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, 2002
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 ( )
The number of shares outstanding of the registrant's Common Stock, par
value $1.00 per share, at July 31, 2002 was 2,198,788 shares.
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2002 2001
(In thousands except per share amounts) (Unaudited)
ASSETS
Cash $ 2,391 $ 1,798
Short-term investments 11,649 12,890
Total cash and cash equivalents 14,040 14,688
Securities inventory 40,110 98,436
Accounts receivable 3,545 4,340
Notes receivable 10,645 9,219
Other investments 38,655 48,177
Land, buildings and equipment, at cost,
net of reserves for depreciation of
$12,962 and $12,056, respectively 4,830 5,455
Other assets 6,211 5,641
Total assets $118,036 $185,956
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term notes payable $ 4,503 $ 3,375
Securities sold under agreements to repurchase 28,014 37,870
Payable to clearing broker 25,694 79,089
Accrued compensation 3,342 8,887
Bonds payable 2,700 3,300
Other liabilities and deferred items 9,574 9,321
Total liabilities 73,827 141,842
Minority interest 4,910 1,259
Commitments
Shareholders' equity
Common stock, $1 par, 7,500 shares authorized,
3,544 shares issued 3,544 3,544
Additional paid-in capital 6,222 6,250
Retained earnings 51,049 51,172
Treasury stock, at cost, 1,343
and 1,143 shares, respectively (21,146) (18,074)
Unearned compensation (370) (37)
Total shareholders' equity 39,299 42,855
Total liabilities and shareholders' equity $118,036 $185,956
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
June 30, June 30,
2002 2001
(In thousands except per share amounts)
Revenues:
Investment banking $ 8,804 $ 5,280
Commissions 2,857 3,849
Investment management and advisory fees 2,527 8,263
Interest and dividends 1,327 1,241
Gain on sale of operations 303 851
Other income 458 2,455
Total revenues 16,276 21,939
Expenses:
Employee compensation and benefits 9,688 9,997
Communications and data processing 1,575 2,709
Promotional 1,194 1,213
Occupancy 965 1,193
Brokerage commissions and clearing 828 972
Professional and regulatory 417 352
Interest 302 697
Investment manager and other 225 3,451
Other expenses 295 374
Total expenses 15,489 20,958
Income from operations before income taxes
and minority interest 787 981
Minority interest in net loss of subsidiaries 95 -
Income from operations before income taxes 882 981
Provision for income taxes 288 399
Net income $ 594 $ 582
Per share data:
Basic and diluted earnings per share $ 0.26 $ 0.24
The accompanying notes to consolidated financial statements
are an integral part of these statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended
June 30, June 30,
2002 2001
(In thousands except per share amounts)
Revenues:
Investment banking $13,615 $10,557
Commissions 5,817 8,017
Investment management and advisory fees 5,066 16,285
Interest and dividends 2,922 2,654
Gain on sale of operations 303 851
Other income 1,363 3,311
Total revenues 29,086 41,675
Expenses:
Employee compensation and benefits 17,427 19,295
Communications and data processing 3,116 5,077
Promotional 2,060 1,923
Occupancy 1,912 2,249
Brokerage commissions and clearing 1,586 2,068
Professional and regulatory 965 894
Interest 679 1,419
Investment manager and other 421 6,895
Other expenses 680 530
Total expenses 28,846 40,350
Income from operations before income taxes
and minority interest 240 1,325
Minority interest in net loss of subsidiaries 338 -
Income from operations before income taxes 578 1,325
Provision for income taxes 73 535
Net income $ 505 $ 790
Per share data:
Basic and diluted earnings per share $ 0.22 $ 0.33
The accompanying notes to consolidated financial statements
are an integral part of these statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, June 30,
2002 2001
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 505 $ 790
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,140 1,809
Gain on sale of land and equipment - (273)
Gain on sale of operations (303) (851)
Unrealized gain on securities inventory (214) (232)
Compensation expense paid in stock 101 142
Minority interest in subsidiary losses (338) -
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable 795 (607)
Accrued income taxes receivable - 2,877
Securities inventory 58,540 (11,027)
Other assets (532) (72)
Increase (decrease) in:
Payable to broker-dealers and
clearing organizations (53,395) 17,585
Accrued compensation (5,545) (3,818)
Other liabilities and deferred items 253 (1,160)
Net cash provided by operating activities 1,007 5,163
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of building - 351
Payments received on notes receivable 2,352 11,360
Sales/paydowns of other investments 10,022 3,476
Sale of operations, net - 591
Payments for:
Issuance of notes receivable (3,433) -
Capital expenditures (595) (1,031)
Purchase of other investments (500) (1,320)
Net cash provided by investing activities 7,846 13,427
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
0
For the Six Months Ended
June 30, June 30,
2002 2001
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes payable $14,754 $10,598
Issuance of bonds payable 1,100 -
Minority interest capital contributions 3,988 -
Payments for:
Principal payments on short-term notes
payable (13,625) (10,600)
Repayments of bonds payable (1,700) (591)
Purchase of treasury stock (3,535) (338)
Cash dividends paid (627) (627)
Net repayments under credit facilities - (11,500)
Net repayments on securities sold under agreements
to repurchase (9,856) (3,470)
Net cash used in financing activities (9,501) (16,528)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (648) 2,062
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 14,688 7,098
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $14,040 $ 9,160
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 682 $ 1,442
Income taxes refunded during the period, net $ (79) $(2,486)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Granting of restricted stock from treasury stock $ 412 $ 50
The accompanying notes to consolidated financial statements
are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data,
unless specifically stated otherwise)
June 30, 2002
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. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States
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. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's 2001 annual report on Form 10-K. Operating results for the six
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
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. BCZ attempts to obtain
commitments to sell the securities issues to customers. BCZ had $14,130 of
firm underwriting commitments at June 30, 2002.
