BANDO McGLOCKLIN SEMI-ANNUAL REPORT 1996
(Bando McGlocklin Logo)
DIVIDEND REINVESTMENT PLAN
Shareholders may automatically reinvest their dividends in the Company's
Dividend Reinvestment Plan. In addition, enrolled shareholders can purchase up
to $3,000 of Bando McGlocklin stock per quarter through the Dividend
Reinvestment Plan without paying any commissions or service fees.
PERFORMANCE RESULTS
AVERAGE ANNUAL TOTAL RETURN 22.84%
Percentage based upon the average of the total rates of return for each of the
years in the period September 1, 1980 through December 31, 1995, assuming the
reinvestment of cash dividends paid.
As with all performance results, total rates of return should not be
considered as representative of the performance of the Company in the future.
Total value on June 30 of each year and December 31, 1995 of a $10,000 initial
investment in September 1980 assuming the reinvestment of dividends paid.
TOTAL VALUE $10,000 INVESTMENT
TOTAL VALUE CHART
Bando S&P
Year Ending McGlocklin 500
June 30, Capital Corp. Composite
- ---------------------------------------------
1980 $10,000 $10,000
1981 10,000 10,000
1982 10,609 8,900
1983 19,367 14,100
1984 22,780 13,400
1985 27,996 17,300
1986 35,001 23,200
1987 48,349 28,800
1988 55,156 26,600
1989 66,041 31,700
1990 85,521 36,500
1991 100,152 38,700
1992 159,458 43,500
1993 164,883 50,700
1994 224,190 50,900
1995 177,981 61,400
Six Months Ending
12/31/95 $200,124 $69,300
Bando McGlocklin Capital Corporation and Subsidiaries
LETTER TO SHAREHOLDERS
As of December 31, 1995, loans under management increased 16 percent to
$131,393,274 from $113,286,201 a year earlier. Our loan portfolio is growing as
anticipated; however, net interest margins continue to be under pressure as a
result of intense competition for loans to small business.
Net operating income of $1,752,040 or $0.45 per share was up slightly from
$l,729,536 or $0.44 per share last year for the same period.
As the banking industry consolidates and lending to small business becomes more
competitive, there will be a greater opportunity for small banks and non-bank
lenders. Bando McGlocklin is preparing to take advantage of this opportunity.
On January 29, 1996 the Board of Directors of Bando McGlocklin Capital
Corporation submitted an appli cation to the State of Wisconsin Commissioner of
Banking for authority to organize a banking corporation to be known as
InvestorsBank, and to the Federal Deposit Insurance Corporation (''FDIC'') for
deposit insurance.
Pending the approval of the State of Wisconsin Commissioner of Banking, the FDIC
and the Federal Reserve, Investors Bank will become a wholly owned subsidiary of
Bando McGlocklin Capital Corporation and will be located at the corner of
Pewaukee and Busse Roads in Pewaukee, Wisconsin (near the corner of Highway J
and I-94). Plans for the building are being finalized. Construction is expected
to begin April 1, 1996 and be completed by September 30, 1996.
InvestorsBank will be a full-service bank. It will expand our business banking
services to existing customers and provide the opportunity to attract new
customers. It will allow us to pursue personal banking relationships by offering
checking accounts, savings accounts, certificates of deposit and a full range of
other banking services for individuals. It will improve our competitive
advantage in an industry where ''value added'' is difficult to achieve.
Historically, Bando McGlocklin has concentrated on increasing dividends to
shareholders. In the future our efforts will be directed toward growth, not
income. Bank earnings will be reinvested rather than distributed as dividends.
As a result, earnings are expected to grow but dividends are not. We believe
this change will maximize the return on shareholders' equity, and consequently,
the return on your investment.
Under the Investment Company Act of 1940 we are required to announce our plans
to repurchase either our common or preferred stock. The price of the stock and
the number of shares available in the open market will determine the number of
shares we decide to repurchase. In the past, the Company has repurchased both
its common and preferred stock in the open market and plans to continue
repurchasing stock as there is opportunity.
Sincerely,
/s/ George R. Schonath
George R. Schonath
Chairman and Chief Executive Officer
CONSOLIDATED BALANCE SHEET
UNAUDITED
DECEMBER 31, June 30,
1995 1995
------------ ----------
ASSETS
Loans $79,371,294 $85,330,979
Loan-backed certificates 2,301,015 1,239,060
Real estate owned 258,773 258,773
Common stock investments 2,098,186 2,098,186
Less: reserve for losses (800,000) (800,000)
Less: retained loan discount (1,530,334) (1,007,561)
---------- ----------
Investments at fair value 81,698,934 87,119,437
Excess servicing asset 1,552,133 1,016,366
Short-term securities at market value 1,196,778 250,000
Investment in swap contracts at
market value 1,103,791 1,035,597
Interest receivable 1,249,631 1,188,004
Cash 995,505 112,786
Fixed assets - net 60,057 44,384
Other assets - net 596,331 460,918
---------- ----------
TOTAL ASSETS $88,453,160 $91,227,492
---------- ----------
---------- ----------
LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Commercial paper $22,335,212 $23,412,322
Notes payable to bank 325,000 880,000
---------- ----------
Short-term borrowings 22,660,212 24,292,322
Small Business Administration debenture 12,620,000 12,620,000
State of Wisconsin Investment
Board notes payable 13,666,667 14,333,334
Other liabilities 2,029,561 1,325,892
---------- ----------
TOTAL LIABILITIES 50,976,440 52,571,548
---------- ----------
Preferred Stock, 1 cent par value,
3,000,000 shares
authorized, 674,791 shares
issued and outstanding
after deducting 15,209 shares
in treasury 16,908,025 16,908,025
---------- ----------
Common Stock and Other Shareholders' Equity:
Common stock, 6 2/3 cents par value,
15,000,000 shares authorized, 3,955,744 and
3,940,024 shares issued
and outstanding before deducting
shares in treasury, respectively 263,716 262,668
Additional paid-in capital 24,033,232 23,923,520
Overdistributed net operating income (199,821) (75,688)
Net unrealized appreciation on
investments and securities 303,791 235,597
Realized loss on investments (2,031,928) (2,031,928)
Treasury stock, at cost (140,950 and 41,750
shares, respectively) (1,800,295) (566,250)
----------- -----------
TOTAL COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY 20,568,695 21,747,919
---------- ----------
TOTAL LIABILITIES, PREFERRED STOCK, COMMON STOCK
AND OTHER SHAREHOLDERS' EQUITY $88,453,160 $91,227,492
---------- ----------
---------- ----------
Net asset value per share $5.39 $5.58
---------- ----------
---------- ----------
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
SIX MONTHS ENDED DECEMBER 31, 1995 1994
--------- ---------
OPERATING INCOME:
Interest on loans $4,579,443 $4,764,330
--------- ---------
Interest on short-term securities 42,960 65,660
Premium income 12,994 -
Other income 121,719 222,513
--------- ---------
TOTAL OPERATING INCOME 4,757,116 5,052,503
--------- ---------
OPERATING EXPENSES:
Interest expense 2,133,830 2,482,768
Salaries and employee benefits 541,417 419,048
Other operating expenses 329,829 421,151
--------- ---------
TOTAL OPERATING EXPENSES 3,005,076 3,322,967
--------- ---------
Net operating income 1,752,040 1,729,536
Realized loss on investments - (2,031,928)
Change in unrealized appreciation/depreciation
on investments and securities 68,194 (992,754)
--------- ----------
Net operating income, realized loss
on investments and change in unrealized
appreciation/depreciation on investments
and securities $1,820,234 $(1,295,146)
--------- ----------
--------- ----------
The accompanying notes are an integral part of the financial statements.
