Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 1999 was 2,457,291 shares.
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 10,640,088 $ 7,037,183
Short-term investments 5,172,306 10,267,040
Total cash and cash equivalents 15,812,394 17,304,223
Securities inventory 51,835,498 125,429,892
Securities purchased under agreements to
resell 4,415,625 4,753,125
Accounts receivable -- securities sales 856,172 543,029
Accounts receivable -- other 6,255,258 6,112,737
Accrued income taxes receivable 1,680,614 1,344,380
Investment in and receivables from
affiliates 1,654,113 1,629,473
Notes receivable 4,741,585 5,509,630
Other investments 27,232,367 28,587,845
Land, buildings and equipment, at cost,
net of accumulated depreciation of
$21,022,795 and $19,792,490,
respectively 12,897,328 13,240,874
Deferred income tax benefit 3,113,666 3,212,427
Goodwill 12,876,614 13,346,998
Other assets 5,604,425 5,719,308
Total assets $148,975,659 $226,733,941
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 11,717,366 $ 13,501,519
Securities sold under agreements to
repurchase 29,796,480 31,040,000
Payable to broker-dealers and clearing
organizations 34,465,427 98,435,492
Accounts payable 1,934,086 2,156,426
Securities sold, not yet purchased 4,438,125 4,644,855
Notes payable to banks 1,129,746 2,776,687
Bonds payable 4,700,682 5,369,797
Other liabilities and deferred items 11,801,508 19,208,188
Total liabilities 99,983,420 177,132,964
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 6,220,888 6,204,728
Retained earnings 56,467,827 56,875,618
Treasury stock, at cost, 1,086,739
and 1,073,459 shares, respectively (17,075,164) (16,797,954)
Unearned compensation (165,342) (225,445)
Total stockholders' equity 48,992,239 49,600,977
Total liabilities and stockholders' equity $148,975,659 $226,733,941
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
</TABLE>
<PAGE>
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Revenues:
Investment banking income $ 7,707,011 $10,124,008
Commission income 6,196,366 5,545,171
Investment management and advisory fees 6,641,034 1,447,185
Interest and dividends 1,779,740 2,272,073
Gross profit on chemical products 684,388 888,388
Other 1,391,866 964,380
Total revenues 24,400,405 21,241,205
Expenses:
Employee compensation and benefits 11,285,881 11,478,848
Brokerage commission and
clearing fees 4,358,968 1,528,876
Communications 1,001,195 1,004,287
Occupancy and equipment 2,304,881 1,442,429
Promotional 1,178,552 994,462
Professional and regulatory 558,329 504,818
Interest 968,287 1,804,722
Goodwill amortization 235,192 28,931
Other operating expenses 1,416,732 1,718,795
Total expenses 23,308,017 20,506,168
Income before income taxes 1,092,388 735,037
Provision for income taxes 452,500 269,200
Net income $ 639,888 $ 465,837
Net income per share of common stock:
Basic earnings per share $ .26 $ .20
Diluted earnings per share .26 .19
Dividends per share $ .13 $ .13
Average number of shares outstanding:
Basic 2,427,898 2,372,579
Diluted 2,456,195 2,439,188
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Revenues:
Investment banking income $14,363,244 $14,694,530
Commission income 12,281,334 11,288,078
Investment management fees 13,119,498 2,819,807
Interest and dividends 3,344,301 4,175,907
Gross profit on chemical products 1,255,858 1,642,177
Other 2,043,878 1,814,804
Total revenues 46,408,113 36,435,303
Expenses:
Employee compensation and
benefits 22,275,485 20,588,323
Commissions and clearing fees 8,746,353 2,594,393
Communications 1,865,638 2,023,091
Occupancy and equipment 4,542,738 2,886,642
Promotional 1,998,009 1,843,361
Professional and regulatory 1,030,402 900,163
Interest 2,118,853 3,297,238
Goodwill amortization 470,384 57,863
Other operating expenses 2,802,888 3,305,239
Total expenses 45,850,750 37,496,313
Income (loss) before income taxes 557,363 (1,061,010)
Provision for (benefit from)
income taxes 323,700 (377,600)
Net income (loss) $ 233,663 $ (683,410)
Net income (loss) per share of common stock:
Basic and diluted earnings (loss)
per share $ .10 $(.29)
Diluted earnings (loss) per share .10 (.29)
Dividends per share $ .26 $ .26
Average number of shares outstanding:
Basic 2,429,970 2,371,694
Diluted 2,459,296 2,439,937
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 233,663 $ (683,410)
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,922,380 840,355
Unrealized loss on securities inventory 235,488 97,517
Compensation expense related to restricted
stock grants 60,103 168,353
Deferred income taxes 98,761 (551,500)
Loss on bond retirement - 94,268
