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 September 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 October 31, 2002 was 2,191,763 shares.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2002 2001
(In thousands except per share amounts) (Unaudited)
ASSETS
Cash $ 1,800 $ 1,798
Short-term investments 25,228 12,890
-------- --------
Total cash and cash equivalents 27,028 14,688
Securities inventory 18,316 98,436
Accounts receivable 3,229 4,340
Notes receivable 15,631 9,219
Other investments 33,577 48,177
Land, buildings and equipment, at cost,
net of accumulated depreciation of
$13,354 and $12,056, respectively 5,062 5,455
Other assets 6,387 5,641
-------- --------
Total assets $109,230 $185,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 5,607 $ 3,375
Securities sold under agreements to repurchase 22,994 37,870
Payable to broker-dealers 12,876 79,089
Accrued compensation 5,823 8,887
Bonds payable 8,040 3,300
Other liabilities and deferred items 9,666 9,321
-------- --------
Total liabilities 65,006 141,842
Minority interest 4,565 1,259
Commitments
Stockholders' equity:
Common stock, $1 par, authorized
7,500 shares, issued 3,544 3,544 3,544
Additional paid-in capital 6,222 6,250
Retained earnings 51,480 51,172
Treasury stock, at cost, 1,352,
and 1,143 shares, respectively (21,287) (18,074)
Unearned compensation (300) (37)
-------- --------
Total stockholders' equity 39,659 42,855
-------- --------
Total liabilities and stockholders' equity $109,230 $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
September 30, September 30,
2002 2001
(In thousands except per share amounts)
Revenues:
Investment banking $ 9,217 $ 9,198
Commissions 3,245 6,064
Investment management and advisory fees 2,172 2,875
Interest and dividends 1,181 1,144
Gain on sale of operations 600 1,102
Other income 925 576
------- -------
Total revenues 17,340 20,959
Expenses:
Employee compensation and benefits 10,437 10,963
Communications and data processing 1,416 2,329
Promotional 1,092 1,052
Occupancy 979 969
Brokerage commissions and clearing 712 665
Professional and regulatory 609 378
Interest 316 755
Investment manager and other 177 2,472
Other expenses 342 429
------- -------
Total expenses 16,080 20,012
------- -------
Income from operations before income taxes
and minority interest 1,260 947
Minority interest in net income of subsidiaries (30) -
------- -------
Income from operations before income taxes 1,230 947
Provision for income taxes 513 461
------- -------
Net income $ 717 $ 486
======= =======
Per share data:
Basic and diluted earnings per share $ 0.33 $ 0.20
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 Nine Months Ended
September 30, September 30,
2002 2001
(In thousands except per share amounts)
Revenues:
Investment banking $22,832 $19,755
Commissions 9,062 10,892
Investment management and advisory fees 7,238 22,349
Interest and dividends 4,103 3,798
Gain on sale of operations 903 1,953
Other income 2,288 3,887
------- -------
Total revenues 46,426 62,634
Expenses:
Employee compensation and benefits 27,864 30,258
Communications and data processing 4,532 7,407
Promotional 3,152 2,975
Occupancy 2,891 3,218
Brokerage commissions and clearing 2,298 2,733
Professional and regulatory 1,574 1,271
Interest 995 2,174
Investment manager and other 598 9,367
Other expenses 1,022 959
------- -------
Total expenses 44,926 60,362
------- -------
Income from operations before income taxes
and minority interest 1,500 2,272
Minority interest in net loss of subsidiaries 308 -
------- -------
Income from operations before income taxes 1,808 2,272
Provision for income taxes 586 996
------- -------
Net income $ 1,222 $ 1,276
======= =======
Per share data:
Basic and diluted earnings per share $ 0.54 $ 0.53
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 Nine Months Ended
September 30, September 30,
2002 2001
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,222 $ 1,276
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,560 2,679
Gain on sale of building and equipment - (274)
Gain on sale of operations (903) (1,953)
Unrealized gain on securities inventory (168) (255)
Compensation expense paid in stock 170 156
Minority interest in subsidiary loss (308) -
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,111 (951)
Accrued income taxes receivable - 3,216
Securities inventory 80,288 (34,057)
Other assets, net (708) 441
Increase (decrease) in:
Payable to broker-dealers (66,213) 31,323
Accrued income taxes payable 666 -
Accrued compensation (3,064) (1,436)
Other liabilities and deferred
items, net 280 (1,656)
------- -------
Net cash provided by (used in) operating
activities 13,933 (1,491)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of building and equipment - 364
Payments received on notes receivable 4,182 11,996
Sales/paydowns on other investments 15,099 3,648
Sale of operations, net 303 2,775
Payments for:
Issuance of new notes receivable (10,553) -
Capital expenditures (1,246) (1,800)
