U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the year ended December 31, 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: 811-3787
THE MIDDLETON DOLL COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-4300
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Title of Class
Common Stock, 6-2/3 cents Par Value Preferred Stock, $0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant at March 14, 2003 was $12,421,976.
The number of shares of common stock outstanding at March 14, 2003 was
3,727,589.
DOCUMENTS INCORPORATED BY REFERENCE:
-----------------------------------
Portions of the The Middleton Doll Company Proxy Statement for the 2003 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
under Regulation 14A within 120 days after the end of the Registrant's year) are
upon such filing, incorporated by reference into Part III.
THE MIDDLETON DOLL COMPANY
Index to Annual Report on Form 10-K
For the Year Ended December 31, 2002
PART I....................................................................... 3
Item 1. Description of Business....................................3
Item 2. Properties.................................................9
Item 3. Legal Proceedings..........................................9
Item 4. Submission of Matters to a Vote of Security Holders........9
PART II......................................................................10
Item 5. Market for Common Equity and Related Stockholder Matters..10
Item 6. Selected Financial Data (In thousands, except per
share data)...............................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (for the years
ended December 31, 2002, 2001 and 2000)...................11
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...............................................19
Item 8. Financial Statement and Supplementary Data..............21
PART III.....................................................................57
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................57
Item 10. Directors and Executive Officers of the Registrant.......57
Item 11. Executive Compensation....................................57
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................57
Item 13. Certain Relationships and Related Transactions............57
Item 14. Controls and Procedures...................................57
PART IV......................................................................58
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................58
2
Part I
Item 1. Description of Business
Introduction
The Middleton Doll Company (the "Company") was incorporated in February,
1980 to provide long-term collateralized loans to small businesses. At present
the Company consists of two business segments, the Financial Services Business
and the Consumer Products Business.
The Financial Services Business segment consists of the Company and its
wholly-owned subsidiary, Bando McGlocklin Small Business Lending Corporation
(BMSBLC). Both the Company and BMSBLC are operated as a real estate investment
trust ("REIT") pursuant to the provisions of Section 856 of the Internal Revenue
Code of 1986, as amended. The principal business of the segment is making
mortgage loans and leasing buildings to small businesses. The segment also
participates in mortgage loans with third party loan originators.
The Consumer Products Business segment consists of a 99% interest in Lee
Middleton Original Dolls, Inc. ("LMOD"). George R. Schonath, President and Chief
Executive Officer, owns the remaining 1% of the stock of LMOD. LMOD is a
manufacturer of vinyl collectible dolls and a distributor of vinyl play dolls.
LMOD has a wholly-owned subsidiary, License Products, Inc. ("LPI"), that
designs, develops and markets a line of quality, proprietary time pieces. On
January 1, 2002, LMOD, which previously owned 51% of LPI, acquired the remaining
outstanding 49% interest in LPI. Also during 2002, LMOD disposed of its 51%
interest in Middleton (HK) Limited ("MHK"), a Hong Kong corporation that
provided LMOD with raw material and finished goods from Asia. Neither of these
transactions had a material impact upon the financial statements.
In order to qualify as a REIT under the Internal Revenue Code, the Company
cannot hold more than 10% of the outstanding voting securities of any one issuer
except for "Taxable Real Estate Investment Trust Subsidiaries" ("TRSs"). LMOD
and LPI became TRSs as of January 1, 2001, which allowed the Company on June 25,
2001, to exchange its non-voting stock in LMOD for voting stock.
On September 3, 1997, the Company capitalized InvestorsBancorp, Inc., a
bank holding company, for approximately $6.2 million and then distributed all of
the outstanding shares of InvestorsBancorp, Inc. to the Company's shareholders.
The Company and InvestorsBancorp, Inc., together with its wholly-owned
subsidiary, InvestorsBank (the "Bank"), share common offices and personnel.
Expenses are shared between the two entities in accordance with a Management
Services and Allocation of Expenses Agreement (the "Management Agreement"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources".
Financial Services Business
Loans
The Company, through its Financial Services Business, owns and leases
industrial and commercial real estate to small businesses and makes loans to
small business entities collateralized primarily by first or second real estate
mortgages.
Until the distribution of the shares of InvestorsBancorp, Inc. in
September, 1997, the Company had engaged in the business of originating loans to
small businesses. Concurrent with such distribution, the Company and the Bank
agreed in the Management Agreement that the Company would not originate any
loans unless agreed to by the Bank in writing, unless the loans are made to
current Company customers or unless the loans are outside the Bank's lending
limitations. Thus, except for the making of loans to Company customers who
desire to increase their loan amounts with the Company and for loans outside the
Bank's lending limitations, the Company does not solicit any loans.
3
The Company's loan and leased property portfolio is managed by the Bank for
an annual fee, payable monthly, equal to 25 basis points of the total dollar
amount of loans under management and 6% of the rents from leased properties.
Operating expenses are also shared by the Bank and the Company, as well as
certain expenses of employees providing accounting, reporting and related
services to the Company.
The Company's loan portfolio is primarily comprised of long-term, variable
rate, collateralized loans to small business entities. The loans are primarily
collateralized by first mortgages on real estate, although some loans are
collateralized by second mortgages. Approximately 90% of the Company's loans by
dollar volume are loans to borrowers located in the State of Wisconsin.
Substantially all of the Company's loan portfolio is held by BMSBLC.
The Company's borrowers include manufacturers, wholesalers, retailers,
professionals and service providers. The Company funds its lending operations
through its equity capital, bank and institutional borrowings, commercial paper
sales and the sale of loan participations.
The Company's exposure to loss in the event of nonperformance by the
borrower is represented by the outstanding principal amount of loans of $73.60
million and accrued interest of $0.27 million at December 31, 2002.
Substantially all loans are fully collateralized by first or second mortgages on
commercial real estate. Diversification across industries is a means of managing
market risk by decreasing loan concentrations. The following table provides
information regarding the outstanding principal amount of loans by industry at
December 31, 2002.
Outstanding Percent of
Number Principal Total Loans
Type of Business of Loans Balance Outstanding
- ------------------------------------------ ----------- --------------- ---------------
Industrial Machinery 8 $ 11,258,364 15.30%
Investment Property 5 8,930,898 12.13%
Construction 4 8,787,699 11.94%
Wholesale Goods 8 7,586,822 10.31%
Metalworking Machinery 7 6,144,190 8.35%
Retail 5 5,662,224 7.69%
Services 8 4,953,501 6.73%
Dies, Molds and Patterns 12 4,733,103 6.43%
Other Manufacturing 10 4,321,914 5.87%
Electronic and Electrical Equipment 5 3,288,757 4.47%
Commercial Printing 4 3,265,022 4.44%
Transportation 4 2,873,209 3.90%
Rubber Products 3 1,795,181 2.44%
----------- --------------- ---------------
Total 83 $ 73,600,884 100.00%
=========== =============== ===============
4
The Company's loans are further comprised of fixed rate loans, variable
rate loans with fixed cap rates and variable rate loans.
Percent of
Outstanding Total Loans
Balance Outstanding
--------------- ---------------
Fixed rate $ 12,074,584 16.4%
Variable rate with fixed cap 6,445,669 8.8%
Variable rate 55,080,631 74.8%
--------------- ---------------
Total $ 73,600,884 100.0%
=============== ===============
Further detail regarding the fixed rate loans and the variable rate loans
with a fixed cap is provided in the following table.
Maximum Interest Rates
Expiration
Date 4.0-4.9% 6.0-6.9% 7.0-7.9% 8.0-8.9% 9.0-9.9% Total
- ---------- --------- --------- ------------ ----------- -------- ------------
Demand $ - $ - $ - 1,529,064 $ - $ 1,529,064
2003 80,177 - 635,731 1,819,598 2,936 2,538,442
2004 - - 2,556,577 1,998,567 - 4,555,144
2005 - - 880,097 3,369,402 - 4,249,499
2006 - - 3,117,229 297,283 - 3,414,512
2007 - 590,217 1,643,375 - - 2,233,592
-------- --------- ----------- ----------- ------- ------------
Total $ 80,177 $ 590,217 $ 8,833,009 $ 9,013,914 $ 2,936 $ 18,520,253
======== ========= =========== =========== ======= ============
A loan is considered to be impaired when, based on current information and
events, management does not expect to collect all amounts due according to the
contractual terms of the loan agreement in the normal course of business. A loan
is also impaired when the loan contract is restructured by extending the due
date of either principal or interest payments or by reducing the interest rate
on the loan. A loan is not impaired during a period of delay in payment if
management expects to collect all amounts due including accrued interest at the
contractual interest rate for the period of the delay. When the projected cash
flow of the business from all sources including capital contributions,
conversion of assets to cash, and net income plus depreciation are inadequate to
make contractual payments as scheduled, then the loan is considered impaired.
Impaired loans totaled $2.01 million and $0.52 million at December 31, 2002 and
2001, respectively. One loan which is secured by real estate accounted for $1.75
million of the total at December 31, 2002. Gross income of $0.07 million would
have been recorded during 2002 had the impaired loans been current in accordance
with their original terms.
5
Real Estate
At December 31, 2002 the Company owned 23 buildings and had entered into
long-term lease agreements on 22 of the properties and had one vacant property.
During the year the Company sold two properties. The Company anticipates that it
will continue to construct or purchase additional industrial or commercial
properties to lease. The total cost of the Company's properties (not including
construction in progress and the cost of the related land) at December 31, 2002,
was $33.51 million and the depreciated book value was $31.59 million. Two of the
leased properties were on nonaccrual status during 2002. Rental income of $0.26
million would have been recorded during 2002 had the tenants been current in
accordance with their leases.
The Company anticipates that its rental properties will either be
industrial real estate (i.e. used for manufacturing purposes), or commercial
real estate properties, such as office buildings and retail stores and that
substantially all of its properties will be located in Wisconsin. The following
table sets forth additional information regarding the Company's leased
properties, all of which are located in Wisconsin.
Property Lease Acquistion Square
Type Location Rents Cost Footage
-------------- -------------------------- -------------- --------------- ------------
Commercial Hartland, WI $ 347,236 $ 3,941,150 67,835
Industrial Germantown, WI 365,640 3,450,000 64,910
Commercial Menomonee Falls, WI 306,807 2,249,968 54,805
Commercial Pewaukee, WI 312,144 2,116,454 32,325
Industrial Berlin, WI 209,700 1,921,660 71,830
Industrial Franklin, WI 201,000 1,866,120 37,904
Commercial Mequon, WI 214,248 1,857,248 26,650
Commercial Oconomowoc, WI 176,292 1,678,978 27,045
Industrial Menomonee Falls, WI 180,060 1,650,000 33,358
Commercial Menomonee Falls, WI 108,860 1,565,543 23,958
Industrial Milwaukee, WI 175,956 1,551,910 42,000
Commercial Mequon, WI 146,810 1,351,433 26,248
Industrial Waukesha, WI 164,925 1,165,355 31,174
Commercial Franklin, WI 170,516 1,003,950 27,000
Commercial New Berlin, WI 135,458 962,017 19,958
Industrial Cudahy, WI - * 816,081 32,681
Commercial Lake Geneva, WI 85,068 794,311 8,250
Industrial Cudahy, WI 70,580 715,787 27,750
Commercial Menomonee Falls, WI 80,311 702,493 16,100
Commercial Menomonee Falls, WI 102,205 688,395 19,680
Commercial Milwaukee, WI 73,248 522,328 12,200
Industrial West Allis, WI 53,610 480,000 9,705
Commercial Menomonee Falls, WI 74,576 462,542 10,400
-------------- --------------- ------------
$ 3,755,250 $ 33,513,723 723,766
============== =============== ============
* Property not presently leased
Competition
The Company, in managing its loan portfolio, competes primarily with
commercial banks and commercial finance companies, many of which have
substantially more assets and capital than the Company. Banks, in particular,
have been active in seeking to refinance outstanding loans. The Company
believes, however, that it is able to compete effectively to maintain its loan
portfolio because of its smaller size and more flexible structure.
6
In owning and leasing real estate, the Company competes primarily with
other REITs and other investors such as insurance companies, a variety of
investment companies and individual investors, all of whom seek to own and lease
real estate. In addition, the Company competes with banks and other financial
institutions, which seek to lend money to potential tenants of the Company in
order to allow the potential tenants to construct and own their own building
rather than to lease a building owned by the Company.
Employees
As of December 31, 2002, the Company employed only its President and Vice
President. All other duties are performed by Bank employees pursuant to the
Management Agreement.
Credit Concentration
As of December 31, 2002, the Company had seven loans with outstanding
balances totaling $11.61 million to one customer and its affiliated companies.
Of that amount $4.51 million was participated to a third party without recourse.
Consumer Products Business
Lee Middleton Original Dolls, Inc.
Lee Middleton Original Dolls, Inc. ("LMOD"), headquartered in Westerville,
Ohio with its manufacturing facility located in Belpre, Ohio, is a 99% owned
subsidiary of the Company, with the President of the Company owning the
remaining 1%. LMOD is a manufacturer of artist designed vinyl collectible dolls
and a distributor of vinyl play dolls. LMOD uses a multi-step process to
manufacture its vinyl dolls that includes (1) rotational molding to create body
parts for dolls, (2) painting, eyeing and wigging each doll, and (3) dressing
the dolls in custom designed clothes.
LMOD distributes its collectible doll lines through a network of
independent, specialty retail stores throughout the United States. Distribution
is also slowly expanding into Canada, Japan, Mexico and Europe. Competition is
with various other doll manufacturers including Zapf, Adora, Madam Alexander,
Ashton Drake, Mattel's American Girl and a variety of small artist-owned
manufacturers. LMOD has two outlet stores and a newly opened mall based retail
location showcasing the Newborn Nursery concept that was developed at the
factory outlet retail store. Future growth plans include expanding into the
lower priced, higher volume mass retail channels with newly designed products
while maintaining the quality of the collectible doll line.
At the close of 2001 LMOD ceased sourcing its imported components and play
doll products through its MHK subsidiary in favor of three new Chinese suppliers
of outfits and accessories. The final product assembly is done at the Belpre,
Ohio, factory. This arrangement has allowed LMOD to develop a line of less
expensive dolls for wider retail distribution.
License Products, Inc.
License Products, Inc. ("LPI") is a wholly-owned subsidiary of LMOD. Prior
to January 1, 2002, LMOD owned 51% of LPI. On January 1, 2002, LMOD acquired the
remaining 49% of the common stock of LPI. LPI, located in Hartland, Wisconsin,
designs, develops and markets a line of quality, proprietary time pieces. The
company's products are distributed nationwide through major retail account
channels.
Employees
The Consumer Products Business segment employs approximately 100 persons.
At LMOD, approximately 50 employees are subject to a collective bargaining
agreement which expires on April 30, 2004.
7
Seasonality
The Consumer Products Business tends to be seasonal with the strongest
months being September, October and November.
Large Customers
Kohls Department Stores accounted for approximately 16% and Bed Bath &
Beyond accounted for approximately 5% of the Consumer Products Business' total
revenues for 2002.
Backlog
The backlog of the Consumer Products Business was approximately $0.37
million as of December 31, 2002, all of which should be filled during 2003.
