U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 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: 811-3787
BANDO McGLOCKLIN CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-4300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Title of Class
Common Stock, 6-2/3 cents Par Value Preferred Stock, 6-2/3 cents Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant at March 15, 2000 was $26,221,803.
The number of shares of common stock outstanding at March 15, 2000 was
3,910,289.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Bando McGlocklin Capital Corporation Proxy Statement for the
2000 Annual Meeting of Shareholders (to be filed with the Securities and
Exchange Commission under Regulation 14A within 120 days after the end of the
Registrant's year, and upon such filing, to be incorporated by reference into
Part III).
<PAGE>
BANDO McGLOCKLIN CAPITAL CORPORATION
Index to Annual Report on Form 10-K
For the Year Ended December 31, 1999
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Description of Business . . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 7
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 5. Market for Common Equity and Related Stockholder Matters . . 7
Item 6. Selected Financial Data (In thousands, except
per share data) . . . . . . . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (for the years
ended December 31, 1999, 1998 and 1997) . . . . . . . . 9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 8. Financial Statement and Supplementary Data. . . . . . . . . 19
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 54
Item 10. Directors and Executive Officers of the Registrant . . . . 54
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 54
Item 13. Certain Relationships and Related Transactions . . . . . . 54
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 55
(i)
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Part I
Item 1. Description of Business
Introduction
Bando McGlocklin Capital Corporation (the "Company") was
incorporated in February, 1980 to provide long-term secured loans to small
businesses. At present the Company consists of two business segments, the
Financial Service Business and the Consumer Products Business.
The Financial Service Business segment consists of the Company and
the wholly-owned subsidiary Bando McGlocklin Small Business Lending Corporation
(BMSBLC). Both the Company and BMSBLC are operated as a real estate investment
trust ("REIT") pursuant to the provisions of Section 856 of the Internal Revenue
Code of 1986, as amended. The principal business of the segment is making loans
and leasing buildings to small businesses. The segment also participates in
loans with third party loan originators.
The Consumer Products Business segment consists of a 99% equity
interest in Lee Middleton Original Dolls, Inc. ("Middleton Doll"), represented
by 100% of the outstanding non-voting common stock of Lee Middleton, and a 51%
interest in License Products, Inc. ("License Products"), which is held by
Middleton Doll. Middleton Doll is a manufacturer of vinyl collectible dolls and
a distributor of vinyl play dolls and resin figures. License Products designs,
develops and markets a line of quality, proprietary time pieces. George R.
Schonath, President and Chief Operating Officer, owns 100% of the voting common
stock of Middleton Doll, representing 1% of its total equity. As a REIT, the
Company is prohibited from owning more than 10% of the voting common stock of
any corporation that is not a REIT.
On September 3, 1997, the Company capitalized InvestorsBancorp,
Inc., a bank holding company, for approximately $6.2 million and then
distributed all of the outstanding shares of InvestorsBancorp, Inc. to the
Company's shareholders. The Company and InvestorsBancorp, Inc., together with
its wholly-owned subsidiary, InvestorsBank (the "Bank"), share common offices
and personnel. Expenses are shared between the two entities in accordance with a
Management Services and Allocation of Expenses Agreement (the "Management
Agreement"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Liquidity and Capital Resources".
Financial Services Business
Loans
The Company, through its Financial Services Business, (i) manages
its loan portfolio comprised primarily of loans to small business entities
secured by first or second mortgages, (ii) purchases loan participations from
banks, including the Bank, and (iii) owns industrial and commercial real estate
for lease to small businesses.
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Until the distribution of the shares of InvestorsBancorp, Inc. in
September, 1997, the Company had engaged in the business of originating loans to
small businesses. Concurrent with such distribution, the Company and the Bank
agreed in the Management Agreement that the Company would not originate any
loans unless agreed to by the Bank in writing, unless the loans are made to
current Company customers or unless the loans are outside the Bank's lending
limitations. Thus, except for the making of loans to Company customers who
desire to increase their loan amounts with the Company and for loans outside the
Bank's lending limitations, the Company does not solicit any loans.
The Company's loan portfolio is managed by the Bank for an annual
fee, payable monthly, equal to 25 basis points of the total dollar amount of
loans under management and 6% of the rents from leased properties. Overhead
expenses and rent are also shared by the Bank and the Company, as well as
certain expenses of employees providing accounting, reporting and related
services to the Company.
The Company's loan portfolio is primarily comprised of long-term,
variable rate, secured loans to small business entities. The loans are primarily
secured by first mortgages on real estate, although some loans are secured by
second mortgages. Approximately 88% of the Company's loans by dollar volume are
loans to borrowers located in the State of Wisconsin. Substantially all of the
Company's loan portfolio is held by BMSBLC.
The Company's borrowers include manufacturers, wholesalers,
retailers, professionals and service providers. The Company funds its lending
operations through its equity capital, bank and institutional borrowings,
commercial paper sales and the sale of loan participations.
Real Estate
On July 14, 1998, BMSBLC completed an acquisition of approximately
$19.6 million of leased properties and other assets from Bando McGlocklin Real
Estate Investment Corporation ("BMREIC"), an independently owned real estate
investment trust. The leased portfolio, which had a cost of approximately $18.3
million, consisted of 18 owner-occupied properties in the greater Milwaukee area
that were leased to a variety of manufacturing and service businesses.
At December 31, 1999 the Company owned eighteen buildings and had
construction in progress on two additional buildings. During the year the
Company sold eight properties and purchased seven new properties. The Company
has entered into long-term lease agreements for all properties. The Company
anticipates that it will continue to construct or purchase additional industrial
or commercial properties to lease.
The Company anticipates that most of its rental properties will be
for industrial real estate, but also anticipates that it may also own and lease
commercial real estate properties, such as office buildings and retail stores.
The Company expects that substantially all of its properties will be located in
Wisconsin.
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Competition
The Company, in managing its loan portfolio, competes primarily with
commercial banks and commercial finance companies, many of which have
substantially more assets and capital than the Company. Banks, in particular,
have been active in seeking to refinance outstanding loans. The Company
believes, however, that it is able to compete effectively to maintain its loan
portfolio because of its smaller size and more flexible structure.
In owning and leasing real estate, the Company competes primarily
with other REITs and other investors such as insurance companies and a variety
of investment vehicles which seek to own and lease real estate. In addition, the
Company competes with banks and other financial institutions, which seek to lend
money to potential tenants of the Company which would allow the potential
tenants to construct and own the building rather than lease a building owned by
the Company.
Employees
On December 31, 1999, the Company employed only its President and
Senior Vice President. All other duties are performed by Bank employees pursuant
to the Management Agreement.
Consumer Products Business
Lee Middleton Original Dolls, Inc.
Lee Middleton Original Dolls, Inc., located in Belpre, Ohio, is a
99% owned subsidiary of the Company, with the President of the Company owning
the remaining 1%. Middleton Doll is a manufacturer of vinyl collectible dolls
and a distributor of vinyl play dolls and resin figures. Middleton Doll uses a
multi-step process to manufacture its vinyl dolls that includes (1) rotational
molding to create body parts for dolls, (2) painting, eyeing and wigging each
doll, and (3) dressing the dolls in custom designed clothes.
Although it has two retail locations, Middleton Doll does not
primarily sell directly to the retail market. The core of its business is the
distribution of its collectible doll lines through a network of over 2,000
independent, specialty retail stores. Additional distribution has been acquired
through national retailers such as JCPenney, Toys-R-Us, Spiegel, FAO Schwartz
and others. In 2000 a new play doll line targeted at a competitive price for the
toy market and imported from China will increase distribution to more national
retailers such as K-B Toys, Arnes, Bradlees and Boscov's. In addition to
traditional retail outlets, Middleton's products are sold on TV through the Home
Shopping Network and on the Internet through electronic retailers such as eToys,
iDolls, Internet Shopping Network and others.
Middleton Doll sells its products throughout the United States.
Distribution is also slowly expanding into Canada, Japan and other foreign
markets. Competition is with various other doll manufacturers including Madam
Alexander, Ashton-Drake and Corolle.
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Middleton Doll's strategy for future growth is to expand its product lines and
to increase distribution into the mass market.
During 1999 Middleton Doll purchased approximately 84% of its raw
materials from a single supplier in Hong Kong. As of December 31, 1999, this
supplier had an additional commitment for $1.7 million of inventory from
Middleton Doll. Effective January 1, 2000 Middleton Doll acquired a 51% equity
ownership position in a new Hong Kong corporation, Middleton (HK) Limited, which
will supply Middleton Doll with raw materials and finished goods from Asia after
the completion of the earlier commitment. The owner of the remaining 49% is
affiliated with the former supplier used by Middleton Doll.
In February, 2000 Middleton Doll announced it will move its
warehouse and distribution center from Belpre, Ohio to Columbus, Ohio to better
serve its major customers. The new distribution center will be operational by
the end of June, 2000.
License Products, Inc.
License Products is a 51% owned subsidiary of BMCC. License
Products, located in New Berlin, Wisconsin, designs, develops and markets a line
of quality, proprietary time pieces. The products of the Company are distributed
nationwide through major retail account channels.
Employees
The Consumer Products Business employs approximately 160 persons.
Seasonality
The Consumer Products Business tends to be seasonal with the
strongest months being September, October and November.
Large Customers
One customer, JCPenney, accounted for approximately 13% of the
Consumer Products Business' total revenues for 1999.
Backlog
The backlog of the Consumer Products Business was approximately
$370,000 as of December 31, 1999, all of which should be filled during 2000.
5
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Revenues of Principal Product Groups
The following table sets forth (in millions of dollars), for each of
the last three years, revenues attributable to the Company's principal product
groups:
12/31/1999 12/31/1998 12/31/1997
--------- --------- ---------
Revenues
Loan Portfolio $ 8,552 $ 10,698 $ 11,021
Real Estate Portfolio 3,490 1,184 -
Dolls 21,140 17,807 17,673
Time Pieces 2,326 1,939 1,328
Other 439 447 962
--------- --------- ---------
Total $ 35,947 $ 32,075 $ 30,984
========= ========= =========
Segment Information
Financial information concerning the Company's business segments is
incorporated by reference from the consolidated financial statements on pages 21
to 28 herein.
Executive Officers
George R. Schonath, 59, has served as Chief Executive Officer of the
Company since 1983 and as President since July, 1997. Mr. Schonath has also
served as President and Chief Executive Officer of InvestorsBancorp, Inc. and
the Bank since they were established in 1997. Until July, 1997, he served as a
director (since 1980) and Chairman of the Board (since 1983) of the Company.
Jon McGlocklin, 56, has served as a Senior Vice President of the
Company since July, 1997. Mr. McGlocklin has also served as Senior Vice
President and Secretary of InvestorsBancorp, Inc. and Senior Vice President of
the Bank since they were established in 1997. He has also served as President of
Healy Manufacturing, Inc., Menomonee Falls, Wisconsin, since 1997, and as an
announcer for the Milwaukee Bucks, an NBA basketball team, since 1976. Until
July, 1997, he served as a director (since 1980) and President (since 1991) of
the Company.
Susan J. Hauke, 34, has been the Company's Vice President Finance,
Secretary and Treasurer since 1997. In 1997, Ms. Hauke was also appointed
Controller, Vice President - Finance and Secretary of InvestorsBancorp, Inc. and
Controller, Vice President-Finance, and Treasurer of the Bank. From 1991 until
1997, Ms. Hauke served as Controller for the Company and was a senior accountant
at PricewaterhouseCoopers LLP before joining the Company.
Scott J. Russell, 40, has been a Senior Vice President of the
Company since 1997 and InvestorsBancorp, Inc. since February, 1998 and a
Senior Vice President and Lending Officer of the Bank since 1997. From 1994
until 1997, Mr. Russell served as a Vice President of the Company and was a
corporate banker with the Bank of Tokyo, Chicago, Illinois, prior to joining
the Company.
6
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Item 2. Properties
BMCC owns an approximately 16,000 square foot building and leases
approximately 11,200 square feet of the building. The Bank leases approximately
4,750 square feet under a ten year lease and approximately 6,450 square feet is
leased to two other lessees under a one year lease. The monthly rent received is
variable based upon LIBOR interest rates.
Middleton Doll owns an approximately 51,000 square foot building
that serves as its headquarters and manufacturing facility located at 1301
Washington Boulevard, Belpre, Ohio. The one-story building contains retail,
office and warehouse space. During 1997 Middleton Doll increased the
manufacturing facility by 15,000 square feet to its existing size. During 1999,
an additional leased retail outlet store was opened in West Virginia. Until June
30, 2000 Middleton Doll will continue to lease warehouse space of approximately
40,000 square feet in Belpre, Ohio. A new 44,100 square foot facility in
Columbus, Ohio will be leased beginning in June of 2000 which will be used for
distribution and to store raw materials and finished goods.
