71 5.72 5.72 5.73 5.70 5.62 5.58
30 Year Treasury 6.74 6.75 6.63 6.85 6.88 6.75 6.63 6.65
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1997 TO SEPTEMBER 30, 1997
2/28/97 3/7/97 3/14/97 3/21/97 3/27/97 4/4/97 4/11/97 4/18/97
Bond Buyer 20 5.65 5.70 5.75 5.78 5.81 5.88 5.88 5.87
30 Year Treasury 6.81 6.87 6.96 6.96 6.99 7.07 7.10 7.07
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1997 TO SEPTEMBER 30, 1997
4/25/97 5/2/97 5/9/97 5/16/97 5/23/97 5/30/97
Bond Buyer 20 5.87 5.77 5.71 5.67 5.66 5.67
30 Year Treasury 7.12 6.91 6.93 6.87 6.99 6.98
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1996 TO SEPTEMBER 30, 1996
6/6/96 6/13/96 6/20/96 6/27/96 7/4/96 7/11/96 7/18/96 7/25/96 8/2/96
Bond Buyer 20 5.94 6.12 6.06 5.97 5.94 6 5.88 5.86 5.79
30 Year Treasury 6.91 7.12 7.12 7.00 6.93 7.06 6.92 7.06 6.84
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1996 TO SEPTEMBER 30, 1996
8/9/96 8/16/96 8/23/96 8/30/96 9/6/96 9/13/96 9/20/96 9/27/96
Bond Buyer 20 5.67 5.74 5.75 5.86 5.95 5.89 5.88 5.76
30 Year Treasury 6.79 6.81 6.84 7.04 7.16 7.07 7.05 6.88
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1996 TO SEPTEMBER 30, 1996
6/6/97 6/13/97 6/20/97 6/27/97 7/3/97 7/11/97 7/18/97 7/25/97 8/1/97
Bond Buyer 20 5.60 5.52 5.48 5.53 5.53 5.38 5.32 5.28 5.23
30 Year Treasury 6.88 6.76 6.68 6.78 6.71 6.56 6.49 6.43 6.3
YIELD COMPARISONS OF THE
30 YEAR TREASURY BOND
AND THE BOND BUYER 20
FOR THE PERIOD JANUARY 1,
1997 TO SEPTEMBER 30, 1997
8/8/97 8/15/97 8/22/97 8/29/97 9/5/97 9/12/97 9/19/97 9/26/97
Bond Buyer 20 5.33 5.42 5.43 5.45 5.42 5.44 5.33 5.36
30 Year Treasury 6.52 6.55 6.64 6.67 6.61 6.68 6.4 6.4
</TABLE>
Municipal bond new issue volume, which is comprised of new-money
financings, refunding transactions, and issues that have an element
of both new-money and refunding, was $154 billion in the first nine
months of 1997 compared with $128 billion in the same period of 1996.
New-money financings by issuers were $102 billion and $87 billion for
the first three quarters of 1997 and 1996, respectively. Refunding
transactions, which are generally entered into for the purpose of
redeeming outstanding bond issues under conditions more favorable to
the issuer, such as lowering financing costs, totaled $39 billion in
the first nine months of 1997 compared with $31 billion in 1996.
(10)
<PAGE> 11
RECENT EVENTS
- - On August 31, 1997, as part of an ongoing program to broaden the range of
investment products and services offered to investors, the Company
acquired all of the outstanding stock of Rittenhouse Financial Services,
Inc. (Rittenhouse), a nationally-known equity and balanced account
manager, for $145 million in cash. Rittenhouse specializes in managing
individual portfolios for high net worth individuals and institutions.
Rittenhouse's primary products are equity and balanced portfolios that
seek to provide attractive long-term capital appreciation with moderate
risk through common stock investments in quality, large-capitalization
companies and investment-grade quality intermediate bonds. At September
30, 1997, Rittenhouse had approximately $9.4 billion in assets under
management. The Company plans to introduce a growth equity mutual fund,
which will be subadvised by Rittenhouse, in early 1998.