Revenues of Principal Product Groups
The following table sets forth (in thousands of dollars), for each of the
last three years, revenues attributable to the Company's principal product
groups:
12/31/02 12/31/01 12/31/00
------------ ------------ ------------
Revenues
Loan Portfolio $ 4,849 $ 7,895 $10,185
Real Estate Portfolio 4,823 4,039 3,801
Dolls 17,086 23,015 25,468
Time Pieces 6,377 4,216 3,603
Other 997 463 406
------------ ------------ ------------
Total $34,132 $39,628 $43,463
============ ============ ============
Segment Information
Financial information concerning the Company's business segments is
incorporated by reference from the consolidated financial statements on pages 23
to 26 herein.
Executive Officers
George R. Schonath, 62, has served as Chief Executive Officer of the
Company since 1983, as President since July, 1997, and as a director since May,
2001. Mr. Schonath has also served as President and Chief Executive Officer of
InvestorsBancorp, Inc. and the Bank since they were established in 1997. From
1983 until July, 1997, he served as Chairman of the Board of the Company.
Jon McGlocklin, 59, has served as a Vice President of the Company since
November, 2001. From July, 1997, through November, 2001, he served as a Senior
Vice President. Mr. McGlocklin has served as a director of InvestorsBancorp,
Inc. since 1997. Until February 2001 Mr. McGlocklin had also served as Senior
Vice President of InvestorsBancorp, Inc. and Senior Vice President of the Bank
since they were established in 1997. He has also served as President of Healy
Manufacturing, Inc., Menomonee Falls, Wisconsin, since 1997, and as an announcer
for the Milwaukee Bucks, an NBA basketball team, since 1976. From 1980 through
July, 1997, he served as a director of the Company and as President from 1991
through July, 1997.
Susan J. Hauke, 37, has been the Company's Chief Financial Officer since
2002 and Vice President - Finance, Secretary and Treasurer since 1997. In 2002,
Ms. Hauke was also appointed Chief Financial Officer of InvestorsBancorp. She is
also the Vice President - Finance and Secretary of InvestorsBancorp, Inc. and
Controller, Vice President-Finance, and Treasurer of the Bank. From 1991 until
1997, Ms. Hauke served as
8
Controller for the Company and was a senior accountant at PricewaterhouseCoopers
LLP before joining the Company.
Iain Macfarlane, 63, has served as a Senior Vice President of the Company
and Chief Executive Officer of LMOD since December, 2002. Previously he was a
Senior Vice President with Pleasant Company/Mattel (American Girl). From 1997 to
2000 he was CEO of Cowles Creative Publishing and prior to that he was CEO of
Lansinoh Laboratories, Inc. and KNOX International (a direct marketing company).
Item 2. Properties
During October, 2002, the Company sold the building located at W239 N1700
Busse Road, Pewaukee, Wisconsin, to the Bank for $2.4 million, which represented
the fair market value at the time of sale as determined by an independent
appraiser. The Company now leases 4,000 square feet in the building from the
Bank.
LMOD owns an approximately 51,000 square foot building that serves as its
manufacturing facility located at 1301 Washington Boulevard, Belpre, Ohio. The
one-story building also contains retail and warehouse space. During 1999, an
additional leased retail outlet store was opened in West Virginia. A new 44,100
square foot facility in Columbus, Ohio was leased beginning in June of 2000
which is used for distribution and to store raw materials and finished goods. In
September 2000 LMOD entered into a five year office lease for 18,800 square feet
in Westerville, Ohio, which is the company's new headquarters.
LPI leases approximately 62,000 square feet of office and warehouse space
in a building owned by the Company and located at 1050 Walnut Ridge Drive,
Hartland, Wisconsin. During 2002, the Company added approximately 35,000 square
feet of additional warehouse space to the building in order to accommodate
future growth at LPI.
Item 3. Legal Proceedings
As of the date of this filing, neither the Company nor any of its
subsidiaries is a party to any legal proceedings, the adverse outcome of which,
in management's opinion, would have a material effect on the Company's results
of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2002.
9
Part II
Item 5. Market for Common Equity and Related Shareholder Matters
The common stock of the Company is traded on the Nasdaq Stock Market under
the symbol DOLL. The table below represents the high and low sales price for the
Company's common stock as reported on the Nasdaq Stock Market and the cash
dividends paid per share for 2002 and 2001.
Common Stock
---------------------------- Cash Dividends
High Low Per Share
------------ ------------- -------------------
2002
----
First Quarter $ 7.000 $ 5.940 $0.16364
Second Quarter $ 6.990 $ 6.200 $0.16364
Third Quarter $ 6.460 $ 5.550 $0.16364
Fourth Quarter $ 6.100 $ 4.970 $0.16364
2001
----
First Quarter $ 8.250 $ 5.875 $0.16364
Second Quarter $ 8.250 $ 6.500 $0.16364
Third Quarter $ 7.800 $ 4.050 $0.16364
Fourth Quarter $ 7.250 $ 5.550 $0.16364
As of March 14, 2003, there were approximately 910 shareholders of record
of the Company's common stock.
Item 6. Selected Financial Data (In thousands, except per share data)
The following table sets forth certain Selected Consolidated Financial Data
for the periods and as of the dates indicated:
For the years ended
(In thousands, except per December 31,
share data) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total revenues $ 34,132 $39,628 $43,463 $35,947 $32,075
Net income available to
common shareholders 3,203 1,645 4,264 5,476 3,770
Total assets 125,539 157,266 168,214 156,066 154,424
Long-term debt 35,597 48,453 63,772 48,005 62,506
Total liabilities 95,014 126,109 138,068 125,633 125,639
Redeemable preferred stock 16,855 16,855 16,855 16,908 16,908
Diluted earnings per share $ 0.86 $ 0.44 $ 1.11 $ 1.36(1) $ 0.93(1)
Cash dividends declared per
common share $ 0.65 $ 0.65 $ 0.65 $ 0.76(1) $ 0.59(1)
(1) Restated for 10% stock dividend as of December 31, 1999 record date.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Amounts presented as of December 31, 2002, 2001 and 2000 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 years ended December 31, 2002 and December 31, 2001
The Company's total net income available for common shareholders for the
year ended December 31, 2002 equaled $3.20 million or $0.86 per share (diluted)
as compared to $1.64 million or $0.44 per share (diluted) for the year ended
December 31, 2001, a 95% increase. The improved earnings were due to the
consumer products segment recognizing a net operating loss carryforward from LPI
which resulted in an income tax benefit of $0.83 million and the financial
services segment selling two leased properties resulting in income net of
related taxes of $0.78 million and terminating two interest rate swap agreements
resulting in income of $0.75 million.
Consumer Products
Net income (loss) for the consumer products segment before intercompany
charges and after income taxes and minority interest for the year ended December
31, 2002 was $0.41 million compared to ($0.07) million for the year ended
December 31, 2001.
Net sales from consumer products for the year ended December 31, 2002
decreased 14% to $23.46 million from $27.23 million for the year ended December
31, 2001. This was due to decreased sales of $5.93 million at LMOD offset by
increased sales of $2.16 million at LPI. The decrease in sales at LMOD was
primarily due to a $6 million decrease in the artist studio collection sales
resulting from the soft economy and an increase in competition in the
collectible doll market. Sales decreased due to a net loss of over 130 dealers
and the remaining dealers have been ordering conservatively, approximately 20%
below the previous year's levels. If the difficult economic conditions in the
marketplace continue to result in sales decreases, then personnel reductions
and/or periodic plant shut-downs in 2003 might be required in order to further
reduce costs. Cost of sales decreased 7% to $13.91 million for the year ended
December 31, 2002 compared to $14.97 million for the year ended December 31,
2001. LMOD's cost of sales decreased to $9.84 million from $12.07 million, an
18% decrease. LPI's cost of sales increased to $4.07 million from $2.90 million,
a 40% increase. Total gross profit margin decreased to 41% from 45% in the prior
year. LMOD's gross profit margin decreased to 42% from 48% while LPI's increased
to 36% from 31% during 2002. The decrease in the gross profit margin at LMOD was
primarily due to the liquidation of $1.0 million of slow moving inventory,
including the remaining 2001 artist studio collection dolls. Obsolete inventory
from the Small Wonder play doll line and the nursery bear line was also
liquidated. The increase in the gross profit margin at LPI was due to a change
in suppliers which decreased product costs and a decrease in sales to a less
profitable customer, which improved the product mix.
Total operating expenses of consumer products for the year ended December
31, 2002 were $9.76 million compared to $11.98 million for the year ended
December 31, 2001, a 19% decrease. Total operating expenses as a percent of net
sales was 42% in 2002 compared to 44% in 2001. Sales and marketing expense
decreased 21% to $4.98 million, with LMOD's expense decreasing $1.48 million and
LPI's increasing $0.14 million. The increase at LPI was due to an increase in
customer store allowances and promotions for customers' new store openings.
Expense reduction at LMOD was accomplished by decreasing advertising, catalog
printing, and packaging costs. Due to the decrease in sales, cost reductions in
commissions, freight and merchant fees contributed to the overall decrease in
sales and marketing expenses. Reduced participation in trade shows and the
associated reduction in travel expenses also contributed to the decrease. New
product development costs decreased $0.26 million at LMOD due to the
reclassification of quality administration costs. LPI's new product development
11
costs increased $0.14 million due to an increase in sample prototypes being
developed for customer approval. General and administrative expenses were $3.91
million for the year ended December 31, 2002 compared to $4.66 million for the
year ended December 31, 2001. General and administrative expenses at LMOD
decreased $1 million and LPI's increased $0.25 million. LPI's increase was due
to increased shipping costs associated with the increase in sales and higher
costs associated with improved data processing capabilities. Expense reduction
at LMOD was accomplished through personnel reduction and a decrease in royalty
payments due to the decrease in sales.
Other income, net decreased $0.10 million when compared to the same period
a year ago due to a decrease in interest expense. The minority interest in
earnings of subsidiaries decreased the consolidated net income of consumer
products by $0.08 million for the year ended December 31, 2002 and $0.10 million
for the prior year. Consumer products' income tax expense, based on net income
before intercompany charges, was ($0.83) million for the year ended December 31,
2002 and $0.03 million for the year ended December 31, 2001. For the year ended
December 31, 2002, LMOD and LPI were allowed to file consolidated income tax
returns due to the change in stock ownership at LPI. The $0.83 million of income
tax benefit for the year ended December 31, 2002, was primarily due to the
recognition of a net operating loss carryforward of $0.72 million from LPI.
Financial Services
Net income from financial services for the year ended December 31, 2002 was
$3.89 million compared to $2.64 million for the year ended December 31, 2001, a
47% increase. The increase resulted from the sale of two leased properties,
which resulted in income net of related taxes, of $0.78 million and from the
termination of two interest rate swap agreements totaling $0.75 million. In
January 2003, all remaining interest rate swap agreements were terminated
resulting in $0.48 million of income for 2003. The Company does not anticipate
any further income from the termination of interest rate swap contracts.
The net interest margin for 2002 was 3.80% compared to 3.23% for 2001. Net
interest margin is determined by dividing the total of interest income on loans
and rental income less interest expenses 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 $10.63 million for the year ended December 31, 2002
compared to $12.37 million for the year ended December 31, 2001, a 14% decrease.
Interest on loans decreased 39% to $4.85 million for the year ended December 31,
2002 compared to $7.89 million for the year ended December 31, 2001. The large
decrease in interest income from loans was primarily due to the 32% decrease in
the prime rate. The average prime rate was 4.68% for the year ended December 31,
2002 compared to 6.92% for the year ended December 31, 2001. Average loans under
management decreased $19.73 million from a year ago. The 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 and to
maintain its earnings depends on the ability of the Company to obtain additional
sources of funding. For further detail, see "Liquidity and Capital - Financial
Services" in the Management Discussion and Analysis on page 17 hereof.
Rental income was $3.64 million for the year ended December 31, 2002
compared to $3.89 million for the year ended December 31, 2001, a 6% decrease.
The sale of two leased properties resulted in a reduction of $0.22 million in
rents and the transfer of $0.05 million to nonaccrual status further reduced
rental income. Leased properties, net of accumulated depreciation, decreased to
$32.37 million as of December 31, 2002, compared to $34.88 million as of
December 31, 2001. One new property is under construction and improvements to
existing properties totaled $1.64 million during 2002.
Other income for the year ended December 31, 2002, included a gain of $1.19
million from the sale of leased properties, $0.75 million from the termination
of two interest rate swap agreements, $0.13 million in loan prepayment penalties
and $0.08 million of miscellaneous income. For the year ended December 31, 2001,
other income included a gain of $0.15 million from the sale of leased property,
$0.25 million from the termination of two interest rate swap agreements, $0.08
million of fees from letters of credit and $0.11 million of miscellaneous
income.
12
Interest expense decreased 47% to $3.70 million from $7.03 million for the
year ended December 31, 2002 as compared with the year ended December 31, 2001
primarily due to lower rates for the Company's cost of funds and a decrease in
the outstanding average debt balance. 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 224
basis points during 2002. The average debt balance also decreased $22.82 million
during 2002 as a result of the decrease in loans as explained above. As a result
of interest rate swaps, the Company recognized a reduction in interest expense
of $0.54 million for the year ended December 31, 2002, and $0.69 million for the
year ended December 31, 2001.
Depreciation expense decreased $0.04 million for the year ended December
31, 2002 as compared to the year ended December 31, 2001, due to the decrease in
leased properties. Management fees did not change significantly between the
years. Other operating expenses increased to $0.82 million for the year ended
December 31, 2002 compared to $0.78 million for the year ended December 31,
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 due to
the prepayment of a real estate loan, and leased property expenses increased
$0.03 million due to insurance and real estate tax expenses incurred with regard
to two leased properties.
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.
During 2002 and 2001, the Company took advantage of a provision in the tax law
that allows a REIT to retain any capital gains on the sale of real estate
properties by paying income tax on the gains. The Company retained $1.19 million
in capital gains and paid $0.41 million in taxes as of December 31, 2002, and
retained $0.15 million in capital gains and paid $0.06 million in taxes as of
December 31, 2001. Tax basis income for financial services (before the preferred
stock dividend) was approximately $4.98 million or $1.33 per share (diluted) for
the year ended December 31, 2002. Book income for financial services (before the
preferred stock dividend) was $3.89 million or $1.04 per share (diluted) due to
the elimination of intercompany revenue and expenses from the consumer products
segment and normal book/tax adjustments. For the year ended December 31, 2001,
tax basis income for financial services (before the preferred stock dividend)
was approximately $3.99 million or $1.07 per share (diluted) and book income
(before the preferred stock dividend) was $2.64 million or $0.71 per share
(diluted) due to the elimination of intercompany revenue and expenses from the
consumer products segment and normal book/tax adjustments.
For the years ended December 31, 2001 and December 31, 2000
The Company's total net income available for common shareholders for the
year ended December 31, 2001 equaled $1.64 million or $0.44 per share (diluted)
as compared to $4.26 million or $1.11 per share (diluted) for the year ended
December 31, 2000, a 62% decrease.
Consumer Products
Net income(loss) from consumer products after income taxes and minority
interest for the year ended December 31, 2001 was ($0.07) million compared to
$3.32 million for the year ended December 31, 2000, a 102% decrease.
