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 below 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 “believe,” “expect,” “anticipate”, 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 I
ITEM 1. DESCRIPTION OF BUSINESS
General Development of Business
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.
Trudy Corporation was organized as a Connecticut corporation under the name Norwest Manufacturing Corporation on September 14, 1979, changed its name to Trudy Toys Company, Inc. on December 5, 1979, changed its name to Trudy Corporation on March 27, 1984 and was re-incorporated as a Delaware corporation on February 25, 1987. On July 27, 1987 the Company first offered shares of common stock for sale to the public.
Page 2 of 46
Products and Licensing
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Sales by license for the fiscal years ended March 31, |
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License |
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2008 |
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2007 |
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Disney |
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53.4 |
% |
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54.9 |
% |
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Smithsonian |
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21.6 |
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18.0 |
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Proprietary |
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13.1 |
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11.5 |
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Sesame Street |
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9.4 |
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9.4 |
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WGBH |
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0.5 |
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2.6 |
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All other |
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2.0 |
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3.6 |
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The Company holds a non-exclusive publishing license with Disney Licensed Publishing, an imprint of Disney Children’s Book Group, LLC (“Disney”) for the territories of North America. The license is effective through December 31, 2008. The license provides for the Studio Mouse imprint to publish certain novelty book and audio CD formats for distribution into the licensed territories, as well as the United Kingdom, Russia, nine African countries and many select countries throughout Asia, the Middle East, Eastern Europe, Latin America, and the Caribbean, with more countries pending approval. The agreement includes a 3 year distribution period for an expanded line of novelty books with audio CD’s with content based on an educational platform. The licensed characters include core properties such as Disney Princess and Winnie-the-Pooh, selected Disney Channel shows, as well as feature films including Disney-Pixar titles such as “Finding Nemo”, “Cars”, and Disney feature films such as “Pirates of the Caribbean” as well as Disney’s own animation releases such as “Chicken Little.” The license also includes Spanish language for distribution in North America, Latin America and Spain and bilingual rights for North America and various other territories throughout the world. The Company also holds a non-exclusive publishing license with The Walt Disney Company Iberia, S.L. for Spain that is effective through March 31, 2009.
The material published is targeted to a preschool through early elementary school audience and contains early childhood developmental and educational content utilizing popular Disney characters. Since the inception of the license the Company has published over 100 Disney-branded titles in English and Spanish. For the fiscal year ended March 31, 2008 sales of Disney-licensed product represented 53.4% of total sales. In the fiscal year ended March 31, 2007 sales of Disney-licensed product represented 54.9% of total sales. The Disney license requires royalties to be paid.
The Company holds an exclusive license from the Smithsonian Institution to create Smithsonian-licensed fiction titles through September 30, 2007. The license, under an extension to the present, allows for the sale of educational components and bundled kits, under the Soundprints imprint, containing realistic wildlife plush toys, storybooks, and audio-books in various formats. For the fiscal year ended March 31, 2008 sales of Smithsonian-licensed product represented 21.6% of total sales. For the fiscal year ended March 31, 2007 sales of Smithsonian-licensed product represented 18.0% of total sales. The Smithsonian license requires royalties to be paid. The Company is currently negotiating a new contract with the Smithsonian that will be made retroactive to October 1, 2007 when executed.
Page 3 of 46
Disney-licensed Products
In March 2008, the Company released the first two titles in a new series, entitled Learn-on-the-Go!™. These titles feature the Disney Princesses and Disney*Pixar Cars characters. The content focuses on early learning fundamentals such as numbers and the alphabet. Each title features a patent-pending zip-shut format with carrying handle, write-on/wipe-off pens, an audio CD, stickers and durable board pages. The Company has plans for additional titles in this format for fiscal 2009. The Company also continued to publish new Disney titles from successful series in customary formats, as well as new Playhouse Disney television properties such as Mickey Mouse Club House and Little Einsteins to be packaged in the Carry-a-Tune™, Learn & Carry™, Zip & Carry™, Travel Pack™ and Storybook Sets™ formats.
