UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission file number: 811-3787
BANDO McGLOCKLIN CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation) No.)
W239 N1700 Busse Road
P.O. Box 190 53072-0190
Pewaukee, Wisconsin (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (414) 523-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ___
On May 14, 1997 there was 3,677,662 shares outstanding of the
Registrant's common stock, 6 2/3 cents par value.
BANDO McGLOCKLIN CAPITAL CORPORATION
FORM 10-Q INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statement of Operations - For the Three
Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . 5
Consolidated Statement of Cash Flows - For the Three
Months Ended March 31, 1997 and 1996 . . . . . . . . . . . 6-7
Notes to the Consolidated Financial Statements . . . . . . 8-21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 22-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 25
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 25
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 25
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 26
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 27
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1997 December 31, 1996
(Unaudited) (Unaudited)
ASSETS
Loans $105,424,218 $69,468,291
Loan-backed certificates 1,497,499 1,988,056
Land 295,002 369,577
Less: reserve for loan losses (450,000) (450,000)
Less: retained loan discount (706,652) (1,482,657)
----------- -----------
Investments 106,060,067 69,893,267
Excess servicing asset 710,499 1,555,231
Short-term securities 525,000 -
Investment in swap contracts at
market value 311,201 444,257
Accounts receivable (net of
allowance of $12,162 and $16,245,
respectively) 1,246,418 1,176,025
Inventory 1,657,287 1,827,170
Interest receivable 1,086,266 1,348,860
Cash 549,663 1,337,556
Fixed assets (net of accumulated
depreciation of $578,910 and
$541,791, respectively) 1,575,205 1,419,930
Other assets 1,129,527 727,001
------------ -----------
Total Assets $114,851,133 $79,729,297
============ ===========
March 31, 1997 December 31, 1996
(Unaudited) (Unaudited)
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS'
EQUITY
Commercial Paper $20,043,397 $21,768,394
Notes payable to banks 7,500,000 9,700,000
----------- -----------
Short-term borrowings 27,543,397 31,468,394
State of Wisconsin Investment
Board note payable 6,500,000 6,666,667
Loan participations with 42,754,216 5,348,619
repurchase options
Accounts payable 618,961 565,803
Other notes payable 26,967 29,469
Other liabilities 3,471,065 2,286,050
---------- ----------
Total Liabilities 80,914,606 46,365,002
---------- ----------
Minority interest in subsidiaries 770,677 598,211
Preferred stock, 1 cent par 16,908,025 16,908,025
value, 3,000,000
shares authorized, 674,791
shares issued and outstanding
after deducting 15,209 shares
in treasury
Common Stock and Other
Shareholders' Equity
Common Stock, 6 2/3 cents par 265,035 263,716
value,
3,000,000 shares authorized,
3,975,540 and 3,955,744
shares issued and outstanding,
before deducting shares in
treasury, respectively
Additional paid-in capital 19,625,680 19,498,326
Retained earnings/(deficit) 103,154 (641,370)
Treasury stock, at cost (303,648
and 266,650 shares, respectively) (3,736,044) (3,262,613)
----------- -----------
Total Common Stock and Other 16,257,825 15,858,059
Shareholders' Equity ---------- ----------
Total Liabilities, Minority $114,851,133 $79,729,297
Interest, Preferred ============ ===========
Stock, Common Stock and Other
Shareholders' Equity
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
March 31,1997 March 31,1996
(Unaudited) (Unaudited)
Revenues:
Interest on loans $2,432,587 $1,974,713
Net sales of manufacturing 3,029,640 271,927
subsidiaries
Interest on short-term 13,276 15,850
securities
Premium (expense) income (68,727) 5,678
Other income 35,638 85,227
--------- ---------
Total Revenues 5,442,414 2,353,395
--------- ---------
Expenses:
Interest expense 1,264,316 702,731
Cost of goods sold of 1,637,134 217,269
manufacturing subsidiaries
Salaries and employee benefits 466,439 326,974
Change in appreciation on 133,056 25,067
investment swaps
Realized losses - 16,066
Other operating expenses 792,406 356,968
--------- ---------
Total Expenses 4,293,351 1,645,075
--------- ---------
Net operating income before 1,149,063 708,320
income taxes and --------- ---------
minority interest
Provision for income taxes (232,073) -
Minority interest in earnings of (172,466) -
subsidiaries --------- ---------
Net Income $744,524 $708,320
========= ==========
Net Income Per Common Share $0.20 $0.19
Weighted Average Shares 3,717,625 3,792,735
Outstanding
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31, 1997 March 31, 1996
(Unaudited) (Unaudited)
Cash Flows from Operating
Activities
Net income $744,524 $708,320
Loans made (13,274,823) (11,230,700)
Principal collected on loans 10,197,537 3,904,574
Loans sold - 12,004,722
Premium expense (income) - net 68,727 (5,678)
Loans purchased (32,388,084) -
Change in minority interest in 172,466 -
subsidiaries
Other adjustments to reconcile
net income to net cash (used)
provided by operating activities:
Change in appreciation on 133,056 25,067
investment swaps
24,320 19,971
Amortization
Depreciation 37,119 20,093
Increase (decrease) in cash due
to changes in:
Accounts receivable (70,393) (61,539)
Inventory 169,883 18,115
Interest receivable 262,594 (620,796)
Other assets (426,846) (250,446)
Accounts payable 53,158 157,631