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable --
securities sales (313,143) 4,444,470
Accounts receivable -- other (304,445) (92,087)
Securities inventory 73,358,906 (26,032,360)
Securities purchased under agreements
to resell 337,500 (4,983,750)
Other assets 178,895 11,295
Increase (Decrease) in -
Payable to customers and
broker-dealers (63,970,065) 33,765,520
Accounts payable (222,340) (4,649,135)
Income taxes payable (336,234) (329,982)
Securities sold, not yet purchased (206,730) -
Securities sold under agreements to
repurchase (1,243,520) 30,850,000
Other liabilities (7,429,832) (1,553,631)
Net cash provided by operating activities 2,399,387 31,395,923
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of equipment 99,200 17,125
Principal payments received under
leases - 760,074
Sale of leased equipment - 909,608
Payments received on notes receivable 793,699 3,508,670
Sale of leases and notes - 5,832,190
Sales/paydowns on other investments 1,355,478 -
Payments for:
Issuance of new notes receivable - (561,146)
Capital expenditures (1,159,147) (3,051,102)
Net cash provided by investing activities $ 1,089,230 $ 7,415,419
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of short-term notes
payable $47,338,000 $41,336,000
Exercise of employee stock options 104,900 82,469
Payments for:
Principal payments of short-term notes
payable (49,099,000) (40,052,000))
Repayments of bonds payable (670,000) (3,961,000)
Purchase of treasury stock (365,950) (182,167)
Cash dividends paid (641,455) (1,358,097)
Retirement of bonds outstanding - (6,257,698)
Net repayments under bank credit facilities (1,646,941) (33,439,304)
Net cash used in financing activities (4,980,446) (43,831,797)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,491,829) (5,020,455)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 17,304,223 35,425,130
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $15,812,394 $30,404,675
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid during the period $ 2,510,000 $ 2,298,000
Income taxes paid during
the period $ 345,000 $ 646,000
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.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 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. Operating results for the six
months ended June 30, 1999 are not necessarily indicative of the results
that may be executed for the year ending December 31, 1999. 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 did not have any commitments outstanding at
June 30, 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 June
30, 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 $150,000. 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 $972,000 at June 30, 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
capital, as defined, available to meet 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 June 30, 1999, is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BCZ ZTT PBS
Aggregate indebtedness $8,678,000 $ 728,000 $ 52,000
Net capital $7,704,000 $2,156,000 $814,000
Ratio of aggregate
indebtedness to
net capital 1.13 to 1 0.34 to 1 0.06 to 1
Required net capital $579,000 $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 June 30, 1999 there was
approximately $1,854,000 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
June 30, June 30,
1999 1998
<S> <C> <C>
Revenues -
Interest $669,869 $960,192
Gain on sale/redemption of
mortgage certificates 91,309 25,441
Total revenues 761,178 985,633
Expenses -
Interest 622,739 878,025
Amortization of bond issuance costs 101,808 40,635
Management fees 14,375 43,270
Other 22,256 23,703
Total expenses 761,178 985,633
Net income $ - $ -
For the Six Months Ended
June 30, June 30,
1999 1998
Revenues -
Interest $1,408,688 $2,255,947
Gain on Sale/Redemption of
Mortgage Certificates 124,285 1,054,747
Total Revenues 1,532,973 3,310,694
Expenses -
Interest 1,295,136 2,087,179
Amortization of bond issuance costs 146,876 1,071,202
Management fees 38,987 24,091
Other 51,974 128,222
Total expenses 1,532,973 3,310,694
Net income $ - $ -
Note E -- Securities Inventory
Securities inventory consisted of the following:
June 30, December 31,
1999 1998
Municipal bond issues $39,728,779 $110,536,184
Collateralized mortgage
obligations 4,887,227 5,251,202
Institutional bond issues 174,578 2,827,386
Preferred stock 6,026,504 3,476,229
Other securities 1,018,410 3,338,891
$51,835,498 $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:
June 30, December 31,
1999 1998
