10-Q 1 zmsi2q01.txt ZMSI II JUNE 30, 2001 FORM 10-Q Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 33-28290 ZIEGLER MORTGAGE SECURITIES, INC. II (Exact name of registrant as specified in its charter) Wisconsin 39-1539696 (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 June 30, 2001 was 20,000 shares. PART I ZIEGLER MORTGAGE SECURITIES, INC. II CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, 2001 2000 ASSETS Cash $ 40,225 $ 14,527 Money market investments, at cost which approximates market 33,306 32,469 Total cash and cash equivalents 73,531 46,996 Assets held by trustee 1,033,272 1,246,185 Accrued interest receivable 148,730 199,201 Mortgage Certificates held by trustee (net of purchase discount of $594,671 and $807,898, respectively) 23,734,666 31,489,383 Receivable from affiliate 4,946 - Deferred issuance costs 592,374 799,929 Total assets $25,587,519 $33,781,694 LIABILITIES AND STOCKHOLDERS' EQUITY Accrued interest payable $ 637,519 $ 865,098 Mortgage Certificate-Backed bonds payable 24,388,000 32,348,000 Payable to B. C. Ziegler and Company - 9,596 Other liabilities 42,000 39,000 Total liabilities 25,067,519 33,261,694 Stockholders' equity Preferred stock, $.10 par value, non-voting, $9.00 non-cumulative dividend, $100 redemption price; 200,000 shares authorized 5,000 shares issued and outstanding 500,000 500,000 Common stock, $1 par value; 56,000 shares authorized 20,000 shares issued and outstanding 20,000 20,000 Retained earnings - - Total stockholders' equity 520,000 520,000 Total liabilities and stockholders' equity $25,587,519 $33,781,694 The accompanying notes to condensed financial statements are an integral part of these balance sheets.

ZIEGLER MORTGAGE SECURITIES, INC. II CONDENSED STATEMENTS OF INCOME (Unaudited) For the Three Months Ended June 30, June 30, 2001 2000 Revenues: Interest income $458,289 $623,425 Gain on sale/redemption of Mortgage Certificates 233,961 8,012 Total revenues 692,250 631,437 Expenses: Interest expense 435,969 570,098 Amortization of deferred issuance costs 94,335 13,808 Management fee 132,989 31,073 General and administrative 28,957 16,458 Total expenses 692,250 631,437 Income before income taxes - - Provision for income taxes - - Net income $ - $ - The accompanying notes to condensed financial statements are an integral part of these statements.

ZIEGLER MORTGAGE SECURITIES, INC. II CONDENSED STATEMENTS OF INCOME (Unaudited) For the Six Months Ended June 30, June 30, 2001 2000 Revenues: Interest income $1,012,382 $1,258,706 Gain on sale/redemption of Mortgage Certificates 344,118 13,804 Total revenues 1,356,500 1,272,510 Expenses: Interest expense 964,327 1,143,909 Amortization of deferred issuance costs 207,555 28,171 Management fee 144,019 69,320 General and administrative 40,599 31,110 Total expenses 1,356,500 1,272,510 Income before income taxes - - Provision for income taxes - - Net income $ - $ - The accompanying notes to condensed financial statements are an integral part of these statements.

ZIEGLER MORTGAGE SECURITIES, INC. II CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, June 30, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ - $ - Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale/redemption of Mortgage Certificates (344,118) (13,804) Discount accretion on Mortgage Certificates (13,411) (16,620) Amortization of deferred issuance cost 207,555 28,171 Change in assets and liabilities: Decrease (Increase) in - Assets held by trustee 212,913 (88,955) Accrued interest receivable 50,471 3,063 Receivable from affiliate (4,946) - Increase (Decrease) in - Accrued interest payable (227,579) (11,199) Other liabilities 3,000 26,000 Payable to B. C. Ziegler and Company (9,596) 35,131 Net cash used in operating activities (125,711) (38,213) CASH FLOWS FROM INVESTING ACTIVITIES Sale and redemption of Mortgage Certificates 8,112,246 526,217 Net cash provided by investing activities 8,112,246 526,217 CASH FLOWS FROM FINANCING ACTIVITIES Redemption of preferred stock - (1,000,000) Principal payments of Mortgage Certificate-Backed bonds (7,960,000) (451,000) Net cash used in financing activities (7,960,000) (1,451,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,535 (962,996) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,996 1,049,777 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 73,531 $ 86,781 Interest expense paid during the periods was approximately $1,192,000 and $1,155,000 in 2001 and 2000, respectively. No taxes have been paid by the Company. The accompanying notes to condensed financial statements are an integral part of these statements.

NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 2001 and 2000 Note A -- Basis of Presentation The condensed financial statements included herein have been prepared by the company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Management believes, however, that these condensed financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the periods presented. All such adjustments are of a normal recurring nature. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the company's latest annual report on Form 10-K. Note B -- Mortgage Certificate-Backed Bonds Bonds outstanding at June 30, 2001 consist of the following: Outstanding Original Original Principal Date of Stated Principal Amounts Series Rate Bonds Maturity Amounts at 6/30/01 62 7.25% 2/1/92 4/15/22 $ 2,925,000 $ 332,000 63 7.60% 5/1/92 5/15/22 3,400,000 260,000 64 7.40% 6/1/92 6/15/22 3,300,000 491,000 65 7.00% 1/1/93 1/15/28 3,029,000 2,826,000 66 7.00% 1/1/93 1/15/28 3,000,000 2,796,000 68 6.25% 4/1/93 5/01/23 3,000,000 1,272,000 69 6.00% 5/1/93 5/01/23 3,022,000 797,000 70 6.00% 3/1/94 11/15/28 3,390,000 3,168,000 71 7.00% 4/1/94 9/20/23 3,015,000 924,000 73 7.00% 4/1/94 4/15/24 3,130,000 1,754,000 74 7.10% 5/1/94 2/15/24 3,145,000 217,000 75 7.10% 6/1/94 2/15/24 3,290,000 1,773,000 79 6.75% 6/1/95 6/15/22 2,622,000 2,390,000 81 7.00% 4/1/96 5/15/28 3,237,000 3,089,000 83 7.00% 4/1/97 2/15/27 3,152,000 1,761,000 46,657,000 23,850,000 American Mortgage Securities, Inc. Mortgage Certificate-Backed Bonds 5 7.35% 3/1/92 3/01/22 3,000,000 538,000 $49,657,000 $24,388,000

