BANDO McGLOCKLIN DECEMBER 31, 1996
(BANDO MCGLOCKLIN Logo)
Bando McGlocklin Capital Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
DECEMBER 31, June 30,
1996 1996
------------ ---------
ASSETS
Loans $72,467,911 $77,136,508
Loan-backed certificates 1,988,056 2,205,712
Common stock investments 3,819,461 2,098,186
Less: reserve for losses (2,000,000) (800,000)
Less: retained loan discount (1,482,657) (1,683,814)
----------- -----------
Investments at fair value 74,792,771 78,956,592
Excess servicing asset 1,555,231 1,771,597
Short-term securities at market value - 999,255
Investment in swap contracts at market value 444,257 707,602
Interest receivable 1,369,674 1,323,787
Cash 349,870 332,389
Fixed assets - net 281,045 58,177
Other assets - net 656,518 536,529
----------- -----------
TOTAL ASSETS $79,449,366 $84,685,928
=========== ===========
LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Commercial paper $21,768,394 $24,288,887
Notes payable to banks 9,700,000 -
----------- -----------
Short-term borrowings 31,468,394 24,288,887
Small Business Administration debenture - 12,620,000
State of Wisconsin Investment Board
note payable 6,666,667 7,000,000
Loan participations with repurchase options 5,348,619 3,983,990
Other liabilities 1,483,789 1,189,630
----------- -----------
TOTAL LIABILITIES 44,967,469 49,082,507
----------- -----------
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
shares issued and outstanding, before
deducting shares in treasury 263,716 263,716
Additional paid-in capital 24,033,232 24,033,232
Overdistributed net operating income (2,423,044) (211,962)
Net unrealized appreciation (depreciation)
on investments and securities 994,257 (92,398)
Realized loss on investments (2,031,676) (2,034,579)
Treasury stock, at cost
(266,650 shares) (3,262,613) (3,262,613)
----------- -----------
TOTAL COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY 17,573,872 18,695,396
----------- -----------
TOTAL LIABILITIES, PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS'
EQUITY $79,449,366 $84,685,928
=========== ===========
Net asset value per share $4.76 $5.07
=========== ===========
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED Year Ended June 30,
DECEMBER 31, 1996 1996 1995
----------------- ---- ----
OPERATING INCOME:
Interest on loans $3,702,185 $8,471,061 $10,071,440
---------- ---------- ----------
Interest on short-term securities 19,135 57,144 87,716
Premium (expense) income (15,209) 78,978 8,805
Other income 255,562 447,963 428,573
---------- ---------- ----------
TOTAL OPERATING INCOME 3,961,673 9,055,146 10,596,534
---------- ---------- ----------
OPERATING EXPENSES:
Interest expense 987,376 3,399,344 5,519,492
Salaries and employee benefits 616,871 1,140,817 824,943
Other operating expenses 897,860 972,783 722,957
---------- ---------- ----------
TOTAL OPERATING EXPENSES 2,502,107 5,512,944 7,067,392
---------- ---------- ----------
Net operating income 1,459,566 3,542,202 3,529,142
Realized gain (loss) on investments 2,903 (2,651) (2,031,928)
Change in unrealized appreciation/
depreciation on investments
and securities 1,086,655 (327,995) 1,500,681
---------- ---------- ----------
Net operating income, realized gain
(loss) on investments and change in
unrealized appreciation/depreciation
on investments and securities $2,549,124 $3,211,556 $2,997,895
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
NET UNREALIZED
(OVERDISTRIBUTED) APPRECIATION
ADDITIONAL UNDISTRIBUTED (DEPRECIATION) REALIZED
COMMON PAID-IN NET OPERATING ON INVESTMENTS (LOSS) 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-$1.00 per share - - (3,916,153) - (5,091) -
---------- ----------- ---------- ------------ ---------- ----------
BALANCE, JUNE 30, 1995 262,668 23,923,520 (75,688) 235,597 (2,031,928) (566,250)
========== =========== ========== ============ ========== ==========
Proceeds from exercise of
stock options 1,048 109,712 - - - -
Purchase of treasury stock - - - - - (2,696,363)
Net operating income - - 3,542,202 - - -
Change in unrealized appreciation
on investments and securities - - - (327,995) - -
Realized loss on investments - - - - (2,651) -
Cash dividends-$.96 per share - - (3,678,476) - - -
---------- ----------- ---------- ------------ ---------- ----------
BALANCE, JUNE 30, 1996 263,716 24,033,232 (211,962) (92,398) (2,034,579) (3,262,613)
========== =========== ========== ============ ========== ==========
Net operating income - - 1,459,566 - - -
Change in unrealized depreciation
on investments and securities - - - 1,086,655 - -
Realized gain on investments - - - - 2,903 -
Cash dividends-$.995 per share - - (3,670,648) - - -
---------- ----------- ---------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1996 $263,716 $24,033,232 ($2,423,044) $994,257 ($2,031,676) ($3,262,613)
========== =========== ========== ============ ========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
SIX MONTHS ENDED Year Ended June 30,
DECEMBER 31, 1996 1996 1995
------------------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net operating income, realized gain (loss)
on investments and change in
unrealized appreciation/depreciation
on investments and securities $2,549,124 $3,211,556 $2,997,895
Loans made (23,791,873) (42,890,223) (39,385,802)
Principal collected on loans 13,537,343 23,736,708 23,586,361
Loans sold 15,140,783 28,087,037 33,644,334
Premium income-net 15,209 (78,978) (8,805)
Certificate purchased from trust - (1,213,315) (1,294,198)
Loans purchased - (449,615) -
Real estate sold - 216,000 -
Purchase of short-term securities - (899,255) -
Proceeds from maturity of securities 999,255 150,000 15,400,000
Adjustments to reconcile net operating
income, realized gain (loss) on investments
and change in unrealized appreciation/
depreciation on investments and securities to
net cash provided by operating activities:
Change in unrealized appreciation/depreciation
on investments and securities (1,086,655) 327,995 (1,500,681)
Amortization 96,743 86,739 80,270
Depreciation (19,384) 25,655 25,421
Increase (decrease) in cash due to changes in:
Interest receivable (45,887) (135,783) (266,599)
Other assets (420,216) (201,798) (129,530)
Other liabilities 294,159 (136,262) 59,256
----------- ---------- -----------
NET CASH PROVIDED BY OPERATIONS 7,268,601 9,836,461 33,207,922
----------- ---------- -----------
Cash Flows from Financing Activities:
Increase (decrease) in short-term borrowings 7,179,507 (3,435) (9,024,189)
Proceeds from loan participations with
repurchase options-net 1,364,629 3,983,990 -
Repayment of SWIB notes (333,333) (7,333,334) (1,333,333)
Repayment of SBA debentures (12,620,000) - (560,000)
Decrease in notes payable to bank - - (17,600,000)
Dividend received from BMIC 828,725 - -
Dividends paid (3,670,648) (3,678,476) (3,921,244)
Proceeds from exercise of stock options - 110,760 114,257
Repurchase of common stock - (2,696,363) (566,250)
Repurchase of preferred stock - - (341,975)
----------- ---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (7,251,120) (9,616,858) (33,232,734)
----------- ---------- -----------
Net increase (decrease) in cash 17,481 219,603 (24,812)
Cash, beginning of year 332,389 112,786 137,598
----------- ---------- -----------
Cash, end of year $349,870 $332,389 $112,786
=========== ========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 1,777,806 $ 3,680,381 $5,373,395
=========== ========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Bando McGlocklin Capital Corporation (the "Company") was incorporated in
February 1980 and was 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 an SBIC) and liabilities to Bando McGlocklin Small Business
Investment Corporation ("BMSBIC"), a wholly owned subsidiary of the Company.
