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 September 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
------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 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 November 12, 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 September 30, 1999
(Unaudited) and December 31, 1998 .............................3
Consolidated Statements of Operations - For the Three and
Nine Months Ended September 30, 1999 and 1998
(Unaudited)....................................................5
Consolidated Statement of Cash Flows - For the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)..................7
Notesto 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 SHEETS
(Unaudited)
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- -----------------------
ASSETS
Consumer Products:
<S> <C> <C>
Cash $ 496,157 $ 2,209,105
Accounts receivable, net of allowance of
$145,540 and $75,557 as of September 30, 1999
and December 31, 1998, respectively 2,573,666 2,177,385
Inventory 5,246,281 3,261,553
Prepaid expenses 715,972 614,362
----------------------- -----------------------
----------------------- -----------------------
Total current assets 9,032,076 8,262,405
----------------------- -----------------------
Fixed assets, net of accumulated depreciation of
$1,278,723 and $1,069,042 as of September 30,
1999 and December 31, 1998, respectively 2,907,603 2,648,947
Loans 621,968 621,968
Prepaid expenses and other assets 1,982,418 2,413,210
Goodwill, net of accumulated amortization of
$23,238 and $20,656 as of September 30, 1999
and December 31, 1998, respectively 575,859 599,097
----------------------- -----------------------
----------------------- -----------------------
Total Consumer Products assets 15,119,924 14,545,627
----------------------- -----------------------
Financial Services:
Cash 1,412,981 626,838
Interest receivable 543,159 644,780
Other current assets 331,440 235,292
----------------------- -----------------------
----------------------- -----------------------
Total current assets 2,287,580 1,506,910
----------------------- -----------------------
Loans 96,771,747 115,759,968
Leased properties:
Buildings, net of accumulated depreciation of
$546,928 and $214,822 as of September 30, 1999
and December 31, 1998, respectively 21,853,289 18,782,045
Land 3,395,516 3,090,572
Construction in progress 2,104,713 133,649
----------------------- -----------------------
Total Leased Properties 27,353,518 22,006,266
Fixed assets, net of accumulated depreciation of
$403,834 and $329,216 as of September 30, 1999
and December 31, 1998, respectively 333,337 384,703
Other assets, net 305,704 220,613
----------------------- -----------------------
----------------------- -----------------------
Total Financial Services assets 127,051,886 139,878,460
----------------------- -----------------------
Total Assets $ 142,171,810 $ 154,424,087
======================= =======================
</TABLE>
3
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<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ ------------------------
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products:
<S> <C> <C>
Short-term borrowings $ 1,606,863 $ -
Accounts payable 483,853 748,838
Accrued liabilities 1,212,961 1,959,191
------------------------ ------------------------
Total current liabilities 3,303,677 2,708,029
Long-term debt 31,278 35,279
------------------------ ------------------------
------------------------ ------------------------
Total Consumer Products liabilities 3,334,955 2,743,308
------------------------ ------------------------
Financial Services:
Commercial paper 52,798,135 52,487,321
Notes payable to banks 5,000,000 6,040,000
------------------------ ------------------------
Short-term borrowings 57,798,135 58,527,321
Accrued liabilities 1,592,061 1,898,342
------------------------ ------------------------
Total current liabilities 59,390,196 60,425,663
State of Wisconsin Investment Board notes
payable 14,000,000 15,000,000
Loan participations with repurchase options 34,748,877 45,881,418
Other notes payable 1,585,088 1,588,989
------------------------ ------------------------
------------------------ ------------------------
Total Financial Services liabilities 109,724,161 122,896,070
------------------------ ------------------------
Minority interest in subsidiaries 26,504 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
September 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
September 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 2,872,607 1,770,080
Treasury stock, at cost (378,828 shares and 312,438
shares as of September 30, 1999 and December 31, 1998,
respectively) (4,633,158) (3,852,511)
------------------------ ------------------------
------------------------ ------------------------
Total Shareholders' Equity 12,178,165 11,856,285
------------------------ ------------------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $ 142,171,810 $ 154,424,087
======================== ========================