Purchase of other investments (500) (1,320)
------- -------
Net cash provided by investing activities 7,285 15,663
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2002 2001
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes payable $23,175 $15,501
Issuance of bonds payable 6,440 -
Minority interest capital contributions 3,614 -
Payments for:
Principal payments on short-term notes
payable (20,943) (14,212)
Repayment of bonds payable (1,700) (1,233)
Purchase of treasury stock (3,675) (346)
Cash dividends paid (913) (941)
Net repayments under credit facilities - (11,500)
Net repayments on securities sold
under agreements to repurchase (14,876) (3,642)
------- --------
Net cash used in financing activities (8,878) (16,373)
------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 12,340 (2,201)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,688 7,098
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,028 $ 4,897
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 1,053 $ 2,242
Income taxes refunded during the
period, net $ (80) $(2,474)
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)
September 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 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. 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 nine months ended September 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 $8,455 of
firm underwriting commitments at September 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 September 30, 2002, Ziegler Healthcare Fund I, LP had outstanding
commitments of $1,100.
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 September 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, could result in a loss to the Company approximating
$1.3 million based on current market values as of September 30, 2002.
Management believes it has meritorious defenses and has not provided any
significant reserves for losses with respect to this matter at September 30,
2002. The matter is expected to be arbitrated in the last quarter of 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. However, if during any period a potential adverse
contingency should become probable or resolved, the results of operations in
that period could be materially affected. In addition, the ultimate costs of
litigation-related charges can vary significantly from period to period,
depending on factors such as market conditions and the size and volume of
complaints and claims.
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 September 30, 2002, is as follows:
Net capital $12,031
Net capital in excess of required net capital $11,308
Required net capital $723
Ratio of aggregate indebtedness to net capital 0.90 to 1
Note D -- Securities Inventory and Other Investments
Securities inventory consisted of the following::
September 30, December 31,
2002 2001
Municipal bond issues $17,787 $96,281
Institutional bond issues 24 1,271
Other securities 505 884
------- -------
$18,316 $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 September 30, 2002, is due to the remarketing of
variable rate demand notes and the retail sale of bonds.
Other investments consisted of the following:
Collateralized mortgage obligations ("CMOs") $23,077 $38,152
EnvestNet common stock 9,500 9,500
Other 1,000 525
------- -------
$33,577 $48,177
======= =======
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 is $12,682 at
September 30, 2002 and relates primarily to the financing of inventory and is
collateralized by securities held in inventory with a market value of
approximately $18,295 at September 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 September 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 September 30 (shares in thousands):
For the Three Months Ended
September 30, September 30,
2002 2001
Net income $ 717 $ 486
===== =====
Basic
Weighted average shares outstanding 2,159 2,398
===== =====
Basic income per share $ .33 $ .20
===== =====
Diluted
Weighted average shares outstanding-
Basic 2,159 2,398
Effect of dilutive securities:
Restricted stock 15 13
Stock options - -
----- -----
Weighted average shares outstanding-
Diluted 2,174 2,411
===== =====
Diluted income per share $ .33 $ .20
===== =====
For the Nine Months Ended
September 30, September 30,
2002 2001
Net income $1,222 $1,276
====== ======
Basic
Weighted average shares outstanding 2,265 2,396
===== =====
Basic income per share $ .54 $ .53
===== =====
Diluted
Weighted average shares outstanding-
Basic 2,265 2,396
Effect of dilutive securities:
Restricted stock 9 12
Stock options - 1
----- -----
Weighted average shares outstanding-
Diluted 2,274 2,409
===== =====
Diluted income per share $ .54 $ .53
===== =====
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,
insurance products, and performance reporting and related administrative
services. The Investment Services Group also provides investment advisory
services to Company-sponsored mutual funds and asset management services for
institutional and individual clients.