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
<CAPTION>
NET UNREALIZED
(OVERDISTRIBUTED) APPRECIATION
ADDITIONAL UNDISTRIBUTED (DEPRECIATION) REALIZED (LOSS)
COMMON PAID-IN NET OPERATING ON INVESTMENTS GAIN ON TREASURY
STOCK CAPITAL INCOME AND SECURITIES INVESTMENTS STOCK
------- ----------- --------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 $261,590 $23,810,341 $311,323 $(1,265,084) $5,091 $-
------- ---------- ------- ---------- ----- ------
Proceeds from exercise of
stock options 1,078 113,179 - - - -
Purchase of treasury stock - - - - - (566,250)
Net operating income - - 3,529,142 - - -
Change in unrealized depreciation
on investments and securities - - - 1,500,681 - -
Realized loss on investments - - - - (2,031,928) -
Cash dividends-$1.00 per share - - (3,916,153) - (5,091) -
------- ---------- ---------- --------- ---------- --------
BALANCE, JUNE 30, 1995 262,668 23,923,520 (75,688) 235,597 (2,031,928) (566,250)
------- ---------- -------- ------- ---------- --------
Proceeds from exercise of
stock options 1,048 109,712 - - - -
Purchase of treasury stock - - - - - (1,234,045)
Net operating income - - 1,752,040 - - -
Change in unrealized depreciation
on investments and securities - - - 68,194 - -
Cash dividends-$.48 per share - - (1,876,173) - - -
------- ---------- ---------- ------- --------- ---------
BALANCE, DECEMBER 31, 1995 $263,716 $24,033,232 $(199,821) $303,791 $(2,031,928)$(1,800,295)
------- ---------- --------- ------- ----------- ----------
------- ---------- --------- ------- ----------- ----------
The accompanying notes are an integral part of the financial statements.
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED DECEMBER 31, 1995 1994
---------- -----------
Cash Flows from Operating Activities:
Net operating income, realized loss
on investments and change in
unrealized appreciation/depreciation
on investments and securities $1,820,234 $(1,295,146)
Loans made (23,003,932) (14,262,646)
Principal collected on loans 14,164,102 12,432,799
Loans sold 15,400,490 7,045,534
Premium income, net (12,994) -
Certificate purchased from trust (1,213,315) (1,294,198)
Loans purchased (449,615) -
Purchase of short-term securities (1,196,778) -
Proceeds from maturity of securities 250,000 15,390,000
Adjustments to reconcile net operating
income, realized loss on investments
and change in unrealized appreciation/
depreciation on investments and securities to
net cash provided by (used in) operating activities:
Change in unrealized appreciation/depreciation
on investments and securities (68,194) 992,754
Amortization 43,093 37,866
Depreciation 11,240 12,414
Increase (decrease) in cash due to changes in:
Interest receivable (61,627) (513,431)
Other assets (205,419) (124,829)
Other liabilities 703,669 (360,325)
--------- ----------
NET CASH PROVIDED BY OPERATIONS 6,180,954 18,060,792
--------- ----------
Cash Flows from Financing Activities:
Decrease in short-term borrowings (1,632,110) (10,211,876)
Repayment of SWIB notes (666,667) (666,667)
Repayment of SBA debentures - (560,000)
Decrease in notes payable to banks - (4,042,794)
Dividends paid (1,876,173) (2,046,211)
Proceeds from exercise of stock options 110,760 85,001
Repurchase of common stock (1,234,045) (295,125)
Repurchase of preferred stock - (233,975)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (5,298,235) (17,971,647)
---------- -----------
Net increase in cash 882,719 89,145
Cash, beginning of period 112,786 137,598
-------- --------
Cash, end of period $995,505 $226,743
------- -------
------- -------
Supplemental Disclosure of Cash Flow Information:
Interest paid $2,004,408 $2,641,692
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
UNAUDITED
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Bando McGlocklin Capital Corporation (the ''Company'') was incorporated in
February 1980 and is registered as a closed-end management investment company
under the Investment Company Act of 1940 (''1940 Act''). The Company provides
long-term secured loans to finance the growth, expansion and modernization of
small businesses. Prior to March 26, 1993, the Company operated as a small
business investment company (''SBIC''), licensed under the Small Business
Investment Act of 1958.
On March 26, 1993, the Company completed the formation of a holding company
structure by transferring substantially all of its assets (including its license
to operate as a SBIC) and liabilities to Bando McGlocklin Small Business
Investment Corporation (''BMSBIC''), a wholly owned subsidiary of the Company.
BMSBIC is registered as an investment company under the 1940 Act and makes loans
to small business concerns qualifying under the SBIC program.
On May 5, 1993, the Company formed Bando McGlocklin Investment Company
(''BMIC''), a wholly owned subsidiary of the Company. In May 1993, a partially
developed real estate parcel was transferred at fair value to BMIC. The parcel
was previously accounted for as real estate owned.
On March 3, 1994, the Company formed Bando McGlocklin Small Business Lending
Corporation (''BMSBLC''), a wholly owned subsidiary of the Company. On June 13,
1994, BMSBLC was registered as a non-diversified closed-end management invest
ment company under the 1940 Act. BMSBLC makes loans to small business concerns
qualifying under the SBA 7(a) Loan Guarantee Program.
Under the 1940 Act, the Company is required to satisfy certain asset coverage
requirements. These requirements may have an impact on the Company's ability to
pay dividends. At December 31, 1995, the Company satisfied all asset coverage
requirements of the 1940 Act.
BASIS OF PRESENTATION
These financial statements are prepared in accordance with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
BMSBIC and BMSBLC, its wholly owned registered investment company subsidiaries,
after elimination of intercompany balances and trans actions. BMIC is not a
registered investment company under the 1940 Act and as a result, is not
consolidated.
TREASURY STOCK
Preferred stock has been reduced by the cost of shares acquired for treasury.
The common treasury stock is shown as a reduction in shareholders' equity at
cost.
INVESTMENT VALUATION
Under the 1940 Act, unrestricted securities, such as short-term securities, are
to be valued at current market value. In addition, the Company's investment swap
con tracts are also valued at market value by the Board of Directors. Loans,
loan-backed certificates, real estate owned and common stock investments
(including BMIC) are stated at ''fair value'' as determined in good faith by the
Board of Directors.
The valuation of loans to small business concerns, loan-backed certificates,
real estate owned and common stock investments is based on the Board of
Directors' evaluation of the financial condition of the borrowers and/or the
underlying collateral. The values assigned are considered to be amounts which
could be realized in the normal course of business which anticipates the Company
holding the loan to maturity and realizing the face value of the loan. Fair
value normally corresponds to cost unless adverse factors lead to a
determination of fair value at a lower amount. In such instances, a loss reserve
is established to reduce the carrying value to fair value, as determined by the
Board of Directors. Amounts which might ultimately be realized on loans and the
Company's other investments may be less than the valuations herein.
When a portion of a loan is sold, the basis of the retained portion of the loan
is discounted by the differential between the face amount of the sold portion of
the loan and the relative market value of the sold portion of the loan. This
difference is referred to as the Retained Loan Discount. The relative market
value is determined by the expected cash flows discounted with assumptions made
on prepayments and rate of return. At the time of sale, premium income is
reduced by the Retained Loan Discount. The Retained Loan Discount is amortized
over the life of the underlying loan. When a loan is prepaid, the remaining
Retained Loan Discount is recognized as an increase to interest income. When a
loan is sold, the remaining Retained Loan Discount is included as a reduction to
the basis of the underlying loan.
