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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2003
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission file number: 0-22663
THE MIDDLETON DOLL COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin 39-1364345
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
W239 N1700 Busse Road
Waukesha, Wisconsin 53188-1160
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (262) 523-4300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----- -----
On May 14, 2003, there were 3,727,589 shares outstanding of the Registrant's
common stock, 6-2/3 cents par value.
THE MIDDLETON DOLL COMPANY
FORM 10-Q INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002 ............................................ 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 2003 and 2002 (Unaudited) ........................ 5
Consolidated Statement of Changes in Shareholders' Equity -
For the Three Months Ended March 31, 2003 and 2002 (Unaudited).... 7
Consolidated Statements of Cash Flows - For the Three Months
Ended March 31, 2003 and 2002 (Unaudited) ........................ 8
Notes to the Consolidated Financial Statements (Unaudited) ....... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk ........ 16
Item 4. Controls and Procedures .......................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 17
Item 2. Changes in Securities and Use of Proceeds ........................ 17
Item 3. Defaults Upon Senior Securities .................................. 17
Item 4. Submission of Matters to a Vote of Security Holders .............. 17
Item 5. Other Information ................................................ 17
Item 6. Exhibits and Reports on Form 8-K ................................. 17
Signatures ....................................................... 18
Exhibit Index ................................................... 21
2
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
ASSETS
Consumer Products
Cash $ 474,123 $ 500,815
Accounts receivable, net of allowance of
$467,247 and $332,386 as of March 31, 2003
and December 31, 2002, respectively 1,621,095 3,233,376
Inventory 6,148,105 6,206,737
Prepaid inventory 197,967 142,512
Prepaid corporate taxes 677,295 677,295
Other prepaid expenses 504,570 327,977
------------ ------------
Total current assets 9,623,155 11,088,712
Property and equipment, net of accumulated
depreciation of $3,003,851 and $2,788,953 as of
March 31, 2003 and December 31, 2002, respectively 3,879,135 3,995,514
Deferred income taxes 1,683,505 1,316,526
Licensing agreement, net of accumulated
amortization of $2,458,334 and $2,333,334
as of March 31, 2003 and December 31, 2002,
respectively 41,666 166,666
Goodwill 506,145 506,145
------------ ------------
Total Consumer Products Assets 15,733,606 17,073,563
------------ ------------
Financial Services
Cash 336,711 433,847
Interest receivable 306,571 268,091
Rent receivable, net of allowance of $150,000
as of March 31, 2003 and December 31, 2002 218,298 250,487
Loans 68,782,404 73,600,884
Leased properties:
Buildings, net of accumulated depreciation of
$2,354,748 and $2,294,053 as of March 31,
2003 and December 31, 2002, respectively 25,933,954 27,323,798
Land 4,039,872 4,270,872
Construction in progress 1,413,680 780,143
------------ ------------
Total leased properties 31,387,506 32,374,813
Property and equipment, net of accumulated
depreciation of $694,380 and $678,128 as of
March 31, 2003 and December 31, 2002, respectively 57,152 73,404
Investment in swap contracts at fair value -- 512,316
Other assets 1,025,821 951,260
------------ ------------
Total Financial Services Assets 102,114,463 108,465,102
------------ ------------
Total Assets $117,848,069 $125,538,665
============ ============
3
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products
Short-term borrowings $ -- $ 1,242,000
Accounts payable 720,293 1,019,546
Accrued salaries 280,722 250,611
Accrued liabilities 317,305 494,784
------------- -------------
Total Consumer Products Liabilities 1,318,320 3,006,941
------------- -------------
Financial Services
Commercial paper 11,945,000 51,272,618
Lines of credit 40,350,000 3,480,000
Direct pay letter of credit obligation 7,160,000 7,305,000
State of Wisconsin Investment Board notes payble 9,333,333 9,666,667
Loan participations with repurchase options 15,286,550 17,184,176
Other borrowings 1,439,410 1,441,042
Accrued liabilities 899,259 1,657,322
------------- -------------
Total Financial Services Liabilities 86,413,552 92,006,825
------------- -------------
Minority Interest and Preferred Stock
