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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-10854
THE ZIEGLER COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1148883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 978-6400
_______________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( ) No ( X )
The number of shares outstanding of the registrant's Common Stock, par value
$1.00 per share, at October 31, 2003 was 2,187,172 shares.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
2003 2002
(In thousands except per share amounts)
ASSETS
Cash and cash equivalents $ 27,622 $ 10,448
Securities owned 15,585 53,888
Receivables 3,691 4,171
Notes receivable, net 35,116 24,842
Other investments 29,713 31,882
Land, buildings and equipment, at cost,
net of accumulated depreciation of
$14,020 and $13,490, respectively 5,777 5,377
Goodwill and other intangible assets 2,565 2,565
Other assets 4,859 4,626
Total assets $124,928 $137,799
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 4,415 $ 4,682
Securities sold under agreements to repurchase 16,973 21,268
Payable to broker-dealers 7,157 27,686
Accrued compensation 7,873 11,065
Long-term debt 24,961 16,115
Other liabilities and deferred items 9,090 9,454
Total liabilities 70,469 90,270
Minority interest 14,117 7,487
Commitments
Stockholders' equity:
Common stock, $1 par, authorized
7,500 shares, issued 3,544 3,544 3,544
Additional paid-in capital 6,221 6,222
Retained earnings 52,234 51,793
Treasury stock, at cost, 1,369
and 1,352 shares, respectively (21,525) (21,286)
Unearned compensation (132) (231)
Total stockholders' equity 40,342 40,042
Total liabilities and stockholders' equity $124,928 $137,799
See accompanying notes to consolidated financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
September 30, September 30,
2003 2002
(In thousands except per share amounts)
Revenues:
Investment banking $ 9,442 $ 9,217
Investment management and advisory fees 3,017 2,172
Commissions 4,841 3,245
Interest and dividends 1,742 1,181
Gain on sale of operations 400 600
Other income 472 925
Total revenues 19,914 17,340
Expenses:
Employee compensation and benefits 12,410 10,437
Communications and data processing 1,435 1,416
Promotional 1,243 1,092
Occupancy 1,003 979
Brokerage commissions and clearing 723 712
Professional and regulatory 463 609
Investment manager and other 483 177
Interest 386 316
Other expenses 419 342
Total expenses 18,565 16,080
Income from operations before income
taxes and minority interest 1,349 1,260
Minority interest in net income of
subsidiaries (545) (30)
Income from operations before income taxes 804 1,230
Provision for income taxes 330 513
Net income $ 474 $ 717
Per share data:
Basic and diluted earnings per share $ 0.22 $ 0.33
See accompanying notes to consolidated financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2003 2002
(In thousands except per share amounts)
Revenues:
Investment banking $25,136 $22,832
Investment management and advisory fees 8,610 7,238
Commissions 11,370 9,062
Interest and dividends 5,399 4,103
Gain on sale of operations 400 903
Other income 1,962 2,288
Total revenues 52,877 46,426
Expenses:
Employee compensation and benefits 31,069 27,864
Communications and data processing 4,328 4,532
Promotional 3,383 3,152
Occupancy 3,197 2,891
Brokerage commissions and clearing 2,059 2,298
Professional and regulatory 1,543 1,574
Investment manager and other 1,293 598
Interest 1,172 995
Other expenses 1,326 1,022
Total expenses 49,370 44,926
Income from operations before income
taxes and minority interest 3,507 1,500
Minority interest in net (income) loss
of subsidiaries (1,578) 308
Income from operations before income taxes 1,929 1,808
Provision for income taxes 639 586
Net income $ 1,290 $ 1,222
Per share data:
Basic and diluted earnings per share $ 0.60 $ 0.54
See accompanying notes to consolidated financial statements.
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2003 2002
(In thousands except per share amounts)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,290 $ 1,222
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,171 1,560
Provision for losses 100 -
Gain on sale of equipment (11) -
Gain on sale of operations (400) (903)
Compensation expense paid in common stock 161 170
Minority interest in net income (loss)
of subsidiaries 1,578 (308)
Changes in assets and liabilities:
Decrease (increase) in:
Securities owned 38,303 80,120
Receivables 480 1,111
Other assets (241) (708)
Increase (decrease) in:
Payable to broker-dealers (20,529) (66,213)
Accrued compensation (3,192) (3,064)
Other liabilities and deferred items __ 36 946
Net cash provided by operating activities 18,746 13,933
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of equipment 21 -
Payments received on notes receivable 5,876 4,182
Sales/paydowns on other investments 4,870 15,099
Sale of operations, net - 303
Payments for:
Issuance of notes receivable (16,250) (10,553)
Capital expenditures (1,573) (1,246)
Purchase of other investments (2,701) (500)
Net cash (used in) provided by investing
activities (9,757) 7,285
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes payable $29,220 $23,175
Short-term bank borrowing 9,400 -
Issuance of long-term debt 9,150 6,440
Minority interest capital contributions 5,052 3,614
Payments for:
Principal payments of short-term notes
payable (29,487) (20,943)
Repayments of short-term bank borrowing (9,400) -
Securities sold under agreements to
repurchase (4,295) (14,876)
Principal payments of long-term debt (304) (1,700)
Purchase of treasury stock (302) (3,675)
Cash dividends paid (849) (913)
Net cash provided by (used in) financing
activities 8,185 (8,878)
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,174 12,340
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,448 14,688
CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,622 $27,028
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 1,317 $ 1,053
Income taxes paid (refunded) during
the period $ 23 $ (80)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Granting of restricted stock from
treasury stock $ 42 $ 412
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
September 30, 2003
Note A -- Basis of Presentation
The consolidated financial statements included herein have been prepared
by The Ziegler Companies, Inc. (the "Parent") and its wholly owned and
partially-owned and controlled subsidiaries (collectively known as the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and the instructions to Form 10-Q. Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. Management believes, however,
that these consolidated financial statements reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
the results for the periods presented. All such adjustments are of a normal
recurring nature. Because certain disclosures have been condensed or omitted
from these consolidated financial statements, these consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's 2002
annual report on Form 10-K. Operating results for the nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. Certain prior year amounts
have been reclassified to conform with current period presentation.
Note B -- Commitments and Contingent Liabilities
In the normal course of business, B. C. Ziegler and Company ("BCZ"), a
wholly owned subsidiary of the Parent, enters into firm underwriting
commitments for the purchase of debt securities. These commitments require
BCZ to purchase debt securities at a specified price. In order to mitigate
the risk of holding recently underwritten debt securities, BCZ attempts to
pre-sell the securities to customers in advance of closing on the
underwriting. BCZ had commitments outstanding to purchase debt securities of
$2,189 at September 30, 2003.
In the normal course of business, Ziegler Healthcare Fund I, LP, a
partially-owned subsidiary of the Company, makes commitments to originate SBA
loans. At September 30, 2003, Ziegler Healthcare Fund I, LP had outstanding
commitments of $2,250.
In the normal course of business, the Company is the subject of customer
complaints and is named as a defendant in various legal actions arising from
the securities and other businesses. The Company has established reserves for
potential losses that may result from these customer complaints and legal
actions. Although the outcome of litigation is always uncertain, especially
in the early stages of a complaint or legal action, based on its understanding
of the facts and the advice of legal counsel, management believes that
resolution of these actions will not result in a material adverse effect on
the consolidated financial condition or consolidated results of operations of
the Company. However, if during any period any adverse complaint or legal
action should become probable or be resolved, the results of operations could
be materially affected.
Note C -- Net Capital Requirements
As the Company's registered broker-dealer, BCZ is subject to the
Securities and Exchange Commission Uniform Net Capital Rule (the "Rule"),
which requires the maintenance of minimum net capital. BCZ has elected to use
the alternative method permitted by the Rule, which requires that BCZ maintain
minimum net capital, as defined by the Rule, equal to the greater of $250 or
2% of aggregate debit balances arising from customer transactions, as defined
by the Rule. At September 30, 2003, BCZ had net capital of approximately
$10,847 which was approximately $10,597 in excess of its required minimum
capital. BCZ requires net capital in excess of its regulatory minimum in
order to enter into most underwriting transactions. Such net capital
requirements could restrict the ability of BCZ to pay dividends to the Parent.
