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 June 30, 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 August 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 June 30, 2003 (Unaudited)
and December 31, 2002 ............................................. 3
Consolidated Statements of Operations - For the Three and
Six Months Ended June 30, 2003 and 2002 (Unaudited) ............... 5
Consolidated Statement of Changes in Shareholders' Equity -
For the Six Months Ended June 30, 2003 and 2002 (Unaudited) ....... 7
Consolidated Statements of Cash Flows - For the Three and
Six Months Ended June 30, 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 ......... 19
Item 4. Controls and Procedures ........................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 20
Item 2. Changes in Securities and Use of Proceeds ......................... 20
Item 3. Defaults Upon Senior Securities ................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ............... 20
Item 5. Other Information ................................................. 20
Item 6. Exhibits and Reports on Form 8-K .................................. 21
Signatures ........................................................ 22
Exhibit Index ..................................................... 23
2
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
June 30, 2003 2002
------------- ------------
(Unaudited)
ASSETS
Consumer Products
Cash $ 142,927 $ 500,815
Accounts receivable, net of allowance of
$462,885 and $332,386 as of June 30, 2003
and December 31, 2002, respectively 1,537,907 3,233,376
Inventory 6,972,089 6,206,737
Prepaid inventory 116,302 142,512
Prepaid corporate taxes 514,155 677,295
Other prepaid expenses 608,224 327,977
------------ ------------
Total current assets 9,891,604 11,088,712
Property and equipment, net of accumulated
depreciation of $3,221,570 and $2,788,953 as of
June 30, 2003 and December 31, 2002, respectively 3,805,521 3,995,514
Deferred income taxes 2,121,006 1,316,526
Licensing agreement, net of accumulated
amortization of $2,500,000 and $2,333,334
as of June 30, 2003 and December 31, 2002,
respectively -- 166,666
Goodwill 506,145 506,145
------------ ------------
Total Consumer Products Assets 16,324,276 17,073,563
------------ ------------
Financial Services
Cash 388,829 433,847
Interest receivable 334,789 268,091
Rent receivable, net of allowance of $150,000
as of June 30, 2003 and December 31, 2002 241,805 250,487
Loans 61,232,663 73,600,884
Leased properties:
Buildings, net of accumulated depreciation
of $2,536,415 and $2,294,053 as of June 30,
2003 and December 31, 2002, respectively 29,360,528 27,323,798
Land 4,509,872 4,270,872
Construction in progress -- 780,143
------------ ------------
Total leased properties 33,870,400 32,374,813
Property and equipment, net of accumulated
depreciation of $710,600 and $678,128 as of
June 30, 2003 and December 31, 2002, respectively 40,932 73,404
Investment in swap contracts at fair value -- 512,316
Other assets 994,701 951,260
------------ ------------
Total Financial Services Assets 97,104,119 108,465,102
------------ ------------
Total Assets $113,428,395 $125,538,665
============ ============
3
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31,
June 30, 2003 2002
------------- ------------
(Unaudited)
LIABILITIES, MINORITY INTEREST,
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Consumer Products
Short-term borrowings $ -- $ 1,242,000
Accounts payable 1,196,764 1,019,546
Accrued salaries 178,031 250,611
Accrued liabilities 322,929 494,784
------------ ------------
Total Consumer Products Liabilities 1,697,724 3,006,941
------------ ------------
Financial Services
Commercial paper 13,320,000 51,272,618
Lines of credit 41,850,000 3,480,000
Direct pay letter of credit obligation 7,020,000 7,305,000
State of Wisconsin Investment Board notes payble 9,000,001 9,666,667
Loan participations with repurchase options 8,728,208 17,184,176
Other borrowings 1,437,746 1,441,042
Accrued liabilities 1,142,611 1,657,322
------------ ------------
Total Financial Services Liabilities 82,498,566 92,006,825
------------ ------------
Minority Interest and Preferred Stock
Minority interest in subsidiaries 38,184 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 2,166,883 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 12,339,146 13,618,483
------------ ------------
Total Liabilities, Minority Interest,
Preferred Stock and Shareholders' Equity $113,428,395 $125,538,665
============ ============
4
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Consumer Products
Net sales $ 3,306,943 $ 4,932,191 $ 7,218,811 $ 10,516,297
Cost of goods sold 2,333,407 2,946,227 4,540,806 6,088,222
------------ ------------ ------------ ------------
Gross profit 973,536 1,985,964 2,678,005 4,428,075
Operating expenses
Sales and marketing 760,956 925,474 1,579,144 2,087,152
New product development 174,911 208,514 380,046 434,050
General and administrative 1,051,054 894,099 2,217,127 2,022,086
------------ ------------ ------------ ------------
Total operating expenses 1,986,921 2,028,087 4,176,317 4,543,288
Net operating loss (1,013,385) (42,123) (1,498,312) (115,213)