Overall, the Company introduced 83 new titles in fiscal 2008, 108 in fiscal 2007, and has plans to expand new introductions in future years.
Smithsonian-licensed products
In October of 2007, the Company launched the first two titles in the Smithsonian I Love My Board Books series beginning with “I Love My Mommy” and “I Love My Daddy.” These books feature beautiful original artwork and inspirational text celebrating the importance of family. The titles were well reviewed by children’s media reviewers and have enjoyed strong sell-through. They are currently reprinting.
In November of 2007, the Company launched another new Smithsonian board book series entitled “Baby Animals”. These titles feature high-quality casebound board books, colorful photography and ultra-soft plush toys. These titles have also been well-received by children’s media reviewers and are experiencing strong sales numbers.
In January of 2008, the Company released the first two titles in the Smithsonian Alphabet Books series, which include a hardcover storybook, an audio CD stored in the company’s patented CD tray requiring no additional packaging and a fold-out poster. In fiscal 2008, the company published additional titles in this series and they have continued to be best-sellers. The initial print-run of each title in this series have sold out. The “Alphabet of Insects” was a 2008 Benjamin Franklin Award Book and Audiobook finalist. The Company also continued publication of books and audio in the series introduced in 2006 called American Favorites” (popular songs in the public domain).
Proprietary Products
In the Fall of 2007, the Company released updated editions of its Mother Goose “Let’s Sing,” “Let’s Move,” “Let’s Listen,” “Let’s Play” board book series. This series drives strong sales in many of the Company’s important non-returnable accounts. Also, in early Spring 2008, the Company released another title in it’s successful Travel Pack™ series featuring content created in conjunction with the American Veterinary Medical Association (AVMA) entitled “Pet Friends,” and the company continues to publish new titles in it’s popular Pet Tales series, also created in conjunction with the AVMA.
Page 4 of 46
Sesame Workshop-licensed products
In the Fall of 2007, the company launched several Sesame Workshop licensed titles in its existing successful formats, such as the Learn-n-Carry™, Zip & Carry™ and Travel Pack.™ Additionally, in March of 2008, the company released a series of four book and CD sets packaged in a slipcase featuring Sesame Street characters retelling silly versions of classic fairy tales, entitled Fairly Furry Fairy Tales. This series includes picture (rebus) words embedded in the text throughout the books to help emerging readers follow along with the audio read-along and to become part of the reading process. The series also includes multi-book carry-along gift packs with the company’s patented sliding CD tray compartment mounted on the slipcase packaging exterior.
Formats
The Company has developed several new formats that are utilized in conjunction with its different licenses. In early Spring of 2008, the Company was pleased to learn that it’s pending patent application for a media storage method embedded into book covers was accepted by the US Patent and Trademark office, and the patent number was issued. This is a versatile patented structure with numerous format options. Below is a summary of some of the Company’s unique formats and a sampling of the licensed properties that are combined with these formats:
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• |
In the spring of 2008, the Company launched two new formats designed to address the market opportunity for lower priced book and CD combinations: |
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• |
The Learn-on-the-Go!™ format is an 8 by10 inch, 28-page board book with a CD secured in a custom clamshell blister pack along with two write-on/wipe-off pens, a padded foam cover and a zipper closure and carry-along handle, with a retail price of $14.99. This format also includes 2 pages of removable stickers and sturdy board pages. This format was launched with Disney-licensed content featuring Disney Princess and Disney*Pixar Cars content. It was first launched in English and is in the final stages of production in Spanish for Spain and Latin America. The Company is continuing to release titles in this format in English language with other licenses such as Sesame Workshop and the Smithsonian Institution. |
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• |
Flat Learn & Carry™ format is a boxed set of 4 casebound board books, and an audio CD for $12.99, and was first released with content featuring Disney Princess, Disney*Pixar Cars, Playhouse Disney JoJo’s Circus, Winnie-the-Pooh and Sesame Street. This format has accounted for strong sales in the Direct-to-Consumer Returnable division in fiscal 2008. |
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• |
Since the Company’s acquisition of the direct-to-consumer business, Music For Little People™, the company has also begun offering proprietary high-quality children’s musical instruments (such as guitars and ukuleles) and children’s music-related electronics such as a CD player and karaoke machine for sales in its direct-to-consumer and select retail divisions. |
Page 5 of 46
Marketing and Sales
The Company’s products are sold both nationally and internationally to book, toy, and specialty store resellers, warehouse clubs and book, gift and educational distributors by an in-house sales staff and approximately 100 independent commissioned sales representatives. The Company historically mailed a catalog directly to consumers, schools, and libraries. While this was discontinued in 2004 as a result of poor results, the Company is planning a larger catalog mailing initiative in the fall of 2008 in conjunction with the purchase of the direct-to-consumer and school and library business assets from Musical Kidz, LLC d/b/a Music For Little People.
