<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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.)
215 North Main Street, West Bend, Wisconsin 53095
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 334-5521
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 June 30, 1998 was 2,428,454 shares.
<PAGE>
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
<S> <C> <C>
1998 1997
Revenues:
Investment banking and
commission income $15,813,176 $10,574,392
Investment management fees 2,358,919 791,956
Interest and dividends 2,272,073 1,292,738
Gross profit on chemical products 888,388 899,970
Insurance agency 244,269 223,688
Other 964,380 809,334
Total revenues 22,541,205 14,592,078
Expenses:
Employee compensation and
benefits 11,478,848 6,861,496
Commissions and clearing fees 1,528,876 277,093
Communications 1,004,287 659,818
Occupancy and equipment 1,442,429 1,244,031
Promotional 994,462 530,433
Professional and regulatory 504,818 234,230
Interest 1,804,722 914,725
Other operating expenses 1,747,726 1,440,857
Total expenses 20,506,168 12,162,683
Income before income taxes 2,035,037 2,429,395
Provision for income taxes 809,200 961,400
Net income $ 1,225,837 $ 1,467,995
Net income per share of common stock:
Basic earnings per share $ .52 $ .61
Diluted earnings per share .50 .60
Dividends per share $ .13 $ .13
Average number of shares outstanding:
Basic 2,372,579 2,392,721
Diluted 2,439,188 2,435,465
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Revenues:
Investment banking and commission
income $24,805,396 $16,242,097
Investment management fees 4,611,595 1,539,349
Interest and dividends 4,175,907 2,536,889
Gross profit on chemical products 1,642,177 1,706,129
Insurance agency 685,424 620,182
Other 1,814,804 1,666,589
Total revenues 37,735,303 24,311,235
Expenses:
Employee compensation and
benefits 20,588,323 12,638,079
Commissions and clearing fees 2,594,393 565,174
Communications 2,023,091 1,337,833
Occupancy and equipment 2,886,642 2,417,419
Promotional 1,843,361 1,061,466
Professional and regulatory 900,163 539,953
Interest 3,297,238 1,732,064
Provision for losses - 1,400,000
Other operating expenses 3,363,102 2,879,999
Total expenses 37,496,313 24,571,987
Income (loss) before income taxes 238,990 (260,752)
Provision for (benefit from)
income taxes 162,400 (110,600)
Net income (loss) $ 76,590 $ (150,152)
Net income (loss) per share of common stock:
Basic and diluted earnings (loss)
per share $ .03 $(.06)
Dividends per share $ .26 $ .26
Average number of shares outstanding:
Basic 2,371,964 2,390,549
Diluted 2,439,937 2,427,243
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash $ 4,963,752 $ 5,769,914
Short-term investments 20,231,103 22,849,551
Bonds due and called as of July 1,1998
and January 1, 1998, respectively 5,209,820 6,805,665
Total cash and cash equivalents 30,404,675 35,425,130
Securities inventory 101,325,916 69,255,507
Securities purchased under agreements to
resell 13,223,750 8,240,000
Accounts receivable -- securities sales 2,828,202 7,272,672
Accounts receivable -- other 6,698,625 6,660,650
Investment in and receivables from
affiliates 1,597,604 1,550,082
Investment in leases - 4,475,935
Notes receivable 8,545,513 14,513,323
Land, buildings and equipment, at cost,
net of accumulated depreciation of
$16,749,802 and $15,949,666,
respectively 11,206,353 8,879,613
Deferred income tax benefit 2,339,146 2,327,646
Other assets 8,646,810 8,876,549
Total assets $186,816,594 $167,477,107
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 16,298,130 $ 15,033,913
Securities sold under agreements to
repurchase 38,174,000 7,324,000
Payable to customers 4,851,110 4,668,771
Payable to broker-dealers and clearing
organizations 34,264,161 680,980
Accounts payable 1,449,045 6,098,180
Dividends payable - 1,042,222
Accrued income taxes payable - 329,982
Securities sold, not yet purchased 14,124,628 7,989,062
Notes payable to banks 8,393,892 41,833,196
Bonds payable 8,179,797 18,281,775
Other liabilities and deferred items 8,957,805 11,900,370
Total liabilities 134,692,568 115,182,451
Commitments
Stockholders' equity
Common stock, $1 par, authorized
7,500,000 shares, issued 3,544,030 3,544,030 3,544,030
Additional paid-in capital 6,059,436 6,068,647
Retained earnings 60,419,596 60,658,881
Treasury stock, at cost, 1,115,576
and 1,120,257, respectively (17,484,209) (17,600,754)
Unearned compensation (414,827) (376,148)
Total stockholders' equity 52,124,026 52,294,656
Total liabilities and stockholders' equity $186,816,594 $167,477,107
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 76,590 $ (150,152)
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Depreciation and amortization 840,355 745,890
Provision for losses - 1,400,000
Unrealized loss on securities inventory 97,517 44,748
Compensation expense related to restricted
stock grants 168,353 77,379
Deferred income taxes (11,500) (140,000)
Net dividend received from unconsolidated
affiliates - 307,465
Loss on bond retirement 94,268 -
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable --
securities sales 4,444,470 2,161,299
Accounts receivable -- other (92,087) (725,142)
Securities inventory (26,032,360) 15,141,247
Securities purchased under agreements
to resell (4,983,750) -
Other assets 11,295 603,054
Increase (Decrease) in -
Payable to customers and
broker-dealers 33,765,520 5,918,037
Accounts payable (4,649,135) (2,110,249)
Income taxes payable (329,982) (6,074,024)
Securities sold under agreements to
repurchase 30,850,000 -
Other liabilities (2,853,631) (4,200,859)
Net cash provided by operating activities 31,395,923 12,998,693
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of equipment 17,125 217,215
Principal payments received under
leases 760,074 1,259,309
Sale of leased equipment 909,608 -
Sale of investment in affiliat - 787,000
Payments received on notes receivable 3,508,670 4,522,991
Sale of leases and notes 5,832,190 -
Payments for:
Issuance of new notes receivable (561,146) -
Capital expenditures (3,051,102) (1,131,885)
Net cash provided by investing activities $ 7,415,419 $ 5,654,630
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes
payable $41,336,000 $40,728,000
Exercise of employee stock options 82,469 127,340
