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 June 30, 1999
-------------
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission file number: 0-22663
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) Identification No.)
W239 N1700 Busse Road
P.O. Box 190
Pewaukee, Wisconsin 53072-0190
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(Address of principal executive offices) (Zip Code)
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 August 13, 1999, there were 3,622,712 shares outstanding of the Registrant's
common stock, 6-2/3 cents par value.
<PAGE>
BANDO McGLOCKLIN CAPITAL CORPORATION
FORM 10-Q INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999 (Unaudited)
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations - For the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited) . . . . . . . . . . 5
Consolidated Statement of Cash Flows - For the Six Months Ended
June 30, 1999 and 1998 (Unaudited) . . . . . . . . . . . . . . . . . 7
Notes to the Consolidated Financial Statements (Unaudited). . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . .12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . .19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . .19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . .19
Item 4. Submission of Matters to a Vote of Security Holders . . . . .19
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . .19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . .19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . .21
2
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<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<CAPTION>
June 30, 1999 December 31, 1998
----------------------- -----------------------
ASSETS
Consumer Products:
<S> <C> <C>
Cash $ 120,184 $ 2,209,105
Accounts receivable, net of allowance of
$103,887 and $75,557 as of June 30, 1999
and December 31, 1998, respectively 1,361,675 2,177,385
Inventory 5,359,859 3,261,553
Prepaid expenses 958,371 614,362
----------------------- -----------------------
----------------------- -----------------------
Total current assets 7,800,089 8,262,405
----------------------- -----------------------
Fixed assets, net of accumulated depreciation of
$1,168,860 and $1,069,042 as of June 30,
1999 and December 31, 1998, respectively 2,910,427 2,648,947
Loans 621,968 621,968
Prepaid expenses and other assets 2,105,593 2,413,210
Goodwill, net of accumulated amortization of
$36,148 and $20,656 as of June 30, 1999
and December 31, 1998, respectively 583,605 599,097
----------------------- -----------------------
----------------------- -----------------------
Total Consumer Products assets 14,021,682 14,545,627
----------------------- -----------------------
Financial Services:
Cash 449,622 626,838
Interest receivable 585,704 644,780
Other current assets 77,674 235,292
----------------------- -----------------------
----------------------- -----------------------
Total current assets 1,113,000 1,506,910
----------------------- -----------------------
Loans 100,674,281 115,759,968
Leased properties:
Buildings, net of accumulated depreciation of
$411,973 and $214,822 as of June 30, 1999
and December 31, 1998, respectively 20,784,752 18,782,045
Land 3,164,516 3,090,572
Construction in progress 1,028,477 133,649
----------------------- -----------------------
Total Leased Properties 24,977,745 22,006,266
Fixed assets, net of accumulated depreciation of
$378,465 and $329,216 as of June 30, 1999
and December 31, 1998, respectively 356,034 384,703
Other assets, net 394,631 220,613
----------------------- -----------------------
----------------------- -----------------------
Total Financial Services assets 127,515,691 139,878,460
----------------------- -----------------------
Total Assets $ 141,537,373 $ 154,424,087
======================= =======================
</TABLE>
3
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<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
<CAPTION>
June 30, 1999 December 31, 1998
----------------------- -----------------------
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products:
<S> <C> <C>
Short-term borrowings $ 1,600,000 $ -
Accounts payable 426,799 748,838
Accrued liabilities 909,058 1,959,191
----------------------- -----------------------
Total current liabilities 2,935,857 2,708,029
Long-term debt 32,568 35,279
----------------------- -----------------------
Total Consumer Products liabilities 2,968,425 2,743,308
Financial Services:
Commercial paper 49,423,652 52,487,321
Notes payable to banks 7,120,000 6,040,000
----------------------- -----------------------
Short-term borrowings 56,543,652 58,527,321
Accrued liabilities 1,212,415 1,898,342
