UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(i) FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 November 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 September 30, 1998
and December 31, 1997.................... ....................3-4
Consolidated Statement of Operations - For the Three
Months and Nine Months Ended September 30, 1998 and
1997..........................................................5-6
Consolidated Statement of Cash Flows - For the Nine
Months Ended September 30, 1998 and 1997......................7-8
Notes to the Consolidated Financial Statements.................9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................12-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................20
Item 2. Changes in Securities................................................20
Item 3. Defaults Upon Senior Securities......................................20
Item 4. Submission of Matters to a Vote of Security Holders..................20
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signatures..................................................21
Exhibit Index...............................................22
2
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1998 December 31,
1998 1997
ASSETS
Consumer Products:
Cash $ 190,034 $ -
Accounts receivable, net of allowance of
$39,417 and $268,796 as of September 30, 1998 2,290,780 1,958,672
and December 31, 1997, respectively
Inventory 3,813,571 3,280,172
Prepaid expenses 1,218,469 320,339
----------- ----------
Total current assets 7,512,854 5,559,183
----------- ----------
Fixed assets, net of accumulated depreciation of
$962,596 and $756,901 as of September 30, 1998 and
December 31, 1997, respectively 2,443,286 1,666,399
Other assets 2,756,478 943,402
Goodwill, net of accumulated amortization of $12,910
and $0 as of September 30, 1998 and December 31, 606,843
1997, respectively -----------
Total Consumer Products assets 13,319,461 8,168,984
----------- ----------
Financial Services:
Cash 444,040 197,576
Interest receivable 646,438 844,840
Other current assets 212,627 144,700
----------- ----------
Total current assets 1,303,105 1,187,116
----------- ----------
Loans 112,085,983 130,413,277
Less: reserve for loan losses (437,577) (450,000)
Leased properties:
Buildings, net 18,930,984 -
Land 3,028,035 395,843
Construction in progress 30,018 4,001
Fixed assets, net of accumulated depreciation of
$306,457 and $236,869 as of September 30, 1998 and 366,995 427,999
December 31, 1997, respectively
Other assets, net 211,058 190,010
----------- -----------
Total Financial Services assets 135,518,601 132,168,246
----------- -----------
Total Assets $148,838,062 $140,337,230
============ ============
3
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET-(Continued)
(Unaudited)
September 30, December 31,
1998 1997
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products:
Short-term borrowings $ 314,941 $ -
Accounts payable 928,719 948,075
Accrued liabilities 1,166,507 1,179,476
------------- ----------
Total current liabilities 2,410,167 2,127,551
Total current liabilities - 22,936
Long-term debt ------------- ----------
Total Consumer Products liabilities 2,410,167 2,150,487
------------- ----------
Financial Services:
Commercial paper 46,154,992 25,009,972
Notes payable to banks 135,000 7,500,000
------------- -----------
Short-term borrowings 46,289,992 32,509,972
Accrued liabilities 3,800,816 1,090,965
------------- -----------
Total current liabilities 50,090,808 33,600,937
State of Wisconsin Investment Board notes payable 15,333,334 6,000,000
Loan participations with repurchase options 47,770,978 69,250,467
Other notes payable 5,080,237 -
------------- -----------
Total Financial Services liabilities 118,275,357 108,851,404
------------- -----------
Minority interest in subsidiaries 16,890 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 September
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
September 30,1998 and December 31, 1997, before 266,769 266,769
deducting shares in treasury
Additional paid-in capital 13,671,947 13,671,947
Retained earnings 1,141,418 656,597
Treasury stock, at cost (312,438 shares as of
September 30, 1998 and December 31, 1997) (3,852,511) (3,852,511)
-------------- ------------
Total Shareholders' Equity 11,227,623 10,742,802
-------------- ------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $148,838,062 $140,337,230
============== ============
4
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Consumer Products:
