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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number
March 31, 1998 0-16056
TRUDY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-1007765
- -------------------------------- ------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
353 Main Avenue, Norwalk, Connecticut 06851-1552
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Telephone: (203) 846-2274
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [X] No [ ].
For the year ended March 31, 1998 total revenues for the Company were
$4,977,599. As of June 30, 1998, 331,222,249 shares of Common Stock, $.0001 par
value per share, were outstanding. The aggregate market value, held by
non-affiliates, of shares of the Common Stock, based upon the estimated average
of the bid and ask prices for such stock on that date was approximately
$662,444.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registration Statement on Form S-18
(File Number 33-14379B) are incorporated by reference into Part IV of this
report.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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PART I
ITEM 1. BUSINESS
(a)(1) GENERAL DEVELOPMENT OF BUSINESS.
The Company publishes early juvenile story books and audio-cassettes which are
sold in conjunction with contract manufactured educational toys to the retail
and mail order markets.
The Company 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. As used in this report the term "Company" includes Trudy Corporation
and its Connecticut predecessor, except as the context may otherwise require.
On July 14, 1987, the Company became publicly held through the sale of
100,000,000 shares of Common Stock. On August 24, 1987, the Company's
underwriter exercised its over-allotment option with respect to 12,392,249
additional shares of Common Stock.
In September 1990, Company's management and the Board of Directors decided to
restructure the Company's businesses so as to reduce the level of the Company's
bank and trade debt, overhead and administrative expenses. The restructuring was
achieved by selling off selected assets and by divesting certain business lines.
The Company engaged outside consultants to advise it in its restructuring plans.
By March 1991, three of the Company's four business lines had been divested. In
addition, various incidental equipment was sold to diverse buyers, though no
single sale was material.
The first full year that the Company operated in its restructured capacity as a
publisher was 1993.
During the past year, there have been no bankruptcy, receivership, or similar
proceedings with respect to the Registrant. There has been no merger or
consolidation of the Registrant other than the Registrant's re-incorporation as
a Delaware corporation on February 25, 1987.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Not Applicable.
(c)(1) NARRATIVE DESCRIPTION OF BUSINESS.
The following paragraphs describe in greater detail the business done and
intended to be done by the Registrant.
After the divestiture of most of the corporation's assets during 1991, one small
business segment remained ---the wholly owned publishing subsidiary,
Soundprints. Effective March 1991, the company began doing business as Trudy
Corporation d/b/a Soundprints, hereafter called Soundprints, and consolidated
operations into the parent company. Retroactive to March 31, 1992, the
Soundprints subsidiary was liquidated and the Soundprints division activated.
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The Company holds an exclusive license from the Smithsonian Institution to
utilize the Smithsonian name through the period ending September 30, 2002 in
connection with the sale of realistic wildlife plush, educational toys,
storybooks, and audio cassettes. Under this Agreement, the Smithsonian will not
issue a competing license without first conferring with the Company. Royalties
to be paid to the Smithsonian are 5.0% of net sales on all licensed products.
In October 1994 the Company signed a six year license with The Nature
Conservancy to develop a habitat series of toy/book/tape combinations. The first
four of those habitat titles came to market in the spring of 1997, and their
orientation has been to span across both the educational and the trade markets.
Market reception has been extremely positive as retail turns have exceeded three
times annually as a result of the high perceive value of the $14.95 price point
for a paperback and plush animal. As of Fall 1998, ten Nature Conservancy titles
will have been published.
MARKETING AND SALES
The Company's products are sold to book, toy, and specialty store retailers as
well as book distributors by a commissioned sales force of 70 independent sales
representatives. In addition, the company mails a catalog once a year directly
to consumers, schools, and libraries and receives phone and mail-in orders by an
in house in-bound telemarketing staff. Sales to warehouse clubs continue to be
significant with 35% of the Company's 1998 volume going to the distributor that
services the three chains that comprise this market segment. The Company,
however, has an explicit strategy to develop other more consistent markets over
time.
One such growth category is school book clubs and book fairs where subsidiary
paperback publishing rights to specific titles are sold for the most part to
three customers who purchase significant quantities of related stuffed animals
to accompany each title.
Having discontinued its plush toy sewing operations, the Company concentrates
its warehouse efforts on package assembly of the toy, book, and tape components
for fulfillment to the retail and mail order trade. The fulfillment operation
will become increasingly important as the primary growth area for the company is
the mail order division which contributed 25% of the Company's 1998 volume, up
from 17% in 1997. In addition, the marketing focus of the Company is to expand
its percentage of sales via consumer direct response and telephone sales to
schools and libraries while maintaining sales to resellers.