Note D -- Securities Owned and Other Investments
Securities owned consisted of the following:
September 30, December 31,
2003 2002
Municipal bonds $12,211 $49,643
Preferred stock 2,698 1,770
Institutional bonds 56 1,708
Other securities 620 767
$15,585 $53,888
Municipal bonds consist primarily of revenue bonds issued by state and
local governmental authorities generally related to healthcare or long-term
care facilities. Institutional bonds consist primarily of bonds issued by
churches and independent schools. The reduction in municipal bonds from
December 31, 2002, to September 30, 2003, is due to the remarketing of
variable rate demand notes and the sale of bonds to retail and institutional
investors.
Other investments consisted of the following:
September 30, December 31,
2003 2002
Collateralized mortgage obligations ("CMOs") $17,012 $21,382
The EnvestNet Group, Inc. common stock 9,500 9,500
Other 3,201 1,000
$29,713 $31,882
The Company currently has a deferred gain from the sale in 2001 of PMC
International, Inc. ("PMC") of $4,596. The deferred gain will be recognized
as the remaining $2 million note is collected and the common stock of The
EnvestNet Group, Inc. is sold. The amount of deferred gain associated with
The EnvestNet Group, Inc. common stock is $3,797.
Note E -- Payable to Broker-Dealers
BCZ clears its proprietary and customer transactions through other
broker-dealers on a fully disclosed basis. The relationship with these
clearing brokers results in amounts payable for transaction processing,
inventory purchases, and losses on securities transactions, offset by fees
earned, commissions, inventory sales and profits on securities transactions.
The amount payable to the primary clearing broker was $6,794 at September 30,
2003 and relates primarily to the financing of inventory and is collateralized
by securities held in BCZ's inventory with a market value of approximately
$14,983 at September 30, 2003. At December 31, 2002, the amount payable was
$27,586 collateralized by securities with a market value of approximately
$53,163.
Note F -- Short-term Bank Borrowing
The Company has a line of credit of $20 million in place to obtain
short-term funds. The line of credit is used primarily for underwriting
activity and the funding of Federal Housing Administration loan originations,
both on a short-term basis. The Company had no amounts outstanding at
September 30, 2003 or at December 31, 2002.
Note G -- Income Taxes
The principal reason for the difference between the Company's effective
tax rate and the federal statutory rate is the non-taxable interest earned on
municipal bonds. During the third quarter of 2003, the non-taxable interest
earned was offset by nondeductible business expenses which caused the
effective income tax rate to increase.
Note H -- Earnings per Share
The following reconciles the numerators and denominators of the basic and
diluted earnings per share computations for net income for the following
periods ended September 30 (shares in thousands):
For the Three Months Ended
September 30, September 30,
2003 2002
Net income $ 474 $ 717
Basic
Weighted average shares outstanding 2,154 2,159
Basic income per share $0.22 $0.33
Diluted
Weighted average shares outstanding-
Basic 2,154 2,159
Effect of dilutive securities:
Restricted stock 11 15
Weighted average shares outstanding-
Diluted 2,165 2,174
Diluted income per share $0.22 $0.33
For the Nine Months Ended
September 30, September 30,
2003 2002
Net income $1,290 $1,222
Basic
Weighted average shares outstanding 2,153 2,265
Basic income per share $0.60 $0.54
Diluted
Weighted average shares outstanding-
Basic 2,153 2,265
Effect of dilutive securities:
Restricted stock 11 9
Weighted average shares outstanding-
Diluted 2,164 2,274
Diluted income per share $0.60 $0.54
Note I -- Stock-Based Compensation
The Company accounts for stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. No stock-based employee compensation cost related to stock
options is reflected in net income, as all stock options granted had an
exercise price equal to or greater than the fair market value of the
underlying common stock on the date of grant. The pro forma effect on net
income and earnings per share, had the Company applied the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation related to stock options, is presented below. The Black-Scholes
option pricing model was used in all calculations.
For the Three Months Ended
September 30, September 30,
2003 2002
Net income, as reported $474 $717
Deduct: Total employee compensation
expense determined under the fair value
based method for stock options,
net of related tax effects 19 28
Pro forma net income $455 $689
Earnings per share:
Basic and diluted - as reported $0.22 $0.33
Basic and diluted - pro forma $0.21 $0.32
For the Nine Months Ended
September 30, September 30,
2003 2002
Net income, as reported $1,290 $1,222
Deduct: Total employee compensation
expense determined under the fair value
based method for stock options,
net of related tax effects 63 78
Pro forma net income $1,227 $1,144
Earnings per share:
Basic and diluted - as reported $0.60 $0.54
Basic and diluted - pro forma $0.57 $0.50
Note J -- Operating Segments
The Company is organized and provides financial services through three
operating segments. These operating segments are Capital Markets, Investment
Services and Corporate. Operating segment results include all direct revenues
and expenses of the operating units in each operating segment as well as an
allocation of indirect administrative and operating costs.
The Capital Markets segment consists of the Company's fixed income and
preferred stock institutional sales and trading, risk management and financial
advisory, and institutional and public finance services. Sales credits
associated with underwritten offerings are reported in the Investment Services
segment when sold through retail distribution channels and in the Capital
Markets segment when sold through institutional distribution channels.
The Investment Services segment sells a wide range of financial products
through its retail branch distribution network, including equity and fixed
income securities, affiliated and non-affiliated mutual funds, annuities,
insurance products, and portfolio management and related administrative
services. The Investment Services segment also provides investment advisory
services to the affiliated mutual funds (the North Track Funds) and asset
management services for institutional and individual clients.
The Corporate segment is principally the Company's corporate investment
and borrowing activities and unallocated corporate revenues and expenses.
Corporate segment investment activities include the other investments
described in Note D; the activities and share of income related to Ziegler
Healthcare Fund I, LP ("ZHF"), an 11% owned Small Business Investment Company
("SBIC"); the operating results for Ziegler Healthcare Capital, LLC ("ZHC"),
the Company's wholly owned management company of the SBIC; and the Company's
proportionate share of an investment in Ziegler Equity Funding I, LLC ("ZEF"),
a 68% owned private equity fund. The remaining 32% of ZEF is owned by
qualified officers and key employees of the Company. The effect on net income
before taxes and after the adjustment for minority interests is reflected
below.
Since there are no comprehensive authorities for management accounting
related to the allocation of administrative expenses which are equivalent to
accounting principles generally accepted in the United States of America, the
information presented is not necessarily comparable with similar information
in other broker-dealer financial statements. In addition, methodologies used
to measure, assign and allocate certain items may change from time-to-time to
reflect, among other things, accounting refinements and changes in the
organization and management structure. Allocations of indirect administrative
and operating costs are based on methodologies which consider the size of the
operation, the number of personnel, and other relevant factors.
Operating segment financial information is as follows:
For the Three Months Ended
September 30, September 30,
2003 2002
Revenues:
Capital Markets $ 8,055 $ 7,897
Investment Services 9,535 7,591
Corporate 2,324 1,852
Total $19,914 $17,340
Net Income (Loss) from Operations
Before Income Taxes:
Capital Markets $ 399 $ 561
Investment Services 42 (440)
Corporate 363 1,109
Total $ 804 $ 1,230
For the Nine Months Ended
September 30, September 30,
2003 2002
Revenues:
Capital Markets $20,128 $19,152
Investment Services 26,557 22,651
Corporate 6,192 4,623
Total $52,877 $46,426
Net Income (Loss) from Operations
Before Income Taxes:
Capital Markets $ 1,231 $ 846
Investment Services (411) (683)
Corporate 1,109 1,645
Total $ 1,929 $ 1,808
The Company's revenues and net income before taxes presented above are
derived entirely from domestic operations. The Company does not segregate
asset information by operating segment.
Note K -- New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" and establishes new standards regarding
the consolidation of a variable interest entity when the controlling
enterprise does not hold a majority voting interest in the entity.