Net sales $5,638,757 $ 4,791,450 $12,879,423 $ 12,446,386
Cost of sales 2,870,483 2,415,934 6,639,607 6,474,457
----------- ----------- ----------- ------------
Gross profit 2,768,274 2,375,516 6,239,816 5,971,929
Operating expenses:
Sales and marketing 748,785 576,538 2,102,134 1,522,733
New product development 122,325 171,243 395,050 326,786
General and administrative 493,783 432,643 1,456,357 1,226,863
----------- ----------- ----------- ------------
Total operating expenses 1,364,893 1,180,424 3,953,541 3,076,382
Other income (expense):
Interest expense (26,531) (755) (42,175) (6,243)
Other income, net 9,793 6,933 105,309 42,739
----------- ----------- ----------- ------------
Total other income (expense) (16,738) 6,178 63,134 36,496
Net income before income taxes and 1,386,643 1,201,270 2,349,409 2,932,043
minority interest
Provision for income taxes (441,767) (439,728) (820,707) (1,127,536)
Minority interest in earnings of
subsidiaries (5,475) (359,933) (212,626) (937,970)
------------ ------------ ----------- -----------
Net income 939,401 401,609 1,316,076 866,537
------------ ------------ ----------- -----------
Financial Services:
Revenues:
Interest on loans 2,600,828 3,005,909 8,332,205 8,153,117
Rental income 523,949 - 536,639 -
Other income 80,222 202,915 251,399 800,319
------------ ----------- ----------- -----------
Total Revenues 3,204,999 3,208,824 9,120,243 8,953,436
------------ ----------- ----------- -----------
Expenses:
Interest expense 2,361,240 1,979,686 6,769,688 4,838,647
Other operating expenses 462,270 777,884 1,189,695 2,193,988
------------ ----------- ----------- -----------
Total Expenses 2,823,510 2,757,570 7,959,383 7,032,635
Net income 381,489 451,254 1,160,860 1,920,801
------------ ----------- ----------- -----------
5
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS - (Continued)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Total Company:
Net income before income taxes and
minority interest 1,768,132 1,652,524 3,510,269 4,852,844
Provision for income taxes (441,767) (439,728) (820,707) (1,127,536)
Minority interest in earnings of
subsidiaries (5,475) (359,933) (212,626) (937,970)
------------ ----------- ----------- -----------
Net income $1,320,890 $ 852,863 $2,476,936 $2,787,338
============ =========== ============ ===========
Basic Earnings Per Share $ 0.36 $ 0.23 $ 0.67 $ 0.76
Diluted Earnings Per Share $ 0.36 $ 0.23 $ 0.67 $ 0.75
6
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
Consumer Financial Consumer Financial
Products Services Products Services
Cash Flows from Operating Activities:
Net income $ 1,316,076 $ 1,160,860 $ 866,537 $ 1,920,801
Adjustments to reconcile net cash (used)
provided by operating activities:
Change in appreciation on investment swaps - 45,348 - 308,341
Depreciation and amortization 218,605 211,039 115,572 135,702
Change in minority interest in subsidiaries (1,667,622) - 929,477 -
Increase (decrease) in cash due to change in:
Accounts receivable (332,108) - (1,228,277) -
Inventory (533,399) - (1,904,848) -
Interest receivable - 198,402 - 257,144
Other assets (2,711,206) (57,633) (247,040) (30,707)
Accounts payable (19,356) - 492,031 -
Other liabilities (12,969) 2,361,822 859,023 (173,109)
--------- ----------- --------- ---------
Net Cash (Used) Provided by Operations (3,741,979) 3,919,838 (117,525) 2,418,172
----------- ----------- ---------- ---------
Cash Flows from Investing Activities:
Loans made - (54,725,524) - (41,430,388)
Principal collected on loans - 2,760,651 - 27,209,076
Cash paid for Bando McGlocklin Real Estate - (7,249,856) - -
Investment Corporation's assets
Loans purchased - - - (49,647,182)
Loan and interest charge off - (12,423) - -
Premium expense - net - 13,344 - 62,622
Construction of leased properties - (3,850,389) - -
Land sold - - 74,575 -
7
BANDO McGLOCKLIN CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
Consumer Financial Consumer Financial
Products Services Products Services
Cash Flows from Investing Activities (cont.) :
Purchase of short-term securities - - - (2,625,000)
Proceeds from maturity of securities - - - 2,275,000
Purchase of fixed assets (982,582) (8,584) (524,528) (189,394)
Acquisition of minority interest in subsidiary (619,753) - -
--------- ---------- ---------- -----------
-
Net Cash Used by Investing (1,602,335) 3,072,781) (449,953) (64,345,266)
---------- ---------- ---------- -----------
Cash Flows from Financing Activities:
Increase in short term borrowings 314,941 13,780,020 187,500 4,126,612
Proceeds from loan participations with - (21,479,489) - 65,530,610