Payments for:
Principal payments of short-term notes
payable (40,052,000) (40,766,000)
Repayments of bonds payable (3,961,000) (3,110,000)
Purchase of treasury stock (182,167) (32,175)
Cash dividends paid (1,358,097) (1,367,624)
Retirement of bonds outstanding (6,257,698) -
Net repayments under bank credit facilities (33,439,304) (19,841,978)
Net cash used in financing activities (43,831,797) (24,262,437)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (5,020,455) (5,609,114)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 35,425,130 43,096,718
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $30,404,675 $37,487,604
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid during the period $ 2,298,000 $ 1,814,000
Income taxes paid during
the period $ 646,000 $ 6,105,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Granting of restricted stock from
treasury stock $ 207,000 $ -
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1998
Note A -- Basis of Presentation
The consolidated condensed financial statements included herein have
been prepared by The Ziegler Companies, Inc. (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. Management believes, however, that these condensed
financial statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the periods
presented. All such adjustments are of a normal recurring nature. It is
suggested that these condensed financial statements be read in conjunction
with the audited financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. Certain prior year amounts
have been reclassified to conform with current year presentation.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, requires the reporting of other comprehensive income.
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but excluded from net income. There are no items of
other comprehensive income, therefore comprehensive income equals net
income.
In June 1998, Statement of Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities,
was issued. The Statement establishes accounting and reporting standards
for derivative instruments. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. Management has not yet quantified the
impacts of adopting SFAS 133 on the financial statements and has not
determined the timing of or method of adoption of SFAS 133. Although
management expects the amount to be immaterial, the Statement could
increase volatility in earnings and other comprehensive income.
Note B -- Commitments and Contingent Liabilities
In the normal course of business, B. C. Ziegler and Company (BCZ) and
GS2 Securities, Inc. (GS2) enter into firm underwriting commitments for the
purchase of debt and equity issues. BCZ purchases debt issues at a
specified price. To manage the related credit and market risk exposure,
BCZ attempts to presell the debt issues to customers. BCZ had
approximately $27,840,000 of firm underwriting commitments outstanding at
June 30, 1998. GS2 had no firm underwriting commitments outstanding at
June 30, 1998.
As of June 30, 1998, Ziegler Financing Corporation (ZFC) had no
financial commitments to unrelated entities for construction or other
loans.
WRR Environmental Services Co., Inc. (WRR) is subject to a consent
order of the Wisconsin Department of Natural Resources for further testing
and surface water control of contaminants in ground water under and
adjacent to the plant site in Eau Claire, Wisconsin.
WRR has disposed of wastes at other recycling sites which are on or
may be added to the National Priority List, and may be required to share in
the cost of the clean-up of these sites. As of June 30, 1998, WRR had been
identified as a potentially responsible party ("PRP") in connection with
three sites. For the first site, a payment of $138,000 was made in 1997 in
response to an assessment by a steering committee of PRPs at the site. WRR
believes that the payment is sufficient to cover its proportionate share of
the current estimated costs to clean up the first site. Release of WRR by
the Environmental Protection Agency ("EPA") will occur only after site work
is completed and no further costs have been determined. The estimated cost
of cleaning up a second site is approximately $7,000,000 based on current
management estimates. Based on the identification of other PRPs and the
present interim allocation schedule, WRR would be responsible for costs of
approximately $420,000. WRR was notified by the EPA that WRR is a PRP at a
third site to which WRR delivered materials from 1982 to 1985. In
addition, a group of major PRPs at the site have cross-complained against
WRR and other PRPs, requesting contributions for the cleanup costs. The
case is pending in a federal district court. WRR's review of the EPA's
remediation investigation and feasibility study, and other materials
prepared by the EPA on account of this site, indicates that WRR has valid
defenses to this cross complaint by the major PRP group at the site, or any
action by the EPA to collect remediation costs. The EPA's estimate of
WRR's proportionate share of anticipated remediation costs at this third
site approximates $200,000.
While WRR is jointly and severally liable on all three sites,
management is not aware of circumstances which could lead to non-
performance by the other PRPs when viewed as a group. No potential
insurance recoveries have been accrued in the financial statements. The
reserve for accrued loss contingencies totaled $593,000 at June 30, 1998
and covers the costs related to the specific sites identified above and
other ongoing environmental matters. It is possible that WRR's estimates
of its liability related to the clean-up of these sites may change
materially in the future.
Note C -- Stock-Based Compensation Plans
On January 15, 1998, the Company issued an aggregate of 10,617 shares
of restricted common stock of the Company to certain key employees under
the 1993 Plan. Each employee's ownership of shares is subject to full or
partial forfeiture in accordance with a vesting schedule in the event that
the employee's employment with the Company terminates for any reason before
January 15, 2001. All shares remain nonvested at June 30, 1998. The
market value of the restricted stock, when issued, was $19.50 per share.