A Vice President – Sales and an Assistant Sales Manager call on mass merchandisers and non-returnable specialty book accounts such as Target, Costco, T.J. Maxx and Wal-Mart. They also handle direct sales to international accounts. The Vice President – Sales also supervises several networks of independent sales representatives totaling over 100 sales people who call on all other applicable book, gift and toy sales channels. Two independent sales representatives specifically call on specialty sales customers in the home shopping television, door to door and display marketing channels. The Chairman and Director of Corporate Development and the CEO each handle sales development in certain targeted international territories.
The Company sells its products to accounts on both a returnable and a non-returnable basis.
Manufacturing and Product Design
Plush and toy product designs are executed with the Company’s oversight by overseas contractors. Book content is created by freelance authors and illustrators working under the direction of and in conjunction with the Company’s editorial and graphic design staff. Audio is produced by award-winning sound designers overseen by the Company’s editorial department. Instruments and electronics are developed by skilled manufacturers with the oversight of the Company’s development staff.
The Company manufactures the majority of its products by sub-contracting with independent stuffed toy factories, compact disc duplicators, toy manufacturers and printing plants located in Asia. Toys purchased during the year were purchased from one vendor in China, but the Company has other qualified sources of supply from which it has purchased in the past. Books and audio are procured from multiple vendors in China, Indonesia and Singapore. The Company co-copyrights with the Smithsonian Institution the design of each Smithsonian toy; the design of each Disney toy is owned by Disney. The designs of other stuffed toy products are proprietary to the Company. The Company does not own any of the Disney-branded and Sesame-branded book and audio products, other than the basic copyrights to its musical compositions and its right to its patented and patent-pending proprietary formats, as Disney and Sesame retain all other content rights, and actively manage the release of new products. The Company believes that production could quickly be transferred to other vendors in China or other countries if production were not available from its current vendors or if more favorable pricing became available elsewhere. Printers can also perform certain other functions such as receiving and consolidating stuffed toys from the original manufacturer, creating and printing packaging, and labeling and repacking product combinations for volume orders for drop shipment directly to large customers. Audiocassettes and limited number of CD’s are duplicated domestically in the United States. All other CD’s are duplicated in Hong Kong, China and Singapore and shipped to the Asian book printer to be inserted into the books. Substantially all purchases are in U.S. dollars.
Page 6 of 46
Governmental Regulations
The Company is subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Products Safety Act. Those laws empower the Consumer Products Safety Commission (the “CPSC”) to protect children from hazardous products. The CPSC has the authority to exclude from the market, articles that are found to be hazardous and can require a manufacturer to repurchase such products under certain circumstances. Any such determination by the CPSC is subject to court review. Similar laws exist in some states and cities in the United States and in many jurisdictions throughout the world. The Company endeavors to comply with all applicable regulations.