Other liabilities 1,185,015 (54,220)
--------- ---------
Net Cash (Used) Provided by
Operations (33,111,747) 4,635,114
----------- ---------
Cash Flows from Investing Activities:
Purchase of fixed assets (192,394) (40,658)
Land sold 74,575 149,150
Purchase of short-term (525,000) -
securities
Proceeds from maturity of
securities - 1,063,778
---------- -----------
Net Cash (Used) Provided by (642,819) 1,172,270
Investing Activities ---------- -----------
Cash Flows from Financing
Activities:
(Decrease) increase in short-term ($3,924,997) $1,051,963
borrowings
Proceeds from loan participations 37,405,597 2,096,644
with repurchase options - net
Repayment of SWIB note (166,667) (6,500,000)
Decrease in other notes payable
(2,502) -
Dividends paid - (915,551)
Proceeds from exercise of
stock options 128,673 -
Repurchase of common stock (473,431) (1,313,250)
---------- ----------
Net Cash Provided (Used) in
Financing Activities 32,966,673 (5,580,194)
---------- ----------
Net (decrease) increase in cash (787,893) 227,190
Cash, beginning of period 1,337,556 1,008,847
---------- ----------
Cash, end of period $549,663 $1,236,037
========== ==========
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Bando McGlocklin Capital Corporation (the "Company"),
was incorporated in February 1980 and provides long-term secured loans to
finance the growth, expansion and modernization of 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, BMSLBC surrendered its Small Business
Administration ("SBA") license. BMSBLC will continue to provide secured
loans to small business concerns. Prior to January 1, 1997, BMSBLC was
known as Bando McGlocklin Small Business Investment Corporation.
On May 5, 1993, the Company formed Bando McGlocklin Investment Company
("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 third party.
In January 1997, this one percent interest was sold to an officer of the
Company and was given 100% of the voting stock of BMIC by the Company. In
1997, BMSBLC contributed it's 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. 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 financial position
as of December 31, 1996 and the results of operations and cash flows for
the three months ended March 31, 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
subsidiaries are consolidated.
During 1996 the Company changed its year-end from June 30 to December 31.
In 1997, the Company intends to capitalize a bank holding company and then
spin-off the bank holding company in a common share distribution to
Company shareholders.
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.
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with the instructions to Form 10-
Q and do not include all of the other information and disclosures required
by generally accepted accounting principles.
The accompanying consolidated financial statements have not been audited
by independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management such financial statements
include all adjustments, consisting only of normal recurring accruals,
necessary to summarize fairly the Company's financial position and results
of operations. The results of operations for the three months ended March
31, 1997 may not be indicative of the results that may be expected for the
year ending December 31, 1997.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements as of
March 31, 1997 and December 31, 1996 and for the period ended March 31,
1997 include the accounts of the Company, BMSBLC, BMIC, Middleton Doll
and License Products. During the three months ended March 31, 1996, 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. Management previously expressed an intention to dispose of
BMCC's investment in Middleton Doll and License Products. Management now
intends to retain these investments. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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 -Short-term securities and the Company's investment
swap contracts are valued at current market value. Loans and loan-backed
certificates 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.
When a portion of a loan is sold, the basis of the retained portion of the
loan is discounted by the differential between the face amount of the sold
portion of the loan and the relative market value of the sold portion of
the loan. This difference is referred to as the retained loan discount.
The relative market value is determined by the expected cash flows
discounted with assumptions made on prepayments and rate of return. At
the time of sale, premium income is reduced by the retained loan discount.
The retained loan discount is amortized over the life of the underlying
loan. When a loan is prepaid, the remaining retained loan discount is
recognized as an increase to interest income. When a loan is sold, the
remaining retained loan discount is included as a reduction to the basis
of the underlying loan.
EXCESS SERVICING ASSET - The excess servicing asset represents the
unamortized balance of the present valued cash flows of the interest rate
differential resulting from the sale of a loan with servicing rights
retained. For transactions entered into prior to January 1, 1997, the
interest rate differential is the difference between the interest rate on
the underlying loan and the interest rate paid to the purchaser on the
sold portion after considering normal servicing fees and transaction fees.
This amount is amortized over the life of the underlying loan, subject to
periodic review of prepayment speeds.