Interpretation No. 46 applies in the fiscal year or interim period beginning
after December 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. The
Company is evaluating the effect of Interpretation No. 46 on its consolidated
financial statements. The Company does not expect that Interpretation No. 46
will have a material effect on its consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" to amend and clarify financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In addition, SFAS No. 149 requires that contracts with
comparable characteristics be accounted for similarly. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 (with
certain exceptions) and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have a material effect on the
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. Pursuant to SFAS No. 150,
such freestanding financial instruments (i.e., those entered into separately
from an entity's other financial instruments or equity transactions or that
are legally detachable and separately exercisable) must be classified as
liabilities or, in some cases, assets. In addition, SFAS No. 150 requires
that financial instruments containing obligations to repurchase the issuing
entity's equity shares and, under certain circumstances, obligations that are
settled by delivery of the issuer's shares be classified as liabilities. SFAS
No. 150 amends SFAS No. 128, Earnings Per Share, and SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and nullifies (or partially
nullifies) various EITF (Emerging Issue Task Force) consensuses. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003 and for contracts in existence at the start of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material effect on the consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business and Operating Segments
The Ziegler Companies, Inc. (the "Parent"), through its wholly owned
subsidiaries and partially-owned and controlled subsidiaries (collectively
known as the "Company"), is engaged in financial services activities. These
financial services activities are conducted through three operating segments:
Capital Markets, Investment Services and Corporate.
The Capital Markets segment underwrites fixed income securities to
finance senior living and healthcare providers, religious institutions, and
private schools. Capital Markets' services also include risk management and
financial advisory services, merger and acquisition services, sales and
trading of fixed income securities and preferred stock, and Federal Housing
Administration ("FHA") mortgage loan origination, often in conjunction with
the Company's investment banking services. Capital Markets activities are
conducted primarily through B. C. Ziegler and Company ("BCZ"), except that
Ziegler Financing Corporation ("ZFC") conducts FHA mortgage loan origination
activities. These services are provided primarily to institutions,
corporations, and municipalities.
The Investment Services segment consists of two operating units: Asset
Management and Wealth Management. Asset Management provides investment
advisory services to affiliated mutual funds (the North Track Funds) and
private accounts of institutional and individual clients. Wealth Management
offers a wide range of financial products and financial planning services to
retail and institutional clients through its broker distribution network,
including equity and fixed-income securities, affiliated and non-affiliated
mutual funds, annuities and other insurance products. Wealth Management is
the primary retail distribution channel for religious institution and private
school bonds and other taxable and tax-exempt bonds underwritten by the
Capital Markets segment. Allocated sales credits associated with underwritten
offerings are reported in the Investment Services segment when sold through
the Company's retail distribution channels. Asset Management and Wealth
Management activities are conducted through BCZ.
The Corporate segment consists primarily of the investment and debt
management activities of the Parent and BCZ's unallocated corporate
administrative activities. Certain corporate administrative expenses are
allocated to the Capital Markets and the Investment Services segments using
methodologies which consider the size of the operation, the number of
personnel, and other relevant factors. Corporate segment investment activity
includes the Company's share of the operations of Ziegler Healthcare Fund I,
LP ("ZHF"), a small business investment company ("SBIC") that is in the
business of originating loans to qualified small businesses, primarily for-
profit long-term care companies; Ziegler Healthcare Capital, LLC ("ZHC"), the
management company of ZHF; and ZHP I, LLC ("ZHP"), the general partner of ZHF.
The Company has an 11% ownership share in ZHF and wholly owns ZHP and ZHC.
The Company also owns 68% of Ziegler Equity Funding I, LLC ("ZEF") a private
equity fund whose purpose is to provide funding for the pre-finance
development needs of developmental stage continuing care retirement
communities. The Corporate segment includes the Company's share of the
operations of ZEF. ZEF is also 32% owned by qualified officers and employees
of the Company. Each of these companies is consolidated into the Company's
financial statements.
Business Environment
The general level of interest rates, the prospects for economic recovery
and economic growth, valuations in the equity markets and many other economic
factors impact the investment and financing decisions of the Company's
customers, both institutional and retail. In 2002, investment banking
activity in the form of bond underwriting and sales by the Capital Markets
segment was at its highest level in the past three years as the result of
favorable interest rates. The reductions in prevailing interest rates, the
growing need for senior housing, and, to some extent, the desire to refinance
higher interest rate debt contributed to the increased bond underwriting
volumes in 2002 over previous years. These favorable interest rates have
continued into 2003 with only small increases.
Historically, the Company has experienced uneven bond underwriting
activity during the year. In general, the Company's underwriting activity is
slower during the early months of the year and higher levels of activity are
experienced in later months as issuers attempt to finalize project financing
activity before the end of the calendar year. Despite a modest increase in
the prevailing interest rates in the third quarter of 2003, issuance volume of
debt securities by the Company's investment banking clients increased in the
third quarter to bring total issuance volume to $1.2 billion in 25
transactions for the first nine months of 2003. This compares to issuance
volume of $1.0 billion in 33 transactions during the first nine months of
2002. During 2003, a high proportion of issuance volume was in variable rate
bonds. Variable rate bonds are issued by issuers to take advantage of the
historically low short term interest rates, but carry less profitability for
the Company as underwriter. As interest rates increase, issuers may refinance
variable rate bonds with long term fixed rate bonds, or seek to fix their cost
of debt using interest rate derivatives.
The Company continues to build on its "pipeline" of bond underwriting
projects, attempting to identify potential bond issues to underwrite. Market
conditions continue to appear favorable for the issuance of bonds as rates
remain relatively low and bond investors continue to show a strong appetite
for fixed income securities of all types. A significant increase in
prevailing interest rates could affect the offering pipeline. Because of the
current favorable conditions, the Company experienced a strong increase in
secondary bond and preferred stock trading activity in the first nine months
of 2003. Increased demand for fixed income securities came from both
institutional and individual investors. The increase in secondary bond
trading business was a direct reflection of that demand.
The Investment Services segment is affected by the investment perceptions
and demands of its customers. Increases in the sale of annuities, church and
school bonds, equities, and alternative investments have occurred in 2003 as
compared to 2002. The sale of mutual funds, both North Track and other funds,
although behind 2002 year-to-date, increased in the third quarter of 2003 as
compared to the third quarter of 2002. Total assets added to the North Track
Funds followed a similar pattern with increases in the third quarter as
compared to the prior six months and third quarter of 2002.
The Asset Management business has seen some recovery in market values
in its assets under management during 2003, as well as increases due to sales
of North Track mutual funds and separate account asset management services.
Fees for this business unit are earned based upon the value of assets under
management. Although total assets under management increased approximately
$240 million since the beginning of 2003, total assets under management did
not change significantly in the third quarter of 2003. Total assets under
management started the year at just over $1.8 billion and is at just under
$2.1 billion at September 30, 2003. The increases since the beginning of the
year are approximately evenly split between increases due to net sales over
redemptions and market value increases. In the third quarter of 2003, market
value increases were partially offset by net redemptions over sales for the
quarter.
Both the mutual funds and the separate accounts assets under management
experience outflows of assets. The mutual funds will experience net
redemptions as investors decide to liquidate their investments. The separate
account asset management business experiences run-off as funds are withdrawn
for building projects. A large proportion of the separate account asset
management business is related to managing assets on a short-term basis for
clients who issue bonds, the proceeds of which are initially invested and then
withdrawn, as needed, to fund building projects.
In March 2003, the National Association of Securities Dealers ("NASD")
directed member firms to conduct a self-assessment of their record of
delivering commission discounts to customers for certain mutual fund
purchases. BCZ, as a member firm, conducted this self-assessment which
involved a statistical sample of all transactions in 2001 and 2002. Based
upon the statistical sample, a $40 liability reserve was established. Refunds
have been made to all clients identified in the sample that were overcharged
and the balance of the reserve is available for customer refunds.
The New York Attorney General recently announced ongoing investigations
of mutual funds and their managers for late trading and market timing
transactions. The Securities and Exchange Commission ("SEC") has requested
information about such activities, and policies pertaining to such activities,
from the largest U.S. mutual fund companies. To the Company's knowledge, the
Company's affiliated mutual fund family, the North Track Funds, is not among
the mutual funds under investigation.
The Corporate segment (whose operations include 100% of the revenues and
expenses of the partially-owned, but consolidated, entities) had interest
revenues increase as the SBIC increased its portfolio of loans. The SBIC has
made progress in identifying SBA-qualified borrowers during the course of its
first full year of operations in 2002 and has continued that progress in 2003.