In the normal course of business, Ziegler Healthcare Fund I, LP, a
partially owned subsidiary of the Parent, makes commitments to originate
loans. At June 30, 2002, Ziegler Healthcare Fund I, LP had outstanding
commitments of $4,120.
In the normal course of business, the Company has been named as defendant
in certain lawsuits. These suits arise in connection with the Company's role
as an underwriter in various securities offerings as well as a broker for
customers. At June 30, 2002, one such lawsuit brought by an institutional
investor who purchased a $5 million bond in a primary offering of securities
was pending. The investor requests rescission under state securities laws.
Rescission, if granted, would have resulted in a loss to the Company
approximating $850 based on market values as of June 30, 2002. Management
believes it has meritorious defenses and has not provided any significant
reserves for losses with respect to this matter at June 30, 2002. The matter
is expected to be arbitrated in 2002. The Company is also a defendant in
other lawsuits incidental to its securities and other businesses. Although
the outcome of litigation is always uncertain, based on its understanding of
the facts, and the advice of legal counsel, management believes that
resolution of these actions will not result in any material effect on the
consolidated financial condition or results of operations of the Company.
Note C -- Net Capital Requirements
As a registered broker-dealer, BCZ is subject to the Securities
and Exchange Commission Uniform Net Capital Rule (SEC rule 15c3-1), which
requires the maintenance of minimum net capital and requires that the ratio
of aggregate indebtedness to net capital, both as defined, shall not exceed
15 to 1. Such net capital requirements could restrict the ability of BCZ to
pay dividends to the Parent.
Net capital information as of June 30, 2002, is as follows:
Net capital $11,310
Net capital in excess of required net capital $10,774
Required net capital $536
Ratio of aggregate indebtedness to net capital .71 to 1
Note D -- Securities Inventory and Other Investments
Securities inventory consisted of the following:
June 30, December 31,
2002 2001
Municipal bond issues $39,480 $96,281
Institutional bond issues 109 1,271
Other securities 521 884
$40,110 $98,436
Municipal bond issues consist primarily of revenue bonds issued by state
and local governmental authorities related to healthcare or long-term care
facilities. Institutional bond issues consist primarily of bonds issued by
churches and independent schools. The reduction in municipal bond issues from
December 31, 2001, to June 30, 2002, is primarily due to the remarketing of
$47,000 of variable rate demand notes and the retail sale of bonds.
Other investments consisted of the following:
Collateralized mortgage obligations ("CMOs") $28,155 $38,152
EnvestNet common stock 9,500 9,500
Other 1,000 525
$38,655 $48,177
Note E -- Payable to Broker-Dealers and Clearing Organizations
BCZ clears its proprietary and customer transactions through other
broker-dealers on a fully disclosed basis. The relationship with the
clearing brokers results in amounts payable for transaction processing and
inventory purchases offset by fees earned, commissions, inventory sales and
profits or increased for losses on securities transactions. The amount
payable to the clearing broker of $25,694 at June 30, 2002 relates primarily
to the financing of inventory and is collateralized by securities held in
inventory with a market value of approximately $40,013 at June 30, 2002, owned
by BCZ.
Note F -- Notes Payable to Banks
The Company has a line of credit of up to $20 million in place to obtain
short-term funds. The line of credit is used for general corporate purposes,
purchases of large blocks of securities, and the funding of Federal Housing
Administration loan originations, all on a short-term basis. The Company had
no notes payable to banks outstanding at June 30, 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 from operations for the
following periods ended June 30 (shares in thousands):
For the Three Months Ended
2002 2001
Net income $594 $582
Basic
Weighted average shares outstanding 2,245 2,398
Basic income per share $ .26 $ .24
Diluted
Weighted average shares outstanding-
Basic 2,245 2,398
Effect of dilutive securities:
Restricted stock 11 12
Stock options - -
Weighted average shares outstanding-
Diluted 2,256 2,410
Diluted income per share $ .26 $ .24
For the Six Months Ended
2002 2001
Net income $505 $790
Basic
Weighted average shares outstanding 2,318 2,395
Basic income per share $ .22 $ .33
Diluted
Weighted average shares outstanding-
Basic 2,318 2,395
Effect of dilutive securities:
Restricted stock 9 12
Stock options - 2
Weighted average shares outstanding-
Diluted 2,327 2,409
Diluted income per share $ .22 $ .33
Note I -- 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 Group consists of the Company's fixed income
institutional sales and trading, financial advisory, and institutional and
public finance activities. Sales credits associated with underwritten
offerings are reported in the Investment Services Group when sold through
retail distribution channels and in the Capital Markets Group when sold
through institutional distribution channels.
The Investment Services Group provides a wide range of financial products
through its retail branch distribution network, including equity and fixed
income securities, proprietary and non-affiliated mutual funds, annuities and
insurance products. The Investment Services Group also provides investment
advisory services to Company-sponsored mutual funds and asset management
services for institutional and individual clients. Prior to August 31, 2001,
the Investment Services Group also provided performance reporting and related
administrative services.
Corporate is principally the Company's corporate investment and borrowing
activities and unallocated corporate revenues and expenses. Corporate
investment activities include the other investments described in Note D, the
activities and share of income related to an 11% owned Small Business
Investment Company ("SBIC"), the operating results of the wholly owned
management company of the SBIC, and the Company's proportionate share of an
investment in Ziegler Equity Funding I, LLC ("ZEF"), a 67% owned private
equity fund. ZEF is 33% owned by qualified officers and employees of the
Company. The effect on net income before taxes after the adjustment for
minority interests is reflected below. Revenues related to minority interests
were insignificant.
