<PAGE>
Form 10-Q/A
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 September 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 September 30, 1998 was 2,401,632 shares.
<PAGE>
PART I
------
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
----------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
September 30, September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Revenues:
Investment banking and commission
income $11,765,138 $10,331,634
Investment management and
advisory fees 2,294,304 1,870,087
Interest and dividends 2,488,725 1,165,748
Gross profit on chemical products 1,018,127 838,336
Insurance agency 243,179 258,074
Other 522,884 1,044,404
----------- -----------
Total revenues 18,332,357 15,508,283
Expenses:
Employee compensation and benefits 9,997,473 8,317,021
Commissions and clearing fees 1,891,782 1,055,076
Communications 825,585 732,207
Occupancy and equipment 1,402,473 1,261,475
Promotional 1,043,485 661,650
Professional and regulatory 259,777 267,498
Interest 2,176,016 674,472
Provision for losses - 2,500,000
Other operating expenses 1,460,999 1,619,951
----------- -----------
Total expenses 19,057,590 17,089,350
----------- -----------
Loss before income taxes (725,233) (1,581,067)
Benefit from income taxes (246,400) (641,700)
----------- -----------
Net loss $ (478,833) $ (939,367)
=========== ===========
Net loss per share of common stock:
Basic and diluted loss per share $(.20) $(.39)
Dividends per share $ - $ .13
Average number of shares outstanding:
Basic 2,372,343 2,400,494
Diluted 2,417,389 2,472,398
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
2
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED OPERATING STATEMENTS
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------
September 30, September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Revenues:
Investment banking and commission
income $35,270,535 $26,573,731
Investment management and
advisory fees 6,905,897 3,409,436
Interest and dividends 6,664,632 3,702,637
Gross profit on chemical products 2,660,304 2,544,465
Insurance agency 928,603 878,256
Other 2,337,688 2,710,993
----------- -----------
Total revenues 54,767,659 39,819,518
Expenses:
Employee compensation and benefits 30,585,796 20,955,100
Commissions and clearing fees 4,486,175 1,620,250
Communications 2,848,676 2,070,040
Occupancy and equipment 4,289,114 3,678,894
Promotional 3,082,686 1,723,116
Professional and regulatory 964,100 807,451
Interest 5,473,254 2,406,536
Provision for losses - 3,900,000
Other operating expenses 4,824,101 4,499,951
----------- -----------
Total expenses 56,553,902 41,661,338
----------- -----------
Loss before income taxes (1,786,243) (1,841,820)
Benefit from income taxes (624,000) (752,300)
----------- -----------
Net loss $(1,162,243) $(1,089,520)
=========== ===========
Net loss per share of common stock:
Basic and diluted loss per share $(.49) $(.46)
Dividends per share $.26 $.39
Average number of shares outstanding:
Basic 2,372,090 2,393,864
Diluted 2,428,934 2,443,478
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
3
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Cash $ 4,327,235 $ 5,769,914
Short-term investments 25,343,404 22,849,551
Bonds due and called as of January 1, 1998 - 6,805,665
------------ ------------
Total cash and cash equivalents 29,670,639 35,425,130
Securities inventory 91,127,223 69,255,507
Securities purchased under agreements
to resell 19,160,049 8,240,000
Accounts receivable -- securities sales - 7,272,672
Accounts receivable -- other 6,908,782 6,660,650
Investment in and receivables from
affiliates 1,660,496 1,550,082
Investment in leases - 4,475,935
Notes receivable 7,531,560 14,513,323
Other investments 29,635,465 -
Land, buildings and equipment, at cost,
net of accumulated depreciation of
$17,107,174 and $15,949,666, respectively 12,194,860 8,879,613
Deferred income tax benefit 3,387,471 2,327,646
Other assets 7,761,304 8,876,549
------------ ------------
Total assets $209,037,849 $167,477,107
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 14,542,839 $ 15,033,913
Securities sold under agreements
to repurchase 39,788,000 7,324,000
Payable to customers 720,426 4,668,771
Payable to broker-dealers and clearing
organizations 63,876,205 680,980
Accounts payable 1,345,316 6,098,180
Dividends payable - 1,042,222
Accrued income taxes payable - 329,982
Securities sold, not yet purchased 19,373,640 7,989,062
Notes payable to banks 816,294 41,833,196
Bonds payable 6,922,309 18,281,775
Other liabilities and deferred items 11,177,787 11,900,370
------------ ------------
Total liabilities 158,562,816 115,182,451
------------ ------------
Commitments
Stockholders' equity
Common stock, $1.00 par,
authorized 7,500,000 shares,
issued 3,544,030 shares 3,544,030 3,544,030
Additional paid-in capital 6,058,808 6,068,647
Retained earnings 58,866,375 60,658,881
Treasury stock, at cost, 1,128,398
and 1,120,257 shares, respectively (17,708,578) (17,600,754)
Unearned compensation (285,602) (376,148)
------------ ------------
Total stockholders' equity 50,475,033 52,294,656
------------ ------------
Total liabilities and stockholders'
equity $209,037,849 $167,477,107
============ ============
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
4
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------------
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,162,243) $(1,089,520)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,259,092 1,114,421
Provision for losses - 2,500,000
Unrealized loss (gain) on securities
inventory 464,740 (53,198)
Gain on sale of other investments (73,853) -
Compensation expense related to
restricted stock grants 297,578 115,389
Deferred income taxes (1,059,825) (94,999)
Net dividends received from
unconsolidated affiliates - 356,965
Loss on bond retirement 94,268 -
Changes in assets and liabilities:
Decrease/(Increase) in -
Securities inventory (10,951,878) 19,362,779
Accounts receivable -- securities sales 7,272,672 3,692,615
Accounts receivable -- other (352,292) (366,454)
