10-Q 1 pdm175a.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2001 ------------------ or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission file number: 0-22663 THE MIDDLETON DOLL COMPANY (Exact name of registrant as specified in its charter) Wisconsin 39-1364345 --------- ---------- (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.) W239 N1700 Busse Road Waukesha, Wisconsin 53188-1160 ---------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (262) 523-4300 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ On November 19, 2001, there were 3,727,589 shares outstanding of the Registrant's common stock, 6-2/3 cents par value. THE MIDDLETON DOLL COMPANY FORM 10-Q INDEX PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 Unaudited) and December 31, 2000..................................3 Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited).........5 Consolidated Statement of Changes in Shareholders' Equity (Unaudited)................................................7 Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2001 and 2000 (Unaudited).....................8 Notes to the Consolidated Financial Statements (Unaudited)........9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................11 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................16 Item 2. Changes in Securities...................................16 Item 3. Defaults Upon Senior Securities.........................16 Item 4. Submission of Matters to a Vote of Security Holders.....16 Item 5. Other Information.......................................16 Item 6. Exhibits and Reports on Form 8-K........................16 Signatures.......................................................17 Exhibit Index....................................................18 2 THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000 ------------------ ----------------- (Unaudited) ASSETS Consumer Products Cash $ 1,433,369 $ 628,418 Accounts receivable, net of allowance of $303,083 and $120,639 as of September 30, 2001 and December 31, 2000, respectively 3,360,921 3,886,502 Inventory 7,259,525 6,444,038 Prepaid inventory 526,824 662,036 Prepaid corporate taxes 865,869 315,035 Other prepaid expenses 484,302 225,183 ------------------ ----------------- Total current assets 13,930,810 12,161,212 Fixed assets, net of accumulated depreciation of $2,250,268 and $1,990,879 as of September 30, 2001 and December 31, 2000, respectively 3,824,545 3,434,808 Loans 621,968 621,968 Prepaid expenses and other assets 599,003 796,219 Licensing Agreement 791,666 1,166,666 Goodwill, net of accumulated amortization of $98,116 and $82,624 as of September 30, 2001 and December 31, 2000, respectively 513,891 537,129 ------------------ ----------------- Total Consumer Products Assets 20,281,883 18,718,002 ------------------ ----------------- Financial Services Cash 880,911 85,276 Interest receivable 551,961 772,904 Rent receivable, net of allowance of $150,000 and $0 as of September 30, 2001 and December 31, 2000, respectively 201,955 296,454 Loans, net of allowance for doubtful accounts of $0 and $150,000 as of September 30, 2001 and December 31, 2000, respectively 102,571,852 111,269,302 Leased properties: Buildings, net of accumulated depreciation of $1,782,871 and $1,220,426 as of September 30, 2001 and December 31, 2000, respectively 30,567,054 30,570,290 Land 4,501,344 4,738,169 Construction in progress - 111,849 ------------------ ----------------- Total leased properties 35,068,398 35,420,308 Fixed assets, net of accumulated depreciation of $588,486 and $522,005 as of September 30, 2001 and December 31, 2000, respectively 163,046 229,527 Investment in swap contracts at fair value 2,114,874 - Other assets, net 1,305,326 1,422,411 ------------------ ----------------- Total Financial Services Assets 142,858,323 149,496,182 ------------------ ----------------- Total Assets $ 163,140,206 $ 168,214,184 ================== =================
3 THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 2001 December 31, 2000 ------------------ ----------------- LIABILITIES, MINORITY INTEREST, (Unaudited) PREFERRED STOCK AND SHAREHOLDERS' EQUITY Consumer Products Short-term borrowings $ 3,800,000 $ 1,176,926 Accounts payable 597,317 901,340 Accrued salaries 542,368 415,230 Accrued liabilities 666,582 667,044 ------------------ ----------------- Total current liabilities 5,606,267 3,160,540 Long-term debt 18,473 317,816 ------------------ ----------------- Total Consumer Products Liabilities 5,624,740 3,478,356 ------------------ ----------------- Financial Services Commercial paper 61,494,973 61,345,865 Notes payable to banks 7,375,000 8,000,000 Other short-term borrowings 11,695,000 12,085,000 State of Wisconsin Investment Board notes payble 11,333,333 12,333,333 Loan participations with repurchase options 30,280,765 37,457,356 Other long-term debt 1,573,815 1,578,210 Accrued liabilities 1,860,763 1,789,758 ------------------ ----------------- Total