Since there are no comprehensive authorities for management accounting
equivalent to accounting principles generally accepted in the United States,
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 extent of administrative services provided, the
number of personnel, and other relevant factors.
Operating segment financial information is as follows:
Three Months Ended June 30,
2002 2001
Revenues
Capital Markets $ 7,258 $ 6,379
Investment Services 7,918 14,123
Corporate 1,100 1,437
Total $16,276 $21,939
Net Income (Loss) Before Income Taxes:
Capital Markets $ 993 $ 1,283
Investment Services (19) (535)
Corporate (92) 233
Total $ 882 $ 981
Six Months Ended June 30,
2002 2001
Revenues
Capital Markets $11,255 $11,103
Investment Services 15,060 27,732
Corporate 2,771 2,840
Total $29,086 $41,675
Net Income (Loss) Before Income Taxes:
Capital Markets $ 285 $ 1,468
Investment Services (243) (1,122)
Corporate 536 979
Total $ 578 $ 1,325
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 J -- New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination be recognized as assets apart from goodwill. SFAS No.
141 was effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 requires goodwill to be tested for impairment under certain
circumstances, and written down when impaired, rather than being amortized as
previous standards required. Furthermore, SFAS No. 142 requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. Purchased intangible
assets are carried at cost less accumulated amortization. Amortization is
computed over the useful lives of the respective assets.
In accordance with SFAS No. 142, the Company ceased amortizing goodwill
totaling $546 as of the beginning of 2002. As a result, during the six month
period ended June 30, 2002, the Company did not recognize amortization of
goodwill totaling $26 that would have been recognized had the pervious
standards been in effect. The Company had no purchased intangibles as of the
beginning of 2002. The following table presents the impact of SFAS No. 142 on
net income and earnings per share had the standard been in effect for the six
month period ended June 30, 2001:
Six months ended
June 30,
2002 2001
Net income as reported $505 $ 790
Add back goodwill amortization N/A 365
Adjusted net income $505 $1,155
Basic and diluted earnings per share
as reported $ .22 $ .33
Add back goodwill amortization N/A .15
Adjusted basic and diluted earnings per share $ .22 $ .48
The Company is required to perform goodwill impairment tests on an annual
basis and between annual tests in certain circumstances. The Company
performed the first of the required impairment tests of goodwill during the
second quarter of 2002 and no impairment charge was deemed necessary. There
can be no assurance that future goodwill impairment tests will not result in a
charge to earnings.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Under previous accounting
guidance, a company recognized a liability for an exit cost when it committed
to an exit plan. SFAS No. 146 will spread out the reporting of expenses
related to exit, disposal or restructuring activities initiated after December
31, 2002 because commitment to a plan to exit an activity, dispose of long-
lived assets or restructure will no longer be the determining factor of when to
record a liability for the anticipated costs. Instead, companies will
record exit, disposal or restructuring costs when they are incurred
(obligated) and can be measured at fair value, and they will subsequently
adjust the recorded liability for changes in estimated cash flows. Under SFAS
No. 146, some of these costs might qualify for immediate recognition, others
might be spread over one or more quarters, and still others might not be
recorded until incurred in some much later period. The future impact to the
Company will be determined by any future activities in these areas. The
Company does not currently have plans in any of these areas, but has
occasionally conducted these types of activities in the past.
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 Group underwrites fixed income securities primarily
for senior living and healthcare providers, religious institutions, and
private schools. Capital Markets' services also include financial advisory
services, merger and acquisition services, sales on an agency basis of complex
financial products incorporating risk management strategies, 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 through the B. C. Ziegler and Company ("BCZ") subsidiary, 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 Group consisted of three operating units: Asset
Management, Wealth Management and Portfolio Consulting. On August 31, 2001,
the Company sold its Portfolio Consulting business with the disposition of PMC
International, Inc. ("PMC") located in Denver, Colorado. The Company still
offers portfolio consulting services through the broker distribution network
of its Wealth Management operation using third party providers. Asset
Management provides investment advisory services to Company-sponsored mutual
funds and private account asset management services for institutional and
individual clients. Wealth Management provides a wide range of financial
products and financial planning services to retail clients through its broker
distribution network, including equity and fixed-income securities,
proprietary 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 Company. Sales credits associated with
underwritten offerings are reported in the Investment Services Group when sold
through the Company's retail distribution channels. Asset Management and
Wealth Management activities are conducted through BCZ.
Portfolio Consulting provided fee-based "wrap account" services as an
intermediary, serving independent financial advisors, investment consultants,
and other financial services organizations. In wrap accounts, multiple
services such as manager search and evaluation, trade execution, performance
reporting, and statement preparation are "wrapped" together in exchange for a
single fee from the customer. Through August 2001 Portfolio Consulting
activities were provided by the Company through PMC.
The Corporate Group consists primarily of the investment and debt
management activities of the Parent and the unallocated corporate
administrative activities included in BCZ. Certain corporate administrative
costs are allocated to the Capital Markets and the Investment Services Groups
using methodologies which consider the size of the operation, the extent of
administrative services provided, the number of personnel, the area occupied
and other related factors. Corporate Group 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 and lending to qualified small businesses, primarily for-
profit assisted living providers; 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 67% 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. Corporate also includes the Company's share of the operations of
ZEF. Each of these companies is consolidated into the Company's financial
statements.
The Company's businesses are sensitive to economic and other factors.
Capital Markets Group investment banking revenues and related fees have
increased in 2002. To a large extent, much of the activity in 2002 is related
to projects begun in the previous several years. As this "pipeline" of
underwriting projects has reached the stage of a bond issue, investment
banking revenues have increased. There continues to be strong demand for
additional capital from the Capital Markets Group's main clients, senior
living and healthcare providers, religious institutions, and private schools.
