UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission file number: 0-22663
BANDO McGLOCKLIN CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
W239 N1700 Busse Road
P.O. Box 190 53072-0190
Pewaukee, Wisconsin (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (414) 523-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
On August 14, 1998 there was 3,689,102 shares outstanding of the
Registrant's common stock, 6 2/3 cents par value.
BANDO McGLOCKLIN CAPITAL CORPORATION
FORM 10-Q INDEX
PART I.FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statement of Operations - For the
Three Months and Six Months Ended June 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Consolidated Statement of Cash Flows - For the
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . 7-8
Notes to the Consolidated Financial Statements . . . . . . . . . 9-10
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 11-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 20
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1998 December 31, 1997
ASSETS
Consumer Products:
Cash $ 562,929 $ -
Accounts receivable, net
of allowance of $88,003
and $268,796 as of
June 30, 1998 and
December 31, 1997,
respectively 1,067,803 1,958,672
Inventory 3,957,508 3,280,172
Prepaid expenses 2,688,995 320,339
--------- ---------
Total current assets 8,277,235 5,559,183
--------- ---------
Fixed assets, net of
accumulated depreciation
of $875,760 and $756,901
as of June 30, 1998 and
December 31, 1997,
respectively 1,857,512 1,666,399
Other assets 1,083,516 943,402
Goodwill, net of
accumulated amortization
of $5,164 and $0 as of
June 30, 1998 and
December 31, 1997,
respectively 614,589 -
--------- ---------
Total Consumer Products
assets 11,832,852 8,168,984
--------- ---------
Financial Services:
Cash 438,777 197,576
Interest receivable 844,457 844,840
Other current assets 186,215 144,700
---------- ----------
Total current assets 1,469,449 1,187,116
---------- ----------
Loans 128,130,333 130,413,277
Less: reserve for loan
losses (437,577) (450,000)
Leased properties:
Buildings, net 1,041,738 -
Land 395,682 395,843
Construction in progress 717,548 4,001
Fixed assets, net of
accumulated depreciation
of $284,126 and $236,869
as of June 30, 1998
and December 31, 1997,
respectively 384,471 427,999
Other assets, net 215,784 190,010
---------- ----------
Total Financial Services 131,917,428 132,168,246
assets ----------- -----------
Total Assets $143,750,280 $140,337,230
=========== ===========
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET-(Continued)
(Unaudited)
June 30, 1998 December 31, 1997
LIABILITIES, MINORITY
INTEREST, PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Consumer Products:
Short-term borrowings $ 4,480 $ -
Accounts payable 541,801 948,075
Accrued liabilities 1,043,067 1,179,476
----------- ----------
Total current
liabilities 1,589,348 2,127,551
Long-term debt - 22,936
----------- ----------
Total Consumer Products
liabilities 1,589,348 2,150,487
----------- ----------
Financial Services:
Commercial paper 39,849,800 25,009,972
Notes payable to banks 3,100,000 7,500,000
----------- ----------
Short-term borrowings 42,949,800 32,509,972
Accrued liabilities 967,994 1,090,965
----------- ----------
Total current
liabilities 43,917,794 33,600,937
State of Wisconsin
Investment Board notes
payable 15,666,667 6,000,000
Loan participations with
repurchase options 50,086,260 69,250,467
Other note payable 5,000,000 -
----------- ----------
Total Financial Services
liabilities 114,670,721 108,851,404
----------- -----------
Minority interest in
subsidiaries 11,415 1,684,512
Redeemable Preferred stock,
1 cent par value,
3,000,000 shares
authorized in 1998 and
1997; 674,791 shares
issued and outstanding
after deducting 15,209
shares in treasury as of
June 30, 1998 and
December 31, 1997 16,908,025 16,908,025
Shareholders' Equity
Common stock, 6 2/3 cents
par value, 15,000,000
shares authorized in 1998
and 1997, 4,001,540 shares
issued and outstanding as
of June 30, 1998 and
December 31, 1997, before
deducting shares in
treasury 266,769 266,769
Additional paid-in capital 13,671,947 13,671,947
Retained earnings 484,566 656,597
Treasury stock, at cost
(312,438 shares as of
June 30, 1998 and
December 31, 1997) (3,852,511) (3,852,511)
----------- -----------
Total Shareholders'
Equity 10,570,771 10,742,802
----------- -----------
Total Liabilities,
Minority Interest,
Preferred Stock and