Financial Services Liabilities 125,613,649 134,589,522 ------------------ ----------------- Minority interest in subsidiaries 233,501 153,454 Redeemable Preferred stock, 1 cent par value, 3,000,000 shares authorized, 690,000 shares issued and outstanding before deducting shares in treasury 17,250,000 17,250,000 Redeemable Preferred Treasury stock, at cost (15,809 shares) (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 2,526,404 2,965,814 Common treasury stock, at cost (674,010 shares) (6,725,922) (6,725,922) Accumulated other comprehensive income 2,114,874 - ------------------ ----------------- Total Shareholders' Equity 14,813,541 13,138,077 ------------------ ----------------- Total Liabilities, Minority Interest, Preferred Stock and Shareholders' Equity $ 163,140,206 $ 168,214,184 ================== =================
4 THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months -------------------- ------------------- Ended September 30, Ended September 30, ------------------- ------------------- 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Consumer Products Net sales $ 6,509,913 $ 7,553,151 $ 18,799,279 $ 19,221,451 Cost of sales 3,702,612 4,037,254 10,220,068 10,067,075 --------------- --------------- --------------- --------------- Gross profit 2,807,301 3,515,897 8,579,211 9,154,376 Operating expenses Sales and marketing 1,382,989 1,300,494 3,831,591 3,494,456 New product development 275,531 182,564 758,591 499,141 General and administrative 890,550 1,119,630 3,497,929 2,793,323 --------------- --------------- --------------- --------------- Total operating expenses 2,549,070 2,602,688 8,088,111 6,786,920 Net operating income (loss) 258,231 913,209 491,100 2,367,456 Other income (expense) Interest expense (70,089) (54,147) (174,243) (97,837) Other income, net 64,887 15,550 80,249 103,938 --------------- --------------- --------------- --------------- Total other income (expense) (5,202) (38,597) (93,994) 6,101 Income (loss) before income taxes and minority interest 253,029 874,612 397,106 2,373,557 Income tax benefit (expense) 16,877 (279,145) 296,944 (440,186) Minority interest in earnings (losses) of subsidiaries (21,571) (1,607) (80,047) (6,451) --------------- --------------- --------------- --------------- Net Income - Consumer Products 248,335 593,860 614,003 1,926,920 --------------- --------------- --------------- --------------- Financial Services Revenues Interest on loans 1,886,596 2,589,329 6,301,722 7,653,347 Rental income 984,565 1,017,439 2,933,099 2,755,089 Gain on sale of property 19,512 36,471 150,979 36,471 Unrealized loss on hedging activities (123,642) - - - Other income 52,371 46,597 150,103 118,902 --------------- --------------- --------------- --------------- Total revenues 2,819,402 3,689,836 9,535,903 10,563,809 --------------- --------------- --------------- --------------- Expenses Interest expense 1,525,244 2,622,316 5,719,217 7,289,850 Depreciation expense on leased properties 192,152 197,072 581,956 516,493 Management fee expense 246,502 258,432 745,578 749,630 Other operating expenses 220,745 179,304 634,336 509,202 --------------- --------------- --------------- --------------- Total expenses 2,184,643 3,257,124 7,681,087 9,065,175 --------------- --------------- --------------- --------------- Net Income - Financial Services $ 634,759 $ 432,712 $ 1,854,816 $ 1,498,634 --------------- --------------- --------------- ---------------
5 THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued) (Unaudited)
For the Three Months For the Nine Months -------------------- ------------------- Ended September 30, Ended September 30, ------------------- ------------------- 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Total Company Income before income taxes and minority interest Consumer products $ 253,029 $ 874,612 $ 397,106 $ 2,373,557 Financial services 634,759 432,712 1,854,816 1,498,634 --------------- --------------- --------------- --------------- Total company 887,788 1,307,324 2,251,922 3,872,191 Income tax benefit (expense) 16,877 (279,145) 296,944 (440,186) Minority interest in earnings (losses) of subsidiaries (21,571) (1,607) (80,047) (6,451) --------------- --------------- --------------- --------------- Net income 883,094 1,026,572 2,468,819 3,425,554 Preferred stock dividends (359,428) (359,749) (1,078,284) (1,035,766) --------------- --------------- --------------- --------------- Net income available to common shareholders $ 523,666 $ 666,823 $ 1,390,535 $ 2,389,788 ============== =============== =============== =============== Basic Earnings Per Share $ 0.14 $ 0.18 $ 0.37 $ 0.62 ============== =============== =============== =============== Diluted Earnings Per Share $ 0.14 $ 0.18 $ 0.37 $ 0.62 ============== =============== =============== =============== Weighted average shares outstanding (diluted) 3,727,589 3,803,806 3,727,589 3,867,059 ============== =============== =============== =============== Segment