EXCESS SERVICING ASSET
The excess servicing asset represents the unamortized balance of the present
valued cash flows of the interest rate differential resulting from the sale of a
loan with servicing rights retained. The interest rate differential is the
difference between the interest rate on the underlying loan and the interest
rate paid to the purchaser on the sold portion after considering normal
servicing fees and transaction fees. This amount is amortized over the life of
the underlying loan, subject to periodic review of prepayment speeds.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements as a means of managing its
interest rate exposure. The differential to be paid or received on all interest
rate swap agreements is accrued as interest rates change and is recognized over
the life of the agreements. Those agreements which are considered to be
investments are accounted for at market value on the consolidated balance sheet.
FIXED ASSETS
Fixed assets are stated at cost and are depreciated using the straight-line
method for financial state ment purposes and accelerated methods for income tax
purposes.
RECOGNITION OF INTEREST INCOME
Interest income is recorded on the accrual basis to the extent that management
anticipates that such amounts will be collected. In all other cases, no entry is
made to accrue interest, but the unpaid interest is monitored, and interest is
recorded upon receipt.
PREMIUM INCOME
Premium income represents the differential at the time a portion of a loan is
sold between the present valued excess servicing income on the sold portion and
the Retained Loan Discount.
REALIZED AND UNREALIZED GAIN OR LOSS ON INVESTMENTS
Realized gains or losses are recorded upon disposition of investments,
calculated based upon the difference between the proceeds and the cost basis
determined using the specific identification method. Payments made to modify the
terms of investment swap contracts are also accounted for as a realized loss on
investments. All other changes in the value of investments, including the
provision for losses, are included as changes in the unrealized appreciation or
depreciation in the consolidated statement of operations.
INCOME TAXES
The Company, BMSBIC and BMSBLC intend to qualify as regulated investment
companies (''RICs'') meeting certain require ments under the Internal Revenue
Code (the ''Code''). As such, the Company, BMSBIC and BMSBLC will not be subject
to income tax on investment company taxable income which is distributed to
shareholders.
In order to maintain their status as RICs under the Code, the Company, BMSBIC
and BMSBLC must separately, (a) derive at least 90% of their gross income from
dividends, interest, gains from the sale or other disposition of securities and
other income related to the Company's, BMSBIC's and BMSBLC's business of
investing in securities, (b) derive less than 30% of their gross income from the
sale or other disposition of securities held for less than three months, and (c)
the Company's, BMSBIC's and BMSBLC's investments must be diversified as defined
by the Code. During the year ended June 30, 1995, BMSBLC failed to meet the
asset diversification requirement of the Code and as a result, its income was
subject to federal and state taxes. The Company and BMSBIC continued to qualify
as RICs. The Company, BMSBIC and BMSBLC intend to qualify in 1996 and future
years by meeting the aforementioned requirements.
During the year ended June 30, 1995, the Company made payments to modify the
terms of certain investment swap contracts which resulted in a $2,031,928
realized loss for financial statement purposes. For tax purposes, the realized
loss will be amortized over four years. As a result, ordinary taxable income was
reduced by $631,698 in 1995, and will be reduced by $820,598, $528,049, and
$51,583 in 1996, 1997 and 1998, respectively.
NOTE 2
LOANS AND COMMON STOCK INVESTMENTS
The Company's exposure to loss in the event of nonperformance by the borrower is
represented by the outstanding principal amount of the loans. Substantially all
loans are fully secured by first or second mortgages on owner-occupied real
estate. Approximately 87% of the Company's loan portfolio at December 31, 1995
is comprised of loans to borrowers located within the State of Wisconsin.
The Company's loan portfolio consists primarily of variable-rate loans with
terms of five to fifteen years. The Company writes interest rate caps for terms
not exceeding five years on certain variable-rate loans to meet the financing
needs of its borrowers. Interest rate caps written by the Company enable
borrowers to modify or reduce their interest rate risk. The Company is exposed
to interest rate risk to the extent that its cost of funds exceeds the interest
rate caps. Interest rate caps do not represent exposure to credit loss for the
Company in that they do not affect the outstanding principal amounts of the
loans.
The Company has made loans which have outstanding balances at December 31, 1995
of $4,532,971 to Bando McGlocklin Real Estate Investment Corporation, a related
party.
Under Small Business Administration (SBA) regulations, investments in any single
small business concern are limited to 20% of BMSBIC's private capital (common
stock and additional paid-in capital). At December 31, 1995, this limitation
totalled $4,884,305.
In addition to BMIC, common stock investments include 51% and 49% equity
interests, respectively, in two BMSBIC borrowers which were acquired as a result
of loan workout situations. At December 31, 1995, no value has been attributed
to the equity investments in these two entities.
Undisbursed construction loan com mitments and lines of credit totalled
$8,339,104 at December 31, 1995.
NOTE 3
LOANS SOLD
During the six months ended December 31, 1995 and the years ended June 30, 1995
and June 30, 1994, the Company sold loans to third parties. The table below
summarizes the sales.
PRINCIPAL BALANCE SOLD PERCENTAGE PRINCIPAL BALANCE SOLD RECOURSE
AT DATE OF SALE SOLD AT DECEMBER 31, 1995 PROVISION
- -------------------------------------------------------------------------------
For the six months ending December 31, 1995:
$5,062,308 90% $5,021,253 100%
1,671,644 68%-85% 1,666,421 None
---------- ----------
$6,733,952 $6,687,674
For the year ending June 30, 1995:
$13,222,580 85% $12,894,522 100%
10,343,932 90% 8,901,595 100%
2,837,677 75%-80% 2,692,706 None
1,455,000 75% 1,411,647 None
505,175 100% - None
1,100,000 100% - None
---------- ----------
$29,464,364 $25,900,470
For the year ending June 30, 1994:
$10,397,410 75% $5,518,124 None
---------- ---- --------- ----
For the loans sold with no recourse, the Company is susceptible to loss on the
loans up to the percentage of the retained interest to the extent the underlying
collateral is insufficient in the event of nonperformance by the borrower. For
the loans sold with full recourse, the Company is susceptible to loss equal to
the total principal balance of the loan to the extent the underlying collateral
is insufficient in the event of nonperformance. The Company's retained interest
is subordinated to the portion sold. No associated loss reserve has been
established as of December 31, 1995 for loans which have been sold.
Under the terms of the agreements, the Company retains servicing rights for the
entire loan. (See Note 5.) As servicer and provider of recourse, certain
agreements require the Company to comply with various covenants, including the
maintenance of net worth. As of December 31, 1995, the Company was in compliance
with these covenants.
NOTE 4
LOAN-BACKED CERTIFICATES
In the six months ended December 31, 1995, and the year ended June 30, 1995, the
company sold loans to a trust, which issued two classes of cer tificates as
noted in the table below:
PRINCIPAL BALANCE A CERTIFICATE B CERTIFICATE A CERTIFICATE
SOLD AT SOLD TO A CERTIFICATE BALANCE SOLD BALANCE AT
DATE OF SALE THIRD PARTY INTEREST RATE TO COMPANY DECEMBER 31, 1995
- -------------------------------------------------------------------------------
For period ending December 31, 1995:
$8,666,538 $7,453,223 7.4375%(1)<F4> $1,213,315 $6,725,011
--------- --------- ------- --------- ---------
For year ending June 30, 1995:
$6,540,358 $5,246,160 8.00%(2)<F5> $1,294,198 $4,889,547
--------- --------- ----- --------- ---------
(1)<F4>The interest rate will be reset monthly based upon the 30 day London
Interbank OfferedRate (LIBOR) plus one and one-half percent.
