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 June 30, 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 July 1, 2000 was 2,424,183 shares.
<PAGE>
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Dollars in thousands) (Unaudited)
ASSETS
<S> <C> <C>
Cash $ 3,149 $ 5,378
Short-term investments 3,339 11,865
Total cash and cash equivalents 6,488 17,243
Securities inventory 23,465 82,791
Securities purchased under agreements to resell 4,382 4,365
Accounts receivable 5,090 6,069
Accrued income taxes receivable 3,816 2,454
Investment in and receivables from affiliates 692 1,538
Notes receivable 23,958 4,548
Other investments 26,236 26,931
Land, buildings and equipment, at cost,
net of reserves for depreciation of
$13,227 and $12,100, respectively 7,776 8,609
Deferred income tax benefit 2,904 3,158
Goodwill 9,776 10,141
Other assets 2,752 2,775
Total assets $117,335 $170,622
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 4,855 $ 6,160
Securities sold under agreements to repurchase 27,981 28,959
Payable to broker-dealers and clearing
organizations 7,090 60,742
Accounts payable 2,086 2,288
Securities sold, not yet purchased 4,380 4,364
Notes payable 12,800 -
Bonds payable 4,035 4,223
Other liabilities and deferred items 7,617 14,590
Total liabilities 70,844 121,326
Commitments
Stockholders' equity
Common stock, $1 par, authorized
7,500 shares, issued 3,544 3,544 3,544
Additional paid-in capital 6,245 6,221
Retained earnings 54,451 57,110
Treasury stock, at cost, 1,120,
and 1,113 shares, respectively (17,674) (17,469)
Unearned compensation (75) (110)
Total stockholders' equity 46,491 49,296
Total liabilities and stockholders' equity $117,335 $170,622
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
2000 1999
(Dollars in thousands except per share data)
Revenues:
<S> <C> <C>
Investment banking income $ 5,583 $ 7,707
Commission income 5,169 6,196
Investment management and advisory fees 7,564 6,641
Interest and dividends 1,468 1,775
Other 598 1,232
Total revenues 20,382 23,551
Expenses:
Employee compensation and benefits 10,149 11,286
Investment manager and other fees 3,070 2,621
Commissions and clearing fees 1,101 1,738
Communications 835 992
Occupancy and equipment 2,358 2,299
Promotional 1,247 1,179
Professional and regulatory 742 559
Interest 927 948
Goodwill 182 235
Other operating expenses 548 814
Total expenses 21,159 22,671
Income (loss) from continuing operations
before income taxes (777) 880
Income (benefit)from income taxes (265) 369
Income (loss) from continuing operations (512) 511
Discontinued operations:
Income from operations of discontinued
environmental services subsidiary
(less applicable income taxes of $83) - 129
Net income (loss) $ (512) $ 640
Per share data:
Continuing operations $ (0.21) $ 0.21
Discontinued operations - 0.05
Basic and Diluted income (loss) per share $ (0.21) $ 0.26
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
2000 1999
(Dollars in thousands except per share data)
Revenues:
<S> <C> <C>
Investment banking income $ 8,104 $14,363
Commission income 11,302 12,281
Investment management and advisory fees 14,842 13,120
Interest and dividends 3,241 3,334
Other 2,746 1,815
Total revenues 40,235 44,913
Expenses:
Employee compensation and benefits 21,540 22,276
Investment manager and other fees 5,999 5,428
Commissions and clearing fees 2,449 3,318
Communications 1,683 1,851
Occupancy and equipment 4,740 4,528
Promotional 2,186 1,998
Professional and regulatory 1,308 1,031
Interest 2,123 2,078
Goodwill 365 470
Other operating expenses 1,143 1,593
Total expenses 43,536 44,571
Income (loss) from continuing operations
before income taxes (3,301) 342
Income (benefit) from income taxes (1,272) 238
Income (loss) from continuing operations (2,029) 104
Discontinued operations:
Income from operations of discontinued
environmental services subsidiary
(less applicable income taxes of $85) - 130
