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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, 2002
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, 2002, there were 93,095,584 shares of the Company's
Common Stock outstanding, consisting of 19,770,370 shares of Class A Common
Stock, $.01 par value, and 73,325,214 shares of Class B Common Stock, $.01 par
value.
THE JOHN NUVEEN COMPANY
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited),
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income (Unaudited),
Three Months Ended September 30, 2002 and 2001
Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statement of Changes in Common Stockholders'
Equity (Unaudited), Nine Months Ended September 30, 2002 5
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements
(Unaudited) 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 23
ITEM 4.
Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1 through Item 6 24
Signatures 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE JOHN NUVEEN COMPANY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ -----------
ASSETS
Cash and cash equivalents $ 68,082 $ 83,659
Management and distribution fees receivable 45,928 53,803
Other receivables 9,950 12,537
Securities owned (trading account), at market value:
Nuveen defined portfolios 12 15,901
Bonds and notes -- 1,445
Deferred income tax asset, net -- 164
Furniture, equipment, and leasehold improvements, at cost less accumulated depreciation
and amortization of $36,924 and $31,823, respectively 29,630 28,372
Other investments 57,434 59,651
Goodwill 493,501 353,598
Other intangible assets, net of accumulated amortization of $4,217 and $1,623, respectively 69,933 51,876
Prepaid expenses and other assets 38,420 35,605
--------- ---------
$ 812,890 $ 696,611
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 305,000 $ 183,000
Accrued compensation and other expenses 44,022 44,973
Deferred compensation 27,724 28,398
Security purchase obligations -- 739
Deferred income tax liability, net 5,634 --
Other liabilities 48,501 27,611
--------- ---------
Total liabilities 430,881 284,721
--------- ---------
Redeemable preferred stock, at redemption value; 5,000,000 shares authorized,
0 and 225,000 shares issued and outstanding, respectively -- 5,625
Minority interest 3,231 --
Common stockholders' equity:
Class A Common stock, $.01 par value; 160,000,000 shares authorized at Sept. 30, 2002; 476 470
47,586,266 and 46,967,682 shares issued and outstanding, respectively
Class B Common stock, $.01 par value; 80,000,000 shares authorized at Sept. 30, 2002; 733 733
73,325,214 shares issued and outstanding at September 30, 2002 and December 31, 2001
Additional paid-in capital 154,487 131,996
Retained earnings 667,117 620,274
Unamortized cost of restricted stock awards (945) (1,537)
Accumulated other comprehensive loss (5,378) (3,713)
--------- ---------
816,490 748,223
Less common stock held in treasury, at cost (27,607,596 and 25,150,668 shares, respectively) (437,712) (341,958)
--------- ---------
Total common stockholders' equity 378,778 406,265
--------- ---------
$ 812,890 $ 696,611
========= =========
See accompanying notes to consolidated financial statements.
3
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,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Operating revenues:
Investment advisory fees from assets under management $ 91,013 $ 86,124 $ 262,225 $ 244,679
Underwriting and distribution of investment products 2,839 5,085 9,376 14,347
Positioning profits/(losses), net 13 1,991 (114) 2,168
Other operating revenue 8,541 4,340 13,876 8,271
--------- --------- --------- ---------
Total operating revenues 102,406 97,540 285,363 269,465
Operating expenses:
Compensation and benefits 27,343 24,026 71,913 66,933
Advertising and promotional costs 3,065 4,650 10,032 13,117
Occupancy and equipment costs 4,843 3,767 13,016 10,446
Amortization of goodwill and intangible assets 1,183 2,139 2,594 6,221
Travel and entertainment 2,026 2,152 6,139 6,572
Other operating expenses 9,519 11,751 27,871 27,054
--------- --------- --------- ---------
Total operating expenses 47,979 48,485 131,565 130,343
Operating income 54,427 49,055 153,798 139,122
Non-operating income/(expense) (2,314) (1,129) (2,243) 963
--------- --------- --------- ---------
Income before taxes 52,113 47,926 151,555 140,085
Income taxes 20,105 19,163 59,106 55,348
--------- --------- --------- ---------
Net income $ 32,008 $ 28,763 $ 92,449 $ 84,737
========= ========= ========= =========
Average common and common equivalent shares outstanding:
Basic 93,312 95,216 94,205 94,246
========= ========= ========= =========
Diluted 96,878 101,730 98,529 102,046
========= ========= ========= =========
Earnings per common share:
Basic $ 0.34 $ 0.30 $ 0.98 $ 0.89
========= ========= ========= =========
Diluted $ 0.33 $ 0.28 $ 0.94 $ 0.83
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
Unamortized Accumulated
Class A Class B Additional Cost of Other
Common Common Paid-In Retained Restricted Comprehensive Treasury
Stock Stock Capital Earnings Stock Awards Loss Stock Total
--------- ------- --------- -------- ------------ ------------- --------- ----------
Balance at December 31, 2001 $ 470 $ 733 $ 131,996 $ 620,274 $ (1,537) $ (3,713) $(341,958) $ 406,265
Net income - - - 92,449 - - - 92,449
Cash dividends paid - - - (35,013) - - - (35,013)
Amortization of restricted
stock awards - - - - 592 - - 592
Purchase of treasury stock - - - - - - (133,481) (133,481)
Exercise of stock options - - - (10,559) - - 37,639 27,080
Issuance of restricted stock - - - (34) - - 88 54
Tax benefit of options exercised - - 16,872 - - - - 16,872
Conversion of preferred to common 6 - 5,619 - - - - 5,625
Other - - - - - (1,665) - (1,665)
-------- ------- ---------- --------- ---------- ---------- ---------- ----------
Balance at September 30, 2002 $ 476 $ 733 $ 154,487 $667,117 $ (945) $ (5,378) $ (437,712) $ 378,778
======== ======= ========== ========= ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
THE JOHN NUVEEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 92,449 $ 84,737
Adjustments to reconcile net income to net cash
provided from operating activities:
Deferred income taxes 6,897 1,097
Depreciation of office property and equipment 5,367 3,736
Amortization of goodwill and intangible assets 2,594 6,221
Net (increase) decrease in assets:
Management and distribution fees receivable 17,117 42,521
Other receivables 2,796 14,193
Nuveen defined portfolios 15,889 (3,987)
Bonds and notes 1,445 414
Prepaid expenses and other assets (2,749) 1,420
Net increase (decrease) in liabilities:
Accrued compensation and other expenses (1,726) (17,498)
Deferred compensation (673) (1,370)
Security purchase obligations (739) 4,440
Other liabilities 14,861 3,417
Other 18,233 18,957
--------- ---------
Net cash provided from operating activities 171,761 158,298
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable 250,000 173,000
Repayments of notes payable (128,000) --
Dividends paid (35,013) (34,002)
Proceeds from stock options exercised 27,080 40,048
Acquisition of treasury stock (133,481) (127,786)
--------- ---------
Net cash (used for)/provided from financing activities (19,414) 51,260
--------- ---------
Cash flows from investing activities:
Symphony acquisition, net of cash received -- (203,179)
NWQ acquisition, net of cash received and liability due to Old Mutual (156,653) --
Proceeds from Rittenhouse stock options exercised 40,504 --
Repurchase of Rittenhouse stock (45,036) --
Net purchase of office property and equipment (5,432) (6,704)
Proceeds from sales of investment securities 1,378 20,623
Purchases of investment securities (1,614) (5,805)
Other (1,071) (8,556)
--------- ---------
Net cash used for investing activities (167,924) (203,621)
--------- ---------
(Decrease)/increase in cash and cash equivalents (15,577) 5,937
Cash and cash equivalents:
Beginning of year 83,659 72,351
--------- ---------
End of period $ 68,082 $ 78,288
--------- ---------
Supplemental Information:
Taxes paid $ 33,332 $ 30,404
Interest paid $ 4,297 $ 1,711
See accompanying notes to consolidated financial statements.