License Products leases approximately 9,500 square feet in a
multi-tenant building located at 16200 West Rogers Drive, New Berlin, Wisconsin
at a monthly rental rate of $3,680 with the lease term being month-to-month.
Item 3. Legal Proceedings
As of the date of this filing, neither the Company nor any of its
subsidiaries is a party to any legal proceedings, the adverse outcome of which,
in management's opinion, would have a material effect on the Company's results
of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1999.
Part II
Item 5. Market for Common Equity and Related Shareholder Matters
The common stock of the Company is traded on the Nasdaq Stock Market
under the symbol BMCC. The table below represents the high and low sales price
for the Company's common stock as reported on the Nasdaq Stock Market and the
cash dividends paid per share for 1999 and 1998:
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Common Stock Cash Dividends
High Low Per Share
1999
First Quarter $ 13.000 $ 9.000 0 $0.18
Second Quarter $ 13.500 $ 9.500 0 $0.18
Third Quarter $ 12.875 $ 8.000 0 $0.18
Fourth Quarter $ 10.438 $ 7.273 3 $0.18
1998
First Quarter $ 11.875 $ 9.625 5 $0.18
Second Quarter $ 13.000 $ 9.750 0 $0.18
Third Quarter $ 12.250 $ 8.500 0 $0.18
Fourth Quarter $ 11.500 $ 8.000 0 $0.18
As of March 16, 2000, there were approximately 1,150 shareholders of
record of the Company's common stock.
Item 6. Selected Financial Data (In thousands, except per share data)
The following table sets forth certain Selected Consolidated
Financial Data for the periods and as of the dates indicated:
<TABLE>
<CAPTION>
For the years ended Six months For the years ended
(In thousands, except per December 31, ended June 30,
share data) 1999 1998 1997 12/31/1996 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Total revenues $35,947 $32,075 $30,984 $ 10,940 $10,617 $11,738
Net income available to
common shareholders 5,476 3,770 3,506 1,142 3,130 3,208
Total assets 156,066 154,424 140,337 79,519 85,379 (1) 91,033 (1)
Long-term debt 48,005 62,506 75,273 12,045 23,604 (1) 26,953 (1)
Total liabilities 125,633 125,639 111,002 46,370 50,285 (1) 52,823 (1)
Redeemable preferred stock 16,908 16,908 16,908 16,908 16,908 (1) 16,908 (1)
Diluted earnings per share $ 1.50 $ 1.02 $ 0.95 $ 0.31 $ 0.82 $ 0.81
Cash dividends declared per
common share $ 0.84 $ 0.65 $ 0.61 $ 0.995 $ 0.96 $ 1.00
(1) Unaudited
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Amounts presented as of December 31, 1999, 1998 and 1997 include the
consolidation of two segments. The financial services segment includes Bando
McGlocklin Capital Corporation ("BMCC" or the "Company") and Bando McGlocklin
Small Business Lending Corporation ("BMSBLC"), a 100% owned subsidiary of the
Company. The consumer products segment includes 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. In
June of 1996 Bando McGlocklin Investment Corporation ("BMIC") owned 51% of
Middleton Doll. On January 6, 1997, a 1% interest was sold to George R.
Schonath, President and Chief Executive Officer of the Company. Then on April
30, 1998, the Company acquired the remaining 49%. On May 28, 1999 BMIC was
merged into Middleton Doll.
Results of Operations
For the years ended December 31, 1999 and December 31, 1998
The Company's total net income available for common shareholders for
the year ended December 31, 1999 equaled $5.48 million or $1.50 per share
(diluted) as compared to $3.77 million or $1.02 per share (diluted) for the year
ended December 31, 1998, a 45% increase.
Consumer Products
Net income from consumer products after income taxes and minority
interest for the year ended December 31, 1999 was $3.69 million compared to
$2.08 million for the year ended December 31, 1998, a 77% increase.
Net sales from consumer products for the year ended December 31,
1999 increased 19% to $23.47 million compared to $19.75 million for the year
ended December 31, 1998. This was due to increased sales of $3.33 million at
Middleton Doll and $0.39 million at License Products. Cost of sales increased
20% to $12.54 million for the year ended December 31, 1999 compared to $10.45
million for the year ended December 31, 1998 as a result of the increase in
sales. Middleton Doll's cost of sales increased to $10.91 million from $8.72
million, a 25% increase. License Products' cost of sales decreased to $1.63 from
$1.73 million, a 6% decrease. In total, gross profit margin remained the same at
47% for both years. Middleton Doll's gross profit margin decreased from 51% to
48% while License Products' increased from 11% to 30% during 1999. The decrease
in gross profit margin at Middleton Doll was due to increased sales made to high
volume retailers which are sold at slightly lower margins.
Total operating expenses of consumer products for the year ended
December 31, 1999 were $6.27 million compared to $5.59 million for the year
ended December 31, 1998, a
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12% increase. Sales and marketing expense increased 14% to $3.67 million.
Middleton Doll's expense increased $0.80 million due to hiring additional sales
personnel and due to an increase in advertising for new high volume retailers.
License Products' sales and marketing expense decreased $0.33 million. New
product development increased $0.14 million at Middleton Doll and decreased
$0.07 million at License Products. General and administrative expenses were
$1.99 million for the year ended December 31, 1999 compared to $1.84 million for
the year ended December 31, 1998. General and administrative expenses of
Middleton Doll increased $0.37 million due to additional staffing requirements,
related benefit costs and legal expenses. License Products' operating expenses
decreased $0.22 million as a result of a cost cutting program.
Other expense increased $0.08 million when compared to the same
period a year ago due to an increase in interest expense. The minority interest
in earnings of subsidiaries decreased the consolidated net income of consumer
products by $0.02 million for the year ended December 31, 1999 compared to $0.22
million for the year ended December 31, 1998. This difference is due to the
ownership of 99% of the stock of Middleton Doll as of April 30, 1998. The
consumer products' consolidated net income was reduced by income tax expense of
$0.95 million and $1.49 million for the years ended December 31, 1999 and 1998,
respectively. 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. Middleton Doll's tax expense is calculated on net income
before the elimination of intercompany expenses which were $1.64 million as of
December 31, 1999.
Financial Services
Net income from financial services for the year ended December 31,
1999 was $3.23 million compared to $3.06 million for the year ended December 31,
1998, a 6% increase.
Total revenues were $12.40 million for the year ended December 31,
1999 compared to $12.21 million for the year ended December 31, 1998, a 2%
increase. Interest on loans decreased 20% to $8.55 million for the year ended
December 31, 1999 compared to $10.70 million for the year ended December 31,
1998. Average loans under management decreased $16 million from a year ago due
to normal market competition and an unanticipated sale of a customer's business.
In addition the average prime rate was 8.00% for the year ended December 31,
1999 compared to 8.36% for the year ended December 31, 1998.
Rental income increased $1.54 million or 130% to $2.73 million for
the year ended December 31, 1999 due to an increase in ownership of commercial
rental properties. At December 31, 1999 the Company had $24.07 million in leased
properties compared to $22.0 million at December 31, 1998. Most of the rental
properties were not purchased by the Company until July of 1998. During 1999 the
Company sold eight leased properties which resulted in a gain of $0.76 million.
There were no sales of leased properties during 1998. Other income increased
$0.03 million to $0.36 million for the year ended December 31, 1999 from $0.33
million for the year ended December 31, 1998. Prepayment penalties increased
$0.13 million which offset the decrease of $0.10 million of other income items.
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Interest expense decreased to $6.97 million from $7.67 million for
the year ended December 31, 1999 as compared with the year ended December 31,
1998 due to lower rates for the Company's cost of funds. The average debt
balance for the year ended in 1999 decreased $0.99 million when compared to the
year ended in 1998.
Operating expenses increased 49% to $2.21 million for the year ended
December 31, 1999 compared to $1.48 million for the year ended December 31,
1998. During 1998 the Company reversed $0.46 million of loan loss reserve which
was offset against 1998 operating expenses. The remainder of the increase was
mainly due to the increase in depreciation on leased properties which increased
$0.29 million.
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. Tax basis income for Financial Services (before the preferred
stock dividend) was $5.09 million or $1.39 per share (diluted) for the year
ended December 31, 1999. Book income for Financial Services (before the
preferred stock dividend) was $3.23 million or $0.88 per share (diluted) due to
the elimination of intercompany revenue and expenses from the consumer products
segment and normal book/tax adjustments. For the year ended December 31, 1998,
tax basis income for Financial Services (before the preferred stock dividend)
was $3.74 million or $1.01 per share (diluted) and its book income (before the
preferred stock dividend) was $3.06 million or $0.83 per share (diluted) due to
the elimination of intercompany revenue and expenses from the consumer products
segment and normal book/tax adjustments.
For the twelve months ended December 31, 1998 and 1997
The Company's total net income available for common shareholders for
the year ended December 31, 1998 equaled $3.77 million or $1.02 per share
(diluted) as compared to $3.51 million or $0.95 per share (diluted) for the year
ended December 31, 1997, a 7% increase.
Consumer Products
Net income from consumer products after income taxes and minority
interest for the year ended December 31, 1998 was $2.08 million compared to
$1.32 million for the year ended December 31, 1997, a 58% increase. As of April
30, 1998, Bando McGlocklin Investment Corporation ("BMIC"), which was a 99%
owned subsidiary until its merger with Middleton Doll in 1999, owned 99% of
Middleton Doll as compared with 51% ownership in the year ended December 31,
1997.
Net sales from consumer products for the year ended December 31,
1998 increased 4% to $19.75 million compared to $19.0 million for the year ended
December 31, 1997. This was due to increased sales of $0.14 million at Middleton
Doll and $0.61 million at License Products. Sales of License Products increased
46% during 1998 when compared to 1997. Cost of sales increased 1% to $10.45
million for the year ended December 31, 1998 compared to $10.38 million for the
year ended December 31, 1997 due to the increased sales volume. Middleton Doll's
cost of sales decreased to $8.72 million from $9.48 million, an 8%
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decrease. License Products' cost of sales increased to $1.73 million from $0.90
million, a 92% increase. In total, gross profit margin increased slightly to 47%
from 45% when comparing the year ended December 31, 1998 to the year ended
December 31, 1997. Middleton Doll's gross profit margin increased from 46% to
51% while License Products gross profit margin decreased from 32% to 11% during
the comparative periods.
Total operating expenses of consumer products for the year ended
December 31, 1998 were $5.59 million compared to $4.74 million for the year
ended December 31, 1997, an 18% increase. Sales and marketing expense increased
$0.86 million, a 37% increase. Of this increase, $0.63 million was attributable
to Middleton Doll due to the expansion of trade shows, including more
advertising, additional personnel and leased space per show, along with
promotions such as point of sale displays. License Products' sales and marketing
expense was up $0.23 million because of its efforts to increase sales of its new
product line through printed materials and due to the opening of a showroom in
Chicago. New product development expense increased $0.06 million at Middleton
Doll because of two new artists that were introduced late in 1997 and increased
$0.04 million at License Products as a result of the new product line. General
and administrative expenses decreased $0.11 million to $1.84 million for the
year ended December 31, 1998 compared to $1.95 million for the year ended
December 31, 1997. Middleton Doll's expense decreased $0.19 million due to some
non-recurring expenses that occurred in 1997. License Products' general and
administrative expense increased $0.3 million during 1998 and BMIC's expense
increased $0.05 million as a result of amortization of goodwill associated with
the acquisition of the minority interest in Middleton Doll and an increase in
other miscellaneous expenses.
The consumer products' consolidated net income was reduced by the
minority interest ownership in the net earnings of Middleton Doll for the period
prior to April 30, 1998. The minority interest in earnings of subsidiaries
equaled $0.22 million for the year ended December 31, 1998 compared to $1.08
million for the year ended December 31, 1997. The 80% decrease is the result of
BMIC owning 99% of the stock of Middleton Doll as of April 30, 1998. The
consumer products' consolidated net income was reduced by a provision for income
taxes of $1.49 million and $1.54 million for the year ended December 31, 1998
and 1997, respectively.
Financial Services
Net income from financial services for the year ended December 31,
1998 was $3.06 million compared to $3.47 million for the year ended December 31,
1997, a 12% decrease.