Net income (loss) $(2,029) $ 234
Per share data:
Continuing operations $(0.85) $ 0.04
Discontinued operations - 0.05
Basic and Diluted income (loss) per share $(0.85) $ 0.09
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
2000 1999
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(2,029) $ 234
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,611 1,601
Unrealized loss on securities inventory 125 235
Compensation expense related to restricted
stock grants 34 60
Deferred income taxes 254 (29)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 979 (677)
Accrued income tax receivable (1,363) (269)
Securities inventory, net 59,219 73,152
Securities purchased under agreements
to resell (49) 338
Other assets (229) 16
Increase (decrease) in:
Payable to customers and broker-dealers (53,652) (63,970)
Accounts payable (201) (443)
Securities sold under agreements to
repurchase (978) (1,244)
Other liabilities (6,934) (7,374)
Discontinued operations - noncash charges
and working capital changes - 246
Net cash provided by (used in) operating
activities (3,213) 1,876
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of land and equipment 702 74
Decrease in investment in affiliate 1,000 -
Payments received on notes receivable 257 794
Sales/paydowns on other investments 695 1,355
Payments for:
Capital expenditures (1,023) (949)
Increase in notes receivable (19,630) -
Net cash provided by (used in) investing
activities (17,999) 1,274
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from:
Issuance of short-term notes payable $11,607 $47,338
Exercise of employee stock options 331 105
Payments for:
Principal payments on short-term notes
payable (12,951) (49,099)
Repayment of bonds payable (188) (670)
Purchase of treasury stock (512) (366)
Cash dividends (630) (642)
Net borrowing (repayments) under credit
facilities 12,800 (1,513)
Net cash provided by (used in)
financing activities 10,457 (4,847)
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,755) (1,697)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,243 16,273
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,488 $14,576
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 1,926 $ 2,470
Income taxes paid (received) during the
period $ (163) $ 345
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
June 30, 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 six
months ended June 30, 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 issues. BCZ
purchases debt issues at a specified price. To manage the related credit and
market risk exposure, BCZ attempts to presell the debt issues to customers.
BCZ had outstanding commitments of $1,314 at June 30, 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 June 30, 2000, is as
follows:
BCZ PBS
Aggregate indebtedness $89,138 $205
Net capital $ 6,287 $669
Ratio of aggregate indebtedness
to net capital .82 to 1 .31 to 1
Required net capital $430 $100
Registered broker-dealers that carry customer accounts are subject to
Securities and Exchange Commission rule 15c3-3. BCZ maintained a separate
bank account for the exclusive benefit of customers. The amount maintained
in that account was determined by periodic computations required under that
rule, which allows the Company to maintain the computed amounts in cash or
other qualified securities. As of June 30, 2000 there was approximately
$1,040 in the customer reserve account. As of July 1, 2000, BCZ received
regulatory approval to discontinue its customer reserve account and related
calculations. BCZ clears all securities purchase and sale transactions
through a clearing agent on a fully disclosed basis and no longer carries
customer 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.
Note D - Investment in Ziegler Mortgage Securities, Inc. II
The Company has a 50% interest in Ziegler Mortgage Securities, Inc. II
(ZMSI II), an unconsolidated entity accounted for by the equity method.