Net sales from consumer products for the year ended December 31, 2001
decreased 6% to $27.23 million compared to $29.07 million for the year ended
December 31, 2000. This was due to decreased sales of $2.45 million at LMOD
offset by increased sales of $0.61 million at LPI. The decrease in sales at LMOD
was primarily due to a $2.22 million decrease in the play doll lines. The artist
studio collection dolls sold to dealers decreased by $0.05 million and the
remaining decrease in sales was in LMOD's two retail stores. The events of
September 11th slowed sales significantly during the final quarter of 2001 which
would normally be the busiest time of the year for LMOD. Cost of sales increased
1% to $14.97 million for the year ended December 31, 2001 compared to $14.88
million for the year ended December 31, 2000. LMOD's cost of sales decreased to
$12.06 million from $12.33 million, a 2% decrease. LPI's cost of sales increased
to $2.90 million from $2.55 million, a 14% increase. Total gross profit margin
decreased to 45% from 49% in the prior year. LMOD's gross profit margin
decreased to 48% from 52% while LPI's increased to 31% from 30% during 2000.
LMOD's profit margin
13
decreased as a result of a change in the product mix to higher cost products, an
inventory write down of $0.40 million due to inventory obsolescence, and the
absorption of fixed factory overhead costs during a three week plant shutdown to
reduce inventory levels. The increase in the gross profit margin at LPI was due
to a shift in the product mix and better product sourcing.
Total operating expenses of consumer products for the year ended December
31, 2001 were $11.98 million compared to $9.37 million for the year ended
December 31, 2000, a 28% increase. Total operating expenses as a percent of net
sales was 44% in 2001 compared to 32% in 2000. Sales and marketing expense
increased 33% to $6.32 million with LMOD's expense increasing $1.48 million and
LPI's increasing $0.08 million. New marketing and royalty expenses related to
LMOD's Alzheimer's and Newborns in Need charitable programs accounted for $0.10
million of the increase. New print advertising and sweepstakes programs
accounted for an additional $0.20 million and one-time set up costs for newborn
nurseries in dealers and the development of new packaging for the play doll line
increased marketing expenses by $0.18 million. Additional sales staffing
accounted for $0.30 million and write-offs for dealers and high volume retailers
who had gone out of business incurred an additional $0.30 million in costs.
Various special promotions accounted for the balance of the increase in costs.
Product development costs increased $0.25 million at LMOD due to the termination
of two of its artist contracts for $0.10 million and due to added staffing costs
of $0.15 million. New product development costs increased $0.04 million at LPI.
General and administrative expenses were $4.66 million for the year ended
December 31, 2001 compared to $3.92 million for the year ended December 31,
2000. General and administrative expenses of LMOD increased $0.70 million and
LPI's increased $0.04 million. The increase at LMOD was primarily due to costs
incurred by the relocation of LMOD's administrative offices to Westerville,
Ohio. The new office lease accounted for $0.25 million of the increase and a new
management accounting software package with training and consulting costs was
$0.12 million. Higher labor costs, additional personnel, computer expenses and
office and warehouse rental space also contributed to the increase. Warehouse
expenses, including higher labor costs, increased $0.27 million from the prior
year.
Other income, net decreased $0.30 million when compared to the same period
a year ago due to a decrease in other income and an increase in interest
expense. The minority interest in earnings of subsidiaries decreased the
consolidated net income of consumer products by $0.10 million for the year ended
December 31, 2001 and $0.11 million for the prior year. Consumer products'
income tax expense, based on net income before intercompany charges, was $0.03
million for the year ended December 31, 2001 and $1.47 million for the year
ended December 31, 2000. This income tax expense was attributable only to LMOD
since LPI has a net operating loss carryforward to offset any current net
income. Since the Company and LMOD were not allowed to file consolidated income
tax returns, an additional $1.24 million in intercompany expenses was deductible
on LMOD's tax return. This additional deduction results in an income tax benefit
of $0.51 million and $0.53 million for the years ended December 31, 2001 and
2000, respectively.
Financial Services
Net income from financial services for the year ended December 31, 2001 was
$2.64 million compared to $1.82 million for the year ended December 31, 2000, a
45% increase. The increase resulted primarily from improved net interest margins
as the Company's cost of funds decreased more rapidly than revenues decreased.
The net interest margin was 3.23% for 2001 compared to 2.70% for 2000. Net
interest margin is determined by interest on loans and rental income less
interest expense divided by average loans and leased properties.
Total revenues were $12.37 million for the year ended December 31, 2001
compared to $14.16 million for the year ended December 31, 2000, a 13% decrease.
Interest on loans decreased 22% to $7.89 million for the year ended December 31,
2001 compared to $10.18 million for the year ended December 31, 2000. The large
decrease in interest income from loans was primarily due to the 25% decrease in
the prime rate. The average prime rate was 6.92% for the year ended December 31,
2001 compared to 9.24% for the year ended December 31, 2000 and average loans
under management decreased $6.75 million from a year ago.
Rental income was $3.89 million for the year ended December 31, 2001
compared to $3.76 million for the year ended December 31, 2000, a 3% increase.
At December 31, 2001 the Company had $34.88 million in leased properties, net of
accumulated depreciation, compared to $35.42 million at December 31, 2000.
14
One property and a piece of vacant land were sold during 2001 resulting in a
total gain of $0.15 million and two properties were acquired through foreclosure
proceedings.
Other income increased $0.01 million to $0.19 million for the year ended
December 31, 2001 from $0.18 million for the year ended December 31, 2000 due to
an increase in letter of credit fees. Other income also includes a $0.25 million
gain from the termination of two interest rate swaps during the year ended
December 31, 2001 (See Note 14).
Interest expense decreased 29% to $7.03 million from $9.93 million for the
year ended December 31, 2001 as compared with the year ended December 31, 2000
primarily due to lower rates for the Company's cost of funds. The Company's debt
has primarily variable rates which were significantly lowered as the Federal
Reserve cut interest rates during 2001. The average debt balance for the year
ended in 2001 decreased 2%, or $3.07 million, when compared to the prior year.
As a result of interest rate swaps, the Company recognized a reduction in
interest expense of $0.69 million for the year ended December 31, 2001, and an
increase in interest expense of $0.05 million for the year ended December 31,
2000.
Depreciation on leased properties increased $0.06 million and management
fee expense decreased $0.02 million. Other operating expenses increased to $0.78
million for the year ended December 31, 2001 compared to $0.60 million for the
year ended December 31, 2000. This increase was due to additional expenses for
certain leased properties.
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.
During 2001, the Company took advantage of a provision in the tax law that
allows a REIT to retain any capital gains on the sale of real estate properties
by paying income tax on the gains. The Company retained $0.15 million in capital
gains and paid $0.06 million in taxes as of December 31, 2001. Tax basis income
for financial services (before the preferred stock dividend) was approximately
$3.99 million or $1.07 per share (diluted) for the year ended December 31, 2001.
Book income for financial services (before the preferred stock dividend) was
$2.64 million or $0.71 per share (diluted) due to the elimination of
intercompany revenue and expenses from the consumer products segment and normal
book/tax adjustments. For the year ended December 31, 2000, tax basis income for
financial services (before the preferred stock dividend) was approximately $3.58
million or $0.93 per share (diluted) and book income (before the preferred stock
dividend) was $1.82 million or $0.47 per share (diluted) due to 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 $17.07 million as of December 31,
2002 and $19.17 million as of December 31, 2001, an 11% decrease.
Cash decreased to $0.50 million at December 31, 2002 from $0.68 million at
December 31, 2001.
Accounts receivable, net of the allowance, decreased to $3.23 million at
December 31, 2002 from $3.95 million at December 31, 2001. LPI's receivables
increased $0.48 million and LMOD's receivables decreased $1.20 million as a
result of their respective fourth quarter sales.
Inventory, net of the allowance for obsolete inventory, was $6.35 million
at December 31, 2002 compared to $6.77 million at December 31, 2001. LMOD's
inventory decreased $1.07 million and LPI's inventory increased $0.65 million.
Fixed assets increased by $0.39 million which included $0.28 million of
machinery and equipment additions. Accumulated depreciation increased by $0.55
million, resulting in a net decrease to fixed assets of $0.16 million between
December 31, 2002 and 2001.
15
Prepaid corporate taxes decreased $0.12 million from the prior year due to
the refund of 2001 estimated income tax payments. Deferred income taxes
increased by $0.60 million between December 31, 2002 and 2001 due to the
recognition of income tax loss carryforwards from LPI. LMOD received payment of
a remaining loan balance of $0.62 million from an independent third party during
2002. Other prepaid expenses did not change significantly between the years.
A licensing agreement with the Family Trust of the founder of LMOD, Lee
Middleton, allows LMOD to manufacture and sell certain dolls designed by Lee
Middleton. The $2.5 million agreement gives LMOD the right to produce certain
dolls until April 28, 2003, and an additional twelve months to sell any
remaining inventory. The agreement is treated as an intangible asset with a
definite five year life. The remaining unamortized balance of the licensing
agreement was $0.17 million and $0.67 million as of December 31, 2002 and 2001,
respectively. Sales of Lee Middleton designed dolls have been decreasing during
the past few years and represented less than five percent of LMOD's sales during
2002. Artist Reva Schick now designs dolls for LMOD under a royalty agreement.
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 the book value by $0.62 million. As of
December 31, 2002 and 2001, the balance of the goodwill, net of previous
accumulated amortization, was $0.51 million. For the years ended December 31,
2002 and 2001, no impairment was recorded.
LMOD decreased its short-term borrowings on a line of credit with the Bank
by $2.16 million during the year ended December 31, 2002. The remaining balance
on the line of credit of $1.24 million matured and was paid on February 28,
2003. The debt was replaced with intercompany loans which are collateralized by
LMOD's and LPI's accounts receivable and inventory.
Accounts payable and other liabilities did not change significantly between
the years.
Financial Services
Total assets of financial services were $108.47 million as of December 31,
2002 and $138.09 million as of December 31, 2001.
Cash increased to $0.43 million at December 31, 2002 from $0.23 million at
December 31, 2001.
Interest and rent receivable decreased to $0.52 million as of December 31,
2002 from $0.57 million at December 31, 2001. Interest receivable decreased
$0.16 million due to lower interest rates and due to lower outstanding loan
balances. Rents receivable increased $0.11 million primarily due to two tenants
becoming delinquent in their rent payments. The rent receivable is shown net of
an allowance for doubtful accounts of $150,000 as of December 31, 2002 and 2001,
respectively. At December 31, 2002, three borrowers were on nonaccrual resulting
in $0.07 million of gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms. Two
tenants were also on nonaccrual resulting in $0.26 million of rental income
which would have been recorded had the tenants been current in accordance with
their leases.
Fixed assets and other assets including prepaid amounts decreased by $0.47
million. Of that amount, prepaid expenses decreased $0.07 million, fixed assets
decreased $0.07 million due to depreciation and notes receivable relating to
leased properties decreased by $0.23 million.
The Company's interest rate swaps are cash flow hedges and had a fair value
of $0.51 million as of December 31, 2002. The $1.19 million decrease in value
from December 31, 2001, was due to the termination of two swaps which resulted
in a gain of $0.75 million. The remaining $0.44 million decrease was offset by
$0.54 million of interest income earned from the interest rate swaps.
16
Total loans on the balance sheet decreased by $25.62 million or 26% to
$73.60 million at December 31, 2002, from $99.22 million at December 31, 2001,
with a corresponding decrease in liabilities. As of December 31, 2002 and 2001,
management did not provide an allowance for loan losses. Nonperforming and
impaired loans at December 31, 2002, totaled $2.09 million. BMSBLC had unfunded
commitments of $1.28 million as of December 31, 2002.
The decrease in loans noted above was primarily due to loans maturing and
the Company's inability to replace them with current funding sources. The
Company's ability to make additional loans depends upon 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. 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. Additionally, the planned redemption of
$16.9 million of preferred stock in 2008 requires the Company to continue to
focus on asset quality while de-leveraging the balance sheet.
Leased properties, net of accumulated depreciation, decreased to $32.37
million as of December 31, 2002, compared to $34.88 million as of December 31,
2001. One new property is under construction and improvements to existing
properties totaled $1.64 million during 2002. Two properties were sold during
2002 resulting in income net of related taxes of $0.78 million.
The financial services' total consolidated indebtedness at December 31,
2002 decreased $29.10 million. As of December 31, 2002, financial services had
$35.60 million outstanding in long-term debt and $54.75 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 $60 million line of credit that 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 that its line of credit will be
renewed 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.
Long-term debt of $2.67 million matures in 2006, $0.06 million in 2010, $7
million matures in 2013, $1.39 million in 2018, and $24.48 million matures at
the varying maturity dates of the underlying notes (See Note 12).
Critical 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. The following areas require
management to make estimates that are susceptible to significant change in the
near term.
Consumer Products
Allowance for doubtful accounts. The Company provides an allowance for
doubtful accounts based on management's estimate of uncollectible amounts. The
estimate is based on historical collection experience and a review of the
current status of trade accounts receivable.
Inventory valuation. Inventories are valued at lower of cost or market
using the first-in, first-out (FIFO) method.
17
Allowance for obsolete inventory. The Company provides an allowance for
obsolete inventory items based on management's estimate. The estimate is based
on items which are slow-moving or obsolete and for which management estimates
that full value cannot be realized.
Amortization of goodwill. 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 accounting principle.
Thereafter, goodwill impairment losses will be charged to operations.
Deferred tax assets. Amounts provided for income tax expense are based on
income reported for financial statement purposes and do not necessarily
represent amounts currently payable under tax laws. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. The differences relate
principally to different methods used for depreciation for income tax purposes,
vacation accruals, health insurance, deferred revenue, net operating losses,
capitalization requirements of the Internal Revenue Code, allowances for
doubtful accounts and obsolete inventory and charitable contribution
carryforwards. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Financial Services
Accrual of interest income. 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.
Accrual of rental income. 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.
Allowance for loan losses. 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.
Leased properties. 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.
Nonperforming loans. A loan is impaired when, based on current information
and events, management does not expect to collect all amounts due according to
the contractual terms of the loan agreement in the normal course of business. A
loan is also impaired when the loan contract is restructured by extending the
due date of either principal or interest payments or by reducing the interest
rate on the loan. A loan is not impaired during a period of delay in payment if
management expects to collect all amounts due including accrued interest at the
contractual interest rate for the period of the delay. When the projected cash
flow of the business from all sources including capital contributions,
conversion of assets to cash, and net income plus depreciation are inadequate to
make contractual payments as scheduled, then the loan is considered impaired.
Unfunded commitments. Unfunded commitments are recorded in the financial
statements when they are funded or when related fees are incurred or received.
Derivative Instruments. 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.
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
18
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 (See Note 20).
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "may", "will", "could", "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and the
subsidiaries include, but are not 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 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 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company utilizes derivative instruments for purposes of asset liability
management which involves both credit and market risk. The Company has entered
into various interest rate swap agreements with other financial institutions to
manage interest rate exposure. 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.
Interest rate swaps are contracts in which a series of interest rate
payments are exchanged over a specified period based on a notional amount. The
notional amount on which the interest payments are based is not exchanged.
Therefore, notional amounts do not represent direct credit exposures as the
exposure is limited to the net difference between the calculated amounts to be
received and paid by the financial institutions participating in the interest
rate swap. Most interest rate swaps involve the exchange of fixed and floating
interest rates. By entering into an interest rate swap the Company can change
the interest payment stream and effectively change fixed rate debt into variable
rate debt.
The Company's interest rate swap agreements are structured so that the
Company pays a variable interest rate and receives a fixed rate based on the
LIBOR index. In August of 2001, the Company entered into additional interest
rate swap agreements which then fixed the interest rate spread of the existing
rate swaps. These swap agreements allow the Company to pay a fixed rate and
receive a variable rate based on the LIBOR index.