Other income (expense)
Interest expense -- (41,299) (3,896) (84,113)
Other income, net 5,569 15,404 14,678 22,859
------------ ------------ ------------ ------------
Net other income (expense) 5,569 (25,895) 10,782 (61,254)
Loss before income taxes, minority interest
and intercompany charges (1,007,816) (68,018) (1,487,530) (176,467)
Income tax benefit 403,126 27,207 595,012 70,587
Minority interest in loss (earnings) of
subsidiaries 8,585 (63,022) 13,457 (74,932)
------------ ------------ ------------ ------------
Loss Before Intercompany
Charges - Consumer Products (596,105) (103,833) (879,061) (180,812)
------------ ------------ ------------ ------------
Financial Services
Revenues
Interest on loans 880,596 1,290,213 1,807,968 2,659,396
Rental income 849,440 962,144 1,660,894 1,938,320
Gain on sale of leased properties -- 1,035,355 303,570 1,036,248
Gain on termination of interest rate swaps -- -- 484,304 --
Other income 77,285 22,411 90,258 157,761
------------ ------------ ------------ ------------
Total revenues 1,807,321 3,310,123 4,346,994 5,791,725
------------ ------------ ------------ ------------
Expenses
Interest expense 772,841 967,928 1,570,798 2,003,649
Depreciation expense 197,887 211,758 387,004 427,951
Management fee expense 238,023 250,272 484,466 511,279
Other operating expenses 204,144 192,245 412,085 398,337
------------ ------------ ------------ ------------
Total expenses 1,412,895 1,622,203 2,854,353 3,341,216
------------ ------------ ------------ ------------
Income before income taxes and
intercompany revenue 394,426 1,687,920 1,492,641 2,450,509
Income tax expense -- (364,776) (107,499) (364,776)
------------ ------------ ------------ ------------
Income Before Intercompany Revenue -
Financial Services $ 394,426 $ 1,323,144 $ 1,385,142 $ 2,085,733
------------ ------------ ------------ ------------
5
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Total Company
Income (loss) before income taxes, minority
interest and intercompany activity
Consumer products $(1,007,816) $ (68,018) $(1,487,530) $ (176,467)
Financial services 394,426 1,687,920 1,492,641 2,450,509
----------- ----------- ----------- -----------
Total company (613,390) 1,619,902 5,111 2,274,042
Income tax benefit (expense) 461,485 (283,002) 678,785 (164,738)
Minority interest in loss (earnings) of
subsidiaries 8,585 (63,022) 13,457 (74,932)
----------- ----------- ----------- -----------
Net (loss) income (143,320) 1,273,878 697,353 2,034,372
Preferred stock dividends (359,428) (359,428) (718,856) (718,856)
----------- ----------- ----------- -----------
Net (loss) income available to
common shareholders $ (502,748) $ 914,450 $ (21,503) $ 1,315,516
=========== =========== =========== ===========
Basic Earnings (Loss) Per Common Share $ (0.13) $ 0.25 $ (0.01) $ 0.35
=========== =========== =========== ===========
Diluted Earnings (Loss) Per Common Share $ (0.13) $ 0.25 $ (0.01) $ 0.35
=========== =========== =========== ===========
Weighted average shares outstanding (diluted) 3,730,637 3,727,589 3,730,929 3,727,589
=========== =========== =========== ===========
Segment Reconciliation
Consumer Products
Loss before intercompany charges $ (596,105) $ (103,833) $ (879,061) $ (180,812)
Interest/rental expense to parent (220,105) (118,978) (437,766) (301,091)
Management fees to parent (97,401) (113,985) (217,401) (217,843)
Applicable income tax benefit related to
intercompany charges and other items 58,359 54,567 191,272 129,451
----------- ----------- ----------- -----------
Total segment net loss (855,252) (282,229) (1,342,956) (570,295)
Financial Services
Income before intercompany revenue 394,426 1,323,144 1,385,142 2,085,733
Interest/rental income from subsidiary 220,105 118,978 437,766 301,091
Management fees from subsidiary 97,401 113,985 217,401 217,843
----------- ----------- ----------- -----------
Total segment net income 711,932 1,556,107 2,040,309 2,604,667
Net (Loss) Income $ (143,320) $ 1,273,878 $ 697,353 $ 2,034,372
=========== =========== =========== ===========
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 six months
ended June 30, 2002 -- -- 2,034,372 -- -- 2,034,372
Change in fair market
value of interest rate
swap agreement -- -- -- -- (176,302) (176,302)
------------
Total Comprehensive
Income 1,858,070
------------
Cash dividends on
preferred stock -- -- (718,856) -- -- (718,856)
Cash dividends on common
stock -- -- (1,219,964) -- -- (1,219,964)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
June 30, 2002 $ 293,441 $ 16,604,744 $ 2,266,368 $ (6,725,922) $ 1,527,868 $ 13,966,499
============ ============ ============ ============ ============ ============
BALANCES,
December 31, 2002 $ 293,441 $ 16,604,744 $ 2,933,904 $ (6,725,922) $ 512,316 $ 13,618,483
------------
Comprehensive income
Net income six months
ended June 30, 2003 -- -- 697,353 -- -- 697,353
Change in fair market
value of interest rate
swap agreement -- -- -- -- (512,316) (512,316)
------------
Total Comprehensive
Income 185,037
------------
Cash dividends on
preferred stock -- -- (718,856) -- -- (718,856)
Cash dividends on common