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 not significant.
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 extent of administrative services provided, the
number of personnel, and other relevant factors.
Operating segment financial information is as follows:
Three Months Ended September 30,
2002 2001
Revenues:
Capital Markets $ 7,897 $ 8,355
Investment Services 7,591 11,877
Corporate 1,852 727
------- -------
Total $17,340 $20,959
======= =======
Net Income (Loss) Before Income Taxes:
Capital Markets $ 561 $ 1,383
Investment Services (440) (416)
Corporate 1,109 (20)
------- -------
Total $ 1,230 $ 947
======= =======
Nine Months Ended September 30,
2002 2001
Revenues:
Capital Markets $19,152 $19,458
Investment Services 22,651 39,609
Corporate 4,623 3,567
------- -------
$46,426 $62,634
======= =======
Net Income (Loss) Before Taxes:
Capital Markets $ 846 $ 2,848
Investment Services (683) (1,538)
Corporate 1,645 962
------- -------
Total $ 1,808 $ 2,272
======= =======
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 nine month
period ended September 30, 2002, the Company did not recognize amortization of
goodwill totaling $39 that would have been recognized had the previous
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
three month period and nine month period ended September 30, 2001:
Three months ended
September 30,
2002 2001
Net income as reported $ 717 $ 486
Add back goodwill amortization - 126
------ ------
Adjusted net income $ 717 $ 612
====== ======
Basic and diluted earnings per share
as reported $ .33 $ .20
Add back goodwill amortization - .05
----- -----
Adjusted basic and diluted earnings
per share $ .33 $ .25
===== =====
Nine months ended
September 30,
2002 2001
Net income as reported $1,222 $1,276
Add back goodwill amortization - 491
------ ------
Adjusted net income $1,222 $1,767
====== ======
Basic and diluted earnings per share
as reported $ .54 $ .53
Add back goodwill amortization - .21
----- -----
Adjusted basic and diluted earnings
per share $ .54 $ .74
===== =====
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.
Note K -- Subsequent Event
B. C. Ziegler and Company entered into a definitive agreement to acquire
certain assets related to the Heartland Wisconsin Tax Free Fund from the
Heartland Advisors, Inc. This transaction closed on November 1, 2002.
BCZ paid $1,894 in the transaction. The purchase price was financed with a
bank loan. The bank loan has a term of 5 years with annual payments of
principal and monthly payments of interest at a rate of 5.91% for three
years and floating thereafter based on LIBOR plus 300 basis points. The
agreement, together with a merger agreement approved by the shareholders
of the Heartland Wisconsin Tax free Fund, provides for the management by
BCZ of approximately $85.5 million of assets included in the Heartland
Wisconsin Tax Free Fund. The assets under management over which the
contracts apply were merged on the date of closing with the North Track
Wisconsin Tax-Exempt Fund, a fund within the North Track family of mutual
funds. BCZ is the current sponsor and manager of the North Track family
of funds. The North Track Wisconsin Tax-Exempt Fund is currently the
largest State of Wisconsin tax-exempt mutual fund available to investors.
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 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 Company resources as well as 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 PMC provided these services
as part of the Company. Subsequent to that time, the Company continues to
provide these services at a reduced volume as well as contracting with third
party providers for these services.