repurchase options - net
Proceeds from SWIB note - net - 9,333,334 - (500,000)
(Decrease) Increase in other notes payable (22,936) 5,000,000 (7,598) -
Capitalization and distribution of - - - (6,160,000)
InvestorsBank
Dividends paid - (1,992,115) - (1,326,017)
Proceeds from exercise of stock options - - - 336,674
Repurchase of common stock - - - (589,898)
----------- ---------- --------- -----------
Net Cash Provided by Financing 292,005 4,641,750 179,902 61,417,981
----------- ---------- --------- -----------
Net intercompany transactions 5,242,343 (5,242,343) (144,009) 144,009
Net increase (decrease) in cash 190,034 246,464 (531,585) (365,104)
Cash, beginning of period 197,576 663,936 673,620
----------- ---------- --------- -----------
-
Cash, end of period $ 190,034 $ 444,040 $ 132,351 $ 308,516
=========== ========== ========== =========
8
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.
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 ("BMREIC"), 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.
NOTE 2 - RECLASSIFICATION
Certain amounts in the September 30, 1997 financial statements have been
reclassified to conform to the September 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 nine months ended September 30, 1998 may not be
indicative of the results that may be expected for the year ending December 31,
1998.
9
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:
September 30, December 31,
1998 1997
Raw materials $2,282,417 $1,975,002
Work in process 369,618 282,484
Finished goods 1,348,409 1,230,298
Inventory reserve (186,873) (207,612)
-------- --------
Total $3,813,571 $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
September 30, 1998, under this agreement, the outstanding principal balance was
$135,000.
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 were 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 September 30, 1998, the
outstanding principal balance was $9,833,333.
NOTE 7 - LOANS SOLD
On September 18, 1998, BMSBLC sold $5,331,814 in loans to a third party with an
option to repurchase them at a later date. These loans are sold with full
recourse and have been accounted for as secured financings. 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 September 30, 1998 for
loans which have been sold.
10
NOTE 8 - BUSINESS ACQUISITIONS
In July, 1998, BMSBLC acquired Bando McGlocklin Real Estate Investment
Corporation, an independantly owned operated real estate investement trust
("BMREIC"). This acquisition was accounted for as a purchase. Under the terms of
the Plan of Merger, BMSBIC acquired assets with a fair value of approximatley
$19.6 million, assumed liabilities of approximatley $13.8 million and paid cash
of approximatley $5.1 million to shareholders of BMREIC. Of the liabilities
assumed, approximatley $22.0 million were paid by BMSBLC at the date of 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 agreed upon as part of the acquisition of BMREIC
described above and had been capitalized as part of the purchase price.
NOTE 9 - EARNINGS PER SHARE
See Exhibit 11
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Amounts presented as of September 30, 1998 and December 31, 1997, and for the
three months and the nine months ended September 30, 1998 and September 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 September 30, 1998 and September 30, 1997
The Company's total net income after income taxes and minority interest for the
quarter ended September 30, 1998 equaled $1.32 million or $0.36 per share
(diluted) as compared to $0.85 million or $0.23 per share (diluted) for the
quarter ended September 30, 1997, a 55% increase.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the quarter ended September 30, 1998 was $0.94 million compared to $0.40 million
for the quarter ended September 30, 1997, a 134% increase. As of April 30, 1998
BMIC owned 100% of Middleton Doll as compared with the quarter ended September
30, 1997 when BMIC owned only 51% of Middleton Doll.
Net sales from consumer products for the quarter ended September 30, 1998
increased 18% to $5.64 million compared to $4.79 million for the quarter ended
September 30, 1997. This increase was due to increased sales of $0.52 million at
Middleton Doll and $0.33 million at License Products for the quarter ended
September 30, 1998. Cost of sales increased 19% to $2.87 million for the quarter
ended September 30, 1998 compared to $2.42 million for the quarter ended
September 30, 1997. Gross profit margin remained unchanged at 49%.