Securities purchased under agreements
to resell (10,920,049) -
Other assets 510,323 299,365
Increase/(Decrease) in -
Payable to customers and broker-dealers 59,246,880 434,251
Accounts payable (4,752,864) 1,147,755
Income taxes payable (329,982) (7,348,280)
Other liabilities (621,941) (1,815,961)
--------- ---------
Net cash provided by operating
activities 38,920,626 18,255,128
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sale of equipment 17,125 -
Principal payments received under leases 779,645 1,850,432
Sale of leased equipment 924,652 223,991
Payments received on notes receivable 4,813,508 6,123,185
Sale of investment in affiliate - 825,000
Cash acquired in purchase of GS/2/ - 600,196
Sale of leases and notes 5,832,190 -
Sales/paydowns of other investments 10,016,893 -
Payments for:
Issuance of new notes receivable (561,146) -
Purchase of other investments (39,578,505) -
Capital expenditures (4,409,699) (1,958,960)
---------- ---------
Net cash provided by (used in)
investing activities (22,165,337) 7,663,844
</TABLE>
5
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of short-term notes payable $ 60,463,000 $ 55,312,000
Exercise of employee stock options 85,965 127,339
Payments for:
Principal payments of short-term notes payable (60,946,000) (58,998,000)
Repayments of bonds payable (5,219,000) (4,112,000)
Purchase of treasury stock (410,660) (1,473,010)
Cash dividends paid (1,672,485) (1,689,950)
Retirement of bonds outstanding (6,257,698)
Net payments under bank credit
facilities (41,016,902) (21,875,023)
Net receipts on securities sold under agreements
to repurchase 32,464,000 -
------------ ------------
Net cash used in financing
activities (22,509,780) (32,708,644)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,754,491) (6,789,672)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 35,425,130 43,096,718
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,670,639 $ 36,307,046
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 5,132,000 $ 2,539,000
Income taxes paid during the period $ 755,000 $ 6,721,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Granting of restricted stock from
treasury stock $ 207,000 $ -
Treasury stock issued for acquisition
of GS/2/ $ - $ 1,375,000
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
6
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
September 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 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 material 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 or method of adoption of
SFAS 133. Although management expects the amount to be immaterial, the
application of this Statement to the Company's financial statements could
increase volatility in net income and other comprehensive income.
Note B -- Commitments and Contingent Liabilities
- ------ --------------------------------------
In the normal course of business, B. C. Ziegler and Company (BCZ) and GS/2/
Securities, Inc. (GS/2/) 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 $7,027,000 of firm
underwriting commitments outstanding at September 30, 1998. GS/2/ had no firm
underwriting commitments outstanding at September 30, 1998.
WRR Environmental Services Co., Inc. (WRR) is subject to a consent order of
the Wisconsin Department of Natural Resources for further testing
7
<PAGE>
and surface water control of contaminants in ground water under and adjacent to
its 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 September 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. During the third quarter
of 1998 the steering committee notified WRR that additional remediation and
monitoring costs will be required to clean up the first site. WRR's estimate of
this future cost is $50,000. 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
estimates that it 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. A group of major PRPs at the site have cross-
complained against WRR and other PRPs who delivered smaller volumes of waste to
the site, 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 EPA on account of this
site, indicates that WRR may have valid defenses to this cross complaint. WRR
continues to evaluate its potential liability for remediation costs at this site
but is unable to estimate a realistic cost at this time based upon the presently
available information.
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
$585,000 at September 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. As of September 30, 1998, a total of 2,565 shares had been forfeited. Each
remaining 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. None of such shares were vested at September 30, 1998. The market
value of the restricted stock, when issued, was $19.50 per share. The total
value of these shares is being amortized and recorded as compensation expense
over the period of vesting. The shares may not be transferred by the recipients
until vested.
In April, 1998, the shareholders authorized the establishment of the 1998
Stock Incentive Plan (the "1998 Plan") for key employees of the
8
<PAGE>
Company. Stock options, restricted stock and stock appreciation rights may be
granted under the 1998 Plan. A total of 435,000 shares are issuable under the
1998 Plan. The 1998 Plan will terminate on April 20, 2008.
On August 28, 1998, a total of 196,500 options to purchase shares were
granted under the 1998 Plan. The options vest equally after each of the next
three years if certain specified earnings targets are met and will vest in any
case after eight years from the date of grant. All options granted are forfeited
upon termination of employment. Under the 1998 Plan any options that expire,
terminate, or are canceled are again available for future granting. The options
must be exercised within 10 years from the date of grant.
No further awards or grants may be made under the 1993 Employees' Stock
Incentive Plan (the "1993 Plan"). Options already granted under the 1993 Plan
will remain in effect until they have been exercised or have expired.