19
The following table summarizes the interest rate swap agreements in effect at
December 31, 2002:
Variable Interest Fixed Interest
Notional Company Fair Market Rate Rate Expiration Rate
Amount Payment Value (Paid) Received Received (Paid) Date Index
- ----------------- ------------ --------------- --------------------- --------------------- --------------- -------------
$ 16,908,000 Variable $ 364,995 (1.40000%) 5.725% 06/30/03 LIBOR
16,908,000 Fixed (237,624) 1.40000% (4.160)% 06/30/03 LIBOR
5,000,000 Variable 618,851 (1.42000%) 7.600% 03/10/05 LIBOR
5,000,000 Fixed (329,060) 1.42000% (5.030)% 03/10/05 LIBOR
3,125,000 Variable 280,887 (1.40000%) 6.500% 09/29/05 LIBOR
3,125,000 Fixed (185,733) 1.40000% (5.010)% 09/29/05 LIBOR
As a result of hedge arrangements, the Company recognized a $0.54 million
reduction in interest expense for the year ended December 31, 2002 and a $0.69
million reduction in interest expense for the year ended December 31, 2001. In,
addition, the Company recognized a gain of $0.75 million in 2002 and a gain of
$0.25 million in 2001 on the termination of interest rate swaps.
20
Item 8. Financial Statements and Supplementary Data
The Middleton Doll Company
Consolidated Financial Statements
Contents
Report of Virchow, Krause & Company, LLP, Independent Auditors................22
Consolidated Balance Sheets as of December 31, 2002 and 2001..................23
Consolidated Statements of Income
For the years ended December 31, 2002, 2001 and 2000.................25
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2002, 2001 and 2000.................27
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000.................28
Notes to Consolidated Financial Statements.................................30
Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant..........55
Schedule II Valuation and Qualifying Accounts.....................55
Schedule IV Mortgage Loans on Real Estate..........................56
21
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Middleton Doll Company and Subsidiaries
Waukesha, Wisconsin
We have audited the accompanying consolidated balance sheets of The Middleton
Doll Company and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 2002, 2001 and 2000. We have also audited
the financial statement schedules listed in Item 8. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Middleton Doll
Company and Subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for the years ended December 31, 2002,
2001 and 2000, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the financial statement
schedules listed in Item 8, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
VIRCHOW, KRAUSE & COMPANY, LLP
Milwaukee, Wisconsin
January 24, 2003
22
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
2002 2001
---------------- ----------------
CONSUMER PRODUCTS
Current Assets:
Cash and cash equivalents $ 500,815 $ 681,267
Accounts receivable, net 3,233,376 3,954,444
Inventory, net 6,206,737 6,093,822
Prepaid inventory 142,512 676,943
Prepaid corporate taxes 677,295 798,262
Other prepaid expenses 327,977 304,775
---------------- ----------------
Total current assets 11,088,712 12,509,513
Property and equipment, net 3,995,514 4,150,695
Loan - 621,968
Deferred income taxes 1,316,526 716,722
Licensing agreement, net 166,666 666,666
Goodwill 506,145 506,145
---------------- ----------------
Total Consumer Products Assets 17,073,563 19,171,709
---------------- ----------------
FINANCIAL SERVICES
Cash and cash equivalents 433,847 229,506
Interest receivable 268,091 431,284
Rent receivable, net 250,487 136,939
Loans, net 73,600,884 99,218,367
Leased properties, net 32,374,813 34,876,486
Property and equipment, net 73,404 141,340
Interest rate swap contracts 512,316 1,704,170
Other assets 951,260 1,356,617
---------------- ----------------
Total Financial Services Assets 108,465,102 138,094,709
---------------- ----------------
TOTAL ASSETS $ 125,538,665 $ 157,266,418
================ ================
See accompanying notes to consolidated financial statements.
23
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST, PREFERRED STOCK AND SHAREHOLDERS' EQUITY
2002 2001
---------------- ----------------
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 1,242,000 $ 3,400,000
Accounts payable 1,019,546 794,179
Accrued salaries 250,611 217,078
Accrued liabilities 494,784 753,826
---------------- ----------------
Total Current Liabilities 3,006,941 5,165,083
Long-term debt - 16,518
---------------- ----------------
Total Consumer Products Liabilities 3,006,941 5,181,601
---------------- ----------------
FINANCIAL SERVICES
Commercial paper 51,272,618 62,806,903
Lines of credit 3,480,000 8,200,000
Direct pay letter of credit obligation 7,305,000 7,800,000
State of Wisconsin Investment Board notes payable 9,666,667 11,000,001
Loan participations with repurchase options 17,184,176 28,123,907
Other borrowings 1,441,042 1,512,317
Accrued liabilities 1,657,322 1,484,405
---------------- ----------------
Total Financial Services Liabilities 92,006,825 120,927,533
---------------- ----------------
MINORITY INTEREST AND PREFERRED STOCK
Minority interest in subsidiaries 51,641 255,260
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 2,933,904 2,170,816
Treasury stock, 674,010 shares, at cost (6,725,922) (6,725,922)
Accumulated other comprehensive income 512,316 1,704,170
---------------- ----------------
13,618,483 14,047,249
---------------- ----------------
TOTAL LIABILITIES, MINORITY INTEREST, PREFERRED STOCK AND
SHAREHOLDERS' EQUITY $ 125,538,665 $ 157,266,418
================ ================
See accompanying notes to consolidated financial statements.
24
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
- ----------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------
CONSUMER PRODUCTS
NET SALES $ 23,463,333 $ 27,230,808 $ 29,070,575
COST OF GOODS SOLD 13,910,220 14,965,180 14,883,028
---------------- ---------------- ----------------
Gross Profit 9,553,113 12,265,628 14,187,547
---------------- ---------------- ----------------
OPERATING EXPENSES
Sales and marketing 4,978,653 6,324,482 4,756,412
New product development 868,100 991,648 702,005
General and administrative 3,909,984 4,659,596 3,916,553
---------------- ---------------- ----------------
Total Operating Expenses 9,756,737 11,975,726 9,374,970
---------------- ---------------- ----------------
Net operating income (loss) (203,624) 289,902 4,812,577
---------------- ---------------- ----------------
OTHER INCOME (EXPENSES)
Interest expense (167,091) (253,642) (153,133)
Other income, net 39,256 25,171 229,238
---------------- ---------------- ----------------
Net Other Income (Expenses) (127,835) (228,471) 76,105
---------------- ---------------- ----------------
Income (loss) before income taxes, minority
interest and intercompany charges (331,459) 61,431 4,888,682
Less: Applicable income tax (expense) benefit 826,718 (25,064) (1,466,604)
Minority interest in earnings of subsidiaries (84,129) (101,806) (106,085)
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INTERCOMPANY CHARGES - CONSUMER
PRODUCTS $ 411,130 $ (65,439) $ 3,315,993
================ ================ ================
FINANCIAL SERVICES
REVENUES
Interest on loans $ 4,849,362 $ 7,894,999 $ 10,184,955
Rental income 3,636,388 3,887,964 3,764,427
Gain on sales of leased properties 1,186,961 150,979 36,471
Other income 209,230 188,639 177,693
Gain on termination of interest rate swaps 747,000 249,500 -
---------------- ---------------- ----------------
Total Revenues 10,628,941 12,372,081 14,163,546
---------------- ---------------- ----------------
EXPENSES
Interest expense 3,699,308 7,027,025 9,931,103
Depreciation expense 825,244 863,309 805,320
Management fee expense 985,720 991,511 1,012,023
Other operating expenses 820,658 783,547 599,469
---------------- ---------------- ----------------
Total Expenses 6,330,930 9,665,392 12,347,915
---------------- ---------------- ----------------
Income before income taxes and
intercompany revenue 4,298,011 2,706,689 1,815,631
Less: Applicable income tax expense (406,173) (64,970) -
---------------- ---------------- ----------------
INCOME BEFORE INTERCOMPANY REVENUE - FINANCIAL SERVICES $ 3,891,838 $ 2,641,719 $ 1,815,631
================ ================ ================
See accompanying notes to consolidated financial statements.
25
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years Ended December 31, 2002, 2001 and 2000
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------
TOTAL COMPANY
Income (loss) before income taxes, minority
interest and intercompany activity
Consumer products $ (331,459)$ 61,431 $ 4,888,682
Financial services 4,298,011 2,706,689 1,815,631
---------------- ---------------- ----------------
Total Company 3,966,552 2,768,120 6,704,313
Income tax benefit (expense) 758,305 416,325 (938,958)
Minority interest in earnings of subsidiaries (84,129) (101,806) (106,085)
---------------- ---------------- ----------------
NET INCOME 4,640,728 3,082,639 5,659,270
Preferred stock dividends (1,437,712) (1,437,713) (1,394,874)
---------------- ---------------- ----------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,203,016 $ 1,644,926 $ 4,264,396
================ ================ ================
Basic earnings per common share $ 0.86 $ 0.44 $ 1.11
================ ================ ================
Diluted earnings per common share $ 0.86 $ 0.44 $ 1.11
================ ================ ================
Weighted average shares outstanding 3,727,589 3,727,589 3,832,769
================ ================ ================
SEGMENT RECONCILIATION
CONSUMER PRODUCTS
Income (loss) before intercompany charges $ 411,130 $ (65,439) $ 3,315,993
Interest and rent expense to parent (590,088) (823,953) (1,223,495)
Management fees to parent (438,909) (416,537) (530,317)
Applicable income tax benefit related to intercompany
charges 337,760 506,359 527,646
---------------- ---------------- ----------------
Total Segment Net Income (Loss) (280,107) (799,570) 2,089,827
---------------- ---------------- ----------------
FINANCIAL SERVICES
Income before intercompany revenue 3,891,838 2,641,719 1,815,631
Interest and rent income from subsidiary 590,088 823,953 1,223,495
Management fees from subsidiary 438,909 416,537 530,317
---------------- ---------------- ----------------
Total Segment Net Income 4,920,835 3,882,209 3,569,443
---------------- ---------------- ----------------
NET INCOME $ 4,640,728 $ 3,082,639 $ 5,659,270
================ ================ ================
See accompanying notes to consolidated financial statements.
26
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional other
Common paid-in Retained Treasury comprehensive
stock capital earnings stock income Total
----------- ------------- ------------ ------------ --------------- ---------------
BALANCES - December 31, 1999 $ 293,441 $ 16,604,744 $ 1,218,617 $(4,633,158) $ - $ 13,483,644
Net income - 2000 - - 5,659,270 - - 5,659,270
Purchase 257,200 shares of treasury
stock - - - (2,092,764) - (2,092,764)
Cash dividends on preferred stock -
8.53% dividend rate - - (1,394,874) - - (1,394,874)
Cash dividends on common stock -
$.65 per share - - (2,517,199) - - (2,517,199)
----------- ------------- ------------- ----------- -------------- ---------------
BALANCES - December 31, 2000 293,441 16,604,744 2,965,814 (6,725,922) - 13,138,077
---------------
Comprehensive income
Net income - 2001 - - 3,082,639 - - 3,082,639
Unrealized gains on
cash flow hedges - - - - 2,645,838 2,645,838
Reclassification adjustment
for gains realized on
termination of cash flow
hedges included in net
income - - - - (249,500) (249,500)
Reclassification adjustment
for cash flow hedging
gains included in net
income - - - - (692,168) (692,168)
---------------
Total Comprehensive Income 4,786,809
---------------
Cash dividends on preferred stock -
8.53% dividend rate - - (1,437,713) - - (1,437,713)
Cash dividends on common stock -
$.65 per share - - (2,439,924) - - (2,439,924)
----------- ------------- ------------- ----------- -------------- ---------------
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 - 2002 - - 4,640,728 - - 4,640,728
Unrealized gains on
cash flow hedges - - - - 95,317 95,317
Reclassification adjustment
for gains realized on
termination of cash flow
hedges included in net
income - - - - (747,000) (747,000)
Reclassification adjustment
for cash flow hedging
gains included in net
income - - - - (540,171) (540,171)
---------------
Total Comprehensive Income 3,448,874
---------------
Cash dividends on preferred stock -
8.53% dividend rate - - (1,437,712) - - (1,437,712)
Cash dividends on common stock -
$.65 per share - - (2,439,928) - - (2,439,928)
----------- ------------- ------------- ----------- -------------- ---------------
BALANCES - December 31, 2002 $ 293,441 $ 16,604,744 $ 2,933,904 $(6,725,922) $ 512,316 $ 13,618,483
=========== ============= ============= =========== ============== ===============
See accompanying notes to consolidated financial statements.
27
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------
CONSUMER PRODUCTS
CASH FLOWS FROM OPERATING ACTIVITIES
Segment net income (loss) $ (280,107) $ (799,570) $ 2,089,827
Adjustments to reconcile segment net
income (loss) to net cash flows from
operating activities
Depreciation and amortization 1,357,557 1,099,844 1,113,760
Provision for losses on accounts
receivable 479,984 390,845 15,400
(Gain) loss on disposal of property and equipment (6,391) 16,508 -
Provision for inventory reserve 186,583 372,401 305,823
Deferred income tax benefit (599,804) (304,464) (192,258)
Change in minority interest in subsidiaries (203,619) 101,806 112,399
Net change in
Accounts receivable 241,084 (458,787) (947,474)
Inventory, net (299,498) (37,092) (1,754,721)
Other assets 632,196 (178,858) (447,891)
Accounts payable 225,367 (107,161) 12,871
Other liabilities (225,509) (111,370) (40,139)
------------------ ------------------ ------------------
Net Cash Flows from Operating Activities 1,507,843 (15,898) 267,597
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment expenditures (695,985) (1,301,255) (1,136,703)
Repayment of loans 621,968 - -
------------------ ------------------ ------------------
Net Cash Flows from Investing Activities (74,017) (1,301,255) (1,136,703)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in short term
borrowings (2,158,000) 2,223,074 976,926
Net (decrease) increase in other notes
payable (16,518) (301,298) 287,890
Net intercompany transactions 560,240 (551,774) (298,211)
------------------ ------------------ ------------------
Net Cash Flows from Financing Activities (1,614,278) 1,370,002 966,605
------------------ ------------------ ------------------
Net Change in Cash and Cash Equivalents (180,452) 52,849 97,499
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 681,267 628,418 530,919
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 500,815 $ 681,267 $ 628,418
================== ================== ==================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 167,091 $ 191,402 $ 153,133
Cash paid (received) for income taxes (685,641) 214,834 955,232
See accompanying notes to consolidated financial statements.