Condensed income statement information is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
2000 1999
Revenues -
<S> <C> <C>
Interest $623 $670
Gain on sale/redemption of
mortgage certificates 8 91
Total revenues $631 $761
Expenses -
Interest 570 623
Amortization of bond issuance costs 14 102
Management fee 31 14
Other 16 22
Total expenses 631 761
Net income $ - $ -
For the Six Months Ended
June 30, June 30,
2000 1999
Revenues -
Interest $1,258 $1,409
Gain on sale/redemption of
mortgage certificates 14 124
Total revenues $1,272 $1,533
Expenses -
Interest 1,144 1,295
Amortization of bond issuance costs 28 147
Management fee 69 39
Other 31 52
Total expenses 1,272 1,533
Net income $ - $ -
</TABLE>
Note E - Securities Inventory
Securities inventory consisted of the following:
June 30, December 31,
2000 1999
Municipal bond issues $18,046 $71,651
Collateralized mortgage obligations 4,152 4,246
Corporate bond issues - 553
Institutional bond issues 802 2,418
Preferred stock 233 3,328
Other securities 232 595
$23,465 $82,791
Note F - Securities Sold, Not Yet Purchased
Marketable securities sold, not yet purchased, consist of trading
securities at market value as follows:
June 30, December 31,
2000 1999
U.S. Treasury Note $4,380 $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, inventory purchases,
and losses on securities transactions offset by fees earned, commissions,
inventory sales and profits on securities transactions. The amount payable
to the clearing agent of approximately $7,081 at June 30, 2000 relates
primarily to the financing of inventory and is collateralized by securities
held in inventory with a market value of approximately $19,342 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 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,
purchases of large blocks of securities, or to fund FHA loan activity. The
Company had $12,800 in short-term borrowings outstanding at June 30, 2000.
Such short-term borrowings are generally repaid within 30 days.
Note I - Stock-Based Compensation Plans
On April 18, 2000, the Board of Directors regranted options under the
1989 Employees' Stock Purchase Plan (the "1989 Plan"). A total of 108,060
options are available for exercise by employees under the 1989 Plan. The
options are exercisable through April 17, 2002, at a price of 85% of the
market value on the date of exercise. A total of 2,600 of the options have
been exercised through June 30, 2000 at an average price of $16.02 per share.
Note J - 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 following periods (shares in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, June 30,
2000 1999
<S> <C> <C>
Income (loss) from continuing operations $(512) $511
Basic
Weighted average shares outstanding 2,393 2,428
Basic earnings (loss) per share $(.21) $.21
Diluted
Weighted average shares outstanding-
Basic 2,393 2,428
Effect of dilutive securities:
Restricted stock - 23
Employee stock purchase plan - -
Stock options - 6
Weighted average shares outstanding-
Diluted 2,393 2,457
Diluted earnings (loss) per share $(.21) $.21
</TABLE>
The diluted share base for the three month period ended June 30, 2000
excludes incremental shares related to restricted stock, the employee stock
purchase plan, and options totaling 34 shares. These shares are excluded due
to their antidilutive effect as a result of the Company's loss from
continuing operations during the three month period ended June 30, 2000.
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
2000 1999
<S> <C> <C>
Income (loss) from continuing operations $(2,029) $103
Basic
Weighted average shares outstanding 2,397 2,430
Basic earnings (loss) per share $(.85) $.04
Diluted
Weighted average shares outstanding-
Basic 2,397 2,430
Effect of dilutive securities:
Restricted stock - 21
Employee stock purchase plan - -
Stock options - 8
Weighted average shares outstanding-
Diluted 2,397 2,459
Diluted earnings (loss) per share $(.85) $.04
</TABLE>
The diluted share base for the six month period ended June 30, 2000
excludes incremental shares related to restricted stock, the employee stock
purchase plan, and options totaling 28 shares. These shares are excluded due
to their antidilutive effect as a result of the Company's loss from
continuing operations during the six month period ended June 30, 2000.
Note K - Operating Segments
The Company is organized and provides financial services through three
operating segments. These operating segments are Capital Markets (formerly
called 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 also included and 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.
The Capital Markets Group 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 Capital Markets Group
when sold through institutional distribution channels.
The Investment Services Group consists of three operating components.
The asset management operation manages investor assets in separate accounts
and mutual funds. The wealth management operation provides financial
products and retail brokerage services primarily to retail investors. The
portfolio consulting (formerly called managed money) operation provides
services as an intermediary in matching investors with appropriate money
managers and provides account and performance reporting services.
Other principally consists of the Company's corporate investment and
debt management activities and the unallocated corporate administrative
expenses.