In addition, historically low interest rates, and a steepening yield curve,
have prompted a higher level of refinancing and interest rate management
transactions. Capital Markets continues to observe its usual seasonality,
whereby transaction activity in the first quarter is lower than subsequent
quarters of the calendar year. Capital Market's trading and security sales
activity is lower than in 2001. As interest rates dropped quickly in 2001,
investors sought to capture yield and reposition portfolios. In 2002, rates
have stayed low, but the general level of secondary trading has taken a
backseat to an increased investor desire to purchase new issues. In general,
demand for fixed income products has been favorable, especially in light of
uncertainty in other investment markets.
Market valuation in the equity markets and market uncertainty are factors
affecting the Investment Services Group. Asset Management and, to a lesser
extent, Wealth Management were affected by these circumstances with respect to
assets under management or advisement. The dollar value of total assets under
management in the Company's current businesses had been increasing due to the
sale of additional asset management services, but declining market values
offset those increases. Furthermore, the proportion of assets under
management shifted to fixed income portfolios on which lower fees are charged.
As the result of these circumstances revenues from these services were
relatively flat in the Asset Management and Wealth Management businesses. The
Portfolio Consulting assets were removed from the Company's total assets under
management or advisement with the sale of PMC in 2001. As a result of the PMC
sale, overall Company revenues and related expenses declined accordingly.
Wealth Management transaction volumes were also impacted by uncertain markets.
Retail brokerage transaction activity remains relatively slow. However, the
Company has experienced increased demand from retail clients for its
underwritten bond issues.
The level of interest rates and the rate of prepayments on principal are
primary factors affecting Corporate. The spread between interest received on
the Government National Mortgage Association and Federal National Mortgage
Association CMOs and the cost of borrowing on the repurchase agreement used to
finance the securities may narrow if short-term interest rates increase. An
increase in interest rates would increase the cost of financing these CMOs.
The current spread in the interest rates is approximately 5.9%. Interest
earned on the portfolio of CMOs will decrease as scheduled and unscheduled
prepayments of principal occur. In the first six months of 2002,
approximately $10 million of principal had been repaid on these securities.
The repurchase agreement used to finance the security was reduced by a
corresponding amount. Corporate also realizes gains as it realizes cash flows
from the disposition of PMC. Cash flows will occur as $4.5 million of notes
are paid and the stock is sold. A note of $1.5 million is due August 31,
2002, on which $600 of deferred gain will be recognized and a note of $3
million is due August 31, 2003, on which $1,199 of deferred gain will be
recognized as those notes are repaid. The balance of the deferred gain of
$3,797 will be recognized when the stock is ultimately sold. The gain was
deferred at the time of the transaction due to the uncertainty of collection
of the debt and realization of the value of the common stock.
Results of Operations - Three months ended
June 30, 2002 Compared to June 30, 2001
(Dollars in thousands, unless specifically stated otherwise)
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
Increase/
For the Three Months Ended June 30, 2002 2001 (Decrease)
Revenues
Capital Markets $ 7,258 $ 6,379 $ 879
Investment Services
Asset Management 2,129 2,103 26
Wealth Management 5,789 5,952 (163)
Portfolio Consulting - 6,068 (6,068)
Total Investment Services 7,918 14,123 (6,205)
Corporate 1,100 1,437 (337)
Total $16,276 $21,939 $(5,663)
Net Income (Loss) Before Income Taxes
Capital Markets $ 993 $ 1,283 $ (290)
Investment Services
Asset Management (27) (211) 184
Wealth Management 8 188 (180)
Portfolio Consulting - (512) 512
Total Investment Services (19) (535) 516
Corporate (92) 233 (325)
Total $ 882 $ 981 $ (99)
All references to 2002 and 2001 in the information below refer to the
three months ended June 30 in both of those years unless otherwise indicated.
Capital Markets Group
Capital Markets total revenues were $7,258 in 2002 compared to $6,379 in
2001, an increase of $879. Underwriting revenue increased $3,232 in 2002. A
total of thirteen senior and sole managed municipal underwriting transactions
totaling $387 million in bonds issued were completed in 2002 compared to nine
transactions totaling $171 million in 2001. A total of seven church and
school underwriting transactions totaling $41 million were completed in 2002,
compared to three transactions totaling $11 million in 2001. Trading profits
decreased $480 in 2002. In 2001, a decreasing rate environment caused a
higher level of trading activity among institutional investors than the level
of trading activity in 2002. Revenues related to FHA mortgage loan
originations decreased $1,818 between periods due to fewer mortgage
originations.
Capital Markets expenses were $6,265 in 2002 compared to $5,096 in 2001,
an increase of $1,169. Employee compensation and benefits increased $629
primarily due to increased incentive-based compensation on higher revenues.
Interest expense decreased $267 as the result of decreased interest rates.
Administrative support activities allocated to Capital Markets increased $681.
The resulting net income before taxes for Capital Markets in 2002 was $993
compared to $1,283 in 2001.
Investment Services Group
Revenues and net losses were $7,918 and $19, respectively, in 2002
compared to $14,123 and $535, respectively, in 2001 for this segment.
Declining market values of equity securities and mutual funds, sluggish retail
investor activity, and the elimination of the Portfolio Consulting operation
which was sold in 2001, resulted in lower revenues and less of a loss in 2002.
Asset Management-
Total revenues were $2,129 in 2002 compared to $2,103 in 2001. Total
assets under management were $1.8 billion as of both June 30, 2002 and 2001.
All categories of revenue remained relatively constant between 2002 and 2001.
