Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

or

Commission file number: 0-22663

THE MIDDLETON DOLL COMPANY
(Exact name of registrant as specified in its charter)

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 Exchange Act).

Yes          No    X  

On May 11, 2005, 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

2

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

3

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)

4

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

5

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS – (Continued)
(Unaudited)

6

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY
(Unaudited)

7

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

8

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.     NATURE OF BUSINESS

The consolidated financial statements of The Middleton Doll Company (the “Parent”) include the accounts of the Parent, Bando McGlocklin Small Business Lending Corporation (“BMSBLC”), Lee Middleton Original Dolls, Inc. (“LMOD”) and License Products (“LPI”). All significant intercompany accounts and transactions have been eliminated in consolidation. The term “Company”, when used herein, refers to the Parent, BMSBLC, LMOD and LPI on a consolidated basis.

LMOD is a designer and distributor of collectible vinyl dolls and vinyl play dolls. LPI designs, develops and markets a line of proprietary time pieces. BMSBLC manages its existing loans, leases buildings to small businesses and participates in loans with third party loan originators.

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, 2005 and December 31, 2004, the results of operations for the three months ended March 31, 2005 and 2004 and the statements of changes in shareholders’ equity and cash flows for the three months ended March 31, 2005 and 2004 have been made. Such adjustments consisted only of normal recurring items. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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 2004 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, 2004.

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 allowances for loan and lease losses and doubtful accounts and the valuation of inventories and deferred income tax assets. See discussion of “Critical Accounting Policies” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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:

NOTE 4.     INCOME TAXES

The Parent 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 common shareholders. However, the REIT may retain capital gains from the sale of real estate and pay income tax on that gain. At March 31, 2005, $0.21 million of income tax expense was accrued on $0.59 million of tax basis capital gains from the sale of real estate during the first quarter of 2005.

Income tax expense (benefit) recorded by the Company that is attributable to the Consumer Products segment is calculated based on the determination of net income (loss) before the elimination of intercompany expenses. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized in the foreseeable future. In evaluating the consumer products segment’s ability to realize the net deferred income tax assets, the Company considers all available evidence, both positive and negative, including past operating results, the existence of cumulative losses in the most recent fiscal years, tax planning strategies that are prudent and feasible, and the forecast of future taxable income. In considering this information, the Company is required to make certain assumptions and judgments based on plans and estimates. Any changes in the Company’s assumptions and/or estimates may materially impact the consumer products segment’s income tax expense. At March 31, 2005, the consumer products segment’s valuation allowance was $3.72 million, which should be available to be utilized against future taxable income.

NOTE 5.     LOSS PER SHARE

See Exhibit 11 for the computation of the net loss per common share.

NOTE 6.     COMMITMENTS

Undisbursed construction and loan commitments totaled $5.92 million at March 31, 2005.

NOTE 7.     RECLASSIFICATION

Certain 2004 amounts have been reclassified to conform with the 2005 presentation. The reclassifications have no effect on reported amounts of net income or equity.

10

NOTE 8.     RECENT ACCOUNTING DEVELOPMENTS

On December 15, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, “Share-Based Payment” (SFAS 123R), which requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of the compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS 123R replaces FASB Statement No. 123, “Accounting for Stock Issued to Employees”. SFAS 123R is effective for the Company’s reporting period ending March 31, 2006. The Company is currently evaluating the impact that the adoption of SFAS 123R will have on its consolidated financial statements.

Overview

        Amounts presented as of March 31, 2005, and December 31, 2004, and for the three month periods ended March 31, 2005, and March 31, 2004, include the consolidation of two segments. The financial services segment includes The Middleton Doll Company (the “Parent”) and Bando McGlocklin Small Business Lending Corporation (“BMSBLC”), a 100% owned subsidiary of the Parent. The consumer products segment includes Lee Middleton Original Dolls, Inc. (“LMOD”), a 99% owned subsidiary of the Parent and License Products, Inc. (“LPI”), a 100% owned subsidiary of LMOD. The term “Company”, when used herein, refers to the Parent, BMSBLC, LMOD and LPI on a consolidated basis.

