UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
_______________________
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-10854
THE ZIEGLER COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1148883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 978-6400
_______________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( ) No ( X )
The number of shares outstanding of the registrant's Common Stock, par value
$1.00 per share, at July 31, 2003 was 2,175,172 shares.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
2003 2002
(In thousands except per share amounts)
ASSETS
Cash and cash equivalents $ 21,502 $ 10,448
Securities owned 11,737 53,888
Receivables 4,231 4,171
Notes receivable 37,261 24,842
Other investments 32,865 31,882
Land, buildings and equipment, at cost,
net of accumulated depreciation of
$14,188 and $13,490, respectively 5,647 5,377
Goodwill and other intangible assets 2,565 2,565
Other assets 4,878 4,626
Total assets $120,686 $137,799
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 5,704 $ 4,682
Securities sold under agreements to repurchase 20,057 21,268
Payable to broker-dealers 3,951 27,686
Accrued compensation 4,997 11,065
Long-term debt 25,062 16,115
Other liabilities and deferred items 9,302 9,454
Total liabilities 69,073 90,270
Minority interest 11,491 7,487
Commitments
Stockholders' equity:
Common stock, $1 par, authorized
7,500 shares, issued 3,544 3,544 3,544
Additional paid-in capital 6,221 6,222
Retained earnings 52,043 51,793
Treasury stock, at cost, 1,369
and 1,352 shares, respectively (21,527) (21,286)
Unearned compensation (159) (231)
Total stockholders' equity 40,122 40,042
Total liabilities and stockholders' equity $120,686 $137,799
See accompanying notes to consolidated financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
June 30, June 30,
2003 2002
(In thousands except per share amounts)
Revenues:
Investment banking $ 8,712 $ 8,804
Investment management and advisory fees 2,862 2,527
Commissions 3,830 2,857
Interest and dividends 1,723 1,327
Gain on sale of operations - 303
Other income 403 458
Total revenues 17,530 16,276
Expenses:
Employee compensation and benefits 9,886 9,688
Communications and data processing 1,451 1,575
Occupancy 1,133 965
Promotional 1,101 1,302
Brokerage commissions and clearing 723 720
Professional and regulatory 612 417
Investment manager and other 430 225
Interest 407 302
Other expenses 454 295
Total expenses 16,197 15,489
Income from operations before income
taxes and minority interest 1,333 787
Minority interest in net (income) loss
of subsidiaries (502) 95
Income from operations before income taxes 831 882
Provision for income taxes 267 288
Net income $ 564 $ 594
Per share data:
Basic and diluted earnings per share $ 0.26 $ 0.26
See accompanying notes to consolidated financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended
June 30, June 30,
2003 2002
(In thousands except per share amounts)
Revenues:
Investment banking $15,694 $13,615
Investment management and advisory fees 5,593 5,066
Commissions 6,529 5,817
Interest and dividends 3,657 2,922
Gain on sale of operations - 303
Other income 1,490 1,363
Total revenues 32,963 29,086
Expenses:
Employee compensation and benefits 18,659 17,427
Communications and data processing 2,893 3,116
Occupancy 2,194 1,912
Promotional 2,140 2,060
Brokerage commissions and clearing 1,336 1,586
Professional and regulatory 1,080 965
Investment manager and other 810 421
Interest 786 679
Other expenses 907 680
Total expenses 30,805 28,846
Income from operations before income
taxes and minority interest 2,158 240
Minority interest in net (income) loss
of subsidiaries (1,033) 338
Income from operations before income taxes 1,125 578
Provision for income taxes 309 73
Net income $ 816 $ 505
Per share data:
Basic and diluted earnings per share $ 0.38 $ 0.22
See accompanying notes to consolidated financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, June 30,
2003 2002
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 816 $ 505
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 768 1,140
Provision for losses 100 -
Gain on sale of equipment (9) -
Gain on sale of operations - (303)
Compensation expense paid in common stock 123 101
Minority interest in net income (loss)
of subsidiaries 1,034 (338)
Changes in assets and liabilities:
Decrease (increase) in:
Securities owned 42,151 58,326
Receivables (60) 795
Other assets (256) (532)
Increase (decrease) in:
Payable to broker-dealers (23,735) (53,395)
Accrued compensation (6,068) (5,545)
Other liabilities and deferred items (154) 253
Net cash provided by operating activities 14,710 1,007
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of equipment 19 -
Payments received on notes receivable 3,531 2,352
Sales/paydowns on other investments 1,718 10,022
Payments for:
Issuance of notes receivable (16,050) (3,433)
Capital expenditures (1,043) (595)
Purchase of other investments (2,701) (500)
Net cash (used in) provided by investing
activities (14,526) 7,846
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
June 30, June 30,
2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes payable $22,186 $14,754
Short-term bank borrowing 8,200 6,500
Issuance of long-term debt 9,150 1,100
Minority interest capital contributions 2,970 3,988
Payments for:
Principal payments of short-term notes
payable (21,164) (13,625)
Repayments of short-term bank borrowing (8,200) (6,500)
Securities sold under agreements to
repurchase (1,211) (9,856)
Principal payments of long-term debt (203) (1,700)
Purchase of treasury stock (292) (3,535)
Cash dividends paid (566) (627)
Net cash provided by (used in) financing
activities 10,870 (9,501)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 11,054 (648)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,448 14,688
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,502 $14,040
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 799 $ 682
Income taxes paid (refunded) during
the period $ 23 $ (79)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Granting of restricted stock from
treasury stock $ 30 $ 412
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
June 30, 2003
Note A -- Basis of Presentation
The consolidated financial statements included herein have been prepared
by The Ziegler Companies, Inc. (the "Parent") and its wholly owned and
partially-owned and controlled subsidiaries (collectively known as the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and the instructions to Form 10-Q. Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. Management believes, however,
that these consolidated financial statements reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
the results for the periods presented. All such adjustments are of a normal
recurring nature. Because certain disclosures have been condensed or omitted
from these consolidated financial statements, these consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's 2002
annual report on Form 10-K. Operating results for the six months ended
June 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. Certain prior year amounts
have been reclassified to conform with current year presentation.
Note B -- Commitments and Contingent Liabilities
In the normal course of business, B. C. Ziegler and Company ("BCZ"), a
wholly owned subsidiary of the Parent, enters into firm underwriting
commitments for the purchase of debt securities. These commitments require
BCZ to purchase debt securities at a specified price. In order to mitigate
the risk of holding recently underwritten debt securities, BCZ attempts to
pre-sell the securities to customers in advance of closing on the
underwriting. BCZ had commitments outstanding to purchase debt securities of
$2,002 at June 30, 2003.
In the normal course of business, Ziegler Healthcare Fund I, LP, a
partially-owned subsidiary of the Company, makes commitments to originate SBA
loans. At June 30, 2003, Ziegler Healthcare Fund I, LP had no outstanding
commitments.
In the normal course of business, the Company is the subject of customer
complaints and is named as a defendant in various legal actions arising from
the securities and other businesses. The Company has established reserves for
potential losses that may result from these customer complaints and legal
actions. Although the outcome of litigation is always uncertain, especially
in the early stages of a complaint or legal action, based on its understanding
of the facts and the advice of legal counsel, management believes that
resolution of these actions will not result in a material adverse effect on
the consolidated financial condition or consolidated results of operations of
the Company. However, if during any period any adverse complaint or legal
action should become probable or be resolved, the results of operations could
be materially affected.
