SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT |
For the transition period from ____________ to ___________
Commission File No. 0-16056
TRUDY CORPORATION | ||
(Exact name of Registrant as specified in its charter) | ||
Delaware | 06-1007765 | |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
353 Main Avenue
Norwalk, CT 06851
(Address of Principal Executive Offices)
(203) 846-2274 |
(Registrant’s telephone number, including area code) |
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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 o No x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
March 5, 2010
Common Stock, $.0001 par value: 700,862,912 shares
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The Financial Statements of the Registrant required to be filed with this 10-Q Quarterly Report were prepared by management and commence below, together with related notes. In the opinion of management, the Financial Statements fairly present the financial condition of the Registrant.
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9 | ||
16 | ||
24 | ||
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25 | ||
25 | ||
25 | ||
25 | ||
26 | ||
26 | ||
27 |
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Trudy Corporation
Consolidated Balance Sheets
December 31, 2009 and March 31, 2009
December 31, 2009 | March 31, 2009 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Assets held for sale | ||||||||
Cash and cash equivalents | $ | 173,665 | $ | 122,739 | ||||
Accounts receivable, net | 1,409,778 | 1,042,278 | ||||||
Inventory, net | 1,368,422 | 1,649,476 | ||||||
Prepaid expenses and other current assets | 111,765 | 172,827 | ||||||
Total current assets | 3,063,630 | 2,987,320 | ||||||
Assets held for sale | ||||||||
Equipment, net | 70,941 | 84,792 | ||||||
Royalty advances, net | 161,945 | 264,820 | ||||||
Prepublication costs and other assets, net | 436,769 | 484,645 | ||||||
Prepaid acquisitions | 327,586 | 386,908 | ||||||
Total other assets | 997,241 | 1,221,165 | ||||||
Total assets | $ | 4,060,871 | $ | 4,208,485 | ||||
Current liabilities | ||||||||
Current liabilities associated with assets held for sale | ||||||||
Notes payable - bank | $ | 520,706 | $ | 1,045,947 | ||||
Notes payable - third party | 421,826 | — | ||||||
Notes payable - related parties | 2,680,701 | 1,894,959 | ||||||
Accounts payable and accrued expenses | 1,671,478 | 1,766,359 | ||||||
Deferred revenue | 163,528 | 280,231 | ||||||
Royalties and commissions payable | 573,594 | 554,060 | ||||||
Total current liabilities | 6,031,833 | 5,541,556 | ||||||
Total liabilities | 6,031,833 | 5,541,556 | ||||||
Commitments | ||||||||
Shareholders’ deficit | ||||||||
Common stock - $ 0.0001 par value 850,000,000 shares authorized 700,682,912 issued and outstanding at December 31, 2009 and March 31, 2009 | 70,087 | 70,087 | ||||||
Paid-in capital | 7,140,750 | 7,140,750 | ||||||
Accumulated deficit | (9,181,799 | ) | (8,543,908 | ) | ||||
Total shareholders’ deficit | (1,970,962 | ) | (1,333,071 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 4,060,871 | $ | 4,208,485 |
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the consolidated financial statements.
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Trudy Corporation
Consolidated Statements of Operations
For the Three & Nine Month Periods Ended December 31, 2009 & December 31, 2008
Three Month Period | Nine Month Period | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Net product sales | $ | — | $ | — | $ | — | $ | — | ||||||||
Royalty sales | — | — | — | — | ||||||||||||
Net sales | — | — | — | — | ||||||||||||
Cost of sales | — | — | — | — | ||||||||||||
Gross profit | — | — | — | — | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | — | — | — | — | ||||||||||||
Loss from operations | — | — | — | — | ||||||||||||
Other expense | — | — | — | — | ||||||||||||
Loss from continuing operations | $ | — | $ | — | $ | — | $ | — | ||||||||
Discontinued operations | (75,549 | ) | (4,155 | ) | (637,891 | ) | (359,331 | ) | ||||||||
Net loss | $ | (75,549 | ) | $ | (4,155 | ) | $ | (637,891 | ) | $ | (359,331 | ) | ||||
Basic and diluted net loss per share | $ | — | $ | — | $ | — | $ | — | ||||||||
Weighted average number of shares outstanding | 700,862,912 | 643,760,617 | 700,862,912 | 637,300,231 |
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the consolidated financial statements.