Total operating expenses of consumer products for the quarter ended September
30, 1998 were $1.36 million compared to $1.18 million for the quarter ended
September 30, 1997, an increase of 16%. Sales and marketing expense increased
$0.17 million, a 30% increase. $0.09 million of this increase was a result of
License Products hiring additional sales personnel and increased commissions and
royalties as a result of increased sales. Middleton Doll incurred costs of $0.04
million for the design and purchase of point of sale displays and an additional
$0.04 million on trade shows and additional sales personnel. New product
development expense decreased $0.01 million at Middleton Doll and $0.04 million
at License Products for the quarter ended September 30, 1998 compared to the
quarter ended September 30, 1997. These costs were higher during 1997 because of
the reformation of their product lines. General and administrative expenses
increased $0.06 million to $0.49 million for the quarter ended September 30,
1998 compared to $0.43 million for the quarter ended September 30, 1997.
Middleton Doll's expense increased $0.04 million due to expenses stemming from
the continued growth of the company. License Products' expense remained
relatively unchanged and BMIC's expense increased $0.02 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.
12
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
was $0.005 million for the quarter ended September 30, 1998 and $0.36 million
for the quarter ended September 30, 1997. The decrease is the result of BMIC
owning 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
$0.44 million for the quarters ended September 30, 1998 and 1997.
Financial Services
Net income from financial services for the quarter ended September 30, 1998 was
$0.38 million compared to $0.45 million for the quarter ended September 30,
1997, a 15% decrease.
Total revenues were $3.2 million for both the quarter ended September 30, 1998
and the quarter ended September 30, 1997. Interest on loans and rental income
increased 4% to $3.12 million for the quarter ended September 30, 1998 compared
to $3.01 million for the quarter ended June 30, 1997. Interest on loans
decreased 13% to $2.60 million from $3.01 million for the quarters ended
September 30, 1998 and September 30, 1997, respectively. Rental income increased
to $0.52 million for the quarter ended September 30, 1998 compared to zero for
the quarter ended June 30, 1997. The decrease in interest income is the result
of the merger of BMSBLC with Bando McGlocklin Real Estate Investment Corporation
("BMREIC"), an independently owned and operated real estate investment trust.
The Company had financed a portion of BMREIC's rental properties and, as a
result of the merger, loans decreased and rental properties increased.
Other income decreased $0.12 million. Of this amount, $0.08 million were fees
related to the sale of residential mortgages which are now being originated in
InvestorsBank (the "Bank"), a wholly owned subsidiary of InvestorsBancorp, Inc.
The remaining $0.04 million was a reduction in miscellaneous loan fees stemming
from competitive market conditions.
Interest expense increased to $2.36 million for the quarter ended September 30,
1998 as compared to $1.98 million for the quarter ended September 30, 1997.
Interest expense increased approximately $0.11 million as a result of the
repurchase of loans by BMSBLC that had been previously sold and the purchase of
$19.0 million of assets from BMREIC. Those repurchased loans and assets were
funded with new debt. Average debt on the balance sheet increased approximately
$8 million during the quarter ended September 30, 1998 as compared to the
quarter ended September 30, 1997. This repurchase had minimal impact on net
operating income as both interest income and interest expense increased. The
interest rate on the Company's preferred stock reset, effective July 1, 1998,
which resulted in a $0.04 million increase in interest expense. Interest
expense, which is offset by swap income, increased by $0.23 million because of a
decline in swap income due to investment swaps maturing and no new agreements
being entered into.
Operating expenses decreased 40% to $0.46 million for the quarter ended
September 30, 1998 compared to $0.77 million for the quarter ended June 30,
1997. All employees of the Company terminated their employment with the Company
on September 8, 1997 to become employees of the Bank, 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 and
employee benefits decreased $0.21 million, and other operating expenses
decreased $0.11 million. A portion of the reduction in employee benefits expense
was due to a non-recurring stock option adjustment made in 1997. These
reductions were partially offset by an increase in depreciation of $0.09 million
stemming from the merger of BMSBLC with BMREIC. In addition the expense
resulting from the change in
13
appreciation on investment swaps decreased $0.08 million for the three months
ended September 30, 1998. No new investment swaps were entered into during the
quarter ended September 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 $791,344 or $0.21 per share for the
quarter ended September 30, 1998, which differs from book earnings of $381,489
or $0.10 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 September 30, 1997 the taxable income was $696,825 or
$0.19 per share, which differs from book earnings of $451,254 or $0.12 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 nine months ended September 30, 1998 and September 30, 1997
The Company's total net income after income taxes and minority interest for the
nine months ended September 30, 1998 equaled $2.48 million or $0.67 per share
(diluted) as compared to $2.79 million or $0.75 per share (diluted) for the nine
months ended September 30, 1997, an 11% decrease.