Total revenues were $12.21 million for the year ended December 31,
1998 compared to $11.92 million for the year ended December 31, 1997, a 2%
increase. Interest on loans and rental income increased 8% to $11.88 million for
the year ended December 31, 1998 from $11.02 million for the year ended December
31, 1997. Rental income for the year was $1.18 million as a result of the
acquisition of $19 million of leased properties from BMREIC. Interest on loans
decreased 3% as a result of the decrease in loans due to the acquisition of
BMREIC. Prior to the acquisition, the Company had $11.1 million in loans
outstanding with BMREIC. The average loans under management decreased $3.6
million or 3% during 1998.
12
<PAGE>
Other income decreased $0.57 million. Of this amount, $0.50 million
was the result of receiving proceeds of an executive's life insurance policy
where BMCC was the beneficiary in the second quarter of 1997. The remainder of
the decrease is comprised of fees related to the sale of residential mortgages
which are now being originated in InvestorsBank and a reduction in miscellaneous
loan fees stemming from competitive market conditions.
Interest expense increased to $7.67 million from $5.65 million for
the year ended December 31, 1998 as compared with the year ended December 31,
1997. Interest expense increased approximately $0.81 million as a result of the
purchase of $19.6 million of assets from BMREIC, net of the $13.8 million in
liabilities assumed and other new assets. Those additional assets were funded
with new debt. Average debt on the balance sheet increased $38.7 million during
the year ended December 31, 1998 as compared to the year ended December 31, 1997
as a result of BMSBLC repurchasing loans that had been previously sold. Since
December 31, 1997 debt increased $13.2 million. During 1998 the Company had
borrowed $5.0 million in new debt to lend to Middleton Doll for the repurchase
of the 49% minority interest and licensing agreement. This new debt increased
interest expense by $0.28 million during the year. Interest expense, which is
offset by swap income, increased by $0.93 million because of a decline in swap
income due to investment swaps maturing.
Operating expenses decreased 47% to $1.48 million for the year ended
December 31, 1998 compared to $2.79 million for the year ended December 31,
1997. All employees of the Company terminated their employment with the Company
on September 8, 1997 to become employees of InvestorsBank (the "Bank"), a wholly
owned subsidiary of InvestorsBancorp, Inc., except for certain executive
officers who are employees of both the Company and the Bank. The Company and the
Bank entered into a Management Services and Allocation of Operating Expenses
Agreement (the "Agreement") which has reduced the level of operating expenses in
the Company by $1.01 million. Other operating expenses were reduced by $0.40
million as a result of non-recurring professional fees that were incurred in
1997 due to the restructuring. The Company reversed $0.26 million of its loan
loss reserve due to the good condition of its loan portfolio as of December 31,
1998. These reductions were partially offset by an increase in depreciation of
$0.21 million attributable to the merger with BMREIC and other new leased
properties. In addition, the expense resulting from the change in appreciation
on investment swaps decreased $0.25 million for the year ended December 31,
1998. There were no new investment swaps entered into during the year ended
December 31, 1998. Disclosures regarding the Company's swap transactions are
incorporated by reference from Note 13 of the financial statements on pages 39
and 40, herein.
The financial services segment is comprised of two entities that
intend to qualify as a real estate investment trust ("REIT") under the Internal
Revenue Code. Under REIT status, the Company, together with its qualified REIT
subsidiary, BMSBLC, will continue to not be subject to income taxes on taxable
income which is distributed to shareholders. Taxable income (before the
preferred stock dividend) was $3.74 million or $1.01 per share for the year
ended December 31, 1998 which differs from book earnings (before the preferred
stock dividend) of $3.06 million or $0.83 per share due to the impact of the
elimination of intercompany revenue and expenses from the consumer products
segment and normal book/tax adjustments. For the year ended December 31, 1997,
the taxable income (before the preferred stock dividend) was
13
<PAGE>
$3.52 million or $0.95 per share which differs from book earnings (before the
preferred stock dividend) of $3.47 million or $0.94 per share due to the impact
of the elimination of intercompany revenue and expenses from the consumer
products segment and normal book/tax adjustments.
Liquidity and Capital
Consumer Products
Total assets of consumer products were $15.58 million as of December
31, 1999 and $14.55 million as of December 31, 1997, a 7% increase.
Cash decreased to $0.53 million at December 31, 1999 from $2.21
million at December 31, 1998.
Accounts receivable, net of the allowance, increased to $2.95
million at December 31, 1999 from $2.18 million at December 31, 1998. A decrease
of $0.10 million is attributable to License Products and an increase of $0.87
million to Middleton Doll's receivables. Both companies have seasonal sales
which result in higher receivable balances at the end of the year. However,
License Products improved its collection process during 1999 which resulted in a
lower accounts receivable balance as of December 31, 1999.
Inventory was $4.78 million at December 31, 1999 compared to $3.26
million at December 31, 1998. Middleton Doll's inventory increased $1.44 million
due to new product lines and License Products' inventory increased $0.08
million.
Fixed assets, net of accumulated depreciation, increased by $0.23
million as of December 31, 1999 compared to December 31, 1998. Other assets and
prepaid expenses increased $0.21 million during the same period.
Goodwill was recorded when the Company purchased the remaining
interest in the stock from the estate of Lee Middleton, the founder of Middleton
Doll, on April 30, 1998. The purchase price exceeded book value by $0.62 million
which is being amortized over 20 years. As of December 31, 1999 the balance of
the goodwill, net of accumulated amortization, is $0.57 million.
Middleton Doll increased its short-term borrowings by $0.20 million
based on a line of credit with a bank during the year ended December 31, 1999.
The line of credit had an availability of $2.5 million as of December 31, 1999.
Accounts payable decreased by $0.14 million as of December 31, 1999
compared to December 31, 1998. Other liabilities decreased by $0.84 million due
to a decrease in accrued taxes for Middleton Doll.
14
<PAGE>
Financial Services
Total assets of financial services were $140.49 million as of
December 31, 1999 and $139.88 million as of December 31, 1998.
Cash increased to $1.51 million at December 31, 1999 from $0.63
million at December 31, 1998.
Interest receivable decreased to $0.60 million as of December 31,
1999 from $0.64 million at December 31, 1998. Fixed assets and other assets
including prepaid amounts increased by $0.24 million.
Total loans on the balance sheet decreased by $2.53 million or 2% to
$113.23 million at December 31, 1999 from $115.76 million at December 31, 1998
due to normal market competition and an unanticipated sale of a business. During
1999 the allowance for doubtful accounts was increased from zero to $150,000 due
to an analysis of impaired loans. Leased properties increased to $24.07 million
as of December 31, 1999 compared to $22.0 million as of December 31, 1998. Five
properties were purchased during the year ended December 31, 1999 and
construction was completed on two additional properties. Eight 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 December
31, 1999 increased $0.63 million. As of December 31, 1999, financial services
had $47.97 million outstanding in long-term debt and $73.66 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 commercial paper 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. 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's cumulative costs of the Year 2000 problem through the
twelve months ended December 31, 1999 have been approximately $13,000. This
includes costs to upgrade software and replace equipment specifically for the
purpose of Year 2000 compliance and certain administrative expenditures.
Additional costs related to Year 2000 will be immaterial.
15
<PAGE>
As a result of the efforts of the Company's Year 2000 committee, the
Company and its subsidiaries experienced an uneventful transition from 1999 to
2000. As of this date, the Company has not experienced any disruption in its
software or hardware and has not experienced any other significant problems as a
result of the Year 2000 issues. In addition, the Company has not experienced nor
has it been informed of any such problems related to any of its material
third-party vendors or commercial customers.
Among the benefits derived from the time, effort and costs related
to Year 2000 was a complete review and update of the Company's disaster recovery
and contingency plans. As a result the Company is now better prepared to deal
with technical or natural disasters which could threaten the Company's
operations.
Despite the testing process and lack of disruption as of this date,
there can be no assurance that Year 2000 related disruptions will not occur in
the future and will not have a material adverse impact on the Company's results
of operations. Based on currently available information, the Company believes
that any Year 2000 related disruptions that may occur in the future will not
have a material adverse impact on the results of operations. The Company has
developed contingency plans to deal with potential Year 2000 related disruptions
and will continue to monitor its exposure as appropriate and will act to resolve
any problems that may occur.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement, as amended, establishes
accounting and reporting standards for derivative instruments. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal years beginning after June 15, 2000.
The Company does not believe that this statement will have a material impact on
the financial statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "may", "will", "could", "believe",
"expect", "intend", "anticipate", "estimate", "project", or similar expressions.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and the
subsidiaries include, but are not
16
<PAGE>
limited to, changes in: interest rates, general economic conditions, including
the condition of the local real estate market, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, competition, demand for
financial services in the Company's market area, demand for the Company's
consumer products and accounting principles and policies. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company enters into interest rate swap agreements primarily as a
means of managing interest rate risk. To the extent that the Company's
variable-rate loans are funded with fixed-rate debt, the Company is subject to
interest rate risk. To reduce interest rate risk, the Company enters into
certain interest rate swaps designed to convert variable-rate loans into
fixed-rate loans. Although these swaps reduce interest rate risk, the potential
for profit or loss on interest rate swaps still exists depending upon
fluctuations in interest rates. In addition, the Company enters into interest
rate swaps in an attempt to further manage interest rate risk resulting from
interest rate movements.
In accordance with applicable accounting policies, the Company's
interest rate swap agreements are held for purposes other than trading and are
further classified as either hedges or as investment contracts. Both hedges and
investment contracts have the potential for profit and loss. Hedges are
accounted for using the designation method which matches the swaps with the
assets that are being hedged. When the designated asset matures, or is sold,
extinguished or terminated, the hedge would be reclassified as an investment.
Accounting principles dictate that those contracts not meeting hedge criteria be
classified as investments and marked-to-market with any associated unrealized
gain or loss recorded in the statements of operations, whereas those contracts
meeting hedge criteria are not to be classified as investments or
marked-to-market.
At December 31, 1999 there were no swaps which were classified as
investment contracts while at December 31, 1998 the market value of the
investment contracts was $49,579. Unrealized losses were $49,579 and $73,434 for
the years ended December 31, 1999 and December 31, 1998, respectively.
The average notational amount of investment swaps outstanding during
the years ended December 31, 1999, 1998 and 1997 was $1,375,000, $2,750,000 and
$45,750,000, respectively. Based on quoted market valuations, the estimated
market value of the hedge swaps at December 31, 1999 and December 31, 1998 was
approximately ($0.5 million) and $3.4 million, respectively.
The following table summarizes the interest rate swap agreements in
effect at December 31, 1999, all of which are hedge swaps. No funds were
borrowed or are to be repaid under these agreements.
17
<PAGE>
<TABLE>
<CAPTION>
Current Interest
Rates Paid
Original
Company Bank By By Notional Expiration
Bank Payment Payment Company Bank Amount Date
<S> <C> <C> <C> <C> <C> <C> <C>
LaSalle Bank Floating Fixed 6.15250% (1) 6.340% $ 5,400,000 03/21/01
Chicago, IL
Firstar Bank Floating Fixed 6.19880% (1) 7.435% $10,325,000 (2) 09/28/01
Milwaukee, WI
Firstar Bank Floating Fixed 6.18125% (1) 5.725% $16,908,000 06/30/03
Milwaukee, WI
LaSalle Bank Floating Fixed 6.12000% (1) 7.600% $ 5,000,000 03/10/05
Chicago, IL
LaSalle Bank Floating Fixed 6.10125% (1) 6.660% $ 5,250,000 (3) 05/23/05
Chicago, IL
LaSalle Bank Floating Fixed 6.18125% (1) 6.500% $ 5,000,000 (4) 09/29/05
Chicago, IL
LaSalle Bank Floating Fixed 6.12125% (1) 7.090% $12,500,000 09/05/06
Chicago, IL
Firstar Bank Floating Fixed 6.12125% (1) 5.760% $10,000,000 (5) 06/16/08
Milwaukee, WI
(1) Adjusted every three months to the three-month LIBOR rate then in effect.
(2) The notional amount decreases by $166,667 each quarter and was $4,825,000
at December 31, 1999.
(3) The notional amount decreases by $100,000 each quarter and was $3,450,000
at December 31, 1999.
(4) The notional amount decreases by $75,000 each quarter and was $3,725,000
at December 31, 1999.
(5) The notional amount decreases by $166,667 each quarter and was $8,999,998
at December 31, 1999.
</TABLE>
As a result of hedge arrangements, the Company recognized a
$711,006, $519,795 and $1,193,877 reduction in interest expense for the years
ended December 31, 1999, 1998 and 1997, respectively. In addition, the Company
recognized a $88,131, $93,201 and $353,962 reduction in interest expense for the
years ended December 31, 1999, 1998 and 1997, respectively, as a result of
investment swap contracts which have now expired.
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 institutions.
