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 September 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 October 31, 2000 was 2,425,593 shares.
<PAGE>
PART I
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Dollars in thousands) (Unaudited)
<S> <C> <C>
ASSETS
Cash $ 3,548 $ 5,378
Short-term investments 3,016 11,865
Total cash and cash equivalents 6,564 17,243
Securities inventory 35,165 82,791
Securities purchased under agreements to resell 4,494 4,365
Accounts receivable 4,765 6,069
Accrued income taxes receivable 4,360 2,454
Investment in and receivables from affiliates 537 1,538
Notes receivable 4,215 4,548
Other investments 26,105 26,931
Land, buildings and equipment, at cost,
net of reserves for depreciation of
$13,597 and $12,100, respectively 7,550 8,609
Deferred income tax benefit 2,696 3,158
Goodwill 9,594 10,141
Other assets 2,751 2,775
Total assets $108,796 $170,622
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable $ 3,325 $ 6,160
Securities sold under agreements to repurchase 27,866 28,959
Payable to broker-dealers and clearing
organizations 11,714 60,742
Accounts payable 1,590 2,288
Securities sold, not yet purchased 4,437 4,364
Notes payable 650 -
Bonds payable 3,909 4,223
Other liabilities and deferred items 9,454 14,590
Total liabilities 62,945 121,326
Commitments
Stockholders' equity
Common stock, $1 par, authorized
7,500,000 shares, issued 3,544,000 3,544 3,544
Additional paid-in capital 6,241 6,221
Retained earnings 53,783 57,110
Treasury stock, at cost, 1,118,000,
and 1,113,000 shares, respectively (17,657) (17,469)
Unearned compensation (60) (110)
Total stockholders' equity 45,851 49,296
Total liabilities and stockholders' equity $108,796 $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
September 30, September 30,
2000 1999
(Dollars in thousands except per share data)
<S> <C> <C>
Revenues:
Investment banking income $ 6,885 $ 6,087
Commission income 4,879 6,166
Investment management and advisory fees 7,925 6,554
Interest and dividends 1,403 1,480
Other 816 751
Total revenues 21,908 21,038
Expenses:
Employee compensation and benefits 11,352 10,862
Investment manager and other fees 3,140 2,447
Commissions and clearing fees 1,096 1,625
Communications 611 902
Occupancy and equipment 2,323 2,470
Promotional 1,236 1,151
Professional and regulatory 928 624
Interest 818 967
Goodwill 182 236
Other operating expenses 818 580
Total expenses 22,504 21,864
Loss from continuing operations
before income taxes (596) (826)
Benefit from income taxes (242) (267)
Loss from continuing operations (354) (559)
Discontinued operations:
Income from operations of discontinued
environmental services subsidiary
(less applicable income taxes of $117) - 210
Net Loss $ (354) $ (349)
Per share data:
Continuing operations $ (.15) $ (.23)
Discontinued operations - .09
Basic and Diluted income (loss) per share $ (.15) $ (.14)
</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 Nine Months Ended
September 30, September 30,
2000 1999
(Dollars in thousands except per share data)
<S> <C> <C>
Revenues:
Investment banking income $14,989 $20,450
Commission income 16,181 18,447
Investment management and advisory fees 22,767 19,674
Interest and dividends 4,644 4,814
Other 3,562 2,566
Total revenues 62,143 65,951
Expenses:
Employee compensation and benefits 32,892 33,138
Investment manager and other fees 9,139 7,875
Commissions and clearing fees 3,545 4,943
Communications 2,294 2,753
Occupancy and equipment 7,063 6,998
Promotional 3,422 3,149
Professional and regulatory 2,236 1,655
Interest 2,941 3,045
Goodwill 547 706
Other operating expenses 1,961 2,173
Total expenses 66,040 66,435
Loss from continuing operations
before income taxes (3,897) (484)
Benefit from income taxes (1,514) (29)
Loss from continuing operations (2,383) (455)
Discontinued operations:
Income from operations of discontinued
environmental services subsidiary
(less applicable income taxes of $201) - 340
Net Loss $(2,383) $ (115)
Per share data:
Continuing operations $ (.99) $ (.19)
Discontinued operations - .14
Basic and Diluted income (loss) per share $ (.99) $ (.05)
</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 Nine Months Ended
September 30, September 30,
2000 1999
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,383) $ (115)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,361 2,482
Unrealized loss on securities inventory 30 256
Compensation expense related to restricted
stock grants 50 88
Deferred income taxes 462 531
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,305 (577)
Accrued income taxes receivable (1,906) (681)
Securities inventory, net 47,668 85,341