Reconciliation Consumer Products Net income (loss) $ 248,335 $ 593,860 $ 614,003 $ 1,926,920 Interest/rental expense to parent (172,544) $ (308,655) (887,544) (914,951) Management fees to parent (105,842) $ (126,105) (314,011) (373,285) --------------- --------------- --------------- --------------- Total segment net income (loss) (30,051) 159,100 (587,552) 638,684 Financial Services Net income 634,759 432,712 1,854,816 1,498,634 Interest/rental income from subsidiary 172,544 308,655 887,544 914,951 Management fees from subsidiary 105,842 126,105 314,011 373,285 --------------- --------------- --------------- --------------- Total segment net income (loss) 913,145 867,472 3,056,371 2,786,870 Total Company Net Income $ 883,094 $ 1,026,572 $ 2,468,819 $ 3,425,554 =============== =============== =============== ===============
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, 1999 $ 293,441 $ 16,604,744 $ 1,218,617 $ (4,633,158) $ - $ 13,483,644 Purchase 214,800 shares of treasury stock - - - (1,731,914) - (1,253,383) Net income - 2000 - - 3,425,554 - - 3,425,554 Cash dividends on preferred stock ($1.60) - - (1,035,765) - - (1,035,765) Cash dividends on common stock ($0.49) - - (1,905,450) - - (1,905,450) ------------- --------------- -------------- --------------- --------------- --------------- BALANCES, September 30, 2000 $ 293,441 $ 16,604,744 $ 1,702,955 $ (6,365,072) $ - $ 12,236,068 ============= =============== ============== =============== =============== =============== BALANCES, December 31, 2000 $ 293,441 $ 16,604,744 $ 2,965,814 $ (6,725,922) $ - $ 13,138,077 --------------- Comprehensive income Net income - 2001 - - 2,468,819 - - 2,468,819 Change in unrealized gains on securities available for sale - - - - 2,114,874 2,114,874 --------------- Total Comprehensive Income 4,583,693 Cash dividends on preferred stock ($1.60) - - (1,078,284) - - (1,078,284) Cash dividends on common stock ($0.49) - - (1,829,945) - - (1,829,945) ------------- --------------- -------------- --------------- --------------- --------------- BALANCES, September 30, 2001 $ 293,441 $ 16,604,744 $ 2,526,404 $ (6,725,922) $ 2,114,874 $ 14,813,541 ============= =============== ============== =============== =============== ===============
7 THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months For the Nine Months -------------------- ------------------- Ended September 30, 2001 Ended September 30, 2000 ------------------------ ------------------------ Consumer Financial Consumer Financial Products Services Products Services --------------- --------------- --------------- --------------- Cash Flows from Operating Activities: Net income $ 614,003 $1,854,816 $ 1,926,920 $1,498,634 Adjustments to reconcile net cash provided by operating activities: Depreciation and amortization 282,627 648,438 394,647 586,945 Allowance for doubtful accounts 182,444 - 53,609 - Provision for inventory reserve 288,696 - 86,592 - Change in appreciation on investments - 27,005 - (17,688) Gain on sale of leased properties - (150,979) - - Change in minority interest in subsidiaries 80,047 - 12,767 - Increase (decrease) in cash due to change in: Accounts receivable 343,137 - (986,819) - Inventory (442,147) - (2,983,268) - Interest receivable - 220,943 - (183,679) Other assets (764,561) 34,579 1,001,501 (824,937) Accounts payable (304,023) - 532,283 - Other liabilities 126,676 71,005 (176,187) (109,648) --------------- --------------- --------------- --------------- Net Cash from Operating Activities 406,899 2,705,807 (137,955) 949,627 --------------- --------------- --------------- --------------- Cash Flows from Investing Activities: Loans made - (13,137,195) - (32,762,171) Principal collected on loans - 21,984,645 - 38,181,201 Proceeds from sale of property - 1,385,816 - 555,722 Purchase or improvements of leased properties - (1,464,884) - (13,613,371) Purchase of fixed assets (649,126) - (716,274) (8,972) --------------- --------------- --------------- --------------- Net Cash from Investing Activities (649,126) 8,768,382 (716,274) (7,647,591) --------------- --------------- --------------- --------------- Cash Flows from Financing Activities: Increase (decrease) in short term borrowings 2,329,074 (475,892) 2,049,000 (2,808,441) Proceeds from (repayment of) loan participations with repurchase options - net - (7,176,591) - 13,416,017 Repayment of IRB participations - (390,000) - - Repayment of SWIB notes - (1,000,000) - (1,000,000) Decrease in other notes payable (5,343) (4,395) (4,471) (4,138) Preferred stock dividends paid - (1,078,284) - (1,089,016) Common stock dividends paid - (1,829,945) - (1,905,450) Repurchase of common stock - - - (1,731,914) --------------- --------------- --------------- --------------- Net Cash from Financing Activities 2,323,731 (11,955,107) 2,044,529 4,877,058 --------------- --------------- --------------- --------------- Net intercompany transactions (1,276,553) 1,276,553 (1,029,810) 1,029,810 Net increase (decrease) in cash 804,951 795,635 160,490 (791,096) Cash, beginning of period 628,418 85,276 530,919 1,509,148 --------------- --------------- --------------- --------------- Cash, end of period $ 1,433,369 $ 880,911 $ 691,409 $ 718,052 =============== =============== =============== ===============