        The loan and real estate portfolios of the Parent and BMSBLC are administered and managed by InvestorsBank (the “Bank”), a wholly-owned subsidiary of InvestorsBancorp, Inc. under a “Second Amended and Restated Management and Services and Allocation of Expenses Agreement” dated January 1, 2004, (the “Management Agreement”). In addition, the Bank provides certain management services to LMOD. George R. Schonath, President and Chief Executive Officer of the Parent and BMSBLC, is also President and Chief Executive Officer of the Bank and InvestorsBancorp, Inc. George Schonath and members of his family own all of the outstanding stock of InvestorsBancorp, Inc.

        For the loan and real estate management services provided under the Management Agreement, the Bank receives an annual fee, payable monthly, equal to 0.25% (1/4 of 1%) of the total amount of loans under management and 6% of the rents from the real estate portfolio. The Management Agreement provides for the sharing of operating expenses between the Bank and BMSBLC, as well as certain expenses of employees of the Bank who provide accounting, reporting and related services to the Parent and BMSBLC. Additionally, for its services in providing ongoing credit analysis, loan and lease monitoring, workout services, and management services to LMOD, the Bank receives an annual fee of $365,000, payable monthly. The Parent and BMSBLC currently have only one paid employee, a Vice President of the Company and BMSBLC. George Schonath, the President and Chief Executive Officer, provides services to the Parent, BMSBLC and LMOD under the Management Agreement and is not separately compensated by any of those entities.

        During the past four years there has been a significant decrease in net sales of the consumer products segment. This decrease is primarily attributable to the decrease in demand for expensive collectible dolls and intense pricing competition from dolls produced in China. In June of 2004, LMOD transferred production of its high quality, lifelike Artist Studio Collection (ASC) dolls to a contract manufacturer in China to reduce manufacturing costs. The manufacturer in China that was selected to make ASC dolls was a current supplier at the time of its selection and has devoted a separate unit and staff exclusively to the manufacturing of these dolls. Limited doll production will continue at the LMOD facilities in Belpre, Ohio.

11

        Twenty Newborn Nursery® boutiques, developed by LMOD for department stores owned by the Saks Department Store Group, are now open. The boutiques are located in the children’s department and provide an opportunity for children to experience the “adoption” of their very own lifelike baby in a simulated hospital nursery while encouraging the development of positive childhood memories. LMOD’s goal is to expand the Newborn Nursery® concept to 100 boutiques within the Saks Department Store Group over a three-year period. Depending upon the success of the Newborn Nursery® boutiques, LMOD expects a total of 48 boutiques to be in operation by the end of 2005.

        LMOD anticipates increasing sales of play dolls through the Newborn Nursery® boutiques and will also continue to develop new products for the Artist Studio Collection line of dolls while emphasizing high product quality. During the past two years LMOD has reduced operating expenses; however, general and administrative expenses have not significantly decreased primarily due to long-term leases in effect until April 30, 2006, for the headquarters located in Westerville, Ohio, and until August 15, 2006, for the warehouse facilities in Columbus, Ohio. Management is attempting to achieve further reductions in operating expenses by continuing to focus on controlling expenses.

        Due to the Parent’s required redemption of $16.85 million of outstanding preferred stock on July 1, 2008, BMSBLC has reduced and expects to continue to materially reduce its lending and real estate leasing activities over the next three years. During the second quarter of 2004, the Board of Directors of the Company approved a plan to convert loans and leased properties of BMSBLC to cash as loans mature and leased properties are sold. The proceeds will be used to reduce outstanding debt and to redeem preferred stock at maturity. Under this policy, BMSBLC does not intend to make new loans or purchase new properties to lease, with only limited exceptions for participations with InvestorsBank. This reduction in assets will reduce the income available for common stock dividends in each of the next four years. As a result, the Board of Directors has changed the common stock dividend policy from the payment of quarterly dividends to an annual dividend which would be payable in January for the preceding year. No dividends were paid to common shareholders in January of 2005. The preferred stock dividend of $0.335 per share per quarter ($1.34 annual dividend per preferred share) will continue to be paid on a quarterly basis.