Consumer Products
Net income from consumer products after income taxes and minority interest for
the nine months ended September 30, 1998 was $1.32 million compared to $0.87
million for the nine months ended September 30, 1997, a 52% increase. As of
April 30, 1998, BMIC owned 100% of Middleton Doll as compared with the nine
months ended September 30, 1997 when BMIC owned only 51% of Middleton Doll.
Net sales from consumer products for the nine months ended September 30, 1998
increased 3% to $12.88 million compared to $12.45 million for the nine months
ended September 30, 1997. This was due to increased sales of $0.11 million at
Middleton Doll and $0.32 million at License Products. Cost of sales also
increased 3% to $6.64 million for the nine months ended September 30, 1998
compared to $6.47 million for the nine months ended September 30, 1997 as a
result of the increase in sales. Gross profit margin remained constant at 48%
for the nine months ended September 30, 1998 and September 30, 1997.
Total operating expenses of consumer products for the nine months ended
September 30, 1998 were $3.95 million compared to $3.08 million for the nine
months ended September 30, 1997, a 29% increase. Sales and marketing expense
increased $0.58 million, a 38% increase. $0.39 million of this increase is
attributable to Middleton Doll implementing major expansion of trade shows,
including more advertising, personnel and leased space per show, along with
additional promotions such as, point of sale displays. License Products' sales
and marketing expense was up $0.19 million because of their efforts to increase
sales on its new product line. New product development expense increased $0.06
million at Middleton Doll because of two new artists that were introduced late
in 1997 and increased $0.01 million at License Products. General and
administrative expenses increased $0.22 million to $1.45 million for the nine
months ended September 30, 1998 compared to $1.23 million for the nine months
ended September 30, 1997. Middleton Doll's expense increased $0.15 million due
to 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 $0.07 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.
14
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 and the net consolidated earnings of BMIC. The minority interest
in earnings of subsidiaries equaled $0.21 million for the nine months ended
September 30, 1998 compared to $0.94 million for the nine months ended September
30, 1997. The 77% decrease is the result of BMIC owning 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 $0.82 million and $1.13
million for the nine months ended September 30, 1998 and 1997, respectively.
Financial Services
Net income from financial services for the nine months ended September 30, 1998
was $1.16 million compared to $1.92 million for the nine months ended September
30, 1997, a 40% decrease.
Total revenues were $9.12 million for the nine months ended September 30, 1998
compared to $8.95 million for the nine months ended September 30, 1997, a 2%
increase. Interest on loans and rental income increased 9% to $8.87 million for
the nine months ended September 30, 1998 from $8.15 million for the nine months
ended September 30, 1997. Rental income for the period was $0.54 million as a
result of the acquisition of $19 million of leased properties and other assets
through a merger with BMREIC. Interest on loans increased 2% as a result of the
repurchase of $25 million of loans on May 1, 1997 that were previously sold to a
third party. However, most of the increase is offset by a decrease in loans due
to the merger of the Company with BMREIC and the decreasing yield on the
portfolio of loans due to the market's competitive pricing.
Other income decreased $0.55 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 $6.77 million from $4.84 million for the nine
months ended September 30, 1998 as compared with the nine months ended September
30, 1997. Interest expense increased approximately $0.91million as a result of
the repurchase of loans by BMSBLC that had been previously sold and the purchase
of $19.0 million of assets from BMREIC. Those repurchased loans and assets were
funded with new debt. Average debt on the balance sheet increased $24 million
during the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997. This repurchase had minimal impact on net operating
income as both interest income and interest expense increased. The interest rate
on the Company's preferred stock reset effective July 1, 1998 which resulted in
a $0.04 million increase in interest expense. Interest expense, which is offset
by swap income, increased by $0.98 million because of a decline in swap income
due to investment swaps maturing and no new agreements being entered into.