BMSBIC was 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
investment company under the 1940 Act. BMSBLC made loans to small business
concerns qualifying under the SBA 7(a) Loan Guarantee Program. BMSBLC filed a
plan of liquidation as of November 30, 1996. All assets and liabilities were
transferred to the Company as of December 1, 1996.
On December 27, 1996, BMSBIC filed Articles of Amendment to Restate Articles of
Incorporation to change its name to BMSBLC at the close of the day on December
31, 1996. For the sake of clarity in these financial statements, the subsidiary
now named BMSBLC will continue to be referred to as BMSBIC in these notes.
References to BMSBLC will be to the subsidiary liquidated on November 30, 1996.
At the close of the day on December 31, 1996, BMSBIC surrendered its Small
Business Administration ("SBA") license. BMSBIC will continue to make loans to
small businesses. Effective January 2, 1997, the Company and BMSBIC deregistered
as investment companies under the 1940 Act. The Company will continue to operate
as a registrant under the Securities Act of 1933. In 1997, the Company intends
to capitalize a banking subsidiary.
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 as of and for the periods presented
include the accounts of the Company, BMSBIC and BMSBLC, its wholly owned
registered investment company subsidiaries, after elimination of intercompany
balances and transactions. 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
contracts are also valued at market value. 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 the amounts
which could be realized in the normal course of business which anticipates the
Company holding the loans to maturity and realizing the face values of the
loans. Fair value of the loans 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.
Following deregistration from the 1940 Act in 1997, for financial statement
purposes loans and loan-backed certificates will be stated at unpaid principal
balance unless reserves for impairment are considered necessary.
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 statement 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 (EXPENSE) INCOME
Premium (expense) 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, and subsequent to sale, amortization of
the retained loan discount and excess servicing asset.
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 qualified as regulated investment companies
("RICs") meeting certain requirements under the Internal Revenue Code (the
"Code") for the six months ended December 31, 1996. As such, the Company, BMSBIC
and BMSBLC are not subject to income tax on investment company taxable income
which has been distributed to shareholders. Subsequent to December 31, 1996, the
Company intends to qualify as a real estate investment trust ("REIT") under the
Code. Under REIT status, the Company will continue to not be subject to income
tax on taxable income which is distributed to shareholders. Due to the change in
status, the Company has changed its year end to December 31 for both tax and
financial reporting purposes.
In order to qualify 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 six months ended December 31, 1996, the Company, BMSBIC and
BMSBLC qualified as RICs by meeting the aforementioned requirements. In 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.
In order to qualify as a REIT under the Code, the Company, together with its
qualified REIT subsidiaries, among other requirements, must meet certain annual
income and quarterly asset diversification tests including not holding the
securities of any one issuer valued at more than 5% of total assets, and not
holding more than 10% of the outstanding voting securities of any one issuer.
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 $355,721 for the six months ended December 31, 1996 and $820,598 and
$631,698 for fiscal years 1996 and 1995, respectively. In 1997, ordinary taxable
income will be reduced by $223,911. Primarily as a result of this amortization
for tax purposes, $746,362 of the $3,678,476 in common stock dividends paid by
the Company in the year ended June 30, 1996 was return of capital.
As of December 31, 1996, the Company recognized a $2,550,000 capital gain for
tax purposes on one of its common stock investments. (See Note 2.) This amount
was fully distributed in the six months ended December 31, 1996. For financial
reporting purposes this amount was included in net unrealized
appreciation/depreciation on investments and securities.
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 90% of the Company's loan portfolio at December 31, 1996
is comprised of loans to borrowers located within the State of Wisconsin.
The Company routinely monitors its loan portfolio for evidence of loan
impairment. A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan. Historically impairment has
not been an indicator of loss. As of December 31, 1996 and June 30, 1996, loans
with balances aggregating $2,560,434 and $3,039,906, respectively, were
considered impaired. In determining the fair value of the impaired loans, the
Board of Directors looks to the underlying collateral. A loss reserve is
established if the estimated value of the underlying collateral is insufficient
to cover the impaired loan. At December 31, 1996, a loss reserve of $1,383,730
was recorded on impaired loans totaling $1,580,791. At June 30, 1996, a loss
reserve of $583,729 was recorded on impaired loans totaling $1,444,791. The
average impaired loan balance during the six months ended December 31, 1996 was
$2,860,073. The accrued interest on the impaired loans totals $51,223 at
December 31, 1996 and is considered fully collectible.
