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EXHIBIT 13
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THE XXXX XXXXXX COMPANY
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INVESTING IN OUR
SECOND CENTURY 98
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1998 ANNUAL REPORT TO SHAREHOLDERS
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To Our Shareholders and Employees
In 1998, your Company enjoyed a record year:
- Sales grew to $7.8 billion - up 156%.
- Revenues increased to $308 million - up 14%.
- Earnings grew to $84 million - up 13%.
- Return on shareholders' equity exceeded 25%.
- Earnings per share grew by 14% to $2.43.
- Cash flow per share increased by 16% to $2.98.
- Quarterly dividends rose 13%, our sixth
consecutive annual increase since we became
a public company in 1992.
The Xxxx Xxxxxx Company, through its Nuveen and Xxxxxxxxxxx operations,
provides customized individual accounts, mutual funds, exchange-traded funds
and defined portfolios that help financial advisers meet the needs of their
affluent investor clients. The Company also provides municipal, institutional
and corporate investment banking and asset management services. The
Company's products and services are offered through registered financial
advisers working for independent broker-dealers, banks, insurance companies,
accounting firms and financial planning specialists. The Xxxx Xxxxxx Company
is listed on the New York Stock Exchange and trades under the symbol "JNC."
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The Xxxx Nuveen Company
Financial Highlights
(in millions, except per share data)
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December 31, 1998 1997 1996 1995 1994
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Assets Under Management $55,267 $49,594 $33,191 $33,042 $30,047
Gross Sales $ 7,755 $ 3,026 $ 1,747 $ 1,618 $ 1,614
Revenues $ 308 $ 269 $ 232 $ 236 $ 220
Net Income $ 84 $ 74 $ 73 $ 71 $ 58
Earnings per Share (diluted) $ 2.43 $ 2.13 $ 1.98 $ 1.87 $ 1.52
Cash Flow per Share (diluted) $ 2.98 $ 2.57 $ 2.11 $ 2.00 $ 1.62
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CHART 1 CHART 2
(ASSETS UNDER MANAGEMENT) (GROSS SALES)
CHART 3 CHART 4
(EARNINGS PER SHARE) (CASH FLOW PER SHARE)
P. 1
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The Xxxx Nuveen Company
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OUR MISSION FOR A NEW CENTURY
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To rapidly become a premier investment management firm by delivering
exceptional value to advisers who help build and manage wealth for their
investors, by achieving superior earnings growth for JNC shareholders, and
by offering rewarding careers to our employees.
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Xxxxxxx X. Xxxxxxxxxxxx
Chairman and [PHOTO]
Chief Executive Officer
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P. 2
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The Xxxx Nuveen Company
Dear Shareholders,
On behalf of all of us at the The Xxxx Nuveen Company, I am very pleased
to report on the record results and significant accomplishments achieved in
1998.
First, 1998 marked another year of record earnings - led, in large part,
by accelerating growth in products and services added since 1996.
These results reflect the impact of our new strategic direction and the
investments we made in new products, new services and new ideas during the year.
We are executing a strategic transformation of our Company, a process that
is having a positive impact on every part of our operations.
Our strategy is both simple and compelling, with two central tenets:
The first is to continue leveraging our heritage of high-quality,
long-term oriented investment expertise through a broad range of relationships
with financial advisers who serve affluent investors.
The second is to provide exceptional value to financial advisers by
recognizing and serving their diverse needs. We are now organized around
distinct lines of business - individually managed accounts, mutual funds,
defined portfolios and exchange-traded funds-that reflect the business
practices and service requirements of our key customers.
Consistently meeting our investment standards and providing exceptional
value to financial advisers is the goal of every portfolio manager, sales
representative and customer service person within the firm, and of all the rest
of us who stand behind these front line contacts.
This strategy provides a connecting link between our history and our
increasing role as a provider of investment solutions to financial advisers
looking to help their clients sustain the wealth of a lifetime.
To rapidly become a premier
investment management firm
We define premier as being considered by leading brokerage firms and financial
advisers to be one of their best and most trusted investment management
partners. It means a constant, unwavering commitment to the highest standards of
quality and dependability in all aspects of our business.
In particular, this emphasis on quality and dependability is a driving
force behind our product selection and development. It also underlies our
affiliation with a select group of seasoned investment managers chosen for their
specialization in a particular asset class or investment style, and their
sharing of our underlying commitment to quality, dependable performance and
rigorous research.
Today, these managers include Xxxxxxxxxxx Financial Services for our
large-cap, growth-oriented individually managed accounts, mutual funds and
defined portfolios; Institutional Capital Corporation for our value-oriented
mutual funds; and Nuveen Advisory Corporation, for our fixed-income mutual
funds, managed
P. 3
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The Xxxx Nuveen Company
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Investing in our business to enhance our performance
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"Throughout 1998...sales momentum increased in every product
category...more than two-thirds of 1998 sales were in equity-based
products that have been added to the Company's product line since 1996."
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PIE BAR
CHART CHART
Equity-based products dominated 1998 sales Quarterly sales show dramatic growth
Municipal 30% Quarterly Sales
(in $ millions)
Taxable Fixed Income 3%
1Q94 406.5
Equity-Based 67% 2Q94 362
3Q94 343
4Q94 386
1Q95 367
2Q95 421.1
3Q95 369.5
4Q95 157
1Q96 288.8
2Q96 311.3
3Q96 315.6
4Q96 746.3
1Q97 492.5
2Q97 611
3Q97 804
4Q97 1118.3
1Q98 1727
2Q98 1831
3Q98 1999
4Q98 2197
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P. 4
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The Xxxx Nuveen Company
accounts and defined portfolios.
Looking more specifically at our defined portfolios, this commitment to
quality and dependability also has led to the introduction of equity investments
using criteria developed with well-known equity research firms, including
Standard & Poor's and Dow Xxxxx, to select securities whose performance we
believe will withstand the test of time.
by delivering exceptional value to advisers
Our continued success also rests on identifying and delivering distinct,
compelling, tangible value to our most important customers - the financial
advisers who work with affluent and high net worth investors.
Value manifests itself in several ways. One of the most important, and
most visible, is the quality and dependability of our product performance.
Exceptional value is built upon a foundation of consistently competitive
investment performance.
For example, as of December 31, 44% of our 57 exchange-traded funds had
four-or five-star ratings from Morningstar. Most of these 57 funds were trading
at higher premiums or smaller discounts than their peers, creating more than
$500 million in additional market value for Nuveen fund shareholders.
Eleven Nuveen exchange-traded and open-end funds recently were recognized
by Xxxxxx as being the No. 1 fund in their peer group in total return over the
preceding one-, five-or ten-year periods.
The Xxxxxxxxxxx model equity portfolio, consisting of well-established
industry leaders with outstanding long-term records, posted a total return of
28.25% for 1998, comparing well with an S&P 500 return dominated by high tech
stocks. This represented Xxxxxxxxxxx'x 15th positive year in a row.
Five of our sector defined portfolios posted returns of more than 30% in
the first three months of their existence.
This consistently strong performance creates value, and has a direct
impact on product sales. Throughout 1998, total sales of funds, accounts and
portfolios reached more than $7.7 billion, a 156% increase over 1997 and one of
our best years ever. Sales momentum increased in every product category.
New investment opportunities also can create value. In 1998, we introduced
a variety of funds and portfolios designed to help advisers address specific
investor needs for more balance and diversity in their holdings. These new
offerings included:
MUTUAL FUNDS
Xxxxxxxxxxx Growth Fund
European Value Fund
DEFINED PORTFOLIOS
Dow 5 and Dow 10 Portfolios
Xxxxxxxxxxx Concentrated Growth Portfolio
10 Industry Sector Portfolios
P. 5
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The Xxxx Nuveen Company
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INVESTING IN HIGH VALUE, HIGH GROWTH MARKET SEGMENTS
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"Our primary focus remains on those advisers who work with investors
seeking to sustain wealth for themselves and their families...As our
country ages and grows wealthier, we believe financial advisers are well
positioned to help their clients through the challenges ahead."
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CHART CHART
55-64 age group faster than national average
(in millions)
year 55-64 total pop change in Change in HIGHLY CONFIDENT ----------------------
55-65 from total pop OF INVESTMENT 100%
prior period from prior SUCCESS
period ----------------------
80%
1955 14621 165069 Investors who
1960 15624 179979 0.0686 0.090326 work with ----------------------
1965 17076 193526 0.0929339 0.07527 financial 60%
1970 18682 203984 0.0940501 0.054039 advisers
1975 20045 215465 0.0729579 0.056284 ----------------------
1980 21754 227225 0.0852582 0.05458 40%
1985 22135 237924 0.017514 0.047085 Investors who
1990 21092 249402 -0.04712 0.048242 do not work with ----------------------
1995 21131 262755 0.001849 0.05354 financial 20%
2000 23961 274634 0.1339265 0.045209 advisers
2005 29605 285981 0.2355494 0.041317 ----------------------
2010 35283 297716 0.1917919 0.041034 0
56% 23%
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Our target investor market is growing Adviser-assisted investors are more
much faster than the general population confident of their investment success
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P. 6
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We also took significant steps to align our internal organization in ways that
help us deliver added value to financial advisers. One example is the
restructuring of our investment management activities by combining the expertise
of our portfolio managers and research analysts. By establishing integrated
teams, each specializing in a particular type of investment or region of the
country, we are better positioned to identify and take rapid advantage of market
opportunities as they arise.
In addition, we have almost completed the consolidation of all customer
servicing activities. By combining all customer records within one organization,
our customer service representatives have increased abilities to call up entire
account histories, answer a variety of questions easily and provide faster
service without the need to transfer callers.
Our investment banking operations also made significant strides in 1998,
focusing on our proven strength in fashioning innovative financings and
establishing relationships with a variety of agencies and authorities that
represent signi?cant future opportunities.
who help build and manage
wealth for their investors
Our primary focus remains on those advisers who work with investors seeking to
sustain wealth for themselves and their families. We have found that our
individual managed account services at Xxxxxxxxxxx and Nuveen Asset Management
are attractive particularly to advisers working with clients with between $1
million and $10 million to invest. Our mutual funds and defined portfolios are
focused primarily on helping advisers serve the needs of those with investment
portfolios averaging more than $250,000.
During the 1990s, it is estimated that the affluent market grew five times
faster than the population as a whole. We believe this market will continue to
grow by as much as 50% over the next ten years. As our country ages and grows
wealthier, investors will be faced with increasingly complex tax, retirement and
estate planning issues that will require careful, integrated solutions. We
believe professional investment advisers are well positioned to help their
clients through the challenging questions that lie ahead.
achieving superior earnings
growth for JNC shareholders
Prosperity in any business is ultimately defined by earnings growth. This is a
truism we recognize and a shareholder expectation we are committed to satisfy.