        Effective July 14, 2004, the Company’s common stock (DOLL) and preferred stock (DOLLP) began trading on the OTC Bulletin Board. The Company voluntarily delisted from The Nasdaq National Market because the shareholders’ equity in the Company no longer met the minimum NASDAQ requirement of $10.0 million.

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. LMOD and LPI provide an allowance for doubtful accounts based on management’s estimate of uncollectible amounts. Management reviews the trade accounts receivable based on an aging of accounts, historical collection experience, and a specific review of certain accounts in order to evaluate the collectibility of the accounts receivable.

        Inventory and allowance for obsolete inventory. Inventories are valued at lower of cost or market using the first-in, first-out (FIFO) method. LMOD and LPI provide an allowance for obsolete inventory items based on management’s estimate. Management reviews all slow-moving or obsolete inventory items in order to determine the appropriate allowance for obsolete inventory. The inventory allowance reflects the estimated markdown necessary to liquidate the slow-moving inventory items.

12

        Impairment of goodwill. Goodwill is reviewed by management at least annually for impairment. An impairment review is designed to determine whether the fair value of a reporting unit is below its carrying value. Management estimates the fair value based upon the present value of future expected cash flows using management’s best estimates of assumptions for sales and expenses. Any goodwill impairment losses will be charged to operations.

        Deferred income tax assets and liabilities. 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 for differences between the financial statement and tax basis 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 income 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 income 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 evaluates past loan loss experience, the level of nonperforming loans, current economic conditions, loan volume, growth and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of underlying collateral, and other relevant factors.

        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.

13

Results of Operations

For the three months ended March 31, 2005 and March 31, 2004

        The Company’s total net loss applicable to common shareholders for the three months ended March 31, 2005 equaled ($0.35) million, or ($0.09) per common share (diluted), as compared to ($0.72) million, or ($0.19) per common share (diluted), for the three months ended March 31, 2004.

        The consumer products segment’s net loss increased $0.08 million when comparing the first quarter of 2005 to the first quarter of 2004, primarily due to increases in sales and marketing expenses. Net sales increased slightly when comparing the two quarters. The increase in sales of Newborn Nursery® dolls to the Saks Department Store Group was offset by a corresponding decrease in dealer sales. Gross profit margins improved when comparing the two quarters due to decreased production costs associated with the transfer of doll production to China in July of 2004.

        For the financial services segment both rental income and loan income decreased when comparing the first quarter of 2005 to the first quarter of 2004. This was the result of both leased properties and loans declining compared to the first quarter of 2004 which is in accordance with management’s plan to reduce loans and leased properties in anticipation of the redemption of the preferred stock in 2008. The increase in the financial services segment’s net income was primarily due to $0.56 million of gains on sales of leased properties (net of income taxes).

Consumer Products

        Net sales for the consumer products segment for the three months ended March 31, 2005, increased 3% to $2.91 million from $2.82 million for the three months ended March 31, 2004. During the first quarter of 2005, LMOD’s net sales were $1.62 million (a decrease of $.06 million from the first quarter of 2004) and LPI’s net sales were $1.29 million (an increase of $0.15 million from the first quarter of 2004). At LMOD, sales of play dolls to retailers decreased $0.06 million when comparing the first quarter of 2005 to the first quarter of 2004. Sales of Artist Studio Collection (ASC) dolls are made through the LMOD dealer network which decreased by approximately 100 dealers since the first quarter of 2004. As a result, sales to dealers of ASC dolls decreased $0.33 million when comparing the first quarter of 2005 to the first quarter of 2004. This sales decrease was offset by sales of $0.33 million of Newborn Nursery® dolls to the Saks Department Store Group. During the first quarter of 2005, start-up orders for twelve Newborn Nursery® boutiques were shipped and an additional eight boutiques placed reorders.