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, 1996
of $4,480,053 to Bando McGlocklin Real Estate Investment Corporation, a related
party. The Company has a loan outstanding in the amount of $1,345,631 as of
December 31, 1996 to the contractor that built an office building for Bando
McGlocklin Real Estate Investment Corporation from which the Company leases
space.
Under SBA regulations, investments in and loans to any single small business
concern were limited to 20% of BMSBIC's private capital (common stock and
additional paid-in capital). At December 31, 1996, this limitation totaled
$4,884,305. At December 31, 1996, BMSBIC had loans outstanding to a single
borrower in excess of this regulatory limit. Prior to surrender of its
SBA license, BMSBIC would not have been eligible for additional SBA financing
until it rectified the violation.
In addition to BMIC, common stock investments include 51% equity interests in
two BMSBIC borrowers which were acquired as a result of loan workout situations.
Loans to these two BMSBIC borrowers totaled $3,766,091 as of December 31, 1996.
In addition, BMSBIC received management fees of $232,500 in the six months
ending December 31, 1996 of which $192,500 related to prior periods. At December
31, 1996, a value of $2,550,000 has been attributed to the equity investment in
one of these entities based upon a third party appraisal. The other common stock
investment is valued at $0. Management intends to dispose of these two common
stock investments in the next several years.
Undisbursed construction loan commitments and lines of credit totaled $4,121,506
at December 31, 1996.
Note 3
LOANS SOLD
Since 1994, the Company has sold loans to third parties. The table on page 9
summarizes the sales and the outstanding balance of loans sold.
The Company also sells loans with the option to repurchase them at a later date.
As of December 31, 1996 and June 30, 1996, the balance of loan participations
with repurchase options was $5,384,619 and $3,983,990, respectively. These sales
have been accounted for as secured financings.
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. The
Company's retained interest is subordinated to the portion sold. 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. No associated loss reserve has been
established as of December 31, 1996 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, 1996, the Company was in compliance
with these covenants.
PRINCIPAL BALANCE SOLD PERCENTAGE PRINCIPAL BALANCE SOLD RECOURSE
AT DATE OF SALE SOLD AT DECEMBER 31, 1996 PROVISION
- --------------- ---------- -------------------- ----------
During the six months ended December 31, 1996:
$9,809,709 90% $9,649,400 100%
3,790,000 100% 3,769,795 None
550,000 58% 546,846 None
197,795 75% 196,977 None
- ----------- -----------
$14,347,504 $14,163,018
During the year ended June 30, 1996:
$15,991,581 90% $15,047,626 100%
1,671,644 68-85% 1,606,422 None
1,757,275 100% 1,734,819 None
- ----------- -----------
$19,420,500 $18,388,867
During the year ended June 30, 1995:
$13,222,580 85% $12,217,157 100%
10,343,932 90% 6,969,867 100%
2,837,677 80-85% 1,959,447 None
1,455,000 75% - None
1,605,175 100% - None
- ----------- -----------
$29,464,364 $21,146,471
During the year ended June 30, 1994:
$10,397,410 75% $3,127,172 None
- ----------- -----------
Note 4
LOAN-BACKED CERTIFICATES
During the years ended June 30, 1996 and June 30, 1995, the Company sold loans
to a trust, which issued two classes of certificates as noted in the table
below.
A B
PRINCIPAL BALANCE CERTIFICATE A CERTIFICATE CERTIFICATE A CERTIFICATE
SOLD AT SOLD TO INTEREST RATE AT SOLD TO BALANCE AT
DATE OF SALE THIRD PARTY DEC. 31, 1996 COMPANY DEC. 31, 1996
- ------------ ----------- ------------- -------- -------------
During the year ended June 30, 1996:
$8,666,538 $7,453,223 7.063%(1)<F1> $1,213,315 $6,102,114
---------- ---------- ---------- ----------
During the year ended June 30, 1995:
$6,540,358 $5,246,160 8.00%(2)<F2> $1,294,198 $4,032,231
---------- ---------- ---------- ----------
(1)<F1>The interest rate will be reset monthly based upon the 30-day London
Interbank Offered Rate (LIBOR) plus one and one-half percent.
(2)<F2>The interest rate will be reset every three years based upon the
three-year U.S. Treasury Bond 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 balances to the extent
the underlying collateral is insufficient in the event of nonperformance by the
borrowers. At December 31, 1996, 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 the 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, 1996, the Company held no short-term securities.
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, 1996
was 5.75%.
BMSBIC has entered into three loan agreements with certain banks. The current
loan agreements provide for a maximum of $32,500,000 less the outstanding
principal amount of commercial paper. Two facilities bear interest at the prime
rate while the other facility bears interest at the 30-, 60- or 90-day LIBOR
plus one and three-eighths percent. Interest is payable monthly, and the loan
agreements expire on October 31, 1997. BMSBIC 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 BMSBIC's assets which are not securing
long-term debt. (See Note 8). At December 31, 1996, under these agreements, the
outstanding principal balance was $9,700,000.
Note 8
LONG-TERM DEBT
SMALL BUSINESS ADMINISTRATION DEBENTURE
This debenture had a maturity in November, 1997 and an interest rate of 10.35%.
On September 3, 1996 the debenture was prepaid. A prepayment penalty of $261,234
was expensed in other operating expenses during the six month period ended
December 31, 1996.
STATE OF WISCONSIN INVESTMENT BOARD NOTES PAYABLE
On July 9, 1990, BMSBIC entered into an agreement with the State of Wisconsin
Investment Board ("SWIB") providing for a term note of $10,000,000 bearing
interest at 10.1%. This note was prepaid as of January 30, 1996. A prepayment
penalty of $285,000 was expensed in other operating expenses during the year
ended June 30, 1996.
