SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
_______________________
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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: (262) 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 April 30, 2000 was 2,412,865 shares.
<PAGE>
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Dollars in thousands) (Unaudited)
ASSETS
<S> <C> <C>
Cash $ 3,394 $ 5,378
Short-term investments 11,297 11,865
Total cash and cash equivalents 14,691 17,243
Securities inventory 26,961 82,791
Securities purchased under agreements to
resell 4,421 4,365
Accounts receivable 5,109 6,069
Accrued income taxes receivable 3,773 2,454
Investment in and receivables from affiliates 1,538 1,538
Notes receivable 4,444 4,548
Other investments 26,547 26,931
Land, buildings and equipment, at cost,
net of reserves for depreciation of
$12,679 and $12,100, respectively 8,410 8,609
Deferred income tax benefit 2,799 3,158
Goodwill 9,959 10,141
Other assets 2,795 2,775
Total assets $111,447 $170,622
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 6,835 $ 6,160
Securities sold under agreements to repurchase 28,517 28,959
Payable to broker-dealers and clearing
organizations 10,862 60,742
Accounts payable 2,175 2,288
Securities sold, not yet purchased 4,365 4,364
Bonds payable 4,102 4,223
Other liabilities and deferred items 7,485 14,590
Total liabilities 64,341 121,326
Commitments
Stockholders' equity
Common stock, $1 par, authorized
7,500,000 shares, issued 3,544,030 3,544 3,544
Additional paid-in capital 6,221 6,221
Retained earnings 55,277 57,110
Treasury stock, at cost, 1,132,650
and 1,113,052 shares, respectively (17,846) (17,469)
Unearned compensation (90) (110)
Total stockholders' equity 47,106 49,296
Total liabilities and stockholders' equity $111,447 $170,622
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, March 31,
2000 1999
(Dollars in thousands except per share data)
Revenues:
<S> <C> <C>
Investment banking income $ 2,521 $ 6,656
Commission income 6,133 6,085
Investment management and advisory fees 7,278 6,479
Interest and dividends 1,773 1,559
Other 2,148 583
Total revenues 19,853 21,362
Expenses:
Employee compensation and benefits 11,391 10,990
Investment manager fees 2,929 2,807
Commissions and clearing fees 1,348 1,580
Communications 848 859
Occupancy and equipment 2,382 2,229
Promotional 939 819
Professional and regulatory 566 472
Interest 1,196 1,130
Goodwill 183 235
Other operating expenses 595 779
Total expenses 22,377 21,900
Loss from continuing operations before
income taxes (2,524) (538)
Benefit from income taxes (1,007) (131)
Loss from continuing operations (1,517) (407)
Discontinued operations:
Income from operations of discontinued
environmental services subsidiary
(less applicable income taxes of $2) - 1
Net Loss $(1,517) $ (406)
Per share data:
Continuing operations $(0.63) $(0.17)
Discontinued operations - -
Basic and Diluted loss per share $(0.63) $(0.17)
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 Three Months Ended
March 31, March 31,
2000 1999
<S> <C> <C>
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,517) $ (406)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 822 757
Unrealized (gain) loss on securities
inventory 305 (58)
Compensation expense related to restricted
stock grants 19 33
Deferred income taxes 359 (169)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 960 852
Accrued income taxes receivable (1,320) (197)
Securities inventory, net 55,527 103,820
Securities purchased under agreements
to resell (51) 180
Other assets (102) 61
Discontinued operations - noncash charges
and working capital charges - 375
Increase (decrease) in:
Payable to customers and broker-dealers (49,880) (92,628)
Accounts payable (112) (389)
Securities sold under agreements
to repurchase (442) 2,134
Other liabilities (7,058) (9,365)
Net cash provided by (used in) operating
activities (2,490) 5,000
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Payments received on notes receivable 124 132
Sales/paydowns on other investments 385 139
Payments for:
Capital expenditures (385) (308)
Net cash provided by (used in) investing
activities 124 (37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Three Months Ended
March 31, March 31,
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from:
Issuance of short-term notes payable $ 5,010 $22,909
Exercise of employee stock options - 14
Payments for:
Principal payments on short-term notes
payable (4,383) (16,251)
Repayment of bonds payable (121) (119)
Purchase of treasury stock (376) (254)
Cash dividends (316) (321)
Net repayments under credit facilities - (2,013)
Net cash provided by (used in)
financing activities (186) 3,965
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,552) 8,928
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 17,243 16,273
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $14,691 $25,201
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the quarter $ 995 $ 1,623
Income taxes paid (received) during the quarter $ (46) $ 44
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
March 31, 2000
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 present 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
three months ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
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 outstanding commitments at
March 31, 2000.
Note C -- Net Capital Requirements and Customer Reserve Accounts
As registered broker-dealers, BCZ and Portfolio Brokerage Services,
Inc. (PBS), a subsidiary of PMC International, Inc., 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, 2000, is as follows:
BCZ PBS
Aggregate indebtedness $5,143 $214
Net capital $3,216 $625
Ratio of aggregate indebtedness
to net capital 1.60 to 1 .34 to 1
Required net capital $343 $100
Registered broker-dealers that carry customer accounts are subject to
Securities and Exchange Commission Rule 15c3-3. BCZ maintains 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, 2000 there was approximately
$1,026 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 clears all securities purchase and sale transactions
through a clearing agent on a fully disclosed basis and does not carry
customer accounts. BCZ currently makes deposits to a customer reserve
account as the result of a transfer agent service that it provided. This
account will be closed once all regulatory approvals are received.
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:
For the Three Months Ended
March 31, March 31,
2000 1999
Revenues -
Interest $635 $739
Gain on sale/redemption of
mortgage certificates 6 33
Total revenues $641 $772
Expenses -
Interest 574 672
Amortization of bond issuance costs 14 45
Management fee 38 25
Other 15 30
Total expenses 641 772
Net income $ - $ -
Note E -- Securities Inventory
Securities inventory consisted of the following:
March 31, December 31,
2000 1999
Municipal bond issues $19,088 $71,651
Collateralized mortgage obligations 4,302 4,246
Corporate bond issues 56 553
Institutional bond issues 2,842 2,418
Preferred stock 390 3,328
Other securities 283 595
$26,961 $82,791
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,
2000 1999
U.S. Treasury Notes $4,365 $4,364
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 $10,853 at March 31, 2000 relates
primarily to the financing of inventory and is collateralized by securities
held in inventory with a market value of approximately $22,760 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 no short-term borrowings outstanding at March 31, 2000. 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:
2000 1999
(Shares in thousands)
Net loss $(1,517) $ (406)
Basic
Weighted average shares outstanding 2,401 2,432
Basic loss per share $(.63) $(.17)
Diluted
Weighted average shares outstanding-
Basic 2,401 2,432
Effect of dilutive securities:
Restricted stock - -
Employee stock purchase plan - -
Stock options - -
Weighted average shares outstanding-
Diluted 2,401 2,432
Diluted loss per share $(.63) $(.17)
The diluted share base for the three month periods ended March 31,
2000 and 1999 excludes incremental shares related to restricted stock and
options of 32 and 60 shares, respectively. These shares are excluded due
to their antidilutive effect as a result of the Company's loss from
continuing operations during the three month periods ended March 31, 2000
and 1999.
Note J -- Operating Segments
The Company is organized and provides financial services through three
operating segments. These operating segments are Investment Banking/
Capital Markets, Investment Services and Other. Operating segment results
include all direct revenues and expenses of the operating units in each
operating segment. Allocations of indirect corporate administrative
expenses are based on specific methodologies which consider the size of the
operation and the extent of administrative services provided. Prior year
results are restated to incorporate the allocation methodologies.
Investment Banking/Capital Markets consists of the Company's
healthcare and senior living finance groups, church and school finance
group, and fixed-income institutional sales and trading groups. Sales
credits associated with underwritten offerings are reported in the
Investment Services group when sold through retail distribution channels
and in the Investment Banking/Capital Markets group when sold through
institutional distribution channels.
Investment Services consists of three operating components. The asset
management operation manages investor assets in separate accounts,
institutional accounts, and mutual funds. The wealth management operation
provides financial products and retail brokerage services primarily to
retail investors. The managed money operation provides services as an
intermediary in matching investors with appropriate money managers and
provides performance reporting services.
Other is principally the Company's corporate investment and debt
management activities and the unallocated corporate administrative
expenses.
Operating segment financial information is as follows:
Three Months Ended March 31,
2000 1999
Revenues
Investment Banking/Capital Markets $ 2,621 $ 6,513
Investment Services 14,433 12,354
Other 2,799 1,053
19,853 19,920
Ziegler Thrift Trading, Inc. - 1,442
$19,853 $21,362
Net Income (Loss) Before Taxes:
Investment Banking/Capital Markets $(3,509) $ (220)
Investment Services (442) (586)
Other Activities 1,427 8
(2,524) (798)
Ziegler Thrift Trading, Inc. - 260
$(2,524) $ (538)
The Company's revenues and net income (loss) before taxes presented
above are derived entirely from domestic operations. The Company does not
segregate asset information by operating segment.
<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 engaged in financial
services activities. These financial services activities are conducted
through three operating segments. These operating segments are Investment
Banking/Capital Markets, Investment Services and Other.
The Investment Banking/Capital Markets operating segment underwrites
fixed income securities primarily for senior living and healthcare
facilities, FHA housing, religious institutions, and private schools and
provides fixed income institutional sales and trading and advisory
services. Investment Services operating segment consists of three primary
operating components: asset management, wealth management, and managed
money operations. The asset management operation manages investor assets
in separate accounts, institutional accounts, and mutual funds. The wealth
management operation provides financial products and services primarily to
retail investors. The managed money operation provides services as an
intermediary in matching investors with money managers and provides
performance reporting and other administrative services. Other operating
activities are primarily the investment and debt management activities of
the Parent and the unallocated corporate administrative activities included
in B.C. Ziegler and Company ("BCZ"). Corporate administrative costs are
allocated using various allocation methodologies which consider the size of
the operation and the extent of administrative services provided.