Note D -- Net Capital Requirements and Customer Reserve Accounts
- ------ ------------------------------------------------------
As registered broker-dealers, BCZ, Ziegler Thrift Trading, Inc. (ZTT) and
GS/2/ Securities, Inc. (GS/2/) 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 September 30, 1998, is as follows:
<TABLE>
<CAPTION>
BCZ ZTT GS/2/
----------- ---------- ----------
<S> <C> <C> <C>
Aggregate indebtedness $ 8,207,000 $ 682,000 $1,487,000
Net capital $ 707,000 $1,942,000 $ 534,000
Ratio of aggregate
indebtedness to
net capital 11.61 to 1 .35 to 1 2.78 to 1
Required net capital $ 547,000 $ 250,000 $ 100,000
</TABLE>
As a registered broker-dealer that still has 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 September 30, 1998, there was approximately
$2,009,000 in the customer reserve account.
In April, 1998, ZTT entered into an agreement to clear all transaction
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
September 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-dealer.
9
<PAGE>
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
----------------------------
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Revenues -
Interest $ 939,324 $2,066,050
Gain on sale/redemption of
mortgage certificates 23,431 200,345
---------- ----------
Total revenues 962,755 2,266,395
---------- ----------
Expenses -
Interest 860,791 1,956,502
Amortization of bond
issuance costs 36,423 136,074
Management fees 53,004 143,808
Other 12,537 30,011
---------- ----------
Total expenses 962,755 2,266,395
---------- ----------
Net income $ - $ -
========== ==========
For the Nine Months Ended
----------------------------
September 30, September 30,
1998 1997
------------- -------------
Revenues -
Interest $3,195,271 $6,354,062
Gain on sale/redemption of
mortgage certificates 1,078,178 304,432
---------- ----------
Total revenues $4,273,449 $6,658,494
---------- ----------
Expenses -
Interest 2,947,970 5,991,020
Amortization of bond
issuance costs 1,107,625 287,229
Management fees 77,095 287,891
Other 140,759 92,354
---------- ----------
Total expenses 4,273,449 6,658,494
---------- ----------
Net income $ - $ -
========== ==========
</TABLE>
10
<PAGE>
Note F -- Securities Inventory
- ------ --------------------
Securities inventory consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Municipal bond issues $72,471,400 $54,481,670
Mortgage and asset backed securities 13,909,117 9,300,821
Corporate bond issues 1,260,067 1,742,008
Institutional bond issues 209,565 2,165,128
Preferred stock 2,454,021 401,766
Other securities 823,053 1,164,114
----------- -----------
$91,127,223 $69,255,507
=========== ===========
</TABLE>
U.S. government agency securities consisting of collateralized mortgage
obligations totaling $39,579,000 were purchased by BCZ from ZMSI-II in February,
1998. In July, 1998, BCZ sold these securities to the parent (ZCO) at cost which
approximated par value. As the result of sales of some securities and repayments
of principal on the underlying mortgage obligations for securities still held
the total volume of securities has declined. 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. ZCO
carries these U.S. government agency securities as other investments on the
balance sheet, totaling $29,635,000 at September 30, 1998. Coincident with
purchasing these securities, ZCO entered into a repurchase agreement under which
ZCO is able to benefit from the spread between current short-term interest rates
and the yields on the associated U.S. government agency securities.
Note G -- Securities Sold, Not Yet Purchased
- ------ ----------------------------------
Marketable securities sold, not yet purchased, consist of trading
securities at market value as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
U.S. government and agency securities $19,373,640 $7,989,062
</TABLE>
Note H -- Payable to Broker-Dealers and Clearing Organizations
- ------ ----------------------------------------------------
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, commissions, inventory sales and profits or
losses on securities transactions. The amount payable to the clearing broker of
approximately $63,876,000 at September 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
11
<PAGE>
purchases or purchases of other large blocks of securities. The Company had
$490,000 in short-term borrowings outstanding at September 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 has a $70,000,000 revolving credit facility and an $83,000,000
uncommitted borrowing facility. Both facilities are primarily for financing
variable rate municipal securities, 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 September 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 of equipment leases
and notes and no longer intends to make offerings of this nature to the public.
Summarized balance sheet information of ZCSI as of September 30, 1998 and
December 31, 1997 and income statements for the nine month periods ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Balance Sheets as of:
-----------------------------
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Investment in leases $ - $ 4,475,934
Notes receivable 178,301 4,203,967
Other assets 81,885 2,454,051
-------- -----------
Total assets $260,186 $11,133,952
======== ===========
Bonds payable $ - $ 8,829,000
Other liabilities 250,186 2,294,952
-------- -----------
Total liabilities 250,186 11,123,952
Stockholder's equity 10,000 10,000
-------- -----------
Total liabilities and
stockholder's equity $260,186 $11,133,952
======== ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Income Statements for the
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
-------------- -------------
<S> <C> <C>
Lease income $136,438 $471,744
Interest income 187,894 457,809
-------- --------
Total income 324,332 929,553
-------- --------
Interest expense 306,567 754,219
Management subsidy (68,809) (17,049)
Other expenses 86,574 192,383
-------- --------
Total expenses 324,332 929,553
-------- --------
Net income $ - $ -
======== ========
</TABLE>
ZCO provides management and administrative services to ZCSI. Management
subsidy received from ZCO is 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.