On November 7, 1991, BMSBIC 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 on November 7, 2006, and
is secured by specific loans. At December 31, 1996, the outstanding principal
balance was $6,666,667.
REVOLVING LINE OF CREDIT
On August 9, 1993, BMSBIC entered into a revolving line of credit facility with
a single bank providing for a maximum amount of $5,000,000. Outstanding
borrowings under this facility were at the prime rate announced from time to
timeby such bank. Outstanding indebtedness under this facility was secured by
specific loans of BMSBIC. On September 30, 1994, BMSBIC terminated this
facility.
NOTES PAYABLE TO BANKS
On April 12, 1994, BMCC 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, BMSBIC 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 BMSBIC'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, 1996, BMSBIC was in compliance with all such
requirements.
Future annual maturities of long-term debt as of December 31, 1996 are as
follows:
1997 $666,667
1998 666,666
1999 666,667
2000 666,666
2001 666,667
Later Years 3,333,334
----------
$6,666,667
==========
Based on the borrowing rates currently available to BMSBIC for loans with
similar maturities, the estimated fair market value of the long-term debt at
December 31, 1996 was approximately $6.8 million.
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 which include loans sold off balance sheet 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 held for purposes other than trading and are further
classified as either hedges or as investment contracts. Both hedges and
investment contracts have the potential for profit and loss. Hedges are
accounted for using the designation method, which matches the swaps with the
assets that are being hedged. When the designated asset matures, or is sold,
extinguished or terminated, the hedge would be reclassified as an investment.
Accounting principles dictate that those contracts 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, 1996 and June 30, 1996, the
investment contracts at market resulted in an unrealized gain of $444,257 and
$707,602, respectively, which was recorded as a component of net unrealized
appreciation (depreciation) on investments and securities.
The average notional amount of investment swaps outstanding during the six
months ended December 31, 1996 and the twelve months ended June 30, 1996 was
$124,178,570 and $142,750,000, respectively.
<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. Floating Fixed 5.65625%(3)<F5> 8.77000% $10,000,000(6) 06/30/97
Milwaukee, Wisconsin <F8>
Firstar Bank Milwaukee, N.A. Floating Fixed 5.60547%(3)<F5> 6.53000% $17,500,000 07/07/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A. Floating Fixed 5.60547%(3)<F5> 6.84700% $31,500,000 07/07/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A.(1)<F3> Floating Floating 5.53516%(3)<F5> 6.14410%(4) $25,000,000 09/16/97
Milwaukee, Wisconsin <F6>
First Bank National Association Floating Fixed 5.82031%(2)<F4> 10.20000% $12,600,000 09/23/97
Minneapolis, Minnesota
Firstar Bank Milwaukee, N.A.(1)<F3> Floating Floating 5.60547%(3)<F5> 6.17247%(5) $35,000,000 10/06/97
Milwaukee, Wisconsin <F7>
Firstar Bank Milwaukee, N.A. Floating Fixed 5.59375%(2)<F4> 8.50270% $ 5,000,000 12/11/97
Milwaukee, Wisconsin
Norwest Bank Minnesota, N.A. Floating Fixed 5.53516%(3)<F5> 5.29000% $15,000,000 09/16/98
Minneapolis, Minnesota
First Bank National Association(1) Floating Fixed 5.64063%(7)<F9> 9.20000% $18,000,000(8) 06/16/99
Minneapolis, Minnesota <F3> <F10>
LaSalle National Bank Floating Fixed 5.59375%(3)<F5> 6.34000% $5,400,000 03/21/01
Chicago, Illinois
Firstar Bank Milwaukee, N.A. Floating Fixed 5.68440%(3)<F5> 7.43500% $10,325,000(9) 09/28/01
Milwaukee, Wisconsin <F11>
LaSalle National Bank Floating Fixed 5.54688%(3)<F5> 7.60000% $5,000,000 03/10/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.50000%(3)<F5> 6.66000% $5,250,000(10) 05/23/05
Chicago, Illinois <F12>
LaSalle National Bank Floating Fixed 5.59375%(3)<F5> 6.50000% $5,000,000(11) 09/29/05
Chicago, Illinois <F13>
LaSalle National Bank Floating Fixed 5.50000%(3)<F5> 7.09000% $12,500,000 09/05/06
Chicago, Illinois
(1)<F3>Investment swap.
(2)<F4>Adjusted every six months to the six-month LIBOR then in effect.
(3)<F5>Adjusted every three months to the three-month LIBOR then in effect.
(4)<F6>Adjusted every three months to the three-month LIBOR then in effect plus
a premium, currently at .60894%, subject to a 25 basis point maximum increase
at each adjustment period.
(5)<F7>Adjusted every three months to the three-month LIBOR then in effect plus
a premium, currently at .567%, subject to a 25 basis point maximum increase at
each adjustment period.
(6)<F8>The notional amount decreases by $166,667 each quarter and was $5,666,658
at December 31, 1996.
(7)<F9>Adjusted every month to the one-month LIBOR then in effect.
(8)<F10>The notional amount decreases by $83,333 each quarter and was $5,416,677
at December 31, 1996. $2,666,667 of this contract was designated as a hedge;
$2,750,000 was accounted for as an investment.
(9)<F11>The notional amount decreases by $166,667 each quarter and was
$6,825,000 at December 31, 1996.
(10)<F12>The notional amount decreases by $100,000 each quarter and was
$4,650,000 at December 31, 1996.
(11)<F13>The notional amount decreases by $75,000 each quarter and was
$4,625,000 at December 31, 1996.
</TABLE>
Based on quoted market valuations, the estimated market value of the hedge swaps
at December 31, 1996 and June 30, 1996 was approximately $1.9 million and $1.2
million, respectively.
The table on page 11 summarizes the interest rate swap agreements in effect at
December 31, 1996. No funds were borrowed or are to be repaid under these
arrangements.
