U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998;
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from _________________ to
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Commission File Number :811-3787
BANDO McGLOCKLIN CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
W239 N1700 Busse Road
P.O. Box 190
Pewaukee, Wisconsin 53072-0190
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 523-4300
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Title of Class
Common Stock, 6-2/3 cents Par Value Preferred Stock, 6-2/3 cents Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant at March 16, 1999 was $35,885,596.
The number of shares of common stock outstanding at March 16, 1999 was
3,689,102
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Bando McGlocklin Capital Corporation Proxy Statement for the
1999 Annual Meeting of Shareholders (to be filed with the Securities and
Exchange Commission under Regulation 14A within 120 days after the end of the
Registrant's fiscal year and, and upon such filing, to be incorporated by
reference into Part III).
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BANDO McGLOCKLIN CAPITAL CORPORATION
Index to Annual Report on Form 10-K
For the Fiscal Year Ended
December 31, 1998
Page
Part I.........................................................................2
Item 1. Description of Business...........................................2
Item 2. Properties........................................................6
Item 3. Legal Proceedings.................................................6
Item 4. Submission of Matters to a Vote of Security Holders...............6
Part II........................................................................6
Item 5. Market for Common Equity and Related Stockholder Matters..........6
Item 6. Selected Financial Data (In thousands,
except per share data)............................................7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (for the fiscal
years ended December 31, 1997 and June 30, 1996 and 1995).........8
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk................................................14
Item 8. Financial Statement and Supplementary Data.......................16
Part III......................................................................52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................52
Item 10. Directors and Executive Officers of the Registrant...............52
Item 11. Executive Compensation...........................................52
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................52
Item 13. Certain Relationships and Related Transactions...................52
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..........................................52
(i)
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Part I
Item 1. Description of Business
Introduction
Bando McGlocklin Capital Corporation (the "Company"), was originally
incorporated in February 1980 to provide long-term secured loans to finance the
growth, expansion and modernization of small businesses. The Company is now
engaged in two business segments, the Financial Service Business and the
Consumer Products Business.
On May 5, 1993, the Company formed Bando McGlocklin Investment Company,
a subsidiary of the Company ("BMIC"). In May 1993, the Company transferred a
fully developed real estate parcel to BMIC. In December 1996 one percent of the
economic interest in BMIC was sold to an unrelated third party. In January 1997,
this one percent interest was sold to George R. Schonath, President and Chief
Executive Officer of the Company. In a subsequent recapitalization of BMIC, the
99% voting common stock interest in BMIC then held by the Company was converted
to the ownership of 100% of the non-voting common stock of BMIC. After the
recapitalization, the Company held 100% of the non-voting common stock of BMIC,
representing 99% of the total equity interest, and George R. Schonath owned 100%
of the voting common stock of BMIC, representing one percent of the total equity
interest. The recapitalization was effected because applicable REIT tax
provisions do not permit a REIT to own more than 10% of the voting stock of any
corporation.
On March 26, 1993, the Company transferred substantially all of its
assets and liabilities to Bando McGlocklin Small Business Lending Corporation
("BMSBLC"), a wholly-owned subsidiary of the Company. In 1997, BMSBLC
contributed its ownership interest in Lee Middleton Original Dolls, Inc.
("Middleton Doll") and License Products, Inc. ("License Products"), both 51%
owned subsidiaries engaged in the consumer products business, to BMIC. The
remaining 49% of each company was owned by unaffiliated parties. On April 30,
1998, BMIC acquired the remaining 49% interest of Middleton Doll and the right
to produce certain dolls for $5 million in cash. The consolidated accounts of
the Company reflect the consolidated financial position and results of
operations of BMIC, Middleton Doll and License Products.
Prior to January 2, 1997, the Company and BMSBLC were registered as
investment companies under the Investment Company Act of 1940 ("1940 Act").
Effective January 2, 1997, the Company and BMSBLC deregistered as investment
companies under the 1940 Act. The Company now reports under the Securities
Exchange Act of 1934 ("1934 Act"). Since January 1, 1997, the Company, together
with its wholly-owned subsidiary, BMSBLC, has operated as a real estate
investment trust ("REIT") pursuant to the provisions of Section 856 of the
Internal Revenue Code of 1986, as amended.
On September 3, 1997, the Company capitalized InvestorsBancorp, Inc., a
bank holding company, with approximately $6.2 million and then distributed all
its shares of InvestorsBancorp, Inc. to the Company's shareholders.
The Company and InvestorsBancorp, Inc., together with its wholly-owned
subsidiary, InvestorsBank (the "Bank"), share common offices and personnel.
Expenses are shared between the two entities in accordance with a Management
Services and Allocation of Expenses Agreement (the "Management Agreement"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
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Financial Services Business
Loans
The Company, through its Financial Services Business, (i) manages its
loan portfolio comprised primarily of loans to small business entities secured
by first or second mortgages, (ii) purchases loan participations from banks,
including the Bank, and (iii) owns industrial and commercial real estate for
lease to small businesses.
Until the distribution of the shares of InvestorsBancorp, Inc. in
September 1997, the Company had engaged in the business of originating loans to
small businesses. Concurrent with such distribution, the Company and the Bank
agreed in the Management Agreement that the Company would not originate any
loans unless agreed to by the Bank in writing or unless the loans are made to
current Company customers. Thus, except for the making of loans to Company
customers who desire to increase their loan amounts with the Company, the
Company does not solicit any loans.
The Company's loan portfolio is managed by the Bank for an annual fee,
payable monthly, equal to 25 basis points of the total dollar amount of loans
under management and 6% on leased properties. Overhead expenses and rent are
also shared by the Bank and the Company, as well as certain expenses of
employees providing accounting, reporting and related services to the Company.
The Company's loan portfolio is primarily comprised of long-term,
variable rate, secured loans to small business entities. The loans are primarily
secured by first mortgages on real estate, although some loans are secured by
second mortgages. Over 93% of the Company's loans by dollar volume are loans to
borrowers located in the State of Wisconsin. Substantially all of the Company's
loan portfolio is held by BMSBLC.
The Company's borrowers include manufacturers, wholesalers, retailers,
professionals and service providers. The Company funds its lending operations
through its equity capital, bank and institutional borrowings, commercial paper
sales and the sale of loan participations.
Real Estate
On July 14, 1998 BMSBLC completed an acquisition of approximately $19.6
million of leased properties and other assets from Bando McGlocklin Real Estate
Investment Corporation ("BMREIC"), an independently owned real estate investment
trust. The leased portfolio, which has a cost of approximately $18.3 million,
consists of 18 owner-occupied properties in the greater Milwaukee area that are
leased to a variety of manufacturing and service businesses.
The Company currently owns 3 other buildings and two parcels of real
estate on which two multi-purpose buildings are being constructed. The Company
has entered into long-term lease agreements for all properties. The Company
anticipates that it will continue to construct or purchase additional industrial
or commercial properties to lease.
The Company anticipates that most of its rental properties will be for
industrial real estate, but also anticipates that it may also own and lease
commercial real estate properties, such as office buildings and retail stores.
The Company expects that substantially all of its properties will be located in
Wisconsin.
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Competition
The Company, in managing its loan portfolio, competes primarily with
commercial banks and commercial finance companies, many of which have
substantially more assets and capital than the Company. Banks, in particular,
have been active in seeking to refinance outstanding loans. The Company
believes, however, that it is able to compete effectively to maintain its loan
portfolio because of its smaller size and more flexible structure.
In owning and leasing real estate, the Company competes primarily with
other REITs and other investors such as insurance companies and a variety of
investment vehicles which seek to own and lease real estate. In addition, the
Company competes with banks and other financial institutions, which seek to lend
money to potential tenants of the Company which would allow the potential
tenants to construct and own the building rather than lease a building owned by
the Company.
Employees
On December 31, 1998, the Company employed only its President and a
Senior Vice President. All other duties are performed by Bank employees pursuant
to the Management Agreement.
Consumer Products Business
(a) Middleton Doll. Middleton Doll, located in Belpre, Ohio, is a 100%
owned subsidiary of BMIC. Middleton Doll is a manufacturer of collectible vinyl
dolls and a distributor of collectible porcelain dolls and mohair bears.
Middleton Doll uses a multi-step process to manufacture its vinyl dolls that
include: (1) molding liquid vinyl to create the various body parts of its dolls;
(2) painting, eyeing and wigging each doll; and (3) dressing the dolls in custom
designed clothes.
Although it has one retail location, Middleton Doll does not sell
directly to the retail market. The majority of its dealers are small
independently owned stores and specialty shops that are located in shopping
malls, plazas, freestanding buildings and various other locations. Middleton
Doll uses a database of approximately 1,700 to 2,000 stores to target potential
customers. In addition, Middleton Doll sells directly to a limited number of
large retailers. In addition to 600 JC Penney stores, its dolls are being
introduced nationwide in Toys-R-Us, FAO Schwartz and Imaginarium Stores.
Middleton Doll sells its products throughout the United States. It
competes with various other doll manufacturers including: Madam Alexander, LL
Nickerbocker, Ashton Drake and Pleasant Company. Middleton Doll's strategy for
future growth is to expand its channels of distribution and its product lines.
About 40% of Middleton Dolls material purchases, such as clothing and
accessories, are purchased from sources in the Far East. The other 60%,
including clothing, is purchased from sources in the USA.
Approximately 47% of Middleton Doll raw materials were acquired from a
single supplier in Hong Kong. There is no formal agreement between Middleton
Doll and this supplier. As of December 31, 1998, Middleton Doll has entered into
commitments to acquire approximately $630,000 of raw material from this
supplier.
(b) License Products. License Products is a 51% owned subsidiary of
BMIC. License Products, located in New Berlin, Wisconsin, designs, develops and
markets a line of quality proprietary time pieces. The products of the Company
are distributed nation wide through major retail account channels.
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(c) Employees. The Consumer Products Business employs approximately 150
persons.
(d) Seasonality. The Consumer Products Business tends to be seasonal
with the strongest months being September, October and November.
(e) Large Customers. No customer accounted for more than 10% of the
Consumer Products Business' total revenues for fiscal 1998.
(f) Backlog. The backlog of the Consumer Products Business was
approximately $21,000 as of December 31, 1998, all of which should be filled
during 1999.
Revenues of Principal Product Groups
The following table sets forth (in millions of dollars), for each of
the last three fiscal years, revenues attributable to the Company's principal
product groups:
1998 1997 1996
---- ---- ----
Revenues
Loan Portfolio 10,698 11,021 8,364
Real Estate Portfolio 1,184 -- --
Dolls 17,807 17,673 --
Time Pieces 1,939 1,328 1,702
Other 329 897 560
------- ------ ------
Total 31,957 30,919 10,626
Segment Information
Financial information concerning the Company's business segments is
incorporated by reference to the consolidated financial statements on pages 19 -
27 herein.
Executive Officers
George R. Schonath, 57, has served as Chief Executive Officer of the
Company since 1983 and President since July 1997. Mr. Schonath has also served
as President and Chief Executive Officer of InvestorsBancorp, Inc. and the Bank
since they were established in 1997. Until July, 1997, he served as a director
(since 1980) and Chairman of the Board (since 1983) of the Company.
Jon McGlocklin, 55, has served as a Senior Vice President of the
Company since July 1997. Mr. McGlocklin has also served as Senior Vice President
and Secretary of InvestorsBancorp, Inc. and Senior Vice President of the Bank
since they were established in 1997. He has also served as President of Healy
Manufacturing, Inc., Menomonee Falls, Wisconsin, since 1997, and as an announcer
for the Milwaukee Bucks, an NBA baksetball team, since 1976. Until July 1997, he
served as a director (since 1980) and President (since 1991) of the Company.
Susan J. Hauke, 33, has been the Company's Vice President - Finance,
Secretary and Treasurer since 1997. In 1997, Ms. Hauke was also appointed
Controller, Vice President - Finance and Assistant Secretary of
InvestorsBancorp, Inc., and Controller, Vice President-Finance, Secretary and
Treasurer of the
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Bank. From 1991 until 1997, Ms. Hauke served as Controller for the Company, and
was a senior accountant at PricewaterhouseCoopers LLP before joining the
Company.
Scott J. Russell, 39, has been a Senior Vice President of the Company
since 1997 and InvestorsBancorp, Inc. since February 1998 and a Senior Vice
President and Lending Officer of the Bank since 1997. From 1994 until 1997, Mr.
Russell served as a Vice President of the Company and was a corporate banker
with the Bank of Tokyo, Chicago, Illinois, prior to joining the Company.
Item 2. Properties
BMCC owns an approximately 16,000 square foot building. BMCC leases
approximately 11,200 square feet of the building, of which approximately 4,750
square feet is leased to the Bank and approximately 6,450 is leased to two other
lessees. The monthly rent received is variable based upon LIBOR interest rates.
Each lease has a one year term.
Middleton Doll owns an approximately 51,000 square foot building that
serves as its headquarters and manufacturing facility located at 1301 Washington
Boulevard, Belpre, Ohio. During 1997 Middleton Doll added 15,000 square feet to
its existing manufacturing facility. The building is a one-story retail, office
and warehouse. In addition, Middleton Doll leases warehouse space of
approximately 40,000 square feet in Belpre, Ohio which it uses to store raw
material and finished goods.
License Products leases approximately 9,500 square feet in a
multi-tenant building located at 16200 West Rogers Drive, New Berlin, Wisconsin
at a monthly rental rate of $3,790. The term of the lease is month-to-month.
Item 3. Legal Proceedings
As of the date of this filing, neither the Company nor any of its
subsidiaries is a party to any legal proceedings, the adverse outcome of which,
in management's opinion, would have a material effect on the Company's results
of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The common stock of the Company is traded on The Nasdaq Stock Market
under the symbol BMCC.