Note C -- Net Capital Requirements
As the Company's registered broker-dealer, BCZ is subject to the
Securities and Exchange Commission Uniform Net Capital Rule (the "Rule"),
which requires the maintenance of minimum net capital. BCZ has elected to use
the alternative method permitted by the Rule, which requires that BCZ maintain
minimum net capital, as defined by the Rule, equal to the greater of $250 or
2% of aggregate debit balances arising from customer transactions, as defined
by the Rule. At June 30, 2003, BCZ had net capital of approximately $9,495
which was approximately $9,245 in excess of its required minimum capital. BCZ
requires net capital in excess of its regulatory minimum in order to enter
into most underwriting transactions. Such net capital requirements could
restrict the ability of BCZ to pay dividends to the Parent.
Note D -- Securities Owned and Other Investments
Securities owned consisted of the following:
June 30, December 31,
2003 2002
Municipal bonds $ 8,338 $49,643
Preferred stock 1,338 1,770
Institutional bonds 1,317 1,708
Other securities 744 767
$11,737 $53,888
Municipal bonds consist primarily of revenue bonds issued by state
and local governmental authorities generally related to healthcare or long-
term care facilities. Institutional bonds consist primarily of bonds issued
by churches and independent schools. The reduction in municipal bonds from
December 31, 2002, to June 30, 2003, is due to the remarketing of variable
rate demand notes and the sale of bonds to retail and institutional investors.
Other investments consisted of the following:
June 30, December 31,
2003 2002
Collateralized mortgage obligations ("CMOs") $20,164 $21,382
EnvestNet common stock 9,500 9,500
Other 3,201 1,000
$32,865 $31,882
Note E -- Payable to Broker-Dealers
BCZ clears its proprietary and customer transactions through other
broker-dealers on a fully disclosed basis. The relationship with these
clearing brokers results in amounts payable for transaction processing,
inventory purchases, and losses on securities transactions, offset by fees
earned, commissions, inventory sales and profits on securities transactions.
The amount payable to the primary clearing broker was $3,951 at June 30,
2003 and relates primarily to the financing of inventory and is collateralized
by securities held in BCZ's inventory with a market value of approximately
$11,062 at June 30, 2003. At December 31, 2002, the amount payable was
$27,586 collateralized by securities with a market value of approximately
$53,163.
Note F -- Short-term Bank Borrowing
The Company has a line of credit of $20 million in place to obtain
short-term funds. The line of credit is used primarily for underwriting
activity and the funding of Federal Housing Administration loan originations,
both on a short-term basis. The Company had no amounts outstanding at
June 30, 2003 or at December 31, 2002.
Note G -- Income Taxes
The principal reason for the difference between the Company's effective
tax rate and the federal statutory rate is the non-taxable interest earned on
municipal bonds.
Note H -- Earnings per Share
The following reconciles the numerators and denominators of the basic and
diluted earnings per share computations for net income for the following
periods ended June 30 (shares in thousands):
For the Three Months Ended
June 30, June 30,
2003 2002
Net income $ 564 $ 594
Basic
Weighted average shares outstanding 2,154 2,245
Basic income per share $0.26 $0.26
Diluted
Weighted average shares outstanding-
Basic 2,154 2,245
Effect of dilutive securities:
Restricted stock 9 11
Weighted average shares outstanding-
Diluted 2,163 2,256
Diluted income per share $0.26 $0.26
For the Six Months Ended
June 30, June 30,
2003 2002
Net income $ 816 $ 505
Basic
Weighted average shares outstanding 2,153 2,318
Basic income per share $0.38 $0.22
Diluted
Weighted average shares outstanding-
Basic 2,153 2,318
Effect of dilutive securities:
Restricted stock 9 9
Weighted average shares outstanding-
Diluted 2,162 2,327
Diluted income per share $0.38 $0.22
Note I -- Stock-Based Compensation
The Company accounts for stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. No stock-based employee compensation cost related to stock
options is reflected in net income, as all stock options granted had an
exercise price equal to or greater than the fair market value of the
underlying common stock on the date of grant. The pro forma effect on net
income and earnings per share, had the Company applied the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation related to stock options, is presented below. The Black-Scholes
option pricing model was used in all calculations.
For the Three Months Ended
June 30, June 30,
2003 2002
Net income, as reported $564 $594
Deduct: Total employee compensation
expense determined under the fair value
based method for stock options,
net of related tax effects 23 28
Pro forma net income $541 $566
Earnings per share:
Basic and diluted - as reported $0.26 $0.26
Basic and diluted - pro forma $0.25 $0.25
For the Six Months Ended
June 30, June 30,
2003 2002
Net income, as reported $816 $505
Deduct: Total employee compensation
expense determined under the fair value
based method for stock options,
net of related tax effects 44 50
Pro forma net income $772 $455
Earnings per share:
Basic and diluted - as reported $0.38 $0.22
Basic and diluted - pro forma $0.36 $0.20
Note J -- Operating Segments
The Company is organized and provides financial services through three
operating segments. These operating segments are Capital Markets, Investment
Services and Corporate. Operating segment results include all direct revenues
and expenses of the operating units in each operating segment as well as an
allocation of indirect administrative and operating costs.
The Capital Markets segment consists of the Company's fixed income and
preferred stock institutional sales and trading, risk management and financial
advisory, and institutional and public finance services. Sales credits
associated with underwritten offerings are reported in the Investment Services
segment when sold through retail distribution channels and in the Capital
Markets segment when sold through institutional distribution channels.
The Investment Services segment sells a wide range of financial products
through its retail branch distribution network, including equity and fixed
income securities, affiliated and non-affiliated mutual funds, annuities,
insurance products, and portfolio management and related administrative
services. The Investment Services segment also provides investment advisory
services to the affiliated mutual funds (the North Track Funds) and asset
management services for institutional and individual clients.
The Corporate segment is principally the Company's corporate investment
and borrowing activities and unallocated corporate revenues and expenses.
Corporate segment investment activities include the other investments
described in Note D; the activities and share of income related to Ziegler
Healthcare Fund I, LP ("ZHF"), an 11% owned Small Business Investment Company
("SBIC"); the operating results for Ziegler Healthcare Capital, LLC ("ZHC"),
the Company's wholly owned management company of the SBIC; and the Company's
proportionate share of an investment in Ziegler Equity Funding I, LLC ("ZEF"),
a 68% owned private equity fund. The remaining 32% of ZEF is owned by
qualified officers and key employees of the Company. The effect on net income
before taxes and after the adjustment for minority interests is reflected
below.
Since there are no comprehensive authorities for management accounting
related to the allocation of administrative expenses which are equivalent to
accounting principles generally accepted in the United States of America, the
information presented is not necessarily comparable with similar information
in other broker-dealer financial statements. In addition, methodologies used
to measure, assign and allocate certain items may change from time-to-time to
reflect, among other things, accounting refinements and changes in the
organization and management structure. Allocations of indirect administrative
and operating costs are based on methodologies which consider the size of the
operation, the number of personnel, and other relevant factors.