Securities purchased under agreements
to resell (152) 270
Other assets (89) 98
Increase (decrease) in:
Payable to customers and broker-dealers (49,027) (73,699)
Accounts payable (698) (502)
Other liabilities (5,084) (6,165)
Discontinued operations - noncash charges
and working capital changes - (164)
Net cash provided by (used in) operating
activities (7,463) 7,163
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of land and equipment 714 75
Decrease in investment in affiliate 1,000 -
Payments received on notes receivable 386 936
Sales/paydowns on other investments 826 1,532
Payments for:
Capital expenditures (1,387) (1,373)
Net cash provided by investing activities 1,539 1,170
</TABLE>
<PAGE>
THE ZIEGLER COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from:
Issuance of short-term notes payable $16,275 $55,104
Exercise of employee stock options 345 105
Payments for:
Principal payments on short-term notes
payable (19,161) (59,761)
Repayment of bonds payable (314) (776)
Purchase of treasury stock (512) (463)
Cash dividends (945) (961)
Net borrowing (repayments) under credit
facilities 650 (2,013)
Net receipts on securities sold under
agreements to repurchase (1,093) (1,570)
Net cash provided by (used in)
financing activities (4,755) (10,335)
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,679) (2,002)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,243 16,273
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,564 $14,271
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the period $ 2,564 $ 3,366
Income taxes paid (received) during the
period $ (70) $ 683
</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)
September 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 nine
months ended September 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 $12,600 at September 30, 2000.
Note C - Net Capital Requirements
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 of each subsidiary as of
September 30, 2000, is as follows:
BCZ PBS
Aggregate indebtedness $8,156 $237
Net capital $6,088 $663
Ratio of aggregate indebtedness
to net capital 1.34 to 1 .36 to 1
Required net capital $544 $100
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
September 30, September 30,
2000 1999
Revenues -
Interest $614 $649
Gain on sale/redemption of
mortgage certificates 6 16
Total revenues $620 $665
Expenses -
Interest 565 593
Amortization of bond issuance costs 17 24
Management fee 24 37
Other 14 11
Total expenses 620 665
Net income $ - $ -
For the Nine Months Ended
September 30, September 30,
2000 1999
Revenues -
Interest $1,872 $2,058
Gain on sale/redemption of
mortgage certificates 20 140
Total revenues $1,892 $2,198
Expenses -
Interest 1,709 1,888
Amortization of bond issuance costs 45 171
Management fee 93 76
Other 45 63
Total expenses 1,892 2,198
Net income $ - $ -
Note E - Securities Inventory
Securities inventory consisted of the following:
September 30, December 31,
2000 1999
Municipal bond issues $25,487 $71,651
Collateralized mortgage obligations 4,043 4,246
Corporate bond issues - 553
Institutional bond issues 5,356 2,418
Preferred stock - 3,328
Other securities 279 595
$35,165 $82,791
Note F - Securities Sold, Not Yet Purchased
Marketable securities sold, not yet purchased, consist of trading
securities at market value as follows:
September 30, December 31,
2000 1999
U.S. Treasury Note $4,437 $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 $11,473 at September, 30, 2000 relates
primarily to the financing of inventory and is collateralized by securities
held in inventory with a market value of approximately $30,965 owned by BCZ.
Funds are borrowed at the Federal Funds rate plus 50 basis points and are due
under normal margin arrangements with customary terms and conditions 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 $650 in short-term borrowings outstanding at September 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 granted options to purchase
shares under the 1989 Employees' Stock Purchase Plan (the "1989 Plan"). A
total of 108,060 options were available for exercise by employees under the
1989 Plan. A total of 4,325 of the options have been exercised through
September 20, 2000 at an average price of $15.30 per share. On September 20,
the Organization and Compensation Committee of the Board of Directors
terminated the 1989 Plan and authorized a non-qualified grant of stock
options under the 1998 Stock Incentive Plan (the "1998 Plan") to a broad base
of full-time employees of the Company. Approximately 150,000 stock options
were granted at a price of $18.125 per share. The options vest over three
years and expire in ten years.