- - On January 2, 1997, the Company completed the acquisition of Flagship
Resources Inc. (Flagship), a municipal mutual fund sponsor and asset
manager, for cash and preferred stock with a total value of approximately
$63 million. Additional payments, which are contingent on the significant
future growth in the Company's municipal mutual funds, could amount to as
much as $20 million over the next four years. With the merging of
Flagship and the Company's municipal mutual fund businesses, the Company
has expanded the range of municipal investments offered to investors and
strengthened its mutual fund sales capabilities. As a result of the
merger, the Company now offers municipal bond mutual funds,
exchange-traded funds or unit trusts in 28 states, in addition to national
funds and trusts.
- - The above acquisitions have been accounted for using the purchase method
of accounting resulting in the creation of approximately $200 million
of goodwill for financial reporting purposes which will be amortized
against earnings over approximately 30 years.
- - The Company expanded its unit trust product offerings in May 1997 with the
launch of taxable unit trusts including equity, U.S. Treasury and insured
corporate unit trusts.
(11)
<PAGE> 12
The following table compares key operating information of the
Company for the three month periods and nine month periods ended
September 30, 1997 and 1996.
NUVEEN OPERATING STATISTICS
(in millions except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
For the third quarter of For the first nine months of
1997 1996 % change 1997 1996 % change
------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues $67.8 $58.6 15.7% $192.2 $171.4 12.1%
Operating expenses 37.2 28.8 29.2 103.6 86.2 20.2
Pretax operating income 30.6 29.9 2.3 88.7 85.2 4.1
Net income 18.6 18.5 .01 54.1 52.7 2.7
Primary earnings per share 0.55 0.50 10.0 1.57 1.41 11.3
Fully diluted earnings per share 0.53 0.50 6.0 1.53 1.41 8.5
Operating cash flow per share (1) 0.64 0.54 18.5 1.82 1.51 20.5
Dividend per share 0.23 0.21 9.5 0.65 0.59 10.2
Consolidated stockholders' equity (2) 304.9 307.8 (.01) 304.9 307.8 (.01)
Gross Sales 776.8 355.1 118.8 1,907.2 985.7 93.5
Assets under management (2) 48,075 32,510 47.9 48,075 32,510 47.9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating cash flow (net income plus amortization and
depreciation) on a per-share basis is calculated under the
same method used for fully diluted earnings per share and
is presented as an additional measure of operating
performance, not as a substitute for earnings per share.
(2) At period end.
SUMMARY OF OPERATING RESULTS
- - The addition of the Flagship mutual funds and the Rittenhouse managed
accounts, together with the benefits of a restructuring of the Company's
existing institutional managed account business and an increase in
investment banking activity provided most of the increase in gross
revenues for the three month and nine month periods ended September 30,
1997 when compared to the same periods of the prior year. This increase
was partially offset by a decline in interest income earned on short-term
investments.
- - Expenses for the period increased when compared to the same period of the
prior year primarily due to an increase in advertising and promotional
costs, goodwill amortization, amortization of the costs associated with
the launch of the growth and income fund products and incremental
personnel and operating expenses resulting from the acquisitions of
Flagship and Rittenhouse.
(12)
<PAGE> 13
The following discussion and analysis contains important
information that should be helpful in evaluating the Company's
results of operations and financial condition, and should be read
in conjunction with the consolidated financial statements and
related notes.
RESULTS OF OPERATIONS
Total advisory fee income earned during any fiscal year is directly
related to the market value of the assets managed by the Company.
Advisory fee income will increase with a rise in the level of assets
under management, which occurs with the sale of fund shares, deposits
into individually managed accounts, the acquisition of assets under
management from other advisory companies, or through increases in the
value of portfolio investments. Sales may include shares of new or
existing funds or managed accounts. Fund shares may be sold either
to new or existing shareholders. Assets under management may also
increase as a result of reinvestment of distributions from unit trusts
sponsored by the Company into shares of the mutual funds. Fee
income will decline when managed assets decline, as would occur
when the values of fund portfolio investments decrease or when
mutual fund redemptions or managed account withdrawals exceed
sales.
Investment advisory fee income, net of expense reimbursements, from
assets managed by the Company is shown in the following table:
- -----------------------------------------------------------------------
NUVEEN MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Managed Funds:
Mutual Funds $12,034 $ 6,358 $ 33,694 $ 18,972
Exchange-Traded
Products 39,611 38,786 116,476 115,939
Money Market Funds 961 1,067 2,872 3,372
Managed Accounts (1) 3,937 180 5,102 543
----------- ---------- --------- ----------
Total $56,543 $46,391 $158,144 $138,826
=========== ========== ========= ==========
</TABLE>
(1) For 1997 periods, includes one month of advisory
fee income earned on assets managed by Rittenhouse.