Operating segment financial information is as follows:
For the Three Months Ended
June 30, June 30,
2003 2002
Revenues:
Capital Markets $ 6,609 $ 7,258
Investment Services 9,248 7,918
Corporate 1,673 1,100
Total $17,530 $16,276
Net Income (Loss) from Operations
Before Income Taxes:
Capital Markets $ 724 $ 993
Investment Services 254 (19)
Corporate (147) (92)
Total $ 831 $ 882
For the Six Months Ended
June 30, June 30,
2003 2002
Revenues:
Capital Markets $12,073 $11,255
Investment Services 17,022 15,060
Corporate 3,868 2,771
Total $32,963 $29,086
Net Income (Loss) from Operations
Before Income Taxes:
Capital Markets $ 832 $ 285
Investment Services (453) (243)
Corporate 746 536
Total $ 1,125 $ 578
The Company's revenues and net income before taxes presented above are
derived entirely from domestic operations. The Company does not segregate
asset information by operating segment.
Note K -- New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" and establishes new standards regarding
the consolidation of a variable interest entity when the controlling
enterprise does not hold a majority voting interest in the entity.
Interpretation No. 46 applies in the fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. The
Company is evaluating the effect of Interpretation No. 46 on its consolidated
financial statements. The Company does not expect that Interpretation No. 46
will have a material effect on its consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" to amend and clarify financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In addition,
SFAS No. 149 requires that contracts with comparable characteristics be
accounted for similarly. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions) and for hedging
relationships designated after June 30, 2003. The Company does not expect the
adoption will have a material impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 establishes standards regarding the manner in which an issuer classifies
and measures certain types of financial instruments having characteristics of
both liabilities and equity. Pursuant to SFAS No. 150, such freestanding
financial instruments (i.e., those entered into separately from an entity's
other financial instruments or equity transactions or that are legally
detachable and separately exercisable) must be classified as liabilities or,
in some cases, assets. In addition, SFAS No. 150 requires that financial
instruments containing obligations to repurchase the issuing entity's equity
shares and, under certain circumstances, obligations that are settled by
delivery of the issuer's shares be classified as liabilities. SFAS No. 150
amends SFAS No. 128, Earnings Per Share, and SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and nullifies (or partially
nullifies) various EITF (Emerging Issue Task Force) consensuses. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003 and for contracts in existence at the start of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption will
have a material impact on the consolidated statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business and Operating Segments
The Ziegler Companies, Inc. (the "Parent"), through its wholly owned
subsidiaries and partially-owned and controlled subsidiaries (collectively
known as the "Company"), is engaged in financial services activities. These
financial services activities are conducted through three operating segments:
Capital Markets, Investment Services and Corporate.
The Capital Markets segment underwrites fixed income securities to
finance senior living and healthcare providers, religious institutions, and
private schools. Capital Markets' services also include risk management and
financial advisory services, merger and acquisition services, sales and
trading of fixed income securities and preferred stock, and Federal Housing
Administration ("FHA") mortgage loan origination, often in conjunction with
the Company's investment banking services. Capital Markets activities are
conducted primarily through B. C. Ziegler and Company ("BCZ"), except that
Ziegler Financing Corporation ("ZFC") conducts FHA mortgage loan origination
activities. These services are provided primarily to institutions,
corporations, and municipalities.
The Investment Services segment consists of two operating units: Asset
Management and Wealth Management. Asset Management provides investment
advisory services to affiliated mutual funds (the North Track Funds) and
private accounts of institutional and individual clients. Wealth Management
offers a wide range of financial products and financial planning services to
retail and institutional clients through its broker distribution network,
including equity and fixed-income securities, affiliated and non-affiliated
mutual funds, annuities and other insurance products. Wealth Management is the
primary retail distribution channel for religious institution and private
school bonds and other taxable and tax-exempt bonds underwritten by the
Capital Markets segment. Allocated sales credits associated with underwritten
offerings are reported in the Investment Services segment when sold through
the Company's retail distribution channels. Asset Management and Wealth
Management activities are conducted through BCZ.
The Corporate segment consists primarily of the investment and debt
management activities of the Parent and BCZ's unallocated corporate
administrative activities. Certain corporate administrative expenses are
allocated to the Capital Markets and the Investment Services segments using
methodologies which consider the size of the operation, the number of
personnel, and other relevant factors. Corporate segment investment activity
includes the Company's share of the operations of Ziegler Healthcare Fund I,
LP ("ZHF"), a small business investment company ("SBIC") that is in the
business of originating loans to qualified small businesses, primarily for-
profit long-term care companies; Ziegler Healthcare Capital, LLC ("ZHC"), the
management company of ZHF; and ZHP I, LLC ("ZHP"), the general partner of ZHF.
The Company has an 11% ownership share in ZHF and wholly owns ZHP and ZHC.
The Company also owns 68% of Ziegler Equity Funding I, LLC ("ZEF") a private
equity fund whose purpose is to provide funding for the pre-finance
development needs of developmental stage continuing care retirement
communities. The Corporate segment includes the Company's share of the
operations of ZEF. ZEF is also 32% owned by qualified officers and employees
of the Company. Each of these companies is consolidated into the Company's
financial statements.
The general level of interest rates, the prospects for economic recovery
and economic growth, valuations in the equity markets and many other economic
factors impact the investment and financing decisions of the Company's
customers, both institutional and retail. In 2002, investment banking
activity in the form of bond underwriting and sales by the Capital Markets
segment was at its highest level in the past three years as the result of
favorable interest rates. The reductions in prevailing interest rates, the
growing need for senior housing, and, to some extent, the desire to refinance
higher interest rate debt contributed to the increased bond underwriting
volumes in 2002 over previous years.
Historically, the Company has experienced uneven bond underwriting
activity during the year. In general, the Company's underwriting activity is
slower during the early months of the year and higher levels of activity are
experienced in later months as issuers attempt to finalize project financing
activity before the end of the calendar year.
For the first six months of 2003, prevailing interest rates continued
their long decline. The yield on the 10 year US Treasury note was 3.82% on
December 31, 2002, and finished the first half of the year at 3.52%, on June
30, 2003. Despite this continued positive trend for borrowers, the Company
experienced fewer underwriting transactions and lower issuance volumes in the
first half of 2003 compared with the same period in 2002. This decrease in
underwriting transactions is a result of the fact that issuers that are good
candidates for refinancing of outstanding bond issues have generally completed
those refinancings. While there has been some continued refinancing activity,
future bond issuance will likely be for new construction, expansion of
facilities, or a desire to "term out" short term debt at historically low
rates.
The Company continues to build on its "pipeline" of bond underwriting
projects, attempting to identify potential bond issues to underwrite. Market
conditions continue to appear favorable for the issuance of bonds as rates
remain low and bond investors continue to show a strong appetite for fixed
income securities of all types. An increase in prevailing interest rates
could affect the offering pipeline. Because of the current favorable
conditions, the Company experienced a strong increase in secondary bond and
preferred stock trading activity in the first six months of 2003. Increased
demand for fixed income securities came from both institutional and individual
investors. The increase in secondary bond trading business was a direct
reflection of that demand.
The Investment Services segment continues to be affected by the
relatively low equity market valuations and the uncertainty in the securities
markets. These circumstances have created a significant demand from retail
investors for the Company's underwritten bonds. The sale of other products,
such as mutual funds and equity securities, continued to be below a level
desired by the Company. The Company has experienced success in marketing and
selling alternative investments in which the Company has expertise and will
continue to seek out such opportunities.