13
<PAGE>
Note K -- Earnings per Share
- ------ ------------------
The following reconciles the numerators and denominators of the basic and
diluted EPS computations for the net losses for the following periods:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
September 30, September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Net loss $ (478,833) $ (939,367)
=========== ===========
Basic
- ---------------
Weighted average shares outstanding 2,372,343 2,400,494
=========== ===========
Basic earnings per share $ (.20) $ (.39)
=========== ===========
Diluted
- ---------------
Weighted average shares outstanding-
Basic 2,372,343 2,400,494
Effect of dilutive securities:
Restricted stock 26,461 30,688
Employee stock purchase plan 9,368 28,565
Stock options 9,217 12,651
----------- -----------
Weighted average shares outstanding-
Diluted 2,417,389 2,472,398
=========== ===========
Diluted earnings per share $ (.20) $ (.39)
=========== ===========
For the Nine Months Ended
------------------------------
September 30, September 30,
1998 1997
------------ ------------
Net loss $(1,162,243) $(1,089,520)
=========== ===========
Basic
- ---------------
Weighted average shares outstanding 2,372,090 2,393,864
=========== ===========
Basic earnings per share $ (.49) $ (.46)
=========== ===========
Diluted
- ---------------
Weighted average shares outstanding-
Basic 2,372,090 2,393,864
Effect of dilutive securities:
Restricted stock 24,264 28,500
Employee stock purchase plan 16,465 12,499
Stock options 16,115 8,615
----------- -----------
Weighted average shares outstanding-
Diluted 2,428,934 2,443,478
=========== ===========
Diluted earnings per share $ (.49) $ (.46)
=========== ===========
</TABLE>
Options to purchase 50,000 shares of common stock at $19 per share were
outstanding during the three and nine month periods ended September 30, 1998,
but were not included in the computation of diluted EPS because the
14
<PAGE>
performance requirements for exercise of the options had not been met. The
options, which expire on June 30, 2007, were still outstanding at September 30,
1998.
Note L -- Subsequent Event--Acquisition of PMC International, Inc.
- ------------------------------------------------------------------
On November 4, 1998, the Company announced the signing of a merger
agreement for the Company to acquire PMC International, Inc. ("PMC"), a Denver-
based investment management and consulting firm. Under the terms of the
agreement, a subsidiary of the Company commenced a tender offer to acquire all
of the outstanding common stock of PMC for $0.60 per share and all of the
outstanding preferred stock of PMC for $2.50 per share. Following the completion
of the tender offer, the Company will consummate a second-step merger in which
the remaining PMC common shareholders will receive $0.60 per share and its
preferred shareholders will receive $2.50 per share. The total purchase price
for the currently outstanding common and preferred stock, including PMC stock
warrants and options, is approximately $3.1 million, which will be funded from
working capital of the Company.
To support PMC during the period in which the companies are effecting the
merger, the Company has executed a $3.5 million credit facility with PMC, the
outstanding balance of which is convertible into PMC common stock at $0.60 per
share. In October 1998, the Company loaned PMC $500,000 for working capital
which is convertible into PMC preferred stock at $2.50 per share. In addition,
the two firms have entered into an option for common stock under which the
Company may immediately purchase 4,500,000 shares of PMC common stock for $0.60
per share.
Following the completion of the merger, the Company expects to furnish
additional capital to PMC in the range of $2 million to $3 million, either in
the form of debt or equity.
Note M -- Merger of Subsidiaries
- --------------------------------
The Company intends to merge its GS/2/ subsidiary into BCZ effective
January 1, 1999. GS/2/ was originally purchased July 1, 1997 for total
consideration of $1,375,000 paid in Company stock. Additional contingent
consideration, which would increase the purchase price and goodwill, were to be
paid based upon the achievement of performance targets during the three years
following the purchase. In recognition of performance to date, the Company will
pay an additional 72,366 shares in Company stock and approximately $468,000 in
cash in final settlement of the purchase price. The final payments will be made
December 31, 1998, which will increase the purchase price and goodwill of the
transaction.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations - Three Months Ended
September 30, 1998 versus September 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.
The Company declared dividends for the third quarter of 1998 of 13 cents
per share on October 21, 1998, after the end of the quarter. The dividends are
payable to shareholders of record on November 2, 1998, and will be paid on
November 13, 1998. For the third quarter of 1997 dividends were declared during
the quarter on September 19, 1997, payable to shareholders of record on October
3, 1997. The dividends were paid on October 17, 1997.
All references to 1998 and 1997 in this section of the results of
operations refer to the three months ended September 30, unless otherwise noted.
Total revenues of the Company were $18,332,000 compared to $15,508,000 in 1997,
an increase of $2,824,000 or 18%. Expenses of the Company in 1998 were
$19,058,000 compared to $17,089,000 in 1997, an increase of $1,969,000 or 12%.
The benefit from income taxes was $246,000 in 1998 and $642,000 in 1997. The
statutory federal income tax rate applicable to the Company was 34% in each of
the two periods. The net loss of the Company in 1998 was $479,000 compared to
$939,000 in 1997. The basic and diluted losses per share were $.20 in 1998
compared to $.39 in 1997. The changes in revenues, operating expenses, and net
income were primarily a reflection of factors related to investment banking,
broker-dealer and parent company 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 $11,660,000 in
1998 compared to $9,425,000 in 1997, an increase of $2,235,000 or 24%. The
increase was due to several factors. Underwriting
16
<PAGE>
revenues increased $1,854,000 or 36% to $6,935,000 primarily due to an increase
in municipal bond underwritings. BCZ experienced a higher level of bond
refunding underwriting as municipalities took advantage of the lower interest
rates to reduce their overall borrowing costs. Trading profits decreased
$904,000 to $190,000 primarily as the result of realized and unrealized losses
on inventory positions. Commission income from the sale of other financial
products increased $291,000 to $2,389,000. Interest income increased $1,107,000
to $1,532,000 due to substantially higher inventory levels. All other revenues
did not change significantly.