stock -- -- (745,518) -- -- (745,518)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
June 30, 2003 $ 293,441 $ 16,604,744 $ 2,166,883 $ (6,725,922) $ -- $ 12,339,146
============ ============ ============ ============ ============ ============
7
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, 2003 Ended June 30, 2002
----------------------------- -----------------------------
Consumer Financial Consumer Financial
Products Services Products Services
------------ ------------ ------------ ------------
Cash Flows from Operating Activities:
Segment income (loss) $ (1,342,956) $ 2,040,309 $ (570,295) $ 2,604,667
Adjustments to reconcile segment net income (loss)
to net cash flows from operating activities
Depreciation and amortization 599,283 387,003 644,905 427,951
Provision for losses on accounts receivable 50,538 -- 53,109 --
Provision for inventory reserve 83,605 -- (107,733) --
Change in appreciation on investments -- (4,981) -- 926
Gain on sale of leased properties -- (303,570) -- (1,036,248)
Change in minority interest in subsidiaries (13,457) -- (187,206) --
Net change in:
Accounts receivable 1,644,931 -- 1,253,132 --
Inventory (848,957) -- (140,318) --
Interest receivable -- (66,698) -- (79,835)
Rent receivable -- 8,682 -- (129,611)
Other assets (895,377) (38,460) 29,338 175,537
Accounts payable 177,218 -- (136,783) --
Other liabilities (244,435) (514,711) (350,619) 488,518
------------ ------------ ------------ ------------
Net Cash Flows from Operating Activities (789,607) 1,507,574 487,530 2,451,905
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Net loan repayments received -- 12,368,221 621,968 13,588,642
Proceeds from sale of leased properties -- 1,743,311 -- 3,338,030
Purchase or construction of leased property -- (3,289,859) -- (85,936)
Capital expenditures (242,624) -- (359,208) --
------------ ------------ ------------ ------------
Net Cash Flows from Investing Activities (242,624) 10,821,673 262,760 16,840,736
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Net change in short term borrowings (1,242,000) -- (1,030,000) --
Net change in commercial paper -- (37,952,618) -- (2,132,276)
Net change in lines of credit -- 38,370,000 -- (4,320,000)
Net payments on letter of credit -- (285,000) -- (220,000)
Repayment of SWIB notes -- (666,666) -- (666,668)
Repayment of loan participations with
repurchase options -- (8,455,968) -- (9,779,725)
Net change in other notes payable -- (3,296) (2,759) (3,176)
Preferred stock dividends paid -- (718,856) -- (718,856)
Common stock dividends paid -- (745,518) -- (1,219,964)
Net intercompany transactions 1,916,343 (1,916,343) (239,408) 239,408
------------ ------------ ------------ ------------
Net Cash Flows from Financing Activities 674,343 (12,374,265) (1,272,167) (18,821,257)
------------ ------------ ------------ ------------
Net change in cash and cash equivalents (357,888) (45,018) (521,877) 471,384
Cash and equivalents beginning of period 500,815 433,847 681,267 229,506
------------ ------------ ------------ ------------
Cash and equivalents end of period $ 142,927 $ 388,829 $ 159,390 $ 700,890
============ ============ ============ ============
Supplemental Cash Flow Disclosures
Cash paid for interest $ -- $ 1,670,666 $ 3,896 $ 2,154,419
============ ============ ============ ============
Cash (received) paid for income taxes $ (163,140) $ 418,158 $ (152,440) $ 64,970
============ ============ ============ ============
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 June 30,
2003 and December 31, 2002 and the results of operations for the three and six
months ended June 30, 2003 and 2002 and statement of changes in shareholders'
equity and cash flows for the six months ended June 30, 2003 and 2002 have been
made. Such adjustments consisted only of normal recurring items. Operating
results for the periods ended June 30, 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:
June 30, 2003 December 31, 2002
------------- -----------------
Raw materials $ 1,907,234 $ 2,317,792
Work in process 119,156 100,118
Finished goods 5,079,940 3,885,584
----------- -----------
7,106,330 6,303,494
Less: reserve for obsolete inventory (134,241) (96,757)
----------- -----------
$ 6,972,089 $ 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
in the determination of 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 $1.16 million at June 30,
2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Amounts presented as of June 30, 2003 and December 31, 2002, and for the three
and six month periods ended June 30, 2003 and June 30, 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 June 30, 2003 and June 30, 2002
The Company's total net (loss) income available for common shareholders for the
quarter ended June 30, 2003 was ($0.50) million or ($0.13) per share (diluted)
as compared to $0.91 million or $0.25 per share (diluted) for the quarter ended
June 30, 2002, a 155% decrease. The consumer products segment incurred a net
loss before intercompany charges of ($0.60) million due to lower sales as a
result of increased competition and pricing pressure from the collectible dolls
produced in China and due to the slowdown in consumer discretionary spending.