----------------------- -----------------------
Total current liabilities 57,756,067 60,425,663
State of Wisconsin Investment Board notes
payable 14,333,333 15,000,000
Loan participations with repurchase options 36,413,516 45,881,418
Other notes payable 1,586,395 1,588,989
----------------------- -----------------------
----------------------- -----------------------
Total Financial Services liabilities 110,089,311 122,896,070
----------------------- -----------------------
Minority interest in subsidiaries 20,236 20,399
Redeemable preferred stock, 1 cent par value,
3,000,000 shares authorized in 1999 and 1998;
674,791 shares issued and outstanding after
deducting 15,209 shares in treasury as of
June 30, 1999 and December 31, 1998 16,908,025 16,908,025
Shareholders' Equity
Common stock, 6 2/3 cents par value,
15,000,000 shares authorized in 1999 and 1998,
4,001,540 shares issued and outstanding as of
June 30, 1999 and December 31, 1998,
before deducting shares in treasury 266,769 266,769
Additional paid-in capital 13,671,947 13,671,947
Retained earnings 2,245,818 1,770,080
Treasury stock, at cost (378,828 shares and 312,438
shares as of June 30, 1999 and December 31, 1998,
respectively) (4,633,158) (3,852,511)
----------------------- -----------------------
----------------------- -----------------------
Total Shareholders' Equity 11,551,376 11,856,285
----------------------- -----------------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $ 141,537,373 $ 154,424,087
======================= =======================
</TABLE>
4
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Consumer Products:
Net sales $ 3,927,575 $ 3,808,899 $ 8,146,400 $ 7,240,666
Cost of sales 2,263,654 1,949,684 4,396,713 3,769,124
-------------- -------------- --------------- --------------
Gross profit 1,663,921 1,859,215 3,749,687 3,471,542
Operating expenses:
Sales and marketing 686,469 683,494 1,596,134 1,353,349
New product development 153,943 141,142 296,541 272,725
General and administrative 559,915 407,709 1,066,510 962,574
-------------- -------------- --------------- --------------
Total operating expenses 1,400,327 1,232,345 2,959,185 2,588,648
Other income (expense):
Interest expense (3,764) (10,852) (7,895) (15,644)
Other income, net 46,801 85,862 79,503 95,516
-------------- -------------- --------------- --------------
Total other income (expense) 43,037 75,010 71,608 79,872
Income before income taxes
and minority interest 306,631 701,880 862,110 962,766
Income tax benefit (expense) 30,937 (238,786) (43,237) (378,940)
Minority interest in losses (earnings)
of subsidiaries 884 (98,543) 164 (207,151)
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Net income 338,452 364,551 819,037 376,675
-------------- -------------- --------------- --------------
Financial Services:
Revenues:
Interest on loans 2,159,021 2,893,220 4,438,610 5,731,377
Rental income 704,714 12,690 1,338,534 12,690
Other income 262,691 83,917 422,674 171,177
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Total revenues 3,126,426 2,989,827 6,199,818 5,915,244
-------------- -------------- --------------- --------------
Expenses:
Interest expense 1,690,504 1,918,923 3,460,044 3,765,289
Other operating expenses 514,195 413,677 1,040,784 727,425
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Total expenses 2,204,699 2,332,600 4,500,828 4,492,714
-------------- -------------- --------------- --------------
Net income $ 921,727 $ 657,227 $ 1,698,990 $ 1,422,530
-------------- -------------- --------------- --------------
</TABLE>
5
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS-(Continued)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
Total Company:
Income before income taxes and
minority interest
<S> <C> <C> <C> <C>
Consumer products $ 306,631 $ 701,880 $ 862,110 $ 962,766
Financial services 921,727 657,227 1,698,990 1,422,530
-------------- -------------- --------------- --------------
Total company 1,228,358 1,359,107 2,561,100 2,385,296
Income tax benefit (expense) 30,937 (238,786) (43,237) (378,940)
Minority interest in losses (earnings)
of subsidiaries 884 (98,543) 164 (207,151)
-------------- -------------- --------------- --------------
Net income 1,260,179 1,021,778 2,518,027 1,799,205
Preferred stock dividends (359,748) (321,579) (719,496) (643,159)
-------------- -------------- --------------- --------------
Net income available to common
stockholders $ 900,431 $ 700,199 $ 1,798,531 $ 1,156,046
============== ============== =============== ==============
Basic Earnings Per Share $ 0.25 $ 0.19 $ 0.49 $ 0.31
============== ============== =============== ==============
Diluted Earnings Per Share $ 0.25 $ 0.19 $ 0.49 $ 0.31