6
THE JOHN NUVEEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The John Nuveen
Company and its wholly owned subsidiaries ("the Company" or "Nuveen") and have
been prepared in conformity with accounting principles generally accepted in the
United States of America. These financial statements have also been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures have been omitted pursuant to such rules
and regulations. As a result, these financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
included in the Company's latest annual report on Form 10-K.
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.
NOTE 2 EARNINGS PER COMMON SHARE
On August 9, 2001, the Company's Board of Directors authorized a 3-for-2 stock
split of its common stock to shareholders of record on September 20, 2001. On
May 9, 2002, the Company's Board of Directors declared another stock split - a
2-for-1 stock split to be effected as a dividend to shareholders of record as of
June 3, 2002. All references in the consolidated financial statements and notes
as to number of shares, per share amounts and market prices of the Company's
common stock have been restated to reflect the increased number of shares
outstanding.
The following table sets forth a reconciliation of net income and the weighted
average common shares used in the basic and diluted earnings per share
computations for the three-month and nine-month periods ended September 30, 2002
and September 30, 2001.
- ---------------------------------------------------------------------------------------------------------------
In thousands, For the three months ended
except per share data September 30, 2002 September 30, 2001
Net Per-share Net Per-share
income Shares amount income Shares amount
-----------------------------------------------------------------------
Net income $32,008 $28,763
Less: Preferred stock dividends - (281)
----------- ----------
Basic EPS 32,008 93,312 $0.34 28,482 95,216 $0.30
Dilutive effect of:
Restricted stock - 463 - 274
Employee stock options - 2,691 - 3,766
Actual / assumed conversion of
Preferred stock - 412 281 2,474
---------------------- ---------------------
Diluted EPS $32,008 96,878 $0.33 $28,763 101,730 $0.28
- ---------------------------------------------------------------------------------------------------------------
7
- ---------------------------------------------------------------------------------------------------------------
In thousands, For the nine months ended
except per share data September 30, 2002 September 30, 2001
Net Per-share Net Per-share
income Shares amount income Shares amount
-----------------------------------------------------------------------
Net income $92,449 $84,737
Less: Preferred stock dividends (141) (1,125)
----------- ----------
Basic EPS 92,308 94,205 $0.98 83,612 94,246 $0.89
Dilutive effect of:
Restricted stock - 400 - 272
Employee stock options - 3,374 - 3,680
Actual / assumed conversion of
Preferred stock 141 550 1,125 3,848
-------------------- -------------------
Diluted EPS $92,449 98,529 $0.94 $84,737 102,046 $0.83
- ---------------------------------------------------------------------------------------------------------------
On August 30, 2002, the remaining 225,000 shares of JNC 5% Cumulative
Convertible Preferred Stock were converted into 618,584 shares of JNC common
stock.
Options to purchase 5,149,800 and 90,000 shares of the Company's common stock
were outstanding at September 30, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the options'
respective weighted average exercise prices of $27.21 and $21.71 per share were
greater than the average market price of the Company's common shares during the
applicable period.
NOTE 3 NET CAPITAL REQUIREMENT
Nuveen Investments, 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 2002, Nuveen Investments'
net capital ratio was 2.60 to 1 and its net capital was $9,910,000, which is
$8,193,000 in excess of the required net capital of $1,717,000.
NOTE 4 ACQUISITION OF SYMPHONY ASSET MANAGEMENT
On July 16, 2001, Nuveen acquired Symphony Asset Management, LLC ("Symphony").
Symphony is an institutional investment manager based in San Francisco. The
aggregate purchase price was $208.3 million, of which approximately $4.5 million
was allocated to the net book value of assets acquired. Net book value consisted
primarily of cash, fee receivables and payables. The remaining purchase price
has been allocated to identifiable intangible assets and goodwill. Of the $45.8
million of acquired intangible assets, $43.8 million was assigned to existing
contractual customer relationships (19.7-year estimated useful life), $1.6
million to internally developed software (5-year estimated useful life), and the
remaining $0.4 million to a favorable lease (38-month useful life). For the
three months and nine months ended September 30, 2002, the aggregate
amortization expense (pre-tax) relating to amortizable intangible assets
acquired in the Symphony acquisition was approximately $0.7 million and $2.0
million, respectively. There were no unamortizable intangible assets with
indefinite lives acquired in the Symphony acquisition. As Symphony was not
acquired until July 16, 2001 and the purchase price allocation was not yet
complete, the amortization expense relating to Symphony amortizable intangible
assets for the three months ended September 30, 2001 was only approximately $0.1
million. The following table sets
8
forth the gross carrying amounts of the acquired amortizable intangible assets
and their corresponding accumulated amortization amounts as of September 30,
2002 and December 31, 2001:
- --------------------------------------------------------------------------------
Acquired Amortizable Intangible Assets
(in thousands)
- --------------------------------------------------------------------------------
Gross
Carrying Accumulated Amortization As Of:
Amount 9/30/02 12/31/01
-----------------------------------------------
Customer relationships $43,800 $2,667 $1,000
Internally developed software 1,622 377 134
Favorable lease 369 197 110
------- ------ ------
Total $45,791 $3,241 $1,244
- --------------------------------------------------------------------------------
The estimated aggregate annual amortization expense for each of the next four
years is approximately $2.7 million and approximately $0.3 million in the fifth
year and is mainly attributable to the amortization of the customer
relationships.