Sales of additional asset management services offset by declining market
values caused investment management and advisory fees to remain virtually the
same between 2002 and 2001.
Asset Management expenses were $2,156 in 2002 compared to $2,314 in 2001.
Compensation and benefits decreased $236 due to a reduction in personnel.
Other changes in expense categories were not significant. Asset Management
had a net loss before taxes of $27 in 2002 compared to $211 in 2001.
Wealth Management-
Total revenues of Wealth Management were $5,789 in 2002 compared to
$5,952 in 2001, a decrease of $163. Commission income from financial products
not underwritten by BCZ decreased $457, primarily as a result of decreased
overall retail investor transaction volumes in mutual funds and equities.
Commission income also decreased $267 as the result of the sale of the
insurance agency at the end of the second quarter of 2001. A gain on the sale
of the insurance agency was $303 in 2002 compared to $851 in 2001, a decrease
of $548. The gain in 2002 is related to a contingent payment due as a result
of the retention of the customer base of the insurance operation by the
purchaser. These decreases were partially offset by a $954 increase in
revenues from the retail sale of bonds underwritten by the Company and an
increase in advisory fees related to "wrap" programs.
Total Wealth Management expenses were $5,781 in 2002 compared to $5,764
in 2001, an increase of $17. Compensation and benefit expense increased $343
compared to 2001, primarily due to the commissions paid on underwritten
product sales in the quarter. Professional and regulatory fees increased $127
due to increased legal, consulting, and state registration expense. Expenses
allocated for administrative support activities decreased $654 in 2002
compared to 2001. All other changes in expenses were not significant. Wealth
Management had net income before taxes of $8 in 2002 compared to $188 in 2001.
Portfolio Consulting -
This operation was merged into an unaffiliated company on August 31,
2001. Total revenues and expenses of Portfolio Consulting were $6,068 and
$6,580, respectively, in 2001. Both revenues and expenses were eliminated due
to the sale of the operations. The operating loss after taxes was $345 in
2001.
Corporate Group
Corporate revenues were $1,100 in 2002 compared to $1,437 in 2001.
Interest income increased $201 as the result of an increase in investments,
primarily Government National Mortgage Association and Federal National
Mortgage Association bonds, and notes. The increase in interest was offset by
decreases in management fee and other income. Minority interest revenues in
2002 were not significant.
Corporate expenses net of the minority interests and after allocations to
the Company's other operating segments were $1,192 in 2002 compared to $1,204
in 2001. Total corporate expenses did not change significantly between years.
The largest component of expenses is employee compensation and benefits which
was $1,884 in 2002 compared to $1,753 in 2001. Interest expense, primarily
related to the financing of the government agency-backed CMOs decreased in
2002. Other categories of expense did not change significantly. The
allocations to the other segments totaled $1,874 in 2002 compared to $2,012 in
2001. The minority interests incurred losses in the second quarter of 2002
which are removed from the results of the Corporate segment and separately
disclosed in the Company's consolidated financial statements. These losses
totaled $95 in 2002. Corporate had a net loss before taxes of $92 in 2002
compared to net income before taxes of $233 in 2001.
Results of Operations - Six months ended
June 30, 2002 Compared to June 30, 2001
(Dollars in thousands)
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
Increase/
For the Six Months Ended June 30, 2002 2001 (Decrease)
Revenues
Capital Markets $11,255 $11,103 $ 152
Investment Services
Asset Management 4,348 4,239 109
Wealth Management 10,712 11,254 (542)
Portfolio Consulting - 12,239 (12,239)
Total Investment Services 15,060 27,732 (12,672)
Corporate 2,771 2,840 (69)
Total $29,086 $41,675 $(12,589)
Net Income (Loss) Before Income Taxes
Capital Markets $ 285 $ 1,468 $ (1,183)
Investment Services
Asset Management 66 (47) 113
Wealth Management (309) (205) (104)
Portfolio Consulting - (870) 870
Total Investment Services (243) (1,122) 879
Corporate 536 979 (443)
Total $ 578 $ 1,325 $ (747)
All references to 2002 and 2001 in the information below refer to the
six months ended June 30 in both of those years unless otherwise indicated.
Capital Markets Group
Capital Markets total revenues were $11,255 in 2002 compared to $11,103
in 2001, an increase of $152. Underwriting revenue increased $2,952 in 2002.
A total of twenty-one senior and sole managed municipal underwriting
transactions totaling $583 million in bonds issued were completed in 2002
compared to fifteen transactions totaling $375 million in 2001. A total of
eleven church and school underwriting transactions totaling $63 million were
completed in 2002, compared to four transactions totaling $22 million in 2001.
Trading profits decreased $924 in 2002. In 2001, a decreasing rate
environment caused a higher level of trading activity among institutional
investors. In 2002 there was a lower level of institutional fixed income
securities trading activity. Revenues related to FHA mortgage loan
originations decreased $1,866 between periods due to fewer mortgage
originations.
Capital Markets expenses were $10,970 in 2002 compared to $9,635 in
2001, an increase of $1,335. Employee compensation and benefits increased
$364 primarily due to increased incentive-based compensation on higher
revenues. Interest expense decreased $382 as the result of decreased interest
rates. Administrative support activities allocated to Capital Markets
increased $1,039. The resulting net income before taxes for Capital Markets
in 2002 was $285 compared to net income of $1,468 in 2001.
Investment Services Group
Revenues and net losses were $15,060 and $243, respectively, in 2002
compared to $27,732 and $1,122, respectively, in 2001 for this segment.
Declining market values of equity securities and mutual funds, sluggish retail
investor activity, and the elimination of the Portfolio Consulting operation
which was sold in 2001, resulted in lower revenues and less of a loss in 2002.