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):
For the Three Months Ended
September 30, September 30,
2000 1999
Loss from continuing operations $(354) $(349)
Basic
Weighted average shares outstanding 2,402 2,422
Basic loss per share $(.15) $(.23)
Diluted
Weighted average shares outstanding-
Basic 2,402 2,422
Effect of dilutive securities:
Restricted stock - -
Stock options - -
Weighted average shares outstanding-
Diluted 2,402 2,422
Diluted loss per share $(.15) $(.23)
The diluted share base for the three month periods ended September 30,
2000 and 1999 exclude incremental shares related to restricted stock and
stock options totaling 22 and 25 shares, respectively. These shares are
excluded due to their antidilutive effect as a result of the Company's losses
from continuing operations during the three month periods ended September 30,
2000 and 1999.
For the Nine Months Ended
September 30, September 30,
2000 1999
Loss from continuing operations $(2,383) $(115)
Basic
Weighted average shares outstanding 2,399 2,427
Basic loss per share $(.99) $(.19)
Diluted
Weighted average shares outstanding-
Basic 2,399 2,427
Effect of dilutive securities:
Restricted stock - -
Stock options - -
Weighted average shares outstanding-
Diluted 2,399 2,427
Diluted loss per share $(.99) $(.19)
The diluted share base for the nine month periods ended September 30,
2000 and 1999 excludes incremental shares related to restricted stock and
stock options totaling 22 and 28 shares, respectively. These shares are
excluded due to their antidilutive effect as a result of the Company's losses
from continuing operations during the nine month periods ended September 30,
2000 and 1999.
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 retail brokerage
services. 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.
The Other operating segment 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:
Three Months Ended September 30,
2000 1999
Revenues
Capital Markets Group $ 6,243 $ 5,909
Investment Services Group 14,510 12,835
Other 1,155 1,021
21,908 19,765
Ziegler Thrift Trading, Inc. - 1,273
$21,908 $21,038
Net Income (Loss) Before Taxes:
Capital Markets Group $ 302 $ (592)
Investment Services Group (786) (558)
Other (112) 210
(596) (940)
Ziegler Thrift Trading, Inc. - 114
$ (596) $ (826)
Nine Months Ended September 30,
2000 1999
Revenues
Capital Markets Group $13,763 $20,446
Investment Services Group 42,838 37,907
Other 5,542 3,200
62,143 61,553
Ziegler Thrift Trading, Inc. - 4,398
$62,143 $65,951
Net Income (Loss) Before Taxes:
Capital Markets Group $(3,056) $ (33)
Investment Services Group (1,974) (2,064)
Other 1,133 871
(3,897) (1,226)
Ziegler Thrift Trading, Inc. - 742
$(3,897) $ (484)
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.
Note L - Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, which has been
amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS 133, an amendment of SFAS
133" and SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of SFAS 133." SFAS 133 requires that every
derivative instrument be recorded on the balance sheet as an asset or
liability measured at its fair value and that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and will be applied to: (a) derivative
instruments; and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1998. The Company has certain financial contracts that meet the
definition of a derivative under SFAS 133. The Company has entered into an
interest rate forward agreement to manage the interest volatility associated
with a forward debt service agreement executed on behalf of a customer. The
Company also may enter into futures contracts to manage the impact of
interest rate fluctuations on securities inventory. The Company will adopt
SFAS 133 on January 1, 2001. SFAS 133 requires that as of the date of
initial adoption, the difference between the fair market value of derivative
instruments recorded on the balance sheet and the previous carrying amount of
those derivatives be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle in
accordance with Accounting Principles Board No. 20, "Accounting Changes." To
the extent that these amounts are recorded in other comprehensive income,
they will be reversed into earnings in the period in which the hedged
transactions occur. The Company believes their existing derivative
instruments will qualify for hedge accounting or that the fair value is not
material. Therefore, the impacts of adopting SFAS 133 on the financial
statements will not be material as of January 1, 2001.