(13)
<PAGE> 14
The following table summarizes net assets under management:
- -------------------------------------------------------------------
NUVEEN MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------- ------------ -------------
<S> <C> <C> <C>
Managed Funds:
Mutual Funds $10,705 $ 5,930 $ 5,409
Exchange-traded
Products 25,799 25,434 25,267
Money Market Funds 967 1,004 1,061
Managed Accounts 10,604 823 773
------------- ------------ -------------
TOTAL $48,075 $33,191 $32,510
============= ============ =============
</TABLE>
(1) Excludes the unit trust assets under surveillance.
- -------------------------------------------------------------------
Total advisory fees for the three month and nine month periods
ended September 30, 1997 increased over the comparable periods of
the prior year as a result of the higher levels of average assets
under management relating principally to the Flagship and
Rittenhouse acquisitions. Mutual fund assets under management at
September 30, 1997 increased 81% from December 31, 1996 and 98%
from September 30, 1996. This increase resulted from the
acquisition of $4.2 billion of assets from Flagship, the
introduction of the growth and income fund products in late 1996
and early 1997, sales of fund shares over the periods, and
appreciation in the underlying value of the portfolio investments.
This increase was partially offset by share redemptions in the
mutual funds. Managed account assets under management
increased $9.8 billion from December 31, 1996 and September 30,
1996 due to the acquisition of $9.4 billion and $400 million in
managed account assets from Rittenhouse and Flagship, respectively,
and net sales of retail managed accounts during those periods,
partially offset by the effect of the December 1996 restructuring
of certain institutional accounts previously managed through a
joint venture between the Company and Duff & Phelps. The change in
fees earned on exchange-traded funds principally reflects the
impact of the movement of interest rates on the value of the
investment portfolios. Average money market net assets under
management continued to decrease due to relatively low short-term
interest rates, a strong equity market and strong competition from
sponsors of competing money market products.
(14)
<PAGE> 15
Sales of investment products for the three month period and nine
month period ended September 30, 1997 and 1996 are shown below.
- -------------------------------------------------------------------------------
GROSS INVESTMENT PRODUCT SALES
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Unit Trusts $ 168 $ 275 $ 611 $ 766
Mutual Funds 228 49 731 135
Exchange-traded
funds 25 - 25 -
Managed Accounts 356 31 540 85
------------- ------------ ------------- -------------
Total $ 777 $ 355 $1,907 $ 986
============= ============ ============= =============
</TABLE>
- -------------------------------------------------------------------------------
The introduction of the Company's growth and income fund family of
products together with integration of the Flagship mutual funds and
the Flagship distribution systems contributed significantly to an
increase in the sale of mutual funds for the first nine months and
third quarter of 1997 over the first nine months and third quarter
of 1996 and a resultant increase in distribution revenue for the
period. However, the municipal mutual funds experienced net
redemptions for the first nine months of the year as demand for
municipal products remained relatively flat for the year,
continuing last year's trend. This trend is primarily due to
competition from strong equity markets and investor concerns that
interest rates will increase with a potentially expanding economy.
Likewise, sales of municipal unit trusts and the related
distribution revenue were lower in the first nine months of 1997
when compared to the first nine months of 1996 as absolute yields
continue to be too low to attract significant investor interest in
the trusts.
Sales of managed accounts increased during the first nine months of
1997 as compared to the same period last year as Flagship's managed
account business was combined with the Company's managed account
business for the full nine months of the year coupled with one
month of Rittenhouse account sales. One of the exchange-traded
funds sponsored by the Company issued $25 million in preferred
stock in late September. Sales of managed accounts and
exchange-traded preferred stock do not impact the Company's
underwriting and distribution revenue as there is no
transaction-based revenue associated with those products.
The Company records positioning profits or losses from changes in
the market value of unit trust inventories and fixed income
securities held for future deposits into unit trusts, and from
realized gains or losses on temporary investments in newly
sponsored mutual funds. During the first three quarters of the
year, the Company recognized positioning gains of $821,000
compared to losses of $602,000 recognized during the first three
quarters of 1996. The Company manages the interest-rate risk
on the unit trust and fixed income inventories by controlling
inventory levels for both unit trusts and fixed income
securities, by timing deposits of new unit trusts to coincide
closely with expected demand, and, on occasion, by hedging these
inventories against fluctuations in interest rates using
financial futures.