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, formerly known as Bando McGlocklin Capital Corporation, (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. ("Middleton Doll"), License Products, Inc. ("License Products") and Middleton (HK) Limited ("Middleton (HK)") as consumer product companies. All significant intercompany accounts and transactions have been eliminated in consolidation. Effective January 1, 2001, Middleton Doll, Middleton (HK) and License Products were each classified as a "Taxable Real Estate Investment Trust Subsidiary" ("TRS") under the Internal Revenue Code of 1986, as amended. This allows the Company, operating as a real estate investment trust ("REIT"), to hold more than 10% of the voting common stock of these corporations and to own TRSs having an aggregate value equal to not more than 20% of the value of the total assets of the Company. At the Annual Meeting held on May 3, 2001, shareholders approved an amendment to the Articles of Incorporation of the Company changing the Company name to "The Middleton Doll Company". The name change was effective on May 4, 2001. NOTE 2. BASIS OF PRESENTATION The accompanying unaudited financial statements of the Company and its majority-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 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. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with auditing standards generally accepted in the United States of America, but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring accruals, necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the periods ended September 30, 2001 may not be indicative of the results that may be expected for the year ending December 31, 2001. NOTE 3. HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement, as amended, establishes accounting and reporting standards for derivative instruments and was effective January 1, 2001, for the Company. At September 30, 2001, the Company's interest rate swaps had a fair market value of $2.11 million and unrealized gains of $2.11 million. The unrealized gains are recognized through other comprehensive income. 9 NOTE 4. INVENTORY Inventories of Middleton Doll and License Products are valued at the lower of cost or market. Middleton Doll and License Products utilize the average cost method to determine cost. The components of inventory are as follows: September 30, 2001 December 31, 2000 ------------------ ----------------- Raw materials, net of reserve of $184,379 and $133,061, respectively $ 1,881,461 $ 2,018,040 Work in process 134,417 350,675 Finished goods 5,243,647 4,075,323 -------------- -------------- Total $ 7,259,525 $ 6,444,038 ============== ============== NOTE 5. SHORT-TERM BORROWING On April 30, 2001, Middleton Doll entered into a loan agreement with a bank providing for a line of credit of $3,900,000 at the prime rate. The note is due on June 30, 2002 with interest payable monthly. At September 30, 2001 the outstanding principal balance was $3,800,000. On June 29, 2001, BMSBLC entered into an amendment to its amended and restated loan agreement with three participating banks. The loan agreement renewed the existing facility of $75,000,000 less the outstanding principal amount of commercial paper and industrial revenue bonds. The facility would bear interest either at the prime rate or at the 30, 60, or 90 day LIBOR rate plus one and three-eighths percent. Interest is payable monthly and the loan agreement expires on June 28, 2002. On June 29, 2001 the Company renewed an amended credit agreement with one of its correspondent banks providing for a line of credit of $8,000,000 bearing interest at the prime rate. Interest is payable quarterly and the credit agreement expires on June 28, 2002. NOTE 6. INCOME TAXES The Company and its qualified REIT subsidiary, BMSBLC, qualify as a real estate investment trust under the Internal Revenue Code. Accordingly, they are not subject to income tax on taxable income that is distributed to shareholders. The income tax expense recorded by the Company is attributable to the Consumers Product segment. Tax expense is calculated on net income before the elimination of intercompany expenses and, at the present time, is attributable only to Middleton Doll income as License Products has a net operating loss carryforward to offset its current net income. NOTE 7. EARNINGS PER SHARE See Exhibit 11 for the computation of the net income per common share. NOTE 8. COMMITMENTS Undisbursed construction loan commitments and lines of credit totaled $1.29 million at September 30, 2001. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Amounts presented as of September 30, 2001 and December 31, 2000, and for the three months and the nine months ended September 30, 2001 and September 30, 2000 include the consolidation of two segments. The financial services segment includes The Middleton Doll Company (the "Company") and Bando McGlocklin Small Business Lending Corporation ("BMSBLC"), a 100% owned subsidiary of the Company. The consumer products segment includes Lee Middleton Original Dolls, Inc. ("Middleton Doll"), a 99% owned subsidiary of the Company, Middleton (HK) Limited ("Middleton (HK)"), a 51% owned subsidiary of Middleton Doll and License Products, Inc. ("License Products"), a 51% owned subsidiary of Middleton Doll. Results of Operations For the three months ended September 30, 2001 and September 30, 2000 Overall, net income decreased when comparing the third quarter of 2001 to the third quarter of 2000. The Company's total net income available to common shareholders for the quarter ended September 30, 2001 was $0.52 million or $0.14 per share (diluted) as compared to $0.67 million or $0.18 per share (diluted) for the quarter ended September 30, 2000, a 22% decrease in net income available to common shareholders. The consumer products segment's net income decreased due to lower than expected sales as a result of the overall slowdown in the retail sector and the general economy after the September 11 tragedy. The financial services segment's net income increased due to the increase in the net interest margin as a result of lower interest rates. Consumer Products After income taxes and minority interest, the consumer products segment had net income of $0.25 million for the quarter ended September 30, 2001 compared to net income of $0.59 million for the quarter ended September 30, 2000. After giving effect to interest, rental and management fees paid to the Company, the consumer products segment net loss was ($0.03) million for the three months ended September 30, 2001, as compared to $0.16 million of net income for the three months ended September 30, 2000. Net sales from consumer products for the quarter ended September 30, 2001 decreased 14% to $6.51 million from $7.55 million in the corresponding prior year period. This was due to decreased sales of $0.88 million at Middleton Doll and $0.16 million at License Products. Sales were less than expected in the third quarter due to the events of September 11. The nature of their sales is to begin processing the holiday sales in September; however, Middleton Doll's sales slowed significantly after the events of September 11. Middleton Doll's decrease was mainly driven by a $0.54 million decrease in the artist studio collection sales sold to dealers and a $0.22 million decrease in the play doll lines. Cost of sales decreased 8% to $3.70 million for the quarter ended September 30, 2001 from $4.04 million for the prior year quarter. Middleton Doll's cost of sales increased to $3.26 million from $3.23 million while License Products' cost of sales decreased to $0.44 million from $0.81 million. Gross profit margin was 43% for the three months ended September 30, 2001 and was 47% for the three months ended September 30, 2000. Gross profit margins decreased at Middleton Doll due to the write down of one product line to realizable value during the third quarter of 2001. The write-down was 1.3% of gross year-to-date sales. In addition, Middleton Doll had a three week plant shutdown in July 2001 in order to reduce inventory levels while the fixed overhead costs for the factory were still being absorbed in the third quarter's sales. Total operating expenses of consumer products for the quarter ended September 30, 2001 were $2.55 million compared to $2.60 million for the quarter ended September 30, 2000, a 2% decrease. Middleton Doll's total operating expenses decreased $0.05 million and License Products' operating expenses decreased $7,000. Sales and marketing expense and new product development increased $0.18 million to $1.66 million for the quarter ended September 30, 2001 compared to $1.48 million for the quarter ended September 30, 2000. There was a small increase in expense from Middleton Doll's continued efforts to build awareness of the Lee Middleton Original Dolls brand name through marketing initiatives and a dealer acquisition program. New product development increased $0.10 million with the addition of new artists and the costs involved with new molds for new dolls. General and 11 administrative expenses increased $0.23 million at Middleton Doll for the quarter ended September 30, 2001. This increase was primarily due to costs incurred with the relocation of the Middleton Doll administrative offices to Westerville, Ohio. Higher labor costs, additional personnel, computer expenses and office and warehouse rental space all contributed to the increase in costs. Other expense, net, decreased $0.03 million when compared to the same period a year ago primarily due to an increase in other income. The minority interest in losses of subsidiaries