Total expenses of BCZ were $13,835,000 in 1998 compared to $9,408,000 in
1997, an increase of $4,427,000 or 47%. Employee compensation and benefits
increased $1,700,000 in 1998 to $8,193,000 primarily due to an increase in the
accrual for incentive compensation, new hires for the secondary sales and
trading areas, and increases in commission expense related to higher sales
volumes. Interest expense increased $1,490,000 to $1,595,000, 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. Commissions and clearing fees increased $507,000 to $650,000 as
the result of the change from a clearing broker-dealer to a fully disclosed
broker-dealer in May, 1998. Promotional expenses increased to $911,000 primarily
related to $338,000 of expense related to municipal bond underwritings. Other
categories of expenses increased in conjunction with the increased activity
levels.
The net loss in 1998 for BCZ was $1,344,000 compared to net income of
$30,000 in 1997. The net loss is primarily related to losses in the taxable
fixed income trading division. The components of the loss in the taxable fixed
income trading division were a lower volume of trading activity than
anticipated, high fixed costs of the division, primarily in the form of
personnel costs, and unanticipated market conditions that created losses in
inventory, and for which hedging transactions were not as effective as
anticipated. The taxable fixed income trading division had a loss of $1,952,000
before taxes in 1998. Included in the taxable fixed income trading division
loss is an unrealized loss of $458,000 related to the effect of the market
conditions on the inventory and hedge positions. Also contributing to the loss
were increased expenses that continued into the third quarter related to the
conversion of clearing operations and the cost of consultants that are assisting
in the conversion of processing and administrative technology which is intended
to increase BCZ's capabilities as a broker-dealer and to prepare them for Year
2000 compliance.
Ziegler Thrift Trading, Inc. ("ZTT"), the reduced commission brokerage
service of the Company, had total revenues in 1998 of $1,074,000 compared to
$1,344,000 in 1997, a decrease of $270,000 or 20%. Commission income, the
primary source of revenues, decreased $178,000 to $925,000 in 1998, a 19%
decrease. Decreased trading volumes and a reduction in average commission per
trade are the reasons for the decreases. A decrease in higher commission stock
option trading due to market conditions, lower commissions on electronic trading
which is approximately 10% of trades, and general competitive pressure to reduce
commissions are the reasons for these decreases. Total expenses of ZTT in 1998
were $1,021,000 compared to $1,019,000 in 1997, an increase of $2,000 or less
than 1%. The resulting net income in 1998 was $33,000 compared to $202,000 in
1997, a decrease of $169,000 or 84%.
17
<PAGE>
GS/2/ Securities, Inc. ("GS/2/"), an equity investment banking, research,
and investment management business, had total revenues in 1998 of $2,526,000
compared to $2,075,000 in 1997, an increase of $451,000 or 22%. An increase in
underwriting income of $397,000 was the primary reason for the increase. Total
expenses of GS/2/ were $2,293,000 in 1998 and $1,952,000 in 1997, an increase of
$341,000 or 17%. The primary reason for the increase was an increase in
commissions and clearing fees of $191,000 to $961,000. This increase is
reflective of increased transaction activity and includes both the cost of
clearing transactions and the commissions to nonemployee selling brokers. Net
income for GS/2/ was $131,000 in 1998 compared to $64,000 in 1997, an increase
of $67,000 or 105%.
Ziegler Asset Management, Inc. ("ZAMI"), the asset management services
subsidiary of the Company, had total revenues of $1,150,000 in 1998 compared to
$906,000 in 1997, an increase of $244,000 or 27%. This increase was primarily
due to increases in management fee income associated with increased assets under
management. Assets under management increased to approximately $1.20 billion at
September 30, 1998, from approximately $1.07 billion at September 30, 1997.
Management fee income increased $271,000 to $1,117,000 in 1998. Total expenses
of ZAMI were $846,000 in 1998 compared to $740,000 in 1997, an increase of
$106,000 or 14%. The primary reason for the increase was an increased level of
referral fees for new business. Net income for ZAMI in 1998 was $183,000
compared to $92,000 in 1997, an increase of $91,000 or 99%.
Other Financial Services
- ------------------------
Other financial service revenues primarily consist of interest income and
lease income. Total revenues in 1998 of $1,150,000 increased $87,000 or 8% from
revenues from the same operations of $1,063,000 in 1997. Decreased lease income
as the result of the sale of substantially all leases and notes in ZCSI in June
1998 was more than offset by increased interest income. Interest income
increased $310,000 as the result of the U.S. government agency securities held
by ZCO. Other changes in revenues were not significant. Total expenses were
$648,000 in 1998 compared to $3,502,000 in 1997, a decrease of $2,854,000 or
81%. The decrease in expenses from 1997 was primarily due to the 1997
writedowns of loans receivable in the amount of $2.25 million and lease
receivables of $250,000 held by ZCO and ZCSI, respectively. The balance of the
decrease was due to a reduction in interest expense related to the outstanding
bonds issued by ZCSI and retired in the second quarter of 1998. Net income from
other financial services was $301,000 in 1998, compared to a net loss of
$1,466,000 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. Gross revenues in 1998 were
$3,650,000 compared to $3,072,000 in 1997, an increase of $578,000 or 19%. The
gross margin for WRR was $1,018,000 in 1998, compared to $838,000 in 1997, an
increase of $180,000 or 21%. The gross margin percentage in 1998 was 28%
compared to 27% in 1997. Higher volumes of waste and product sales are the
reasons for the
18
<PAGE>
increased sales. The gross margin percentage increase was primarily due to
product sales, a higher margin activity. Total expenses of WRR in 1998 were
$685,000 in 1998 compared to $643,000 in 1997, an increase of $42,000 or 7%. The
resulting net income for WRR in 1998 was $220,000 compared to $141,000 in 1997,
an increase of $79,000 or 56%.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations - Nine Months Ended
September 30, 1998 versus September 30, 1997
All references to 1998 and 1997 in this section of the results of
operations refer to the nine months ended September 30, unless otherwise noted.