One result of our pattern of record earnings is that last year our
operating margin exceeded 50%. Our return on total shareholders' equity of just
over 25% is right in line with our 25-year historical average. In addition to
continued revenue growth, we remain committed to the rigorous cost controls that
make these types
P. 7
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The Xxxx Nuveen Company
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INVESTING IN A CUSTOMER-FOCUSED STRATEGY
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"To stand out, we must offer exceptional value to Financial advisers by
recognizing and serving their diverse needs...We are now organized around
distinct lines of business...that reflect the business practices and
service requirements of our key customers."
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[FLOW CHART DEPICTING THE DECISION MAKING PROCESS
AND CHARACTERISTICS OF PERCEIVED TARGET MARKET]
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We are committed to working with our customers in ways
that meet their needs and business practices.
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p.8
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of results possible in a period when we also are investing to grow our
businesses.
Over time, we believe stock prices tend to track with earnings growth. Our
goal is to provide steady, predictable earnings growth that demonstrates clearly
and consistently that our business development strategies are producing
excellent results.
In addition to share price, dividends remain an important part of
shareholder return. In 1998, we were able to raise our quarterly dividend by
13%, maintaining our pattern of raising the dividend every year since our
initial public offering in 1992.
We are especially proud of our ability to raise our dividend consistently
over the past three years while investing more than $400 million in business
acquisitions, share repurchases, infrastructure improvements and new product
introductions. We will continue to look for ways to combine our capital, our
products, and our distribution strategy to grow earnings and dividends
consistently.
and offering rewarding careers to our employees
The heart of any organization is its base of professional, dedicated employees,
and we maintain a keen interest in their growth and development. For this
reason, we are supplementing our ongoing technical training with management and
leadership training programs designed to build the skills needed to take full
advantage of our opportunities.
The record results, the growing array of products, the quality service and
the exciting opportunities now before us can all be traced to the continued
dedication and hard work of the men and women who comprise all the different
parts of The Xxxx Xxxxxx Company. Their increased productivity and efficiency
allowed us to achieve this outstanding performance. Without their efforts, our
Company would not enjoy the advantages we have today.
READY FOR OUR SECOND CENTURY
Our Company celebrated its 100th birthday in November, capping a century of
achievement that provides a solid financial and cultural foundation for future
growth.
A century of existence might cause some companies to believe they have
seen it all and have all the answers. While we're proud of our corporate
achievements, we know that our continued success depends on our continued
evolution. Our first 100 years shows a continuous commitment to new business
growth initiatives. We will maintain this commitment as we enthusiastically
embark on our second century.
Sincerely,
/s/ Xxxxxxx X. Xxxxxxxxxxxx
Xxxxxxx X. Xxxxxxxxxxxx
Chairman and Chief Executive Officer
P. 9
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FINANCIAL REVIEW
Management's Discussion and Analysis 11
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Consolidated Balance Sheets 21
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Consolidated Statements of Income 22
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Consolidated Statements of Changes in
Common Stockholders' Equity 23
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Consolidated Statements of Cash Flows 24
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Notes to Consolidated Financial Statements 25
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Report of Independent Auditors 35
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Five Year Financial Summary 36
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Directors and Executive Officers 37
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Shareholder Information 38
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13
The Xxxx Nuveen Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(December 31, 1998)
DESCRIPTION OF THE BUSINESS
The Company's principal businesses are asset management and related research;
development, marketing and distribution of investment products and services; and
municipal and corporate investment banking services. The Company distributes its
investment products, including mutual funds, exchange-traded funds (closed-end
funds), defined portfolios (unit trusts) and individually managed accounts
through registered representatives associated with unaffiliated firms including
broker-dealers, commercial banks, affiliates of insurance providers, financial
planners, accountants, consultants and investment advisers.
The Company distributes individually managed accounts primarily through its
Xxxxxxxxxxx Financial Services, Inc. (Xxxxxxxxxxx) operating unit as well as
through Nuveen Asset Management, and distributes its mutual funds and defined
portfolios through its Xxxx Xxxxxx & Co. Incorporated (Nuveen & Co.) operating
unit.
The Company's primary business activities generate three principal sources of
revenue: (1) ongoing advisory fees earned on assets under management, including
mutual funds, exchange-traded funds and individually managed accounts; (2)
transaction-based revenue earned upon the distribution of mutual fund and
defined portfolio products; and (3) investment banking revenues, consisting of
underwriting and advisory fees.
The 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 equity, fixed-income or other investments, the
availability and attractiveness of competing products, equity market
performance, changes in interest rates, the rate of inflation, changes in income
tax rates and laws, and municipal bond new issue supply.
Assets under management include equity, taxable fixed-income and municipal
securities. Municipal assets represented 71% of assets under management in
managed funds and accounts at December 31, 1998, compared with 77% at December
31, 1997.
GENERAL INDUSTRY TRENDS
The U.S. economy in 1998 continued to expand despite financial and trade
problems in many other parts of the world. U.S. stock prices showed considerable
volatility, with the S&P 500 declining 10% in the third quarter before
rebounding strongly to finish with a total return of 29% for the year. Despite
the strong economy and resilient stock market, interest rates on Treasury
securities were driven down by investors seeking safety in the midst of global
uncertainty. The yield on the 30-year Treasury bond fell from just under 6% to
just over 5% at year end. While municipal yields did not drop as dramatically
(the Bond Buyer 20 dipped from 5.15% to 5.00%), they decreased enough to help
boost new issue volume by 29% compared with 1997.
Market volatility and uncertainty during 1998 resulted in a decrease in net
flows (equal to the sum of sales, reinvestment and exchanges less redemptions)
into equity and taxable fixed-income mutual funds industry-wide for the year
compared with the previous year. Sales of these mutual funds for the
twelve-month period ended December 31, 1998, were down approximately 25%
compared with the same period of the prior year. Equity managed accounts and
equity defined portfolio products continued to attract increased cash flows
across the industry. Municipal bond funds posted a 175% increase in net flows
industry-wide in 1998 over the prior year. This was primarily due to volatility
in the equity markets, the relative price stability of high-quality fixed-income
products and favorable pricing of municipals compared with treasury securities.
Industry sales of municipal defined portfolio products declined in 1998 as a
result of less competitive current returns.
p.11
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The Xxxx Nuveen Company
The following table compares key operating information of the Company for the
respective twelve-month periods:
FINANCIAL RESULTS SUMMARY
(in millions, except per share amounts)
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December 31, 1998 1997 1996
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Gross sales of investment
products $ 7,755 $ 3,026 $ 1,747
Assets under management(1)(2) 55,267 49,594 33,191
Gross revenues 307.5 268.9 232.5
Operating expenses 169.8 146.7 115.0
Pretax operating income 137.7 122.2 117.5
Net income 83.6 74.2 72.5
Basic earnings per share 2.57 2.23 2.03
Diluted earnings per share 2.43 2.13 1.98
Operating cash flow per share(3) 2.98 2.57 2.11
Dividends per share .98 .88 .78
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(1) Excludes defined portfolio products sponsored by the Company.
(2) At period end.
(3) Operating cash flow (net income plus amortization and depreciation) on a
per-share basis is calculated under the same method used for diluted earnings
per share and is presented as an additional measurement of operating
performance, not as a substitute for earnings per share.
SUMMARY OF OPERATING RESULTS
- Gross sales for 1998 reached more than $7.7 billion, an increase of 156% from
the level of total sales in 1997. More than two-thirds of the Company's sales in
1998 were in equity-based products that have been added to the Company's product
line since 1996.
- Gross revenues for the year ended December 31, 1998, increased 14% from the
prior year primarily due to higher advisory fee revenues. This increase resulted
from increased levels of average assets under management in funds and accounts.
Average net assets increased due to the inclusion of a full year of Xxxxxxxxxxx
managed account assets which were acquired in August 1997, and the sale of funds
and accounts throughout 1997 and 1998. These increases were partially offset by
a decline in interest income earned on short-term investments as the Company
invested in the growth of its business, and a decline in distribution revenues
earned on sales of municipal defined portfolio products.
- Operating expenses in 1998 increased over the prior year primarily due to a
full year of goodwill amortization and incremental personnel and operating
expenses resulting from the acquisition of Xxxxxxxxxxx in August 1997.
The following discussion and analysis contains important information that
should be helpful in evaluating the Company's results of operations and
financial condition, and should be read in conjunction with the consolidated
financial statements and related notes.
RESULTS OF OPERATIONS
Total advisory fee income earned during any period is directly related to the
market value of the assets managed by the Company. Advisory fee income will
increase with a rise in the level of assets under management, which occurs with
the sale of fund shares, the addition of new managed accounts or deposits into
existing managed accounts, the acquisition of assets under management from other
advisory companies, or through increases in the value of portfolio investments.
Assets under management may also increase as a result of reinvestment of
distributions from funds and accounts, and from reinvestment of distributions
from defined portfolio products sponsored by the Company into shares of mutual
funds. Fee income will decline when managed assets decline, as would occur when
the values of fund portfolio investments decrease or when mutual fund
redemptions or managed account withdrawals exceed sales and reinvestments.
p.12
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The Xxxx Nuveen Company
Investment advisory fee income, net of subadvisory fees and expense
reimbursements, from assets managed by the Company is shown in the following
table:
MANAGED FUNDS AND ACCOUNTS
INVESTMENT ADVISORY FEES
(in thousands)
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December 31, 1998 1997 1996
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Managed Funds:
Mutual Funds(1) $ 51,851 $ 45,809 $ 25,495
Exchange-Traded Funds 159,638 156,392 155,172
Money Market Funds 3,431 3,801 4,430
Managed Accounts(2) 57,939 15,633 748
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Total $272,859 $221,635 $185,845
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(1) The 1997 and 1998 periods include advisory fee income earned on assets
acquired from Flagship Resources,Inc. on January 2, 1997.
(2) The 1998 period and the last four months of 1997 include advisory fee income
earned on assets managed by Xxxxxxxxxxx.
The following table summarizes net assets under management:
MANAGED FUNDS AND ACCOUNTS
NET ASSETS UNDER MANAGEMENT(1)
(in millions)
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December 31, 1998 1997 1996
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Managed Funds:
Mutual Funds(2) $ 11,883 $ 10,885 $ 5,930
Exchange-Traded Funds 26,223 26,117 25,434
Money Market Funds 824 970 1,004
Managed Accounts (3) 16,337 11,622 823
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Total $ 55,267 $ 49,594 $ 33,191
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(1) Excludes defined portfolio product assets under surveillance.
(2) Includes $4.2 billion in mutual funds acquired from Flagship Resources, Inc.
on January 2, 1997.
(3) Includes $9.1 billion in managed accounts acquired from Xxxxxxxxxxx on
August 31, 1997.
