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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002
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
THE MIDDLETON DOLL COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-4300
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 13, 2002, there were 3,727,589 shares outstanding of the
Registrant's common stock, 6-2/3 cents par value.
THE MIDDLETON DOLL COMPANY
FORM 10-Q INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(Unaudited) and December 31, 2001 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations - For the Three
and Nine Months Ended September 30, 2002 and 2001
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Changes in Shareholders'
Equity - For the Nine Months Ended September 30, 2002
and 2001 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows - For the Nine
Months Ended September 30, 2002 and 2001 (Unaudited) . . . . . . . 8
Notes to the Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . .11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . .19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . .19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . .19
Item 4. Submission of Matters to a Vote of Security Holders . . . .19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . .19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . .19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . .23
2
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Consumer Products
Cash $ 348,613 $ 681,267
Accounts receivable, net of allowance of
$312,086 and $326,389 as of September 30,
2002 and December 31, 2001, respectively 2,807,924 3,954,444
Inventory 7,022,980 6,093,822
Prepaid inventory 313,079 676,943
Prepaid corporate taxes 102,854 798,262
Other prepaid expenses 305,918 296,065
------------ ------------
Total current assets 10,901,368 12,500,803
Property and equipment, net of accumulated
depreciation of $2,838,681 and $2,240,331
as of September 30, 2002 and December 31,
2001, respectively 4,161,584 4,150,695
Loan - 621,968
Prepaid expenses and other assets 1,234,733 725,432
Licensing agreement, net of accumulated 291,666 666,666
amortization of $2,208,334 and $1,833,334
as of September 30, 2002 and December 31,
2001, respectively
Goodwill, net of accumulated amortization
of $113,608 as of September 30, 2002 and
December 31, 2001, respectively 506,145 506,145
------------ ------------
Total Consumer Products Assets 17,095,496 19,171,709
------------ ------------
Financial Services
Cash 3,352,848 229,506
Interest receivable 342,692 431,284
Rent receivable, net of allowance of
$150,000 as of September 30, 2002 and
December 31, 2001 242,339 136,939
Loans 77,255,399 99,218,367
Leased properties:
Buildings, net of accumulated depreciation
of $2,318,110 and $1,976,037 as of
September 30, 2002 and December 31, 2001,
respectively 27,671,195 30,375,142
Land 4,773,861 4,501,344
Construction in progress 425,159 -
------------ ------------
Total leased properties 32,870,215 34,876,486
Property and equipment, net of accumulated
depreciation of $661,875 and $610,192 as
of September 30, 2002 and December 31,
2001, respectively 89,657 141,340
Investment in swap contracts at fair value 646,491 1,704,170
Other assets 1,019,429 1,356,617
------------ ------------
Total Financial Services Assets 115,819,070 138,094,709
------------ ------------
Total Assets $132,914,566 $157,266,418
============ ============
3
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products
Short-term borrowings $ 2,842,000 $ 3,400,000
Accounts payable 947,566 794,179
Accrued salaries 261,468 217,078
Accrued liabilities 422,478 753,826
------------ ------------
Total current liabilities 4,473,512 5,165,083
Long-term debt 13,759 16,518
------------ ------------
Total Consumer Products Liabilities 4,487,271 5,181,601
------------ ------------
Financial Services
Commercial paper 59,654,826 62,806,903
Lines of credit 3,180,000 8,200,000
Direct pay letter of credit obligation 8,890,000 9,250,000
State of Wisconsin Investment Board notes
payble 10,000,001 11,000,001
Loan participations with repurchase options 15,047,572 28,123,907
Other borrowings 57,669 62,317
Accrued liabilities 1,445,501 1,484,405
------------ ------------
Total Financial Services Liabilities 98,275,569 120,927,533
------------ ------------
Minority Interest and Preferred Stock
Minority interest in subsidiaries 65,450 255,260
Redeemable Preferred stock, 1 cent par value,
3,000,000 shares authorized, 690,000 shares
issued 17,250,000 17,250,000
Redeemable Preferred Treasury stock 15,809
shares, at cost (395,225) (395,225)
Shareholders' Equity
Common stock, 6 2/3 cents par value,
15,000,000 shares authorized, 4,401,599
shares issued 293,441 293,441
Additional paid-in capital 16,604,744 16,604,744
Retained earnings 2,412,747 2,170,816
Treasury stock, 674,010 shares, at cost (6,725,922) (6,725,922)
Accumulated other comprehensive income 646,491 1,704,170
------------ ------------
Total Shareholders' Equity 13,231,501 14,047,249
------------ ------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $132,914,566 $157,266,418
============ ============
4
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Consumer Products
Net sales $ 5,335,018 $ 6,509,913 $ 15,851,315 $ 18,799,279
Cost of goods sold 3,250,288 3,702,612 9,338,510 10,220,068
----------- ----------- ------------ ------------
Gross profit 2,084,730 2,807,301 6,512,805 8,579,211
Operating expenses
Sales and marketing 956,292 1,382,989 3,043,444 3,831,591
New product development 194,777 275,531 628,827 758,591
General and administrative 1,209,518 890,550 3,231,604 3,497,929
----------- ----------- ------------ ------------
Total operating expenses 2,360,587 2,549,070 6,903,875 8,088,111
Net operating income (loss) (275,857) 258,231 (391,070) 491,100
