SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1998 Commission File No. 0-16056 TRUDY CORPORATION 353 Main Avenue Norwalk, Conn. 06851 Incorporated in the State of DELAWARE Federal Identification No. 06-1007765 Telephone: (203) 846-2274 Trudy Corporation has filed all reports required to be filed by section 13 or 15 (d) of the Securities Act of 1934 during the preceding twelve months and has been subject to such filing requirements for the past year. SHARES OUTSTANDING AT September 30, 1998 Common Stock, $.0001 par value 331,222,249 shares TRUDY CORPORATION INDEX PAGE NUMBER PART I. FINANCIAL INFORMATION Unaudited Balance Sheets - June 30, and September 30, 1998 ...............2 Unaudited Statements of Income and Deficit - Three months and six months ended September 30, 1997 and September 30, 1998 .................3 Unaudited Statements of Cash Flows - Three months ended September 30, 1997 and September 30, 1998 ..............................4 Notes to Unaudited Financial Statements .................................5 Management's Discussion and Analysis .....................................6 PART II. OTHER INFORMATION ..............................................7 SIGNATURES ...............................................................8 TRUDY CORPORATION BALANCE SHEETS September 30, June 30, ASSETS 1998 1998 --------------- --------------- (Unaudited) (Unaudited) Current assets Cash $ 69,999 $ 3,727 Accounts receivable, net of allowance for doubtful accounts 37,299 (September 30) 39,953 (June 30) 744,487 536,633 Inventories 1,718,561 1,760,352 Prepaid expenses and other current assets 470,555 86,212 Prepaid income taxes 14,826 21,134 Deferred income taxes 59,000 59,000 --------------- --------------- Total current assets 3,077,428 2,467,058 Plant and equipment (net) 143,782 134,825 Pre-publication costs and royalty advances 315,579 327,148 Deferred income taxes 319,000 319,000 =============== =============== Total assets $ 3,855,789 $ 3,248,031 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 604,709 $ 337,164 Current portion of long-term debt 37,159 52,271 Current portion of notes payable to related parties and accrued interest 630,661 285,237 --------------- --------------- Total current liabilities 1,272,529 674,672 Bank note payable 855,688 858,688 Long-term debt 189,111 189,111 Notes payable to related parties 166,342 163,809 --------------- --------------- Total liabilities 2,483,670 1,886,280 --------------- --------------- Stockholders' equity Common stock, par value $.0001; 850,000 shares authorized; 331,222,249 issued and outstanding 33,123 33,123 Capital in excess of par value 4,000,316 4,000,316 Accumulated deficit (2,661,320) (2,671,688) --------------- --------------- Total stockholders' equity 1,372,119 1,361,751 --------------- --------------- Total liabilities and stockholders' equity $ 3,855,789 $ 3,248,031 =============== =============== See Notes to Financial Statements -2- TRUDY CORPORATION STATEMENTS OF INCOME AND DEFICIT (UNAUDITED) Three Months Ended Six Months Ended -------------------------------- ------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net Sales $ 1,021,468 $ 1,581,553 $ 1,732,201 $ 2,257,408 ------------- ------------- ------------- ------------- Operating costs & expenses: Cost of sales 499,865 849,077 927,515 1,245,363 Selling, general and administrative 450,014 451,585 834,880 819,350 ------------- ------------- ------------- ------------- 949,879 1,300,662 1,762,395 2,064,713 ------------- ------------- ------------- ------------- Income (loss) from operations 71,589 280,891 (30,194) 192,695 ------------- ------------- ------------- ------------- Other income (expenses): Other income 7,931 1,440 12,238 10,084 Interest expense, net (42,652) (25,182) (58,001) (38,125) Depreciation (26,500) (2,832) (35,500) (5,639) ------------- ------------- ------------- ------------- (61,221) (26,574) (81,263) (33,680) ------------- ------------- ------------- ------------- Income (loss) before income taxes 10,368 254,317 (111,457) 159,015 Provision for income taxes 0 5,658 0 5,658 ------------- ------------- ------------- ------------- Net income (loss) 10,368 248,659 (111,457) 153,357 Deficit-beginning of period (2,671,688) (2,848,718) (2,549,863) (2,753,416) ------------- ------------- ------------- ------------- Deficit-end of period $ (2,661,320) $ (2,600,059) $ (2,661,320) $ (2,600,059) ============= ============= ============= ============= Net income (loss) per share 0.0000313 0.0007664 (0.0003365) 0.0004727 ============= ============= ============= ============= Weighted number of shares outstanding 331,222,249 324,457,249 331,222,249 324,457,249 ============= ============= ============= ============= See Notes to Financial Statements. -3- TRUDY CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED September 30, September 