U.S. Treasury Notes $4,438,125 $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 $33,356,000 at June 30, 1999 relates
primarily to the financing of inventory and is collateralized by securities
held in inventory with a market value of approximately $47,473,000 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 $1,130,000 in short-term borrowings outstanding at June 30, 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 EPS computations for net income (loss) for the following
periods:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Net income $ 639,888 $ 465,837
Basic
Weighted average shares outstanding 2,427,898 2,372,579
Basic earnings per share $ .26 $ .20
Diluted
Weighted average shares outstanding-
Basic 2,427,898 2,372,579
Effect of dilutive securities:
Restricted stock 22,632 31,597
Employee stock purchase plan - 14,632
Stock options 5,665 20,380
Weighted average shares outstanding-
Diluted 2,456,195 2,439,188
Diluted earnings per share $ .26 $ .19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
<S> <C> <C>
1999 1998
Net income (loss) $ 233,663 $ (683,410)
Basic
Weighted average shares outstanding 2,429,970 2,371,964
Basic earnings (loss) per share $ .10 $(.29)
Diluted
Weighted average shares outstanding-
Basic 2,429,970 2,371,964
Effect of dilutive securities:
Restricted stock 21,648 30,085
Employee stock purchase plan - 21,508
Stock options 7,678 16,380
Weighted average shares outstanding-
Diluted 2,459,296 2,439,937
Diluted earnings (loss) per share $ .10 $(.29)
</TABLE>
<TABLE>
<CAPTION>
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>
Health Care
and Senior
Living
Investment Retail Asset Taxable Other
Banking Brokerage Management Trading Segments Totals
<S> <C> <C> <C> <C> <C> <C>
For the three
months ended
June 30, 1999
Total
revenues $ 6,165,790 $ 6,784,443 $ 9,079,882 $ 620,666 $ 981,064 $23,631,845
Intersegment
revenues 44,613 54,825 124,619 - - 224,057
Income (loss)
before taxes 1,570,572 1,062,310 (158,733) 101,771 223,220 2,799,140
For the three
months ended
June 30, 1998
Total
revenues $ 7,598,190 $ 5,376,671 $4,629,017 $ 781,784 $ 1,336,029 $19,721,691
Intersegment
revenues 7,290 34,971 45,523 - 5,100 92,884
Income (loss)
before taxes 2,412,116 237,258 367,345 (1,198,217) 239,985 2,058,487
For the six
months ended
June 30, 1999
Total
revenues $11,452,002 $12,823,027 $17,688,204 $ 1,032,643 $ 1,756,755 $44,752,631
Intersegment
revenues 49,260 111,003 124,619 - - 284,882
Income (loss)
before taxes 2,569,147 1,750,277 (253,046) (109,987) 237,468 4,193,859
Total assets 32,068,263 18,051,594 21,365,472 7,106,560 12,962,756 91,554,645
For the six
months ended
June 30, 1998
Total
revenues $10,240,176 $10,857,926 $ 8,293,213 $ 1,768,356 $ 2,669,691 $33,829,362
Intersegment
revenues 16,027 45,312 92,439 - 26,311 180,089
Income (loss)
before taxes 1,643,205 724,442 736,594 (1,310,278) 268,578 2,062,541
Total assets 40,968,340 18,371,651 7,161,278 36,858,759 17,447,262 120,807,290
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following are reconciliations of operating segment information to
the Company's consolidated totals:
For the Three Months Ended For the Six Months Ended
June 30 June 30, June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Total Revenues:
Total revenues for
reportable segments $22,650,781 $18,385,662 $42,995,876 $31,159,671
Revenue for other segments 981,064 1,336,029 1,756,755 2,669,691
Revenues from administrative
and corporate functions 1,028,920 1,831,752 2,045,919 3,195,259
Elimination of intersegment
revenues (260,360) (312,238) (390,437) (589,318)
Total consolidated revenues $24,400,405 $21,241,205 $46,408,113 $36,435,303
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.
For the Three Months Ended For the Six Months Ended
June 30 June 30, June 30, June 30,
1999 1998 1999 1998
Income before taxes::
Total income for reportable
segments $ 2,575,920 $ 1,818,502 $ 3,956,391 $ 1,793,963
Income before taxes for other
segments 223,220 239,985 237,468 268,578
Unallocated amounts:
Unallocated administrative and
corporate expenses net of
income (1,706,752) (1,323,450) (3,636,496) (3,123,551)
Total consolidated net income
(loss) before taxes $ 1,092,388 $ 735,037 $ 557,363 $(1,061,010)
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.
For the Six Months Ended
June 30, June 30,
1999 1998
Total Assets:
Total assets for reportable
segments $ 78,591,889 $103,360,028
Assets for other segments 12,962,756 17,447,262
Corporate and other unallocated
assets 57,421,014 66,549,304
Total consolidated assets $148,975,659 $187,356,594
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.