Other income (expenses)
Interest expense (41,737) (70,089) (125,850) (174,243)
Other income, net 4,550 64,887 27,409 80,249
----------- ----------- ------------ ------------
Net other expenses (37,187) (5,202) (98,441) (93,994)
Income (loss) before income
taxes, minority interest
and intercompany charges (313,044) 253,029 (489,511) 397,106
Income tax benefit (expense) 125,218 (101,212) 195,804 (158,842)
Minority interest in
earnings of subsidiaries 2,603 (21,571) (72,329) (80,047)
----------- ----------- ------------ ------------
Income (Loss) Before
Intercompany Charges -
Consumer Products (185,223) 130,246 (366,036) 158,217
----------- ----------- ------------ ------------
Financial Services
Revenues
Interest on loans 1,143,667 1,886,596 3,803,063 6,301,722
Rental income 838,629 984,565 2,776,949 2,933,099
Gain on sale of leased
properties - 19,512 1,036,248 150,979
Gain on sale of swap
contract 747,000 - 747,000 -
Other income (loss) 20,752 (71,271) 178,513 150,103
----------- ----------- ------------ ------------
Total revenues 2,750,048 2,819,402 8,541,773 9,535,903
----------- ----------- ------------ ------------
Expenses
Interest expense 920,525 1,525,244 2,924,174 5,719,217
Depreciation expense 199,328 258,632 627,279 648,436
Management fee expense 248,214 246,502 759,493 745,578
Other operating expenses 248,951 154,265 647,288 567,856
----------- ----------- ------------ ------------
Total expenses 1,617,018 2,184,643 4,958,234 7,681,087
----------- ----------- ------------ ------------
Income before income taxes
and intercompany revenue 1,133,030 634,759 3,583,539 1,854,816
Income tax benefit (expense) 11,985 - (352,791) -
----------- ----------- ------------ ------------
Income Before Intercompany
Revenue - Financial Services $ 1,145,015 $ 634,759 $ 3,230,748 $ 1,854,816
----------- ----------- ------------ ------------
5
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Total Company
Income (loss) before income
taxes, minority interest
and intercompany activity
Consumer products $ (313,044) $ 253,029 $ (489,511) $ 397,106
Financial services 1,133,030 634,759 3,583,539 1,854,816
----------- ----------- ------------ ------------
Total company 819,986 887,788 3,094,028 2,251,922
Income tax benefit 293,200 16,877 128,462 296,944
Minority interest in
earnings of subsidiaries 2,603 (21,571) (72,329) (80,047)
----------- ----------- ------------ ------------
Net income 1,115,789 883,094 3,150,161 2,468,819
Preferred stock dividends (359,428) (359,428) (1,078,284) (1,078,284)
----------- ----------- -------------- ------------
Net income available to
common shareholders $ 756,361 $ 523,666 $ 2,071,877 $ 1,390,535
=========== =========== ============ ============
Basic Earnings Per Common
Share $ 0.20 $ 0.14 $ 0.56 $ 0.37
=========== =========== ============ ============
Diluted Earnings Per Common
Share $ 0.20 $ 0.14 $ 0.56 $ 0.37
=========== =========== ============ ============
Weighted average shares
outstanding (diluted) 3,727,589 3,727,589 3,727,589 3,727,589
=========== =========== ============ ============
Segment Reconciliation
Consumer Products
Income (loss) before
intercompany charges $ (185,223) $ 130,246 $ (366,036) $ 158,217
Interest/rental expense to
parent (130,358) (172,544) (431,449) (887,544)
Management fees to parent (106,917) (105,842) (324,760) (314,011)
Applicable income tax
benefit related to
intercompany charges and
other items 155,998 118,089 285,449 455,786
----------- ----------- ------------ ------------
Total segment net loss (266,500) (30,051) (836,796) (587,552)
Financial Services
Income before intercompany
revenue 1,145,015 634,759 3,230,748 1,854,816
Interest/rental income
from subsidiary 130,358 172,544 431,449 887,544
Management fees from
subsidiary 106,917 105,842 324,760 314,011
----------- ----------- ------------ ------------
Total segment net income 1,382,290 913,145 3,986,957 3,056,371
Net Income $ 1,115,790 $ 883,094 $ 3,150,161 $ 2,468,819
=========== =========== ============ ============
6
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Common Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
--------- ----------- ------------ ------------ ------------- -----------
BALANCES,
December 31, 2000 $ 293,441 $16,604,744 $ 2,965,814 $(6,725,922) $ - $13,138,077
-----------
Comprehensive income
Net income nine months
ended September 30, 2001 - - 2,468,819 - - 2,468,819
Change in fair market
value of interest rate
swap agreement - - - - 2,114,874 2,114,874
-----------
Total Comprehensive Income 4,583,693
-----------
Cash dividends on
preferred stock - - (1,078,284) - - (1,078,284)
Cash dividends on common
stock - - (1,829,945) - - (1,829,945)
--------- ----------- ----------- ----------- ----------- -----------
BALANCES,
September 30, 2001 $ 293,441 $16,604,744 $ 2,526,404 $(6,725,922) $ 2,114,874 $14,813,541
========= =========== =========== =========== =========== ===========
BALANCES,
December 31, 2001 $ 293,441 $16,604,744 $ 2,170,816 $(6,725,922) $ 1,704,170 $14,047,249
-----------
Comprehensive income
Net income nine months
ended September 30, 2002 - - 3,150,161 - - 3,150,161
Change in fair market
value of interest rate
swap agreement - - - - (1,057,679) (1,057,679)
-----------
Total Comprehensive Income 2,092,482
-----------
Cash dividends on
preferred stock - - (1,078,284) - - (1,078,284)
Cash dividends on
common stock - - (1,829,946) - - (1,829,946)
--------- ----------- ----------- ----------- ----------- -----------
BALANCES,
September 30, 2002 $ 293,441 $16,604,744 $ 2,412,747 $(6,725,922) $ 646,491 $13,231,501
========= =========== =========== =========== =========== ===========
7
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, 2002 Ended September 30, 2001
--------------------------- ----------------------------
Consumer Financial Consumer Financial
Products Services Products Services