The Asset Management business has seen some recovery in market values
during 2003, which has contributed to its business. Fees for this business
unit are earned based upon the value of assets under management. As the
market value of assets under management changes, fees change accordingly. The
Company has had success in selling its North Track mutual funds with net sales
of $16,227 in 2003 split approximately evenly between equity and fixed income
portfolios. This positive sales trend follows 2002 during which North Track
experienced net sales of $9,474, but experienced net redemptions of $18,073 in
the last six months of the year. The Company has approximately $2.1 billion
of assets under management at June 30, 2003.
The Corporate segment (whose operations include 100% of the revenues and
expenses of the partially-owned, but consolidated, entities) had interest
revenues increase as the SBIC increased its portfolio of loans. The SBIC has
made solid progress in identifying SBA-qualified borrowers during the course
of its first full year of operations in 2002 and has continued that progress
in 2003. After significant declines, due to principal prepayments, in the
balance of collateralized mortgage obligation ("CMO") investments held by the
Corporate segment during 2002, the pace of those declines slowed in 2003. The
favorable spread between interest earned and the currently low cost of
borrowing contributes favorably to the Company's profitability, although at a
lower level than in 2002. However, this source of net interest income could
decrease if the rate of principal prepayments increases or short-term interest
rates rise.
The Company has an investment in common stock and a note receivable from
The EnvestNet Group, Inc. ("EnvestNet") resulting from the sale of the
Company's former subsidiary, PMC International, Inc. ("PMC"), in 2001.
EnvestNet is a closely held mid to late stage development company. It is
engaged in the business of providing managed account and performance reporting
services. The common stock held by the Company is currently valued at $9,500
in the consolidated financial statements. The note receivable from EnvestNet
is for $3,000 and is due over two years. Under this note, payment of $1,000
is due August 31, 2003, and payment of $2,000 is due August 31, 2004.
Interest is paid monthly. EnvestNet raised additional capital at the
beginning of 2003, and the Company considered the price at which EnvestNet
raised its additional capital in valuing the Company's common stock investment
in EnvestNet. This additional capital was raised by EnvestNet through the
sale of preferred stock in a private placement at a conversion price that was
above the value recorded on the Company's consolidated statement of financial
position for its investment in EnvestNet common stock. The note receivable is
recorded at its face value and EnvestNet is current on all interest payments.
EnvestNet has had difficulty in the current economic environment. It
relies on assets under advisement to generate sufficient revenues to support
operations. To date, these revenues have not been sufficient to fully fund
current operations. EnvestNet uses capital from investors, in addition to
revenues from its regular business operations, to meet its operating expenses.
EnvestNet projections for profitability have been delayed due to the
prevailing economic circumstances and the competitive environment in which it
operates. The Company currently has a deferred gain from the sale of PMC
included on its consolidated statement of financial position of $4,996. The
deferred gain will be recognized as the remaining note receivable is collected
and the common stock of EnvestNet is sold, or the uncertainty of the valuation
of the common stock is removed. The value of both the common stock and the
note receivable as well as the recognition of the deferred gain are subject to
various risks including, but not limited to, the cash requirements of
EnvestNet's operations, competition in its marketplace, equity market
valuations, employee recruitment and retention, and other factors. Given the
level of risks, it is possible that changes in the value of the common stock
and the note receivable may occur in the future and the deferred gain may have
to be adjusted downward or, if significant, the recording of a loss may be
required.
Results of Operations - Three months ended
June 30, 2003 Compared to June 30, 2002
(Dollars in thousands unless specifically indicated)
The overall trends and conditions of the financial markets, specifically,
the fixed income markets and the senior living and healthcare markets, have a
significant effect on the consolidated financial position and results of
operations of the Company. Results of any period should not be considered
representative of future results. While the Company has attempted to
establish a cost structure that is appropriate for anticipated future business
activity, certain fixed operating costs cannot be reduced quickly should
business activity decline quickly. The Company continuously reviews its
business structure and attempts to make adjustments accordingly.
Financial Overview
In the second quarter of 2003, the Company's revenues increased to
$17,530 from $16,276, primarily due to increased revenues from the Investment
Services and Corporate segments. Investment Services increases came primarily
from increased volumes in the Wealth Management business in part due to an
increase in investment consultants since the second quarter of 2002 and an
increase in the sale of alternative investments. Corporate revenues increased
as the result of the increase in revenues of the partially-owned entities,
despite a reduction in interest income from CMO investments. The expenses of
the Company also increased.
Segment Results
The following table summarizes the changes in revenues and income (loss)
from operations before taxes of the Company and its segments. Total revenues
and the Company's share of the results of operations of the partially-owned
entities are included in the Corporate segment.
Increase/
For the three months ended June 30, 2003 2002 (Decrease)
Revenues
Capital Markets $ 6,609 $ 7,258 $ (649)
Investment Services
Asset Management 2,553 2,129 424
Wealth Management 6,695 5,789 906
Total 9,248 7,918 1,330
Corporate 1,673 1,100 573
$17,530 $16,276 $1,254
Net Income (Loss) from Operations
Before Taxes
Capital Markets $ 724 $ 993 $ (269)
Investment Services
Asset Management (49) (27) (22)
Wealth Management 303 8 295
Total 254 (19) 273
Corporate (147) (92) (55)
$ 831 $ 882 $ (51)
All references to the years 2003 and 2002 in the information below refer
to the three months ended June 30 in both years unless otherwise indicated.
Capital Markets Segment
Capital Markets total revenues were $6,609 in 2003 compared to $7,258 in
2002, a decrease of $649. A decline in underwriting revenue, partially offset
by an increase in trading profits is the primary reason for the decline in
total revenues in 2003. Underwriting revenues declined $1,703 to $4,688 in
2003. A total of eight senior, sole-managed, and co-managed municipal
underwriting transactions representing $243 million in bonds issued were
completed in 2003 compared to thirteen transactions representing $387 million
in 2002. The reduction in municipal bond underwritings is primarily due to a
lower number of bond refinancings than in 2002 as many municipal issuers have
completed their refinancings. A total of seven church and school underwriting
transactions representing $44 million were completed in 2003, compared to
seven transaction representing $41 million in 2002. The church and school
market continues to experience bond refinancing transactions. Trading profits
increased $886 to $1,170 in 2003 as the result of a strong trading environment
for bonds.
Capital Markets expenses were $5,885 in 2003 compared to $6,265 in 2002,
a decrease of $380. Expenses other than allocated administrative support
expenses did not change significantly. Allocated administrative support
expenses decreased $357 from $1,212 in 2002 to $855 in 2003 due to increased
activity in other segments and a related higher charge to those segments
reducing the allocation to Capital Markets. The resulting net income from
operations before taxes for Capital Markets in 2003 was $724 compared to $993
in 2002.
Investment Services Segment
The Investment Services segment is made up of the Asset Management and
Wealth Management businesses, both of which are affected by the securities
markets. Revenues and net income were $9,248 and $254, respectively, in 2003
compared to revenues and a net loss of $7,918 and $19, respectively, in 2002.
Asset Management-
Total revenues were $2,553 in 2003 compared to $2,129 in 2002, an
increase of $424 or 20%. Total assets under management averaged approximately
$2.1 billion of assets during 2003, a 5% increase over the prior year balance
of $2.0 billion. Increases in assets under management due to the acquisition
of the Heartland Wisconsin Tax-Exempt Fund in November 2002 were offset by
overall decreases in the market value of assets under management and the net
redemption of mutual fund assets during 2002 and the first quarter of 2003.