Asset Management-
Total revenues were $4,348 in 2002 compared to $4,239 in 2001, an
increase of $109. Distributor commissions increased $105 primarily due to
increased sales volumes compared to 2001. Sales of asset management services
have been largely offset by declines in market value and a shift from equity
to fixed income portfolios. Despite these circumstances revenues from
investment management and advisory fees remained virtually the same between
years.
Asset Management expenses were $4,282 in 2002 compared to $4,286 in 2001.
Compensation and benefits decreased $396 due to a reduction in personnel.
This decrease was offset primarily by increased promotional and brokerage
commission expenses in 2002 as compared to 2001. The balance of the increased
expenses was spread across several categories of expense and related to an
overall increase in costs of operations. Asset Management had net income
before taxes of $66 in 2002 compared to a loss before taxes of $47 in 2001.
Wealth Management-
Total revenues of Wealth Management were $10,712 in 2002 compared to
$11,254 in 2001, a decrease of $542. Commission income from financial
products not underwritten by BCZ decreased $935, primarily as a result of
decreased overall retail investor transaction volumes in mutual funds and
equities. Commission income also decreased $634 as the result of the sale of
the insurance agency at the end of the second quarter of 2001. A gain on the
sale of the insurance agency was $303 in 2002 compared to $851 in 2001, a
decrease of $548. These decreases were partially offset by a $1,257 increase
in revenues from the retail sale of bonds underwritten by the Company and an
increase in advisory fees related to "wrap" programs.
Total Wealth Management expenses were $11,021 in 2002 compared to $11,459
in 2001, a decrease of $438. Most expense categories did not change
significantly. Professional and regulatory fees increased $246 due to
increased legal, consulting, and state registration expenses. Compensation
and benefit expense increased $173 primarily due to increased commissions paid
due to higher levels of underwritten product sales that were only partially
offset by reductions in other product sales. Promotional expense increased
$150 due to a higher level of advertising related to underwritten products.
Expenses allocated for administrative support activities decreased $1,278 in
2002 compared to 2001. All other changes in expense were not significant.
Wealth Management had a loss before taxes of $309 in 2002 compared to $205 in
2001.
Portfolio Consulting -
This operation was merged into an unaffiliated company on August 31,
2001. Total revenues and expenses of Portfolio Consulting were $12,239 and
$13,109, respectively, in 2001. Both revenues and expenses were eliminated
due to the sale of the operations. The operating loss after taxes was $610 in
2001.
Corporate Group
Corporate revenues were $2,771 in 2002 compared to $2,840 in 2001.
Interest and dividends were $1,966 in 2002 compared to $1,666 in 2001 and are
primarily related to the investment in government agency-backed collateralized
mortgage obligations ("CMOs"), which increased in December 2001, and notes
receivable. The Company also received a $341 rebate in 2002 from its clearing
broker as the result of favorable contract negotiations which is reflected in
other income. These increases were offset by decreases in management fee and
other income. Minority interest revenues in 2002 were not significant.
Corporate expenses net of the minority interests and after allocations to
the Company's other operating segments were $2,235 in 2002 compared to $1,861
in 2001. The largest component of expenses is employee compensation and
benefits which was $3,215 in 2002 compared to $2,772 in 2001. Interest
expense, primarily related to the financing of the government agency-backed
CMOs, decreased in 2002. The allocations to the other segments totaled $3,508
in 2002 compared to $4,029 in 2001. The minority interests incurred losses in
the first six months of 2002 which are removed from the results of the
Corporate segment and separately disclosed in the Company's consolidated
financial statements. These losses totaled $338 in 2002. Corporate net
income before taxes was $536 in 2002 compared to $979 in 2001.
Liquidity and Capital Resources
(Dollars in thousands)
The Company provides financial services. Variations in assets and
liabilities are primarily related to fluctuations in the value of financial
assets associated with those services. The level of securities inventory and
the related financing of that inventory through the Company's clearing broker
has the greatest impact on cash flow. Capital expenditures for fixed assets
are generally insignificant.
A source of cash for the Company 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.
In 2002, a total of $14,754 of notes were issued and $13,625 were repaid. The
total balance of short-term notes outstanding was $4,503 as of June 30, 2002.
The short-term notes are sold directly to customers and are limited by the
availability of customers who wish to invest in these short-term notes at the
rates offered by the Company.
The Parent also finances its activities through a banking relationship
shared with BCZ and through repurchase agreements. The Parent had no amounts
outstanding under the bank unsecured line of credit of up to $20 million at
June 30, 2002. Amounts outstanding under repurchase agreements totaled
$28,014 at June 30, 2002 and were used to finance the purchase of government
agency-backed CMOs included in other investments in the Consolidated
Statements of Financial Condition.
BCZ, the Company's broker-dealer subsidiary, finances activities from its
own resources, from the unsecured line of credit of up to $20 million
available through the banking relationship and shared with the Parent, from
its clearing agent using inventory as collateral under normal margin
arrangements, and from intercompany borrowings with the Parent. There were no
amounts outstanding under the bank unsecured line of credit or intercompany
borrowings from the Parent at June 30, 2002. The amount due the clearing
agent was $25,694 at June 30, 2002. Securities inventory held by BCZ serves
as the underlying collateral for the amount due.
BCZ acts as remarketing agent for approximately $2 billion of variable
rate demand municipal securities, most of which BCZ previously underwrote.
The securities may be tendered to BCZ at the option of the holder, generally
on seven days advance notice. The obligation of the municipal borrower to pay
for tendered securities is, in substantially all cases, 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 securities. There were $17,800 of variable
rate securities held in inventory at June 30, 2002. Amounts in inventory are
generally held for less than two weeks. BCZ finances its inventory of
variable rate securities acquired pursuant to its remarketing activities
through its clearing agent under the clearing agent's margin financing
arrangements.