INTEREST RATE SWAP AGREEMENTS - The Company enters into interest rate swap
agreements as a means of managing its interest rate exposure. The
differential to be paid or received on all interest rate swap agreements
is accrued as interest rates change and is recognized over the life of the
agreements. Those agreements which are considered to be investments are
accounted for at market value in the financial statements.
ACCOUNTS RECEIVABLE - Accounts receivable represents sales on credit made
by Middleton Doll and License Products, net of an allowance for doubtful
accounts.
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.
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.
RECOGNITION OF INTEREST INCOME - Interest income is recorded on the
accrual basis to the extent that management anticipates that such amounts
will be collected. In all other cases, no entry is made to accrue
interest, but the unpaid interest is monitored, and interest is recorded
upon receipt.
PREMIUM (EXPENSE) INCOME - Premium (expense) income represents the
differential at the time a portion of a loan is sold between the present
valued excess servicing income on the sold portion and the retained loan
discount, and subsequent to sale, amortization of the retained loan
discount and excess servicing asset.
INCOME TAXES - The Company intends 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 generally not be
subject to income tax on that portion of its taxable income which is
distributed to shareholders. The Company must also meet certain other
annual income and quarterly asset diversification tests.
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 financial statement purposes. For tax
purposes, the realized loss will be amortized through 1997. As a result,
ordinary taxable income was reduced by $88,057 and $206,456 for the three
months ended March 31, 1997 and 1996 respectively. During the year ending
December 31, 1997, ordinary taxable income will be reduced by $223,911.
NOTE 2 - 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.
Substantially all loans are fully secured by first or second mortgages on
owner-occupied real estate. Approximately 95% of the Company's loan
portfolio at March 31, 1997 is comprised of loans to borrowers located
within the State of Wisconsin.
The Company routinely monitors its loan portfolio for evidence of loan
impairment. A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan.
Historically impairment has not been an indicator of loss. As of March
31, 1997 and December 31, 1996 loans with balances aggregating $1,176,737
and $1,022,434, 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 March 31, 1997, a loss reserve of $450,000 was recorded on
impaired loans totaling $1,176,737. At December 31, 1996, a loss reserve
of $450,000 was recorded on impaired loans totaling $1,022,434. The
accrued interest on the impaired loans totals $58,493 at March 31, 1997
and is considered fully collectible.
The Company's loan portfolio consists primarily of variable-rate loans
with terms of five to fifteen years. The Company writes interest rate
caps for terms not exceeding five years on certain variable rate loans to
meet the financing needs of its borrowers. Interest rate caps written by
the Company enable borrowers to modify or reduce their interest rate risk.
The Company is exposed to interest rate risk to the extent that its cost
of funds exceeds the interest rate caps. Interest rate caps do not
represent exposure to credit loss for the Company in that they do not
affect the outstanding principal amounts of the loans.
The Company has made loans which have outstanding balances at March 31,
1997 of $4,465,253 to Bando McGlocklin Real Estate Investment Corporation,
a related party. The Company has a loan outstanding in the amount of
$1,533,664 as of March 31, 1997 to the contractor that built an office
building for Bando McGlocklin Real Estate Investment Corporation from
which the Company leases space.
At March 31, 1997, the Company had loans outstanding to its largest
borrower totalling $12,812,897. Undisbursed construction loan commitments
and lines of credit totaled $6,508,366 at March 31, 1997.
NOTE 3 - LOANS SOLD
Since 1994, the Company has sold loans to third parties. The following
table summarizes the sales and the outstanding balance of loans sold.
Principal Principal
Balance Sold Percentage Balance Sold at Recourse
at Date of Sale Sold March 31, 1997 Provision
During the six months ended December 31, 1996:
$550,000 58% $544,900 None
97,795 75% 196,977 None
$647,795 $741,877
During the year ended June 30, 1996:
$1,671,644 68%- $1,589,263 None
85%
1,757,275 100% 1,723,027 None
$3,428,919 $3,312,290
During the year ended June 30, 1995:
$13,222,580 85% $9,189,813 100%
2,837,677 75%- 1,929,486 None
80%
1,455,000 75% --- None
1,605,175 100% --- None
$19,120,432 $11,119,299
During the year ended June 30, 1994:
$10,397,410 75% $2,995,085 None
During the three months ended March 31, 1997, the Company repurchased
certain loans which had been sold to third parties, at unpaid principal
balances totalling $32,388,084. As a result of these transactions, the
excess servicing asset and retained loan discount related to the original
sale were reduced $642,319 and $615,763, respectively. Premium expense of
$26,556 was also recognized due to these transactions.
The Company also sells loans with the option to repurchase them at a later
date. As of March 31, 1997, the balance of loan participations with
repurchase options was $42,754,216. During the three months ended March
31, 1997, the Company resold, with an option to repurchase, the loans
referred to in the preceding paragraph at unpaid principal balances
totalling $32,388,084. These sales have been accounted for as secured
financings.