Operating expenses decreased 46% to $1.19 million for the nine months ended
September 30, 1998 compared to $2.19 million for the nine months ended September
30, 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"). The effect of such agreement has
been to reduce the level of operating expenses in the Company. Salaries were
reduced by $0.42 million and other operating expenses were reduced by $0.41
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. The reductions in other operating expense were partially offset
by an increase in depreciation of $0.09 million attributable to the merger with
BMREIC. In addition the expense resulting from the change
15
in appreciation on investment swaps decreased $0.26 million for the nine months
ended September 30, 1998. No new investment swaps were entered into during the
nine months ended September 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 $1,976,895 or $0.54 per share for the
nine months ended September 30, 1998, which differs from book earnings of
$1,160,860 or $0.31 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 nine months ended September 30, 1997 the taxable
income was $1,824,563 or $0.50 per share, which differs from book earnings of
$1,920,801 or $0.52 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 $13.32 million as of September 30, 1998
and $8.17 million as of December 31, 1997, a 63% increase.
Cash increased to $0.19 million at September 30, 1998 from zero at December 31,
1997.
Accounts receivable, net of the allowance, increased to $2.29 million at
September 30, 1998 from $1.96 million at December 31, 1997. An increase of $0.21
million is attributable to License Products, and the remaining $0.12 million is
attributable to Middleton Doll. Both companies are seasonal and typically have
higher sales in the third and fourth quarter of the year, which corresponds to
higher accounts receivable balances.
Inventory was $3.81 million at September 30, 1998 compared to $3.28 million at
December 31, 1997. License Products' inventory was up $0.64 million due to
anticipated sales in a new merchandise line, and Middleton Doll's inventory was
down $0.11 million.
Prepaid assets increased to $1.22 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. $0.50 million is capitalized in current
prepaid assets, and the remaining balance is in other assets. The asset is
amortizing over the remaining life of the agreement.
Fixed assets, net of accumulated depreciation, increased by $0.78 million or 47%
as of September 30, 1998 compared to December 31, 1997. This increase is mainly
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 founder of Middleton Doll, on April 30,
1998. The purchase price exceeded book value by $0.61 million. Other assets
increased to $2.76 million as of September 30, 1998 from $0.94 million as of
December 31, 1997.
Middleton Doll increased its short-term borrowings by borrowing $0.31 million on
a line of credit during the period ended September 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 $0.02 million as of September 30, 1998 compared to
December 31,
16
1997. Middleton Doll's accounts payable decreased $0.24 million while License
Products' accounts payable increased $0.22 million. Other liabilities decreased
by $0.01 million.
Financial Services
Total assets of financial services were $135.52 million as of September 30, 1998
and $132.17 million as of December 31, 1997, a 3% increase.
Total loans on the balance sheet decreased by $18.33 million, or 14%, to $112.09
million at September 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 decreased to $114.2 million as of
September 30, 1998 from $134.6 million as of December 31, 1997. Leased
properties increased to $21.99 million as of September 30, 1998 compared to
$0.40 million as of December 31, 1997. The large increase was the result of the
merger of BMSBLC with BMREIC.
Cash increased to $0.44 million at September 30, 1998 from $0.20 million at
December 31, 1997.
Interest receivable decreased to $0.65 million as of September 30, 1998 from
$0.84 at December 31, 1997. Fixed assets, investment swaps and other assets, in
aggregate increased by only $0.03 million.
The financial services' total consolidated indebtedness at September 30, 1998
increased $6.71 million. $5 million of the increase was for the purchase of the
remaining 49% interest in Middleton Doll and the related right to produce
certain dolls from the estate of Lee Middleton, founder of Middleton Doll. As of
September 30, 1998, financial services had $68.18 million outstanding in
long-term debt and $46.29 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. The Company also 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 second quarter.
Year 2000 Compliance
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operation programs may be unable to distinguish
the Year 2000 from the Year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether.