The transaction price will have potential additional future payments up to a
maximum of $180 million based on Symphony's reaching specified performance and
growth targets for its business. Any future payments will be recorded as
additional goodwill. There were no such payments for the year ended December 31,
2001 or during the nine months ended September 30, 2002.
The following unaudited actual information for the nine-month period ended
September 30, 2002 and the unaudited pro-forma information for the nine-month
period ended September 30, 2001 reflect a summary of the consolidated results of
operations of Nuveen and Symphony as if the acquisition had occurred on January
1, 2001. As the Symphony acquisition was consummated on July 16, 2001, pro-forma
results for the three months ended September 30, 2001 would not be materially
different from actual "as reported" information for the three months ended
September 30, 2001. (In thousands, except per share data).
------------------------------------------------------------------
As Reported Pro-forma
Nine Months Ended Nine Months Ended
Sept. 30, 2002 Sept. 30, 2001
---------------------------------------
Revenues $285,363 $285,576
Net Income $ 92,449 $ 84,489
Earnings per common share
(diluted) $ 0.94 $ 0.83
------------------------------------------------------------------
NOTE 5 ACQUISITION OF NWQ INVESTMENT MANAGEMENT COMPANY, INC.
On August 1, 2002, Nuveen completed the acquisition of NWQ Investment Management
Company, Inc. ("NWQ"). NWQ is an asset management firm based in Los Angeles,
California with approximately $7 billion of assets under management. NWQ
specializes in value-oriented equity investments with significant relationships
among institutions and financial advisors serving high net worth investors. As a
result of the acquisition, Nuveen has broadened its asset base, enabling us to
meet the needs of our customers with core value, growth, and fixed-income
components of a conservative, well-diversified portfolio.
9
The aggregate NWQ purchase price was $145.7 million, of which approximately
$11.7 million was allocated to the net liabilities assumed in the transaction.
Net book value consists primarily of cash, fee receivables and payables. The
purchase price plus the net liabilities assumed will be allocated to
identifiable intangible assets and goodwill. The transaction price includes
potential additional future payments up to a maximum of $20.5 million over a
five year period and can be offset by fees paid to Old Mutual affiliates under a
strategic alliance agreement. As these future payments relate to a take-or-pay
type of contract, the $20.5 million has been recorded as both goodwill and a
corresponding liability on the accompanying September 30, 2002 consolidated
balance sheet. No actual cash payments on this $20.5 million have been made
through the date of this filing.
Nuveen has engaged external valuation experts to determine the appropriate
purchase price allocation. Although preliminary results of the external
valuation are reflected in both the accompanying consolidated balance sheet as
of September 30, 2002 and in these footnotes, the final purchase price
allocation is subject to refinement for one year from the date of acquisition
until the final valuation analysis is complete.
Preliminary valuation results indicate that approximately $27.9 million of the
purchase price in excess of the net book value of the assets acquired is
assignable to intangible assets, all of which relates to existing contractual
customer relationships (the preliminary valuation estimates a 9-year useful
life).
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. As stated above, we are in
the process of obtaining a finalized third-party valuation for the NWQ purchase.
Hence, the purchase price allocations presented within this footnote are
tentative and preliminary, only. At this time, however, we do expect that the
final valuation will result in a significant amount of the total purchase price
being allocated to goodwill and intangible assets.
---------------------------------------------------------------
(In millions)
---------------------------------------------------------------
AT AUGUST 1, 2002
---------------------------------------------------------------
Net fixed assets 1.3
---------------------------------------------------------------
Other assets 0.2
---------------------------------------------------------------
Intangible assets 27.9
---------------------------------------------------------------
Goodwill 128.0
------
---------------------------------------------------------------
Total assets acquired $157.4
------
---------------------------------------------------------------
Total liabilities assumed (11.7)
------
---------------------------------------------------------------
Net cash paid $145.7
------
---------------------------------------------------------------
Of the $128.0 million preliminarily assigned to non-amortizable goodwill,
approximately $3.6 million is expected to be deductible for 2002 tax purposes.
For the three months ended September 30, 2002, the aggregate amortization
expense relating to amortizable intangible assets acquired in the NWQ
acquisition is approximately $0.5 million. There were no unamortizable
intangible assets with indefinite lives acquired in the NWQ acquisition. The
estimated aggregate amortization expense for each of the next five years (based
on the preliminary purchase price allocation as of September 30, 2002) is $3.1
million.
The following unaudited pro forma information for the three month and nine month
periods ended September 30, 2002 and 2001 reflect a summary of the consolidated
results of operations of Nuveen and the acquired business as if the acquisition
had occurred on January 1, 2001. (In thousands, except per share data).
10
- ---------------------------------------------------------------------------------------------------------
Pro-Forma Pro-Forma Pro Forma Pro-forma
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
---------------------------------------------------------------------------
Revenues $105,476 $97,163 $305,960 $291,490
Net Income $ 32,698 $28,318 $ 94,278 $ 84,955
Earnings per common share
(diluted) $ 0.34 $ 0.28 $ 0.96 $ 0.83
- ---------------------------------------------------------------------------------------------------------
NOTE 6 GOODWILL - ADOPTION OF SFAS NO. 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead that they be tested for impairment at least annually using a two-step
process. Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the estimated future periods to be benefited. Effective
January 1, 2002 (adoption date of SFAS No. 142), goodwill is no longer being
amortized, but is subject to the impairment rules of SFAS No. 142.