Ziegler Thrift Trading, Inc. ("ZTT") was sold in October, 1999.
Although not a separate segment and, therefore, not a discontinued
operation under generally accepted accounting principles, financial results
are separately identified in the operating segment information for
comparability purposes. WRR Environmental Services, Inc., which was the
hazardous waste management operation of the Company, was sold in December,
1999, and is considered a discontinued operation and not a part of the
operating segment financial information presented.
The Company's operating results are sensitive to various factors.
During the last half of 1999 and into 2000, the general level of interest
rates increased. Consequently, the issuance of bonds to refund bonds
already outstanding became uneconomical for issuers. This circumstance
caused fewer underwritings in the first quarter of 2000 than in 1999.
The first quarter rise in interest rates combined with the favorable
returns in the overall equity markets has caused investors to turn from
fixed income investment vehicles to equity investment vehicles. This flow
of funds caused a higher level of liquidations in tax-exempt bond mutual
funds, which in turn reduced the ability of these mutual funds to purchase
new issue municipal securities.
The Company has increased assets under management in the equity mutual
funds that it manages, primarily the PSE Tech 100 Index Portfolio, as a
result of the factors noted above. This increase continued into the first
quarter of 2000. Revenue from management fees increased correspondingly.
This increase in the value of assets under management would be slowed or
reversed by a correction in the equity or fixed income markets.
The rise in interest rates also increases the cost of financing
inventory. Since much of the Company's inventory is in the form of fixed
rate debt instruments, the cost of financing increases without a
corresponding increase in interest income. Further, the inventory being
held may lose value as the result of general interest rate increases and
may have to be sold at or below cost. The Company marks its inventory to
market to reflect these circumstances.
Results of Operations - Three months ended
March 31, 2000 Compared to March 31, 1999
(Dollars in thousands)
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
Increase/
For the Three Months Ended March 31, 2000 1999 (Decrease)
Revenues
Investment Banking/Capital Markets $ 2,621 $ 6,513 $(3,892)
Investment Services
Asset Management 2,321 1,576 745
Wealth Management 6,390 5,442 948
Managed Money 5,722 5,336 386
Total Investment Services 14,433 12,354 2,079
Other Activities 2,799 1,053 1,746
19,853 19,920 (67)
ZTT - 1,442 (1,442)
$19,853 $21,362 $(1,509)
Net Income (Loss) Before Taxes
Investment Banking/Capital Markets $(3,509) $ (220) $(3,289)
Investment Services
Asset Management 344 200 144
Wealth Management (235) (563) 328
Managed Money (551) (223) (328)
Total Investment Services (442) (586) 144
Other Activities 1,427 8 1,419
(2,524) (798) (1,726)
ZTT - 260 (260)
$(2,524) $ (538) $(1,986)
Investment Banking/Capital Markets
Total revenues for this segment decreased $3,892 from $6,513 in 1999
to $2,621 in 2000. A significantly reduced level of underwriting activity
due to the economic circumstances as discussed above is the primary reason
for the decrease. A total of 2 managed municipal underwriting transactions
totaling $39 million were completed in 2000 compared to 15 managed
transactions totaling $379 million for the same period in 1999. Church and
school underwriting activity decreased. A total of 2 transactions for $15
million were completed in 2000 compared to 5 transactions for $16 million
in 1999. The resulting revenues from underwriting decreased $3,741 between
the quarters. Trading profits also decreased $588 as the result of the
disposition and marking to market of fixed rate inventory (bonds and
preferred stock) in a rising interest rate environment which offset gains
from other trading transactions.
Total expenses of this segment, including allocated costs, decreased
$603 from $6,732 in 1999 to $6,129 in 2000. A decrease of $985 in
compensation expense between quarters was offset by small increases in
other expense categories. The compensation expense decrease is primarily
related to decreased incentive compensation as the result of decreased
underwriting volumes.
The decreased underwriting activity is the primary reason for the
resulting loss before taxes of $3,509 for this segment in 2000 compared to
a loss of $220 in 1999. The first quarter of the year generally has a
lower level of underwriting activity, but the situation was more pronounced
in 2000 due to economic factors. The preferred stock trading and
institutional equity sales activities in this segment were discontinued in
the first quarter of 2000. These activities incurred losses of $617 in
2000 and $373 in 1999. These activities were not considered to be a part
of the Company's core business strategy.
Investment Services
This segment is composed of three operating components whose purpose
is to serve investors. These operating segments are asset management,
wealth management, and managed money operations. The combined results for
this segment resulted in revenues and net losses of $14,433 and $442 in
2000 compared to $12,354 and $586 in 1999, respectively.
Asset Management-
Total revenues of this operating component were $2,321 in 2000
compared to $1,576 in 1999, an increase of $745 or 47%. Investment
management fees increased $582 as the result of increases in assets under
management. Assets under management were $2.1 billion dollars at March 31,
2000 compared to $1.4 billion at March 31, 1999. Increases were primarily
in the equity mutual fund portfolios, specifically the technology and S&P
index funds. The substantial net sales of these mutual funds also
increased distributor commissions received by $248 between quarters. These
increases were partially offset by a decrease in fee income as the result
of the outsourcing of transfer agent activities in November, 1999.
Total expenses of the asset management operations increased $601 to
$1,977 in 2000 from $1,376 in 1999. The increase is primarily related to
increased employee compensation and benefits of $418. These compensation
increases are primarily related to commissions paid for distributor sales
of mutual funds. Increases in other categories of expense were not
individually significant.
The net income before taxes of the asset management operation was $344
in 2000 compared to $200 in 1999 an increase of $144. The success of this
operation is sensitive to sales activity and market conditions. The recent
volatility in the equity markets has not caused a significant decline in
total assets nor have there been any significant redemptions net of sales.
Wealth Management-
Total revenues for this operating component were $6,390 in 2000
compared to $5,442 in 1999, an increase of $948. Commission income
increased $710 primarily as the result of full service retail brokerage
sales activities related to mutual funds and equity sales. The balance of
the increase is related to secondary market bond sales to retail investors
and insurance agency sales.
Total expenses increased $621 to $6,626 in 2000 from $6,005 in 1999.
Compensation and benefits increased $832 due to increases in commissions
paid to brokers on higher sales volumes. The increase was partially offset
by a decrease in brokerage commissions of $204. The decreased brokerage
commissions are due to a reduction in independent contractor sales
activities. The total loss, which includes administrative cost
allocations, was $235 in 2000 compared to $563 in 1999. Administrative
cost allocations approximated $1,100 in each year. Before such allocations
and considering only specifically related expenses, the wealth management
operation had net income before taxes of $828 in 2000 compared to $543 in
1999.
Managed Money-
Total revenues of this operating component were $5,722 in 2000
compared to $5,336 in 1999 an increase of $386. Increases in advisory fees
and commissions were $262 and $377, respectively, and were offset by
reductions for trading losses and decreases in interest income and in other
income. Administrative and performance reporting services are being
provided for a total of $5.6 billion of assets at March 31, 2000 compared
to $3.3 billion of assets at March 31, 1999. Despite the increase in
assets, the mix of services provided and the related fees as well as
pricing pressure associated with those services causes the disproportionate
increase in fees relative to assets.
Total expenses of the managed money operation were $6,273 in 2000
compared to $5,560 in 1999, an increase of $713. Commissions and clearing
fees increased $302 as the result of broker commissions paid and clearing
fees incurred on new account transaction volume. Employee compensation and
benefits increased $174 as the result of increased staffing requirements
and costs associated with staff turnover. Investment manager fees
increased $122 in proportion to related revenues. The resulting net loss
in 2000 was $551 compared to $223 in 1999. A higher level of asset
turnover has impaired the ability to gather assets to be serviced.
Further, the competition for services in the industry has created
additional pressure on margins.
Other
Total revenues for this segment were $2,799 in 2000 compared to $1,053
in 1999, an increase of $1,746. The primary reason for the increase was an
award by an NASD arbitration panel of $1,700 for the Company's claims of
unfair competition related to BCZ's Denver, Colorado retail brokerage
office by another securities firm. The only other significant source of
revenues is interest income related to investments in collateralized
mortgage obligations ("CMOs") held by the Parent. Interest income
approximated $1 million dollars in both quarters from the CMO investments.
Total expenses after allocations to the other operating segments were
$1,372 in 2000 compared to $1,046 in 1999. The largest component of
expenses is interest expense on the financing of the CMOs of $685 in 2000
and $763 in 1999. Other expenses are the unallocated administrative
expenses. The increase in expenses relates to unallocated personnel
expenses associated with personnel changes.
Total net income after taxes was $1,427 in 2000 compared to $8 in
1999. These amounts reflect the results after allocations to other
segments. The allocations are intended to reflect the administrative
functions provided to the other operating segments. The current year
income is primarily due to the arbitration award offset by unallocated
personnel expenses.
Liquidity and Capital Resources
(Dollars in thousands)
Capital expenditures for assets for the first three months of 2000
were $385. Land, buildings and equipment, net of related depreciation and
amortization, constitutes 8% of total Company assets.
The Company has a continuing requirement for cash to finance its
investment and underwriting activities. A source of cash has been and
continues to be the issuance of short-term notes of the Company by the
Parent. These notes vary in maturities up to 270 days. In the first three
months of 2000, a total of $5,010 of notes were issued and $4,383 were
repaid. The total balance of short-term notes outstanding was $6,835 as of
March 31, 2000.
FCFC serves as a limited purpose finance company for financing
mortgages to churches, and issued bonds to the public as a source of cash
prior to 1996. Mandatory redemption on the bonds is made from principal
payments received on the mortgage loans which serve as collateral for the
bonds. There were $4,331 of mortgage loans outstanding at March 31, 2000,
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 as well as through prepayments.