The Corporate Group consists primarily of the investment and debt
management activities of the Parent and 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, and other relevant
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 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 ZHC and ZHP. 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, Capital Markets, Investment Services and
Corporate, are sensitive to economic and other factors. Capital Markets Group
investment banking revenues and related fees have increased 21% 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 investment banking
transaction activity in the first quarter is lower than subsequent quarters of
the calendar year. Capital Market's trading activity is lower than in 2001.
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 have
remained 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 equity transaction activity
remains relatively low. However, the Company has experienced increased demand
from retail clients for its underwritten bond issues. The Wealth Management
Group has also increased its recruiting activity. As part of this activity
and to attract qualified brokers, the Company has offered customary incentives
for the brokers to join the Company. The Company has experienced a net
increase of approximately 12 brokers since the beginning of 2002.
Corporate revenues include the spread between the Company's cost of
borrowing and the interest received on its portfolio of Government National
Mortgage Association and Federal National Mortgage Association CMOs. The
current spread exceeds 5% and the size of the portfolio approximates $23,077.
The size of the portfolio continues to decline due to prepayments of principal
on the CMOs. Corporate also realizes gains as it realizes cash flows from the
disposition of PMC in 2001. Cash flows occur as payments are received on
notes due. A note of $1.5 million was due and paid August 31, 2002, on which
$600 of deferred gain was recognized and a note of $3 million is due August
31, 2003, on which $1,199 of deferred gain will be recognized if and when that
note is repaid. As a precaution that the note may not be repaid, the Company
has discontinued accruing interest on the note due August 31, 2003. The
balance of the deferred gain of $3,797 will be recognized if and when the
stock is ultimately sold at the carrying value of $9,500.
0
Results of Operations - Three months ended
September 30, 2002 Compared to September 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 three months ended September 30, 2002 2001 (Decrease)
Revenues
Capital Markets Group $ 7,897 $ 8,355 $ (458)
Investment Services Group
Asset Management 1,935 1,980 (45)
Wealth Management 5,656 4,803 853
Portfolio Consulting - 5,094 (5,094)
------- ------- -------
Total 7,591 11,877 (4,286)
Corporate 1,852 727 1,125
------- ------- -------
$17,340 $20,959 $(3,619)
======= ======= =======
Net Income Before Taxes
Capital Markets Group $ 561 $ 1,383 $ (822)
Investment Services Group
Asset Management (335) (263) (72)
Wealth Management (105) (869) 764
Portfolio Consulting - 716 (716)
------- ------- -------
Total (440) (416) (24)
Corporate 1,109 (20) 1,129
------- ------- ------
$ 1,230 $ 947 $ 283
======= ======= ======
All references to 2002 and 2001 in the information below refer to the
three months ended in both years unless otherwise indicated.
Capital Markets Group
Capital Markets total revenues were $7,897 in 2002 compared to $8,355 in
2001, a decrease of $458 or 5%. A total of eleven senior and sole managed
municipal underwriting transactions totaling $388 million in bonds issued were
completed in 2002 compared to ten transactions totaling $643 million in 2001.
A total of seven church and school underwriting transactions totaling $32
million were completed in 2002, compared to eight transactions totaling $42
million in 2001. Differences between periods in the amounts of revenues were
not significant.
Capital Markets expenses were $7,336 in 2002 compared to $6,972 in 2001,
an increase of $364. Employee compensation and benefits decreased $564
primarily due to decreased incentive-based compensation. Interest expense
decreased $285 primarily as the result of decreased interest rates. Other
categories of expense did not change significantly. Administrative support
activities allocated to Capital Markets increased $991 due to a change in the
allocation methodology. The resulting net income before taxes for Capital
Markets in 2002 was $561 compared to $1,383 in 2001.