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Trudy Corporation
Consolidated Statements of Shareholders’ Deficit
For the Nine Months Ended December 31, 2009
Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||
Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
Balance at March 31, 2009 (audited) | 700,862,912 | $ | 70,087 | $ | 7,140,750 | $ | (8,543,908 | ) | $ | (1,333,071 | ) | |||||||||
Net Loss | — | — | — | (637,891 | ) | (637,891 | ) | |||||||||||||
Balance at December 31, 2009 (unaudited) | 700,862,912 | $ | 70,087 | $ | 7,140,750 | $ | (9,181,799 | ) | $ | (1,970,962 | ) |
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
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Trudy Corporation and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended December 31, 2009 & December 31, 2008
Nine Month Period Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss - from discontinued operations | $ | (637,891 | ) | $ | (359,331 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 18,076 | 13,566 | ||||||
Amortization of pre-publication costs | 126,648 | 184,888 | ||||||
Amortization of intangibles | 59,322 | 41,652 | ||||||
Amortization of royalty advances | 102,875 | |||||||
Provision for losses on accounts receivable | 10,000 | 27 | ||||||
Provision for promotional allowance | 17,000 | (27,000 | ) | |||||
Provision for slow moving inventory | — | (108,000 | ) | |||||
Provision for sales returns | — | (571,114 | ) | |||||
Board Compensation | — | 11,100 | ||||||
Gain on debt extinguishment | (55,000 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||
Change in accounts receivable | (394,500 | ) | 606,362 | |||||
Change in inventories | 281,054 | (32,623 | ) | |||||
Change in prepaid expenses and other current assets | 61,062 | 10,071 | ||||||
Change in accounts payable and accrued expenses | (94,881 | ) | 339,623 | |||||
Change in deferred revenue | (116,703 | ) | 138,241 | |||||
Change in royalties and commissions payable | 19,534 | 84,260 | ||||||
Net cash (used) / provided by operating activities | (548,404 | ) | 276,722 | |||||
Investing activities: | ||||||||
Purchases of property and equipment | (4,225 | ) | (21,170 | ) | ||||
Pre-publication and royalty advances | (78,772 | ) | (231,446 | ) | ||||
Net cash (used) / provided by investing activities | (82,997 | ) | (252,616 | ) | ||||
Financing activities: | ||||||||
Net change in note payable, bank | (294,000 | ) | (162,992 | ) | ||||
Repayments of long-term debt | (231,241 | ) | — | |||||
Repayments to related parties | (40,501 | ) | (44,760 | ) | ||||
Proceeds from related parties | 826,230 | 210,629 | ||||||
Proceeds from third party | 421,839 | — | ||||||
Net cash provided/(used) by financing activities | 682,327 | 2,877 | ||||||
Net increase / (decrease) in cash and cash equivalents | 50,926 | 26,983 | ||||||
Cash and cash equivalents at beginning of period | 122,739 | 21,256 | ||||||
Cash and cash equivalents at end of period | $ | 173,665 | $ | 48,239 | ||||
Cash paid for interest | $ | 79,111 | $ | 54,859 | ||||
Cash paid for income taxes | $ | — | $ | — |
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
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TRUDY CORPORATION
(UNAUDITED)
1. | Description of Business and Basis of Presentation and Going Concern |
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 and nine month periods ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended March 31, 2009.
Going Concern
The Company has suffered recurring losses from operations and has a deficiency in net assets. Such factors raise substantial doubt about the Company’s ability to continue as a going concern.
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective March 31, 2009, the Company adopted a new accounting standard issued by the FASB related to the disclosure requirements of the fair value of financial instruments. This standard expands the disclosure requirements of fair value (including the methods and significant assumptions used to estimate fair value) of certain financial instruments to interim period financial statements that were previously only required to be disclosed in financial statements for annual periods. In accordance with this standard, the disclosure requirements have been applied on a prospective basis and did not have a material impact on the Company’s financial statements.
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On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.
In August 2009, the FASB issued an amendment to the accounting standards related to the measurement of liabilities that are recognized or disclosed at fair value on a recurring basis. This standard clarifies how a company should measure the fair value of liabilities and that restrictions preventing the transfer of a liability should not be considered as a factor in the measurement of liabilities within the scope of this standard. This standard is effective for the Company on October 1, 2009. The Company does not expect the impact of its adoption to be material to its financial statements.