(2)<F5>The interest rate will be reset every three years based upon the
three-year U.S. TreasuryBond yield plus one and one-half percent.
The B Certificates purchased by the Company are subordinated to the A
Certificates. The B Certificates receive all excess interest after expenses. The
Company has risk equal to the B Certificates' principal balance to the extent
the underlying collateral is insufficient in the event of nonperformance by the
borrowers. At December 31, 1995, no associated loss reserve has been
established. Under the terms of the Pooling and Servicing Agreements, the
Company retains servicing rights for all the loans sold. (See Note 5).
NOTE 5
EXCESS SERVICING ASSET
The Company has retained the servicing rights on each of the loans it has sold
to third parties. By retaining the right to service the loan, the Company earns
an interest rate spread equal to the difference between the interest rate on the
loan and the interest rate paid to the purchaser on the sold portion (this
difference is referred to as the ''Servicing Spread'').
The value of this excess servicing asset has been estimated based upon the
present valued cash flow of the Servicing Spread after considering the effects
of estimated prepayments, normal servicing fees and transaction fees. The value
of the excess servicing asset is recognized as premium income at time of the
sale and is concurrently capitalized on the consolidated balance sheet. It is
then amortized over the life of the loan. If actual cash flows exceed the excess
servicing asset, the Company will recognize additional income in excess of the
value of the excess servicing asset. A shorter loan life than that estimated at
the time the excess servicing asset was established will result in the carrying
value of the excess servicing asset being written down through a charge to
earnings.
The carrying value of the excess servicing asset is analyzed quarterly by the
Company to determine whether prepayment and default experience has any impact on
this carrying value.
NOTE 6
SHORT-TERM SECURITIES
Short-term securities are used to invest idle cash. Short-term securities having
a maturity of less than 90 days are stated at cost (which approximates market
value). At December 31, 1995, the Company held treasury bills with maturities
ranging from four to eleven days and bearing interest at 4.5% to 4.9%.
NOTE 7
SHORT-TERM BORROWINGS
Commercial paper is issued for working capital purposes with maturities of up to
90 days. The average yield on commercial paper outstanding at December 31, 1995
was 5.95%.
The Company has entered into two loan agreements with certain banks. The current
loan agreements provide for a maximum of $25,000,000 less the outstanding
principal amount of commercial paper. Both facilities bear interest at the prime
rate which is payable monthly. The loan agreements expire on March 31, 1996 and
October 31, 1996. The Company is also required to pay an availability fee to
each bank for the use of these facilities. The banks are party to an
Intercreditor Agreement which grants each party a proportionate security
interest in substantially all of the Company's assets which are not securing
long-term debt. (See Note 8). At December 31, 1995, under these agreements, the
outstanding principal balance was $325,000.
NOTE 8
LONG-TERM DEBT
SMALL BUSINESS ADMINISTRATION DEBENTURE
This debenture has a maturity in fiscal 1998 and an interest rate of 10.350%. In
accordance with provisions of the debenture, BMSBIC has agreed not to repurchase
or retire any of its private capital or make distributions to the Company as its
sole shareholder, other than periodic pay ments of undistributed net operating
income and realized gains, without prior approval of the SBA.
STATE OF WISCONSIN INVESTMENT BOARD NOTES PAYABLE
On March 17, 1989, the Company entered into an agreement with the State of
Wisconsin Investment Board (''SWIB'') providing for a term note of $5,000,000
bearing interest at 10.8%. This note was prepaid as of January 1, 1994.
On July 9, 1990, the Company borrowed an additional $10,000,000 from SWIB
pursuant to a term note which bears interest at a fixed rate of 10.1% per year
through its maturity. The note is payable in equal quarterly installments of
$166,667 with a final payment of unpaid principal due on June 30, 2005, and is
secured by specific loans. At December 31, 1995, the outstanding principal
balance was $6,333,334. This note was prepaid as of January 30, 1996.
On November 7, 1991, the Company borrowed an additional $10,000,000 from SWIB
pursuant to a term note which bears interest at a fixed rate of 9.05% per year
through its maturity. The note is payable in equal quarterly installments of
$166,667 with a final payment of unpaid principal due November 7, 2006, and is
secured by specific loans. At December 31, 1995, the outstanding principal
balance was $7,333,333.
REVOLVING LINE OF CREDIT
On August 9, 1993, the Company entered into a revolving line of credit facility
with a single bank providing for a maximum amount of $5,000,000 revolving line
of credit. Outstanding borrowings under this facility were at the prime rate
announced from time to time by such bank. Outstanding indebtedness under this
facility was secured by specific loans of the Company. On September 30, 1994,
the Company terminated this facility.
NOTES PAYABLE TO BANKS
On April 12, 1994, the Company entered into a credit agreement with a bank for a
maximum amount of $5,000,000 which was secured by specific loans. On September
29, 1994, the note was paid in full.
On May 19, 1994, the Company entered into an additional credit agreement with
the bank for a maximum amount of $15,000,000 which was secured by specific
loans. On June 28, 1995, the note was paid in full.
The SWIB agreements and the loan agreements described in Note 7 contain
restrictions on the Company's new indebtedness, acquisition of its common stock,
return of capital dividends, past due loans, and realized losses on loans, and
require maintenance of collateral, minimum equity and loan-to-debt ratios, among
others. As of December 31, 1995, the Company was in compliance with all such
requirements.
Future annual maturities by fiscal year of long-term debt as of December 31,
1995 are as follows:
1996 $ 666,666
1997 1,333,334
1998 13,953,333
1999 1,333,334
2000 1,333,334
Later Years 7,666,666
----------
$26,286,667
----------
----------
NOTE 9
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements primarily as a means of
managing interest rate risk. To the extent that the Company's variable-rate
loans are funded with fixed-rate debt, the Company is subject to interest rate
risk. To reduce interest rate risk, the Company enters into certain interest
rate swaps designed to convert variable-rate loans into fixed-rate loans.
Although these swaps reduce interest rate risk, the potential for profit or loss
on interest rate swaps still exists depending upon fluctuations in interest
rates. In addition, the Company enters into interest rate swaps in an attempt to
further manage interest rate risk resulting from interest rate movements.
In accordance with applicable accounting principles, the Company's interest rate
swap agreements are classified as either hedges or as investment contracts. Both
hedges and investment contracts have the potential for profit and loss.
Accounting principles dictate that those con tracts not meeting hedge criteria
be classified as investments and marked-to-market with any associated unrealized
gain or loss recorded in the financial statements, whereas those contracts
meeting hedge criteria are not to be classified as investments or marked-to-
market in the financial statements. On December 31, 1995, the investment
contracts at market resulted in an unrealized gain of $1,103,791, which was
recorded as a component of net unrealized appreciation on investments and
securities.