Total advisory fees for the year ended December 31, 1998, increased over the
comparable periods in 1997 and 1996 as a result of higher levels of average
assets under management relating principally to the 1997 acquisitions of
Xxxxxxxxxxx and Flagship Resources, Inc. (Flagship). Mutual fund assets under
management at December 31, 1998, increased $1.0 billion from December 31, 1997,
and managed account assets under management at December 31, 1998, increased $4.7
billion from December 31, 1997. These increases reflect net sales of fund shares
and accounts over the periods and appreciation in the underlying value of the
portfolio investments. Mutual fund assets increased $5.0 billion and managed
account assets increased $10.8 billion from December 31, 1996, to December 31,
1997, primarily due to the acquisition of Flagship on January 2, 1997, and the
acquisition of Xxxxxxxxxxx on August 31, 1997, respectively. Average money
market fund net assets under management decreased in both 1998 and 1997 due to
redemptions, which were driven by relatively low short-term interest rates and
strong competition from sponsors of competing money market products.
Gross sales of investment products for the years ending December 31, 1998,
1997 and 1996 are shown below:
GROSS INVESTMENT PRODUCT SALES
(in millions)
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1998 1997 1996
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Mutual Funds(1) $ 1,553 $ 951 $ 649
Defined Portfolios 809 757 963
Exchange-Traded Funds - 125 -
Managed Accounts(2) 5,393 1,193 135
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Total $ 7,755 $ 3,026 $ 1,747
=========================================================================
(1) The 1997 and 1998 periods include sales of funds acquired from Flagship on
January 2, 1997.
(2) The 1998 period and the last four months of 1997 include sales of
Xxxxxxxxxxx accounts.
Overall, gross sales of the Company's products for the years ended December
31, 1998, and December 31, 1997, increased 156% and 73%, respectively, from the
previous twelve-month periods. Net flows (equal to the sum of sales,
reinvestment and exchanges less redemptions) were $5.7 billion for the
twelve-month period ended December 31, 1998, and $1.8 billion for the
twelve-month period ended December 31, 1997,
p.13
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The Xxxx Nuveen Company
which represents an increase of 217%. Net flows in 1996 were $1.7 billion.
Mutual Funds Growing concern regarding general valuation levels and volatility
in the equity markets resulted in a 68% increase in the Company's municipal
mutual fund sales during 1998 over 1997 as investors sought to balance their
portfolios or turned to more conservative investments. Municipal mutual fund
redemptions during 1998 were 11% lower than those of the prior year. However,
distribution revenue earned on the municipal mutual fund sales in 1998 declined
compared with the prior year. This decrease is primarily the result of the
inclusion, for the 1997 period only, of 12b-1 fees earned in January 1997 under
Flagship's former mutual fund pricing structure. On February 1, 1997, the
Flagship and Nuveen municipal funds merged and adopted pricing structures more
similar to the Nuveen funds. Additionally, compensation paid by the Company to
financial advisers in 1998 on municipal mutual fund sales in excess of $1.0
million increased over 1997. Municipal mutual fund sales in 1997 also increased
when compared with 1996. This was primarily due to the integration of the
Flagship mutual funds and the Flagship distribution organization early in 1997.
Sales of the Company's equity mutual funds increased 56% in 1998 over 1997
due to the introduction of two new funds. In January 1998, the Company
introduced a new large-cap growth equity fund subadvised by Xxxxxxxxxxx and in
June 1998, a new European value equity fund subadvised by Institutional Capital
Corporation (icap). Accordingly, the Company experienced an increase in
distribution revenue.
Defined Portfolios The increase in sales of defined portfolio products for the
twelve-month period ended December 31, 1998, compared with the prior year was
primarily the result of increased sales of equity and taxable fixed-income
defined portfolio products. This increase was partially offset by the decrease
of municipal defined portfolio sales, resulting from less competitive current
returns on these products. Distribution revenue for the equity and taxable
fixed-income defined portfolio products increased by $1.2 million in 1998
compared with 1997, while distribution revenue for the longer term municipal
defined portfolio products was down $2.1 million over the same period.
Sales of municipal defined portfolios and the related distribution revenue
also declined when comparing 1997 with 1996, primarily due to the same factors
affecting municipal defined portfolio sales in 1998.
Managed Accounts Sales of managed accounts increased 352% during the
twelve-month period ended December 31, 1998, when compared with 1997 primarily
due to the inclusion of twelve months of Xxxxxxxxxxx account sales in 1998 and
to the continuing momentum of Xxxxxxxxxxx sales through its traditional customer
base and through Xxxxxx's broad distribution relationships. Sales of Nuveen's
municipal managed accounts increased $390 million in 1998, an 80% increase when
compared with the prior year. Total Xxxxxxxxxxx and Xxxxxx managed account sales
also increased in 1997 when compared with the 1996 period as Xxxxxxxxxxx'x
managed account business was added to the Company's for the last four months of
1997. Sales of managed accounts do not impact the Company's underwriting and
distribution revenue since there are no transaction-based revenues associated
with these products.
Other Revenues The Company records positioning profits or losses from changes in
the market value of investment products and securities held temporarily. The
Company xxxxxx certain of these holdings against fluctuations in interest rates
using financial futures. During 1998, the Company realized net positioning gains
of $0.3 million compared with gains of $3.5 million and losses of $0.2 million
during 1997 and 1996, respectively.
p.14
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The Xxxx Nuveen Company
Investment banking revenues include both net new issue underwriting revenues
and fee income earned from various financial advisory activities. Investment
banking revenues were $13.0 million in 1998, $13.4 million in 1997 and $11.1
million in 1996. The decrease of $0.4 million in 1998 compared with 1997 was due
to lower fee revenue partially offset by higher underwriting revenues. The
increase of $2.3 million in 1997 over 1996 was due to an increase in both
negotiated underwritings and financial advisory activity.
Interest and dividend revenue declined $4.1 million and $8.0 million when
comparing the years ended December 31, 1998 and 1997 with the respective prior
years as cash balances were deployed in January 1997 for part of the acquisition
of Flagship, in August 1997 for the acquisition of Xxxxxxxxxxx, for repurchases
of a portion of the Company's outstanding common shares, and for investments in
new products and systems in 1997 and 1998.
Operating Expenses Operating expenses increased $23.0 million and $31.8 million
in 1998 and 1997 over the respective prior years. The increase in 1998 was
principally due to the inclusion of twelve months of Xxxxxxxxxxx operations in
the 1998 results and only four months in the 1997 results. The increase in the
1997 operating expenses over 1996 was primarily due to the inclusion of a full
year of Flagship expenses in 1997 and four months of Xxxxxxxxxxx expenses in
1997 with no comparable costs incurred in 1996.
Compensation and related benefits for the year ended December 31, 1998,
increased $11.6 million, or 15% over the prior year. This increase was the
result of the inclusion of approximately 90 Xxxxxxxxxxx employees in 1998, which
was partially offset by headcount reductions in other areas. Compensation and
benefits for the year ended December 31, 1997, increased $5.6 million, or 8%
over 1996 primarily due to the addition of approximately 60 Flagship employees
for the full year and 80 Xxxxxxxxxxx employees for the last four months of 1997.
This increase was partially offset by a reduction in incentive plan compensation
expense.
Advertising and promotional expenditures increased for 1998 when compared
with 1997 primarily due to the inclusion of Xxxxxxxxxxx advertising and
promotional expenditures and the incremental costs to support the expanded
product line offered by the Company. Advertising and promotional expenditures
increased in 1997 over 1996 primarily as a result of an advertising and
promotional campaign in the first and second quarters of 1997 to support the
launch of new equity-based growth and income mutual funds.
The increase in amortization of goodwill and deferred offering costs when
comparing 1998 with 1997 also relates to the acquisition of Xxxxxxxxxxx and the
introduction of the Company's new equity mutual funds. The Company recorded $4.9
million of Xxxxxxxxxxx-related goodwill amortization expense in 1998 compared
with $1.6 million in 1997. The Company is amortizing the goodwill associated
with Xxxxxxxxxxx over approximately 30 years. The increase in amortization
expense when comparing 1997 with 1996 is due to the first year of amortization
expense on the Flagship-related goodwill, four months of Xxxxxxxxxxx-related
goodwill amortization and the first of three years of amortization expense on
the December 1996 load-waived mutual fund offering.
Occupancy and equipment, travel and entertainment, and other operating
expenses increased $8.7 million and $7.8 million for the years ended December
31, 1998 and 1997, respectively, when compared with the prior years. The
increase in 1998 was primarily due to the addition of the Xxxxxxxxxxx operations
for the full twelve-month period. The increase in 1997 was due to the addition
of the Flagship operations for the full twelve months of 1997 and Xxxxxxxxxxx
operations for the four-month period ended December 31, 1997.
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The Xxxx Nuveen Company
CAPITAL RESOURCES, LIQUIDITY
AND FINANCIAL CONDITION
The Company's principal businesses are not capital intensive and, historically,
the Company has met its liquidity requirements through cash flow generated by
the Company's operations. The Company's broker-dealer subsidiary occasionally
utilizes available, uncommitted lines of credit, which exceed $400 million, to
satisfy additional periodic, short-term liquidity requirements generally for the
purpose of carrying variable rate demand obligations (VRDOs). As of December 31,
1998, the balance due on these uncommitted lines of credit was $10 million.
Additionally, in August 1997, the Company entered into a $200 million committed,
three-year revolving credit facility with a group of banks to ensure an ongoing
liquidity source for general corporate purposes including acquisitions. As of
December 31, 1998, there was no outstanding balance due on the committed credit
line.
On August 31, 1997, the Company acquired Xxxxxxxxxxx, a nationally-known
equity and balanced account manager, for a cash purchase price of $145 million.
To finance the transaction the Company used $95 million of cash on hand and, for
the remainder, utilized the aforementioned committed credit line, which was
subsequently paid down during the first quarter of 1998. The acquisition has
been accounted for using the purchase method of accounting resulting in
approximately $144 million in goodwill for financial reporting purposes, which
will be amortized against earnings over approximately 30 years.
The Company completed the acquisition of Flagship on January 2, 1997, for a
total purchase price of $71.8 million, before taking into account contingent
consideration. The Company financed the acquisition using cash of $18.0 million
and preferred stock valued at $45.0 million, with the remaining balance
representing liabilities assumed and direct acquisition costs. Additional
payments in cash and common stock, which are contingent on the significant
future growth in the Company's municipal bond mutual funds, could amount to as
much as $20.0 million over a four-year period. Contingent consideration for 1998
and 1997 amounted to approximately $2.4 and $1.0 million, respectively. Goodwill
of approximately $70.0 million, before taking into account the contingent
consideration, will be amortized against earnings over approximately 30 years.
At December 31, 1998, the Company held in its treasury 7,298,720 shares of
common stock acquired in open market transactions and in transactions with its
Class B shareholder, The St. Xxxx Companies, Inc., as part of ongoing stock
repurchase programs. In February 1997, the Board of Directors authorized the
purchase of 3.5 million shares. At December 31, 1998, the Company has
approximately 1.0 million shares remaining to be purchased under the February
1997 repurchase program.
In August 1998, the Company announced a 13% increase in its third quarter
dividend, to $0.26 per common share, from the second quarter amount of $0.23 per
common share. During 1998, the Company paid out dividends on common shares
totaling $31.0 million and on preferred shares totaling $2.2 million, compared
with $28.3 million and $2.2 million, respectively, in 1997.