Competition
Management believes the Company is the leading supplier of licensed educational books and audiobooks that are often packaged with realistic plush toys. The Company is not aware of any direct competitors in this market although there are a small number of publishers who compete by combining plush toys with single titles of children’s classic books or licensed sound books. Management believes that the Company’s innovative approach to packaging audio CDs with educational novelty books also differentiates its products in the marketplace and has little competition from other publishers in this market niche, although more publishers are experimenting with combining some form of CD with various book formats such as workbooks, sticker books and activity books. The Company believes that its competitive advantages lie in its licenses with Disney, the Smithsonian Institution and Sesame Workshop, its unique editorial genre, its innovative formats, its superior design, its creative approach to new product development including book formats, electronic formats and the perceived high quality of its products relative to the retail price.
However, many publishers and distributors compete with the Company for sales. Many are larger and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products. It is possible that increased competition or improved performance by these competitors may impact the Company’s market share, profit margin and operating results.
The Company relies on selected distributors to gain access to key channels of trade such as retail book wholesalers and library distributors. The Company is dependent upon these resellers and as a result poor performance on their part can have an adverse impact on the Company’s profit margin and operating results.
Page 7 of 46
The Company’s ability to design, manufacture, market and sell high quality, desirable products depends largely upon its ability to attract and retain highly skilled personnel, particularly in the product design, publishing and sales areas. Inability to retain highly skilled individuals could impact the Company’s financial performance.
Employees
As of June 30, 2008, the Company had 34 full-time and 4 part-time employees, all based in its Norwalk, Connecticut facility. The Company also has 4 part-time employees in Redway, California, following the acquisition of the Music For Little People direct-to-consumer business. Seasonal personnel are hired in the fall to assist with greater volumes in the assembly area.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 27,000 square foot warehouse and administrative facility at 353 Main Avenue in Norwalk, Connecticut. The building is located approximately 45 miles northeast of New York City. This building is owned by a limited liability company owned by three members. Its principal member who owns a majority of the equity is the Company’s Chairman. A former Director and Officer and a current Director each has a minority interest. The property was purchased and financed independently of the Company.
The Company signed a three year lease, effective May 1, 2005 that holds the Company responsible for payment of taxes, insurance and utilities. The Company is evaluating outsourcing its distribution in the event that its facilities and labor pool are deemed inadequate for future requirements. As of May 1, 2008 the Company, its current lease having expired, has been placed on a month-to -month lease basis at the same rental terms as in the expired lease and is currently evaluating its options in moving its offices and warehouse elsewhere within Southern Connecticut.
The Company also leases a small space in Redway, California to house the 4 employees allocated to the Music for Little People direct-to-consumer and school and library business.
ITEM 3. 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.
Page 8 of 46
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company did not submit any matters to a vote of its security holders during the fourth quarter of the fiscal year ended March 31, 2008.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock trades on the OTC Bulletin Board under the symbol “TRDY.OB.” The price of the Company’s Common Stock as of June 30, 2008 was $0.002 per share. The prices presented are bid quotations, as reported by the OTC Bulletin Board Market, which reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions.
As of March 31, 2008, there were 1,415 common stockholders of record; there were 1,420 as of March 31, 2007.
Since its organization, the Company has not paid any dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. Future dividend policy is subject to the discretion of the Board of Directors and is dependent on a number of factors including future earnings, capital requirements, and the financial condition of the Company.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein.
Critical Accounting Policies
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Allowances for doubtful accounts are based on historical experience and known factors regarding specific customers and industries in which customers operate. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
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.
Page 9 of 46
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.
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.
The Company defers certain costs related to the development of new titles and amortizes these costs over the estimated useful lives when published.
Fiscal Year Ended March 31, 2008 Compared to Fiscal Year Ended March 31, 2007
Results of Operations
NET SALES.