The total value at issuance is being amortized and recorded as compensation
expense over the period of vesting. The shares may not be transferred by
the recipients until vested.
Note D -- Net Capital Requirements and Customer Reserve Accounts
As registered broker-dealers, BCZ, Ziegler Thrift Trading, Inc. (ZTT)
and GS2 Securities, Inc. (GS2) are subject to the requirements of Rule
15c3-1 (the "net capital rule") under the Securities Exchange Act of 1934.
The basic concept of the rule is liquidity, requiring a broker-dealer to
have sufficient liquid assets at all times to cover current indebtedness.
Specifically, the rule prohibits a broker-dealer from permitting "aggregate
indebtedness" to exceed 15 times "net capital" (15 to 1) as those terms are
defined. Approximate net capital data as of June 30, 1998, is as follows:
<TABLE>
<CAPTION>
BCZ ZTT GS2
<S> <C> <C> <C>
Aggregate indebtedness $49,207,000 $ 653,000 $1,500,000
Net capital $10,327,000 $1,873,000 $ 466,000
Ratio of aggregate
indebtedness to
net capital 4.76 to 1 .35 to 1 3.21 to 1
Required net capital $ 3,280,000 $ 250,000 $ 100,000
</TABLE>
As a registered broker-dealer that carries customer accounts, BCZ is
subject to Securities and Exchange Commission Rule 15c3-3. BCZ must
maintain a separate bank account for the exclusive benefit of customers.
The amount maintained in this account is determined by periodic
computations required under the rule, which allows the company to maintain
the computed amounts in cash or other qualified securities. As of June 30,
1998, there was approximately $3,504,000 in the customer reserve account.
In April, 1998, ZTT entered into an agreement to clear all
transactions through a clearing broker-dealer on a fully disclosed basis.
ZTT no longer carries customer accounts and is no longer subject to Rule
15c3-3 and, accordingly, no longer is required to make deposits to a
customer reserve account. In May, 1998, BCZ entered into a similar
agreement. However, as of June 30, 1998, BCZ still maintained some
customer accounts and accordingly was still required to maintain deposits
in a customer reserve account. BCZ is in the process of transferring all
remaining customer accounts to a clearing broker.
Note E -- Investment in Ziegler Mortgage Securities, Inc. II
The Company has a 50% interest in Ziegler Mortgage Securities, Inc.
II (ZMSI II), an unconsolidated entity accounted for by the equity method.
Condensed income statement information is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Revenues -
Interest $960,192 $2,142,821
Gain on sale/redemption of
mortgage certificates 25,441 85,042
Total revenues 985,633 2,227,863
Expenses -
Interest 878,025 2,021,195
Amortization of bond issuance costs 40,635 109,394
Management fees 43,270 59,177
Other 23,703 38,097
Total expenses 985,633 2,227,863
Net income $ - $ -
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Revenues -
Interest $2,255,947 $4,288,011
Gain on Sale/Redemption of
Mortgage Certificates 1,054,747 104,087
Total Revenues 3,310,694 4,392,098
Expenses -
Interest 2,087,179 4,034,517
Amortization of bond issuance costs 1,071,202 151,155
Management fees 24,091 144,083
Other 128,222 62,343
Total expenses 3,310,694 4,392,098
Net income $ - $ -
</TABLE>
BCZ purchased approximately $39,579,000 of mortgage certificates from
ZMSI II in February, 1998. ZMSI used the proceeds from the sale to call
$39,570,000 of bonds which were outstanding.
Note F -- Securities Inventory
Securities inventory consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Municipal bond issues $ 32,046,534 $54,481,670
Collateralized mortgage obligations 5,232,793 9,300,821
Corporate bond issues 14,318,311 1,742,008
U.S. government and agency securities 42,095,469 -
Institutional bond issues 2,676,588 2,165,128
Preferred stock 3,542,919 401,766
Other securities 1,413,302 1,164,114
$101,325,916 $69,255,507
</TABLE>
U.S. government agency securities totalling $36,990,000 were purchased by
BCZ from ZMSI II and remained in inventory at June 30, 1998. Because of
the nature of the underlying mortgage obligations, the true market value is
difficult to determine, but management believes the market values
approximate par value. Coincident with purchasing these securities, BCZ
entered into a repurchase agreement under which BCZ is able to benefit from
the spread between current short-term interest rates and the yields on the
associated U.S. government agency securities. In July 1998, BCZ sold the
U.S. government agency securities to the parent at cost which approximated
par value and also transferred the respective repurchase agreement to the
parent.
Note G -- Securities Sold, Not Yet Purchased
Marketable securities sold, not yet purchased, consist of trading
securities at market value as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
U.S. government and agency securities $14,124,628 $ 7,989,062
</TABLE>
Note H -- Payable to Broker-Dealers and Clearing Organizations
As of May, 1998 BCZ clears its proprietary and customer transactions
through another broker-dealer on a fully disclosed basis. The relationship
with the clearing broker results in amounts payable for transaction
processing and inventory purchases offset by fees earned and commissions
and profits or losses on securities transactions. The amount payable to
the clearing broker of approximately $34,264,000 at June 30, 1998 relates
primarily to the financing of inventory and is collateralized by securities
owned by BCZ.