The first step of the SFAS No. 142 goodwill impairment test is to identify
potential impairment and, in the year of adoption, this step must be measured as
of the beginning of the fiscal year (the "initial impairment test"). A company
has six months from the date of adoption to complete the initial impairment
test. The second step of the goodwill impairment test (which only has to be
performed if the results from the first step of the goodwill impairment test
indicate that there is potential impairment) measures the actual amount of the
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of a company's fiscal year. After the initial
impairment test is completed, the SFAS 142 impairment test must be repeated on
an annual basis for subsequent years. The measurement date for the on-going
impairment test is discretionary, however should be consistent for each
subsequent year. Nuveen has chosen May 31 as its measurement date for the
on-going SFAS 142 impairment test.
Nuveen has completed both the initial SFAS 142 impairment test (as of January 1,
2002) and its first on-going, subsequent SFAS 142 impairment test (as of May 31,
2002). The results of both analyses do not indicate any potential impairment of
goodwill.
In 2001 (prior to the adoption of SFAS No. 142), we incurred annual goodwill
amortization expense of approximately $8 million ($2.0 million and $6.0 million
before taxes, for the three months and nine months ended September 30, 2001,
respectively). The following table presents what net income would have been for
the three months and nine months ended September 30, 2001 as if the new
accounting rules effective January 1, 2002 (goodwill is no longer being
amortized) were in effect as of January 1, 2001. Adjusted per-share amounts are
also presented.
11
- ------------------------------------------------------------------------------------------------------------
(in thousands, except for earnings FOR THE THREE MONTHS FOR THE NINE MONTHS
per share amounts) ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2002 2001 2002 2001
-------------------------------------------------------
Net income, as reported $ 32,008 $ 28,763 $ 92,449 $ 84,737
Addback: goodwill amortization, net of tax -- 1,211 -- 3,633
-------------------------------------------------------
Adjusted net income $ 32,008 $ 29,974 $ 92,449 $ 88,370
BASIC EARNINGS PER SHARE:
As reported $ 0.34 $ 0.30 $ 0.98 $ 0.89
Goodwill amortization, net of tax -- 0.01 -- 0.04
-------------------------------------------------------
As adjusted $ 0.34 $ 0.31 $ 0.98 $ 0.93
DILUTED EARNINGS PER SHARE:
As reported $ 0.33 $ 0.29 $ 0.94 $ 0.83
Goodwill amortization, net of tax -- 0.01 -- 0.04
-------------------------------------------------------
As adjusted $ 0.33 $ 0.30 $ 0.94 $ 0.87
- ------------------------------------------------------------------------------------------------------------
NOTE 7 NOTES PAYABLE
On August 10, 2000, the Company entered into a $250 million revolving line of
credit with a group of banks that extends through August 2003. The committed
line is divided into two equal facilities, one of which has a three-year term,
the other is renewable each 364 days. On August 8, 2002, Nuveen renewed its
364-day credit facility. Proceeds from borrowings under the facility are used
for fulfilling day to day cash requirements and general corporate purchases
including acquisitions, share repurchases and asset purchases. The rate of
interest payable under the agreement is, at the Company's option, a function of
one of various floating rate indices. The agreement requires the Company to pay
a facility fee at an annual rate of .095% of the committed amount for the
three-year facility and .08% of the committed amount for the 364-day facility.
The Company has the option to provide collateral to secure borrowings under this
line of credit. During the third quarter of 2002, Nuveen paid down to $55
million the $183 million debt that was outstanding as of June 30, 2002.
On July 31, 2002, Nuveen entered into and drew down fully on a $250 million
revolving loan agreement with its majority shareholder, The St. Paul Companies,
Inc. ("St. Paul"). This loan facility expires on July 15, 2003 and carries a
floating interest rate of LIBOR plus a margin of up to 0.25%. A portion of the
proceeds from this $250 million loan was used to repay $128 million of the
previous outstanding debt of $183 million under the bank facility discussed,
above, while the remainder of the proceeds were used to help fund the NWQ
acquisition. For the three months ended September 30, 2002, the weighted average
annual interest rate on the St. Paul debt facility was 2.06%.
12
NOTE 8 RELATED PARTY TRANSACTIONS
Included in Other Assets is a note receivable of approximately $2 million
relating to a loan made to one of Symphony's prior owners, Maestro LLC. The
members of Maestro LLC are also employees of Symphony. This uncollateralized,
interest-bearing loan is payable on or before December 31, 2006 and carries an
interest rate equal to the Applicable Federal Rate published by the Secretary of
the Treasury (as of July 2002, the applicable interest rate is 4.60% per annum).
Any contingent consideration payments required to be made by the Company
relating to the Symphony acquisition (see Note 4) may offset this loan
obligation to the Company.
13
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2002
DESCRIPTION OF THE BUSINESS
Our principal businesses are asset management and related research as well as
the development, marketing, and distribution of investment products and services
for the affluent, high-net-worth and the institutional market segments. We
distribute our investment products and services, including mutual funds,
exchange-traded funds, and individually managed accounts, to the affluent and
high-net-worth market segments through unaffiliated intermediary firms including
broker/dealers, commercial banks, affiliates of insurance providers, financial
planners, accountants, consultants and investment advisors. We also provide
investment products to institutional markets.
The financial advisors we support serve affluent and high-net-worth investors.
We provide consultative services to these financial advisors with a primary
focus on managed assets for fee-based customers and structured investment
services for transaction-based advisors.
Our primary business activities generate three principal sources of revenue: (1)
ongoing advisory fees earned on assets under management, including mutual funds,
exchange-traded funds, and separately managed accounts, (2) distribution
revenues earned upon the sale of certain investment products and (3) incentive
fees earned on certain institutional accounts based on the performance of such
accounts.
Sales of our products, and their profitability, are directly affected by many
variables, including investor preferences for equity, fixed-income or other
investments, the availability and attractiveness of competing products, market
performance, continued access to distribution channels, changes in interest
rates, inflation, and income tax rates and laws.
RECENT EVENTS
The following events are relevant to the understanding of our third quarter 2002
results:
On August 1, 2002 we finalized the acquisition of NWQ Investment Management
("NWQ"), an asset management firm based in Los Angeles with approximately $7
billion of assets under management. NWQ specializes in value-oriented equity
investments with significant relationships among institutions and financial
advisors serving high net worth investors. Cash payments of approximately $146
million will be paid to Old Mutual (U.S.) Holdings, Inc., which includes up to a
maximum of $20.5 million to be paid over a five year period under the terms of a
strategic alliance agreement. Retention programs have been put in place,
including an equity-based program designed to enable key management to
participate in NWQ's future earnings growth.
