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 March 31, 1999
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 March 31, 1999 was 2,458,431 shares.
<PAGE>
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
<S> <C> <C>
Revenues:
Investment banking income $ 6,656,233 $ 4,570,522
Commission income 6,084,968 5,742,906
Investment management and advisory fees 6,478,464 1,372,623
Interest and dividends 1,564,561 1,903,835
Gross profit on chemical products 571,470 753,789
Other 652,012 850,423
Total revenues 22,007,708 15,194,098
Expenses:
Employee compensation and benefits 10,989,604 9,105,777
Commissions and clearing fees 4,387,385 1,070,043
Communications 864,443 1,018,806
Occupancy and equipment 2,237,857 1,471,001
Promotional 819,457 848,580
Professional and regulatory 472,073 395,665
Interest 1,150,566 1,488,341
Goodwill 235,192 28,932
Other operating expenses 1,386,155 1,563,000
Total expenses 22,542,732 16,990,145
Loss before income taxes (535,024) (1,796,047)
Benefit from income taxes (128,800) (646,800)
Net loss (406,224) (1,149,247)
Net loss per share of common stock:
Basic and Diluted earnings
per share $(.17) $(.49)
Average number of shares outstanding:
Basic 2,432,042 2,371,350
Diluted 2,492,844 2,434,144
</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>
March 31, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash $ 9,086,452 $ 7,037,183
Short-term investments 16,847,931 10,267,040
Total cash and cash equivalents 25,934,383 17,304,223
Securities inventory 21,633,543 125,429,892
Securities purchased under agreements to
resell 4,573,125 4,753,125
Accounts receivable--securities sales 706,444 543,029
Accounts receivable--other 5,085,714 6,112,737
Accrued income taxes receivable 1,542,787 1,344,380
Investment in and receivables from
affiliates 1,613,570 1,629,473
Notes receivable 5,383,341 5,509,630
Other investments 28,448,819 28,587,845
Land, buildings and equipment, at cost,
net of reserves for depreciation of
$20,406,737 and $19,792,490, respectively 13,111,436 13,240,874
Deferred income tax benefit 3,381,172 3,212,427
Goodwill 13,111,806 13,346,998
Other assets 5,356,950 5,719,308
Total assets $129,883,090 $226,733,941
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 20,157,927 $ 13,501,519
Securities sold under agreements to
repurchase 33,174,000 31,040,000
Payable to broker-dealers and clearing
organizations 5,807,647 98,435,492
Accounts payable 1,873,371 2,156,426
Securities sold, not yet purchased 4,610,220 4,644,855
Notes payable to banks 632,102 2,776,687
Bonds payable 5,251,239 5,369,797
Other liabilities and deferred items 9,709,983 19,208,188
Total liabilities 81,216,489 177,132,964
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 6,206,753 6,204,728
Retained earnings 56,148,219 56,875,618
Treasury stock, at cost, 1,085,599
and 1,073,459, respectively (17,039,734) (16,797,954)
Unearned compensation (192,667) (225,445)
Total stockholders' equity 48,666,601 49,600,977
Total liabilities and
stockholders' equity $129,883,090 $226,733,941
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>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (406,224) $(1,149,247)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 903,095 416,282
Unrealized (gain) loss on securities
inventory (58,110) 97,517
Gain on sale of equipment (18,496) -
Compensation expense related to
restricted stock grants 32,778 36,200
Deferred income tax (168,745) (11,500)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable--securities
sales (163,415) (980,395)
Accounts receivable--other 992,373 439,218
Securities inventory, net 103,819,824 763,501
Securities purchased under
agreements to resell 180,000 (9,738,300)
Other assets 418,436 (1,041,365)
Increase (decrease) in:
Payable to customers and
broker-dealers (92,627,845) 2,577,011
Accounts payable (283,055) (903,195)
Income taxes payable (198,407) (1,138,580)
Securities sold under agreements
to repurchase 2,134,000 33,490,000
Other liabilities (9,529,797) (2,819,197)
Net cash provided by operating activities 5,026,412 20,037,950
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of equipment 25,000 17,125
Principal payments received under
leases - 464,951
Sale of leased equipment - 908,771
Payments received on notes receivable 131,805 1,371,032
Sales/paydowns on other investments 139,026 -
Payments for:
Issuance of new notes receivable - (61,146)
Capital expenditures (525,568) (1,620,503)
Net cash provided by (used in) investing
activities (229,737) 1,080,230
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes payable 22,909,000 20,981,000
Exercise of employee stock options 14,495 24,465
Payments for:
Principal payments on short-term notes
payable (16,251,000) (21,078,000)
Repayment of bonds payable (119,000) (1,935,000)
Purchase of treasury stock (254,250) -
Cash dividends (321,175) (1,042,222)
Net repayments under credit facilities (2,144,585) (21,413,127)
Net cash provided by (used in)
financing activities 3,833,485 (24,462,884)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,630,160 (3,344,704)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 17,304,223 35,425,130
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $25,934,383 $32,080,426
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the quarter $ 1,638,000 $ 1,486,000
Income taxes paid during the quarter $ 46,000 $ 503,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Granting of restricted stock from
treasury stock $ - $ 207,000
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999
Note A -- Basis of Presentation
The consolidated condensed financial statements included herein have
been prepared by The Ziegler Companies, Inc. and its subsidiaries
(collectively known as the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in 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.