Total bonds outstanding at March 31, 2000 were $4,102. As principal
payments are received on the mortgage loans, whether scheduled or prepaid,
bonds are called and retired. No new bonds have been issued since 1995 nor
does the Company plan to issue bonds from this subsidiary 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 $3,365 of variable rate securities were held in inventory at March
31, 2000. 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, 2000. Amounts outstanding under
repurchase agreements were $715 and the amount owed the clearing
agent was $10,853. 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. The Parent had no amounts outstanding under bank
unsecured credit facilities at March 31, 2000. Amounts outstanding under
repurchase agreements totaled $27,802 at March 31, 2000, and were used to
finance collateralized mortgage obligations included in Other Investments
on the balance sheet.
During 1999, the Company received approximately $10,647 in net
proceeds after taxes from the sales of WRR and substantially all of the
assets and liabilities of ZTT. The Company is evaluating its alternatives
for the use of the proceeds. Some proceeds have been used to reduce short-
term borrowings of the Company. This reduction may be temporary and allows
the Company greater discretion for future operations.
The Company's cash and cash equivalent position allows a certain
degree of 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 option of
management, the Company's capital resources and available sources of credit
are adequate for present and anticipated future operations.
Year 2000
The Year 2000 issue was expected to affect the ability of computer
systems to correctly process dates after December 31, 1999. The Company
did not experience any significant disruptions and does not believe it will
be affected by such problems in the future.
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 described in our Form 10-K for the year ended
December 31, 1999.
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 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 on a limited basis 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
(Dollars in thousands)
Forward Debt Services Agreement $5,005 $(116)
Index: Municipal Market Data Services AAA/Aaaa Scale plus a forward
spread.
Forward Interest Rate Agreement $5,005 $39
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
Expected Maturity Dates
2000 2001 2002 2003 2004 Thereafter Total Fair Value
(U.S. Dollars in thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Inventory - fixed rate
Municipal bond issues 10 5 - 25 149 16,859 17,048 15,723
Weighted average interest rate 6.50% 7.00% 7.94% 5.85% 6.58%
Collateralized Mortgage obligations(1) - - - - - 5,878 5,878 4,302
Weighted average interest rate 8.78%
Corporate Bond issues 8 - - - - 52 60 56
Weighted average interest rate 9.55% 7.08%
Institutional Bonds 31 2 - - - 2,927 2,960 2,842
Weighted average interest rate 7.08% 9.85% 8.18%
Preferred Stock - - - - - 809 809 414
Weighted average dividend rate 2.80%
Other - - - - 100 165 265 259
Weighted average interest rate 7.02% 6.93%
Securities Inventory - variable rate
Variable rate demand notes - - - - - 3,365 3,365 3,365
Weighted average interest rate 3.90%
Securities purchased under agreement
to resell(2) 4,421 - - - - - 4,421 4,421
Weighted average interest rate 5.25%
Notes receivable - - - - - 4,444 4,444 4,444
Weighted average interest rate 9.23%
Other investments - - - - - 26,547 26,547 26,547
Weighted average interest rate 8.87%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Dates
2000 2001 2002 2003 2004 Thereafter Total Fair Value
(U.S. Dollars in thousands)
LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term notes payable(2) 6,835 - - - - - 6,835 6,835
Weighted average interest rate 6.21%
Securities sold under agreement to
repurchase(2) 28,517 - - - - - 28,517 28,517
Weighted average interest rate 6.14%
Securities sold not yet purchased - - - 4,500 - - 4,500 4,365
Weighted average interest rate 5.38%
Bonds payable - fixed rate(1) - - - - - 4,102 4,102 4,102
Weighted average interest rate 8.29%
Futures Contracts (short)
Notional Amount None
Market Value None
Price Range:
(1) Assumes no prepayments
(2) The information shown above includes actual interest rates at December 31, 1999 and assumes
no changes in interest rates in 2000 or thereafter.
</TABLE>
<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 $2.1 billion in the form of separately managed and
mutual fund accounts. Additionally, BCZ's and PMC's accounts under
management or advisement together have over $5 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 3. Not applicable.
Item 4. Results of Votes of Security Holders
Registrant held an annual meeting on Tuesday, April 18, 2000 for which a
proxy statement was sent to shareholders of record at the close of business
on March 16, 2000. A brief description of the matters voted upon is as
follows:
1. To elect four directors for a term of three years; and
2. To vote on a proposal to ratify the retention of Arthur Andersen LLP
as auditors for 2000; and
3. To transact any other business which may properly come before the
meeting, or any adjournments thereof.
A total of 2,145,773 shares were voted. The following votes were cast:
1. Election of directors: Shareholders voted to grant or withhold
authority to vote for or against the nominees.
Grant Withhold
J. C. Frueh 2,096,535 49,238
J. R. Green 2,116,571 29,202
J. J. Mulherin 2,119,873 25,900
G. J. Gagner 2,116,414 29,359
The following directors continued in office: P. D. Ziegler, F. J.
Wenzel, P. R. Kellogg, S. A. Roell, B. C. Ziegler III, and D. A. Carlson.
2. retention of Arthur Anderson LLP as auditors:
For Against Abstain
2,143,052 775 1,946
3. To act on other business:
Grant Withhold
2,145,773 None
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
10.1 Clearing Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated
January 24, 2000, indicating that The Ziegler Companies,
Inc. appointed John J. Mulherin to the positions of
president and chief executive officer of The Ziegler
Companies, Inc. effective mid-February 2000.
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 15, 2000 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: May 15, 2000 By /s/ Gary P. Engle
Gary P. Engle
Senior Vice President/CFO
<PAGE> EXHIBIT INDEX
Exhibit
Number Description
10.1 Clearing Agreement
27 Financial Data Schedule
<PAGE>
Exhibit 10.1
FULLY DISCLOSED CLEARING AGREEMENT
OF
PERSHING DIVISION
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
THIS AGREEMENT is made and entered into as of the 28th day of January 1998,
by and between the Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corporation ("Pershing"), a Delaware Corporation, and B.C. Ziegler
& Company ("Broker"), a Wisconsin Corporation.
1.0 APPROVAL
This Agreement shall be subject to approval by the New York Stock
Exchange, Inc. ("NYSE") and by any other self-regulatory organization vested
with the authority to review or approve it. Pershing shall submit this
Agreement to the NYSE and Broker shall submit the Agreement to any other
organization from which Broker is required to obtain approval. In the event
of disapproval, the parties shall bargain in good faith to achieve the
requisite approval.
2.0 AGREEMENT
From the opening of business on or about the May 1, 1998, until
the termination of this Agreement as provided for in Paragraph 21 hereof,
Pershing shall carry the cash and margin accounts of the customers of Broker
introduced by Broker to Pershing, and accepted by Pershing, and shall clear
transactions on a fully disclosed basis for such accounts, in the manner and
to the extent set forth in this Agreement.
3.0 ALLOCATION OF RESPONSIBILITY
3.1 Responsibilities of the Parties. Pursuant to NYSE Rule 382,
responsibility for compliance with all applicable laws, rules, and
regulations of the Securities and Exchange Commission ("SEC"), the National
Association of Securities Dealers, Inc. ("NASD"), the NYSE, and any other
regulatory or self-regulatory agency or organization shall be allocated
between Pershing and Broker as set forth in this Agreement. To the extent
that a particular function is allocated to one party under this Agreement,
the other party shall supply that party with information in its possession
pertinent to the proper performance and supervision of that function.
3.2 Relationship with Customers. Except as provided in Paragraph 26.11
of this Agreement, all customers receiving services pursuant to this
Agreement shall remain customers of Broker. Pershing shall provide services
under this Agreement to Broker only to the extent explicitly required by
specific provisions contained in this Agreement and shall not be responsible
for any duties or obligations not specifically allocated to Pershing pursuant
to this Agreement. Broker shall enter into appropriate contractual
arrangements with customers on its own behalf, and such agreements shall make
Broker, and not Pershing, responsible to customers for the provision of
services. Broker shall not be deemed to be an agent of Pershing for any
purpose, except to the limited extent expressly set forth in paragraph
9.1.8of this Agreement, nor shall Pershing be deemed to have a fiduciary
relationship with any of Broker's customers. Broker acknowledges that
Pershing does not control the business or operations of Broker.
4.0 REPRESENTATIONS AND WARRANTIES
4.1 Broker. Broker represents and warrants that:
4.1.1 Corporation Duly Organized. Broker is a corporation duly
organized, validly existing, and in good standing under the laws of the
state of its incorporation.
4.1.2 Registration. Broker is duly registered and in good standing as a
broker dealer with the SEC and is a member firm in good standing of the
NASD.
4.1.3 Authority to Enter Agreement. Broker has all requisite authority,
whether arising under applicable federal or state law or the rules and
regulations of any regulatory or self-regulatory organization to which
Broker is subject, to enter into this Agreement and to retain the services
of Pershing in accordance with the terms of this Agreement.
4.1.4 Substantial Compliance with Rules and Regulations. Broker and each
of its employees is in substantial compliance with, and during the term of
this Agreement shall remain in substantial compliance with, the
registration, qualification, capital, financial reporting, customer
protection, and other requirements of every self-regulatory organization of
which Broker is a member, of the SEC, and of every state to the extent that
Broker or any of its employees is subject to the jurisdiction of that
state.
4.1.5 No Pending Action, Suit, Investigation or Inquiry. Broker has
disclosed to Pershing every material action, suit, investigation, inquiry
or proceeding against or affecting Broker or its respective property or
assets, by or before any court or other tribunal, any arbitrator, any
governmental authority, or any self-regulatory organization of which any of
them is a member. Broker shall notify Pershing promptly, but in any event
within three business days, of the initiation of any such action, suit,
investigation, inquiry, or proceeding that may have a material impact on
the capital of Broker.
4.2 Pershing. Pershing represents and warrants that:
4.2.1 Corporation Duly Organized. Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Delaware.
4.2.2 Registration. DLJ is duly registered and in good standing as a
broker dealer with the SEC and is a member firm in good standing of the
NYSE and the NASD.
4.2.3 Authority to Enter Agreement. DLJ has all requisite authority,
whether arising under applicable federal or state law, or the rules and
regulations of any regulatory or self-regulatory organization to which DLJ
is subject, to enter into this Agreement and provide services in accordance
with the terms of this Agreement.