18
<PAGE>
Item 8. Financial Statement and Supplementary Data
Bando McGlocklin Capital Corporation
Consolidated Financial Statements
Contents
Report of BDO Seidman, LLP, Independent Auditors . . . . . . . . . . . . 20
Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997 . . . . 21
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998 and 1997 . . . . . . . 23
Consolidated Statement of Changes in Shareholders' Equity . . . . . . . . . 25
Consolidated Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997 . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 29
Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant . . . . . 51
Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . 51
Schedule IV Mortgage Loans on Real Estate . . . . . . . . . . . . . 52
19
<PAGE>
To the Shareholders and Board of Directors of Bando McGlocklin Capital
Corporation:
We have audited the accompanying consolidated balance sheets of Bando McGlocklin
Capital Corporation as of December 31, 1999 and 1998 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1999, 1998 and 1997 in conformity with generally
accepted accounting principles. We have also audited the schedules listed in
Item 8. These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bando McGlocklin
Capital Corporation at December 31, 1999 and 1998 and the results of its
operations and its cash flows for the years ended December 31, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Milwaukee, Wisconsin
February 14, 2000
20
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31, 1999 December 31, 1998
<S> <C> <C>
ASSETS
Consumer Products
Cash $ 530,919 $ 2,209,105
Accounts receivable, net of allowance of
$129,280 and $75,557 as of December 31,
1999 and 1998, respectively 2,954,428 2,177,385
Inventory 4,784,645 3,261,553
Prepaid inventory 872,531 473,335
Other prepaid expenses 407,361 141,027
------------ ------------
Total current assets 9,549,884 8,262,405
------------ ------------
Fixed assets, net of accumulated depreciation of
$1,408,103 and $1,069,042 as of December 31,
1999 and 1998, respectively 2,880,881 2,648,947
Loans 621,968 621,968
Prepaid expenses and other assets 1,955,593 2,413,210
Goodwill, net of accumulated amortization of
$51,640 and $20,656 as of December 31,
1999 and 1998, respectively 568,113 599,097
------------ ------------
Total Consumer Products assets 15,576,439 14,545,627
------------ ------------
Financial Services
Cash 1,509,148 626,838
Interest receivable 597,705 644,780
Other current assets 204,224 235,292
------------ ------------
Total current assets 2,311,077 1,506,910
------------ ------------
Loans, net of allowance for doubtful accounts
of $150,000 as of December 31, 1999 113,229,680 115,759,968
Leased properties:
Buildings, net of accumulated depreciation of
$536,684 and $214,822 as of December 31,
1999 and 1998, respectively 17,897,897 18,782,045
Land 2,848,326 3,090,572
Construction in progress 3,324,085 133,649
------------ ------------
Total leased properties 24,070,308 22,006,266
Fixed assets, net of accumulated depreciation of
$429,167 and $329,216 as of December 31,
1999 and 1998, respectively 313,393 384,703
Other assets, net 564,627 220,613
------------ ------------
Total Financial Services assets 140,489,085 139,878,460
------------ ------------
Total Assets $156,065,524 $154,424,087
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<CAPTION>
December 31, 1999 December 31, 1998
<S> <C> <C>
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products
Short-term borrowings $ 200,000 $ --
Accounts payable 888,469 748,838
Accrued liabilities 1,122,413 1,959,191
------------- -------------
Total current liabilities 2,210,882 2,708,029
Long-term debt 29,926 35,279
------------- -------------
Total Consumer Products liabilities 2,240,808 2,743,308
Financial Services
Commercial paper 68,657,172 52,487,321
Notes payable to banks 5,000,000 6,040,000
------------- -------------
Short-term borrowings 73,657,172 58,527,321
Accrued liabilities 1,760,157 1,898,342
------------- -------------
Total current liabilities 75,417,329 60,425,663
State of Wisconsin Investment Board notes
payable 13,666,667 15,000,000
Loan participations with repurchase options 32,724,235 45,881,418
Other notes payable 1,583,761 1,588,989
------------- -------------
Total Financial Services liabilities 123,391,992 122,896,070
------------- -------------
Minority interest in subsidiaries 41,055 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 December 31, 1999 and 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,
4,401,599 shares and 4,001,540 shares issued
and outstanding as of December 31, 1999 and 1998,
respectively, before deducting shares in treasury 293,441 266,769
Additional paid-in capital 16,604,744 13,671,947
Retained earnings 1,218,617 1,770,080
Treasury stock, at cost (416,710 shares and 312,438
shares as of December 31, 1999 and 1998,
respectively) (4,633,158) (3,852,511)
------------- -------------
Total Shareholders' Equity 13,483,644 11,856,285
------------- -------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $ 156,065,524 $ 154,424,087
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Consumer Products
Net sales $ 23,466,464 $ 19,745,491 $ 19,000,778
Cost of sales 12,535,759 10,448,494 10,381,039
------------ ------------ ------------
Gross profit 10,930,705 9,296,997 8,619,739
Operating expenses
Sales and marketing 3,665,249 3,202,906 2,340,625
New product development 617,496 550,176 451,973
General and administrative 1,985,265 1,838,074 1,945,361
------------ ------------ ------------
Total operating expenses 6,268,010 5,591,156 4,737,959
Other income (expense)
Interest expense (77,934) (39,900) (7,074)
Other income, net 77,457 118,598 65,019
------------ ------------ ------------
Total other income (expense) (477) 78,698 57,945
Income before income taxes
and minority interest 4,662,218 3,784,539 3,939,725
Income tax expense (952,018) (1,492,636) (1,539,265)
Minority interest in earnings
of subsidiaries (20,655) (216,136) (1,082,362)
------------ ------------ ------------
Net income 3,689,545 2,075,767 1,318,098
------------ ------------ ------------
Financial Services
Revenues
Interest on loans 8,551,453 10,698,422 11,021,265
Rental income 2,727,023 1,183,891 --
Gain on sales of leased properties 763,228 -- --
Other income 361,488 329,323 897,298
------------ ------------ ------------
Total revenues 12,403,192 12,211,636 11,918,563
------------ ------------ ------------
Expenses
Interest expense 6,969,619 7,673,884 5,649,910
Other operating expenses 2,207,799 1,481,223 2,794,051
------------ ------------ ------------
Total expenses 9,177,418 9,155,107 8,443,961
------------ ------------ ------------
Net income $ 3,225,774 $ 3,056,529 $ 3,474,602
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Total Company
Income before income taxes and
minority interest
Consumer products $ 4,662,218 $ 3,784,539 $ 3,939,725
Financial services 3,225,774 3,056,529 3,474,602
------------ ------------ ------------
Total company 7,887,992 6,841,068 7,414,327
Income tax expense (952,018) (1,492,636) (1,539,265)
Minority interest in earnings of
subsidiaries (20,655) (216,136) (1,082,362)
------------ ------------ ------------
Net income 6,915,319 5,132,296 4,792,700
Preferred stock dividends (1,438,992) (1,362,659) (1,286,320)
------------ ------------ ------------
Net income available to common
shareholders $ 5,476,327 $ 3,769,637 $ 3,506,380
============ ============ ============
Basic Earnings Per Share $ 1.50 $ 1.02 $ 0.95
============ ============ ============
Diluted Earnings Per Share $ 1.50 $ 1.02 $ 0.95
============ ============ ============
Segment Reconciliation
Consumer products
Net income $ 3,689,545 $ 2,075,767 $ 1,318,098
Intersegment expenses (1,644,609) (1,171,929) (451,352)
------------ ------------ ------------
Total segment net income 2,044,936 903,838 866,746
Financial services
Net income 3,225,774 3,056,529 3,474,602
Intersegment income 1,644,609 1,171,929 451,352
------------ ------------ ------------
Total segment net income 4,870,383 4,228,458 3,925,954
Total company net income $ 6,915,319 $ 5,132,296 $ 4,792,700
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Additional Retained
Common Paid-In Earnings Treasury
Stock Capital (Deficit) Stock
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 263,716 $ 19,498,326 $ (859,728) $ (3,262,613)
Proceeds from exercise of stock options 3,053 333,621 -- --
Purchase of treasury stock -- -- -- (589,898)
Net income -- -- 4,792,700 --
Cash dividends on preferred stock -- -- (1,286,320) --
Cash dividends on common stock -- -- (1,990,055) --
Capitalization of InvestorsBancorp, Inc. -- (6,160,000) -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 $ 266,769 $ 13,671,947 $ 656,597 $ (3,852,511)
Net income -- -- 5,132,296 --
Cash dividends on preferred stock -- -- (1,362,659) --
Cash dividends on common stock -- -- (2,656,154) --
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 $ 266,769 $ 13,671,947 $ 1,770,080 $ (3,852,511)
Purchase of treasury stock -- -- -- (780,647)
Net income -- -- 6,915,319 --
Cash dividends on preferred stock -- -- (1,438,992) --
Cash dividends on common stock -- -- (3,067,561) --
Stock dividend on common stock 26,672 2,932,797 (2,960,229) --
------------ ------------ ------------ ------------
BALANCE, December 31, 1999 $ 293,441 $ 16,604,744 $ 1,218,617 $ (4,633,158)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
Consumer Products
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $ 3,689,545 $ 2,075,767 $ 1,318,098
Adjustments to reconcile net
cash provided by operating activities:
Depreciation and amortization 471,041 353,453 252,463
Allowance for doubtful accounts 53,723 (193,239) 170,713
Inventory reserve (231,093) 259,049 207,612
Change in minority interest in subsidiaries 20,656 216,136 1,082,362
Increase (decrease) in cash due to change in:
Accounts receivable (830,766) (25,474) (1,084,608)
Inventory (1,291,999) (240,430) (1,786,970)
Other assets (207,913) (22,422) (361,192)
Accounts payable 139,631 (199,237) 382,272
Other liabilities (836,778) 895,680 372,695
----------- ----------- -----------
Net Cash Provided by Operations 976,047 3,119,283 553,445
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land -- -- 129,675
Purchase of fixed assets (671,991) (1,294,689) (685,682)
Acquisition of minority interest in subsidiary -- (2,500,000) --
Acquisition of royalty rights -- (2,500,000) --
----------- ----------- -----------
Net Cash Used in Investing (671,991) (6,294,689) (556,007)
----------- ----------- -----------
Cash Flows from Financing Activities:
Increase in short term borrowings 200,000 -- --
(Decrease) increase in other notes payable (5,353) 12,343 (6,533)
----------- ----------- -----------
Net Cash (Used) Provided by Financing 194,647 12,343 (6,533)
----------- ----------- -----------
Net intercompany transactions (2,176,889) 5,372,168 (654,841)
Net (decrease) increase in cash (1,678,186) 2,209,105 (663,936)
Cash, beginning of period 2,209,105 -- 663,936
----------- ----------- -----------
Cash, end of period $ 530,919 $ 2,209,105 $ --
=========== =========== ===========
Supplemental Disclosure of Cas
Flow Information:
Taxes paid $ 1,780,573 $ 628,100 $ 1,179,023
Interest paid $ 77,934 $ 39,900 $ 2,972
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
Financial Services
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $ 3,225,774 $ 3,056,529 $ 3,474,602
Adjustments to reconcile net cash
provided by operating activities:
Change in appreciation on investments 53,096 73,434 321,244
Depreciation and amortization 604,468 388,278 215,479
Provision for loan loss reserve 150,000 (450,000) 6,335
Increase (decrease) in cash due
to change in:
Interest receivable 47,075 200,060 488,513
Other assets (206,860) 282,439 329,744
Other liabilities (138,185) 459,348 (392,824)
------------ ------------ ------------
Net Cash Provided by Operations 3,735,368 4,010,088 4,443,093
------------ ------------ ------------
Cash Flows from Investing Activities:
Loans made (76,152,875) (79,143,575) (53,759,887)
Principal collected on loans 78,533,163 93,795,013 43,821,836
Loan and interest charge off -- 1,869 --
Loans purchased -- -- (49,647,182)
Cash paid for Bando McGlocklin
Real Estate Investment
Corporation's assets -- (19,095,424) --
Proceeds from sale of leased properties 6,999,387 -- --
Premium expense - net -- -- 59,230
Purchase or construction of leased
properties (9,727,128) (2,855,729) (399,844)
Purchase of fixed assets (28,641) (49,051) (235,291)
------------ ------------ ------------
Net Cash Used in Investing (376,094) (7,346,897) (60,161,138)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
Financial Services
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Increase in short term borrowings 15,129,851 26,017,349 1,041,578
Proceeds from loan participations
with repurchase options - net (13,157,183) (23,369,049) 63,901,848
Proceeds from SWIB note -- 10,000,000 --
Repayment of SWIB notes (1,333,333) (1,000,000) (666,667)
(Decrease) increase in other notes payable (5,228) 1,508,752 --
Capitalization and distribution of InvestorsBank -- -- (6,160,000)
Proceeds from exercise of stock options -- -- 336,674
Preferred stock dividends paid (1,438,992) (1,362,659) (1,286,320)
Common stock dividends paid (3,067,561) (2,656,154) (1,990,055)
Repurchase of common stock (781,407) -- (589,898)
------------ ------------ ------------
Net Cash (Used) Provided by Financing (4,653,853) 9,138,239 54,587,160
------------ ------------ ------------
Net intercompany transactions 2,176,889 (5,372,168) 654,841
Net increase (decrease) in cash 882,310 429,262 (476,044)
Cash, beginning of period 626,838 197,576 673,620
------------ ------------ ------------
Cash, end of period $ 1,509,148 $ 626,838 $ 197,576
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 6,598,990 $ 7,812,817 $ 7,110,310
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Bando McGlocklin Capital Corporation (the "Company"), was
incorporated in February, 1980, to provide long-term secured loans to small
businesses. At present the Company consists of two business segments, the
Financial Service Business and the Consumer Products Business.