Note I -- Notes Payable to Banks
The Company has various unsecured and secured borrowing facilities in
place to obtain short-term funds. Short-term borrowings are used for
general corporate purposes as well as to fund specific underwriting
purchases or purchases of other large blocks of securities. The Company
had $8,065,000 in short-term borrowings outstanding at June 30, 1998.
BCZ serves as the remarketing agent on certain variable-rate
municipal bonds that can be tendered back to the respective issuers,
generally upon seven days advance notice, by the holders. In its role as
remarketing agent, BCZ may purchase the tendered bonds into its own
inventory. To assist in financing such activity, BCZ obtained a
$70,000,000 revolving credit facility and an $83,000,000 uncommitted
borrowing facility. Both facilities are primarily for financing variable
rate municipal bonds, although they may be used to finance other inventory
on a limited basis. The financings are done at the Federal funds rate plus
.85% and are fully collateralized. There were no amounts outstanding under
these facilities at June 30, 1998.
Note J -- Ziegler Collateralized Securities, Inc.
Ziegler Collateralized Securities, Inc. (ZCSI), a wholly-owned
subsidiary of the Company, was organized to facilitate the financing of
equipment purchases and leases by securitizing such purchases and leases
for offerings to the public. ZCSI has ceased any further securitization
activity and no longer intends to make offerings to the public.
Summarized balance sheet information of ZCSI as of June 30, 1998 and
December 31, 1997 and income statements for the six month periods ended
June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Balance Sheets as of:
June 30, December 31,
1998 1997
<S> <C> <C>
Investment in leases $ - $ 4,475,934
Notes receivable 203,322 4,203,967
Other assets 594,170 2,454,051
Total assets $797,492 $11,133,952
Bonds payable $ - $ 8,829,000
Other liabilities 787,492 2,294,952
Total liabilities 787,492 11,123,952
Stockholder's equity 10,000 10,000
Total liabilities and
stockholder's equity $797,492 $11,133,952
</TABLE>
<TABLE>
<CAPTION>
Income Statements for the
Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Lease income $129,546 $327,054
Interest income 189,999 325,147
Total income 319,545 652,201
Interest expense 303,244 528,975
Management fee (subsidy) (69,879) (6,759)
Other expenses 86,180 129,985
Total expenses 319,545 652,201
Net income $ - $ -
</TABLE>
ZCO provides management and administrative services to ZCSI.
Management fees paid to ZCO are limited to the amount which prevents ZCSI
from incurring a loss.
During June, 1998 ZCSI sold substantially all leases and notes to a
third party. The total proceeds of the transaction were $5,832,000 which
approximated the book value of the assets sold. A total of approximately
$6,258,000 was deposited in escrow with the trustee to retire the
outstanding bonds collateralized by the leases and notes sold. The total
amount deposited is adequate to pay all principal and accrued interest on
the bonds through maturity or the first available call date which will
occur on or before November 1, 1998. The loss on the retirement of the
ZCSI bonds was approximately $94,000 before taxes.
Note K -- Earnings per Share
The following reconciles the numerators and denominators of the basic
and diluted EPS computations for net income (loss) for the following
periods:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Net income $1,225,837 $1,467,995
Basic
Weighted average shares outstanding 2,372,579 2,392,721
Basic earnings per share $ .52 $ .61
Diluted
Weighted average shares outstanding-
Basic 2,372,579 2,392,721
Effect of dilutive securities:
Restricted stock 31,597 28,211
Employee stock purchase plan 14,632 9,482
Stock options 20,380 5,051
Weighted average shares outstanding-
Diluted 2,439,188 2,435,465
Diluted earnings per share $ .50 $ .60
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Net income (loss) $ 76,590 $ (150,152)
Basic
Weighted average shares outstanding 2,371,964 2,390,549
Basic earnings (loss) per share $ .03 $(.06)
Diluted
Weighted average shares outstanding-
Basic 2,371,964 2,390,549
Effect of dilutive securities:
Restricted stock 30,085 27,196
Employee stock purchase plan 21,508 3,889
Stock options 16,380 5,609
Weighted average shares outstanding-
Diluted 2,439,937 2,427,243
Diluted earnings (loss) per share $ .03 $(.06)
</TABLE>
Options to purchase 50,000 shares of common stock at $19 per share were
outstanding during the three and six month periods ended June 30, 1998, but were
not included in the computation of diluted EPS because the performance
requirements for exercise of the options had not been met. The options, which
expire on June 30, 2007, were still outstanding at June 30, 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three Months Ended
June 30, 1998 versus June 30, 1997
The "Company", consisting of The Ziegler Companies, Inc. and its
subsidiaries, is a financial services company whose principal activities
are investment banking, retail/institutional sales and trading of
securities, and asset management services. The Company's investment
banking services are the underwriting and marketing of debt securities for
the health care industry, nonprofit senior living providers, and for
churches and private schools, the underwriting of equity securities as well
as providing financial advisory services. The Company also provides full-
service and reduced-commission brokerage services, investment management
and advisory services, equity and fixed income primary and secondary
trading, sales of complex financial instruments on an agency basis, and
Federal Housing Administration loan origination in conjunction with
investment banking activities. The nonfinancial services of the Company
are pollution abatement, as well as the recycling, reclaiming and disposing
of chemical wastes.
All references to 1998 and 1997 in this section of the results of
operations refer to the three months ended June 30, unless otherwise noted.