Shareholders' Equity $ 143,750,280 $140,337,230
============ ===========
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Consumer Products:
Net sales $ 3,808,899 $ 4,625,296 $ 7,240,666 $ 7,654,936
Cost of sales 1,949,684 2,421,389 3,769,124 4,058,523
---------- ---------- ---------- ----------
Gross profit 1,859,215 2,203,907 3,471,542 3,596,413
Operating expenses:
Sales and marketing 683,494 568,094 1,353,349 946,195
New product
development 141,142 81,212 272,725 155,543
General and
administrative 407,709 419,751 962,574 794,220
---------- ---------- ---------- ----------
Total operating
expenses 1,232,345 1,069,057 2,588,648 1,895,958
Other income
(expense):
Interest expense (10,852) (65) (15,644) (5,488)
Other income, net 85,862 23,370 95,516 35,806
---------- ---------- ---------- ----------
Total other income
(expense) 75,010 23,305 79,872 30,318
Net income before
income taxes and
minority interest 701,880 1,158,155 962,766 1,730,773
Provision for income
taxes (238,786) (461,983) (378,940) (687,808)
Minority interest in
earnings of
subsidiaries (98,543) (388,203) (207,151) (578,037)
---------- ---------- ---------- ----------
Net income 364,551 307,969 376,675 464,928
---------- ----------- ---------- ----------
Financial Services:
Revenues:
Interest on loans 2,893,220 2,720,098 5,731,377 5,147,208
Rental income 12,690 - 12,690 -
Other income 83,917 624,176 171,177 597,404
---------- ---------- ---------- ----------
Total Revenues 2,989,827 3,344,274 5,915,244 5,744,612
---------- ---------- ----------- ----------
Expenses:
Interest expense 2,240,502 1,600,068 4,408,448 2,858,961
Other operating
expenses 413,677 749,432 727,425 1,416,104
----------- ---------- ---------- -----------
Total Expenses 2,654,179 2,349,500 5,135,873 4,275,065
Net income 335,648 994,774 779,371 1,469,547
----------- ----------- ---------- -----------
Total Company:
Net income before
income taxes and
minority interest 1,037,528 2,152,929 1,742,137 3,200,320
Provision for income
taxes (238,786) (461,983) (378,940) (687,808)
Minority interest in
earnings of
subsidiaries (98,543) (388,203) (207,151) (578,037)
---------- ---------- ---------- ----------
Net income $ 700,199 $ 1,302,743 $ 1,156,046 $ 1,934,475
=========== =========== =========== ===========
Basic Earnings Per
Share $ 0.19 $ 0.35 $ 0.31 $ 0.52
Diluted Earnings Per
Share $ 0.19 $ 0.35 $ 0.31 $ 0.52
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended Six months ended
June 30, 1998 June 30, 1997
Consumer Financial Consumer Financial
Products Services Products Services
Cash Flows from Operating
Activities:
Net income $ 376,675 $ 779,371 $ 464,928 $ 1,469,547
Adjustments to reconcile net
cash (used) provided by
operating activities:
Change in appreciation on
investment swaps - 32,875 - 217,232
Depreciation and
amortization 124,023 74,198 40,512 87,611
Change in minority
interest in subsidiaries (1,673,097) - 578,037 -
Increase (decrease) in
cash due to change in:
Accounts receivable 890,869 - (845,238) -
Inventory (677,336) - (550,242) -
Interest receivable - 383 - 162,295
Other assets (2,508,770) (140,449) (462,727) 126,281
Accounts payable (406,274) - 342,312 -
Other liabilities (136,409) (122,971) 430,658 667,467
--------- ---------- ---------- ----------
Net Cash (Used) Provided by
Operations (4,010,319) 623,407 (1,760) 2,730,433
--------- ---------- ---------- ---------
Cash Flows from Investing
Activities:
Loans made - (41,776,831) - (24,973,379)
Principal collected on loans - 44,059,775 - 17,580,922
Loans purchased - - - (49,647,182)
Loan and interest charge off - (12,423) - -
Premium expense net - 13,344 - 60,457
Construction of leased
properties - (1,755,124) - -
Land sold - - 74,575 -
Purchase of short-term
securities - - - (2,625,000)
Proceeds from maturity of
securities - - - 175,000
Purchase of fixed assets (309,972) (3,729) (326,226) (166,117)
Acquisition of minority
interest in subsidiary (619,753) - - -
--------- ----------- --------- ----------
Net Cash (Used) Provided
by Investing (929,725) 525,012 (251,651) (59,595,299)
--------- ----------- --------- ----------
Cash Flows from Financing
Activities:
Increase in short term
borrowings 4,480 10,439,828 - 841,309
Proceeds from loan
participations with
repurchase options
net - (19,164,207) - 57,370,739
Proceeds from SWIB
note net - 9,666,667 - (333,334)
(Decrease) Increase in
other notes payable (22,936) 5,000,000 (5,034) -
Dividends paid - (1,328,077) - (661,979)