The Financial Service Business segment consists of the Company and the
wholly-owned subsidiary Bando McGlocklin Small Business Lending Corporation
(BMSBLC). Both the Company and BMSBLC are operated as a real estate investment
trust ("REIT") pursuant to the provisions of Section 856 of the Internal Revenue
Code of 1986, as amended. The principal business of the segment is making loans
and leasing buildings to small businesses. The segment also participates in
loans with third party loan originators.
The Consumer Products Business segment consists of a 99% interest in Lee
Middleton Original Dolls, Inc. ("Middleton Doll") and a 51% interest in License
Products, Inc. ("License Products"). Middleton Doll is a manufacturer of
collectible vinyl dolls and a distributor of vinyl play dolls and resin figures.
License Products designs, develops and markets a line of quality, proprietary
time pieces.
On September 3, 1997, the Company capitalized InvestorsBancorp, Inc., a bank
holding company, for approximately $6.2 million and then distributed all of the
outstanding shares of InvestorsBancorp, Inc. to the Company's shareholders. The
Company and InvestorsBancorp, Inc., share common offices and personnel.
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 these
estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements as of
December 31, 1999 and December 31, 1998 and for the years ended December 31,
1999, 1998, and 1997, include the accounts of the Company, BMSBLC, Middleton
Doll and License Products. All significant intercompany accounts and
transactions have been eliminated in consolidation.
COMPREHENSIVE INCOME - The Company adopted the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" as of January 1, 1998. The
Company does not have any components of comprehensive income.
SEGMENT INFORMATION - The Company adopted the Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" as of
29
<PAGE>
January 1, 1998. Following the provisions of this Statement, the Company is
reporting segment assets, liabilities, sales and operating income in the same
format reviewed by the Company's management. As discussed in Nature of Business
above, the Company has two reportable segments: Consumer Products (which
includes Middleton Doll and License Products) and Financial Services (which
includes the Company and BMSBLC). Segment information required to be disclosed
under the Statement is included in the accompanying financial statements.
Intersegment charges are reflected in the segment reconciliation on the
consolidated statements of operations and on the consolidated statements of cash
flows. The statements for the year ended December 31, 1997, have been
reclassified to conform to the current year presentation.
TREASURY STOCK - Preferred stock has been reduced by the cost of shares acquired
for treasury stock. The common treasury stock is shown as a reduction in
shareholders' equity at cost.
INVESTMENT VALUATION - The Company's investment swap contracts and stock
investments are valued at current market value. Loans are stated at unpaid
principal balance unless loss reserves are considered necessary. Land owned is
stated at the lower of cost or net realizable value.
INTEREST RATE SWAP AGREEMENTS - The Company enters into interest rate swap
agreements as a means of managing its interest rate exposure. The differential
to be paid or received on all interest rate swap agreements is accrued as
interest rates change and is recognized over the life of the agreements. Those
agreements which are considered to be investments are accounted for at market
value in the financial statements.
ACCOUNTS RECEIVABLE - Accounts receivable represent sales on credit made by
Middleton Doll and License Products, net of an allowance for doubtful accounts.
INVENTORY - Inventories of Middleton Doll and License Products are valued at the
lower of cost or market. Middleton Doll and License Products utilize the average
cost method to determine cost. The components of inventory are as follows:
December 31, 1999 December 31, 1998
Raw materials, net of reserve
of $235,568 and $466,661,
respectively $2,157,740 $1,600,051
Work in process 90,613 275,755
Finished goods 2,536,292 1,356,646
Prepaid Inventory -- 29,101
---------- ----------
Total $4,784,645 $3,261,553
========== ==========
30
<PAGE>
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 straight-line methods for financial statement
purposes and accelerated methods for income tax purposes. Maintenance and repair
costs are charged to expense as incurred, and renewals and improvements that
extend the useful life of the assets are added to the plant and equipment
accounts. The major classes of fixed assets are as follows:
<TABLE>
<CAPTION>
Useful Lives December 31, 1999 December 31, 1998
---------------- --------------------- ---------------------
<S> <C> <C> <C>
Land - $ 283,817 $ 173,590
Building 40 years 1,649,276 1,579,838
Furniture & fixtures 7 years 755,964 727,323
Machinery & equipment 3-5 years 2,342,487 1,951,157
--------------------- ---------------------
Total $ 5,031,544 $ 4,431,908
===================== =====================
</TABLE>
LEASED PROPERTIES - Depreciation is calculated using the straight-line method
over 40 years for book purposes and 39 years for tax purposes. The costs of
normal repairs and maintenance are charged to expense as incurred.
RECOGNITION OF INTEREST INCOME - Interest income is recorded on the accrual
basis to the extent that management anticipates that such amounts will be
collected. In all other cases, the unpaid interest is monitored and interest
income is recorded only upon receipt.
PREMIUM (EXPENSE) INCOME - Premium (expense) income represents the differential
at the time a portion of a loan is sold between the present value of 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 - Beginning January 1, 1997, the Company and its qualified REIT
subsidiary, BMSBLC, qualified as real estate investment trusts under the
Internal Revenue Code. Accordingly, they are not subject to income tax on
taxable income that is distributed to shareholders.
In order to qualify as a REIT under the Internal Revenue Code, the Company,
together with its qualified REIT subsidiary, BMSBLC, among other requirements,
must meet certain annual income and quarterly asset diversification tests
including not holding the securities of any one issuer valued at more than 5% of
total assets, and not holding more than 10% of the outstanding voting securities
of any one issuer.
Middleton Doll and License Products file their own tax returns. Income taxes are
calculated 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. Income tax expense in the
accompanying financial statements is based on their operations prior to the
elimination of approximately $1.64 million of interest and other expenses on
transactions with the Company.
31
<PAGE>
The Company's ordinary taxable income was reduced by $223,911 for the year ended
December 31, 1997 due to a payment which was made during the fiscal year ended
June 30, 1995 and was amortized through 1997. The payment was made to modify the
terms of certain investment swap contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial Accounting Standards Board
Statement No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments.
Carrying Amounts Approximate Fair Values for the Following Instruments
Cash
Net loans
Short-term borrowings
Variable rate long-term notes payable
Quoted Market Prices (where available, or if not available, based on
quoted market prices of comparable instruments for the following
instruments)
Interest rate swaps
Redeemable preferred stock
Discounted Cash Flows (using interest rates currently being offered on
instruments with similar terms and with similar credit quality)
Fixed rate long-term debt
Off-Balance-Sheet Instruments
Letters of credit
Lending commitments
Since the majority of the Company's off-balance-sheet instruments
consist of nonfee-producing, variable rate commitments, the Company has
determined it does not have a distinguishable fair value.
NEW ACCOUNTING PRONOUNCEMENTS - In June, 1998, the Financial Accounting
Standards Board issued the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement,
as amended, establishes
32
<PAGE>
accounting and reporting standards for derivative instruments. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal years beginning after June 15, 2000.
The Company does not believe that this statement will have a material impact
upon its financial statements.
NOTE 2. INVESTORSBANCORP, INC.
InvestorsBancorp. Inc. is a bank holding company that was incorporated on June
12, 1996 and capitalized on September 3, 1997 primarily by the Company. The
Company distributed all of its outstanding shares of InvestorsBancorp, Inc. to
its shareholders on September 6, 1997 to shareholders of record on September 5,
1997.
InvestorsBank (the "Bank") is a Wisconsin chartered commercial bank with
depository accounts insured by the Federal Deposit Insurance Corporation. The
Bank started providing a full range of commercial and consumer banking services
on September 8, 1997.
All employees, except certain officers, ceased their employment with the Company
on September 8, 1997 and became employees of the Bank. The officers of the
Company became officers of both the Company and the Bank.
The Company and the Bank entered into a Management Services and Allocation of
Expenses Agreement (the "Agreement") on September 2, 1997. The Agreement allows
the employees of the Bank to provide loan management, leasing and accounting
services to the Company for a fee, payable monthly. Management fee expense
relating to the Agreement was $872,201 for the year ended December 31, 1999,
$775,892 for the year ended December 31, 1998 and $229,285 for the period from
September 3, 1997 to December 31, 1997. Overhead expenses and rent are also
shared between the two entities in accordance with the Agreement.
NOTE 3 ACQUISITION OF MINORITY INTEREST
On April 30, 1998, the Company paid $5 million for an additional 49% interest of
Middleton Doll and the right to produce certain dolls under a five year royalty
agreement. $2.5 million was allocated to the acquisition of the minority
interest based upon an appraisal of Middleton Doll. This exceeded the amount of
the recorded minority interest by $619,751 and this difference has been recorded
as goodwill in the accompanying financial statements and is being amortized over
twenty years on a straight line basis.
The $2.5 million allocated to the right to produce certain dolls has been
recorded as a prepaid royalty in the accompany financial statements and is being
amortized on a straight line basis over the five year term of the royalty
agreement.
33
<PAGE>
NOTE 4. CONCENTRATION OF CREDIT RISK
The Consumer Products Segment's customers are not concentrated in any specific
geographic region. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. The Company routinely assesses the financial
strength of its customers, and, as a consequence, believes that its trade
accounts receivable credit risk exposure is limited. For the year ended December
31, 1999 the Consumer Products Segment had one unrelated customer that accounted
for approximately 13% of the Segment's sales and approximately 30% of the
Segment's December 31, 1999 gross trade accounts receivable.
NOTE 5. SIGNIFICANT SUPPLIER
Approximately 84% and 47% of Middleton Doll raw materials were acquired during
1999 and 1998, respectively, from a single supplier in Hong Kong. There has been
no formal agreement between Middleton Doll and this supplier. As of December 31,
1999, Middleton Doll has entered into commitments to acquire approximately
$1,743,000 of raw material from this supplier. After those goods are shipped,
Middleton Doll will no longer buy raw materials from this supplier.
Effective January 1, 2000, Middleton Doll entered into a Shareholder and Loan
Agreement with Middleton (HK) Limited, a Hong Kong corporation. Middleton (HK)
is a management corporation which will provide Middleton Doll with all of its
raw materials and finished goods from Asia. Middleton Doll has acquired a 51%
equity ownership in this Hong Kong corporation and the owner of the remaining
49% is affiliated with the former supplier used by Middleton Doll. Through the
Shareholder and Loan Agreement, Middleton Doll is committed to lending $306,000
as an investment loan which bears interest at the prime rate plus 1%, payable
quarterly and has a maturity date of January 1, 2005. In addition to the
investment loan Middleton Doll has also agreed to fund a revolving loan up to a
maximum of $700,000 at an interest rate of the prime rate plus 1%. The revolving
line also matures on January 1, 2005. The revolving loan is secured by assets of
Middleton (HK) Limited.
NOTE 6. LOANS
The Company's exposure to loss in the event of nonperformance by the borrower is
represented by the outstanding principal amount of the loans. The Company's loan
portfolio consists primarily of variable-rate loans with terms of five to
fifteen years. Substantially all loans are fully secured by first or second
mortgages on commercial real estate. Approximately 88% of the Company's loan
portfolio at December 31, 1999 is comprised of loans to borrowers located within
the State of Wisconsin. As of December 31, 1999, the Company has loans
outstanding to its largest borrower totaling $14,116,064.
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
34
<PAGE>
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.