        Cost of goods sold decreased 4% to $1.66 million for the three months ended March 31, 2005, compared to $1.73 million for the three months ended March 31, 2004. LMOD’s cost of goods sold decreased to $0.78 million from $1.00 million while LPI’s cost of goods sold increased to $0.88 million from $0.73 million. Total gross profit margin increased to 43% from 39% in the prior year. LMOD’s gross profit margin increased to 52% from 41% primarily due to decreased production costs associated with the transfer of doll production to China. LPI’s gross profit margin decreased to 31% for the first quarter of 2005 as compared to 36% for the first quarter of 2004 due to changes in customer and product mix.

14

        Total operating expenses of the consumer products segment for the three months ended March 31, 2005, were $2.07 million compared to $1.88 million for the three months ended March 31, 2004, a 10% increase. LMOD’s total operating expenses increased $0.12 million to $1.61 million when comparing the three months ended March 31, 2005 to the three months ended March 31, 2004. Sales and marketing expense increased $0.16 million, primarily due to increases in shared advertising fees. These fees include one-time start-up costs of $0.11 million associated with the opening of twelve Newborn Nursery® boutiques during the first quarter of 2005. When compared to the first quarter of 2004, new product development costs at LMOD increased $0.03 million, primarily due to increased salaries, and general and administrative expenses decreased $0.07 million, primarily due to a reduction in restructuring costs. LPI’s operating expenses increased $0.07 million to $0.46 million for the first quarter of 2005. Sales and marketing expenses increased $0.02 million primarily due to increases in salaries and shared advertising fees. New product development costs increased $0.01 million due to increases in salaries, while general and administrative expenses increased $0.04 million, primarily due to salary increases, travel and building expenses.

        When comparing the first quarter of 2005 to the first quarter of 2004, other income decreased $0.04 million. During the first quarter of 2005, LPI’s other income increased $0.04 million due to rental income that LPI receives from a tenant in its building. During the first quarter of 2004, LMOD reported $0.08 million of other income as a result of settlements with defendants regarding legal actions taken to prevent the sale of certain dolls that management believed infringed on LMOD’s copyrights and other intellectual property.

        Interest expense and intercompany loans have been eliminated for consolidation purposes. At March 31, 2005, LMOD owed the Parent $4.2 million, consisting of a line of credit of $0.50 million and an unsecured note of $3.7 million. LMOD owed BMSBLC $2.98 million, consisting of a line of credit of $0.98 million and a first mortgage on real estate of $2.0 million. The average interest rate on LMOD’s notes was 6.0% at March 31, 2005. At March 31, 2005, LPI owed BMSBLC $7.76 million consisting of a line of credit of $1.86 million, an unsecured note of $2.35 million, and a first mortgage on real estate of $3.55 million. The average interest rate on LPI’s notes was 6.2% at March 31, 2005. Before intercompany eliminations, interest expense for the consumer products segment and interest income to the financial services segment was $0.21 million for the quarter ended March 31, 2005.

        For the three months ended March 31, 2005, the consumer products segment did not record any income tax expense or benefit. Management has determined, based on the level of continuing losses of the consumer products segment, that it would provide a valuation allowance for the full amount of any net operating loss carryforwards and other net deferred income tax assets, due to uncertainties of realization in the near term. If the consumer products segment becomes profitable, the existing net operating loss carryforwards should be available to be utilized against future taxable income. In assessing the recoverability of deferred income tax assets, including net operating loss carryforwards, management considers whether it is more likely than not, in the foreseeable future, that some portion or all of the deferred income tax assets will not be realized. The realization of deferred income tax assets in this instance is dependent upon the generation of future taxable income during the periods in which the net operating loss carryforwards would be available to offset the taxable income. At March 31, 2005, there were unused net operating loss carryforwards of approximately $7.59 million to be used to offset against future federal taxable income.