Note K -- Subsequent Event
The Company has signed a definitive asset purchase agreement to sell
substantially all of the assets and liabilities (excluding approximately
$1.866 million in cash) of ZTT, its discount brokerage subsidiary, to a
major financial services company for $7.4 million. The closing of the
proposed sale is subject to certain conditions, including regulatory
approval. The sale is expected to close during 1999. The proceeds will be
paid in cash at closing. The proposed transaction will generate an after-
tax gain of approximately $3.6 million or $1.48 per share.
</TABLE>
<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, Inc. ("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
June 30, 1999 Compared to June 30, 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 June 30, 1999 1998 (Decrease)
(Dollars in thousands)
<S> <C> <C> <C>
Revenues:
Health Care and Senior Living
Investment Banking $ 6,166 $ 7,598 $(1,432)
Retail Brokerage 6,784 5,377 1,407
Asset Management 9,080 4,629 4,451
Taxable Trading 621 782 (161)
Other Activities and Eliminations 1,749 2,855 (1,106)
Total $24,400 $21,241 $3,159
Income (Loss) Before Taxes:
Health Care and Senior Living
Investment Banking $ 1,571 $ 2,412 $ (841)
Retail Brokerage 1,062 237 825
Asset Management (159) 367 (526)
Taxable Trading 102 (1,198) 1,300
Other Activities (1,484) (1,083) (401)
Total $ 1,092 $ 735 $ 357
</TABLE>
Health Care and Senior Living Investment Banking
Health care and senior living investment banking activities generated
revenues of $6,166,000 in 1999 compared to $7,598,000 in 1998, a decrease
of $1,432,000 or 19%. Revenue from underwriting and sales of municipal
bonds did not change significantly between years. A total of 19 managed or
comanaged transactions were completed in 1999 compared to 23 in 1998 which
generated approximately the same level of revenues. Financial advisory and
special products fees decreased approximately $1,800,000 in 1999 compared
to 1998. A decrease in special products and financial advisory
transactions is the reason for the decrease in fees and is primarily due to
a turnover in personnel decreasing capacity in that area. The decrease in
fees was partially offset by increased fees from FHA mortgage origination
activities which approximated $600,000.
Total expenses of the health care and senior living investment
banking activities were $4,595,000 in 1999 compared to $5,186,000 in 1998,
a decrease of $591,000 or 11%. The decrease was primarily related to a
decrease in commission-based employee compensation and benefits of $380,000
as the result of decreased revenues. A decrease in interest expense
primarily related to remarketing activities is the primary reason for the
balance of the decline. There was less of a need to carry inventory with
respect to our remarketing activities. The health care and senior living
investment banking activities had a net income before taxes of $1,571,000
in 1999 compared to $2,412,000 in 1998.
Retail Brokerage
Retail brokerage activities generated revenues of $6,784,000 in 1999
compared to $5,377,000 in 1998, an increase of $1,407,000 or 26%. The
increase is primarily the result of a $600,000 increase in the revenue from
the underwriting and sale of church and school bonds. These bonds were
primarily sold through BCZ full service retail brokerage offices. The BCZ
retail brokerage offices also increased commission revenues through sales
of primarily equities, mutual funds and annuities by approximately
$530,000. ZTT also increased its discount brokerage revenues by
approximately $350,000 as the result of increased transaction activity.
BCZ insurance agency revenues decreased slightly.
Total expenses of the retail brokerage activities were $5,722,000 in
1999 compared to $5,140,000 in 1998, an increase of $582,000 or 11%. The
primary reason for the increase was increased clearing charges of
approximately $480,000 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 other significant increase in expense was an increase in sales
commissions of approximately $200,000 as the result of commission payouts
on higher volumes of sales revenue. These increases were partially offset
by a decrease in communication expense which was higher in 1998 due to the
need to inform and educate customers about the change in the Company's
method of clearing brokerage transactions. The resulting net income before
taxes for retail brokerage activities was $1,062,000 in 1999 compared to
$237,000 in 1998.
Asset Management
Asset management activities generated revenues of $9,080,000 in 1999
compared to $4,629,000 in 1998, an increase of $4,451,000 or 96%. The
inclusion of PMC as a subsidiary contributed $5,067,000 of revenues in
1999. PMC was not a part of the Company until December, 1998. Total ZAMI
revenues decreased $240,000 as the result of the transfer of Principal
Preservation Portfolio ("PPP") mutual fund management to BCZ effective May
1, 1999. BCZ managed asset activities had increased revenues of $710,000
in 1999 over 1998 primarily as the result of the aforementioned transfer,
which was done to better align activities within the Company. The net
increase in revenues of approximately $470,000 was the result of an
increase in assets under management for these two entities to $1.55 billion
at June 30, 1999 compared to $1.35 billion at December 31, 1998. These
increases were offset by a decrease in revenue of approximately $1,000,000
primarily related to lower equity investment banking activity of the former
GS2 subsidiary which was merged into BCZ as of December 31, 1999.