As a result of hedge arrangements, the Company recognized a $732,066, $1,382,751
and $1,193,506 reduction in interest expense for the six months ended December
31, 1996, and fiscal years 1996 and 1995, respectively. In addition, the Company
recognized $445,568, $412,129, and $73,239 reduction in interest expense for the
six months ended December 31, 1996, and fiscal years 1996 and 1995,
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 periods 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, 1996, the Company purchased 15,209
shares for treasury.
Based on quoted market prices, the estimated fair market value of the preferred
stock outstanding as of December 31, 1996 was approximately $16.3 million.
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 to their accounts 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.
Total contributions by the Company to the 401(k) and money purchase plans for
the six months ended December 31, 1996, and the fiscal years ended June 30, 1996
and 1995 were $29,180, $56,407, and $47,826, respectively.
The Company provides additional supplemental retirement benefits for two
executive officers. Such benefits totaled $71,683 for the six months ended
December 31, 1996 and $194,882 for the year ended June 30, 1996. No supplemental
benefits were expensed in the year ended June 30, 1995. 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"). 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. The
exercise price of the options granted in 1995 and 1996 was equal to the market
value of the stock on 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 at right.
The Company adopted the disclosure only option under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation. If the
accounting provisions of the new statement had been adopted as of the beginning
of fiscal 1996, the effect on net income for the year ended June 30, 1996 and
the six months ended December 31, 1996 would have been immaterial.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
STOCK OPTION PLANS DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1995
- ------------------ ----------------- ---------------- ----------------
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at July 1, 1996,
1995 and 1994, respectively 153,924 $10.37 147,144 $9.92 149,551 $8.92
Options granted 15,500 11.25 22,500 11.00 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, 1996,
June 30, 1996 and June 30, 1995,
respectively 169,424 10.45 153,924 10.37 147,144 9.92
Options available for grant
at December 31, 1996, June 30, 1996
and June 30, 1995, respectively 55,430 - 70,930 - 93,430 -
-------- ------- --------- ------- -------- -------
TOTAL RESERVED SHARES 224,854 - 224,854 - 240,574 -
-------- ------- --------- ------- -------- -------
Options exercisable at December 31, 1996,
June 30, 1996 and June 30, 1995,
respectively 46,780 $8.58 46,780 $8.58 47,968 $7.66
-------- ------- --------- ------- -------- -------
</TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- -------------------
REMAINING AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE RANGE SHARES LIFE (YEARS) PRICE SHARES PRICE
- ----------- ------ --------- -------- ------- --------
$6.50-8.50 73,876 3.1 $7.60 36,436 $7.19
$11.00-14.50 95,548 8.0 $12.66 10,344 $13.49
------- ---- ------ ------- ------
Total 169,424 5.9 $10.45 46,780 $8.58
======= =======
Note 13
RESTRICTIONS ON INTERCOMPANY CASH TRANSFERS
The Company is subject to limitations regarding the amount of cash which can be
transferred to it from BMSBIC in the form of loans, advances or dividends
without the consent of a third party. Without prior approval of the SBA, BMSBIC
was 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). At December 31, 1996, BMSBIC had negative "Retained Earnings
Available for Distribution." BMSBIC had obtained SBA approval to distribute net
operating income to the Company for tax purposes. Similarly, pursuant to
covenants contained in its debt agreements, BMSBIC is 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, 1996 and June 30, 1996, the condensed financial statements of
the Company (on an unconsolidated basis) are shown on page 14.
DECEMBER 31, JUNE 30,
BALANCE SHEET, UNCONSOLIDATED 1996 1996
- ----------------------------- ------------ --------
ASSETS
Investments at fair value $10,922,911 $7,968,326
Excess servicing asset 549,655 312,501
Investments in subsidiaries 22,854,176 25,516,827
Short-term securities - 100,000
Notes receivable from subsidiaries - 1,403,666
Other assets-net 1,028,342 552,269
----------- -----------
TOTAL ASSETS $35,355,084 $35,853,589
=========== ============
Other liabilities 873,187 250,168
Preferred stock (less treasury stock) 16,908,025 16,908,025
Shareholders' equity 17,573,872 18,695,396
----------- -----------
TOTAL LIABILITIES, PREFERRED STOCK AND
SHAREHOLDERS' EQUITY $35,355,084 $35,853,589
=========== ===========
FOR THE SIX FOR THE
STATEMENT OF OPERATIONS, MONTHS ENDED YEAR ENDED
UNCONSOLIDATED DECEMBER 31, 1996 JUNE 30, 1996
- -------------- ----------------- -------------
Interest income $465,379 $1,119,127
Equity in income of subsidiaries 2,744,717 5,351,987
Premium (expense) income (8,815) 52,938
Other income 53,491 66,989
----------- -----------
TOTAL OPERATING INCOME 3,254,772 6,591,041
----------- -----------
Interest expense 667,909 1,358,422
Other operating expenses 1,127,297 1,690,417
----------- -----------
TOTAL OPERATING EXPENSES 1,795,206 3,048,839
----------- -----------
Net operating income 1,459,566 3,542,202
Realized gain on investments 2,903 -
Change in unrealized appreciation/
depreciation on investments and
securities 811,947 343,643
----------- -----------
Net operating income, realized gain
on investments and change in unrealized
appreciation/depreciation on investments
and securities $2,274,416 $3,885,845
========== ==========
FOR THE SIX FOR THE
STATEMENT OF CASH FLOWS MONTHS ENDED YEAR ENDED