Financial Services

        The financial services segment net income after the preferred stock dividend payment increased $0.45 million for the three months ended March 31, 2005, compared to the three months ended March 31, 2004.

        Interest income on loans decreased 30% to $0.46 million for the three months ended March 31, 2005, as compared to $0.66 million for the three months ended March 31, 2004. The overall decrease in interest income was primarily due to a $20.56 million decrease in average total loans outstanding when comparing the three months ended March 31, 2005, to the three months ended March 31, 2004. During the three months ended March 31, 2005, competitive pressures resulted in a reduction in loans of $6.34 million due to pay-offs, while normal principal reductions amounted to $0.39 million. During the three months ended March 31, 2005, $1.85 million of new loan participations through InvestorsBank were added to the loan portfolio. Participations with InvestorsBank comprised approximately 62% of the loan portfolio at March 31, 2005.

15

        Due to the requirement to redeem $16.85 million of preferred stock on July 1, 2008, the Parent and BMSBLC will use the proceeds of loan maturities, payoffs, and sales of leased properties to reduce outstanding indebtedness and therefore they do not intend to make any new loans or purchase any new properties, except for the purchase of loan participations from InvestorsBank. Thus, the Company’s plan to redeem its preferred stock is resulting in BMSBLC’s inability to maintain the size of its loan and leased property portfolio. Management anticipates that the loan and leased property portfolio will be reduced to the extent required to redeem the Company’s preferred stock.

        Rental income decreased 26% to $0.53 million for the three months ended March 31, 2005, as compared to $0.72 million for the three months ended March 31, 2004. Rental income for the three months ended March 31, 2005, increased $0.01 million due to scheduled rent increases and decreased $0.20 million due to leased property sales and vacant buildings. Four properties were sold during the first quarter of 2005, resulting in a gain of $0.56 million , net of income taxes. All tenants were current in their rent payments at March 31, 2005, and two vacant rental properties with a carrying value of $3.27 million were available for sale or lease at March 31, 2005.

        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 interest margin for the three months ended March 31, 2005, was 4.07% compared to 3.74% for the three months ended March 31, 2004. During the first quarter of 2005, average loans outstanding of $31.82 million (net of intercompany loans) generated $0.46 million in interest income and average leased properties of $21.17 million generated $0.53 million in rental income. The average gross return for the first quarter of 2005 on rental properties was approximately 10.0% while the average gross return on loans was approximately 5.8%. During the first quarter of 2004, average loans outstanding of $52.37 million (net of intercompany loans) generated $0.66 million in interest income and average leased properties of $30.03 million (net of intercompany properties) generated $0.72 million in rental income. The average gross return during the first quarter of 2004 on rental properties was approximately 9.4% while the average gross return on loans was approximately 5.0%.

        Interest expense decreased 25% to $0.45 million for the three months ended March 31, 2005, as compared to $0.60 million for the three months ended March 31, 2004, primarily due to a decrease in the outstanding average debt balance. The average debt balance decreased $28.84 million when comparing the first quarter of 2005 to the first quarter of 2004 as a result of the decrease in loans as explained above. However, BMSBLC’s cost of funds is based primarily on variable interest rates. The average prime rate for the first quarter of 2005 was 5.44% while the average prime rate for the first quarter of 2004 was 4.0%. As a result, BMSBLC’s cost of funds was 149 basis points higher when comparing the first quarter of 2005 to the first quarter of 2004. The average cost of funds was 4.48% for the first quarter of 2005 as compared to 2.99% for the first quarter of 2004. During 2004, a substantial amount of commercial paper which had matured was not able to be replaced by sales of additional commercial paper, requiring BMSBLC to draw upon the back-up bank line of credit, which has an interest rate that is approximately 50 basis points higher than commercial paper. During the first quarter of 2004, commercial paper comprised 51% of BMSBLC’s debt structure while during the first quarter of 2005 commercial paper comprised 22% of BMSBLC’s debt structure. When the line of credit facility matures on June 24, 2005, commercial paper will no longer be available to BMSBLC and the debt facility will consist solely of a line of credit.