Minority interest in subsidiaries 46,769 51,641
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 3,042,390 2,933,904
Treasury stock, 674,010 shares, at cost (6,725,922) (6,725,922)
Accumulated other comprehensive income -- 512,316
------------- -------------
Total Shareholders' Equity 13,214,653 13,618,483
------------- -------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $ 117,848,069 $ 125,538,665
============= =============
4
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended March 31,
--------------------------
2003 2002
----------- -----------
Consumer Products
Net sales $ 3,911,868 $ 5,584,106
Cost of goods sold 2,207,399 3,141,995
----------- -----------
Gross profit 1,704,469 2,442,111
Operating expenses
Sales and marketing 818,188 1,161,678
New product development 205,135 225,536
General and administrative 1,166,073 1,127,987
----------- -----------
Total operating expenses 2,189,396 2,515,201
Net operating loss (484,927) (73,090)
Other income (expense)
Interest expense (4,136) (42,814)
Other income, net 9,349 7,455
----------- -----------
Net other income (expense) 5,213 (35,359)
Loss before income taxes, minority
interest and intercompany charges (479,714) (108,449)
Income tax benefit 191,886 43,380
Minority interest in loss (earnings)
of subsidiaries 4,872 (11,910)
----------- -----------
Loss Before Intercompany
Charges - Consumer Products (282,956) (76,979)
----------- -----------
Financial Services
Revenues
Interest on loans 927,372 1,369,183
Rental income 811,454 976,176
Gain on sale of leased properties 303,570 893
Gain on termination of interest rate swaps 484,304 --
Other income 12,973 135,350
----------- -----------
Total revenues 2,539,673 2,481,602
----------- -----------
Expenses
Interest expense 797,957 1,035,721
Depreciation expense 189,117 216,193
Management fee expense 246,443 261,007
Other operating expenses 207,941 206,092
----------- -----------
Total expenses 1,441,458 1,719,013
----------- -----------
Income before income taxes and
intercompany revenue 1,098,215 762,589
Income tax expense (107,499) --
----------- -----------
Income Before Intercompany Revenue
- Financial Services $ 990,716 $ 762,589
----------- -----------
5
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(Unaudited)
For the Three Months
Ended March 31,
--------------------------
2003 2002
----------- -----------
Total Company
Loss before income taxes, minority interest
and intercompany activity
Consumer products $ (479,714) $ (108,449)
Financial services 1,098,215 762,589
----------- -----------
Total company 618,501 654,140
Income tax benefit 217,300 118,264
Minority interest in loss (earnings) of
subsidiaries 4,872 (11,910)
----------- -----------
Net income 840,673 760,494
Preferred stock dividends (359,428) (359,428)
----------- -----------
Net income available to common shareholders $ 481,245 $ 401,066
=========== ===========
Basic Earnings Per Common Share $ 0.13 $ 0.11
=========== ===========
Diluted Earnings Per Common Share $ 0.13 $ 0.11
=========== ===========
Weighted average shares outstanding (diluted) 3,727,589 3,727,589
=========== ===========
Segment Reconciliation
Consumer Products
Loss before intercompany charges $ (282,956) $ (76,979)
Interest/rental expense to parent (217,661) (182,113)
Management fees to parent (120,000) (103,858)
Applicable income tax benefit related to
intercompany charges and other items 132,913 74,884
----------- -----------
Total segment net loss (487,704) (288,066)
Financial Services
Income before intercompany revenue 990,716 762,589
Interest/rental income from subsidiary 217,661 182,113
Management fees from subsidiary 120,000 103,858
----------- -----------
Total segment net income 1,328,377 1,048,560
Net Income $ 840,673 $ 760,494
=========== ===========
6
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Common Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
--------- ----------- ----------- ----------- ------------- -----------
BALANCES,
December 31, 2001 $ 293,441 $16,604,744 $ 2,170,816 $(6,725,922) $ 1,704,170 $14,047,249
-----------
Comprehensive income
Net income three months
ended March 31, 2002 -- -- 760,494 -- -- 760,494
Change in fair market
value of interest rate
swap agreement -- -- -- -- (157,524) (157,524)
-----------
Total Comprehensive
Income 602,970
-----------
Cash dividends on
preferred stock -- -- (359,428) -- -- (359,428)
Cash dividends on
common stock -- -- (609,982) -- -- (609,982)
--------- ----------- ----------- ----------- ------------ -----------
BALANCES,
March 31, 2002 $ 293,441 $16,604,744 $ 1,961,900 $(6,725,922) $ 1,546,646 $13,680,809