For the loans sold with no recourse, the Company is susceptible to loss on
the loans up to the percentage of the retained interest to the extent the
underlying collateral is insufficient in the event of nonperformance by
the borrower. The Company's retained interest is subordinated to the
portion sold. For the loans sold with full recourse, the Company is
susceptible to loss equal to the total principal balance of the loan to
the extent the underlying collateral is insufficient in the event of
nonperformance. No associated loss reserve has been established as of
March 31, 1997 for loans which have been sold.
Under the terms of the agreements, the Company retains servicing rights
for the entire loan. (See Note 5.) As servicer and provider of recourse,
certain agreements require the Company to comply with various covenants,
including the maintenance of net worth. As of March 31, 1997, the Company
was in compliance with these covenants.
NOTE 4 - LOAN BACKED CERTIFICATES
During the years ended June 30, 1996 and June 30, 1995, the Company sold
loans to a trust, which issued two classes of certificates as noted in the
table below:
Principal A Certificate
Balance A Certificate B Certificate Balance at
Sold at Date Sold to A Certificate Sold to March 31,
of Sale Third Party Interest Rate Company 1997
For year ended June 30, 1996:
$8,666,538 $7,453,223 6.938% (1) $1,213,315 $5,959,464
For year ended June 30, 1995:
$6,540,358 $5,246,160 8.00% (2) $1,294,198 $2,138,097
(1) The interest rate will be reset monthly based upon the 30 day
London Interbank Offered Rate (LIBOR) plus one and one-half
percent.
(2) The interest rate will be reset every three years based upon the
three-year U.S. Treasury Bond yield plus one and one-half percent.
The B Certificates purchased by the Company are subordinated to the A
Certificates. The B Certificates receive all excess interest after
expenses. The Company has risk equal to the B Certificates' principal
balances to the extent the underlying collateral is insufficient in the
event of nonperformance by the borrowers. At March 31, 1997, no associated
loss reserve has been established. Under the terms of the Pooling and
Servicing Agreements the Company retains servicing rights for all the
loans sold. (See Note 5).
NOTE 5 - EXCESS SERVICING ASSET
The Company has retained the servicing rights on each of the loans it has
sold to third parties. By retaining the right to service the loan, the
Company earns an interest rate spread equal to the difference between the
interest rate on the loan and the interest rate paid to the purchaser on
the sold portion (this difference is referred to as the "Servicing
Spread").
For transactions entered into prior to January 1, 1997, the value of this
excess servicing asset has been estimated based upon the present valued
cash flow of the Servicing Spread after considering the effects of
estimated prepayments, normal servicing fees and transaction fees. The
value of the excess servicing asset is recognized as premium income at the
time of the sale and is concurrently capitalized on the consolidated
balance sheet. It is then amortized over the life of the loan. If actual
cash flows exceed the excess servicing asset, the Company will recognize
additional income in excess of the value of the excess servicing asset. A
shorter loan life than that estimated at the time the excess servicing
asset was established, will result in the carrying value of the excess
servicing asset being written down through a charge to earnings.
The carrying value of the excess servicing asset is analyzed quarterly by
the Company to determine whether prepayment and default experience has any
impact on this carrying value.
NOTE 6 - SHORT-TERM SECURITIES
Short-term securities are used to invest idle cash. Short-term securities
having a maturity of less than 90 days are stated at market value (which
approximates cost). At March 31, 1997, the Company held two securities
with maturities ranging from one to seven days and bearing interest at
5.25% to 5.75%.
NOTE 7 - SHORT-TERM BORROWINGS
Commercial paper is issued for working capital purposes with maturities of
up to 90 days. The average yield on commercial paper outstanding at March
31, 1997 was 5.67%.
BMSBLC has entered into three loan agreements with certain banks. The
current loan agreements provide for a maximum of $32,500,000 less the
outstanding principal amount of commercial paper. Two facilities bear
interest at the prime rate while the other facility bears interest at the
30-,60- or 90-day LIBOR plus one and three-eighths percent. Interest is
payable monthly, and the loan agreements expire on October 31, 1997.
BMSBLC is also required to pay an availability fee to the two facilities
that bear interest at the prime rate for the use of those facilities. The
banks are party to an Intercreditor Agreement which grants each party a
proportionate security interest in substantially all of BMSBLC's assets
which are not securing long-term debt. (See Note 8.) At March 31, 1997,
under these agreements, the outstanding principal balance was $7,500,000.
NOTE 8 - 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 March 31, 1997, the outstanding principal balance was
$6,500,000.
The SWIB agreement and the loan agreements described in Note 7 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. As of March 31, 1997, BMSBLC is in compliance
with all such requirements.