28
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2002, 2001 and 2000
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------
FINANCIAL SERVICES
CASH FLOWS FROM OPERATING ACTIVITIES
Segment net income $ 4,920,835 $ 3,882,209 $ 3,569,443
Adjustments to reconcile segment net
income to net cash flows from
operating activities
Depreciation 825,244 863,309 805,319
Change in appreciation on investments - - (33,514)
Gain on sale of leased properties (1,186,961) (150,979) (36,471)
Net change in
Interest receivable 163,193 341,620 (175,199)
Rent receivable (113,548) 159,515 (916,500)
Other assets 405,357 65,794 29,601
Accrued liabilities 172,917 (305,353) -
------------------ ------------------ ------------------
Net Cash Flows from Operating Activities 5,187,037 4,856,115 3,242,679
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net loan repayments received 25,617,483 12,050,935 1,960,378
Proceeds from sale of leased properties 6,199,083 1,387,187 1,645,657
Purchase or construction of leased property (3,267,757) (1,467,508) (13,671,667)
Property and equipment expenditures - - (8,972)
Net intercompany transactions (560,240) 551,774 298,211
------------------ ------------------ ------------------
Net Cash Flows from Investing Activities 27,988,569 12,522,388 (9,776,393)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in commercial paper (11,534,285) 1,461,038 (7,311,307)
Net change in lines of credit (4,720,000) 200,000 3,000,000
Net payments on letter of credit (495,000) (4,285,000) 12,085,000
Repayment of SWIB notes (1,333,334) (1,333,332) (1,333,334)
Proceeds from (repayment of) loan participations with
repurchase options (10,939,731) (9,333,449) 4,733,121
Net repayment of other long-term debt (71,275) (65,893) (5,551)
Preferred stock dividends paid (1,437,712) (1,437,713) (1,448,124)
Common stock dividends paid (2,439,928) (2,439,924) (2,517,199)
Purchase of treasury stock - - (2,092,764)
------------------ ------------------ ------------------
Net Cash Flows from Financing Activities (32,971,265) (17,234,273) 5,109,842
------------------ ------------------ ------------------
Net Change in Cash and Cash Equivalents 204,341 144,230 (1,423,872)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 229,506 85,276 1,509,148
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 433,847 $ 229,506 $ 85,276
================== ================== ==================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 4,085,858 $ 7,307,518 $ 9,718,128
See accompanying notes to consolidated financial statements.
29
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Consolidation
The consolidated financial statements of The Middleton Doll Company and
Subsidiaries (the Company) include the accounts of the Company, Bando McGlocklin
Small Business Lending Corporation (BMSBLC) and Lee Middleton Original Dolls,
Inc. (LMOD). LMOD includes the accounts of its wholly owned subsidiary License
Products, Inc. (LPI) and its 51% owned subsidiary, Middleton (HK) Limited (MHK).
In 2002, Middleton (HK) Limited was liquidated. The consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Nature of Business
On May 3, 2001, the shareholders approved a name change from Bando McGlocklin
Capital Corporation to The Middleton Doll Company. The Middleton Doll Company
and Subsidiaries (the Company), was incorporated in February 1980, to provide
long-term secured loans to small businesses. At the present time, the Company
consists of two business segments, the financial services segment and the
consumer products segment.
The financial services segment consists of the Company and its wholly-owned
subsidiary BMSBLC. Both the Company and BMSBLC operated as a real estate
investment trust (REIT) pursuant to the provisions of Section 856 of the
Internal Revenue Service Code of 1986, as amended. The principal business of the
segment is making loans and leasing buildings to small businesses. The segment
has participated in loans with third party loan originators.
The consumer products segment consists of a 99% interest in LMOD, including a
51% interest in LMOD's subsidiary, MHK, and a 100% interest in LPI. On January
1, 2002, LMOD acquired the remaining 49% interest in LPI. LMOD is a manufacturer
of collectible vinyl dolls and a distributor of vinyl play dolls. LPI designs,
develops and markets a line of quality, proprietary time pieces.
Use of Estimates
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 allowances for loan and lease losses and doubtful accounts and the
valuation of inventories and deferred income tax assets.
Segment Information
The Company is reporting segment assets, liabilities, sales and operating income
in the same format reviewed by the Company's management. As discussed in Nature
of Business above, the Company has two reportable segments: consumer products
(which includes LMOD, MHK and LPI) and financial services (which includes the
Company and BMSBLC). Segment information required to be disclosed is included in
the accompanying consolidated financial statements. Intersegment charges are
reflected in the segment reconciliation on the consolidated statements of income
and on the consolidated statements of cash flows.
30
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are defined as
those financial assets with an original maturity of three months or less. The
Company may at times maintain balances at financial institutions that exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
Loans
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. Interest income is accrued
on the unpaid principal balance. 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 payment 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.
Allowance for Loan Losses
A loan is considered impaired when, based on current information and events, it
is probable that the lender will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured on a loan by
loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. Management reviews the value of the collateral on each
loan to determine if an allowance for loan losses is necessary. Management has
determined that no allowance for loan losses is necessary.
Rent Receivable
Rent receivable is accrued on a monthly basis based on the lease agreement. If
at any point it is determined the lessee will not make rent payments as dictated
by the lease agreement, the accrual of rent is discontinued until management
determines the rent to be collectible. Rent receivable is presented net of an
allowance for lease losses of $150,000 at December 31, 2002 and 2001.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $332,386 and $326,389 at December 31, 2002 and 2001,
respectively.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements as a means of managing its
interest rate exposure. The differential to be paid or received on all interest
rate swap agreements is accrued as interest rates change and is recognized over
the life of the agreements. The swap agreements are recorded at fair value on
the consolidated balance sheet with the net adjustment recorded as other
comprehensive income.
31
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
Inventory
Inventories of LMOD and LPI are valued at lower of cost or market using the
first-in, first-out (FIFO) method.
Leased Properties
Leased properties are recorded at their cost value. Depreciation is calculated
using the straight-line method over 40 years for book purposes and 39 years for
tax purposes. The costs of normal repairs and maintenance are charged to expense
as incurred.
Property and Equipment
Property and equipment primarily represent manufacturing property, plant and
equipment of LMOD and LPI. Property and equipment is stated at cost and
depreciated using straight-line methods for financial statement purposes and
accelerated methods for income tax purposes. Maintenance and repair costs are
charged to expense as incurred, and renewals and improvements that extend the
useful life of the assets are added to the property and equipment accounts.
Revenue Recognition
Revenue is recognized when products are shipped.
Research and Development Costs
The cost of research, development and product improvement costs are charged to
expense as they are incurred. Research, development and product improvement
costs are reported as a separate component of operating expenses and total
$868,100, $991,648 and $702,005 for the years ended December 31, 2002, 2001 and
2000, respectively.
Stock-Based Compensation Plan
At December 31, 2002, the Company has a stock-based employee compensation plan
which is described more fully in Note 17. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the approximate
market value of the underlying common stock on the date of grant. The following
table illustrates, in accordance with SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure, the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
2002 2001 2000
---------------- ---------------- ----------------
Net income available to common shareholders - as reported $ 3,203,016 $ 1,644,926 $ 4,264,396
================ ================ ================
Basic earnings per share - as reported $ 0.86 $ 0.44 $ 1.11
================ ================ ================
Diluted earnings per share - as reported $ 0.86 $ 0.44 $ 1.11
================ ================ ================
32
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
Income Taxes
The Company and its qualified REIT subsidiary, BMSBLC, qualify as real estate
investment trusts under the Internal Revenue Code. Accordingly, they are not
subject to income tax on taxable income that is distributed to shareholders.
During 2001 and 2002, the Company took advantage of a provision in the tax law
that allows a REIT to retain any capital gains on sale of real estate properties
and pay the corresponding tax on the gains.
In order to qualify as a REIT under the Internal Revenue Code, the Company,
together with its qualified REIT subsidiary, BMSBLC, among other requirements,
must meet certain annual income and quarterly asset diversification tests
including not holding the securities of any one issuer valued at more than 5% of
total assets, and not holding more than 10% of the outstanding voting securities
of any one issuer, unless, in both cases, that issuer qualifies as a taxable
real estate investment trust subsidiary.
LMOD and LPI are taxed as C corporations and file a consolidated federal income
tax return and individual state income tax returns.
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The differences relate principally to different
methods used for depreciation for income tax purposes, vacation accruals, heatlh
insurance, deferred revenue, net operating losses, capitalization requirements
of the Internal Revenue Code, allowances for doubtful accounts and obsolete
inventory and charitable contribution carryforwards. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amount
expected to be realized.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expense
was $920,361, $1,408,734 and $1,173,154 for the years ended December 31, 2002,
2001 and 2000, respectively
Off-Balance Sheet Financial Instruments
In the ordinary course of business BMSBLC has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
33
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
Derivative Financial Instruments Designated As Hedges
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", and SFAS No. 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 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 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. The
interest component associated with the contract is recognized over the life of
the contract as an adjustment to interest expense.
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.
Earnings Per Share
Earnings per share are computed based upon the weighted average number of common
shares outstanding during each year. In the computation of diluted earnings per
share, all dilutive stock options are assumed to be exercised at the beginning
of each year and the proceeds are used to purchase shares of the Company's
common stock at the average market price during the year.
34
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Carrying Amounts Approximate Fair Values for the Following Instruments
Cash and cash equivalents
Accounts receivable
Interest receivable
Rent receivable
Variable rate loans that reprice frequently where no
significant change in credit risk has occurred
Short-term borrowings
Accounts payable
Variable rate long-term debt
Quoted Market Prices
Where available, or if not available, based on quoted market prices
of comparable instruments for the following instruments:
Interest rate swaps
Redeemable preferred stock
Discounted Cash Flows
Using interest rates currently being offered on instruments with
similar terms and with similar credit quality:
All loans except variable rate loans described above
Fixed rate long-term debt
Quoted fees currently being charged for similar instruments
Taking into account the remaining terms of the agreements and the
counterparties' credit standing:
Off-balance-sheet instruments
-----------------------------
Letters of credit
Lending commitments
Since the majority of the Company's off-balance-sheet instruments consist of
nonfee-producing, variable rate commitments, the Company had determined these do
not have a distinguishable fair value.
35
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
Recent Statement of Financial Accounting Standards (SFAS) Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period it is incurred if a reasonable estimate
of fair value can be made. The associated retirement costs are capitalized as a
component of the carrying amount of the long-lived asset and allocated to
expense over the useful life of the asset. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Management does not believe the adoption of this statement will have a material
impact on the consolidated financial statements.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
establishes accounting and reporting standards for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed. SFAS
No. 144 provides one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held for use or newly acquired and
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted this statement as of January 1, 2002 and the implementation of
this standard did not have a material impact on the consolidated financial
statements.
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and amends SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also
rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. It
further amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Most provisions of this
statement are effective for financial statements issued for fiscal years
beginning after May 15, 2002. Adoption of this statement is not expected to have
a material impact on the consolidated financial statements.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
addresses financial accounting and reporting for costs associated with exit or
disposal activities and requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002. Adoption of this statement is not
expected to have a material impact on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company does not anticipate the
Interpretation will have a material impact on its consolidated financial
statements.
36
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (cont.)
- --------------------------------------------------------------------------------
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities. This Interpretation addresses consolidation by
business enterprises of variable interest entities. Under current practice,
entities generally have been included in consolidated financial statements
because they are controlled through voting interests. This Interpretation
explains how to identify variable interest entities and how an entity assesses
its interests in a variable interest entity to decide whether to consolidate
that entity. FIN 46 requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. The Company does not
anticipate FIN 46 will have a material impact to its consolidated financial
statements.
Reclassification
Certain 2001 and 2000 amounts have been reclassified to conform with the 2002
presentation. The reclassifications have no effect on reported amounts of net
income or equity.
- --------------------------------------------------------------------------------
NOTE 2 - Related Entity
- --------------------------------------------------------------------------------
The Company shares common ownership and management with InvestorsBancorp, Inc.
(the Bank). The Company and the Bank have a Management Services and Allocation
of Expenses Agreement (the Agreement). The Agreement allows the employees of the
Bank to provide loan management, leasing and accounting services to the Company
for a fee, payable monthly. Management fee expense relating to the Agreement was
$985,720, $991,511 and $1,012,023 for the years ended December 31, 2002, 2001
and 2000, respectively. Overhead expenses and rent are also shared between the
two entities in accordance with the Agreement.
During the year ended December 31, 2000, InvestorsBancorp, Inc. borrowed
$2,500,000 from the Company. The loan was unsecured and matures April 30, 2010
with interest payable quarterly at Prime plus 2%. At December 31, 2001, the
outstanding principal balance on the note was $2,500,000. In 2002, the loan was
paid in full.
- --------------------------------------------------------------------------------
NOTE 3 - Concentration
- --------------------------------------------------------------------------------
The consumer products segment's customers are not concentrated in any specific
geographic region. The Company establishes an allowance for doubtful accounts
based upon the factors surrounding the credit risk of specific customers,
historical trends and other information. The Company routinely assesses the
financial strength of its customers, and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
The financial services segment grants loans and leases properties to small and
medium-sized businesses primarily in southeastern Wisconsin. As of December 31,
2002 and 2001, respectively, the Company had loans outstanding to its largest
borrower totaling $11,609,853 and $12,412,449 which represented approximately
16% and 7 total loans outstanding at December 31, 2002.
Approximately 50% of LMOD's labor force is subject to a collective bargaining
agreement. The agreement's expiration date is April 30, 2004.
37
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 4 - Loans
- --------------------------------------------------------------------------------
Approximately 85% of the Company's loan portfolio consists of variable-rate
loans with terms of five to fifteen years. Substantially all loans are
collateralized by first or second mortgages on commercial real estate.
Impaired loans were $2,006,016 and $520,135 at December 31, 2002 and 2001,
respectively. The average recorded amount of impaired loans during 2002 and 2001
was $901,697 and $531,848, respectively. The interest accrued on the impaired
loans was $20,936 and $20,936 at December 31, 2002 and 2001, respectively. There
was no allowance for loan loss related to these loans at December 31, 2002 and
2001. At December 31, 2000, there was an allowance of $150,000 related to these
loans. Interest income on impaired loans of $34,405, $18,115 and $27,228 was
recognized for cash payments received in 2002, 2001 and 2000, respectively.
Undisbursed loan commitments and lines of credit totaled $1,284,931 and $559,450
at December 31, 2002 and 2001, respectively. There were no letters of credit
outstanding as of December 31, 2002.
- --------------------------------------------------------------------------------
NOTE 5 - Allowance for Loan and Rent Losses
- --------------------------------------------------------------------------------
The allowance for loan and rent losses is established as losses are estimated to
have occurred through a provision for loan and rent losses charged to earnings.
Management reviews the entire loan and rent receivable portfolio when
determining the necessary allowance. As of December 31, 2002 and 2001, the
allowance was $150,000.
- --------------------------------------------------------------------------------
NOTE 6 - Loans Sold
- --------------------------------------------------------------------------------
The Company sells loans with the option to repurchase them at a later date.
During 2002 and 2001, the Company sold $2,818,488 and $913,607, respectively, of
loans to third parties with the option to repurchase them. These sales all have
been accounted for as secured financings. As of December 31, 2002 and 2001, the
balance of loan participations sold with repurchase options was $17,184,176 and
$28,123,907, respectively. Of this amount approximately $7 million and $15
million was sold to a single non-related party as of December 31, 2002 and 2001,
respectively. These loan participations mature as the corresponding notes mature
with the maturities ranging from one to six years. Under the terms of the
repurchase agreements, the Company retains servicing rights for the entire loan.
As servicer and provider of recourse, certain agreements require the Company to
comply with various covenants, including the maintenance of net worth. As of
December 31, 2002, the Company was in compliance with these covenants.
For the loans sold with no recourse, the Company is susceptible to loss on the
loans up to the percentage of the retained interest to the extent the underlying
collateral is insufficient in the event of nonperformance by the borrower. The
Company's retained interest is subordinated to the portion sold. For the loans
sold with full recourse, the Company is susceptible to loss equal to the total
principal balance of the loan to the extent the underlying collateral is
insufficient in the event of nonperformance. No associated loss reserve has been
established as of December 31, 2002 and 2001, for loans which have been sold.