Total expenses of the asset management activities were $9,239,000 in
1999 compared to $4,262,000 in 1998, an increase of $4,977,000 or 117%.
The inclusion of PMC as a subsidiary in 1999 caused an increase of
$5,086,000 in expenses, of which $2,650,000 related to fees paid by PMC to
third party investment managers and others which are included in
Commissions and Clearing Fees. The asset management activities had a net
loss before taxes of $159,000 in 1999 compared to net income of $367,000 in
1998. The losses were incurred in the former GS2 operation, PMC and the
BCZ mutual fund asset management/transfer agent activity. The GS2 loss is
due to lower than anticipated corporate finance investment banking revenues
to date. PMC was close to breakeven for the quarter ended June 30, 1999
and has improved as assets under management have increased. The BCZ mutual
fund asset management/transfer agent activity has experienced greater than
anticipated expenses.
Taxable Trading
Taxable trading activities had gross revenues of $621,000 in 1999
compared to $782,000 in 1998, a decrease of $161,000 or 21%. The decrease
in revenues is primarily due to reduced trading activity. A reduced
trading operation and market conditions are the primary reasons for the
decrease.
Expenses of taxable trading activities were $519,000 in 1999 compared
to $1,980,000 in 1998, a decrease of $1,461,000 or 74%. Reductions in
employee compensation and benefits of approximately $730,000 related to the
reduced trading operation and approximately $600,000 in interest expense
due to the financing of lower levels of inventory are the primary reasons
for the decrease. The taxable trading activities had a net income before
tax of $102,000 in 1999 compared to a net loss before tax of $1,198,000 in
1998.
Other Activities and Intercompany
The activities of other financial services generated revenues of
$132,000 in 1999 compared to $411,000 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 $850,000 in 1999 compared to $925,000 in 1998, a decrease of
$75,000 or 8%. Decreased product sales as compared to prior year is the
primary reason for the decrease. The overall decrease in petroleum prices
earlier in the year as well as the effects of the Asian economy on WRR's
customers has caused sales to decrease. A recovery in oil prices has begun
to see a return of sales activity. Net income before taxes for WRR was
$215,000 in 1999 compared to $441,000 in 1998.
The administrative activities of BCZ and the Parent generated
revenues of $1,029,000 in 1999 compared to $1,831,000 in 1998. This
revenue was primarily related to interest income on collateralized mortgage
obligations ("CMOs") held by the Parent and purchased in February, 1998.
This revenue has decreased as the result of principal paydowns and
occasional sales of the investment. Total expenses were $2,736,000 in 1999
compared to $3,155,000 in 1998. Decreased interest expense associated with
the CMO financing and a decrease in administrative expenses are the primary
reasons for the decrease. Administrative 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 $1,706,000 in 1999 compared to $1,323,000 in
1998.
Results of Operations - Six months ended
June 30, 1999 Compared to June 30, 1998
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
<TABLE>
<CAPTION>
Increase/
For the Six Months Ended June 30, 1999 1998 (Decrease)
(Dollars in thousands)
<S> <C> <C> <C>
Revenues:
Health Care and Senior Living
Investment Banking $11,452 $10,240 $ 1,212
Retail Brokerage 12,823 10,858 1,965
Asset Management 17,688 8,293 9,395
Taxable Trading 1,033 1,768 (735)
Other Activities and Intercompany 3,412 5,276 (1,864)
Total $46,408 $36,435 $9,973
Income (Loss) Before Taxes:
Health Care and Senior Living
Investment Banking $ 2,569 $ 1,643 $ 926
Retail Brokerage 1,750 724 1,026
Asset Management (253) 737 (990)
Taxable Trading (110) (1,310) 1,200
Other Activities and Intercompany (3,399) (2,855) (544)
Total $ 557 $(1,061) $1,618
</TABLE>
Health Care and Senior Living Investment Banking
Health care and senior living investment banking activities generated
revenues of $11,452,000 in 1999 compared to $10,240,000 in 1998, an
increase of $1,212,000 or 12%. A strong first quarter provided an increase
in underwriting revenue net of direct expenses of approximately $2,300,000
in 1999 compared to 1998. A total of 36 managed or comanaged transactions
were completed in 1999 compared to 31 in 1998. Underwriting fees decreased
$1,400,000 in 1999 compared to 1998. A decrease in special products and
financial advisory transactions is the reason for the decrease and is
primarily due to a turnover in personnel. Remarketing fees and income from
tax-exempt trading also decreased compared to prior year. These decreases
were partially offset by increased fees from mortgage originations which
approximated $600,000.