Total revenues of the Company in 1998 were $54,768,000 compared to $39,820,000
in 1997, an increase of $14,948,000 or 38%. Expenses of the Company in 1998
were $56,554,000 compared to $41,661,000 in 1997, an increase of $14,893,000 or
36%. The benefit from income taxes was $624,000 in 1998 as compared to a
benefit of $752,000 in 1997. The statutory federal income tax rate applicable
to the Company was 34% in each of the two periods. The net loss of the Company
in 1998 was $1,162,000 compared to a net loss of $1,090,000 in 1997. The basic
and diluted losses per share were $.49 in 1998 compared to $.46 in 1997. 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.
As noted in the three month results, the dividends for the third quarter
were declared on October 21, 1998, and will be paid on November 13, 1998.
Dividends of 39 cents per share were paid in 1997 for the first three quarters
of the year and the same amount will be paid in 1998 on the first three quarters
of the year.
This amendment is being filed to reflect the Company's determination that
$1,300,000 of cash received and recognized as revenue by its B.C. Ziegler and
Company subsidiary in the second quarter for certain hedging services actually
should have been taken into revenue over an extended period of time as future
contingencies are met.
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 $34,553,000 in
1998 compared to $25,398,000 in 1997, an increase of $9,155,000 or 36%. The
increase was due to several factors. Underwriting revenues increased $3,842,000
or 29% to $17,283,000 primarily due to an increase in municipal bond
underwritings and related sales of complex financial instruments primarily on an
agency basis. BCZ experienced an increased volume of bond refunding
underwritings as municipalities took advantage of the lower interest rate
environment. Commission income increased $1,972,000 or 27% to $7,422,000 due to
a substantial increase in other financial product sales, primarily mutual funds
and equity securities. Trading profits were $2,949,000 and did not change
significantly from 1997. Interest income increased $3,164,000 or 239% to
$4,488,000 due to substantially higher inventory levels. All other revenues did
not change significantly.
Total expenses of BCZ were $39,393,000 in 1998 compared to $27,476,000 in
1997, an increase of $11,917,000 or 43%. Employee
20
<PAGE>
compensation and benefits increased $6,638,000 in 1998 to $23,748,000 primarily
due to increases in commission expense related to higher sales volumes, new
hires for the secondary sales and fixed income trading areas, and an increase in
the accrual for incentive compensation. Interest expense increased $3,397,000 to
$3,990,000, 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. Commissions and clearing fees
increased $840,000 to $1,236,000 in 1998 as the result of the change from a
clearing broker-dealer to a fully disclosed broker-dealer in May, 1998.
Communication costs increased $605,000 to $2,306,000 and promotional expenses
increased $1,141,000 to $2,562,000. Both the communication and promotional
expense increases relate to higher levels of information provided to customers
involving the conversion of our clearing operations and an increase in awareness
and product advertising. Promotional expense also increased as the result of
$551,000 of expense related to municipal bond underwritings. Other categories of
expense did not change significantly.
BCZ had a net loss of $2,990,000 in 1998 compared to a net loss of
$1,228,000 in 1997. The larger loss in 1998 originated primarily in the taxable
fixed income trading division. A lower than projected volume of trading
combined with market conditions that created losses in inventory were the
primary contributors to the BCZ loss in 1998. The taxable fixed income trading
division had a loss of $3,294,000 before taxes in 1998. Included in the taxable
fixed income trading division loss is an unrealized loss of $458,000 related to
the effect of the market conditions on the inventory and hedge positions. Also
contributing to the loss were the increased expenses of the clearing and
technology conversions now taking place. Each of the conversions is part of a
strategy to increase BCZ's capabilities as a broker-dealer and achieve Year 2000
compliance.
Ziegler Thrift Trading, Inc. ("ZTT"), the reduced-commission brokerage
service of the Company, had total revenues in 1998 of $3,856,000 compared to
$4,436,000 in 1997, a decrease of $580,000 or 13%. Commission income, the
primary source of revenues, decreased $412,000 to $3,207,000 in 1998, an 11%
decrease. A 3% decrease in trading volume as well as a decrease in average
commissions per trade were the primary reasons for the decreases in revenue and
commissions. A decrease in higher commission stock option trading due to market
conditions, lower commissions on electronic trading which is approximately 10%
of trades, and general competitive pressure to reduce commissions are the
reasons for these decreases. Total expenses of ZTT in 1998 were $3,417,000
compared to $3,334,000 in 1997, an increase of $83,000 or 2%. Reductions in
compensation and benefits were offset by increases in clearing costs while other
expense categories did not change significantly. The resulting net income in
1998 was $275,000 compared to $683,000 in 1997, a decrease of $408,000 or 60%.