38
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 7 - Inventory
- ----------------------------------------------------------------------------------------------------------------------------------
Inventory consists of the following at December 31:
2002 2001
---------------- ----------------
Raw materials $ 2,317,792 $ 2,116,694
Work in process 100,118 113,163
Finished goods 3,885,584 4,147,305
---------------- ----------------
6,303,494 6,377,162
Allowance for obsolete inventory (96,757) (283,340)
---------------- ----------------
$ 6,206,737 $ 6,093,822
================ ================
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 8 - Leased Properties
- ----------------------------------------------------------------------------------------------------------------------------------
The major categories of leased properties at December 31 are summarized as
follows:
Useful
Lives 2002 2001
----------- ---------------- -----------------
Land N/A $ 4,270,872 $ 4,501,344
Building 40 yrs. 29,617,851 32,351,179
Construction in progress N/A 780,143 -
---------------- ----------------
Total 34,668,866 36,852,523
Less: accumulated depreciation (2,294,053) (1,976,037)
---------------- ----------------
Net $ 32,374,813 $ 34,876,486
================ ================
Depreciation expense on leased properties was $757,308, $775,122 and $712,481
for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company normally leases its properties pursuant to a lease agreement with
initial lease terms, primarily ranging from five to fifteen years. The leases
require the lessee to pay all operating expenses including utilities, insurance
and taxes. The lease agreements, all of which are operating leases, expire at
various dates through 2014 and provide the lessee with renewal and purchase
options. If it is determined that the lessee will not be able to make all
required lease payments, the lease is put on nonaccrual and no future amounts of
rents are accrued. At such time that the lessee becomes current on past lease
payments, the Company will resume the accrual of lease payments. Rent receivable
is shown net of an allowance of $150,000 at December 31, 2002 and 2001.
39
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------------------------------------------------------
NOTE 8 - Leased Properties (cont.)
- --------------------------------------------------------------------------------------------------------------------------------
Minimum future rental income, by year, from these leases based on the agreements
in effect at December 31, 2002 is as follows:
Projected Rental
Year Income
---- -----------------
2003 $ 3,874,771
2004 3,675,677
2005 3,420,617
2006 2,784,106
2007 2,280,044
Future years 3,821,725
----------------
$ 19,856,940
================
The Company leased half of its office space to InvestorsBank, a related party.
Monthly rents were variable based on LIBOR. Rental income from the related party
for the years ended December 31, 2002, 2001 and 2000 was $48,015, $57,618 and
$55,747, respectively.
- --------------------------------------------------------------------------------------------------------------------------------
NOTE 9 - Property and Equipment
- --------------------------------------------------------------------------------------------------------------------------------
The major categories of property and equipment at December 31 are summarized as
follows:
Useful
Lives 2002 2001
--------- ---------------- ----------------
Consumer Products:
Land N/A $ 173,590 $ 173,590
Building 40 yrs. 1,944,685 1,926,002
Machinery and equipment 3-5 yrs. 2,831,628 2,548,121
Furniture and fixtures 7 yrs. 1,834,564 1,743,313
---------------- ----------------
Total 6,784,467 6,391,026
Less: accumulated depreciation (2,788,953) (2,240,331)
---------------- ----------------
Net $ 3,995,514 $ 4,150,695
================ ================
Financial Services:
Furniture and fixtures 3-7 yrs $ 751,532 $ 751,532
Less: accumulated depreciation (678,128) (610,192)
---------------- ----------------
Net $ 73,404 $ 141,340
================ ================
Depreciation expense for consumer products was $857,557, $568,860 and $582,776
and for financial services was $67,936, $88,187 and $92,839 for the years ended
December 31, 2002, 2001 and 2000, respectively.
40
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 10 - Goodwill and Intangible Assets
- --------------------------------------------------------------------------------
The goodwill associated with the April 30, 1998 acquisition of the 49% interest
in LMOD amounted to $619,753. The amount, under previous accounting
requirements, was amortized over a period of twenty years. The unamortized
amount and current carrying value of goodwill is $506,145.
On January 1, 2002, the Company implemented Statement of Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets. 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, is below its carrying value.
Management has conducted the impairment review and determined that the carrying
value of goodwill has not been impaired. Accordingly, there were no charges to
operations for goodwill impairment. However, adoption of this Statement had the
following pro forma impacts to the consolidated financial statements:
2002 2001 2000
---------------- ---------------- ----------------
Net income available to common shareholders - as reported $ 3,203,016 $ 1,644,926 $ 4,264,396
Add back goodwill amortization - 30,984 30,984
---------------- ---------------- ----------------
Adjusted net income $ 3,203,016 $ 1,675,910 $ 4,295,380
================ ================ ================
Basic earnings per share - as reported $ 0.86 $ 0.44 $ 1.11
Add back goodwill amortization - 0.01 0.01
---------------- ---------------- ----------------
Adjusted net income $ 0.86 $ 0.45 $ 1.12
================ ================ ================
Diluted earnings per share - as reported $ 0.86 $ 0.44 $ 1.11
Add back goodwill amortization - 0.01 0.01
---------------- ---------------- ----------------
Adjusted net income $ 0.86 $ 0.45 $ 1.12
================ ================ ================
The licensing agreement is a definite-lived intangible asset associated with the
right to produce certain dolls under a five year royalty agreement with an
original cost of $2,500,000. The licensing agreement is being amortized over
five years. Amortization expense for the licensing agreement amounted to
$500,000 in each of 2002, 2001 and 2000. Accumulated amortization for the
licensing agreement amounted to $2,333,334 and $1,833,334 at December 31, 2002
and 2001, respectively. Amortization expense for 2003 on this agreement will be
$166,666.
41
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 11 - Short-Term Borrowings
- --------------------------------------------------------------------------------
Short-term borrowings consist of the following at December 31:
2002 2001
---------------- ----------------
Consumer Products:
Short-term borrowings $ 1,242,000 $ 3,400,000
Financial Services:
Commercial paper 51,272,618 62,806,903
Lines of credit 3,480,000 8,200,000
---------------- ----------------
Total short-term borrowings $ 55,994,618 $ 74,406,903
================ ================
Consumer Products:
LMOD has a loan agreement with a InvestorsBank, a related party, providing for a
line of credit of $4,075,000 at prime plus .50%, which was 4.75% at December 31,
2002. The note is due on December 31, 2002 and interest is payable monthly. The
note was extended to February 28, 2003, at which time the note was paid in full.
The note was paid with proceeds of a new note with similar short-term financing
from a related company. The agreement was collateralized by receivables and
inventory of LMOD and LPI.
Financial Services:
Commercial paper is issued for working capital purposes with maturities up to 90
days. The average yield on commercial paper outstanding at December 31, 2002 and
2001 was 1.77 and 2.34, respectively.
As of December 31, 2002, BMSBLC has a line of credit with three participating
banks. The line of credit agreement provides for a maximum line of credit of
$60,000,000 less the outstanding principal amount of the commercial paper and
direct pay letter of credit obligation. The agreement bears interest at the
prime rate or at the 30, 60, or 90 day LIBOR rate plus one and three-eighths
percent. The interest rate index is determined by BMSBLC at the time funds are
drawn. Interest is payable monthly and the agreement expires on June 27, 2003.
BMSBLC is also required to pay a commitment fee equal to one-half of one percent
per year on the unused amount of the loan commitment. The outstanding principal
balance was $0 and $825,000 at December 31, 2002 and 2001, respectively.
The financial services' commercial paper and lines of credit are collateralized
by a pool of loans with an outstanding balance of $38.8 million and $45.5
million and leased properties with net carrying value of approximately $30.9
million and $33.3 million as of December 31, 2002 and 2001, respectively
The Company has a line of credit agreement with one of its correspondent banks
providing for a line of credit of $5,000,000 bearing interest at the prime rate.
Interest is payable quarterly and the credit agreement expires on December 31,
2002. The note was extended to February 28, 2003, at which time the note was
paid in full. As of December 31, 2002 and 2001, the outstanding principal
balance was $3,480,000 and $7,375,000. The credit agreement was collateralized
by the stock of LMOD and BMSBLC and a loan with an outstanding balance of $0 and
$2,500,000 as December 31, 2002 and 2001, respectively.
The line of credit agreements and the SWIB agreements described in Note 12
contain restrictions on BMSBLC's new indebtedness, acquisition of its common
stock, return of capital dividends, past due loans, and realized losses on
loans, and requires maintenance of collateral, minimum equity and loan to debt
ratios. As of December 31, 2002, BMSBLC is in compliance with all such
requirements.
42
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- ---------------------------------------------------------------------------------------------------------------------------------
NOTE 12 - Long-Term Debt
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings consist of the following at December 31:
2002 2001
--------------- ---------------
Consumer Products -
Capital lease $ - $ 16,518
Financial Services:
Direct pay letter of credit obligation 7,305,000 7,800,000
State of Wisconsin Investment Board notes payable 9,666,667 11,000,001
Other borrowings 1,441,042 1,512,317
--------------- ---------------
18,412,709 20,328,836
Loan participations with repurchase options (See Note 7) 17,184,176 28,123,907
--------------- ---------------
Total long-term borrowings $ 35,596,885 $ 48,452,743
=============== ===============
Letter of Credit
BMSBLC has a Letter of Credit Agreement with one of its correspondent banks to
support the issuance, reissuance and remarketing of industrial revenue bonds.
The letter of credit expires on October 15, 2003 unless renewed. The promissory
notes of the underlying obligors, which are classified as loans on the Company's
balance sheet with an outstanding balance of $7.3 million and $7.9 million as of
December 31, 2002 and 2001, respectively are used as collateral under the
agreement. The interest rate changes weekly based upon the remarketing agent's
lowest rate to permit the sale of the bonds. The outstanding principal balance
of the letter of credit and the interest rate was $7,305,000 and 1.80% and
$7,800,000 and 1.85% as of December 31, 2002 and 2001, respectively.
BMSBLC entered into a Loan and Trust Agreement with the City of Franklin,
Wisconsin and a correspondent bank. The agreement provides for a letter of
credit to fund the issuance of industrial development revenue bonds secured by
real estate with a fair market value of $1.8 million. The bonds mature on
December 1, 2018 with interest payable monthly to the trustee. The interest rate
changes weekly based upon the remarketing agent's lowest rate to permit the sale
of the bonds. As of December 31, 2002 and 2001, the interest rate was 1.70% and
1.80%, respectively. The outstanding principal balance was $1,385,000 and
$1,450,000 at December 31, 2002 and 2001, respectively.
State of Wisconsin Investment Board
BMSBLC has a term note with the State of Wisconsin Investment Board (SWIB) which
bears interest at a fixed rate of 9.05% per year through its maturity and is
collaterized by specific loans with an outstanding balance of $4.0 million and
$4.5 million as of December 31, 2002 and 2001, respectively. The note is payable
in equal quarterly installments of $166,667 with a final payment of unpaid
principal due November 7, 2006. At December 31, 2002 and 2001, the outstanding
principal balance was $2,666,667 and $3,333,334, respectively.
In addition, BMSBLC has a term note with SWIB which bears interest at a fixed
rate of 6.98% per year through its maturity and is secured by specific loans
with an outstanding balance of $6.9 million and $8.2 million as of December 31,
2002 and 2001, respectively. The note is payable in equal quarterly installments
of $166,667 with a final payment of unpaid principal due on June 1, 2013. At
December 31, 2002 and 2001, the outstanding principal balance was $7,000,000 and
$7,666,667, respectively.
43
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 12 - Long-Term Debt (cont.)
- --------------------------------------------------------------------------------
The SWIB agreements and the line of credit agreements described in Note 11
contain restrictions on BMSBLC's new indebtedness, acquisition of its common
stock, return of capital dividends, past due loans, and realized losses on
loans, and requires maintenance of collateral, minimum equity and loan to debt
ratios. As of December 31, 2002, BMSBLC is in compliance with all such
requirements.
Other Long-Term Debt
BMSBLC has a term note with the Milwaukee Economic Development Corporation which
bears interest at a fixed rate of 6.00% per year through its maturity and is
collaterized by a second mortgage on real estate. The note is payable in equal
monthly installments of $819 with a final payment due on January 1, 2010. The
outstanding principal balance was $56,042 and $62,317 at December 31, 2002 and
2001, respectively.
Expected annual maturities of long-term debt as of December 31, 2002 are as
follows:
2003 $ 8,709,942
2004 1,410,350
2005 1,410,783
2006 1,416,281
2007 750,663
Thereafter 4,714,690
----------------
$ 18,412,709
================
- --------------------------------------------------------------------------------
NOTE 13 - Operating Leases
- --------------------------------------------------------------------------------
The consumer products segment leases from third parties various buildings. The
leases are classified as operating leases and the buildings are used as offices,
warehouses and outlet stores for the storage, distribution and sale of Lee
Middleton Original Dolls merchandise as well as for a variety of equipment.
Lease expenses were approximately $746,000, $580,000, and $340,000 in 2002, 2001
and 2000, respectively.
At December 31, 2002, the future minimum lease payments for each of the five
succeeding years and in the aggregate are as follows:
2003 $ 680,630
2004 650,044
2005 613,695
2006 241,114
2007 12,391
----------------
$ 2,197,874
================
44
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 14 - Interest Rate Swaps
- --------------------------------------------------------------------------------
The Company utilizes derivative instruments for purposes of asset liability
management. These derivative transactions involve both credit and market risk.
The notional amounts are amounts on which calculations and payments are based.
Notional amounts do not represent direct credit exposures as the exposure is
limited to the net difference between the calculated amounts to be received and
paid by the financial institutions participating in the interest rate swap. The
Company does not anticipate nonperformance by these institutions.
Interest rate swaps are contracts in which a series of interest rate flows are
exchanges over a prescribed period. Most interest rate swaps involve the
exchange of fixed and floating interest rates. An example of a situation in
which the Company would utilize an interest rate swap would be to convert its
fixed-rate debt to a variable rate. By entering into the swap, the principal
amount of the debt would remain unchanged but the interest payment streams would
change.
The Company's swap agreements are structured so that the Company pays a variable
interest rate and receives a fixed rate based on various rate indexes. The
Company has also entered into additional swap agreements to fix the interest
rate spread of the existing interest rate swaps and fixed-rate debt.
The following table summarizes the interest rate swap agreements, designated as
cash flow hedges, in effect at December 31, 2002.
Variable Interest Fixed Interest
Company Fair Value Rate Rate Expiration
Notional Amount Payment Amount (Paid) Received Received (Paid) Date Rate Index
- ---------------- -------- ------------ ----------------- --------------- -------- ----------
$ 16,908,000 Variable $ 364,995 (1.40000)% 5.725% 06/30/03 LIBOR
16,908,000 Fixed (237,624) 1.40000% (4.160)% 06/30/03 LIBOR
5,000,000 Variable 618,851 (1.42000)% 7.600% 03/10/05 LIBOR
5,000,000 Fixed (329,060) 1.42000% (5.030)% 03/10/05 LIBOR
3,125,000 Variable 280,887 (1.40000)% 6.500% 09/29/05 LIBOR
3,125,000 Fixed (185,733) 1.40000% (5.010)% 09/29/05 LIBOR
-------------
Total $ 512,316
=============
As a result of hedge arrangements, the Company recognized a reduction (increase)
in interest expense of $540,171, $692,168 and $(49,734) during the years ended
December 31, 2002, 2001 and 2000, respectively. In addition, the Company
recognized a gain of $747,000 and $249,500 on the termination of interest rate
swaps during 2002 and 2001, respectively. The impact on earnings due to
ineffectiveness was immaterial.