Future annual maturities of long-term debt as of March 31, 1997 are as
follows:
March 31, 1998 $ 666,667
March 31, 1999 666,666
March 31, 2000 666,667
March 31, 2001 666,666
March 31, 2002 666,667
Later Years 3,166,667
__________
$6,500,000
==========
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 March 31, 1997 was approximately $6.6 million.
NOTE 9 - INTEREST RATE SWAPS
The Company enters into interest rate swap agreements primarily as a means
of managing interest rate risk. To the extent that the Company's
variable-rate loans are funded with fixed-rate debt, the Company is
subject to interest rate risk. To reduce interest rate risk, the Company
enters into certain interest rate swaps designed to convert variable-rate
loans into fixed-rate loans. Although these swaps reduce interest rate
risk, the potential for profit or loss on interest rate swaps still exists
depending upon fluctuations in interest rates. In addition, the Company
enters into interest rate swaps in an attempt to further manage interest
rate risk resulting from interest rate movements.
In accordance with applicable accounting principles, the Company's
interest rate swap agreements are held for purposes other than trading and
are further classified as either hedges or as investment contracts. Both
hedges and investment contracts have the potential for profit and loss.
Hedges are accounted for using the designation method, which matches the
swaps with the assets that are being hedged. When the designated asset
matures, or is sold, extinguished or terminated, the hedge would be
reclassified as an investment. Accounting principles dictate that those
contracts not meeting hedge criteria be classified as investments and
marked-to-market with any associated unrealized gain or loss recorded in
the financial statements, whereas those contracts meeting hedge criteria
are not to be classified as investments or marked-to-market in the
financial statements. On March 31, 1997 and March 31, 1996, the
investment contracts at market resulted in an unrealized gain of $311,201
and $1,072,223, respectively. The difference in the unrealized gain at
March 31, 1997 and March 31, 1996 as compared to December 31, 1996 and
December 31, 1995, a decrease of $133,056 and $25,067 respectively, was
recorded in the consolidated statement of operations.
The average notional amount of investment swaps outstanding during the
three months ended March 31, 1997 and March 31, 1996 was $62,750,000 and
$142,750,000, respectively.
Based on quoted market valuations, the estimated market value of the hedge
swaps at March 31, 1997 and December 31, 1996 was approximately $0.3
million and $1.9 million, respectively.
The following table summarizes the interest rate swap agreements in effect
at March 31, 1997. No funds were borrowed or are to be repaid under these
arrangements.
Original
Company Bank Current Interest Rates Paid Notional Amount Expiration
Bank Payment Payment By Company By Bank Date
Firstar Bank Milwaukee, N.A Floating Fixed 5.65625% (3) 8.77000% $10,000,000(6) 06/30/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A Floating Fixed 5.56250% (3) 6.53000% $17,500,000 07/07/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A Floating Fixed 5.56250% (3) 6.84700% $1,500,000 07/07/97
Milwaukee, Wisconsin
Firstar Bank Milwaukee, N.A Floating Floating 5.56250% (3) 6.17144% (4) $25,000,000 09/16/97
Milwaukee, Wisconsin (1)
First Bank National Association Floating Fixed 5.85156% (2) 10.20000% $12,600,000 09/23/97
Minneapolis, Minnesota
Firstar Bank Milwaukee, N.A
Milwaukee, Wisconsin (1) Floating Floating 5.56250% (3) 6.12950% (5) $35,000,000 10/06/97
Firstar Bank Milwaukee, N.A Floating Fixed 5.59375% (2) 8.50270% $5,000,000 12/11/97
Milwaukee, Wisconsin
Norwest Bank Minnesota, N.A. Floating Fixed 5.56250% (3) 5.29000% $15,000,000 09/16/98
Minneapolis, Minnesota
First Bank National Association Floating Fixed 5.47656% (7) 9.20000% $8,000,00 (8) 06/16/99
Minneapolis, Minnesota (1)
LaSalle National Bank Floating Fixed 5.62500% (3) 6.34000% $5,400,000 03/21/01
Chicago, Illinois
Firstar Bank Milwaukee, N.A Floating Fixed 5.78125% (3) 7.43500% $10,325,000 (9) 09/28/01
Milwaukee, Wisconsin
LaSalle National Bank Floating Fixed 5.56250% (3) 7.60000% $5,000,000 03/10/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.47266% (3) 6.66000% $5,250,000(10) 05/23/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.75000% (3) 6.50000% $5,000,000(11) 09/29/05
Chicago, Illinois
LaSalle National Bank Floating Fixed 5.53906% (3) 7.09000% $12,500,000 09/05/06
Chicago, Illinois
(1) Investment Swap
(2) Adjusted every six months to the six-month London Interbank Offered Rate (LIBOR) then in effect..
(3) Adjusted every three months to the three-month LIBOR then in effect.