Proceeds from exercise of
stock options - - - 245,153
Repurchase of common stock - - - (589,898)
--------- ---------- ---------- ----------
Net Cash (Used) Provided by (18,456) 4,614,211 (5,034) 56,871,990
Financing --------- ---------- --------- ----------
Net intercompany transactions 5,521,429 (5,521,429) (195,383) 195,383
Net increase (decrease)
in cash 562,929 241,201 (453,828) 202,507
Cash, beginning of period - 197,576 663,936 673,620
--------- ----------- --------- ----------
Cash, end of period $ 562,929 $ 438,777 $ 210,108 $ 876,127
========= =========== ========= ==========
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 NATURE OF BUSINESS
The consolidated financial statements of Bando McGlocklin Capital
Corporation (the "Company") include two segments of business: financial
services and consumer products. The consolidated financial statements as
of and for the periods presented include the accounts of the Company and
Bando McGlocklin Small Business Lending Corporation ("BMSBLC") as
financial services companies and Bando McGlocklin Investment Corporation,
Lee Middleton Original Dolls, Inc. ("Middleton Doll") and License
Products, Inc. ("License Products") as consumer product companies. On
April 30, 1998 the Company acquired the remaining 49% interest of
Middleton Doll and the right to produce certain dolls for $5 million in
cash. All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 RECLASSIFICATION
Certain amounts in the June 30, 1997 financial statements have been
reclassified to conform to the June 30, 1998 presentation. These
reclassifications have no effect on the retained earnings or net income
previously reported.
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the
Company and its majority-owned subsidiaries have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the other information and disclosures required by generally accepted
accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
The accompanying consolidated financial statements have not been audited
by independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management such financial statements
include all adjustments, consisting only of normal recurring accruals,
necessary to summarize fairly the Company's financial position and results
of operations. The results of operations for the three months ended June
30, 1998 may not be indicative of the results that may be expected for the
year ending December 31, 1998.
NOTE 4 INVENTORY
Inventories of Middleton Doll and License Products are valued at the lower
of cost or market. Middleton Doll and License Products utilize the
average cost method to determine cost. The components of inventory are as
follows:
June 30, December 31,
1998 1997
Raw materials $2,109,829 $1,975,002
Work in process 285,376 282,484
Finished goods 1,749,036 1,230,298
Inventory reserve (186,733) (207,612)
--------- ---------
Total $3,957,508 $3,280,172
NOTE 5 SHORT-TERM BORROWINGS
BMSBLC entered into one loan agreement with four participating banks as of
March 11, 1998. As of June 9, 1998 the agreement was amended to add a
fifth participant bank. The current loan agreement provides for a maximum
of $60,000,000 less the outstanding principal amount of commercial paper.
The facility bears interest at the prime rate or at the 30-, 60- or 90-day
LIBOR plus one and three-eighths percent. Interest is payable monthly,
and the loan agreement expires on April 30, 1999. BMSBLC is also required
to pay a commitment fee equal to 1/2 of 1% per year on the unused amount of
the loan commitment. At June 30, 1998, under this agreement, the
outstanding principal balance was $3,100,000.
On April 30, 1998, BMCC entered into a credit agreement with one of its
correspondent banks providing for a note of $5,000,000 bearing interest at
the prime rate. The credit agreement expires on April 30, 1999. The
proceeds from the new note was for the purchase of the remaining 49%
interest in Middleton Doll and the right to produce certain dolls.
NOTE 6 LONG-TERM DEBT
On June 12, 1998, BMSBLC borrowed an additional $10,000,000 from the State
of Wisconsin Investment Board pursuant to a term note which bears interest
at a fixed rate of 6.98% per year through its maturity. The note is
payable in equal quarterly installments of $166,667 with a final payment
of unpaid principal due on June 1, 2013, and is secured by specific loans.
At June 30, 1998, the outstanding principal balance was $10,000,000.