After significant declines, due to principal prepayments, in the balance of
collateralized mortgage obligation ("CMO") investments held by the Corporate
segment during 2002, the pace of those declines slowed in 2003. The favorable
spread between interest earned and the currently low cost of borrowing
contributes favorably to the Company's profitability, although at a lower
level than in 2002. However, this source of net interest income could
decrease if the rate of principal prepayments increases or short-term interest
rates rise.
The Company has an investment in common stock and a note receivable from
The EnvestNet Group, Inc. ("EnvestNet") resulting from the sale of the
Company's former subsidiary, PMC International, Inc. ("PMC"), in 2001.
EnvestNet is a closely held mid to late stage development company. It is
engaged in the business of providing managed account and performance reporting
services. The common stock held by the Company is currently valued at $9,500
in the consolidated financial statements. The Company received payment on its
note from EnvestNet in the amount of $1,000 on August 31, 2003, and has a note
receivable from EnvestNet for $2,000 due August 31, 2004. The Company
recognized an additional gain on the sale of PMC of $400 upon receipt of the
note payment. Interest is paid monthly on the remaining note. EnvestNet
raised additional capital at the beginning of 2003, and the Company considered
the price at which EnvestNet raised its additional capital in valuing the
Company's common stock investment in EnvestNet. This additional capital was
raised by EnvestNet through the sale of preferred stock in a private placement
at a conversion price that was above the value recorded on the Company's
consolidated statement of financial position for its investment in EnvestNet
common stock. The note receivable is recorded at its face value and EnvestNet
is current on all interest payments.
EnvestNet has had difficulty in the current economic environment. It
relies on assets under advisement to generate sufficient revenues to support
operations. To date, these revenues have not been sufficient to fully fund
current operations. EnvestNet uses capital from investors, in addition to
revenues from its regular business operations, to meet its operating expenses.
EnvestNet projections for profitability have been delayed due to the
prevailing economic circumstances and the competitive environment in which it
operates. The Company currently has a deferred gain from the sale of PMC
included on its consolidated statement of financial position of $4,596 after
the recognition of the $400 gain this quarter. The deferred gain will be
recognized as the remaining note receivable is collected and the common stock
of EnvestNet is sold. The value of both the common stock and the note
receivable are subject to various risks including, but not limited to, the
cash requirements of EnvestNet's operations, competition in its marketplace,
equity market valuations, employee recruitment and retention, and other
factors. Given the level of risks, it is possible that changes in the value
of the common stock and the note receivable may occur in the future and the
deferred gain may have to be adjusted downward or, if significant, the
recording of a loss may be required.
Results of Operations - Three months ended
September 30, 2003 Compared to September 30, 2002
(Dollars in thousands unless specifically indicated)
The overall trends and conditions of the financial markets, specifically,
the fixed income markets and the senior living and healthcare markets, have a
significant effect on the consolidated financial position and results of
operations of the Company. Results of any period should not be considered
representative of future results. While the Company has attempted to
establish a cost structure that is appropriate for anticipated future business
activity, certain fixed operating costs cannot be reduced quickly should
business activity decline quickly. The Company continuously reviews its
business structure and attempts to make adjustments accordingly.
Financial Overview
In the third quarter of 2003, the Company's revenues increased to $19,914
from $17,340. Capital Markets increases came primarily from commission income
offset by a decline in underwriting income. Investment Services increases
came primarily from increased sales activity in the Wealth Management business
in part due to an increase in investment consultants since the second quarter
of 2002 and an increase in the sale of alternative investments. Corporate
revenues increased as the result of the increase in revenues of the partially-
owned entities, despite a reduction in interest income from CMO investments.
Segment Results
The following table summarizes the changes in revenues and income (loss)
from operations before taxes of the Company and its segments. Total revenues
and the Company's share of the results of operations of the partially-owned
entities are included in the Corporate segment.
Increase/
For the three months ended September 30, 2003 2002 (Decrease)
Revenues
Capital Markets $ 8,055 $ 7,897 $ 158
Investment Services
Asset Management 2,559 1,935 624
Wealth Management 6,976 5,656 1,320
Total 9,535 7,591 1,944
Corporate 2,324 1,852 472
$19,914 $17,340 $2,574
Net Income (Loss) from Operations
Before Taxes
Capital Markets $ 399 $ 561 $ (162)
Investment Services
Asset Management (92) (335) 243
Wealth Management 134 (105) 239
Total 42 (440) 482
Corporate 363 1,109 (746)
$ 804 $ 1,230 $ (426)
All references to the years 2003 and 2002 in the information below refer
to the three months ended September 30 in both years unless otherwise
indicated.
Capital Markets Segment
Capital Markets total revenues were $8,055 in 2003 compared to $7,897 in
2002, an increase of $158. Underwriting revenues declined $212 to $6,272 in
2003. A total of eleven senior, sole-managed, and co-managed municipal
underwriting transactions representing $530 million in bonds issued were
completed in 2003 compared to eleven transactions representing $388 million in
2002. A total of ten church and school underwriting transactions representing
$67 million were completed in 2003, compared to seven transaction representing
$32 million in 2002. Of the ten church and school transactions, three
transactions were tax-exempt variable rate transactions totaling $20 million.
A higher proportion of variable rate bond issues, which generate less
revenues, is the primary reason for the decline in underwriting revenues.
Commission income increased to $896 due to the sale of a specialty
subordinated debt product developed by the Company and sold by the Capital
Markets Group to institutional clients. The increased commission income was
also offset by a lack of FHA mortgage origination activity as compared to the
third quarter of 2002. Trading profits approximated $700 in both third
quarters of 2003 and 2002.
Capital Markets expenses were $7,656 in 2003 compared to $7,336 in 2002,
an increase of $320. The increase is primarily due to increased employee
compensation and benefits expense of $603 due to incentive-based compensation
and the higher levels of commission income and trading profits. Allocated
administrative support expenses decreased $253 from $1,564 in 2002 to $1,311
in 2003 due to increased activity in other segments and a related higher
charge to those segments reducing the allocation to Capital Markets. The
resulting net income from operations before taxes for Capital Markets in 2003
was $399 compared to $561 in 2002.
Investment Services Segment
The Investment Services segment is made up of the Asset Management and
Wealth Management businesses, both of which are affected by the securities
markets. Revenues and net income were $9,535 and $42, respectively, in 2003
compared to revenues and a net loss of $7,591 and $440, respectively, in 2002.
Asset Management-
Total revenues were $2,559 in 2003 compared to $1,935 in 2002, an
increase of $624 or 32%. Total assets under management averaged approximately
$2.1 billion of assets during the third quarter of 2003, a 17% increase over
the prior third quarter average balance of $1.8 billion. Assets under
management increased for both mutual fund and separate account assets. These
increases came from both net increases over redemptions in assets due to sales
and increases in market value of the existing assets. Management fee revenues
based on assets increased accordingly. Distributor commission revenue also
increased due to increased mutual fund sales.
Asset Management expenses increased $381 to $2,651 in 2003 compared to
$2,270 in 2002. The increase in total expenses is due to increases in several
categories of expenses. Compensation and benefits increased $101 due to the
higher level of sales activity and the addition of wholesalers. Brokerage
commissions paid to brokers selling North Track mutual funds increased due to
higher sales volumes. Allocated administrative support expenses increased
$101 from $534 in 2002 to $635 in 2003. Asset Management had a net loss from
operations before taxes of $92 in 2003 compared $335 in 2002.
Wealth Management-
Total revenues of Wealth Management were $6,976 in 2003 compared to
$5,656 in 2002, an increase of $1,320. The increased revenues are primarily
due to an increase in commissions, trading profits and investment management
and advisory fees. Commissions increased $464 primarily due to the sale in
the third quarter of a specialty subordinated debt product developed by the
Company for an issuer. Trading profits increased $223 as the result of an
increased remarketing of bonds put back by investors, and a generally strong
trading environment for bonds. Increased investment management and advisory
fees of $504 related to increased assets in that business.