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The table below represents the high and low sales prices for the
Company common stock as reported on The Nasdaq Stock Market and cash dividends
paid per share for fiscal 1998 and 1997:
Cash Dividends
Common Stock per share
1998 High Low
First Quarter $11.875 $ 9.625 $0.18
Second Quarter $13.000 $ 9.750 $0.18
Third Quarter $12.250 $ 8.500 $0.18
Fourth Quarter $11.500 $ 8.000 $0.18
1997 High Low
First Quarter $13.500 $11.250 $ --
Second Quarter $14.250 $11.250 $0.18
Third Quarter $14.750 $ 8.625 $0.18
Fourth Quarter $13.000 $ 8.750 $0.18
As of March 16, 1999, there were approximately 1,200 shareholders of
record of the Company's common stock.
Item 6. Selected Financial Data (In thousands, except per share data)
The following table sets forth certain Selected Consolidated Financial
Data for the periods and as of the dates indicated:
<TABLE>
<CAPTION>
Six months ended
Twelve months ended December 31, December 31, 1996 Twelve months ended June 30,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $ 32,075 $ 30,984 $ 10,940 $ 10,617 $ 11,738
Net income available
to common shareholders 3,770 3,506 1,142 3,130 3,208
Total assets 154,424 140,337 79,519 85,379(1) 91,033(1)
Long term debt 62,506 75,273 12,045 23,604(1) 26,953(1)
Total liabilities 125,639 111,002 46,370 50,285(1) 52,823(1)
Redeemable preferred stock 16,908 16,908 16,908 16,908(1) 16,908(1)
Diluted earnings per share $1.02 $0.95 $0.31 $0.82 $0.81
Cash dividends declared
per common share $0.65 $2.28 $0.995 $0.96 $1.00
(In thousands, except per share data)
(1) Unaudited
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (for the fiscal years ended December 31, 1998,
December 31, 1997 and June 30, 1996)
General
Amounts presented as of December 31, 1998 and December 31, 1997, and for the
twelve months ended December 31, 1998 and 1997 include the consolidation of two
segments. The financial services segment includes Bando McGlocklin Capital
Corporation ("BMCC" or the "Company") and Bando McGlocklin Small Business
Lending Corporation ("BMSBLC"), a 100% owned subsidiary of the Company. The
consumer products segment includes Bando McGlocklin Investment Corporation
("BMIC"), a 99%-owned subsidiary of the Company; Lee Middleton Original Dolls,
Inc. ("Middleton Doll") and License Products, Inc. ("License Products"), 100%
and 51%-owned subsidiaries of BMIC, respectively. As of April 30, 1998, BMIC
acquired the remaining 49% of Middleton Doll; before that date BMIC owed 51% of
Middleton Doll. The twelve months ended June 30, 1996 also includes the
consolidation of the two segments, however the consumer products segment does
not include Middleton Doll. The Company had owned 49% of Middleton Doll since
1993; the acquisition of an additional two percent of Middleton Doll was
completed at the end of June 1996. Prior to this acquisition, Middleton Doll was
accounted for on the equity method.
Results of Operations
For the twelve months ended December 31, 1998 and December 31, 1997
The Company's total net income available for common shareholders for the twelve
months ended December 31, 1998 equaled $3.77 million or $1.02 per share
(diluted) as compared to $3.51 million or $0.95 per share (diluted) for the
twelve months ended December 31, 1997, a 7.4% increase.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the twelve months ended December 31, 1998 was $2.08 million compared to $1.32
million for the twelve months ended December 31, 1997, a 58% increase. As of
April 30, 1998, BMIC owned 100% of Middleton Doll as compared with the year
ended December 31, 1997 when BMIC owned only 51% of Middleton Doll.
Net sales from consumer products for the year ended December 31, 1998 increased
4% to $19.75 million compared to $19.0 million for the twelve months ended
December 31, 1997. This was due to increased sales of $0.14 million at Middleton
Doll and $0.61 million at License Products. Sales of License Products increased
46% during 1998 compared to 1997. Cost of sales increased 1% to $10.45 million
for the twelve months ended December 31, 1998 compared to $10.38 million for the
twelve months ended December 31, 1997 as a result of the increase in sales.
Middleton Doll's cost of sales decreased to $8.72 million from 9.48 million, a
8% decrease. License Products cost of sales increased to $1.73 million from
$0.90 million, a 92% increase. In total gross profit margin increased slightly
to 47% for the twelve months ended December 31, 1998 from 45% for the twelve
months ended December 31, 1997. Middleton Doll's gross profit margin increased
from 46% to 51% during 1998 while License Products decreased from 32% to 11% in
1998.
Total operating expenses of consumer products for the twelve months ended
December 31, 1998 were $5.59 million compared to $4.74 million for the twelve
months ended December 31, 1997, an 18% increase. Sales and marketing expense
increased $0.86 million, a 37% increase. $0.63 million of this increase is
attributable to Middleton Doll implementing a major expansion of trade shows,
including more advertising, personnel and leased space per show, along with
additional promotions such as, point of sale displays. License Products' sales
and marketing expense was up $0.23 million because of its efforts to increase
sales of its new product line through printed materials and opening a showroom
in Chicago. New product development expense increased $0.06 million at Middleton
Doll because of two new artists that were introduced late in 1997 and increased
$0.04 million at License Products as result of the new product line. General and
administrative expenses decreased $0.11 million to $1.84 million for the twelve
months ended December 31, 1998 compared to $1.95 million for the twelve months
ended December 31, 1997. Middleton Doll's expense decreased $0.19 million
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due to some non-recurring expenses that occurred in 1997. License Products'
general and administrative expense increased $0.03 million during 1998 and
BMIC's expense increased $0.05 million as a result of amortization of goodwill
associated with the acquisition of the minority interest in Middleton Doll and
an increase in other miscellaneous expenses.
The consumer products' consolidated net income was reduced by the minority
interest ownership in the net earnings of Middleton Doll for the period prior to
April 30, 1998. The minority interest in earnings of subsidiaries equaled $0.22
million for the twelve months ended December 31, 1998 compared to $1.08 million
for the twelve months ended December 31, 1997. The 81% decrease is the result of
BMIC owning 100% of the stock of Middleton Doll as of April 30, 1998. The
consumer products' consolidated net income was reduced by a provision for income
taxes of $1.49 million and $1.54 million for the twelve months ended December
31, 1998 and 1997, respectively.
Financial Services
Net income from financial services for the twelve months ended December 31, 1998
was $3.06 million compared to $3.47 million for the twelve months ended December
31, 1997, a 12% decrease.
Total revenues were $12.21 million for the twelve months ended December 31, 1998
compared to $11.92 million for the twelve months ended December 31, 1997, a 2%
increase. Interest on loans and rental income increased 8% to $11.88 million for
the twelve months ended December 31, 1998 from $11.02 million for the twelve
months ended December 31, 1997. Rental income for the year was $1.18 million as
a result of the acquisition of $19 million of leased properties from BMREIC.
Interest on loans decreased 3% as a result of the decrease in loans due to the
acquisition of BMREIC. Prior to the acquisition, the Company had $11.1 million
in loans outstanding with BMREIC. The average loans under management decreased
$3.6 million, or 3% during 1998.
Other income decreased $0.57 million. Of this amount, $0.50 million was the
result of receiving proceeds of an executive's life insurance policy where BMCC
was the beneficiary in the second quarter of 1997. The remainder of the decrease
is comprised of fees related to the sale of residential mortgages, which are now
being originated in InvestorsBank and a reduction in miscellaneous loan fees
stemming from competitive market conditions.
Interest expense increased to $7.67 million from $5.65 million for the twelve
months ended December 31, 1998 as compared with the twelve months ended December
31, 1997. Interest expense increased approximately $0.81 million as a result of
the purchase of $19.6 million of assets from BMREIC, net of the $13.8 million in
liabilities assumed and other new assets. Those additional assets were funded
with new debt. Average debt on the balance sheet increased $38.7 million during
the twelve months ended December 31, 1998 as compared to the twelve months ended
December 31, 1997 as a result of BMSBLC repurchasing loans that had been
previously sold. Since December 31, 1997 debt increased $13.2 million. During
1998 the Company had borrowed $5.0 million in new debt to lend to Middleton Doll
for the repurchase of the 49% minority interest and the licensing agreement;
this new debt increased interest expense by $0.28 million during the year.
Interest expense, which is offset by swap income, increased by $0.93 million
because of a decline in swap income due to investment swaps maturing and no new
agreements being entered into.
Operating expenses decreased 47% to $1.48 million for the twelve months ended
December 31, 1998 compared to $2.79 million for the twelve months ended December
31, 1997. All employees of the Company terminated their employment with the
Company on September 8, 1997 to become employees of InvestorsBank (the "Bank"),
a wholly owned subsidiary of InvestorsBancorp, Inc., except for certain
executive officers who are employees of both the Company and the Bank. The
Company and the Bank entered into a Management Services and Allocation of
Operating Expenses Agreement (the "Agreement"). The effect of such agreement has
been to reduce the level of operating expenses in the Company. Salaries and
other operating expenses were reduced by $1.01 million. $0.40 million of the
other operating expenses was reduced as a result of non-recurring professional
fees that were incurred in 1997 due to the restructuring. The Company reversed
$0.26 million of its loan loss reserve to due the good condition of its loan
portfolio as of December 31, 1998. The
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reductions in other operating expense were partially offset by an increase in
depreciation of $0.21 million attributable to the merger with BMREIC and other
new leased properties. In addition the expense resulting from the change in
appreciation on investment swaps decreased $0.25 million for the year ended
December 31, 1998. No new investment swaps were entered into during the twelve
months ended December 31, 1998. Disclosures regarding the Company's swap
transactions are incorporated by reference from Note 12 of the financial
statements on pages 36 and 37, herein.
The financial services segment is comprised of two entities that intend to
qualify as a real estate investment trust ("REIT") under the code. Under REIT
status, the Company, together with its qualified REIT subsidiary, BMSBLC, will
continue to not be subject to income tax on taxable income which is distributed
to shareholders. Taxable income and book earnings do not deduct the preferred
stock dividend. The taxable income was $3.74 million or $1.01 per share for the
twelve months ended December 31, 1998, which differs from book earnings of $3.06
million or $0.83 per share due to the impact of the elimination of intercompany
revenue and expenses from the consumer products segment and normal book/tax
adjustments. For the twelve months ended December 31, 1997 the taxable income
was $3.52 million or $0.95 per share, which differs from book earnings of $3.47
million or $0.94 per share due to impact of the elimination of intercompany
revenue and expenses from the consumer products segment and normal book/tax
adjustments.
For the twelve months ended December 31, 1997 and June 30, 1996
The Company's total net income available for common shareholders for the twelve
months ended December 31, 1997 equaled $3.51 million or $0.95 per share
(diluted) as compared to $3.13 million or $0.82 per share (diluted) for the
twelve months ended June 30, 1996, a 12% increase.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the twelve months ended December 31, 1997 was $1.32 million compared to $0.04
million for the twelve months ended June 30, 1996. This large increase is the
result of the increase in Middleton Doll's earnings for the twelve months
December 31, 1997. The acquisition of an additional two percent of Middleton
Doll was completed at the end of June 1996; previously it was accounted for on
the equity method and was not consolidated in the financial statements. As of
December 31, 1997, BMIC owned 51% of Middleton Doll as compared with the year
ended June 30, 1996 when BMIC owned only 49% of Middleton Doll.
Net sales from consumer products for the year ended December 31, 1997 increased
to $19.0 million compared to $1.7 million for the twelve months ended June 30,
1996. This large increase is the result of the consolidation of operations of
Middleton Doll for the twelve months December 31, 1997 as noted in the above
paragraph. Cost of sales increased to $10.38 million for the twelve months ended
December 31, 1997 compared to $1.1 million for the twelve months ended June 30,
1996 as a result of the increase in sales.
Total operating expenses of consumer products for the twelve months ended
December 31, 1997 were $4.74 million compared to $0.99 million for the twelve
months ended June 30, 1996. Sales and marketing expense increased $2.06 million.
New product development expense increased $0.43 million. General and
administrative expenses increased $1.26 million. All of these large increases
are the result of the consolidation of Middleton Doll for the twelve months
December 31, 1997.
As a result of the change in accounting for Middleton Doll, equity earnings in
this subsidiary decreased $0.36 million for the twelve months ended December 31,
1997.
The minority interest ownership in the net earnings of Middleton Doll reduced
the consumer products' consolidated net income for the year ended December 31,
1997 and the net consolidated earnings of BMIC. The minority interest in
earnings of subsidiaries equaled $1.08 million for the twelve months ended
December 31, 1997 compared to zero for the twelve months ended June 30, 1996.
The consumer products' consolidated net income was reduced by a provision for
income taxes of $1.54 million for the twelve months ended December 31, 1997 and
increased net income by $0.04 million of a tax benefit for the year ended June
30, 1996.
10
<PAGE>
Financial Services
Net income from financial services for the twelve months ended December 31, 1997
was $3.47 million compared to $4.38 million for the twelve months ended June 30,
1996, a 21% decrease.
Total revenues were $11.92 million for the twelve months ended December 31, 1997
compared to $8.92 million for the twelve months ended June 30, 1996, a 34%
increase. Interest on loans increased 32% to $11.02 million for the twelve
months ended December 31, 1997 from $8.36 million for the twelve months ended
June 30, 1996. Interest on loans increased $2.66 million for the twelve months
ended December 31, 1997 as a result of the new loans and the repurchase of loans
that were previously sold to a third party. Average loans under management
increased $5.7 million to $136.9 million for the twelve months ended December
31, 1997, compared to $131.2 million for the twelve months ended June 30, 1996.
However, the increase in interest income as a result of buying back loans is
reduced by the decreasing yield on the portfolio of loans due to the market's
competitive pricing. The average prime rate of 8.44% was slightly lower for the
twelve months ended December 31, 1997 compared to 8.52% for the twelve months
ended June 30, 1996.
Other income increased 60% or $0.34 million during the twelve months ended
December 31, 1997 compared to the twelve months ended June 30, 1996. Other
income increased $0.50 million as a result receiving $0.50 million from an
executive's life insurance policy where BMCC was the beneficiary in the second
quarter of 1997. This increase was offset by $0.16 million decrease in other
income.