----------- ------------- ------------ -------------
Cash Flows from Operating Activities:
Segment income (loss) $ (836,796) $ 3,986,957 $ (587,552) $ 3,056,371
Adjustments to reconcile segment net income to
net cash flows from operating activities
Depreciation and amortization 973,350 627,279 282,627 648,438
Provision for losses on accounts receivable 100,109 - 199,300 -
Provision for inventory reserve (230,501) - 288,696 -
Change in appreciation on investments - 16,384 - 27,005
Gain on sale of leased properties - (1,036,248) - (150,979)
Change in minority interest in subsidiaries (189,810) - 80,047 -
Net change in:
Accounts receivable 1,046,411 - 326,281 -
Inventory (21,714) - (442,147) -
Interest receivable - 88,592 - 220,943
Rent receivable - (105,400) - 94,499
Other assets (136,825) 320,804 (764,561) (59,920)
Accounts payable 153,387 - (304,023) -
Other liabilities (286,958) (38,904) 126,676 71,005
---------- ------------ ----------- ------------
Net Cash Flows from Operating Activities 570,653 3,859,464 (794,656) 3,907,362
---------- ------------ ----------- ------------
Cash Flows from Investing Activities:
Net loan repayments received 621,968 21,962,968 - 8,847,450
Proceeds from sale of leased properties - 3,338,030 - 1,385,816
Purchase or construction of leased property - (871,107) - (1,464,884)
Capital expenditures (609,239) - (649,126) -
---------- ------------ ----------- ------------
Net Cash Flows from Investing Activities 12,729 24,429,891 (649,126) 8,768,382
---------- ------------ ----------- ------------
Cash Flows from Financing Activities:
Net change in short term borrowings (558,000) - 2,329,074 -
Net change in commercial paper - (3,152,077) - 149,108
Net change in lines of credit - (5,020,000) - (625,000)
Net payments on letter of credit - (360,000) - (390,000)
Repayment of SWIB notes - (1,000,000) - (1,000,000)
Repayment of loan participations with
repurchase options - (13,076,335) - (7,176,591)
Net change in other notes payable (2,759) (4,648) (5,343) (4,395)
Preferred stock dividends paid - (1,078,284) - (1,078,284)
Common stock dividends paid - (1,829,946) - (1,829,945)
Net intercompany transactions (355,277) 355,277 (74,998) 74,998
---------- ------------ ----------- ------------
Net Cash Flows from Financing Activities (916,036) (25,166,013) 2,248,733 (11,880,109)
---------- ------------ ----------- ------------
Net change in cash and cash equivalents (332,654) 3,123,342 804,951 795,635
Cash and equivalents beginning of period 681,267 229,506 628,418 85,276
---------- ------------ ----------- ------------
Cash and equivalents end of period $ 348,613 $ 3,352,848 $ 1,433,369 $ 880,911
========== ============ =========== ============
Supplemental Cash Flow Disclosures
Cash paid for interest $ 125,850 $ 2,279,248 $ 174,243 $ 5,656,204
========== ============ =========== ============
Cash paid for (refund of) income taxes $ (653,907) $ 52,985 $ 214,704 $ -
========== ============ =========== ============
8
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS
The consolidated financial statements of The Middleton Doll Company (the
"Company") include two segments of business: financial services and consumer
products. The consolidated financial statements as of and for the periods
presented include the accounts of the Company and Bando McGlocklin Small
Business Lending Corporation ("BMSBLC") as financial services companies and Lee
Middleton Original Dolls, Inc. ("LMOD"), License Products, Inc. ("LPI") and
Middleton (HK) Limited ("MHK") as consumer product companies. All significant
intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management of the Company, all
adjustments necessary to present fairly the financial position as of September
30, 2002 and December 31, 2001 and the results of operations for the three
months and nine months ended September 30, 2002 and 2001 and statement of
changes in shareholders' equity and cash flows for the nine months ended
September 30, 2002 and 2001 have been made. Such adjustments consisted only of
normal recurring items. Operating results for the periods ended September 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The accounting policies followed by the Company are set
forth in Note 1 to the Company's consolidated financial statements contained in
the Company's 2001 Annual Report on Form 10-K. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The balance sheet for consumer products is classified due to its normal business
cycle being less than twelve months. Financial services' balance sheet is not
classified as its normal business cycle is greater than twelve months.
In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for doubtful accounts, valuation of inventories and deferred
tax assets.
NOTE 3. INTEREST RATE SWAPS
The Company has adopted FAS 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by FAS 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement 133",
and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". These statements require the Company to designate all derivative
instruments as either fair value hedges or cash flow hedges and to record the
hedge on the balance sheet at its fair market value. The net gain/loss on
instruments classified as cash flow hedges are reported as changes in other
comprehensive income. The net gain/loss on instruments classified as fair value
hedges are reported as increases/decreases in current year earnings.
As part of the Company's asset/liability management, the Company uses interest
rate swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Derivatives that are
9
used as part of the asset/liability management process are linked to specific
assets or liabilities and have high correlation between the contract and the
underlying item being hedged, both at inception and throughout the hedge period.