Total expenses of the health care and senior living investment
banking activities were $8,883,000 in 1999 compared to $8,597,000 in 1998,
an increase of $286,000 or 3%. An increase in employee compensation and
benefits of $300,000 and other expense categories to a lesser extent were
offset by decreases in interest expense. The health care and senior living
investment banking activities had a net income before taxes of $2,569,000
in 1999 compared to $1,643,000 in 1998.
Retail Brokerage
Retail brokerage activities generated revenues of $12,823,000 in 1999
compared to $10,858,000 in 1998, an increase of $1,965,000 or 18%. The
increase is primarily the result of a $1,885,000 increase in revenue from
the underwriting and sale of church and school bonds. These bonds were
primarily sold through BCZ full service retail brokerage offices. The BCZ
retail brokerage offices also increased revenues from other products by
approximately $965,000. Other products sold include primarily equities,
mutual funds, and annuities. ZTT also increased its discount brokerage
revenues by approximately $340,000 as the result of increased transaction
activity in 1999 over 1998. These increases were partially offset by
reduced secondary trading revenue associated with our retail trading
activities.
The expenses of retail brokerage activities were $11,073,000 in 1999
compared to $10,134,000 in 1998, an increase of $939,000 or 9%. This
increase was primarily due to increased clearing charges of approximately
$1,140,000 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. Compensation and benefits increased approximately $235,000,
primarily associated with the higher volumes of activity. Interest expense
also increased $150,000 as the result of interest expense allocations to
the BCZ retail sales group for inventory held. These increases were
partially offset by decreases in promotional and communication expenses
totalling approximately $560,000. The decreased promotional and
communications activity relates to a high volume of activity in 1998 with
respect to communication of the clearing conversions and related issues
with our customers that did not recur in 1999. The resulting net income
before taxes for retail brokerage activities was $1,750,000 in 1999
compared to $724,000 in 1998.
Asset Management
Asset management activities generated revenues of $17,688,000 in 1999
compared to $8,293,000 in 1998, an increase of $9,395,000 or 113%. The
inclusion of PMC as a subsidiary contributed $10,138,000 or revenues in
1999. Total ZAMI revenues remained approximately the same despite the
transfer of PPP mutual fund investment management activity to BCZ. BCZ
managed asset activities had increased revenues of $646,000 in 1999 over
1998 primarily as the result of the transfer. The overall increase in
revenues at ZAMI and BCZ is the result of an increase in total assets under
management. The above increases were offset by reduced revenue at the
former GS2 subsidiary of approximately $1,400,000 primarily related to
reduced investment banking volumes.
Total expenses of the asset management activities were $17,941,000 in
1999 compared to $7,557,000 in 1998, an increase of $10,384,000 or 137%.
The inclusion of PMC as a subsidiary in 1999 caused an increase of
$10,356,000 in expenses, of which $5,495,000 related to fees paid to third
party investment managers and others. The asset management activities of
the Company had a net loss before taxes of $253,000 in 1999 compared to net
income of $737,000 in 1998. The losses were incurred in the former GS2
operation, PMC and the BCZ mutual fund asset management/transfer agent
activity. The factors associated with the second quarter results apply to
the six month results.
Taxable Trading
Taxable trading activities had gross revenues of $1,033,000 in 1999
compared to $1,768,000 in 1998, a decrease of $735,000 or 42%. Trading
revenue decreased by approximately $500,000 due to a reduced trading
operation and current fixed income market conditions. The balance of the
decrease is related to reduced interest income as the result of lower
levels of inventory.
Expenses of taxable trading activities were $1,143,000 in 1999
compared to $3,078,000 in 1998, a decrease of $1,935,000 or 63%. Employee
compensation and benefits decreased $1,027,000 as the result of the
reduction in this activity in 1999 compared to 1998. Interest expense
decreased $686,000 as the result of less financing required on reduced
inventory levels. The taxable trading activity had a net loss before taxes
of $110,000 in 1999 compared to $1,310,000 in 1998.
Other Activities and Intercompany
The activities of other financial services generated revenues of
$261,000 in 1999 compared to $966,000 in 1998. The decrease in revenues as
well as expenses was related to the planned reduction or discontinuation of
several activities as discussed earlier.