Investment Services Group
Revenues and net losses were $7,591 and $440, respectively, in 2002
compared to $11,877 and $416, respectively, in 2001. Declining market values
of equity securities and mutual funds, sluggish retail investor activity, and
the elimination of the Portfolio Consulting operation which was sold on
August 31, 2001, resulted in lower revenues and less of a loss in 2002 before
taking into account the gain of $1,102 recorded from the sale of PMC in this
segment in 2001. An additional gain of $600 in 2002 from the sale of PMC was
recorded in the Corporate segment as the result of the receipt of payment on a
note.
Asset Management-
Total revenues were $1,935 in 2002 compared to $1,980 in 2001. Total
assets under management were $1.8 billion as of both September 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 $2,270 in 2002 compared to $2,243 in 2001.
Compensation and benefits decreased $168 due to a reduction in personnel.
Other changes in expense categories were not significant. Expenses allocated
for administrative support activities increased $171 in 2002 compared to 2001
primarily due to a change in the allocation methodology. Asset Management had
a net loss before taxes of $335 in 2002 compared to $263 in 2001.
Wealth Management-
Total revenues of Wealth Management were $5,656 in 2002 compared to
$4,803 in 2001, an increase of $853. Commission income increased $485 as the
result of the sale of a private equity product offered by BCZ. Lower revenues
from BCZ underwritten bonds sold to retail customers was more than offset by
increased trading revenues from the sale of secondary market bonds.
Total Wealth Management expenses were $5,761 in 2002 compared to $5,672
in 2001, an increase of $89. Compensation and benefit expense increased $364
compared to 2001, primarily due to the commissions paid to employee brokers.
Professional and regulatory fees increased $108 due to increased legal,
consulting, and state registration expenses. Expenses allocated for
administrative support activities decreased $453 in 2002 compared to 2001 due
to a change in the allocation methodology. All other changes in expenses were
not significant. Wealth Management had a net loss before taxes of $105 in
2002 compared to a net loss before taxes of $869 in 2001.
Portfolio Consulting -
This operation was merged into an unaffiliated company on August 31,
2001. Total revenues in 2001 of Portfolio Consulting were $5,095, which
includes a gain recorded on the sale of $1,102. Total expenses in 2001 were
$4,379. The net income before taxes was $716 in 2001. There were no revenues
and expenses in 2002. An additional gain recorded in 2002 is included in the
Corporate segment results.
Corporate
Corporate revenues were $1,852 in 2002 compared to $727 in 2001.
Revenues increased $600 as the result of the recognition of a gain on the sale
of PMC related to the receipt of payment on a note. Interest income increased
$244 primarily as the result of the addition of notes receivable in ZHF, which
offset declines in other investments and notes as those items are paid down.
Minority interest revenues in 2002 were $409, which includes $299 of interest.
Corporate expenses after allocations to the Company's other operating
segments were $743 in 2002 compared to $747 in 2001. The largest component of
expenses is employee compensation and benefits which was $1,272 in 2002
compared to $695 in 2001, an increase of $577. The increase in employee
compensation and benefits was primarily due to a change in the allocation
process whereby certain incentive-based amounts are recorded in Corporate in
2002 rather than directly in the business areas as was the process in 2001.
The allocation of administrative expenses was adjusted to reflect this change.
Interest expense, primarily related to the financing of the government agency-
backed CMOs and securities inventory, decreased $227 in 2002. Other
categories of expense did not change significantly. The allocations to the
other segments totaled $2,620 in 2002 compared to $2,021 in 2001. The
minority interests had net income in the third quarter of 2002 which is
removed from the results of the Corporate segment and separately disclosed in
the Company's consolidated financial statements. The net income attributable
to minority interests totaled $30 in 2002. Corporate had net income before
taxes of $1,109 in 2002 compared to a net loss before taxes of $20 in 2001.