4.2.4 Compliance with Registration. Pershing and each of its employees
is in substantial compliance with, and during the term of this Agreement
shall remain in substantial compliance with the registration,
qualification, capital, financial reporting, customer protection, and other
requirements of every self-regulatory organization of which Pershing is a
member, of the SEC, and every state.
4.2.5 No Pending Action, Suit, Investigation or Inquiry. Pershing has
disclosed to Broker every material action, suit, investigation, inquiry or
proceeding against or affecting Pershing or its respective property assets,
by or before any court or other tribunal, any arbitrator, any governmental
authority, or any self-regulatory organization of which any of them is a
member. Pershing shall notify Broker promptly, but in any event within
three business days, of the initiation of any such action, suit,
investigation, inquiry, or proceeding that may have a material impact on
the capital of Pershing.
5.0 ESTABLISHING AND ACCEPTING NEW ACCOUNTS
5.1 Acceptance of New Accounts. Broker shall be responsible for
opening and approving new accounts.
5.2 Maintenance of Account Information. Pershing may rely without
inquiry on the validity of all customer information furnished to it by
Broker.
5.3 Pershing Operations Manual. Broker acknowledges receipt and
familiarity with the Pershing "Customer Reference Guide" and agrees to
familiarize itself with any modifications or supplements to such guide that
may be issued from time to time.
6.0 SUPERVISION OF ORDERS AND ACCOUNTS
6.1 Responsibility for Compliance. Broker shall be solely responsible
for compliance with Suitability, "Know Your Customer' rules and other
requirements of federal and state law and regulatory and self-regulatory
rules and regulations governing transactions and accounts. Possession by
Pershing of surveillance records, exception reports, or other similar data
shall not obligate Pershing to establish procedures for dealing with such
material or to review or be aware of their contents. Pershing shall not be
required to make any investigation into the facts surrounding any
transaction that it may execute or clear for Broker or any customer of
Broker.
6.2 Compliance Procedures. Broker agrees to diligently supervise
compliance with all applicable laws, results, and regulations of the SEC,
NASD, NYSE, and any other regulatory or self-regulatory agency or
organization having jurisdiction over Broker through the use of a
compliance manual or other written procedures. Broker shall review
transactions and accounts to assure compliance with prohibitions against
manipulative practices and insider trading and other requirements of
federal and state law and applicable regulatory and self-regulatory rules
and regulations to which Broker or its customer are subject. Without
limiting the above, Broker shall be responsible for compliance with the
supervisory requirements in Section 15(b)(4) of the Securities Exchange Act
of 1934, as amended, NASD Rule 27, NYSE Rules 342, 431 and 351, and similar
rules adopted by any other regulatory or self-regulatory agency or
organization, to the extent applicable.
6.3 Knowledge of Customer's Financial Resources and Investment
Objectives. Broker shall comply with Rule 405(1) of the NYSE or comparable
requirements of similar rules of any other self-regulatory organization to
which Broker is subject. Broker shall obtain all essential facts relating
to each customer, each cash and margin account, each order, and each person
holding a power of attorney over any account, in order to assess the
suitability of transactions when required by applicable rules, the
authenticity of orders, signatures, endorsements, certificates, or other
documentation, and the frequency of trading. Broker warrants that, to the
best of its knowledge, it will not open or maintain accounts for persons
who are minors or who are otherwise legally incompetent and that it will
comply with NYSE Rule 407 and other laws, rules, or regulations that govern
the manner and circumstances in which accounts may be opened or
transactions authorized.
6.4 Furnishing of Investment Advice. Broker shall be solely
responsible for any recommendation or advice it may offer to its customers.
6.5 Discretionary Accounts. Broker shall be solely responsible for
obtaining customer approval for and supervising discretionary accounts.
6.6 Option Accounts. Before engaging in option trading for any
customer, Broker shall deliver to the customer a current disclosure
statement of the Options Clearing Corporation and any effective
supplements. Broker shall obtain the required signatures on all option
agreements, shall obtain proper approval of the opening of all option
accounts and shall otherwise comply with all applicable laws, rules and
regulations relating to options accounts and option trading. Broker shall
deliver to Pershing a copy of a signed option agreement for each customer
approved by it for options trading in a form acceptable to Pershing.
6.7 Accounts of Employees of Member Organizations, Self-Regulatory
Organizations, and Financial Institutions. Broker shall give required
notices and obtain required approvals of employers in each case in which a
customer is an employee of a broker-dealer, a self-regulatory organization,
or a financial institution.
7.0 EXTENSION OF CREDIT
7.1 Presumption of Cash Account. Pershing may, but is not required to,
permit customers of Broker to purchase securities on margin, but all
transactions for a customer will be deemed to be cash transactions, and
payment for those transactions will be required in the manner applicable to
cash transactions, unless, on or prior to settlement, Broker has furnished
Pershing with a properly executed and binding customer margin agreement and
consent to loan of securities in a form acceptable to Pershing.
7.2 Margin Requirements. All margin accounts introduced by Broker
shall be subject to Pershing's margin requirements as in effect from time
to time. Pershing reserves the right (but shall not be obligated) to
refuse to accept any transaction in a margin account or group of accounts
without the actual receipt of the necessary margin and to impose a higher
margin requirement for a particular account when, in Pershing's discretion,
the past history or nature of the account or other factors or the
securities held in it warrant such action. In all instances, Broker shall
be responsible for determining the amount of credit suitable for every
account and may require higher margin than imposed by Pershing for any
particular account, group of accounts, or all accounts introduced by Broker
to Pershing.
7.3 Margin Maintenance and Compliance with Regulation T and SEC Rule
15c3-3(m).
7.3.1 Initial Margin. Broker shall be responsible for the initial margin
requirement for any transaction until such initial margin has been received
by Pershing in acceptable form.
7.3.2 Margin Calls. After the initial margin for a transaction has been
received, subsequent margin calls may be made by Pershing at its
discretion. Pershing shall calculate the maintenance requirement and
notify Broker of any amounts due. Broker shall be responsible for issuing
the margin call to its customer and obtaining the amount due directly from
Broker's customer. If Broker fails to take the appropriate action,
Pershing reserves the right to collect the amount due directly from
Broker's customer. Broker agrees to cooperate with Pershing in complying
with and obtaining margin in response to such calls. If any customer fails
to meet a maintenance call, Broker shall be liable to Pershing for any loss
or damage it may incur unless the Broker establishes that the loss or
damage was directly attributable to Pershing's failure to give proper and
timely notification to Broker or customer.
7.3.3 Actions Upon Failure to Meet Margin Calls or Deliver Securities.
In the event that satisfactory margin is not provided within the time
specified by Pershing, or securities sold are not delivered as required,
Pershing may take such actions as Pershing deems appropriate, including but
not limited to the sale or purchase of securities in connection with the
account. Broker shall cooperate with Pershing by entering appropriate
orders to buy-in or sell-out securities in any such instance. Compliance
with a request to withhold action shall not be deemed a waiver by Pershing
of any of its rights under this Agreement, including but not limited to the
right to close out a contract or position if in Pershing's judgment
changing conditions render such action advisable, with or without prior
notification to customer or Broker.
7.4 Charging of Interest and Disclosures Pursuant to Rule 10b-16.
Interest charged with respect to debit balances in customers' accounts
shall be determined in accordance with the fully disclosed pricing schedule
attached to this Agreement. Broker shall send each margin customer a
written disclosure statement, in a form acceptable to Pershing, at the time
of the opening of a margin account as required by SEC Rule 10b-16.
7.5 Unsecured Debits or Unsecured Short Positions. Pershing shall
charge against the account of Broker an amount equal to the value of any
unsecured debit or short position (on a "mark to market" basis) in a
customer account if that position has not been promptly resolved by payment
or delivery. Any remaining debit shall be charged against Broker's Deposit
Account and be considered a claim against Broker pursuant to Paragraph 19
of this Agreement.
8.0 MAINTENANCE OF BOOKS AND RECORDS
8.1 Stock Records. Pershing shall maintain stock records and other
prescribed books and records of all transactions executed or cleared
through it in accordance with generally accepted practices in the
securities industry.
8.2 Regulatory Reports and Records. Broker shall prepare, submit, and
maintain copies of all reports, records, and regulatory filings required of
Broker by any entity that regulates it, including, but not limited to,
copies of all account agreements and similar documentation obtained
pursuant to paragraph 5.0 of this Agreement and any reports and records
required to be made or kept under the Currency and Foreign Transactions
Reporting Act of 1970, the Money Laundering Act of 1986, and any rules and
regulations promulgated pursuant thereto. To the extent that Pershing is
required to prepare or submit any reports or records by any entity that
regulates it, Broker shall cooperate in providing Pershing with any
information needed in order to prepare such reports or records.
8.3 Audiotaping of Telephone Conversations. Broker understands that
for quality control, dispute resolution or other business purposes,
Pershing records some or all telephone conversations between Broker and
Pershing. Broker hereby consents to such recording and will inform its
employees, representatives and agents of this practice. It is further
understood that all such conversations are deemed to be solely for business
purposes.
9.0 RECEIPT AND DELIVERY OF FUNDS AND SECURITIES
9.1 Receipt and Delivery of Funds and Securities.
9.1.1 Cashiering Functions. Pershing shall perform normal and reasonable
cashiering functions for customer accounts introduced by Broker. These
functions shall include receipt and delivery of securities purchased, sold,
borrowed, and loaned; receipt and payment of funds owed by or to customers;
and provision of custody for securities and funds. Broker shall provide
Pershing with the basic data and documents that are necessary or
appropriate to permit Pershing to perform its obligations under this
Paragraph, including but not limited to copies of records documenting
receipt of customers' funds and securities received directly by Broker.
Such data and documents must be compatible with the requirements of
Pershing's data processing systems.
9.1.2 Purchases. Broker shall be responsible for purchases made for
customers until actual and complete payment has been received by Pershing.