============== ============== =============== ==============
Segment Reconciliation:
Consumer products
Net income $ 338,452 $ 364,551 $ 819,037 $ 376,675
Intersegment expenses (424,239) (77,882) (833,531) (142,687)
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Total segment net income (loss) (85,787) 286,669 (14,494) 233,988
-------------- -------------- --------------- --------------
Financial services
Net income 921,727 657,227 1,698,990 1,422,530
Intersegment profits 424,239 77,882 833,531 142,687
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Total segment net income 1,345,966 735,109 2,532,521 1,565,217
-------------- -------------- --------------- --------------
Total company net income $ 1,260,179 $ 1,021,778 $ 2,518,027 $ 1,799,205
============== ============== =============== ==============
</TABLE>
6
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 1999 June 30, 1998
-------------------------------- --------------------------------
Consumer Financial Consumer Financial
Products Services Products Products
------------- -------------- -------------- --------------
Cash Flows from Operating Activities:
<S> <C> <C> <C> <C>
Net income $ 819,037 $ 1,698,990 $ 376,675 $ 1,422,530
Adjustments to reconcile net cash (used)
provided by operating activities:
Change in appreciation on investments - 47,407 - 32,875
Depreciation and amortization 226,479 290,919 124,023 74,198
Change in minority interest in subsidiaries (163) - (1,673,097) -
Increase (decrease) in cash due to change in:
Accounts receivable 815,710 - 890,869 -
Inventory (2,098,306) - (677,336) -
Interest receivable - 59,076 - 383
Other assets (36,392) (63,807) (2,508,770) (138,275)
Accounts payable (322,039) - (406,274) -
Other liabilities (1,050,133) (685,927) (136,409) (122,971)
------------- -------------- -------------- --------------
Net Cash (Used) Provided by Operations (1,645,807) 1,346,658 (4,010,319) 1,268,740
------------- -------------- -------------- --------------
Cash Flows from Investing Activities:
Loans made - (22,115,218) - (41,776,831)
Principal collected on loans - 37,200,905 - 44,059,775
Loan and interest charge off - - - (12,423)
Proceeds from sale of leased properties - 2,601,063 - -
Premium expense (income) - net - - - 13,344
Purchase or construction of leased properties - (5,814,212) - (1,757,299)
Purchase of fixed assets (472,467) (20,580) (309,972) (3,729)
Acquisition of minority interest in subsidiary - - (619,753) -
------------- -------------- -------------- --------------
Net Cash (Used) Provided by Investing (472,467) 11,851,958 (929,725) 522,837
------------- -------------- -------------- --------------
</TABLE>
7
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<CAPTION>
Six Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 1999 June 30, 1998
-------------------------------- --------------------------------
Consumer Financial Consumer Financial
Products Services Products Products
------------- -------------- -------------- --------------
Cash Flows from Financing Activities:
<S> <C> <C> <C> <C>
(Decrease) increase in short term
borrowings 1,600,000 (1,983,669) 4,480 10,439,828
Proceeds from loan participations with
repurchase options - net - (9,467,902) - (19,164,207)
Proceeds from SWIB note - - 10,000,000
Repayment of SWIB notes - (666,667) - (333,333)
(Decrease) increase in other notes payable (2,711) (2,594) (22,936) 5,000,000
Preferred stock dividends paid (719,496) - (643,158)
Common stock dividends paid - (1,322,793) - (1,328,077)
Repurchase of common stock - (780,647) - -
------------- -------------- -------------- --------------
Net Cash (Used) Provided by Financing 1,597,289 (14,943,768) (18,456) 3,971,053
------------- -------------- -------------- --------------
Net intercompany transactions (1,567,936) 1,567,936 5,521,429 (5,521,429)
Net (decrease) increase in cash (2,088,921) (177,216) 562,929 241,201
Cash, beginning of period 2,209,105 626,838 - 197,576
------------- -------------- -------------- --------------
Cash, end of period $ 120,184 $ 449,622 $ 562,929 $ 438,777
============= ============== ============== ==============
</TABLE>
8
<PAGE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS
The consolidated financial statements of Bando McGlocklin Capital Corporation
(the "Company") include two segments of business: financial services and
consumer products. The consolidated financial statements as of and for the
periods presented include the accounts of the Company and Bando McGlocklin Small
Business Lending Corporation ("BMSBLC") as financial services companies and Lee
Middleton Original Dolls, Inc. ("Middleton Doll") and License Products, Inc.