Interest expense increased 168% to $5.65 million from $2.11 million for the
twelve months ended December 31, 1997 as compared with the twelve months ended
June 30, 1996. Interest expense increased for the twelve months ended December
31, 1997 as a result of the repurchase of loans by BMSBLC. Those repurchased
loans were funded with new debt. This repurchase had no impact on net operating
income as both interest income and interest expense increased by the same
amount. Interest expense, which is offset by swap income, increased by $0.2
million for the twelve months ended December 31, 1997 because of a decline in
swap income due to some investment swaps maturing and no new ones being entered
into. Disclosures regarding the Company's swap transactions are incorporated by
reference from Note 12 to the financial statements on pages 36 and 37, herein.
Operating expenses increased 15% to $2.79 million for the twelve months ended
December 31, 1997 compared to $2.43 million for the twelve months ended June 30,
1996. The $0.36 million increase in expenses over the corresponding prior period
are non-recurring expenses, of which $0.06 million is the result of a salary
adjustment and $0.30 million are restructuring expenses of the Company,
including legal and accounting fees, salaries and other miscellaneous expenses.
Beginning in September of 1997, certain operating expenses were allocated based
on a Management Services and Allocation of Operating Expenses Agreement between
the Company and the Bank. The effect of such agreement will be to reduce the
level of operating expenses in the Company.
Liquidity and Capital
Consumer Products
Total assets of consumer products were $14.55 million as of December 31, 1998
and $8.17 million as of December 31, 1997, a 78% increase.
Cash increased to $2.21 million at December 31, 1998 from zero at December 31,
1997.
Accounts receivable, net of the allowance, increased to $2.18 million at
December 31, 1998 from $1.96 million at December 31, 1997. An increase of $0.27
million is attributable to License Products, and Middleton Doll's receivables
decreased $0.05 million. License Products had an 82% increase in sales in the
third and fourth quarter of 1998 compared to 1997, which resulted in higher
receivable balances as of December 31, 1998.
11
<PAGE>
Inventory was $3.26 million at December 31, 1998 compared to $3.28 million at
December 31, 1997. License Products' inventory was up $0.35 million due to
anticipated sales in a new merchandise line, and Middleton Doll's inventory was
down $0.37 million. At the end of 1997 Middleton Doll had a higher than normal
inventory level due a slowdown in sales during 1997's fourth quarter.
Non-current prepaid assets increased to $2.41 million from $0.32 million as of
December 31, 1997. On April 30, 1998 Middleton Doll bought the licensing
agreement to produce Lee Middleton dolls for $2.5 million. The asset is
amortizing over the remaining life of the agreement.
Fixed assets, net of accumulated depreciation, increased by $0.98 million or 59%
as of December 31, 1998 compared to December 31, 1997. This increase is mainly
the result of Middleton Doll's construction of a new addition to the
manufacturing plant in Ohio.
Goodwill was created when the company purchased the remaining 49% of the stock
from the estate of Lee Middleton, the founder of Middleton Doll, on April 30,
1998. The purchase price exceeded book value by $0.61 million. Prepaid assets
and other assets increased to $2.54 million as of December 31, 1998 from $0.94
million as of December 31, 1997.
License Products entered into a capital lease obligation for $0.035 million
during 1998. The capital lease was for the purchase of computer equipment over a
five year period. Middleton Doll paid off a long-term note payable of $0.02
million with another bank during the first quarter of 1998.
Accounts payable decreased by $0.20 million as of December 31, 1998 compared to
December 31, 1997. License Products' accounts payable decreased $0.27 million
while Middleton Doll's accounts payable increased $0.07 million. Other
liabilities increased by $0.78 million; a majority of the increase is the
increase in accrued taxes for Middleton Doll as of December 31, 1998.
Financial Services
Total assets of financial services were $139.88 million as of December 31, 1998
and $132.17 million as of December 31, 1997, a 6% increase.
Total loans on the balance sheet decreased by $14.65 million, or 11%, to $115.76
million at December 31, 1998 from $130.41 million at December 31, 1997. The
Company's loan loss reserve decreased to zero. Leased properties increased to
$22.0 million as of December 31, 1998 compared to $0.40 million as of December
31, 1997. The large increase in leased properties and the decrease in loans is
primarily the result of the acquisition of BMREIC's assets.
Cash increased to $0.63 million at December 31, 1998 from $0.20 million at
December 31, 1997.
Interest receivable decreased to $0.65 million as of December 31, 1998 from
$0.84 million at December 31, 1997. Fixed assets, investment swaps and other
assets, in aggregate increased by $0.08 million.
The financial services' total consolidated indebtedness at December 31, 1998
increased $13.24 million. $5 million of the increase was for the purchase of the
remaining 49% interest in Middleton Doll and the related right to produce
certain dolls from the estate of Lee Middleton, founder of Middleton Doll. As of
December 31, 1998, financial services had $62.47 million outstanding in
long-term debt and $58.53 million outstanding in short-term borrowings compared
to $75.25 million outstanding in long-term debt and $32.51 million outstanding
in short-term borrowings as of December 31, 1997. Financial services' short-term
facility increased from $50 million to $60 million during the quarter ended June
30, 1998. The Company also entered into a $5 million annually renewable note
secured by the stock of Middleton Doll, which is classified as short-term.
BMSBLC also entered into a $10 million long-term note payable secured with real
estate. As a result of the increase in the short-term facility and long-term
facility, the Company paid off some higher cost participations during the second
quarter of 1998. During 1999 the Company may finance new growth in part through
an increase of its short-term facility.
12
<PAGE>
Year 2000 Compliance
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operation programs may be unable to distinguish
the Year 2000 from the Year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether.
In 1997, the Company moved into a newly constructed building. The Company
purchased new computer systems during this move and the Year 2000 problem was
factored into the selection of the new equipment. During this time, the Company
identified hardware and software issues required to assure Year 2000 compliance.
The Company began by assessing the issues related to the Year 2000 problem and
the potential for those issues to adversely affect the Company's business and
operations.
The Company has established a Year 2000 management committee to deal with this
issue. It is the mission of this committee to identify areas subject to
complication related to the Year 2000 problem and to initiate remedial measures
designed to eliminate any adverse effects on the Company's business and
operations. The committee has identified all mission-critical software and
hardware that may be adversely affected by the Year 2000 problem and has
required its vendors to represent that the systems and products provided are or
will be Year 2000 compliant.
The Company licenses all software used in conducting its business from third
party vendors. None of the Company's software has been internally developed. The
Company has developed a comprehensive list of all software, all hardware and all
service providers used by the Company. Every vendor has been contacted regarding
the Year 2000 problem. The vendor of the primary software in use at the Company
released its Year 2000 compliant software in September 1998. Testing at the
Company, using test scripts developed by the vendor, was completed on October 3,
1998. The vendor will be conducting ongoing proxy testing and seminars and will
report its progress to the Company in a monthly management report. In addition,
the Company continues to monitor all other major vendors of services to the
Company for Year 2000 problems in order to avoid shortages of supplies and
services in the coming months.
There are three third party utilities with which the Company has an important
relationship. The Company has not identified any practical, long-term
alternatives to relying on these companies for basic utility services. In the
event that the utilities significantly curtailed or interrupted their services
to the Company, it would have a significant adverse effect on the Company's
ability to conduct its business.
The Company also has tested all heating and air conditioning units, vault doors,
alarms systems, networks, etc. and is not aware of any significant problems with
such systems.
The Company's cumulative costs of the Year 2000 problem through the year ended
December 31, 1998 have been $15,000. At the present time, the Company does not
anticipate material cost expenditures in the future to become fully compliant.
However, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results. The estimated total cost of the Year 2000
problem is currently $20,000. This includes costs to upgrade software and
replace equipment specifically for the purpose of Year 2000 compliance and
certain administrative expenditures.
It is not possible at this time to quantify the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service; however, such costs could
be substantial.
The Company is committed to a plan for achieving compliance, focusing not only
on its own data processing systems, but also on its loan customers. The Year
2000 management committee has proposed policy and procedure changes to help
identify potential risks to the Company and to gain an understanding of how
customers are managing the risks associated with the Year 2000 problem. The
Company is assessing the
13
<PAGE>
impact, if any, the Year 2000 problem will have on its credit risk and loan
underwriting. In connection with potential credit risk related to the Year 2000
problem, the Company has contacted its large commercial loan customers regarding
their level of preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal years beginning after June 15, 1999. The Company does
not believe this statement will have a material impact.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. The Company intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by use of
the words "may," "will," "could," "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
and future prospects of the Company and the subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions, including
the condition of the local real estate market, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area, demand
for the Company's consumer products and accounting principles and policies.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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 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 statements of operations, whereas those contracts
meeting hedge criteria are not to be classified as investments or
marked-to-market. On December 31, 1998 and December 31, 1997, the investment
contracts at market resulted in an unrealized gain of $49,579 and $123,013,
respectively. The difference in the unrealized gain at December 31,
14
<PAGE>
1998 and December 31, 1997 is a decrease of $73,434 recorded in the consolidated
statement of operations for the twelve months ended December 31, 1998.
The average notional amount of investment swaps outstanding during the
twelve months ended December 31, 1998, December 31, 1997, June 30, 1996, and for
the six months ended December 31, 1996 and December 31, 1995 was $2,750,000,
$45,750,000, $142,750,000, 124,178,570 and $142,750,000, respectively.
Based on quoted market valuations, the estimated market value
of the hedge swaps at December 31, 1998 and December 31, 1997 was approximately
$3.4 million and $1.6 million, respectively.
The following table summarizes the interest rate swap agreements in
effect at December 31, 1998. No funds were borrowed or are to be repaid under
these agreements:
<TABLE>
Current Interest
Rates Paid
<CAPTION>
Company Bank Original Notional Expiration
Bank Payment Payment By Company By Bank Amount Date
- ---- ------- ------- ---------- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Bank National Association Floating Fixed 5.59031%(3) 9.20000% $ 8,000,000(4) 06/16/99
St. Paul, Minnesota (1)
LaSalle National Bank Floating Fixed 5.22094%(2) 6.34000% $ 5,400,000 03/21/01
Chicago, Illinois
Firstar Bank Milwaukee, N.A. Floating Fixed 5.35016%(2) 7.43500% $10,325,000(5) 09/28/01
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A. Floating Fixed 5.25000%(2) 5.72500% $16,908,000 06/30/03
Milwaukee, Wisconsin
LaSalle National Bank Floating Fixed 5.24375%(2) 7.60000% $ 5,000,000 03/10/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.25000%(2) 6.66000% $ 5,250,000(6) 05/23/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.25000%(2) 6.50000% $ 5,000,000(7) 09/29/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.27531%(2) 7.09000% $12,500,000 09/05/06
Chicago, Illinois
Firstar Bank Milwaukee, N.A. Floating Fixed 5.22063%(2) 5.76000% $10,000,000(8) 06/16/08
Milwaukee, Wisconsin
(1) Investment Swap
(2) Adjusted every three months to the three-month LIBOR then in effect.
(3) Adjusted every month to the one-month LIBOR then in effect.
(4) The notional amount decreases by $83,333 each quarter and was $4,750,013 at December 31, 1998; $2,000,013 of this contract was
designated as a hedge; $2,750,000 was accounted for as an investment.
(5) The notional amount decreases by $166,667 each quarter and was $5,491,667 at December 31, 1998.
(6) The notional amount decreases by $100,000 each quarter and was $3,850,000 at December 31, 1998.
(7) The notional amount decreases by $75,000 each quarter and was $4,025,000 at December 31, 1998
(8) The notional amount decreased by $166,667 each quarter and was $9,666,666 at December 31, 1998.
</TABLE>
As a result of hedge arrangements, the Company recognized a $519,795,
$1,193,877, $1,382,751, and $732,066 and $566,614 reduction in interest expense
for the twelve months ended December 31, 1998 December 31, 1997, and June 30,
1996 and for the six months ended December 31, 1996 and December 31, 1995,
respectively. In addition, the Company recognized a $93,201, $353,962, $412,129,
$445,568 and $43,458 reduction in interest expense for the twelve months ended
December 31, 1998, December 31, 1997, and June 30, 1996 and for the six months
ended December 31, 1996 and December 31, 1995, respectively, as a result of the
investment swap contracts.
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.
15
<PAGE>
Item 8. Financial Statement and Supplementary Data.
Bando McGlocklin Capital Corporation
Consolidated Financial Statements
Contents
Report of BDO Seidman LLP, Independent Auditors...............................17
Report of PricewaterhouseCoopers LLP, Independent Accountants.................18
Consolidated Balance Sheets as of December 31, 1998 and 1997..................19
Consolidated Statements of Operations - For the Twelve
Months Ended December 31, 1998 and 1997 and six months ended
December 31, 1996 and twelve months ended June 30, 1996 ......................21
Consolidated Statement of Changes in Shareholders' Equity.....................23
Consolidated Statements of Cash Flows - For the Twelve
Months Ended December 31, 1998 and 1997 and six months ended
December 31, 1996 and twelve months ended June 30, 1996.......................24
Notes to Consolidated Financial Statements....................................28
Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant.................50
Schedule II - Valuation and Qualifying Accounts.............................50
Schedule IV - Mortgage Loans on Real Estate.................................51
16
<PAGE>
To the Shareholders and Board of Directors of Bando McGlocklin Capital
Corporation:
We have audited the accompanying consolidated balance sheets of Bando McGlocklin
Capital Corporation as of December 31, 1998 and December 31, 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended in conformity with generally accepted accounting
principles. We have also audited the schedules listed in Item 8. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bando McGlocklin
Capital Corporation at December 31, 1998 and December 31, 1997, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Milwaukee, Wisconsin
March 5, 1999
17
<PAGE>
To the Shareholders and Board of Directors of Bando McGlocklin Capital
Corporation:
In our opinion, the consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the six months ended December 31,
1996 and the twelve months ended June 30, 1996 present fairly, in all material
respects, the results of operations and cash flows of Bando McGlocklin Capital
Corporation and its subsidiaries for the six months ended December 31, 1996 and
the twelve months ended June 30, 1996 in conformity with generally accepted
accounting principles. These 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
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 provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Bando McGlocklin Capital Corporation for
any period subsequent to December 31, 1996.