NOTE 7 EARNINGS PER SHARE
See Exhibit 11
NOTE 8 SUBSEQUENT EVENTS
On July 14, 1998 BMSBLC completed an acquisition of $19 million of leased
properties and other assets through a merger with Bando McGlocklin Real
Estate Investment Corporation, an independently owned and operated real
estate investment trust. The leased portfolio, which has a cost of
approximately $18 million, consists of 18 owner-occupied properties in the
greater Milwaukee area that are leased to a variety of manufacturing and
service businesses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Amounts presented as of June 30, 1998 and December 31, 1997, and for the
three months and the six months ended June 30, 1998 and June 30, 1997
include the consolidation of two segments. The financial services segment
includes Bando McGlocklin Capital Corporation (the "Company") and Bando
McGlocklin Small Business Lending Corporation ("BMSBLC"), a 100% owned
subsidiary of the Company. The consumer products segment includes Bando
McGlocklin Investment Corporation ("BMIC"), a 99%-owned subsidiary of the
Company; Lee Middleton Original Dolls, Inc. ("Middleton Doll") and License
Products, Inc. ("License Products"), 100% and 51%-owned subsidiaries of
BMIC, respectively. As of April 30, 1998 BMIC owned 100% of Middleton
Doll; prior to that date BMIC owed 51% of Middleton Doll.
Results of Operations
For the three months ended June 30, 1998 and June 30, 1997
The Company's total net income after income taxes and minority interest
for the quarter ended June 30, 1998 equaled $0.70 million or $0.19 per
share (diluted) as compared to $1.30 million or $0.35 per share (diluted)
for the quarter ended June 30, 1997, a 46% decrease.
Consumer Products
Net income from consumer products after income taxes and minority interest
for the quarter ended June 30, 1998 was $0.36 million compared to $0.31
million for the quarter ended June 30, 1997, a 16% increase. However, as
of April 30, 1998 BMIC owned 100% of Middleton Doll as compared with the
quarter ended June 30, 1997 when BMIC owned only 51% of Middleton Doll.
Net sales from consumer products for the quarter ended June 30, 1998
decreased 18% to $3.81 million from $4.63 million in the corresponding
prior year period. This decrease was due to decreased sales of $0.75
million at Middleton Doll and $0.07 million at License Products for the
quarter ended June 30, 1998. Cost of sales also decreased 19% to $1.95
million for the quarter ended June 30, 1998 from $2.42 million for the
prior year quarter. Gross profit margin increased slightly to 49% for the
quarter ended June 30, 1998 from 48% for the quarter ended June 30, 1997.
Total operating expenses of consumer products for the quarter ended June
30, 1998 were $1.23 million compared to $1.07 million for the quarter
ended June 30, 1997, a 15% increase. Sales and marketing expense
increased $0.12 million, a 20% increase. $0.07 million of this increase
was a result of Middleton Doll hiring additional sales and customer
service personnel and increasing the company's participation in trade
shows, and increased promotions. In addition, Middleton Doll's payment of
commissions increased $0.09 million due to dealer sales being up nearly
40% in the quarter ended June 30, 1998. Offsetting these increases,
Middleton Doll's payment of royalties decreased by $0.08 million. License
Products' sales and marketing expense increased $0.04 million. New
product development expense increased $0.03 million at Middleton Doll
because of two new artists that were introduced late in 1997 and increased
$0.03 million at License Products because of the reformation of its
product lines into new catalogs. General and administrative expenses
decreased $0.01 million to $0.41 million for the quarter ended June 30,
1998 compared to $0.42 million for the quarter ended June 30, 1997.
Middleton Doll's expense increased $0.01 million due to related expenses
stemming from the continued growth of the company. License Products'
expense decreased $0.03 million due to non-recurring professional fees
that were expenses in the prior period and BMIC's expense increased
$0.01million as a result of additional expenses for officers.
The consumer products' consolidated net income was reduced by the minority
interest ownership in the net earnings of Middleton Doll and the net
consolidated earnings of BMIC. The minority interest in earnings of
subsidiaries equaled $0.10 million for the quarter ended June 30, 1998 and
$0.38 million for the quarter ended June 30, 1997. The decrease is the
result of BMIC owing 100 % of the stock of Middleton Doll as of April 30,
1998. The consumer products' consolidated net income was reduced by a
provision for income taxes of $0.24 million and $0.46 million for the
quarters ended June 30, 1998 and 1997, respectively.