UNCONSOLIDATED DECEMBER 31, 1996 JUNE 30, 1996
- -------------- ------------------ -------------
Net Cash Provided by Operations $2,955,395 $6,388,466
Net Cash Used in Financing Activities (2,841,923) (6,264,079)
----------- -----------
Net Increase in Cash 113,472 124,387
Cash, beginning of year 227,766 103,379
Cash transferred from BMSBLC to BMCC 487 -
----------- -----------
Cash, end of year $341,725 $227,766
----------- -----------
CONSOLIDATED SCHEDULE OF INVESTMENTS
LOANS, LOAN-BACKED CERTIFICATES AND COMMON STOCK INVESTMENTS
UNPAID
PRINCIPAL
LOANS(1)<F14> NUMBER BALANCE
TYPE OF BUSINESS OF LOANS OR COST VALUE
- ---------------- --------- ---------- ----------
Wholesale Goods 24 $7,945,216 $7,812,960
Fabricated Metal Products 16 8,654,715 8,584,505
Industrial Machinery 46 18,794,532 18,594,990
Services 25 4,721,127 4,513,045
Commercial Printing 30 8,108,672 7,855,236
Rubber Products 2 190,247 150,102
Instruments and Related Products 8 2,544,897 1,150,098
Construction 12 4,292,195 4,260,802
Electronic Equipment 7 3,526,554 3,500,505
Retail 11 1,630,161 1,416,844
Manufacturing-Miscellaneous 14 7,317,641 6,877,498
Transportation 8 4,548,434 4,534,049
Miscellaneous 3 193,520 171,496
---- ----------- -----------
206 72,467,911 69,422,130
LOAN-BACKED CERTIFICATES 2 1,988,056 1,767,450
COMMON STOCK INVESTMENTS 3 3,819,461 3,603,191
---- ----------- -----------
211 $78,275,428 $74,792,771
==== =========== ===========
Percentage of total assets 94%
====
(1)<F14>Loans to small business concerns bear interest primarily at variable
rates ranging from 8% to 11.25% and are generally payable in installments with
final maturities of up to 20 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
<CAPTION>
SIX MONTHS
ENDED Year Ended June 30,
PER SHARE OPERATING PERFORMANCE DECEMBER 31,
- -------------------------------- ------------
1996 1996 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $5.07 $5.58 $5.89 $6.35
Net investment income 0.40 0.92 0.90 1.00
Net realized and unrealized gains or losses
on investments 0.29 (0.09) (0.13) (0.23)
------ ------- ------- -------
Total from investment operations 0.69 0.83 0.77 0.77
Other capital transactions(2)<F16> - (0.38) (0.08) (0.23)
Less distributions to common shareholders
Dividends (from net investment income) (0.31) (0.96)(8) (1.00) (1.00)
<F22>
Distributions (from capital gains) (0.69) - - -
------ ------- ------- -------
Total distributions (1.00) (0.96) (1.00) (1.00)
Net asset value, end of period $4.76 $5.07 $5.58 $5.89
====== ====== ======= =======
Per share market value, end of period $11.25 $11.00 $12.00 $16.25
Total investment return(3)<F17> 10.74%(4) (0.86)% (19.37)% 30.84%
<F18>
------ ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $17,574 $18,695 $21,748 $23,123
Ratio of expenses to average net assets(5)<F19> 26.78%(6) 26.97% 32.92% 20.86%
Ratio of net operating income to average <F20>
net assets 15.62%(6) 17.33% 16.44% 16.30%
<F20>
Portfolio turnover rate(7)<F21> 20.45% 73.42% 50.95% 27.04%
------ ------- ------- -------
(1)<F15>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)<F16>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)<F17>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,
distributions and returns of capital.
(4)<F18>Non-annualized.
(5)<F19>The expense amount used for calculating the ratios includes interest
expense incurred by the Company for each period.
(6)<F20>Annualized.
(7)<F21>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 loans for the
period.
(8)<F22>For tax purposes, approximately $0.20 of the dividends distributed in
the year ended June 30, 1996 were return of capital.
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED Year Ended June 30,
PER SHARE OPERATING PERFORMANCE DECEMBER 31,
- -------------------------------- ------------
1993 1992 1991 1990 1989 1988 1987(1)<F15>
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $4.19 $4.29 $3.57 $4.12 $4.34 $4.56 $4.63
Net investment income 1.01 0.88 0.83 0.74 0.63 0.60 0.03
Net realized and unrealized gains or losses
on investments 0.03 (0.14) (0.07) (0.51) (0.17) (0.21) (0.10)
------ ------- ------- ------- ------- ------- -------
Total from investment operations 1.04 0.74 0.76 0.23 0.46 0.39 (0.07)
Other capital transactions(2)<F16> 2.04 0.04 0.84 - - - -
Less distributions to common shareholders
Dividends (from net investment income) (0.92) (0.88) (0.88) (0.78) (0.68) (0.61) -
Distributions (from capital gains) - - - - - - -
------ ------- ------- ------- ------- ------- -------
Total distributions (0.92) (0.88) (0.88) (0.78) (0.68) (0.61) -
Net asset value, end of period $6.35 $4.19 $4.29 $3.57 $4.12 $4.34 $4.56
======= ======= ====== ======= ====== ======= =======
Per share market value, end of period $12.75 $13.25 $9.00 $8.50 $7.25 $6.625 $6.875
Total investment return(3)<F17> 3.40% 54.91% 17.11% 27.30% 11.33% 5.78% 7.84%(4)<F18>
------ ------- ------- ------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $24,340 $11,512 $11,554 $7,297 $8,424 $8,882 $9,326
Ratio of expenses to average net assets(5)<F19> 20.97% 52.28% 78.23% 89.39% 66.83% 40.97% 28.95%(6)<F20>
Ratio of net operating income to average
net assets 16.68% 20.46% 19.84% 18.57% 15.08% 13.61% 7.94%(6)<F20>
Portfolio turnover rate(7)<F21> 12.37% 11.22% 10.36% 16.91% 15.76% 13.05% 38.14%(6)<F20>
------ ------- ------- ------- ------- ------- -------
(1)<F15>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)<F16>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)<F17>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,
distributions and returns of capital.
(4)<F18>Non-annualized.
(5)<F19>The expense amount used for calculating the ratios includes interest
expense incurred by the Company for each period.
(6)<F20>Annualized.
(7)<F21>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 loans for the
period.
(8)<F22>For tax purposes, approximately $0.20 of the dividends distributed in
the year ended June 30, 1996 were return of capital.