Our audits of the consolidated financial statements referred to in the preceding
paragraph also included an audit of the financial statement schedules listed in
the accompanying index as of December 31, 1996 and for the six months ended
December 31, 1996 and the twelve months ended June 30, 1996. In our opinion,
these financial statement schedules, for the periods indicated, present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 17, 1998
18
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
----------- -----------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Consumer Products:
Cash and Cash Equivalents $ 2,209,105 $ --
Accounts receivable, net of allowance of $75,557 and
$268,796 as of December 31, 1998 and 1997, respectively 2,177,385 1,958,672
Inventory 3,261,553 3,280,172
Prepaid expenses 614,362 320,339
------------ ------------
Total current assets 8,262,405 5,559,183
------------ ------------
Fixed assets, net of accumulated depreciation of $1,069,042
and $756,901 as of December 31, 1998 and 1997,
respectively 2,648,947 1,666,399
Loans 621,968 621,968
Prepaid expenses and other assets 2,413,210 321,434
Goodwill, net of accumulated amortization of $20,656 599,097 --
------------ ------------
Total Consumer Products assets 14,545,627 8,168,984
------------ -------------
Financial Services:
Cash 626,838 197,576
Interest receivable 644,780 844,840
Other current assets 235,292 144,700
------------ ------------
Total current assets 1,506,910 1,187,116
------------ ------------
Loans 115,759,968 130,413,277
Less: reserve for loan losses -- (450,000)
Leased properties:
Buildings, net of accumulated depreciation of $214,822 as
of December 31, 1998 18,782,045 --
Land 3,090,572 395,843
Construction in progress 133,649 4,001
------------ ------------
Total Leased Properties 22,006,266 399,844
Fixed assets, net of accumulated depreciation of $329,216
and $236,869 as of December 31, 1998 and 1997,
respectively 384,703 427,999
Other assets, net 220,613 190,010
------------ ------------
Total Financial Services assets 139,878,460 132,168,246
------------ ------------
Total Assets $154,424,087 $140,337,230
============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
19
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-(Continued)
<CAPTION>
December 31, December 31,
----------- -----------
1998 1997
---- ----
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Consumer Products:
Accounts payable 748,838 948,075
Accrued liabilities 1,959,191 1,179,476
------------ ------------
Total current liabilities 2,708,029 2,127,551
Long-term debt 35,279 22,936
------------ ------------
Total Consumer Products liabilities 2,743,308 2,150,487
------------ ------------
Financial Services:
Commercial paper 52,487,321 25,009,972
Notes payable to banks 6,040,000 7,500,000
------------ ------------
Short-term borrowings 58,527,321 32,509,972
Accrued liabilities 1,898,342 1,090,965
------------ ------------
Total current liabilities 60,425,663 33,600,937
State of Wisconsin Investment Board notes payable 15,000,000 6,000,000
Loan participations with repurchase options 45,881,418 69,250,467
Other notes payable 1,588,989 --
------------ ------------
Total Financial Services liabilities 122,896,070 108,851,404
------------ ------------
Minority interest in subsidiaries 20,399 1,684,512
Redeemable preferred stock, 1 cent par value,
3,000,000 shares authorized in 1998 and 1997;
674,791 shares issued and outstanding after deducting
15,209 shares in treasury 16,908,025 16,908,025
Shareholders' Equity
Common stock, 6 2/3 cents par value,
15,000,000 shares authorized in 1998 and 1997, 4,001,540
shares issued and outstanding as of December 31, 1998 and
1997, respectively, before deducting shares in treasury 266,769 266,769
Additional paid-in capital 13,671,947 13,671,947
Retained earnings 1,770,080 656,597
Treasury stock, at cost (312,438 shares as of
December 31, 1998 and 1997) (3,852,511) (3,852,511)
------------ ------------
Total Shareholders' Equity 11,856,285 10,742,802
------------ ------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $154,424,087 $140,337,230
============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
20
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Six Months Twelve
Twelve Months Ended Ended Months Ended
December 31, December 31, June 30,
1998 1997 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consumer Products:
Net sales $19,745,491 $19,000,778 $7,226,130 $1,702,357
Cost of sales 10,448,494 10,381,039 3,413,772 1,116,876
----------- ----------- ---------- ----------
Gross profit 9,296,997 8,619,739 3,812,358 585,481
Operating expenses:
Sales and marketing 3,202,906 2,340,625 408,524 275,713
New product development 550,176 451,973 82,423 25,498
General and administrative 1,838,074 1,945,361 1,271,996 689,335
----------- ------------ ---------- ----------
Total operating expenses 5,591,156 4,737,959 1,762,943 990,546
Other income (expense):
Interest expense (39,900) (7,074) (9,717) --
Other income, net 118,598 65,019 117,351 47,438
Equity earnings in subsidiary -- -- -- 358,967
----------- ----------- ---------- ----------
Total other income 78,698 57,945 107,634 406,405
Income before income taxes and
minority interest 3,784,539 3,939,725 2,157,049 1,340
Provision for income taxes (1,492,636) (1,539,265) (844,262) 35,074
Minority interest in earnings of
subsidiaries (216,136) (1,082,362) (573,371) --
----------- ----------- ---------- ----------
Income 2,075,767 1,318,098 739,416 36,414
----------- ----------- ---------- ----------
Financial Services:
Revenues:
Interest on loans 10,698,422 11,021,265 3,578,396 8,363,911
Rental income 1,183,891 -- -- --
Other income 329,323 897,298 17,713 560,085
----------- ----------- ---------- ----------
Total revenues 12,211,636 11,918,563 3,596,109 8,923,996
Expenses:
Interest expense 7,673,884 5,649,910 468,005 2,113,024
Other operating expenses 1,481,223 2,794,051 2,082,400 2,431,094
----------- ----------- ---------- ----------
Total expenses 9,155,107 8,443,961 2,550,405 4,544,118
Income 3,056,529 3,474,602 1,045,704 4,379,878
----------- ----------- ---------- ----------
The accompanying notes are an integral part of the financial statements.
</TABLE>
21
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
<CAPTION>
Six Months
Twelve Months Ended Ended Twelve Months
December 31, December 31, Ended June 30,
1998 1997 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Company:
Income before income taxes and
minority interest 6,841,068 7,414,327 3,202,753 4,381,218
Provision for income taxes (1,492,636) (1,539,265) (844,262) 35,074
Minority interest in earnings of
subsidiaries (216,136) (1,082,362) (573,371) --
---------- ---------- ---------- ----------
Net income 5,132,296 4,792,700 1,785,120 4,416,292
Preferred stock dividends (1,362,659) (1,286,320) (643,160) (1,286,320)
---------- ---------- ---------- ----------
Net income available to common
shareholders $3,769,637 $3,506,380 $1,141,960 $3,129,972
========== ========== ========== ==========
Basic earnings per share $ 1.02 $ 0.95 $ 0.31 $ 0.82
Diluted earnings per share $ 1.02 $ 0.95 $ 0.31 $ 0.82
Segment Reconciliation:
Net income
Consumer products $2,075,767 $1,318,098 $ 739,416 $ 36,414
Financial services 3,056,529 3,474,602 1,045,704 4,379,878
---------- ---------- ---------- ----------
Total company 5,132,296 4,792,700 1,785,120 4,416,292
Intersegment charges
Consumer products (1,171,929) (451,352) (365,564) (131,150)
Financial services 1,171,929 451,352 365,564 131,150
---------- ---------- ---------- ----------
Total net income for reportable
segments
Consumer products 903,838 866,746 373,852 (94,736)
Financial services 4,228,458 3,925,954 1,411,268 4,511,028
---------- ---------- ---------- ----------
Total company $5,132,296 $4,792,700 $1,785,120 $4,416,292
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
22
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
<CAPTION>
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1995 $ 262,668 $21,753,353 $ (147,275) $ (566,250)
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 1,048 109,712 -- --
Purchase of treasury stock -- -- -- (2,696,363)
Net income -- -- 4,416,292 --
Cash dividends on preferred stock -- -- (1,286,320) --
Cash dividends on common stock -- (156,560) (3,521,916) --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 263,716 21,706,505 (539,219) (3,262,613)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 1,785,120 --
Cash dividends on preferred stock -- -- (643,160) --
Cash dividends on common stock -- (2,208,179) (1,462,469) --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 263,716 19,498,326 (859,728) (3,262,613)
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 3,053 333,621 -- --
Purchase of treasury stock -- -- -- (589,898)
Net income -- -- 4,792,700 --
Cash dividends on preferred stock -- -- (1,286,320) --
Cash dividends on common stock -- -- (1,990,055) --
Capitalization of InvestorsBancorp, Inc. -- (6,160,000) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 266,769 13,671,947 656,597 (3,852,511)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 5,132,296 --
Cash dividends on preferred stock -- -- (1,362,659) --
Cash dividends on common stock -- -- (2,656,154) --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 266,769 13,671,947 1,770,080 (3,852,511)
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
23
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Twelve months ended Twelve months ended
December 31, 1998 December 31, 1997
----------------- -----------------
Consumer Financial Consumer Financial
-------- --------- -------- ---------
Products Services Products Services
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,075,767 $ 3,056,529 $ 1,318,098 $ 3,474,602
Adjustments to reconcile net cash (used)
provided by operating activities:
Change in appreciation on investment swaps -- 73,434 -- 321,244
Provision for loan loss reserve (450,000) -- 6,335
Depreciation and amortization 353,453 388,278 252,463 215,479
Change in minority interest in subsidiaries 216,136 -- 1,082,362 --
Increase (decrease) in cash due to change in:
Accounts receivable (218,713) -- (913,895) --
Inventory 18,619 -- (1,579,358) --
Interest receivable -- 200,060 -- 488,513
Other assets (22,422) 282,439 (361,192) 329,744
Accounts payable (199,237) -- 382,272 --
Other liabilities 895,680 459,348 372,695 (392,824)
Intersegment transactions (386,480) 386,480 (300,000) 300,000
---------- ---------- ----------- -----------
Net Cash Provided by Operations 2,732,803 4,396,568 253,445 4,743,093
---------- ---------- ----------- -----------
Cash Flows from Investing Activities:
Loans made -- (79,143,575) -- (53,759,887)
Principal collected on loans -- 93,795,013 -- 43,821,836
Cash paid for Bando McGlocklin Real Estate
Investment Corporation's assets -- (19,095,424) -- --
Loans purchased -- -- -- (49,647,182)
Loan and interest charge off -- 1,869 -- --
Premium expense - net -- -- -- 59,230
Construction of leased properties -- (2,497,378) -- (399,844)
Land sold -- -- 129,675 --
Land purchased and construction in progress -- (358,351) -- --
Acquisition of minority interest (2,500,000) -- -- --
Acquisition of royalty rights (2,500,000) -- -- --
Purchase of fixed assets (1,294,689) (49,051) (685,682) (235,291)
---------- ---------- ----------- -----------
Net Cash Used by Investing (6,294,689) (7,346,897) (556,007) (60,161,138)
---------- ---------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
</TABLE>
24
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
Twelve months ended Twelve months ended
December 31, 1998 December 31, 1997
----------------- -----------------
Consumer Financial Consumer Financial
-------- --------- -------- ---------
Products Services Products Services
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Increase in short term borrowings -- 26,017,349 -- 1,041,578
(Repayment) proceeds from loan participations
with repurchase options - net -- (23,369,049) -- 63,901,848
Proceeds from SWIB note - net -- 9,000,000 -- (666,667)
Capitalization and distribution of InvestorsBank -- -- -- (6,160,000)
Preferred stock dividends paid -- (1,362,659) -- (1,286,320)
Common stock dividends paid -- (2,656,154) -- (1,990,055)
Proceeds from exercise of stock options -- -- -- 336,674
Increase (Decrease) in other Notes Payable 12,343 1,508,752 (6,533) --
Repurchase of common stock -- -- -- (589,898)
Net intersegment transactions 5,758,648 (5,758,648) (354,841) 354,841
---------- ----------- ---------- -----------
Net Cash Provided (Used) by Financing 5,770,991 3,379,591 (361,374) 54,942,001
---------- ----------- ---------- -----------
Net increase (decrease) in cash 2,209,105 429,262 (663,936) (476,044)
Cash, beginning of period -- 197,576 663,936 673,620
---------- ----------- ---------- -----------
Cash, end of period $2,209,105 $ 626,838 $ -- $ 197,576
========== =========== ========== ===========
Supplemental Disclosure of Cash Flow
Information:
Interest paid $ -- $ 7,812,817 $ 2,972 $ 7,110,310
Taxes paid $1,492,636 $ -- $1,179,023 $ --
The accompanying notes are an integral part of the financial statements.
</TABLE>
25
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<CAPTION>
Six months ended Twelve months ended
December 31, 1996 June 30, 1996
----------------- -----------------
Consumer Financial Consumer Financial
-------- --------- -------- ---------
Products Services Products Services
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 739,416 $ 1,045,704 $ 36,414 $ 4,379,878
Adjustments to reconcile net cash (used) provided
by operating activities: -- -- -- --
Change in appreciation on investment swaps -- 263,345 (74,199) 327,995
Provision for loan loss reserve -- 411,209 -- (10,501)
Depreciation and amortization 96,920 77,360 28,693 112,394
Equity (earnings) loss in subsidiary -- -- (358,967) --
Change in minority interest in subsidiaries 573,371 -- -- --
Other 10,533 -- -- --
Increase (decrease) in cash due to change in:
Accounts receivable (270,315) -- 228,597 --
Inventory (580,662) -- 7,686 --
Interest receivable -- (71,189) -- (95,000)
Other assets (3,168) 4,545 (37,203) (53,100)
Accounts payable 76,989 -- 143,398 --
Other liabilities 244,162 294,159 (150,033) (138,913)
-------- ----------- -------- -----------
Net Cash Provided by Operations 887,246 2,025,133 (175,614) 4,522,753
-------- ----------- -------- -----------
Cash Flows from Investing Activities:
Loans made -- (23,729,026) -- (42,745,527)
Principal collected on loans -- 13,600,355 459,587 23,421,624
Cash paid for Bando McGlocklin Real Estate
Investment Corporation's assets
Loans Sold -- 15,140,783 -- 28,087,037
Certificate purchased from trust -- -- -- (1,213,315)
Loans purchased -- -- -- --
Loan and interest charge off -- -- -- --
Premium expense - net -- 15,209 -- (78,978)
Construction of leased properties -- -- -- --
Land sold -- -- 298,300 258,773
Purchase of short-term securities -- -- (690,000) (749,255)
Proceeds from maturity of securities 830,000 999,255 -- --
Purchase of fixed assets (110,681) (203,485) (232,870) (39,448)
Consolidation of Middleton Dolls -- -- 400,325 --
-------- ----------- -------- -----------
Net Cash (Used) Provided by Investing 719,319 5,823,091 235,342 6,940,911
-------- ----------- -------- -----------
The accompanying notes are an integral part of the financial statements.