========= =========== =========== =========== ============ ===========
BALANCES,
December 31, 2002 $ 293,441 $16,604,744 $ 2,933,904 $(6,725,922) $ 512,316 $13,618,483
-----------
Comprehensive income
Net income three months
ended March 31, 2003 -- -- 840,673 -- -- 840,673
Change in fair market
value of interest rate
swap agreement -- -- -- -- (512,316) (512,316)
-----------
Total Comprehensive
Income 328,357
-----------
Cash dividends on
preferred stock -- -- (359,428) -- -- (359,428)
Cash dividends on
common stock -- -- (372,759) -- -- (372,759)
--------- ----------- ----------- ----------- ------------ -----------
BALANCES,
March 31, 2003 $ 293,441 $16,604,744 $ 3,042,390 $(6,725,922) $ -- $13,214,653
========= =========== =========== =========== ============ ===========
7
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31, 2003
----------------------------
Consumer Financial
Products Services
------------ -------------
Cash Flows from Operating Activities:
Segment income (loss) $ (487,704) $ 1,328,377
Adjustments to reconcile segment net income (loss)
to net cash flows from operating activities
Depreciation and amortization 339,898 189,116
Provision for losses on accounts receivable 134,861 --
Provision for inventory reserve 46,121 --
Change in appreciation on investments -- 5,031
Gain on sale of leased properties -- (303,570)
Change in minority interest in subsidiaries (4,872) --
Net change in:
Accounts receivable 1,477,420 --
Inventory 12,511 --
Interest receivable -- (38,480)
Rent receivable -- 32,189
Other assets (599,027) (79,592)
Accounts payable (299,253) --
Other liabilities (147,368) (758,063)
----------- ------------
Net Cash Flows from Operating Activities 472,587 375,008
----------- ------------
Cash Flows from Investing Activities:
Net loan repayments received -- 4,818,480
Proceeds from sale of leased properties -- 1,743,311
Purchase or construction of leased property -- (625,298)
Capital expenditures (98,519) --
----------- ------------
Net Cash Flows from Investing Activities (98,519) 5,936,493
----------- ------------
Cash Flows from Financing Activities:
Net change in short term borrowings (1,242,000) --
Net change in commercial paper -- (39,327,618)
Net change in lines of credit -- 36,870,000
Net payments on letter of credit -- (145,000)
Repayment of SWIB notes -- (333,334)
Repayment of loan participations with
repurchase options -- (1,897,626)
Net change in other notes payable -- (1,632)
Preferred stock dividends paid -- (359,428)
Common stock dividends paid -- (372,759)
Net intercompany transactions 841,240 (841,240)
----------- ------------
Net Cash Flows from Financing Activities (400,760) (6,408,637)
----------- ------------
Net change in cash and cash equivalents (26,692) (97,136)
Cash and equivalents beginning of period 500,815 433,847
----------- ------------
Cash and equivalents end of period $ 474,123 $ 336,711
=========== ============
Supplemental Cash Flow Disclosures
Cash paid for interest $ 63,522 $ 864,824
=========== ============
Cash paid for income taxes $ 10,700 $ 418,158
=========== ============
8
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS
The consolidated financial statements of The Middleton Doll Company (the
"Company") include two segments of business: financial services and consumer
products. The consolidated financial statements as of and for the periods
presented include the accounts of the Company and Bando McGlocklin Small
Business Lending Corporation ("BMSBLC") as financial services companies and Lee
Middleton Original Dolls, Inc. ("LMOD"), and License Products, Inc. ("LPI") as
consumer product companies. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management of the Company, all
adjustments necessary to present fairly the financial position as of March 31,
2003 and December 31, 2002 and the results of operations for the three months
ended March 31, 2003 and 2002 and statement of changes in shareholders' equity
and cash flows for the three months ended March 31, 2003 and 2002 have been
made. Such adjustments consisted only of normal recurring items. Operating
results for the periods ended March 31, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. The accounting policies
followed by the Company are set forth in Note 1 to the Company's consolidated
financial statements contained in the Company's 2002 Annual Report on Form 10-K.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
The balance sheet for consumer products is classified due to its normal business
cycle being less than twelve months. Financial services' balance sheet is not
classified as its normal business cycle is greater than twelve months.