Recently Issued Accounting Standards
In October 2009, the FASB issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminated the use of the residual method for allocating arrangement considerations and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, for which the Company is currently assessing the impact, will become effective for the Company on January 1, 2011.
In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. This standard, for which the Company is currently assessing the impact, will become effective for the Company on January 1, 2011.
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2. | Discontinued Operations |
a. Assets Held for Sale
On December 18, 2009, the Company entered into a definitive Asset Purchase Agreement whereby Trudy would sell substantially all of its assets to MMAC, LLC, which also would assume certain liabilities of Trudy.
Under the terms of the agreement, MMAC will assume substantially all of the secured and unsecured liabilities of Trudy with the exception of $2.7MM of personal debt owed to the principal shareholder and Chairman of Trudy, William W. Burnham. In consideration of the sale of substantially all of its assets, at Closing, Trudy will receive a note from MMAC to Trudy in the principal amount of $225,000 and an equity interest in MMAC, not to exceed 33%, determined in accordance with the net asset value of Trudy at Closing. In addition, loans from an affiliate of MMAC to Trudy, estimated to be $600,000 at Closing, will be assumed by MMAC at Closing. Substantially simultaneously with the Closing, Trudy will transfer the note and the equity interest in MMAC to William W. Burnham in consideration of the cancellation by Mr. Burnham of the personal debt owed by Trudy to Mr. Burnham, with the exception of up to $50,000 of debt owed to Mr. Burnham which will remain outstanding and which will be repaid to Mr. Burnham one year following the closing if and to the extent Trudy has not spent the $50,000 of cash it will retain at the closing for general corporate purposes.
Holders of Trudy’s common stock will not receive any payment or distribution with respect to their shares pursuant to the sale of substantially all the assets to MMAC.
MMAC will also enter into a new four year lease with Noreast Management, LLC, a company that is 91% owned by Mr. Burnham, for Trudy’s current headquarters on substantially the same terms as the current lease with Trudy.
Ashley Andersen Zantop, CEO and President of Trudy, Fell Herdeg, CFO, and William W. Burnham, Director of Corporate Development will be retained as employees by MMAC on substantially the same terms as their current employment with Trudy. Mr. Burnham and Ms. Andersen Zantop will join the Board of Directors of MMAC.
Trudy’s senior management intends to recommend to its Board of Directors that, after Closing, Trudy dissolve under Delaware law, delist its Common Stock from trading through the facilities of the pink sheets, deregister its Common Stock with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 and liquidate. In the event of dissolution and liquidation, it is highly unlikely that stockholders will receive any distribution whatsoever.
The Asset Purchase Agreement and the transactions contemplated thereby have been approved by an Independent Committee of outside Directors of Trudy, by the Board of Directors of Trudy and by written consent of holders of a majority of the issued and outstanding shares of Common Stock of Trudy. The transaction is, however, subject to compliance with U.S. securities laws, including the preparation and filing with the SEC of an Information Statement which will be mailed to all of Trudy’s shareholders for their information, as well as other closing conditions.
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The Company shall use its reasonable best efforts, after consultation with the Buyer, to respond to and resolve all SEC comments with respect to the Information Statement promptly after receipt thereof.