Overview
Consolidated net sales for the year ended March 31, 2008 were $5,922,901 compared to $6,270,977 for the year ended March 31, 2007, a decrease of $348,076 or 5.6%.
The Company’s profit margin deteriorated from 45.2% in the prior year to 39.9% in the current year, resulting in gross profit for the current year of $2,365,093 compared with gross profit for the prior year of $2,835,672. The Company recorded a net loss of $775,255 versus a net loss of $16,771 for the prior year, a decrease of $758,484. The gross profit decline was due to a change in the sales mix and to increased prices from its Asian printers and manufacturers owing to the weakening US dollar impacted by a now floating Chinese RMB, child safety testing mandates and increased utilities, raw material paper costs and a general increase in labor.
Page 10 of 46
For the year ended March 31, 2008, the decrease in net sales versus the prior fiscal year was primarily attributed to the continuing impact of increased returns from customers due to overall weak book sales among mass merchandisers and warehouse clubs within North America, as well as dramatically reduced sales to the warehouse club channel specifically as a result of the December 2006 bankruptcy of Advanced Marketing Services, Inc, formerly the largest distributor in this channel, and subsequent redistribution of market share in this channel amongst several distributors.
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Sales decreases, net of |
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Sales channel |
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2008 |
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2007 |
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Variance |
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% change |
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Domestic Warehouse Club Distributors (returnable) |
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$ |
68,690 |
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$ |
1,228,830 |
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$ |
(1,160,140 |
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-94.4 |
% |
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Domestic Warehouse Club Distributors (non-returnable) |
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101,808 |
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262,350 |
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(160,542 |
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-61.2 |
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Domestic Discount Retailers (non-returnable) |
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657,295 |
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792,688 |
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(135,393 |
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-17.1 |
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Returnable Domestic Warehouse Club Distributor sales decreased 94.4% or $1,160,140 for the current fiscal year versus a year ago, largely a result of the ongoing impact of the bankruptcy of Advanced Marketing Services, Inc (“AMS”) which filed for Chapter 11 voluntary protection on December 28, 2006. Company sales to this channel were down in general, as new distributors gained rights to this business and marketshare within the channel was realigned. Additionally, in April 2008 the Company entered into an agreement with Baker and Taylor Marketing Services (BTMS), the purchaser of the remaining assets of AMS, to accept certain product returns of goods not sold to BTMS, but sold to AMS prior to the acquisition by Baker & Taylor of the assets of AMS in early 2007, as part of an agreement reached to allow both parties to conduct business in a mutually satisfactory manner going forward.
Sales to Domestic Warehouse Club distributors are somewhat distorted as certain sales to warehouse clubs are booked through two existing distributors, one in the Book Distributors channel of trade and the other in the Mass Market channel of trade. Accordingly, sales in the Book Distributors division show significant growth as the Company has chosen not to differentiate the divisional class of sales within the customer record for operational reasons.
Page 11 of 46
Non-returnable Domestic Warehouse Club Distributor sales decreased $160,542 in the current year as a result of the reduced purchasing ability of the surviving entity acquired out of bankruptcy by Baker and Taylor.
Sales to Domestic Non-returnable Discount Retailers declined $135,393 versus the prior year due to one customer failing to accept the Company’s pricing for an opportunistic six figure sale due to cost increases which the Company’s Asian printers had imposed. This customer had been shipped orders of over $100,000 in 2007.
Other channels of trade experienced decreased sales including Canadian book distributors, mass market distributors, specialty retailers and domestic book retailers principally due to general book market weakness and the questionable financial footing and decreased open-to-buy funds of a major national book chain.
Sales of Disney-licensed product represented 53.4% of total sales versus 54.9% of total sales for the prior fiscal year. For the fiscal year ended March 31, 2008 sales of Smithsonian-licensed product represented 21.6% of total sales versus 18.0% of total sales for the fiscal year ended March 31, 2007.
For the year ended March 31, 2008, the major sales channels that contributed to an overall increase in Company net sales versus the prior year were those that purchased product on a non-returnable or low returns basis.