Results of Operations - Nine months ended
September 30, 2002 Compared to September 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 nine months ended September 30, 2002 2001 (Decrease)
Revenues
Capital Markets Group $19,152 $19,458 $ (306)
Investment Services Group
Asset Management 6,284 6,219 65
Wealth Management 16,367 16,057 310
Portfolio Consulting - 17,333 (17,333)
------- ------- --------
Total 22,651 39,609 (16,958)
Corporate 4,623 3,567 1,056
------- ------- --------
$46,426 $62,634 $(16,208)
======= ======= ========
Net Income (Loss) Before Taxes
Capital Markets Group $ 846 $ 2,848 $ (2,002)
Investment Services Group
Asset Management (269) (310) 41
Wealth Management (414) (1,074) 660
Portfolio Consulting - (154) 154
------- ------- --------
Total (683) (1,538) 855
Corporate 1,645 962 683
------- ------- --------
$ 1,808 $ 2,272 $ (464)
======= ======= ========
All references to 2002 and 2001 in the information below refer to the
nine months ended in both of those years unless otherwise indicated.
Capital Markets Group
Capital Markets total revenues were $19,152 in 2002 compared to $19,458
in 2001, a decrease of $306. Underwriting revenue increased $2,680 in 2002.
A total of thirty-three senior and sole managed municipal underwriting
transactions totaling $1 billion in bonds issued were completed in 2002
compared to twenty-five transactions totaling $1 billion in 2001. A total of
eighteen church and school underwriting transactions totaling $95 million were
completed in 2002, compared to twelve transactions totaling $65 million in
2001. Trading profits decreased $1,077 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 $1,667 between periods due to fewer mortgage
originations. The balance of the decrease is primarily due to a decrease in
interest income.
Capital Markets expenses were $18,306 in 2002 compared to $16,610 in
2001, an increase of $1,696. Employee compensation and benefits decreased
$200 primarily due to decreased commissions on lower trading activity.
Interest expense decreased $667 as the result of decreased interest rates.
Administrative support activities allocated to Capital Markets increased
$2,030 due to a change in the allocation methodology. The resulting net
income before taxes for Capital Markets in 2002 was $846 compared to net
income of $2,848 in 2001.
Investment Services Group
Revenues and net losses were $22,651 and $683, respectively, in 2002
compared to $39,609 and $1,538, 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 on August 31, 2001, resulted in lower revenues and less of a
loss in 2002.
Asset Management-
Total revenues were $6,284 in 2002 compared to $6,219 in 2001, an
increase of $65. Distributor commissions increased $120 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 upon which lower fees are charged. Despite these
circumstances, revenues from investment management and advisory fees remained
virtually the same between years.
Asset Management expenses were $6,553 in 2002 compared to $6,529 in 2001.
Compensation and benefits decreased $564 due to a reduction in personnel.
This decrease was partially offset by increased 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. Expenses allocated for administrative support activities
increased $217 in 2002 compared to 2001 primarily due to a change in the
allocation methodology. Asset Management had a net loss before taxes of $269
in 2002 compared to a loss before taxes of $310 in 2001.
Wealth Management-
Total revenues of Wealth Management were $16,368 in 2002 compared to
$16,057 in 2001, an increase of $311. Commission income from financial
products not underwritten by BCZ decreased $450, primarily as a result of
decreased overall retail investor transaction volumes in mutual funds and
equities. Commission income also decreased $635 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 offset by a $2,023 increase in
revenues from the retail sale of bonds underwritten by the Company, an
increase in advisory fees related to "wrap" programs, and an increase in
trading profits.
Total Wealth Management expenses were $16,782 in 2002 compared to $17,131
in 2001, a decrease of $349. Compensation and benefit expense increased $537
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. Professional and regulatory fees increased $354 due to
increased legal, consulting, and state registration expenses. Promotional
expense increased $174 due to a higher level of advertising. Expenses
allocated for administrative support activities decreased $1,730 in 2002
compared to 2001 due to a change in the allocation methodology. Wealth
Management had a loss before taxes of $414 in 2002 compared to $1,074 in 2001.