Please refer to the Asset Purchase Agreement filed with the SEC on December 23, 2009 as an exhibit to the Company’s Form 8-K. It is anticipated that the transaction will close within the next couple of months. Since substantially all of the Company is held for sale prior to December 31, 2009, the assets, liabilities and results of operations have been shown separately as discontinued operations on the accompanying balance sheet and statement of operations. Assets and liabilities of discontinued operations consisted of the following:
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Assets held for sale | ||||||||
Cash and cash equivalents | $ | 173,665 | $ | 122,739 | ||||
Accounts receivable, net | 1,409,778 | 1,042,278 | ||||||
Inventory, net | 1,368,422 | 1,649,476 | ||||||
Prepaid expenses and other current assets | 111,765 | 172,827 | ||||||
Total current assets | $ | 3,063,630 | $ | 2,987,320 | ||||
Assets held for sale | ||||||||
Equipment, net | $ | 70,941 | $ | 84,792 | ||||
Royalty advances, net | 161,945 | 264,820 | ||||||
Prepublication and other assets, net | 436,769 | 484,645 | ||||||
Prepaid acquisitions | 327,586 | 386,908 | ||||||
Total other assets | $ | 997,241 | $ | 1,221,165 | ||||
Total assets | $ | 4,060,871 | $ | 4,208,485 | ||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Current liabilities associated with assets held for sale | ||||||||
Notes payable – Bank | $ | 520,706 | $ | 1,045,947 | ||||
Notes payable – Third party | 421,826 | 0 | ||||||
Notes payable – Related parties | 2,680,701 | 1,894,959 | ||||||
Accounts Payable and accrued expenses | 1,671,478 | 1,766,359 | ||||||
Deferred Revenue | 163,528 | 280,231 | ||||||
Royalties and commissions payable | 573,594 | 554,060 | ||||||
Total Current Liabilities | $ | 6,031,833 | $ | 5,541,556 |
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b. Reclassification
Certain items from the March 31, 2009 balance sheet and the three and nine months ended December 31, 2008 statements of operations have been reclassified to conform with the three and nine months ended December 31, 2009 financial statement presentation. There is no effect on net income, cash flows or stockholder’s equity as a result of these classifications.
c. Inventories
Inventories consist of the following:
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
Raw Materials | $ | 32,941 | $ | 44,066 | ||||
Finished Goods | 1,600,472 | 1,870,401 | ||||||
Reserve for Obsolescence | (264,991 | ) | (264,991 | ) | ||||
Inventory | $ | 1,368,422 | $ | 1,649,476 |
d. Notes Payable, Bank and Related Parties
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
A revolving line of credit totaling $850,000. Interest is payable monthly equal to the Wall Street Journal reported prime rate plus 2.0% with interest rate not to be less than 7.5%. 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). | $ | 520,706 | $ | 814,706 | ||||
Various notes payable, to principal shareholder (William W. Burnham, Chairman of the Board) due on demand. Interest is payable monthly at LIBOR + 1.25%. | 2,680,701 | 1,894,959 | ||||||
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. | — | 231,241 | ||||||
Notes payable, Third Party due May 31, 2010 or upon termination of the Asset Purchase Agreement. Interest accrues monthly at 7.0% on any unpaid principal and accrued interest. | 421,826 | — | ||||||
Total | $ | 3,623,233 | $ | 2,940,906 |
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e. 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, Peter Ogilvie, a former Director and Officer of the Company, and Fred M. Filoon, a Director of the Company. Rent expense totaled $26,004 and $31,150 for the three months ended December 31, 2009 and 2008, respectively. Rent expense totaled $69,947 and $87,848 for the nine months ended December 31, 2009 and 2008, respectively.
As of December 31, 2009, the Company has borrowings from related parties of $2,680,701. Interest to related parties totaled $21,663 and $14,127 for the three months ended December 31, 2009 and 2008, respectively. Interest to related parties totaled $37,752 and $54,859 for the nine months ended December 31, 2009 and 2008, respectively. Repayments to related parties totaled $7,753 and $20,720 for the three months ended December 31, 2009 and 2008, respectively. Repayments to related parties totaled $29,598 and $43,508 for the nine months ended December 31, 2009 and 2008, respectively.
Accounts payable to related parties at December 31, 2009 was $95,776. Accounts payable to related parties at December 31, 2008 was $18,909.
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Guarantor fees for Mr. Burnham for the quarter ended December 31, 2009 were $1,652.
f. Concentrations and Credit Risk
Percentage of net sales for three months ended December 31, | Balance in Accounts Receivable as of | |||||||||
2009 | 2008 | December 31, 2009 | ||||||||
Customer 1 | 11% | 0% | 10% |
All other individual customers comprised less than 10% of total sales for the three month period ended December 31, 2009 and 2008. The Company does not require collateral to support accounts receivable or financial instruments subject to credit risk though it does pursue credit insurance on the larger accounts.