Under the terms of the swap agreements, the parties exchange interest payment
streams calculated on the notional principal amount. The swap agreements are
accounted for on the "accrual" method. Under that method, the interest component
associated with the contract is recognized over the life of the contract in net
interest income. Although these swaps reduce interest rate risk, the potential
for profit or loss on interest rate swaps still exists depending upon
fluctuations in interest rates. The Company may be susceptible to risk with
respect to interest rate swap agreements to the extent of nonperformance by the
financial institutions participating in the interest rate swap agreements.
However, the Company does not anticipate nonperformance by these institutions.
Contracts that do not meet the hedging criteria are classified as trading
activities and are recorded at fair value with changes in fair value recorded in
earnings.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
NOTE 5. INVENTORY
Inventories of LMOD and LPI are valued at the lower of cost or market and
utilize the first-in, first-out (FIFO) method to determine cost. The components
of inventory are as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 1,961,444 $ 2,116,694
Work in process 101,617 113,163
Finished goods 5,012,758 4,147,305
----------- -----------
7,075,819 6,377,162
Less: reserve for obsolete inventory (52,839) (283,340)
----------- -----------
$ 7,022,980 $ 6,093,822
=========== ===========
NOTE 6. INCOME TAXES
The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate
investment trust under the Internal Revenue Code. Accordingly, the REIT is not
subject to income tax on taxable income that is distributed to shareholders.
However, the REIT may retain capital gains from the sale of real estate and pay
income tax on that gain. Currently, the REIT has accrued $364,776 in income tax
expense based on the sale of leased property. The income tax expense (benefit)
recorded by the Company that is attributable to the Consumers Product segment is
calculated on net income before the elimination of intercompany expenses.
NOTE 7. EARNINGS PER SHARE
See Exhibit 11 for the computation of the net income per common share.
10
NOTE 8. COMMITMENTS
Undisbursed construction and loan commitments totaled $2.98 million at September
30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Amounts presented as of September 30, 2002 and December 31, 2001, and for the
nine months and three months ended September 30, 2002 and September 30, 2001
include the consolidation of two segments. The financial services segment
includes The Middleton Doll Company (the "Company") and Bando McGlocklin Small
Business Lending Corporation ("BMSBLC"), a 100% owned subsidiary of the Company.
The consumer products segment includes Lee Middleton Original Dolls, Inc.
("LMOD"), a 99% owned subsidiary of the Company, Middleton (HK) Limited ("MHK"),
a 51% owned subsidiary of LMOD and License Products, Inc. ("LPI"), a 100% owned
subsidiary of LMOD.
Results of Operations
For the three months ended September 30, 2002 and September 30, 2001
Net income increased when comparing the third quarter of 2002 to the third
quarter of 2001. The Company's total net income available to common shareholders
for the quarter ended September 30, 2002 was $0.76 million or $0.20 per share
(diluted) as compared to $0.52 million or $0.14 per share (diluted) for the
quarter ended September 30, 2001, a 46% increase. The consumer products segment
incurred a net loss due to lower than expected sales as a result of the overall
slowdown in the retail sector and the general economy. The financial services
segment's net income increased due to a $0.75 million gain on the termination of
interest rate swaps.
Consumer Products
After income taxes and minority interest, the consumer products segment had a
net loss of $0.19 million for the quarter ended September 30, 2002 compared to
net income of $0.13 million for the quarter ended September 30, 2001. After
giving effect to interest, rental and management fees paid to the Company, the
consumer products segment's net loss was $0.27 million for the three months
ended September 30, 2002, as compared to a net loss of $0.03 million for the
three months ended September 30, 2001.
Net sales from consumer products for the quarter ended September 30, 2002
decreased 18% to $5.34 million from $6.51 million in the corresponding prior
year period. This was due to decreased sales of $1.98 million at LMOD offset by
increased sales of $0.81 million at LPI. LMOD's decrease was mainly due to a
$1.30 million decrease in the artist studio collection sold to dealers.
Approximately 600 of LMOD's 2,500 dealers have ceased operation during 2002;
however, LMOD has added approximately 400 new dealers. Additionally, existing
dealers have been ordering conservatively, approximately 20% below last year's
levels. Cost of sales decreased 12% to $3.25 million for the quarter ended
September 30, 2002 compared to $3.70 million for the prior year quarter. LMOD's
cost of sales decreased to $2.31 million from $3.26 million while LPI's cost of
sales increased to $0.94 million from $0.44 million. Total gross profit margin
decreased to 39% from 43% in the prior year. LMOD's gross profit margin
decreased to 40% from 45% and LPI's increased to 35% from 30%. The decrease in
the gross profit margin at LMOD was due to the continued liquidation of slow
moving inventory and discounting of excess inventory items. The increase in the
gross profit margin at LPI was due to the introduction of new products, better
pricing from suppliers based on volume and the increase in sales to existing
customers.
Total operating expenses of consumer products for the quarter ended September
30, 2002 were $2.36 million compared to $2.55 million for the quarter ended
September 30, 2001, a 7% decrease. LMOD's total operating expenses decreased
$0.39 million and LPI's operating expenses increased $0.20 million. Sales and
marketing expense and new product development decreased $0.51 million to $1.15
million for the quarter ended September 30, 2002 compared to $1.66 million for
the quarter ended September 30, 2001. LMOD's sales and marketing expenses
decreased $0.49 million while LPI's increased $0.06 million. LMOD's cost
reductions resulted from a decrease in
11
personnel and a reduction in advertising, catalog and promotional expenses.
LPI's increase was due to additional advertising allowances for customers. New
product development decreased $0.12 million at LMOD and increased $0.04 million
at LPI. General and administrative expenses increased $0.22 million at LMOD and
increased $0.10 million at LPI when comparing the quarter ended September 30,
2002 to the same quarter in 2001.