Note B -- Commitments and Contingent Liabilities
In the normal course of business, B. C. Ziegler and Company (BCZ)
enters 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 $4,932,000 in commitments
outstanding at March 31, 1999.
WRR Environmental Services Company, Inc. (WRR) is subject to a
consent order of the Wisconsin Department of Natural Resources for further
testing and control of contaminants in ground water under and adjacent to
the plant site in Eau Claire, Wisconsin.
WRR has disposed of wastes at other waste disposal or 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 March
31, 1999, 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 1998 the steering committee notified
WRR that additional remediation and monitoring costs will be required to
clean up the first site. WRR estimates that its total remaining assessment
for cleanup costs at the first site will be approximately $50,000. The
total 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 its proportionate share of remediation costs at this
second site will approximate $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 has cross-complained against WRR
and other PRPs, requesting contribution for the cleanup costs. The case is
pending in a federal district court. Based upon recent information
involving administration, investigation and remediation costs, WRR
estimates that its proportionate share of the cleanup costs associated with
this site is $400,000 to $1,000,000. WRR's review of the EPA's remediation
investigation and feasibility study, and other materials prepared by EPA
and the parties in the pending federal court action, indicates that WRR may
have valid defenses to the cross complaint.
While WRR may be 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 $811,000 at March 31, 1999
and covers the estimated 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 -- Net Capital Requirements and Customer Reserve Accounts
As registered broker-dealers, BCZ, Ziegler Thrift Trading, Inc. (ZTT)
and Portfolio Brokerage Services, Inc. (PBS) (all of which are direct or
indirect subsidiaries of the Company) are subject to the requirements of
Rule 15c3-1 (the "net capital rule") under the Securities Exchange Act of
1934. The net capital rule requires a broker-dealer to have sufficient
liquid assets at all times to cover current indebtedness. Specifically,
the net capital 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 March 31, 1999, is as follows:
</TABLE>
<TABLE>
<CAPTION>
BCZ ZTT PBS
<S> <C> <C> <C>
Aggregate indebtedness $ 4,965,000 $ 833,000 $ 49,000
Net capital $12,222,000 $1,953,000 $818,000
Ratio of aggregate
indebtedness to
net capital 0.41 to 1 0.43 to 1 0.06 to 1
Required net capital $ 435,000 $ 250,000 $100,000
</TABLE>
Registered broker-dealers that carry customer accounts are subject to
Securities and Exchange Commission Rule 15c3-3. BCZ and ZTT each maintain
a separate bank account for the exclusive benefit of customers. The amount
maintained in this account is determined by periodic computations required
under that rule, which allows the Company to maintain the computed amounts
in cash or other qualified securities. As of March 31, 1999 there was
approximately $1,753,000 in the customer reserve accounts. PBS executes
transactions and promptly transmits all customer cash and securities on a
delivery versus payment basis through the customer's custodian bank and is,
therefore, not subject to rule 15c3-3.
BCZ and ZTT clear all securities purchase and sale transactions
through a clearing agent on a fully disclosed basis and do not carry
customer accounts. BCZ currently makes deposits to a customer reserve
account as the result of a transfer agent service that it provides. ZTT is
awaiting approval from the SEC and NASD to discontinue its customer reserve
account.