Percentage of Accounts Receivable (net) as of | ||||||||
December 31, 2009 | March 31, 2009 | |||||||
Customer 1 | 20 | % | 2 | % | ||||
Customer 2 | 14 | 12 | ||||||
Customer 3 | 13 | 33 | ||||||
Customer 4 | 10 | 5 | ||||||
Total | 57 | % | 52 | % |
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All other individual customers comprised less than 10% of total accounts receivable (net) for as of December 31, 2009 and 2008.
Percentage of net sales for nine months ended December 31, | Balance in Accounts Receivable as of | |||||||||||
2009 | 2008 | December 31, 2009 | ||||||||||
Customer 1 | 16 | % | 10 | % | 20 | % | ||||||
Total | 16 | % | 10 | % | 20 | % |
All other individual customers comprised less than 10% of total sales for the nine month period ended December 31, 2009 and 2008.
g. Subsequent Events
Management evaluated subsequent events through the date the financial statements were issued, March 5, 2010 and there are none.
NET SALES FROM DISCONTINUED OPERATIONS.
Overview
Net Sales from discontinued operations for the Company’s December quarter of fiscal 2010 increased 15.5% versus the comparable quarter of fiscal 2009. This is primarily a result of an aggressive push by management to accelerate sales to mass merchandise and warehouse club customers against products subject to a licensing agreement expiring on December 31, 2009. Product costs from discontinued operations increased from 37.8% in the quarter ended December 31, 2008 to 45.2% in the current quarter as a result of price increases from Asia and a shift to lower margin customers. The three month period resulted in a net loss from discontinued operations of $75,552 versus a net loss of $4,155 for the prior year.
Three months ended December 31, 2009
As noted above, net sales from discontinued operations of $2,061,126 for the third quarter of fiscal 2010 increased 15.5% versus the comparable quarter’s sales of $1,784,142 a year ago. Sales from discontinued operations from the Company’s Music For Little People product line were 13.4% of sales for the current quarter versus 31.9% in the prior year’s quarter. The reduction in sales from discontinued operations was primarily due to a later catalog mailing and a decrease in the quantity of catalogs mailed as well as reduced and later inventory purchases made to support the division’s eCommerce/online sales for the holiday period.
16
Sales of Disney-licensed products from discontinued operations as a percentage of total Company sales increased from 27.7% to 50.2% for the current quarter versus the comparable quarter a year ago. Smithsonian-licensed product sales from discontinued operations decreased from 22.3% of Company sales to 3.9%. The shift in licensed product sales from Smithsonian to Disney came as a result of order timing for some major orders for products under these licenses. Finally, Sesame Workshop share of net sales from discontinued operations increased from 2.6% for the December quarter of fiscal 2009 to 20.6% in the comparable current period as a result of an effort by the Company to move licensed product inventories against the license’s expiration date of December 31, 2009.
Percentage of sales from discontinued operations by license and/or product line for the quarters ended December 31, | ||||||||
License/Product Line | 2009 | 2008 | ||||||
Disney | 50.2 | % | 27.7 | % | ||||
Music For Little People (MFLP) | 13.4 | 31.9 | ||||||
Proprietary | 9.3 | 16.1 | ||||||
Smithsonian | 3.9 | 22.3 | ||||||
Sesame Workshop | 20.6 | 1.5 | ||||||
All other | 2.6 | 0.5 | ||||||
Total | 100.0 | 100.0 |
Sales Increases
Sales from discontinued operations to domestic discount retailers increased $280,455 as a result of increased demand for the Company’s products in this sales channel.
Sales from discontinued operations to domestic close out accounts increased $183,251 in the current quarter versus the prior year’s quarter as a result of efforts to balance inventory levels, reduce aging inventory and support cash flow.
Domestic book retailer sales from discontinued operations increased from $12,346 in the prior quarter to $121,726 in the current quarter, an increase of $109,290 as a result of an increase in sales of custom-published product sales to a national bookstore chain.
Sales Decreases
Music For Little People sales from discontinued operations decreased $347,869 as a result of a later mailing, a cut-back in the number of catalogs mailed and reduced inventory quantities.
Direct-to-consumer book distributor sales from discontinued operations decreased $92,968 to $58,018 as a result of a limited number of products that the Company was unable to supply until later periods and an overall sluggishness in this sales channel as a result of the slack economy.
17
A few other channels of trade experienced decreased sales from discontinued operations for the quarter including, but not limited to, international direct-to-consumer sales, international trade book distributors and Canadian book distributors.