WRR had a gross margin of $1,256,000 in 1999 compared to $1,642,000
in 1998, a decrease of $386,000 or 24%. Decreased recycled product sales
as the result of the overall decline in petroleum prices is the primary
reason for the decrease. WRR responded with cost reductions and has seen
improvement in sales activity toward the end of the period. Net income
before taxes for WRR was $215,000 in 1999 compared to $441,000 in 1998.
The administrative activities of BCZ and the Parent generated
revenues of $2,046,000 in 1999 compared to $3,195,000 in 1998. This
revenue was primarily related to interest income on CMOs held by the Parent
and purchased in February, 1998. Principal paydowns on the CMOs have
caused this revenue to decrease. Total expenses were $5,682,000 in 1999
compared to $6,319,000 in 1998. Decreased interest expense and a decrease
in other administrative expenses are the primary reasons for the decrease.
The administrative activities of BCZ and the Parent reduced net income
before taxes by $3,636,000 in 1999 compared to $3,123,000 in 1998.
<PAGE>
Liquidity and Capital Resources
Capital expenditures for assets for the first six months of 1999 were
$1,159,000. Approximately $744,000 were technology expenditures and
$415,000 were expended for furniture, equipment, and leasehold
improvements. Land, buildings and equipment, net of related depreciation
and amortization, was 9% 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 six months of 1999, a total of $47,338,000 of notes
were issued and $49,099,000 were repaid. 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
$4,682,000 of mortgage loans outstanding at June 30, 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 June 30, 1999 were $4,376,000. 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 $5,455,000 of variable rate securities were held in inventory at June
30, 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 was $400,000 outstanding under bank unsecured
credit facilities at June 30, 1999. Amounts outstanding under repurchase
agreements were $822,000 and the amount owed the clearing agent was
$33,358,000. 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 $100,000 outstanding under bank unsecured
credit facilities at June 30, 1999. Amounts outstanding under repurchase
agreements totalled $28,974,000 at June 30, 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 all vendors of mission critical systems
as to their readiness for Year 2000. The Company has successfully
participated in industry-wide testing. The industry-wide testing was
completed with no material exceptions. The internal testing of mission
critical systems is substantially complete. The internal testing of non-
critical internal systems is over 90% 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 using primarily internal resources. PMC's business operations include
both internal information systems, such as performance reporting and
portfolio accounting, and external systems, which support its broker-dealer
operations and portfolio accounting. Final testing of the internal systems
is expected to be completed by September 30, 1999. The external systems
are provided by recognized vendors who have responded favorably with
respect to inquiries about Year 2000 compliance. PMC has developed a
preliminary contingency plan which is in the process of being finalized.
The total cost of the Year 2000 preparedness efforts are not
specifically identified. 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 larger strategy to
update internal systems, 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 specifically 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 mitigated.
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 is in the process of being reviewed and may be changed
based upon the results of ongoing testing throughout 1999. Many of our
subsidiaries were required to file Year 2000 information with the
Securities and Exchange Commission. This information may be found on their
website at www.sec.gov.
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 at June 30, 1999
Notational Fair
Amount Value
Forward Debt Services Agreement $5,005,000 $3,499
Index: Municipal Market Data Services AAA/Aaaa Scale plus a forward
spread.
Forward Interest Rate Agreement $5,005,000 $(950)
Index: Municipal Market Data Services AAA/Aaaa Scale plus a forward
spread. (Hedge to above instrument.)
<PAGE>
<TABLE>
<CAPTION>
II. Trading and Non Trading Portfolio at June 30, 1999
ASSETS
Expected Maturity Dates
(In U.S. Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Inventory - fixed rate 1999 2000 2001 2002 2003 Thereafter Total Fair Value
Municipal bond issues - 5,000 5,000 20,000 177,000 35,002,623 35,209,623 34,273,779
Weighted average interest rate - 6.15% 6.00% 5.00% 6.30% 6.10%
Collateralized Mortgage obligations(1) - - - - - 7,444,102 7,444,102 4,887,228
Weighted average interest rate - - - - - 6.63%
Corporate Bond issues - - - - - 204,379 204,379 200,997
Weighted average interest rate - - - - - 8.54%
Institutional Bonds 30,000 16,000 45,000 4,000 3,000 88,000 186,000 174,578
Weighted average interest rate 7.20% 7.05% 8.03% 8.00% 8.25% 7.89%
Preferred Stock - - - - - 6,484,600 6,484,600 6,026,504
Weighted average dividend rate - - - - - 7.42%
Other 5,000 - - - 287,000 538,800 830,800 817,412
Weighted average interest rate 6.40% - - - 5.10% 6.75%
Securities Inventory - variable rate
Variable rate demand notes - - - - - 5,455,000 5,455,000 5,455,000
Weighted average interest rate - - - - - 3.51%
Securities purchased under agreement
to resell(2) 4,500,000 - - - - - 4,500,000 4,415,625
Weighted average interest rate 4.25% - - - - -
Notes receivable - - - - - 4,741,585 4,741,585 4,741,585
Weighted average interest rate - - - - - 9.22%
Other investments - - - - - 27,232,367 27,232,367 27,232,367
Weighted average interest rate - - - - - 8.87%
LIABILITIES
Short-term notes payable(2) 11,717,366 - - - - - 11,717,366 11,717,366
Weighted average interest rate 5.14% - - - - -
Securities sold under agreement to
repurchase(2) 29,796,480 - - - - - 29,796,480 29,796,480
Weighted average interest rate 5.27% - - - - -
Securities sold not yet purchased - - - - 4,500,000 - 4,500,000 4,438,125
Weighted average interest rate - - - - 5.38% -
<PAGE>
LIABILITIES (Cont'd.)