("License Products") as consumer product companies. All significant intercompany
accounts and transactions have been eliminated in consolidation.
On May 28, 1999 Bando McGlocklin Investment Corporation was merged with Lee
Middleton Original Dolls, Inc. The surviving corporation is Lee Middleton
Original Dolls, Inc., a Wisconsin corporation, with offices in Belpre, Ohio.
Since the entities were previously presented on a consolidated basis in the
financial statements, the merger does not have a significant effect on these
financial statements.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company and its
majority-owned subsidiaries 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. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
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 period ended June 30, 1999 may not be indicative
of the results that may be expected for the year ending December 31, 1999.
9
<PAGE>
NOTE 3. 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:
June 30, 1999 December 31, 1998
---------------- --------------------
Raw materials, net of reserve
of $202,621 and $466,661,
respectively $ 2,602,933 $ 1,600,051
Work in process 174,460 275,755
Finished goods 2,555,091 1,356,646
Prepaid Inventory 27,375 29,101
---------------- --------------------
================ ====================
Total $ 5,359,859 $ 3,261,553
================ ====================
NOTE 4. SHORT-TERM BORROWINGS
On June 25, 1999 Lee Middleton Original Dolls, Inc. entered into a loan
agreement with a bank providing for a line of credit of $2,700,000 at the prime
rate. The note is a demand note and is due on April 30, 2000 with interest
payable monthly. At June 30, 1999, the outstanding principal balance was
$1,600,000 and the interest rate was 8.0%.
On April 30, 1999 BMSBLC entered into an amended and restated loan agreement
with five participating banks. The loan agreement increased the existing
facility from a maximum of $60,000,000 to $70,000,000 less the outstanding
principal amount of commercial paper. The facility will continue to bear
interest at the prime rate or at the 30, 60 or 90-day LIBOR rate plus one and
three-eighths percent. Interest is payable monthly and the loan agreement
expires on April 28, 2000.
NOTE 5. INCOME TAXES
The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate
investment trust under the Internal Revenue Code. Accordingly, they are not
subject to income tax on taxable income that is distributed to shareholders.
Lee Middleton Original Dolls and License Products file their own tax returns.
Income tax provision in the accompanying financial statements is based on their
operations prior to the elimination of approximately $834,000 of interest and
other expenses on transactions with the Company.
10
<PAGE>
NOTE 6. TREASURY STOCK
During the quarter ended June 30, 1999 the Company purchased 17,500 shares of
its common stock and through its subsidiary purchased an additional 48,890
shares of common stock in the open market at an average price of $11.76. It is
the Company's intention to hold these shares as treasury stock.
NOTE 7. EARNINGS PER SHARE
See Exhibit 11.
NOTE 8. COMMITMENTS
Undisbursed construction loan commitments and lines of credit totaled $9,163,975
at June 30, 1999. In addition the Company issued a letter of credit totaling
$4,000,000 as of June 30, 1999.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Amounts presented as of June 30, 1999 and December 31, 1998, and for the three
months and the six months ended June 30, 1999 and June 30, 1998 include the
consolidation of two segments. The financial services segment includes Bando
McGlocklin Capital Corporation (the "Company") and Bando McGlocklin Small
Business Lending Corporation ("BMSBLC"), a 100% owned subsidiary of the Company.
The consumer products segment includes Lee Middleton Original Dolls, Inc.
("Middleton Doll") and License Products, Inc. ("License Products").
Results of Operations
For the three months ended June 30, 1999 and June 30, 1998
The Company's total net income after income taxes and minority interest for the
quarter ended June 30, 1999 equaled $0.90 million or $0.25 per share (diluted)
as compared to $0.70 million or $0.19 per share (diluted) for the quarter ended
June 30, 1998, a 29% increase.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the quarter ended June 30, 1999 was $0.34 million compared to $0.36 million for
the quarter ended June 30, 1998, a 6% decrease.
Net sales from consumer products for the quarter ended June 30, 1999 increased
3% to $3.93 million from $3.81 million in the corresponding prior year period.