<TABLE>
<CAPTION>
COMPANY COUNTERPARTY CURRENT INTEREST RATES PAID ORIGINAL NOTIONAL EXPIRATION
---------------------------
COUNTERPARTY PAYMENT PAYMENT BY COMPANY BY COUNTERPARTY AMOUNT DATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Firstar Bank Milwaukee, N.A.(1)<F6> Floating Floating 5.05311%(2)<F7> 5.37500%(3)<F8>$50,000,000 11/28/96
Milwaukee, Wisconsin
First Bank National Association Floating Fixed 5.65625%(4)<F9> 8.25000% $ 5,000,000 12/08/96
Minneapolis, Minnesota
Firstar Bank Milwaukee, N.A.(1)<F6> Floating Floating 5.67969%(5)<F10> 5.86950%(6)<F11>25,000,000 12/26/96
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A.(1)<F6> Floating Fixed 5.68750%(5)<F10> 4.62000% $ 5,000,000 12/29/96
Milwaukee, Wisconsin
Norwest Bank Minnesota, N.A. Floating Fixed 5.88672%(4)<F9> 4.66000% $10,000,000 12/30/96
Minneapolis, Minnesota
Firstar Bank Milwaukee, N.A. Floating Fixed 5.99219%(5)<F10> 8.77000% $10,000,000(9)<F14>06/30/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A. Floating Fixed 5.93750%(5)<F10> 6.53000% $17,500,000 07/07/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A. Floating Fixed 5.93750%(5)<F10> 6.84700% $ 1,500,000 07/07/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A.(1)<F6> Floating Floating 5.81250%(5)<F10> 5.98394%(7)<F12>25,000,000 09/16/97
Milwaukee, Wisconsin
First Bank National Association Floating Fixed 5.83594%(4)<F9> 10.20000% $12,600,000 09/23/97
Minneapolis, Minnesota
Firstar Bank Milwaukee, N.A.(1)<F6> Floating Floating 5.93750%(5)<F10> 5.62950%(8)<F13>35,000,000 10/06/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A. Floating Fixed 5.65625%(4)<F9> 8.50270% $ 5,000,000 12/11/97
Milwaukee, Wisconsin
Norwest Bank Minnesota, N.A. Floating Fixed 5.81250%(5)<F10> 5.29000% $15,000,000 09/16/98
Minneapolis, Minnesota
First Bank National Association(1)<F6>Floating Fixed 5.99219%(10)<F15> 9.20000% $8,000,000(11)<F16>06/16/99
Minneapolis, Minnesota
Firstar Bank Milwaukee, N.A. Floating Fixed 5.74219%(5)<F10> 7.43500% $10,325,000(12)<F17>09/28/01
Milwaukee, Wisconsin
LaSalle National Bank Floating Fixed 5.80859%(5)<F10> 7.60000% $5,000,000 03/10/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.86719%(5)<F10> 6.66000% $5,250,000(13)<F18>05/23/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.68750%(5)<F10> 6.50000% $5,000,000(14)<F19>09/29/05
Chicago, Illinois
(1)<F6>Investment Swap.
(2)<F7>Adjusted every three months to the three-month London Interbank Offered
Rate (LIBOR) then in effect minus a variable rate premium, currently at
.81408%. LIBORis an index which reflects changes in market rates.
(3)<F8>Adjusted every three months to the three-month (LIBOR) then in effect
subject to a 25 basis point maximum increase at each adjustment period.
(4)<F9>Adjusted every six months to the six-month LIBORthen in effect.
(5)<F10>Adjusted every three months to the three-month LIBORthen in effect.
(6)<F11>Adjusted every three months to the three-month LIBOR then in effect plus
a premium, currently at .557%, subject to a 25 basis point maximum increase at
each adjustment period.
(7)<F12>Adjusted every three months to the three-month LIBORthen in effect plus
a premium, currently at .60894%, subject to a 25 basis point maximum increase
at each adjustment period.
(8)<F13>Adjusted every three months to the three-month LIBORthen in effect plus
a premium, currently at .567%, subject to a 25 basis point maximum increase at
each adjustment period.
(9)<F14>The notional amount decreases by $166,667 each quarter and was
$6,499,993 at December 31, 1995.
(10)<F15>Adjusted every month to the one-month LIBOR then in effect.
(11)<F16>The notional amount decreases by $83,333 each quarter and was
$5,750,009 at December 31, 1995. $3,000,009 of this contract was designated as
a hedge; $2,750,000 was accounted for as an investment.
(12)<F17>The notional amount decreases by $166,667 each quarter and was
$7,491,667 at December 31, 1995.
(13)<F18>The notional amount decreases by $100,000 each quarter and was
$5,050,000 at December 31, 1995.
(14)<F19>The notional amount decreases by $75,000 each quarter and was
$4,925,000 at December 31, 1995.
</TABLE>
The table on page 10 summarizes the interest rate swap agreements in effect at
December 31, 1995. No funds were borrowed or are to be repaid under these
arrangements.
As a result of hedge arrangements, the Company recognized a $563,614 and
$867,417 reduction in interest expense for the six months ended December 31,
1995 and 1994, respectively. In addition, the Company recognized a $43,458
reduction in interest expense and an $8,730 increase in interest expense for the
six months ended December 31, 1995 and 1994, respectively, as a result of the
investment swap contracts.
During the year ended June 30, 1995, the Company made payments to modify the
terms of certain investment swaps which resulted in a $2,031,928 realized loss
for financial reporting purposes. The modifications resulted in a $1,581,321
reduction to interest expense in the year ended June 30, 1995, as compared with
what would have been recorded absent the modifications.
The Company may be susceptible to risk with respect to interest rate swap
agreements to the extent of nonperformance by the financial institutions
participating in the interest rate swap agreements. However, the Company does
not anticipate nonperformance by these counterparties.
NOTE 10
MANDATORILY REDEEMABLE PREFERRED STOCK
On October 20, 1993, the Company issued 690,000 shares of Adjustable Rate
Cumulative Preferred Stock, Series A in a public offering at $25.00 per share
less an underwriting discount of $1.0625 per share and other issuance costs
amounting to $295,221. The preferred stock is redeemable, in whole or in part at
the option of the Company, on any dividend payment date during the period from
July 1, 2001 to June 30, 2003 and from July 1, 2006 to June 30, 2008 at $25 per
share plus accrued and unpaid dividends. Any shares of preferred stock not
redeemed prior to July 1, 2008 are subject to mandatory redemption on that date
by the Company at a price of $25 plus accrued dividends. Dividends on the
preferred stock are paid quarterly at the annual rate of 7.625%, which is
subject to adjustment effective for the five-year periods commencing July 1,
1998 and July 1, 2003. Through December 31, 1995, the Com pany purchased 15,209
shares for treasury.
NOTE 11
RETIREMENT PLANS
The Company maintains a profit sharing plan in accordance with Section 401(k) of
the Code and a money purchase plan covering all of its employees to provide for
their retirement. Participants in the 401(k) plan may elect to have the Company
make contributions on their account through payroll deductions ranging from 2%
to 10% of the participant's total cash compensation up to the maximum amounts
permitted by the Code. Contributions by the Company to the 401(k) plan are
dependent both upon the Company's earnings and upon decisions made by the
Compensation Committee of the Board of Directors. The Company is obligated to
make contributions to its money purchase plan in amounts equal to 5% of each
participant's total cash compensation. All contributions are funded currently.
The Company provides additional supplemental retirement benefits for two
executive officers. Such benefits totaled $194,882 for the six months ended
December 31, 1995, and no payments were made for the six months ended December
31, 1994. The payments were made in the sole discretion of the outside members
of the Board of Directors.
NOTE 12
STOCK OPTION PLANS
The Company has three stock option plans; the 1987 Stock Option Plan, the 1990
Stock Option Plan and the 1993 Stock Option Plan (the "Plans").