Note D -- 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
March 31, March 31,
1999 1998
<S> <C> <C>
Revenues -
Interest $738,819 $1,306,906
Gain on sale/redemption of
mortgage certificates 32,975 1,018,156
Total revenues $771,794 $2,325,062
Expenses -
Interest 672,396 1,209,155
Amortization of bond
issuance costs 45,068 1,030,567
Management fee (subsidy) 24,611 (19,179)
Other 29,719 104,519
Total expenses 771,794 2,325,062
Net income $ - $ -
</TABLE>
Note E -- Securities Inventory
Securities inventory consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Municipal bond issues $10,729,473 $110,536,184
Collateralized mortgage
obligations 5,126,026 5,251,202
Corporate bond issues 380,209 203,051
Institutional bond issues 103,028 2,827,386
Preferred stock 2,419,964 3,476,229
Other securities 2,874,843 3,135,840
$21,633,543 $125,429,892
</TABLE>
Note F -- Securities Sold, Not Yet Purchased
Marketable securities sold, not yet purchased, consist of trading
securities at market value as follows:
March 31, December 31,
1999 1998
U.S. Treasury Notes $4,610,220 $4,644,855
Note G -- Payable to Broker-Dealers and Clearing Organizations
BCZ clears its proprietary and customer transactions through a
clearing agent on a fully disclosed basis. The relationship with the
clearing agent 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 agent of approximately $4,465,000 at March 31, 1999 relates
primarily to the financing of inventory and is collateralized by securities
held in inventory with a market value of approximately $17,055,000 owned by
BCZ. Funds are borrowed at the Federal Funds rate plus 50 basis points and
are due under normal margin arrangements for securities inventory.
Note H -- 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 $632,000 in short-term borrowings outstanding at March 31, 1999. Such
short-term borrowings are generally repaid within 30 days.
Note I -- Earnings per Share
The following reconciles the numerators and denominators of the basic
and diluted earnings per share computations for income from continuing
operations for the three month periods ended March 31,
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net loss $ (406,224) $(1,149,247)
Basic
Weighted average shares outstanding 2,432,042 2,371,350
Basic loss per share $(.17) $(.49)
Diluted
Weighted average shares outstanding-
Basic 2,432,042 2,371,350
Effect of dilutive securities:
Restricted stock 30,897 33,152
Employee stock purchase plan 16,203 16,455
Stock options 13,702 13,187
Weighted average shares outstanding-
Diluted 2,492,844 2,434,144
Diluted loss per share $(.17) $(.49)
</TABLE>
Note J -- Operating Segments
The operating segments of the Company are organized according to the
products and services they provide and the customers they serve. The
following is a summary of information by operating segment:
<PAGE>
<TABLE>
<CAPTION>
Health Care
and Senior
Living
Investment Retail Asset Taxable Other
Banking Brokerage Management Trading Segments Totals
For the
three months
ended
March 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total
revenues $5,286,212 $ 6,038,584 $ 8,608,322 $ 411,977 $ 775,691 $21,120,786
Intersegment
revenues 4,647 56,178 - - - 60,825
Income (loss)
before taxes 998,575 687,967 (94,313) (211,758) 14,248 1,394,719
Total assets 9,861,400 10,994,227 24,986,610 5,762,183 13,273,140 64,877,560
</TABLE>
<TABLE>
<CAPTION>
Health Care
and Senior
Living
Investment Retail Asset Taxable Other
Banking Brokerage Management Trading Segments Totals
For the
three months
ended
March 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Total
revenues $2,641,986 $5,481,255 $3,664,196 $ 986,572 $1,333,662 $14,107,671
Intersegment
revenues 8,737 10,341 46,916 - 21,211 87,205
Income (loss)
before taxes (768,911) 487,184 369,249 (112,061) 28,593 4,054
Total assets 33,676,888 22,429,047 6,899,753 21,494,217 27,545,822 112,045,726
</TABLE>
The following are reconciliations of operating segment information to
the Company's consolidated totals:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
Total Revenues:
<S> <C> <C>
Total revenues for reportable
segments $20,345,095 $12,774,009
Revenue for other segments 775,691 1,333,662
Revenues from administrative and
corporate functions 1,016,999 1,363,507
Elimination of intersegment revenues (130,077) (277,080)
Total consolidated revenues $22,007,708 $15,194,098
</TABLE>
Revenues from administrative and corporate functions are primarily
related to fee income and interest revenue. Intersegment revenues include
primarily miscellaneous transactions for various services and fees,
generally of an administrative nature.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
Income (loss) before taxes:
<S> <C> <C>>
Total income before taxes for
reportable segments $1,380,471 $ (24,539)
Income before taxes for other
segments 14,248 28,593
Unallocated amounts:
Unallocated administrative and
corporate expenses net of income (1,929,743) (1,800,101)
Total consolidated net income
(loss) before taxes $ (535,024) $(1,796,047)
</TABLE>
<PAGE>
Administrative and corporate activities are activities that support
multiple segments and relate to the overall management, administration, and
regulatory compliance of the Company and its subsidiaries. Substantially
all income is earned from the services and activities provided by the
Company. Taxes are not allocated among the operating segments.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
1999 1998
Total Assets:
<S> <C> <C>
Total assets for reportable
segments $ 48,761,903 $ 84,499,904
Assets for other segments 13,273,140 27,545,822
Corporate and other unallocated
assets 67,848,047 71,338,784
Total consolidated assets $129,883,090 $183,384,510
</TABLE>
Assets specifically identifiable to a segment are allocated to that
segment. A significant amount of the assets are financial assets
pertaining to corporate activities and are not allocated. Total assets
includes securities inventory which can vary significantly from period to
period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Ziegler Companies, Inc. (the "Parent"), through its wholly owned
subsidiaries (collectively known as the "Company"), is principally engaged
in financial services activities. These financial services activities are
conducted primarily through four operating segments. These operating
segments are health care and senior living investment banking, retail
brokerage, asset management, and taxable trading. These activities are
carried on through the Company's subsidiaries which are B. C. Ziegler and
Company ("BCZ"), Ziegler Thrift Trading ("ZTT"), Ziegler Financing
Corporation ("ZFC"), Ziegler Asset Management Inc. ("ZAMI"), and PMC
International, Inc. and its subsidiaries ("PMC"). GS2 Securities, Inc.