- --------------------------------------------------------------------------------
NOTE 15 - Mandatory Redeemable Preferred Stock
- --------------------------------------------------------------------------------
On October 20, 1993, the Company issued 690,000 shares of Adjustable Rate
Cumulative Preferred Stock, Series A, in a public offering at $25 per share less
an underwriting discount of $1.0625 per share and other issuance costs amounting
to $295,221. The preferred stock is redeemable, in whole or in part at the
option of the Company, on any dividend payment date during the period from July
1, 2001 to June 30, 2003 and from July 1, 2006 to June 30, 2008 at $25 per share
plus accrued and unpaid dividends. Any shares of preferred stock not redeemed
prior to July 1, 2008 are subject to mandatory redemption on that date by the
Company at a price of $25 plus accrued dividends. Dividends on the preferred
stock were paid quarterly at the annual rate of 7.625% through the dividend
period ending June 30, 1998. The dividend rate was adjusted to an annual rate of
8.53% for the dividend period commencing July 1, 1998 and ending June 30, 2003.
The next adjustment will be effective for the five year period commencing July
1, 2003. The adjusted dividend rate will reset at the five year treasury rate as
of June 1 immediately preceding the adjustment date plus 300 basis points. The
new dividend rate will be reflected in the October 1, 2003 dividend. As of
December 31, 2002, the Company had repurchased 15,809 shares.
45
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 16 - Retirement Plans
- --------------------------------------------------------------------------------
LMOD has a qualified defined contribution plan for eligible employees. LMOD's
contribution to the plan is at the discretion of LMOD's Board of Directors.
Contributions were $12,371, $9,849 and $10,832 for the years ended December 31,
2002, 2001 and 2000, respectively.
The Company provided a supplemental retirement benefit for an executive officer,
which is included in the management fee expense, totaling $94,677, $74,527, and
$63,680 for the years ended December 31, 2002, 2001 and 2000, respectively.
These payments were made at the sole discretion of the independent members of
the Board of Directors of the Company.
- --------------------------------------------------------------------------------
NOTE 17 - Stockholders' Equity
- --------------------------------------------------------------------------------
The Company has two stock option plans, the 1993 Stock Option Plan and the 1997
Stock Option Plan (the Plans). During 2000, the 1990 Stock Option Plan
terminated. In accordance with the Plans' provisions, the exercise prices for
stock options may not be less than the fair market value of the optioned stock
at the date of grant. The exercise price of all options granted was equal to the
market value of the stock on the date of the grant. Options may be exercised
based on the vesting schedule outlined in each agreement. All of the options,
except for the options granted under the 1997 Stock Option Plan, are "incentive
stock options" as defined under Section 422 of the Code. Options granted under
the 1997 Stock Option Plan are considered "non-qualified stock options" as
defined by the Internal Revenue Code. All options must be exercised within ten
years of the date of grant. There were no options granted in 2002, 2001 or 2000.
Activity is summarized in the following table:
2002 2001 2000
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
OUTSTANDING - Beginning of Year 214,445 $ 10.37 214,445 $ 10.37 226,457 $ 10.21
Options
Cancelled or forfeited - - - - (12,012) 7.27
-------- ------- --------
OUTSTANDING - End of Year 214,445 10.37 214,445 10.37 214,445 10.37
======== ======= ========
Exercisable at year end 212,245 10.34 211,145 10.34 210,045 10.34
Available for future grant at year end 105,555 105,555 105,555
Total reserved shares 320,000 320,000 320,000
46
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- -------------------------------------------------------------------------------------------------------------------------------
NOTE 17 - Stockholders' Equity (cont.)
- -------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about Plan awards outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Number Contractual Life Exercisable Number Exercise Price
Exercise Price Outstanding -------------------- Price Exercisable --------------
-------------- ----------- ----------- -----------
$ 9.50-13.50 214,445 4.1 years $ 10.37 212,245 $ 10.34
The Company applies APB Opinion 25 and related interpretations in accounting for
its Plan. Accordingly, no compensation cost has been recognized for its stock
option awards.
SFAS No. 123 encourages a "fair value" based method of accounting for
stock-based compensation plans. Had compensation cost for the Company's plan
been determined based upon the fair value at the grant dates as prescribed by
SFAS No. 123, the Company's proforma net income and earnings per share would be
the same as reported due to no options being granted in 2002, 2001 and 2000 and
all proforma compensation being recognized in the year of granting.
A reconciliation of the numerators and the denominators of earnings per share
and earnings per share assuming dilution are:
Per Share
Income Shares Amount
----------- --------- ---------
2002
Earnings $ 3,203,016 3,727,589 $ 0.86
=======
Effect of options -
---------
Earnings - assuming dilution $ 3,203,016 3,727,589 $ 0.86
=========== ========= =======
2001
Earnings $ 1,644,926 3,727,589 $ 0.44
=======
Effect of options -
---------
Earnings - assuming dilution $ 1,644,926 3,727,589 $ 0.44
=========== ========= =======
2000
Earnings $ 4,264,396 3,832,769 $ 1.11
=======
Effect of options -
---------
Earnings - assuming dilution $ 4,264,396 3,832,769 $ 1.11
=========== ========= =======
47
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 18 - Income Taxes
- --------------------------------------------------------------------------------
Consumer Products:
The provision for income taxes included in the accompanying consolidated
financial statements consists of the following components at December 31:
2002 2001 2000
--------------- --------------- ----------------
Current Taxes (Benefit)
Federal $ (564,674) $ (176,831) $ 965,735
State - - 165,481
--------------- --------------- ----------------
(564,674) (176,831) 1,131,216
--------------- --------------- ----------------
Deferred Income Benefit
Federal (500,191) (230,584) (165,328)
State (99,613) (73,880) (26,930)
--------------- --------------- ----------------
(599,804) (304,464) (192,258)
--------------- --------------- ----------------
Total Provision for Income Taxes (Benefit) $ (1,164,478) $ (481,295) $ 938,958
=============== =============== ================
Tax expense is calculated on income (loss) before the elimination of
intercompany expenses. A reconciliation of consumer products income before taxes
to income subject to taxes is as follows:
2002 2001 2000
--------------- --------------- ----------------
Income (loss) before taxes $ (331,459) $ 61,431 $ 4,888,682
Less intercompany eliminations (1,028,997) (1,240,490) (1,753,812)
--------------- --------------- ----------------
Income subject to taxes $ (1,360,456) $ (1,179,059) $ 3,134,870
=============== =============== ================
A reconciliation of statutory federal income taxes based upon income before
taxes to the provision for federal and state income taxes for consumer products
for the period, as summarized previously, is as follows:
2002 2001 2000
----------------------------------
Reconciliation of statutory to effective rates
Federal income taxes at statutory rate (34.0)% (34.0)% 34.0%
Adjustments for
State taxes (4.8) (4.4) 4.4
Over (under) accrual of taxes 5.0 - (5.4)
Other 1.0 (2.4) (3.0)
-------- ------- -----
Effective Income Taxes - Operations (32.8) (40.8) 30.0
Release of valuation allowance (52.8) - -
-------- ------- -----
Income Taxes - Operations (85.6)% (40.8)% 30.0%
========= ======= =====
48
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------------------------------------------------------
NOTE 18 - Income Taxes (cont.)
- --------------------------------------------------------------------------------------------------------------------------------
The net deferred tax assets in the accompanying consolidated balance sheets
include the following amounts of deferred tax assets and liabilities at December
31:
2002 2001
-----------------------------------
Deferred Tax Assets:
Depreciation $ 14,556 $ 100,134
Accrued expenses and reserves 568,186 616,588
Net operating loss carryforwards 813,468 749,000
Deferred Tax Liabilities:
Other (79,684) -
Valuation allowance - (749,000)
---------------- ----------------
$ 1,316,526 $ 716,722
================ ================
The valuation allowance represents net operating loss carryforwards at License
Products. The remaining valuation allowance of $718,000 was released during
2002. Management believes it is more likely than not that the balance of the
deferred tax assets will be fully realized.
Financial Services:
The Company and its subsidiary, BMSBLC, qualify as a real estate investment
trust under the Internal Revenue Code. Accordingly, they are not subject to
income tax on taxable income that is distributed to shareholders. During 2002
and 2001, the Company took advantage of a provision in the tax law that allows a
REIT to retain any capital gains on sale of real estate properties and pay the
corresponding tax on the gains. Gains on sale of leased properties totaled
$1,186,961 and $150,979 in 2002 and 2001, respectively, and the corresponding
tax paid by the company was $406,173 and $64,970, respectively. There was no tax
expense for year ending December 31, 2000.
- --------------------------------------------------------------------------------
NOTE 19 - Distributions
- --------------------------------------------------------------------------------
For the years ended December 31, 2002, 2001 and 2000, the Company's Board of
Directors has declared the following common stock distributions:
2002 2001 2000
---------------------------------------------
Total common stock distributions $ 2,439,928 $ 2,439,924 $ 2,517,199
============== ============== ==============
Common stock distributions per share (tax basis) $ 0.65 $ 0.65 $ 0.65
============== ============== ==============
Distribution in cash $ 0.65 $ 0.65 $ 0.65
============== ============== ==============
49
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - Fair Value of Financial Instruments
- ----------------------------------------------------------------------------------------------------------------------------------
The estimated fair values of financial instruments at December 31, 2002 and 2001
are as follows:
2002 2001
------------------------------------ ----------------------------------
Estimated Fair Estimated Fair
Carrying Amount Value Carrying Amount Value
----------------- ----------------- ----------------- ---------------
FINANCIAL ASSETS
Cash and cash equivalents $ 934,662 $ 934,662 $ 910,773 $ 910,773
================ ================ ================ ===============
Accounts receivable $ 3,233,376 $ 3,233,376 $ 3,954,444 $ 3,954,444
================ ================ ================ ===============
Interest receivable $ 268,091 $ 268,091 $ 431,284 $ 431,284
================ ================ ================ ===============
Rent receivable $ 250,487 $ 250,487 $ 136,939 $ 136,939
================ ================ ================ ===============
Variable rate loans $ 61,526,300 $ 61,526,300 $ 87,495,713 $ 87,495,713
================ ================ ================ ===============
Fixed rate loans $ 12,074,584 $ 12,778,496 $ 12,344,622 $ 13,100,808
================ ================ ================ ===============
Interest rate swaps $ 512,316 $ 512,316 $ 1,704,170 $ 1,704,170
================ ================ ================ ===============
FINANCIAL LIABILITIES
Short-term borrowings $ 55,994,618 $ 55,994,618 $ 74,406,903 $ 74,406,903
================ ================ ================ ===============
Accounts payable $ 1,019,546 $ 1,019,546 $ 794,179 $ 794,179
================ ================ ================ ===============
Variable rate long-term debt $ 18,736,701 $ 18,736,701 $ 22,355,590 $ 22,355,590
================ ================ ================ ===============
Fixed rate long-term debt
Practicable to estimate fair value $ 9,722,709 $ 10,528,037 $ 11,062,318 $ 11,237,480
================ ================ ================ ===============
Not practicable $ 7,137,475 n/a $ 15,034,835 n/a
================ ================ ================ ===============
Redeemable preferred stock $ 16,854,775 $ 11,895,762 $ 16,854,775 $ 12,405,114
================ ================ ================ ===============
The estimated fair value of fee income on letters of credit at December 31, 2002
and 2001 is insignificant. Loan commitments on which the committed interest rate
is less than the current market rate are also insignificant at December 31, 2002
and 2001.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to repay in a falling rate environment.
The Company has loan participations with repurchase options. The underlying
loans have various maturities and principal reductions which makes it
impracticable to measure the fair value.
50
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------------------------------------------------------
NOTE 21 - Quarterly Financial Information (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
Quarters Ended (in thousands, except per share data)
3/31/02 6/30/02 9/30/02 12/31/02
-------- -------- -------- --------
Total revenues $ 8,066 $ 8,242 $ 8,085 $ 9,699
Net operating income before income taxes and
minority interest $ 654 $ 1,620 $ 820 $ 873
Net income available to common shareholders $ 401 $ 914 $ 756 $ 1,132
Basic earnings per share $ 0.11 $ 0.25 $ 0.20 $ 0.30
Diluted earnings per share $ 0.11 $ 0.25 $ 0.20 $ 0.30
3/31/01 6/30/01 9/30/01 12/31/01
-------- -------- -------- --------
Total revenues $ 10,168 $ 8,837 $ 9,329 $ 11,269
Net operating income before income taxes and
minority interest $ 1,108 $ 256 $ 888 $ 516
Net income available to common shareholders $ 627 $ 240 $ 524 $ 254
Basic earnings per share $ 0.17 $ 0.06 $ 0.14 $ 0.07
Diluted earnings per share $ 0.17 $ 0.06 $ 0.14 $ 0.07
3/31/00 6/30/00 9/30/00 12/31/00
-------- -------- -------- --------
Total revenues $ 9,756 $ 8,786 $ 11,243 $ 13,449
Net operating income before income taxes and
minority interest $ 1,695 $ 870 $ 1,307 $ 2,832
Net income available to common shareholders $ 1,048 $ 674 $ 667 $ 1,875
Basic earnings per share $ 0.27 $ 0.18 $ 0.18 $ 0.48
Diluted earnings per share $ 0.27 $ 0.18 $ 0.18 $ 0.48
51
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - The Middleton Doll Company (Parent Company Only) Financial Information
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31,
-------------------------------------
2002 2001
------------------ ------------------
ASSETS
Cash and cash equivalents $ 105,605 $ 472
Interest receivable 769 29,162
Loans 3,952,527 7,058,689
Investment in BMSBLC 25,124,615 25,903,498
Investment in other subsidiaries 5,112,409 5,357,316
Property and equipment 73,404 141,340
Other assets 52,145 67,521
Interest rate swap contracts 127,371 370,825
------------------ ------------------
TOTAL ASSETS $ 34,548,845 $ 38,928,823
================== ==================
LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY
LIABILITIES
Note payable $ 3,480,000 $ 7,375,000
Other liabilities 819 57,031
------------------ ------------------
Total Liabilities 3,480,819 7,432,031
------------------ ------------------
PREFERRED STOCK, net of treasury stock 16,854,775 16,854,775
SHAREHOLDERS' EQUITY 14,213,251 14,642,017
------------------ ------------------
TOTAL LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY $ 34,548,845 $ 38,928,823
================== ==================
52
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- ---------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - The Middleton Doll Company (Parent Company Only) Financial Information
(cont.)
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
REVENUES
Interest on loans $ 342,365 $ 769,254 $ 1,189,589
Gain on termination of interest rate swaps 268,778 - -
Equity in income of BMSBLC 4,714,137 3,737,054 3,335,879
Equity in income of other subsidiaries (337,516) (772,087) 2,077,986
Other income 53,350 58,017 60,907
---------------- ---------------- ----------------
Total Income 5,041,114 3,792,238 6,664,361
---------------- ---------------- ----------------
EXPENSES
Interest expense 239,368 379,885 772,741
Depreciation expense 67,936 88,187 92,839
Other operating expenses 150,491 214,043 83,530
Minority interest in earnings of subsidiaries (3,375) (7,721) 20,780
---------------- ---------------- ----------------
Total Expenses 454,420 674,394 969,890
---------------- ---------------- ----------------
Net Income 4,586,694 3,117,844 5,694,471
Preferred Stock dividend 1,437,712 1,437,713 1,394,874
---------------- ---------------- ----------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $ 3,148,982 $ 1,680,131 $ 4,299,597
================ ================ ================
53
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
- ---------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - The Middleton Doll Company (Parent Company Only) Financial Information
(cont.)