When payment is tendered to Pershing in the form of a check, Broker shall
remain responsible until the check has been paid and the proceeds actually
received and finally credited to Pershing (without any subsequent
chargeback) by its bank. Pershing shall use due diligence in depositing
any checks that it receives directly from customers of Broker.
9.1.3 Sales. Broker shall be responsible for sales until Pershing has
received, in acceptable form, the securities involved in a transaction. If
Pershing does not receive delivery of securities in an acceptable form,
Pershing may buy-in all or part of the securities for the accounts of the
customer of Broker or Broker.
9.1.4 When Issued and Delayed Delivery Transactions. In the case of the
purchase or sale of securities on a "when issued" basis, and in the case of
a purchase or sale where distribution or delivery is otherwise delayed
(except pursuant to a margin agreement), Broker shall remain responsible,
as set forth in this Agreement, until necessary and satisfactory payment of
funds or delivery of securities, as required by the margin rules, has been
received by Pershing.
9.1.5 Funds and Securities Received by Broker. Broker shall promptly
deposit with Pershing funds or securities received by Broker from its
customers, together with such information as may be relevant or necessary
to enable Pershing to record such remittances and receipts in the
respective customer accounts.
9.1.6 Failure to Settle or Pay. In the event of a failure to timely
deposit required funds or securities, Pershing may take appropriate
remedial action. Without waiving or otherwise limiting its right to take
other remedial action, Pershing may at its option charge interest at rates
as agreed in Schedule A to this Agreement. Broker may pass such charges on
to its customers but Broker remains responsible therefor until actually
paid.
9.1.7 Settlement and Delivery. Broker shall obtain each customer's
agreement in the form provided by Pershing to accept partial deliveries and
to abide by other clearance arrangements as may be directed by any exchange
or association. With respect to any settlements which involve the drafting
of securities, draft charges, including interest expense, will be borne by
Broker.
9.1.8 Check Writing Authority. Pershing may, but is not required to,
authorize certain of Broker's employees to sign checks to Broker's
customers for amounts due to, and requested by them, with respect to their
accounts. Broker shall designate in writing the names of any employees it
wishes to receive the authorization described in this subparagraph. All
checks must be signed by two employees who have received authorization from
Pershing. No check or checks totaling more than $250,000 shall be provided
to any customer by Broker on the same business day. All expenses incurred
in connection with the issuance of checks under the authority described in
this subparagraph shall be charged to Broker. Broker remains responsible
for the disbursement and delivery of such checks to its customers. Any
lien on the customer's property granted by the customer to Broker or
Pershing shall extend to any funds which may be segregated in a separate
account in connection with the exercise of the authority described in this
subparagraph.
9.2 Transfer of Securities and Accounts. Upon receiving written or
oral instructions from Broker, or written instructions from a customer,
Pershing shall make reasonable efforts to effectuate such transfers of
securities or accounts as may be requested. Whenever practicable, Pershing
shall first notify the Broker before acting on a customer's written
request.
9.3 Restricted and Control Stock Requirements. Broker shall be
responsible for determining whether any securities held in Broker's or its
customer accounts are restricted or control securities as defined by
applicable laws, rules, or regulations. Broker is responsible for assuring
that orders executed for such securities comply with such laws, rules, and
regulations.
9.4 Payment of Dividends and Handling of Exchange or Tender Offers,
Rights, Warrants and Redemptions. Whenever Pershing has been instructed to
retain custody of the securities in any account, Pershing may hold the
securities in the customer's name, the name of Pershing or its nominee, or
in te names of nominees of any depository used by Pershing. Pershing shall
perform the services required in connection with holding the securities in
custody in each account, including (1) collection and payment of dividends
and interest; (2) transmittal and handling (through Broker) of tenders or
exchanges pursuant to tender offers and exchange offers; (3) transmittal of
proxy materials and other shareholder communications if Pershing is
appropriately compensated; and (4) handling of exercises or expirations of
rights, options, warrants and redemptions.
9.5 COD-Orders. Broker shall not introduce any retail or individual
accounts requiring settlement on a "delivery versus payment" or "receive
versus payment" basis without the prior written approval of Pershing. If
such approval has been given, Broker shall arrange for timely settlement of
all such transactions. Broker shall be responsible for complying with the
requirements of NYSE Rule 387 with respect to those transactions, except
that Pershing shall be responsible for delivering confirmations pursuant to
NYSE Rule 387.
10.0 SAFEGUARDING OF FUNDS AND SECURITIES
Except as otherwise provided in this Agreement, Pershing shall be
responsible for the safekeeping of all money and securities received by it
pursuant to this Agreement. However, Pershing will not be responsible for
any funds or securities delivered by a customer to Broker until such funds
or securities are actually received by Pershing or deposited in bank
accounts maintained by Pershing.
11.0 CONFIRMATIONS AND STATEMENTS
11.1 Preparation and Transmission of Confirmations and Statements.
Pershing shall prepare confirmations and summary periodic statements and
shall, to the extent required, transmit them to customers and Broker in a
timely fashion except to the extent Broker has agreed to transmit
confirmations to customers. Confirmations and statements shall be prepared
on forms disclosing that the account is carried on a fully disclosed basis
for the Broker in accordance with applicable rules, regulations and
interpretations. Broker will have the ultimate regulatory responsibility
for compliance with the prospectus delivery requirements of the Securities
Act of 1933, as amended, regardless of its retention of a prospectus
fulfillment service to perform delivery of same.
11.2 Examination and Notification of Errors. Broker shall examine
promptly all confirmations, statements, and other reports provided for
Broker by Pershing. Broker must promptly notify Pershing of any error
claimed by Broker in any account. If Broker fails to notify Pershing
promptly of any error, the existence of which was, or should reasonably
have been discoverable by review of confirmations, statements, and reports
provided to Broker by Pershing, Broker shall be deemed to have waived its
right to make any claim against Pershing with respect to damages resulting
from or as a result of the failure to promptly examine the confirmations,
statements and reports.
12.0 ACCEPTANCE AND EXECUTION OF TRANSACTIONS
12.1 Responsibility to Accept or Reject Trades. Pershing shall execute
transactions in customers' accounts and release or deposit money or
securities to or for accounts only upon Broker's instructions. Pershing
reserves the right to accept written or oral transaction orders from
Broker's customers in circumstances where it determines that the customers
are unable to execute those transactions through Broker. Notwithstanding
any instructions to the contrary, Pershing may, after giving reasonable
notice, (i) refuse to confirm a transaction or cancel a confirmation, (ii)
reject a delivery or receipt of securities or money, (iii) refuse to clear
a trade executed by Broker, or (iv) refuse to execute a trade for the
account of a customer or Broker. Pershing agrees to correct errors and re-
issue confirmations to customer when correcting errors.
12.2 Responsibility for Errors in Execution. Broker shall be
responsible for transmission to Pershing of all customer orders and for any
errors in the Broker's recording or transmission of such orders. Pershing
shall be responsible for any errors it might make in the further
transmission and execution of such orders after their receipt, in proper
and complete form, from Broker.
13.0 OTHER OBLIGATIONS AND RESPONSIBILITIES OF BROKER
13.1 Other Clearing Agreements. During the term of this Agreement,
Broker shall not enter into any other similar agreement or obtain the
services contemplated by this Agreement from any other party or supply the
services contemplated by the Agreement without the prior written notice to
Pershing.
13.2.1 Disciplinary Action, Suspension, or Restriction. If Broker becomes
subject to disciplinary action, suspension, or restriction by a federal or
state agency, stock exchange, or regulatory or self-regulatory organization
having jurisdiction over Broker or Broker's securities or commodities
business, Broker shall notify Pershing immediately, orally and in writing,
and provide Pershing a copy of any decision relating to such action,
suspension, or restriction. Broker shall reimburse Pershing for the fees
and expenses associated with any legal advice Pershing may seek with
respect to the effect of such action, suspension, or restriction on the
rights and obligations of Pershing under this Agreement to the extent that
such fees and expenses are approved in advance by Broker. Pershing may
take any action it reasonably deems to be necessary (i) to assure that it
will continue to comply with all applicable legal, regulatory, and self-
regulatory requirements, notwithstanding such action, suspension, or
restriction, and (ii) to comply with any requests, directives, or demands
made upon Pershing by any such federal or state agency, stock exchange, or
regulatory or self-regulatory organization.
13.2.2 Disciplinary Action, Suspension, or Restriction. If Pershing
becomes subject to disciplinary action, suspension, or restriction by a
federal or state agency, stock exchange or regulatory organization having
jurisdiction over Pershing or Pershing's securities or commodities
business, Pershing shall notify Broker immediately, orally and in writing,
and provide Broker a copy of any decision relating to such action,
suspension, or restriction. Pershing shall reimburse Broker for the fees
and expenses associated with any legal advice Broker may seek with respect
to the effect of such action, suspension, or restriction on the rights and
obligations of Broker under this Agreement to the extent that such fees and
expenses are approved in advance by Pershing. Broker may take any action
it reasonably deems to be necessary (i) to assure that it will continue to
comply with all applicable legal, regulatory, and self-regulatory
requirements, notwithstanding such action, suspension or restriction, and
(ii) to comply with any requests, directives, or demands made upon Broker
by any such federal or state agency, stock exchange, or regulatory or self-
regulatory organization.
13.3 Provision of Financial Information. Broker shall furnish Pershing
copies of FOCUS Reports, financial statements for the current fiscal year,
the executed Forms X-17a-5 (Parts I and IIA) filed with the SEC, any
amendments to Broker's Form BD, and any other regulatory or financial
reports Pershing may from time to time require. Broker shall provide such
reports to Pershing at the time Broker files such reports with its primary
examining authority. Broker shall also notify Pershing in advance of
withdrawals of more than 20% of its net capital.
13.4 Fidelity Bond. Broker shall maintain throughout the term of this
Agreement fidelity insurance coverage in at least the minimum amount
required under NASD rules.
Pershing may require that Broker obtain additional fidelity insurance
coverage if it reasonably determines that such coverage is necessary to
assure Broker's performance of its obligations under this Agreement.