Other expenses, net, increased $0.03 million. Interest expense decreased $0.03
million; however, other income decreased $0.06 million. Consumer products
recorded an income tax benefit of $0.29 million for the quarter ended September
30, 2002 as compared to $0.02 million for the quarter ended September 30, 2001.
Income tax benefit for the third quarter of 2002 is composed of tax benefit on
net loss before intercompany charges of $0.13 million and the tax benefit
attributable to intercompany charges and other miscellaneous items of $0.16
million. Intercompany charges were $0.24 million for the quarter ended September
30, 2002 and $0.28 million for the quarter ended September 30, 2001. The
decrease in the intercompany expenses was due to a decrease in interest expense
due to lower interest rates.
Financial Services
Net income from financial services for the quarter ended September 30, 2002 was
$1.15 million compared to $0.63 million for the quarter ended September 30,
2001, an 83% increase. The increase resulted from the termination of two swap
agreements totaling $0.75 million. If interest, rental and management fees from
the consumer products segment were included in the financial services segment
net income, the net income for the quarter ended September 30, 2002 would have
been $1.38 million and for the quarter ended September 30, 2001 net income would
have been $0.91 million.
The net interest margin for the quarter ended September 30, 2002 was 3.53%
compared to 3.74% for the quarter ended September 30, 2001. Net interest margin
is determined by dividing the total of interest income on loans and rental
income less interest expense by the total of average loans and leased
properties. The decrease in net interest margin resulted from the transfer of
$42,000 of interest income and $55,000 of rental income to nonaccrual status
during the quarter ended September 30, 2002.
Total revenues were $2.75 million for the quarter ended September 30, 2002 and
$2.82 million for the quarter ended September 30, 2001. Interest on loans
decreased 40% to $1.14 million for the quarter ended September 30, 2002 from
$1.89 million for the comparative quarter. The large decrease in interest income
from loans was due to the 28% decrease in the prime rate and due to the decrease
in the average loans outstanding. The average prime rate was 4.75% for the
quarter ended September 30, 2002 compared to 6.57% for the quarter ended
September 30, 2001.
Average loans under management decreased $21.11 million when comparing the third
quarter of 2002 to the third quarter of 2001. This decrease was primarily due to
maturing loans and the inability to replace them with the Company's current
funding sources. The Company's ability to make additional loans depends on the
ability of the Company to obtain additional sources of funding.
Rental income decreased $0.14 million to $0.84 million for the quarter ended
September 30, 2002 as compared to $0.98 million for the quarter ended September
30, 2001. The sale of one leased property resulted in a reduction of $0.09
million in rents and the transfer of $0.05 million to nonaccrual status
accounted for the remaining decrease. At September 30, 2002 the Company had
$32.87 million in leased properties, net of accumulated depreciation, compared
to $34.88 million at September 30, 2001.
Other income for the three months ending September 30, 2002 was composed of
$0.75 million from the termination of swap contracts and $0.02 million of
miscellaneous income. For the three months ending September 30, 2001, other
income included $0.02 million from the sale of a leased property, $0.05 million
of miscellaneous income and an unrealized loss on hedging activities of $0.12
million due to a change in accounting methods between the second and third
quarter of 2001.
Interest expense decreased 40% to $0.92 million for the quarter ended September
30, 2002 as compared to $1.53 million for the quarter ended September 30, 2001.
Lower rates for the Company's cost of funds and a decrease in the outstanding
average debt balance resulted in the decrease in interest expense. The Company's
debt cost is based primarily on variable interest rates which were significantly
lower due to the decrease in interest rates set by the Federal Reserve. The
average prime rate decreased 182 basis points between the third quarter of 2002
and the third
12
quarter of 2001. The average debt balance also decreased $26.10 million in the
third quarter of 2002 compared to the third quarter of 2001, which was the
result of the decrease in loans noted above. As a result of interest rate swaps,
the Company recognized a reduction in interest expense of $0.10 million for the
quarter ended September 30, 2002 and $0.28 million for the quarter ended
September 30, 2001.
Depreciation expense decreased $0.06 million for the third quarter of 2002 as
compared to the third quarter of 2001 due to the decrease in leased properties.
Other operating expenses increased $0.09 million for the quarter ended September
30, 2002 compared to the quarter ended September 30, 2001. Legal expenses of
$0.03 million were incurred to obtain a loan recovery of $0.47 million.
Additional debt issue costs of $0.02 million were expensed during the quarter
due to the prepayment of a real estate loan. Leased property expenses increased
$0.03 million due to insurance and real estate tax expenses incurred with regard
to two properties. Miscellaneous operating expenses increased $0.01 million.
The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate
investment trust under the Internal Revenue Code. Accordingly, they are not
subject to income tax on taxable income that is distributed to shareholders.
However, the REIT may retain capital gains from the sale of real estate and pay
income tax on that gain. Currently, the REIT has accrued $0.36 million in income
tax expense based on the sale of leased property.
For the nine months ended September 30, 2002 and September 30, 2001
Net income increased when comparing the first nine months of 2002 to the first
nine months of 2001. The Company's total net income available to common
shareholders for the nine months ended September 30, 2002 was $2.07 million or
$0.56 per share (diluted) as compared to $1.39 million or $0.37 per share
(diluted) for the nine months ended September 30, 2001, a 49% increase. The
consumer products segment incurred a net loss due to lower than expected sales
as a result of the overall slowdown in the retail sector and the general
economy. The financial services segment's net income increased $0.67 million,
net of related taxes, from the sale of two leased properties and $0.75 million
from the termination of interest rate swap agreements.