<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 brokerage services to retail investors. The
portfolio consulting operation provides services to financial consultants and
individuals as an intermediary in matching investors with money managers, and
also provides performance reporting and other administrative services. The
operating segment designated "Other" consists primarily of 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 segments 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 through 2000 to date, 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 nine months of 2000 than
in 1999.
Despite the first quarter rise in interest rates, the favorable returns
in the overall equity markets 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 those mutual funds to purchase new issue municipal
securities. As the year progressed, the general level of interest rates on
non-US Treasury debt rose as a result of this preference for equities as well
as a growing concern about the impact of a slowing US economy on the credit
quality of bond issuers. Subsequent corrections and heightened volatility in
the equity markets, especially in technology stocks, have caused investors to
reconsider their investment alternatives.
The Company increased assets under management during the year in the
equity mutual funds that it manages. The increase was 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 and third quarters
as the result of the volatility in the equity markets. The increase more
than offset any decreases in assets under management associated with
decreases in market value.
The rise in interest rates also increased 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 when the inventory is not sold.
Further, the inventory being held may lose value as the result of future
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.
<TABLE>
<CAPTION>
Results of Operations - Three months ended
September 30, 2000 Compared to September 30, 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 September 30, 2000 1999 (Decrease)
<S> <C> <C> <C>
Revenues
Capital Markets Group $ 6,243 $ 5,909 $ 334
Investment Services Group
Asset Management 2,413 1,666 747
Wealth Management 6,199 5,938 261
Portfolio Consulting 5,898 5,231 667
Total 14,510 12,835 1,675
Other 1,155 1,021 134
21,908 19,765 2,143
ZTT - 1,273 (1,273)
$21,908 $21,038 $ 870
Net Income (Loss) Before Taxes
Capital Markets Group $ 302 $ (592) $ 894
Investment Services Group
Asset Management 85 324 (239)
Wealth Management (265) (762) 497
Portfolio Consulting (606) (120) (486)
Total (786) (558) (228)
Other Activities (112) 210 (322)
(596) (940) 344
ZTT - 114 (114)
$ (596) $ (826) $ 230
</TABLE>
Capital Markets Group
Total revenues for this segment increased $334 from $5,909 in 1999 to
$6,243 in 2000. Municipal underwriting volume increased during the period as
compared to prior year as a result of some easing of the economic conditions
as noted above. A total of 12 managed municipal underwriting transactions
totaling $482 million in par value of securities issued were completed in
2000 compared to 13 managed municipal underwriting transactions totaling $364
million for the same period in 1999. Taxable church and school underwriting
activity increased between years. A total of six transactions for
$26 million in par value of securities issued were completed in 2000 compared
to five transactions for $20 million in 1999. The resulting revenues from
underwriting increased $715 between the quarters. The increase in
underwriting revenue was primarily offset by a decrease in commission income
due to the closing of the Company's institutional equity sales and research
department in April, 2000.
Total expenses of this segment decreased $560 from $6,501 in 1999 to
$5,941 in 2000. The decrease is primarily due to a decrease of $437 in
compensation expense between quarters primarily related to decreased
incentive compensation as the result of decreased underwriting volumes. The
closing of the institutional equity sales and research department also
contributed to decreased expenses and was partially offset by expenses
associated with an investment fund currently being organized. The balance of
the decrease is spread among several categories of expense.
The higher underwriting activity is the primary reason for the resulting
earnings before taxes of $302 for this segment in 2000 compared to a loss of
$592 in 1999. The preferred stock trading and institutional equity sales
activities in this segment were discontinued in 2000. These activities
incurred losses of $13 in 2000 and $475 in 1999, respectively. 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 $14,510 and $786 in 2000 compared to
$12,835 and $558 in 1999, respectively.
Asset Management-
Total revenues of this operating component were $2,413 in 2000 compared
to $1,666 in 1999, an increase of $747 or 45%. Investment management fees
increased $795 primarily as the result of increases in assets under
management and increased administrative fees. Assets under management were
$2 billion dollars at September 30, 2000 compared to $1.4 billion at
September 30, 1999. Increases in assets under management were primarily in
the equity mutual fund portfolios.