The Company is remarketing agent for various issuers of VRDOs with an
aggregate principal value of $1.7 billion as of December 31, 1998. Although
remarketing agents, including the Company, are only generally obligated to use
their best efforts in locating purchasers for the VRDOs, they frequently
repurchase VRDOs for resale to other buyers within a few days. During temporary
periods of imbalance between supply and demand for VRDOs, the Company may hold
larger than average balances of such obligations for resale. The Company has
come to expect such imbalances at year-end and, to a lesser extent, at each
calendar quarter-end. Substantially all VRDOs for which the Company is
remarketing agent are secured by letters of credit obtained by the issuer from
top-rated third-party providers, including major commercial banks and insurance
p.16
19
The Xxxx Nuveen Company
companies. On December 31, 1998, and December 31, 1997, the Company held $66.8
million and $97.7 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 $14.9 million
during 1998 and $32.3 million during 1997.
To minimize interest rate risk on fixed-income defined portfolio product
inventories and securities held by the Company, the Company entered into hedging
transactions using futures contracts during 1998 and expects to continue to do
so periodically. Additionally, the Company's investment banking group will, on
occasion, act as financial adviser, broker, or underwriter to municipal or other
issuers with respect to transactions such as interest rate swaps and forward
delivery transactions.
Xxxx Xxxxxx & 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 December 31, 1998, its net
capital ratio was 2.06 to 1 and its net capital was $27.8 million which is $24.0
million in excess of the required net capital of $3.8 million.
Management believes that cash provided from operations and borrowings
available under its uncommitted and committed credit facilities will provide the
Company with sufficient liquidity to meet its operating needs for the
foreseeable future.
OTHER MATTERS
Year 2000 The Company has taken a number of steps to address the Year 2000
challenge. As background, the Company first addressed this challenge in the
early 1980s because of the historical focus of the Company's broker-dealer and
investment adviser subsidiaries on municipal bonds, which typically mature 20 to
30 years after the date of issuance. As a result, in the early 1980s the Company
began developing internal software standards and other information technology
systems that required the use of four digits to represent a year. These systems
have been improved and tested over the years and remain in place, thus providing
the Company with a base of internally developed, Year 2000 ready software. The
Company outsources to service providers many administrative functions relating
to its funds and investment products, and an outside service provider serves as
transfer agent and custodian for all of the funds sponsored by the Company.
In light of the above, the Company's preparations for Year 2000 consist
essentially of examination and testing of the software packages and hardware
provided by third parties and of the systems and software of service partners,
with particular emphasis on its key service providers, to determine their degree
of Year 2000 compliance. The Company has compiled a detailed inventory of all
third-party software and hardware used in processing at Nuveen and Xxxxxxxxxxx
and is in the process of obtaining certifications of the Year 2000 compliance
for each item of software and hardware (which the Company expects to complete by
the end of the second quarter in 1999). The certification process may require
follow up, which will be done as needed throughout 1999.
The most significant service providers include Chase Manhattan Bank,
CheckFree Investment Services (formerly Security APL), and XX Xxxxx, a
subsidiary of Standard & Poor's Corporation. Chase serves as transfer agent and
custodian for the Company's funds and serves as trustee of the defined
portfolios sponsored by the Company. CheckFree provides the portfolio accounting
system for both Xxxxxxxxxxx and Nuveen Asset Management. Xxxxx serves as pricing
agent for the municipal securities held by the Company's funds.
The Company is coordinating with, and monitoring the Year 2000 readiness
plans of, each of these service providers, who have shared detailed information
with the Company regarding their respective Year 2000 plans and initiatives.
Chase has
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The Xxxx Nuveen Company
certified to the Company that it has completed its internal testing and
remediation and that its systems are Year 2000 compliant. Chase has begun
testing system interfaces with its business partners, including the Company, and
this testing is expected to be completed during the second quarter of 1999.
CheckFree Investment Services has recently tested and put into production its
Year 2000 remediated systems. XX Xxxxx and the Company are scheduled to begin
testing system interfaces during the second quarter of 1999.
The Company is participating in the industry wide testing of securities trade
processing systems sponsored by the Securities Industry Association. As part of
this initiative, the Company is partnering with three other firms over a
four-week period to simulate post-Year 2000 settlement of securities trades
through settlement clearinghouses used by industry participants. All of the
Company's critical systems involved in trade processing are being tested as part
of this effort. The results of this testing initiative will be reviewed by the
Securities Industry Association and are expected to be available in April 1999.
The testing of the Company's critical systems that are not involved in
securities trade processing, including general ledger and portfolio management
systems, are scheduled to be completed by June 30, 1999. Year 2000 compliance of
the CheckFree Investment Services APL Wrap host system is the most critical
Xxxxxxxxxxx Year 2000 readiness matter. CheckFree has completed testing the
system interfaces with its business partners, which include the major brokers
using Xxxxxxxxxxx'x individual managed account services, and is also
participating in the Securities Industry Association testing program with
respect to settlement clearinghouses. Xxxxxxxxxxx has completed the testing of
all of its critical internal systems that currently exist, and they appear to be
Year 2000 ready. Xxxxxxxxxxx does not engage in any in-house system application
development. The Company is confident that these critical systems testing
initiatives will be successfully completed, and the Company will address
promptly any Year 2000 readiness issues identified through these efforts.
Given the Company's prior development work, the Company and its subsidiaries
do not anticipate facing the prospect of costly and time consuming redesign of
internal information technology systems, and the costs of the Company's
compliance program are not expected to be significant and will be incurred as
part of normal operations. The costs presently consist of the cost of upgrades
of software and of travel expenses to coordinate with our parent company,
subsidiaries and service partners. Therefore, the Company has not to date
specially allocated a budget for the Company's Year 2000 initiatives.
While the Company does not presently believe that challenges associated with
Year 2000 are likely to have a material effect on the Company's operations,
liquidity and financial condition, the Company has not completed the process of
assessing the compliance of all of its third-party software suppliers and key
service providers. These outside parties are at various stages of readiness for
Year 2000 and depending on the result of such assessments, it is possible the
Company could conclude that the Year 2000 challenge could affect the Company's
business to a greater extent than it currently believes likely. It is also
possible that certain service providers, despite assurances to the contrary, may
not in fact successfully modify all their key systems on a timely basis for Year
2000 and that the Company's testing of such firms' compliance may not allow the
Company to detect such problems on a timely basis. Further, there can be no
assurance that entities such as public utilities will be fully Year 2000
compliant and any interruption in basic services, such as telephone or
electrical service, would disrupt the Company's operations.
The Company is developing Year 2000 contingency plans, which are based on the
extent to which the Company's examination of the Year 2000 compliance of its
third-party software and service providers reveals problems in achieving
readiness. The Company is not aware of any such problems
p.18
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The Xxxx Nuveen Company
presently but it has not yet completed its due diligence examination. Once this
examination is completed, the Company will address any specific concerns with
providers and seek to take appropriate remedial action. We anticipate that the
majority of any specific contingency plans will be developed in accordance with
our normal disaster recovery plans. It may not be possible to develop adequate
contingency plans relating to Year 2000 challenges at service providers that are
not identified sufficiently in advance of January 1, 2000.
Market Risk The Company is exposed to market risk from changes in interest rates
which may adversely affect its results of operations and financial condition.
The Company is exposed to interest rate risk primarily in its defined portfolio
inventory and seeks to minimize the risks from these interest rate fluctuations
through the use of derivative financial instruments. The Company does not use
derivative financial instruments for trading or other speculative purposes and
is not party to any leveraged financial instruments. A discussion of the
Company's accounting policies for financial instruments is included in Note 1
(Summary of Significant Accounting Policies) of the Notes to Consolidated
Financial Statements.
The Company regularly purchases and holds for resale municipal securities and
defined portfolio units. The level of inventory maintained by the Company will
fluctuate daily and is dependent upon the need to maintain municipal inventory
for future defined portfolios, and the need to maintain defined portfolio
inventory to support ongoing sales. To minimize interest rate risk on securities
held by the Company, the Company has entered into futures contracts.
The Company invests in short-term debt instruments, classified as securities
purchased under agreements to resell. The investments are treated as
collateralized financing transactions and are carried at the amounts at which
they will be subsequently resold, including accrued interest. The Company often
holds temporary investments in VRDOs arising from remarketing activities and
related debt to meet its short-term financing needs for this product.
Substantially all VRDOs are secured by letters of credit obtained by the issuer
from highly-rated third-party providers including commercial banks and insurance
companies. The Company also invests in certain Company-sponsored equity and
fixed-income mutual funds.
The Company manages risk by restricting the use of derivative financial
instruments to hedging activities and by limiting potential interest rate
exposure. The Company does not believe that the effect of any reasonably
possible near-term changes in interest rates would be material to the Company's
financial position, results of operations or cash flows.
Recent Accounting Pronouncements In the Spring of 1998 the Financial Accounting
Standards Board (FASB) approved AICPA Statement of Position (SOP) 98-5
"Reporting of the Costs of Start-up Activities," which requires that all costs
associated with start-up activities be expensed as incurred. Start-up activities
include activities related to organizing a new entity. These costs are commonly
referred to as organization costs. Certain offering costs are not within the
scope of SOP 98-5. The pronouncement generally has the effect of requiring an
investment company sponsor to bear certain costs that were historically
capitalized as a fund asset and amortized as an expense of the fund over a
period of five years.
In October 1998, the Financial Accounting Standards Board staff announced its
position that offering costs incurred by an investment adviser in connection
with the distribution of shares of a fund do not meet the definition of an
asset, unless the adviser receives both distribution fees under a plan adopted
pursuant to Rule 12b-1 and contingent deferred sales charges (CDSCs). Absent
both Rule 12b-1 fees and CDSCs, such costs should be expensed as incurred.
Further, the FASB staff believes that initial offering costs paid by such an
p.19
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The Xxxx Nuveen Company
adviser are start-up costs and should be accounted for in accordance with
AICPA SOP 98-05, discussed above. The staff announcement applies to advisers of
closed-end investment companies that pay underwriting commissions on behalf of
shareholders. The effect of such announcement is to require that any such
underwriting commissions paid be expensed immediately at the time paid instead
of capitalized by the adviser and amortized as an expense of the adviser over an
appropriate period.
Inflation The Company's assets are, to a large extent, liquid in nature and
therefore not significantly affected by inflation. However, inflation may result
in increases in the Company's expenses, such as employee compensation,
advertising and promotional costs, and office occupancy costs. To the extent
inflation, or the expectation thereof, results in rising interest rates or has
other adverse effects upon the securities markets and on the value of financial
instruments, it may adversely affect the Company's financial condition and
results of operations. A substantial decline in the value of fixed-income or
equity investments could adversely affect the net asset value of funds managed
by the Company, which in turn would result in a decline in investment advisory
fee income.
Forward-Looking Information From time to time, information provided by the
Company or information included in its filings with the sec (including this
report on Form 10-k) may contain statements which are not historical facts but
are forward-looking statements reflecting management's expectations and
opinions. The Company's actual future results may differ significantly from
those anticipated in any forward-looking statements due to numerous factors.