(4) Adjusted every three months to the three-month LIBOR then in effect plus a premium, currently at .60894%, subject to a
25 basis point maximum increase at each adjustment period.
(5) Adjusted every three months to the three-month LIBOR then in effect plus a premium, currently at .567%, subject to a 25
basis point maximum increase at each adjustment period.
(6) The notional amount decreases by $166,667 each quarter and was $5,499,991 at March 31, 1997.
(7) Adjusted every month to the one-month LIBOR then in effect.
(8) The notional amount decreases by $83,333 each quarter and was $5,333,344 at March 31, 1997. $2,583,344 of this
contract was designated as a hedge; $2,750,000 was accounted for as an investment.
(9) The notional amount decreases by $166,667 each quarter and was $6,658,333 at March 31, 1997.
(10) The notional amount decreases by $100,000 each quarter and was $4,550,000 at March 31, 1997.
(11) The notional amount decreases by $75,000 each quarter and was $4,550,000 at March 31, 1997.
As a result of hedge arrangements, the Company recognized a $408,728 and
$442,861 reduction in interest expense for the three months ended March
31, 1997 and March 31, 1996, respectively. In addition, the Company
recognized a $112,858 and $127,773 reduction in interest expense for the
three months ended March 31, 1997 and March 31, 1996, 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 10 -MANDATORILY REDEEMABLE PREFERRED STOCK
On October 20, 1993, the Company issued 690,000 shares of Adjustable Rate
Cumulative Preferred Stock, Series A in a public offering at $25.00 per
share less an underwriting discount of $1.0625 per share and other
issuance costs amounting to $295,221. The preferred stock is redeemable,
in whole or in part at the option of the Company, on any dividend payment
date during the period from July 1, 2001 to June 30, 2003 and from July 1,
2006 to June 30, 2008 at $25 per share plus accrued and unpaid dividends.
Any shares of preferred stock not redeemed prior to July 1, 2008 are
subject to mandatory redemption on that date by the Company at a price of
$25 plus accrued dividends. Dividends on the preferred stock are paid
quarterly at the annual rate of 7.625% which is subject to adjustment
effective for the five year periods commencing July 1, 1998 and July 1,
2003. Through March 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 March 31, 1997 was approximately $16.5
million.
NOTE 11 - RETIREMENT PLANS
The Company maintains a profit sharing plan in accordance with Section
401(k) of the Internal Revenue Code ("the Code") and a money purchase plan
covering all of its employees to provide for their retirement.
Participants in the 401(k) plan may elect to have the Company make
contributions to their accounts through payroll deductions ranging from 2%
to 10% of the participant's total cash compensation up to the maximum
amounts permitted by the Code. Contributions by the Company to the 401(k)
plan are dependent both upon the Company's earnings and upon decisions
made by the Compensation Committee of the Board of Directors. The Company
is obligated to make contributions to its money purchase plan in amounts
equal to 5% of each participant's total cash compensation. All
contributions are funded annually. Expense for Company contributions to
the 401(k) or money purchase plans for the three months ended March 31,
1997 and March 31, 1996 were $15,000 and $14,550, respectively.
The Company provides additional supplemental retirement benefits for two
executive officers. Expense of $18,000 and $58,720 was recorded for the
three months ended March 31, 1997 and March 31, 1996, respectively.
NOTE 12 - 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:
For the three months
Stock Option Plans ended
March 31, 1997
Number Average
of Option
Options Price
Options outstanding at January 1, 1997 169,424 $10.45
Options granted 113,302 12.50
Options exercised (19,796) 6.50
Options terminated unexercised ---- ----
Options outstanding at March 31, 1997 262,930 $11.62
Options available for grant at
March 31, 1997 142,128 ----
Total reserved shares 405,058 ----
Options exercisable at March 31. 1997 154,118 $11.80
Options Outstanding Options Exercisable
Remaining Average
Average Exercise Exercise
Exercise Shares Life Price Shares price
Price Range (years)
$6.50-8.50 54,080 3.7 $8.00 26,000 $8.00
$11.00-14.50 208,850 9.0 $12.57 128,118 $12.58
Total 262,930 7.9 $11.62 154,118 $11.80
The Company adopted the disclosure only option under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. If the accounting provisions of the new statement had been
adopted as of the beginning of fiscal 1996, the effect on net income would
have been immaterial.
NOTE 13 - INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" requires the use of the liability method of acounting for
income taxes. The liability method measures the expected tax impact of
future taxable income or deductions implicit in the consolidated balance
sheet.
Deferred tax assets, included in other assets, consist of benefits for net
operating loss carryforwards generated by the Company's non-REIT
subsidiaries. These deferred tax assets are primarily offset by a
valuation allowance due to the questionable use of these net operating
loss carryforwards. Deferred tax liabilities, included in other
liabilities, principally relate to accelerated depreciation for income tax
purposes.
