Independent Auditors' Report
To the Shareholders
Studio Mouse, LLC
Norwalk, Connecticut
We have audited the accompanying balance sheet of Studio Mouse, LLC as of
December 31, 2001, and the related statements of operations, shareholders'
deficit, and cash flows from inception (June 1, 2001) to December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Studio Mouse, LLC at December
31, 2001, and the results of its operations and its cash flows from inception
(June 1, 2001) to December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Abrams and Company, P.C.
Melville, NY
June 24, 2002
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Studio Mouse, LLC
Balance Sheets
December 31, June 30,
2001 2002
(Audited) (Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,561 $ 144,213
Accounts receivable 32,660 312,687
Inventories 498 498
Prepaid expenses and other current assets 18,038 16,258
------------ ------------
Total current assets 54,757 473,656
Equipment, net 11,082 14,172
Organization costs, net 4,879 4,337
Pre-publication costs, net 28,558 37,305
------------ ------------
Total assets $ 99,276 $ 529,470
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 38,165 $ 195,906
Royalties payable 792 65,400
Due to Trudy Corporation 29,076 35,678
Due to The Chart Studio (Pty) Ltd. 41,685 85,074
------------ ------------
Total current liabilities 109,718 382,058
Shareholders' (deficit) equity:
Common stock: No par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 500,000 50,000 50,000
Accumulated deficit (60,442) 97,412
------------ ------------
Total shareholders' (deficit) equity (10,442) 147,412
------------ ------------
Total liabilities and shareholders' (deficit) equity $ 99,276 $ 529,470
============ ============
See accompanying summary of accounting policies and notes to financial statements.
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Studio Mouse, LLC
Statements of Operations
For the
From inception six months
(June 1, 2001) to ended
December 31, June 30,
2001 2002
(Audited) (Unaudited)
----------- -----------
Net sales $ 32,660 $ 794,141
Cost of sales 33,661 484,015
----------- -----------
Gross (loss) profit (1,001) 310,126
Operating expenses:
Selling, general and administrative 56,683 148,880
Depreciation and amortization 2,758 3,392
----------- -----------
(Loss) Income from operations (60,442) 157,854
----------- -----------
Net (loss) income $ (60,442) $ 157,854
=========== ===========
Basic net (loss) income per share $ (0.12) $ 0.32
=========== ===========
Weighted average number of shares outstanding 500,000 500,000
=========== ===========
See accompanying summary of accounting policies and
notes to financial statements.
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Studio Mouse, LLC
Statement of Shareholders' (Deficit) Equity
Retained Total
Common Stock (Deficit) Shareholders'
Shares Amount Earnings (Deficit) Equity
--------- --------- --------- ----------------
Balance at June 1, 2001 500,000 $ 50,000 $ -- $ 50,000
Net loss (audited) (60,442) (60,442)
--------- --------- --------- ---------
Balance at December 31, 2001 500,000 50,000 (60,442) (10,442)
Net income (unaudited) 157,854 157,854
--------- --------- --------- ---------
Balance at June 30, 2002 500,000 $ 50,000 $ 97,412 $ 147,412
========= ========= ========= =========
See accompanying summary of accounting policies and
notes to financial statements.
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Studio Mouse, LLC
Statements of Cash Flows
For the
From inception six months
(June 1, 2001) to ended
December 31, June 30,
2001 2002
(Audited) (Unaudited)
---------- ----------
Operating activities
Net (loss) income $ (60,442) $ 157,854
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 2,216 2,851
Amortization of organization costs 542 542
Amortization of pre-publication costs 551 7,766
Changes in operating assets and liabilities:
Accounts receivable (32,660) (280,027)
Inventories (498) --
Prepaid expenses and other current assets (18,038) 1,780
Accounts payable and accrued expenses 38,165 157,741
Royalties payable 792 64,608
Advances from Trudy Corporation 29,076 6,602
Advances from The Chart Studio (Pty) Ltd. 41,685 43,389
---------- ----------
Net cash provided by operating activities 1,389 163,106
Investing activities:
Purchases of property and equipment (13,298) (5,941)
Pre-publication and royalty advances (29,109) (16,513)
Organization costs (5,421) --
---------- ----------
Net cash used by investing activities (47,828) (22,454)
Financing activities:
Capital contributions from joint venture shareholders 50,000 --
---------- ----------
Net cash used by financing activities 50,000 --
---------- ----------
Net decrease in cash and cash equivalents 3,561 140,652
Cash and cash equivalents at beginning of period -- 3,561
---------- ----------
Cash and cash equivalents at end of period $ 3,561 $ 144,213
========== ==========
See accompanying summary of accounting policies and
notes to financial statements.