Total revenues of the Company in 1998 were $22,541,000 compared to
$14,592,000 in 1997, an increase of $7,949,000 or 54%. Expenses of the
Company in 1998 were $20,506,000 compared to $12,163,000 in 1997, an
increase of $8,343,000 or 69%. The provision for income taxes was $809,000
in 1998 and $961,000 in 1997. The statutory federal income tax rate
applicable to the Company was 34% in each of the two periods. Net income
of the Company in 1998 was $1,226,000 compared to $1,468,000 in 1997, a
decrease of $242,000 or 16%. The basic and diluted earnings per share were
$.52 and $.50 in 1998 as compared to $.61 and $.60 in 1997. The changes in
revenues, operating expenses, and net income were primarily a reflection of
factors related to investment banking and broker-dealer activities, as well
as changes in the Company's nonfinancial services company, WRR
Environmental Services Co., Inc. These factors, as well as the impact of
other factors, are explained more fully in the information that follows.
Investment Banking, Broker-Dealer and Asset Management Activities
B. C. Ziegler and Company ("BCZ"), the principal investment banking
and broker-dealer subsidiary of the Company, had total revenues of
$15,414,000 in 1998 compared to $10,393,000,in 1997, an increase of
$5,021,000 or 48%. The increase was due to several factors. Underwriting
revenues increased $2,665,000 or 41% to $9,227,000 primarily due to an
increase in municipal bond underwritings and related sales of complex
financial instruments on an agency basis. BCZ experienced a higher level
of bond refunding underwritings as municipalities took advantage of the
lower interest rates to reduce their overall borrowing costs. Commission
income increased $700,000 or 40% to $2,444,000 due to a substantial
increase in other financial product sales, primarily mutual funds. Trading
profits increased $117,000 or 12% to $1,055,000 due to the addition of
several new trading areas to BCZ and a greater emphasis on secondary
trading as a source of customer service to institutional clients. Interest
income also increased $1,288,000 or 267% to $1,729,000 due to substantially
higher inventory levels. Insurance agency and other revenues did not
change significantly.
Total expenses of BCZ were $14,099,000 in 1998 compared to $8,961,000
in 1997, an increase of $5,138,000 or 57%. Employee compensation and
benefits increased $2,876,000 in 1998 to $8,729,000 primarily due to
increases in commission expense related to higher sales volumes, new hires
for the secondary sales and trading areas, and an increase in the accrual
for incentive compensation. Interest expense increased $1,096,000 to
$1,418,000, primarily due to higher inventories of variable rate demand
notes, U.S. Government Agency Securities, and secondary market issues and
the related borrowing to finance this inventory. The remaining expense
increases were primarily a function of expanding offices and activities.
BCZ had net income of $797,000 in 1998 compared to net income of $867,000
in 1997.
Ziegler Thrift Trading, Inc. ("ZTT"), the reduced-commission
brokerage service of the Company, had total revenues in 1998 of $1,324,000
compared to $1,539,000 in 1997, a decrease of $215,000 or 14%. Commission
income, the primary source of revenues, decreased $143,000 to $1,103,000 in
1998, a 12% decrease. Decreased trading volumes and a reduction in average
commission per trade are the reasons for the decreases. Total expenses of
ZTT in 1998 were $1,180,000 compared to $1,150,000 in 1997, an increase of
$30,000 or 3%. The resulting net income in 1998 was $90,000 compared to
$240,000 in 1997, a decrease of $150,000 or 62%.
GS2 Securities, Inc. ("GS2"), an equity investment banking, research,
asset management and broker-dealer business, had total revenues in 1998 of
$3,290,000. Its primary sources of revenue were investment advisory fees
of $1,316,000, commission income of $750,000 and investment banking fees of
$1,027,000. Total expenses of GS2 were $3,044,000. The largest expense
categories were employee compensation and benefits of $1,743,000 and
brokerage commission and clearing fees of $851,000. Net income for GS2 was
$139,000 in 1998. GS2 was not a part of the Company in the second quarter
of 1997.
Ziegler Asset Management, Inc. ("ZAMI"), the asset management
services subsidiary of the Company, had total revenues of $1,089,000 in
1998 compared to $882,000 in 1997, an increase of $207,000 or 23%. This
increase was primarily due to increases in management fee income associated
with increased assets under management. Assets under management increased
to approximately $1.2 billion at June 30, 1998, from approximately $1
billion at June 30, 1997. Total expenses of ZAMI were $818,000 in 1998
compared to $708,000 in 1997, an increase of $110,000 or 16%. Employee
compensation and benefits increased $52,000 or 13% to $459,000. Net income
for ZAMI in 1998 was $162,000 compared to $98,000 in 1997, an increase of
$64,000 or 65%.
Other Financial Services
The Company's other financial services are primarily provided through
Ziegler Financing Corporation ("ZFC"), First Church Financing Corporation
("FCFC"), Ziegler Collateralized Securities, Inc. ("ZCSI"), Ziegler Capital
Company, LLC ("ZCC") and to a limited extent through The Ziegler Companies,
Inc. ("ZCO"). ZFC provides construction financing and interim lending,
primarily to investment banking clients, and is also qualified to originate
federally insured mortgage loans for the Federal Housing Administration
("FHA"). FCFC was organized for the purpose of issuing mortgage-backed
bonds collateralized by first mortgages on church buildings and properties.
ZCSI facilitated the financing of equipment leases and sales by
securitizing equipment leases or notes supporting equipment leases or
sales, and offering the resulting securities to the public. ZCC was formed
for the purpose of acquiring, owning, financing and otherwise dealing with
mortgages secured by senior living facilities. Substantially all the
assets of ZCSI were sold during the quarter for no material gain or loss.