In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for doubtful accounts, valuation of inventories and deferred
tax assets.
9
NOTE 3. INVENTORY
Inventories of LMOD and LPI are valued at the lower of cost or market and
utilize the first-in, first-out (FIFO) method to determine cost. The components
of inventory are as follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Raw materials $ 1,896,991 $ 2,317,792
Work in process 108,094 100,118
Finished goods 4,239,777 3,885,584
----------- -----------
6,244,862 6,303,494
Less: reserve for obsolete inventory (96,757) (96,757)
----------- -----------
$ 6,148,105 $ 6,206,737
=========== ===========
NOTE 4. INCOME TAXES
The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate
investment trust under the Internal Revenue Code. Accordingly, the REIT is not
subject to income tax on taxable income that is distributed to shareholders.
However, the REIT may retain capital gains from the sale of real estate and pay
income tax on that gain. Currently, the REIT has accrued $107,499 in income tax
expense based on the sale of leased property. The income tax benefit recorded by
the Company that is attributable to the Consumers Product segment is calculated
on net income before the elimination of intercompany expenses.
NOTE 5. EARNINGS PER SHARE
See Exhibit 11 for the computation of the net income per common share.
NOTE 6. COMMITMENTS
Undisbursed construction and loan commitments totaled $1.14 million at March 31,
2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Amounts presented as of March 31, 2003 and December 31, 2002, and for the three
months ended March 31, 2003 and March 31, 2002 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, and License Products, Inc. ("LPI"), a 100% owned
subsidiary of LMOD.
Results of Operations
For the three months ended March 31, 2003 and March 31, 2002
The Company's total net income available for common shareholders for the quarter
ended March 31, 2003 was $0.48 million or $0.13 per share (diluted) as compared
to $0.40 million or $0.11 per share (diluted) for the quarter ended March 31,
2002, a 20% increase. The consumer products segment incurred a net loss before
intercompany charges of $0.28 million due to lower sales as a result of
increased competition, a failed play doll strategy, and due to the slowdown in
consumer spending related to the soft economy. The financial services segment's
net income increased due to a sale of a leased property which resulted in
income, net of related taxes, of $0.20 million and from a $0.48 million gain on
the termination of interest rate swaps.
10
Consumer Products
After income taxes and minority interest and before intercompany charges, the
consumer products segment had a net loss of $0.28 million for the quarter ended
March 31, 2003 compared to a net loss of $0.08 million for the quarter ended
March 31, 2002. After giving effect to interest, rental and management fees paid
to the Company, the consumer products segment's net loss was $0.49 million for
the three months ended March 31, 2003, as compared to a net loss of $0.29
million for the three months ended March 31, 2002.
Net sales from consumer products for the quarter ended March 31, 2003 decreased
30% to $3.91 million from $5.58 million in the corresponding prior year period.
This was due to decreased sales of $1.95 million at LMOD offset by increased
sales of $0.28 million at LPI. LMOD's decrease in sales resulted from the soft
economy, an increase in competition and a failed play doll strategy. Sales of
both the artist-designed collectible dolls and the play dolls have been affected
by foreign produced dolls which sell at a substantial discount from LMOD's
dolls. Additionally, the number of dealers decreased from a year ago and the
dealers are ordering more conservatively. LPI's increase in sales resulted from
additional store openings by its customers. Cost of sales decreased 30% to $2.21
million for the quarter ended March 31, 2003 compared to $3.14 million for the
prior year quarter. LMOD's cost of sales decreased to $1.45 million from $2.42
million while LPI's cost of sales increased to $0.75 million from $0.73 million.
Total gross profit margin remained the same at 44% for both periods. LMOD's
gross profit margin decreased to 43% from 46% and LPI's increased to 44% from
32%. The decrease in the gross profit margin at LMOD was due to a change in
sales mix between collectible and play dolls. The increase in the gross profit
margin at LPI was due to better pricing from suppliers based on volume and the
increase in sales to existing customers.