("GS2") was merged into BCZ as of December 31, 1998.
The other activities of the Company include the financial activities
associated with First Church Financing Corporation ("FCFC") and Ziegler
Collateralized Securities, Inc. ("ZCSI"). The Company also has a
nonfinancial subsidiary, WRR Environmental Services Company, Inc. ("WRR"),
whose services include pollution abatement and chemical blending, as well
as the recycling, reclaiming and disposing of chemical wastes. Other areas
of the Company not considered operating segments are the administrative
activities provided by BCZ and the Parent.
Results of Operations - Three months ended
March 31, 1999 Compared to March 31, 1998
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
<TABLE>
<CAPTION>
Increase/
For the Three Months Ended March 31, 1999 1998 (Decrease)
(Dollars in thousands)
Revenues:
<S> <C> <C> <C>
Health Care and Senior Living
Investment Banking $ 5,286 $ 2,642 $2,644
Retail Brokerage 6,039 5,481 558
Asset Management 8,608 3,664 4,944
Taxable Trading 412 987 (575)
Other Activities and Intercompany 1,663 2,420 (757)
Total $22,008 $15,194 $6,814
Income (Loss) Before Taxes:
Health Care and Senior Living
Investment Banking $ 999 $ (769) $1,768
Retail Brokerage 688 487 201
Asset Management (94) 369 (463)
Taxable Trading (212) (112) (100)
Other Activities and Intercompany (1,916) (1,771) (145)
Total $ (535) $(1,796) $1,261
</TABLE>
Health Care and Senior Living Investment Banking
Health care and senior living investment banking activities generated
revenues of $5,286,000 in 1999 compared to $2,642,000 in 1998, an increase
of $2,644,000 or 100%. A continued favorable economic environment that
allowed for a higher volume of underwritings provided for an increase in
municipal underwriting revenue of $2,247,000 to $3,709,000. A total of 17
underwriting transactions totalling $396 million were completed in 1999
compared to 10 transactions totalling $160 million in 1998. Related fee
income and secondary market tax-exempt trading also increased compared to
the prior year first quarter.
Total expenses of the health care and senior living investment
banking activities were $4,287,000 in 1999 compared to $3,411,000 in 1998,
an increase of $876,000 or 27%. The increase was primarily related to an
increase in employee compensation and benefits of $705,000 associated with
the higher level of investment banking activity. The health care and
senior living investment banking activities had a net income before taxes
of $999,000 compared to a loss of $769,000 in 1998.
Retail Brokerage
Retail brokerage activities generated revenues of $6,039,000 in 1999
compared to $5,481,000 in 1998, an increase of $558,000 or 10%. This
increase was primarily the result of a $330,000 increase in the revenue
from the underwriting and sale of church and school bonds. These bonds
were sold through BCZ full service retail brokerage offices. BCZ also had
increased revenue from municipal bonds and equity sales. Both the ZTT
discount brokerage activities and BCZ insurance sales activities had slight
declines in revenue.