These include, but are not limited to, the effects of the substantial
competition that the Company, like all market participants, faces in the
investment management business, including competition for continued access to
the brokerage firm's retail distribution systems, the Company's reliance on
revenues from investment management contracts which are renewed annually
according to their terms, burdensome regulatory developments, recent accounting
pronouncements, unforeseen developments in litigation and the previously
discussed risks with respect to Year 2000 readiness. The Company undertakes no
responsibility to update publicly or revise any forward-looking statements.
p.20
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The Xxxx Nuveen Company
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
--------------------------------------------------------------------------------------------------------
December 31, 1998 1997
--------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 5,148 $ 8,771
Securities purchased under agreements to resell 6,000 -
Temporary investments arising from remarketing obligations 66,750 97,705
Management and distribution fees receivable 27,824 27,169
Other receivables 19,009 13,548
Securities owned (trading account), at market value:
Nuveen defined portfolios 37,447 31,926
Municipal bonds and notes 2,630 572
Deferred income tax asset, net 4,236 7,096
Furniture, equipment, and leasehold improvements, at cost less accumulated
depreciation and amortization of $29,680 and $24,808, respectively 12,824 14,788
Other investments 48,404 54,500
Goodwill, at cost less accumulated amortization of $11,186
and $3,956, respectively 203,380 209,300
Prepaid expenses and other assets 34,309 26,857
--------------------------------------------------------------------------------------------------------
$ 467,961 $ 492,232
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ - $ 15,000
Short-term loans secured by remarketing obligations 10,000 69,500
Accrued compensation and other expenses 46,400 42,111
Deferred compensation 28,816 27,414
Security purchase obligations 7,413 -
Other liabilities 26,224 20,087
--------------------------------------------------------------------------------------------------------
Total liabilities 118,853 174,112
--------------------------------------------------------------------------------------------------------
Redeemable preferred stock, at redemption value; 5,000,000 shares
authorized, 1,800,000 shares issued 45,000 45,000
--------------------------------------------------------------------------------------------------------
Common stockholders' equity:
Class A Common stock, $.01 par value; 150,000,000 shares
authorized, issued 14,212,618 shares and 14,212,618 shares, respectively 142 142
Class B Common stock, $.01 par value; 40,000,000 shares
authorized, issued 24,441,738 shares and 24,441,738 shares, respectively 245 245
Additional paid-in capital 55,139 52,963
Retained earnings 451,529 403,635
Unamortized cost of restricted stock awards (79) (185)
--------------------------------------------------------------------------------------------------------
506,976 456,800
Less common stock held in treasury, at cost (7,298,720 and
6,871,805 shares, respectively) (202,868) (183,680)
--------------------------------------------------------------------------------------------------------
Total common stockholders' equity 304,108 273,120
--------------------------------------------------------------------------------------------------------
$ 467,961 $ 492,232
========================================================================================================
See accompanying notes to consolidated financial statements.
p.21
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The Xxxx Nuveen Company
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
---------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------
Revenues
Investment advisory fees from assets under management $272,859 $221,635 $185,845
Underwriting and distribution of investment products 10,623 12,671 14,566
Positioning profits (losses) 300 3,491 (191)
Investment banking 12,967 13,409 11,098
Interest 6,549 10,627 18,640
Other 4,237 7,094 2,494
---------------------------------------------------------------------------------------------------------
Total revenues 307,535 268,927 232,452
---------------------------------------------------------------------------------------------------------
Expenses
Compensation and benefits 88,885 77,274 71,683
Advertising and promotional costs 19,415 18,853 12,641
Occupancy and equipment costs 12,277 12,647 11,948
Amortization of goodwill and deferred offering costs 14,093 10,865 -
Travel and entertainment 9,331 7,132 4,627
Interest and dividends 2,597 3,686 2,325
Other operating expenses 23,200 16,300 11,726
---------------------------------------------------------------------------------------------------------
Total expenses 169,798 146,757 114,950
---------------------------------------------------------------------------------------------------------
Income before taxes 137,737 122,170 117,502
---------------------------------------------------------------------------------------------------------
Income taxes
Current 51,268 44,697 41,833
Deferred 2,824 3,293 3,140
---------------------------------------------------------------------------------------------------------
Total income taxes 54,092 47,990 44,973
---------------------------------------------------------------------------------------------------------
Net income $ 83,645 $ 74,180 $ 72,529
=========================================================================================================
Average common and common equivalent shares outstanding
Basic 31,641 32,275 35,656
=========================================================================================================
Diluted 34,427 34,902 36,702
=========================================================================================================
Earnings per common share
Basic $ 2.57 $ 2.23 $ 2.03
=========================================================================================================
Diluted $ 2.43 $ 2.13 $ 1.98
=========================================================================================================
See accompanying notes to consolidated financial statements.
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The Xxxx Nuveen Company
Consolidated Statements of Changes in Common Stockholders' Equity
(in thousands)
---------------------------------------------------------------------------------------------------------------
Unamortized
Class A Class B Additional Cost of
Common Common Paid-In Retained Restricted Treasury
Stock Stock Capital Earnings Stock Awards Stock Total
---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $101 $286 $50,122 $319,705 $(1,611) $ (45,747) $322,856
Net income 72,529 72,529
Cash dividends paid (27,579) (27,579)
Issuance of restricted
stock awards 55 (750) 695 -
Amortization of restricted
stock awards 1,656 1,656
Purchase of treasury stock (101,074) (101,074)
Exercise of stock options (55) (940) 3,974 2,979
Other 27 (27) 527 527
---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 128 259 50,649 363,715 (705) (142,152) 271,894
===============================================================================================================
Net income 74,180 74,180
Cash dividends paid (30,589) (30,589)
Issuance of restricted
stock awards 62 1,342 1,404
Amortization of restricted
stock awards 520 520
Purchase of treasury stock (54,775) (54,775)
Exercise of stock options (62) (3,671) 11,905 8,172
Other 14 (14) 2,314 2,314
---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 142 245 52,963 403,635 (185) (183,680) 273,120
===============================================================================================================
Net income 83,645 83,645
Cash dividends paid (33,229) (33,229)
Issuance of earnout shares 179 562 741
Amortization of restricted
stock awards 106 106
Purchase of treasury stock (27,421) (27,421)
Exercise of stock options (2,519) 7,635 5,116
Other 1,997 (3) 36 2,030
---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $142 $245 $55,139 $451,529 $ (79) $(202,868) $304,108
===============================================================================================================
See accompanying notes to consolidated financial statements.
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The Xxxx Nuveen Company
Consolidated Statements of Cash Flows
(in thousands)
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 83,645 $ 74,180 $ 72,529
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Deferred income taxes 2,860 3,293 3,140
Amortization/Depreciation:
Furniture, equipment and leasehold improvements 4,915 4,555 5,052
Goodwill 7,230 3,956 -
Net (increase) decrease in assets:
Temporary investments arising from remarketing obligations 30,955 2,130 98,450
Management and distribution fees receivable (655) (563) (1,134)
Other receivables (5,461) 19,435 422
U.S. government securities (escrow accounts) - - 1,385
Nuveen defined portfolios (5,521) 7,280 (138)
Municipal bonds and notes (2,058) 3,982 7,755
Prepaid expenses and other assets (7,452) (2,980) (18,894)
Net increase (decrease) in liabilities:
Accrued compensation and other expenses 4,289 (10,138) 34,049
Deferred compensation 1,402 3,834 598
Security purchase obligations 7,413 (2,227) (4,947)
Other liabilities 6,137 (15,326) (786)
Other 2,103 2,826 1,434
---------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 129,802 94,237 198,915
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Notes Payable:
New loans 14,000 76,000 -
Payments on loans (29,000) (61,000) -
Net (payments) receipts on short-term borrowings:
Securities sold under agreements to repurchase - - (25,000)
Short-term loans secured by remarketing obligations (59,500) 69,500 -
Dividends paid (33,229) (30,589) (27,579)
Proceeds from stock options exercised 5,116 8,172 3,080
Acquisition of treasury stock (27,421) (54,775) (101,074)
Other 34 - -
---------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities (130,000) 7,308 (150,573)
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for purchases of other companies, net of cash received - (165,369) -
Purchases of office furniture and equipment (2,951) (3,194) (2,787)
Other investments 6,096 (2,564) 16,757
Other (570) 5 -
---------------------------------------------------------------------------------------------------------
Net cash provided from (used for) investing activities 2,575 (171,122) 13,970
---------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash and cash equivalents 2,377 (69,577) 62,312
Cash and cash equivalents:
Beginning of year 8,771 78,348 16,036
---------------------------------------------------------------------------------------------------------
End of year $ 11,148 $ 8,771 $ 78,348
=========================================================================================================
See accompanying notes to consolidated financial statements.
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The Xxxx Nuveen Company
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Information and Basis
of Presentation The consolidated financial statements include the accounts of
The Xxxx Xxxxxx Company (the Company) and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the prior year financial statements have been
reclassified to correspond to the 1998 presentation. These reclassifications had
no effect on net income or retained earnings as previously reported for those
years. The Company's majority shareholder is The St. Xxxx Companies, Inc.
Xxxx Xxxxxx & Co. Incorporated (Nuveen & Co.), a registered broker and dealer
in securities under the Securities Exchange Act of 1934, is sponsor/underwriter
of the Nuveen mutual funds, exchange-traded funds (closed-end funds) and defined
portfolios (unit trusts). Nuveen & Co. trades, underwrites and markets municipal
and corporate bonds. The Company has four advisor subsidiaries which are
registered under the Investment Advisers Act of 1940: Nuveen Advisory Corp.
(NAC), Nuveen Institutional Advisory Corp. (NIAC), Nuveen Asset Management (NAM)
and Xxxxxxxxxxx Financial Services, Inc. (Xxxxxxxxxxx). NAC and NIAC provide
investment advice to and administer the business affairs of the Nuveen family of
management investment companies. NAM and Xxxxxxxxxxx provide investment
management services through individual accounts for individuals and
institutional investors. Xxxxxxxxxxx also sub-advises an equity mutual fund
sponsored by Nuveen & Co.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and related notes to the financial statements. Changes in such
estimates may affect amounts reported in future periods.
Securities Purchased Under Agreements to Resell Securities purchased under
agreements to resell are treated as collateralized financing transactions and
are carried at the amounts at which such securities will be subsequently resold,
including accrued interest. The Company's exposure to credit risks associated
with the nonperformance of counterparties in fulfilling these contractual
obligations can be directly impacted by market fluctuations that may impair the
counterparties' ability to satisfy their obligations. It is the Company's policy
to take possession of the securities underlying the agreements to resell or
enter into tri-party agreements which include segregation of the collateral by
an independent third party for the benefit of the Company. The Company monitors
the value of these securities daily and, if necessary, obtains additional
collateral to assure that the agreements are fully secured.