This increase was due to increased sales of $0.09 million at Middleton Doll and
$0.03 million at License Products for the quarter ended June 30, 1999. Cost of
sales also increased 16% to $2.26 million for the quarter ended June 30, 1999
from $1.95 million for the prior year quarter. Gross profit margin decreased to
42% for the quarter ended June 30, 1999 from 49% for the quarter ended June 30,
1998. This decrease is the result of Middleton Doll having higher factory
overhead due to additional warehouse space and personnel. During the quarter,
the sales were not high enough to absorb these increases in overhead.
Total operating expenses of consumer products for the quarter ended June 30,
1999 were $1.40 million compared to $1.23 million for the quarter ended June 30,
1998, a 14% increase. Sales and marketing expense and new product development
increased slightly over the same period a year ago. General and administrative
expenses increased $0.15 million to $0.56 million for the quarter ended June 30,
1999 compared to $0.41 million for the quarter ended June 30, 1998. Middleton
Doll's expense increased $0.16 million due to related expenses stemming from the
continued growth of the company. Because of their growth they have hired
additional staff and because of exploring new opportunities they have incurred
higher legal expenses. License Products' expense decreased $0.01 million.
12
<PAGE>
Other income decreased $0.03 million to $0.04 million from $0.07 million when
compared to the same period a year ago. The minority interest in earnings of
subsidiaries decreased $0.10 million for the quarter ended June 30, 1999 as
compared to the corresponding prior year period. This decrease is the result of
100% ownership of the stock of Middleton Doll as of April 30, 1998. The
consolidated net income of consumer products for the quarter ended June 30, 1999
was increased by $0.27 million due to a reduction in income tax expense of $0.27
million as compared to the second quarter of 1998. Consumer products recorded a
tax benefit of $0.03 million for the second quarter.
Financial Services
Net income from financial services for the quarter ended June 30, 1999 was $0.92
million compared to $0.66 million for the quarter ended June 30, 1998, a 39%
increase.
Total revenues were $3.13 million for the quarter ended June 30, 1999 compared
to $2.99 million for the quarter ended June 30, 1998, a 5% increase. Interest on
loans decreased 25% to $2.16 million for the quarter ended June 30, 1999 from
$2.89 million for the comparative quarter. Average loans under management
decreased $22 million from second quarter 1999 compared to second quarter 1998.
In addition the prime rate was 7.75% in 1999 as compared to 8.5% in 1998.
Rental income increased $0.69 million to $0.70 million for the quarter ended
June 30, 1999 due to an increase in ownership of commercial rental properties.
At June 30, 1999 the Company had $25 million in leased properties compared to
$2.2 million as of June 30, 1998. Other income increased $0.18 million to $0.26
million when comparing June 30, 1999 to June 30, 1998. Prepayment penalties
increased $0.08 million and the sale of two leased properties resulted in a gain
of $0.13 million, which was offset by a decrease in other miscellaneous income.
Interest expense decreased to $1.69 million for the quarter ended June 30, 1999
as compared to $1.92 million for the quarter ended June 30, 1998 due to lower
rates on the Company's cost of funds.
Operating expenses increased to $0.51 million for the quarter ended June 30,
1999 from $0.41 million for the prior year quarter due to the increase in
depreciation on the leased properties. Other operating expenses did not change
significantly between the two periods.
For the six months ended June 30, 1999 and June 30, 1998
The Company's total net income after income taxes and minority interest for the
six months ended June 30, 1999 equaled $1.80 million or $0.49 per share
(diluted) as compared to $1.16 million or $0.31 per share (diluted) for the six
months ended June 30, 1998, a 55% increase.
13
<PAGE>
Consumer Products
Net income from consumer products after income taxes and minority interest for
the six months ended June 30, 1999 was $0.82 million compared to $0.38 million
for the six months ended June 30, 1998, a 116% increase.
Net sales from consumer products for the six months ended June 30, 1999
increased 12.6% to $8.15 million from $7.24 million in the corresponding prior
year period. This increase was due to increased sales of $0.71 million at
Middleton Doll and $0.20 million at License Products. Cost of sales also
increased 17% to $4.4 million for the six months ended June 30, 1999 from $3.77
million for the prior year period. Gross profit margin decreased slightly to 46%
for the six months ended June 30, 1999 from 48% for the six months ended June
30, 1998.
Total operating expenses of consumer products for the six months ended June 30,
1999 were $2.96 million compared to $2.59 million for the six months ended June
30, 1998, a 14% increase. Sales and marketing expense increased $0.24 million, a
18% increase. License Products had a decrease of $0.14 million in its sales and
marketing expenses and Middleton Doll experienced an increase of $0.38 million
in its expense. The majority of this increase was a result of Middleton Doll
hiring additional sales personnel and increasing advertising, including point of
purchase displays and other promotions. New product development increased $0.02
million. General and administrative expenses increased $0.10 million to $1.07
million for the six months ended June 30, 1999 from $0.97 for the six months
ended June 30, 1998. General and administrative expenses of License Products
decreased $0.02 million and expenses of Middleton Doll increased $0.12 million.
As Middleton Doll continues to grow their personnel and benefit costs are also
increasing and as a result of exploring new opportunities legal costs have
increased in 1999 compared to 1998.
The minority interest ownership in the net consolidated earnings increased the
consolidated net income of consumer products by $164 for the six months ended
June 30, 1999. For the six months ended June 30, 1998, the minority ownership
decreased the consolidated net income by $98,643. This difference is due to the
ownership of 100% of the stock of Middleton Doll as of April 30, 1998. The
provision for income taxes decreased by $0.34 million when comparing the six
months ending June 30, 1999 to June 30, 1998. The consolidated net income of
consumer products for the first half of 1999 was increased by $0.34 million due
to a reduction in income tax expense of $0.34 million as compared to the first
half of 1998. Consumer products recorded a net loss for the second quarter
before eliminating intersegment expenses.
Financial Services
Net income from financial services for the six months ended June 30, 1999 was
$1.7 million compared to $1.42 million for the six months ended June 30, 1998, a
20% increase.
Total revenues were $6.2 million for the six months ended June 30, 1999 compared
to $5.92 million for the six months ended June 30, 1998, a 5% increase. Interest
on loans decreased 23% to $4.44 million for the six months ended June 30, 1999
compared to $5.73 million for the
14
<PAGE>
comparative six months. Average loans under management decreased $19 million
from the first half of 1999 compared to the first half of 1998. In addition the
prime rate was 7.75% in 1999 as compared to 8.5% in 1998.
Rental income increased $1.33 million to $1.34 million for the quarter ended
June 30, 1999 due to an increase in ownership of commercial rental properties.
At June 30, 1999 the Company had $25 million in leased properties compared to
$2.2 million as of June 30, 1998. Other income increased $0.25 million to $0.42
million when comparing June 30, 1999 to June 30, 1998. Prepayment penalties
increased $0.10 million and the sale of four leased properties resulted in a
gain of $0.24 million, which was offset by a decrease in other miscellaneous
income.
Interest expense decreased to $3.46 million for the six months ended June 30,
1999 as compared to $3.77 million for the six months ended June 30, 1998 due to
lower rates on the Company's cost of funds. In addition the average debt balance
decreased $4.6 million in the first half of 1999 compared to the first half of
1998.
Operating expenses increased to $1.04 million for the six months ended June 30,
1999 from $0.73 million for the prior year quarter, in large part, due to the
increase in depreciation on the leased properties. There were small increases in
other operating expenses which resulted in $0.07 million of the total increase.
Liquidity and Capital
Consumer Products
Total assets of consumer products were $14.02 million as of June 30, 1999 and
$14.55 million as of December 31, 1998, a 3.6% decrease.
Cash decreased to $0.12 million at June 30, 1999 from $2.21 million at December
31, 1998.
Accounts receivable, net of the allowance, decreased to $1.36 million at June
30, 1999 from $2.18 million at December 31, 1998. A decrease of $0.59 million is
attributable to Middleton Doll, and the remaining $0.23 million is attributable
to License Products. Both companies are seasonal and typically have lower sales
in the first and second quarter of the year, which corresponds to lower accounts
receivable balances.
Inventory was $5.36 million at June 30, 1999 compared to $3.26 million at
December 31, 1998. Middleton Doll's inventory increased $2.1 million due to new
product lines and anticipated sales in future quarters while License Products'
inventory remained level.
Fixed assets increased by $0.26 million and other assets and prepaid expenses
increased slightly by $0.04 million.
Middleton Doll increased its short-term borrowings by borrowing $1.6 million on
a line of credit with InvestorsBank during the quarter ended June 30, 1999.
15
<PAGE>
Accounts payable decreased by $0.32 million as of June 30, 1999 compared to
December 31, 1998. Middleton Doll's accounts payable decreased $0.09 million
while License Products' accounts payable decreased $0.23 million. Other
liabilities decreased by $1.1 million due to a decrease in Middleton Doll's tax
accrual.
Financial Services
Total assets of financial services were $127.52 million as of June 30, 1999 and
$139.88 million as of December 31, 1998, a 9% decrease.
Cash decreased to $0.45 million at June 30, 1999 from $0.63 million at December
31, 1998.
Interest receivable decreased to $0.59 million from $0.64 million. Fixed assets
and other assets including prepaid amounts decreased in the aggregate by $0.01
million.
Total loans decreased by $15.09 million or 13% to $100.67 million at June 30,
1999 from $115.76 million at December 31, 998. Leased properties under
management increased $2.97 million due to the purchase of three properties and
the completion of construction of two properties. Four properties were sold
since the beginning of the year and construction is in progress on two new
properties.
The financial services' total consolidated indebtedness at June 30, 1999
decreased $12.13 million. As of June 30, 1999, financial services had $52.33
million outstanding in long-term debt and $56.54 million outstanding in
short-term borrowings compared to $62.47 million outstanding in long-term debt
and $58.53 million outstanding in short-term borrowings as of December 31, 1998.
Financial services' short-term facility increased from $60 million to $70
million during the quarter ended June 30, 1999.
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 operations 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
16
<PAGE>
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 has conducted proxy testing and has had an independent company
rate the proxy testing. The Company's Year 2000 committee has analyzed the
published results by the independent company and is satisfied that this vendor
has proved itself Year 2000 compliant. The vendor will be conducting additional
seminars and will report its progress monthly to the Company using a management
report. In addition, the Company continues to monitor all other major vendors of
services to the Company for Year 2000 issues in order to avoid shortages of
supplies and services in the coming months.
The Company has an important relationship with third party utilities. 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 curtail or interrupt their services to the Company, it would have
a significant adverse effect on the Company's ability to conduct its business.
The Company has also tested all heating and air conditioning units, vault doors,
alarm 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 quarter
ended June 30, 1999 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 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
17
<PAGE>
2000 problem, the Company has contacted its larger 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.
18
<PAGE>
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 June 30, 1999.
19
<PAGE>
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: August 13, 1999 /s/ George R. Schonath
----------------------
George R. Schonath
President and Chief Executive Officer
Date: August 13, 1999 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Chief Accounting Officer
20
<PAGE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit Number Exhibit
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule (EDGAR version only)
21
Exhibit 11
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net income $ 900,431 $ 700,199 $1,798,531 $1,156,046
Determination of shares:
Weighted average common shares
outstanding (basic) 3,652,549 3,689,102 3,670,724 3,689,102
Assumed conversion of stock
options 9,853 3,282 2,961 2,939
---------- ---------- ---------- ----------
Weighted average common shares
outstanding (diluted) 3,662,402 3,692,384 3,673,685 3,692,041
========== ========== ========== ==========
Basic earnings per share $ 0.25 $ 0.19 $ 0.49 $ 0.31
========== ========== ========== ==========
Diluted earnings per share $ 0.25 $ 0.19 $ 0.49 $ 0.31
========== ========== ========== ==========
22
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 120,184
<SECURITIES> 126,273,994
<RECEIVABLES> 2,051,266
<ALLOWANCES> (103,887)
<INVENTORY> 5,359,859
<CURRENT-ASSETS> 1,036,045
<PP&E> 4,813,786
<DEPRECIATION> (1,547,325)
<TOTAL-ASSETS> 141,537,373
<CURRENT-LIABILITIES> 60,691,924
<BONDS> 52,365,812
16,908,025
0
<COMMON> 266,769
<OTHER-SE> 11,284,607
<TOTAL-LIABILITY-AND-EQUITY> 141,537,373
<SALES> 8,146,400
<TOTAL-REVENUES> 14,346,218
<CGS> 4,396,713
<TOTAL-COSTS> 4,396,713
<OTHER-EXPENSES> 3,999,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,467,937
<INCOME-PRETAX> 2,561,100
<INCOME-TAX> 43,237
<INCOME-CONTINUING> 1,798,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,798,531
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.49
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