Total expenses of the retail brokerage activities were $5,351,000 in
1999 compared to $4,994,000 in 1998, an increase of $357,000 or 7%. This
increase was due to increased clearing charges of $665,000 at BCZ and ZTT
related to the clearing of brokerage transactions by outside clearing
agents. Prior to May, 1998, clearing costs were part of BCZ administrative
overhead and were not allocated to the BCZ retail sales group. The
clearing charges were partially offset by decreases in communication and
promotional expenses which were incurred as part of the clearing
conversions in 1998. The resulting net income before taxes for retail
brokerage activities was $688,000 in 1999 compared to $487,000 in 1998, an
increase of $201,000 or 41%.
Asset Management
Asset management activities generated revenues of $8,608,000 in 1999
compared to $3,664,000 in 1998, an increase of $4,944,000 or 135%. The
inclusion of PMC as a subsidiary contributed $5,072,000 of revenues in
1999. PMC was not a part of the Company in the first quarter of 1998.
ZAMI revenue also increased in 1999 by $205,000 or 20% primarily as the
result of increased assets under management. These increases were offset
by a decrease in revenues related to equity underwriting activity of the
former GS2 subsidiary which was merged into BCZ as of December 31, 1998.
Total expenses of the asset management activities were $8,702,000 in
1999 compared to $3,295,000 in 1998, an increase of $5,407,000. The
inclusion of PMC in 1999 caused an increase of $5,270,000 in expenses, of
which $2,808,000 related to fees paid to investment managers and others
which are included in Commissions and Clearing Fees. Other changes in
expenses were not significant. The asset management activities had a net
loss before taxes of $94,000 in 1999 compared to net income before taxes of
$369,000 in 1998. The primary reasons were losses at PMC and the former
GS2. The PMC losses were expected. Management anticipates growth in
assets under management and related revenue. The former GS2 had a slower
first quarter than in the prior year first quarter in income other than
asset-based fees.
Taxable Trading
Taxable trading activities had gross revenues of $412,000 in 1999
compared to $987,000 in 1998, a decrease of $575,000 or 58%. Market and
interest rate conditions as well as a reduced level of operations caused
secondary trading activity to decrease in the first quarter of 1999 as
compared to 1998 causing the decrease in revenues for preferred stock and
taxable bond trading.
Expenses of taxable trading activities were $624,000 in 1999 compared
to $1,099,000 in 1998, a decrease of $475,000 or 43%. A reduction in
employee compensation and benefits and interest expense were the primary
reasons for the decrease. Reduced staffing and a lower level of inventory
caused these reductions. The net loss before taxes was $212,000 in 1999
compared to $112,000 in 1998.
Other Activities and Intercompany
The activities of other financial services generated revenues of
$130,000 in 1999 compared to $555,000 in 1998. The decease was related to
the planned reduction or discontinuation of several activities. Reductions
in the FCFC loan portfolio and the sale by ZCSI of substantially all leases
and notes receivable in June, 1998, are the primary reasons for the
decrease in revenues, primarily interest income. Expenses, primarily
interest expense, for these activities also decreased as the result of the
retirement of bonds outstanding for both FCFC and ZCSI.
WRR, the only nonfinancial activity of the Company, had a gross
margin of $571,000 in 1999 compared to $754,000 in 1998, a decrease of
$183,000 or 24%. A lower level of sales in higher margin products despite
only a small decline in total sales was the primary reason for the
decreased gross margin. Expenses did not change significantly.
The administrative activities of BCZ and the Parent generated
revenues of $1,017,000 in 1999 compared to $882,000 in 1998. This revenue
and the increase were primarily related to interest income on
collateralized mortgage obligations held by the Parent and purchased in
February, 1998. Total expenses were $2,683,000 in 1999 compared to
$1,930,000 in 1998. An increase in interest expense of $280,000 to finance
the collateralized mortgage obligations noted above and an increase in
operating expenses associated with administrative activities were the
primary reasons for the increase. Such activities include executive
management, internal audit, management information systems, human
resources, building services, securities operations, compliance and
accounting. The administrative activities of BCZ and the Parent reduced
net income before taxes by $1,930,000 in 1999 compared to $1,800,000 in
1998.
<PAGE>
Liquidity and Capital Resources
Capital expenditures for assets for the first three months of 1999
were $526,000. Approximately $287,000 was for technology expenditures and
$239,000 was for furniture, equipment, and leasehold improvements. Land,
buildings and equipment, net of related depreciation and amortization, was
10% of total Company assets.
The Company has a continuing need 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 three months of 1999, a total of $22,909,000 of notes
were issued and $16,251,000 were repaid. The total balance of short-term
notes outstanding was $20,158,000 as of March 31, 1999. This source of
additional cash was used primarily to finance lending and investment
activity.