The Company utilizes resale agreements to invest capital not required to fund
daily operations. The level of such investments will fluctuate on a daily basis
as the Company commits capital to carry temporary investments in variable rate
demand obligations (VRDOs) and inventory positions and to finance new issue
underwritings. Such resale agreements typically mature on the day following the
day in which the Company enters into such agreements. Since these agreements are
highly liquid investments, readily convertible to cash, and mature in less than
three months, the Company includes these amounts in cash equivalents for cash
flow purposes. At December 31, 1998, the Company held $6.0 million in resale
agreements. The entire amount has been segregated for the benefit of customers
under rule 15c3-3 of the Securities and Exchange Commission.
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The Xxxx Nuveen Company
Temporary Investments Arising from Remarketing Obligations The Company is
remarketing agent for various issuers of VRDOs with an aggregate principal value
in excess of $1.7 billion at December 31, 1998. Although remarketing agents,
including the Company, are only generally obligated to use their best efforts in
locating purchasers for the VRDOs, they frequently purchase 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 substantial amounts of such
obligations for resale. The Company has come to expect such imbalances at year
end and, to a lesser extent, at each calendar quarter end. Substantially all
VRDOs for which the Company is remarketing agent are secured by letters of
credit obtained by the issuer from highly-rated third-party providers including
major commercial banks and insurance companies. At December 31, 1998, and 1997,
the Company held VRDOs with a cost and market value of $66.8 million and $97.7
million, respectively. In comparison, the Company's average daily temporary
investment in VRDOs was $14.9 million during 1998 and $32.3 million during 1997.
Short-Term Loans Secured by Remarketing Obligations The Company meets its
short-term financing needs arising from its VRDOs remarketing activities by
obtaining bank loans under uncommitted lines of credit that are collateralized
by securities owned by the Company, including VRDOs.
Securities Transactions Securities transactions entered into by the Company's
broker-dealer subsidiary are recorded on a settlement date basis, which is
generally three business days after the trade date. Securities owned (trading
accounts) are valued at market value and realized and unrealized gains and
losses are reflected in income. Profits and losses are accrued on unsettled
securities transactions based on trade dates and, to the extent determinable, on
underwriting commitments, purchase and sales commitments of when-issued
securities, and delayed delivery contracts.
Furniture, Equipment and Leasehold Improvements Furniture and equipment,
primarily computer equipment, is depreciated on a straight-line basis over
estimated useful lives ranging from three to ten years. Leasehold improvements
are amortized over the lesser of the economic useful life of the improvement or
the remaining term of the lease.
Other Investments Other investments consists primarily of convertible preferred
stock in a privately held institutional equity manager and investments in
certain Company-sponsored mutual funds. The preferred stock investment is
carried at cost and is not readily marketable. Consequently, fair value cannot
be readily ascertained.
Goodwill Goodwill, representing the excess of the cost over the net tangible and
intangible assets of acquired businesses, is stated at cost and is amortized on
a straight-line basis over the estimated future periods to be benefited. The
Company periodically assesses the recoverability of the cost of its goodwill
based on a review of undiscounted cash flows of the related acquired operations.
Prepaid Expenses and Other Assets Prepaid expenses and other assets consists
primarily of commissions advanced by the Company on sales of certain mutual fund
shares. Such costs are being amortized over the lesser of the 12b-1 period (one
to eight years) or the period during which the shares of the fund upon which the
commissions were paid remain outstanding, with the exception of commissions
advanced in conjunction with the load-waived offerings of certain of the equity
and income mutual funds in late 1996 and early 1997. Those costs are being
amortized on a straight-line
p.26
29
The Xxxx Nuveen Company
basis over the lesser of three years or the period during which the shares of
the fund upon which the commissions were paid remain outstanding.
Security Purchase Obligations As sponsor/underwriter of the Nuveen defined
portfolios, the Company enters into trust agreements that obligate it to
purchase certain municipal when-issued bonds reported as security purchase
obligations on the consolidated balance sheets, and deliver such bonds together
with "regular way" bonds on hand or receivable from brokers to the trustee. The
commitments to deliver these bonds are secured by irrevocable bank letters of
credit drawn by the Company in favor of the trustee. These letters of credit are
collateralized by securities owned by the Company. The liabilities reported in
the consolidated balance sheets are the amounts the Company is contractually
obligated to pay at the future settlement date of the purchase transactions,
including interest accrued through the balance sheet dates.
Derivative Financial Instruments To minimize interest rate risk on securities
held by the Company, the Company has entered into futures contracts, and other
hedge transactions, and expects to continue to do so in the future.
Additionally, the Company's investment banking group, on occasion, acts as
financial adviser, broker or underwriter to municipal or other not-for-profit
issuers with respect to transactions in interest rate swaps and forward delivery
transactions. Derivative financial instruments owned by the Company are valued
at market value and realized and unrealized gains and losses are reflected in
income.
Equity Incentive Plans The Company accounts for restricted stock and options
issued under its equity incentive plans using the accounting methods prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and its related interpretations.
Advertising and Promotional Costs Advertising and promotional costs include
amounts related to the marketing and distribution of specific products offered
by the Company, as well as expenses associated with promoting the Company's
brands and image. The Company's policy is to expense such costs as incurred.
Supplemental Cash Flow Information The Company paid interest of $2.4 million in
1998, $2.3 million in 1997 and $1.6 million in 1996. This compares with interest
expense reported in the Company's Consolidated Statements of Income of $2.6
million, $3.7 million and $2.3 million for the respective reporting years.
2. EARNINGS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." This statement replaced the previous
calculation of primary and fully diluted earnings per share (EPS) with basic and
diluted eps. Basic EPS excludes the dilutive effects of options and convertible
securities. Diluted EPS is similar to the previously reported fully diluted EPS.
The following table sets forth a reconciliation of net income and common
shares used in the basic
p.27
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The Xxxx Nuveen Company
and diluted EPS computations for the three years ended December 31, 1998:
(in thousands, except per share data)
------------------------------------------------------------------
Net Per-Share
Income Shares Amount
------------------------------------------------------------------
1996
Basic EPS $72,529 35,656 $2.03
Dilutive effect of
Deferred stock - 137
Employee stock options - 909
Diluted EPS $72,529 36,702 $1.98
------------------------------------------------------------------
1997
Net income $74,180
Less: Preferred stock dividends (2,250)
Basic EPS $71,930 32,275 $2.23
Dilutive effect of
Contingent common stock - 5
Deferred stock - 178
Employee stock options - 794
Assumed conversion of
preferred stock 2,250 1,650
Diluted EPS $74,180 34,902 $2.13
------------------------------------------------------------------
1998
Net income $83,645
Less: Preferred stock dividends (2,250)
Basic EPS $81,395 31,641 $2.57
Dilutive effect of
Contingent common stock - 16
Deferred stock - 178
Employee stock options - 942
Assumed conversion of
preferred stock 2,250 1,650
Diluted EPS $83,645 34,427 $2.43
------------------------------------------------------------------
Options to purchase 328,500 and 102,500 shares of the Company's common stock
were outstanding at December 31, 1998, and 1997, respectively, but were not
included in the computation of diluted earnings per share because the options'
respective exercise prices per share were greater than the average market price
of the Company's common shares during the applicable year. The weighted average
exercise prices of these options for 1998 and 1997 were $38.51 and $37.59 per
share, respectively.
3. INCOME TAXES
The provision for income taxes is different from that which would be computed by
applying the statutory federal income tax rate to income before taxes. The
principal reasons for these differences are as follows:
---------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------
Federal statutory rate applied to
income before taxes 35.0% 35.0% 35.0%
State and local income taxes, net
of federal income tax benefit 4.2 4.6 4.2
Tax-exempt interest income, net
of disallowed interest expense (.5) (.9) (1.0)
Other, net .6 .6 .1
---------------------------------------------------------------------
Effective tax rate 39.3% 39.3% 38.3%
=====================================================================
The tax effect of significant items that gives rise to the net deferred tax
asset recorded on the Company's consolidated balance sheets is shown in the
following table:
(in thousands)
----------------------------------------------------------------------
December 31, 1998 1997
----------------------------------------------------------------------
Gross deferred tax asset:
Deferred compensation $12,417 $11,830
Accrued post retirement benefit obligation 3,003 2,794
Unfunded accrued pension cost
(non-qualified plan) 634 467
Book depreciation in excess of
tax depreciation 2,164 1,634
Other 1,687 735
----------------------------------------------------------------------
Gross deferred tax asset 19,905 17,460
----------------------------------------------------------------------
Gross deferred tax liability:
Deferred commissions and fund
offering costs 10,207 7,822
Goodwill amortization 4,271 675
Prepaid pension costs 1,005 690
Unrealized gain - 1,119
Other 186 58
----------------------------------------------------------------------
Gross deferred tax liability 15,669 10,364
----------------------------------------------------------------------
Net deferred tax asset $ 4,236 $ 7,096
======================================================================
The future realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
p.28
31
The Xxxx Nuveen Company
differences become deductible. Management believes it is more likely than not
the Company will realize the benefits of these future tax deductions.
Not included in income tax expense for 1998, 1997 and 1996, are income tax
benefits of $1,997,000, $2,308,000 and $527,000, respectively, attributable to
the vesting of restricted stock and the exercise of stock options. Such amounts
are reported on the consolidated balance sheets in additional paid-in capital.
Federal and state income taxes paid for the years ending December 31, 1998,
1997 and 1996, amounting to $47,454,000, $41,557,000 and $46,664,000,
respectively, include required payments on estimated taxable income and final
payments of prior year taxes required to be paid upon filing the final federal
and state tax returns, reduced by refunds received.
4. NOTES PAYABLE
On August 8, 1997, the Company entered into a $200 million revolving credit
facility with a group of banks that extends through August 2000. Proceeds from
borrowings under the facility are to be used for general corporate purposes
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 .09% of the maximum amount available under
the credit line. Borrowings under the agreement are unsecured. During 1998, the
weighted average interest rate relating to amounts borrowed under the credit
facility was 5.92%. At December 31, 1998, there were no outstanding borrowings
under this facility.
5. COMMITMENTS AND CONTINGENCIES
Rent expense for office space and equipment was $6,366,000, $7,293,000 and
$5,919,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Minimum rental commitments for office space and equipment, including estimated
escalation for insurance, taxes and maintenance for the years 1999 through 2013,
the last year for which there is a commitment, are as follows:
(in thousands)
-------------------------------------------------------------------------
Year Commitment
-------------------------------------------------------------------------
1999 $ 6,718
2000 6,859
2001 6,787
2002 6,820
2003 6,002
Thereafter 47,668
=========================================================================
The Company and its subsidiaries are named as defendants in certain legal
actions having arisen in the ordinary 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.