</TABLE>
26
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
Six months ended Twelve months ended
December 31, 1996 June 30, 1996
----------------- -----------------
Consumer Financial Consumer Financial
-------- --------- -------- ---------
Products Services Products Services
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Increase in short term borrowings -- 7,179,507 -- (3,435)
Proceeds from loan participations with
repurchase options - net -- 1,364,629 -- 3,983,990
Proceeds from SWIB note - net -- (333,333) -- (7,333,334)
Repayment of SBA debenture -- (12,620,000) -- --
(Decrease) Increase in other notes payable (121,159) -- -- --
Capitalization and distribution of InvestorsBank -- -- -- --
Preferred stock dividends paid -- (643,160) -- (1,286,320)
Common stock dividends paid -- (3,670,648) -- (3,678,476)
Proceeds from exercise of stock options -- -- -- 110,760
Repurchase of common stock -- -- -- (2,696,363)
---------- ----------- -------- -----------
Net cash used by financing (121,159) (8,723,005) -- (10,903,178)
---------- ----------- -------- -----------
Net intersegment transactions (1,216,012) 1,216,012 340,883 (340,883)
---------- ----------- -------- -----------
Net increase (decrease) in cash 269,394 341,231 400,611 219,603
Cash, beginning of period 394,542 332,389 (6,069) 112,786
---------- ----------- -------- -----------
Cash, end of period $ 663,936 $ 673,620 $394,542 $ 332,389
========== =========== ======== ===========
Supplemental Disclosure of Cash Flow
Information:
Interest paid $ 1,286 $ 1,777,806 $ -- $ 3,680,381
Taxes Paid $ 903,202 $ -- $ -- $ --
The accompanying notes are an integral part of the financial statements.
</TABLE>
27
<PAGE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Bando McGlocklin Capital Corporation (the "Company'), was
originally incorporated in February 1980 to provide long-term secured loans to
finance the growth, expansion and modernization of small businesses. During 1997
it began leasing "owner-occupied" type real estate to small businesses.
On March 26, 1993, the Company completed the formation of a holding company
structure by transferring substantially all of its assets and liabilities to
Bando McGlocklin Small Business Lending Corporation ("BMSBLC"), a wholly owned
subsidiary of the Company. At the close of the day on December 31, 1996, BMSBLC
surrendered its Small Business Administration ("SBA") license. BMSBLC was
formerly known as Bando McGlocklin Small Business Investment Corporation; the
entity formerly known as BMSBLC was liquidated on December 1, 1996.
On May 5, 1993, the Company formed Bando McGlocklin Investment Corporation
("BMIC"), a subsidiary of the Company. In May 1993, a partially developed real
estate parcel was transferred to BMIC. In December 1996, one percent of the
economic interest in BMIC was sold to an unrelated party. In January 1997, this
one percent interest was sold by the unrelated party to an officer of the
Company and the officer received 100% of the voting stock of BMIC by the
Company. In 1997, BMSBLC contributed its ownership interest in Lee Middleton
Original Dolls, Inc. ("Middleton Doll") and License Products, Inc. ("License
Products"), both 51% owned subsidiaries engaged in the manufacturing business,
to BMIC. On April 30, 1998 the Company acquired the remaining 49% interest of
Middleton Doll and the right to produce certain dolls for $5 million in cash.
The consolidated accounts of the Company reflect the consolidated financial
position and results of operations of BMIC, Middleton Doll and License Products.
Prior to January 2, 1997, the Company and BMSBLC were registered as investment
companies under the Investment Company Act of 1940 ("1940 Act"). Effective
January 2, 1997, the Company and BMSBLC deregistered as investment companies
under the 1940 Act. The Company continues to operate as a registrant under the
Securities Act of 1933, but now reports under the Securities Exchange Act of
1934 ("1934 Act"). The statements of operations and cash flows for the six
months ended December 31, 1996 and December 31, 1995 (unaudited) and for the
twelve months ended June 30, 1996 have been restated as if the Company had
always reported under the 1934 Act. Under the 1940 Act, the investments in BMIC,
Middleton Doll and License Products were accounted for as common stock
investments and stated at "fair value" as determined in good faith by the Board
of Directors. Under the 1934 Act, these three investments are consolidated or
accounted for as equity investments, as appropriate. The format and manner of
presentation of the financial statements has also been changed to conform with
the reporting requirements of the 1934 Act.
During 1996 the Company changed its year-end from June 30 to December 31.
On September 3, 1997, the Company capitalized InvestorsBancorp, Inc., a bank
holding company, with approximately $6.2 million and then distributed all of its
outstanding shares of InvestorsBancorp, Inc. to the Company's shareholders.
Subsequent to the spin-off of the bank holding company, the principal business
of the Company is to manage its loan portfolio and expand its real estate
lending business into ownership of real property including related buildings and
improvements for lease to small businesses. The Company also participates in
loans with third party loan originators.
28
<PAGE>
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
December 31, 1998 and December 31, 1997 and for the twelve months ended December
31, 1998, December 31, 1997 and the six months ended December 31, 1996 include
the accounts of the Company, BMSBLC, BMIC, Middleton Doll and License Products.
During the twelve months ended June 30, 1996 and for the six months ended
December 31, 1995, the Company owned only 49% of Middleton Doll and as a result
during this period the investment is accounted for on the equity method and is
not consolidated. In late June 1996, BMCC acquired an additional 2% interest in
Middleton Doll and, therefore, the balance sheet of Middleton Doll was
consolidated as of June 30, 1996. All significant intercompany accounts and
transactions have been eliminated in consolidation.
COMPREHENSIVE INCOME - The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" as of January 1, 1998. The
Company does not have any components of comprehensive income.
SEGMENT INFORMATION - The Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" as of January 1, 1998. Following the provisions of this Statement,
the Company is reporting segment assets, liabilities, sales and operating income
in the same format reviewed by the Company's management. As discussed in Nature
of Business above, the Company has two reportable segments: Consumer Products
(which includes BMIC, Middleton Doll, and License Products) and Financial
Services (which includes the Company and BMSBLC). Segment information required
to be disclosed under the Statement is included in the accompanying financial
statements.
Intersegment charges are only reflected in the segment reconciliation on the
consolidated statement of operations. The consolidated statement of operations
and the consolidated statement of cash flows for the twelve months ended
December 31, 1997, six months ended December 31, 1996 and the twelve months
ended June 30, 1996 have been reclassified to conform to the current year
presentation.
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 - The Company's investment swap contracts are valued at
current market value. Loans are stated at unpaid principal balance unless loss
reserves are considered necessary. Land owned is stated at the lower of cost or
net realizable value.
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 in the financial statements.
ACCOUNTS RECEIVABLE - Accounts receivable represent sales on credit made by
Middleton Doll and License Products, net of an allowance for doubtful accounts.
29
<PAGE>
INVENTORY - Inventories of Middleton Doll and License Products are valued at the
lower of cost or market. Middleton Doll and License Products utilize the average
cost method to determine cost. The components of inventory are as follows:
December 31,
1998 1997
Raw materials, net of reserve of $466,661
and $207,612, respectively $1,600,051 $1,767,390
Work in process 275,755 282,484
Finished goods 1,356,646 1,230,298
Prepaid inventory 29,101 --
---------- ----------
Total $3,261,553 $3,280,172
========== ==========
FIXED ASSETS - Fixed assets primarily represent manufacturing property, plant
and equipment of Middleton Doll and License Products. 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. Maintenance and repair
costs are charged to expense as incurred, and renewals and improvements that
extend the useful life of the assets are added to the plant and equipment
accounts. The major classes of fixed assets are as follows:
Useful December 31,
Lives 1998 1997
------ ---- ----
Land -- $ 173,590 $ 173,590
Building 40 years 1,579,838 698,876
Furniture & fixtures 7 years 727,323 551,838
Machinery & equipment 3 - 5 years 1,951,157 1,663,864
---------- ---------
Total $4,431,908 $3,088,168
========== ==========
LEASED PROPERTIES - Depreciation is calculated for both book and income tax
purposes on the straight-line method over the estimated useful lives of the
leased properties, generally 40 years. The costs of normal repairs and
maintenance are charged against income in the period incurred.
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, the unpaid interest is monitored, and interest
income is recorded only 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.
INCOME TAXES - The Company 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 and the twelve months
ended June 30, 1996. As such, the Company and BMSBLC were not subject to income
tax on investment company taxable income which had been distributed to
shareholders. Subsequent to December 31, 1996, the Company has qualified as a
real estate investment trust ("REIT") under the Code. Under REIT status, the
Company, together with its qualified REIT subsidiary, BMSBLC, will continue to
not be subject to income tax on taxable income which is distributed to
shareholders. Due to the
30
<PAGE>
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 a REIT under the Code, the Company, together with its
qualified REIT subsidiary, 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.
For the non-qualified REIT subsidiaries of the Company, taxes are provided using
the liability approach which generally requires that deferred income taxes be
recognized when assets and liabilities have different values for financial
statement and tax reporting purposes.
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 the financial statement purposes. For tax purposes, the
realized loss has been amortized through 1997. As a result, ordinary taxable
income was reduced by $223,911 for the 12 months ended December 31, 1997,
$355,721 for the six months ended December 31, 1996 and $820,598 and $631,698
for the years ended June 30, 1996 and 1995, respectively.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal years beginning after June 15, 1999.
The Company does not believe this statement will have a material impact.
NOTE 2 - INVESTORSBANCORP, INC.
InvestorsBancorp, Inc. is a bank holding company that was incorporated on June
12, 1996 and capitalized on September 3, 1997 primarily by the Company. The
Company distributed all of its outstanding shares of InvestorsBancorp, Inc. to
its shareholders on September 6, 1997 to shareholders of record on September 5,
1997.
InvestorsBank (the "Bank") is a newly-organized Wisconsin chartered commercial
bank with depository accounts insured by the Federal Deposit Insurance
Corporation. The Bank started providing a full range of commercial and consumer
banking services on September 8, 1997.
All employees, except certain officers, ceased their employment with the Company
on September 8, 1997 and became employees of the Bank. The officers of the
Company became officers of both the Company and the Bank.
The Company and the Bank entered into a Management Services and Allocation of
Expenses Agreement (the "Agreement") on September 2, 1997. The Agreement allows
the employees of the Bank to provide loan management and accounting services to
the Company for a fee, payable monthly. Management fee expense relating to the
Agreement was $775,892 for the year ended December 31, 1998 and was $229,285 for
the period from September 3, 1997 to December 31, 1997. Overhead expenses and
rent are also shared between the two entities in accordance with the Agreement.
31
<PAGE>
NOTE 3 - ACQUISITION OF MINORITY INTEREST
On April 30, 1998, BMIC paid $5 million for the remaining 49% interest of
Middleton Doll and the right to produce certain dolls under a five year royalty
agreement. The purchase was financed by a loan from BMSBLC. One half of the
purchase price was allocated to the acquisition of the minority interest based
upon an appraisal of Middleton Doll. The $2.5 million allocated to the stock
exceeded the minority interest recorded by BMIC by $619,751. This amount has
been recorded as goodwill in the accompanying financial statements and is being
amortized over twenty years.
The $2.5 million allocated to the right to produce certain dolls has been
recorded as a prepaid royalty in the accompanying financial statements. This
amount is being amortized on a straight line basis over the term of the five
year royalty agreement.
NOTE 4 - SIGNIFICANT SUPPLIER
Approximately 47% of Middleton Doll raw materials were acquired from a single
supplier in Hong Kong. There is no formal agreement between Middleton Doll and
this supplier. As of December 31, 1998, Middleton Doll has entered into
commitments to acquire approximately $630,000
of raw material from this supplier.
NOTE 5 - LOANS
The Company's exposure to loss in the event of nonperformance by the borrower is
represented by the outstanding principal amount of the loans. The Company's loan
portfolio consists primarily of variable-rate loans with terms of five to
fifteen years. Substantially all loans are fully secured by first or second
mortgages on commercial real estate. Approximately 93% of the Company's loan
portfolio at December 31, 1998 is comprised of loans to borrowers located within
the State of Wisconsin. At December 31, 1998, the Company had loans outstanding
to its largest borrower totaling $9,021,322.
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, 1998 and December 31, 1997
loans with balances aggregating $721,816 and $1,583,981, respectively, were
considered impaired. In determining the need for a loss reserve on the impaired
loans, management 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, 1998, no loss reserve was recorded
on impaired loans. At December 31, 1997, a loss reserve of $100,491 was recorded
on impaired loans totaling $1,583,981. The average impaired loan balance during
the twelve months ended December 31, 1998 was $1,213,914. The accrued interest
on the impaired loans totals $12,017 at December 31, 1998 and all is considered
fully collectible.
Undisbursed construction loan commitments and lines of credit totaled
$10,133,279 at December 31, 1998. In addition the Company issued a letter of
credit totaling $4,000,000 as of December 31, 1998.
NOTE 6 - LOANS SOLD
Since 1994, the Company has sold loans to third parties. During 1998 and 1997 no
new loans were sold to third parties. The following table summarizes the
outstanding balance of loans sold.