increased for the quarter ended September 30, 2001 due to the increase in losses at Middleton Doll. Consumer products recorded an income tax benefit of $17,000 for the quarter ended September 30, 2001 as compared to an income tax expense of $0.28 million for the quarter ended September 30, 2000. Income taxes are attributable only to Middleton Doll's and Middleton (HK)'s income since License Products has a net operating loss carryforward to offset its current net income. Financial Services Net income from financial services for the quarter ended September 30, 2001 was $0.63 million compared to $0.43 million for the quarter ended September 30, 2000, a 47% increase. The increase resulted primarily from an improved net interest margin, as the Company's cost of funds fell faster than the rates charged by the Company to borrowers and tenants in leased properties. After giving effect to interest, rental and management fees received from the consumer products segment, the financial services segment net income was $0.91 million and $0.87 million for the quarters ended September 30, 2001 and 2000, respectively. Total revenues were $2.82 million for the quarter ended September 30, 2001 compared to $3.69 million for the quarter ended September 30, 2000, a 24% decrease. Interest on loans decreased 27% to $1.89 million for the quarter ended September 30, 2001 from $2.59 million for the comparative quarter. Average loans under management decreased $5.95 million when comparing the third quarter of 2001 to the third quarter of 2000. The average prime rate decreased 31% from 9.50% in the third quarter of 2000 to 6.57% in the third quarter of 2001. Rental income decreased $0.04 million to $0.98 million for the quarter ended September 30, 2001 as compared to $1.02 million for the quarter ended September 30, 2000 due to a loss of rental income from one property. At September 30, 2001 the Company had $35.07 million in leased properties, net of accumulated depreciation, compared to $36.61 million at September 30, 2000. During the third quarter of 2001, one property was sold resulting in a gain of $0.02 million. Other income includes an unrealized loss on hedging activities of $0.12 million due to a change in accounting methods between the second and third quarter of 2001 (See Note 3). An increase in letter of credit fees resulted in additional income of $6,000 in the third quarter of 2001 as compared to the third quarter of 2000. Interest expense decreased 42% to $1.53 million for the quarter ended September 30, 2001 as compared to $2.62 million for the quarter ended September 30, 2000. The average debt balance decreased $4.58 million in the third quarter of 2001 compared to the third quarter of 2000 due to a $3.58 million decrease in loan participations and a $1.00 million decrease in commercial paper borrowing. The 293 basis point decrease in the average prime rate between the third quarter of 2000 and the third quarter of 2001 also contributed to the decrease in interest expense. Other expenses, including depreciation and management fees, increased $0.02 million for the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000. For the nine months ended September 30, 2001 and September 30, 2000 Overall, net income decreased when comparing the first nine months of 2001 to the first nine months of 2000. The Company's total net income available to common shareholders for the nine months ended September 30, 2001 was $1.39 million or $0.37 per share (diluted) as compared to $2.39 million or $0.62 per share (diluted) for the nine months ended September 30, 2000, a 42% decrease. The consumer products segment's net income decreased due to lower than expected sales as a result of the overall slowdown in the retail sector and the general economy. The financial services segment's net income increased due to the increase in the net interest margin as a result of lower interest rates. 12 Consumer Products Net income from consumer products after income taxes and minority interest for the nine months ended September 30, 2001 was $0.61 million compared to $1.93 million for the nine months ended September 30, 2000, a 68% decrease. After giving effect to interest, rental and management fees paid to the Company, the consumer products segment net loss was ($0.59) million for the nine months ended September 30, 2001 as compared to $0.64 million of net income for the nine months ended September 30, 2000. Net sales from consumer products for the nine months ended September 30, 2001 decreased 2% to $18.80 million from $19.22 million in the corresponding prior year period. This was due to decreased sales of $0.44 million at Middleton Doll while License Products had an increase in sales of $0.02 million. Cost of sales increased 1% to $10.22 million for the nine months ended September 30, 2001 from $10.07 million for the prior year quarter. Middleton Doll's cost of sales increased to $8.31 million from $8.01 million while License Products' cost of