In 1997, the Company moved into a newly constructed building. The Company
purchased new computer systems during this move and the Year 2000 problem was
factored into the selection of the new equipment. During this time, the Company
identified hardware and software issues required to assure Year 2000 compliance.
The Company began by assessing the issues related to the Year 2000 problem and
the potential for those issues to adversely affect the Company's business and
operations.
The Company has established a Year 2000 management committee to deal with this
issue. It is the mission of this committee to identify areas subject to
complication related to the Year 2000 problem and to initiate remedial measures
designed to eliminate any adverse effects on the Company's business and
operations. The committee has identified all mission-critical software and
hardware
17
that may be adversely affected by the Year 2000 problem and has required its
vendors to represent that the systems and products provided are or will be Year
2000 compliant.
The Company licenses all software used in conducting its business from third
party vendors. None of the Company's software has been internally developed. The
Company has developed a comprehensive list of all software, all hardware and all
service providers used by the Company. Every vendor has been contacted regarding
the Year 2000 problem. The vendor of the primary software in use at the Company
released its Year 2000 compliant software in September 1998. Testing at the
Company, using test scripts developed by the vendor, was completed on October 3,
1998. The vendor will be conducting ongoing proxy testing and seminars and will
report its progress to the Company in a monthly management report. Members of
the committee have joined a peer user group. In addition, the Company continues
to monitor all other major vendors of services to the Company for Year 2000
problems in order to avoid shortages of supplies and services in the coming
months.
There are three third party utilities with which the Company has an important
relationship. The Company has not identified any practical, long-term
alternatives to relying on these companies for basic utility services. In the
event that the utilities significantly curtailed or interrupted their services
to the Company, it would have a significant adverse effect on the Company's
ability to conduct its business.
The Company also has tested all heating and air conditioning units, vault doors,
alarms systems, networks, etc. and is not aware of any significant problems with
such systems.
The Company's cumulative costs of the Year 2000 problem through the third
quarter of 1998 have been $10,000. At the present time, the Company does not
anticipate material cost expenditures in the future to become fully compliant.
However, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results. The estimated total cost of the Year 2000
problem is currently $15,000. This includes costs to upgrade software and
replace equipment specifically for the purpose of Year 2000 compliance and
certain administrative expenditures.
It is not possible at this time to quantify the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service; however, such costs could
be substantial.
The Company is committed to a plan for achieving compliance, focusing not only
on its own data processing systems, but also on its loan customers. The
management committee has proposed policy and procedure changes to help identify
potential risks to the Company and to gain an understanding of how customers are
managing the risks associated with the Year 2000 problem. The Company is
assessing the impact, if any, the Year 2000 problem will have on its credit risk
and loan underwriting. In connection with potential credit risk related to the
Year 2000 problem, the Company has contacted its large commercial loan customers
regarding their level of preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income," which
establishes standards for reporting
18
of comprehensive income and its components. This statement is effective for the
Company as of January 1, 1998. This statement requires that entities classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and surplus in the equity section of a statement of financial
condition. Comprehensive income is composed of net income and "other
comprehensive income." Other comprehensive income includes charges or credits to
equity that are not the result of transactions with the entities' shareholders.
Currently, no items of other comprehensive income result from activities of the
Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information, (SFAS No. 131)" which establishes standards
for the way the Company reports information about its operating segments in its
annual report to shareholders and certain selected information about its
operating segments in interim reports to shareholders. In addition, SFAS No. 131
also requires certain additional disclosures on an enterprise-wide basis
primarily related to geographic information and revenue from major customers.
The Company does not believe that these enterprise-wide disclosures will be
applicable. This statement is effective for fiscal years beginning after
December 15, 1997.
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. ii.
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.
19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any material pending legal
proceeding and no such material proceedings are known to be
contemplated.
Item 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the
Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are
identified on the Exhibit Index hereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1998.
20
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: November 13, 1998 George R. Schonath
President and Chief Executive Officer
/s/ Susan J. Hauke
Date: November 13, 1998 Susan J. Hauke
Chief Accounting Officer
BANDO McGLOCKLIN CAPITAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit
(1)
2.1 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
2.2 Agreement between Schonath, Kestly, Bando & McGlocklin, Inc. and
Bando McGlocklin Small Business Lending Corporation dated July 13,
1998.
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule (EDGAR version only)
22