32
<PAGE>
Principal Principal
Balance Sold at Percentage Balance sold at Recourse
Date of Sale Sold December 31, 1998 Provision
- ------------ ---- ----------------- ---------
During the year ended June 30, 1995:
$ 2,837,677 75%-80% $608,348 None
During the year ended June 30, 1994:
$10,397,410 75% $519,327 None
The Company also sells loans with the option to repurchase them at a later date.
During 1998, the Company sold $5,331,814 in loans to a third party with an
option to repurchase them. As of December 31, 1998, the balance of loan
participations with repurchase options was $45,881,418. Of this amount
approximately $30.4 million is to a single non-related party. These loan
participations mature as the corresponding notes mature, which at December 31,
1998 range from one to nine years. During 1998 loan participations matured and
were refinanced with new debt, such as commercial paper and long-term debt. (See
Notes 10 & 11). As of December 31, 1997, the balance of loan participations with
repurchase options was $69,250,467. During the twelve months ended December 31,
1997, the Company resold, with an option to repurchase, loans at unpaid
principal balances totaling $41,549,621. These sales all have been accounted for
as secured financing.
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, 1998 for loans which have been sold.
Under the terms of the agreements, the Company retains servicing rights for the
entire loan. 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, 1998, the company was in compliance with these
covenants.
NOTE 7 - LOAN BACKED CERTIFICATES
During the year ended June 30, 1996, the Company sold loans to a trust, which
issued two classes of certificates as noted in the table below:
Principal Balance A Certificate B Certificate
Sold at Sold to A Certificate Sold to
Date of Sale Third Party Interest Rate Company
- ----------------- ------------- ------------- -------
$8,666,538 $7,453,223 (1) $1,213,315
(1) The interest rate was reset monthly based upon the 30 day London
Interbank Offered Rate (LIBOR) plus one and one-half percent.
On May 1, 1997 the Company repurchased all of the loans sold to the trust. The
unpaid principal balances for the A and B certificates were $8,097,561 and
$1,497,499, respectively. As a result of these transactions, the
33
<PAGE>
excess servicing asset and retained loan discount related to the original sale
were reduced by $202,437 and $201,140, respectively. Premium expense of $1,297
was also recognized due to these transactions.
NOTE 8 - BUSINESS ACQUISTION
In July, 1998, BMSBLC acquired Bando McGlocklin Real Estate Investment
Corporation ("BMREIC"), an independently owned real estate investment trust.
This acquisition was accounted for as a purchase. Under the terms of the Plan of
Merger, BMSBLC acquired leased properties and other assets with a fair value of
approximately $19.6 million, assumed liabilities of approximately $13.8 million
and paid cash of approximately $5.1 million to shareholders of BMREIC. Of the
liabilities assumed, $13.4 million were paid by BMSBLC at the date of closing.
In addition, BMSBLC paid $555,379 to a related party to acquire the rights,
title and interest under an Advisory Agreement between the related party and
BMREIC. This purchase was made in connection with the acquisition of BMREIC
described above and has been capitalized as part of the purchase price.
As of December 31, 1997 the Company had outstanding loans to BMREIC of
$4,428,578.
NOTE 9 - LEASED PROPERTIES
The Company has $22 million in leased properties located in southeastern
Wisconsin as of December 31, 1998. This includes the $18.3 million of acquired
properties described in Note 8 above. The Company has entered into three
construction contracts totaling $2,552,855 of which $1,053,629 is unfunded as of
December 31, 1998.
The Company normally leases its properties pursuant to a lease agreement with
initial lease terms ranging from five to fifteen years. The leases require the
lessee to pay all operating expenses including utilities, insurance and taxes.
The lease agreements, all of which are operating leases, expire at various dates
through 2009 and provide the lessee with renewal and purchase options. Minimum
future rental income, by year, from these leases based on the agreements in
effect at December 31, 1998 approximate:
1999 $ 2,217,506
2000 2,056,994
2001 1,927,686
2002 1,957,335
2003 1,776,832
Future Years 5,548,274
-----------
$15,484,627
===========
The Company subleases half of its office space with InvestorsBank, a related
party. Monthly rents are variable based on LIBOR interest rates and the
agreement is for a one-year renewable term. Rental income from the related party
for the year ended December 31, 1998 and period from September 3, 1997 through
December 31, 1997 was $67,452 and $24,330, respectively.
NOTE 10 - 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, 1998
was 5.50%.
34
<PAGE>
BMSBLC has entered into one loan agreement with four participating banks as of
March 11, 1998. The current loan agreement provides for a maximum of $60,000,000
less the outstanding principal amount of commercial paper. The facility bears
interest at the prime rate or at the 30-, 60- or 90-day LIBOR plus one and
three-eighths percent. Interest is payable monthly, and the loan agreement
expires on April 30, 1999. BMSBLC is also required to pay a commitment fee equal
to 1/2 of 1% per year on the unused amount of the loan commitment. At December
31, 1998, under these agreements, the outstanding principal balance was
$1,040,000.
On April 30, 1998, the Company entered into a credit agreement with one of its
correspondent banks providing for a note of $5,000,000 bearing interest at the
prime rate. The credit agreement expires on April 30, 1999. The proceeds from
the new note were for the purchase of the remaining 49% interest in Middleton
Doll and the right to produce certain dolls. As of December 31, 1998, the
outstanding principal balance was $5,000,000.
NOTE 11 - LONG-TERM DEBT
On November 7, 1991, BMSBLC borrowed $10,000,000 from The State of Wisconsin
Investment Board ("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, 1998, the
outstanding principal balance was $5,333,333.
On June 12, 1998, BMSBLC borrowed an additional $10,000,000 from the State of
Wisconsin Investment Board pursuant to a term note which bears interest at a
fixed rate of 6.98% 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 1, 2013, and is secured by specific loans. At December 31, 1998, the
outstanding principal balance was $9,666,667.
The SWIB agreement and the loan agreements described in Note 10 contain
restrictions on BMSBLC'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. Under the most restrictive covenant, approximately $800,000 of BMSBLC's
capital is available for payment of dividends to BMCC. As of December 31, 1998,
BMSBLC is in compliance with all such requirements.
On December 1, 1998, BMSBLC entered into a Loan and Trust Agreement with the
City of Franklin, Wisconsin, which issued an industrial development revenue
bond. The bond matures on December 1, 2018. The interest rate changes weekly
based upon the remarketing agent's lowest rate to permit the sale of the bonds.
This interest is paid monthly to the trustee. As of December 31, 1998, the
outstanding principal balance was $1,510,000 and the interest rate was 4.20%.
35
<PAGE>
Future annual maturities of long-term debt as of December 31, 1998 are as
follows:
December 31. 1999 $ 1,338,534
December 31, 2000 1,338,855
December 31, 2001 1,399,196
December 31, 2002 1,404,557
December 31, 2003 1,404,941
Later Years 9,702,906
----------
$16,588,989
===========
Based on the borrowing rates currently available to BMSBLC for loans with
similar maturities, the estimated fair market value of the long-term debt at
December 31, 1998 was approximately $16.9 million.
NOTE 12 - 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 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 statements of operations, whereas those contracts
meeting hedge criteria are not to be classified as investments or
marked-to-market. On December 31, 1998 and December 31, 1997, the investment
contracts at market resulted in an unrealized gain of $49,579 and $123,013,
respectively. The difference in the unrealized gain at December 31, 1998 and
December 31, 1997 is a decrease of $73,434 recorded in the consolidated
statement of operations for the twelve months ended December 31, 1998.
The average notional amount of investment swaps outstanding during the twelve
months ended December 31, 1998, December 31, 1997, June 30, 1996, and for the
six months ended December 31, 1996 and December 31, 1995 was $2,750,000,
$45,750,000, $142,750,000, 124,178,570 and
$142,750,000 (unaudited), respectively.
Based on quoted market valuations, the estimated market value of the hedge swaps
at December 31, 1998 and December 31, 1997 was approximately $3.4 million and
$1.6 million, respectively.
The following table summarizes the interest rate swap agreements in effect at
December 31, 1998. No funds were borrowed or are to be repaid under these
agreements:
36
<PAGE>
<TABLE>
Current Interest
Rates Paid
<CAPTION>
Company Bank Original Notional Expiration
Bank Payment Payment By Company By Bank Amount Date
- ---- ------- ----- ---------- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Bank National Association Floating Fixed 5.59031%(3) 9.20000% $ 8,000,000(4) 06/16/99
St. Paul, Minnesota (1)
LaSalle National Bank Floating Fixed 5.22094%(2) 6.34000% $ 5,400,000 03/21/01
Chicago, Illinois
Firstar Bank Milwaukee, N.A. Floating Fixed 5.35016%(2) 7.43500% $10,325,000(5) 09/28/01
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A. Floating Fixed 5.25000%(2) 5.72500% $16,908,000 06/30/03
Milwaukee, Wisconsin
LaSalle National Bank Floating Fixed 5.24375%(2) 7.60000% $ 5,000,000 03/10/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.25000%(2) 6.66000% $ 5,250,000(6) 05/23/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.25000%(2) 6.50000% $ 5,000,000(7) 09/29/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.27531%(2) 7.09000% $12,500,000 09/05/06
Chicago, Illinois
Firstar Bank Milwaukee, N.A. Floating Fixed 5.22063%(2) 5.76000% $10,000,000(8) 06/16/08
Milwaukee, Wisconsin
(1) Investment Swap
(8) Adjusted every three months to the three-month LIBOR then in effect.
(9) Adjusted every month to the one-month LIBOR then in effect.
(10) The notional amount decreases by $83,333 each quarter and was $4,750,013 at December 31, 1998; $2,000,013 of this contract was
designated as a hedge; $2,750,000 was accounted for as an investment.
(11) The notional amount decreases by $166,667 each quarter and was $5,491,667 at December 31, 1998.
(12) The notional amount decreases by $100,000 each quarter and was $3,850,000 at December 31, 1998.
(13) The notional amount decreases by $75,000 each quarter and was $4,025,000 at December 31, 1998
(8) The notional amount decreased by $166,667 each quarter and was $9,666,666 at December 31, 1998.
</TABLE>
As a result of hedge arrangements, the Company recognized a $519,795,
$1,193,877, $1,382,751, and $732,066 and $566,614 (unaudited) reduction in
interest expense for the twelve months ended December 31, 1998 December 31,
1997, and June 30, 1996 and for the six months ended December 31, 1996 and
December 31, 1995, respectively. In addition, the Company recognized a $93,201,
$353,962, $412,129, $445,568 and $43,458 (unaudited) reduction in interest
expense for the twelve months ended December 31, 1998, December 31, 1997, and
June 30, 1996 and for the six months ended December 31, 1996 and December 31,
1995, respectively, as a result of the investment swap contracts.
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 13 - 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
37
<PAGE>
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 were paid quarterly at the annual rate of 7.625% through the
dividend period June 30, 1998. The dividend rate was adjusted to an annual rate
of 8.53% for the dividend period commencing July 1, 1998 and ending June 30,
2003. The next adjustment will be effective for the five year period commencing
July 1, 2003. Through December 31, 1997, 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, 1998 was approximately $15.6 million.
In the twelve months ended December 31, 1998, the Company began presenting
preferred stock dividends as a deduction from net income to arrive at net income
available to common shareholders. In prior periods, the Company presented
preferred stock dividends as part of interest expense. Prior period consolidated
statements of operations have been reclassified to conform to current period
presentation.
NOTE 14 - RETIREMENT PLANS
On September 8, 1997 the Company terminated its profit sharing plan and money
purchase plan. The Company continues to have an employee benefit expense through
the sharing of employees and expenses according to the Agreement. (See Note 2.)
As of July 1, 1998, the Company's subsidiary, Lee Middleton Original Dolls, Inc.
has a qualified defined contribution plan for eligible employees. Employees can
contribute between 1% and 15% of their base compensation to the plan. The
Company's contribution to the plan is at the discretion of the Company's Board
of Directors. The Company made no contributions to the plan for the year ended
December 31, 1998.
The Company provided an additional supplemental retirement benefit for an
executive officer, such benefit totaled $ 38,098 and $38,347 for the twelve
months ended December 31, 1998 and 1997, respectively. For the year ended
December 31, 1998 and for the period September 3, 1997 to December 31, 1997 this
benefit was paid as part of the Management Services Fee paid to InvestorsBank.
In the prior periods this benefit was given to two executive officers. The
benefits paid during the six months ended December 31, 1996 and the fiscal year
ended June 30, 1996 were $71,683 and $194,882, respectively. The payments were
made in the sole discretion of the outside members of the Board of Directors.
NOTE 15 - STOCK OPTION PLANS
The Company has four stock option plans, the 1987 Stock Option Plan, the 1990
Stock Option Plan, the 1993 Stock Option Plan and the 1997 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 all options granted was equal to the
market value of the stock on the date of grant. All of the options, except for
the options granted under the 1997 Stock Option Plan, are "incentive stock
options" as defined under Section 422 of the Code. Options granted under the
1997 Stock Option Plan are considered "non-qualified stock options" as defined
by the Code. All options must be exercised within ten years of the date of
grant.