However, the North Track Funds had net sales over redemptions of $18,254 in
the second quarter of 2003. As a result, the increase in revenues is
primarily due to a combination of increased assets due to sales as well as
market value increases during the period.
Asset Management expenses increased $446 to $2,602 in 2003 compared to
$2,156 in 2002. The increase is primarily due to an increase in compensation
and benefits and an increase in allocated administrative support expenses.
Compensation and benefits increased $136 due to increased commission payouts
on higher sales volumes, overall compensation increases, and some termination
expenses offset by a reduction in recruitment fees. Allocated administrative
support expenses increased $219 from $332 in 2002 to $551 in 2003. Asset
Management had a net loss from operations before taxes of $49 in 2003 compared
to a net loss before taxes of $27 in 2002.
Wealth Management-
Total revenues of Wealth Management were $6,695 in 2003 compared to
$5,789 in 2002, an increase of $906. The increased revenues are primarily due
to an increase in commissions and trading profits. Commissions increased $529
primarily due to the sale in the second quarter of a specialty subordinated
debt product developed by the Company for an issuer. Trading profits
increased as the result of the sale of secondary bond inventory at an
increased profit due to an improved valuation of bonds carried in inventory,
increased remarketing of bonds put back by investors, and a generally strong
trading environment for bonds. Increased investment management and advisory
fees related to increased assets in that business were offset by a decrease in
the sale of underwritten bonds due to lower levels of underwriting activity.
A $303 gain recognized in 2002 on the sale of the insurance agency in 2001
also contributed to the change in revenues between the two quarters. The gain
on the insurance agency in 2002 was related to a contingent payment which
reflected the final payment on the sale.
Total Wealth Management expenses were $6,392 in 2003 compared to $5,781
in 2002, an increase of $611. Employee compensation and benefits increased
$166 primarily due to increased commission expense on higher revenues and the
increased cost of new broker compensation arrangements. Investment manager
fees increased $206 due to an increase in assets associated with the
investment management and advisory business. Other expense increases were
primarily related to increased office remodeling as the Company standardizes
its retail offices, increased promotional expenses and increased professional
fees, primarily legal expenses. Allocated administrative support expenses
decreased $36 from $330 in 2002 to $294 in 2003. Wealth Management had net
income before taxes of $303 in 2003 compared to $8 in 2002.
Corporate Segment
Corporate revenues were $1,673 in 2003 compared to $1,100 in 2002. A
large component of revenues was from interest and dividends which were $1,361
in 2003 compared to $920 in 2002. Interest on the government agency-backed
CMOs decreased $208 to $401 between years as the result of declining principal
balances due to principal paydowns on that investment. However, the overall
increase in interest and dividends is the result of an increase of $664 in
interest income from the increase in the size of the loan portfolio of the
SBIC, the Company's partially-owned entity. Trading profits also increased
$200 as the result of a payment on an asset-backed security that had
previously been written-down. Revenues of the minority interests included in
total Company revenues were $934 in 2003 compared to $169 in 2002.
Total Corporate segment expenses, which are prior to the allocation of
administrative support expenses, were $3,019 in 2003 compared to $3,160 in
2002. The small decline in expenses is due to the assumption of certain
direct costs by the other segments totaling $345 offset by an increase in
auditing and legal expense associated with increased regulatory requirements
and increased interest expense in the SBIC, the Company's partially-owned
entity, as the result of increased long-term debt. Joint costs allocated to
the other segments totaled $1,700 in 2003 compared to $1,874 in 2002. The
change in allocations is the result of increased activity in the Corporate
segment which increases related expenses associated with that activity and
reduces the expenses allocated to the other segments. The adjustment for the
minority-owned share of income in 2003 was $502 compared to a reduction of the
minority share of the loss of $95 in 2002. The resulting Corporate net loss
from operations before taxes after allocation of administrative support
expenses and adjustment for minority interests was $147 in 2003 compared to a
loss of $92 in 2002.
Results of Operations - Six months ended
June 30, 2003 Compared to June 30, 2002
(Dollars in thousands unless specifically indicated)
Financial Overview
In the first six months of 2003 the Company's revenues increased to
$32,963 from $29,086, due to increased sales activity in the Wealth Management
business related to the sale of bonds, particularly secondary market bonds.
The Capital Markets segment increased revenues primarily as the result of
increases in trading income and the Asset Management business had increased
revenues due to sales and market value increases. Corporate revenues
increased primarily as the result of interest income from the partially-owned
entities.
Segment Results
The following table summarizes the changes in revenues and income (loss)
from operations before taxes of the Company and its segments. Total revenues
and the Company's share of the results of operations of the partially-owned
entities are included in the Corporate segment.
Increase/
For the six months ended June 30, 2003 2002 (Decrease)
Revenues
Capital Markets $12,073 $11,255 $ 818
Investment Services
Asset Management 4,787 4,348 439
Wealth Management 12,235 10,712 1,523
Total 17,022 15,060 1,962
Corporate 3,868 2,771 1,097
$32,963 $29,086 $3,877
Net Income (Loss) from Operations
Before Taxes
Capital Markets $ 832 $ 285 $ 547
Investment Services
Asset Management (165) 66 (231)
Wealth Management (288) (309) 21
Total (453) (243) (210)
Corporate 746 536 210
$ 1,125 $ 578 $ 547
All references to the years 2003 and 2002 in the information below refer
to the six months ended June 30 in both years unless otherwise indicated.
Capital Markets Segment
Capital Markets total revenues were $12,073 in 2003 compared to $11,255
in 2002, an increase of $818. Although there were fewer total underwriting
transactions in 2003 compared to 2002, total bond issuance volumes were
similar. In particular, a single underwriting transaction for the issuance of
$183 million of municipal bonds was the primary reason for the substantially
similar revenues of $8,734 in 2003 compared to $9,070 in 2002 on fewer
transactions. A total of 14 senior, sole-managed, and co-managed municipal
underwriting transactions representing $629 million in bonds issued were
completed in 2003 compared to 22 transactions representing $634 million in
2002. A total of 11 church and school underwriting transactions representing
$65 million were completed in 2003, compared to 11 transactions representing
$63 million in 2002. Trading profits increased $1,138 to $2,069 in 2003 as
the result of a strong trading environment for bonds.
Capital Markets expenses increased $271 from $10,970 in 2002 to $11,241
in 2003. The increase in expenses is primarily attributable to increases in
employee compensation and benefits of $329 partially offset by reductions in
several other categories of expense. Employee compensation and benefits
increases are primarily related to increased commissions on higher trading
volumes. Total expenses for allocated administrative support were $2,079 in
2003 compared to $2,102 in 2002. The resulting net income from operations
before taxes for Capital Markets in 2003 was $832 compared to $285 in 2002.
Investment Services Segment
The Investment Services segment is made up of the Asset Management and
Wealth Management businesses, both of which are impacted by the securities
markets. Revenues and net losses were $17,022 and $453, respectively, in 2003
compared to $15,060 and $243, respectively, in 2002.
Asset Management-
Total revenues were $4,787 in 2003 compared to $4,348 in 2002, an
increase of $439 or 10%. Asset Management earns a management fee on the
assets under management. Total assets under management averaged approximately
$2.1 billion of assets during 2003, an approximate 5% increase over the same
period in 2002. Increases in assets under management due to the acquisition
of the Heartland Wisconsin Tax-Exempt Fund in November 2002 were offset by
overall decreases in the market value of assets under management and the net
redemption of mutual fund assets during 2002. Although the North Track Funds
had net sales over redemptions in the full year of 2002 of $9,474, during the
last nine months of 2002, the North Track Funds had net redemptions of $19,190
offsetting strong sales earlier in the year. However, the North Track Funds
had net sales over redemptions of $16,227 in the first six months of 2003. As
a result, the increase in revenues is primarily due to a combination of
increased assets due to sales as well as market increases and the related
increases in management fees received by the Company.