The proceeds from the sale were used to pay the company's outstanding
bonds. For all practical purposes, ZCSI has ceased its operating
activities. ZCC ceased operating in May, 1998.
Other financial service revenues primarily consist of interest income
and lease income. Total revenues in 1998 of $811,000 decreased $266,000 or
25% from revenues from the same operations of $1,077,000 in 1997. The
decrease was primarily due to a decrease in interest income and lease
income. Decreasing lease balances in ZCSI and securitized church loan
balances in FCFC caused the decreases in these businesses as this area of
the business is being phased out. Total expenses were $1,0411,000 in 1998
compared to $907,000 in 1997, an increase of $134,000 or 15%. The increase
in expenses was due to increased activity and administrative expenses in
the parent company as well as an increase in interest expense. The net
loss from other financial services was $229,000 in 1998, compared to net
income of $100,000 in 1997.
Nonfinancial Services
WRR Environmental Services Co., Inc. ("WRR") is in the business of
providing pollution abatement services, blending virgin chemicals on a
contract basis for manufacturing firms, and recycling, reclaiming, and
disposing of chemical wastes. WRR is also engaged in the sale,
installation and servicing of truck equipment through a wholly-owned
subsidiary. Total gross revenues in 1998 were $3,567,000 compared to
$3,073,000 in 1997, an increase of $494,000 or 16%. The total gross margin
for WRR and its subsidiary was $888,000 in 1998, compared to $900,000 in
1997, a decrease of $12,000 or 1%. The gross margin percentage in 1998 was
25% compared to 29% in 1997. Total expenses of WRR in 1998 were $634,000
compared to $671,000 in 1997, a decrease of $38,000 or 6%. The resulting
net income for WRR in 1998 was $176,000 compared to $164,000 in 1997, an
increase of $12,000 or 7%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Six Months Ended
June 30, 1998 versus June 30, 1997
All references to 1998 and 1997 in this section of the results of
operations refer to the six months ended June 30, unless otherwise noted.
Total revenues of the Company in 1998 were $37,735,000 compared to
$24,311,000 in 1997, an increase of $13,424,000 or 55%. Expenses of the
Company in 1998 were $37,496,000 compared to $24,572,000 in 1997, an
increase of $12,924,000 or 53%. The provision for income taxes was
$162,000 in 1998 as compared to a benefit from income taxes of $111,000 in
1997. The statutory federal income tax rate applicable to the Company was
34% in each of the two periods. Net income of the Company in 1998 was
$77,000 compared to a net loss of $150,000 in 1997, an increase of
$227,000. The basic and diluted earnings per share were $.03 in 1998
compared to a loss per share of $.06 in 1997, respectively. The changes in
revenues, operating expenses, and net income from continuing operations
were primarily a reflection of factors related to investment banking and
broker-dealer activities, as well as changes in the Company's nonfinancial
services company, WRR Environmental Services Co., Inc. These factors, as
well as the impact of other factors, are explained more fully in the
information that follows.
Investment Banking, Broker-Dealer and Asset Management Activities
B. C. Ziegler and Company ("BCZ"), the principal investment banking
and broker-dealer subsidiary of the Company, had total revenues of
$24,193,000 in 1998 compared to $15,972,000 in 1997, an increase of
$8,221,000 or 51%. The increase was due to several factors. Underwriting
revenues increased $3,288,000 or 39% to $11,648,000 primarily due to an
increase in municipal bond underwritings and related sales of complex
financial instruments on an agency basis. An increased volume of
underwritings is the primary reason for the increase. Many new issues were
for bond refundings as municipalities took advantage of the lower interest
rate environment. Commission income increased $1,681,000 or 50% to
$5,033,000 due to a substantial increase in other financial product sales,
primarily mutual funds. Trading profits increased $888,000 or 47% to
$2,759,000 due to the addition of several new trading areas to BCZ and a
greater emphasis on secondary trading as a source of customer service to
institutional clients. Interest income also increased $2,057,000 or 229%
to $2,956,000 due to substantially higher inventory levels. Insurance
agency and other revenues did not change significantly.
Total expenses of BCZ were $25,558,000 in 1998 compared to
$18,068,000 in 1997, an increase of $7,490,000 or 41%. Employee
compensation and benefits increased $5,013,000 in 1998 to $15,631,000
primarily due to increases in commission expense related to higher sales
volumes, new hires for the secondary sales and trading areas, and an
increase in the accrual for incentive compensation. Interest expense
increased $1,906,000 to $2,395,000, primarily due to higher inventories of
variable rate demand notes, U.S. government agency securities, and other
secondary market issues and the related borrowing to finance this
inventory. The remaining expense increases were primarily a function of
expanding offices and activities. BCZ had a net loss of $886,000 in 1998
compared to a net loss of $1,258,000 in 1997. The results in the prior
year period included a $1,400,000 before tax settlement on a defaulted bond
issue underwritten by BCZ in 1989.
Ziegler Thrift Trading, Inc. ("ZTT"), the reduced-commission
brokerage service of the Company, had total revenues in 1998 of $2,782,000
compared to $3,092,000 in 1997, a decrease of $310,000 or 10%. Commission
income, the primary source of revenues, decreased $207,000 to $2,281,000 in
1998, an 8% decrease. A 1% decrease in trading volume as well as a
decrease in average commissions per trade are the primary reasons for the
decreases in revenue and commissions. Total expenses of ZTT in 1998 were
$2,397,000 compared to $2,316,000 in 1997, an increase of $81,000 or 3%.