Consumer Products
After income taxes and minority interest, the consumer products segment had a
net loss of $0.37 million for the nine months ended September 30, 2002 compared
to net income of $0.16 million for the nine months ended September 30, 2001.
After giving effect to interest, rental and management fees paid to the Company,
the consumer products segment's net loss was $0.84 million for the nine months
ended September 30, 2002, as compared to $0.59 million for the nine months ended
September 30, 2001.
Net sales from consumer products for the nine months ended September 30, 2002
decreased 16% to $15.85 million from $18.80 million in the corresponding prior
year period. This was due to decreased sales of $4.09 million at LMOD offset by
increased sales of $1.14 million at LPI. LMOD's decrease was mainly due to a
$3.41 million decrease in the artist studio collection sold to dealers and a
$0.36 million decrease due to the end of a Disney program. Approximately 600 of
LMOD's 2,500 dealers have ceased operations during 2002; however, LMOD has added
approximately 400 new dealers. Additionally, existing dealers have been ordering
conservatively, approximately 20% below last year's levels. Cost of sales
decreased 9% to $9.34 million for the nine months ended September 30, 2002
compared to $10.22 million for the prior year nine months period. LMOD's cost of
sales decreased to $6.75 million from $8.31 million while LPI's cost of sales
increased to $2.59 million from $1.91 million. Total gross profit margin
decreased to 41% from 46% in the prior year. LMOD's gross profit margin
decreased to 43% from 48% and LPI's increased to 34% from 31%. The decrease in
the gross profit margin at LMOD was due to the continued liquidation of slow
moving inventory and discounting of excess inventory items. The increase in the
gross profit margin at LPI was due to the introduction of new products, better
pricing from suppliers based on volume and the increase in sales to existing
customers.
Total operating expenses of consumer products for the nine months ended
September 30, 2002 were $6.90 million compared to $8.09 million for the nine
months ended September 30, 2001, a 15% decrease. LMOD's total operating expenses
decreased $1.61 million and LPI's operating expenses increased $0.42 million.
Sales and marketing expense and new product development decreased $0.92 million
to $3.67 million for the nine months ended September 30, 2002 compared to $4.59
million for the nine months ended September 30, 2001. LMOD's sales and
13
marketing expenses decreased $0.90 million while LPI's increased $0.11 million.
LMOD's cost reductions resulted from a decrease in personnel and a reduction in
advertising, catalog and promotional expenses while LPI's increase was due to
additional advertising allowances for customers. New product development
decreased $0.22 million at LMOD and increased $0.09 million at LPI. General and
administrative expenses decreased $0.49 million at LMOD and increased $0.22
million at LPI when comparing the nine months ended September 30, 2002 to the
same period in 2001.
There was no significant change to other expenses for the nine month periods.
The minority interest in earnings of subsidiaries decreased for the nine months
ended September 30, 2002 primarily due to the liquidation of the MHK subsidiary,
resulting in a dividend payment to the minority shareholder. Consumer products
recorded an income tax benefit of $0.48 million for the nine months ended
September 30, 2002 as compared to $0.30 million for the nine months ended
September 30, 2001. Income tax benefit is composed of tax benefit on net loss
before intercompany charges of $0.20 million and the tax benefit attributable to
intercompany charges and other miscellaneous items of $0.28 million.
Intercompany charges were $0.76 million for the nine months ended September 30,
2002 and $1.20 million for the nine months ended September 30, 2001. The
decrease in the intercompany expenses was due to a decrease in interest expense
due to lower interest rates.
Financial Services
Net income from financial services for the nine months ended September 30, 2002
was $3.23 million compared to $1.85 million for the nine months ended September
30, 2001, a 75% increase. The increase resulted from the sale of two leased
properties, which resulted in income, net of related taxes, of $0.67 million and
from the termination of two swap agreements totaling $0.75 million. If interest,
rental and management fees from the consumer products segment were included in
the financial services segment net income, the net income for the nine months
ended September 30, 2002 would have been $3.99 million and for the nine months
ended September 30, 2001 net income would have been $3.06 million.
The net interest margin for the nine months ended September 30, 2002 was 3.86%
compared to 3.24% for the nine months ended September 30, 2001. Net interest
margin is determined by dividing the total of interest income on loans and
rental income less interest expense by the total of average loans and leased
properties. The increase is the result of the Company's cost of funds falling
faster than the rates charged by the Company to borrowers and to tenants of
leased properties.
Total revenues were $8.54 million for the nine months ended September 30, 2002
and $9.54 million for the nine months ended September 30, 2001. Interest on
loans decreased 40% to $3.80 million for the nine months ended September 30,
2002 from $6.30 million for the comparative period. The large decrease in
interest income from loans was due to the 37% decrease in the prime rate and due
to the decrease in the average loans outstanding. The average prime rate was
4.75% for the nine months ended September 30, 2002 compared to 7.52% for the
nine months ended September 30, 2001.
Average loans under management decreased $18.08 million when comparing the first
nine months of 2002 to the first nine months of 2001. This decrease was
primarily due to maturing loans and the inability to replace them with the
Company's current funding sources. The Company's ability to make additional
loans depends on the ability of the Company to obtain additional sources of
funding.
Rental income decreased $0.15 million to $2.78 million for the nine months ended
September 30, 2002 as compared to $2.93 million for the nine months ended
September 30, 2001. The sale of one leased property resulted in a reduction of
$0.10 million in rents and the transfer of $0.05 million to nonaccrual status
accounted for the remaining decrease. At September 30, 2002 the Company had
$32.87 million in leased properties, net of accumulated depreciation, compared
to $34.88 million at September 30, 2001.