When a loan is deemed impaired, the Company computes the present value of the
loan's future cash flows, discounted at the effective interest rate. The
effective rate used is the contractual rate adjusted for any deferred fees,
deferred costs, premiums or discounts existing at origination. If the present
value is less than the carrying value of the loan, a valuation allowance is
recorded. For collateral-dependent loans, the Company uses the fair value of the
collateral, less estimated costs to sell, on a discounted basis, to measure
impairment. As of December 31, 1999 and December 31, 1998 loans with balances
aggregating $584,227 and $721,816, respectively, were considered impaired. At
December 31, 1999 a loan loss reserve of $150,000 was established. At December
31, 1998, no loss reserve was recorded on impaired loans. The average impaired
loan balance during the year ended December 31, 1999 was $634,334. The accrued
interest on the impaired loans was $37,241 at December 31, 1999. Net of the loan
loss reserve of $150,000 the remaining balances are expected to be fully
collected.
Undisbursed loan commitments and lines of credit totaled $9,705,418 at December
31, 1999. There were no letters of credit outstanding as of December 31, 1999.
NOTE 7. LOANS SOLD
The following table summarizes the outstanding balance of loans sold by the
Company to third parties.
Principal Balance Sold Percentage Principal Balance sold Recourse
at Date of Sale Sold at December 31, 1999 Provision
During the year ended
December 31, 1999
$480,000 80% $378,939 None
During the year ended
June 30, 1995
$2,837,677 75-80% $224,348 None
The Company also sells loans with the option to repurchase them at a later date.
During 1999, the Company sold $15,447,540 in loans to third parties with the
option to repurchase them. As of December 31, 1999, the balance of loan
participations with repurchase options was $32,724,235. Of this amount
approximately $23.7 million is sold to a single non-related party. These loan
participations mature as the corresponding notes mature with the maturities
ranging from one to nine years as of December 31, 1999. As of December 31, 1998,
the balance of loan participations with repurchase options was $45,881,418.
During the year ended December 31, 1998, the Company resold with an option to
repurchase, loans with unpaid principal balances totaling $5,331,814. These
sales all have been accounted for as secured financing. Loan participations that
mature are refinanced with new debt such as commercial paper and long-term debt
(see Notes 11 and 12).
35
<PAGE>
For the loans sold with no recourse, the Company is susceptible to loss on the
loans up to the percentage of the retained interest to the extent the underlying
collateral is insufficient in the event of nonperformance by the borrower. The
Company's retained interest is subordinated to the portion sold. For the loans
sold with full recourse, the Company is susceptible to loss equal to the total
principal balance of the loan to the extent the underlying collateral is
insufficient in the event of nonperformance. No associated loss reserve has been
established as of December 31, 1999, for loans which have been sold.
Under the terms of the agreements, the Company retains servicing rights for the
entire loan. As servicer and provider of recourse, certain agreements require
the Company to comply with various covenants, including the maintenance of net
worth. As of December 31, 1999, the Company was in compliance with these
covenants.
NOTE 8. LOAN BACKED CERTIFICATES
During the year ended June 30, 1996, the Company sold loans having a principal
balance of $8,666,538 to a trust which issued two classes of certificates. The
"A" Certificate in the amount of $7,453,223 was sold to a third party and the
"B" Certificate in the amount of $1,213,315 was sold to the Company.
On May 1, 1997, the Company repurchased all of the loans sold to the trust. The
unpaid principal balances for the A and B certificates were $8,097,561 and
$1,497,499, respectively. As a result of these transactions, during the year
ended December 31, 1997, the Company recognized $1,297 of premium expense and
the excess servicing asset and retained loan discount related to the original
sale were reduced by $202,437 and $201,140, respectively.
NOTE 9. BUSINESS ACQUISITION
In July, 1998, BMSBLC acquired Bando McGlocklin Real Estate Investment
Corporation ("BMREIC"), an independently owned real estate investment trust.
This acquisition was accounted for as a purchase. Under the terms of the Plan of
Merger, BMSBLC acquired leased properties and other assets with a fair value of
approximately $19.6 million and assumed liabilities of approximately $13.8
million. Cash of approximately $5.1 million was paid to the shareholders of
BMREIC. Of the liabilities assumed, $13.4 million were paid by BMSBLC at the
date of the closing.
In addition, BMSBLC paid $555,379 to a related party to acquire the rights,
title and interest under an Advisory Agreement between the related party and
BMREIC. This purchase was made in connection with the acquisition of BMREIC
described above and has been capitalized as part of the purchase price.
36
<PAGE>
NOTE 10. LEASED PROPERTIES
The Company has $24 million in leased properties located in southeastern
Wisconsin as of December 31, 1999 as compared to $22 million in leased
properties as of December 31, 1998. This includes the $18.3 million of acquired
properties described in Note 9. The Company has entered into construction
contracts totaling $5,051,638 of which $1,727,553 is unfunded as of December 31,
1999.
The Company normally leases its properties pursuant to a lease agreement with
initial lease terms, primarily ranging from five to fifteen years. The leases
require the lessee to pay all operating expenses including utilities, insurance
and taxes. The lease agreements, all of which are operating leases, expire at
various dates through 2014 and provide the lessee with renewal and purchase
options. Minimum future rental income, by year, from these leases based on the
agreements in effect at December 31, 1999 is as follows:
Projected
Year Rental Income
2000 $ 3,345,430
2001 3,317,269
2002 3,357,301
2003 3,206,296
2004 2,885,783
Future Years 11,771,088
------------------
$ 27,883,167
==================
The Company subleases half of its office space with InvestorsBank, a related
party. Monthly rents are variable based on LIBOR interest rates and the rental
agreement is for a ten year term. Rental income from the related party for the
years ended December 31, 1999 and December 31, 1998 was $50,981 and $67,452,
respectively.
NOTE 11. SHORT-TERM BORROWINGS
Commercial paper is issued for working capital purposes with maturities of up to
90 days. The average yield on commercial paper outstanding at December 31, 1999
was 6.49%.
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 quarterly. At December 31, 1999, the outstanding principal balance was
$200,000 and the interest rate was 8.5%.
BMSBLC has entered into an amended and restated loan agreement with five
participating banks as of April 30, 1999. The agreement provides for a maximum
principal of $70,000,000 less the outstanding principal amount of commercial
paper and bears interest at the prime rate or at the 30, 60 or 90 day LIBOR plus
one and three-eighths percent. Interest is payable monthly and the agreement
expires on April 28, 2000. BMSBLC is also required to pay a commitment fee equal
37
<PAGE>
to one-half of one percent per year on the unused amount of the loan commitment.
There was no outstanding principal balance at December 31, 1999.
On April 30, 1998, the Company entered into a credit agreement with one of its
correspondent banks providing for a note of $5,000,000 bearing interest at the
prime rate. The proceeds from this note were used for the purchase of the
remaining 49% interest in Middleton Doll and the rights to produce certain
dolls. The agreement expired on April 30, 1999 and was extended under the same
terms until April 30, 2000. As of December 31, 1999, the outstanding principal
balance was $5,000,000.
NOTE 12. 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 and is secured by specific
loans. The note is payable in equal quarterly installments of $166,667 with a
final payment of unpaid principal due on November 7, 2006. At December 31, 1999,
the outstanding principal balance was $4,666,667.
On June 12, 1998, BMSBLC borrowed an additional $10,000,000 from the State of
Wisconsin Investment Board ("SWIB") pursuant to a term note which bears interest
at a fixed rate of 6.98% per year through its maturity and is secured by
specific loans. The note is payable in equal quarterly installments of $166,667
with a final payment of unpaid principal due on June 1, 2013. At December 31,
1999, the outstanding principal balance was $9,000,000.
The SWIB agreements and the loan agreements described in Note 11 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
requires maintenance of collateral, minimum equity and loan to debt ratios.
Under the most restrictive covenant, approximately $2 million of BMSBLC's
capital is available for payment of dividends to BMCC. As of December 31, 1999,
BMSBLC is in compliance with all such requirements.
On December 1, 1998, BMSBLC entered into a Loan and Trust Agreement with the
City of Franklin, Wisconsin, which issued an industrial development revenue
bond. The bond matures on December 1, 2018 with interest payable monthly to the
trustee. The interest rate changes weekly based upon the remarketing agent's
lowest rate to permit the sale of the bonds. As of December 31, 1999, the
outstanding principal balance was $1,510,000 and the interest rate was 5.7%.
38
<PAGE>
Future annual maturities of long-term debt as of December 31, 1999 are as
follows:
December 31, 2000 $ 1,338,856
December 31, 2001 1,339,197
December 31, 2002 1,339,558
December 31, 2003 1,339,942
December 31, 2004 1,340,350
Later Years 8,552,525
----------------
$ 15,250,428
================
NOTE 13. 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 this risk, the Company enters into certain interest rate swaps
designed to convert variable-rate loans into fixed-rate loans. Although these
swaps reduce interest rate risk, the potential for profit or loss on interest
rate swaps still exists depending upon fluctuations in interest rates. In
addition, the Company enters into interest rate swaps in an attempt to further
manage interest rate risk resulting from interest rate movements.
In accordance with applicable accounting principles, the Company's interest rate
swap agreements are held for purposes other than trading and are further
classified as either hedges or as investment contracts. Both hedges and
investment contracts have the potential for profit and loss. Hedges are
accounted for using the designation method which matches the swaps with the
assets that are being hedged. When the designated asset matures or is sold,
extinguished or terminated, the hedge would be reclassified as an investment.
Accounting principles dictate that those contracts not meeting hedge criteria be
classified as investments and marked-to-market with any associated unrealized
gain or loss recorded in the statements of operations, whereas those contracts
meeting hedge criteria are not to be classified as investments or
marked-to-market.
At December 31, 1999 there were no swaps which were classified as investment
contracts while at December 31, 1998 the market value of the investment
contracts was $49,579. Unrealized losses were $49,579 and $73,434 for the years
ended December 31, 1999 and December 31, 1998, respectively.
The average notional amount of investment swaps outstanding during the years
ended December 31, 1999, 1998 and 1997 was $1,375,000, $2,750,000, and
$45,750,000, respectively.
The following table summarizes the interest rate swap agreements in effect at
December 31, 1999, all of which are hedge swaps. No funds were borrowed or are
to be repaid under these agreements.
39
<PAGE>
<TABLE>
Current Interest
Rates Paid
Original
<CAPTION>
Company Bank By By Notional Expiration
Bank Payment Payment Company Bank Amount Date
<S> <C> <C> <C> <C> <C> <C> <C>
LaSalle Bank Floating Fixed 6.15250% (1) 6.340% $ 5,400,000 03/21/01
Chicago, IL
Firstar Bank Floating Fixed 6.19880% (1) 7.435% $10,325,000 (2) 09/28/01
Milwaukee, WI
Firstar Bank Floating Fixed 6.18125% (1) 5.725% $16,908,000 06/30/03
Milwaukee, WI
LaSalle Bank Floating Fixed 6.12000% (1) 7.600% $ 5,000,000 03/10/05
Chicago, IL
LaSalle Bank Floating Fixed 6.10125% (1) 6.660% $ 5,250,000 (3) 05/23/05
Chicago, IL
LaSalle Bank Floating Fixed 6.18125% (1) 6.500% $ 5,000,000 (4) 09/29/05
Chicago, IL
LaSalle Bank Floating Fixed 6.12125% (1) 7.090% $12,500,000 09/05/06
Chicago, IL
Firstar Bank Floating Fixed 6.12125% (1) 5.760% $10,000,000 (5) 06/16/08
Milwaukee, WI
(1) Adjusted every three months to the three-month LIBOR rate then in effect.
(2) The notional amount decreases by $166,667 each quarter and was $4,825,000 at
December 31, 1999.
(3) The notional amount decreases by $100,000 each quarter and was $3,450,000
at December 31, 1999.
(4) The notional amount decreases by $75,000 each quarter and was $3,725,000
at December 31, 1999.
(5) The notional amount decreases by $166,667 each quarter and was $8,999,998
at December 31, 1999.
</TABLE>
As a result of hedge arrangements, the Company recognized a $711,006, $519,795
and $1,193,877 reduction in interest expense for the years ended December 31,
1999, 1998 and 1997, respectively. In addition, the Company recognized a
$88,131, $93,201 and $353,962 reduction in interest expense for the years ended
December 31, 1999, 1998 and 1997, respectively, as a result of investment swap
contracts which have now expired.
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 institutions.
40
<PAGE>
NOTE 14. 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 were paid quarterly at the annual rate of 7.625% through the
dividend period ending June 30, 1998. The dividend rate was adjusted to an
annual rate of 8.53% for the dividend period commencing July 1, 1998 and ending
June 30, 2003. The next adjustment will be effective for the five year period
commencing July 1, 2003. As of December 31, 1997, the Company had repurchased
15,209 shares.