ZFC, whose activities include FHA loan origination, finances its
activities from its own resources, through intercompany borrowing from the
Parent, and by arrangements with other parties involved in the FHA
transactions.
Ziegler Healthcare Fund I, LP ("ZHF") is a limited partnership in which
the Company has an 11% direct and indirect interest, is the general partner
through ZHP, and is included in the Company's consolidated financial
statements. 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 debentures
from the SBA on favorable terms. The SBA has granted ZHF leverage of up to
$38.2 million. At June 30, 2002, ZHF had $5,040 of outstanding loans to small
businesses and $2,700 of debentures due the SBA, increases of $3,040 and
$1,100, respectively, since December 31, 2001. The interest received on the
loans is intended to be 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 correspond to
the repayment terms on the debentures from the SBA. At June 30, 2002, ZHF had
a remaining leverage commitment from the SBA of up to $35.5 million.
First Church Financing Corporation served as a limited purpose finance
company for financing mortgages to churches, and issued bonds to the public as
a source of cash prior to 1996. During the first quarter of 2002, FCFC sold
its portfolio of loans to churches totaling $2,083 to an unaffiliated third
party and used the $1,700 of proceeds to redeem 100 percent of FCFC's
outstanding bonds.
BCZ, the Company's broker-dealer subsidiary, is subject to the
requirements of the Security and Exchange Commission Uniform Net Capital Rule,
which is designed to measure the general financial soundness and liquidity of
broker-dealers. At June 30, 2002, BCZ had net capital of $11,310, which
exceeded minimum net capital requirements by $10,774. Such net capital
requirements could restrict the ability of BCZ to pay dividends to the Parent.
Adequate net capital is also important for BCZ in the conduct of its business
activities. In the opinion of management, the current level of net capital is
adequate for the conduct of its business activities.
The Company's overall funding needs are periodically reviewed to ensure
that it has adequate resources to support the operation of its businesses.
The Company's cash and cash equivalent position allows a certain 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 explore
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 use of the Company's common stock.
Critical Accounting Policies
Accounting policies are an integral part of the preparation of the
Company's financial statements in accordance with accounting principles
generally accepted in the United States. See Note 1 of Notes to Consolidated
Financial Statements in the Company's 2001 Annual Report for a discussion of
significant accounting policies and other information. Certain critical
accounting policies require us to make estimates and assumptions that affect
the amounts of assets, liabilities, revenues and expenses reported in the
financial statements. Due to their nature, estimates involve judgment based
upon available information. Therefore, actual results or amounts could differ
from estimates and the difference could have a material impact on the
Company's consolidated financial statements.
The following are considered to be among the Company's current accounting
policies that involve significant estimates or judgments.
Valuation of Financial Instruments
Substantially all financial instruments are reflected in the financial
statements at fair value or amounts that approximate fair value. Where
available, the Company uses prices from independent sources such as listed
market prices or broker or dealer price quotations. For investments in
illiquid and thinly traded securities that do not have readily determinable
fair values, the determination of fair value requires management to estimate
the value of the securities based upon available information such as projected
cash flows and a review of the financial and market conditions of the
underlying entity. In addition, even where the value of a security is derived
from an independent market price or broker or dealer quote, certain
assumptions may be required to determine the fair value. However, these
assumptions may be incorrect and the actual value realized upon disposition
could be different from the current carrying value.
Intangible Assets and Goodwill
In July 2001, the Financial Accounting Standard Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. In addition, it
provides that the cost of an acquired entity must be allocated to the assets
acquired, including identifiable intangible assets, and liabilities assumed
based on their estimated fair values at the date of acquisition. The excess
cost over the fair value of the net assets acquired must be recognized as
goodwill. SFAS No. 142 provides that goodwill is no longer amortized and the
value of an identifiable intangible asset must be amortized over its useful
life. As of June 30, 2002, the Company had $546 in goodwill and no
amortizable intangible assets. Goodwill is impaired when the carrying amount
of a reporting unit exceeds the fair value of the reporting unit. In
estimating the fair value of the reporting unit, we use valuation techniques
based on cash flows. All of the Company's goodwill is assigned to our Wealth
Management Group within our Investment Services operating segment.
Reserves for Losses and Contingencies
The Company is the subject of customer complaints and has also been named
as a defendant in various legal actions. In accordance with SFAS No. 5
"Accounting for Contingencies," we have established reserves for potential
losses that may result from such complaints and legal actions. In
establishing these reserves, we use our judgment to determine the probability
that losses may be incurred and a reasonable estimate of the amount of the
losses. In making these decisions, we base our judgments on our knowledge of
the situations, consultation with legal counsel and our experience. If our
judgments prove to be incorrect, our reserves may not accurately reflect
actual losses that result from these actions, which could materially affect
results in the period the expenses are ultimately determined. See Note B of
the Notes to Consolidated Financial Statements for additional disclosures
regarding contingencies.
Forward Looking Statements
Certain comments in this Form 10-Q represent forward looking statements
made pursuant to the provisions of the Private Securities Litigation Reform
Act of 1995. The forward-looking statements are subject to a number of risks
and uncertainties, in particular, the overall financial health of the
securities industry, the strength of the healthcare sector of the U.S. economy
and the municipal securities marketplace, the ability of the Company to
underwrite and distribute securities, the market value of mutual fund
portfolios and separate account portfolios advised by the Company, the
collection of amounts owed to the Company, the volume of sales by its retail
brokers, the outcome of pending litigation, and the ability to attract and
retain qualified employees.