Total expenses of the asset management operations increased $986 to
$2,328 in 2000 from $1,342 in 1999. Employee compensation and benefit
expense increased $291 as the result of recruiting and hiring of additional
sales people. Other expenses increased $351 as the result of increased
reimbursement for expenses of the Company's proprietary mutual funds. The
balance of the increase is primarily related to increased promotional
activities related to asset management services.
The net income before taxes of the asset management operation was $85 in
2000 compared to $324 in 1999 a decrease of $239. Through the third quarter
of 2000 the volatility in the equity markets had not caused a significant
decline in total assets under management nor had there been any significant
redemptions net of sales. In the fourth quarter to date, mutual fund assets
under management declined approximately 9% compared to a 14% decline in the
NASDAQ.
Wealth Management-
Total revenues for this operating component were $6,199 in 2000 compared
to $5,938 in 1999, an increase of $261. Income from underwritten product
increased $339 as the result of the increase in underwritings in the quarter
Pand the subsequent sale through the Company's retail distribution system.
This was partially offset by a decrease in commission income from reduced
sales of other products.
Total expenses decreased $236 to $6,464 in 2000 from $6,700 in 1999.
Compensation and benefits increased $436 due to increases in commissions paid
to brokers on increased sales volumes. The increase was more than offset by
a decrease in brokerage commissions of $521. The decreased brokerage
commissions are due to a reduction in independent contractor sales
activities. The total loss, which includes administrative cost allocations,
was $265 in 2000 compared to $762 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 $816 in 2000 compared to $344 in 1999.
Portfolio Consulting-
Total revenues of this operating component were $5,898 in 2000 compared
to $5,231 in 1999, an increase of $667. Increases in advisory fees and
commissions were $518 and $346, 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 $5.5 billion
of assets at September 30, 2000 compared to $4 billion of assets at September
30, 1999. Despite the increase in assets, pricing pressure associated with
delivering those services to new institutional customers caused the
disproportionately small increase in revenues relative to assets.
Total expenses of the portfolio consulting operation were $6,504 in 2000
compared to $5,351 in 1999, an increase of $1,153. Investment manager and
related account fees increased $694. Commissions and clearing fees increased
$295 as the result of outside broker commissions paid on increased commission
income. The resulting net loss in 2000 was $606 compared to $120 in 1999.
The competition in the industry has created additional pressure on margins.
This operating component is focusing on the appropriate pricing of its
services, a strategy for the increased use of technology to increase
processing efficiency, and the overall containment of costs.
Other
Total revenues for this segment were $1,155 in 2000 compared to $1,021
in 1999, an increase of $134. 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 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
$961 in 2000 compared to $641 in 1999. Interest expense of $475 was incurred
in 2000, and $375 in 1999 to finance the CMOs noted above. The balance of
the difference is related to expenses not allocated to the operating
components. In 2000, the increased expenses are primarily related to
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 corporate nature of the
expenses, they were not allocated to the operating components of the Company.
The total net loss before taxes was $112 in 2000 compared to net income
of $210 in 1999. These amounts reflect the results after allocations. The
allocations reflect the cost of administrative functions provided to the
other operating components.
Results of Operations - Nine months ended
September 30, 2000 Compared to September 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 nine months ended September 30, 2000 1999 (Decrease)
<S> <C> <C> <C>
Revenues
Capital Markets Group $13,763 $20,446 $(6,683)
Investment Services Group
Asset Management 6,706 4,805 1,901
Wealth Management 18,683 17,168 1,515
Portfolio Consulting 17,449 15,934 1,515
Total 42,838 37,907 4,931
Other Activities 5,542 3,200 2,342
62,143 61,553 590
ZTT - 4,398 (4,398)
$62,143 $65,951 $(3,808)
Net Income (Loss) Before Taxes
Capital Markets Group $(3,056) $ (33) $(3,023)
Investment Services Group
Asset Management 622 519 103
Wealth Management (747) (2,123) 1,376
Portfolio Consulting (1,849) (460) (1,389)
Total (1,974) (2,064) 90
Other Activities 1,133 871 262
(3,897) (1,226) (2,671)
ZTT - 742 (742)
$(3,897) $ (484) $(3,413)
</TABLE>
Capital Markets Group
Total revenues for this segment decreased $6,683 from $20,446 in 1999 to
$13,763 in 2000. A significantly reduced level of underwriting activity due
to the economic climate as discussed previously is the primary reason for the
decrease. A total of 20 managed municipal underwriting transactions totaling
$682 million were completed in 2000 compared to 42 managed municipal
underwriting transactions totaling $1.1 billion for the same period in 1999.