For the year ended December 31, 1998, the Company began presenting preferred
stock dividends as a deduction from net income to arrive at net income available
to common shareholders. In prior periods, the Company presented preferred stock
dividends as part of the interest expense. Prior period consolidated statements
of operations have been reclassified to conform to current period presentation.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash $ 2,040,067 $ 2,040,067 $ 2,835,943 $ 2,835,943
Net loans 113,851,648 113,851,648 116,381,936 116,381,936
FINANCIAL LIABILITIES
Short-term borrowings 73,857,172 73,857,172 58,527,321 58,527,321
Variable rate long-term debt 10,612,778 10,612,778 17,005,436 17,005,436
Fixed rate long-term debt
Practicable to estimate fair value 13,740,428 13,045,454 15,078,990 15,369,133
Not practicable 23,651,383 -- 30,421,260 --
Redeemable preferred stock 16,908,025 11,640,145 16,908,025 15,604,542
Interest rate swaps -- (548,067) -- 3,731,276
</TABLE>
The estimated fair value of fee income on letters of credit at December 31, 1999
and 1998 was insignificant. Loan commitments on which the committed interest
rate is less than the current market rate was also insignificant at December 31,
1999 and 1998.
41
<PAGE>
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Borrowers with fixed rate obligations are less likely to prepay in a
rising rate environment and more likely to repay in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by using interest rate swaps (see Note 13).
NOTE 16. OPERATING LEASES
The Company's Consumer Products Segment leases from third parties various
buildings. The leases are classified as operating leases and the buildings are
used as warehouses and outlet stores for the storage, distribution and sale of
Lee Middleton Original Dolls merchandise as well as for a variety of equipment.
Minimum future lease payments, by year, from these leases based on the
agreements in effect at December 31, 1999 is as follows:
Future Minimum
Year Lease Payments
----------------- ---------------------
2000 $ 203,947
2001 107,941
2002 62,476
2003 54,816
2004 18,672
---------------------
$ 447,852
=====================
NOTE 17. 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 18. RETIREMENT PLANS
On September 8, 1997, the Company terminated its profit sharing plan and money
purchase plan. The Company continues to have an employee benefit expense through
the sharing of employees and expenses according to the Agreement (see Note 2).
As of July 1, 1998, the Company's subsidiary, Lee Middleton Original Dolls, Inc.
has a qualified defined contribution plan for eligible employees. Employees can
contribute between 1% and 15% of their base compensation to the plan. The
Company's contribution to the plan is at the discretion of the Company's Board
of Directors. No Company contributions were made to the plan during the years
ended December 31, 1999 and December 31, 1998.
42
<PAGE>
The Company provided an additional supplemental retirement benefit for an
executive officer totaling $55,412, $38,098 and $38,347 for the years ended
December 31, 1999, 1998 and 1997, respectively. In the prior periods this
benefit was given to two executive officers. These payments were made at the
sole discretion of the outside members of the Board of Directors.
NOTE 19. STOCK OPTION PLANS
The Company has three stock option plans, 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 the 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 Internal Revenue
Code. All options must be exercised within ten years of the date of grant.
Additional information relating to the Plans is shown below:
<TABLE>
<CAPTION>
For the year ended For the year ended For the year ended
December 31, 1999 December 31, 1998 December 31, 1997
Number Average Number Average Number Average
of Option of Option of Option
Options Price Options Price Options Price
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at 205,870 $11.23 205,870 $ 12.73 169,424 $ 10.45
beginning of year
Options granted - - - - 189,450 12.90
Options exercised - - - - (45,796) 7.35
Options terminated unexercised - - - - (107,208) 11.70
Increase due to stock dividend 20,587 (1) - - - - -
----------- ----------- -----------
Options outstanding at end of year 226,457 10.21 (1) 205,870 11.23 (2) 205,870 12.73
Options available for grant at
end of year 172,601 - 173,188 - 173,188 -
----------- ----------- -----------
Total reserved shares 399,058 - 379,058 - 379,058 -
Options exercisable at end of year 216,953 $10.19 192,590 $ 11.25 187,950 $ 12.94
(1) On February 22, 2000, the Board of Directors of the Company approved a
10% increase in outstanding options and a 10% downward adjustment of
the exercise price on all options. This adjustment was to reflect the
Company's 10% stock dividend as of December 31, 1999.
43
<PAGE>
(2) On February 11, 1998, the Board of Directors of the Company approved a
downward adjustment of $1.67 in the exercise prices of the 1997 Stock
options that were granted on February 3, 1997 and June 25, 1997. The
downward price adjustment was to reflect the Company's 1997 return of
capital dividend.
</TABLE>
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Remaining
Average Average
Exercise Life Exercise Exercise
Price Range Shares In Years Price Shares Price
<S> <C> <C> <C> <C> <C>
$7.00-$8.00 12,012 0.9 $ 7.27 8,008 $ 7.27
$9.50-$13.50 214,445 7.1 $ 10.37 208,945 $ 10.30
------------ ------------- ----------- ----------- -----------
Total 226,457 6.8 $ 10.21 216,953 $ 10.19
</TABLE>
The Company has adopted the disclosure only option under the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The impact of the provision of this statement on proforma income
and earnings per share is not material.
NOTE 20. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by giving effect to all
dilutive potential common shares. A reconciliation of the income and shares
issued in computing the basic and diluted earnings per share for the years ended
December 31, 1999, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net income available to
common shareholders $ 5,476,327 $ 3,769,637 $ 3,506,380
-------------- -------------- ---------------
Determination of shares:
Weighted average common shares
outstanding (basic) 3,647,513 3,689,102 3,685,990
Assumed conversion of stock options 2,536 2,468 11,597
-------------- -------------- ---------------
Weighted average common shares
outstanding (diluted) 3,650,049 3,691,570 3,697,587
============== ============== ===============
Basic earnings per share $ 1.50 $ 1.02 $ 0.95
Diluted earnings per share $ 1.50 $ 1.02 $ 0.95
</TABLE>
44
<PAGE>
NOTE 21. INCOME TAXES
Taxes on income consist of the following:
For the years ended December 31,
1999 1998 1997
-------------- -------------- --------------
Current taxes
Federal $ 913,418 $ 1,188,422 $ 1,311,497
State 138,600 234,404 227,126
-------------- -------------- --------------
1,052,018 1,422,826 1,538,623
-------------- -------------- --------------
Deferred taxes
Federal (100,000) 53,000 642
State - 16,810 -
-------------- -------------- --------------
(100,000) 69,810 642
-------------- -------------- --------------
Taxes on income $ 952,018 $ 1,492,636 $ 1,539,265
============== ============== ==============
The Company and its 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. The income tax
expense recorded by the Company is attributable to the Consumers Products
segment. Tax expense is calculated on net income before the elimination of
intercompany expenses and, at the present time, is attributable only to
Middleton Doll income as License Products has a net operating loss carryforward
to offset its current net income. A reconciliation of Consumer Products income
before taxes to income subject to taxes is as follows.
1999 1998 1997
--------------- -------------- --------------
Income before taxes $ 4,662,218 $ 3,784,539 $ 3,939,725
Less intercompany
eliminations (1,644,609) (1,171,929) (451,352)
Plus License Products
loss not benefited - 1,062,752 567,700
--------------- -------------- --------------
Income subject to taxes $ 3,017,609 $ 3,675,362 $ 4,056,073
=============== ============== ==============
A reconciliation of the statutory Federal income tax rate and the effective rate
as a percentage of income subject to taxes for Consumer Products is as follows.
1999 1998 1997
------------ ------------ ------------
Federal statutory rate 34.0% 34.0% 34.0%
State taxes 4.6% 6.9% 5.4%
Other -7.2% -0.1% -0.8%
------------ ------------ ------------
Effective rate 31.4% 40.8% 38.6%
============ ============ ============
45
<PAGE>
Temporary differences and carryforwards create deferred tax assets and
liabilities. The following table lists the items which affect the deferred tax
calculation for the Company:
For the years ended December 31,
1999 1998 1997
Deferred tax assets:
Accrued expenses and reserves $ 231,900 $ 125,000 $ 195,100
Net operating loss carryforwards 1,222,100 1,172,000 784,000
-------------- ------------ -----------
1,454,000 1,297,000 979,100
Valuation allowance (1,227,600) (1,172,000) (784,000)
-------------- ------------ -----------
226,400 125,000 195,100
Deferred tax liabilities:
Depreciation and amortization (6,400) (5,000) (5,290)
-------------- ------------ -----------
Net deferred tax assets $ 220,000 $ 120,000 $ 189,810
============== ============ ===========
The valuation allowance represents net operating loss carryforwards at License
Products for which utilization is uncertain. The increase in the valuation
allowance is a result of the increased deferred tax asset associated with the
net operating loss carryforwards. A portion of the deferred income tax assets
may be realized through carrybacks with the remainder dependent upon future
income. Management believes that sufficient income will be earned in the future
to realize the remaining net deferred income tax assets.
NOTE 22. DISTRIBUTIONS
For the years ended December 31, 1999, 1998, and 1997, the Company's Board of
Directors has declared the following common stock distributions.