The financial services segment's net income before intercompany revenue
decreased $0.93 million due to a decrease in
10
interest income from loans, and, in the second quarter of 2002, the sale of a
leased property, net of related taxes, which resulted in income of $0.67 million
attributable to such period.
Consumer Products
After income taxes and minority interest and before intercompany charges, the
consumer products segment had a net loss of ($0.60) million for the quarter
ended June 30, 2003 compared to a net loss of ($0.10) million for the quarter
ended June 30, 2002. After giving effect to interest, rental and management fees
paid to the Company, the consumer products segment's net loss was ($0.86)
million for the three months ended June 30, 2003, as compared to a net loss of
($0.28) million for the three months ended June 30, 2002.
Net sales from consumer products for the quarter ended June 30, 2003 decreased
33% to $3.31 million from $4.93 million in the corresponding prior year period.
This was due to decreased sales of $1.38 million at LMOD and decreased sales of
$0.24 million at LPI. LMOD's decrease in sales resulted from the soft economy
and an increase in offshore competition with pricing pressure from collectible
dolls produced in China. Sales of the artist-designed collectible dolls have
been affected by foreign produced dolls which have been selling at a substantial
discount from LMOD's dolls. In June, 2003, LMOD lowered prices on its line of
artist-designed collectible dolls to stimulate sales and is pursuing legal
action to prevent the sale of certain dolls manufactured in China which the
Company believes are infringing on LMOD's copyrights. LPI's decrease in second
quarter sales resulted from a customer not repeating a 2002 back-to-school
promotion. Cost of goods sold decreased 21% to $2.33 million for the quarter
ended June 30, 2003 compared to $2.95 million for the prior year's quarter.
LMOD's cost of sales decreased to $1.59 million from $2.02 million while LPI's
cost of sales decreased to $0.74 million from $0.93 million. Total gross profit
margin decreased to 29% from 40% in the prior year. LMOD's gross profit margin
decreased to 26% from 43% and LPI's increased to 36% from 34%. The decrease in
the gross profit margin at LMOD was due to the combination of lower sales, fixed
factory overhead costs and the liquidation of slow moving inventory as well as a
change in sales mix. The increase in the gross profit margin at LPI was due to
better pricing from suppliers and a decrease in sales to a low margin customer.
LMOD is in a transition period with efforts being refocused on preventing
copyright infringements, reducing costs, and on marketing new products. 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 is being 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, LMOD has lowered prices on its line of artist-designed collectible dolls
and a new line of artist studio collection dolls called "Classic Miniatures" has
been introduced to expand distribution into traditional dealers and smaller gift
stores. In addition, the Company is pursuing a limited expansion of its "Newborn
Nursery Adoption Centers" that go beyond selling dolls to evoke an emotional
experience as children "adopt" their new baby doll.
Total operating expenses of consumer products for the quarter ended June 30,
2003 were $1.99 million compared to $2.03 million for the quarter ended June 30,
2002, a 2% decrease. LMOD's total operating expenses decreased $0.02 million,
with sales and marketing expense decreasing $0.15 million and product
development expense decreasing $0.02 million. 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 commission, freight and merchant fees also contributed to the
reduction in expenses. General and administrative expenses increased $0.15
million at LMOD primarily due to the salary of the new CEO and due to
non-recurring restructuring expenses. LPI's total operating expenses decreased
$0.02 million, with sales and marketing expense decreasing $0.02 million due to
decreased advertising costs, product development expense decreasing $0.01
million and general and administrative expenses increasing $0.01 million due to
depreciation.
Other expenses, net, decreased $0.03 million due to a decrease in interest
expense. Consumer products recorded an income tax benefit of $0.46 million for
the quarter ended June 30, 2003 as compared to $0.08 million for the quarter
ended June 30, 2002. Income tax benefit for the second quarter of 2003 is
composed of tax benefit on net loss before intercompany charges of $0.40 million
and the tax benefit attributable to intercompany charges and other miscellaneous
items of $0.06 million. Intercompany charges were $0.32 million for the quarter
ended June 30, 2003 and $0.23 million for the quarter ended June 30, 2002. The
increase in the intercompany expenses was due to increased intercompany loans
resulting in an increase in interest expense.