</TABLE>
4
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<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- -----------------------------------
--------------------------------- -----------------------------------
September 30, September 30,
--------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- ---------------
Consumer Products:
<S> <C> <C> <C> <C>
Net sales $ 6,849,590 $ 5,638,757 $ 14,995,990 $ 12,879,423
Cost of sales 3,733,899 2,870,483 8,130,612 6,639,607
-------------- -------------- --------------- ---------------
Gross profit 3,115,691 2,768,274 6,865,378 6,239,816
Operating expenses:
Sales and marketing 1,001,311 748,785 2,597,445 2,102,134
New product development 182,236 122,325 478,777 395,050
General and administrative 499,118 493,783 1,565,628 1,456,357
-------------- -------------- --------------- ---------------
Total operating expenses 1,682,665 1,364,893 4,641,850 3,953,541
Other income (expense):
Interest expense (52,037) (26,531) (54,564) (42,175)
Other income (expense), net 4,355 9,793 78,490 105,309
-------------- -------------- --------------- ---------------
Total other income (expense) (47,682) (16,738) 23,926 63,134
Income before income taxes
and minority interest 1,385,344 1,386,643 2,247,454 2,349,409
Provision for income taxes (360,913) (441,767) (404,150) (820,707)
Minority interest in earnings
of subsidiaries (6,269) (5,475) (6,105) (212,626)
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
Net income 1,018,162 939,401 1,837,199 1,316,076
-------------- -------------- --------------- ---------------
Financial Services:
Revenues:
Interest on loans 2,038,930 2,600,828 6,477,540 8,332,205
Rental income 733,968 523,949 2,072,502 536,639
Other income 37,113 80,222 459,787 251,399
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
Total revenues 2,810,011 3,204,999 9,009,829 9,120,243
-------------- -------------- --------------- ---------------
Expenses:
Interest expense 1,682,604 2,001,492 5,142,648 5,766,781
Other operating expenses 506,945 462,270 1,547,729 1,189,695
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
Total expenses 2,189,549 2,463,762 6,690,377 6,956,476
-------------- -------------- --------------- ---------------
Net income $ 620,462 $ 741,237 $ 2,319,452 $ 2,163,767
-------------- -------------- --------------- ---------------
</TABLE>
5
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<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
--------------------------------- ---------------------------------
September 30, September 30,
--------------------------------- ---------------------------------
--------------- -------------- -------------- --------------
1999 1998 1999 1998
--------------- -------------- -------------- --------------
Total Company:
Income before income taxes and
minority interest
<S> <C> <C> <C> <C>
Consumer products $ 1,385,344 $ 1,386,643 $ 2,247,454 $ 2,349,409
Financial services 620,462 741,237 2,319,452 2,163,767
--------------- -------------- -------------- --------------
Total company 2,005,806 2,127,880 4,566,906 4,513,176
Provision for income taxes (360,913) (441,767) (404,150) (820,707)
Minority interest in earnings of
subsidiaries (6,269) (5,475) (6,105) (212,626)
--------------- -------------- -------------- --------------
Net income 1,638,624 1,680,638 4,156,651 3,479,843
Preferred stock dividends (359,748) (359,748) (1,079,244) (1,002,907)
--------------- -------------- -------------- --------------
Net income available to common
stockholders $ 1,278,876 $ 1,320,890 $ 3,077,407 $ 2,476,936
=============== ============== ============== ==============
Basic Earnings Per Share $ 0.35 $ 0.36 $ 0.84 $ 0.67
=============== ============== ============== ==============
Diluted Earnings Per Share $ 0.35 $ 0.36 $ 0.84 $ 0.67
=============== ============== ============== ==============
Segment Reconciliation:
Consumer products
Net income $ 1,018,162 $ 939,401 $ 1,837,199 $ 1,316,076
Intersegment expenses (393,151) (391,907) (1,226,682) (534,594)
--------------- -------------- -------------- --------------
Total segment net income (loss) 625,011 547,494 610,517 781,482
Financial services
Net income 620,462 741,237 2,319,452 2,163,767
Intersegment profits 393,151 391,907 1,226,682 534,594
--------------- -------------- -------------- --------------
Total segment net income 1,013,613 1,133,144 3,546,134 2,698,361
Total company net income $ 1,638,624 $ 1,680,638 $ 4,156,651 $ 3,479,843
=============== ============== ============== ==============
</TABLE>
6
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended Nine Months Ended
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
September 30, 1999 September 30, 1998
---------------------------------- ----------------------------------
Consumer Financial Consumer Financial
Products Services Products Services
-------------- --------------- -------------- ---------------
Cash Flows from Operating Activities:
<S> <C> <C> <C> <C>
Net income $ 1,837,199 $ 2,319,452 $ 1,316,076 $ 2,163,767
