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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 September 30, 1999 was 20,000 shares.
<PAGE>
PART I
ZIEGLER MORTGAGE SECURITIES, INC. II
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash $ 79,480 $ 49,974
Money market investments, at cost,
which approximates market 998,602 963,077
Total cash and cash equivalents 1,078,082 1,013,051
Assets held by trustee 1,410,657 4,292,159
Accrued interest receivable 209,669 243,281
Mortgage Certificates held by trustee
(net of purchase discount of $895,042
and $1,061,640, respectively) 33,189,737 38,586,973
Deferred issuance costs 889,453 1,060,400
Total assets $36,777,598 $45,195,864
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accrued interest payable $ 956,338 $ 1,073,417
Mortgage Certificate-Backed
bonds payable 34,246,000 42,584,000
Payable to B. C. Ziegler and
Company 37,260 447
Other liabilities 18,000 18,000
Total liabilities 35,257,598 43,675,864
Stockholders' equity
Preferred stock, $.10 par value,
non-voting, $9.00 non-cumulative
dividend, $100 redemption price;
200,000 shares authorized
15,000 shares issued and
outstanding 1,500,000 1,500,000
Common stock, $1 par value;
56,000 shares authorized
20,000 shares issued and
outstanding 20,000 20,000
Retained earnings - -
Total stockholders' equity 1,520,000 1,520,000
Total liabilities and
stockholders' equity $36,777,598 $45,195,864
The accompanying notes to condensed financial statements
are an integral part of these balance sheets.
</TABLE>
<PAGE>
ZIEGLER MORTGAGE SECURITIES, INC. II
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, September 30,
1999 1998
<S> <C> <C>
Revenues:
Interest income $649,489 $939,324
Gain on sale/redemption of
Mortgage Certificates 15,206 23,431
Total revenues 664,695 962,755
Expenses:
Interest expense 592,968 860,791
Amortization of deferred issuance
costs 24,071 36,423
General and administrative 47,656 65,541
Total expenses 664,695 962,755
Income before income taxes - -
Provision for income taxes - -
Net income $ - $ -
The accompanying notes to condensed financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
ZIEGLER MORTGAGE SECURITIES, INC. II
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
1999 1998
<S> <C> <C>
Revenues:
Interest income $2,058,178 $3,195,271
Gain on sale/redemption of
Mortgage Certificates 139,491 1,078,178
Total revenues 2,197,669 4,273,449
Expenses:
Interest expense 1,888,104 2,947,970
Amortization of deferred issuance
costs 170,947 1,107,625
General and administrative 138,618 217,854
Total expenses 2,197,669 4,273,449
Income before income taxes - -
Provision for income taxes - -
Net income $ - $ -
The accompanying notes to condensed financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
ZIEGLER MORTGAGE SECURITIES, INC. II
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
Sept. 30, Sept. 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ - $ -
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Gain on sale/redemption of
Mortgage Certificates (139,491) (1,078,178)
Discount accretion on Mortgage
Certificates (27,107) (41,330)
Amortization of deferred issuance costs 170,947 1,107,625
Change in assets and liabilities:
Decrease (Increase) in -
Assets held by trustee 2,881,502 5,007,857
Accrued interest receivable 33,612 331,778
Increase (Decrease) in -
Accrued interest payable (117,079) (1,295,340)
Payable to B. C. Ziegler and Company 36,813 44,493
Net cash provided by operating activities 2,839,197 4,076,905
CASH FLOWS FROM INVESTING ACTIVITIES
Sale and redemption of Mortgage
Certificates 5,563,834 42,095,758
Net cash provided by investing activities 5,563,834 42,095,758
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on Mortgage
Certificate-Backed Bonds (8,338,000) (45,799,000)
Net cash used in financing activities (8,338,000) (45,799,000)
NET INCREASE IN CASH AND CASH EQUIVALENTS 65,031 373,663
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,013,051 627,785
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,078,082 $ 1,001,448
Interest expense paid during the periods was approximately $2,005,000 and
$4,243,000 in 1999 and 1998, respectively. No taxes have been paid by the
Company.