The resulting net income in 1998 was $242,000 compared to $481,000 in 1997,
a decrease of $239,000 or 50%.
GS2 Securities, Inc. ("GS2"), an equity investment banking, research,
asset management and broker-dealer business, had total revenues of
$5,679,000 for the first six months. Its primary sources of revenue were
investment advisory fees of $2,588,000, commission income of $1,331,000 and
investment banking fees of $1,417,000. Total expenses of GS2 were
$5,205,000. The largest expense categories were employee compensation and
benefits of $2,846,000 and brokerage commission and clearing fees of
$1,575,000. Net income for GS2 was $264,000 in 1998. GS2 was not a part
of the Company in the first six months of 1997.
Ziegler Asset Management, Inc. ("ZAMI"), the asset management
services subsidiary of the Company, had total revenues of $2,114,000 in
1998 compared to $1,681,000 in 1997, an increase of $433,000 or 26%. This
increase was primarily due to increases in management fee income associated
with increased assets under management which reached $1.2 billion at June
30, 1998. Total expenses of ZAMI were $1,584,000 in 1998 compared to
$1,440,000 in 1997, an increase of $144,000 or 9%. Employee compensation
and benefits increased $114,000 or 14% to $913,000. Net income for ZAMI in
1998 was $317,000 compared to $134,000 in 1997, an increase of $183,000 or
137%.
Other Financial Services
Other financial service revenues primarily consist of interest
income, lease income and mortgage fees. Total revenues in 1998 of
$1,853,000 decreased $366,000 or 16% from revenues from the same operations
of $2,219,000 in 1997. The decrease was primarily due to a decrease in
interest income and lease income as the ZCSI and FCFC operations are phased
out. Total expenses were $2,079,000 in 1998 compared to $1,824,000 in
1997, an increase of $255,000 or 14%. The increase in expenses was due to
increased activity and administrative expense in the parent company, offset
by a decrease in interest expense. The net loss from other financial
services was $226,000 in 1998, compared to net income of $233,000 in 1997.
Nonfinancial Services
WRR Environmental Services Co., Inc. ("WRR") is in the business of
providing pollution abatement services, blending virgin chemicals on a
contract basis for manufacturing firms, and recycling, reclaiming, and
disposing of chemical wastes. WRR is also engaged in the sale,
installation and servicing of truck equipment through a wholly-owned
subsidiary. Total gross revenues in 1998 were $6,594,000 compared to
$5,893,000 in 1997, an increase of $701,000 or 12%. The total gross margin
for WRR and its subsidiary was $1,642,000 in 1998, compared to $1,706,000
in 1997, a decrease of $64,000 or 4%. The gross margin percentage in 1998
was 25% compared to 29% in 1997. Total expenses of WRR in 1998 were
$1,259,000 compared to $1,344,000 in 1997, a decrease of $85,000 or 6%.
The resulting net income for WRR in 1998 was $268,000 compared to $260,000
in 1997.
Liquidity and Capital Resources
The Company's primary activities involve investment banking, retail
and institutional securities brokerage, other financial services and
environmental services. Capital expenditures for assets for the first six
months of 1998 were $3,051,000. Land, buildings and equipment, net of
related depreciation and amortization, was 6% of total Company assets. In
1997 the Company began modifying its computer systems and outsourcing
various activities to address the Year 2000 issue. Anticipated spending
for these modifications will be expensed as incurred and is not expected to
have a significant impact on the Company's ongoing results of operations.
The Company expects to have its primary computer systems Year 2000
compliant by the second quarter of 1999.
The Company has a continuing requirement for cash to finance its
activities. A significant source of cash has been and continues to be the
issuance of short-term notes of the Company. These notes vary in
maturities up to 270 days. In the first six months of 1998, a total of
$41,336,000 of notes were issued and $40,728,000 were repaid. The total
balance of short-term notes outstanding was $16,298,000 as of June 30,
1998, compared to $15,034,000 as of December 31, 1997. This source of
additional cash was used primarily to finance lending activity and
securities inventory.
ZCSI issued bonds to the public as a source of cash prior to 1997.
During the second quarter of 1998, substantially all the non-cash assets of
ZCSI were sold and the proceeds used to retire all the bonds outstanding.
The bonds were used to finance the purchase of lease obligations and lease
financing notes. No new bonds have been issued in 1997 or 1998, nor does
the Company contemplate issuing bonds from this subsidiary in the future.
FCFC issued bonds to the public as a source of cash prior to 1997.
Mandatory redemption on the bonds is made from principal payments received
on the mortgage loans which serve as collateral for the bonds. There are
$7,861,000 of mortgage loans outstanding at June 30, 1998, which are
included in Notes Receivable in the balance sheet. Principal payments on
the mortgage loans are received in regular installments over a 15-year
amortization schedule through 2010. Total bonds outstanding at June 30,
1998 were $7,812,000. No new bonds were issued in the first six months of
1998.