Operating segment financial information is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
<S> <C> <C>
2000 1999
Revenues
Capital Markets Group $ 4,899 $ 8,024
Investment Services Group 14,134 12,718
Other 1,349 1,126
20,382 21,868
Ziegler Thrift Trading, Inc. - 1,683
$20,382 $23,551
Net Income (Loss) Before Taxes:
Capital Markets Group $ 151 $ 779
Investment Services Group (746) (920)
Other (182) 653
(777) 512
Ziegler Thrift Trading, Inc. - 368
$ (777) $ 880
Six Months Ended June 30,
2000 1999
Revenues
Capital Markets Group $ 7,520 $14,537
Investment Services Group 28,328 25,072
Other 4,387 2,179
40,235 41,788
Ziegler Thrift Trading, Inc. - 3,125
$40,235 $44,913
Net Income (Loss) Before Taxes:
Capital Markets Group $(3,358) $ 559
Investment Services Group (1,188) (1,506)
Other 1,245 661
(3,301) (286)
Ziegler Thrift Trading, Inc. - 628
$(3,301) $ 342
</TABLE>
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 DISCSSION 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
service activities. These financial service activities are conducted through
three operating segments. These operating segments are the Capital Markets
Group, Investment Services Group and Other.
Capital Markets Group 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 financial advisory services. The Investment Services Group consists of
three primary operating components: asset management, wealth management, and
portfolio consulting. 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 portfolio consulting 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"). Certain corporate administrative costs are
allocated to the Capital Markets and Investment Services Groups 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 has increased. Consequently, the issuance of bonds to refund bonds
already outstanding became uneconomical for many issuers. This circumstance
caused fewer underwritings in the first six months of 2000 than in 1999.
Despite the first quarter rise in interest rates, the favorable returns
in the overall equity markets had 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 mutual funds, which in turn
reduced the ability of these mutual funds to purchase new issue municipal
securities. Subsequent corrections in the equity markets, especially in
technology stocks, has caused investors to begin to reconsider their
investment alternatives. Consequently, the outflow of funds from tax-exempt
mutual funds has slowed.
The Company has increased assets under management in the equity mutual
funds that it manages. The increase has been primarily in the PSE Tech 100
Index Portfolio. The increases were strongest in the first quarter of the
year. The increase in assets slowed in the second quarter as the result of
the factors noted above. These increases more than offset any decreases in
assets under management associated with decreases in market value.
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
June 30, 2000 Compared to June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
Increase/
For the three months ended June 30, 2000 1999 (Decrease)
<S> <C> <C> <C>
Revenues
Capital Markets Group $ 4,899 $ 8,024 $(3,125)
Investment Services Group
Asset Management 2,211 1,563 648
Wealth Management 6,094 5,788 306
Portfolio Consulting 5,829 5,367 462
Total 14,134 12,718 1,416
Other 1,349 1,126 223
20,382 21,868 (1,486)
ZTT - 1,683 (1,683)
$20,382 $23,551 $(3,169)
Net Income (Loss) Before Taxes
Capital Markets Group $ 151 $ 779 $ (628)
Investment Services Group
Asset Management 193 (5) 198
Wealth Management (247) (798) 551
Portfolio Consulting (692) (117) (575)
Total (746) (920) 174
Other Activities (182) 653 (835)
(777) 512 (1,289)
ZTT - 368 (368)
$ (777) $ 880 $(1,657)
</TABLE>
Capital Markets Group
Total revenues for this segment decreased $3,125 from $8,024 in 1999 to
$4,899 in 2000. A significantly reduced level of underwriting activity due
to the economic circumstances discussed previously is the primary reason for
the decrease. A total of six managed municipal underwriting transactions
totaling $160 million were completed in 2000 compared to 14 managed
transactions totaling $352 million for the same period in 1999. Taxable
church and school underwriting activity also decreased. A total of five
transactions for $9 million were completed in 2000 compared to seven
transactions for $26 million in 1999. The resulting revenues from
underwriting decreased $2,103 between the quarters. Other income decreased
$390 due to decreased mortgage origination activity and commissions decreased
$223 primarily due to the closing of the Company's institutional equity sales
and research department in April, 2000. The balance of the decrease was
primarily due to lower interest revenue as the result of lower levels of
inventory.