The remaining net change in sales from discontinued operations was the result of sales increases and decreases over the rest of the Company’s 42 channels of trade.
Nine months ended December 31, 2009
Net sales from discontinued operations for the nine months ended December 31, 2009 decreased 8.6% versus the prior year. Sales from the Company’s Music For Little People product line were 19.1% of sales for the prior nine month period versus 10.0% in the current year.
Sales from discontinued operations of Disney-licensed products as a percentage of total Company sales from discontinued operations increased from 44.9% to 48.4% for the current nine month period versus the comparable period a year ago.
The Company did not renew its license with Sesame Workshop which terminated on December 31, 2009. As a result, sales from discontinued operations of Sesame Workshop-licensed products increased from 2.2% of sales to 15.0% of sales from discontinued operations as the Company worked to accelerate sales of its Sesame Workshop-licensed product to sell through most of its remaining inventories.
Percentage of sales from discontinued operations by license and/or product line for the nine months ended December 31, | ||||||||
License | 2009 | 2008 | ||||||
Disney | 48.4 | % | 44.9 | % | ||||
Music For Little People (MFLP) | 10.0 | 19.1 | ||||||
Proprietary | 7.2 | 11.1 | ||||||
Smithsonian | 19.1 | 22.0 | ||||||
Sesame Workshop | 15.0 | 2.2 | ||||||
All other | 0.3 | 0.7 | ||||||
Total | 100.0 | 100.0 |
Sales Increases
Sales from discontinued operations to domestic discount retailers increased $327,590 as a result of a major customer’s decision to place much of their holiday book purchasing dollars behind the Company’s titles and a general increase in demand for the Company’s products in this sales channel.
Sales from discontinued operations to domestic book retailers increased $226,129 as a result of an increase in custom-publishing/private label sales to a major book retail chain.
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Sales from discontinued operations to direct-to-consumer distributor accounts increased $203,959 as a result of three additional new product orders received from a television home shopping customer.
The remaining net change in sales from discontinued operations was the result of sales increases and decreases over the rest of the Company’s 42 channels of trade.
Sales Decreases
Music For Little People sales from discontinued operations decreased $578,076 due to a reduced and later catalog mailing and reduced inventory levels purchased for the holiday period.
Sales from discontinued operations to international mass market distributors declined $559,148 again as a result of the poor economic conditions in Latin America and the loss of distribution from the Company’s distributor in that market and a change in timing for orders to the Company’s distributor in Spain.
Direct-to-consumer book distributor sales from discontinued operations declined $156,845 as a result of reduced purchases by the Company’s one major display marketing sales customer due to poor economic conditions and a reduction in sales to one of the Company’s direct-to-consumer distributors due to the reluctance of this customer to accept the Company’s price increases and poor economic conditions.
COST OF SALES FROM DISCONTINUED OPERATIONS.
Three months ended December 31, 2009
The Company’s cost of sales from discontinued operations for the quarter ended December 31, 2009 increased $241,111 from $1,002,447 in the prior year to $1,243,558 in the current year, an increase of 24.1%. Cost of sales from discontinued operations as a percentage of net sales from discontinued operations increased from 56.2% to 60.3% in the current quarter as a result of a significant increase in direct product costs from the Company’s printers in China and increased sales to channels with lower profit margins versus the prior year. These costs were partially offset by decreased warehousing, fulfillment and product development expenses.
Nine months ended December 31, 2009
The Company’s cost of sales from discontinued operations for the nine months ended December 31, 2009 decreased $76,099 from $2,867,161 in the prior year to $2,791,062 in the current year, a decrease of 2.7%. Cost of sales from discontinued operations as a percentage of net sales from discontinued operations increased from 58.5% to 62.3% in the current quarter as a result of a change in the sales mix and product cost increases from China which were partially offset by decreased warehousing, fulfillment and product development expenses.
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GROSS PROFIT FROM DISCONTINUED OPERATIONS.
Three months ended December 31, 2009
The resulting gross profit from discontinued operations for the quarter ended December 31, 2009 increased 4.6% from $781,695 to $817,568. The gross margin was 45.4% in the prior year versus 41.4% in the current year’s quarter.