13.5 Executing Brokers. If Broker wishes to act as an "Executing
Broker" as such term is understood in that certain letter dated January 25,
1994 from the Division of Market Regulation of the Securities and Exchange
Commission, as the same may be amended, modified or supplemented from time
to time (the "No-Action Letter") then all terms herein shall have the same
meaning as ascribed thereto either in the Agreement or in the No-Action
Letter as the sense thereof shall require. Broker may, from time to time,
execute trades (either directly or through Pershing) for Prime Brokerage
Accounts in compliance with the requirements of the No-Action Letter. (The
No-Action Letter requires, inter alia, that a contract be executed between
Pershing and Prime Broker, and between Broker and Prime Brokerage Customer
prior to the transaction of any business hereunder). Broker shall promptly
notify Pershing, but in no event later than 5:00 p.m. New York time of
trade date in a mutually acceptable fashion, of such trades in sufficient
detail for Pershing to be able to report and transfer any trade executed by
Broker on behalf of a Prime Brokerage Account to the relevant Prime Broker.
Broker understands and agrees that if Prime Broker shall disaffirm or "dk"
any trade executed by Broker on behalf of a Prime Brokerage Account, Broker
shall open an account for such Prime Brokerage Account in its range of
accounts and shall transfer or deliver the trade to such account at the
risk and expense of Broker to the same extent as for any account introduced
by Broker pursuant to the Agreement. Broker understands and agrees that
all Prime Brokerage Accounts shall be conducted in accordance with the
requirements of the No-Action Letter and any relevant agreement between
Broker and a Prime Brokerage Customer, or between Pershing and relevant
Prime Broker. Broker further agrees to supply Pershing with such
documents, papers and things, which from time to time are reasonably
required by Pershing to carry out the intention of this Paragraph. Broker
agrees that it shall know its customer, obtain appropriate documentation,
including new account form, conduct its own credit check and determine the
availability of shares for any short sales. Broker shall maintain
facilities to clear any disaffirmed trades.
14.0 OTHER OBLIGATIONS AND RESPONSIBILITIES OF PERSHING
14.1 Use of Third Party Services. Pershing may, at its reasonable
option, and consistent with common industry practice, retain one or more
independent date processing or other service bureaus to perform functions
(including but not necessarily limited to pricing services or proxy mailing
services) superfluous assigned to Pershing under this Agreement. If any
such service bureau fails to perform an assigned function accurately, in
accordance with specifications, or within the customary time periods,
Pershing shall cause the service bureau to correct any error in its next
regularly scheduled processing operation and to deliver any overdue work as
soon as reasonably practicable. Except as stated in this subparagraph,
Pershing shall not be responsible for any losses, damages, liability, or
expenses claimed by Broker or its customers arising from any such failure
beyond the amount of such losses, damages or expense which Pershing is able
to recover pursuant to the terms of its agreement with such service bureau.
14.2 Backup Withholding. Broker hereby agrees to take necessary
measures to comply with the backup withholding requirements of Section 3406
and the nonresident alien withholding requirements of Section 1441 of the
Internal Revenue Code of 1986, as amended, with respect to its customer
accounts. Broker agrees to furnish to Pershing in writing or by electronic
transmission any tax information in its possession relating to each
customer account transferred to Pershing and to each future customer
(including the customer's taxpayer identification number and any
certifications provided by the customer on IRS Forms W-9, W-8, or 1001 or
any authorized substitute) and agrees that Pershing may rely on such
information. Pershing agrees to notify Broker of any account not in
compliance with such back-up withholding requirements. Broker hereby
authorizes Pershing to employ any procedures permitted under applicable law
or regulation to achieve compliance with withholding obligations under the
federal income tax law, including procedures pertaining to backup
withholding on orders to purchase or sell securities which are received
from customers by telephone or electronic transmission.
15.0 SERVICES FOR WHICH PERSHING IS NOT RESPONSIBLE
Unless otherwise expressly agreed in writing, Pershing shall not
provide nor be responsible for providing any of the following services:
15.1 Accounting, bookkeeping, record-keeping, cashiering, or other
services involving commodity transactions, or any other transactions not
involving securities; or any matter not contemplated by the Agreement.
15.2 Preparation of Broker's payroll records, financial statements, or
any analysis thereof;
15.3 Preparation or issuance of checks in payment of Broker's expenses;
other than expenses incurred by Pershing on behalf of Broker pursuant to
this Agreement;
15.4 Payment of commissions to Broker's sales personnel.
16.0 LIABILITY OF PERSHING
16.1 Pershing Indemnification. In addition to any other obligations it
may possess under other provisions of this Agreement, Pershing shall
indemnify, defend, and hold harmless Broker from and against all claims,
demands, proceedings, suits, actions, liabilities, expenses, attorney's
fees, and costs in connection therewith arising out of any negligent,
dishonest, fraudulent, or criminal act or omission on the part of any of
its officers, directors, or employees with respect to the services provided
by Pershing under this Agreement including fees and costs incurred in
enforcing its right to indemnification. Notwithstanding the foregoing,
Pershing shall have no liability to any of Broker's customers for any loss
suffered by any customer. Pershing's liability will be only to Broker and
then only to the extent expressly set forth in this Agreement.
16.2 Defense of Third Party Claims. If, within 10 days after receiving
written notice of any claim, demand, suit, proceeding, or action with
respect to which Broker may have any colorable claims to indemnification
under this Agreement, Pershing shall fail to institute the defense of
Broker in connection with such claim, demand, suit, proceeding, or action,
or if thereafter Pershing shall fail diligently to pursue such defense,
Broker shall have the right to defend such action or settle such action.
The reasonable costs and expenses, including attorney's fees, associated
with such defense or settlement shall be borne by Pershing. The exercise
of the right to participate in or assume the responsibility for any such
defense shall not limit in any way Broker's right to indemnification under
this Paragraph.
16.3 Damages. Neither Pershing nor Broker shall be liable for punitive
damages which the other party may incur or experience, whether such damages
are incurred or experienced as a result of entering into, performing or
relying on this Agreement or otherwise, even if such party has been advised
of the possibility of such damages.
16.4 Pershing Right to Compete. Nothing in this Agreement shall be
deemed to restrict in any way the right of Pershing or any affiliate of
Pershing to compete with Broker in any or all aspects of Broker's business.
17.0 LIABILITY OF BROKER
17.1 Broker Indemnification. In addition to any other obligations it
may possess under other provisions of this Agreement, Broker shall
indemnify, defend, and hold harmless Pershing, and any controlling person
of Pershing, from and against all claims, demands, proceedings, suits, and
actions and all liabilities, expenses, attorney's fees (including fees and
costs incurred in enforcing it's right to indemnification), and costs in
connection therewith arising out of one or more of Broker's or any of its
employee's negligent, dishonest, fraudulent or criminal act or omission or
any of the following:
17.1.1 Failure to Make Payment or Deliver Securities. Failure of Broker
or a customer of Broker to make any payment or deliver any securities when
due. A check received by Pershing from a customer shall not constitute
payment until it has been paid and the proceeds are actually received and
finally credited to Pershing (without any subsequent chargeback) by its
bank.
17.1.2 Margin Calls. Failure of a customer to meet any initial margin
call or any maintenance call, except that Pershing shall be responsible for
the portion of any such loss or damage that Broker establishes was directly
attributable to Pershing's failure to give notification to the Broker as
required in paragraph 7.2 of this Agreement.
17.1.3 Broker's Failure to Perform. Failure of Broker to perform any
duty, obligation, or responsibility with respect to customer accounts as
set forth in this Agreement. Broker's indemnification obligation under
this subparagraph shall not be affected by the participation of Pershing or
any person controlling it or controlled by it within the meaning of the
Securities Exchange Act of 1934, as amended, in any transaction giving rise
to such an obligation, unless such participation constitutes recklessness,
fraud, or criminal conduct.
17.1.4 Improper Conduct by Agents. Any negligent, dishonest, fraudulent,
or criminal act or omission on the part of any of Broker's officers,
directors, employees or agents.
17.1.5 Failure of a Customer to Perform Obligations. Any failure by any
of Broker's customers to perform any commitment or obligation with respect
to a transaction carried by Pershing under this Agreement, whether or not
such failure was under the control of Broker.
17.1.6 Customer Claims and Disputes. Any claim or dispute between Broker
and a customer with respect to services provided under this Agreement,
including but not limited to any claim or dispute concerning the validity
of a customer order in the form the order was transmitted to Pershing by
Broker and any claim arising in connection with Pershing's guarantee of any
signature of any customer of Broker.
17.1.7 Warranties. Any adverse claim with respect to any security
delivered to or cleared by Pershing, including a claim of a defect in title
with respect to securities that are alleged to have been forged,
counterfeited, raised or otherwise altered, or if they are alleged to have
been lost or stolen. The parties agree that Pershing shall be deemed to be
an intermediary between Broker and customer and shall be deemed to make no
warranties other than as provided in Section 8-306(3) of the Uniform
Commercial Code.
17.1.8 Default of Third Party Broker. Any default by a third party broker
with whom the Broker deals on a principal or agency basis in a transaction
either not executed by Pershing or not cleared by Pershing even if
permitted by Pershing as provided herein.
17.1.9 Check Signing. Any negligence, fraud, malfeasance, or error of any
employee of Broker with respect to the use of the checksigning authority
granted under paragraph 9.1.8 of this Agreement.
17.1.10 Prior Self-Clearing Arrangements. Any guarantee, indemnification,
or hold harmless agreement in connection with Broker's business or
customers that Pershing may provide to the National Securities Clearing
Corporation, the Depository Trust Company, or any other clearing,
depository, or self-regulatory organization with respect to transactions
self-cleared by Broker prior to transfer of such functions to Pershing.
17.1.11 Breach of Warranty by Broker. Any breach by Broker of any
representation or warranty made by it under this Agreement.
17.1.12 Deposit of Checks to Customer Accounts. Any failure to exercise
due diligence in reviewing checks received from customers to insure that
same are in proper form, or in the issuance of instructions to Pershing
regarding the accounts into which checks are to be deposited.