Portfolio Consulting -
This operation was merged into an unaffiliated company on August 31,
2001. Total revenues in 2001 of Portfolio Consulting were $17,333, which
includes a gain recorded on the sale of $1,102. Total expenses in 2001 were
$17,487. The net loss before taxes was $154 in 2001. There were no revenues
and expenses in 2002. An additional gain recorded in 2002 is included in the
Corporate segment results.
Corporate
Corporate revenues were $4,623 in 2002 compared to $3,567 in 2001.
Interest and dividends were $2,952 in 2002 compared to $2,381 in 2001 and are
primarily related to the investment in government agency-backed collateralized
mortgage obligations ("CMOs"). The investment in CMOs increased significantly
in December 2001, but prepayments of principal have caused the current
investment balance to decrease by $15,075 as of September 30, 2002. Corporate
revenues also include a $600 gain recognized on the sale of PMC as the result
of the receipt of a payment on a note related to that sale. 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 $706, which includes $542 of interest.
Corporate expenses after allocations to the Company's other operating
segments were $2,978 in 2002 compared to $2,605 in 2001. The largest
component of expenses is employee compensation and benefits which was $5,182
in 2002 compared to $4,044 in 2001, an increase of $1,138. The increase in
employee compensation and benefits was due to a change in the allocation
process whereby certain incentive-based amounts are recorded in Corporate in
2002 rather than directly in the business areas as was the process in 2001.
The allocation of administrative expenses was adjusted to reflect this change.
Interest expense, primarily related to the financing of the government agency-
backed CMOs and securities inventory, decreased $642 in 2002. The allocations
to the other segments totaled $5,825 in 2002 compared to $6,075 in 2001. The
minority interests incurred losses in the first nine 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 attributable to
minority interests totaled $308 in 2002. Corporate net income before taxes
was $1,645 in 2002 compared to $962 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. At September 30, 2002, the increase in
cash and cash equivalents was due to a lower level of inventory and the
related level of financing of that inventory through the clearing broker.
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 $23,175 of notes were issued and $20,943 were repaid. The
total balance of short-term notes outstanding was $5,607 as of September 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 unrated 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
September 30, 2002. Amounts outstanding under repurchase agreements totaled
$22,994 at September 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. The repurchase agreements are
repaid as principal payments on the underlying investments are received.
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 shared with the Parent, from
its primary clearing broker 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 September 30, 2002. The amount due the primary
clearing broker is $12,682 at September 30, 2002. Securities inventory held
by BCZ at the clearing broker serves as the underlying collateral for the
amount due.
BCZ acts as remarketing agent for approximately $2.3 billion of municipal
variable rate demand notes ("VRDNs"), most of which BCZ previously underwrote.
The VRDNs 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 VRDNs 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 VRDNs. There were $12,150 of VRDNs held in inventory at
September 30, 2002. The inventory of VRDNs was remarketed at the beginning of
the fourth quarter. Amounts purchased into inventory 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. In its capacity as remarketing agent,
BCZ may purchase the bonds into inventory as part of its remarketing efforts.
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 September 30, 2002, ZHF had $11,213 of outstanding loans to
small businesses and $8,040 of debentures due the SBA, increases of $9,283 and
$6,440, 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 September 30, 2002,
ZHF had a remaining leverage commitment from the SBA of up to $30.2 million.
First Church Financing Corporation ("FCFC") 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 September 30, 2002, BCZ had net capital of $12,031, which
exceeded minimum net capital requirements by $11,308. 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 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 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 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
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 consolidated
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. 141 was implemented as of July 1, 2001. 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. SFAS No. 142 was
implemented on January 1, 2002. As of September 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 discounted 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, including, 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 volatile and competitive nature
of the financial services business, the ability of the Company to underwrite
and distribute securities, the effect of federal and state regulation, the
market value of mutual fund portfolios and separate account portfolios advised
by the Company as well as the ability of the Company to maintain asset
management fees at current levels, the collection of amounts owed to the
Company including the note from PMC, the volume of sales by its retail
brokers, potential liability under federal and state securities laws and other
laws and regulations governing the Company's business, 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 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
September 30, 2002, the Company manages a portfolio with an aggregate value of
approximately $1.8 billion in the form of separately managed and mutual fund
accounts. Of the total, $587 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. There is no ready
market for these securities, accordingly, the Company has established
procedures to periodically test these securities for proper valuation. The
Company continuously reviews these investments.
