UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2008
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-16056
TRUDY CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 06-1007765
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
353 Main Avenue, Norwalk, CT 06851
--------------------------------------------------
(Address of principal executive offices, Zip code)
(203) 846-2274
---------------------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
------------------------------
(Title of class)
Check whether the Company (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
[ ] Yes [X] No
Indicate by check mark whether the Company is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding
Class as of June 30, 2008
------------------------------- ----------------------------
Common stock, $0.0001 par value 641,307,356
INDEX
NUMBER PAGE
- ------ -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 2008 (unaudited) 3
Consolidated Statements of Operations (unaudited) for the three
months ended June 30, 2008 and June 30, 2007 (unaudited) 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended June 30, 2008 and June 30, 2007 (unaudited) 5
Consolidated Statement of Shareholders' Deficit (unaudited) from
April 1, 2008 through June 30, 2008 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Page 2 of 23
Trudy Corporation
Balance Sheet
June 30, 2008
(Unaudited)
-----------
Assets
Current assets
Cash and cash equivalents $ 31,605
Accounts receivable, net 1,670,094
Inventory, net 1,433,705
Prepaid expenses and other current assets 76,685
-----------
Total current assets 3,212,089
Equipment, net 63,410
Royalty advances, net 160,420
Prepublication costs and other assets, net 500,130
Intangible assets, net 431,747
-----------
Total Other assets 1,155,707
-----------
Total assets $ 4,367,796
===========
Current liabilities
Notes payable - Bank & related parties $ 2,703,319
Accounts payable and accrued expenses 1,386,101
Deferred Revenue 318,369
Royalties and commissions payable 331,231
-----------
Total Current liabilities 4,739,021
-----------
Total liabilities 4,739,021
Commitments
Shareholders' equity
Common stock - par value 64,131
Paid-in capital 7,035,506
Accumulated deficit (7,470,862)
Total shareholders' equity (371,225)
-----------
Total liabilities and shareholders' equity $ 4,367,796
===========
The accompanying summary of significant accounting policies and notes to
financial statements are an integral part of the consolidated
financial statements.
Page 3 of 23
Trudy Corporation
Statement of Operations
For the Three Month Periods Ended June 30, 2008 & June 30, 2007
Three Month Period
Ended June 30,
------------------------------
2008 2007
------------- -------------
(unaudited) (unaudited)
Net product sales $ 1,494,912 $ 971,082
Net royalty sales 44,372 5,817
------------- -------------
Net sales 1,539,284 976,899
Cost of sales 881,015 651,820
------------- -------------
Gross profit 658,269 325,079
Operating expenses:
Selling, general and administrative 844,772 732,732
------------- -------------
Income/(loss) from operations (186,503) (407,653)
Other income/(expense)
Interest, net (41,218) (34,914)
Other income, net 9,166 1,942
------------- -------------
Other expense (32,053) (32,972)
------------- -------------
Net income/(loss) $ (218,556) $ (440,625)
============= =============
Basic and diluted net income/(loss) loss per share $ -- $ --
============= =============
Weighted average number of shares outstanding 641,307,356 612,566,330
============= =============
The accompanying summary of significant accounting policies and notes to
financial statements are an integral part of the consolidated
financial statements.
Page 4 of 23
Trudy Corporation
Statements of Shareholders' Equity
Quarter ended June 30, 2008
Common Stock Additional Total
------------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
Balance at March 31, 2008 (audited) 641,307,356 $ 64,131 $ 7,035,506 $(7,252,306) $ (152,669)
Net loss (unaudited) -- -- -- (218,556) (218,556)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2008 (unaudited) 641,307,356 $ 64,131 $ 7,035,506 $(7,470,862) $ (371,225)
=========== =========== =========== =========== ===========
The accompanying summary of significant accounting policies and notes to
financial statements are an integral part of the consolidated
financial statements.