11
Financial Services
After income taxes and before intercompany revenues, the financial services
segment had net income of $0.39 million for the quarter ended June 30, 2003
compared to $1.32 million for the quarter ended June 30, 2002, a 70% decrease.
In 2002, the sale of a leased property, net of related taxes, resulted in income
of $0.67 million. The remaining decrease of $0.26 million resulted primarily
from a decrease in interest income from loans. 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 June
30, 2003 would have been $0.71 million and for the quarter ended June 30, 2002
net income would have been $1.56 million.
The net interest margin for the quarter ended June 30, 2003 was 3.96% compared
to 4.08% for the quarter ended June 30, 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 $0.11 million primarily due to the sale of three leased properties and a
reduction in interest rate swap income of $0.17 million due to swap
terminations. 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, resulting
in additional interest expense of $0.06 million for the quarter.
Total revenues were $1.81 million for the quarter ended June 30, 2003 and $3.31
million for the quarter ended June 30, 2002. Interest on loans decreased 32% to
$0.88 million for the quarter ended June 30, 2003 from $1.29 million for the
comparative quarter. The decrease in interest income from loans was due to a
$21.55 million decrease in the average total loans outstanding when comparing
the three months of June, 2003 to June, 2002. This decrease occurred when loans
matured and the Company was unable to replace them due to a lack of funding
sources. Proceeds from the maturing debt were used to reduce existing debt. 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 $0.11 million primarily due to the sale of three leased
properties during prior periods. Rental income for the quarter ended June 30,
2003, was $0.85 million as compared to $0.96 million for the quarter ended June
30, 2002. Proceeds from the sale of the rental properties was used to reduce
debt levels at the Company. At June 30, 2003, the Company had $33.87 million in
leased properties, net of accumulated depreciation. One property under
construction at December 31, 2002, was completed for $2.51 million and was
placed in service in May, 2003. Two vacant rental properties totaling $2.74
million, net of accumulated depreciation, were available for lease at June 30,
2003 and one rental property totaling $1.68 million was on non-accrual status at
June 30, 2003.
Other income for the three months ended June 30, 2003 included $0.05 million in
loan prepayment penalties, $0.02 million in late payment fees and $0.01 million
of miscellaneous income. For the three months ended June 30, 2002, other income
included $0.02 million of miscellaneous income and $1.04 million from the sale
of a leased property.
Interest expense decreased 21% to $0.77 million for the quarter ended June 30,
2003 as compared to $0.97 million for the quarter ended June 30, 2002, primarily
due to a decrease in the outstanding average debt balance and due to lower
interest rates. The average debt balance decreased $24.13 million when comparing
the second quarters of 2003 and 2002 as a result of the decrease in loans as
explained above. The Company's cost of funds is based primarily on variable
interest rates which were lower due to the decrease in interest rates set by the
Federal Reserve. The average prime rate was 4.25% during the second quarter of
2003 and was 4.75% during the second quarter of 2002. The second quarter of 2002
also included a reduction in interest expense due to $0.17 million of swap
income which did not reoccur in the second quarter of 2003 due to swap
terminations. Offsetting the decrease, BMSBLC was required during the second
quarter of 2003 to draw upon its back-up bank line of credit which has a higher
interest rate than commercial paper. Commercial paper which had matured was not
able to be replaced by sales of additional commercial paper, resulting in
additional interest expense of $0.06 million for the quarter.
Depreciation expense decreased $0.01 million and management fees decreased $0.01
million for the second quarter of 2003 as compared to the second quarter of 2002
due to the decrease in loans under management. Other operating expenses
increased $0.01 million due to increased expenses involving the leased property
portfolio.
12
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.
For the six months ended June 30, 2003 and June 30, 2002
The Company's total net (loss) income available for common shareholders for the
six months ended June 30, 2003 was ($0.02) million or ($0.01) per share
(diluted) as compared to $1.32 million or $0.35 per share (diluted) for the six
months ended June 30, 2002, a 102% decrease. The consumer products segment
incurred a net loss before intercompany charges of ($0.88) million due to lower
sales as a result of increased competition and pricing pressure and due to the
slowdown in consumer discretionary spending. The financial services segment's
net income before intercompany revenue decreased $0.70 million due to a decrease
in interest income from loans and due to smaller gains on the sale of leased
properties.
Consumer Products
After income taxes and minority interest and before intercompany charges, the
consumer products segment had a net loss of ($0.88) million for the six months
ended June 30, 2003 compared to a net loss of ($0.18) million for the six months
ended June 30, 2002. After giving effect to interest, rental and management fees
paid to the Company, the consumer products segment's net loss was ($1.34)
million for the six months ended June 30, 2003, as compared to a net loss of
($0.57) million for the six months ended June 30, 2002.