        BMSBLC’s debt facility consists of commercial paper and drawn letters of credit backed by a $30 million line of credit that matures on June 24, 2005. Management expects that the debt facility will be renewed for an additional year at the $30 million level. At March 31, 2005, BMSBLC had $0.82 million in lending capability with outstanding unfunded commitments of $5.92 million. Management expects that due to scheduled loan maturities and sales of leased properties BMSBLC will be able to fund the outstanding commitments. The redemption requirements of $16.85 million of preferred stock in 2008 requires the Company to focus on asset quality while de-leveraging the balance sheet. For further details regarding the current levels of bank debt and commercial paper, see “Liquidity and Capital – Financial Services”, herein.

        Other miscellaneous income remained the same at $0.01 million for the three months ended March 31, 2005 and 2004. Other miscellaneous income is composed primarily of prepayment penalties, letter of credit fees and late payment fees.

16

        Depreciation expense decreased $0.07 million due to leased property sales and vacancies when comparing the three months ended March 31, 2005 to 2004. Management fees under the management fee agreement with InvestorsBank in the first quarter of 2005 decreased $0.02 million from the first quarter of 2004, due to the decrease in loans under management. Other operating expenses decreased $0.04 million when comparing the two quarters due to decreases in carrying costs for leased properties.

        The Parent 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 common shareholders. However, the REIT may retain capital gains from the sale of real estate and pay income tax on that gain. In January, 2005, the Parent paid $0.13 million in capital gains taxes which were accrued at December 31, 2004. At March 31, 2005, $0.21 million of income tax expense was accrued on $0.59 million of tax basis capital gains from the sale of real estate during the first quarter of 2005.

        Interest expense and intercompany loans have been eliminated for consolidation purposes. At March 31, 2005, LMOD owed the Parent $4.2 million, consisting of a line of credit of $0.50 million and an unsecured note of $3.7 million. LMOD owed BMSBLC $2.98 million, consisting of a line of credit of $0.98 million and a first mortgage on real estate of $2.0 million. The average interest rate on LMOD’s notes was 6.0% at March 31, 2005. At March 31, 2005, LPI owed BMSBLC $7.76 million consisting of a line of credit of $1.86 million, an unsecured note of $2.35 million, and a first mortgage on real estate of $3.55 million. The average interest rate on LPI’s notes was 6.2% at March 31, 2005. Before intercompany eliminations, interest expense for the consumer products segment and interest income to the financial services segment was $0.21 million for the quarter ended March 31, 2005.

Liquidity and Capital

Consumer Products

        The consumer products segment’s net loss after intercompany transactions for the three months ended March 31, 2005, was $1.00 million. This was primarily financed by a $0.70 million reduction in accounts receivable due to the collection of accounts receivable balances after the year-end selling season and an increase in an intercompany line of credit of $0.76 million, which was offset by a $0.39 million increase in inventory.

        Total assets of consumer products were $13.73 million as of March 31, 2005, and $14.22 million as of December 31, 2004, a 3% decrease. Cash increased to $0.07 million at March 31, 2005, from $0.02 million at December 31, 2004.

        Accounts receivable, net of the allowance for doubtful accounts, decreased to $1.37 million at March 31, 2005, from $2.08 million at December 31, 2004, due to normal collections after the year-end selling season. LPI’s receivables decreased $0.45 million and LMOD’s receivables decreased $0.26 million.

        Inventory and prepaid inventory, net of the allowance for obsolescence, increased to $5.13 million at March 31, 2005, compared to $4.72 million at December 31, 2004. LMOD’s inventory increased $0.32 million and LPI’s inventory increased by $0.09 million. Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. The increase in inventory at LMOD was due to the introduction of 23 new dolls and six new Breath of Life Babies® in the first quarter of 2005.