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 1998 or 1999, 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 were
$5,134,000 of mortgage loans outstanding at March 31, 1999, 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 and through prepayments. Total bonds
outstanding at March 31, 1999 were $4,996,000. No new bonds were issued in
1999 nor does the Company plan to issue bonds in the future.
BCZ acts as remarketing agent for approximately $1.2 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. A total
of $1,300,000 of variable rate securities were held in inventory at March
31, 1999. BCZ finances its inventory of variable rate securities acquired
pursuant to its remarketing activities through its clearing agent under the
clearing agent's margin financing arrangements.
BCZ finances activities from its own resources, from unsecured lines
of credit available through banking relationships, from repurchase
agreements through brokerage relationships, from its clearing agent using
inventory as collateral, as well as intercompany borrowings from the
Parent, if necessary. There were no amounts outstanding under bank
unsecured credit facilities at March 31, 1999. Amounts outstanding under
repurchase agreements were $2,777,000 and the amount owed the clearing
agent was $4,468,000. In each case securities are the underlying
collateral for the amounts due.
The Parent finances its activities through the issuance of short-term
notes described above, banking relationships shared with BCZ, and
repurchase agreements. ZCO had no amounts outstanding under bank unsecured
credit facilities at March 31, 1999. Amounts outstanding under repurchase
agreements totalled $30,397,000 at March 31, 1999, and were used to finance
collateralized mortgage obligations included in Other Investments on the
balance sheet.
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.
In the opinion of management, the Company's capital resources and
available lines of credit are adequate for present and anticipated future
operations.
Year 2000
The Year 2000 issue affects the ability of computer systems to
correctly process dates after December 31, 1999. The Year 2000 issue is
the result of computer programs being written using two digits rather than
four to define the applicable year. Computer equipment, software, and
electronic devices with imbedded technology that are time sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in similar normal business
activities.
The Company began the process of addressing Year 2000 compliance in
1996. During 1998, BCZ and ZTT, the Company's primary retail brokerage
subsidiaries, completed the conversion from self-clearing to clearing on a
fully disclosed basis through clearing agents. This conversion relieved
the Company of the burden of making corrections to its internal computer-
based clearing systems to achieve Year 2000 compliance. In the case of
each of the two subsidiaries, the conversion of securities brokerage
processing systems was to a vendor that is a significant provider of this
type of service to the securities industry. Each vendor has published
plans and progress reports with respect to its readiness for Year 2000 and
indicated its belief that it will be prepared for Year 2000. The Company
has also converted its information technology processes from a central
mainframe computer to a server-based network system. The vendors of the
hardware and software associated with this system have indicated compliance
with Year 2000 readiness standards. This server-based network system is
being extended throughout the company replacing older systems.
As part of its reviews, the Company completed a company-wide
inventory and assessment of electronic equipment and systems of all its
financial services subsidiaries including PMC and its subsidiaries acquired
in December, 1998. The Company has made substantial progress in the
process of updating technology as part of a larger conversion of
information technology systems and operational systems and should have all
remaining systems Year 2000 compliant by the end of the third quarter. The
Company has received responses from virtually all vendors of mission
critical systems as to their readiness for Year 2000 and is pursuing
responses from vendors who have not yet responded. The Company has
successfully participated in industry-wide testing and is in the process of
internal testing. The industry-wide testing is substantially completed
with no material exceptions. The internal testing of mission critical
systems is over 50% complete and is expected to be completed in the third
quarter. The internal testing of non-critical internal systems is over 25%
complete and is expected to be completed by the end of October, 1999.
Year 2000 planning and preparation at PMC has been in progress since
1997 and is primarily relying on internal resources. PMC's business
operations include both internal information systems, primarily related to
performance reporting and portfolio accounting, and external systems,
primarily related to their broker-dealer operations and portfolio
accounting. Programming corrections for Year 2000 compliance of internal
systems is in progress and is scheduled to be completed by June 30, 1999.
Testing of the corrections are to be completed by September 30, 1999. The
external systems are provided by recognized vendors who have responded
favorably with respect to Year 2000 compliance. PMC has developed a
preliminary contingency plan which will be finalized during 1999.
The total cost of the Year 2000 preparedness efforts cannot be
estimated with precision. The conversion of BCZ and ZTT to fully disclosed
clearing through third party clearing agents and the updating of internal
information systems to current technology were part of a strategy to update
our internal operations, and were not budgeted or identified as expenses
related to Year 2000 compliance. As a result, it is difficult to
distinguish between the costs of strategic operational conversions and Year
2000 compliance. Costs incurred for Year 2000 compliance are principally
the related payroll costs of internal information systems personnel which
are not separately tracked.