Adjustments to reconcile net cash (used)
provided by operating activities:
Change in appreciation on investments - 54,337 - 45,348
Depreciation and amortization 344,088 451,243 218,605 211,039
Change in minority interest in subsidiaries 6,105 - (1,667,622) -
Increase (decrease) in cash due to change in:
Accounts receivable (396,281) - (332,108) -
Inventory (1,984,728) - (533,399) -
Interest receivable - 101,621 - 198,402
Other assets 329,182 (76,394) (2,711,206) (57,633)
Accounts payable (264,985) - (19,356) -
Other liabilities (746,230) (306,281) (12,969) 2,361,822
-------------- --------------- -------------- ---------------
Net Cash (Used) Provided by Operations (875,650) 2,543,978 (3,741,979) 4,922,745
-------------- --------------- -------------- ---------------
Cash Flows from Investing Activities:
Loans made - (30,439,209) - (54,725,524)
Principal collected on loans - 49,427,430 - 62,760,651
Loan and interest charge off - - - (12,423)
Cash paid for Bando McGlocklin Real Estate
Investment Corporation's assets - - (7,805,235)
Proceeds from sale of leased properties - 2,601,063 - -
Premium expense (income) - net - - - 13,344
Purchase or construction of leased properties - (8,484,122) - (3,295,010)
Purchase of fixed assets (579,506) (23,252) (982,582) (8,584)
Acquisition of minority interest in subsidiary - - (619,753) -
-------------- --------------- -------------- ---------------
Net Cash (Used) Provided by Investing (579,506) 13,081,910 (1,602,335) (3,072,781)
-------------- --------------- -------------- ---------------
</TABLE>
7
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<CAPTION>
Nine Months Ended Nine Months Ended
------------------------------- ------------------------------
------------------------------- ------------------------------
September 30, 1999 September 30, 1998
------------------------------- ------------------------------
Consumer Financial Consumer Financial
Products Services Products Services
-------------- --------------- ------------- --------------
Cash Flows from Financing Activities:
<S> <C> <C> <C> <C>
(Decrease) increase in short term
borrowings 1,606,863 (729,186) 314,941 13,780,020
Proceeds from loan participations with
repurchase options - net - (11,132,541) - (21,479,489)
Proceeds from SWIB note - - - 10,000,000
Repayment of SWIB notes - (1,000,000) - (666,666)
(Decrease) increase in other notes payable (4,001) (3,901) (22,936) 5,000,000
Preferred stock dividends paid - (1,079,244) (1,002,907)
Common stock dividends paid - (1,974,880) - (1,992,115)
Repurchase of common stock - (780,647) - -
-------------- --------------- ------------- --------------
Net Cash (Used) Provided by Financing 1,602,862 (16,700,399) 292,005 3,638,843
-------------- --------------- ------------- --------------
Net intercompany transactions (1,860,654) 1,860,654 5,242,343 (5,242,343)
Net (decrease) increase in cash (1,712,948) 786,143 190,034 246,464
Cash, beginning of period 2,209,105 626,838 - 197,576
-------------- --------------- ------------- --------------
Cash, end of period $ 496,157 $ 1,412,981 $ 190,034 $ 444,040
============== =============== ============= ==============
</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 September 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999.
9
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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:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials, net of reserve
of $202,621 and $466,661,
respectively $ 2,706,287 $ 1,600,051
Work in process 171,251 275,755
Finished goods 2,316,445 1,356,646
Prepaid Inventory 52,298 29,101
--------------- ---------------
=============== ===============
Total $ 5,246,281 $ 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 September 30, 1999, the outstanding principal balance was
$1,606,863 and the interest rate was 8.25%.
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 $1,227,000 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 $9,760,808
at September 30, 1999. In addition, the Company issued a letter of credit
totaling $4,000,000 as of September 30, 1999.
NOTE 9. SUBSEQUENT EVENT
Effective January 1, 2000 Middleton Doll entered into a Shareholder and Loan
Agreement (the "Agreement") whereby it will make an initial investment of
$50,000 for a 50% ownership in a management corporation that will provide
Middleton Doll with all its raw materials and finished goods from Asia. Also in
connection with the Agreement Middleton Doll has committed to fund an investment
loan of $306,000 and a secured revolving loan up to a maximum of $700,000 at an
interest rate of prime plus 1%. Interest is payable monthly on both loans.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Amounts presented as of September 30, 1999 and December 31, 1998, and for the
three months and the nine months ended September 30, 1999 and September 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"), a 99% owned subsidiary of the Company
and License Products, Inc. ("License Products"), a 51% owned subsidiary of the
Company.