During 1998 sales to the retail categories, principally book, toy, and specialty
stores were flat or off somewhat from the prior fiscal year. Traditional
aquarium, museum, and zoo stores continued to have a positive impact on sales
due to the themed nature of the Company's products. On the other hand, sales to
independent book sellers have proven to be the most volatile as this class of
trade continues to be affected by the marketing penetration of the large
bookstore chains.
Presently, the Company has no significant international business other than
subsidiary rights sales to French and Korean publishers as well as distributor
sales to Singapore, Australia and Japan. The Company began distribution to
Canada in July 1997 with mixed results.
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Longer term the Company continues to explore strategic partnership opportunities
to obtain synergies in editorial, distribution, and sales to enhance growth and
leverage margins.
MANUFACTURING
The Company produces the majority of its products by subcontracting with a
number of independent toy and printing factories located in Singapore,
Bangladesh, Thailand, and China. These outside manufacturers also perform
certain other functions (for example, the labeling and packaging of product for
final shipment direct to the customer). Three of these manufacturers account for
roughly 95% of the work performed by outside manufacturers. Audiotapes are
duplicated in Bridgeport, CT on a two week turnaround basis which virtually
eliminates the need for large inventories.
The past year has seen the Company shift its plush toy manufacturing away from
Thailand and Indonesia to China. The currency crises in Southeast Asia posed
significant risks to the financial well-being of Thai and Indonesian factories
though there were significant cost savings on plush toy purchases. At the same
time, the currency instability in these countries put pressure on China's
factories to lower stuffed toy costs to remain competitive with Thail and
Indonesian factories. Furthermore, for book purchases, the stronger US dollar
allowed for significant savings on book print orders originating from Singapore
where 60% of the Company's books are produced. Delivery has been satisfactory
from all suppliers.
SEASONALITY
The demand for the Company's retail products is seasonal, with a majority of
sales to retailers occurring during the late summer and early fall in
anticipation of the Christmas season.
CUSTOMERS
One customer accounted for 35.2% of sales in 1998 with this same customer
representing 36.5% in 1997.
BACKLOG
As of March 31, 1998, the Company's order backlog was approximately $472,365. As
of March 31, 1997, the Company's backlog was approximately $143,918. Although
March is typically a slow month for sales in this industry and backlog figures
are volatile and may change dramatically from month to month, the increase in
order backlog from last year is primarily the results of several large orders
placed by the Company's largest customers. Although orders are subject to
cancellation, this happens only rarely.
GOVERNMENT REGULATIONS
Not Applicable.
COMPETITION
Management believes the Company is the leading supplier of licensed realistic
plush toys packaged together with an educational book and audio-cassette. The
Company is not aware of any major competitors in this market at this time,
though there are a few publishers who compete by combining plush toys with
single titles of children's classics or TV promoted licenses. The Company
5
<PAGE>
believes its competitive advantages are its superior design and quality control
capabilities, in addition to the licenses with the Smithsonian and The Nature
Conservancy.
The Company believes that a large percentage of the ultimate purchasers or
recipients of its products are adults who in turn are gift-givers to children.
The Company does not view itself as being strictly a toy company but rather a
multi-media publisher. Nevertheless, the Company experiences some indirect
competition from toy companies and publishers who compete for the same "open to
buy" dollars among wholesalers and retailers.
RESEARCH AND DEVELOPMENT.
Not applicable.
EMPLOYEES
As of March 31, 1998 the Company had 21 full-time employees, all in its Norwalk
facility, consisting of twelve persons in sales and administration, seven in
shipping and handling, and two in editing and graphic design. Seasonal personnel
are hired in the fall to assist with greater volumes in the assembly area and to
handle in-bound telemarketing for the direct response business.
The Company's ability to design, manufacture, market, and sell products depends
in large part on its ability to attract, retain, and motivate highly skilled
personnel, particularly in the product design, publishing, and sales positions.
The Company has upgraded its positions in editorial and sales management in
terms of professionalism and experience level to improve the quality of the
published product and its perceived value to the trade.
Plush and toy product design is largely done by "design rooms" managed by the
Company's overseas' contractors. Storybooks are created through free-lance
authors, illustrators, and graphic designers, working together with the
Company's editorial staff.
(d)(1) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases warehouse and administrative facilities in a 27,000 square
foot building at 353 Main Avenue in Norwalk, Connecticut. The building is
located in an industrial area approximately 50 miles east of New York City. This
facility, first occupied by the Company in July 1996 is owned by a partnership
comprised of the Company's President, a former Vice President, and a Board
Member.