The impact of the Year 2000 issue on the securities industry will
likely be significant since virtually every aspect of the sale of
securities and processing of transactions requires Year 2000 compliance
review. 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 failure to correct a significant Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
However, the Company does not control third party vendors and as a result,
cannot determine to what extent future results may be adversely affected by
the failure of these third parties to successfully address their Year 2000
issues. Due to the general uncertainty inherent in the Year 2000 issue,
resulting in part form the uncertainty of the Year 2000 readiness of third-
party suppliers and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material
impact on the Company's results of operations, liquidity or financial
condition. The Company believes that, with the conversion to fully-
disclosed clearing agents who have favorably responded as to their Year
2000 readiness, and updated technology platforms, the probability of
significant interruptions of normal operations is reduced.
The Company has prepared a contingency plan for Year 2000 issues.
The plan identifies Year 2000 issues with respect to our primary
operational activities. Time frames and alternatives have been developed
to continue processing transactions under various scenarios. It is
impossible to anticipate all possible circumstances; however, the Company
has attempted to address all significant operational areas. The
contingency plan will be reviewed and may be changed based upon the results
of testing yet to be completed.
Forward Looking Statements
Certain comments in this Form 10-Q represent forward looking
statements made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. The statements are based on current
estimates and are dependent upon a variety of factors that could cause
actual results to differ from these estimates. Such factors which may
impact the results are: a reduction in the demand for investment banking
services by nonprofit healthcare and senior living providers; a significant
decline in the overall values of equity and fixed income securities, and
the level of activity in those markets; the loss of key personnel;
unforeseen material Year 2000 operational problems; the loss of significant
customer relationships for investment banking or investment advisory
services.
Quantitative and Qualitative Disclosure About Market Risk
Market risk to the Company arises from exposure to changes in
interest rates and other relevant market rate or price risk which impact an
instrument's financial value. The Company is exposed to market risk from
changes in interest rates through its trading and non-trading activities.
In the ordinary course of its business, the Company selectively uses
hedging strategies which, while not perfect, are designed to reduce market
risk. The Company has adopted policies and procedures which prohibit the
use of such derivative instruments for trading purposes.
Interest Rate Risk
The Company enters into interest rate agreements and purchases
futures contracts to minimize the effect of potential interest rate
changes. The table below provides information about the Company's
financial instruments that are sensitive to changes in interest rates,
including interest rate forward agreements, futures contracts, securities
inventory and debt obligations. For securities inventory and debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate
forward agreements, the table presents notional amounts and weighted
average interest rates by expected (contractual) maturity dates. Notional
amounts are used to calculate the contractual payments to be exchanged
under the contracts. For futures contracts, the table presents the
notional amounts and the current market value. Trading accounts are shown
in the caption "Securities Inventory", "Securities purchased under
agreements to resell", "Securities sold under agreements to repurchase",
and "Futures contracts", and non-trading accounts are shown in other
captions.
I. Forward Agreements
Notational Fair
Amount Value
Forward Debt Services Agreement $5,005,000 $47,337
Index: Municipal Market Data Services AAA/Aaaa Scale plus a forward
spread.
Forward Interest Rate Agreement $5,005,000 $(49,059)
Index: Municipal Market Data Services AAA/Aaaa Scale plus a forward
spread. (Hedge to above instrument.)