FOR SIX MONTHS FOR TWELVE MONTHS
STOCK OPTION PLANS ENDED 12/31/95 ENDED 6/30/95
- -----------------------------------------------------------------------------
NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION
OPTIONS PRICE OPTIONS PRICE
-------- ------ -------- ------
Options outstanding at July 1, 1995
and 1994, respectively 147,144 $9.92 149,551 $8.92
Options granted - - 30,000 14.50
Options exercised (15,720) 7.05 (16,157) 7.07
Options terminated unexercised - - (16,250) 12.00
-------- -------
Options outstanding at December 31, 1995
and June 30, 1995, respectively 131,424 10.26 147,144 9.92
------- -------
Options available for grant
at December 31, 1995 and
June 30, 1995, respectively 23,430 - 23,430 -
------- -------
TOTAL RESERVED SHARES 154,854 - 170,574 -
------- -------
Options exercisable at December 31, 1995
and June 30, 1995, respectively 32,248 $7.96 47,968 $7.66
------ ------
BALANCE SHEET, UNCONSOLIDATED
DECEMBER 31, June 30,
ASSETS 1995 1995
- -----------------------------------------------------------------------------
Investments at fair value $9,494,419 $12,106,330
Excess servicing asset 316,235 -
Investments in subsidiaries 25,410,766 25,194,643
Short-term securities - 250,000
Notes receivable from subsidiaries 1,914,097 859,977
Other assets-net 1,465,598 370,535
---------- ----------
TOTAL ASSETS $38,601,115 $38,781,485
---------- ----------
---------- ----------
Preferred stock dividend payable 321,579 -
Other liabilities 802,816 125,541
Preferred stock (less treasury stock) 16,908,025 16,908,025
Shareholders' equity 20,568,695 21,747,919
TOTAL LIABILITIES, PREFERRED STOCK AND ---------- ----------
SHAREHOLDERS' EQUITY $38,601,115 $38,781,485
---------- ----------
---------- ----------
FOR THE SIX MONTHS ENDED
DECEMBER 31,
STATEMENT OF OPERATIONS, UNCONSOLIDATED 1995 1994
- ----------------------------------------------------------------------------
Interest income $650,218 $659,549
Equity in income of subsidiary 2,566,661 2,533,445
Other income 27,619 15,726
--------- ---------
TOTAL OPERATING INCOME 3,244,498 3,208,720
--------- ---------
Interest expense 691,788 681,685
Other operating expenses 800,670 797,499
--------- ---------
TOTAL OPERATING EXPENSES 1,492,458 1,479,184
--------- ---------
Net operating income 1,752,040 1,729,536
Change in unrealized appreciation/depreciation
on investments and securities 216,124 (2,876,329)
--------- ----------
Net operating income, realized gain on
investments, and change in unrealized
appreciation/depreciation on investments
and securities $1,968,164 $1,146,793
--------- ---------
--------- ---------
FOR THE SIX MONTHS ENDED
DECEMBER 31,
STATEMENT OF CASH FLOWS, UNCONSOLIDATED 1995 1994
- -----------------------------------------------------------------------------
Net Cash Provided by Operations $3,874,472 $7,208,514
Net Cash Used in Financing Activities (2,999,458) (7,089,310)
--------- ----------
Net Increase in Cash 875,014 119,204
--------- ----------
Cash, beginning of period 103,379 16,081
--------- ----------
Cash, end of period $978,393 $135,285
In accordance with the Plans' provisions, the exercise prices for stock options
may not be less than the fair market value of the optioned stock at the date of
grant. All of the options are ''incentive stock options'' as defined under
Section 422 of the Code. All options must be exercised within ten years of the
date of grant.
Additional information relating to the Plans is shown on page 11.
Note 13
- -------
RESTRICTIONSON INTERCOMPANY CASH TRANSFERS
The Company is subject to limitations regarding the amount of cash which can be
transferred to it from BMSBICin the form of loans, advances or dividends without
the consent of a third party. Without prior approval of the SBA, BMSBICis
prohibited from making distributions to the Company other than periodic payments
out of ''Retained Earnings Available for Distribution,'' as defined by the SBA
(consisting of the sum of undistributed net operating income, realized gains and
losses on investments and unrealized depreciation on investments and
securities). Similarly, pursuant to covenants contained in its debt agreements,
BMSBICis prohibited from declaring or paying any dividend on its common stock
which would constitute a return-of-capital dividend for income tax purposes.
At December 31, 1995 and June 30, 1995, the condensed financial statements of
the Company (on an unconsolidated basis) are shown at left.
CONSOLIDATED SCHEDULE OF INVESTMENTS
UNAUDITED
DECEMBER 31, 1995
SHORT-TERM INVESTMENTS(1)<F20> COST VALUE
--------- --------
U.S. Treasury Bills $1,196,778 $1,196,778
--------- ---------
--------- ---------
Percentage of total assets 1.4%
-------
-------
LOANS, REAL ESTATE OWNED AND COMMON STOCK INVESTMENTS
UNPAID
PRINCIPAL
LOANS(2)<F21> NUMBER BALANCE
TYPE OF BUSINESS OF LOANS OR COST VALUE
- -----------------------------------------------------------------------------
Wholesale Goods 45 $24,724,686 $23,927,259
Metalworking Machinery 31 18,082,564 17,965,893
Industrial Machinery 17 5,338,214 5,221,187
Services 27 5,489,682 5,280,498
Commercial Printing 19 7,695,091 7,624,290
Rubber Products 5 2,678,261 2,649,424
Instruments and Related Products 7 1,385,405 1,345,033
Construction 13 3,619,012 3,545,354
Electronic Equipment 4 2,029,699 2,029,699
Retail 5 899,918 854,143
Furniture 3 1,192,514 1,153,690
Electrical Goods 4 663,990 658,446
Transportation 7 2,183,072 2,125,362
Miscellaneous 9 3,389,186 3,260,489
--- ---------- ----------
196 79,371,294 77,640,767
LOAN-BACKED CERTIFICATES 2 2,301,015 1,977,728
REAL ESTATE OWNED 1 258,773 219,982
COMMON STOCK INVESTMENTS 3 2,098,186 1,860,457
--- ---------- ----------
202 $84,029,268 $81,698,934
--- ---------- ----------
--- ---------- ----------
Percentage of total assets 92%
---
---
(1)<F20>The short-term investments bear interest at rates ranging from 4.5% to
4.9%. All investment issuances have a maturity of 90 days or less.
(2)<F21>Loans to small business concerns bear interest primarily at variable
rates ranging from 8% to 13.5% and are generally payable in installments with
final maturities of up to 15 years. Loans made by the Company are primarily
secured by a first or second mortgage on real estate. Names have been omitted as
disclosures to the public may be detrimental to the small business concern.