        Property and equipment, net of accumulated depreciation, decreased by $0.17 million as of March 31, 2005, compared to December 31, 2004, due to the disposal of unused equipment at LMOD. Property and equipment decreased by $0.21 million while accumulated depreciation decreased by $0.04 million. Other prepaid expenses decreased $0.08 million from December 31, 2004 to March 31, 2005.

17

        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 carrying value by $0.62 million. As of March 31, 2005 and December 31, 2004, the balance of the goodwill, net of previous accumulated amortization, was $0.51 million. Management has concluded that the goodwill is not impaired as of March 31, 2005.

        Due to the losses suffered by the consumer products segment, it is unable to borrow money from outside financial sources and is dependent on the financial backing of the Parent and BMSBLC for its borrowing requirements. In 2004, InvestorsBank extended a $2.0 million line of credit to LMOD with the Parent as a co-borrower on the line. The outstanding balance on the line at December 31, 2004, was $0.22 million which was paid in full to InvestorsBank in January of 2005 with proceeds from a loan from BMSBLC.

        Other liabilities, excluding short-term borrowing, increased $0.11 million to $1.48 million at March 31, 2005, from $1.37 million at December 31, 2004, due to an increase in accounts payable.

Financial Services

        During the first three months of 2005, the financial products segment’s net income after intercompany transactions was $0.87 million before dividends of $0.23 million were paid to preferred stockholders.

        Total assets of financial services were $46.66 million as of March 31, 2005, and $56.44 million as of December 31, 2004. Cash increased to $0.80 million at March 31, 2005 from $0.63 million at December 31, 2004.

        Interest receivable decreased to $0.20 million as of March 31, 2005, from $0.23 million at December 31, 2004. At March 31, 2005, four non-performing loans totaling $0.42 million in principal were on non-accrual, resulting in $0.01 million less of interest income which would have been recorded for the three months ending March 31, 2005, had the non-accruing loans been current in accordance with their original terms. During February, 2005, one non-performing loan was paid in full, totaling $0.75 million in principal. All tenants were current in their rent payments at March 31, 2005, and December 31, 2004.

        Total loans (excluding intercompany loans) decreased by $4.88 million, or 15%, to $27.96 million at March 31, 2005, from $32.84 million at December 31, 2004, with a corresponding decrease in liabilities. As of March 31, 2005 and December 31, 2004, management did not provide an allowance for loan losses due to management’s belief that the collateral securing nonperforming loans was adequate to fully secure the debtors’ obligations to BMSBLC. At March 31, 2005, BMSBLC’s loan portfolio consisted of 45 loans, of which 20 were participated with InvestorsBank, five were intercompany loans and four were non-performing loans.

        Leased properties, net of accumulated depreciation, decreased to $17.15 million as of March 31, 2005, compared to $22.23 million as of December 31, 2004, primarily due to the sale of four leased properties with a net book value of $4.98 million, and $0.10 million of depreciation for the three months ended March 31, 2005. Two vacant rental properties with a net carrying value of $3.27 million were available for sale or lease at March 31, 2005. Management believes that the carrying value of the properties are not impaired as of March 31, 2005.

        Property and equipment and other assets, including prepaid amounts, increased by $0.03 million due to increases in prepaid items.

        The financial services’ total consolidated indebtedness at March 31, 2005 decreased $9.61 million primarily as the result of the payment of indebtedness using the proceeds of the payoff of loans in the loan portfolio and the sale of leased properties.

18

        BMSBLC’s debt facility consists of commercial paper and drawn letters of credit backed by a $30 million line of credit that matures on June 24, 2005. Management expects that the debt facility will be renewed for an additional year at the $30 million level. At March 31, 2005, BMSBLC had $0.82 million in lending capability with outstanding unfunded commitments of $5.92 million. Management expects that, due to scheduled loan maturities and sales of leased properties, BMSBLC will be able to fund the outstanding commitments.