17.1.13 Assets Not Held in Brokerage Account. Any claim asserted against
Pershing alleging the inaccuracy of any information appearing on Broker's
customer brokerage account statements with respect to assets not held in
the brokerage account, regardless of whether such information was provided
by Broker, customer or a third-party.
17.2 Defense of Third Party Claims. If, within 10 days after receiving
written notice of any claim, demand, suit, proceeding, or action with
respect to which Pershing may have any colorable claim to indemnification
under ths Agreement, Broker shall fail to institute the defense of Pershing
in connection with such claim, demand, suit, proceeding, or action, or if
thereafter Broker shall fail diligently to pursue such defense, Pershing
shall have the right to defend such action or settle such action. The
reasonable costs and expenses, including attorney's fees, associated with
such a defense or settlement shall be borne by Broker. The exercise of the
right to participate in or assume the responsibility for any such defense
shall not limit in any way Pershing's rights to indemnification under this
Paragraph.
18.0 FEES AND SETTLEMENTS FOR SECURITIES TRANSACTIONS
18.1 Commissions. Pershing shall charge each of Broker's customers the
commission, markup and any other charge or expense that Broker instructs it
to charge for each transaction. If instructions are not received with
respect to a transaction in the time period required by Pershing to
implement those instructions, Pershing shall charge the customer the
commission, markup, or other charge or expense prescribed in the basic
commission schedule delivered to Pershing by Broker. This basic schedule
may be amended from time to time by Broker by written instructions
delivered to Pershing. Pershing shall only be required to implement such
amendments to the basic schedule to the extent such amendments are within
the usual capabilities of Pershing's data processing and operations systems
and only within such reasonable time limitations as Pershing may deem
necessary to avoid disruption of its normal operating capabilities.
18.2 Responsibility for Pricing. Broker shall establish the
commissions, mark-ups and other charges or expenses to be charged to
customers in accordance with all applicable laws, rules, and regulations of
the SEC, NASD, NYSE, and other regulatory and self-regulatory agencies and
organization. Pershing shall exercise no control or influence over the
establishment of such commissions, mark-ups or other charges or expenses.
This provision shall not affect Pershing's right to charge Broker or
Broker's customers reasonable fees for the services provided under this
Agreement, including SEC transaction fees, fees for inactive accounts, and
other appropriate fees. Broker may instruct Pershing to charge such fees
to its customers but remains liable for the payment thereof. Broker shall
notify its customers of fees charged to them.
18.3 Settlement. Commissions charged Broker's customers shall be
collected by Pershing and credited to Broker, after deducting Pershing's
compensation referred to in Subparagraph 18.4 below and any other amount
owed to Pershing pursuant to this Agreement. Such commissions shall be
remitted to Broker upon request.
18.4 Fees for Clearing Services. As compensation for services provided
pursuant to this Agreement, Pershing shall deduct from the commissions,
mark-up, mark-down or fees charged Broker's customers the amounts set forth
in the fully disclosed pricing schedule attached hereto as Schedule A. The
compensation schedule may be changed by from time to time as may be agreed
by both parties. Broker shall promptly notify Pershing of any change in
the nature or mix of the business engaged in by Broker.
19.0 DEPOSIT ACCOUNT
19.1 Establishment of Deposit Account. To further assure Broker's
performance of its obligations under this Agreement, including but not
limited to its indemnification obligations under Paragraph 17, Broker
shall, on or before the execution of this Agreement, establish an Account
at Pershing to be designated as the Broker's Deposit Account (the "Deposit
Account"). The Deposit Account shall at all times contains cash,
securities, or a combination of both, having a market value of at least the
amount set forth in Schedule A. The securities placed in the Deposit
Account shall consist only of direct obligations issued by or guaranteed as
to principal and interest by the United States Government. In the event of
a substantial change in the nature and extent of Broker's business
operations, Pershing may require immediately that an additional amount be
deposited in the Deposit Account. If such a deposit is not made in the
amount specified whether or not Broker agrees that the amount is justified
under this subparagraph, Pershing shall have the right to terminate this
Agreement forthwith.
19.2 Pershing Right to Offset Commissions and Deposit Account. If (i)
Pershing shall have any claim against Broker or a customer of Broker which
has not been resolved within five business days after Pershing presents
such claim to Broker, or (ii) if Pershing shall suffer any loss or incur
any expense for which it is entitled to be indemnified pursuant to this
Agreement, and Broker shall fail to make such indemnification within five
business days after being requested to do so, Pershing may deduct the
amount of such claim, loss, or expense from the commissions to be credited
to Broker on the next monthly or other periodic settlement date pursuant to
Paragraph 18.3. If the amount of these commissions is less than the amount
of such claim, loss, or expense, Pershing may withdraw from the Deposit
Account cash or securities (or both) having a market value equal to the
amount of such deficiency. Broker shall be obligated to make an immediate
deposit in the Deposit Account of cash or securities sufficient to bring
the Account back to a value of at least the amount required by Schedule A.
Pershing agrees that in the event it is given notice by Broker, that Broker
intends to arbitrate the claim presented by Pershing, then Pershing agrees
not to reduce commission credits or make withdrawals from the deposit
Account until the matter is settled in arbitration in favor of Pershing.
19.3 Termination of Deposit Account. Upon the termination of this
Agreement, or as soon thereafter as practical, Pershing shall pay and
deliver to Broker the funds and securities in the Deposit Account, less any
amounts which it is entitled under the preceding paragraph; provided,
however, that Pershing may retain in the Deposit Account such amount for
such period as it deems appropriate for its protection from any claim or
proceeding of any type, then pending or threatened, until the final
determination of such claim or proceeding is made. If a threatened claim
or proceeding is not resolved or if a legal action or proceeding is not
instituted within a reasonable time after the termination of this
Agreement, any amount retained with respect to such claim, proceeding, or
action shall be paid or delivered to Broker.
20.0 COMMUNICATION WITH CUSTOMERS
20.1 Notice to Customers. Pershing shall, upon the opening of an
Account pursuant to paragraph 5 of this Agreement, mail to each customer a
copy of the Notice to Customers required by NYSE Rule 382(c).
20.2 Customer Inquiries and Complaints. Broker and Pershing each agree
to forward to the other any written complaint received from a customer
regarding a function the other has agreed to perform pursuant to this
Agreement.
20.3 Restriction on Advertising. Neither Pershing nor Broker shall
utilize the name of the other in any way without the other's prior written
consent nor shall either party employ the other's name in such a manner as
to create the impression that the relationship between them is anything
other than that of clearing broker and introducing broker. Broker shall
not hold itself out as an agent of Pershing or as a subsidiary or company
controlled or indirectly by or affiliated with Pershing.
21.0 TERMINATION OF AGREEMENT
This Agreement shall continue until terminated as hereinafter
provided:
21.1 Termination Upon 90-Day Notice. This Agreement may be terminated
by either party without cause upon ninety days prior written notice
delivered in person or by registered or certified mail. If either party
terminates the Agreement pursuant to this subparagraph, Pershing shall have
the right to impose reasonable limitations upon Broker's activities during
the period between the giving of notice and the transfer of Broker's
accounts.
21.2 Change in Compensation Schedule. If, pursuant to paragraph 18.4 of
this Agreement, Pershing shall make any unilateral change in the
compensation schedule described in that subparagraph, and that change
causes the increase in Pershing's compensation to exceed 10 percent during
any calendar year, Broker may, upon 15 days prior written notice to
Pershing, terminate this Agreement on the effective date of such unilateral
change.
21.3 Default. If either party defaults in the performance of its
obligations under this Agreement, or otherwise violates the provisions of
this Agreement, the nondefaulting party may terminate this Agreement by
delivering written notice to the defaulting party (i) specifying the nature
of the default and (ii) notifying the defaulting party that unless the
default is cured within a period of ten days from receipt of the notice,
this Agreement will be terminated without further proceedings by the
nondefaulting party.
21.4 Disability. This Agreement may be terminated by Pershing or Broker
immediately in the event that the other party is enjoined, disabled,
suspended, prohibited or otherwise becomes unable to engage in the
securities business or any part of it by operation of law or as a result of
any administrative or judicial proceeding or action by the SEC, any state
securities law administrator, or any regulatory or self-regulatory
organization having jurisdiction over such party.
21.5 Conversion of Accounts. In the event that this Agreement is
terminated for any reason, Broker shall arrange for the conversion of
Broker's and its customer accounts to another clearing broker or to Broker
if it becomes self-clearing. Broker shall give Pershing notice (the
"Conversion Notice") of (i) the name of the broker that will assume
responsibility for clearing services for Customers and Broker, (ii) the
date on which such broker will commence providing such services, (iii)
Broker's undertaking, in form and substance satisfactory to Pershing, that
Broker's agreement with such broker provides that such broker will accept
on conversion all Broker and customers accounts then maintained by
Pershing, and (iv) the name of an individual or individuals within new
clearing broker's organization whom Pershing may contact to coordinate the
conversion. Pershing agrees to make such contacts and to cooperate and
take whatever action is necessary to transfer accounts and account balances
to Broker's new clearing Broker. The Conversion Notice shall accompany
Broker's notice of termination given pursuant to this paragraph. If Broker
fails to give Conversion Notice to Pershing, Pershing may give Broker's
customers such notice as Pershing deems appropriate of the termination of
this Agreement and may make such arrangements as Pershing deems appropriate
for transfer or delivery of customer and Broker accounts. The expense of
providing such notice and making such arrangements shall be charged to
Broker.
21.6 Survival. Termination of this Agreement in any manner shall not
release Broker or Pershing from any liability or responsibility to the
other with respect to transactions effected prior to the effective date of
such termination, whether or not claims relating to such transactions shall
have been made before or after such termination.