The Company recognizes that over the past two years the strategy of offering a
high quality play doll at a lower competitive price has been ineffective. The
Company is now transitioning to a new business strategy to build on the name
brand recognition of LMOD in the collectible doll market. This refocus on the
collectible doll market through independent dealers will be accompanied by a
de-emphasis on the recent focus to penetrate the high volume, low priced and
promotionally competitive mass merchandise market. In an effort to increase
sales, a new line of artist studio collection dolls called "Classic Miniatures"
has been introduced to expand distribution into smaller gift stores. In
addition, the Company is pursuing the expansion of its "Newborn Nursery Adoption
Centers" that go beyond selling dolls to evoke an emotional experience as
children "adopt" their new baby doll. Continuing efforts are underway to expand
the dealer base and to strengthen the successful relationships that have been
built with existing dealers over the past twenty-five years.
Total operating expenses of consumer products for the quarter ended March 31,
2003 were $2.19 million compared to $2.52 million for the quarter ended March
31, 2002, a 13% decrease. LMOD's total operating expenses decreased $0.35
million, with sales and marketing expense decreasing $0.33 million, and product
development expense decreasing $0.02 million due to the reclassification of
quality administration costs. Sales and marketing expense reduction at LMOD was
accomplished by staff reductions, and by decreasing advertising, catalog
printing, and packaging costs. Due to decreased sales, cost reductions in
commissions, freight and merchant fees also contributed to the reduction in
expenses. General and administrative expenses remained the same at LMOD. To
further reduce expenses, LMOD's manufacturing facility in Belpre, Ohio, was
closed for five weeks beginning March 24, 2003, in order to reduce inventory
levels. On April 28, 2003, 28 of the 48 employees at that facility were recalled
to work. LPI's total operating expenses increased $0.02 million, with sales and
marketing expense decreasing $0.01 million, and general and administrative
expenses increasing $0.03 million due to depreciation and scheduled salary
increases. Product development costs remained the same.
Other expenses, net, decreased $0.04 million due to a decrease in interest
expense. Consumer products recorded an income tax benefit of $0.32 million for
the quarter ended March 31, 2003 as compared to $0.12 million for the quarter
ended March 31, 2002. Income tax benefit for the first quarter of 2003 is
composed of tax benefit on net loss before intercompany charges of $0.19 million
and the tax benefit attributable to intercompany charges and other miscellaneous
items of $0.13 million. Intercompany charges were $0.34 million for the quarter
ended March 31, 2003 and $0.29 million for the quarter ended March 31, 2002. The
increase in the intercompany expenses was due to increased intercompany loans
resulting in an increase in interest expense.
11
Financial Services
Net income from financial services for the quarter ended March 31, 2003 was
$0.99 million compared to $0.76 million for the quarter ended March 31, 2002, a
30% increase. The increase resulted from the sale of a leased property which
resulted in income, net of related taxes, of $0.20 million and from a $0.48
million gain on the termination of interest rate swaps. If interest, rental and
management fees from the consumer products segment were included in the
financial services segment net income, the net income for the quarter ended
March 31, 2003 would have been $1.33 million and for the quarter ended March 31,
2002 net income would have been $1.05 million.
The net interest margin for the quarter ended March 31, 2003 was 3.76%, compared
to 3.86% for the quarter ended March 31, 2002. Net interest margin is determined
by dividing the total of interest income on loans and rental income less
interest expense by the total of average loans and leased properties. The
decrease in the net interest margin resulted from a reduction in rental income
of $0.16 million due to the sale of three leased properties and a reduction in
interest rate swap income of $0.17 million due to swap terminations between the
quarter ended March 31, 2002 and the quarter ended March 31, 2001.
Total revenues were $2.54 million for the quarter ended March 31, 2003 and $2.48
million for the quarter ended March 31, 2002. Interest on loans decreased 32% to
$0.93 million for the quarter ended March 31, 2002 from $1.37 million for the
comparative quarter. The large decrease in interest income from loans was due to
the $21.35 million decrease in the average total loans outstanding. This
decrease was primarily due to maturing loans and the inability to replace them
with the Company's current funding sources. The Company's ability to make
additional loans and to maintain its earnings depends on the ability of the
Company to obtain additional sources of funding. For further detail see
"Financial Condition - Financial Services".