Investment banking revenues include both new issue underwriting
profits and fee income earned from various financial advisory
activities. During the first nine months of 1997
(15)
<PAGE> 16
investment banking revenues increased 72% from $5.4 million to $9.3
million due to an increase in both negotiated underwritings and
financial advisory activity during the period when compared to the
first nine months of 1996.
Compensation and related benefits increased 5% when comparing the
first three quarters of 1997 and 1996. Although the Company
recognized an increase in salary expense with the addition of
approximately 60 former Flagship employees for the full nine months
of the year and the addition of approximately 80 Rittenhouse
employees for the month of September, the increase was mostly
offset by new compensation arrangements beginning in 1996 which
shift a portion of cash incentive awards to equity incentive awards
in the form of restricted stock and options and a decline in
expense associated with equity awards granted pursuant to the
Company's 1992 Special Incentive Plan. Expense associated with the
1992 awards was tied to a vesting schedule, with substantially all
awards being vested by July 1996.
Advertising and promotional expenditures increased for the first
nine months of 1997 when compared to the same period of the prior
year primarily as a result of an advertising and promotional
campaign in the first and second quarters to support the launch of
the new growth and income mutual fund products and increased
production of prospectuses and other marketing materials needed to
market a growing number of products.
Goodwill amortization of $2.3 million was recorded during the first
nine months of 1997 which relates primarily to the acquisition of
Flagship on January 2, 1997 and Rittenhouse on August 31, 1997.
The Company expects to amortize goodwill purchased over approximately
a 30 year period for both acquisitions.
During December 1996 and the first five months of 1997, the Company
offered shares of the Company's growth and income fund family on a
load-waived basis. During this period, the Company compensated
selling firms with commissions on approximately $600 million of
fund share sales. The Company is amortizing these costs over a
three year period. Amortization expense recorded during the first
three quarters of the year amounted to $4.8 million.
Other operating expenses increased $4.9 million over the nine month
period ended September 30, 1997 when compared to the same period of
the prior year due to an increase in interest expense of $670,000,
and to increases in operating expenses resulting from the
addition of Flagship and Rittenhouse personnel.
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, however, occasionally utilizes available, uncommitted
lines of credit, which exceed $400 million, to satisfy additional
periodic, short-term liquidity requirements. Additionally, in
early August, 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.
On August 31, 1997, the Company acquired Rittenhouse, a
nationally-known equity and balanced account manager, for a cash
purchase price of $145 million. To finance the
(16)
<PAGE> 17
transaction the Company used $95 million of existing cash and drew
$34 million from the aforementioned committed credit line. On
November 17, the Company will pay the final amount due of approximately
$16 million also from this credit line.
The Company completed the acquisition of Flagship for cash and
preferred stock with a total value of approximately $63 million on
January 2, 1997. Additional payments, which are contingent on the
significant future growth in the Company's municipal mutual funds,
could amount to as much as $20 million over the next four years.
The $45 million cash portion of the purchase price was financed
with internal cash.
At September 30, 1997, the Company held in its treasury 6,918,041
shares of common stock acquired in open market transactions and in
transactions with its parent company, The St. Paul Companies, Inc.,
as part of ongoing stock repurchase programs. During February
1997, the Board of Directors authorized the purchase of 3.5
million shares to be prorated between Class A and Class B shares,
based on the total number of shares outstanding. During the first
nine months of 1997, the Company repurchased a total of 1,782,169
of its outstanding common shares, comprised of 397,750 Class A
shares and 1,384,419 Class B shares, which automatically converted
to Class A after repurchase.
The Company is remarketing agent for various issuers of VRDOS with
an aggregate principal value in excess of $1.7 billion at September
30, 1997. Although remarketing agents, including the Company, are
only obligated to use their best efforts in locating purchasers for
the VRDOS, they frequently repurchase VRDOS for resale to other
buyers within a few days. During temporary periods of imbalance
between supply and demand for VRDOS, the Company may hold larger
balances of such obligations for resale. Substantially all VRDOS
for which the Company is remarketing agent are secured by letters
of credit obtained by the issuer from top-rated third-party
providers, including major commercial banks and insurance
companies. At September 30, 1997, and December 31, 1996, the
Company held $16 million and $100 million, respectively, of VRDOS,
which are classified in its consolidated balance sheets as
"Temporary Investments Arising from Remarketing Obligations". The
Company's average daily inventory of VRDOS was $34 million during
the first nine months of 1997 and $18 million during all of 1996.