GS/2/ Securities, Inc. ("GS/2/"), an equity investment banking, research,
and investment management and business, had total revenues in 1998 of $8,204,000
compared to $2,075,000 in 1997, an increase of $6,129,000. GS/2/ was purchased
on July 2, 1997, and was included in the results of operations for three months
in 1997 whereas it is included for a full nine months in 1998. The most
significant differences in revenues to the Company were in commission income
which increased $1,465,000 to $2,100,000; investment banking revenue which
increased $1,814,000 to $1,901,000 and
21
<PAGE>
investment management and advisory fees which increased $2,740,000 to
$3,765,000. Total expenses of GS/2/ in 1998 were $7,498,000 compared to
$1,952,000 in 1997, an increase of $5,546,000. The most significant differences
in expenses were in employee compensation and benefits which increased
$2,927,000 to $3,813,000 and commissions and clearing fees which increased
$1,766,000 to $2,536,000. Net income for GS/2/ in 1998 was $395,000 compared to
$64,000 in 1997.
Ziegler Asset Management, Inc. ("ZAMI"), the asset management services
subsidiary of the Company, had total revenues of $3,264,000 in 1998 compared to
$2,587,000 in 1997, an increase of $677,000 or 26%. This increase was primarily
due to increases in management fee income associated with increased assets under
management. Assets under management at ZAMI reached $1.2 billion at September
30, 1998. Management fee income increased $756,000 to $3,141,000 in 1998.
Total expenses of ZAMI were $2,430,000 in 1998 compared to $2,180,000 in 1997,
an increase of $250,000 or 11%. Increases in employee compensation and benefits
and referral fees for new business are the primary reasons for the increased
expenses. Net income for ZAMI in 1998 was $500,000 compared to $226,000 in
1997, an increase of $274,000 or 121%.
Other Financial Services
- ------------------------
Other financial service revenues primarily consist of interest income and
lease income. Total revenues in 1998 of $3,003,000 decreased $279,000 or 8%
from revenues from the same operations of $3,282,000 in 1997. The decrease was
primarily due to a decrease in lease income related to the sale of substantially
all leases in ZCSI and the phaseout of that subsidiary. Total expenses were
$2,727,000 in 1998 compared to $5,326,000 in 1997, a decrease of $2,599,000 or
49%. The decrease in expenses from 1997 is primarily due to the writedown of
loans receivable in the amount of $2.25 million and a writedown of $250,000 of
lease receivables held by ZCO and ZCSI, respectively. Net income from other
financial services was $276,000 in 1998, compared to net loss of $1,233,000 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. Gross revenues in 1998 were
$10,245,000 compared to $8,965,000 in 1997, an increase of $1,280,000 or 14%.
The gross margin for WRR was $2,660,000 in 1998, compared to $2,544,000 in 1997,
an increase of $116,000 or 5%. The gross margin percentage in 1998 was 26%
compared to 28% in 1997. Higher volumes of waste recycling, remediation
business and, to a lesser extent, product sales are the primary reasons for the
increased sales. Increases in lower margin sales volumes and increased price
competition were the reasons for the decline in gross margin percentages. Total
expenses of WRR in 1998 were $1,944,000 compared to $1,987,000 in 1997, a
decrease of $43,000 or 2%. The resulting net income for WRR in 1998 was
$486,000 compared to $400,000 in 1997.
22
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Capital expenditures for assets for the first nine months of 1998 were
$4,410,000. Land, buildings and equipment, net of related depreciation and
amortization, was 6% of total Company assets.
The Company has also been reviewing the Year 2000 issue. The Year 2000
issue affects the ability of computer systems to correctly process dates after
December 31, 1999. The Company is in the process of completing its evaluation
of its information technology and non-information technology systems. The
evaluation of substantially all systems is expected to be completed by the end
of 1998. Information has also been obtained from our vendors as to their
current Year 2000 compliance or their strategy to be Year 2000 compliant. The
Company began the process of Year 2000 compliance in 1997. During 1998 BCZ and
ZTT completed the conversion from clearing to fully disclosed broker-dealers.
This conversion relieved the Company of the necessity of converting its internal
clearing systems to Year 2000 compliance. The Company has also initiated the
process of updating technology as part of a larger conversion of information
technology systems. As a result, it is not possible to distinguish between the
costs of operational conversions and the Year 2000 preparation. Amounts
associated with Year 2000 preparation are being expensed as incurred and are not
expected to have a significant impact on the Company's ongoing results of
operations.
The impact of the Year 2000 problem on the securities industry will be
material since virtually every aspect of the sale of securities and processing
of transactions will be affected. Because of the interdependent nature of
securities transactions, the Company may be adversely affected depending upon
whether it and the entities with whom the Company interacts address this issue
successfully. The Company has not yet established a contingency plan. Such a
plan will be given significant consideration during 1999. Early in 1999, BCZ
will be conducting Year 2000 tests with its clearing brokers and will also be
working with other vendors in the testing of other systems. Further, the
Company expects to have its primary systems Year 2000 compliant by the end of
the second quarter of 1999. The consideration of contingency planning measures
will be evaluated at that time. BCZ, ZTT, and GS/2/, the broker-dealer
subsidiaries of the Company, were required to and have filed Form BD-Y2K with
the Securities and Exchange Commission providing information related to Year
2000 compliance which is commensurate with and expands upon the information
above.