sales decreased to $1.91 million from $2.06 million. Gross profit margin was 46% for the nine months ended September 30, 2001 and was 48% for the nine months ended September 30, 2000. Gross profit margins decreased at Middleton Doll due to the write down of one product line to realizable value during the third quarter of 2001. The write-down was 1.3% of gross year-to-date sales. In addition, Middleton Doll had a three week plant shutdown in July 2001 in order to reduce inventory levels while the fixed overhead costs for the factory were still being absorbed in the third quarter's sales. Total operating expenses of consumer products for the nine months ended September 30, 2001 were $8.09 million compared to $6.79 million for the nine months ended September 30, 2000, a 19% increase. Middleton Doll's total operating expenses increased $1.20 million due to related expenses stemming from the continued growth of the company and License Products' operating expenses increased $0.10 million. Sales and marketing expense and new product development increased $0.51 million at Middleton Doll and $0.08 million at License Products to $4.59 million for the nine months ended September 30, 2001 compared to $4.00 million for the nine months ended September 30, 2000. Middleton Doll had an increase in payroll related to a new inside sales force and higher wages related to the new headquarters in Westerville. There was also an increase in expenses to build awareness of the Lee Middleton Original Dolls brand name through marketing initiatives and a dealer acquisition program. New product development increased $0.22 million with the addition of a new artist and additional staffing with higher wages in Westerville. General and administrative expenses increased $0.89 million at Middleton Doll for the nine ended September 30, 2001. This increase was primarily due to costs incurred with the relocation of the Middleton Doll administrative offices to Westerville, Ohio and in June of 2000 the relocation of the distribution center and additional warehouse space to Columbus, Ohio. Higher labor costs, additional personnel, computer expenses and office and warehouse rental space all contributed to the increase in costs. Other expense, net, increased $0.10 million when compared to the same period a year ago primarily due to an increase in interest expense. During March, 2000 Middleton Doll received $0.05 million of income from an insurance settlement that was non-reocurring in 2001. The minority interest in losses of subsidiaries increased for the nine months ended September 30, 2001 due to the increase in losses at Middleton Doll. Consumer products recorded an income tax benefit of $0.30 million for the nine months ended September 30, 2001 as compared to an income tax expense of $0.44 million for the nine months ended September 30, 2000. Income taxes are attributable only to Middleton Doll's and Middleton (HK)'s income since License Products has a net operating loss carryforward to offset its current net income. Financial Services Net income from financial services for the nine months ended September 30, 2001 was $1.85 million compared to $1.50 million for the nine months ended September 30, 2000, a 23% increase. The increase resulted primarily from an improved net interest margin, as the Company's cost of funds fell faster than the rates charged by the Company to borrowers and tenants in leased properties. After giving effect to interest, rental and management fees received from the consumer products segment, the financial services segment net income was $3.06 million and $2.79 million for the nine months ended September 30, 2001 and 2000, respectively. Total revenues were $9.54 million for the nine months ended September 30, 2001 compared to $10.56 million for the nine months ended September 30, 2000, a 10% decrease. Interest on loans decreased 18% to $6.30 million for 13 the nine months ended September 30, 2001 from $7.65 million for the comparative period. Average loans under management decreased $5.87 million when comparing the first nine months of 2001 to the first nine months of 2000. The average prime rate decreased from 9.15% in the first nine months of 2000 to 7.52% in the first nine months of 2001. Rental income increased $0.17 million to $2.93 million for the nine months ended September 30, 2001 as compared to $2.76 million for the nine months ended September 30, 2000 due to the purchase of new leased properties in the third quarter of 2000. During 2001 one property and vacant land were sold resulting in a gain of $0.15 million. Other income increased $0.03 million when comparing the nine months ended September 30, 2001 to September 30, 2000 due to an increase in letter of credit fees. Interest expense decreased 22% to $5.72 million for the nine months ended September 30, 2001 as compared to $7.29 million for the nine months ended September 30, 2000 due to an 18% decrease in the average prime rate from 9.15% in 2000 to 