Net sales from consumer products for the six months ended June 30, 2003
decreased 31% to $7.22 million from $10.52 million in the corresponding prior
year period. This was due to decreased sales of $3.34 million at LMOD offset by
increased sales of $0.04 million at LPI. LMOD's decrease in sales resulted from
the soft economy and an increase in offshore competition with pricing pressure
from collectible dolls produced in China. Sales of the artist-designed
collectible dolls have been affected by foreign produced dolls which have been
selling at a substantial discount from LMOD's dolls. In June, 2003, LMOD lowered
prices on its line of artist-designed collectible dolls to stimulate sales and
is pursing legal action to prevent the sale of certain dolls manufactured in
China which the Company believes are infringing on LMOD's copyrights. LPI's
increase in sales resulted from additional store openings by its customers in
the first quarter of the year and was offset by decreased sales in the second
quarter resulting from a customer not repeating a 2002 back-to-school promotion.
Cost of sales decreased 25% to $4.54 million for the six months ended June 30,
2003 compared to $6.09 million for the prior year's six month period. LMOD's
cost of sales decreased to $3.05 million from $4.44 million while LPI's cost of
sales decreased to $1.49 million from $1.65 million. Total gross profit margin
decreased to 37% from 42% in the prior year. LMOD's gross profit margin
decreased to 35% from 45% and LPI's increased to 41% from 33%. The decrease in
the gross profit margin at LMOD was due to the combination of lower sales, fixed
factory overhead costs and the liquidation of slow moving inventory as well as a
change in sales mix. The increase in the gross profit margin at LPI was due to
better pricing from suppliers and a higher margin product mix.
LMOD is in a transition period with efforts being refocused on preventing
copyright infringements, reducing costs, and on marketing new products. 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 is being 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, LMOD has lowered prices on its line of artist-designed collectible dolls
and a new line of artist studio collection dolls called "Classic Miniatures" has
been introduced to expand distribution into traditional dealers and smaller gift
stores. In addition, the Company is pursuing a limited expansion of its "Newborn
Nursery Adoption Centers" that go beyond selling dolls to evoke an emotional
experience as children "adopt" their new baby doll.
LMOD is continuing to evaluate all of its operations in order to identify
additional ways to reduced operating expenses and increase efficiency. 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.
13
Total operating expenses of consumer products for the six months ended June 30,
2003 were $4.18 million compared to $4.54 million for the six months ended June
30, 2002, an 8% decrease. LMOD's total operating expenses decreased $0.37
million, with sales and marketing expense decreasing $0.48 million and product
development expense decreasing $0.04 million. 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 commission, freight and merchant fees also contributed to the
reduction in expenses. General and administrative expenses increased $0.15
million at LMOD primarily due to the salary of the new CEO and due to
non-recurring restructuring expenses. LPI's total operating expenses increased
$0.01 million with sales and marketing expense decreasing $0.02 million due to
decreased advertising costs, product development expense decreasing $0.01
million and general and administrative expenses increasing $0.04 million due to
depreciation and scheduled salary increases.
Other expenses, net, decreased $0.07 million due to a decrease in interest
expense. Consumer products recorded an income tax benefit of $0.79 million for
the six months ended June 30, 2003 as compared to $0.20 million for the six
months ended June 30, 2002. Income tax benefit for the first six months of 2003
is composed of tax benefit on net loss before intercompany charges of $0.60
million and the tax benefit attributable to intercompany charges and other
miscellaneous items of $0.19 million. Intercompany charges were $0.66 million
for the six months ended June 30, 2003 and $0.52 million for the six months
ended June 30, 2002. The increase in the intercompany expenses was due to
increased intercompany loans resulting in an increase in interest expense.
Financial Services
After income taxes and before intercompany revenues, the financial services
segment had net income of $1.39 million for the six months ended June 30, 2003
compared to $2.09 million for the six months ended June 30, 2002, a 33%
decrease. In 2003, the sale of a leased property, net of related taxes, resulted
in income of $0.20 million and a gain of $0.48 million resulted from the
termination of interest rate swaps. In 2002, the sale of a leased property, net
of related taxes, resulted in income of $0.67 million. The remaining decrease of
$0.71 million resulted primarily from a decrease in interest income from loans.
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
six months ended June 30, 2003 would have been $2.04 million and for the six
months ended June 30, 2002 net income would have been $2.60 million.
The net interest margin for the six months ended June 30, 2003 was 3.85%
compared to 3.92% for the six months ended June 30, 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 $0.28 million primarily due to the sale of three leased properties and a
reduction in interest rate swap income of $0.33 million due to swap
terminations. 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 resulting
in additional interest expense of $0.06 million for the six months.