On July 16, 2001, we completed the acquisition of Symphony Asset Management LLC
("Symphony") for $208 million in cash. Symphony, an institutional investment
manager based in San Francisco, manages portfolios designed to reduce risk
through market-neutral and other alternative-investment strategies in several
equity and fixed-income asset classes. Symphony's business generates two
principal sources of revenue: (1) ongoing advisory fees based on assets under
management, and (2) incentive fees earned on certain institutional accounts
based on performance of the accounts.
14
On August 9, 2001, we announced a 3-for-2 stock split of our common stock. The
stock split was effected as a dividend to shareholders of record as of September
20, 2001. Shareholders received one additional share of Nuveen common stock for
every two shares that they owned as of the record date. On May 9, 2002, we
announced a 2-for-1 split of our common stock. The stock split was effected as a
dividend to shareholders of record as of June 3, 2002. For comparability, prior
period share information has been restated for both stock splits.
The Board of Directors for each of the Nuveen Money Market Funds decided to
close all of the Funds effective August 24, 2001. Due to shrinking demand from
investors who increasingly use brokerage sweep accounts for their cash
management needs, the Funds did not maintain a self-sustaining level of assets.
In early 2002, we announced our intention to stop depositing continuously
offered equity and fixed-income defined portfolio products. As anticipated, this
scale-back plan was completed by the end of the first quarter of 2002.
SUMMARY OF OPERATING RESULTS
The table below presents the highlights of our operations for the three-month
and nine-month periods ended September 30, 2002 and 2001:
FINANCIAL RESULTS SUMMARY
COMPANY OPERATING STATISTICS
($ IN MILLIONS EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------
FOR THE THIRD QUARTER OF FOR THE FIRST NINE MONTHS OF
2002 2001 % change 2002 2001 % change
---- ---- -------- ---- ---- --------
Gross sales of investment products $ 4,744 $ 3,227 47% $11,454 $10,293 11%
Net Flows 2,655 1,531 73 5,123 6,199 (17)
Assets under management (1)(2) 76,928 66,477 16 76,928 66,477 16
Operating revenues 102.4 97.5 5 285.4 269.5 6
Operating expenses 48.0 48.5 (1) 131.6 130.3 1
Pretax income 52.1 47.9 9 151.6 140.1 8
Net income 32.0 28.8 11 92.4 84.7 9
Basic earnings per share (3) 0.34 0.30 13 0.98 0.89 10
Diluted earnings per share (3) 0.33 0.28 18 0.94 0.83 13
Dividends per share (3) 0.12 0.12 - 0.36 0.34 6
- ----------------------------------------------------------------------------------------------------
(1) At period end.
(2) Excludes defined portfolio assets under surveillance.
(3) The prior period has been adjusted to reflect the 3-for-2 stock split
that occurred in September of 2001 and the 2-for-1 split that occurred
in June of 2002.
Gross sales for the quarter were $4.7 billion, up 47% versus the prior year. Net
flows (equal to the sum of sales, reinvestments and exchanges less redemptions)
were positive across all product categories (exchange-traded funds, mutual funds
and managed accounts) totaling $2.7 billion for the quarter, an increase of 73%
versus the prior year. Our leadership position in closed-end, exchange-traded
funds was a significant contributor to our strong sales and flows in the third
quarter. Through the initial
15
public offering of six new funds in September we raised nearly $2 billion in new
assets with the leveraging of our June offerings adding an additional $0.4
billion. Strong interest in fixed-income products along with the addition of
NWQ's value style to our managed account business resulted in managed account
sales of $1.9 billion for the quarter, up 14% over the prior year. Defined
portfolio product sales declined as a result of our decision in the first
quarter of 2002 to discontinue this product line.
Strong flows and the addition of NWQ assets drove total assets under management
at the end of the third quarter to just under $77 billion. Excluding the NWQ
acquisition, assets are up $1.5 billion from the end of the second quarter as
positive flows and fixed income appreciation more than offset equity market
depreciation.
Operating revenues for the quarter totaled $102.4 million, an increase of 5%
over the $97.5 million in operating revenues recorded in the third quarter of
2001. This increase was driven by a 6% increase in advisory fees as a result of
the NWQ acquisition and an increase in performance fees earned on Symphony
market neutral accounts. Offsetting these increases was a decline in product
distribution and product positioning due to the discontinuation of the defined
portfolio product line. Excluding the impact of this product line, operating
revenues grew 11% for the quarter.
Operating expenses for the quarter declined 1% when compared with the prior
year. Excluding the impact of NWQ, operating expenses declined 10%. A decrease
in goodwill amortization expense (due to new accounting rules effective 2002)
drove approximately 5% of the decline with the remainder driven mainly by a
decline in advertising and promotional expenses.
RESULTS OF OPERATIONS
The following discussion and analysis contains important information that should
be helpful in evaluating our results of operations and financial condition, and
should be read in conjunction with the consolidated financial statements and
related notes.
Total advisory fee income earned during any period is directly related to the
market value of the assets we manage. Advisory fee income will increase with a
rise in the level of assets under management. Assets under management rise 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 we sponsor into shares of mutual funds. Fee
income will decline when managed assets decline, as would occur when the values
of fund portfolio investments decrease or when mutual fund redemptions or
managed account withdrawals exceed sales and reinvestments.
Distribution revenue is earned as defined portfolio and mutual fund products are
sold to the public through financial advisors. Correspondingly, distribution
revenue will rise and fall with the level of our sales of these products, and
has been impacted by our decision to discontinue the defined portfolio product
line in 2002. Underwriting fees are earned on the initial public offerings of
our exchange-traded fund offerings.
16
Gross sales of investment products for three-month and nine-month periods ended
September 30, 2002 and 2001 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 2,378 $ 964 $ 4,947 $ 2,704
Mutual Funds 469 294 1,127 888
Managed Accounts 1,897 1,658 5,186 5,593
------- ------- ------- -------
Total Managed Assets 4,744 2,916 11,260 9,185
Defined Portfolios -- 311 194 1,108
------- ------- ------- -------
Total $ 4,744 $ 3,227 $11,454 $10,293
======= ======= ======= =======
Gross sales of investment products increased 11% for the nine-month period ended
September 30, 2002 when compared with the same period in 2001, driven by
increases in exchange-traded fund and mutual fund sales. These increases were
partially offset by a decline in defined portfolio sales due to the
discontinuation of this business. Excluding the impact of our exit of the
defined portfolio business, sales grew 23%. YTD we have launched 15 new
exchange-traded funds, raising $4.9 billion in common and preferred shares. This
compares favorably to the $2.7 billion raised during the same period in 2001.