<PAGE>
II. Trading and Non Trading Portfolio
ASSETS
<TABLE>
<CAPTION>
Expected Maturity Dates
(In U.S. Dollars)
Securities Inventory - fixed rate 1999 2000 2001 2002 2003 Thereafter Total Fair Value
<S> <c) <C> <C> <C> <C> <C> <C> <C>
Municipal bond issues - - 80,000 5,000 5,000 9,521,623 9,611,623 9,429,473
Weighted average interest rate - - 6.25% 5.25% 10.50% 5.63%
Collateralized Mortgage obligations(1) - - - - - 7,669,691 7,669,691 5,126,026
Weighted average interest rate - - - - - 8.82%
Corporate Bond issues 1,000 7,000 - - - 693,000 701,000 380,209
Weighted average interest rate 9.75% 8.43% 8.19%
Institutional Bonds 30,000 2,000 13,000 - 1,000 67,000 113,000 103,028
Weighted average interest rate 7.08% 7.75% 9.30% - 6.50% 8.26%
Preferred Stock - - - - - 2,419,964 2,419,964 2,419,964
Weighted average dividend rate - - - - - 6.52%
Other 5,000 - - - 282,000 2,549,805 2,836,805 2,874,843
Weighted average interest rate 6.40% - - - 5.13% 6.91%
Securities Inventory - variable rate
Variable rate demand notes - - - - - 1,300,000 1,300,000 1,300,000
Weighted average interest rate - - - - - 3.05%
Securities purchased under agreement
to resell(2) 4,500,000 - - - - - 4,500,000 4,753,125
Weighted average interest rate 4.23% - - - - -
Notes receivable 721,105 319,917 350,768 384,598 421,692 3,185,261 5,383,341 5,383,341
Weighted average interest rate 9.20% 9.20% 9.20% 9.20% 9.20% 9.20%
Other investments - - - - - 28,448,819 28,448,819 28,448,819
Weighted average interest rate - - - - - 8.91%
LIABILITIES
Short-term notes payable(2) 20,157,927 - - - - - 20,157,927 20,157,927
Weighted average interest rate 5.14% - - - - -
Securities sold under agreement to
repurchase(2) 33,174,000 - - - - - 33,174,000 33,174,000
Weighted average interest rate 5.24% - - - - -
Securities sold not yet purchased - - - - 4,500,000 - 4,500,000 4,644,855
Weighted average interest rate - - - - 5.38% -
<PAGE)
LIABILITIES (Cont'd.)
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Dates
(In U.S. Dollars)
1999 2000 2001 2002 2003 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable to banks - fixed rate 322,102 - - - - - 322,102 322,102
Weighted average interest rate 8.00% - - - - -
Notes payable to banks - variable rate 310,000 - - - - - 310,000 310,000
Weighted average interest rate 7.75%
Bonds payable - fixed rate(1) - - - - - 5,251,239 5,251,239 5,251,239
Weighted average interest rate - - - - - 8.21%
(1) Assumes no prepayment
(2) The information shown above includes actual interest rates at March 31, 1999 and assumes no changes in interest
rates in 1999 or thereafter.
III. Futures Contracts
Futures Contracts (short)
Notional Amount $4,000,000
Market Value $4,825,780
Price Range 119.28125 to 122.625
<PAGE>
Equity Risk
In addition to interest rate risk, the Company faces market risk
associated with the fees it earns on its portfolio in the form of equity
risk. Ziegler Asset Management, Inc. manages a portfolio with an aggregate
value of approximately $1.4 billion in the form of separately managed and
mutual fund accounts. Additionally, BCZ's and PMC's accounts under
management or advisement have over $3 billion of assets, a portion of which
is invested in managed products from which BCZ and PMC receive periodic
fees. A general decline in the equities market could adversely affect
revenues. A reduction in the value of the equity securities in accounts
managed or advised by subsidiaries of the Company would result in a
reduction in the amount of fees payable to BCZ, ZAMI, and PMC. While this
exposure is present, quantification remains difficult due to the number of
other variables affecting fee income. Interest rate changes can also have
an effect on fee income for the above stated reasons.
In addition to the above market risks, material limitations exist in
determining the overall net market risk exposure of the Company.
Computation of prospective effects of hypothetical interest rate changes
are based on many assumptions, including levels of market interest rates,
predicted prepayment speeds, and projected effect on assets under
management and retail customer account balances. Therefore, the above
outcomes should not be relied upon as indicative of actual results.
<PAGE>
PART II
Items 1 through 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: May 17, 1999 By /s/ Peter D. Ziegler
Peter D. Ziegler
Chairman of the Board, President,
and Chief Executive Officer
Dated: May 17, 1999 By /s/ Gary P. Engle
Gary P. Engle
Senior Vice President/CFO
(Chief Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,086,452
<RECEIVABLES> 5,792,158
<SECURITIES-RESALE> 4,573,125
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 57,079,273
<PP&E> 13,111,436
<TOTAL-ASSETS> 129,883,090
<SHORT-TERM> 20,790,029
<PAYABLES> 7,681,018
<REPOS-SOLD> 33,174,000
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 4,610,220
<LONG-TERM> 5,251,239
0
0
<COMMON> 3,544,030
<OTHER-SE> 45,122,571
<TOTAL-LIABILITY-AND-EQUITY> 129,883,090
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 1,564,561
<COMMISSIONS> 6,084,968
<INVESTMENT-BANKING-REVENUES> 6,656,233
<FEE-REVENUE> 6,478,464
<INTEREST-EXPENSE> 1,150,566
<COMPENSATION> 10,989,604
<INCOME-PRETAX> (535,024)
<INCOME-PRE-EXTRAORDINARY> (535,024)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (406,224)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
