Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - TRUDY CORP | ex32_1.htm |
EX-32.2 - EXHIBIT 32.2 - TRUDY CORP | ex32_2.htm |
EX-31.2 - EXHIBIT 31.2 - TRUDY CORP | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - TRUDY CORP | ex31_1.htm |
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
2
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.
3
INDEX
|
PAGE
NUMBER
|
|
3 | ||
5
|
||
6
|
||
7 | ||
8
|
||
9
|
||
16
|
||
24 | ||
24 | ||
25
|
||
25
|
||
25
|
||
25
|
||
26
|
||
26
|
||
27 |
4
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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 |
12
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 |
13
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.
14
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 | % |
15
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.
18
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.
19
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.
20
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.
21
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.
22
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.
23
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.
24
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.
25
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.
|
26
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
|
27