Mutual fund sales year-to-date increased 27% as strong interest in fixed-income
products drove a 42% increase in municipal fund sales. The strong interest in
fixed-income products was also evident in managed accounts, where our
fixed-income managed account sales increased 81%. Offsetting the increase in
fixed- income sales, sales of our equity mutual funds declined 30% and sales of
our growth equity managed accounts declined 47%.
Net flows for three-month and nine-month periods ended September 30, 2002 and
2001 are shown below:
NET FLOWS
(in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Managed Assets:
Exchange-Traded Funds $ 2,383 $ 970 $ 4,965 $ 2,718
Mutual Funds 151 95 80 251
Managed Accounts 121 155 (116) 2,122
------- ------- ------- -------
Total Managed Assets 2,655 1,220 4,929 5,091
Defined Portfolios -- 311 194 1,108
------- ------- ------- -------
Total $ 2,655 $ 1,531 $ 5,123 $ 6,199
======= ======= ======= =======
Net flows for the nine-month period ended September 30, 2002 declined 17% versus
the prior year. Net flows were positive across all product categories, however
increased sales and a reduction in redemptions on fixed-income products could
not offset the increase in redemptions on our growth equity managed accounts
that occurred mainly in the second quarter of 2002.
17
The following table summarizes net assets under management:
NET ASSETS UNDER MANAGEMENT (1)
(in millions)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
---- ---- ----
Mutual Funds $11,866 $11,814 $11,843
Exchange-Traded Funds 38,523 32,000 31,397
Managed Accounts 26,539 24,671 23,237
------- ------- -------
Total $76,928 $68,485 $66,477
======= ======= =======
(1) Excludes defined portfolio product assets under surveillance
Assets under management grew 16% to $76.9 billion, an increase of $10.5 billion
from the end of September 2001. NWQ assets accounted for approximately $7.0
billion of the increase, while strong net flows more than offset equity market
declines. Assets under management increased $8.4 billion versus December 31,
2001 as net flows into funds and accounts of $4.9 billion, the addition of $7.0
billion of NWQ assets and appreciation on our fixed income assets were partially
offset by equity market depreciation of $5.6 billion.
Investment advisory fee income, net of sub-advisory fees and expense
reimbursements, is shown in the following table:
INVESTMENT ADVISORY FEES
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Mutual Funds $ 14,761 $ 14,470 $ 43,371 $ 42,630
Exchange-Traded Products 48,993 44,319 140,304 128,993
Managed Accounts 27,259 27,065 78,550 71,982
Money Market Funds -- 270 -- 1,074
-------- -------- -------- --------
Total $ 91,013 $ 86,124 $262,225 $244,679
======== ======== ======== ========
Advisory fees for the nine-month period ended September 30, 2002, increased 7%
over the same period in 2001. The addition of Symphony and NWQ accounted for 5%
of the increase, while exchange-traded funds and other fixed-income products
drove the remainder. Advisory fees on exchange-traded funds increased 9% due to
an increase in average assets under management as a result of both net flows
into funds and account and market appreciation. Advisory fees on mutual funds
increased 2% as an increase in advisory fees on municipal mutual funds of 7% was
partially offset by a decline in advisory fees on equity funds. Managed account
advisory fees declined as an increase in advisory fees on fixed-income managed
accounts and the addition of advisory fees on NWQ value accounts could not
offset the decline in advisory fees on our equity growth accounts. Money market
fund advisory fees declined as a result of the closing of the money market funds
in the third quarter of 2001.
18
Underwriting and distribution revenue for the three-month and nine-month periods
ended September 30, 2002 and 2001 is shown in the following table:
UNDERWRITING AND DISTRIBUTION REVENUE
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Mutual Funds $ 440 $ 495 $ 1,774 $ 2,357
Defined Portfolios (17) 3,506 2,590 9,323
Muni/FundPreferredTM 422 441 1,150 1,066
Exchange-Traded Funds 1,994 643 3,862 1,601
------- ------- ------- -------
Total $ 2,839 $ 5,085 $ 9,376 $14,347
======= ======= ======= =======
Total underwriting and distribution revenue for the first nine months of 2002
declined $5.0 million when compared with the first nine months of 2001 due to a
decline in distribution revenue on defined portfolios as a result of the
discontinuation of this business. Additionally, mutual fund distribution revenue
declined as a result of a decline in equity product sales. Partially offsetting
these declines is an increase in underwriting fees on the initial public
offerings of our exchange-traded funds.
OTHER OPERATING REVENUE
Other operating revenue consists of various fees earned in connection with
services provided on behalf of our defined portfolio assets under surveillance
and incentive fees earned on institutional assets managed by Symphony. The
increase in other operating revenue of $5.6 million for the nine-month period
ended September 30, 2002 is due to the inclusion of Symphony incentive fees in
the first half of 2002 and an increase of $4.9 million in Symphony performance
fees in the third quarter of 2002. The vast majority of Symphony performance fee
arrangements give rise to increased performance fees in the second half of the
year.
POSITIONING PROFITS/(LOSSES)
We record positioning profits or losses from changes in the market value of the
inventory of unsold investment products and other securities held by our
broker/dealer subsidiary, Nuveen Investments. We recorded net positioning losses
of $0.1 million in the first nine months of 2002, compared to gains of $2.2
million in the first nine months of 2001.