Additional information relating to the Plans is shown below:
38
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the twelve months For the twelve months
Stock Option Plans Ended December 31, 1998 Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Average Average
Number of Option Number of Option
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Options outstanding at January 1, 1998
and 1997, respectively 205,870 $12.73 169,424 $10.45
Options granted -- -- 189,450 12.90
Options exercised -- -- (45,796) 7.35
Options terminated Unexercised -- -- (107,208) 11.70
- ---------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31,
1998 and 1997, respectively 205,870 11.23(1) 205,870 12.73
Options available for grant at December
31, 1998 and 1997, respectively 173,188 -- 173,188 --
- ---------------------------------------------------------------------------------------------------------------------------
Total Reserved Shares 379,058 -- 379,058 --
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1998
and 1997, respectively 192,590 $11.25 187,950 $12.94
- ---------------------------------------------------------------------------------------------------------------------------
(1) On February 11, 1998, the Board of Directors of the Company approved a downward adjustment of $1.67 in the exercise prices of
the 1997 Stock options that were granted on February 3, 1997 and June 25, 1997. The downward adjustment was to reflect the
Company's 1997 return of capital dividend.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the six months ended For the twelve months
Stock Option Plans December 31, 1996 Ended June 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Average Average
Number of Option Number of Option
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Options outstanding at July 1, 1996 and
1995, respectively 153,924 $10.37 147,144 $ 9.92
Options granted 15,500 11.25 22,500 11.00
Options exercised -- -- (15,720) 7.05
Options terminated unexercised -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996
and June 30, 1996, respectively 169,424 10.45 153,924
Options available for grant at December
31, 1996 and June 30, 1996, respectively 55,430 -- 70,930 --
- ---------------------------------------------------------------------------------------------------------------------------
Total reserved shares 224,854 -- 224,854 --
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1996
and June 30, 1996, respectively 46,780 $ 8.58 46,780 $ 8.58
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Exercise Price Range Shares Remaining Average Shares Exercise
Average Life Exercise Price
(years) Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.50-8.50 10,920 1.9 $ 8.00 3,640 $ 8.00
$10.00-$14.50 194,950 8.1 $11.41 188,950 $11.31
- ---------------------------------------------------------------------------------------------------------------------------
Total 205,870 7.8 $11.23 192,590 $11.25
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company adopted the disclosure only option under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
impact of the provision of this statement on proforma income and earnings per
share is not material.
NOTE 16 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by giving effect to all
dilutive potential common shares. A reconciliation of the income and shares
issued in computing the basic and diluted earnings per share for the years ended
December 31, 1998, December 31, 1997, and June 30, 1996, and the six month
periods ended December 31, 1996, respectively, are as follows:
<TABLE>
<CAPTION>
For the Twelve Months Ended For the Six For the Twelve
December 31, Months Ended Months Ended
1998 1997 December 31, 1996 June 30, 1996
---- ---- ------------------ -------------
<S> <C> <C> <C> <C>
Net income available to common
shareholders $ 3,769,637 $ 3,506,380 $ 1,141,960 $ 3,129,972
----------- ----------- ----------- -----------
Determination of shares:
Weighted average common shares
outstanding (basic) 3,689,102 3,685,990 3,689,094 3,812,131
Assumed conversion of stock options 2,468 11,597 22,261 27,354
----------- ---------- ----------- -----------
Weighted average common shares
outstanding (diluted) 3,691,570 3,697,587 3,711,355 3,839,485
=========== =========== =========== ===========
Basic earnings per share $ 1.02 $ 0.95 $ 0.31 $ 0.82
Diluted earnings per share $ 1.02 $ 0.95 $ 0.31 $ 0.82
</TABLE>
40
<PAGE>
NOTE 17 - INCOME TAXES
Taxes on income consist of the following:
<TABLE>
<CAPTION>
Twelve Months ended Six Months ended
December 31, December 31, June 30, December 31,
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current
Federal $1,063,000 $1,311,496 $ -- $860,201 $ --
State 344,404 227,126 -- 40,288 --
---------- ---------- -------- -------- -----
1,407,404 1,538,622 -- 900,489 --
---------- ---------- -------- -------- -----
Deferred
Federal 53,000 642 (35,074) (55,102) --
State 16,810 -- -- (1,125) --
---------- ---------- -------- -------- -----
69,810 642 (35,074) (56,227) --
---------- ---------- -------- -------- -----
Taxes on income $1,477,214 $1,539,264 $(35,074) $844,262 $ --
========== ========== ======== ======== =====
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective tax
rate as a percentage of income before taxes is as
follows:
<TABLE>
<CAPTION>
Twelve Months ended Six Months ended
December 31, December 31, June 30, December 31,
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal Statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
State income taxes, net of
federal tax benefits 4.4 2.3 -- 0.4 --
Income passed through to
shareholders (17.9) (15.1) (35.4) (10.2) (33.7)
Loss not benefited 6.5 3.2 5.5 3.1 3.0
Equity in earnings of
subsidiary -- -- (3.9) -- (3.3)
Other -- 0.6 (1.3) 5.7 0.0
--------------------------------------------------------------------------------------
27.0% 25.0% (1.1)% 33.0% --
======================================================================================
</TABLE>
41
<PAGE>
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities, which were classified in other assets and other liabilities in
the Consolidated Balance Sheet, included:
December 31,
1998 1997
---- ----
Deferred tax assets:
Accrued expenses and reserves $ 125,000 $195,100
Net operating loss carryforwards 1,172,000 784,000
---------- --------
1,297,000 979,100
Valuation allowance (1,172,000) (784,000)
---------- --------
125,000 195,100
Deferred tax liabilities
Depreciation (5,000) (5,290)
---------- --------
Net deferred tax assets $ 120,000 $189,810
========== ========
The valuation allowance represents net operating loss carryforwards at License
Products, for which utilization is uncertain. A portion of the deferred income
tax assets may be realized through carrybacks with the remainder dependent on
future income. Management believes that sufficient income will be earned in the
future to realize the remaining net deferred income tax assets. The increase in
the valuation allowance is a result of the increased deferred tax asset
associated with the net operating loss carryforwards.
NOTE 18- DISTRIBUTIONS
For the year ended December 31, 1998, the Company's board of directors declared
the following common stock distributions:
For the
year ended
December 31,
1998
Total distributions $2,397,916
Distributions per share (tax basis):
Ordinary income $ 0.65
Capital gains --
Return of capital --
----------
Total distributions declared per
share $ 0.65
Distribution in cash $ 0.65
Distribution in stock $ --
42
<PAGE>
NOTE 19- TRANSITION PERIOD
A comparison of key financial information of the Company for the six-month
periods ending December 31, 1996 and 1995 is as follows:
December 31, 1995
December 31, 1996 (Unaudited)
Revenues:
Interest on loans $ 3,579,266 $4,547,651
Net sales of manufacturing subsidiaries 7,226,130 1,049,870
Other income 134,194 128,182
----------- ----------
Total revenues 10,939,590 5,725,703
----------- ----------
Expenses:
Interest expense 477,722 1,490,670
Cost of goods sold of manufacturing
subsidiaries 3,413,772 717,731
Salaries of employee benefits 931,908 635,381
Other expenses 2,913,435 567,170
----------- ----------
Total expenses 7,736,837 3,410,952
----------- ----------
Equity earnings in subsidiary -- 176,760
----------- ----------
Net operating income before income taxes and
minority interest 3,202,753 2,491,511
Provision for income taxes (844,262) --
Minority interest (573,371) --
----------- ----------
Net income $ 1,785,120 $2,491,511
Preferred stock dividends 643,160 643,160
----------- ----------
Net income available to common shareholders $ 1,141,960 $1,848,351
=========== ==========
Basic earnings per share $ 0.31 $ 0.47
=========== ==========
Diluted earnings per share $ 0.31 $ 0.47
=========== ==========
43
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
1995
1996 (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,785,120 $ 2,491,511
Adjustments to reconcile net income to net cash
(used) provided by operating activities 1,127,259 530,058
----------- -----------
Net Cash Provided by Operations 2,912,379 3,021,569
----------- -----------
Cash Flows from Investing Activities:
Loans made (23,729,026) (23,003,932)
Principal collected on loans 13,600,355 14,094,074
Loans sold 15,140,783 15,400,490
Certificate purchased from trust -- (1,213,315)
Purchase of short-term securities -- (1,442,778)
Proceeds from maturity of securities 1,829,255 --
All Other - Net (298,957) (12,583)
----------- -----------
Net Cash Provided by Investing Activities $ 6,542,410 $ 3,821,956
----------- -----------
Cash Flows from Financing Activities:
Increase (decrease) in short-term borrowings $ 7,179,507 $(1,632,110)
Proceeds from loan participations with repurchase
options - net 1,364,629 --
Repayment of SBA debenture (12,620,000) --
Preferred stock dividends paid (643,160) (643,160)
Common stock dividends paid (3,670,648) (1,876,173)
Repurchase of common stock -- (1,234,045)
All other - net (454,492) (555,907)
----------- -----------
Net Cash Used in Financing Activities (8,844,164) (5,941,395)
----------- -----------
Net increase in cash 610,625 902,130
Cash, beginning of period 726,931 106,717
----------- -----------
Cash, end of period $ 1,337,556 $ 1,008,847
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 1,779,092 $ 2,004,408
Taxes paid 903,202 --
</TABLE>
44
<PAGE>
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
(In thousands, except per share data)
---------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
<S> <C> <C> <C> <C>
Total revenues $9,957 $8,844 $6,799 $6,357
Net operating income before income taxes
and minority interest $1,968 $1,768 $1,038 $ 705
Net income available to common
shareholders $1,293 $1,321 $ 700 $ 456
Basic earnings per share $ 0.35 $ 0.36 $ 0.19 $ 0.12
Diluted earnings per share $ 0.35 $ 0.36 $ 0.19 $ 0.12
<CAPTION>
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Total revenues $9,629 $7,920 $7,993 $5,442
Net operating income before income taxes
and minority interest $1,277 $1,653 $2,153 $1,045
Net income available to common
shareholders $ 720 $ 853 $1,303 $ 630
Basic earnings per share $ 0.20 $ 0.23 $ 0.35 $ 0.17
Diluted earnings per share $ 0.20 $ 0.23 $ 0.35 $ 0.17
</TABLE>
NOTE 21- BANDO McGLOCKLIN CAPITAL CORPORATION (PARENT ONLY)
Pursuant to covenants contained in its debt agreements, BMSBLC is prohibited
from declaring or paying any dividend on its common stock which would constitute
a return-of-capital dividend for income tax purposes. The Company's balance
sheet as of December 31, 1998 and 1997 and related statements of operations and
cash flows for the years ended December 31, 1998 and 1997, and June 30, 1996 and
the six months ended December 31, 1996 and 1995 on an unconsolidated basis
follow.
45
<PAGE>
Bando McGlocklin Capital Corporation
Balance Sheets (Parent Only)
December 31,
1998 1997
Assets
Loans $ 5,199,672 $ 1,600,000
Less: Retained loan discount -- (48,875)
Investments in BMSBLC 25,226,128 26,236,596
Investments in other subsidiaries 2,019,516 1,126,677
----------- -----------
Investments 32,445,316 28,914,398
Other assets - net 1,327,153 757,750
----------- -----------
Total Assets $33,772,469 $29,672,148
=========== ===========
Liabilities
Note payable 5,000,000 --
Loan participations with repurchase options -- $ 1,600,000
Other liabilities 8,159 421,321
----------- -----------
Total Liabilities 5,008,159 2,021,321
Preferred stock 16,908,025 16,908,025
Shareholders' Equity
Common stock 266,769 266,769
Additional paid-in capital 13,671,947 13,671,947
Retained earnings/(deficit) 1,770,080 656,597
Treasury stock, at cost (3,852,511) (3,852,511)
----------- -----------
Total Shareholders Equity 11,856,285 10,742,802
----------- -----------
Total Liabilities, Preferred Stock,
Common Stock & Other Shareholders' Equity $33,772,469 $29,672,148
=========== ===========
46
<PAGE>
<TABLE>
Bando McGlocklin Capital Corporation
Statements of Operations (Parent Only)
<CAPTION>
For the Years Ended
December 31, June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Interest on loans $ 712,120 $ 551,793 $1,071,037
Equity in income of BMSBLC 4,333,785 4,791,300 4,792,902
Equity in income of other subsidiaries 901,856 798,482 146,110
Other income 194,400 881,967 168,762
---------- ---------- ----------
Total revenues 6,142,161 7,023,542 6,178,811
---------- ---------- ----------
Expenses:
Interest expense 328,920 157,419 72,102
Salaries and employee benefits 118,917 916,574 1,081,106
Other operating expenses 553,009 1,156,849 609,311
---------- ---------- ----------
Total expenses 1,000,846 2,230,842 1,762,519
---------- ---------- ----------
Net income 5,141,315 4,792,700 4,416,292
Preferred stock dividends 1,362,659 1,286,320 1,286,320
---------- ---------- ----------
Net income available for common
shareholders $3,778,656 $3,506,380 $3,129,972
========== ========== ==========
<CAPTION>
For the Six Months Ended
December 31,
1996 1995
---- (Unaudited)
<S> <C> <C>
Revenues:
Interest on loans $ 477,729 $ 613,782
Equity in income of BMSBLC 2,018,071 2,615,094
Equity in income of other subsidiaries 425,944 47,879
Other income 23,051 64,055
---------- ----------
Total revenues 2,944,795 3,340,810
---------- ----------
Expenses:
Interest expense 24,748 48,628
Salaries and employee benefits 601,361 510,368
Other operating expenses 533,566 290,303
---------- ----------
Total expenses 1,159,675 849,299
---------- ----------
Net income 1,785,120 2,491,511
Preferred stock dividends 643,160 643,160
---------- ----------
Net income available for common shareholders $1,141,960 $1,848,351
========== ==========
</TABLE>
47
<PAGE>
<TABLE>
Bando McGlocklin Capital Corporation
Statements of Cash Flows (Parent Only)
<CAPTION>
For the Twelve For the Twelve
Months Months
Ended December 31, Ended June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,141,315 $4,792,700 $4,416,292
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in subsidiaries' earnings (5,226,622) (5,693,211) (4,939,012)
Dividends from subsidiaries 5,344,251 2,846,038 4,677,698
Other (376,356) (162,070) 53,794
----------- ---------- ----------
Net Cash Provided by Operations 4,882,588 1,783,457 4,208,772
----------- ---------- ----------
Cash Flows from Investing Activities:
Loans made to related party (5,000,000) -- (2,951,633)
Principal collected on loans 1,401,572 6,226,917 1,658,743
Loans sold -- -- 11,173,648
Certificate purchased from trust -- -- (1,213,315)
Loans purchased -- -- (4,767,544)
Proceeds from maturity of securities (664,104) -- --
Increase in note receivable from subsidiary -- -- (543,689)
Other -- (235,290) 110,291
----------- ---------- ----------
Net Cash (Used) Provided by Investing
Activities (4,262,532) 5,991,627 3,466,501
----------- ---------- ----------
Cash flows from Financing Activities:
Proceeds from loan participations with
Repurchase options - net (1,600,000) 1,600,000 --
Increase in other notes payable 5,000,000 -- --
Capitalization & distribution of
InvestorsBank -- (6,160,000) --
Preferred stock dividends paid (1,362,659) (1,286,320) (1,286,320)
Common stock dividends paid (2,656,153) (1,990,055) (3,678,476)
Repurchase of common stock -- (589,898) (2,696,363)
Common stock investment in subsidiaries -- -- --
Other -- 336,674 110,760
----------- ---------- ----------
Net Cash Provided (Used) in Financing
Activities (618,812) (8,089,599) (7,550,399)
----------- ---------- ----------
Net increase (decrease) in cash 1,244 (314,515) 124,874
Cash, beginning of year 27,210 341,725 103,379
----------- ---------- ----------
Cash, end of year $ 28,454 $ 27,210 $ 228,253
=========== ========== ==========
</TABLE>
48
<PAGE>
<TABLE>
Bando McGlocklin Capital Corporation
Statements Cash Flows - continued (Parent Only)
<CAPTION>
For the Six Months Ended
December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,785,120 $ 2,491,511
Other adjustments to reconcile net income to
net cash (used) by operating activities:
Equity in subsidiaries' earnings (2,444,015) (2,662,973)
Dividends from subsidiaries 3,857,425 2,418,731
Other 439,316 812,901
----------- -----------
Net Cash Provided by Operations 3,637,846 3,060,170
----------- -----------
Cash Flows from Investing Activities:
Loans made (5,269,882) (630,149)
Principal collected on loans 631,872 233,092
Loans sold 4,340,001 8,666,538
Certificate purchased from trust -- (1,213,315)
Loans purchased -- (4,767,544)
Proceeds from maturity of securities -- 250,000
Decrease (increase) in note receivable 1,087,443 (1,054,120)
from subsidiary
Other -- (27,040)
----------- -----------
Net Cash Provided by Investing Activities 789,434 1,457,462
----------- -----------
Cash Flows from Financing Activities:
Preferred stock dividends paid (643,160) (643,160)
Common stock dividends paid (3,670,648) (1,876,173)
Repurchase of common stock -- (1,234,045)
Other -- 110,760
----------- -----------
Net Cash Used in Financing Activities (4,313,808) (3,642,618)
----------- -----------
Net increase in cash 113,472 875,014
Cash, beginning of period 228,253 103,379
----------- -----------
Cash, end of period $ 341,725 $ 978,393
=========== ===========
</TABLE>
49
<PAGE>
Schedule I
Condensed Financial Information of Registrant
(Refer to footnote 20 of the financial statements)
Schedule II
Valuation and Qualifying Accounts
<TABLE>
Changes in the reserves deducted from assets in the consolidated balance sheet other than accumulated depreciation for the
years ended December 31, 1998 and 1997 and June 30, 1996, respectively and for the six months ended December 31, 1996 and 1995,
respectively.