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
CONSOLIDATING BALANCE SHEET
<CAPTION>
DECEMBER 31, 1996 BMCC BMSBIC ELIMINATIONS CONSOLIDATED
- ------------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Loans $5,838,861 $66,629,050 $- $72,467,911
Loan-backed certificates 1,988,056 - - 1,988,056
Common stock investments 3,819,461 - - 3,819,461
Less: reserve for losses (216,270) (1,783,730) - (2,000,000)
Less: retained loan discount (507,197) (975,460) - (1,482,657)
---------- ----------- ---------- ------------
Investments at fair value 10,922,911 63,869,860 - 74,792,771
Excess servicing asset 549,655 1,005,576 - 1,555,231
Investments in subsidiary 22,854,176 - (22,854,176) -
Investment in swap contracts at market value - 444,257 - 444,257
Interest receivable 253,665 1,116,009 - 1,369,674
Cash 341,725 8,145 - 349,870
Fixed assets -net 274,846 6,199 - 281,045
Other assets -net 158,106 520,456 (22,044) 656,518
---------- ----------- ---------- ------------
TOTAL ASSETS $35,355,084 $66,970,502 ($22,876,220) $79,449,366
=========== =========== ============ ============
LIABILITIES, PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Commercial paper $- $21,768,394 $ - $21,768,394
Notes payable to banks - 9,700,000 - 9,700,000
---------- ----------- ---------- ------------
Short-term borrowings - 31,468,394 - 31,468,394
SWIB note payable - 6,666,667 - 6,666,667
Loan participations with repurchase options - 5,348,619 - 5,348,619
Notes payable to subsidiary 22,044 - (22,044) -
Other liabilities 851,143 632,646 - 1,483,789
---------- ----------- ---------- ------------
TOTAL LIABILITIES 873,187 44,116,326 (22,044) 44,967,469
---------- ----------- ---------- ------------
Preferred stock 16,908,025 - - 16,908,025
---------- ----------- ---------- ------------
Common Stock and Other Shareholders' Equity:
Common stock 263,716 24,421,525 (24,421,525) 263,716
Additional paid-in capital 24,033,232 - - 24,033,232
(Overdistributed) undistributed net
operating income (4,154,344) 1,806,703 (75,403) (2,423,044)
Net unrealized appreciation (depreciation)
on investments and securities 690,978 (1,339,473) 1,642,752 994,257
Realized (loss) gain on investments 2,903 (2,034,579) - (2,031,676)
Treasury stock, at cost (3,262,613) - - (3,262,613)
---------- ----------- ---------- ------------
TOTAL COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY 17,573,872 22,854,176 (22,854,176) 17,573,872
=========== =========== ============ ===========
TOTAL LIABILITIES, PREFERRED STOCK,
COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY $35,355,084 $66,970,502 ($22,876,220) $79,449,366
=========== ============ ============ ===========
</TABLE>
<TABLE>
CONSOLIDATING STATEMENT OF OPERATIONS
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1996 BMCC BMSBIC BMSBLC* ELIMINATIONS CONSOLIDATED
<F23>
- ----------------------------------- -------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME:
Interest on loans $465,379 $3,146,364 $90,442 $- $3,702,185
Interest on loan to subsidiary 12,350 - - (12,350) -
Equity in income of subsidiary 2,744,717 - - (2,744,717) -
Interest on short-term securities 11,765 6,546 824 - 19,135
Premium (expense) income (8,815) (9,550) 3,156 - (15,209)
Other income 29,376 212,853 13,333 - 255,562
---------- ---------- -------- ----------- ----------
TOTAL OPERATING INCOME 3,254,772 3,356,213 107,755 (2,757,067) 3,961,673
---------- ---------- -------- ----------- ----------
OPERATING EXPENSES:
Interest expense 667,909 319,467 - - 987,376
Interest expense on loan from parent - - 12,350 (12,350) -
Salaries and employee benefits 601,360 1,157 14,354 - 616,871
Other operating expenses 525,937 342,964 28,959 - 897,860
---------- ---------- -------- ----------- ----------
TOTAL OPERATING EXPENSES 1,795,206 663,588 55,663 (12,350) 2,502,107
---------- ---------- -------- ----------- ----------
Net operating income 1,459,566 2,692,625 52,092 (2,744,717) 1,459,566
Realized gain on investments 2,903 - - - 2,903
Change in unrealized appreciation/
depreciation on investments
and securities 811,947 (1,463,346) - 1,738,054 1,086,655
---------- ---------- -------- ----------- ----------
Net operating income, realized gain
on investments and change in
unrealized appreciation/depreciation
on investments and securities $2,274,416 $1,229,279 $52,092 ($1,006,663) $2,549,124
========== ========== ======== =========== ==========
*<F23>For the five-month period ended November 30, 1996.