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Sales increases net of provisions for returns, for the twelve months ended March 31, |
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Sales channel |
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2008 |
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2007 |
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Variance |
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% change |
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International Mass Market Distributors |
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$ |
1,612,918 |
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$ |
1,250,892 |
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$ |
362,026 |
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28.9 |
% |
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Domestic Direct-to-Consumer Book Distributors |
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651,450 |
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295,055 |
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356,395 |
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120.8 |
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Domestic Book Distributors (returnable) |
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296,922 |
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129,088 |
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167,834 |
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130.0 |
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The Company continues to make significant progress in the International arena with its sales of Spanish language Disney product to two distributors, one in Spain and the other in Latin America. The Latin American distributor expanded sales to substantially all of Latin Spanish-speaking South America. The distributor in Spain reported excellent sell through of the Company’s products in its introductory year. Additionally, overall international sales of the Company’s English and Spanish language products were up. In fiscal 2008, sales to all major international divisions were $1,921,167 versus $1,475,429 for the same period in the prior fiscal year, for an increase of $445,738 or 30.2%.
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On March 7, the Company completed its asset purchase of the Music for Little People direct-to-consumer and library business. In the last 24 days of the year or March 7 through March 31, sales from the Music for Little People website, direct mail catalog, and third party on-line distributors prompted by Music for Little People web marketing were $41,620. For the full month of March a year ago, internet direct and distributor sales were $5,808.
Other channels of trade experiencing increased sales were Domestic book clubs, direct-to-consumer returnable sales, museums, zoos and aquariums, military bases, internet accounts, toy and gift distributors, schools and libraries, international trade book sales and school and library distributors.
COST OF SALES.
The Company’s cost of sales for the year ended March 31, 2008 increased $122,503 from $3,435,305 in the prior year to $3,557,808 in the current year, an increase of 3.6%. Cost of sales as a percentage of net sales increased from 54.8% to 60.1% in the current year. The most significant contributor to the increased cost of sales came from direct product costs. As a percentage of net sales, direct product costs (cost of goods excluding overhead and miscellaneous costs) increased from 37.8% to 42.8% due to an increase in lower margin close out sales and growing international revenue whose products are sold non-returnable on a cost- plus basis.
GROSS PROFIT.
The resulting gross profit for the year ended March 31, 2008 decreased 16.6% to $2,365,093 versus the prior year’s gross profit of $2,835,672. Gross margin declined from 45.2% in the prior year to 39.9% for the year ended March 31, 2008.
SELLING, GENERAL & ADMINISTRATIVE COSTS.
The Company’s selling, general, and administrative costs increased $325,325 to $3,037,495 from $2,712,170 for the year ended March 31, 2008, an increase of 12.0% on a 5.6% decrease in net sales.
Increased costs include salaries, provisions for bad debt, exhibits and shows-related expenses and outside services. These increases were partially offset by decreases in legal services and sales commissions, among other smaller expense categories. While royalty expenses only increased 1.8% to $917,252, they were 17.0% of total revenue for the year ended March 31, 2008 up from 14.4% of total revenue in the comparable period a year ago. The increased percentage of revenue was due to a $110,000 shortfall in earned royalties to meet the Smithsonian annual license royalty guarantee for the license term ended September 30, 2007. In addition, the Company reserved for potential unearned royalties against the WGBH license guarantee for the publishing license to PEEP and the Big Wide World.
Page 13 of 46
During the current fiscal year, the Bologna Book Fair, a major international children’s book show, was held twice. Accordingly, the Company incurred increased trade show-related expenses for this fair. Finally, in anticipation for the asset acquisition of the on line assets of Music for Little People, the Company employed a consultant to redesign its Company website and to employ state of the art software for search engine optimizing. This resulted in a $34,260 increased expense to outside services for the current fiscal year.
INCOME/LOSS FROM OPERATIONS.