        At March 31, 2005, the outstanding commercial paper balance was $5.83 million. BMSBLC also had drawn $23.35 million against its bank line of credit to replace outstanding commercial paper that had matured and was unable to be replaced by sales of additional commercial paper. The bank line of credit has an interest rate which is approximately 50 basis points higher than that paid on commercial paper, which results in a reduction of net income. When the line of credit facility matures on June 24, 2005, commercial paper will no longer be available to BMSBLC and the debt facility will consist solely of a line of credit. At December 31, 2004, the outstanding commercial paper balance was $7.07 million and the outstanding balance on the bank line of credit was $30.75 million.

        Long-term debt at March 31, 2005, consists of a term note of $5.5 million, which bears interest at a fixed rate of 6.98% through June 1, 2013, and $0.52 million of loan participations with repurchase options which bear interest at 7.19% until repaid. BMSBLC was in compliance with the covenants contained in its debt agreements as of March 31, 2005. At December 31, 2004, the outstanding balances were $5.67 million and $1.32 million, respectively.

        Accrued liabilities decreased to $0.76 million at March 31, 2005, as compared to $0.96 million at December 31, 2004, primarily due to the payment of real estate taxes due on leased properties.

        Due to the Parent’s required redemption of $16.85 million of outstanding preferred stock on July 1, 2008, BMSBLC expects to materially curtail its lending activities and purchase of leased properties over the next three years. During the second quarter of 2004, the Board of Directors of the Company approved a plan to convert loans and leased properties of BMSBLC to cash as loans mature and leased properties are sold. The proceeds will be used to reduce outstanding debt and to redeem preferred stock at maturity. Under this policy, BMSBLC does not intend to make new loans or purchase new properties to lease, with only limited exceptions for participations with InvestorsBank. This reduction in assets will reduce the income available for common stock dividends in each of the next three years. As a result, the Board of Directors has changed the common stock dividend policy from the payment of quarterly dividends to an annual dividend which would be payable in January for the preceding year. No dividends were paid to common shareholders in January of 2005. The preferred stock dividend of $0.335 per share per quarter ($1.34 annual dividend per preferred share) will continue to be paid on a quarterly basis.

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 real estate portfolios, competition, the accessibility of funding sources at competitive rates, demand for the Company’s consumer products, the degree of success of the Company’s strategy to reduce prices on its collectible dolls and reduce expenses, the effect of not reaching the Company’s goals to expand to 100 boutiques over a three year period, 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.

19

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 Disclosures About Market Risk

        The Parent and BMSBLC assume interest rate risk (the risk that general interest rate levels will change) as a normal component of its operations. As a result, fair values of the Parent’s and BMSBLC’s financial instruments will change when interest rate levels fluctuate and that change may be either favorable or unfavorable to the Company.

        The Parent and BMSBLC’s debt structure and interest rate risk are managed through the use of fixed and variable rate debt. Management attempts to match variable rate loans with variable rate debt and fixed rate loans with fixed rate debt to the extent believed necessary to minimize interest rate risk. A significant portion of BMSBLC’s fixed rate loans and fixed rate leases are matched against fixed rate debt; however, the portfolio is not completely matched. A portion of BMSBLC’s fixed rate assets are funded with variable rate debt. In the present interest rate environment the mismatch of variable rate debt against fixed rate earning assets does not significantly impact BMSBLC. At March 31, 2005, an increase of 1% in the interest rate paid on the variable debt would increase the Company’s annual pre-tax profits in an amount approximating $50,000.

Item 4.     Controls and Procedures

        Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005.

        Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, there were no changes in the Company’s internal control over financial reporting identified in such evaluation that occurred during the quarter ended March 31, 2005 that has materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.

20

PART II. OTHER INFORMATION

Item 1.     LEGAL PROCEEDINGS

Item 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Item 3.     DEFAULTS UPON SENIOR SECURITIES

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5.     OTHER INFORMATION

Item 6.     EXHIBITS

21

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.

22

THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q

EXHIBIT INDEX

23