Total expenses of this segment decreased $2,497 from $7,246 in 1999 to
$4,749 in 2000. A decrease of $1,943 in compensation expense between
quarters is primarily related to decreased incentive compensation as the
result of decreased underwriting volumes. The closing of the institutional
equity sales and research department decreased expenses other than
compensation by $290. The balance of the decreases are spread among several
categories of expense.
The lower underwriting activity is the primary reason for the resulting
earnings before taxes of $151 for this segment in 2000 compared to $779 in
1999. The preferred stock trading and institutional equity sales activities
in this segment were discontinued in 2000. These activities incurred losses
of $12 in 2000 and $304, respectively, in 1999. These activities were not
considered to be part of the Company's core business strategy.
Investment Services Group
This segment is composed of three operating components whose purpose is
to serve investors. These operating segments are asset management, wealth
management, and portfolio consulting. The combined results for this segment
resulted in revenues and net losses of $14,134 and $746 in 2000 compared to
$12,718 and $920 in 1999, respectively. Improvements in the asset and wealth
management operations were offset by increased losses in the portfolio
consulting operation.
Asset Management-
Total revenues of this operating component were $2,211 in 2000 compared
to $1,563 in 1999, an increase of $648 or 41%. Investment management fees
increased $590 as the result of increases in assets under management. Assets
under management were $2.1 billion dollars at June 30, 2000 compared to $1.6
billion at June 30, 1999. Increases were primarily in the equity mutual fund
portfolios, specifically the equity index funds. The balance of the increase
was primarily due to increased distributor commissions on mutual funds.
Total expenses of the asset management operations increased $450 to
$2,018 in 2000 from $1,568 in 1999. The increase is primarily related to
increased employee compensation and benefits of $395. These compensation
increases are primarily related to commissions paid for distributor sales of
mutual funds and the addition of sales personnel. Increases in other
categories of expense were not individually significant.
The net income before taxes of the asset management operation was $193
in 2000 compared to a loss of $5 in 1999 an increase of $198. 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 $6,094 in 2000 compared
to $5,788 in 1999, an increase of $306. Commission income increased $256
primarily as the result of full service retail brokerage sales activities
related to mutual funds and equity sales. Sales credits on the Company's
underwritten products decreased $288 as the result of the decrease in
underwriting activity. The decrease in underwriting income was offset by
profits on secondary market transactions which occurred as the result of the
lack of underwritten product.
Total expenses decreased $246 to $6,341 in 2000 from $6,587 in 1999.
Compensation and benefits increased $260 due to increases in commissions paid
to brokers on higher sales volumes. The increase was more than offset by a
decrease in brokerage commissions of $460. The decreased brokerage
commissions are due to a reduction in independent contractor sales
activities. The total loss, which includes administrative cost allocations,
was $247 in 2000 compared to $798 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 $860 in 2000 compared to $307 in 1999.
Portfolio Consulting-
Total revenues of this operating component were $5,829 in 2000 compared
to $5,367 in 1999 an increase of $462. Increases in advisory fees and
commissions were $231 and $322, respectively, and were partially offset by
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 June 30, 2000 compared to $4.1 billion of assets at June 30,
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 disproportionately small increase in revenues relative to assets.
Total expenses of the portfolio consulting operation were $6,521 in 2000
compared to $5,484 in 1999, an increase of $1,037. Investment manager and
related account fees increased $448. Commissions and clearing fees increased
$268 as the result of outside broker commissions paid and clearing fees
incurred on new account transaction volume. Employee compensation and
benefits increased $176 as the result of increased staffing requirements and
costs associated with staff turnover. The resulting net loss in 2000 was
$692 compared to $117 in 1999. The competition for services in the industry
has created additional pressure on margins. This operating component is
focusing on methods to contain costs and increase operating efficiencies.