The stated maturities are the dates on which Bonds will be fully paid assuming no prepayments are received on the Mortgage Certificates which serve as collateral for the Bonds. The actual maturities of the Bonds will be shortened by prepayments on the Mortgage Certificates and by any Bond calls. The Bonds can be redeemed each month without premium under the following circumstances: The company must call Bonds, to the extent funds are available, commencing in the twelfth month following the original issuance of each series or commencing at such time as the aggregate balance in the Redemption Fund for each series reaches $100,000; whichever first occurs. The Bonds of any series may be redeemed in whole by the company after the third anniversary of the original issuance and, commencing with Series 16 Bonds, at any time as the outstanding principal amount of such series is less than 10% of the aggregate principal amount of such series originally issued. Bondholders can present their Bonds for redemption each month commencing with the second calendar month following the month in which each series is originally issued. The company will redeem such Bonds to the extent funds are available. Note C -- Mortgage Certificates Mortgage Certificates consist of GNMA and FNMA certificates. The carrying values of the Mortgage Certificates as of June 30, 2001 and December 31, 2000, which includes the purchase discount, approximated fair value. This estimate is based on management's consideration of the nature of the mortgage obligations underlying the securities and the risk of prepayment. Note D -- Related Party Transactions During the month of April 2000 the Company redeemed 10,000 shares of preferred stock from The Ziegler Companies, Inc. in the amount of $1,000,000. Note E -- Accounting Pronouncement The Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2001. The Company currently does not use derivative instruments, accordingly, there is no impact to the Company on adopting this statement. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Second Quarter 2001 vs. Second Quarter 2000 During the second quarter of 2001, and also during the second quarter of 2000, the Company did not issue any additional series of Mortgage Certificate-Backed Bonds. Unfavorable spreads between the interest yields on the Mortgage Certificates and the Certificate-Backed Bonds have kept the company from issuing additional series. Total revenues for the quarters totaled approximately $692,000 in 2001 and $631,000 in 2000. Gain on sale/redemption of Mortgage Certificates increased during the quarter due to the redemption of Mortgage Certificates at a premium as compared to prior year. Bond redemptions totaled $3,444,000 during the second quarter of 2001 and $216,000 during the same quarter of 2000. In accordance with a written agreement with B. C. Ziegler and Company, which acts as underwriter and manager of the company, management fees of the company were limited to the amount which prevented the company from incurring a loss. It is anticipated that on a continuing basis the company will operate at close to a breakeven level. First Six Months 2001 vs. First Six Months 2000 During the first six months of 2001, and also during the first six months of 2000, the Company did not issue any additional series of Mortgage Certificate-Backed Bonds. Total revenues, consisting mostly of interest income, for the periods totaled approximately $1,357,000 in 2001 and $1,273,000 in 2000. Gain on sale/redemption of Mortgage Certificates increased during the six months due to the redemption of Mortgage Certificates at a premium as compared to prior year. Bond redemptions totaled $7,960,000 during the first six months of 2001. They were $451,000 during the same period of 2000. Liquidity and Capital Resources The company has no fixed assets nor any commitments outstanding to purchase or lease any fixed assets. Each series of bonds is structured in a manner such that funds received from the related Mortgage Certificates are sufficient to fund all interest and principal payments on the bonds, and all other expenses of the company. As reflected in the Condensed Statement of Cash Flows for the period ended June 30, 2001, there was a net increase in cash and cash equivalents totaling approximately $27,000. The primary net cash receipt totaled approximately $7,968,000 from the redemption of Mortgage Certificates during the period. The primary cash disbursement totaled $7,960,000 and arose from cash disbursed to redeem outstanding Bonds from previous series. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk arises from exposure to changes in interest rates, exchange rates, commodity prices and other relevant market rate or price risk which impact an instrument's financial value. The Company would be exposed to market risk from changes in interest rates, except that the structured nature of the Company's activities minimizes this risk. The cash flows from payments on the Mortgage Certificates are used to retire the principal of the Mortgage Certificate-Backed Bonds Payable. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates, which include mortgage certificates and bonds payable. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. Principal payments on the Mortgage Certificates will occur as the result of amortization on the underlying mortgages. However, the amount of amortization is difficult to predict and is not estimated in the table. Any cash flows received from principal payments will be used to redeem Mortgage Certificate-Backed Bonds Payable. The fair values of the Mortgage Certificates at June 30, 2001 were approximately par given the nature of the mortgage obligations underlying the securities and the risk of prepayment. Expected Maturity Dates (In US dollars) 2001-2005 Thereafter Total Fair Value ASSETS Mortgage Certificates (1) $ - $24,329,337 $24,329,337 $23,735,000 Weighted average interest rate 7.11% LIABILITIES Mortgage Certificate- Backed Bonds Payable - 24,388,000 24,388,000 23,686,000 Weighted average interest rate 6.81% (1) Assumes no prepayments.

PART II Items 1 through 5. None of the Items are applicable. Item 6. Exhibits and 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. ZIEGLER MORTGAGE SECURITIES, INC. II Dated: August 9, 2001 By /s/ Thomas S. Ross Thomas S. Ross President Dated: August 9, 2001 By /s/ Jeffrey C. Vredenbregt Jeffrey C. Vredenbregt Treasurer 2

ZIEGLER MORTGAGE SECURITIES INC II 10-Q