Taxable church and school underwriting activity also decreased. A total of
13 transactions for $51 million were completed in 2000 compared to 17
transactions for $61 million in 1999. The resulting revenues from
underwriting decreased $5,374 between the years. The balance of the decrease
is primarily due to reduced commissions as the result of the closing of the
institutional equity sales and research department and the preferred stock
trading activities, and a decrease in mortgage origination activity as
compared to the same period in the prior year.
Total expenses of this segment decreased $3,660 from $20,479 in 1999 to
$16,819 in 2000. The decrease is primarily related to a decrease in
compensation expense between years. A decrease of $1,230 in compensation
expense is related to the closing of the preferred stock trading and the
institutional equity sales and research departments. The balance of the
decrease is primarily related to reduced compensation associated with the
decreased underwriting volumes.
The decreased underwriting activity is the primary reason for the
resulting loss before taxes of $3,056 for this segment in 2000 compared to
net loss before taxes of $33 in 1999. Although underwriting activity has
begun to increase to some extent in 2000, the increase has not been
sufficient to make up for the reduced volumes earlier in the year as compared
to 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 $643 in 2000 and $1,244 in 1999.
Investment Services Group
The combined results for this segment resulted in revenues and net
losses of $42,838 and $1,974 in 2000 compared to $37,907 and $2,064 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 $6,706 in 2000 compared
to $4,805 in 1999, an increase of $1,901. Investment management fees
increased $1,728 as the result of increases in assets under management. 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 $1,798 to
$6,084 in 2000 from $4,286 in 1999. The increase is related to increased
employee compensation and benefits of $1,104, 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 $622 in 2000 compared to $519 in 1999.
Wealth Management-
Total revenues for this operating component were $18,683 in 2000
compared to $17,168 in 1999, an increase of $1,515. Commission income
increased $644 primarily as the result of full service retail brokerage sales
activities related to mutual funds and equity sales. Profits on sales to
customers of secondary market bonds increased $600. Managed fee revenue
increased $355 to $1,268 in 2000 as assets under management increased for
clients of this operating component.
Total expenses increased $139 to $19,430 in 2000 compared to $19,291 in
1999. Compensation and benefits increased $1,529 due to increases in
commissions paid to brokers on higher sales volumes and additional personnel.
The increase was partially offset by a decrease in brokerage commissions of
$1,184. The decreased brokerage commissions are due to a reduction in
independent contractor sales activities. The total loss, which includes
administrative cost allocations, was $747 in 2000 compared to $2,123 in 1999
Administrative cost allocations approximated $3,300 in each year. Before
such allocations, the wealth management operation had net income before taxes
of $2,504 in 2000 compared to $1,194 in 1999.
Portfolio Consulting-
Total revenues of this operating component were $17,449 in 2000 compared
to $15,934 in 1999 an increase of $1,515. Increases in advisory fees and
commissions were $1,010 and $1,045, 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 $19,298 in
2000 compared to $16,394 in 1999, an increase of $2,904. Payments for
investment manager and related account fees increased $1,264. Commissions
and clearing fees increased $865 as the result of outside broker commissions
paid on increased commission income. Employee compensation and benefits
increased $412 as the result of increased staffing requirements and costs
associated with staff turnover.
The net loss for the portfolio consulting operation in 2000 was $1,849
compared to $460 in 1999, which includes purchase goodwill amortization of
$508 in 2000 and $530 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, a strategy
for the increased use of technology to increase processing efficiency, and
the overall containment of costs.