The lease which runs to 2004 provides for annual rent which is representative of
the local market today and holds the Company responsible for payment of taxes
and utilities as well as rent.
The Main Avenue property was purchased and financed independently of Trudy
Corporation. Renovations to the site however required the use of a $300,000
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<PAGE>
installment loan payable over eight years. This bank loan is collateralized with
the Trudy lease contract, as well as a Trudy Corporation guarantee.
The Company believes that its facilities are adequate for all of its foreseeable
requirements.
Trudy Corporation formerly occupied a building at 165 Water Street in Norwalk,
CT which it vacated in early July 1996. Trudy remains obligated as a guarantor
on the industrial revenue bonds used to finance the construction of that
building. At present the building is leased to a 100% owned subsidiary of Timex
Corp under lease terms which run for another three years. The lease payments
provide adequate funds for the payment of principal amortization and interest on
the $ 1,500,000 remaining on the industrial revenue bond used to build the
facility. The interest rate on the bond is adjusted, based upon an index of
short-term tax exempt obligations. The interest rate in effect on June 30, 1998
was 3.85%.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company is a party, or of
which, any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended March 31, 1998 through the solicitation of proxies or
otherwise.
7
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the over-the-counter market
(NASDAQ symbol: TRDY) since July 14, 1987. The following table shows the range
of low bid and high bid quotations for the Company's Common Stock on the NASDAQ
System for the periods indicated, as furnished to the Company by NASDAQ.
FISCAL YEAR 1998 LOW BID HIGH BID
---------------- ------- --------
First Quarter est. .001 .002
(April - June 1997)
Second Quarter est. .001 .002
(July - September 1997)
Third Quarter est. .001 .002
(October - December 1997)
Fourth Quarter est. .001 .002
(January - March 1998)
These quotations represent the Company's best estimate as to stock prices. Since
Trudy is a so-called "penny stock" and de-listed, trading activity has been
limited. The Company's stock will probably remain illiquid until financial
performance improves still further and a market-maker takes a more active
involvement in this stock.
Since its organization, the Company has not paid any dividends on its Common
Stock and its Board of Directors does not contemplate declaring any dividends in
the future. In the past, certain long-term debt agreements with a bank and the
bond guarantee agreement (see Notes 5(b) and 8(a,b)) included restrictive
covenants pursuant to which the Company was restricted from paying any dividends
other than a stock dividend on its own capital stock. The Company intends to
retain future earnings, if any, for use in the Company's business rather than
pay dividends.
8
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data with respect to the
Company for the five years ended March 31, 1998. Note that the financial
information for the fiscal years 1998, 1997, and 1996 has been subjected to a
audit, whereas that for 1995 and 1994 has only been reviewed by outside
auditors. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" at Item 7 and in conjunction with the Company's Financial Statements
and Notes thereto appearing on pages F-2 through F-19 of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------------------------------------------------
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 4,977,599 $ 4,796,410 $ 4,096,219 $ 3,254,256 $ 2,383,639
Income (loss) from operations
before taxes and other charges** $ 78,876 $ 451,795 $ 224,412 $ 278,114 $ 39,987
Income (loss)
per share $ 0.000627 $ 0.001093 $ 0.000999 $ 0.000887 $ 0.000126
Weighted average number of
shares outstanding 324,598,187 321,790,582 318,457,249 318,457,249 318,457,249
FINANCIAL DATA
Total assets $ 2,889,844 $ 2,323,438 $ 2,790,816 $ 1,597,953 $ 1,225,581
Notes payable and
other long term debt $ 698,888 $ 560,003 $ 547,320 $ 130,878 $ 170,326
Stockholders' equity $ 1,483,574 $ 1,272,727 $ 909,051 $ 537,726 $ 255,272
</TABLE>
** Note - does not include the cumulative effect of change in accounting
principle as disclosed in Note 13 to the financial statements.
9
<PAGE>
ITEM 7. 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.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
Net sales for the year ended March 31, 1998 were $4,977,599 as compared with net
sales of $4,796,410 for the year ended March 31, 1997, or an increase of 3.8%.
Direct market catalog sales increased by over 50 % from $810,067 in 1997 to
$1,231,178 in 1998. Sales to mass merchant warehouse clubs were flat year to
year, but remained the largest segment. Sales to the retail booksellers and
special markets declined due to increased competition from the large bookstore
chains.