Page 5 of 23
Trudy Corporation
Statements of Cash Flows
For the Three Months Ended
June 30,
----------------------------
2008 2007
------------ ------------
(unaudited) (unaudited)
Cash Flows From Operating Activities
Net loss $ (218,556) $ (440,625)
Adjustments to reconcile net loss to net cash
provided by / (used in) operating activities:
Depreciation and amortization 23,060 3,248
Amortization of pre-publication costs 59,573 66,595
Provision for losses on accounts receivable 0 72
Provision for promotional allowance 3,000 (32,556)
Provision for slow moving inventory (65,000) 0
Provision for sales returns (240,186) (9,227)
Consulting fee 0 32,813
Changes in operating assets and liabilities:
Decrease in accounts receivable 109,367 630,804
Decrease in inventories 155,262 (106,876)
Increase in prepaid expenses and other current assets 85,236 74,344
Decrease in accounts payable and accrued expenses (94,278) (159,810)
Increase (Decrease) in deferred revenue 284,369 0
Decrease in royalties and commissions payable (21,167) (170,926)
------------ ------------
Net cash provided by / (used in) operating activities 80,680 (112,144)
Investing activities:
Purchases of property and equipment (2,876) (4,729)
Pre-publication and royalty advances (59,202) (46,621)
------------ ------------
Net cash (used) / provided by investing activities (62,078) (51,350)
Financing activities:
Net change in note payable, bank (100,247) 264,081
Repayments to related parties 0 (29,757)
Proceeds from related parties 91,994 0
------------ ------------
Net cash provided/(used) by financing activities (8,253) 234,324
------------ ------------
Net increase / (decrease) in cash and cash equivalents 10,349 41,072
Cash and cash equivalents at beginning of period 21,256 5,753
------------ ------------
Cash and cash equivalents at end of period $ 31,605 $ 46,825
============ ============
Cash paid for interest $ 41,392 $ 35,401
Cash paid for income taxes $ -- $ --
The accompanying summary of significant accounting policies and notes to
financial statements are an integral part of the consolidated
financial statements.
Page 6 of 23
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, books with read- and sing-along audio tapes and CD's and
designs, manufactures and markets children's musical instruments, electronics
and plush stuffed animals for sale to domestic and international retail and
wholesale customers on a returnable and non-returnable basis. The Company's
products are sold under the trade names (i.e. imprints) of Studio Mouse,
Soundprints, Little Soundprints, Music for Little People and Fetching Books.
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 June 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.
Page 7 of 23
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.
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.
Page 8 of 23
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.
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
Page 9 of 23
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
companies to recognize compensation expense for the cost of awards of equity
compensation. This compensation cost will be measured as the fair value of the
award estimated using an option-pricing model on the grant date. The Company has
no options outstanding as of June 30, 2008.
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.
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.
Page 10 of 23
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 $9,956 and $5,375 for
the three month periods ended June 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.
4. Inventories
Inventories consist of the following:
Raw Materials $ 30,726
Finished Goods 1,612,979
Reserve for Obsolescence (210,000)
------------
Inventory $ 1,433,705
============
Page 11 of 23
5. Notes Payable, Bank and Related Parties
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). $ 718,705
Various notes payable, to principal shareholder (William W. Burnham,
Chairman of the Board) due on demand. Interest is payable monthly at LIBOR +
1.25%. 1,741,576
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,
Chairman of the Board). 243,038
------------
Total $ 2,703,319
============
6. Income Taxes
The components of income tax (benefit) are as follows:
June 30, 2008 June 30, 2007
---------------------------- ----------------------------
Current Deferred Current Deferred
------------ ------------ ------------ ------------
Income tax expense (benefit) before application
of operating loss carryforwards $ 0 $ (87,200) $ 0 $ (176,000)
Income tax expense (benefit) of operating
loss carryforwards 0 0 0 0
Change in valuation allowance 0 87,200 0 176,000
------------ ------------ ------------ ------------
Income tax expense (benefit) $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
The deferred taxes are comprised of the following at June 30, 2008:
Net operating loss carryforwards $ 1,408,000
Reserves and allowances 571,000
------------
Total deferred tax assets 1,979,000
Less valuation allowance (1,979,000)
------------
Net deferred tax assets $ 0
============
Page 12 of 23
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 June 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. Rent expense totaled $27,348 and $23,743 for the three months ended
June 30, 2008 and 2007, respectively.
As of June 30, 2008, the Company has borrowings from related parties of
$1,741,576. Interest to related parties totaled $25,345 and $13,133 for the
three months ended June 30, 2008 and 2007, respectively. Repayments to related
parties totaled $6,753 for the three months ended June 30, 2008. Repayments to
related parties totaled $26,000 for the three months ended June 30, 2007.
Guarantor fees for Mr. Burnham for the three months ended June 30, 2008 were
$1,420. Guarantor fees for Mr. Burnham for the three months ended June 30, 2007
were $5,097.
On June 19, 2006 Mr. Bradford Mead was elected to the Board of Directors. Mr.
Mead is the President of Delta Capital Group, Inc, the Company's investment
banking advisor. Delta Capital Group received fees in the amount of $6,000 from
the Company for the three months ended June 30, 2008. There were no fees paid to
Delta Capital in the prior fiscal year.
8. Contingency
As of June 30, 2008 the Company maintained a letter of credit of $500,000
related to the Disney license guaranteed by the Chairman of the Company.
The Company is subject to claims and legal proceedings that arise in the
ordinary course of its business activities. In the opinion of Management, these
claims in the aggregate should not have a material effect on the Company's
financial statements or its business operations.
Page 13 of 23
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NET SALES.