Total revenues were $4.35 million for the six months ended June 30, 2003 and
$5.79 million for the six months ended June 30, 2002. Interest on loans
decreased 32% to $1.81 million for the six months ended June 30, 2003 from $2.66
million for the comparative quarter. The decrease in interest income from loans
was due to a $21.67 million decrease in the average total loans outstanding when
comparing the first six months of June, 2003 to June, 2002. This decrease
occurred when loans matured and the Company was unable to replace them due to a
lack of 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 $0.28 million primarily due to the sale of two leased
properties during 2002 and one leased property during 2003. Rental income for
the six months ended June 30, 2003, was $1.66 million as compared to $1.94
million for the six months ended June 30, 2002. Proceeds from the sale of the
rental properties was used to reduce debt levels at the Company. At June 30,
2003, the Company had $33.87 million in leased properties, net of accumulated
depreciation.. One property under construction at December 31, 2002, was
completed for $2.51 million and was placed in service in May, 2003. Two vacant
rental properties totaling $2.74 million, net of
14
accumulated depreciation, were available for lease at June 30, 2003 and one
rental property totaling $1.68 million was on non-accrual status at June 30,
2003.
Other income for the six months ended June 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, $0.05 million in loan prepayment penalties,
$0.02 million in late payment fees and $0.02 million of miscellaneous income.
For the six months ended June 30, 2002, other income included a gain of $1.04
million from the sale of a leased property, $0.11 million in loan prepayment
penalties and $0.05 million of miscellaneous income.
Interest expense decreased 22% to $1.57 million for the six months ended June
30, 2003 as compared to $2.00 million for the six months ended June 30, 2002
primarily due to a decrease in the outstanding average debt balance and due to
lower interest rates. The average debt balance decreased $25.14 million when
comparing the first six months of 2003 and 2002 as a result of the decrease in
loans as explained above. The Company's cost of funds is based primarily on
variable interest rates which were lower due to the decrease in interest rates
set by the Federal Reserve. The average prime rate was 4.25% during the first
six months of 2003 and was 4.75% during the first six months of 2002. The first
six months of 2002 also includes a reduction in interest expense due to $0.33
million of swap income which did not reoccur in 2003 due to swap terminations.
Offsetting the decrease, BMSBLC was required during the second quarter of 2003
to draw upon its back-up bank line of credit which has a higher interest rate
than commercial paper. Commercial paper which had matured was not able to be
replaced by sales of additional commercial paper, resulting in additional
interest expense of $0.06 million for the six months ended June 30, 2003.
Depreciation expense decreased $0.04 million and management fees decreased $0.03
million for the first six months of 2003 as compared to the first six months of
2002 due to the decrease in loans under management. Other operating expenses
increased $0.01 million due to increased expenses involving the leased property
portfolio.
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.
Financial Condition
Consumer Products
Total assets of consumer products were $16.32 million as of June 30, 2003 and
$17.07 million as of December 31, 2002, a 4% decrease.
Cash decreased to $0.14 million at June 30, 2003 from $0.50 million at December
31, 2002.
Accounts receivable, net of the allowance, decreased to $1.54 million at June
30, 2003 from $3.23 million at December 31, 2002. A decrease of $0.76 million is
attributable to LMOD due to its decrease in sales, and a decrease of $0.93
million is attributable to LPI due to normal account balance reduction after the
year-end selling season.
Inventory was $6.97 million at June 30, 2003 compared to $6.21 million at
December 31, 2002. LMOD's inventory increased $0.43 million, primarily due to a
new play doll that was introduced in May 2003. LPI's inventory increased $0.33
million, primarily due to sales being lower than expected during second quarter.
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 $0.19
million and prepaid inventory decreased $0.02 million. Prepaid corporate taxes
increased $0.64 million due to the income tax benefit. Other prepaid expenses
increased by $0.28 million and the licensing agreement decreased $0.17 million
due to amortization. The licensing agreement gave 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.
15
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 June 30, 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 six months
ended June 30, 2003.
LMOD decreased its short-term borrowings on a line of credit with the Bank by
$1.24 million during the first quarter. The debt was replaced with intercompany
loans of $2.52 million which are collateralized by LMOD's and LPI's accounts
receivable and inventory. Accounts payable and other liabilities decreased by
$0.07 million as of June 30, 2003 compared to December 31, 2002.
Financial Services
Total assets of financial services were $97.10 million as of June 30, 2003 and
$108.47 million as of December 31, 2002, a 10% decrease.
Cash decreased to $0.39 million at June 30, 2003 from $0.43 million at December
31, 2002.
Interest and rent receivable increased $0.06 million to $0.58 million at June
30, 2003 from $0.52 million at December 31, 2002. The rent receivable is shown
net of an allowance for doubtful accounts of $150,000 at both periods. At June
30, 2003, three borrowers were on non-accrual resulting in $0.04 million of
gross interest income which would have been recorded for the six months ended
June 30, 2003, had the non-accruing loans been current in accordance with their
original terms. One tenant was also on non-accrual resulting in $0.10 million of
rental income which would have been recorded for the six months ended June 30,
2003, had the tenant been current in accordance with the lease.