Cost of sales of $2,780,401 increased from $2,522,688 in the prior year. In
percentage terms to sales, cost of sales increased from 52.6% to 55.9%
principally as a result of increases in fixed costs, amortization of
pre-publication design costs associated with the increased number of titles
published in the last two years, design and editorial costs, and labor and
shipping costs.
Selling, general, and administrative (SG&A) expenses increased from $1,821,927
to $2,118,322. Higher advertising and catalog expenses along with outside
telemarketing costs and sales salaries account for the increase, but position
the Company for continued growth in both the direct mail and trade segments.
Consequently, income from operations of $78,876 was down from $451,795 in 1997.
Interest expense increased to $102,099 from $55,077 in the prior year primarily
to fund increased working capital levels. With an increasing portion of revenues
occurring in the pre-holiday period in the direct mail segment, it was necessary
to increase inventory levels in the summer months in preparation of this period
of heavy demand.
The 1997 results included a non-recurring expense of $124,384 related to the
relocation of the Company's facilities in July 1997. In 1998, the Company posted
a non-recurring gain of $56,320 (net of income taxes) as William Burnham forgave
$96,320 in interest payments due to him on loans made to the Company over the
past several years.
The deferred tax asset of $378,000 at March 31, 1998 increased principally as a
result of expected realization of net operating loss carry-forwards.
Consequently, net income of $203,552 for the period was below last year's level
of $351,676.
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Accounts receivable increased to $321,898 at March 31, 1998 from $173,697 a year
earlier due in part to higher sales levels in February and March compared with
the prior year and also due to a slowing in payments from several wholesale
customers. In 1997 one large customer had paid its account in full by year end.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
Net sales for the year ended March 31, 1997 were $4,796,410 as compared to net
sales of $4,096,219 for the year ended March 31, 1996, or an increase of 17.1%.
The increase in sales was due to the Company's ability to sell into the
specialized areas of the book and education trade, as well as successful
development of the warehouse clubs and theme retailers such as nature and marine
product stores. Additionally, the Company continued to expand its development
efforts and published sixteen new titles in hard cover and introduced sixteen
existing titles in paperback (or other formats). A national bookstore chain
rolled out with chain wide orders based on favorable test results from prior
months.
Cost of sales, at $2,522,688, showed a decrease, both in absolute terms and as a
percentage of revenues such that cost of sales was 52.6% of revenues in 1997,
down from 59.3% or $2,428,007 in 1996. Diversification of overseas vendors,
together with increases in purchased quantities, has helped reduce prices. Paper
prices for book printing fell towards the end of the 1996 with improved margins
realized in 1997 as a result.
The Company expanded its product development in 1997, doubling the number of
titles published to sixteen and introducing two new series - one under the
Smithsonian aegis and one under The Nature Conservancy license. Further, the
process of vendor diversification continues and has begun to yield material
benefits, especially in the area of plush toys.
Selling, general and administrative costs increased by 26.2% to a total of
$1,821,927 in 1997 from $1,443,800 in 1996. SG&A represented approximately 38.0%
of revenues in 1997 compared to 35.2% in the prior year. The Company hired new
staff in the area of sales and editorial during the past twelve months.
Income from operations was up by 101.3% to $451,795 in 1997 compared with
$224,412 in 1996. The profit performance is especially acceptable considering
that the Company has upgraded its staff in the past twelve months, while
maintaining a conservative inventory policy.
Net interest expense for the Company was $55,077 in 1997, up 12.7% from the
$48,884 in 1996. Bank borrowings were up somewhat over the prior year. In large
part this is due to the fact that the seasonality of the business has lessened
in the past year as more non-holiday related sales are concluded. While this
stabilizes our sales profile, another consequence is the need to stock (and
finance) greater inventory levels on a year round basis.
The Company posted a large, non-recurring expense in 1997 to record the cost of
the move to the new location in Norwalk, CT. This expense of $124,384 reflects
the cost of writing off the leasehold improvements at the prior location dating
back to 1988 as well as the small cash cost of moving and setting up the new
building.
Inclusive of the non-recurring expense noted above, the Company continued to
maintain its financial position by generating a net income after tax of $351,676
which is down 5.3% from the $371,325 produced in 1996. Return on sales was 7.3%
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in 1997 compared to 9.1% in the prior years, a decreased yield but very
respectable nevertheless. In 1996 a change in accounting principles relating to
pre-publication costs resulted in over $98,000 of income (before tax effect).