Financial Services
Net income from financial services for the quarter ended June 30, 1998 was
$0.34 million compared to $0.99 million for the quarter ended June 30,
1997, a 66% decrease.
Total revenues were $2.99 million for the quarter ended June 30, 1998
compared to $3.34 million for the quarter ended June 30, 1997, a 10%
decrease. Interest on loans increased 6% to $2.89 million for the quarter
ended June 30, 1998 from $2.72 million for the comparative quarter as a
result of the repurchase of loans that were previously sold to a third
party. However, some of the increase is offset by the decreasing yield on
the portfolio of loans due to the market's competitive pricing.
Other income decreased $0.54 million. Of this amount, $0.50 million was
the result of receiving the proceeds of an executive's life insurance
policy where BMCC was the beneficiary in the second quarter of 1997. In
addition, during the quarter ended June 30, 1998 financial services had
premium expense of $8,690 relating to repurchasing of loans from third
parties compared to income of $8,270 for the quarter ended June 30, 1997.
Interest expense increased to $2.24 million for the quarter ended June 30,
1998 as compared to $1.60 million for the quarter ended June 30, 1997.
Interest expense increased approximately $0.29 million as a result of the
repurchase of loans by BMSBLC that had been previously sold. Those
repurchased loans were funded with new debt. Average debt increased
approximately $23 million during the quarter ended June 30, 1998 as
compared to the quarter ended June 30, 1997. This repurchase had minimal
impact on net operating income as both interest income and interest
expense increased. Interest expense, which is offset by swap income,
increased by $0.35 million because of a decline in swap income due to
investment swaps maturing and no new agreements being entered into.
Operating expenses decreased 45% to $0.41 million for the quarter ended
June 30, 1998 from $0.75 million for the prior year quarter. All employees
of the Company terminated their employment with the Company on September
8, 1997 to become employees of InvestorsBank (the "Bank"), a wholly owned
subsidiary of InvestorsBancorp, Inc., except for certain executive
officers who are employees of both the Company and the Bank. The Company
and the Bank entered into a Management Services and Allocation of
Operating Expenses Agreement (the "Agreement"). The effect of such
agreement has been to reduce the level of operating expenses of the
Company. Salaries were reduced by $0.11 million and other operating
expenses were reduced by $0.23 million. A portion of the other operating
expenses was reduced as a result of non-recurring professional fees that
were incurred in 1997 due to the restructuring. In addition the expense
resulting from the change in appreciation on investment swaps decreased
$0.07 million for the three months ended June 30, 1998. No new investment
swaps were entered into during the quarter ended June 30, 1998.
The financial services segment is comprised of two entities that intend to
qualify as a real estate investment trust ("REIT") under the code. Under
REIT status, the Company, together with its qualified REIT subsidiary,
BMSBLC, will continue to not be subject to income tax on taxable income
which is distributed to shareholders. The taxable income was $660,564 or
$0.18 per share for the quarter ended June 30, 1998, which differs from
book earnings of $335,648 or $0.09 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 quarter ended
June 30, 1997 the taxable income was $539,709 or $0.15 per share, which
differs from book earnings of $994,774 or $0.27 per share due to impact of
the elimination of intercompany revenue and expenses from the consumer
products segment and normal book/tax adjustments.
For the six months ended June 30, 1998 and June 30, 1997
The Company's total net income after income taxes and minority interest
for the six months ended June 30, 1998 equaled $1.16 million or $0.31 per
share (diluted) as compared to $1.93 million or $0.52 per share (diluted)
for the six months ended June 30, 1997, a 40% decrease.
Consumer Products
Net income from consumer products after income taxes and minority interest
for the six months ended June 30, 1998 was $0.38 million compared to $0.46
million for the six months ended June 30, 1997, a 17% decrease.
Net sales from consumer products for the six months ended June 30, 1998
decreased 5% to $7.24 million from $7.65 million in the corresponding
prior year period. This decrease was due to decreased sales of $0.41
million at Middleton Doll. License Products' sales were flat for the six
months ended June 30, 1998. Cost of sales also decreased 7% to $3.77
million for the six months ended June 30, 1998 from $4.06 million for the
prior year period. The decrease is the result of Middleton Doll's
decrease in sales. License Products' cost of sales remained constant.
Gross profit margin increased slightly to 48% for the six months ended
June 30, 1998 from 47% for the six months ended June 30, 1997.