Nine months ended December 31, 2009
The resulting gross profit from discontinued operations for the nine months ended December 31, 2009 decreased 16.9% from $2,033,500 to $1,690,113. The gross margin was 41.5% in the prior year’s nine month period versus 37.7% in the current year’s nine month period.
SELLING, GENERAL & ADMINISTRATIVE COSTS FROM DISCONTINUED OPERATIONS.
Three months ended December 31, 2009
The Company’s selling, general, and administrative costs from discontinued operations increased 4.4% or $35,843 to $846,523 for the three months ended December 31, 2009 versus $810,679 for the three months ended December 31, 2008. As a percentage of net sales from discontinued operations, selling, general and administrative expenses from discontinued operations decreased from 45.4% of net sales from discontinued operations from the prior year to 41.1% of net sales from discontinued operations in the current fiscal year.
Nine months ended December 31, 2009
The Company’s selling, general, and administrative costs from discontinued operations decreased 5.9% or $139,276 to $2,224,846 for the nine months ended December 31, 2009 versus $2,364,123 for the nine months ended December 31, 2008. As a percentage of net sales from discontinued operations, selling, general and administrative expenses from discontinued operations increased from 48.2% of net sales from the prior year to 49.6% of net sales from discontinued operations in the current fiscal year. The increase in selling, general and administrative expenses from discontinued operations as a percentage of net sales was primarily as result of the decrease in sales.
LOSS FROM DISCONTINUED OPERATIONS.
Three months ended December 31, 2009
For the quarter ended December 31, 2009, the loss from discontinued operations was $28,955 versus a loss of $28,984 for the prior year’s quarter.
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Nine months ended December 31, 2009
For the nine months ended December 31, 2009, the loss from discontinued operations was $534,733 versus a loss of $330,622 for the prior year’s nine month period.
OTHER INCOME/EXPENSE FROM DISCONTINUED OPERATIONS.
Three months ended December 31, 2009
The Company’s other expense from discontinued operations for the quarter ended December 31, 2009 was $46,598 versus income of $24,709 for the quarter ended December 31, 2008. The increase was due to a $55,000 gain on debt extinguishment in the prior year and higher interest expense in the current quarter.
Nine months ended December 31, 2009
The Company’s other expense from discontinued operations for the nine months ended December 31, 2009 was $103,075 versus an expense of $28,713 for the nine months ended December 31, 2008. Again, the increase was due to a $55,000 gain on debt extinguishment in the prior year and higher interest expense in the current quarter.
NET LOSS FROM DISCONTINUED OPERATIONS.
Three months ended December 31, 2009
As a result of the items discussed above, the Company’s net loss from discontinued operations for the quarter ended December 31, 2009 was $75,553 compared to a net loss from discontinued operations of $4,155 for the comparable prior quarter.
Nine months ended December 31, 2009
As a result of the items discussed above, the Company’s net loss from discontinued operations for the nine months ended December 31, 2009 was $637,808 compared to a net loss from discontinued operations of $359,331 for the comparable nine month period in the prior year.
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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 in Note to our financial statements), the following policies involve a higher degree of judgment and/or complexity:
Pre-Publication Costs
Pre-publication costs are title development costs including but not limited to authors, illustrators and other artists, narration, audio production, and studio time for recording and mixing final audio products. These costs are capitalized through the date of publication. At the date of publication the costs begin amortization on an accelerated method over their expected revenue generating lives. The accelerated method is based on historical and future expected sales.
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 writes down its inventories for estimated slow moving and obsolete goods based upon historical selling patterns, assumptions about future demand and market conditions. A significant sudden increase in the demand for the Company’s products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. Additionally, the Company’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the write-down required for excess and obsolete inventory. In the future, if the Company’s inventory is determined to be overvalued, it would be required to recognize such costs in its cost of goods sold at the time of such determination. Likewise, if the Company does not properly estimate the lower of cost or market of its inventory and it is therefore determined to be undervalued, it may have over-reported its cost of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of the Company’s inventory and its reported operating results.