Asset Management expenses increased $670 to $4,952 in 2003 compared to
$4,282 in 2002. The increase is primarily due to an increase in compensation
and benefits, interest expense on the debt incurred to facilitate the
acquisition of the Heartland Tax-Exempt Fund, expense reimbursement to the
North Track Funds, and allocated administrative support expenses.
Compensation and benefits increased $215 due to increased commission payouts
on higher sales volumes, overall compensation increases, and some termination
expenses offset by a reduction in recruitment fees. Allocated administrative
support expenses increased $248 from $706 in 2002 to $954 in 2003. Asset
Management had a net loss from operations before taxes of $165 in 2003
compared to net income from operations before taxes of $66 in 2002.
Wealth Management-
Total revenues of Wealth Management were $12,235 in 2003 compared to
$10,712 in 2002, an increase of $1,523. The increased revenues are primarily
due to an increase in trading profits of $1,173. The sale of secondary bond
inventory at an increased profit due to an improved valuation of bonds carried
in inventory, increased remarketing of bonds put back by investors and a
generally strong trading environment for bonds all contributed to the
increased trading profits. Investment management and advisory fees increased
$426 as the result of an increase in assets associated with this business. An
increase in commissions associated with the sale of a specialty subordinated
debt product developed by the Company was offset by the reduction associated
with the gain of $303 recognized on the sale of the insurance agency in 2001.
The gain on the insurance agency recognized in 2002 was related to a
contingent payment which reflected the final payment on the sale.
Total Wealth Management expenses were $12,523 in 2003 compared to $11,021
in 2002, an increase of $1,502. Employee compensation and benefits increased
$543 primarily due to increased commission expense on higher revenues and the
increased cost of new broker compensation arrangements. Investment manager
fees increased $389 due to the increased investment management and advisory
business. Other expense increases were primarily related to increased office
remodeling as the Company standardizes its retail offices and increased
promotional expenses. Allocated administrative support expenses increased $38
from $700 in 2002 to $738 in 2003. Wealth Management had a net loss from
operations before taxes of $288 in 2003 compared to a loss before taxes of
$309 in 2002.
Corporate Segment
Corporate revenues were $3,868 in 2003 compared to $2,771 in 2002. A
large component of revenues was from interest and dividends which were $2,962
in 2003 compared to $1,966 in 2002. Interest on the government agency-backed
CMOs decreased $495 between years as the result of the declining principal
balances due to principal paydowns on that investment. However, the overall
increase in interest and dividends is the result of an increase of $1,237 in
interest income from the increase in the size of the loan portfolio of the
SBIC and a payment on an asset-backed security that had previously been
written-down. Corporate revenues also increased due to the return on a
partnership investment of ZEF. Revenues of the minority interests included in
total Company revenues were $2,327 in 2003 compared to $295 in 2002.
Total Corporate segment expenses, which are prior to the allocation of
administrative support expenses, were $5,861 in 2003 compared to $6,081 in
2002. The decline in expenses is due to the assumption of certain direct
costs by the other segments totaling $561 offset by an increase in auditing
and legal expense associated with increased regulatory requirements and
increased interest expense in the SBIC as the result of increased long-term
debt. Joint costs allocated to the other segments totaled $3,771 in 2003
compared to $3,508 in 2002. The increased allocation in 2003 is primarily due
to a cost rebate of $341 received in 2002 which was passed on to the other
segments through the allocation. This increase was partially offset by
increased activities and the related increased retention of expenses in the
Corporate segment. The adjustment for the minority-owned share of income in
2003 was $1,033 compared to a reduction of the minority share of the loss of
$338 in 2002. The resulting Corporate net income from operations before taxes
after allocation of administrative support expenses and adjustment for
minority interests was $746 in 2003 compared to $536 in 2002.
Liquidity and Capital Resources
(Dollars in thousands)
The Company is in the business of providing financial services. Adequate
capital and liquidity are essential elements of the Company's businesses,
especially with respect to underwriting activities. The Company must maintain
sufficient liquidity to operate its businesses as well as meet the regulatory
requirements of its broker-dealer subsidiary, BCZ.
A significant means of financing the Company's BCZ operations is the
financing obtained through BCZ's clearing broker. BCZ is able to finance its
securities inventory through its clearing broker under customary margin
arrangements using its securities owned as collateral. At June 30, 2003, BCZ
had a balance due to its clearing broker of $3,951 which was collateralized by
$11,062 of securities owned by BCZ and held by the clearing broker. BCZ is
able to trade the securities used as collateral and settles daily with the
clearing broker.
Additionally, BCZ acts as a remarketing agent for approximately $2.53
billion of municipal variable rate demand notes ("VRDNs"), most of which BCZ
previously underwrote. A total of approximately $2.5 billion can be tendered
to BCZ at the option of the holder on seven days advance notice and
approximately $35 million can be tendered without notice. The obligation of
the municipal borrower to pay for tendered VRDNs is supported by a third party
liquidity provider, such as a commercial bank. In order to avoid utilizing
the third party liquidity provider, municipal borrowers contract with BCZ to
remarket the tendered VRDNs. In its capacity as remarketing agent, BCZ may
purchase and hold the VRDNs as part of its remarketing efforts. Amounts
purchased as securities owned are generally held for less than two weeks. BCZ
finances its inventory of VRDNs acquired pursuant to its remarketing
activities through its clearing broker under the clearing broker's margin
financing arrangements. There were no VRDNs held as part of securities owned
at June 30, 2003. There were $19,800 of VRDNs held as part of securities
owned at December 31, 2002.
BCZ is subject to the requirements of the Securities and Exchange
Commission Uniform Net Capital Rule, which is designed to measure the general
financial soundness and liquidity of broker-dealers. At June 30, 2003, BCZ
had net capital of approximately $9,495 which exceeded the minimum net capital
requirements by approximately $9,245. Such net capital requirements could
restrict the ability of BCZ to pay dividends to the Parent. BCZ requires net
capital in excess of its regulatory minimum in order to enter into most
underwriting transactions which varies with the transaction. In the opinion
of management, the current level of BCZ's net capital is adequate for the
conduct of its business activities.
The Parent and BCZ also share a revolving loan agreement in the amount of
$20,000. The loan agreement is in the form of a demand note due April 29,
2004. The revolving loan agreement has been renewed annually by the bank.
The revolving loan agreement has restrictive covenants requiring, among other
things, a specified level of net worth and a compensating balance of $330.
The Company has maintained compliance with all applicable covenants on the
loan agreement. BCZ borrowed $8,200 under this agreement in 2003, which was
repaid. There have been no borrowings under this agreement by the Parent in
2003. There were no borrowings outstanding under this agreement by either the
Parent or BCZ at December 31, 2002.
The Parent also finances government agency-backed CMOs using a securities
sold under agreement to repurchase arrangement commonly referred to as a
repurchase agreement. The CMOs serve as collateral for the repurchase
agreement. As collateral is paid down, the counterparty collects the
payments, reduces the liability for the repurchase agreement covered by the
collateral, and remits the balance to the Parent. The Parent earns the
difference between the interest earned on the CMOs and the interest paid for
the repurchase agreement.