30, Cash flows from operating activities 1998 1997 ------------- ------------- NET INCOME (LOSS) $ (111,455) $ 153,357 Adjustments to reconcile net loss to net cash used in operating activities Amortization of pre-publication costs 71,250 9,386 Depreciation 35,500 5,639 Provision for losses on accounts receivable 7,927 7,639 Changes in current assets and current liabilities Accounts receivable (430,516) (1,081,402) Inventories (143,660) (482,274) Prepaid expenses and other current assets (379,651) (357,447) Accounts payable and accrued expenses 286,016 529,085 ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (664,589) (1,216,017) ------------- ------------- Cash flows from investing activities Pre-publication & royalty advances (7,283) (49,507) Additions to plant and equipment (49,513) (17,602) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (56,796) (67,109) ------------- ------------- Cash flows from financing activities Net change in short-term borrowings 802,923 1,275,377 Proceeds of loans - long-term 0 25,365 Repayment of loans - long-term (11,539) 0 ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 791,384 1,300,742 ------------- ------------- Net change in cash 69,999 17,616 Cash, beginning of period 0 2,939 ------------- ------------- CASH, END OF PERIOD $ 69,999 $ 20,555 ============= ============= See Notes to Financial Statements. -4- TRUDY CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending March 31, 1999. 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, 1998. -5- MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS REVENUES Trudy Corporation's revenues for the six months ended September 30,1998 were $1,732,201 - a decrease of $525,207 compared with the same period last year. Sales to warehouse clubs, the largest market segment, were down $171,367 to $869,755 due to inventory carryover from the prior year and the clubs' decision to purchase more conservatively. Sales to bookstores and specialty retailers were also below last year as the number of independent bookstores continues to decline and specialty stores have become more selective in their purchases. Sales to schools and education wholesalers were improved as a result of the Company's decision to target this growing market segment. Sales for the three months ended September 30, 1998 were $1,021,468 - a decrease of $560,085 compared with the same period of last year. The decreases cited for the first six months primarily occurred in this quarter. PROFIT AND LOSSES A net loss of $111,457 for the first six months of fiscal 1999 compares to a profit of $153,357 for the same period last year. This decline in profitability is primarily the result of the lower sales volume. Income was below last year also because of higher expenses associated with the amortization of book design costs, higher depreciation expense, and higher interest expense. Product procurement costs have been reduced as a result of improved pricing from Asian manufacturing sources. Selling, general, and administrative expenses were in line with last year's levels. Interest expense increased as a result of higher borrowing needed to fund working capital requirements. Depreciation expense was also higher than last year due to the acquisition of a new computer system and software. Early in the second quarter, having determined that the new software was inadequately serving its needs, the Company decided to purchase an alternative software package. Net income for the three months ended September 30 was $10,368. The Company reported a profit of $248,659 for the same quarter last year. The reasons for this decrease are the same as those cited for the first six months. LIQUIDITY AND CAPITAL RESOURCES Accounts receivable were $744,487 on September 30, 1998 compared with $536,633 on June 30, 1998. This increase is due entirely to increased sales activity especially to warehouse clubs which have extended payment terms. Inventory levels were $1,718,561 on September 30 compared with $1,760,352 on June 30. Inventory levels have been maintained to fill holiday retail and direct mail orders in the third quarter. As of September 30, 1998, the -6- balance owed on bank loans was $1,081,958 compared with $1,100,070 on June 30, while loans to the president of the Company and his family totaled $797,003 compared with $449,046 on June 30. The president loaned the Company an additional $338,900 in the second quarter of this year to fund working capital needs and the second computer system conversion. PART II OTHER INFORMATION - Items 1-6. Not Applicable. -7- SIGNATURES As required by Section 13 or 15(d) of the Securities Exchange Act of 1934, the President being duly authorized, has signed this report on behalf of TRUDY CORPORATION. Date: December 8, 1998 By /s/ WILLIAM W. BURNHAM ------------------------ William W. Burnham, President -8-