The table below provides information about the Company's financial
instruments as of September 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 $ 748
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread.
Forward Interest Rate Agreement $5,005 $ (661)
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread. (Hedge to
above instrument.)
II. Trading and Non-Trading Portfolio
Expected Maturity Dates
2002 2003 2004 2005 2006 Thereafter Total Fair Value
(U.S. Dollars in Thousands)
ASSETS
Securities Inventory - fixed rate
Municipal bond issues $ - $ 2 $ - $ (5) $ - $ 6,131 $ 6,128 $ 5,636
Weighted average interest rate 10.50% 5.10% 6.24%
Institutional bonds - 9 5 10 24 24
Weighted average interest rate 7.75% 8.00% 8.48%
Other - (240) - - - 1,942 1,702 505
Weighted average interest rate 5.55% 8.75%
Securities Inventory - variable rate
Municipal variable rate demand notes - - - - - 12,150 12,150 12,150
Weighted average interest rate 1.83%
Notes receivable 188 4,115 829 2,005 975 7,519 15,631 15,631
Weighted average interest rate 11.80% 11.86% 11.97% 12.11% 12.32% 12.48%
Other investments - CMOs(1) - - - - - 23,077 23,077 23,077
Weighted average interest rate 7.95%
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) 5,607 - - - - - 5,607 5,607
Weighted average interest rate 2.91%
Securities sold under agreements to
repurchase(2) 22,994 - - - - - 22,994 22,994
Weighted average interest rate 2.02%
Bonds payable - fixed rate(1) - - - - - 8,040 8,040 8,040
Weighted average interest rate 6.12%
(1) Assumes no prepayment
(2) The information shown above includes actual interest rates at September 30, 2002 and assumes
no changes in interest rates in 2002 or thereafter.
Material limitations exist in determining the overall net market risk exposure
to 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.
Item 4. Controls and Procedures
Within the 90-day period prior to the date of this report, the Company,
under the supervision and with the participation of the Company's management,
including the Company's chief executive officer and chief financial officer,
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (the "Evaluation"). Based
upon the Evaluation, the Company's chief executive officer and chief financial
officer concluded that the Company's disclosure controls and procedures are
effective in ensuring the material information relating to the Company,
including its consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which this quarterly
report was being prepared.
As the result of the Evaluation, the Company formalized its disclosure
control committee and certain disclosure control processes and procedures.
There were no other significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the Evaluation.
PART II. OTHER INFORMATION
Items 1 through 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See the Exhibit Index following the Certifications page,
which is incorporated herein by reference.
(b) Reports on Form 8-K:
On July 26, 2002, the 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.
(Registrant)
Dated: November 14, 2002 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: November 14, 2002 By /s/ Gary P. Engle
Gary P. Engle
Sr. Vice President/CFO
CERTIFICAITONS
Chief Executive Officer
I, John J. Mulherin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Ziegler
Companies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John J. Mulherin
John J. Mulherin
President and CEO
Chief Financial Officer
I, Gary P. Engle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Ziegler
Companies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Gary P. Engle
Gary P. Engle
Sr. Vice President and CFO
The Ziegler Companies, Inc.
(the "Registrant")
(Commission File No. 1-10854)
EXHIBIT INDEX
to
FORM 10-Q QUARTERLY REPORT
For the quarter ended September 30, 2002
Exhibit
Number Description
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.
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