7.52% in 2001. The average debt balance also decreased by $0.79 million in the first nine months of 2001 compared to the first nine months of 2000. Other expenses, including depreciation and management fees, increased $0.19 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Depreciation expense increased $0.07 million and other leased property expenses increased $0.11 million. Liquidity and Capital Consumer Products Total assets of consumer products were $20.28 million as of September 30, 2001 and $18.72 million as of December 31, 2000, an 8% increase. Cash increased to $1.43 million at September 30, 2001 from $0.63 million at December 31, 2000. Accounts receivable, net of the allowance, decreased to $3.36 million at September 30, 2001 from $3.89 million at December 31, 2000. A decrease of $0.51 million is attributable to Middleton Doll, and a decrease of $0.02 million is attributable to License Products. The decrease in Middleton Doll's accounts receivable is attributable to the seasonality of its sales and the lower sales due to the slowdown in the economy. A higher volume of sales in the fourth quarter results in higher receivables at year end as compared to the first nine months of the following year. In addition, Middleton Doll increased its allowance for doubtful accounts by $0.18 million. Inventory was $7.26 million at September 30, 2001 compared to $6.44 million at December 31, 2000. Middleton Doll's inventory increased $0.86 million due to adding new play doll lines, Newborn Wonder and Playtime Wonder, while License Products' inventory decreased $0.04 million. Fixed assets increased by $0.39 million due to a new computer software system that had a cost of $0.30 million along with new office furniture connected with the relocation of the accounting department. Prepaid inventory decreased $0.14 million. Other assets and prepaid expenses increased by $0.81 million. Prepaid expenses were up $0.55 million due to prepaid corporate taxes. Middleton Doll increased its short-term borrowings by $2.62 million under a line of credit with a bank. The increase in borrowing is due to paying down long-term debt by $0.50 million, purchasing fixed assets, and building inventory for fourth quarter sales. Accounts payable decreased by $0.30 million as of September 30, 2001 compared to December 31, 2000. Middleton Doll's accounts payable decreased by $0.31 million while License Products' accounts payable increased $0.01 million. Other liabilities increased by $0.13 million. 14 Financial Services Total assets of financial services were $142.86 million as of September 30, 2001 and $149.50 million as of December 31, 2000, a 4% decrease. Cash increased to $0.88 million at September 30, 2001 from $0.09 million at December 31, 2000. Interest and rent receivable decreased to $0.75 million from $1.07 million. Interest receivable decreased by $0.22 million as a result of lower interest rates and lower average loan balances. Rent receivable decreased $0.10 million due to the addition of a $0.15 million reserve against the rent receivable. In addition, $0.07 million of rent receivable at December 31, 2000 was transferred to a non-accrual account during 2001. Fixed assets and other assets, including prepaid amounts, decreased by $0.18 million. Interest rate swap contracts increased $2.11 million from December 31, 2000 under new reporting requirements (See Note 3). Total loans decreased by $8.70 million, or 8%, to $102.57 million at September 30, 2001 from $111.27 million at December 31, 2000 due to normal market competition. Leased properties under management decreased $0.35 million primarily due to depreciation. A new property was acquired and one property was sold resulting in a net increase of $0.31 million and vacant land with a cost of $0.11 million was sold. The financial services' total consolidated indebtedness at September 30, 2001 decreased $9.05 million due to the $8.70 million decrease in loans and the $0.35 million decrease in leased properties. 15 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is not a defendant in any material pending legal proceeding and no such material proceedings are known to be contemplated. Item 2. CHANGES IN SECURITIES No material changes have occurred in the securities of the Registrant. Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits The Exhibits to this Quarterly Report on Form 10-Q are identified on the Exhibit Index hereto. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended September 30, 2001. 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. THE MIDDLETON DOLL COMPANY (Registrant) Date: November 19, 2001 /s/ George R. Schonath ---------------------- George R. Schonath President and Chief Executive Officer Date: November 19, 2001 /s/ Susan J. Hauke ------------------- Susan J. Hauke Vice President Finance 17 THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q EXHIBIT INDEX Exhibit Number Exhibit 11 Statement Regarding Computation of Per Share Earnings 18