Total Wealth Management expenses were $6,842 in 2003 compared to $5,761
in 2002, an increase of $1,081. Employee compensation and benefits increased
$667 primarily due to increased commission expense on higher revenues and the
increased cost of new broker compensation arrangements. Investment manager
fees increased $305 due to an increase in assets associated with the
investment management and advisory business. Other expense increases were
primarily related to increased office remodeling as the Company standardized
its retail offices, increased promotional expenses and increased professional
fees, primarily legal expenses. Allocated administrative support expenses
increased $136 from $474 in 2002 to $610 in 2003. Wealth Management had net
income before taxes of $134 in 2003 compared to a net loss before taxes of
$105 in 2002.
Corporate Segment
Corporate revenues were $2,324 in 2003 compared to $1,852 in 2002. A
large component of revenues was from interest and dividends which were $1,537
in 2003 compared to $959 in 2002. Interest on the government agency-backed
CMOs decreased $151 to $343 between years as the result of declining principal
balances due to principal paydowns on that investment. However, the overall
increase in interest and dividends is the result of an increase of $761 in
interest income from the increase in the size of the loan portfolio of the
SBIC, the Company's partially-owned entity. Revenues in 2003 included a gain
on the sale of PMC International, Inc. ("PMC") of $400 compared to $600 in
2002. Both gains related to receipt of payments on notes receivable.
Revenues of the minority interests included in total Company revenues were
$1,272 in 2003 compared to $702 in 2002.
Total Corporate segment expenses, which are prior to the allocation of
administrative support expenses, were $3,808 in 2003 compared to $3,334 in
2002. The increase in expenses is primarily due to increased compensation and
benefits expense due to increases in marketing, information systems and legal
staff as well as termination expenses. Joint costs allocated to the other
segments totaled $2,392 in 2003 compared to $2,620 in 2002. The change in
allocations was the result of increased activity in the Corporate segment
which increased related expenses associated with that activity and reduced the
expenses allocated to other segments. The adjustment for the minority-owned
share of income in 2003 was $545 compared to $30 in 2002. The resulting
Corporate net income from operations before taxes, after allocation of
administrative support expenses and adjustment for minority interests was $363
in 2003 compared to $1,109 in 2002.
Results of Operations - Nine months ended
September 30, 2003 Compared to September 30, 2002
(Dollars in thousands unless specifically indicated)
Financial Overview
In the first nine months of 2003 the Company's revenues increased to
$52,877 from $46,426, due to increased sales activity in the Wealth Management
business related to the sale of bonds, particularly secondary market bonds.
The Capital Markets segment increased revenues primarily as the result of
increases in trading income and the Asset Management business had increased
revenues due to additions to assets from sales and market value increases.
Corporate revenues increased primarily as the result of interest income from
the partially-owned entities.
Segment Results
The following table summarizes the changes in revenues and income (loss)
from operations before taxes of the Company and its segments. Total revenues
and the Company's share of the results of operations of the partially-owned
entities are included in the Corporate segment.
Increase/
For the nine months ended September 30, 2003 2002 (Decrease)
Revenues
Capital Markets $20,128 $19,152 $ 976
Investment Services
Asset Management 7,346 6,284 1,062
Wealth Management 19,211 16,367 2,844
Total 26,557 22,651 3,906
Corporate 6,192 4,623 1,569
$52,877 $46,426 $6,451
Net Income (Loss) from Operations
Before Taxes
Capital Markets $ 1,231 $ 846 $ 385
Investment Services
Asset Management (257) (269) 12
Wealth Management (154) (414) 260
Total (411) (683) 272
Corporate 1,109 1,645 (536)
$ 1,929 $ 1,808 $ 121
All references to the years 2003 and 2002 in the information below refer
to the nine months ended September 30 in both years unless otherwise
indicated.
Capital Markets Segment
Capital Markets total revenues were $20,128 in 2003 compared to $19,152
in 2002, an increase of $976. Although there were fewer total underwriting
transactions in 2003 compared to 2002, total bond issuance volume was higher
in 2003. In particular, a single underwriting transaction for the issuance of
$183 million of municipal bonds was completed in 2003. A total of 25 senior,
sole-managed, and co-managed municipal underwriting transactions representing
$1.2 billion in bonds issued were completed in 2003 compared to 33
transactions representing $1.0 billion in 2002. A total of 21 church and
school underwriting transactions representing $132 million were completed in
2003, compared to 18 transactions representing $95 million in 2002. The
increase is attributable in part to the Company's initiative to add tax-exempt
underwriting capability for private schools. Underwriting revenues were
$15,005 in 2003 compared to $15,555 in 2002. The higher bond issuance volumes
and fewer transactions is due to issuers choosing to issue variable rate debt
given the current interest rate environment. The underwriting of variable
rate debt generates less revenue for the Company than underwriting fixed rate
debt. Commission income increased $1,213 to $1,285 due to the sale of a
specialty subordinated debt product developed by the Company and sold by the
Capital Markets Group to institutional clients. Trading profits increased
$1,127 to $2,766 in 2003 as the result of a strong trading environment for
bonds. FHA mortgage origination income decreased $725 due to a lack of
activity in 2003.
Capital Markets expenses increased $591 from $18,306 in 2002 to $18,897
in 2003. The increase in expenses is primarily attributable to increases in
employee compensation and benefits of $932 partially offset by reductions in
several other categories of expense. Employee compensation and benefits
increases are primarily related to increased incentive-based compensation and
commissions paid on the higher levels of commission income and trading profits
as well as recruiting and other employee costs. Total expenses for allocated
administrative support were $3,390 in 2003 compared to $3,666 in 2002, a
decrease of $276. The resulting net income from operations before taxes for
Capital Markets in 2003 was $1,231 compared to $846 in 2002.
Investment Services Segment
The Investment Services segment is made up of the Asset Management and
Wealth Management businesses, both of which are impacted by the securities
markets. Revenues and net losses were $26,557 and $411, respectively, in 2003
compared to $22,651 and $683, respectively, in 2002.
Asset Management-
Total revenues were $7,346 in 2003 compared to $6,284 in 2002, an
increase of $1,062 or 17%. Asset Management earns a management fee on the
assets under management. Total assets under management averaged approximately
$2.1 billion of assets during 2003, an approximate 17% increase over the
average of $1.8 billion during the same period in 2002. Assets under
management for both mutual fund and separate account assets increased due to
net sales over redemptions and market value increases during the first nine
months of 2003 thereby increasing management fee revenue on higher asset
balances during the period. Net sales over redemptions of assets under
management approximated $89 million and market value increases approximated
$124 million during the period. Contributing to the increase in assets under
management was the acquisition of the Heartland Wisconsin Tax-Exempt Fund in
November 2002 which added approximately $85 million of assets.
Asset Management expenses increased $1,050 to $7,603 in 2003 compared to
$6,553 in 2002. The increase is primarily due to increases in compensation
and benefits, brokerage commissions paid, interest, promotional expense, and
allocated administrative support expenses. Compensation and benefits
increased $317 due to increased commission payouts on higher sales volumes and
overall compensation increases. Brokerage commissions paid increased $136 due
to increased sales of mutual funds. The increase in interest expense is due
to the debt incurred to facilitate the acquisition of the Heartland Tax-Exempt
Fund. Allocated administrative support expenses increased $426 from $1,240 in
2002 to $1,666 in 2003. Asset Management had a net loss from operations
before taxes of $257 in 2003 compared to a net loss from operations before
taxes of $269 in 2002.
Wealth Management-
Total revenues of Wealth Management were $19,211 in 2003 compared to
$16,367 in 2002, an increase of $2,844. The increased revenues are primarily
due to an increase in commissions, trading profits and investment management
and advisory fees. Commissions increased $794 primarily due to the sale of a
specialty subordinated debt product sold by the Wealth Management group.
Trading profits increased $1,396 as the result of the sale of secondary bond
inventory at an increased profit due to an improved valuation of bonds carried
in inventory, increased remarketing of bonds put back by investors, and a
generally strong trading environment for bonds. Increased investment
management and advisory fees of $931 related to increased assets in that
business. A $303 gain recognized in 2002 on the sale of the insurance agency
in 2001 also contributed to the change in revenues between the two quarters.