The resulting income from operations for the year ended March 31, 2008 was a loss of $672,403 versus income of $123,502 for the prior year. As a percentage of net sales, the income from operations was a negative 11.4% for the current year versus 2.0% for the prior year.
INTEREST EXPENSE.
Interest expense (net) for the year ended March 31, 2008 decreased 9.7% to $125,979 as a result of the conversion of shareholder loans to equity in July, 2007 and lower borrowing costs. On March 7, 2008, the Company borrowed from its Chairman and major shareholder for the purchase of the direct- to- consumer and school and library assets of Music for Little People as well as to provide additional working capital to finance continued working capital needs. This decrease was partially offset by increased interest rates associated with bank borrowings and increased borrowings towards fiscal year end.
OTHER INCOME/EXPENSE.
Other income was higher in the current year primarily as a result of lower miscellaneous expenses and an increase in the gain on currency exchange.
NET LOSS.
As a result of the items discussed above, the Company’s net loss for the year ended March 31, 2008 was $775,255 compared to a net loss of $16,771 for the comparable prior fiscal year.
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.
Page 14 of 46
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.
In June 2006, the Financial Accounting Standards Board (FASB) issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB 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. We adopted FIN 48 effective April 1, 2008. The adoption of FIN 48 did not have a material impact on our 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 us as of January 1, 2008. We do not expect the adoption of SFAS 157 to have a material impact on our financial statements.
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 liabitilities 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 January 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 January 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.
Liquidity and Capital Resources
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For the years ended March 31, |
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2008 |
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2007 |
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Variance |
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% change |
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Net assets (deficiency) |
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$ |
(152,669 |
) |
|
$ |
516,087 |
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|
$ |
(668,756 |
) |
NMF |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficiency) |
|
|
(1,328,930 |
) |
|
|
(20,663 |
) |
|
|
(1,308,267 |
) |
NMF |
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Accounts payable and accrued expenses |
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|
1,480,379 |
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|
|
1,387,488 |
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|
|
92,891 |
|
6.1 |
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|
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|
|
|
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Royalties and commissions payable |
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|
352,398 |
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|
474,148 |
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|
|
(121,750 |
) |
-25.7 |
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Accounts receivable |
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|
1,542,275 |
|
|
|
1,650,245 |
|
|
|
(107,970 |
) |
-6.5 |
|
|
The Company continues to suffer from a lack of working capital. At March 31, 2008 the Company had a net asset deficiency of $152,669 versus net assets at March 31, 2007 of $516,087. Working capital deteriorated $1,308,267 from a deficiency of $20,663 at March 31, 2007 to a deficiency of $1,328,930 in the current year. This is a result of additional borrowings from a principal shareholder officer for working capital needs as well as to finance the acquisition of Music for Little People. Further, bank debt that had been classified as long term debt is coming due in fiscal year 2009.
Accounts payable and accrued expenses increased $92,891 versus the prior year from $1,387,488 to $1,480,379 as of March 31, 2008. Royalties and commissions payable decreased 25.7% to $352,398 as of March 31, 2008 versus the prior year. This was primarily attributable to the lower royalties due based on the current fiscal year’s sales mix.
Accounts receivable decreased $107,970 from $1,650,245 to $1,542,275 as a result of the decline in net sales and lower daily sales outstanding as a result of improved collections in certain divisions.
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 to Musical Kidz’s mail-order and ecommerce divisions and included its mail order catalog, over 30,000 current buyers in its house mailing list, over 40,000 email addresses, and the URL 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.
Page 15 of 46
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 Trudy’s 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, including the amended facility of $850,000, the additional bank borrowing of $100,000 and the increased shareholder notes from $260,000 to $1,648,329 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 7, 2008, the balance on the Company’s revolving line of credit was $764,000 out of $850,000 available. As of March 31, 2007 the balance on the Company’s revolving line of credit was $458,206 out of $850,000 available to the Company.