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 nine months of 1998, a total of $60,463,000 of notes
were issued and $60,946,000 were repaid. The total balance of short-term notes
outstanding was $14,543,000 as of September 30, 1998, compared to $15,034,000 as
of December 31, 1997. This source of cash was used primarily to finance lending
and investment activities.
ZCSI issued bonds to the public as a source of cash prior to 1997. During
the second quarter of 1998, substantially all non-cash assets of ZCSI were sold
and the proceeds used to retire all outstanding bonds. The bonds had been used
to finance the purchase of lease obligations and lease financing notes. No new
bonds have been issued in 1997 or 1998, nor does
23
<PAGE>
the Company contemplate issuing bonds from this subsidiary in the future.
FCFC issued bonds to the public as a source of cash prior to 1996.
Mandatory redemption on the bonds is made from principal payments received on
the mortgage loans which serve as collateral for the bonds. There are
$6,665,000 of mortgage loans outstanding at September 30, 1998, which are
included in Notes Receivable on 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 September 30, 1998 were
$6,554,000. No new bonds were issued in 1998 nor does the Company plan to issue
bonds in the future.
BCZ acts as remarketing agent for approximately $1.4 billion of variable
rate demand municipal securities, most of which BCZ 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 BCZ to remarket the
tendered securities. To assist in financing such activity, BCZ has a
$70,000,000 secured revolving credit facility and an $83,000,000 uncommitted,
secured borrowing facility from a syndicate of banks. A total of $52,515,000 of
variable rate securities were in inventory at September 30, 1998. At September
30, 1998, BCZ had no borrowings on the committed or uncommitted lines. BCZ
financed the variable rate securities with its clearing broker-dealer.
BCZ finances activities from its own resources, from unsecured lines of
credit available through banking relationships, from repurchase agreements
through brokerage relationships, and from its clearing broker-dealer using
inventory as collateral as well as intercompany borrowings from the parent, if
necessary. BCZ also has a secured broker loan arrangement available through a
banking relationship. At September 30, 1998, there were no amounts outstanding
under the bank secured and unsecured credit facilities. Amounts outstanding
under repurchase agreements were $10,324,000 and the amount due the clearing
broker-dealer was $63,667,000. In each case securities are the underlying
collateral for the amounts due.
GS/2/ relies on an unsecured line of credit through a banking relationship
and intercompany borrowings to finance its activities. Any utilization of the
line of credit is generally repaid in less than seven days. At September 30,
1998 GS/2/ had no borrowings outstanding under the line of credit or from
intercompany borrowing.
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 will reinvest the proceeds
in suitable acquisitions as described in the notes to the financial statements.
The total cash anticipated to be required in the
24
<PAGE>
acquisition of PMC and finalization of the GS/2/ purchase is approximately $10
million. The remaining balances will be reinvested in operations of the Company.
In the opinion of management, the Company's capital resources and available
lines of credit are adequate for present and anticipated future operations.
25
<PAGE>
PART II
-------
Item 1 through 4.
Not applicable.
Item 5. Pending Acquisition of PMC International, Inc.
On November 4, 1998, the Company announced the signing of a merger
agreement for the Company to acquire PMC International, Inc., a
Denver-based investment management and consulting firm. See Note L
to the Notes to Consolidated Condensed Financial Statements for
additional information.
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
26
<PAGE>
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: March 4, 1999 By /s/ Peter D. Ziegler
-------------------------------
Peter D. Ziegler
President
Dated: March 4, 1999 By /s/ Jeffrey C. Vredenbregt
--------------------------------
Jeffrey C. Vredenbregt
Vice President
27
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
28
<TABLE> <S> <C>
<PAGE>
<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>
<RESTATED>
<CAPTION>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,327,235
<RECEIVABLES> 6,908,782
<SECURITIES-RESALE> 19,160,049 <F1>
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 129,954,744 <F2>
<PP&E> 12,194,860
<TOTAL-ASSETS> 209,037,849
<SHORT-TERM> 15,359,133 <F3>
<PAYABLES> 2,065,742 <F4>
<REPOS-SOLD> 39,788,000
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 19,373,640
<LONG-TERM> 7,738,603 <F5>
0
0
<COMMON> 3,544,030
<OTHER-SE> 46,931,003
<TOTAL-LIABILITY-AND-EQUITY> 209,037,849
<TRADING-REVENUE> 0 <F6>
<INTEREST-DIVIDENDS> 6,664,632
<COMMISSIONS> 0 <F6>
<INVESTMENT-BANKING-REVENUES> 35,270,535 <F6>
<FEE-REVENUE> 6,905,897
<INTEREST-EXPENSE> 5,473,254
<COMPENSATION> 30,585,796
<INCOME-PRETAX> (1,786,243)
<INCOME-PRE-EXTRAORDINARY> (1,162,243)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,162,243)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
<FN>
<F1> Short-term investments also includes securities purchased under resale
agreements as a short-term investment vehicle.
<F2> Financial instruments includes securities inventory, notes receivable
investment in and receivable from affiliates, and other investments.
<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.
<F6> Revenue from investment banking activities also includes revenue from
trading activities and commissions.
<F5> Includes bonds payable and notes payable to banks other than line of credit
borrowings.
</TABLE>