The gain on the insurance agency in 2002 was related to a contingent payment
which reflected the final payment on the sale.
Total Wealth Management expenses were $19,365 in 2003 compared to $16,781
in 2002, an increase of $2,584. Employee compensation and benefits increased
$1,211 primarily due to increased commission expense on higher revenues and
the increased cost of new broker compensation arrangements. Investment
manager fees increased $694 due to the increased investment management and
advisory business. Other expense increases were primarily related to
increased office remodeling as the Company standardized its retail offices and
increased travel and other promotional expenses. Allocated administrative
support expenses increased $495 from $1,095 in 2002 to $1,590 in 2003. Wealth
Management had a net loss from operations before taxes of $154 in 2003
compared to a loss before taxes of $414 in 2002.
Corporate Segment
Corporate revenues were $6,192 in 2003 compared to $4,623 in 2002. A
large component of revenues was from interest and dividends which were $4,298
in 2003 compared to $2,925 in 2002. Interest on the government agency-backed
CMOs decreased $646 between years as the result of the declining principal
balances due to principal paydowns on that investment. However, the overall
increase in interest and dividends is the result of an increase of $1,982 in
interest income from the increase in the size of the loan portfolio of the
SBIC. Revenues in 2003 included a gain on the sale of PMC International, Inc.
("PMC") of $400 compared to $600 in 2002. Both gains related to the receipt
of payment on a note. Revenues of the minority interests included in total
Company revenues were $3,599 in 2003 compared to $702 in 2002.
Total Corporate segment expenses, which are prior to the allocation of
administrative support expenses, were $9,669 in 2003 compared to $9,415 in
2002. The increase in expenses is primarily due to increased compensation and
benefits expense due to increases in marketing, information systems and legal
staff as well as termination expenses. Joint costs allocated to the other
segments totaled $6,163 in 2003 compared to $6,129 in 2002. The adjustment
for the minority-owned share of income in 2003 was $1,578 compared to a
reduction of the minority share of the loss of $308 in 2002. The resulting
Corporate net income from operations before taxes after allocation of
administrative support expenses and adjustment for minority interests was
$1,109 in 2003 compared to $1,645 in 2002.
Minority Interests
The Company's financial statements include two partially-owned entities,
Ziegler Healthcare Fund I, LP ("ZHF") and Ziegler Equity Funding I, LLC
("ZEF"). The Company owns 11% of ZHF and 68% of ZEF. By virtue of the
Company's general partnership interest in ZHF and its majority ownership of
ZEF, all of the revenues and expenses of each of these entities is included in
the Consolidated Statements of Operations of the Company. However, the
Company only includes in its net income its share of each entity's net income.
The share of net income belonging to the other owners is deducted in the
Company's income statement as a "minority interest" and is not a part of the
Company's net income. In the case of a combined loss in the two entities, the
share of loss belonging to the other owners is added back to the Company's net
income. The Company also includes all of the assets and liabilities of the
partially-owned entities in its Consolidated Statements of Financial
Condition. The ownership interest of the other owners of the entities is
listed as a "Minority interest."
The increase in the adjustment for the minority interest for the third
quarter from $30 to $545 is due to an increase in the activity of ZHF, the
SBIC of the Company, as noted in the Corporate results of operations for the
three months ended September 30, 2003. The change in the adjustment for the
nine months ended from an addback to Company net income of $308 to a
reduction of $1,578 is due to both the increasing balance of notes receivable
and related interest income in ZHF and the return on an investment in ZEF.
The above adjustments include the net results of operations of those entities
which reflect revenues net of expenses. In 2002, the minority interests
together incurred a loss and, in 2003, the minority interests together were
profitable.
The increase in the balance of the minority interest on the Consolidated
Statements of Financial Condition relates to the contributions to capital of
the other owners to these entities and the accumulated share of their
earnings. The minority interest increased $6,630 from $7,487 at December 31,
2002, to $14,117 at September 30, 2003. The increase included $5,052 of
capital contributions from the other owners and $1,578 of the other owner's
share of income for 2003.
Liquidity and Capital Resources
(Dollars in thousands)
The Company is in the business of providing financial services. Adequate
capital and liquidity are essential elements of the Company's businesses,
especially with respect to underwriting activities. The Company must maintain
sufficient liquidity to operate its businesses as well as meet the regulatory
requirements of its broker-dealer subsidiary, BCZ.
A significant means of financing the Company's BCZ operations is the
financing obtained through BCZ's clearing broker. BCZ is able to finance its
securities inventory through its clearing broker under customary margin
arrangements using its securities owned as collateral. At September 30, 2003,
BCZ had a balance due to its clearing broker of $6,794 which was
collateralized by $14,983 of securities owned by BCZ and held by the clearing
broker. BCZ is able to trade the securities used as collateral and settles
daily with the clearing broker.
Additionally, BCZ acts as a remarketing agent for approximately $2.74
billion of municipal variable rate demand notes ("VRDNs"), most of which BCZ
previously underwrote. A total of approximately $2.67 billion can be tendered
to BCZ at the option of the holder on seven days advance notice and
approximately $74 million can be tendered without notice. The obligation of
the municipal borrower to pay for tendered VRDNs is supported by a third party
liquidity provider, such as a commercial bank. In order to avoid utilizing
the third party liquidity provider, municipal borrowers contract with BCZ to
remarket the tendered VRDNs. In its capacity as remarketing agent, BCZ may
purchase and hold the VRDNs as part of its remarketing efforts. Amounts
purchased as securities owned are generally held for less than two weeks. BCZ
finances its inventory of VRDNs acquired pursuant to its remarketing
activities through its clearing broker under the clearing broker's margin
financing arrangements. There were $6,300 VRDNs held as part of securities
owned at September 30, 2003. There were $19,800 of VRDNs held as part of
securities owned at December 31, 2002.
BCZ is subject to the requirements of the Securities and Exchange
Commission Uniform Net Capital Rule, which is designed to measure the general
financial soundness and liquidity of broker-dealers. At September 30, 2003,
BCZ had net capital of approximately $10,847 which exceeded the minimum net
capital requirements by approximately $10,597. Such net capital requirements
could restrict the ability of BCZ to pay dividends to the Parent. BCZ
requires net capital in excess of its regulatory minimum in order to enter
into most underwriting transactions which varies with the transaction. In the
opinion of management, the current level of BCZ's net capital is adequate for
the conduct of its business activities.
The Parent and BCZ also share a revolving loan agreement in the amount of
$20,000. The loan agreement is in the form of a demand note due April 29,
2004. The revolving loan agreement has been renewed annually by the bank.
The revolving loan agreement has restrictive covenants requiring, among other
things, a specified level of net worth and a compensating balance of $330.
The Company has maintained compliance with all applicable covenants on the
loan agreement. BCZ borrowed $9,400 under this agreement in 2003, which was
repaid. There have been no borrowings under this agreement by the Parent in
2003. There were no borrowings outstanding under this agreement by either the
Parent or BCZ at September 30, 2003, or December 31, 2002.
The Parent also finances government agency-backed CMOs using a securities
sold under agreement to repurchase arrangement commonly referred to as a
repurchase agreement. The CMOs serve as collateral for the repurchase
agreement. As collateral is paid down, the counterparty collects the
payments, reduces the liability for the repurchase agreement covered by the
collateral, and remits the balance to the Parent. The Parent earns the
difference between the interest earned on the CMOs and the interest paid for
the repurchase agreement.
A source of cash for the Parent has been and continues to be the issuance
of unrated commercial paper classified as short-term notes payable on the
Consolidated Statements of Financial Condition. These notes have varying
maturities up to 270 days with the majority of notes being less than 60 days.
Through September 30 2003, a total of $29,220 of notes were issued and $29,487
were repaid. The total balance of short-term notes payable outstanding was
$4,415 as of September 30, 2003. The short-term notes payable are sold
directly to customers and are limited by the availability of customers who
wish to invest in these unrated short-term notes payable at the rates offered
by the Company. The Company uses this facility as a source of additional
liquidity and to reduce its reliance on higher interest rate borrowing
alternatives.