6. EMPLOYEE RETIREMENT, POSTRETIREMENT
BENEFIT AND INCENTIVE COMPENSATION PROGRAMS
The Company has a noncontributory retirement plan and a postretirement benefit
plan covering the majority of employees, including employees of certain of its
subsidiaries. Pension benefits are based on years of service and the employee's
average compensation during the highest consecutive five years of the employee's
last ten years of employment. The Company's funding policy is to contribute
annually at least the minimum amount that can be deducted for federal income tax
purposes. Additionally the Company currently maintains plans providing certain
life insurance and health care benefits for retired employees and their eligible
dependents. The cost of these benefits is shared by the Company and the retiree.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair
p.29
32
The Xxxx Nuveen Company
value of assets over the two-year period ending December 31, 1998, and a
statement of the funded status as of December 31 of both years:
(in thousands)
----------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
----------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------------
Change in projected
benefit obligation
Obligation at January 1 $17,681 $13,212 $ 5,017 $ 5,048
Service cost 1,051 1,007 338 303
Interest cost 1,249 1,155 353 324
Participant contributions - - - -
Plan amendments - 1,064 - 252
Actuarial (gain) loss 2,724 1,880 230 (845)
Benefit payments (2,106) (637) (80) (65)
----------------------------------------------------------------------
Obligation at
December 31 $20,599 $17,681 $ 5,858 $ 5,017
======================================================================
Change in fair value
of plan assets
Fair value of plan assets
at January 1 $24,662 $20,839 $ - $ -
Actual return on
plan assets 5,662 4,460 - -
Benefit payments (2,106) (637) (80) (65)
Company contributions - - 80 65
----------------------------------------------------------------------
Fair value of plan assets
at December 31 $28,218 $24,662 $ - $ -
======================================================================
Reconciliation prepaid
(accrued) and total
amount recognized
Funded status at
December 31 $ 7,619 $ 6,981 $(5,858) $(5,017)
Unrecognized net
transition asset (539) (718) - -
Unrecognized prior-
service cost 126 114 - -
Unrecognized net gain (6,307) (5,840) (1,398) (1,697)
----------------------------------------------------------------------
Prepaid (accrued) cost $ 899 $ 537 $(7,256) $(6,714)
======================================================================
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31 of both years. Prepaid benefit cost is recorded
in prepaid expenses and other assets. Accrued benefit liability is recorded in
accrued compensation and other expenses.
(in thousands)
----------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
----------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------------
Prepaid benefit cost $ 2,431 $ 1,659 $ - $ -
Accrued benefit liability (1,532) (1,122) (7,256) (6,714)
Intangible asset - - - -
Accumulated other
comprehensive income - - - -
----------------------------------------------------------------------
Net amount recognized $ 899 $ 537 $(7,256) $(6,714)
=======================================================================
The Company's qualified and non-qualified plans' assets exceed the benefit
obligation for the years ending December 31, 1998, and December 31, 1997. The
Company's postretirement benefits plan has no plan assets. The aggregate benefit
obligation for the postretirement plan is $5,858,000 as of December 31, 1998,
and $5,017,000 as of December 31, 1997.
The following table provides the components of net periodic benefit costs for
the plans for the two years ending December 31, 1998:
(in thousands)
----------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
----------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------------
Service cost $ 1,051 $ 1,007 $ 338 $ 303
Interest cost 1,249 1,155 353 324
Expected return on
plan assets (2,175) (1,831) - -
Unrecognized net asset (179) (179) - -
Amortization of prior-
service cost (12) (12) - -
Amortization of net gain (296) (162) (69) (74)
----------------------------------------------------------------------
Net periodic benefit cost $ (362) $ (22) $ 622 $ 553
======================================================================
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
(in thousands)
----------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
----------------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------------
Discount rate 7.0% 7.5% 7.0% 7.5%
Expected return on
plan assets 9.0% 9.0% N/A N/A
Rate of compensation
increase 5.5% 5.5% N/A N/A
----------------------------------------------------------------------
p.30
33
The Xxxx Nuveen Company
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered health care benefits for pre-65 participants was assumed for
1998. The assumption is reduced to 6% by 2002 and remains at that level
thereafter. The annual assumed rate of increase for post-65 participants is 7%
for 1998 and is assumed to decrease to 6% by 1999 and remains at that level
thereafter.
Assumed health care trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
(in thousands)
--------------------------------------------------------------------
1% 1%
Increase Decrease
--------------------------------------------------------------------
Effect on total service and interest cost $ 156 $(126)
Effect on the health care component of the
accumulated postretirement
benefit obligation $1,002 $(853)
--------------------------------------------------------------------
The Company also maintains a noncontributory pension plan for certain
employees whose pension benefits exceed the Section 415 limitations of the
Internal Revenue Code. Pension benefits for this plan follow the vesting
provisions of the funded plan. Funding is not made under this plan until
benefits are paid.
The Company has a profit sharing plan that covers the majority of its
employees, including employees of certain of its subsidiaries. Amounts
determinable under the plan are contributed, in part, to a profit sharing trust
qualified under the Internal Revenue Code, with the remainder paid as cash
bonuses, equity awards and matching 401(k) employee contributions.
The Company has a nonqualified deferred compensation program whereby certain
key employees can elect to defer receipt of all or a portion of their cash
bonuses until retirement, termination, death or disability. The deferred
compensation liabilities incur interest expense at the prime rate.
7. EQUITY INCENTIVE PLANS
The Company maintains two stock-based compensation programs, the Nuveen 1992
Special Incentive Plan (1992 Plan) and the Nuveen 1996 Equity Incentive Plan
(1996 Plan). The 1992 Plan was developed in connection with the Company's
initial public offering of stock and authorized the issuance of an aggregate of
5,980,000 shares of Class A common stock for the grant of equity awards,
including up to 2,340,000 shares of restricted common stock and deferred units.
Under the 1996 Plan, the Company reserved an aggregate of 3,800,000 shares of
Class A common stock for awards. Under both plans, options may be awarded at
exercise prices not less than 100% of the fair market value of the stock on the
grant date, and maximum option terms may not exceed ten years.
In February 1996, the Company awarded 190,000 restricted shares of stock
(including 160,000 shares deferred at the election of the recipients) with a
fair value of $25 per share and a three-year cliff vesting period, pursuant to
the 1996 Plan. The Company further awarded 90,500 shares of restricted stock (of
which 33,500 shares were deferred at the election of the recipients) in 1997
with three-year cliff vesting periods and with a weighted average fair value of
$27.49 per share. During 1998, the Company granted an additional 1,500 shares of
restricted stock (all of which were deferred at the election of the recipients)
with a fair value of $38 per share and a three-year cliff vesting period. All
awards are subject to restrictions on transferability, a risk of forfeiture, and
certain other terms and conditions. The value of such awards is reported as
compensation expense over the shorter of the period beginning on the date of
grant and ending on the last vesting date, or the period in which the related
employee services are rendered. Recorded compensation cost for these awards was
$163,000, $2.4 million and $5.8 million for 1998, 1997 and 1996, respectively.
The Company also awarded certain employees options to purchase the Company's
Class A common stock at exercise prices equal to or greater than the
p.31
34
The Xxxx Nuveen Company
market price of the stock on the day the options were awarded. Options awarded
in 1992, under the 1992 Plan, have vested fully and generally remain exercisable
through May 27, 2002. During 1995, the Company awarded options under the 1992
Plan which vest in quarterly installments through October 1, 1999, and remain
exercisable through May 27, 2002. Options awarded during 1996, 1997 and 1998,
Pursuant to the 1996 Plan, are generally subject to three-and four-year cliff
vesting and expire after ten years. In addition, the Company awarded options to
purchase 798,600 shares of common stock in January 1999 to employees pursuant to
the Company's incentive compensation program for 1998 and for recruiting and
promotion purposes. In accordance with apb Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), no compensation expense has been recognized for
any of the stock options awarded. There are 62,000 shares available for future
equity awards as of December 31, 1998, after consideration of the January 1999
awards.
A summary of the Company's stock option activity for the years ended
December 31, 1998, 1997 and 1996 is presented in the following table and
narrative:
(in thousands, except price data)
------------------------------------------------------
Weighted Average
Shares Exercise Price
------------------------------------------------------
Options outstanding at
December 31, 1995 3,178 $18.11
Awarded 1,464 28.29
Exercised (166) 18.00
Forfeited 0 -
------------------------------------------------------
Options outstanding at
December 31, 1996 4,476 21.63
Awarded 485 29.43
Exercised (453) 18.04
Forfeited (134) 27.59
------------------------------------------------------
Options outstanding at
December 31, 1997 4,374 22.68
Awarded 938 35.50
Exercised (283) 18.05
Forfeited (73) 32.56
------------------------------------------------------
Options outstanding at
December 31, 1998 4,956 $25.23
======================================================
Options exercisable at:
December 31, 1996 2,979 $18.04
December 31, 1997 2,543 $18.09
December 31, 1998 2,319 $18.36
------------------------------------------------------
The options awarded during 1998, 1997 and 1996, with exercise prices equal to
the market price of the stock on the date of grant, have weighted average
exercise prices of $35.08, $27.25 and $25.00, respectively. The options awarded
during 1998, 1997 and 1996, with exercise prices in excess of the stock's grant
date market value, have weighted average exercise prices of $42.67, $37.59 and
$30.00, respectively. Exercise prices for options outstanding as of December 31,
1998, ranged from $18 to $49.20 per share. The weighted average remaining
contractual life of those options is 5.89 years.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) encourages, but does not require, the use
of a fair value based method of accounting for stock-based compensation plans
under which the fair value of stock options is determined on the date of grant
and is amortized to expense over the lesser of the options' vesting period or
the related employee service period. While the Company has elected to account
for its stock-based compensation plans in accordance with APB 25, SFAS 123
requires disclosure of pro forma information regarding net income and earnings
per share as if the provisions of the Statement had been applied and the Company
accounted for its employee stock option awards under the fair value method of
the Statement.
Accordingly, if the Company's compensation cost for employee stock options
awarded had been determined in this manner, the Company's 1998 net income would
have been reduced by $4.9 million, or $.15 per basic and $.14 per diluted
earnings per share. Furthermore, the Company's 1997 and 1996 net income would
have been reduced by $3.3 million and $1.5 million, respectively, translating
into a reduction of $.10 per 1997 basic and diluted earnings per share and a
reduction of $.04 per 1996 basic and diluted earnings per share. The options
awarded during 1998, 1997 and 1996, with exercise prices equal to the market
price of the stock on the date of grant, have weighted average fair values of
$8.23, $6.20 and $5.69 per share, respectively. Options awarded during
p.32
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The Xxxx Nuveen Company
1998, 1997 and 1996, with exercise prices in excess of the stock's grant date
market value have weighted average fair values of $6.26, $5.68 and $4.55 per
share, respectively. The fair value of stock option awards was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions for 1998, 1997 and 1996, respectively: weighted average risk-free
interest rates of 5.6%, 6.4% and 6.0%; dividend yields of 3%; weighted average
expected option lives of 7, 6 and 8 years; and volatility factor of the expected
market price of the Company's common stock of 20% for all three years. SFAS 123
only applies to those equity instruments awarded in fiscal years that begin
after December 15, 1994.