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Liquidity and Capital Resources for Discontinued Operations
For the Period Ended December 31, 2009 | For the Period Ended March 31, 2009 | Variance | % Change | |||||||||||||
Net assets (deficiency) | $ | (1,970,967 | ) | $ | (501,331 | ) | $ | (1,469,636 | ) | NMF | ||||||
Working capital (deficiency) | (2,968,207 | ) | (1,689,672 | ) | (1,278,535 | ) | -75.7 | % | ||||||||
Accounts receivable, net | 1,409,778 | 1,534,000 | (124,222 | ) | -8.1 | |||||||||||
Accounts payable and accrued expenses | 1,658,481 | 1,765,002 | (106,521 | ) | -6.0 | |||||||||||
Royalties and commissions payable | 573,594 | 436,658 | (136,936 | ) | 31.4 |
The Company has suffered recurring losses from operations and has a deficiency in net assets. Such factors raise substantial doubt about the Company’s ability to continue as a going concern.
On December 18, 2009 the Company executed an Asset Purchase Agreement whereby it would sell substantially all of its assets to MMAC, LLC, which also would assume certain liabilities of the Company. A Form 8-K was filed with the Securities and Exchange Commission on December 23, 2009 to which the Agreement was attached as an Exhibit. For additional information on the proposed sale, see Note 3e (Assets Held for Sale) to Notes to Financial Statements above.
At December 31, 2009 the Company had a deficiency of net assets held for sale of $1,970,967 versus a deficiency of $501,331 at March 31, 2009. Working capital deteriorated by $1,278,535 from a deficiency of $1,689,672 to a deficiency of $2,968,207 at March 31, 2009.
Accounts receivable held for sale decreased from $1,534,000 at March 31, 2009 to $1,409,778 at December 31, 2009, a decrease of $124,222. Accounts payable and accrued expenses associated with assets held for sale decreased $106,521 versus the prior year from $1,765,002 to $1,658,481 at December 31, 2009. Royalties and commissions payable associated with assets held for sale increased $136,936 versus the prior year from $436,658 at December 31, 2008 to $573,594 at December 31, 2009 primarily as a result of the sales mix.
In the quarter ended December 31, 2009, the Company received $419,000 in short-term notes from an Affiliate of the Buyer. The notes carry an interest rate of 7.0% and any accrued and unpaid interest is due along with any unpaid principal on May 31, 2010 or upon termination of the Asset Purchase Agreement.
As of March 5, 2009 the Company’s backlog from discontinued operations was approximately $1,310,000.
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Not applicable.
There was no change in our internal control over financial reporting during the quarter ended December 31, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the Company’s critical disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2009, the Company’s most recent evaluation of these controls. Based on that evaluation, Management identified the following weaknesses:
(i) | The Company does not have adequate office and financial staffing in place to effectively control the level of transaction activity and consistently address the complex accounting matters that arise. | |
(ii) | A principal shareholder and Director of the Company who is involved in certain functions of the daily operations of the Company, could in theory override normal operating procedures. | |
(iii) | The Company currently does not have an Audit Committee. |
Given the above identified matters, Management believes that disclosure controls and procedures are not effective and these identified matters have not been remedied as of December 31, 2009. Further, even with proper oversight and controls, Management does not expect that our disclosure controls and procedures or our internal controls will necessarily prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the registrant would be detected.
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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-K for the year ended March 31, 2009 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.
None.
None.
None.
Holders of a majority of the issued and outstanding shares of the Company (an aggregate of 361,162,081 shares, equaling 51.53% of such issued and outstanding shares) executed a Written Consent, dated December 18, 2009, approving the Asset Purchase Agreement, dated as of December 18, 2009 (the “Agreement”), between the Company and MMAC, LLC (“MMAC”), providing for the sale by the Company of substantially all of its assets to, and the assumption of certain liabilities of the Company by, MMAC, approving the various transactions contemplated by the Agreement, approving and authorizing the preparation of an Information Statement, the filing thereof with the SEC and the mailing thereof to all shareholders of the Company, and approving certain related matters.
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None.
(a) | Exhibits | |
3a. | Certificate of Incorporation (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). | |
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)). | |
3c. | By-laws of Company (incorporated by reference to the Company’s registration statement on Form S-18 (file number 33-14379B)). | |
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)). | |
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)). | |
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)). | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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. | |
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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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.
TRUDY CORPORATION | ||
(REGISTRANT) | ||
Date: March 5, 2010 | By: | /s/ Ashley C. Andersen Zantop |
Ashley C. Andersen Zantop, | ||
President, Chief Executive Officer |
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