<TABLE>
FINANCIAL HIGHLIGHTS
UNAUDITED
<CAPTION>
FOR SIX
MONTHS ENDED
PER SHARE OPERATING PERFORMANCE DEC. 31,
- -------------------------------
1995 1995 1994 1993 1992 1991 1990 1989 1988 1987(1)<F22>
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.58 $5.89 $6.35 $4.19 $4.29 $3.57 $4.12 $4.34 $4.56 $4.63
Net investment income 0.45 0.90 1.00 1.01 0.88 0.83 0.74 0.63 0.60 0.03
Net realized and unrealized gains or
losses on investments 0.01 (0.13) (0.23) 0.03 (0.14) (0.07) (0.51) (0.17) (0.21) (0.10)
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Total from investment operations 0.46 0.77 0.77 1.04 0.74 0.76 0.23 0.46 0.39 (0.07)
Other capital transactions(2)<F23> (0.17) (0.08) (0.23) 2.04 0.04 0.84 - - - -
Less distributions to common shareholders
Dividends (from net investment income) (0.48) (1.00) (1.00) (0.92) (0.88) (0.88) (0.78) (0.68) (0.61) -
Distributions (from capital gains) - - - - - - - - - -
Returns of capital - - - - - - - - - -
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Total distributions (0.48) (1.00) (1.00) (0.92) (0.88) (0.88) (0.78) (0.68) (0.61) -
Net asset value, end of period $5.39 $ 5.58 $ 5.89 $ 6.35 $ 4.19 $ 4.29 $ 3.57 $ 4.12 $ 4.34 $ 4.56
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Per share market value, end of period $13.00 $12.00 $16.25 $12.75 $13.25 $ 9.00 $ 8.50 $ 7.25 $ 6.625 $ 6.875
Total investment return(3)<F24> 12.44%(4)<F25>(19.37)% 30.84% 3.40% 54.91% 17.11% 27.30% 11.33% 5.78% 7.84%(4)<F25>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $20,569 $21,748 $23,123 $24,340 $11,512 $11,554 $ 7,297 $ 8,424 $ 8,882 $ 9,326
Ratio of expenses to average
net assets(5)<F26> 27.69%(6)<F27> 32.92% 20.86% 20.97% 52.28% 78.23% 89.39% 66.83% 40.97% 28.95%(6)<F27>
Ratio of net operating income to average
net assets 16.14%(6)<F27> 16.44% 16.30% 16.68% 20.46% 19.84% 18.57% 15.08% 13.61% 7.94%(6)<F27>
Portfolio turnover rate(7)<F28> 41.38% 50.95% 27.04% 12.37% 11.22% 10.36% 16.91% 15.76% 13.05% 38.14%(6)<F27>
1)<F22>May 31, 1987 to June 30, 1987. The Company's initial registration
statement under the Securities Act was declared effective on May 13, 1987. Data
for the interim period from May 13, 1987 to May 31, 1987 are not available.
(2)<F23>The amounts set forth reflect treasury stock activities and stock option
exercises at amounts in excess of or less than net asset value, the decrease
in net asset value resulting from costs from sale of the preferred stock in
1994, and the increase in net asset value of $2.04 and $0.84 per share for
fiscal 1993 and for fiscal 1991, respectively, resulting from the sale of
shares of Common Stock in public offerings in fiscal 1993 and fiscal 1991 at
per share prices in excess of the Company's net asset value per share.
(3)<F24>The returns set forth assume the purchase of Common Stock at the market
price at the beginning of the period and a sale at the market price on the
last day of the period and assume the reinvestment of common dividends.
(4)<F25>Non-annualized.
(5)<F26>The expense amount used for calculating the ratios includes interest
expense incurred by the Company for each period.
(6)<F27>Annualized.
(7)<F28>Calculated for each period by dividing (a) the lesser of new loans
(including refinancings) or loan payments and maturities (including
refinancings) for the period by (b) the monthly average of gross loans for the
period.
The accompanying notes are an integral part of the financial statemetns.
</TABLE>
<TABLE>
CONSOLIDATING BALANCE SHEET
UNAUDITED
<CAPTION>
DECEMBER 31, 1995 BMCC BMSBIC BMSBLC ELIMINATIONS CONSOLIDATED
- ----------------- ---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Loans $5,656,234 $72,134,906 $1,580,154 $- $79,371,294
Loan-backed certificates 2,301,015 - - - 2,301,015
Real estate owned - 258,773 - - 258,773
Common stock investments 2,098,186 - - - 2,098,186
Less: reserve for losses (237,729) (562,271) - - (800,000)
Less: retained loan discount (323,287) (880,535) (326,512) - (1,530,334)
--------- ---------- --------- ------------ ----------
Investments at fair value 9,494,419 70,950,873 1,253,642 - 81,698,934
Excess servicing asset 316,235 911,976 323,922 - 1,552,133
Investments in subsidiaries 25,410,766 - - (25,410,766) -
Short-term securities at market value - - 1,196,778 - 1,196,778
Investment in swap contracts
at market value - 1,103,791 - - 1,103,791
Interest receivable 111,852 1,086,653 51,126 - 1,249,631
Cash 978,393 11,977 5,135 - 995,505
Fixed assets -net 35,860 24,197 - - 60,057
Notes receivable from subsidiaries 1,914,097 - - (1,914,097) -
Other assets -net 339,493 231,216 54,238 (28,616) 596,331
---------- ---------- ---------- ------------ ----------
TOTAL ASSETS $38,601,115 $74,320,683 $2,884,841 $(27,353,479) $88,453,160
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
LIABILITIES, PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Commercial paper $ - $22,335,212 $ - $ - $22,335,212
Notes payable to bank - 325,000 - - 325,000
---------- ---------- --------- --------- ----------
Short-term borrowings - 22,660,212 - - 22,660,212
SBA debenture - 12,620,000 - - 12,620,000
SWIB notes payable - 13,666,667 - - 13,666,667
Notes payable to subsidiary 28,616 - - (28,616) -
Notes payable to parent - 70 1,914,027 (1,914,097) -
Other liabilities 1,095,779 933,782 - - 2,029,561
---------- ---------- ---------- ------------ ----------
TOTAL LIABILITIES 1,124,395 49,880,731 1,914,027 (1,942,713) 50,976,440
---------- ---------- ---------- ------------ ----------
Preferred stock 16,908,025 - - - 16,908,025
---------- ---------- ---------- ------------ ----------
Common Stock and Other
Shareholders' Equity:
Common stock 263,716 24,421,525 1,000,000 (25,421,525) 263,716
Additional paid-in capital 24,033,232 - - - 24,033,232
(Overdistributed) undistributed net
operating income (1,679,470) 1,508,835 (29,186) - (199,821)
Net unrealized appreciation (depreciation)
on investments and securities (248,488) 541,520 - 10,759 303,791
Realized loss on investments - (2,031,928) - - (2,031,928)
Treasury stock, at cost (1,800,295) - - - (1,800,295)
---------- ---------- ---------- ------------ ----------
TOTAL COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY 20,568,695 24,439,952 970,814 (25,410,766) 20,568,695
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
TOTAL LIABILITIES, PREFERRED STOCK,
COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY $38,601,115 $74,320,683 $2,884,841 $(27,353,479) $88,453,160
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
</TABLE>
<TABLE>
CONSOLIDATING STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1995 BMCC BMSBIC BMSBLC ELIMINATIONS CONSOLIDATED
- ---------------------------------- -------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME:
Interest on loans $530,417 $3,873,300 $175,726 $- $4,579,443
Interest on loan to subsidiary 83,365 - - (83,365) -
Equity in income of subsidiary 2,566,661 - - (2,566,661) -
Interest on short-term securities 36,436 1,435 5,089 - 42,960
Premium income (7,052) 27,607 (7,561) - 12,994
Other income 34,671 83,914 3,134 - 121,719
-------- ---------- -------- ------------ ------------
TOTAL OPERATING INCOME 3,244,498 3,986,256 176,388 (2,650,026) 4,757,116
-------- ---------- -------- ------------ ------------