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
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1996 BMCC BMSBIC BMSBLC* ELIMINATIONS CONSOLIDATED
<F24>
- ---------------------------------- ------- -------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net operating income, realized gain
on investments and change in unrealized
appreciation/depreciation on investments
and securities $2,274,416 $1,229,279 $52,092 ($1,006,663) $2,549,124
Loans made (5,269,882) (18,521,991) - - (23,791,873)
Principal collected on loans 631,872 12,877,651 27,820 - 13,537,343
Loans sold 4,340,000 10,602,988 197,795 - 15,140,783
Premium income-net 8,815 9,550 (3,156) - 15,209
Proceeds from maturity of securities 100,000 - 899,255 - 999,255
Adjustments to reconcile net operating income,
realized gain on investments and
change in unrealized appreciation/depreciation
on investments and securities to net cash
provided by operating activities:
Change in unrealized appreciation/depreciation
on investments and securitie (811,947) 1,463,346 - (1,738,054) (1,086,655)
Amortization 25,591 48,452 22,700 - 96,743
Depreciation 10,315 (29,699) - - (19,384)
Increase (decrease) in cash due to changes in:
Interest receivable (90,211) 59,346 (15,022) - (45,887)
Other assets (245,368) (175,472) 624 - (420,216)
Other liabilities 619,632 (293,014) (32,459) - 294,159
Payable to parent - - (1,087,443) 1,087,443 -
Payable to subsidiary 11 - - (11) -
Receivable from parent - (11) - 11 -
Receivable from subsidiary 1,087,443 - - (1,087,443) -
Undistributed net operating
income of subsidiaries 274,708 - - (274,708) -
---------- ---------- -------- ------------ -----------
NET CASH PROVIDED BY OPERATIONS 2,955,395 7,270,425 62,206 (3,019,425) 7,268,601
---------- ---------- -------- ------------ -----------
Cash Flows from Financing Activities:
Increase in short-term borrowings - 7,179,507 - - 7,179,507
Proceeds from loan participations
with repurchase options-net - 1,364,629 - - 1,364,629
Repayment of SWIB notes - (333,333) - - (333,333)
Repayment of SBA debenture - (12,620,000) - - (12,620,000)
Dividend received from BMIC 828,725 - - - 828,725
Dividends paid (3,670,648) - - - (3,670,648)
Distribution to parent - (2,909,162) (110,263) 3,019,425 -
---------- ---------- -------- ------------ -----------
NET CASH USED IN FINANCING
ACTIVITIES (2,841,923) (7,318,359) (110,263) 3,019,425 (7,251,120)
---------- ---------- -------- ------------ -----------
Net increase (decrease) in cash 113,472 (47,934) (48,057) - 17,481
Cash, beginning of year 227,766 56,079 48,544 - 332,389
Cash transferred from BMSBLC to BMCC 487 - (487) - -
---------- ---------- -------- ------------ -----------
Cash, end of year $341,725 $8,145 $- $- $349,870
========== ========== ======== ============ ===========
*<F24>For the five-month period ended November 30, 1996.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Bando McGlocklin Capital
Corporation
In our opinion, the accompanying consolidated balance sheet of Bando McGlocklin
Capital Corporation and its subsidiaries (the "Company"), including the
consolidated schedule of investments as of December 31, 1996, and the related
consolidated statements of operations, of changes in shareholders' equity, and
of cash flows and the financial highlights present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and June
30, 1996, and the results of their operations and their cash flows for the six
months ended December 31, 1996 and for each of the two years in the period ended
June 30, 1996, and the financial highlights for the six months ended December
31, 1996 and for each of the nine years in the period ended June 30, 1996 and
for the period May 31, 1987 through June 30, 1987, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of selected loan balances by correspondence
with the borrowers (and the application of alternative auditing procedures where
confirmations were not received), provide a reasonable basis for the opinion
expressed above.
As indicated in Note 1, effective January 2, 1997, the Company deregistered as
an investment company under the Investment Company Act of 1940. In addition, as
indicated in Note 1, subsequent to December 31, 1996, the Company intends to
qualify as a real estate investment trust under the Internal Revenue Code.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information on pages
18-20 is presented for purposes of additional analysis rather than to present
financial position, results of operations and cash flows of the individual
companies. Accordingly, we do not express an opinion on the financial position,
results of operations and cash flows of the individual companies. However, the
consolidating information on pages 18-20 has been subjected to the auditing
procedures applied in the audit of the consolidated financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Milwaukee, Wisconsin
February 19, 1997
CORPORATE & INVESTOR INFORMATION
DIVIDEND REINVESTMENT PLAN
Any holder of record of Common Stock may elect to participate in the Bando
McGlocklin (the Company) Dividend Reinvestment Plan (DRP). Under the DRP,
participating shareholders may elect to have their dividends automatically
invested in Common Stock. The DRP also allows participants to purchase Common
Stock with supplemental cash deposits of between $25 and $3,000 per quarter.
The DRP is administered by, and additional information regarding the DRP may be
obtained from, Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, telephone (414) 765-5000. To participate in the DRP, eligible
shareholders must sign and deliver to Firstar Trust Company an authorization
form. This form may be obtained from Firstar Trust Company or from Bando
McGlocklin Capital Corporation. A shareholder may terminate participation in the
DRP by delivering written notice to Firstar Trust Company.
Reinvested Common Stock dividends and supplemental cash deposits of DRP
participants are commingled and used to purchase Common Stock. Currently, the
DRP's requirements for shares are being met through open market purchases. Upon
the purchase of additional shares by the DRP in each quarter, each participant's
account is credited with that number of shares, including fractions computed to
three decimal points, equal to the amount invested on behalf of such participant
divided by the applicable weighted average purchase price. Dividends reinvested
under the DRP are subject to Federal income tax as though they had been actually
paid in cash to the participant. Each participant is also subject to Federal
income taxation on his or her pro rata share of any brokerage commissions paid
by the Company in connection with the DRP.
DIVIDEND DATE RECORD DATE
November 15 November 5
January 31 December 31
May 15 May 5
August 15 August 5
MARKET MAKERS
Robert W. Baird & Co. Incorporated
Dain Bosworth Incorporated
A.G. Edwards & Sons Inc.
Frederick & Company, Inc.
Hamilton Investments, Inc.
Stifel, Nicolaus & Company Incorporated
NASDAQ STOCK MARKET
Common Stock Symbol: BMCC
Preferred Stock Symbol: BMCCP
TRANSFER AGENT
Firstar Trust Company
Milwaukee, Wisconsin
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
FOR FURTHER INFORMATION
If you would like to be added to our mailing list or receive additional copies
of the Company's December 31, 1996 Report, Dividend Reinvestment Plan or Form
N-2 filed with the Securities and Exchange Commission, please call Carolyn
Barbian, administrative assistant, at (414) 523-4300 or write: Bando McGlocklin
Capital Corporation P.O. Box 190, Pewaukee, WI 53072-0190.
Bando McGlocklin Capital Corporation
W239 N1700 Busse Rd.
Waukesha, WI 53188
Mailing Address:
P.O. Box 190
Pewaukee, WI 53072-0190
Telephone (414) 523-4300
Facsimile (414) 523-4193
(c)1997 Bando McGlocklin