Ziegler Healthcare Fund I, LP ("ZHF") is a limited partnership in which
the Company has an 11% direct and indirect interest. ZHF has qualified as a
Small Business Investment Company ("SBIC") with the Small Business
Administration ("SBA"). As an SBIC, ZHF is able to lend funds to qualifying
small businesses using its own capital and funds borrowed from the SBA on
favorable terms. In 2001, the SBA granted ZHF leverage of up to $38.2
million. At September 30, 2003, ZHF had $30,871 of outstanding loans to small
businesses and owed $23,240 on debentures due to the SBA. The loans to small
businesses and the debentures to the SBA increased $11,012 and $9,150 in 2003,
respectively, through September 30, 2003. During 2003 there have been $2,458
of principal payments received on the notes receivable. The interest received
on the notes receivable is sufficient to fund the interest due on the
debentures as well as provide for administrative expenses and a return to
investors for contributed capital. Repayment terms on the notes to the
qualifying small businesses, including prepayment penalties, are structured to
approximately correspond to the repayment terms on the debentures due the SBA.
Prepayments of notes can also be redeployed to future notes being originated.
At September 30, 2003, ZHF had a remaining leverage commitment from the SBA of
up to $14.96 million. The Company's obligation as a subscribing investor to
the partnership is limited to its commitment to the partnership of $2,800, of
which $2,208 has already been funded as of September 30, 2003.
ZEF is a partially-owned private equity fund which is also included in
the Consolidated Financial Statements of the Company. The Parent has a
remaining commitment to ZEF totaling approximately $2.9 million at September
30, 2003, which takes into consideration loans to employees. All employee
loan arrangements were established prior to the Sarbanes-Oxley Act. The
timing of the payment of the commitment is dependent upon the funding
requirements of ZEF. Funding requirements are determined by ZEF based upon
the identification of suitable investments to be made. No funding has
occurred to date in 2003. The funding of the remaining commitment will be
offset by returns on the investments in ZEF and the scheduled reduction of
loans extended to employees.
ZFC and BCZ, as subsidiaries of the Parent, have intercompany borrowing
arrangements with the Parent to obtain or provide financing on a short-term
basis, subject to regulatory requirements of each of the subsidiary entities.
The Parent relies on its own cash balances or obtains funds from its revolving
loan agreement to fund loans to either subsidiary. The Parent lends on a
subordinated basis to BCZ in the event of a need for a temporary increase in
capital for its broker-dealer business, as required by regulatory rules. This
form of subordinated lending has not been used in 2003 to date. ZFC, whose
activities include FHA loan origination, generally finances its activities
from its own resources, through intercompany borrowings with the Parent, and
by arrangements with other parties involved in the FHA transaction. No loans
to ZFC have been originated to date in 2003.
The Company's overall funding needs are periodically reviewed to ensure
that it has adequate resources to support the anticipated future operations of
its businesses. The Company's cash and cash equivalent position allows some
degree of flexibility in its business activities. In the opinion of
management, the Company's capital resources and available sources of credit
are adequate for present and anticipated future operations. The Company
intends to investigate potential acquisition opportunities as a means of
expanding its businesses. Such opportunities may require the Company to
arrange for additional sources of funding or the issuance of the Company's
common stock. There is no assurance that additional sources of funding will
be available.
The Company repurchases its own common stock from time-to-time. In
October 2003, the Company's board of directors approved the future purchase of
up to 200,000 shares of Company stock in market or private transactions, under
terms considered reasonable by management. The Company repurchased 20,779
shares in 2003 for a total of $302 through September 30, 2003. Of this total,
purchases in the third quarter were 666 shares for $9. The Company will
evaluate the future purchase of its shares as opportunities arise, after
giving consideration to cash availability, liquidity needs, and other relevant
factors.
Subsequent to the third quarter, on November 4, 2003, the Company filed
an application to voluntarily delist its common shares from trading on the
American Stock Exchange ("AMEX") and to terminate the registration of its
common shares under the Securities Exchange Act of 1934 ("'34 Act"). At the
time that the Securities and Exchange Commission ("SEC") grants the Company's
application to withdraw the shares from listing, the AMEX will suspend the
trading of the Company's shares. If approved, the delisting is expected to
become effective before December 31, 2003. Upon the granting of its
application to delist, the Company intends to take the steps necessary to
suspend its reporting obligations with the SEC under the '34 Act. At the time
the reporting obligations of the Company under the '34 Act cease, the Company
will no longer file reports with the SEC on Forms 10-K, 10-Q and 8-K. In lieu
of reports made to the SEC, the Company intends to disclose information on its
operations and circumstances to the public through periodic press releases and
financial statements on its website.
Upon delisting, the Company expects that its shares will trade in the
over-the-counter market on the Pink Sheets, LLC ("Pink Sheets"), an electronic
network through which participating broker-dealers can make markets, and enter
orders to buy and sell shares of the Company. The Company has identified a
registered broker-dealer that has indicated an intention to sponsor the
Company's shares on the Pink Sheets and act as a market maker following
delisting of the Company's shares from the AMEX. The Company anticipates that
additional market makers will emerge for the Company's shares following
delisting.
Delisting and deregistration are expected to have no material effect on
the operations of the Company, other than the elimination of certain existing
expenses, and the avoidance of substantial additional expenses. All
activities of the Company related to the securities industry will remain in
place. While there can be no assurances, management believes that the
issuance of its commercial paper will not be affected.
More information on the delisting and deregistration process is available
in the Form 8-K filed by the Company on October 28, 2003.
Contractual Obligations
The Company has contractual obligations to make future payments in
connection with short-term and long-term debt and lease agreements for offices
and equipment. The contractual obligations of the Company are included in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report for 2002. There have been no
significant changes to the information disclosed in the Annual Report other
than the increases in the debentures due the SBA from ZHF as described above.
Substantially all increases in 2003 in the debentures are due in more than
five years.
Critical Accounting Policies
Accounting policies play an integral role in the preparation of the
Company's Consolidated Financial Statements in accordance with accounting
principles generally accepted in the United States of America. See Note 1 of
Notes to Consolidated Financial Statements in the Company's Annual Report for
2002 for a discussion of significant accounting policies and other relevant
information. Certain critical accounting policies require us to make
estimates and assumptions that affect the amount of assets, liabilities,
revenues and expenses reported in the Consolidated Financial Statements. Due
to their nature, estimates involve judgment based upon available information.
Therefore, actual results or amounts could differ from estimates and the
differences could have a material impact on the Company's Consolidated
Financial Statements. The critical accounting policies identified by
management in the Company's Annual Report for 2002 are (i) valuation of
financial instruments, (ii) valuation of intangible assets and goodwill, and
(iii) estimation of reserves for losses and contingencies. See Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's Annual Report for 2002 for discussion of these critical
accounting policies.
Forward Looking Statements
This report contains, and other disclosures that we make from time to
time may contain, forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "anticipate,"
"believe," "continue," "estimate," "expect," "goal," "objective," "outlook,"
"could," "intend," "may," "might," "plan," "potential," "predict," "should,"
or "will" or the negative of these terms or other comparable terminology
signify forward-looking statements. You should read statements that contain
these words carefully because they discuss our future expectations; contain
projections of our future results of operations or our financial condition; or
state other forward-looking information.
Forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance or
achievements to be materially different from any future results, performance
or achievements expressed or implied by any forward-looking statement.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results. In addition to
the assumptions and other factors referenced specifically in connection with
such statements, the following factors among others, could impact our business
and financial prospects and affect our future results of operations and
financial condition: the overall financial health of the securities industry,
as well as the strength of the healthcare sector of the U.S. economy and the
municipal securities marketplace, a significant increase in interest rates,
the ability of the Company to distribute securities it underwrites, the
turnover of inventory, the market value of mutual fund portfolios and separate
account portfolios advised by the Company, an increase in any legal
requirements related to the mutual fund industry, the volume of sales by its
retail brokers, the outcome of pending litigation, and the ability to attract
and retain qualified employees.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Risk is an inherent part of the Company's business activities. The
potential for changes in value of the Company's financial instruments is
referred to as "market risk." Market risk to the Company arises from changes
in interest rates, credit spreads and other relevant factors.