Other
Total revenues for this segment were $1,349 in 2000 compared to $1,126
in 1999, an increase of $223. The only significant source of revenues is
interest income related to investments, primarily collateralized mortgage
obligations ("CMOs") held by the Parent. Interest income on the CMOs
approximated $600 dollars in both quarters. The balance of the revenue is
primarily interest income from other Company investments and notes.
Total expenses after allocations to the other operating segments were
$1,530 in 2000 compared to $471 in 1999. Interest expense was incurred of
$456 in 2000 and $408 in 1999 to finance the CMOs noted above. The balance
of the differences is related to expenses not allocated to the operating
components. In 2000, the increased expenses are primarily related to
additional expenses associated with management and business transition
activities. Payments were made for the purpose of attracting qualified
managers to join the Company, as severance to other managers, and for special
projects performed by consultants in the strategic planning and evaluation of
the Company. Given the specialized nature of the expenses, they were not
allocated to the operating components of the Company.
Total net loss before taxes was $182 in 2000 compared to net income of
$653 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 components.
Results of Operations - Six months ended
June 30, 2000 Compared to June 30, 1999
(Dollars in thousands)
The following table summarizes the changes in revenue and net income
(loss) before taxes of the Company:
<TABLE>
<CAPTION>
Increase/
For the six months ended June 30, 2000 1999 (Decrease)
<S> <C> <C> <C>
Revenues
Capital Markets Group $ 7,520 $14,537 $(7,017)
Investment Services Group
Asset Management 4,293 3,139 1,154
Wealth Management 12,484 11,230 1,254
Portfolio Consulting 11,551 10,703 848
Total 28,328 25,072 3,256
Other Activities 4,387 2,179 2,208
40,235 41,788 (1,553)
ZTT - 3,125 (3,125)
$40,235 $44,913 $(4,678)
Net Income (Loss) Before Taxes
Capital Markets Group $(3,358) $ 559 $(3,917)
Investment Services Group
Asset Management 537 195 342
Wealth Management (482) (1,361) 879
Portfolio Consulting (1,243) (340) (903)
Total (1,188) (1,506) 318
Other Activities 1,245 661 584
(3,301) (286) (3,015)
ZTT - 628 (628)
$(3,301) $ 342 $(3,643)
</TABLE>
Capital Markets Group
Total revenues for this segment decreased $7,017 from $14,537 in 1999 to
$7,520 in 2000. A significantly reduced level of underwriting activity due
to the economic circumstances as discussed previously is the primary reason
for the decrease. A total of eight managed municipal underwriting
transactions totaling $199 million were completed in 2000 compared to 29
managed transactions totaling $731 million for the same period in 1999.
Taxable church and school underwriting activity also decreased. A total of
seven transactions for $24 million were completed in 2000 compared to 12
transactions for $42 million in 1999. The resulting revenues from
underwriting decreased $5,844 between the years. Trading profits also
decreased $531 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. The balance
of the decrease is primarily due to a decrease in mortgage origination
activity as compared to the same period in the prior year.
Total expenses of this segment decreased $3,100 from $13,978 in 1999 to
$10,878 in 2000. A decrease of $2,783 in compensation expense between years
is primarily related to decreased incentive compensation as the result of
decreased underwriting volumes. The balance of the decrease is spread among
several expense categories and reflects reduced volumes of activity and
expense reduction measures.
The decreased underwriting activity is the primary reason for the
resulting loss before taxes of $3,358 for this segment in 2000 compared to
net income before taxes of $559 in 1999. As mentioned previously, the
Company terminated the preferred stock and institutional equity sales
operations earlier in 2000. The preferred stock trading and institutional
equity sales activities together incurred losses of $524 in 2000 and $584 in
1999.
Investment Services Group
The combined results for this segment resulted in revenues and net
losses of $28,328 and $1,188 in 2000 compared to $25,072 and $1,506 in 1999,
respectively. Improvements in the asset and wealth management operations
were offset by increased losses in portfolio consulting.