NOTE 14 - SHAREHOLDERS' EQUITY RECLASSIFICATIONS
The Shareholders' Equity section of the consolidated balance sheet as of
December 31, 1996 reflects certain reclassifications from those amounts
reported in the Company's Annual Report to Shareholders for the six months
ended December 31, 1996. These reclassifications were as a result of the
restatement of the financial position and results of operations and cash
flows as if the Company had always reported under the 1934 Act. (See Note
1).
NOTE 15 - SEGMENT INFORMATION
Lending Manufacturing Eliminations Consolidated
Operations Operations
TOTAL REVENUES
Three months ended March 31, $2,455,879 $3,062,076 ($75,541) $5,442,414
1997
Three months ended March 31, 2,081,345 302,170 (30,120) 2,353,395
1996
NET OPERATING INCOME BEFORE
INCOME TAXES AND MINORITY
INTEREST
Three months ended March 31, $528,102 $620,961 - $1,149,063
1997
Three months ended March 31. 868,337 (160,017) - 708,320
1996
NET INCOME
Three months ended March 31, $525,979 $218,545 - $744,524
1997
Three months ended March 31, 868,337 (160,017) - 708,320
1996
ASSETS
March 31, 1997 $111,613,913 $6,086,130 ($2,848,910) $114,851,133
December 31, 1996 77,201,949 6,242,571 (3,715,223) 79,729,297
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
Amounts presented for the 1997 reporting period and at December 31, 1996
include the consolidation of the operations of the following companies:
Bando McGlocklin Capital Corporation (the "Company"); Bando McGlocklin
Small Business Lending Corporation ("BMSBLC"), a 100% owned subsidiary of
the Company; 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"), 51%-owned
subsidiaries of BMIC. Amounts presented for the March 31, 1996 reporting
period include the consolidation of the operations of the following
companies: the Company; BMSBLC and BMIC, 100%-owned subsidiaries of the
Company; and License Products, a 51%-owned subsidiary of the Company.
The Company only owned 49% of Middleton Doll prior to June 14, 1996 and as
such is not consolidated in the March 31, 1996 statement of operations or
statement of cash flows.
The 1996 reporting period reflects the Company's financial statements on a
restated basis. Prior to January 2, 1997 the Company and BMSBLC were
registered investment companies therefore they did not consolidate BMIC,
Middleton Doll and License Products, which are non-registered investment
companies. The 1997 and 1996 consolidated financial position and results
of operations and cash flows include the accounts of the Company and its
51% or greater owned subsidiaries and are offset by the minority interest
in BMIC's, Middleton Doll's and License Products's ownership.
For the Three Months Ended March 31, 1997 and 1996
The Company's net income after income taxes and minority interest
increased 4% to $0.74 million for the quarter ended March 31, 1997
compared to $0.71 million for the same period of last year.
Total revenues for the quarter ended March 31, 1997 increased 135% to $5.4
million from $2.3 million over the corresponding prior year period. This
increase is primarily due to the consolidation of Middleton Doll's sales
of $2.8 million for the quarter ended March 31, 1997. The prior year
period does not include any sales for Middleton Doll because it was
accounted for on the equity method and was not consolidated in the
financial statements. Interest on loans increased $0.4 million as a
result of the Company repurchasing loans that were previously sold to a
third party. This increase in interest income is offset by increased
interest expense. The average loans under management increased $6.6
million to $139.4 million for the quarter ended March 31, 1997 from $132.8
million for the quarter ended March 31, 1996. The increase in interest
income as a result of the increase in loans was completely offset by the
decreasing yield on the portfolio of loans due to the market's competitive
pricing. The remaining $0.1 million decrease in total revenues was a
result of the decrease in other income.
Total operating expenses for the quarter ended March 31, 1997 increased
169% to $4.3 million from $1.6 million over the corresponding prior
period. $2.1 million of the increase is the result of consolidating
Middleton Doll's operations. The prior period does not include operating
expenses for Middleton Doll. Interest expense increased 86% to $1.2
million from $0.7 million for the quarters ended March 31, 1997 and 1996,
respectively. Interest expense increased by $0.4 million as a result of
the repurchase of loans by BMSBLC that had been previously sold. 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 the same amount. Interest expense increased by $0.1
million because the Company continues to grow its investments in mortgage
loans by utilizing leverage. Average loans increased $6.6 million in the
current year quarter over the corresponding prior period. Lastly, the
expense resulting from the decline in unrealized appreciation on
investment swaps, which are marked-to-market, increased $0.1 million for
the quarter ending March 31, 1997.