Interest Rate Risk
Interest rate risk, one component of market risk, arises from holding
interest sensitive financial instruments such as municipal, institutional, and
corporate bonds, and certain preferred equities. The Company manages its
exposure to interest rate risk by monitoring its inventory with respect to its
total capitalization and regulatory net capital requirements. The Company's
inventory of securities is marked to market and, accordingly, represents
current value with no unrecorded gains or losses in value. While a
significant portion of the Company's securities may have contractual
maturities in excess of several years, the inventory, on average, turns over
frequently during the year. Accordingly, the turnover of inventory mitigates
the exposure to interest rate risk.
The Company's other investments include government-agency backed CMOs
issued by the Government National Mortgage Association and the Federal
National Mortgage Association. These investments have a fixed rate of
interest and are subject to scheduled and early prepayments. The Company
finances the CMOs using a repurchase agreement. The Company is exposed to the
risk that the cost of financing, which is based on short-term rates adjusted
monthly, would exceed the interest received on the CMOs, which is a fixed
coupon extending to maturity. Management is of the opinion that the spread
between the rate of interest earned and paid is sufficient to mitigate the
risk of loss in net interest received versus paid. Management continuously
reviews these positions for an adequate spread in interest rates.
Equity Price Risk
Equity price risk results from exposure to changes in the prices of
equity securities. The Company faces equity price risk with respect to the
fees it earns on the portfolio of assets it manages for clients. As of
September 30, 2003, the Company managed a portfolio with an aggregate value of
approximately $2.1 billion in the form of separately managed and mutual fund
accounts. Of the total, $676 million relates to equity securities portfolios.
Declines in the equities market could adversely affect the amount of fee based
revenues. While this exposure is present, quantification remains difficult
due to the number of other variables affecting fee income. In general, a
reduction in assets will cause a reduction in revenue of approximately the
same proportion. Interest rate changes can also have an effect on fee income
as it relates to the value of fixed income securities portfolios.
In addition to the CMOs noted above, other investments also include
common stock in the form of the Company's investment in The EnvestNet Group,
Inc. ("EnvestNet") and a partnership investment owned by ZEF. There is no
ready market for these securities; accordingly, the Company has established
procedures to periodically review these securities for proper valuation. See
"Results of Operations" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
The table below provides information about the Company's financial
instruments as of September 30, 2003 that are sensitive to market risk. For
securities owned and debt obligations, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. For
common stock and partnership interests, the table presents the cost and fair
value of the investments. The common stock is listed as not resulting in any
regular cash flows during the next five years, although cash flows may occur
if the common stock is sold or dividends are paid. The partnership interest
is expected to provide a return of capital plus earnings in the periods
specified. Other equity interests is primarily an investment of ZHF (the
SBIC) which is currently expected to be short-term in nature and will be sold
when a suitable purchaser is identified. The table specifies the current
expectation of the cash flows, but makes no assumptions or estimates as to
earnings. Trading accounts are shown in the caption "Securities Owned" and
non-trading accounts are shown in all other captions.
Trading and Non-Trading Portfolio
Expected Maturity Dates
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(U.S. Dollars in Thousands)
ASSETS
Securities Owned - Fixed Rate
Municipal bond issues $ - $ - $ - $ 25 $ - $ 6,813 $ 6,838 $ 5,911
Weighted average interest rate 4.62% 6.00%
Collateralized Mortgage Obligations - - - - - 28 28 27
Weighted average interest rate 5.50%
Corporate bond issues - - - - - 50 50 52
Weighted average interest rate 7.65%
Preferred Stock - - - - - 2,645 2,645 2,698
Weighted average interest rate 6.18%
Institutional bonds 5 - - - 5 47 57 56
Weighted average interest rate 10.64% 10.64% 7.79%
Other - - - - - 568 568 541
Weighted average interest rate
Securities inventory - variable rate
Municipal variable rate demand notes - - - - - 6,300 6,300 6,300
Weighted average interest rate 1.10%
Notes Receivable
SBA Qualified Borrowers(1) 92 1,003 8,465 4,283 7,433 9,595 30,871 30,871
Weighted average interest rate 12.83% 12.83% 12.82% 12.70% 12.72% 12.58%
Other 2,203 412 446 405 237 542 4,245 4,245
Weighted average interest rate 6.77% 2.71% 2.51% 2.13% 1.24% 4.96%
Other Investments - CMOs(2) - - - - - 17,012 17,012 17,012
Weighted average interest rate 7.97%
Other Investments - EnvestNet
Common Stock - - - - - 9,500 9,500 9,500
Other Investments - Partnership
Interest 500 - - - - - 500 500
Other Investments - Other Equity
Interests(3) - 2,700 - - - 1 2,701 2,701
LIABILITIES
Short-Term Notes Payable(4) 4,415 - - - - - 4,415 4,415
Weighted average interest rate 2.12%
Securities Sold Under Agreements to
Repurchase(2 and 4) 16,973 - - - - - 16,973 16,973
Weighted average interest rate 1.32%
Long-Term Debt
SBA Debentures(5) - - - - - 23,240 23,240 23,240
Weighted average interest rate 5.79%
Bank Term Loan 101 405 405 405 405 - 1,721 1,721
Weighted average interest rate 5.59% 5.59% 5.59% 4.80% 4.80%
(1) These balances are notes receivable of ZHF, the partially-owned entity.
(2) Assumes no prepayment. When prepayments occur, the corresponding debt used to finance
these investments will decrease by a similar amount.
(3) This balance is primarily related to an equity investment held by ZHF, the partially-owned
entity, and is based upon the current intentions of management to sell the equity interest.
(4) The information includes actual interest rates at September 30, 2003. The short-term
repurchase agreements are likely to be renewed with the lenders when due and are, therefore,
listed as maturing after 2007. The future interest rates cannot be predicted.
(5) This balance is a liability of ZHF, the partially-owned entity.
Material limitations exist in determining the overall net market risk exposure
to the Company. The information presented can be affected by many assumptions,
including the levels of market interest rates, prepayments of principal on notes
and other investments, the turnover of securities owned, the credit quality of
obligors and issuers, and other factors. Therefore, the above information should
not be relied upon as indicative of future actual results.
Item 4. Controls and Procedures
Disclosure Controls and Procedures: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
the end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting: The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, also conducted an evaluation of the Company's internal control over
financial reporting to determine whether any changes occurred during the
quarter covered by this report that have materially affected or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during the
quarter covered by this report.
PART II. OTHER INFORMATION
Items 1 through 4. Not applicable.
Item 5. On November 4, 2003, the Registrant filed an Application For
Withdrawal From Listing Of Securities Pursuant to Section 12(d)
Of The Securities Exchange Act of 1934 making its application to
withdraw its common stock from listing and registration on the
American Stock Exchange. The Registrant requested that the
Commission's order granting its application be effective as soon
as possible.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See the Exhibit Index following the signature page,
which is incorporated herein by reference.
(b) Reports on Form 8-K:
On July 29, 2003, the Registrant furnished a Current Report on
Form 8-K dated July 29, 2003, indicating the issuance of a
press release announcing its preliminary financial results
for the second quarter ended June 30, 2003. A copy of the press
release was attached to the Current Report.
On October 28, 2003, the Registrant filed a Current
Report on Form 8-K dated October 28, 2003, indicating the
issuance of a press release announcing the authorization of the
Board of Directors of the Registrant to withdraw the Company's
common shares from listing and registration on the American
Stock Exchange. The Registrant also indicated its intent to
take the necessary steps to suspend its reporting obligations
with the SEC. The press release also announced the Registrant's
preliminary financial results for the third quarter ended
September 30, 2003. A copy of the press release was attached to
the Current Report.
On October 31, 2003, the Registrant furnished a Current Report
on Form 8-K dated October 31, 2003, indicating the issuance of a
press release announcing its declaration of a quarterly dividend
for the third quarter ended September 30, 2003.
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, 2003 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: November 14, 2003 By /s/ Gary P. Engle
Gary P. Engle
Sr. Vice President/CFO
The Ziegler Companies, Inc.
(the "Registrant")
(Commission File No. 1-10854)
EXHIBIT INDEX
to
FORM 10-Q QUARTERLY REPORT
For the quarter ended September 30, 2003
Exhibit
Number Description
31.1 Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
2
6
26
28
32