As of July 10, 2008 the Company’s backlog was approximately $3,202,000.
In November 2007, the Company borrowed $150,000 from William W. Burnham, a principal shareholder and Chairman of the Board.
In December 2007, the Company borrowed an additional $50,000 from Mr. Burnham.
In March 2008 the Company borrowed $647,014 from Mr. Burnham for working capital needs and to fund the asset purchase of Musical Kidz, LLC doing business as Music for Little People.
The terms of these notes can be found in Note 5 to the financial statements.
Subsequent to year end the Company paid off its $100,000 term note held with its bank with and replaced it with a long term note provided by Mr. Burnham.
Page 16 of 46
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ITEM 7. FINANCIAL STATEMENTS |
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Trudy Corporation |
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Financial Report |
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March 31, 2008 |
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Contents |
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18 |
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19 |
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20 |
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21 |
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22 |
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23 |
Page 17 of 46
Report of Independent Registered Public Accounting Firm
To The
Shareholders
Trudy Corporation
Norwalk, Connecticut
We have audited the accompanying balance sheet of Trudy Corporation as of March 31, 2008, and the related statements of operations, shareholders’ equity (deficit), and cash flows for each of the two years in the period ended March 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trudy Corporation at March 31, 2008, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, 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. Management’s plans regarding those matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Dworken, Hillman, LaMorte & Sterczala, P.C.
July 14, 2008
Shelton, Connecticut
Page 18 of 46
Trudy Corporation
Balance Sheet
March 31, 2008
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Assets |
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Current assets |
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Cash and cash equivalents |
|
$ |
21,256 |
|
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Accounts receivable, net |
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|
1,542,275 |
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Inventory, net |
|
|
1,523,967 |
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Prepaid expenses and other current assets |
|
|
161,921 |
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|
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Total current assets |
|
|
3,249,419 |
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|
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Equipment, net |
|
|
65,341 |
|
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Royalty advances, net |
|
|
138,838 |
|
|
Prepublication costs and other assets, net |
|
|
522,082 |
|
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Intangible assets |
|
|
450,000 |
|
|
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|
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|
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Total Other assets |
|
|
1,176,261 |
|
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Total assets |
|
$ |
4,425,680 |
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|
|
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Liabilities and Shareholders’ Equity (Deficit) |
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Current liabilities |
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Notes payable - Bank & related parties |
|
$ |
2,711,572 |
|
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Accounts payable and accrued expenses |
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|
1,480,379 |
|
|
Deferred Revenue |
|
|
34,000 |
|
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Royalties and commissions payable |
|
|
352,398 |
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|
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|
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Total Current liabilities |
|
|
4,578,349 |
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|
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Total liabilities |
|
|
4,578,349 |
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|
|
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|
|
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Commitments |
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Shareholders’ equity (deficit) |
|
|
|
|
|
Common stock - par value |
|
|
64,131 |
|
|
Paid-in capital |
|
|
7,035,506 |
|
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Accumulated deficit |
|
|
(7,252,306 |
) |
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|
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Total shareholders’ equity (deficit) |
|
|
(152,669 |
) |
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|
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Total liabilities and shareholders’ equity (deficit) |
|
$ |
4,425,680 |
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The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
Page 19 of 46
Trudy Corporation
Statement of Operations
For the Twelve Month Periods Ended March 31, 2008 & March 31, 2007
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Twelve Month Period |
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||||
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||||
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2008 |
|
2007 |
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||
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Net Sales |
|
|
5,922,901 |
|
|
6,270,977 |
|
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Cost of sales |
|
|
3,557,808 |
|
|
3,435,305 |
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Gross profit |
|
|
2,365,093 |
|
|
2,835,672 |
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Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
3,037,495 |
|
|
2,712,170 |
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|
|
|
|
|
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|
Income/(loss) from operations |
|
|
(672,402 |
) |
|
123,502 |
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</ | |||