Asset Management-
Total revenues of this operating component were $4,293 in 2000 compared
to $3,139 in 1999, an increase of $1,154 or 37%. Investment management fees
increased $933 as the result of increases in assets under management as
discussed previously. The balance of the increase was due to an increase in
distributor commissions on the sale of mutual funds 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 operation increased $812 to
$3,756 in 2000 from $2,944 in 1999. The increase is related to increased
employee compensation and benefits of $813. These compensation increases are
primarily related to commissions paid for distributor sales of mutual funds
and the addition of sales personnel. The net income before taxes of the
asset management operation was $537 in 2000 compared to $195 in 1999 an
increase of $342.
Wealth Management-
Total revenues for this operating component were $12,484 in 2000
compared to $11,230 in 1999, an increase of $1,254. Commission income
increased $888 primarily as the result of full service retail brokerage sales
activities related to mutual funds and equity sales. Sales credits on the
Company's underwritten products decreased $379 as the result of the decrease
in underwriting activity. More than offsetting the decrease was an increase
of $563 in profits on sales to customers of secondary market bonds. Managed
fee revenue increased $260 to $820 in 2000 as assets under management
increased for clients of this operating component.
Total expenses increased $375 to $12,966 in 2000 compared to $12,591 in
1999. Compensation and benefits increased $1,092 due to increases in
commissions paid to brokers on higher sales volumes. The increase was
partially offset by a decrease in brokerage commissions of $664. The
decreased brokerage commissions are due to a reduction in independent
contractor sales activities. The total loss, which includes administrative
cost allocations, was $482 in 2000 compared to $1,361 in 1999 Administrative
cost allocations approximated $2,200 in each year. Before such allocations,
the wealth management operation had net income before taxes of $1,688 in 2000
compared to $850 in 1999.
Portfolio Consulting-
Total revenues of this operating component were $11,551 in 2000 compared
to $10,703 in 1999 an increase of $848. Increases in advisory fees and
commissions were $492 and $699, respectively, and were offset by reductions
for trading losses and decreases in interest income and in other income.
Total expenses of the portfolio consulting operation were $12,795 in
2000 compared to $11,043 in 1999, an increase of $1,752. Payments for
investment manager and related account fees increased $570. Commissions and
clearing fees increased $570 as the result of outside broker commissions and
clearing fees paid relating to account transaction activity. Employee
compensation and benefits increased $350 as the result of increased staffing
requirements and costs associated with staff turnover.
The net loss for the portfolio consulting component in 2000 was $1,243
compared to $340 in 1999 which includes purchase goodwill amortization of
$339 in 2000 and $354 in 1999. The portfolio consulting component has
experienced continued pressure on its pricing of services. At the same time,
the cost of processing transactions continues to increase as the result of
increased volumes, asset turnover, and employee turnover. This operating
component is focusing on the appropriate pricing of its services, the
increased use of technology to increase processing efficiency, and the
overall containment of costs.
Other
Total revenues for this segment were $4,387 in 2000 compared to $2,179
in 1999, an increase of $2,208. 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 the recruitment of BCZ's Denver, Colorado
retail brokerage office by another securities firm. Interest income on the
CMO investments was $1,182 in 2000 compared to $1,227 in 1999. The balance
of the revenue is also primarily interest income and relates to earnings on
Company investments and notes.
Total expenses after allocations to the other operating segments were
$3,142 in 2000 compared to $1,518 in 1999. The largest component of expenses
is interest expense on the financing of the CMOs of $888 in 2000 and $829 in
1999. Other expenses include interest expense related to outstanding
commercial paper, short inventory, and unallocated administrative expenses.
In 2000, unallocated administrative expenses increased. The increased
expenses are primarily related to additional expenses associated with
management and business transition activities. Payments were made for the
purpose of attracting qualified managers to join the Company, as severance to
other managers, and for special projects performed by consultants in the
strategic planning and evaluation of the Company. Given the specialized
nature of the expenses, they were not allocated to the operating components
of the Company.
Total net income after taxes was $1,245 in 2000 compared to $661 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 transition expenses.