Results of Operations
For the three months ended September 30, 1999 and September 30, 1998
The Company's total net income after income taxes and minority interest for the
quarter ended September 30, 1999 equaled $1.28 million or $0.35 per share
(diluted) as compared to $1.32 million or $0.36 per share (diluted) for the
quarter ended September 30, 1998, a 3% decrease.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the quarter ended September 30, 1999 was $1.02 million compared to $0.94 million
for the quarter ended September 30, 1998, a 9% increase.
Net sales from consumer products for the quarter ended September 30, 1999
increased 21.5% to $6.85 million from $5.64 million in the corresponding prior
year period. This increase was due to increased sales of $1.14 million at
Middleton Doll and $0.07 million at License Products for the quarter ended
September 30, 1999. Cost of sales also increased 30% to $3.73 million for the
quarter ended September 30, 1999 from $2.87 million for the prior year quarter.
Gross profit margin decreased to 45% for the quarter ended September 30, 1999
from 49% for the quarter ended September 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 September
30, 1999 were $1.68 million compared to $1.36 million for the quarter ended
September 30, 1998, a 24% increase. Sales and marketing expense and new product
development increased $0.31 million to $1.18 million for the quarter ended
September 30, 1999 compared to $0.87 million for the quarter ended September 30,
1998. The large increase in sales and marketing expense was due to Middleton
Doll using promotional displays and advertising to introduce their dolls to new
high volume retailers. General and administrative expenses increased slightly
over the same period a year ago. Middleton Doll's total operating expense
increased $0.51 million due to related
12
<PAGE>
expenses stemming from the continued growth of the company. Because of its
growth, it has hired additional staff and incurred higher legal expenses.
License Products' operating expense decreased $0.19 million as a result of a
cost cutting program.
Other expense increased $0.03 million to $0.05 million from $0.02 million when
compared to the same period a year ago due to an increase in interest expense.
The minority interest in earnings of subsidiaries increased slightly when
comparing the quarter ended September 30, 1999 to the corresponding prior year
period. Consumer products recorded an income tax expense of $0.36 million for
the quarter ended September 30, 1999 as compared to $0.44 million for the
quarter ended September 30, 1998, a decrease of $0.08 million. The income tax
expense is attributable only to Middleton Doll's income since License Products
has a net operating loss carryforward to offset its current net income. For the
quarter ended September 30, 1998 License Products had an operating loss of $0.13
million.
Financial Services
Net income from financial services for the quarter ended September 30, 1999 was
$0.62 million compared to $0.74 million for the quarter ended September 30,
1998, a 16% decrease.
Total revenues were $2.81 million for the quarter ended September 30, 1999
compared to $3.20 million for the quarter ended September 30, 1998, a 12%
decrease. Interest on loans decreased 22% to $2.04 million for the quarter ended
September 30, 1999 from $2.60 million for the comparative quarter. Average loans
under management decreased $18 million from third quarter 1999 compared to third
quarter 1998 due to normal market competition and an unanticipated sale of a
business that was the Company's largest borrower. In addition the average prime
rate was 0.34% lower during the third quarter 1999 compared to the third quarter
1998.
Rental income increased $0.21 million to $0.73 million for the quarter ended
September 30, 1999 due to an increase in ownership of commercial rental
properties. At September 30, 1999, the Company had $27.35 million in leased
properties compared to $21.99 million as of September 30, 1998. Other income
decreased $0.04 million to $0.04 million when comparing September 30, 1999 to
September 30, 1998 due to decreases in fee income.
Interest expense decreased 16% to $1.68 million for the quarter ended September
30, 1999 as compared to $2.00 million for the quarter ended September 30, 1998
due to lower rates on the Company's cost of funds. In addition, the average debt
balance decreased $7.44 million in the third quarter of 1999 compared to the
third quarter of 1998.
Operating expenses increased to $0.51 million for the quarter ended September
30, 1999 from $0.46 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.
13
<PAGE>
For the nine months ended September 30, 1999 and September 30, 1998
The Company's total net income after income taxes and minority interest for the
nine months ended September 30, 1999 equaled $3.08 million or $0.84 per share
(diluted) as compared to $2.48 million or $0.67 per share (diluted) for the nine
months ended September 30, 1998, a 24% increase.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the nine months ended September 30, 1999 was $1.84 million compared to $1.32
million for the nine months ended September 30, 1998, a 39% increase.
Net sales from consumer products for the nine months ended September 30, 1999
increased 16.5% to $15.0 million from $12.88 million in the corresponding prior
year period. This increase was due to increased sales of $1.86 million at
Middleton Doll and $0.26 million at License Products. Cost of sales also
increased 22% to $8.13 million for the nine months ended September 30, 1999 from
$6.64 million for the prior year period. Gross profit margin decreased slightly
to 46% for the nine months ended September 30, 1999 from 48% for the nine months
ended September 30, 1998. This decrease is the result of Middleton Doll having
higher factory overhead due to additional warehouse space and personnel. During
the period, the sales were not high enough to absorb these increases in
overhead.
Total operating expenses of consumer products for the nine months ended
September 30, 1999 were $4.64 million compared to $3.95 million for the nine
months ended September 30, 1998, a 17% increase. Sales and marketing expense
increased $0.50 million, a 24% increase. License Products had a decrease of
$0.25 million in its sales and marketing expenses and Middleton Doll experienced
an increase of $0.75 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 for its
new high volume retailers. New product development increased $0.84 million.
General and administrative expenses increased $0.11 million to $1.57 million for
the nine months ended September 30, 1999 from $1.46 million for the nine months
ended September 30, 1998. General and administrative expenses of License
Products decreased $0.15 million as a result of a cost cutting program.
Middleton Doll's operating expenses increased $0.26 million. As Middleton Doll
continues to grow, its personnel, related benefit costs and legal expenses have
increased in 1999 compared to 1998.
The minority interest ownership in the net consolidated earnings decreased the
consolidated net income of consumer products by $0.01 million for the nine
months ended September 30, 1999. For the nine months ended September 30, 1998,
the minority ownership decreased the consolidated net income by $0.21 million.
This difference is due to the ownership of 100% of the stock of Middleton Doll
as of April 30, 1998. Consumer products recorded an income tax expense of $0.40
million for the quarter ended September 30, 1999 as compared to $0.82 million
for the quarter ended September 30, 1998, a decrease of $0.42 million. The
income tax expense is attributable to Middleton Doll since License Products has
a net operating loss carryforward. Middleton Doll's tax expense is calculated on
net income after intercompany expenses. The
14
<PAGE>
intercompany expenses increased to $1.23 million for the nine months ended
September 30, 1999 compared to $0.53 million in the prior year's period.
Financial Services
Net income from financial services for the nine months ended September 30, 1999
was $2.32 million compared to $2.16 million for the nine months ended September
30, 1998, a 7.4% increase.
Total revenues were $9.01 million for the nine months ended September 30, 1999
compared to $9.12 million for the nine months ended September 30, 1998, a 1.2%
decrease. Interest on loans decreased 22% to $6.48 million for the nine months
ended September 30, 1999 compared to $8.33 million for the comparative nine
months. Average loans under management decreased $18 million from the first nine
months of 1999 compared to the first nine months of 1998 due to normal market
competition and an unanticipated sale of a business that was the Company's
largest borrower. In addition, the average prime rate was 7.89% for the nine
months ended September 30, 1999 compared to 8.50% for the nine months ended
September 30, 1998.
Rental income increased $1.54 million to $2.07 million for the nine months ended
September 30, 1999 due to an increase in ownership of commercial rental
properties. At September 30, 1999, the Company had $27.35 million in leased
properties compared to $21.99 million as of September 30, 1998. Other income
increased $0.21 million to $0.46 million when comparing September 30, 1999 to
September 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 11% to $5.14 million for the nine months ended
September 30, 1999 as compared to $5.77 million for the nine months ended
September 30, 1998 due to lower rates on the Company's cost of funds. The
average debt balance increased $0.71 million in the first nine months of 1999
compared to the first nine months of 1998.
Operating expenses increased to $1.55 million for the nine months ended
September 30, 1999 from $1.19 million for the prior year nine months, in large
part, due to the increase in depreciation on the leased properties. There were
small increases in other operating expenses which resulted in $0.08 million of
the total increase.
Liquidity and Capital
Consumer Products
Total assets of consumer products were $15.12 million as of September 30, 1999
and $14.55 million as of December 31, 1998, a 3.9% increase.
Cash decreased to $0.50 million at September 30, 1999 from $2.21 million at
December 31, 1998.
15
<PAGE>
Accounts receivable, net of the allowance, increased to $2.57 million at
September 30, 1999 from $2.18 million at December 31, 1998. An increase of $0.35
million is attributable to Middleton Doll, and the remaining $0.04 million is
attributable to License Products. Both companies are seasonal and typically have
higher sales in the third and fourth quarter of the year, which corresponds to
higher accounts receivable balances.
Inventory was $5.25 million at September 30, 1999 compared to $3.26 million at
December 31, 1998. Middleton Doll's inventory increased $1.85 million due to new
product lines and anticipated sales to new high volume retailers while License
Products' inventory increased $0.14 million.
Fixed assets increased by $0.26 million and other assets and prepaid expenses
decreased by $0.35 million.
Middleton Doll increased its short-term borrowings by borrowing $1.6 million on
a line of credit with a bank during the nine months ended September 30, 1999.
Accounts payable decreased by $0.26 million as of September 30, 1999 compared to
December 31, 1998. Middleton Doll's accounts payable decreased $0.02 million
while License Products' accounts payable decreased $0.24 million. Other
liabilities decreased by $0.75 million due to a decrease in Middleton Doll's tax
accrual.
Financial Services
Total assets of financial services were $127.05 million as of September 30, 1999
and $139.88 million as of December 31, 1998, a 9% decrease.
Cash increased to $1.41 million at September 30, 1999 from $0.63 million at
December 31, 1998.
Interest receivable decreased to $0.54 million from $0.64 million. Fixed assets
and other assets including prepaid amounts increased in the aggregate by $0.13
million.
Total loans decreased by $18.99 million or 16% to $96.77 million at September
30, 1999 from $115.76 million at December 31, 1998 due to normal market
competition and an unanticipated sale of a business which was the Company's
largest borrower. The Company expects to replace these loans. Leased properties
under management increased $5.35 million due to the purchase of four 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 September 30, 1999
decreased $12.87 million. As of September 30, 1999, financial services had
$50.33 million outstanding in long-term debt and $57.80 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' availability under its short-term facility increased from
$60 million to $70 million during the quarter ended June 30, 1999.
16
<PAGE>
Year 2000 Compliance
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and 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 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
has released its Year 2000 compliant software. 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 proven
itself Year 2000 compliant. The vendor has been conducting seminars and has
issued its final management report. The primary software vendor will continue to
work with the Company throughout the year end and into the Year 2000. 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.
17
<PAGE>
The Company's cumulative costs of the Year 2000 problem through the nine months
ended September 30, 1999 have been $13,000. 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 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 September 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: November 12, 1999 /s/ George R. Schonath
----------------------
George R. Schonath
President and Chief Executive Officer
Date: November 12, 1999 /s/ Susan J. Hauke
------------------
Susan J. Hauke
Vice President Finance
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
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------------
---------------------------------- ----------------------------------
September 30, September 30,
---------------------------------- ----------------------------------
-------------- --------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 1,278,876 $ 1,320,890 $ 3,077,407 $ 2,476,936
Determination of shares:
Weighted average common shares
outstanding (basic) 3,622,712 3,689,102 3,654,544 3,689,102
Assumed conversion of stock
options 3,000 2,474 2,824 2,717
-------------- -------------- -------------- --------------
Weighted average common shares
outstanding (diluted) 3,625,712 3,691,576 3,657,368 3,691,819
============== ============== ============== ==============
Basic earnings per share $ 0.35 $ 0.36 $ 0.84 $ 0.67
============== ============== ============== ==============
Diluted earnings per share $ 0.35 $ 0.36 $ 0.84 $ 0.67
============== ============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,909,138
<SECURITIES> 124,747,233
<RECEIVABLES> 3,262,365
<ALLOWANCES> (145,540)
<INVENTORY> 5,246,281
<CURRENT-ASSETS> 1,047,412
<PP&E> 4,923,497
<DEPRECIATION> (1,682,557)
<TOTAL-ASSETS> 142,171,810
<CURRENT-LIABILITIES> 62,693,243
<BONDS> 50,365,243
16,908,025
16,908,025
<COMMON> 266,769
<OTHER-SE> 11,911,396
<TOTAL-LIABILITY-AND-EQUITY> 142,171,810
<SALES> 14,995,990
<TOTAL-REVENUES> 24,005,819
<CGS> 8,130,612
<TOTAL-COSTS> 8,130,612
<OTHER-EXPENSES> 6,189,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,142,648
<INCOME-PRETAX> 4,566,906
<INCOME-TAX> (404,150)
<INCOME-CONTINUING> 3,077,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,077,407
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.84
</TABLE>