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOW
Years Ended December 31,
---------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,586,694 $ 3,117,844 $ 5,694,471
Adjustments to reconcile net income available
for common shareholders to net cash flows
from operating activities
Depreciation 67,936 88,187 -
Equity in subsidiaries' earnings (4,376,620) (2,972,688) (5,393,085)
Dividends from subsidiaries 4,544,620 3,674,368 5,744,036
Other - - (422,802)
Net change in
Interest receivable 28,393 33,103 -
Other assets 12,001 26,125 -
Other liabilities (56,212) 40,123 -
---------------- ---------------- ----------------
Net Cash Flows from Operating Activities 4,806,812 4,007,062 5,622,620
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net principal payments received (loans made) 3,106,162 526,873 (2,529,476)
---------------- ---------------- ----------------
Net Cash Flows from Investing Activities 3,106,162 526,873 (2,529,476)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments on) notes payable (3,895,000) (625,000) 3,000,000
Preferred stock dividend paid (1,437,712) (1,437,713) (1,448,124)
Common stock dividend paid (2,475,129) (2,475,129) (2,552,400)
Repurchase of common stock - - (2,092,764)
---------------- ---------------- ----------------
Net Cash Flows from Financing Activities (7,807,841) (4,537,842) (3,093,288)
---------------- ---------------- ----------------
Net Change in Cash and Cash Equivalents 105,133 (3,907) (144)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 472 4,379 4,523
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 105,605 $ 472 $ 4,379
================ ================ ================
54
Schedule I
Condensed Financial Information of Registrant
(Refer to footnote 22 of the consolidated financial statements)
Schedule II
Valuation and Qualifying Accounts
Changes in the reserves deducted from assets in the consolidated balance sheet
other than accumulated depreciation for the years ended December 31, 2002,
December 31, 2001 and December 31, 2000 are as follows:
Balance at Charged Balance
beginning to at end
of period expense Deductions of period
------------- ------------ -------------- -------------
Allowance for loan and lease losses:
Year ended:
December 31, 2002 $ 150,000 - - $ 150,000
December 31, 2001 $ 150,000 - - $ 150,000
December 31, 2000 $ 150,000 - - $ 150,000
Allowance for doubtful accounts:
Year ended:
December 31, 2002 $ 326,389 479,984 (473,987) $ 332,386
December 31, 2001 $ 120,639 390,845 (185,095) $ 326,389
December 31, 2000 $ 129,280 15,400 (24,041) $ 120,639
Allowance for obsolete inventory:
Year ended:
December 31, 2002 $ 283,340 184,583 (371,166) $ 96,757
December 31, 2001 $ 189,811 372,401 (278,872) $ 283,340
December 31, 2000 $ 235,568 305,823 (351,580) $ 189,811
Deferred income taxes valuation allowance:
Year ended:
December 31, 2002 $ 749,000 (749,000) - $ -
December 31, 2001 $ 752,334 (3,334) - $ 749,000
December 31, 2000 $ 818,385 (66,051) - $ 752,334
55
Schedule IV
Mortgage Loans on Real Estate
Principal
amount
Carrying of loans
Amount subject to
Face of delinquent
Final Periodic Amount Mortgages Principal
Interest Maturity Payment Prior of as of or
Description Rate Date Terms Liens Mortgages 12/31/2002 Interest(1)
- ------------------------ ----------- ------------- ----------- ------------ -------------- ----------------- -----------------
Commercial
First Mortgage 3.19% to 1/1/03 to N/A N/A N/A 67,965,006 1,958,527
8.80% 01/01/2015
Second Mortgage 4.75% to 2/1/03 to N/A N/A N/A 3,904,458
8.25% 01/01/2007
Third Mortgage 4.25% to 3/1/03 to N/A N/A N/A 1,093,396
9.75% 02/01/2005
-----------------
Total Commercial 72,962,860
All others (2) N/A N/A N/A N/A N/A 638,024 134,120
-----------------
Total loans $ 73,600,884
=================
(1) Delinquent is defined as ninety days or more past due.
(2) This category includes all non-mortgage loans on the balance sheet.
For the Years Ended December 31,
2002 2001 2000
----------------- ----------------- -----------------
Loans on balance sheet,
Beginning of period $ 99,840,335 $112,041,270 $ 114,001,648
Additions during the period
Loans made 9,363,644 26,047,051 83,420,989
Loans purchased - - -
Deductions during period
Principal collected on loans 35,603,095 38,247,986 85,381,367
Principal charged off - - -
----------------- ----------------- -----------------
Loans on balance sheet,
end of period $ 73,600,884 $ 99,840,335 $ 112,041,270
================= ================= =================
56
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant
Pursuant to Instruction G, the information required by this item (with
respect to directors of the registrant) is incorporated herein by reference from
the Company's definitive Proxy Statement involving the election of directors.
The information with respect to executive officers of the Company has been
included in Part I hereof. The definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the Company's year end.
Item 11. Executive Compensation
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
2003 annual meeting of shareholders under the caption "Board of Directors" and
"Executive Compensation"; provided however, that the subsection entitled
"Executive Compensation - Compensation Committee Report" shall not be deemed to
be incorporated herein by reference. The definitive proxy statement will be
filed with the Securities and Exchange Commission within 120 days after the
Company's year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Pursuant to Instruction G, information required by this item pursuant to
Item 403 of Regulation S-K, is hereby incorporated by reference from the
Company's definitive proxy statement for its 2003 annual meeting of shareholders
under the caption "Security Ownership of Certain Beneficial Owners and
Management". The information required by this item pursuant to Item 201(d) of
Regulation S-K is incorporated by reference from such proxy statement under the
caption "Proposal No. 2 - Approval of The Middleton Doll Company 2003 Stock
Option Plan - Equity Compensation Plan Information". The definitive proxy
statement will be filed with the Securities and Exchange Commission within 120
days after the Company's year end.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for its
2003 annual meeting of shareholders under the caption "Related Party
Transactions". The definitive proxy statement will be filed with the Securities
and Exchange Commission within 120 days after the Company's year end.
Item 14. 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 Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and the Chief Financial 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.
57
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Exhibits
Reference is made to the separate exhibit index contained on page 62
through 64 hereof.
2. Financial Statements and Financial Statement Schedules
Reference is made to the separate index in Item 8 of this Annual Report on
Form 10-K with respect to the financial statements and schedules filed
herewith.
3. Reports on Form 8-K
None.
58
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 28, 2003.
THE MIDDLETON DOLL COMPANY
By:/s/ George R. Schonath
--------------------------------------
George R. Schonath,
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on March 28, 2003.
Signature Title
/s/ George R. Schonath President and Chief Executive Officer,
- ------------------------------- Director (Principal Financial Officer)
George R. Schonath
/s/ Susan J. Hauke Vice President Finance
- ------------------------------- (Principal Accounting Officer)
Susan J. Hauke
/s/ Salvatore L. Bando Director
- -------------------------------
Salvatore L. Bando
/s/ Peter A. Fischer Director
- -------------------------------
Peter A. Fischer
/s/ David A. Geraldson, Sr. Director
- -------------------------------
David A. Geraldson, Sr.
59
I, George R. Schonath, Chief Executive Officer of the Company, certify that:
1. I have reviewed this report on Form 10-K of The Middleton Doll
Company;
2. Based on my knowledge, this 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 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
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 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 report (the "Evaluation Date"); and (c)
presented in this 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 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: March 28, 2003 /s/ George R. Schonath
------------------------------
George R. Schonath
Chief Executive Officer
60
I, Susan J. Hauke, Chief Financial Officer of the Company, certify that:
1. I have reviewed this report on Form 10-K of The Middleton Doll
Company;
2. Based on my knowledge, this 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 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
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 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 report (the "Evaluation Date"); and (c)
presented in this 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 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: March 28, 2003 /s/ Susan J. Hauke
------------------------------
Susan J. Hauke
Vice President Finance and
Chief Financial Officer
61
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
3.1 Articles of Incorporation, as amended (incorporated by reference
to Exhibit 3.1 to the Company's Form 10-Q for the quarterly
period ended March 31, 1997).
3.2 Amendment to Articles of Incorporation, changing name to "The
Middleton Doll Company" (incorporated by reference to Exhibit 3.1
to the Company's Form 10-Q for the quarterly period ended June
30, 2001).
3.3 By-laws (incorporated by reference to Exhibit 3.2 to the
Company's Form 10-Q for the quarterly period ended March 31,
1997).
4.1 Instruments defining the Rights of Security Holders (incorporated
by reference to Exhibit 3.1 to the Company's Form 10-Q for the
quarterly period ended March 31, 1997).
4.2 Amended and Restated Credit Agreement dated April 30, 1999, by
and among Bando McGlocklin Small Business Lending Corporation,
Firstar Bank Milwaukee, N.A., as agent, and the Financial
Institutions parties thereto (incorporated by reference to
Exhibit 4.1 to the Company's Form 10-Q for the quarterly period
ended March 31, 1999).
4.3 First Amendment to Amended and Restated Credit Agreement between
Bando McGlocklin Small Business Lending Corporation and Firstar
Bank, as agent for the Lenders, dated February 28, 2000
(incorporated by reference to Exhibit 4.3 to the Company's Form
10-K for the year ended December 31, 2000).
4.4 Second Amendment to Amended and Restated Credit Agreement between
Bando McGlocklin Small Business Lending Corporation and Firstar
Bank, as agent for the Lenders, dated April 28, 2000
(incorporated by reference to Exhibit 4.3 to the Company's Form
10-Q for the quarterly period ended June 30, 2000).
4.5 Third Amendment to Amended and Restated Credit Agreement between
Bando McGlocklin Small Business Lending Corporation and Firstar
Bank, as agent for the Lenders, dated June 30, 2000 (incorporated
by reference to Exhibit 4.4 to the Company's Form 10-Q for the
quarterly period ended June 30, 2000).
4.6 Fourth Amendment to Amended and Restated Credit Agreement among
Bando McGlocklin Small Business Lending Corporation, the
financial institutions party thereto and Firstar Bank, N.A., as
agent for the Lenders, dated June 29, 2001(incorporated by
reference to Exhibit 4.2 to the Company's Form 10-Q for the
quarterly period ended June 30, 2001).
4.7 Fifth Amendment to Amended and Restated Credit Agreement among
Bando McGlocklin Small Business Lending Corporation, the
financial institutions party thereto and US Bank National
Association (formerly Firstar Bank, N.A.), as agent for the
Lenders, dated June 28, 2002 (incorporated by reference to
Exhibit 4.2 to the Company's Form 10-Q for the quarterly period
ended June 30, 2002).
4.8 Sixth Amendment to Amended and Restated Credit Agreement among
Bando McGlocklin Small Business Lending Corporation, the
financial institutions party thereto and US Bank National
Assiciation., as agent for the Lenders, dated February 24, 2003.
4.9 Credit Agreement dated April 30, 1998, between Bando McGlocklin
Capital Corporation and Firstar Bank Milwaukee, N.A.,
(incorporated by reference to Exhibit 4.5 to the Company's Form
10-Q for the quarterly period ended June 30, 1998).
62
Exhibit No. Exhibit Description
4.10 First Amendment to Credit Agreement dated June 16, 1998, amends
and supplements that certain Credit Agreement dated April 30,
1998, between Bando McGlocklin Capital Corporation and Firstar
Bank Milwaukee, N.A., (incorporated by reference to Exhibit 4.6
to the Company's Form 10-Q for the quarterly period ended June
30, 1998).
4.11 Second Amendment to Credit Agreement dated April 30, 1999, amends
and supplements that certain Credit Agreement dated April 30,
1998, between Bando McGlocklin Capital Corporation and Firstar
Bank Milwaukee, N.A., (incorporated by reference to Exhibit 4.6
to the Company's Form 10-Q for the quarterly period ended June
30, 1999).
4.12 Third Amendment to Credit Agreement between Bando McGlocklin
Capital Corporation and Firstar Bank, dated April 28, 2000
(incorporated by reference to Exhibit 4.1 to the Company's Form
10-Q for the quarterly period ended June 30, 2000).
4.13 Fourth Amendment to Credit Agreement between Bando McGlocklin
Capital Corporation and Firstar Bank, dated June 30, 2000
(incorporated by reference to Exhibit 4.2 to the Company's Form
10-Q for the quarterly period ended June 30, 2000).
4.14 Fifth Amendment to Credit Agreement between The Middleton Doll
Company (formerly Bando McGlocklin Capital Corporation) and
Firstar Bank, dated June 29, 2001 (incorporated by reference to
Exhibit 4.1 to the Company's Form 10-Q for the quarterly period
ended June 30, 2001).
4.15 Sixth Amendment to Credit Agreement between The Middleton Doll
Company and US Bank National Association (formerly Firstar Bank),
dated June 28, 2002 (incorporated by reference to Exhibit 4.1 to
the Company's Form 10-Q for the quarterly period ended June 30,
2002).
4.16 Seventh Amendment to Credit Agreement between The Middleton Doll
Company and US Bank National Association, dated January 30, 2003.
4.17 Loan Participation Certificate and Agreement dated May 1, 1997,
by and between Bando McGlocklin Small Business Lending
Corporation and Security Bank SSB (incorporated by reference to
Exhibit 10 to the Company's Form 10-Q for the quarterly period
ended June 30, 1997).
4.18 Master Note Purchase Agreement dated January 1, 1997, between the
State of Wisconsin Investment Board, Bando McGlocklin Small
Business Lending Corporation and Bando McGlocklin Capital
Corporation (incorporated by reference to Exhibit 4.7 to the
Company's Form 10-Q for the quarterly period ended March 31,
1997).
4.19 First Amendment to Master Note Purchase Agreement dated June 1,
1998, by and among the State of Wisconsin Investment Board, Bando
McGlocklin Small Business Lending Corporation and Bando
McGlocklin Capital Corporation (incorporated by reference to
Exhibit 4.2 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998).
4.20 Third Amended and Restated Credit Agreement dated June 1, 1998,
by and among State of Wisconsin Investment Board, Bando
McGlocklin Small Business Lending Corporation and Bando
McGlocklin Capital Corporation (incorporated by reference to
Exhibit 4.1 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998).
4.21 Trust Indenture between Bando McGlocklin Small Business Lending
Corporation and Firstar Bank, National Association, as trustee,
dated March 1, 2000 (incorporated by reference to Exhibit 4.1 to
the Company's Form 10-Q for the quarterly period ended March 31,
2000).
63
Exhibit No. Exhibit Description
10.1* Bando McGlocklin Capital Corporation 1993 Incentive Stock Option
Plan (incorporated by reference to Exhibit (i)(6) to the
Company's Pre-Effective Amendment No. 1 to Form N-2 Registration
Statement, Registration No. 33-66258).
10.2* Bando McGlocklin Capital Corporation 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended March 31, 1997).
10.3 Amended and Restated Management Services and Allocation of
Expenses Agreement, dated May 9, 2001, by and between
InvestorsBank, The Middleton Doll Company and Bando McGlocklin
Small Business Lending Corporation (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended June 30, 2001).
21 List of subsidiaries of The Middleton Doll Company.
99.1 Chief Executive Officer Certification
99.2 Chief Financial Officer Certification
_________________________
* Represents a management compensatory plan or arrangement.
64