OPERATING EXPENSES:
Interest expense 691,788 1,442,042 - - 2,133,830
Interest expense on loan from parent - - 83,365 (83,365) -
Salaries and employee benefits 510,368 - 31,049 - 541,417
Other operating expenses 290,302 22,918 16,609 - 329,829
-------- ---------- -------- ------------ ------------
TOTAL OPERATING EXPENSES 1,492,458 1,464,960 131,023 (83,365) 3,005,076
-------- ---------- -------- ------------ ------------
Net operating income 1,752,040 2,521,296 45,365 (2,566,661) 1,752,040
Realized loss on investments - - - - -
Change in unrealized appreciation/
depreciation on investments
and securities 216,124 68,194 - (216,124) 68,194
--------- --------- ------ --------- ---------
Net operating income, realized loss
on investments and change in
unrealized appreciation/depreciation
on investments and securities $1,968,164 $2,589,490 $ 45,365 $(2,782,785) $1,820,234
--------- --------- ------ ---------- ---------
--------- --------- ------ ---------- ---------
BMCC-Bando McGlocklin Capital Corporation
BMSBIC-Bando McGlocklin Small Business Investment Corporation
BMSBLC-Bando McGlocklin Small Business Lending Corporation
SBA-Small Business Administration
SWIB-State of Wisconsin Investment Board
</TABLE>
<TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
UNAUDITED
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1995 BMCC BMSBIC BMSBLC ELIMINATIONS CONSOLIDATED
- ---------------------------------- ---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net operating income, realized loss on
investments and change in unrealized
appreciation/depreciation on investments
and securities $1,968,164 $2,589,490 $45,365 $(2,782,785) $1,820,234
Loans made (630,149) (20,300,808) (2,072,975) - (23,003,932)
Principal collected on loans 233,092 13,430,015 500,995 - 14,164,102
Loans sold 8,666,538 5,062,308 1,671,644 - 15,400,490
Premium income, net 7,052 (27,607) 7,561 - (12,994)
Certificate purchased from trust (1,213,315) - - - (1,213,315)
Loans purchased (4,767,544) - - 4,317,929 (449,615)
Loans sold to parent - 4,317,929 - (4,317,929) -
Purchase of short-term securities - - (1,196,778) - (1,196,778)
Proceeds from maturity of securities 250,000 - - - 250,000
Adjustments to reconcile net operating income,
realized loss on investments and change
in appreciation/depreciation on
investments and securities to net cash
provided by (used in) operating activities:
Change in unrealized appreciation/depreciation
on investments and securities (216,124) (68,194) - 216,124 (68,194)
Amortization 25,591 14,259 3,243 - 43,093
Depreciation 4,199 7,041 - - 11,240
Increase (decrease) in cash due to changes in:
Interest receivable (31,892) (24,161) (5,574) - (61,627)
Other assets (217,946) 8,423 4,104 - (205,419)
Other liabilities 976,566 (265,504) (7,393) - 703,669
Payable to parent - 70 1,054,049 (1,054,119) -
Payable to subsidiary 22,288 - - (22,288) -
Receivable from parent - (22,288) - 22,288 -
Receivable from subsidiary (1,054,119) - - 1,054,119 -
Undistributed net operating
income of subsidiaries (147,929) - - 147,929 -
---------- ----------- ---------- ------------ ------------
NET CASH PROVIDED BY OPERATIONS 3,874,472 4,720,973 4,241 (2,418,732) 6,180,954
---------- ----------- ---------- ------------ ------------
Cash Flows from Financing Activities:
Decrease in short-term borrowings - (1,632,110) - - (1,632,110)
Repayment of SWIB notes - (666,667) - - (666,667)
Dividends paid (1,876,173) - - - (1,876,173)
Distribution to parent - (2,418,732) - 2,418,732 -
Proceeds from exercise of stock options 110,760 - - - 110,760
Repurchase of common stock (1,234,045) - - - (1,234,045)
---------- ----------- ---------- ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (2,999,458) (4,717,509) - 2,418,732 (5,298,235)
---------- ---------- ---------- ------------ -----------
Net increase in cash 875,014 3,464 4,241 - 882,719
Cash, beginning of period 103,379 8,513 894 - 112,786
---------- ---------- ---------- ------------ -----------
Cash, end of period $978,393 $11,977 $5,135 $- $995,505
---------- ----------- ---------- ------------ ------------
---------- ----------- ---------- ------------ ------------
</TABLE>
CORPORATE & INVESTOR INFORMATION
BOARD OF DIRECTORS
George R. Schonath
Chairman of the Board
Jon McGlocklin
President
Salvatore L. Bando
Robert A. Cooper
Peter A. Fischer
David A. Geraldson, Sr.
Albert O. Nicholas
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Milwaukee, Wisconsin
GENERAL COUNSEL
Foley & Lardner
Milwaukee, Wisconsin
TRANSFER AGENT
Firstar Trust Company
Milwaukee, Wisconsin
MARKET MAKERS
Robert W. Baird & Co.
Incorporated
Dain Bosworth Incorporated
A.G. Edwards & Sons Inc.
Frederick & Company, Inc.
Principal Financial Securities, Inc.
Stifel, Nicolaus & Company
Incorporated
NASDAQ STOCK MARKET
Common Stock Symbol: BMCC
Preferred Stock Symbol: BMCCP
DIVIDEND DATE RECORD DATE
November 15 November 5
January 31 December 31
May 15 May 5
August 15 August 5
DIVIDEND REINVESTMENT PLAN
Shareholders may automatically reinvest their dividends in the Company's
Dividend Reinvestment Plan. In addition, enrolled shareholders can purchase up
to $3,000 of Bando McGlocklin stock per quarter through the Dividend
Reinvestment Plan without paying any commissions or service fees.
FOR FURTHER INFORMATION
Copies of the Company's 1995 Annual Report, Dividend Reinvestment Plan or Form
N-2 filed with the Securities and Exchange Commission may be obtained by calling
Carolyn Barbian, administrative assistant, at (414) 784-9010 or by writing:
Bando McGlocklin Capital Corporation
13555 Bishops Court, Suite 205
Brookfield, WI 53005-6226
STOCK PRICE
YEAR ENDING JUNE 30,
High Low Close
1987 $6.875 $6.375 $6.875
1988 7.375 5.500 6.625
1989 8.000 6.625 7.250
1990 9.000 6.500 8.500
1991 9.500 7.500 9.000
1992 14.000 9.000 13.250
1993 14.250 11.250 12.750
1994 18.500 12.250 16.250
1995 16.500 11.500 12.000
1996(2)<F1> 13.750 11.250 13.000
(2)<F1>Six months ending December 31, 1995
NET OPERATING INCOME PER SHARE (3)<F2>
YEAR ENDING JUNE 30,
First Second Third Fourth
Quarter Quarter Quarter Quarter
1987 $.175 $.135 .120 $.126
1988 .136 .143 .155 .170
1989 .151 .172 .171 .132
1990 .150 .215 .180 .196
1991 .200 .200 .178 .221
1992 .250 .220 .221 .187
1993 .200 .230 .260 .250
1994 .250 .290 .260 .200
1995 .220 .220 .210 .260
1996 .240 .210 - -
(3)<F2>Due to the use of weighted average shares outstanding when calculating
net operating income per share, the sum of the quarterly per share data may not
equal the per share data for the year.
RETURN ON INVESTMENT (4)<F3>
YEAR ENDING JUNE 30,
Dividend Apprec./ Total
Yield Deprec. Return
1988 9.42% -3.64% 5.78%
1989 9.58 1.75 11.33
1990 12.05 15.25 27.30
1991 11.23 5.88 17.11
1992 11.67 43.24 54.91
1993 7.17 -3.77 3.40
1994 8.20 22.64 30.84
1995 5.63 -25.00 -19.37
(4)<F3>Assuming the reinvestment of dividends paid
EARNINGS PER SHARE
STOCK PRICE
YEAR ENDING JUNE 30,
EARNINGS PER SHARE/STOCK PRICE CHART
YEAR ENDING STOCK PRICE
JUNE 30, HIGH LOW
- ------------------------------
1991 $9.50 $7.50
1992 14.00 9.00
1993 14.25 11.25
1994 18.50 12.25
1995 16.50 11.50
BANDO MCGLOCKLIN CAPITAL CORPORATION
13555 Bishops Court, Suite 205
Brookfield, Wisconsin 53005-6226
Telephone (414) 784-9010
Facsimile (414) 784-3426
Copyright 1996 Bando McGlocklin