8. ACQUISITIONS AND COMMITMENTS
The Company completed the acquisition of Flagship on January 2, 1997, for a
total purchase price of $71.8 million, before taking into account contingent
consideration. Additional payments in cash and common stock, which are
contingent on the significant future growth in the Company's municipal bond
mutual funds may be made over a four year period ended December 31, 2000.
Contingent consideration for 1998 and 1997 amounted to approximately $2.4
million and $1.0 million, respectively. Goodwill of approximately $70.0 million
is being amortized over approximately 30 years.
On August 31, 1997, the Company acquired Xxxxxxxxxxx for a cash purchase
price of $145 million. The acquisition has been accounted for using the purchase
method of accounting, resulting in approximately $144 million in goodwill for
financial reporting purposes, which is being amortized over approximately 30
years.
Xxxxxxxxxxx established the Xxxxxxxxxxx Financial Services, Inc. 1997 Equity
Incentive Award Plan (1997 Plan) in order to attract and retain officers and
other employees subsequent to the acquisition of Xxxxxxxxxxx by the Company. The
1997 Plan authorizes the issuance to Xxxxxxxxxxx employees of non-qualified
options to purchase shares of a newly created series of Xxxxxxxxxxx common
stock, the non-voting Class B Common Stock. The exercise price for any options
granted under the 1997 Plan must be equal to or greater than the fair market
value of the Xxxxxxxxxxx common stock on the date of grant, as determined and
fixed by a committee of the Xxxxxxxxxxx board of directors on the relevant
valuation date. The Xxxxxxxxxxx Class B Common Stock is not exchangeable for any
common stock or other securities of The Xxxx Xxxxxx Company. The term of each
option is no more than four years from the date of grant. In accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB25), no
compensation expense has been recognized for any of the stock options awarded
under the 1997 Plan. Each option awarded under the 1997 Plan provides that
Xxxxxxxxxxx, or its designee, shall have the right to purchase any or all shares
of Xxxxxxxxxxx Class B Common Stock issued upon exercise of such option at any
time following the six-month period subsequent to the date of exercise, at a
price per share equal to the fair market value most recently determined by the
committee on the valuation date last preceding the date of purchase. As
of December 31, 1998, options to acquire 154,600 shares of Xxxxxxxxxxx Class B
Common Stock have been granted. These options vest in January 2001. The total
number of options authorized under the 1997 Plan is 1,200,000.
9. REDEEMABLE PREFERRED STOCK
On January 2, 1997, in connection with its acquisition of Flagship Resources,
Inc., the Company issued 1.8 million shares of 5% Cumulative Convertible
Preferred Stock to former Flagship shareholders with a redemption value of $45
million. Shares of preferred stock are convertible into approximately 1.65
million shares of the Company's Class A Common Stock on or after January 2,
1999, and are redeemable at the option of the Company at any time on or after
January 2, 2001,
p.33
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The Xxxx Nuveen Company
but not later than January 2, 2007. Dividends on preferred stock are paid
quarterly.
10. COMMON STOCK
A summary of common stock activity for the three-year period ended December 31,
1998, follows:
(in thousands)
------------------------------------------------------------------------
December 31, 1998 1997 1996
------------------------------------------------------------------------
Shares outstanding at
beginning of year 31,783 33,119 36,676
Shares issued under stock options
and other incentive plans 306 506 196
Shares acquired (733) (1,842) (3,753)
------------------------------------------------------------------------
Shares outstanding at end of year 31,356 31,783 33,119
========================================================================
Under the February 1997 share repurchase program, the Company was authorized
to repurchase 3.5 million shares of common stock. As of December 31, 1998, there
were 1.0 million shares remaining to be repurchased under this program.
11. NET CAPITAL REQUIREMENT
Nuveen & Co. 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 December 31, 1998, the
Company's net capital ratio was 2.06 to 1 and its net capital was $27,808,944
which is $23,981,317 in excess of the required net capital of $3,827,627.
12. QUARTERLY RESULTS (UNAUDITED)
The following tables set forth selected quarterly financial information for each
quarter in the two-year period ending December 31, 1998:
(in thousands, except per share data)
--------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
Total revenues $72,469 $76,360 $77,002 $81,704
Net income 19,274 20,232 20,970 23,169
Per common share
Basic EPS .59 .62 .65 .72
Diluted EPS .56 .58 .61 .68
Cash dividends .23 .23 .26 .26
Stock price range
High 365/8 3911/16 411/2 383/16
Low 323/8 353/4 335/8 319/16
--------------------------------------------------------------------
(in thousands, except per share data)
--------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
Total revenues $62,584 $61,846 $67,813 $76,684
Net income 17,802 17,742 18,568 20,068
Per common share
Basic EPS .52 .53 .56 .61
Diluted EPS .50 .51 .54 .58
Cash dividends .21 .21 .23 .23
Stock price range
High 313/8 311/2 351/8 373/4
Low 263/8 285/8 307/16 347/8
--------------------------------------------------------------------
The Xxxx Xxxxxx Company Class A common stock, representing approximately 22%
of the Company's issued and outstanding common stock at December 31, 1998, is
listed on the New York Stock Exchange under the symbol "JNC." There are no
contractual restrictions on the Company's present ability to pay dividends on
its common stock.
p.34
37
The Xxxx Nuveen Company
Report of Independent Auditors
The Board of Directors and Stockholders
The Xxxx Xxxxxx Company:
We have audited the accompanying consolidated balance sheets of The Xxxx Xxxxxx
Company (the Company) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in common stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Xxxx Xxxxxx Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Chicago, Illinois
January 22, 1999
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The Xxxx Nuveen Company
Five Year Financial Summary
(in thousands, unless otherwise indicated)
--------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Revenues:
Investment advisory fees from
assets under management $272,859 $221,635 $185,845 $183,135 $181,918
Underwriting and distribution of
investment products 10,623 12,671 14,566 15,339 18,149
Positioning profits (losses) 300 3,491 (191) 4,981 (8,237)
Investment banking 12,967 13,409 11,098 10,334 11,793
Interest 6,549 10,627 18,640 19,445 13,686
Other 4,237 7,094 2,494 2,973 2,992
--------------------------------------------------------------------------------------------------------
Total revenues 307,535 268,927 232,452 236,207 220,301
--------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 88,885 77,274 71,683 80,366 83,079
Advertising and promotional costs 19,415 18,853 12,641 12,677 16,151
All other 61,498 50,630 30,626 29,394 26,436
--------------------------------------------------------------------------------------------------------
Total expenses 169,798 146,757 114,950 122,437 125,666
--------------------------------------------------------------------------------------------------------
Income before taxes 137,737 122,170 117,502 113,770 94,635
Income taxes 54,092 47,990 44,973 43,150 36,424
--------------------------------------------------------------------------------------------------------
Net income $ 83,645 $ 74,180 $ 72,529 $ 70,620 $ 58,211
========================================================================================================
--------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 2.57 $ 2.23 $ 2.03 $ 1.91 $ 1.54
Diluted $ 2.43 $ 2.13 $ 1.98 $ 1.87 $ 1.52
Return on average equity 25.1% 23.4% 24.4% 23.2% 20.7%
Total dividends per share $ 0.98 $ 0.88 $ 0.78 $ 0.68 $ 0.64
--------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
--------------------------------------------------------------------------------------------------------
Total assets $467,961 $492,232 $355,251 $402,512 $348,847
Total liabilities $118,853 $174,112 $ 83,357 $ 79,656 $ 62,915
Redeemable preferred stock $ 45,000 $ 45,000 - - -
Common stockholders' equity $304,108 $273,120 $271,894 $322,856 $285,932
--------------------------------------------------------------------------------------------------------
NUVEEN MANAGED FUNDS
AND ACCOUNTS (IN MILLIONS)
--------------------------------------------------------------------------------------------------------
Net Assets Under Management:
Mutual funds $ 11,883 $ 10,885 $ 5,930 $ 5,457 $ 4,731
Exchange-traded funds 26,223 26,117 25,434 25,784 23,731
Money market funds 824 970 1,004 1,113 1,242
Managed accounts 16,337 11,622 823 688 343
--------------------------------------------------------------------------------------------------------
Total $ 55,267 $ 49,594 $ 33,191 $ 33,042 $ 30,047
NUVEEN DEFINED PORTFOLIOS (in millions)
--------------------------------------------------------------------------------------------------------
Market value outstanding $ 10,720 $ 12,176 $ 13,571 $ 15,517 $ 16,793
--------------------------------------------------------------------------------------------------------
GROSS SALES (in millions)
--------------------------------------------------------------------------------------------------------
Mutual funds $ 1,553 $ 951 $ 649 $ 179 $ 263
Defined portfolios 809 757 963 1,093 1,235
Exchange-traded funds - 125 - - -
Managed accounts 5,393 1,193 135 346 116
--------------------------------------------------------------------------------------------------------
Total $ 7,755 $ 3,026 $ 1,747 $ 1,618 $ 1,614
========================================================================================================
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The Xxxx Nuveen Company
Directors and Executive Officers
BOARD OF DIRECTORS EXECUTIVE OFFICERS
Xxxxxxx X. Xxxxxxxxxxxx Xxxxxxx X.Xxxxxxxxxxxx
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
Xxxx X. Xxxxxxx Xxxx X. Xxxxxxx
Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Financial Officer
Xxxxxxx X. Xxxx
President Emeritus
Field Museum of Natural History
X. Xxxx Xxxxxxxx
Chairman/Retired
Rock Island Company
Xxxxx X. Xxxxxxxx
Managing Partner/Chief
Executive Officer/Retired
Xxxxxxxx Worldwide
Xxxxxxx X. Xxxxxxxxxxx
Chairman and Chief Executive Officer
The St. Xxxx Companies
Xxxx X. Xxxxx
Executive Vice President and
Chief Financial Officer
The St. Xxxx Companies
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The Xxxx Nuveen Company
Shareholder Information
HEADQUARTERS FORM 10-K
The Xxxx Nuveen Company
000 Xxxx Xxxxxx Xxxxx The annual report to the Securities and Exchange
Chicago, IL 60606 Commission on Form 10-K for the fiscal year ended
000-000-0000 December 31, 1998, will be provided upon written
request to:
Xxxxxxx Xxxxx
TRANSFER AGENT AND REGISTRAR Investor Relations
The Bank of New York The Xxxx Nuveen Company
Church Street Station 000 Xxxx Xxxxxx Xxxxx
P.O. Box 11258 Chicago, IL 60606
New York, NY 10286-1258
0-000-000-0000 ANNUAL MEETING
The annual shareholder's meeting for The Xxxx
STOCK EXCHANGE LISTING Nuveen Company will be Thursday, May 6, 1999, at
New York Stock Exchange 10:30 a.m. at The Northern Trust Company,
trading symbol: JNC 00 Xxxxx XxXxxxx Xxxxxx, Xxxxxxx, Xxxxxxxx.
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41
THE XXXX NUVEEN COMPANY
000 Xxxx Xxxxxx Xxxxx
Xxxxxxx, XX 00000