Rental income decreased $0.17 million due to the sale of two leased properties
during 2002 and one leased property during 2003. Rental income for the quarter
ended March 31, 2003 was $0.81 million as compared to $0.98 million for the
quarter ended March 31, 2002. Proceeds from the sale of the rental properties
was used to reduce debt levels at the Company. At March 31, 2003 the Company had
$29.97 million in leased properties, net of accumulated depreciation, compared
to $34.68 million at March 31, 2002. One new property was under construction
during the quarter ended March 31, 2003.
Other income for the three months ending March 31, 2003 included a gain of $0.30
million from the sale of a leased property, $0.48 million from the termination
of interest rate swap contracts and $0.01 million of miscellaneous income. For
the three months ending March 31, 2002, other income included $0.11 million of
loan prepayment penalties and $0.03 million of miscellaneous income.
Interest expense decreased 42% to $0.80 million for the quarter ended March 31,
2003 as compared to $1.37 million for the quarter ended March 31, 2002. The
average debt balance decreased $26.04 million in the first quarter of 2003
compared to the first quarter of 2002 as a result of the decrease in loans as
explained above and due to lower interest rates. The average prime rate during
the first quarter of 2003 was 4.25% as compared to 4.75% during the first
quarter of 2002. As a result of interest rate swaps, the Company recognized a
reduction in interest expense of $0.17 million for the quarter ended March 31,
2002.
Depreciation expense decreased $0.03 million and management fee expense
decreased $0.01 million for the first quarter of 2003 as compared to the first
quarter of 2002 due to the decrease in leased properties. Other operating
expenses remained the same for the comparative quarters.
The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate
investment trust under the Internal Revenue Code. Accordingly, they are not
subject to income tax on taxable income that is distributed to shareholders.
However, the REIT may retain capital gains from the sale of real estate and pay
income tax on that gain. Currently, the REIT has accrued $0.11 million in income
tax expense based on the sale of leased property.
12
Financial Condition
Consumer Products
Total assets of consumer products were $15.73 million as of March 31, 2003 and
$17.07 million as of December 31, 2002, an 8% decrease.
Cash decreased to $0.47 million at March 31, 2003 from $0.50 million at December
31, 2002.
Accounts receivable, net of the allowance, decreased to $1.62 million at March
31, 2003 from $3.23 million at December 31, 2002. A decrease of $0.67 million is
attributable to LMOD, and a decrease of $0.94 million is attributable to LPI.
Accounts receivable normally decrease at the end of the first quarter as
retailers reduce their account balances after the year-end selling season.
Inventory was $6.15 million at March 31, 2003 compared to $6.21 million at
December 31, 2002. LMOD's inventory remained the same while License Products'
inventory decreased $0.06 million. LMOD's manufacturing facility was closed for
most of the month of April, 2003, in order to reduce inventory levels.
Inventories are valued at lower of cost or market using the first-in, first-out
(FIFO) method.
Property and equipment, net of accumulated depreciation, decreased by $0.12
million and prepaid inventory increased $0.06 million. Prepaid corporate taxes
increased $0.37 million due to the income tax benefit for the current quarter.
Other prepaid expenses increased by $0.18 million and the licensing agreement
decreased $0.13 million due to amortization. The licensing agreement gives LMOD
the right to produce certain dolls until April 28, 2003, and an additional
twelve months to sell any remaining inventory. Sales of dolls designed under the
licensing agreement have been decreasing during the past few years and
represented less than five percent of LMOD's sales during 2002.
Goodwill was recorded when the Company purchased the remaining interest in the
stock from the estate of Lee Middleton, the founder of LMOD, on April 30, 1998.
The purchase price exceeded book value by $0.62 million. As of March 31, 2003
and December 31, 2002, the balance of the goodwill, net of previous accumulated
amortization was $0.51 million. No impairment was recorded during the quarter
ended March 31, 2003.
LMOD decreased its short-term borrowings on a line of credit with the Bank by
$1.24 million during the quarter. 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 decreased by $0.45 million as of March
31, 2003 compared to December 31, 2002.
Financial Services
Total assets of financial services were $102.11 million as of March 31, 2003 and
$108.47 million as of December 31, 2002, a 6% decrease.
Cash decreased to $0.34 million at March 31, 2003 from $0.43 million at December
31, 2002.