Total operating expenses of consumer products for the six months ended
June 30, 1998 were $2.59 million compared to $1.90 million for the six
months ended June 30, 1997, a 36% increase. Sales and marketing expense
increased $0.41 million, a 43% increase. The majority of this increase
was a result of Middleton Doll hiring additional sales personnel and
implementing major expansion of trade shows, including more advertising
and more leased space per show and additional promotions. License
Products' sales and marketing expense increased $0.10 million. New
product development expense increased $0.07 million at Middleton Doll
because of two new artists that were introduced late in 1997 and increased
$0.05 million at License Products because of the reformation of its
product lines into new catalogs. General and administrative expenses
increased $0.17 million to $0.96 million for the six months ended June 30,
1998 compared to $0.79 million for the six months ended June 30, 1997.
Middleton Doll's expense increased $0.11 million due to a new collector
club that was started in April 1997 and increased personnel and related
expenses stemming from the continued growth of the company. License
Products' general and administrative expense remained flat and BMIC's
expense increased $0.06 million as a result of additional salaries for
officers.
The consumer products' consolidated net income was reduced by the minority
interest ownership in the net earnings of Middleton Doll and the net
consolidated earnings of BMIC. The minority interest in earnings of
subsidiaries equaled $0.21 million for the six months ended June 30, 1998
and $0.58 million for the six months ended June 30, 1997. The 64%
decrease is the result of BMIC owing 100% of the stock of Middleton Doll
as of April 30, 1998. The consumer products' consolidated net income was
reduced by a provision for income taxes of $0.38 million and $0.69
million for the six months ended June 30, 1998 and 1997, respectively.
Financial Services
Net income from financial services for the six months ended June 30, 1998
was $0.78 million compared to $1.47 million for the six months ended June
30, 1997, a 47% decrease.
Total revenues were $5.92 million for the six months ended June 30, 1998
compared to $5.74 million for the six months ended June 30, 1997, a 3%
increase. Interest on loans increased 11% to $5.73 million for the six
months ended June 30, 1998 compared to $5.15 million for the comparative
six months as a result of the repurchase of $25 million of loans on May 1,
1997 that were previously sold to a third party. However, some of the
increase is offset by the decreasing yield on the portfolio of loans due
to the market's competitive pricing.
Other income decreased $0.43 million. Of this amount, $0.50 million was
the result of receiving the proceeds of an executive's life insurance
policy where BMCC was the beneficiary in the second quarter of 1997.
Rental income and interest from short-term securities was up $0.02
million. In addition, during the six months ended June 30, 1998 financial
services had premium expense of $0.01 million relating to repurchasing of
loans from third parties compared to expense of $0.06 million for the six
months ended June 30, 1997.
Interest expense increased to $4.41 million from $2.86 million for the six
months ended June 30, 1998 as compared with the six months ended June 30,
1997. Interest expense increased approximately $0.80 million as a result
of the repurchase of loans by BMSBLC that had been previously sold. Those
repurchased loans were funded with new debt. Average debt increased $27
million during the six months ended June 30, 1998 as compared to the six
months ended June 30, 1997. This repurchase had minimal impact on net
operating income as both interest income and interest expense increased.
Interest expense, which is offset by swap income, increased by $0.75
million because of a decline in swap income due to investment swaps
maturing and no new agreements being entered into.
Operating expenses decreased 48% to $0.73 million for the six months ended
June 30, 1998 from $1.42 million for the prior year six months. All
employees of the Company terminated their employment with the Company on
September 8, 1997 to become employees of InvestorsBank (the "Bank"), a
wholly owned subsidiary of InvestorsBancorp, Inc., except for certain
executive officers who are employees of both the Company and the Bank. The
Company and the Bank entered into a Management Services and Allocation of
Operating Expenses Agreement (the "Agreement"). The effect of such
agreement has been to reduce the level of operating expenses in the
Company. Salaries were reduced by $0.20 million and other operating
expenses were reduced by $0.49 million. A portion of the other operating
expenses was reduced as a result of non-recurring professional fees that
were incurred in 1997 due to the restructuring. In addition the expense
resulting from the change in appreciation on investment swaps decreased
$0.05 million for the six months ended June 30, 1998. No new investment
swaps were entered into during the six months ended June 30, 1998.