BCZ, through its Ziegler Securities Division ("ZSD"), acts as
remarketing agent for approximately $1.4 billion of variable rate demand
municipal securities, most of which ZSD previously underwrote. The
securities may be tendered at the option of the holder, generally on seven
days advance notice. The obligation of the municipal borrower to pay for
tendered securities is, in substantially all cases, supported by a third
party liquidity provider, such as a commercial bank. In order to avoid
utilizing the third party liquidity provider, municipal borrowers contract
with ZSD to remarket the tendered securities. In order to permit ZSD,
acting as remarketing agent, to purchase securities to be held in ZSD's
inventory pending successful remarketing to others, ZSD has arranged a
committed, secured line of credit for $70 million from a syndicate of
banks, together with substantial uncommitted lines. At June 30, 1998,
BCZ had no borrowings on the uncommitted lines. BCZ can also finance these
variable rate securities with its clearing organization.
BCZ finances activities from its own resources and from unsecured
lines of credit and repurchase agreements available through banking and
brokerage relationships, and from its clearing broker-dealer using
inventory as collateral as well as intercompany borrowings, if necessary.
BCZ also has broker loan and other collateralized arrangements available
through banking relationships. At June 30, 1998, amounts outstanding under
the credit facilities were $7,575,000.
ZTT and GS2 rely on unsecured lines of credit through their banking
relationships and intercompany borrowings to finance their activities. Any
utilization of those lines of credit is generally repaid in less than seven
days. At June 30, 1998 ZTT and GS2 had no borrowings outstanding under
their respective lines of credit.
The Company's cash and cash equivalent position allows a certain
flexibility in its financial activities. In order to maximize income,
available cash is invested in short-term investments such as money market
funds and reverse repurchase agreements at very short maturities in
accordance with the Company's liquidity requirements.
The Company received approximately $11,000,000 in net proceeds after
taxes from the sale of Ziegler Leasing Corporation in 1996. The net
proceeds have been invested in short term securities. The Company has
requested a Private Letter Ruling from the Internal Revenue Service about
the availability of tax-favored treatment of a possible future distribution
to shareholders of the proceeds. Additionally, the Company continues to
explore reinvestment opportunities as well as a special dividend or partial
buyback of the Company's common stock through open market purchases or a
tender offer.
In the opinion of management, the Company's capital resources and
available lines of credit are adequate for present and anticipated future
operations.
<PAGE>
PART II
Items 1 through 3. Not applicable
Item 4. Results of Votes of Security Holders
Registrant held an annual meeting on Monday, April 20, 1998 for
which a proxy statement was sent to shareholders of record at the
close of business on March 6, 1997. A brief description of the
matters voted upon is as follows:
1. To elect three directors for a term of three years, and a
fourth director to fill the remaining term of a retiring
director.
2. To approve a new equity-based incentive compensation program
for key employees of the Company; and
3. To vote on a proposal to ratify the retention of Arthur
Andersen LLP as auditors for 1998.
A total of 2,425,183 shares were outstanding and eligible to
vote. The following votes were cast and the number of
abstentions and broker nonvotes are also listed.
1. Election of directors: Shareholders voted to grant or
withhold authority to vote for or against the nominees.
<TABLE>
<CAPTION>
Grant Withhold
<S> <C> <C>
P. D. Ziegler 1,944,547 11,111
F. J. Wenzel 1,951,924 3,734
P. R. Kellogg 1,952,124 3,534
D. A. Carlson, Jr. 1,952,397 3,261
</TABLE>
The following directors continued in office: S. A. Roell,
B. C. Ziegler III, J. C. Frueh, and J. R. Green.
2. Approval of incentive compensation program:
Broker
For Against Abstain Nonvotes
1,569,732 12,361 82,134 291,431
3. Retention of Arthur Andersen LLP as auditors:
For Against Abstain
1,925,586 27,141 2,931
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE ZIEGLER COMPANIES, INC.
Dated: August 13, 1998 By /s/ Peter D. Ziegler
Peter D. Ziegler
President
Dated: August 13, 1998 By /s/ D. Wallestad
Dennis A. Wallestad
Senior Vice President/CFO
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary information extracted from The Ziegler Companies,
Inc. and subsidiaries financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,963,752
<RECEIVABLES> 9,526,827
<SECURITIES-RESALE> 13,223,750<F1>
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 111,469,033<F2>
<PP&E> 11,206,353
<TOTAL-ASSETS> 186,816,594
<SHORT-TERM> 24,363,130<F3>
<PAYABLES> 44,474,155<F4>
<REPOS-SOLD> 38,174,000
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 14,124,628
<LONG-TERM> 8,508,689<F5>
0
0
<COMMON> 3,544,030
<OTHER-SE> 48,579,996
<TOTAL-LIABILITY-AND-EQUITY> 186,816,594
<TRADING-REVENUE> 0<F6>
<INTEREST-DIVIDENDS> 4,175,907
<COMMISSIONS> 0<F6>
<INVESTMENT-BANKING-REVENUES> 24,805,396<F6>
<FEE-REVENUE> 4,611,595
<INTEREST-EXPENSE> 3,297,238
<COMPENSATION> 20,588,323
<INCOME-PRETAX> 238,990
<INCOME-PRE-EXTRAORDINARY> 238,990
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,590
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<FN>
<F1>Short-term investments includes securities purchased under resale agreements as
a short-term investment vehicle.
<F2>Financial instruments includes securities inventory, notes receivable and
investment in and receivables from affiliates.
<F3>Includes short-term notes payable and unsecured notes payable to banks under
line of credit agreements.
<F4>Includes payable to customers, payable to broker-dealers, accounts payable, and
dividends payable.
<F5>Includes bonds payalbe and notes payable to banks other than line of credit
borrowings.
<F6>Revenue from investment banking activities also includes revenue from trading
activities and commissions.
</FN>
</TABLE>