Expected Maturity Dates
(In U.S. Dollars)
1999 2000 2001 2002 2003 Thereafter Total Fair Value
Notes payable to banks - fixed rate 319,746 - - - - - 319,746 319,746
Weighted average interest rate 8.00% - - - - -
Notes payable to banks - variable rate 810,000 - - - - - 810,000 810,000
Weighted average interest rate 6.48%
Bonds payable - fixed rate(1) - - - - - 4,700,682 4,700,682 4,700,682
Weighted average interest rate - - - - - 8.24%
(1) Assumes no prepayment
(2) The information shown above includes actual interest rates at June 30, 1999 and assumes no changes in interest
rates in 1999 or thereafter.
III. Futures Contracts
Futures Contracts (short)
Notional Amount $2,000,000
Market Value $2,296,874
Price Range 114.5625 to 115.8750
</TABLE>
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, PMC and BCZ accounts under management
or advisement have an approximate value of $2.9 billion and $860 million,
respectively, 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 3. Not applicable
Item 4. Results of Votes of Security Holders
Registrant held an annual meeting on Monday, April 19, 1999 for
which a proxy statement was sent to shareholders of record at the
close of business on March 1, 1999. A brief description of the
matters voted upon is as follows:
1. To elect three directors for a term of three years and a
fourth director to complete a two year term in a newly created
directorship position.
2. To vote on a proposal to ratify the retention of Arthur
Andersen LLP as auditors for 1999.
A total of 2,465,581 shares were outstanding and eligible to
vote. The following votes were cast and the number of
abstentions and broker nonvotes are also listed.
1. Election of directors: Shareholders voted to grant or
withhold authority to vote for or against the nominees.
Grant Withhold
D. A. Carlson, Jr. 2,075,568 28,421
S. A. Roell 2,073,421 30,568
B. C. Ziegler III 2,075,546 28,443
R. J. Glaisner 2,075,973 28,016
The following directors continued in office: J. C. Frueh,
J. R. Green, P. D. Ziegler, F. J. Wenzel and P. R. Kellogg.
2. Retention of Arthur Andersen LLP as auditors:
For Against Abstain
2,090,605 10,842 2,542
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K: None
<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: August 12, 1999 By /s/ Peter D. Ziegler
Peter D. Ziegler
Chairman of the Board, President,
and Chief Executive Officer
Dated: August 12, 1999 By /s/ Gary P. Engle
Gary P. Engle
Senior Vice President/
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary information extracted from The Ziegler Companies,
Inc. and subsidiaries financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,640,088
<RECEIVABLES> 7,111,430
<SECURITIES-RESALE> 4,415,025
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 85,463,563
<PP&E> 12,897,328
<TOTAL-ASSETS> 148,975,659
<SHORT-TERM> 12,847,112
<PAYABLES> 36,399,513
<REPOS-SOLD> 29,796,480
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 4,438,125
<LONG-TERM> 4,700,682
0
0
<COMMON> 3,544,030
<OTHER-SE> 45,448,209
<TOTAL-LIABILITY-AND-EQUITY> 148,975,659
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 3,344,301
<COMMISSIONS> 12,281,334
<INVESTMENT-BANKING-REVENUES> 14,363,244
<FEE-REVENUE> 13,119,498
<INTEREST-EXPENSE> 2,118,853
<COMPENSATION> 22,275,485
<INCOME-PRETAX> 557,363
<INCOME-PRE-EXTRAORDINARY> 557,363
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,663
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