To minimize interest rate risk on the unit trust inventories and
fixed income securities held by the Company, the Company entered
into futures contracts during the period and expects to continue to
do so. Additionally, the Company's investment banking group will,
on occasion, act as financial adviser, broker, or underwriter to
municipal or other not-for-profit issuers with respect to
transactions such as interest rate swaps and forward delivery
transactions. The Company's investment advisory subsidiaries did
not invest in derivative securities, other than high quality
synthetic money market securities, for the funds and accounts they
manage.
John Nuveen & Co. Incorporated, the Company's wholly owned
broker/dealer subsidiary, is subject to the Securities and Exchange
Commission Rule 15c3-1, the "Uniform Net Capital Rule", which
requires the maintenance of minimum net capital and requires that
the ratio of aggregate indebtedness to net capital, as these terms
are defined, shall not exceed 15 to 1. At September 30, 1997, its
net capital ratio was 1.63 to 1 and its net capital was $25.8
million which is $23.0 million in excess of the required net
capital of $2.8 million.
(17)
<PAGE> 18
Management believes that cash provided from operations and
borrowings available under its committed credit facility will
provide the Company with sufficient liquidity to meet its operating
needs for the foreseeable future.
INFLATION
The Company's assets are, to a large extent, liquid in nature and
therefore not significantly affected by inflation. However,
inflation may result in increases in the Company's expenses, such
as employee compensation, advertising and promotional costs, and
office occupancy costs. To the extent inflation, or the
expectation thereof, results in rising interest rates or has other
adverse effects upon the securities markets and on the value of
financial instruments, it may adversely affect the Company's
financial condition and results of operations. A substantial
decline in the value of fixed income investments could adversely
affect the net asset value of funds managed by the Company, which
in turn would result in a decline in investment advisory fee
income.
(18)
<PAGE> 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-Q for the quarter
ending June 30, 1997, a lawsuit brought in June, 1996 by certain
shareholders is currently pending in federal district court for the
Northern District of Illinois against John Nuveen & Co. Incorporated,
Nuveen Advisory Corp., six Nuveen investment companies (collectively, the
"funds") 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 Corp.
and John Nuveen & Co. Incorporated. The defendants are vigorously
contesting this action and have filed motions to dismiss the entire action
which are pending.
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. Form 8K dated July 22, 1997 reporting under
Item 5 Other Events that the Company had entered into an agreement
with George W. Connell to purchase all the oustanding stock of
Rittenhouse Financial Services, Inc. Also reported under Item 7
Financial Statements, Pro Forma Financial Information and Exhibits
was the Press Release, dated July 15, 1997, relating to the
announcement of the acquisition.
c) Report on Form 8-K. Form 8-K dated August 31, 1997 reporting under
Item 5 Other Events the announcement that the Company had completed
the acquisition of Rittenhouse Financial Services, Inc. Also reported
under Item 7 Financial Statements, Pro Forma Financial Information and
Exhibits was the Press Release dated September 2, 1997 relating to the
completion of such acquisition.
(19)
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE JOHN NUVEEN COMPANY
(Registrant)
DATE: November 13, 1997 By /s/ John P. Amboian
---------------------------------
John P. Amboian
Executive Vice President,
Chief Financial Officer
By /s/ O. Walter Renfftlen
DATE: November 13, 1997 ---------------------------------
O. Walter Renfftlen
Vice President and Controller
(Principal Accounting Officer)
(20)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JOHN
NUVEEN COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,866
<SECURITIES> 60,594
<RECEIVABLES> 39,254
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 135,018
<PP&E> 37,522
<DEPRECIATION> (23,294)
<TOTAL-ASSETS> 430,470
<CURRENT-LIABILITIES> 0
<BONDS> 0
45,000
0
<COMMON> 387
<OTHER-SE> 259,492
<TOTAL-LIABILITY-AND-EQUITY> 430,470
<SALES> 0
<TOTAL-REVENUES> 192,243
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 101,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,485
<INCOME-PRETAX> 88,665
<INCOME-TAX> 34,553
<INCOME-CONTINUING> 54,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,112
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.53
</TABLE>