Fixed assets and other assets, including prepaid amounts, increased by $0.01
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 June 30, 2003, the Company did not have any further interest rate
swaps.
Total loans (excluding intercompany loans) decreased by $12.37 million, or 17%,
to $61.23 million at June 30, 2003, from $73.60 million at December 31, 2002,
with a corresponding decrease in liabilities. Ten loans totaling $8.06 million
were prepaid during the six months ended June 30, 2003. Nonperforming loans at
June 30, 2003, totaled $0.47 million. As of June 30, 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 $1.16 million as of June 30, 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, increased to $33.87 million
as of June 30, 2003, compared to $32.37 million as of December 31, 2002. One
property under construction at December 31, 2002, was completed for $2.51
million and was placed in service in May, 2003, and a foreclosed loan of $1.75
million was added to leased property during the second quarter of 2003. During
the first quarter of 2003 one leased property was sold
16
resulting in a gain of $0.48 million. Two rental properties totaling $2.74
million, net of accumulated depreciation, were available for lease at June 30,
2003.
The financial services' total consolidated indebtedness at June 30, 2003
decreased $8.99 million as compared to December 31, 2002. As of June 30, 2003,
financial services had $26.19 million outstanding in long-term debt and $55.17
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 $65 million line of
credit that matures on June 25, 2004. At June 30, 2003, $41.9 million of
outstanding commercial paper had 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 of
approximately 40 basis points than that paid on commercial paper which will
result in a reduction of net income for 2003. Accrued liabilities decreased to
$1.14 million at June 30, 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.
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 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
17
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 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
18
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
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 the Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of June 30, 2003.
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 controls over financial
reporting identified in such evaluation that occurred during the quarter ended
June 30, 2003, that has materially affected, or is likely to materially affect,
the Company's internal control over financial reporting.
19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any material pending legal
proceeding and no such material proceedings are known to be
contemplated.
Item 2. CHANGES IN SECURITIES 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
On May 8, 2003, the annual meeting of shareholders was held. At the
meeting Salvatore L. Bando and David A. Geraldson were elected by the
holders of Preferred Stock, voting as a separate class, to serve as
Directors of the Company until the next annual meeting of the
shareholders. Peter A. Fischer and George R. Schonath were elected by
the holders of the Preferred Stock and the Common Stock, voting
together, to serve as Directors of the Company until the next annual
meeting of shareholders. The Common Stock and Preferred Stock
shareholders ratified the appointment of Virchow Krause & Company, LLP
as the Company's independent public accountants for the year ending
December 31, 2003, and voted to approve the 2003 Company Stock Option
Plan at the meeting.
There were 3,727,589 issued and outstanding shares of Common Stock and
674,191 issued and outstanding shares of Preferred Stock at the time
of the annual meeting. The voting on each item presented at the annual
meeting was as follows:
For Withheld
Election of Directors --------- --------
Preferred Stock votes:
Salvatore L. Bando 616,857 10,810
David A. Geraldson 617,637 10,030
Preferred and Common Stock votes:
Peter A. Fischer 3,912,216 63,817
George R. Schonath 3,881,856 94,177
For Against Abstain Total
--------- ------- ------- ---------
Ratification of
Accountants 3,914,402 29,237 32,394 3,976,033
For Against Abstain Non-Votes Total
2003 Company --------- ------- ------- --------- ---------
Stock Option
Plan 1,869,401 437,672 68,460 1,600,500 3,976,033
Item 5. OTHER INFORMATION
None.
20
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
A report on Form 8-K was filed on May 12, 2003, under Item 12, which
reported the Company's financial results for the quarterly period
ended on March 31, 2003.
A report on Form 8-K was filed on June 2, 2003, under Item 5, which
reported the Company's subsidiary, Lee Middleton Original Dolls, Inc.
has reduced the prices for all of its Artist Studio Collection dolls.
A report on Form 8-K was filed on June 11, 2003, under Item 5, which
reported the Company will adjust the interest rate on its adjustable
rate cumulative preferred stock to 5.37%.
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.
THE MIDDLETON DOLL COMPANY
(Registrant)
Date: August 14, 2003 /s/ George R. Schonath
--------------------------------------
George R. Schonath
President and Chief Executive Officer
Date: August 14, 2003 /s/ Susan J. Hauke
--------------------------------------
Susan J. Hauke
Vice President Finance and Chief
Financial Officer
22
THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
4.1 Seventh Amendment to Amended and Restated Credit Agreement among
Bando McGlocklin Small Business Lending Corporation, the
financial institutions party thereto and US Bank National
Association (formerly Firstar Bank, N.A.) dated June 27, 2003.
11 Statement Regarding Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the President and Chief Executive Officer of
The Middleton Doll Company pursuant to 18 U.S.C. Section 1350.
32.2 Written Statement of the Chief Financial Officer of The Middleton
Doll Company pursuant to 18 U.S.C. Section 1350.
23