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 in its securities inventory by monitoring its
inventory with respect to its total capitalization and regulatory net capital
requirements. The Company's securities inventories are marked to market and,
accordingly, represent current value with no unrecorded gains or losses in
value. While a significant portion of the Company's securities inventories
may have contractual maturities in excess of several years, the inventories,
on average, turn 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
collateralized mortgage obligations ("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, 2002, the Company manages a portfolio with an aggregate value of
approximately $1.9 billion in the form of separately managed and mutual fund
accounts. Of the total, $750 million relates to equity securities portfolios.
Continued 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. 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 an investment in The EnvestNet Group, Inc.
("EnvestNet") and partnership investments owned by ZEF. These investments are
subject to market risk in the form of equity price, interest rate, credit and
other performance-related risks. The Company continuously reviews these
investments.
The table below provides information about the Company's financial
instruments as of June 30, 2002 that are sensitive to market risk. For
securities inventory and debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
For interest rate forward agreements, the table presents notional amounts and
weighted average interest rates by expected (contractual) maturity dates.
Notional amounts are used to calculate the contractual payments to be
exchanged under the contracts. For common stock and partnership interests,
the table presents the cost and fair values 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 stock is sold. The
partnership interests are expected to provide a return of capital plus
earnings, if any, in the periods specified. The table specifies the current
expectation of the cash flows, but makes no assumptions as to earnings.
Trading accounts are shown in the caption "Securities Inventory" and non-
trading accounts are shown in all other captions.
I. Forward Agreements
Notational Fair
(Dollars in thousands) Amount Value
Forward Debt Services Agreement $5,005 $511
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread.
Forward Interest Rate Agreement $5,005 $(424)
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread. (Hedge to above instrument.)
II. Trading and Non-Trading Portfolio
Scheduled Maturity Dates
2002 2003 2004 2005 2006 Thereafter Total Fair Value
(U.S. Dollars in Thousands)
ASSETS
Securities Inventory - fixed rate
Municipal bond issues $9,239 $ 152 $ 250 $ 300 $ - $12,537 $22,478 $21,680
Weighted average interest rate 5.82% 5.07% 5.50% 6.00% 6.20%
Institutional bonds 10 - - - - 104 114 109
Weighted average interest rate 7.25% 7.38%
Other - - - - - 1,949 1,949 521
Weighted average interest rate 8.46%
Securities inventory - variable rate
Municipal variable rate demand notes - - - - - 17,800 17,800 17,800
Weighted average interest rate 1.25%
Notes receivable 1,964 3,754 179 1,276 235 3,237 10,645 10,645
Weighted average interest rate 11.05% 11.45% 11.21% 11.40% 11.53% 11.94%
Other investments - CMOs(1) - - - - - 28,155 28,155 28,155
Weighted average interest rate 7.96%
Other investments - Common Stock - - - - - 9,500 9,500 9,500
Other investments - Partnership
Interests 500 500 - - - - 1,000 1,000
LIABILITIES
Short-term notes payable(2) 4,503 - - - - - 4,503 4,503
Weighted average interest rate 3.18%
Securities sold under agreements to
repurchase(2) 28,014 - - - - - 28,014 28,014
Weighted average interest rate 2.04%
Bonds payable - fixed rate(1) - - - - - 2,700 2,700 2,700
Weighted average interest rate 7.20%
(1) Assumes no prepayment
(2) The information shown above includes actual interest rates at June 30, 2002
and assumes no changes in interest rates in 2002 or thereafter.
Material limitations exist in determining the overall net market risk exposure
of the Company. Computation of prospective effects of hypothetical interest
rate changes are based on many assumptions, including levels of market
interest rates, predicted prepayment speeds, and projected effect on assets
under management and retail customer account balances. Therefore, the above
information should not be relied upon as indicative of future actual results.
PART II
Items 1 through 3. Not applicable.
Item 4. Results of Votes of Security Holders.
The Registrant held an annual meeting on Tuesday, April 23, 2002
for which a proxy statement was sent to shareholders of record at
the close of business on March 15, 2002. For a description of the
results please see the Registrant's Form 10-Q for the quarter ended
March 31, 2002.
Item 5. The Registrant repurchased 224,549 shares of its stock during the
second quarter of 2002 at an average price of $15.35 per share.
This share repurchase represented a reduction of approximately 9%
in total shares outstanding and will impact the calculation of
earnings per share in current and future periods. Earnings per
share is based on a calculation of weighted average shares
outstanding.
In June, the Board of Directors authorized the repurchase of an
additional 100,000 shares in private and market transactions, at
prices and times considered appropriate by management. At June 30,
2002, a total of 22,299 shares at an average price of $15.04 per
share had been repurchased under the 100,000 share authorization.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 The Ziegler Companies, Inc. 1998 Stock Incentive Plan
(restated to reflect amendments through April 23, 2002).
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Registrant filed a Current Report on Form 8-K dated May 31, 2002
indicating that The Ziegler companies, Inc. had dismissed its
current independent public accountants, Arthur Andersen LLP,
effective May 31, 2002. Registrant reported that there were no
disagreements with Arthur Andersen LLP.
Registrant filed a Current Report on Form 8-K dated July 24, 2002
indicating that the Board of Directors of The Ziegler Companies,
Inc. as recommended by the Audit Committee of the Board of
Directors, appointed KPMG LLP as its new independent accountants.
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.
Dated: August 14, 2002 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: August 14, 2002 By /s/ Gary P. Engle
Gary P. Engle
Senior 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, 2002
Exhibit
Number Description
10.1 The Ziegler Companies, Inc. 1998 Stock Incentive Plan
(restated to reflect amendments through April 23, 2002).
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
6
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