Other
Total revenues for this segment were $5,542 in 2000 compared to $3,200
in 1999, an increase of $2,342. 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 $1,767 in 2000 compared to $1,834 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
$4,408 in 2000 compared to $2,329 in 1999. The largest component of expenses
is interest expense on the financing of the CMOs of $1,363 in 2000 and $1,204
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 related to additional expenses associated with management
recruitment 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 before taxes for this segment was $1,133 in 2000
compared to $871 in 1999. These amounts reflect the results after
allocations to other segments. The allocations reflect the cost of
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 nine months of 2000 were
$1,387. Land, buildings and equipment, net of related accumulated
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 nine
months of 2000, a total of $16,275 of notes were issued and $19,161 were
repaid. The total balance of short-term notes outstanding was $3,325 as of
September 30, 2000.
First Church Financing Corporation served 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 $4,167 of mortgage loans outstanding at
September 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 September 30, 2000 were
$3,909. 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 $16,370 of variable
rate securities were held in inventory at September 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 cash flow, 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
September 30, 2000. Amounts outstanding under repurchase agreements were
$601 and the amount owed the clearing agent was $11,473 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 $650 outstanding under bank unsecured credit
facilities at September 30, 2000. Amounts outstanding under repurchase
agreements totaled $27,265 at September 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 proceeds have been used to reduce short-term
borrowings and finance operations. The reduction in short-term borrowings
may be temporary and allows the Company greater flexibility 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.
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 forward-looking statements are subject to a number of risks
and uncertainties, in particular, the overall financial health of the
securities industry and the healthcare sector of the U.S. economy, as well as
the strength of the municipal securities marketplace, the ability of the
Company to distribute securities it underwrites and the ability to attract
and retain qualified employees. The Company believes that it has sufficient
capital, talent, and product offerings to meet the anticipated quarterly
dividend and produce growth in the Company's revenues and net income. Please
see our form 10-K for a description of additional risks.
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
(Dollars in thousands) Amount Value
Forward Debt Services Agreement $5,005 $57
Index: Municipal Market Data Services AAA/Aaa
Scale plus a forward spread.
Forward Interest Rate Agreement $5,005 $(33)
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 $ 5 $ - $ 1 $ 4 $ - $10,213 $10,223 $ 9,117
Weighted average interest rate 6.50% 7.50% 10.50% 6.41%
Collateralized Mortgage obligations(1) - - - - - 5,464 5,464 4,043
Weighted average interest rate 8.80%
Institutional Bonds 10 2 52 90 153 5,279 5,586 5,356
Weighted average interest rate 6.85% 9.85% 7.73% 7.78% 7.97% 9.15%
Preferred Stock - - - - - 75 75 75
Weighted average dividend rate -
Other - - - - - 196 196 204
Weighted average interest rate 7.33%
Securities Inventory - variable rate
Municipal variable rate demand notes - - - - - 16,370 16,370 16,370
Weighted average interest rate 5.54%
Securities purchased under agreement
to resell(2) 4,494 - - - - - 4,494 4,494
Weighted average interest rate 5.38%
Notes receivable - - - - - 4,215 4,215 4,215
Weighted average interest rate 9.23%
Other investments - - - - - 26,105 26,105 26,105
Weighted average interest rate 8.93%
</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) $ 3,325 $ - $ - $ - $ - $ - $ 3,325 $ 3,325
Weighted average interest rate 6.34%
Securities sold under agreement to
repurchase(2) 27,866 - - - - - 27,866 27,866
Weighted average interest rate 6.87%
Securities sold not yet purchased - - - 4,500 - - 4,500 4,437
Weighted average interest rate 5.38%
Notes Payable 650 - - - - - 650 650
Weighted average interest rate 8.25%
Bonds payable - fixed rate(1) - - - - - 3,909 3,909 3,909
Weighted average interest rate 8.29%
(1) Assumes no prepayments
(2) The information shown above includes actual interest rates at September 30, 2000 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 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.
PART II
Items 1 through 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ZIEGLER COMPANIES, INC.
Dated: November 14, 2000 By /s/ John J. Mulherin
John J. Mulherin
President and CEO
Dated: November 14, 2000 By /s/ Gary P. Engle
Gary P. Engle
Senior Vice President/CFO
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