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Studio Mouse, LLC (the "Company"), registered in the state of Connecticut as a
limited liability company, is a joint venture between Trudy Corporation (Trudy),
a Connecticut company and The Chart Studio (Pty) Ltd., a privately held South
African company. The Company was formed with the goal of maximizing the combined
intellectual assets of each company, including Trudy's license with the
Smithsonian Institution, by creating new product formats utilizing a fresh
approach to creating multimedia "books plus" products. The operating agreement
provides, among other matters, that each of the joint venture shareholders owns
45% of the Company with the remaining 10% owned by related parties of each
shareholder, and further, that the agreement be approved by the Reserve Bank of
South Africa.
Studio Mouse has developed a customer base including both North American and
international accounts in the trade, mass market, door-to-door, and educational
distributor sales channels, to which Studio Mouse ships products directly from
the factory. This model alleviates the majority of the need for the financing
and storage of inventory.
Basis of Presentation
Costs associated with the development and design of the Company's product, which
have been incurred by the joint venture shareholders on behalf of Studio Mouse,
have been allocated to the Company. However, each joint venture shareholder has
chosen to absorb general and administrative costs relating to the operation of
Studio Mouse.
The financial statements presented for June 30, 2002 are unaudited.
Estimates
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 that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
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.
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.
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.
Fair Value of Financial Instruments
The Company has the following financial instruments: cash and cash equivalents,
accounts receivable, inventory, accounts payable and accrued expenses, and loans
payable to the joint venture shareholders. The carrying value of cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses
approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature.
Pre-Publication Costs
Pre-publication costs are capitalized and amortized over a three-year period
using the straight-line method.
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
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
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. Management believes that no impairment loss has
occurred.
Revenue
Revenues are recorded in accordance with SEC Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements."
Revenue 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.
Income Taxes
In lieu of corporation income taxes, the shareholders of a limited liability
company are taxed on their proportionate share of the Company's taxable income.
Therefore, no provision or liability for federal income taxes has been included
in the Company's financial statements.
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).
There are no dilutive shares. Basic earnings per share is computed by dividing
the weighted average number of common shares outstanding into net (loss) income.
Comprehensive Income (Loss)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" (Statement
130). Statement 130 establishes new rules for the reporting and display of
comprehensive income (loss) and its components. Comprehensive income (loss) for
the Company is the same as net income (loss) for all periods presented.
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
Segments of an Enterprise and Related Information
The Company 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.
New Accounting Standards
The Financial Accounting Standards Board (FASB) issued several pronouncements
and interpretations and the Securities and Exchange Commission (SEC) issued
several Staff Accounting Bulletins (SAB). Certain of these pronouncements may
have future applicability, Statement of Financial Accounting Standards (SFAS)
No. 132 "Employers Disclosures about Pensions and Other Post Retirement
Benefits," effective June 15, 2000, and No. 137 "Accounting for Derivative
Instruments and Hedging Activities," effective June 15, 2000 would not have
impacted the financial statements as the Company has not participated in
derivative transactions nor does the Company have a defined benefit plan.
In December 1999, the SEC issued SAB No. 101 "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain areas of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition policies
comply with SAB 101.
In August 1999, the SEC issued SAB No. 99 "Materiality". SAB 99 provides that
the exclusive reliance on certain quantitative benchmarks to assess materiality
in preparing financial statements is inappropriate; misstatements are not
immaterial simply because they fall beneath a numerical threshold. Management
believes the Company is in compliance with SAB 99.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations." SFAS 141 applies prospectively to all business
combinations initiated after June 30, 2001 and to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. This statement requires all business combinations to be
accounted for using one method, the purchase method. The adoption of SFAS No.
141 is not expected to have a significant impact on the Company's future
financial statements.
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
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. There was no
advertising expense for the period from inception (June 1, 2001) through
December 31, 2001 and for the six months ended June 30, 2002.