Liquidity and Capital Resources
(Dollars in thousands)
Capital expenditures for assets for the first six months of 2000 were
$1,023. Land, buildings and equipment, net of related depreciation and
amortization, constitutes 7% of the 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 six
months of 2000, a total of $11,607 of notes were issued and $12,951 were
repaid. The total balance of short-term notes outstanding was $4,855 as of
June 30, 2000.
First Church Financing Corporation 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 $4,252 of mortgage loans outstanding at
June 30, 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 June 30, 2000 were $4,035. 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 $8,065 of variable
rate securities were held in inventory at June 30, 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 arrangement.
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.
BCZ had no amounts outstanding under bank unsecured credit facilities at June
30, 2000. Amounts outstanding under repurchase agreements were $663 and the
amount owed the clearing agent was $7,081. 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 $12,800 outstanding under bank unsecured credit
facilities at June 30, 2000. Amounts outstanding under repurchase agreements
totaled $27,318 at June 30, 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 opinion 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", and
"Securities sold under agreements to repurchase", 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 $(12)
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread.
Forward Interest Rate Agreement $5,005 $ 12
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread. (Hedge to
above instrument.
<PAGE>
II. Trading and Non Trading Portfolio
<TABLE>
<CAPTION>
Expected Maturity Dates
2000 2001 2002 2003 2004 Thereafter Total Fair Value
(U.S. Dollars in Thousands)
ASSETS
Securities Inventory - fixed rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal bond issues $ 10 $ - $ - $ 29 $ 4 $10,599 $10,642 $ 9,981
Weighted average interest rate 5.25% 6.07% 6.30% 6.86%
Collateralized Mortgage obligations(1) - - - - - 5,529 5,529 4,152
Weighted average interest rate 8.79%
Institutional Bonds 14 7 22 30 - 775 848 802
Weighted average interest rate 7.07% 7.46% 7.52% 7.89% 8.30%
Preferred Stock - - - - - 363 363 233
Weighted average dividend rate 4.56%
Other - 25 - 3 - 203 231 232
Weighted average interest rate 4.88% 6.00% 7.73%
Securities Inventory - variable rate
Municipal variable rate demand notes - - - - - 8,065 8,065 8,065
Weighted average interest rate 4.78%
Securities purchased under agreement
to resell(2) 4,382 - - - - - 4,382 4,382
Weighted average interest rate 5.38%
Notes receivable - - - - - 24,062 24,062 23,958
Weighted average interest rate 9.23%
Other investments - - - - - 26,236 26,236 26,236
Weighted average interest rate 8.93%
Expected Maturity Dates
2000 2001 2002 2003 2004 Thereafter Total Fair Value
(U.S. Dollars in thousands)
LIABILITIES
Short-term notes payable(2) $ 4,898 $ - $ - $ - $ - $ - $ 4,898 $ 4,855
Weighted average interest rate 6.43%
Securities sold under agreement to
repurchase(2) 27,981 - - - - - 27,981 27,981
Weighted average interest rate 6.87%
Securities sold not yet purchased - - - 4,500 - - 4,500 4,380
Weighted average interest rate 5.38%
Bonds payable - fixed rate(1) - - - - - 4,035 4,035 4,035
Weighted average interest rate 8.29%
(1) Assumes no prepayments
(2) The information shown above includes actual interest rates at December 31, 1999 and assumed
no changes in interest rates in 2000 or thereafter.
</TABLE>
Equity Risk
In addition to interest rate risk, the Company faces market risk
associated with the fees it earns on its portfolio in the form of equity
risk. Ziegler Asset management, Inc. manages a portfolio with an aggregate
value of approximately $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 equity products from which BCZ and PMC
receive periodic fees derived from the total assets under management or
advisement in those accounts. A general decline in the equities market could
adversely affect the amount of fee based revenues. 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
affect 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 throuh 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ZIEGLER COMPANIES, INC.
Dated: August 14, 2000 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: August 14, 2000 By /s/ Gary P. Engle
Gary P. Engle
Senior Vice President/CFO
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule