SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2008
Commission File No. 0-16056
TRUDY CORPORATION
353 Main Avenue
Norwalk, CT 06851
Incorporated in the State of DELAWARE
Federal Identification No. 06-1007765
Telephone: (203) 846-2274
Trudy Corporation has filed all reports required to be filed by section 13 or 15 (d) of the Securities Act of 1934 during the preceding twelve months and has been subject to such filing requirements for the past 90 days.
SHARES OUTSTANDING AT
November 19, 2008
Common Stock, $.0001 par value: 641,307,356 shares
INDEX
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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2
Trudy Corporation
Balance Sheet
September 30, 2008
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| (Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 91,528 |
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Accounts receivable, net |
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| 1,588,449 |
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Inventory, net |
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| 1,667,811 |
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Prepaid expenses and other current assets |
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| 72,133 |
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Total current assets |
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| 3,419,921 |
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Equipment, net |
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| 57,664 |
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Royalty advances, net |
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| 240,002 |
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Prepublication costs and other assets, net |
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| 463,088 |
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Intangible Assets, net |
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| 413,495 |
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Total Other assets |
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| 1,174,249 |
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Total assets |
| $ | 4,594,170 |
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Current liabilities |
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Notes payable - Bank & related parties |
| $ | 2,861,269 |
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Accounts payable and accrued expenses |
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| 1,673,397 |
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Deferred Revenue |
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| 216,019 |
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Royalties and commissions payable |
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| 351,330 |
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Total Current liabilities |
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| 5,102,015 |
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Total liabilities |
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| 5,102,015 |
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Commitments |
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Shareholders’ equity |
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Common stock - par value |
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| 64,131 |
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Paid-in capital |
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| 7,035,506 |
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Accumulated deficit |
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| (7,607,482 | ) |
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Total shareholders’ equity |
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| (507,845 | ) |
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Total liabilities and shareholders’ equity |
| $ | 4,594,170 |
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The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the consolidated financial statements.
3
Trudy Corporation
Statement of Operations
For the Quarters Ended September 30, 2009 & September 30, 2008
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| Three Month Period |
| Six Month Period |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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Net product sales |
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| 1,567,363 |
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| 1,855,287 |
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| 3,099,277 |
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| 2,826,369 |
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Royalty sales |
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| 9,872 |
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| 22,300 |
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| 17,242 |
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| 28,117 |
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Net Sales |
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| 1,577,235 |
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| 1,877,587 |
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| 3,116,519 |
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| 2,854,486 |
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Cost of sales |
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| 984,414 |
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| 964,205 |
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| 1,864,714 |
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| 1,616,025 |
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Gross profit |
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| 592,821 |
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| 913,382 |
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| 1,251,805 |
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| 1,238,461 |
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Operating expenses: |
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Selling, general and administrative |
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| 708,071 |
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| 757,049 |
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| 1,553,558 |
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| 1,489,781 |
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Income/(loss) from operations |
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| (115,249 | ) |
| 156,333 |
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| (301,753 | ) |
| (251,320 | ) |
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Other expense |
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| (21,370 | ) |
| (19,453 | ) |
| (53,423 | ) |
| (52,423 | ) |
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Net income/(loss) |
| $ | (136,620 | ) | $ | 136,880 |
| $ | (355,176 | ) | $ | (303,743 | ) |
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Basic and diluted net income/(loss) loss per share |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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Weighted average number of shares outstanding |
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| 641,307,356 |
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| 612,566,330 |
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| 630,605,639 |
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| 612,566,330 |
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The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the consolidated financial statements.
4
Trudy Corporation
Statements of Shareholders’ Equity
Quarter ended September 30, 2008
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| Common Stock |
| Additional Paid-in |
| Accumulated |
| Total Shareholders’ |
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| Shares |
| Amount |
| Capital |
| Deficit |
| Equity |
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Balance at March 31, 2008 (audited) |
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| 641,307,356 |
| $ | 64,131 |
| $ | 7,035,506 |
| $ | (7,252,306 | ) | $ | (152,669 | ) |
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Net loss (unaudited) |
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| — |
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| — |
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| (218,556 | ) |
| (218,556 | ) |
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Balance at June 30, 2008 (unaudited) |
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| 641,307,356 |
| $ | 64,131 |
| $ | 7,035,506 |
| $ | (7,470,862 | ) | $ | (371,225 | ) |
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Net loss (unaudited) |
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| (136,620 | ) |
| (136,620 | ) |
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Balance at September 30, 2008 |
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| 641,307,356 |
| $ | 64,131 |
| $ | 7,035,506 |
| $ | (7,607,482 | ) | $ | (507,845 | ) |
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The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the consolidated financial statements.
5
Trudy Corporation
Statements of Cash Flows
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| For the Six Months Ended |
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| 2007 |
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Cash Flows From Operating Activities |
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Net loss |
| $ | (355,176 | ) | $ | (303,745 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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| 9,177 |
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| 6,809 |
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Amortization of pre-publication costs |
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| 123,847 |
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| 138,662 |
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Amortization of intangibles |
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| 37,419 |
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| 0 |
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Provision for losses on accounts receivable |
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| 0 |
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| 300 |
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Provision for promotional allowance |
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| (27,000 | ) |
| (6,500 | ) |
Provision for slow moving inventory |
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| (65,000 | ) |
| 0 |
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Provision for sales returns |
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| (516,687 | ) |
| (133,278 | ) |
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Consulting fee |
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| 0 |
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| 54,688 |
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Changes in operating assets and liabilities: |
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Decrease in accounts receivable |
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| 497,513 |
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| 137,275 |
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Increase in inventories |
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| (78,843 | ) |
| (1,691 | ) |
Increase in prepaid expenses and other current assets |
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| 89,788 |
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| 13,946 |
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Decrease in accounts payable and accrued expenses |
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| 193,017 |
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| (169,613 | ) |
Increase (Decrease) in deferred revenue |
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| 182,019 |
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| 254,103 |
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Decrease in royalties and commissions payable |
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| (1,068 | ) |
| 6,321 |
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Net cash (used) / provided by operating activities |
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| 89,006 |
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| (2,724 | ) |
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Investing activities: |
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Purchases of property and equipment |
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| (1,500 | ) |
| (8,528 | ) |
Pre-publication and royalty advances |
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| (166,932 | ) |
| (137,855 | ) |
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Net cash (used) / provided by investing activities |
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| (168,432 | ) |
| (146,383 | ) |
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Financing activities: |
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Net change in note payable, bank |
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| 66,938 |
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| 185,864 |
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Repayments to related parties |
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| (24,040 | ) |
| (33,515 | ) |
Proceeds from related parties |
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| 106,800 |
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| 0 |
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Net cash provided/(used) by financing activities |
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| 149,698 |
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| 152,350 |
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Net increase / (decrease) in cash and cash equivalents |
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| 70,272 |
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| 3,244 |
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Cash and cash equivalents at beginning of period |
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| 21,256 |
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| 5,753 |
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Cash and cash equivalents at end of period |
| $ | 91,528 |
| $ | 8,997 |
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Cash paid for interest |
| $ | 39,337 |
| $ | 69,445 |
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Cash paid for income taxes |
| $ | — |
| $ | — |
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The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the consolidated financial statements.
6
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business and Basis of Presentation
Trudy Corporation (hereinafter referred to as the ‘Company’), publishes children’s books, eBooks and audiobooks and designs, manufactures and markets plush stuffed toys, children’s instruments and musical electronics for sale directly to consumers in the United States and to domestic and international retail and wholesale customers. The Company’s products are sold under the trade names (i.e. imprints) of Studio Mouse, Soundprints, Little Soundprints, Fetching Books, Music for Little People and BeBop.
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending March 31, 2009. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended March 31, 2008.
2. Summary of Significant Accounting Policies
Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
7
Credit Risk
The Company transacts business on a credit basis with its customers. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. The Company does not require collateral or other security to support credit sales, but provides an allowance for bad debts based on historical experience and specifically identified risks. The Company also obtains credit insurance on customers when it is deemed warranted.
Inventories
Inventories, which consist principally of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company reviews its inventory for obsolescence and provides for obsolescence when the inventory is deemed to be unsaleable over a reasonable time.
Equipment
Equipment is stated at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets which range from three to seven years for machinery and equipment, and furniture and fixtures, and from one to three years for computer software and hardware.
Fair Value of Financial Instruments
The Company has the following financial instruments: cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable and accrued expenses, notes payable and long-term debt. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and notes payable approximate their fair value based on the liquidity of these financial instruments or based on their short-term nature. The carrying value of long-term debt approximates fair market value based on the market interest rates available to the Company for debt of similar risk and maturities.
Pre-Publication Costs
Pre-publication costs are deferred and amortized on an accelerated method over their expected revenue generating lives.
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Intangible Assets
Intangible Assets related to Music for Little People are amortized on a straight line basis over their estimated useful lives.
Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management performs ongoing business reviews and evaluates impairment indicators based on qualitative and quantitative factors. If it is determined that the carrying amount of an asset cannot be fully recovered, an impairment loss is recognized.
Revenue
Revenues are recorded in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements.”
Revenues from product sales are recognized in the period when persuasive evidence of an arrangement with the customer exists, the products are shipped and title has transferred to the customer, all significant obligations have been delivered, and collection is considered probable. Since many of the product shipments are accompanied with the right of return, a provision for estimated returns on these sales is made at the time of sale, in accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists”, based on historical experience. Returned product is resold when possible. Historically, a portion of returned product is deemed unsaleable and is destroyed.
Royalties
The Company records royalty revenue as earned and provides for its royalty expense at the time the royalty income is recorded. Royalty advances are recorded as earned when such advances represent a nonrefundable guarantee and there are no obligations to perform services. Advance royalty payments are recorded as expense when such advance represents a nonrefundable guarantee.
Government Taxes
Product sales are presented net of sales tax collected and remitted to governmental authorities.
9
Subsidiary Licensing Rights
Depending upon the terms of its various licensing agreements, the Company can lease its intellectual property rights to another party. The associated income is recorded as either advances against royalties or royalties. The associated expenses due to the authors, illustrators or licensors are a percentage of such income for use of their text, illustrations, content or imprimaturs.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” The statement employs an asset and liability approach for financial accounting and reporting of deferred income taxes. Generally, SFAS 109 allows for recognition of deferred tax assets in the current period for the future benefit of net operating loss carryforwards and items for which expenses have been recognized for financial statement purposes but will be deductible for tax purposes in future periods. A valuation allowance is recognized, if on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R), replacing SFAS 123 and superseding Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R requires public companies to recognize compensation expense for the cost of awards of equity compensation effective for fiscal years beginning after July 1, 2005. This compensation cost will be measured as the fair value of the award estimated using an option-pricing model on the grant date. The provisions of SFAS No. 123R were effective for Trudy on April 1, 2006. The adoption of SFAS No. 123R did not have a material impact on the financial statements since the Company has no outstanding stock options.
The Company periodically issues shares of its common stock to employees as grants. Shares issued for services are valued either at the Company’s estimate of the fair value of the common stock at the date of issuance or based on the market price at the date of issuance.
Income/Loss Per Share Computation
Income/loss per share is computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” (Statement 128). Basic earnings per share is computed by dividing net income/loss by the weighted average number of outstanding common shares. Diluted earnings per share is computed using the weighted average number of outstanding common shares and common share equivalents during the period. Dilutive common share equivalents consist of employee stock options using the treasury method and dilutive convertible securities, if any, using the if-converted method.
10
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, “Reporting Comprehensive Income” (Statement 130). Statement 130 establishes rules for the reporting and display of comprehensive income and its components. Comprehensive income (loss) for the Company is the same as net income (loss) for all periods presented.
Segments of an Enterprise and Related Information
The Company has adopted the FASB’s SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (Statement 131). Statement 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has determined it has no reportable segments under Statement 131.
Advertising
Advertising costs are expensed as incurred, except for catalogs and brochures which are all amortized over the period benefited not to exceed the publication date of the new brochure or twelve months, whichever is less. The Company provides cooperative advertising allowances to certain customers. These allowances are accounted for in accordance with the requirements of Emerging Issues Task Force Statement No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer”.
Advertising expense related to catalogs and brochures was $8,628 and $5,136 for the three month periods ended September 30, 2008 and 2007, respectively. Advertising expense related to catalogs and brochures was $18,584 and $10,511 for the six month periods ended September 30, 2008 and 2007, respectively.
Other advertising expense was $11,428 and $495 for the three month periods ended September 30, 2008 and 2007, respectively. Other advertising expense was $26,601 and $495 for the six month periods ended September 30, 2008 and 2007, respectively.
3. Acquisition: Music for Little People
On March 7, 2008 the Company purchased certain assets from the children’s audio publisher, Musical Kidz LLC, pertaining to its mail-order and ecommerce divisions. Musical Kidz is the publisher of children’s music distributed on the record label, Music for Little People (MFLP).
The total purchase price was $550,000. The Company received $100,000 in inventory and $450,000 in intangible assets such as direct mail catalog files; images; graphics and text used in direct mail catalogs, flyers, mailing websites; mailing lists; e-mail lists; all MFLP websites; and licensing agreements for MFLP and Bebop, Musical Kidz, LLC’s branded line of musical instruments.
11
4. Inventories
Inventories consist of the following:
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Raw Materials |
| $ | 38,685 |
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Finished Goods |
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| 1,839,126 |
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Reserve for Obsolescence |
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| (210,000 | ) |
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Inventory |
| $ | 1,667,811 |
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5. Notes Payable, Bank and Related Parties
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A revolving line of credit totaling $850,000 due on demand. Interest is payable monthly equal to the Wall Street Journal reported prime rate plus 1.0%. Borrowings are subject to a borrowing base equal to 80% of eligible accounts receivable. The note is also secured by all of the assets of the Company, a mortgage on the Company’s premises and a personal guarantee of a principal shareholder (William W. Burnham, Chairman of the Board). |
| $ | 789,706 |
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Various notes payable, to principal shareholder (William W. Burnham, Chairman of the Board) due on demand. Interest is payable monthly at LIBOR + 1.25%. |
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| 1,832,341 |
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Note payable, bank, payable in monthly installments of $2,713 including interest at 7%. Balance due in February 2009. The note is secured by all assets of the Company, a mortgage on the Company’s premises and a personal guarantee of a principal shareholder, William W. Burnham. |
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| 239,222 |
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Total |
| $ | 2,861,269 |
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12
6. Income Taxes
The components of income tax (benefit) are as follows:
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| September 30, 2008 |
| September 30, 2007 |
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| Current |
| Deferred |
| Current |
| Deferred |
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Income tax expense (benefit) before application of operating loss carryforwards |
| $ | 0 |
| $ | (142,100 | ) | $ | 0 |
| $ | (121,600 | ) |
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Income tax expense (benefit) of operating loss carryforwards |
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| 0 |
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| 0 |
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| 0 |
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| 0 |
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Change in valuation allowance |
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| 0 |
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| 142,100 |
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| 0 |
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| 121,600 |
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Income tax expense (benefit) |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
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The deferred taxes are comprised of the following at September 30, 2008:
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Net operating loss carryforwards |
| $ | 1,408,000 |
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Reserves and allowances |
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| 571,000 |
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Total deferred tax assets |
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| 1,979,000 |
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Less valuation allowance |
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| (1,979,000 | ) |
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Net deferred tax assets |
| $ | 0 |
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The deferred tax asset represents expected future tax savings resulting from the Company’s reserves and allowances expensed for financial reporting purposes but not for tax purposes and net operating loss carryforwards. As of September 30, 2008, the Company has a net operating loss carryforward of approximately $4.0 million for federal income tax purposes which expire at various dates through 2027. Utilization of these benefits is primarily subject to the extent of future earnings of the Company, and may be limited by, among other things, shareholder changes, including the possible issuance by the Company of additional shares in one or more financing transactions. The Company has established a valuation allowance for the portion of possible tax savings not likely to be realized by the end of the carryforward period.
7. Related Party Transactions
The Company is involved in several transactions with existing officers and shareholders of the Company and entities, which are controlled by these individuals, collectively “related parties”. The following is a summary of this activity:
The Main Avenue property leased by the Company is owned by a Connecticut limited liability company, Noreast Management LLC, which is owned jointly by William W. Burnham, the Chairman of the Company and a principal shareholder, Peter Ogilvie, a former Director and Officer of the Company, and Fred M. Filoon, a Director of the Company. The Company currently is on a lease from month to month. Rent expense totaled $29,150 and $23,743 for the three months ended September 30, 2008 and 2007, respectively. Rent expense totaled $56,498 and $47,485 for the six months ended September 30, 2008 and 2007, respectively.
13
As of September 30, 2008, the Company has borrowings from related parties of $1,832,341. Interest to related parties totaled $15,387 and $10,221 for the three months ended September 30, 2008 and 2007, respectively. Interest to related parties totaled $40,732 and $23,354 for the six months ended September 30, 2008 and 2007, respectively. Repayments to related parties totaled $14,883 for the three months ended September 30, 2008 and $22,788 for the six months ended September 30, 2008. There were no loan repayments to related parties for the three or six months periods ended September 30, 2007.
Guarantor fees for Mr. Burnham for the three months ended September 30, 2008 were $3,795. Guarantor fees for Mr. Burnham for the three months ended September 30, 2007 were $4,764. Guarantor fees paid to Mr. Burnham for the six months ended September 30, 2008 were $5,215 versus $9,836 for the prior six months.
The Company has re-engaged Delta Capital Group, Inc. to assist in identifying and negotiating with possible financing sources. Last fiscal year Mr. Bradford Mead, the President of Delta Capital Group, was elected to the Board of Directors.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
NET SALES.
Overview
Net Sales for the Company’s September quarter of fiscal 2008 decreased 16.0% versus the comparable quarter of fiscal 2007. This is primarily a result of revenue decreases among drugstore chains and the Company’s exclusive Canadian book distributor and traditional book and gift retailers and distributors. The Company’s profit margin decreased from 48.6% in the prior year to 37.6% in the current year, primarily as a result of increases in warehousing and fulfillment costs related to the company’s acquisition of a direct-to-consumer business in March of 2008. The three month period resulted in a net loss of $136,620 versus net income of $136,880 for the prior year.
Three months ended September 30, 2008
As noted above, net sales for the second quarter of fiscal 2008 decreased 16.0% versus the prior year. Sales of Disney-licensed products as a percentage of total Company sales increased from 57.4% to 60.0% for the quarter versus the comparable quarter a year ago. Sesame Workshop-licensed sales were immaterial in the current quarter vs. 11.9% of sales in the prior year. Smithsonian-licensed product sales increased from 12.2% of Company sales to 25.1%, driven largely by sales to a major home shopping channel.
14
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| Percentage of Sales by license for the quarters ended September 30, |
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License |
| 2008 |
| 2007 |
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Disney |
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| 60.0 | % |
| 57.4 | % |
Proprietary |
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| 6.1 |
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| 18.2 |
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Smithsonian |
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| 25.1 |
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| 12.2 |
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Sesame Workshop |
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| NMF |
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| 11.9 |
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All other |
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| 8.8 |
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| 0.3 |
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Total |
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| 100.0 |
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| 100.0 |
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| Sales decreases, net of provisions for returns, for the three months ended |
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Sales channel |
| 2008 |
| 2007 |
| Variance |
| % change | |||||
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Domestic Supermarkets & Drugstores |
| $ | 0 |
| $ | 445,354 |
| $ | (445,354 | ) |
| NMF |
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Canadian Book Distributors |
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| 14,239 |
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| 132,792 |
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| (118,553 | ) |
| (89.3 | ) |
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Domestic Discount Retailers (non-returnable) |
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| 149,936 |
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| 207,305 |
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| (57,369 | ) |
| (27.7 | )% |
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Direct-to-Consumer Book Distributors |
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| 93,839 |
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| 150,265 |
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| (56,426 | ) |
| (37.6 | )% |
Sales decreases for the quarter were primarily focused on a few major retail book and gift channels, principally among major book chains and book departments of discount department stores, owing to the general economic malaise.
There were no sales to domestic supermarket & drugstore chains in the current quarter versus $445,354 in sales in the prior year. This was a result of a large one-time order to a drug store chain in the prior year that was not repeated in the current fiscal year.
Sales to the Company’s exclusive Canadian book distributor decreased $118,553 as a result of the exclusion of the Company’s products from the distributor’s major holiday pallet program.
Sales to domestic non-returnable discount retailers decreased $57,369 from $207,305 in the prior year to $149,936 for the three months ended September 30, 2008. This decrease was a result of a vendor change, delaying the availability of key product for this sales channel.
Sales to direct-to-consumer book distributors also decreased 37.6% from $150,265 in the prior year to $93,839 in the current 3 month period as a result of delays in product deliveries by the Company’s printer to one major customer and cessation of operations by a major display marketer.
15
Several other channels of trade experienced decreased sales including international trade book distributors, domestic toy & gift distributors and domestic book distributors as a result of sluggish retail markets worldwide.
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| Sales increases, net of provisions for returns, for the three months ended |
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Sales channel |
| 2008 |
| 2007 |
| Variance |
| % change | |||||
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Direct-to-Consumer (returnable) |
| $ | 219,703 |
| 3,188 |
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| $ | 216,515 |
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| NMF |
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Direct Response (MFLP) |
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| 80,754 |
| 0 |
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| 80,754 |
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| NMF |
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Internet Accounts (MFLP) |
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| 71,664 |
| 0 |
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| 71,664 |
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| NMF |
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Int’l Mass Market Distributors |
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| 506,142 |
| 484,724 |
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| 21,418 |
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| 4.4 |
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Direct-to-consumer (returnable distributor) sales increased $216,515 from $3,188 to $219,703 in the current quarter as a result of a roll-out order from a major television home shopping channel resulting from successful product testing a year ago. International Mass Market distributor sales also increased. The Company continues its successful distribution to Spanish language distributors in Spain and Latin America. Revenue increased 4.4% in the current quarter versus the year ago quarter to $506,142.
Sales of Music For Little People audio and educational music products sold directly to consumers yielded revenue of $152,418. The purchase of Music For Little People was completed in March 2008 and as such there were no sales in the prior year.
Several other channels of trade including domestic warehouse club distributors, international trade book retailers and military bases also experienced increased sales.
Six months ended September 30, 2008
Net sales for the first six months of fiscal 2009 increased 9.2% versus the prior year. Sales of Disney-licensed products as a percentage of total Company sales, increased from 51.7% to 54.6% for the six month period versus the comparable period a year ago. Sesame Workshop-licensed product sales were 2.7% of Company revenue versus 11.1% in the prior 6 month period. Smithsonian-licensed product sales increased from 18.2% of Company sales to 21.9%.
16
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| Percentage of Sales by license for the six months ended September 30, |
| ||||
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License |
| 2008 |
| 2007 |
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Disney |
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| 54.6 | % |
| 51.7 | % |
Smithsonian |
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| 21.9 |
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| 18.2 |
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Proprietary |
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| 8.3 |
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| 16.7 |
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Sesame Workshop |
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| 2.7 |
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| 11.1 |
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All other |
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| 12.5 |
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| 2.3 |
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Total |
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| 100.0 |
|
| 100.0 |
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| Sales increases, net of provisions for returns, for the six months ended |
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Sales channel |
| 2008 |
| 2007 |
| Variance |
| % change | |||||
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Direct-to-consumer (returnable) |
| $ | 322,887 |
| $ | 45,938 |
| $ | 276,949 |
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| NMF |
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Internet Accounts (MFLP) |
|
| 190,478 |
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| 0 |
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| 190,478 |
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| NMF |
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Direct Response (MFLP) |
|
| 158,007 |
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| 0 |
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| 158,007 |
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| NMF |
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Domestic Mass Market Distributors |
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| 205,719 |
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| 119,093 |
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| 86,626 |
|
| 72.7 |
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Domestic Warehouse Club (returnable & non-returnable) |
|
| 126,949 |
|
| 55,110 |
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| 71,839 |
|
| 130.4 |
|
Direct-to-consumer returnable sales increased by $276,949 over the prior year due to a roll out order from a major television home shopping channel as a result of successful product testing a year ago.
Sales of Music For Little People audio and educational music products sold directly to consumers via a catalog and an ecommerce website accounted for sales of $348,485. The purchase of Music For Little People was completed in March 2008 and as such there were no sales in the prior year.
Sales to Mass Market Distributors increased 72.7% to $205,719 versus the prior year as a result of successful sales of select products in key big box retailer plan-o-grams.
17
Domestic warehouse club distributor sales increased 130.4% from $55,110 in the prior year to $126,949 in the current 6 month period.
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| Sales decreases, net of provisions for returns, for the six months ended |
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| ||||||
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| |||||||
Sales channel |
| 2008 |
| 2007 |
| Variance |
| % change | |||||
|
|
|
| ||||||||||
Domestic Supermarkets & Drugstores |
| $ | 0 |
| $ | 445,354 |
| $ | (445,354 | ) |
| NMF |
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Canadian Book Distributors |
|
| 8,305 |
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| 162,311 |
|
| (154,006 | ) |
| (94.9 | %) |
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Direct-to-Consumer Book Distributors |
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| 261,104 |
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| 386,101 |
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| (124,997 | ) |
| (32.4 | ) |
Domestic supermarkets and drugstore sales were $445,354 in the prior current six month period; there were no sales in the current year due to a non-repeating order from a major drug chain.
Sales to Canadian book distributors decreased $154,006 versus the prior year primarily as a result of the lack of a pallet program for the all important Holiday season.
Direct-to-consumer book distributor sales declined for the six month period as well as a result of the cessation of operations of the major display marketer and softening retail sales.
Other channels of trade experienced minor sales decreases including international mass market distributors, international trade book distributors, domestic toy and gift distributors and domestic book retailers.
COST OF SALES.
Three months ended September 30, 2008
The Company’s cost of sales for the quarter ended September 30, 2008 increased $20,209 from $964,205 in the prior year to $984,414 in the current year, an increase of 2.1%, as a result of the decreased sales volume and increased warehousing and fulfillment expenses related to the Music for Little People acquisition completed in March of 2008. Cost of sales as a percentage of net sales increased from 51.4% to 62.4% in the current quarter as a result of a change in the sales mix and the increased warehousing and fulfillment expenses related to the direct-to-consumer acquisition of Music for Little People. This portion of the business is seasonal, with the bulk of its yearly sales taking place in the December quarter. Increases in product costs from pricing pressures by the Company’s Asian printers, product development costs and warehousing costs contributed to the percentage increase. To cover cost increases for the Company’s products, a selective price increase of 10% to 20% was implemented effective August 1, 2008.
18
In the current quarter are expenses for warehousing and shipping supplies from the Company’s outsourced fulfillment center in Missouri employed to service the direct-to-consumer and library sales for Music for Little People. There were no such expenses in the comparable prior quarter.
Six months ended September 30, 2008
The Company’s cost of sales for the six months ended September 30, 2008 increased $248,689 from $1,616,025 in the prior year to $1,864,714 in the current year, an increase of 15.4%, as a result of a 9.2% increase in sales, increased warehousing costs to service distribution of Music for Little People products, and product cost increases from the Company’s Asian printers. Cost of sales as a percentage of net sales increased from 56.6% to 59.8% in the current quarter as a result.
GROSS PROFIT.
Three months ended September 30, 2008
The resulting gross profit for the quarter ended September 30, 2008 decreased 35.1% to $592,821 versus the prior quarter’s gross profit of $913,382. Gross margin was 37.6% in the current quarter versus 48.6% in the quarter ended September 30, 2007.
Six months ended September 30, 2008
Gross profit for the six months ended September 30, 2008 increased 1.1% to $1,251,805 versus the prior year’s gross profit of $1,238,461. Gross margin was 40.2% in the current year versus 43.4% for the six months ended September 30, 2007.
SELLING, GENERAL & ADMINISTRATIVE COSTS.
Three months ended September 30, 2008
The Company’s selling, general, and administrative costs decreased 6.5% or $48,978 to $708,071 for the three months ended September 30, 2008 versus $757,049 for the three months ended September 30, 2007. As a percentage of net sales, selling, general and administrative expenses increased from 40.3% of net sales from the prior year to 44.9% of net sales in the current fiscal year. The increase in selling, general and administrative expenses as a percentage of net sales was largely due to the decreased sales and the overhead impact of managing the Company’s outsourced fulfillment center in Missouri for Music for Little People products and for the additional employees the company added with this acquisition completed in March of 2008.
19
Six months ended September 30, 2008
The Company’s selling, general, and administrative costs increased 4.3% or $63,777 to $1,553,558 for the six months ended September 30, 2008 versus $1,489,781 for the six months ended September 30, 2007. As a percentage of net sales, selling, general and administrative expenses decreased from 52.2% of net sales from the prior year to 49.8% of net sales in the current year.
INCOME / LOSS FROM OPERATIONS.
Three months ended September 30, 2008
For the quarter ended September 30, 2008, the loss from operations was $115,249 versus income of $156,334 for the prior year’s quarter.
Six months ended September 30, 2008
For the six months ended September 30, 2008, the loss from operations was $301,753 versus a loss of $251,320 for the prior year. Again, this is primarily attributed to the acquisition, as noted above. It is not expected that the acquisition will contribute positively to income from operations until the quarter ending December 31, 2008.
OTHER EXPENSE.
Three months ended September 30, 2008
The Company’s other expense for the quarter ended September 30, 2008 was $21,370 versus $19,453 for the quarter ended September 30, 2007.
Six months ended September 30, 2008
The Company’s other expense for the six months ended September 30, 2008 was $53,423 versus $52,423 for the six months ended September 30, 2007.
NET INCOME / LOSS.
Three months ended September 30, 2008
As a result of the items discussed above, the Company’s net loss for the quarter ended September 30, 2008 was $136,620 compared to net income of $136,880 for the comparable prior quarter.
Six months ended September 30, 2008
As a result of the items discussed above, the Company’s net loss for the six months ended September 30, 2008 was $355,176 compared to a net loss of $303,743 for the comparable prior six months.
20
Impact of New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires the recognition of a tax position when it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based upon the technical merits of the position. The provisions of FIN 48 are effective for the Company on April 1, 2007. The Company does not expect the adoption of FIN 48 to have a material impact on the financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure assets and liabilities. SFAS 157 defines fair value and establishes a framework for measuring fair value; however, SFAS 157 does not expand the use of fair value in any new circumstances. The provisions of SFAS 157 are effective for the Company on April 1, 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on the financial statements.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which permits entities to choose to measure many financial assets and liabilities at fair value. The fair value option may be applied, subject to certain exceptions, on an instrument by instrument basis; is irrevocable; and is applied only to entire instruments and not to portions of instruments. The provisions of SFAS 159 are effective for us as of April 1, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS 141(R)), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us as of April 1, 2009. The provisions of SFAS 141(R) will impact us only if we are party to a business combination after SFAS 141(R) has been adopted.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies (see summary of significant accounting policies more fully described on Note 2 of notes to our financial statements), the following policies involve a higher degree of judgment and/or complexity:
Pre-Publication Costs
Pre-publication costs are deferred and amortized on an accelerated method over their expected revenue generating lives.
21
Prepaid Catalog Costs
Catalogs and brochures are amortized over the period benefited, not to exceed the publication date of the subsequent brochure or twelve months, whichever is less.
Inventory
The company reviews its inventory for obsolescence and provides for obsolescence when the inventory becomes unsaleable over a reasonable time.
Reserve for Returns
The Company maintains allowances for product returns. These allowances are based on historical experience and known factors regarding specific information from customers or a product’s known sell-through performance in the marketplace. If product return rates exceeded the established allowances, additional allowances would be required. The Company attempts to resell all returned product whenever possible.
Liquidity and Capital Resources
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| For the quarters ended September 30, |
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| ||||||
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| |||||||
|
| 2008 |
| 2007 |
| Variance |
| % change | |||||
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| |||||||||
| |||||||||||||
Net assets (deficiency) |
| $ | (507,845 | ) | $ | 212,342 |
| $ | (720,187 | ) |
| NMF |
|
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Working capital (deficiency) |
|
| (1,682,094 | ) |
| (100,133 | ) |
| (1,782,227 | ) |
| NMF |
|
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|
Accounts receivable, net |
|
| 1,588,449 |
|
| 1,652,449 |
|
| (64,000 | ) |
| (3.9 | %) |
|
|
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|
|
|
|
|
|
Accounts payable and accrued expenses |
|
| 1,673,397 |
|
| 1,416,978 |
|
| 256,419 |
|
| 18.1 | % |
|
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|
|
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|
|
|
|
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|
|
|
Royalties and commissions payable |
|
| 351,330 |
|
| 480,468 |
|
| (129,138 | ) |
| (26.9 | %) |
At September 30, 2008 the Company had a deficiency of net assets of $507,845 versus net assets of $212,342 at September 30, 2007. Working capital deteriorated by $1,782,227 from a deficiency of $100,133 to a deficiency of $1,682,094 at September 30, 2008.
Accounts receivable decreased from $1,652,449 at September 30, 2007 to $1,588,449 at September 30, 2008, a decrease of $64,000. Accounts payable and accrued expenses increased $256,419 versus the prior year from $1,416,978 to $1,673,397 at September 30, 2008. Royalties and commissions payable decreased $129,138 versus the prior year from $480,468 at September 30, 2007 to $351,330 at September 30, 2008 primarily as a result of the sales mix and the decreased level of sales.
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On March 7, 2008 the Company purchased certain direct-to-consumer and school and library assets from the children’s audio publisher, Musical Kidz LLC doing business as Music for Little People. The acquired assets included trademark rights, its mail order catalog, house mailing list, email addresses, and the URLs for Music for Little People (http://www.musicforlittlepeople.com). Musical Kidz is the publisher of children’s music distributed on the record label, Music for Little People (MFLP). The Company also purchased $100,000 of inventory (see the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2008 for more information).
Expected cash flows from operations supplemented by anticipated lending sources are forecast to be adequate in covering the Company’s operations. Although the Company does not expect to run out of available funds in the coming fiscal year, it does expect that the need for capital will continue to eclipse the limits of its revolving bank credit facility of $850,000, and the increased shareholder notes of $1,832,341 if revenue growth is to be realized. The Company continues to explore alternative financing options other than those from its principal shareholder in the event that cash flow does not materialize in line with current expectations. Additional working capital would be required to fund new growth opportunities through a strategic acquisition and/or new educational publishing initiatives. It is believed a strategic or private equity investor or even a consolidation with another publisher or new media entity would allow the Company to better position itself for growth by providing working capital for future publishing initiatives.
As of November 14, 2008, the balance on the Company’s revolving line of credit was $789,706 out of $850,000 available. As of September 30, 2008 the balance on the Company’s revolving line of credit was $676,206 out of $850,000 available to the Company.
As of November 18, 2008 the Company’s backlog was approximately $2,109,000.
In the most recent quarter the Company received an additional $106,800 in short-term notes from its principal shareholder (William W. Burnham, Chairman of the Board). The note is a demand note.
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Forward-looking Statements
We have made forward-looking statements in this report that are subject to a number of risks and uncertainties, including without limitation, those described in our Annual Report on Form 10-KSB for the year ended March 31, 2008 and other risks and uncertainties indicated from time to time in our filings with the SEC. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the information concerning possible or assumed future results of operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. Readers should understand that the following important factors, in addition to those discussed in the referenced SEC filings, could affect our future financial results, and could cause actual results to differ materially from those expressed in our forward-looking statements:
* The implementation of our strategies;
* The availability of additional capital;
* Variations in stock prices and interest rates;
* Fluctuations in quarterly operating results; and
* Other risks and uncertainties described in our filings with the SEC.
We make no commitment to disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements.
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| OTHER INFORMATION |
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None. | |
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None. | |
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None |
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(a) | Exhibits |
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3a. | Certificate of Incorporation (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). |
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3b. | Certificate of Amendment of Certificate of Incorporation (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). |
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3c. | By-laws of Company (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). |
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3d. | Certificate of Incorporation of Norwest Manufacturing Company (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). |
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3e. | Certificate Amending Certificate of Incorporation of Norwest Manufacturing Company dated December 5, 1979 (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). |
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3f. | Certificate Amending Certificate of Incorporation of Trudy Toys Company, Inc. dated March 27, 1984 (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). |
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31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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(b) | Reports on Form 8-K |
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| None. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| TRUDY CORPORATION | |
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Date: November 19, 2008 | By: | /s/ Ashley C. Andersen |
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| Ashley C. Andersen, |
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| President, Chief Executive Officer |
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