2. Inventories
Inventories consist of the following:
December 31, 2001
and June 30, 2002
-----------------
Finished goods $ 498
========
3. Equipment
Equipment consists of the following:
December 31, 2001 June 30, 2002
----------------- -------------
Furniture and fixtures $ 13,298 $ 16,671
Computer equipment -- 2,568
--------- ---------
13,298 19,239
Accumulated depreciation (2,216) (5,067)
--------- ---------
$ 11,082 $ 14,172
========= =========
4. Loans Payable to Joint Venture Shareholders
Although each joint venture shareholder has chosen to absorb general and
administrative costs relating to the joint venture, both Trudy and The Chart
Studio are required to loan funds to the Company for working capital needs and
other proper purposes, as per the operating agreement. The amount of each
shareholder's loan must be for a minimum of $25,000, bearing interest at a rate
of 5% per annum. In addition to these loans, the sums due the joint venture
shareholders include payroll costs for services rendered to the Company by
employees of both Trudy and The Chart Studio. At December 31, 2001, the Company
owed Trudy $29,076 and The Chart Studio $41,685. At June 30, 2002, the Company
owed Trudy $35,678 and The Chart Studio $85,074.
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
5. Concentrations and Credit Risk
(a) Sales
The Company's two largest accounts from inception (June 1, 2001) to
December 31, 2001 represented 70% of total sales and 30% of total
sales. For the six months ended June 30, 2002, the Company's two
largest accounts represented 59% of total sales and 23% of total
sales. The Company's sales to Trudy Corp. represented 16% of total
sales for the six months ended June 30, 2002, and none from inception
to December 31, 2001.
(b) Cost of Sales
The Company produces the majority of its products by sub-contracting
with independent toy factories and printing plants located in Asia.
From inception (June 1, 2001) to December 31, 2001, the Company
purchased 100% of its books and related multimedia products from
vendors in China with one vendor comprising 80% of such purchases.
During the six month period ended June 30, 2002, this same vendor
comprised approximately 88% of the Company's product purchases.
Purchases from Trudy Corp. for the six month period approximated
$2,000.
The Company believes that production could quickly be transferred to other
companies in China if production were not available from its current vendors, or
if more favorable pricing became available. These manufacturers can also perform
certain other functions such as the labeling and packaging of product for volume
shipments directly to specific customers.
6. Subsequent Events
(a) In April 2002, The Chart Studio (Pty) Ltd. advised Trudy Corp. that
the Reserve Bank of South Africa disapproved of its application to
form a joint venture with Trudy in the name of Studio Mouse, LLC. The
Chart Studio (Pty) Ltd. stated that it intended to resubmit its
application with the guidance of RMB Corvest, the investment banking
arm of Rand Merchant Bank, Johannesburg, which is a minority
stockholder in The Chart Studio.
Although The Chart Studio's application was resubmitted, it was
subsequently denied. Accordingly, a Memorandum of Understanding of
August 20, 2002, provided for changes in the shareholders' business
relationship as follows:
o Studio Mouse has become a subsidiary of Trudy, 95% owned by Trudy
and 5% owned by the president of Studio Mouse and publisher of
Trudy.
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STUDIO MOUSE, LLC
NOTES TO FINANCIAL STATEMENTS
o Chart Studio's contingent equity will be converted into a
long-term loan from Chart Studio to Studio Mouse in the amount of
approximately $420,000.
o Over the next 24 months, Chart Studio may reapply to the Reserve
Bank of South Africa for approval of 50% equity ownership in
Studio Mouse. Upon such approval and satisfaction of certain
other conditions, Chart Studio may exercise the option to
purchase a 50% equity ownership of Studio Mouse, in which case
the long-term loan will be forgiven. Should such approval not be
forthcoming, or Chart Studio not exercise its option, the
long-term loan, plus any equity appreciation, must be repaid over
the 36 months following such 24 month period.
o In order to preserve its potential opportunity for equity
participation in Studio Mouse, Chart Studio shall provide
editorial and art content, graphic design services and worldwide
marketing/sales support at cost to Studio Mouse.
In connection with the purchase of the 50% interest from The Chart
Studio, the Company recorded the goodwill attendant to the purchase
price at the present value of the five year loan, approximating
$420,000, using a 7 1/2% interest factor.
(b) The subsidiary rights licensing agreement between Trudy Corporation
and Studio Mouse, LLC concerning content created under the existing
license by the Smithsonian Institution to Trudy d/b/a Soundprints was
approved in a License Amendment between the Smithsonian Institution
and Soundprints dated April 30, 2002.
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