Interest and rent receivable remained at $0.52 million at March 31, 2003 and at
December 31, 2002. The rent receivable is shown net of an allowance for doubtful
accounts of $150,000 at both periods. At March 31, 2003, three borrowers were on
non-accrual resulting in $0.03 million of gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms. One tenant was also on non-accrual resulting in $0.05 million of
rental income which would have been recorded had the tenant been current in
accordance with the lease.
Fixed assets and other assets, including prepaid amounts, increased by $0.06
million. The Company's interest rate swaps were cash flow hedges and had a fair
market value of $0.51 million as of December 31, 2002. These swaps were
terminated during the first quarter of 2003 resulting in a gain of $0.48
million. At March 31, 2003, the Company did not have any further interest rate
swaps.
13
Total loans (excluding intercompany loans) decreased by $4.82 million, or 7%, to
$68.78 million at March 31, 2003, from $73.60 million at December 31, 2002, with
a corresponding decrease in liabilities. Nonperforming loans at March 31, 2003,
totaled $2.22 million. As of March 31, 2003, and December 31, 2002, management
did not provide an allowance for loan losses due to management's belief that the
collateral which secured the nonperforming loans was adequate to fully secure
the debtors' obligations to the Company. BMSBLC had unfunded commitments of
$1.14 million as of March 31, 2003.
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 $31.39 million
as of March 31, 2003, compared to $32.37 million as of December 31, 2002 due to
the sale of one leased property.
The financial services' total consolidated indebtedness at March 31, 2003
decreased $5.59 million as compared to December 31, 2002. As of March 31, 2003,
financial services had $33.22 million outstanding in long-term debt and $52.30
million outstanding in short-term borrowings compared to $35.60 million
outstanding in long-term debt and $54.75 million outstanding in short-term
borrowing as of December 31, 2002. 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. On March 31, 2003, $39.0 million of
outstanding commercial paper matured and was unable to be replaced by sales of
additional commercial paper, requiring BMSBLC to draw upon its back-up bank line
of credit. The bank line of credit has a higher interest rate than that paid on
commercial paper. The higher interest expense will result in a reduction of net
income for 2003. BMSBLC does expect 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. Accrued liabilities
decreased to $0.90 million at March 31, 2003, as compared to $1.66 million at
December 31, 2002.
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.
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.
14
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 loans is
discontinued when, in the opinion of management, there is reasonable doubt as to
whether the collateral securing the borrower's obligation is sufficient to pay
all principal, accrued interest, and other expenses. 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. In this review, management takes
into account the projected cash flow of the business from all sources including
capital contributions, conversion of collateral to cash, and net income plus
depreciation.
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 considered nonperforming when the scheduled
principal and/or interest payments are more than ninety days past due.
Nonperforming loans are not automatically placed on non-accrual status. For a
discussion of when loans are placed on non-accrual status, see "Accrual of
interest income" above.
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 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
15
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All remaining interest rate swap agreements were terminated during the quarter
ended March 31, 2003. The Company does not anticipate any further income from
the termination of interest rate swap contracts.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. During the prior ninety-day
period, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Accounting Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and the Chief Accounting Officer concluded that the
Company's disclosure controls and procedures were effective.
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
Company's internal controls subsequent to the date of their evaluation.
16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any material pending legal
proceeding and no such material proceedings are known to be
contemplated.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No material changes have occurred in the securities of the Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are identified on
the Exhibit Index hereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 2003.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
THE MIDDLETON DOLL COMPANY
(Registrant)
Date: May 14, 2003 /s/ George R. Schonath
-------------------------------------
George R. Schonath
President and Chief Executive Officer
Date: May 14, 2003 /s/ Susan J. Hauke
-------------------------------------
Susan J. Hauke
Vice President Finance
18
I, George R. Schonath, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Middleton Doll
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ George R. Schonath
-----------------------------
George R. Schonath
Chief Executive Officer
19
I, Susan J. Hauke, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Middleton Doll
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Susan J. Hauke
-----------------------------
Susan J. Hauke
Vice President Finance and
Chief Financial Officer
20
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit Number Exhibit
- -------------- -------
11 Statement Regarding Computation of Per Share Earnings
99.1 Chief Executive Officer Certification
99.2 Chief Financial Officer Certification
21