19
Operating Expenses
The following table summarizes operating expenses for the three-month and
nine-month periods ended September 30, 2002 and 2001:
OPERATING EXPENSES
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Compensation and Benefits $ 27,343 $ 24,026 $ 71,913 $ 66,933
Advertising and Promotion 3,065 4,650 10,032 13,117
Occupancy and Equipment 4,843 3,767 13,016 10,446
Amortization of Intangibles 1,183 2,139 2,594 6,221
Travel and Entertainment 2,026 2,152 6,139 6,572
Other Operating Expenses 9,519 11,751 27,871 27,054
-------- -------- -------- --------
Total $ 47,979 $ 48,485 $131,565 $130,343
======== ======== ======== ========
Operating expenses increased $1.2 million during the first nine months of 2002
when compared with 2001. This increase is primarily due to the inclusion of NWQ
and Symphony operating expenses. Excluding Symphony and NWQ, operating expenses
declined $12.6 million (10%), driven mainly by a $6.0 million reduction in
goodwill amortization expense as a result of new accounting rules effective
January 1, 2002 and a decline in advertising and promotional expenses.
Compensation and related benefits for the first nine months of 2002 increased
$5.0 million compared to the first nine months in the prior year, primarily as a
result of the inclusion of Symphony and NWQ. Excluding the impact of Symphony
and NWQ, compensation expense declined 5% as salary increases were more than
offset by headcount reductions. The reduction in headcount is related to the
discontinuation of the defined portfolio business and other organizational
changes.
Advertising and promotional expenditures decreased $3.1 million for the first
nine months of 2002 compared to the first nine months of 2001. This decrease is
due to a reduction in spending behind our defined portfolio business.
All other operating expenses, including occupancy and equipment costs, travel
and entertainment and other, increased $3.0 million during the first nine months
of 2002 compared to the first nine months of 2001. The increase was driven
completely by the inclusion of Symphony and NWQ. All other operating expenses
excluding Symphony and NWQ were flat as increased severance due to the exit of
our defined portfolio business and fund organization costs related to our
exchange-traded fund offerings were offset by declines in travel and
entertainment and other miscellaneous expenses.
NON-OPERATING INCOME/(EXPENSE)
Non-operating income/(expense) is comprised primarily of net interest
income/(expense) and other miscellaneous non-operating revenue/(expense).
Net interest income was down $4.0 million in the first nine months of 2002
compared to the first nine months of 2001. This decline was partially caused by
a decrease in interest income resulting from the use of cash on hand for the
Symphony and NWQ acquisitions, and partially because of an increase in interest
expense as a result of the debt incurred in connection with the Symphony and NWQ
acquisitions. This decline in net interest income was partially offset by a
decrease in interest expense on deferred compensation.
20
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
Our principal businesses are not capital intensive and, historically, we have
met our liquidity requirements through cash flow generated by operations. In
addition, our broker/dealer subsidiary occasionally utilizes available,
uncommitted lines of credit, which approximate $200 million, to satisfy
periodic, short-term liquidity needs. As of September 30, 2002, no borrowings
were outstanding on these uncommitted lines of credit. In August 2000, we
entered into a $250 million committed line of credit with a group of banks to
ensure an ongoing liquidity source for general corporate purposes including
acquisitions. This committed line is divided into two equal facilities, one of
which has a three-year term, the other is renewable in 364 days. On August 8,
2002, Nuveen renewed its 364-day credit facility. The terms of the facility fee
and interest rate payable remain unchanged from the previous agreement. During
the third quarter of 2002, Nuveen paid down to $55 million the $183 million debt
that was outstanding as of June 30, 2002.
On July 31, 2002 Nuveen entered into and drew down fully on a $250 million
revolving loan agreement with its majority shareholder, The St. Paul Companies,
Inc. ("St. Paul"). This loan facility expires on July 15, 2003 and carries a
floating interest rate of LIBOR plus a margin of up to 0.25%. A portion of the
proceeds from this $250 million loan was used to repay down to $55 million the
$183 million of debt that was outstanding as of June 30, 2002, with the
remainder used to fund the NWQ acquisition.
Options to purchase 395,142 shares of Rittenhouse non-voting Class B common
stock were exercised on March 28, 2002 under the Rittenhouse Financial Services,
Inc. 1997 Equity Incentive Award Plan. Rittenhouse accounted for these options
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." As a result of this exercise, the Company recorded $40.5 million of
minority interest on its consolidated balance sheet. The stock was repurchased
on September 30, 2002, thereby eliminating the minority interest position.
Purchase price in excess of the exercise price was added to goodwill associated
with the Company's acquisition of Rittenhouse. Consistent with SFAS 141, as of
January 1, 2002, goodwill is no longer being amortized.
As part of the NWQ acquisition, key management purchased from the Company a
non-controlling, member interest in the LLC for $2.8 million. The
non-controlling interest of $2.8 million as of September 30, 2002 is reflected
in minority interest in the consolidated balance sheets. This purchase allows
management to participate in profits above specified levels beginning January 1,
2003. Beginning in 2003, the Company will record minority interest expense,
which reflects the portion of profits, if any, applicable to the minority
interest members. Beginning in 2004 and continuing through 2008, the Company has
the right to require the non-managing members to sell certain of their
respective interests to the Company.
At September 30, 2002, we held in treasury 27,607,596 shares of Class A common
stock acquired in open market transactions. During the third quarter of 2002,
the Company repurchased 1,155,800 Class A common stock shares in open market
transactions. As part of a new share repurchase program approved on August 9,
2002, we are authorized to purchase up to 7.0 million shares of common stock. As
of September 30, 2002, there are 6,570,400 shares remaining under the new share
repurchase program.
During the first nine months of 2002, we paid out dividends on common shares
totaling $34.9 million and on preferred shares totaling $0.1 million.
Our 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.)
21
Management believes that cash provided from operations and borrowings available
under its uncommitted and committed credit facilities will provide us with
sufficient liquidity to meet our operating needs for the foreseeable future.
INFLATION
Our assets are, to a large extent, liquid in nature and therefore not
significantly affected by inflation. However, inflation may result in increases
in our 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 our 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 we manage, which in turn would result in a decline in
investment advisory fee revenue.
FORWARD-LOOKING INFORMATION
From time to time, information we provide or information included in our filings
with the SEC (including this report on Form 10-Q) may contain statements that
are not historical facts but are forward-looking statements reflecting
management's expectations and opinions. Our 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 we, like all market participants, face in the
investment management business, including competition for continued access to
the brokerage firms' retail distribution systems, our reliance on revenues from
investment management contracts which are renewed annually according to their
terms, reductions in assets under management because of market declines and
redemptions, burdensome regulatory developments, recent accounting
pronouncements, and unforeseen developments in litigation. We undertake no
responsibility to update publicly or revise any forward-looking statements.