The financial services segment is comprised of two entities that intend to
qualify as a real estate investment trust ("REIT") under the code. Under
REIT status, the Company, together with its qualified REIT subsidiary,
BMSBLC, will continue to not be subject to income tax on taxable income
which is distributed to shareholders. The taxable income was $1,185,551
or $0.32 per share for the six months ended June 30, 1998, which differs
from book earnings of $779,371 or $0.21 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 six months
ended June 30, 1997 the taxable income was $1,127,738 or $0.31 per share,
which differs from book earnings of $1,469,547 or $0.40 per share due to
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 $11.83 million as of June 30, 1998
and $8.17 million as of December 31, 1997, a 45% increase.
Cash increased to $0.56 million at June 30, 1998 from zero at December 31,
1997.
Accounts receivable, net of the allowance, decreased to $1.07 million at
June 30, 1998 from $1.96 million at December 31, 1997. A decrease of
$0.82 million is attributable to Middleton Doll, and the remaining $0.07
million is attributable to License Products. Both companies are seasonal
and typically have lower sales in the first and second quarter of the
year, which corresponds to lower accounts receivable balances.
Inventory was $3.96 million at June 30, 1998 compared to $3.28 million at
December 31, 1997. $0.36 million is the result of Middleton Doll's
anticipated sales for the third and fourth quarter and $0.32 million is
the result of License Products' anticipated sales in a new merchandise
line. Both companies are seasonal and typically report their highest
sales in the third and fourth quarter of the year.
Prepaid assets increased significantly in the second quarter to $2.69
million from $0.32 million as of December 31, 1997. On April 30, 1998
Middleton Doll bought the licensing agreement to produce Lee Middleton
dolls for $2.5 million which was capitalized and will amortize over the
remaining life of the agreement.
Fixed assets, net of accumulated depreciation, increased by $0.19 million
or 11% as of June 30, 1998 compared to December 31, 1997. $0.16 million
is the result of Middleton Doll's construction of a new addition to the
manufacturing plant in Ohio.
Goodwill was created when the company purchased the remaining 49% of the
stock from the estate of Lee Middleton, the company founder, on April 30,
1998. The purchase price exceeded book value by $0.61 million. Other
assets increased to $1.08 million as of June 30, 1998 from $0.94 million
as of December 31, 1997.
Middleton Doll increased its short-term borrowings by borrowing $4,480 on
a line of credit with InvestorsBank during the quarter ended June 30,
1998. Middleton Doll also paid off a long-term note payable of $0.02
million with another bank during the first quarter.
Accounts payable decreased by $0.41 million as of June 30, 1998 compared
to December 31, 1997. Middleton Doll's accounts payable decreased $0.32
million while License Products' accounts payable decreased $0.09 million.
Other liabilities decreased by $0.14 million.
Financial Services
Total assets of financial services were $131.92 million as of June 30,
1998 and $132.17 million as of December 31, 1997, a minimal decrease.
Total loans on the balance sheet decreased by $2.28 million, or 2%, to
$128.13 million at June 30, 1998 from $130.41 million at December 31,
1997. The Company's loan loss reserve decreased by $0.01 million due to a
charge off of a loan. The Company's loans under management increased to
$138.2 million as of June 30, 1998 from $134.6 million as of December 31,
1997. Leased properties under construction increased by $1.76 million as a
result of two new buildings. One of the buildings was complete as of June
1 and the other building is expected to be completed as of September 1.
Cash increased to $0.44 million at June 30, 1998 from $0.20 million at
December 31, 1997.
Interest receivable remained unchanged at $0.84 million as of June 30,
1998 and December 31, 1997. Fixed assets, investment swaps and other
assets, in aggregate increased by only $0.02 million.
The financial services' total consolidated indebtedness at June 30, 1998
increased $5.94 million. $5 million of the increase was for the purchase
of the remaining 49% interest in Lee Middleton Original Doll Company, Inc.
and related right to produce certain dolls from the estate of company
founder Lee Middleton. As of June 30, 1998, financial services had $70.75
million outstanding in long-term debt and $42.95 million outstanding in
short-term borrowings compared to$75.25 million outstanding in long-term
debt and $32.51 million outstanding in short-term borrowings as of
December 31, 1997. Financial services' short-term facility increased from
$50 million to $60 million during the quarter ended June 30, 1998. BMSBLC
also entered into a $10 million long-term note payable secured with real
estate. BMCC entered into a $5 million annually renewable note secured by
the stock of Middleton Doll. As a result of the increase in the short-
term facility and long-term facility, the Company paid off some higher
cost participations during the quarter. The additional $20 million in debt
allowed financial services to purchase $18 million in leased property
during July 1998.