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Total common stock distributions $ 6,027,790 $ 2,397,916 $ 8,150,055
Common stock distributions per share (tax basis)
Ordinary income $ 0.70 $ 0.65 $ 0.61
Capital gains $ 0.14 $ - $ -
Return of capital $ - $ - $ 1.67
Nontaxable $ 0.81 $ - $ -
-------------- -------------- --------------
Total common stock distributions declared per share $ 1.65 $ 0.65 $ 2.28
============== ============== ==============
Distribution in cash $ 0.84 $ 0.65 $ 0.61
Distribution in stock $ 0.81 $ - $ 1.67
</TABLE>
46
<PAGE>
NOTE 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended (in thousands, except per share data)
3/31/1999 6/30/1999 9/30/1999 12/31/1999
<S> <C> <C> <C> <C>
Total revenues $ 7,292 $ 7,054 $ 9,660 $ 11,864
Net operating income before
income taxes and minority interest $ 1,333 $ 1,228 $ 2,006 $ 3,321
Net income available to
common shareholders $ 898 $ 900 $ 1,280 $ 2,398
Basic earnings per share $ 0.24 $ 0.25 $ 0.35 $ 0.66
Diluted earnings per share $ 0.24 $ 0.25 $ 0.35 $ 0.66
<CAPTION>
3/31/1998 6/30/1998 9/30/1998 12/31/1998
<S> <C> <C> <C> <C>
Total revenues $ 6,357 $ 6,799 $ 8,844 $ 9,957
Net operating income before
income taxes and minority interest $ 705 $ 1,038 $ 1,768 $ 1,968
Net income available to
common shareholders $ 456 $ 700 $ 1,321 $ 1,293
Basic earnings per share $ 0.12 $ 0.19 $ 0.36 $ 0.35
Diluted earnings per share $ 0.12 $ 0.19 $ 0.36 $ 0.35
</TABLE>
47
<PAGE>
NOTE 24. BANDO McGLOCKLIN CAPITAL CORPORATION (PARENT ONLY)
Pursuant to covenants contained in its debt agreements, BMSBLC is prohibited
from declaring or paying any dividend on its common stock which would constitute
a return-of-capital dividend for income tax purposes. The Company's balance
sheet as of December 31, 1999 and December 31, 1998 and related statements of
operations and cash flows for the years ended December 31, 1999, 1998 and 1997
on an unconsolidated basis are as follows:
December 31, 1999 December 31, 1998
ASSETS
Loans $ 5,056,087 $ 5,199,672
Investment in BMSBLC 26,915,624 25,226,128
Investment in other subsidiaries 4,064,476 2,019,516
------------ ------------
Total investments 36,036,187 32,445,316
Other assets - net 405,890 1,327,153
------------ ------------
Total assets $ 36,442,077 $ 33,772,469
============ ============
LIABILITIES
Note payable $ 5,000,000 5,000,000
Other liabilities 455,640 8,159
------------ ------------
Total liabilities 5,455,640 5,008,159
Preferred stock 16,908,025 16,908,025
SHAREHOLDERS' EQUITY
Common stock 293,441 266,769
Additional paid-in capital 16,604,744 13,671,947
Retained earnings 1,218,617 1,770,080
Treasury stock, at cost (4,038,390) (3,852,511)
------------ ------------
Total shareholders' equity 14,078,412 11,856,285
Total liabilities, preferred stock,
common stock and other
shareholders' equity $ 36,442,077 $ 33,772,469
============ ============
48
<PAGE>
For the Years Ended
December 31,
1999 1998 1997
Revenues
Interest on loans $1,000,596 $ 712,120 $ 551,793
Equity in income of BMSBLC 4,341,967 4,333,785 4,791,300
Equity in income of other subsidiaries 2,065,616 901,856 798,482
Other income 103,963 194,400 881,967
---------- ---------- ----------
Total revenues 7,512,142 6,142,161 7,023,542
---------- ---------- ----------
Expenses
Interest expense 327,128 328,920 157,419
Salaries and employee benefits -- 118,917 916,574
Other operating expenses 249,960 553,009 1,156,849
---------- ---------- ----------
Total expenses 577,088 1,000,846 2,230,842
---------- ---------- ----------
Net income 6,935,054 5,141,315 4,792,700
Preferred stock dividends 1,438,992 1,362,659 1,286,320
---------- ---------- ----------
Net income available for
common shareholders $5,496,062 $3,778,656 $3,506,380
========== ========== ==========
49
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 6,915,319 $ 5,141,315 $ 4,792,700
Adjustments to reconcile net cash
(used) provided by operating activities:
Equity in subsidiaries' earnings (6,386,927) (5,226,622) (5,693,211)
Dividends from subsidiaries 2,652,471 5,344,251 2,846,038
Other 1,373,454 (376,356) (162,070)
----------- ----------- -----------
Net Cash (Used) Provided by Operations 4,554,317 4,882,588 1,783,457
----------- ----------- -----------
Cash Flows from Investing Activities:
Loans made to related parties -- (5,000,000) --
Principal collected on loans 143,585 1,401,572 6,226,917
Proceeds from maturity of securities -- (664,104) --
Other (28,641) -- (235,290)
----------- ----------- -----------
Net Cash (Used) Provided by Investing 114,944 (4,262,532) 5,991,627
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from loan participations
with repurchase options - net -- (1,600,000) 1,600,000
(Decrease) increase in other notes
payable -- 5,000,000 --
Capitalization and distribution
of InvestorsBank -- -- (6,160,000)
Preferred stock dividends paid (1,438,992) (1,362,659) (1,286,320)
Common stock dividends paid (3,067,560) (2,656,153) (1,990,055)
Repurchase of common stock (186,640) -- (589,898)
Other -- -- 336,674
----------- ----------- -----------
Net Cash (Used) Provided by Financing (4,693,192) (618,812) (8,089,599)
----------- ----------- -----------
Net (decrease) increase in cash (23,931) 1,244 (314,515)
Cash, beginning of period 28,454 27,210 341,725
----------- ----------- -----------
Cash, end of period $ 4,523 $ 28,454 $ 27,210
=========== =========== ===========
</TABLE>
50
<PAGE>
Schedule I
Condensed Financial Information of Registrant
(Refer to footnote 23 of the financial statements)
Schedule II
Valuation and Qualifying Accounts
Changes in the reserves deducted from assets in the consolidated balance sheet
other than accumulated depreciation for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Balance at Charged Balance
beginning to at end
of period expense Deductions of period
<S> <C> <C> <C> <C>
Reserve for loan losses:
Year ended:
December 31, 1999 $ -- 150,000 -- $150,000
December 31, 1998 $450,000 -- (450,000) $ --
December 31, 1997 $450,000 6,335 (6,335) $450,000
Reserve for doubtful accounts:
Year ended:
December 31, 1999 $ 75,557 234,400 (180,677) $129,280
December 31, 1998 $268,796 95,568 (288,807) $ 75,557
December 31, 1997 $ 98,083 202,379 (31,666) $268,796
Inventory reserve:
Year ended:
December 31, 1999 $466,661 129,421 (360,514) $235,568
December 31, 1998 $207,612 300,326 (41,277) $466,661
December 31, 1997 $ -- 229,446 (21,834) $207,612
</TABLE>
51
<PAGE>
Schedule IV
Mortgage Loans on Real Estate
<TABLE>
<CAPTION>
Principal
amount
Carrying of loans
Amount subject to
Face of delinquent
Final Periodic Amount Mortgages Principal
Interest Maturity Payment Prior of as of or
Description Rate Date Terms Liens Mortgages 12/31/1999 Interest (1)
- ------------------------ ----------- ----------- ------------ ------------ ------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential
First Mortgage 10.625% 6/01/2027 N/A N/A N/A $ 68,164
Commercial
First Mortgage 7.0% to 1/1/00 to N/A N/A N/A 90,843,905 309,383
12.50% 1/01/2015
Second Mortgage 7.5% to 11/1/00 to N/A N/A N/A 7,435,824 62,227
12.25% 9/01/2008
Third Mortgage 7.5% to 11/1/00 to N/A N/A N/A 2,146,857 65,049
12.25% 5/01/2009
Construction 7.0% to 10/1/00 to N/A N/A N/A 5,715,330
8.75% 6/01/2006 -----------
Total Commercial 106,141,916
All others (2) N/A N/A N/A N/A N/A 7,791,568
Total loans (3) $ 114,001,648
============
(1) Delinquent is defined as ninety days or more past due.
(2) This category includes all non-mortgage loans on the balance sheet.
(3) No individual mortgage loan exceeded 3% of the total carrying
value of mortgages.
</TABLE>
52
<PAGE>
Reconciliation of Loans on the Balance Sheet
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Loans on balance sheet,
Beginning of period $116,381,936 $131,035,245 $ 71,456,347 (1)
Additions during the period
Loans made 76,152,875 79,143,575 53,759,887
Loans purchased -- -- 49,647,182
Deductions during period
Principal collected on loans 78,533,163 93,795,015 43,821,836
Principal charged off -- 1,869 6,335
------------ ------------ ------------
Loans on balance sheet,
end of period $114,001,648 $116,381,936 $131,035,245
============ ============ ============
(1) Loans on balance sheet include loan-backed certificates where applicable.
</TABLE>
53
<PAGE>
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant
Pursuant to Instruction G, the information required by this item (with
respect to directors of the registrant) is incorporated herein by reference from
the Company's definitive Proxy Statement involving the election of directors.
The information with respect to executive officers of the Company has been
included in Part I hereof. The definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the Company's year end.
Item 11. Executive Compensation
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
2000 annual meeting of shareholders under the caption "Board of Directors -
Director Compensation" and "Executive Compensation"; provided however, that the
subsection entitled "Executive Compensation - Report on Executive Compensation"
shall not be deemed to be incorporated herein by reference. The definitive proxy
statement will be filed with the Securities and Exchange Commission within 120
days after the Company's year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
2000 annual meeting of shareholders under the caption "Principal Shareholders".
The definitive proxy statement will be filed with the Securities and Exchange
Commission within 120 days after the Company's year end.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
2000 annual meeting of shareholders under the caption "Related Party
Transactions". The definitive proxy statement will be filed with the Securities
and Exchange Commission within 120 days after the Company's year end.
54
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Exhibits
Reference is made to the separate exhibit index contained on page I-1
through I-2 hereof.
2. Financial Statements and Financial Statement Schedules
Reference is made to the separate index in Item 8 of this Annual
Report on Form 10-K with respect to the financial statements and
schedules filed herewith.
3. Reports on Form 8-K
None.
55
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 29, 2000.
BANDO McGLOCKLIN CAPITAL CORPORATION
By: /s/ George R. Schonath
George R. Schonath,
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on March 29, 2000.
Signature Title
/s/ George R. Schonath President and Chief Executive Officer
George R. Schonath (Principal Financial Officer)
/s/ Susan J. Hauke Vice President Finance
Susan J. Hauke (Principal Accounting Officer)
/s/ Salvatore L. Bando Director
Salvatore L. Bando
/s/ Robert A. Cooper Director
Robert A. Cooper
/s/ Peter A. Fischer Director
Peter A. Fischer
/s/ David A. Geraldson, Sr. Director
David A. Geraldson, Sr.
56
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarterly period ended
March 31, 1997).
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Company's
Form 10-Q for the quarterly period ended March 31, 1997).
4.1 Instruments defining the Rights of Security Holders (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the quarterly
period ended March 31, 1999).
4.2 Amended and Restated Credit Agreement dated April 30, 1999, by and
among Bando McGlocklin Small Business Lending Corporation, Firstar
Bank Milwaukee, N.A., as agent, and the Financial Institutions parties
thereto (incorporated by reference to Exhibit 4.1 to the Company's
Form 10-Q for the quarterly period ended March 31, 1999).
4.3 Credit Agreement dated April 30, 1998, between Bando McGlocklin
Captial Corporation and Firstar Bank Milwaukee, N.A., (incorporated by
reference to Exhibit 4.5 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998).
4.4 First Amendment to Credit Agreement dated June 16, 1998, amends and
supplements that certain Credit Agreement dated April 30, 1998,
between Bando McGlocklin Capital Corporation and Firstar Bank
Milwaukee, N.A., (incorporated by reference to Exhibit 4.6 to the
Company's Form 10-Q for the quarterly period ended June 30, 1998).
4.5 Second Amendment to Credit Agreement dated April 30, 1999, amends and
supplements that certain Credit Agreement dated April 30, 1998,
between Bando McGlocklin Capital Corporation and Firstar Bank
Milwaukee, N.A., (incorporated by reference to Exhibit 4.6 to the
Company's Form 10-Q for the quarterly period ended June 30, 1999).
4.6 Loan Participation Certificate and Agreement dated May 1, 1997, by and
between Bando McGlocklin Small Business Lending Corporation and
Security Bank SSB (incorporated by reference to Exhibit 10 to the
Company's Form 10-Q for the quarterly period ended June 30, 1997).
4.7 Master Note Purchase Agreement dated January 1, 1997, between the
State of Wisconsin Investment Board, Bando McGlocklin Small Business
Lending Corporation and Bando McGlocklin Capital Corporation
(incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q
for the quarterly period ended March 31, 1997).
4.8 First Amendment to Master Note Purchase Agreement dated June 1, 1998,
by and among the State of Wisconsin Investment Board, Bando McGlocklin
Small Business Lending Corporation and Bando McGlocklin Capital
Corporation (incorporated by reference to Exhibit 4.2 to the Company's
Form 10-Q for the quarterly period ended June 30, 1998).
4.9 Third Amended and Restated Credit Agreement dated June 1, 1998, by and
among State of Wisconsin Investment Board, Bando McGlocklin Small
Business Lending Corporation and Bando McGlocklin Capital Corporation
(incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q
for the quarterly period ended June 30, 1998).
57
<PAGE>
Exhibit No. Exhibit Description
4.10 Agreement and Plan of Merger dated April 1, 1998, by and among Bando
McGlocklin Small Business Lending Corporation and Bando McGlocklin
Real Estate Investment Corporation (incorporated by reference to
Exhibit 2.1 to the Company's Form 10-Q for the quarterly period ended
September 30, 1998).
4.11 Agreement between Schonath, Kestly, Bando & McGlocklin, Inc. and Bando
McGlocklin Small Business Lending Corporation dated July 13, 1998
(incorporated by reference to Exhibit 2.2 to the Company's Form 10-Q
for the quarterly period ended September 30, 1998).
10.1 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).
10.2 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).
10.3 Bando McGlocklin Capital Corporation 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q
for the quarterly period ended March 31, 1997).
10.4 Management Services and Allocation of Expenses Agreement, dated
September 2, 1997, by and between InvestorsBank and Bando McGlocklin
Capital Corporation (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-K for the fiscal year ended December 31, 1997).
21 List of subsidiaries of Bando McGlocklin Capital Corporation.
27 Financial Data Schedule (with EDGAR filing only).
58
Exhibit 21 List of Subsidiaries
Name of Subsidiary Jurisdiction of Incorporation
Bando McGlocklin Small Business
Lending Corporation Wisconsin
Lee Middleton Original Dolls, Inc. (1) Wisconsin
License Products, Inc. (2) Wisconsin
(1) The registrant owns 100% of the non-voting stock and 99% of the
equity stock.
(2) Lee Middleton Original Dolls, Inc. owns 51% of the common stock.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,040,067
<SECURITIES> 137,299,988
<RECEIVABLES> 3,681,413
<ALLOWANCES> (129,280)
<INVENTORY> 4,784,645
<CURRENT-ASSETS> 1,484,116
<PP&E> 5,031,544
<DEPRECIATION> 1,837,270
<TOTAL-ASSETS> 156,065,524
<CURRENT-LIABILITIES> 77,628,211
<BONDS> 47,974,663
16,908,025
0
<COMMON> 293,441
<OTHER-SE> 13,190,203
<TOTAL-LIABILITY-AND-EQUITY> 156,065,524
<SALES> 23,466,464
<TOTAL-REVENUES> 35,869,656
<CGS> 12,535,759
<TOTAL-COSTS> 12,535,759
<OTHER-EXPENSES> 8,475,809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,969,619
<INCOME-PRETAX> 7,867,337
<INCOME-TAX> 952,018
<INCOME-CONTINUING> 5,476,327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,476,327
<EPS-BASIC> 1.50
<EPS-DILUTED> 1.50
</TABLE>