A source of cash for the Parent has been and continues to be the issuance
of unrated commercial paper classified as short-term notes payable on the
Consolidated Statements of Financial Condition. These notes have varying
maturities up to 270 days with the majority of notes being less than 60 days.
Through June 30 2003, a total of $22,186 of notes were issued and $21,164 were
repaid. The total balance of short-term notes payable outstanding was $5,704
as of June 30, 2003. The short-term notes payable are sold directly to
customers and are limited by the availability of customers who wish to invest
in these unrated short-term notes payable at the rates offered by the Company.
The Company uses this facility as a source of additional liquidity and to
reduce its reliance on higher interest rate borrowing alternatives.
Ziegler Healthcare Fund I, LP ("ZHF") is a limited partnership in which
the Company has an 11% direct and indirect interest. ZHF has qualified as a
Small Business Investment Company ("SBIC") with the Small Business
Administration ("SBA"). As an SBIC, ZHF is able to lend funds to qualifying
small businesses using its own capital and funds borrowed from the SBA on
favorable terms. In 2001, the SBA granted ZHF leverage of up to $38.2
million. At June 30, 2003, ZHF had $32,097 of outstanding loans to small
businesses and owed $23,240 on debentures due to the SBA. The loans to small
businesses and the debentures to the SBA increased $15,120 and $9,150 in 2003,
respectively, through June 30, 2003. During 2003 there have been $1,232 of
principal payments received on the notes receivable. The interest received on
the notes receivable is sufficient to fund the interest due on the debentures
as well as provide for administrative expenses and a return to investors for
contributed capital. Repayment terms on the notes to the qualifying small
businesses, including prepayment penalties, are structured to approximately
correspond to the repayment terms on the debentures due the SBA. Prepayments
of notes can also be redeployed to future notes being originated. At June 30,
2003, ZHF had a remaining leverage commitment from the SBA of up to $14.95
million. The Company's obligation as a subscribing investor to the
partnership is limited to its commitment to the partnership of $2,800, of
which $1,903 has already been funded as of June 30, 2003.
ZEF is a partially-owned private equity fund which is also included in
the Consolidated Financial Statements of the Company. The Parent has a
remaining commitment to ZEF totaling approximately $2.8 million at June 30,
2003, which takes into consideration loans to employees. All employee loan
arrangements were established prior to the Sarbanes-Oxley Act. The timing of
the payment of the commitment is dependent upon the funding requirements of
ZEF. Funding requirements are determined by ZEF based upon the identification
of suitable investments to be made. No funding has occurred to date in 2003.
The funding of the remaining commitment will be offset by returns on the
investments in ZEF and the scheduled reduction of loans extended to employees.
ZFC and BCZ, as subsidiaries of the Parent, have intercompany borrowing
arrangements with the Parent to obtain or provide financing on a short-term
basis, subject to regulatory requirements of each of the subsidiary entities.
The Parent relies on its own cash balances or obtains funds from its revolving
loan agreement to fund loans to either subsidiary. The Parent lends on a
subordinated basis to BCZ in the event of a need for a temporary increase in
capital for its broker-dealer business, as required by regulatory rules. This
form of subordinated lending has not been used in 2003 to date. ZFC, whose
activities include FHA loan origination, generally finances its activities
from its own resources, through intercompany borrowings with the Parent, and
by arrangements with other parties involved in the FHA transaction. No loans
to ZFC have been done to date in 2003.
The Company's overall funding needs are periodically reviewed to ensure
that it has adequate resources to support the anticipated future operations of
its businesses. The Company's cash and cash equivalent position allows some
degree of flexibility in its business activities. In the opinion of
management, the Company's capital resources and available sources of credit
are adequate for present and anticipated future operations. The Company
intends to investigate potential acquisition opportunities as a means of
expanding its businesses. Such opportunities may require the Company to
arrange for additional sources of funding or the issuance of the Company's
common stock. There is no assurance that additional sources of funding will
be available.
The Company repurchases its own common stock from time-to-time. In
January 2003, the Company's board of directors approved the future purchase of
up to 100,000 shares of Company stock in market or private transactions, under
terms considered reasonable by management. The Company repurchased 20,113
shares in 2003 under this approval for a total of $292 through June 30, 2003.
Of this total, purchases in the second quarter were 1,000 shares for $15. The
Company will evaluate the future purchase of its shares as opportunities
arise, after giving consideration to cash availability, liquidity needs, and
other relevant factors.
Contractual Obligations
The Company has contractual obligations to make future payments in connection
with short-term and long-term debt and lease agreements for offices and
equipment. The contractual obligations of the Company are included in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report for 2002. There have been no
significant changes to the information disclosed in the Annual Report other
than the increases in the debentures due the SBA from ZHF as described above.
Substantially all increases in 2003 in the debentures are due in more than
five years.
Critical Accounting Policies
Accounting policies play an integral role in the preparation of the
Company's Consolidated Financial Statements in accordance with accounting
principles generally accepted in the United States of America. See Note 1 of
Notes to Consolidated Financial Statements in the Company's Annual Report for
2002 for a discussion of significant accounting policies and other relevant
information. Certain critical accounting policies require us to make
estimates and assumptions that affect the amount of assets, liabilities,
revenues and expenses reported in the Consolidated Financial Statements. Due
to their nature, estimates involve judgment based upon available information.
Therefore, actual results or amounts could differ from estimates and the
differences could have a material impact on the Company's Consolidated
Financial Statements. The critical accounting policies identified by
management in the Company's Annual Report for 2002 are (i) valuation of
financial instruments, (ii) valuation of intangible assets and goodwill, and
(iii) estimation of reserves for losses and contingencies. See Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's Annual Report for 2002 for discussion of these critical
accounting policies.
Forward Looking Statements
This report contains, and other disclosures that we make from time to
time may contain, forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "anticipate,"
"believe," "continue," "estimate," "expect," "goal," "objective," "outlook,"
"could," "intend," "may," "might," "plan," "potential," "predict," "should,"
or "will" or the negative of these terms or other comparable terminology
signify forward-looking statements. You should read statements that contain
these words carefully because they discuss our future expectations; contain
projections of our future results of operations or our financial condition;
or state other forward-looking information.
Forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance or
achievements to be materially different from any future results, performance
or achievements expressed or implied by any forward-looking statement.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results. In addition to
the assumptions and other factors referenced specifically in connection with
such statements, the following factors among others, could impact our business
and financial prospects and affect our future results of operations and
financial condition: the overall financial health of the securities industry,
as well as the strength of the healthcare sector of the U.S. economy and the
municipal securities marketplace, a significant increase in interest rates,
the ability of the Company to distribute securities it underwrites, the
turnover of inventory, the market value of mutual fund portfolios and separate
account portfolios advised by the Company, the volume of sales by its retail
brokers, the outcome of pending litigation, and the ability to attract and
retain qualified employees.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Risk is an inherent part of the Company's business activities. The
potential for changes in value of the Company's financial instruments is
referred to as "market risk." Market risk to the Company arises from changes
in interest rates, credit spreads and other relevant factors.