<CAPTION>
Reserve for loan losses: Beginning Additions Charges for Ending balance
balance charged purposes for --------------
------- to Income which reserve
--------- was created
Year ended: -----------
<S> <C> <C> <C> <C>
December 31, 1998 $450,000 $ -- $ 450,000 $ --
December 31, 1997 450,000 6,335 6,335 450,000
June 30, 1996 51,943 (10,501) 2,651 38,791
Six months ended:
December 31, 1996 38,791 411,209 -- 450,000
December 31, 1995(1) 51,943 (10,501) -- 41,442
<CAPTION>
Reserve for doubtful Beginning Additions Charges for Ending balance
accounts: balance charged purposes for --------------
------- to Income which reserve
--------- was created
Year ended: -----------
<S> <C> <C> <C> <C>
December 31, 1998 $268,796 $274,561 $ -- $543,357
December 31, 1997 98,083 170,713 -- 268,796
June 30, 1996 2,450 58,377 -- 60,827
Six months ended:
December 31, 1996 60,827 37,256 -- 98,083
December 31, 1995(1)(2) 2,450 -- -- 2,450
(1) Unaudited.
(2) These periods include only License Products reserve for doubtful accounts.
</TABLE>
50
<PAGE>
<TABLE>
Schedule IV
Mortgage Loans on real estate
<CAPTION>
Principal
amount of
loans
Carrying subject
Amount of to
Face Mortgages as delinquent
Periodic Amount of Principal
Description Interest Rate Final Payment Prior of December 31, or
----------- ------------- Maturity Date Terms Liens Mortgages 1998 Interest(1)
------------- ----- ----- --------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential
1st Mortgage 10.99% 06/01/27 N/A N/A N/A $ 68,563
Commercial
1st Mortgage 6.375% to 12.00% 02/01/99 to 01/01/16 N/A N/A N/A $ 95,187,657 $309,383
2nd Mortgage 7.750% to 12.00% 02/01/99 to 09/01/07 N/A N/A N/A 4,295,581 62,227
3rd Mortgage 7.750% to 12.00% 02/01/99 to 11/01/07 N/A N/A N/A 285,660 65,049
Construction 7.00% to 8.50% 06/30/99 to 11/01/08 N/A N/A N/A 6,280,896
-----------
Total Commercial 106,049,794
All others(2) N/A N/A N/A N/A N/A 10,263,581 302,087
------------
Total loans(3) $116,381,938
============
Footnotes to Schedule IV:
(1) Delinquent is defined as 90 days or more past due.
(2) This category includes all non-mortgage loans on the balance sheet.
(3) No individual mortgage loan exceeded 3% of the total carrying value of mortgages.
</TABLE>
<TABLE>
Reconciliation of Loans on the Balance Sheet
<CAPTION>
12/31/97 12/31/96 06/30/95 06/30/96 06/30/95
to to to to to
12/31/98 12/31/97 06/30/96 12/31/96 12/31/95
(Unaudited)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans on balance sheet, $131,035,245 $71,456,347 $86,571,594 $76,468,459 $86,571,594
Beginning of period(1)
Additions during period:
Loans made 79,143,575 53,759,887 42,745,527 23,729,026 23,003,932
Loans purchased -- 49,647,182 -- -- --
Certificate purchased from trust -- -- 1,213,315 -- 1,213,315
Deductions during period:
Principal collected on loans 93,795,013 43,821,836 23,881,211 13,600,355 14,094,074
Loans sold -- 28,087,037 15,140,783 15,400,490
Principal charged off 1,869 6,335 2,651 -- --
Consolidation of Middleton Doll -- -- 2,091,078 -- --
----------------- ---------------- ---------------- ----------------- ---------------
Loans on balance sheet, end of period(1) $116,381,938 $131,035,245 $76,468,459 $71,456,347 $81,294,277
================= ================ ================ ================= ===============
(1) Loans on balance sheet includes Loan-backed certificates where applicable.
</TABLE>
51
<PAGE>
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant
Pursuant to Instruction G, the information required by this item (with
respect to directors of the registrant) is incorporated herein by reference from
the Company's definitive Proxy Statement involving the election of directors.
The information with respect to executive officers of the Company has been
included in Part I hereof. The definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
Item 11. Executive Compensation
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
1999 annual meeting of shareholders under the caption "Board of
Directors-Director Compensation" and "Executive Compensation"; provided,
however, that the subsection entitled "Executive Compensation-Report on
Executive Compensation" shall not be deemed to be incorporated herein by
reference. The definitive proxy statement will be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
1999 annual meeting of shareholders under the caption "Principal Shareholders".
The definitive proxy statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
1999 annual meeting of shareholders under the caption "Related Party
Transactions". The definitive proxy statement will be filed with the Securities
and Exchange Commission with 120 days after the end of the Company's fiscal
year.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Exhibits
Reference is made to the separate exhibit index contained on pages I-1
through I-2 hereof.
2. Financial Statements and Financial Statement Schedules
Reference is made to the separate index in Item 8 of this Annual Report
on Form 10-K with respect to the financial statements and schedules filed
herewith.
3. Reports on Form 8-K
None.
52
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 30, 1999.
BANDO McGLOCKLIN CAPITAL
CORPORATION
By:/s/ George R. Schonath
George R. Schonath,
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on March 30, 1999.
Signature Title
/s/ George R. Schonath President and Chief Executive Officer
George R. Schonath (Principal Financial Officer)
/s/ Susan J. Hauke Vice President Finance
Susan J. Hauke (Principal Accounting Officer)
/s/ Robert A. Cooper Director
Robert A. Cooper
/s/ Peter A. Fischer Director
Peter A. Fischer
/s/ David A. Geraldson, Sr. Director
David A. Geraldson, Sr.
/s/ Albert O. Nicholas Director
Albert O. Nicholas
53
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarterly period ended
March 31, 1997).
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Company's Form
10-Q for the quarterly period ended March 31, 1997).
4.1 Loan and Security Agreement, dated March 11, 1998, by and between
Firstar Bank Milwaukee and Bando McGlocklin Capital Corporation
(incorporated by reference to Exhibit 4.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1997).
4.2 Amended and Restated Loan Agreement dated as of June 28, 1996 between
First Bank (N.A.) and Bando McGlocklin Small Business Investment
Corporation (incorporated by reference to Exhibit 4.1 to the Company's
Form 10-Q for the quarterly period ended March 31, 1997).
4.3 Modification Agreement dated as of October 31, 1996 between First Bank
(N.A.) and Bando McGlocklin Small Business Investment Corporation
(incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q
for the quarterly period ended March 31, 1997).
4.4 Loan Agreement dated as of June 28, 1996 between LaSalle National Bank
and Bando McGlocklin Small Business Investment Corporation
(incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q
for the quarterly period ended March 31, 1997).
4.5 First Amendment to Loan Documents dated as of December 2, 1996 by
LaSalle National Bank and Bando McGlocklin (incorporated by reference
to Exhibit 4.3 to the Company's Form 10-Q for the quarterly period
ended March 31, 1997).
4.6 First Amendment to Amended and Restated Loan Agreement dated as of
October 31, 1996 between Firstar Bank Milwaukee, N.A. and Bando
McGlocklin Small Business Investment Corporation (incorporated by
reference to Exhibit 4.4 to the Company's Form 10-Q for the quarterly
period ended March 31, 1997).
4.7 First Amendment to Amended and Restated Loan Agreement dated as of
October 31, 1996 between Firstar Bank Milwaukee, N.A. and Bando
McGlocklin Small Business Investment Corporation (incorporated by
reference to Exhibit 4.5 to the Company's Form 10-Q for the quarterly
period ended March 31, 1997).
4.8 Second Amendment to Amended and Restated Loan Agreement dated as of May
14, 1997 between Firstar Bank Milwaukee, N.A. and Bando McGlocklin
Small Business Investment Corporation (incorporated by reference to
Exhibit 4.6 to the Company's Form 10-Q for the quarterly period ended
March 31, 1997).
4.9 Master Note Purchase Agreement dated as of January 1, 1997 between the
State of Wisconsin Investment Board, Bando McGlocklin Small Business
Lending Corporation and Bando McGlocklin Capital Corporation
(incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q
for the quarterly period ended March 31, 1997).
10.1 Bando McGlocklin Capital Corporation 1987 Incentive Stock Option Plan
(incorporated by reference to Exhibit 7.3 to the Company's Form N-5
Registration Statement, Registration No. 33-12939).
54
<PAGE>
10.2 Bando McGlocklin Capital Corporation 1990 Incentive Stock Option Plan
(incorporated by reference to Exhibit 7.4 to the Company's Form N-5
Registration Statement, Registration No. 33-51406).
10.3 Bando McGlocklin Capital Corporation 1993 Incentive Stock Option Plan
(incorporated by reference to Exhibit (i)(6) to the Company's
Pre-Effective Amendment No. 1 to Form N-2 Registration Statement,
Registration No. 33-66258).
10.4 Bando McGlocklin Capital Corporation 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q
for the quarterly period ended march 31, 1997).
10.5 Management Services and Allocation of Expenses Agreement, dated
September 2, 1997, by and between InvestorsBank and Bando McGlocklin
Capital Corporation (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-K for the fiscal year ended December 31, 1997).
21 List of subsidiaries of Bando McGlocklin Capital Corporation
27 Financial Data Schedule (with EDGAR filing only)
99 Proxy Statement for 1999 Annual Meeting of Shareholders
The Proxy Statement for the 1999 Annual Meeting of Shareholders will be
filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the Company's fiscal year; except to
the extent incorporated by reference, the Proxy Statement for the 1999
Annual Meeting of Shareholders shall not be deemed to be filed with the
Securities and Exchange Commission as part of this Annual Report on
Form 10-K.
EXHIBIT 21
Name of Subsidiary Jurisdiction of Incorporation
Bando McGlocklin Small
Business Lending Corporation Wisconsin
Bando McGlocklin Investment Company (1) Wisconsin
Lee Middleton Original Dolls, Inc. Wisconsin
License Products, Inc. (2) Wisconsin
(1) The registrant owns 100% of the non-voting stock and 99% of the equity
stock.
(2) Bando McGlocklin Investment Company owns 51% of the common stock.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANDO MCGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,835,943
<SECURITIES> 137,766,234
<RECEIVABLES> 2,897,722
<ALLOWANCES> (75,557)
<INVENTORY> 3,261,553
<CURRENT-ASSETS> 849,654
<PP&E> 4,431,908
<DEPRECIATION> (1,398,258)
<TOTAL-ASSETS> 154,424,087
<CURRENT-LIABILITIES> 63,133,692
<BONDS> 62,470,407
16,908,025
0
<COMMON> 266,769
<OTHER-SE> 11,589,516
<TOTAL-LIABILITY-AND-EQUITY> 154,424,087
<SALES> 19,745,491
<TOTAL-REVENUES> 31,957,127
<CGS> 10,448,494
<TOTAL-COSTS> 10,448,494
<OTHER-EXPENSES> 7,072,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,673,884
<INCOME-PRETAX> 6,624,932
<INCOME-TAX> 1,492,636
<INCOME-CONTINUING> 3,769,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,769,637
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