Other income for the nine months ended September 30, 2002 included a gain of
$1.04 million on the sale of leased property and $0.75 million from the
termination of a swap agreement. Loan prepayment penalties of $0.11 million and
$0.07 million of miscellaneous income comprised the balance of other income. For
the nine months ended September 30, 2001, other income included a gain of $0.15
million on the sale of leased property, $0.07 million of fees from letters of
credit and $0.08 million of miscellaneous income.
14
Interest expense decreased 49% to $2.92 million for the nine months ended
September 30, 2002 as compared to $5.72 million for the nine months ended
September 30, 2001. Lower rates for the Company's cost of funds and a decrease
in the outstanding average debt balance resulted in the decrease in interest
expense. The Company's debt cost is based primarily on variable interest rates
which were significantly lower due to the decrease in interest rates set by the
Federal Reserve. The average prime rate decreased 277 basis points between the
first nine months of 2002 and the first nine months of 2001. The average debt
balance also decreased $20.6 million in the first nine months of 2002 compared
to the first nine months of 2001, which was the result of the decrease in loans
noted above. As a result of interest rate swaps, the Company recognized a
reduction in interest expense of $0.43 million for the nine months ended
September 30, 2002 and $0.51 million for the nine months ended September 30,
2001.
Depreciation expense decreased $0.02 million for the first nine months of 2002
as compared to the first nine months of 2001 due to the decrease in leased
properties. Other operating expenses increased $0.09 million for the nine months
ended September 30, 2002 compared to the nine months ended September 30, 2001.
Legal expenses of $0.03 million were incurred to obtain a loan recovery of $0.47
million. Additional debt issue costs of $0.02 million were expensed during the
period due to the prepayment of a real estate loan. Leased property expenses
increased $0.03 million due to insurance and real estate tax expenses incurred
with regard to two properties. Miscellaneous operating expenses increased $0.01
million.
The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate
investment trust under the Internal Revenue Code. Accordingly, they are not
subject to income tax on taxable income that is distributed to shareholders.
However, the REIT may retain capital gains from the sale of real estate and pay
income tax on that gain. Currently, the REIT has accrued $0.36 million in income
tax expense based on the sale of leased property.
Financial Condition
Consumer Products
Total assets of consumer products were $17.10 million as of September 30, 2002
and $19.17 million as of December 31, 2001, an 11% decrease.
Cash decreased to $0.35 million at September 30, 2002 from $0.68 million at
December 31, 2001.
Accounts receivable, net of the allowance, decreased to $2.81 million at
September 30, 2002 from $3.95 million at December 31, 2001. A decrease of $0.77
million is attributable to LMOD, and a decrease of $0.37 million is attributable
to LPI. The decrease in accounts receivable is attributable to the decrease in
sales due to the economy.
Inventory was $7.02 million at September 30, 2002 compared to $6.09 million at
December 31, 2001. LMOD's inventory increased $0.07 million while License
Products' inventory increased $0.86 million primarily in anticipation of the
west coast dock strike and Christmas sales. Inventories are valued at lower of
cost or market using the first-in, first-out (FIFO) method.
Property and equipment, net of accumulated depreciation, increased by $0.01
million and prepaid inventory decreased $0.36 million. Loans decreased by $0.62
million due to a loan payoff. Other assets and prepaid expenses decreased by
$0.18 million due to refunds of income tax payments that were received net of
the current tax benefit. The licensing agreement decreased $0.38 million due to
amortization.
Goodwill was recorded when the Company purchased the remaining interest in the
stock from the estate of Lee Middleton, the founder of LMOD, on April 30, 1998.
The purchase price exceeded book value by $0.62 million which was being
amortized over 20 years. As of December 31, 2001, the balance of the goodwill,
net of accumulated amortization was $0.51 million. The Financial Accounting
Standards Board issued Statement 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001 (i.e., January 1,
2002 for calendar year companies). This statement provides that goodwill and
indefinite lived intangible assets are no longer amortized against income but
are reviewed at least annually for impairment. An impairment review is designed
to determine whether the fair value, and the related recorded goodwill, of a
reporting unit is below its carrying value. In the year of adoption, any
impairment loss will be recorded as a cumulative effect of a change in
15
accounting principle. Thereafter, goodwill impairment losses will be charged to
operations. For the nine months ended September 30, 2002, no impairment loss was
recorded.
LMOD decreased its short-term borrowings by $0.56 million under a line of credit
with a related bank. Accounts payable and other liabilities decreased by $0.13
million as of September 30, 2002 compared to December 31, 2001.
Financial Services
Total assets of financial services were $115.82 million as of September 30, 2002
and $138.09 million as of December 31, 2001, a 16% decrease.
Cash increased to $3.35 million at September 30, 2002 from $0.23 million at
December 31, 2001. A loan pay off of $3.26 million was received at the end of
September of 2002 and was used to decrease the commercial paper facility in
October of 2002.
Interest and rent receivable increased to $0.59 million from $0.57 million.
Interest income is accrued on the unpaid principal balance of loans. The accrual
of interest income on impaired loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due. Loans are returned to
accrual status when the principal and interest amounts contractually due are
brought current and future payments are reasonably assured. For the nine months
ended September 30, 2002, three borrowers were on nonaccrual resulting in $0.10
million of gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms. Rent is
accrued on a monthly basis based on lease agreements. If it is determined by
management that the lessee will not be able to make rent payments as required by
the lease agreement, the accrual of rent is discontinued until management
determines the rent to be collectible. For the nine months ended September 30,
2002, two borrowers were on nonaccrual resulting in $0.20 million of rental
income which would have been recorded had the tenants been current in accordance
with their leases. The rent receivable is shown net of an allowance of $150,000.