Overview
Net Sales for the Company's June Quarter of fiscal 2008 increased 57.6% to
$1,539,284 versus $976,899 in the comparable quarter of fiscal 2007. Of the
total increase, $198,951 was attributed to Music For Little People, the
remainder of the increase was due to sales increases in several of the Company's
other traditional channels of trade. The Company's profit margin improved from
33.3% in the prior year to 42.8% in the current year. The three month period
resulted in a net loss of $218,556 versus a net loss of $440,625 for the same
period in the prior year.
Three months ended June 30, 2008
Net sales for the first three months of fiscal 2009 increased 57.6% versus the
prior year. Revenue growth came mainly from sales to domestic close out
customers, the two channels of trade associated with Music For Little People and
from the returnable direct-to-consumer division.
Sales of Disney-licensed products (pursuant to a licensed book publishing
agreement between Disney Licensed Publishing, an imprint of Disney Book Group,
LLC and Trudy Corporation) as a percentage of total Company sales, increased
from 43.3% to 44.0% for the three-month period versus the comparable period a
year ago. Sesame Workshop-licensed product revenue decreased from 9.8% to 4.8%
for the three month period ended June 30, 2008. Smithsonian-licensed product
sales increased from 27.0% of Company sales to 29.1%.
Percentage of Sales by license
for the three months ended
June 30,
-----------------------------------------------------
License 2008 2007
- -----------------------------------------------------------------------------
Disney 44.0% 43.3%
Smithsonian 29.1 27.0
Proprietary 9.9 14.6
Sesame Workshop 4.8 9.8
All other 12.2 5.3
------------ ------------
Total 100.0 100.0
============ ============
Page 14 of 23
Sales increases, net of
provisions for returns,
for the three months ended
June 30,
----------------------------
Sales channel 2008 2007 Variance % change
- -------------------------------------------------------------------------------------------------------------
Domestic Close out accounts $ 204,088 $ 3,822 $ 200,266 NMF
Music For Little People
(internet sales) 101,703 0 101,703 NMF
Direct-to-Consumer
(returnable) 103,184 42,593 60,591 142.3%
Music For Little People
(direct-to-consumer) 77,253 0 77,253 NMF
For the three months ended June 30, 2008, sales increases were fairly
broad-based across many divisions, but with the most significant increases in
select channels of trade. Sales to domestic close out accounts increased by
$200,266 over the prior year as a result of a concerted and focused effort to
reduce inventory. Such sales were executed with an effort to return a margin
which was low though acceptable.
As previously noted, On March 7, the Company completed its asset purchase of the
Music for Little People business, which the Company categorizes as three
channels of trade: direct-to-consumer, and school and library, and
internet-based sales. Internet sales for Music For Little People were $101,703
and direct-to-consumer sales were $77,253 for the quarter ended June 30, 2008,
there were no sales in these divisions in the prior year.
Sales also increased in several other key divisions including Domestic Warehouse
Club Distributors, Domestic Mass Market distributors, Canadian book
distributors, Schools and Libraries and related distributors, and sub-rights
royalty sales.
Sales decreased in several channels versus the prior year.
Sales decreases, net of
provisions for returns,
for the three months ended
June 30,
----------------------------
Sales channel 2008 2007 Variance % change
- -------------------------------------------------------------------------------------------------------------
International Mass Market
Distributors $ 114,856 $ 208,814 $ (93,958) -45.0%
Direct-to-Consumer Book
Distributors 167,265 235,836 (68,571) -29.1
Educational Catalogs 21,513 51,663 (30,152) -58.4
Page 15 of 23
International mass market distributor sales decreased $93,958 in the current
three month period as a result of timing of shipments. The backlog for the
Company's two largest international mass market distributors in Latin America
and Spain remain solid and significantly up over the backlog in the comparable
period a year ago.
Sales to direct-to-consumer book distributors decreased $68,571 versus the prior
year primarily as a result of a non-repeating six figure order from a major
customer that the Company received last year, and a continuing decline in sales
to Books Are Fun, which has changed buying habits and business model.
Sales from educational catalogs also decreased from $51,663 to $21,513, or
58.4%. This was due to lower school budgets this year.
Several other channels of trade experienced declines in the current three month
period including domestic book retailers, and domestic and international toy &
gift distributors.
COST OF SALES.
Three months ended June 30, 2008
The Company's cost of sales for the quarter ended June 30, 2008 increased
$229,195 from $651,820 in the prior year to $881,015 in the current year, an
increase of 35.2%, primarily as a result of increased revenue. Cost of sales as
a percentage of net sales decreased from 66.7% to 57.2% in the current quarter
as a result of a change in the gross margin mix among sales divisions and the
largely fixed nature of the Company's warehouse operation costs.
GROSS PROFIT.