21.7 Termination Fee. If Broker terminates this Agreement pursuant to
subparagraph 21.1 or 21.2 above, or Pershing or successor terminates this
Agreement pursuant to subparagraph 21.3 or 21.4 above within the period
from the date specified in paragraph 2.0 to the date specified in Schedule
A, Broker shall pay to Pershing a termination fee equal to the amounts
shown on the table in Schedule A, for the first three (3) years or in the
fourth or later years reasonable expenses incurred by Pershing (A) in
establishing systems, procedures, and capacity for servicing Broker and its
customers, and (B) in discontinuing the clearing arrangement, not to exceed
$10,000. Broker shall pay Pershing the amount of such fee within ten days
after receipt of Pershing's statement setting forth in reasonable detail
the expenses incurred by Pershing.
22.0 CONFIDENTIAL NATURE OF DOCUMENTS AND OTHER INFORMATION
Neither Pershing nor Broker shall disclose the terms of this
Agreement or information obtained as a result thereof to any outside party
except to regulatory or self-regulatory organizations with appropriate
jurisdiction, pursuant to judicial process or to authorized employees of
the other on a need-to-know basis. Any other publication or disclosure of
the terms of this Agreement may be made only with the prior written consent
of the other party. Broker and Pershing shall each maintain the
confidentiality of documents and information received from the other party
pursuant to this Agreement. Pershing and Broker each agree that any
information regarding the identity of the other's customers shall be kept
confidential and not used by the other except as required in connection
with obligations under this agreement.
Broker acknowledges that the services Pershing provides hereunder
involve Broker access to proprietary technology, trading and other systems,
and that techniques, algorithms and processes contained in such systems
constitute trade secrets and shall be safeguarded by Broker, and the Broker
shall exercise reasonable care to protect Pershing's interest in such trade
secrets. Broker agrees to make the proprietary nature of such systems
known to those of its consultants, staff, agents or clients who may
reasonably be expected to come into contact with such systems. Broker
agrees that any breach of this confidentiality provision may result in its
being liable for damages as provided by law.
23.0 ACTION AGAINST CUSTOMERS BY PERSHING
In the event that Broker is unable or unwilling to prosecute a
claim, Pershing may, in its sole discretion and at its own expense, upon
written notice to Broker institute and prosecute in its name any action or
proceeding against any of Broker's customers in relation to any controversy
or claim arising out of Pershing's transactions with Broker or with
Broker's customers. Nothing contained in this Agreement shall be deemed
either (a) to require Pershing to institute or prosecute such an action or
proceeding; or (b) to impair or prejudice its right to do so, should it so
elect, nor shall the institution or prosecution of any such action or
proceeding relieve Broker of any liability or responsibility which Broker
would otherwise have had under this Agreement. Broker shall assign to
Pershing its rights against its customers to the extent requested by
Pershing and necessary to effectuate the provisions of this Paragraph
except as provided in paragraph 19.2 of this Agreement, in return for
Broker assigning its right against customers. Pershing agrees to waive any
right to indemnification from Broker in connection with the controversy or
claim and agrees to indemnify Broker for any and all expenses and damages
it may incur in connection with a controversy or claim.
24.0 NOTICES
Any notice of request required or permitted to be given under this
Agreement shall be sufficient if it is in writing and sent by hand or
certified mail, return receipt requested, to the parties at the following
address:
Broker: B.C. Ziegler and Company
215 North Main Street
West Bend, WI 53095
Attn: Dennis A. Wallestad
cc: S.C. O'Meara
Pershing: Pershing Division
Donaldson, Lufkin & Jenrette Securities Corporation
1515 W. 22nd Street, Suite 1000
Oak Brook, IL 60523
Attn: Barry R. Rundle
cc: Legal and Compliance Department
25.0 ARBITRATION
25.1 Arbitration Requirement. Any dispute between Broker and Pershing
that cannot be settled shall be taken to arbitration as set forth in
paragraph 25.3 below.
25.2 ARBITRATION DISCLOSURE
ARBITRATION IS FINAL AND BINDING ON THE PARTIES.
THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM
COURT PROCEEDINGS.
THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
25.3 ARBITRATION AGREEMENT
ANY CONTROVERSY BETWEEN US ARISING OUT OF YOUR BUSINESS OR THIS AGREEMENT
SHALL BE SUBMITTED TO ARBITRATION CONDUCTED BEFORE THE NEW YORK STOCK
EXCHANGE, INC., OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.,
AND IN ACCORDANCE WITH THE RULES OBTAINING OF THE SELECTED ORGANIZATION AND
SHALL BE CONDUCTED AS A BROKER TO BROKER OR MEMBER VS MEMBER DISPUTE.
ARBITRATION MUST BE COMMENCED BY SERVICE UPON THE OTHER PARTY OF A WRITTEN
DEMAND FOR ARBITRATION OR A WRITTEN NOTICE OF INTENTION TO ARBITRATE
THEREIN ELECTING THE ARBITRATION TRIBUNAL.
NO PERSONAL SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION AND
WHO IS A MEMBER OF A PUTATIVE CLASS AND WHO HAS NOT OPTED OUT OF THE CLASS
WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL:
(i) THE CLASS CERTIFICATION IS DENIED; (ii) THE CLASS IS DECERTIFIED; OR
(iii) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE COURT, SUCH
FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A
WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED
HEREIN.
26.0 GENERAL PROVISIONS
26.1 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the respective successors and assigns of
Broker and Pershing. No assignment of this Agreement by Broker shall be
effective unless Pershing's written consent shall be first obtained.
26.2 Severability. If any provision or condition of this Agreement
shall be held to be invalid or unenforceable, the validity or
enforceability of the remaining provisions and conditions shall not be
affected thereby.
26.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute a single
agreement.
26.4 Entire Agreement/Amendments. This Agreement and in the letter
attached as Letter Of Understanding represents the entire agreement between
the parties with respect to the subject matter contained herein. This
Agreement may not be changed orally, but only by an agreement in writing
signed by the parties.
26.5 Captions. Captions herein are for convenience only and are not of
substantive effect.
26.6 Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York, without
giving effect to the conflicts of laws principles thereof.
26.7 Citations. Any reference to the rules or regulations of the SEC,
the NYSE or any other regulatory or self-regulatory organization are
current citations. Any changes in the citations (whether or not there are
any changes in the text of such rules or regulations) shall be
automatically incorporated herein.
26.8 Construction of Agreement. Neither this Agreement nor the
performance of the services hereunder shall be considered to create a joint
venture or partnership between Pershing and Broker or between Broker and
other brokers for whom Pershing may perform the same or similar service.
26.9 Third Parties. This Agreement is between the parties hereto and is
not intended to confer any benefits on third parties, including, but not
limited to, customers of Broker.
26.10 Non-Exclusivity of Remedies. The enumeration herein of specific
remedies shall not be exclusive of any other remedies. Any delay or
failure by a party to this Agreement to exercise any right, power, remedy
or privilege herein contained, or now or hereafter existing under any
applicable statute or law, shall not be construed to be a waiver of such
right, power, remedy, or privilege. No single, partial, or other exercise
of any such right, power, remedy, or privilege shall preclude the further
exercise thereof or the exercise of any other right, power, remedy or
privilege.
26.11 SEC Release 34-31511 Provision. Pursuant to the interpretation of
Introducing Accounts on a Fully Disclosed Basis contained in SEC Release
34-31511, it is hereby agreed between Broker and Pershing that, insofar as
the "financial responsibility rules" of the SEC and Securities Investor
Protection Act only are applicable, the accounts Broker introduces to
Pershing on a fully disclosed basis shall be considered to be accounts of
Pershing and not Broker's accounts. Nothing in this paragraph will
otherwise change or affect the provisions of this Agreement which provide
that the customer account remains Broker's customer account for all other
purposes, including but not limited to, supervision, suitability and
indemnification.
IN WITNESS WHEREOF the parties have hereto affixed their hands and
seals by their duly authorized officers on the day and date first above
written.
This Agreement contains a pre-dispute arbitration clause in
paragraph 25 on pages 16 and 17. Broker acknowledges receiving a copy of
this Agreement.
BROKER:
By: /s/ Dennis Wallestad
Title: CFO
PERSHING DIVISION
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: /s/ Barry R. Rundle
Barry Rundle
Title: Senior Vice President
<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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,394,000
<RECEIVABLES> 5,109,000
<SECURITIES-RESALE> 4,421,000
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 59,490,000
<PP&E> 8,410,000
<TOTAL-ASSETS> 111,447,000
<SHORT-TERM> 6,835,000
<PAYABLES> 13,037,000
<REPOS-SOLD> 28,517,000
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 4,365,000
<LONG-TERM> 4,102,000
0
0
<COMMON> 3,544,000
<OTHER-SE> 43,562,000
<TOTAL-LIABILITY-AND-EQUITY> 111,447,000
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 1,773,000
<COMMISSIONS> 6,133,000
<INVESTMENT-BANKING-REVENUES> 2,521,000
<FEE-REVENUE> 7,278,000
<INTEREST-EXPENSE> 1,196,000
<COMPENSATION> 11,391,000
<INCOME-PRETAX> (2,524,000)
<INCOME-PRE-EXTRAORDINARY> (2,524,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,517,000)
<EPS-BASIC> (.63)
<EPS-DILUTED> (.63)
</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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,830,000
<RECEIVABLES> 4,070,000
<SECURITIES-RESALE> 4,573,000
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 57,079,000
<PP&E> 8,861,000
<TOTAL-ASSETS> 122,207,000
<SHORT-TERM> 20,158,000
<PAYABLES> 7,318,000
<REPOS-SOLD> 33,174,000
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 4,610,000
<LONG-TERM> 4,927,000
0
0
<COMMON> 3,544,000
<OTHER-SE> 45,123,000
<TOTAL-LIABILITY-AND-EQUITY> 122,207,000
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 1,559,000
<COMMISSIONS> 6,085,000
<INVESTMENT-BANKING-REVENUES> 6,656,000
<FEE-REVENUE> 6,479,000
<INTEREST-EXPENSE> 1,130,000
<COMPENSATION> 10,980,000
<INCOME-PRETAX> (538,000)
<INCOME-PRE-EXTRAORDINARY> (538,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (407,000)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