The accompanying notes to condensed financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 September 30, 1999 consist of the following:
<TABLE>
<CAPTION>
Outstanding
Original Original Principal
Date of Stated Principal Amounts
Series Rate Bonds Maturity Amounts at 9/30/99
<C> <C> <C> <C> <C> <C>
62 7.25% 2/1/92 4/15/22 $ 2,925,000 $ 440,000
63 7.60% 5/1/92 5/15/22 3,400,000 694,000
64 7.40% 6/1/92 6/15/22 3,300,000 623,000
65 7.00% 1/1/93 1/15/28 3,029,000 2,881,000
66 7.00% 1/1/93 1/15/28 3,000,000 2,850,000
68 6.25% 4/1/93 5/1/23 3,000,000 1,570,000
69 6.00% 5/1/93 5/1/23 3,022,000 931,000
70 6.00% 3/1/94 11/15/28 3,390,000 3,239,000
71 7.00% 4/1/94 9/20/23 3,015,000 1,280,000
73 7.00% 4/1/94 4/15/24 3,130,000 1,964,000
74 7.10% 5/1/94 2/15/24 3,145,000 2,967,000
75 7.10% 6/1/94 2/15/24 3,290,000 3,094,000
79 6.75% 6/1/95 6/15/22 2,622,000 2,474,000
81 7.00% 4/1/96 5/15/28 3,237,000 3,150,000
82 7.25% 6/1/96 9/15/30 2,987,000 2,932,000
83 7.00% 4/1/97 2/15/27 3,152,000 2,411,000
49,644,000 33,500,000
American Mortgage Securities, Inc.
Mortgage Certificate-Backed Bonds*
5 7.35% 3/1/92 3/1/22 3,000,000 746,000
$52,644,000 $34,246,000
</TABLE>
*Assumed by the Company as a result of the merger of American Mortgage
Securities, Inc. into the Company as of December 30, 1994.
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.
ZMSI II has seldom sold any of the Mortgage Certificates to an
unrelated third party. It has determined that, because of the nature of
the underlying mortgage obligations, the true market values may be
difficult to determine, but are reasonably close to par value.
Note C -- GNMA Certificates
The market values of the GNMA Certificates as of September 30, 1999
and December 31, 1998, were approximately par given the nature of the
mortgage obligations underlying the securities and risk of prepayment.
Note D -- Related Party Transaction
In 1998 the Company sold approximately $39,578,000 of Mortgage
Certificates to B. C. Ziegler and Company, a related company. The Mortgage
Certificates were sold at par which approximated market value. The
proceeds from the Mortgage Certificates were used to call $39,570,000 of
bonds which were outstanding. Because of the high correlation between the
purchase discount on the Mortgage Certificates and the deferred issuance
costs, the sale of the Mortgage Certificates and subsequent replacement of
the Bonds at par value did not result in any significant impact to net
income.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Third Quarter 1999 vs. Third Quarter 1998
During the third quarter of 1999, and also during the third quarter
of 1998, 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 $665,000 in 1999 and $963,000 in 1998. Bond
redemptions totaled $692,000 during the third quarter of 1999 and
$944,000 during the same quarter of 1998.
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 Nine Months 1999 vs. First Nine Months 1998
During the first nine months of 1999, and also during the first nine
months of 1998, 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 $2,198,000 in 1999 and
$4,273,000 in 1998. Bond redemptions totaled $8,338,000 during the first
nine months of 1999. They were $45,799,000 during the same period of 1998.
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 September 30, 1999, there was a net increase in cash and cash
equivalents totaling approximately $65,000. The primary net cash receipt
totaled approximately $5,564,000 from the redemption of Mortgage
Certificates during the period. The primary cash disbursement totaled
$8,338,000 and arose from cash disbursed to redeem outstanding Bonds from
previous series during the period.
The Company's computer systems are Year 2000 compliant. The trustee
of the issuer has indicated that its systems were either Year 2000
compliant when designed and programmed or have been reprogrammed to be Year
2000 compliant.
<PAGE>
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 September 30, 1999 were approximately par given the nature
of the mortgage obligations underlying the securities and the risk of
prepayment.
<TABLE>
<CAPTION>
Expected Maturity Dates
(In US dollars)
ASSETS 1999-2003 Thereafter Total Fair Value
<S> <C> <C> <C> <C>
Mortgage Certifi-
cates (1) $ - $34,084,779 $34,084,779 $33,189,737
Weighted average
interest rate 7.21%
LIABILITIES
Mortgage Certificate-
Backed Bonds
Payable (1) $ - $34,246,000 $34,246,000 $33,356,547
Weighted average
interest rate 6.90%
(1) Assumes no prepayments.
</TABLE>
<PAGE>
PART II
Items 1 through 5.
None of the Items are 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.
ZIEGLER MORTGAGE SECURITIES, INC. II
Dated: November 12, 1999 By /s/ Thomas S. Ross
Thomas S. Ross
President
Dated: November 12, 1999 By /s/ Gary P. Engle
Gary P. Engle
Secretary and Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from ZMSI II
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,078,082
<SECURITIES> 33,189,737
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,777,598
<CURRENT-LIABILITIES> 0
<BONDS> 34,246,000
0
1,500,000
<COMMON> 20,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 36,777,598
<SALES> 0
<TOTAL-REVENUES> 2,197,669
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 309,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,888,104
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