Three months ended June 30, 2008
The resulting gross profit for the quarter ended June 30, 2008 increased 102.5%
to $658,269 versus the prior quarter's gross profit of $325,079. Gross margin
was 42.8% in the current quarter versus 33.3% in the quarter ended June 30,
2007. The increase was largely due to increased product sales and the semi-fixed
nature of the Company's warehouse costs. In addition, the subsidiary rights
revenue of $44,372 for the current quarter had nominal costs associated with the
sale. These savings helped to offset the rising cost of goods manufactured in
Asia.
Page 16 of 23
SELLING, GENERAL & ADMINISTRATIVE COSTS.
Three months ended June 30, 2008
The Company's selling, general and administrative costs ("SG&A") increased 17.6%
or $112,040 to $844,772 for the three months ended June 30, 2008 versus $732,732
for the three months ended June 30, 2007. As a percentage of net sales, SG&A
expenses were 54.9%, down from 75.0% of net sales in the prior fiscal year. The
increase in SG&A expenses was largely due to increases in salary expense as a
result of the acquisition of Music For Little People, and royalty expense, which
were slightly offset by decreases in legal services and outside services.
INCOME / LOSS FROM OPERATIONS.
Three months ended December 31, 2007
For the quarter ended June 30, 2008, the loss from operations was $186,503, or
12.1% of revenue versus a loss of $407,653, or 41.7% of revenues, for the prior
year's quarter.
OTHER EXPENSE.
Three months ended June 30, 2008
The Company's other expense for the quarter ended June 30, 2008 was $32,052
versus $32,972 for the quarter ended June 30, 2007. This expense is mostly made
up of interest paid to carry the Company's bank and shareholder debt.
NET INCOME / LOSS.
Three months ended June 30, 2008
As a result of the items discussed above, the Company's net loss for the quarter
ended June 30, 2008 was $218,556 compared to a net loss of $440,625 for the
comparable prior quarter.
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.
Page 17 of 23
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.
Page 18 of 23
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
For the quarters ended
June 30,
----------------------------
2008 2007 Variance % change
- -------------------------------------------------------------------------------------------------------------
Net assets $ (371,225) $ 75,462 $ (446,687) NMF
Working capital (deficiency) (1,526,932) (447,792) (1,079,140) NMF
Accounts receivable, net 1,670,094 1,091,152 578,942 53.1%
Accounts payable and accrued expenses 1,386,101 1,227,675 158,426 12.9%
Royalties and commissions payable 331,231 303,222 28,009 9.2%
The Company continues to suffer from a lack of working capital. At June 30, 2008
the Company had a deficiency of net assets of $371,225 versus net assets of
$75,462 at June 30, 2007. Working capital declined to a $1,526,932 deficiency at
June 30, 2008 versus a $447,792 deficiency as of June 30, 2007.
Accounts receivable increased from $1,091,152 at June 30, 2007 to $1,670,094 at
June 30, 2008 an increase of $578,942. Accounts payable and accrued expenses
increased $158,426 versus the prior year from $1,227,675 to $1,386,101 at June
30, 2008. Royalties and commissions payable increased $28,009 versus the prior
year from $303,222 at June 30, 2007 to $331,231 at June 30, 2008 primarily as a
result of the sales mix and the increased level of sales.
Page 19 of 23
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.
Consideration for the transaction included $350,000 in cash, $200,000 in the
Company's authorized but unissued Common Stock and earn-out provision payments
in each of the next three years for Musical Kidz, if certain net income goals
are met from the business being purchased. Of the $200,000 in authorized but
unissued Trudy Common Stock, $100,000 in value was calculated at the average
price per share on the fifteen (15) days prior to the March 7, 2008 closing. and
the additional $100,000 worth of authorized but unissued Common Stock is to be
issued on the first year's anniversary of the transaction's closing, valued at
the average closing price per share for the ten (10) trading days preceding the
date of issuance. Financing for the acquisition came from a loan from a
principal shareholder.
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 $1,740,424 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 July 31, 2008, the balance on the Company's revolving line of credit was
$764,000 out of $850,000 available. As of June 30, 2007 the balance on the
Company's revolving line of credit was $734,206 out of $850,000 available to the
Company.
As of August 13, 2008 the Company's backlog was approximately $2,830,000.
Page 20 of 23
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to claims and legal proceedings that arise in the
ordinary course of its business activities. In the opinion of Management, these
claims in the aggregate should not have a material effect on the Company's
financial statements or its business operations.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 21 of 23
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(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.
(b) Reports on Form 8-K
I. None.
Page 22 of 23
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.
TRUDY CORPORATION
(REGISTRANT)
Date: August 19, 2008 By: /s/ Ashley C. Andersen
-------------------------------------
Ashley C. Andersen,
President, Chief Executive Officer
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