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and
software include those developed and maintained by the Company's data
processing provider and purchased software which is run on in-house
computer networks. In 1997, the Company initiated a review and assessment
of all hardware and software to confirm that it will function properly in
the year 2000. The Company's data processing provider and those vendors
who have been contacted indicate that their hardware and/or software will
be Year 2000 compliant by the end of 1998. This will allow time for
compliance testing. Some of the providers have completed their testing
while others will be testing this fall. Additionally, alarms, heating and
cooling systems and other computer-controlled mechanical devices on which
the Company relies have been evaluated. Those found not to be in
compliance will be modified or replaced with a compliant product. The
Company has identified four computers that will need to be replaced and
the operating system will be upgraded to become Year 2000 compliant. The
costs associated with these upgrades are approximately $5,000.
An unknown element at this time is the impact of the Year 2000 on the
Company's borrowing customers and their ability to repay. The Company has
initiated a program to communicate with key customers to ensure they are
properly prepared for the year 2000 and will not suffer serious adverse
consequences. The Company has also added new covenants to its loan
documents that the borrower be Year 2000 compliant. Nevertheless, if not
properly addressed, Year 2000 related computer issues could result in
interruptions to the operations of the Company and have a material adverse
effect on the Company's results of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal
years beginning after June 15, 1999. The Company does not believe this
statement will have a material impact.
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995
This report contains certain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Exchange Act. The Company intends such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and is
including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and
describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "may," "will," "could,"
"believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. The Company's ability to predict results or the
actual effect of future plans or strategies is inherently uncertain.
Factors which could have a material adverse effect on the operations and
future prospects of the Company and the subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
including the condition of the local real estate market,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand
for financial services in the Company's market area, demand for the
Company's consumer products and accounting principles and policies. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any material pending legal
proceeding and no such material proceedings are known to be
contemplated.
Item 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the
Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an annual meeting of shareholders of the Company held on May
7, 1998, the Bando McGlocklin Capital Corporation 1997 Stock
Option Plan was approved by the shareholders. The results of
the balloting were as follows:
Shares Voted
Shares Voted For Against Broker Non-Votes
2,610,105 127,600 950,956
Item 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, for inclusion in the Company's proxy statement for its
1999 Annual Meeting of Shareholders is December 9, 1998.
Additionally, if the Company receives notice of a shareholder
proposal after February 22, 1999, the persons named in proxies
solicited by the Board of Directors of the Company for its 1999
Annual Meeting of Shareholders may exercise discretionary voting
power with respect to such proposals.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are
identified on the Exhibit Index hereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunder duly authorized.
BANDO McGLOCKLIN CAPITAL CORPORATION
(Registrant)
/s/ George R. Schonath
Date: August 14, 1998 George R. Schonath
President and Chief Executive Officer
/s/ Susan J. Hauke
Date: August 14, 1998 Susan J. Hauke
Chief Accounting Officer
BANDO McGLOCKLIN CAPITAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit
4.1 Third Amended and Restated Credit Agreement, dated as
of June 1, 1998, by and among, State of Wisconsin
Investment Board, Bando McGlocklin Small Business
Lending Corporation and Bando McGlocklin Capital
Corporation.
4.2 First Amendment to Master Note Purchase Agreement,
dated as of June 1, 1998, by and among, State of
Wisconsin Investment Board, Bando McGlocklin Small
Business Lending Corporation and Bando McGlocklin
Capital Corporation.
4.3 First Amendment to Credit Agreement, dated as of June
9, 1998, amends and supplements that certain Credit
Agreement dated as of March 11, 1998, by and among,
Bando McGlocklin Small Business Lending Corporation,
the financial institutions from time to time party
thereto and Firstar Bank Milwaukee.
4.4 Second Amendment to Credit Agreement, dated as of July
14, 1998, amends and supplements that certain Credit
Agreement dated as of March 11, 1998, by and among,
Bando McGlocklin Small Business Lending Corporation,
the financial institutions from time to time party
thereto and Firstar Bank Milwaukee.
4.5 Credit Agreement dated as of April 30, 1998, by and
among, Bando McGlocklin Capital Corporation and Firstar
Bank Milwaukee
4.6 First Amendment to Credit Agreement, dated as of June
16, 1998, amends and supplements that certain Credit
Agreement dated as of April 30, 1998, by and among,
Bando McGlocklin Capital Corporation and Firstar Bank
Milwaukee
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule (EDGAR version only)