The Company's consolidated net income has been reduced by the minority
interest ownership in the net earnings of Middleton Doll and License
Products, which have been consolidated by the Company. The minority
interest in earnings of subsidiaries equaled $0.2 million for the quarter
ended March 31, 1997. Also the Company's March 31, 1997 consolidated net
income has been reduced by $0.2 million as a provision of income taxes for
Middleton Doll.
LIQUIDITY AND CAPITAL RESOURCES
Total investment in loans and loan-backed certificates on the balance
sheet increased by $35.5 million, or 50% to $106.9 at March 31, 1997 from
$71.4 at December 31, 1996. During the first quarter of 1997 the Company
repurchased $32.4 million of loans previously sold to a third party and
made new loans of $13.3 million. The Company also collected $10.2 million
of principal payments on loans on the balance sheet and collected $10.5
million of principal payments on loans that were sold to third parties.
The Company's loans under management decreased to $135.2 as of March 31,
1997 from $142.6 as of December 31, 1996. The increase in loans on the
balance sheet was primarily financed through secured borrowings.
Cash and short-term securities decreased to $1.1 million at March 31, 1997
from $1.3 million at December 31, 1996.
The Company's total consolidated indebtedness at March 31, 1997 increased
77% to $76.8 million from $43.5 million as of December 31, 1996. The
Company, as of March 31, 1997, had $49.3 million outstanding in long-term
debt and $27.5 million outstanding in short-term borrowings and as of
December 31, 1996, had $12.0 million outstanding in long-term debt and
$31.5 million outstanding in short-term borrowings. The increase of $33.3
million is the result of funding loans on the balance sheet rather than
selling the loans to third parties.
The Company's board of directors has approved capitalizing
InvestorsBancorp, Inc., a bank holding company with approximately $6.2
million and distributing to the Company's shareholders all of its
outstanding shares of InvestorsBancorp. InvestorsBancorp is a proposed
bank holding company organized to own all of the capital stock of
InvestorsBank (the "Bank"), a Wisconsin-chartered bank. It is
management's belief that the Company has enough capital to invest
approximately $6.2 million in InvestorsBancorp and continue to operate the
Company.
The Company began exploring the idea of opening a bank in 1994 when
management noticed that banks and other traditional financial institutions
were beginning to enter the Company's markets, by providing commercial
real estate loans to small businesses. This competition for commercial
real estate loans has had an adverse effect on the Company's margins. It
was decided a bank could compete more effectively based upon its lower
cost of funds.
After the Company distributes its shares in InvestorsBancorp to
shareholders, the principal business of the Company will be to manage its
loan portfolio and participate in new loans with third party loan
originators, including the Bank and possibly other banks. The Company is
also exploring the expansion of its real estate lending business into
ownership of real property including related buildings and improvements
for lease to small businesses. The Company anticipates that adequate cash
will be available to fund loans and new investments.
All employees of the Company will terminate their employment with the
Company to become employees of the Bank, except for certain executive
officers who will be employees of both the Company and the Bank. The
Company and the Bank will enter into a Management Services and Allocation
of Operating Expenses Agreement (the "Agreement"). The effect of such
agreement will be to reduce the level of operating expenses in the
Company. The investment of approximately $6.2 million in capital is
expected to lower the Company's operating income. Management is unable to
measure the net impact of the Agreement and the capitalization of
InvestorsBancorp on net operating income.
Statements included in this filing concerning the Company's future
prospects are "forward looking statements" under the Federal securities
laws. There can be no assurance that future results will be achieved and
actual results could differ materially from forecasts and estimates.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any material pending legal
proceeding and no such material proceedings are known to be
contemplated.
Item 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the
Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are
identified on the Exhibit Index hereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunder duly authorized.
BANDO McGLOCKLIN CAPITAL CORPORATION
(Registrant)
Date: May 13, 1997 /s/ George R. Schonath
Chairman of the Board, Chief Executive Officer
and Chief Financial Officer
BANDO MCGLOCKLIN CAPITAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit
3.1 Articles of Incorporation, as amended
3.2 By-laws
4.1 Amended and Restated Loan Agreement dated as of
June 28, 1996 between First Bank (N.A.) and Bando
McGlocklin Small Business Investment Corporation
4.2 Modification Agreement dated as of October 31,
1996 between First Bank (N.A.) and Bando
McGlocklin Small Business Investment Corporation
4.3 Loan Agreement dated as of June 28, 1996 between
LaSalle National Bank and Bando McGlocklin Small
Business Investment Corporation
4.4 First Amendment to Loan Documents dated as of
December 2, 1996 by LaSalle National Bank and
Bando McGlocklin Small Business Investment
Corporation
4.5 Amended and Restated Loan Agreement dated as of
June 28, 1996 between First Bank Milwaukee, N.A.
and Bando McGlocklin Small Business Investment
Corporation
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
4.7 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
4.8 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
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)
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
11 Statement Regarding Computation of Per Share
Earnings
27 Financial Data Schedule [EDGAR version only]