Property and equipment and other assets decreased by $0.39 million.
The Company has adopted FAS 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by FAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133", and FAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities". These statements require the Company to designate
all derivative instruments as either fair value hedges or cash flow hedges and
to record the hedge on the balance sheet at its fair market value. The net
gain/loss on instruments classified as cash flow hedges are reported as changes
in other comprehensive income. The net gain/loss on instruments classified as
fair value hedges are reported as increases/decreases in current year earnings.
All derivatives are marked to market on the balance sheet. The Company's
interest rate swaps are cash flow hedges and had a marked to market value of
$0.65 million at September 30, 2002 and $1.70 million at December 31, 2001. The
decrease in swaps is the result of the sale of some of the interest rate swap
contracts.
Total loans decreased by $21.96 million, or 22%, to $77.26 million at September
30, 2002, from $99.22 million at December 31, 2001, with a corresponding
decrease in liabilities. This decrease was primarily due to maturing loans and
the inability to replace them with the Company's current funding sources. The
Company's ability to make additional loans depends on the ability of the Company
to obtain additional sources of acceptable funding. As loans mature, the Company
reduces its outstanding indebtedness by the amount of the maturing loans. If the
Company is not able to secure additional acceptable funding to replace the debt
which has been paid, the Company's loan portfolio will decline, with a resulting
decrease in net income. To date, the Company has not been able to obtain
additional acceptable sources of funding. As noted earlier in this paragraph,
the Company's loan portfolio has decreased $21.96 million in the nine months
ended September 30, 2002, continuing a decline from $99.22 million at December
31, 2001. The Company is constantly seeking additional acceptable sources of
funding but, to date, has not been successful in obtaining additional acceptable
funding sources. If, however, the Company were able to replace existing debt
with the proceeds of other funding sources, the Company would seek to use such
proceeds to make new loans. However, the Company's management agreement with
InvestorsBank prevents it from making new loans to other than existing customers
without the prior consent of InvestorsBank. Neither the ability of the Company
to obtain new funding sources nor the likelihood that the Company could utilize
such funding sources to make new loans is certain or guaranteed.
16
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the amount of unpaid
principal, reduced by the allowance for loan losses. Management reviews the
value of the collateral securing each loan to determine if an allowance for loan
losses is necessary. In management's opinion no loan loss reserve was required
at September 30, 2002 or at December 31, 2001.
Leased properties decreased $2.01 million due to the sales of leased property
and depreciation. Leased properties are recorded at cost and are depreciated
using the straight-line method. The costs of normal repairs and maintenance are
charged to expense as incurred.
The financial services' total liabilities at September 30, 2002 decreased $22.65
million. At September 30, 2002, financial services had $34.0 million outstanding
in long-term debt and $62.83 million outstanding in short-term borrowings
compared to $48.44 million outstanding in long-term debt and $71.01 million
outstanding in short-term borrowings as of December 31, 2001. BMSBLC's
short-term debt facility consists of commercial paper and drawn letters of
credit backed by a $70 million line of credit that is required to be reduced by
$10.0 million as of October 31, 2002 and again by $5.0 million as of February
28, 2003. The facility is being reduced at the request of one of the
participating banks. The Company is attempting to replace the loss of funding
sources. The Company has reduced the facility by $10 million as of October 31,
2002 and anticipates that it will make the $5.0 million payment due February 28,
2003. Such payments will result in a reduction of the Company's loan portfolio
unless the Company is able to make additional loans with other funding sources.
The facility matures on June 27, 2003. If commercial paper would become
unavailable, BMSBLC would have to draw upon its back-up line of credit which
would have higher interest rates and would result in a reduction of net income.
BMSBLC expects to renew its line of credit at its June 27, 2003 maturity.
However, if the line of credit is not renewed, BMSBLC would have to seek other
financing sources. There is no guarantee that any such alternative financing
sources could be obtained. Accrued liabilities decreased $0.03 million from
December 31, 2001 to September 30, 2002.
Other significant accounting policies
In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for doubtful accounts, valuation of inventories and deferred
tax assets.
Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "may", "will", "could", "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and the
subsidiaries include, but are
17
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, competition,
demand for financial services in the Company's market area, demand for the
Company's consumer products, payment when due of principal and interest on loans
made by the Company, payment of rent by lessees on Company properties, reduction
in loans and property owned by the Company, the ability of the Company to obtain
additional acceptable funding sources and the necessity to make additions to the
Company's loan loss reserve. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed
on such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the Company's most recent Annual Report filed on Form 10-K (Item 7A). There
has been no material change in this information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. During the prior ninety-day
period, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Accounting Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and the Chief Accounting Officer concluded that the
Company's disclosure controls and procedures were effective.
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
Company's internal controls subsequent to the date of their evaluation.
18
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, 2002.
19
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.
THE MIDDLETON DOLL COMPANY
(Registrant)
Date: November 13, 2002 /s/ George R. Schonath
-------------------------------------
George R. Schonath
President and Chief Executive Officer
Date: November 13, 2002 /s/ Susan J. Hauke
-------------------------------------
Susan J. Hauke
Vice President Finance
20
I, George R. Schonath, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Middleton Doll
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ George R. Schonath
------------------------------
George R. Schonath
Chief Executive Officer
21
I, Susan J. Hauke, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Middleton Doll
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Susan J. Hauke
------------------------------
Susan J. Hauke
Vice President Finance and
Chief Financial Officer
22
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
11 Statement Regarding Computation of Per Share Earnings
99.1 Chief Executive Officer Certification
99.2 Chief Financial Officer Certification
23