Interest Rate Risk
Interest rate risk, one component of market risk, arises from holding
interest sensitive financial instruments such as municipal, institutional, and
corporate bonds, and certain preferred equities. The Company manages its
exposure to interest rate risk by monitoring its inventory with respect to its
total capitalization and regulatory net capital requirements. The Company's
inventory of securities is marked to market and, accordingly, represents
current value with no unrecorded gains or losses in value. While a
significant portion of the Company's securities may have contractual
maturities in excess of several years, the inventory, on average, turns over
frequently during the year. Accordingly, the turnover of inventory mitigates
the exposure to interest rate risk.
The Company's other investments include government-agency backed CMOs
issued by the Government National Mortgage Association and the Federal
National Mortgage Association. These investments have a fixed rate of
interest and are subject to scheduled and early prepayments. The Company
finances the CMOs using a repurchase agreement. The Company is exposed to the
risk that the cost of financing, which is based on short-term rates adjusted
monthly, would exceed the interest received on the CMOs, which is a fixed
coupon extending to maturity. Management is of the opinion that the spread
between the rate of interest earned and paid is sufficient to mitigate the
risk of loss in net interest received versus paid. Management continuously
reviews these positions for an adequate spread in interest rates.
Equity Price Risk
Equity price risk results from exposure to changes in the prices of
equity securities. The Company faces equity price risk with respect to the
fees it earns on the portfolio of assets it manages for clients. As of June
30, 2003, the Company managed a portfolio with an aggregate value of
approximately $2.1 billion in the form of separately managed and mutual fund
accounts. Of the total, $697 million relates to equity securities portfolios.
Declines in the equities market could adversely affect the amount of fee based
revenues. While this exposure is present, quantification remains difficult
due to the number of other variables affecting fee income. In general, a
reduction in assets will cause a reduction in revenue of approximately the
same proportion. Interest rate changes can also have an effect on fee income
as it relates to the value of fixed income securities portfolios.
In addition to the CMOs noted above, other investments also include
common stock in the form of the Company's investment in The EnvestNet Group,
Inc. ("EnvestNet") and partnership investments owned by ZEF. There is no
ready market for these securities; accordingly, the Company has established
procedures to periodically review these securities for proper valuation. See
"Results of Operations" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
The table below provides information about the Company's financial
instruments as of June 30, 2003 that are sensitive to market risk. For
securities owned and debt obligations, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. For
common stock and partnership interests, the table presents the cost and fair
value of the investments. The common stock is listed as not resulting in any
regular cash flows during the next five years, although cash flows may occur
if the common stock is sold or dividends are paid. The partnership interest
is expected to provide a return of capital plus earnings in the periods
specified. Other equity interests is primarily an investment of ZHF (the
SBIC) which is currently expected to be short-term in nature and will be sold
when a suitable purchaser is identified. The table specifies the current
expectation of the cash flows, but makes no assumptions or estimates as to
earnings. Trading accounts are shown in the caption "Securities Owned" and
non-trading accounts are shown in all other captions.
Trading and Non-Trading Portfolio
Expected Maturity Dates
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(U.S. Dollars in Thousands)
ASSETS
Securities Owned - Fixed Rate
Municipal bond issues $ - $ 18 $ 5 $ - $ 25 $10,456 $10,504 $ 8,338
Weighted average interest rate 6.29% 4.00% 4.55% 5.23%
Preferred Stock - - - - - 1,351 1,351 1,338
Weighted average interest rate 6.56%
Institutional bonds - - 12 - 5 1,352 1,369 1,317
Weighted average interest rate 4.46% 4.75% 6.65%
Other 30 - - - - 676 706 744
Weighted average interest rate 4.50% 1.21%
Notes Receivable
SBA Qualified Borrowers(1) 232 1,011 9,541 4,285 7,423 9,605 32,097 32,097
Weighted average interest rate 12.81% 12.80% 12.79% 12.70% 12.72% 12.58%
Other 3,323 373 407 365 196 500 5,164 5,164
Weighted average interest rate 8.15% 2.82% 2.60% 2.15% 1.07% 5.15%
Other Investments - CMOs(2) - - - - - 20,164 20,164 20,164
Weighted average interest rate 7.87%
Other Investments - EnvestNet
Common Stock - - - - - 9,500 9,500 9,500
Other Investments - Partnership
Interest 500 - - - - - 500 500
Other investments - Other Equity
Interests(3) - 2,700 - - - 1 2,701 2,701
LIABILITIES
Short-Term Notes Payable(4) 5,704 - - - - - 5,704 5,704
Weighted average interest rate 2.26%
Securities Sold Under Agreements to
Repurchase(2 and 4) 20,057 - - - - - 20,057 20,057
Weighted average interest rate 1.52%
Long-Term Debt
SBA Debentures(5) - - - - - 23,240 23,240 23,240
Weighted average interest rate 5.81%
Bank Term Loan 202 405 405 405 405 - 1,822 1,822
Weighted average interest rate 5.59% 5.59% 5.59% 4.80% 4.80%
(1) These balances are notes receivable of ZHF, the partially-owned entity.
(2) Assumes no prepayment. When prepayments occur, the corresponding debt used to finance
these investments will decrease by a similar amount.
(3) This balance is primarily related to an equity investment held by ZHF, the partially-owned
entity, and is based upon the current intentions of management to sell the equity interest.
(4) The information includes actual interest rates at June 30, 2003. The short-term repurchase
agreements are likely to be renewed with the lenders when due and are, therefore, listed as
maturing after 2007. The future interest rates cannot be predicted.
(5) This balance is a liability of ZHF, the partially-owned entity.
Material limitations exist in determining the overall net market risk exposure
to the Company. The information presented can be affected by many assumptions,
including the levels of market interest rates, prepayments of principal on notes
and other investments, the turnover of securities owned, the credit quality of
obligors and issuers, and other factors. Therefore, the above information should
not be relied upon as indicative of future actual results.
Item 4. Controls and Procedures
Disclosure Controls and Procedures: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
the end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, also conducted an evaluation of the Company's internal control over
financial reporting to determine whether any changes occurred during the
quarter covered by this report that have materially affected or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during the
quarter covered by this report.
PART II. OTHER INFORMATION
Items 1 through 3. Not applicable.
Item 4. Results of Votes of Security Holders
The Registrant held an annual meeting on Tuesday, April 22, 2003 for
which a proxy statement was sent to shareholders of record at the
close of business on March 14, 2003. For a description of the
results please see the Registrant's Form 10-Q for the quarter ended
March 31, 2003.
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See the Exhibit Index following the signature page,
which is incorporated herein by reference.
(b) Reports on Form 8-K:
On April 22, 2003, the Registrant furnished a Current
Report on Form 8-K dated April 22, 2003, indicating the issuance
of a press release announcing its preliminary financial results
for the first quarter ended March 31, 2003. A copy of the press
release was attached to the Current Report.
On July 29, 2003, the Registrant furnished a Current
Report on Form 8-K dated July 29, 2003, indicating the issuance
of a press release announcing its preliminary financial results
for the second quarter ended June 30, 2003. A copy of the press
release was attached to the Current Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ZIEGLER COMPANIES, INC.
(Registrant)
Dated: August 14, 2003 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: August 14, 2003 By /s/ Gary P. Engle
Gary P. Engle
Sr. Vice President/CFO
The Ziegler Companies, Inc.
(the "Registrant")
(Commission File No. 1-10854)
EXHIBIT INDEX
to
FORM 10-Q QUARTERLY REPORT
For the quarter ended June 30, 2003
Exhibit
Number Description
31.1 Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
2
6
23
24
25
29