22
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SEPTEMBER 30, 2002
In addition to the various risks previously discussed in this report, we are
exposed to market risk from changes in interest rates, which may adversely
affect our results of operations and financial condition. In the past, we were
exposed to this risk primarily in our fixed-income defined portfolio inventory
and, at times, sought to minimize the risks from these interest rate
fluctuations through the use of derivative financial instruments. As a result of
our decision to discontinue our defined portfolio product line, we no longer
regularly purchase and hold for resale municipal securities and defined
portfolio units. Therefore, it is no longer necessary to utilize futures
contracts to minimize risk. Correspondingly, there were no open derivative
financial instruments at September 30, 2002.
We invest in short-term debt instruments, classified as "Cash and cash
equivalents" on our consolidated balance sheet. The investments are treated as
collateralized financing transactions and are carried at the amounts at which
they will be subsequently resold, including accrued interest. We also invest in
certain Company-sponsored equity, senior-loan and fixed-income mutual funds.
We do not believe that the effect of any reasonably likely near-term changes in
interest rates would be material to our financial position, results of
operations or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman and Chief Executive Officer,
President, and Senior Vice President, Finance, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's
Chairman and Chief Executive Officer, President, and Senior Vice President,
Finance concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported most recently in the Form 10-K for December 31,
2001, a lawsuit (Civil Action No. 97 C 5255) brought in June, 1996 by
certain shareholders was pending in federal district court for the
Northern District of Illinois against Nuveen Advisory. The suit was
originally brought against John Nuveen & Co. Incorporated, Nuveen
Advisory, six Nuveen investment companies (the "Funds") managed by
Nuveen Advisory and two of the Funds' former directors seeking
unspecified damages, an injunction and other relief. The suit also
sought certification of a defendant class consisting of all
Nuveen-managed leveraged funds.
The complaint was 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 that
Plaintiffs allege violated provisions of the Investment Company Act of
1940 and common law. Plaintiffs alleged, among other things, breaches
of fiduciary duty and various misrepresentations and omissions in
disclosures in connection with the use and maintenance of leverage
through the issuance and periodic auctioning of preferred stock and
the payment of management and brokerage fees to Nuveen Advisory and
John Nuveen & Co. The Plaintiffs filed a similar complaint at the same
time against another major leveraged-fund sponsor and adviser. The
Plaintiffs filed a motion to certify a plaintiff class (which would
include current and former shareholders of all Nuveen leveraged
closed-end funds).
On March 30, 1999, the court entered a memorandum opinion and order
(1) granting the Defendants' motion to dismiss all of Plaintiffs'
counts against the defendants other than Nuveen Advisory, (2) granting
Nuveen Advisory's motion to dismiss all of Plaintiffs' counts against
it other than breach of fiduciary duty under Section 36(b) of the
Investment Company Act of 1940, and (3) denying the Plaintiffs' motion
to certify a plaintiff class and a defendant class. No appeal was made
by Plaintiffs of this decision, and the remaining Section 36(b) count
against Nuveen Advisory has proceeded through the discovery phase.
As to alleged damages, Plaintiffs claimed as damages the portion of
all advisory compensation received by Nuveen Advisory from the Funds
during the period from June 21, 1995 to the present that is equal to
the proportion of each Fund's preferred stock to its total assets. The
preferred stock constitutes approximately one third of the Funds'
assets so the amount claimed would equal approximately one third of
management fees received by Nuveen Advisory for managing the Funds
during this period, or more than $60 million. Nuveen Advisory believes
that it has no liability and that Plaintiffs have suffered no damages
and filed a motion for summary judgement as to both liability and
damages. Plaintiffs filed a motion for partial summary judgement as to
liability only. In a memorandum opinion dated September 6, 2001, the
court granted Nuveen Advisory's motion for summary judgement, thereby
terminating the litigation before the court. Plaintiffs appealed this
decision on October 8, 2001.
In an opinion dated July 8, 2002, the United States Court of Appeals
for the Seventh Circuit affirmed the opinion of the district court
dismissing Plaintiffs' lawsuit. On October 1, 2002, Plaintiffs filed a
petition for a writ of certiori with the United States Supreme Court
seeking to appeal the Seventh Circuit opinion.
24
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Employment Agreement between the Company and Timothy
R. Schwertfeger, dated November 1, 2002
10.2 Employment Agreement between the Company and John P.
Amboian, dated November 1, 2002
10.3 Investment Management Agreement and Expense
Reimbursement Agreement between Nuveen Quality
Preferred Income Fund and Nuveen Institutional
Advisory Corp.
10.3(a) Investment Sub-Advisory Agreement between Nuveen
Quality Preferred Income Fund and Spectrum Asset
Management, Inc.
10.4 Investment Management Agreement and Expense
Reimbursement Agreement between Nuveen Quality
Preferred Income Fund 2 and Nuveen Institutional
Advisory Corp.
10.4(a) Investment Sub-Advisory Agreement between Nuveen
Quality Preferred Income Fund 2 and Spectrum Asset
Management, Inc.
10.5 Form of Investment Sub-Advisory Agreement between NWQ
Investment Management Company, LLC and Nuveen
Institutional Advisory Corp.
99.1 Senior Officer Certifications
b) Reports on Form 8-K
A report on Form 8-K relating to the acquisition of NWQ
Investment Management Company, Inc. was filed with the
Securities Exchange Commission on August 14, 2002. Amendment
No.1 to this Form 8-K was filed on October 15, 2002.
25
SIGNATURES
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, 2002 By: /s/ John P. Amboian
----------------------
John P. Amboian
President
DATE: November 13, 2002 By: /s/ Margaret E. Wilson
----------------------
Margaret E. Wilson
Senior Vice President, Finance
(Principal Financial and
Accounting Officer)
26
CERTIFICATONS
I, Timothy R. Schwertfeger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The John
Nuveen Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ TIMOTHY R. SCHWERTFEGER
----------------------------------
Name: Timothy R. Schwertfeger
Title: Chief Executive Officer
I, John P. Amboian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The John
Nuveen Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ JOHN P. AMBOIAN
------------------------------------
Name: John P. Amboian
Title: President
I, Margaret E. Wilson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The John
Nuveen Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ MARGARET E. WILSON
---------------------------------------
Name: Margaret E. Wilson
Title: Senior Vice President, Finance