Inventory levels increased in 1997 by approximately $410,000 as the Company
added sixteen new titles and related toys to its stock. Accounts receivable were
$173,697 at March 31, 1997 compared to $924,038 in the prior year. This decrease
was largely attributable to a single account which altered its buying pattern
slightly in 1997 such that all receivables were collected before year end this
year.
Pre-publication costs rose to $351,183 at March 31, 1997, up 56.5% from the
prior year's level of $ 224,435. Pre-publication expenses consist of both
advances on royalties to authors and illustrators, as well as capitalized
expenses for disbursements directly pertaining to the development of books,
toys, or cassette tapes. The capitalized expenses were increased by $126,800 as
a result of an increase in the Company's production of new titles, as well as an
upgrade in editorial quality such that the Company had to pay more for more
professional and experienced talent.
The deferred tax asset of $256,000 at March 31, 1997 rose by $81,000 as a result
of expected realization of net operating loss carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
Demand for the Company's products continues to be strong and the Company is
aggressively developing additional titles. The Company expects to further expand
its direct response catalog efforts.
The seasonality of sales has made credit availability an important issue for the
Company. In March 1998, the Company renewed a bank revolving line of credit of
$1,200,000 and obtained a four-year term loan of $250,000 to finance seasonal
working capital needs, catalog expenses, and system improvements.
In December 1997, the Company made the decision to replace its computer
operating systems, including those for order processing and accounting, to
improve customer service, operating efficiencies, and management information. A
total of $75,000 was spent. In addition, this investment ensured that the
Company would be Year 2000 compliant.
Subsequent to year end, the Company decided to suspend the system conversion
because the selected system did not satisfy all of the Company's operating and
information needs. Another system was chosen and is in the process of being
installed. It too is Year 2000 compliant.
In July 1998, William W. Burnham loaned the Company an additional $28,900 to
fund this second system conversion. The note bears an interest rate of 8% and is
payable in one year. In August 1998, Mr. Burnham loaned the Company $310,000 to
finance short term working capital needs. This note bears an interest rate of 8%
and is due in sixty days. It is necessary for the Company to build inventory
during the summer in anticipation of the large number of direct mail shipments,
which are primarily paid by credit card, in the fall. Shipments to the warehouse
clubs are also heavy in the late summer and early fall, but payment terms for
these customers are sixty days.
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Over the next year, the Company intends to aggressively pursue acquisitions or a
merger. Management believes that it is necessary to increase the Company's size
to achieve a re-listing of the common stock, smooth out seasonality, efficiently
utilize existing fixed overhead, and position the Company for sustained growth.
ITEM 8. FINANCIAL STATEMENTS
See the attached financial reports from accountants.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS
During 1998 there were no disagreements with accountants, nor were there any
changes in the accountants used to audit the Company's financials.
13
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, their positions held in the
Company and their ages are as follows:
NAME AGE POSITION
---- --- --------
Alice B. Burnham 50 Director
William W. Burnham 55 Chairman of the Board of Directors,
President and Treasurer
Peter D. Nalle 51 Director
Fred M. Filoon 57 Director
Elizabeth T. Prial 40 Publisher and Vice President
William T. Carney 44 Vice President and Chief
Financial Officer
Each director is elected to hold office until the next annual meeting of
shareholders and until his successor is elected and qualified. Executive
officers are elected by the Board of Directors and hold office until their
successors are chosen and qualified, subject to earlier removal by the Board of
Directors.
The principal occupations for the past five years of each director and officer
of the Company are as follows:
Alice B. Burnham was elected a director of the Company in October 1994.
As a major shareholder and wife of the President, she had long been familiar
with the workings of the Company. Mrs. Burnham manages her own business in New
Canaan, CT. and is active in civic affairs. Mrs. Burnham received her degree
from Briarcliff College.
William W. Burnham has been President and a director of the Company
since 1979. Mr. Burnham served as Group Director of Marketing at Pepsico, Inc.
from 1976 to 1979. From 1972 to 1976, Mr. Burnham served as the Director of
Advertising and Sales Promotion at Vlasic Foods. Mr. Burnham received a B.S.
from Trinity College and an M.B.A. from Columbia University. See "CERTAIN
TRANSACTIONS."
Peter D. Nalle was named a director of the Company in September 1996.
Mr. Nalle has years of experience in the publishing industry having worked for
McGraw-Hill and later for Lippincott and for Simon & Schuster. More recently,
Mr. Nalle was Chief Operating Officer of Grolier, Inc. He received his degree
from Brown University.
Fred Filoon was named a director of the Company in January 1993. Mr.
Filoon has thirty years of experience in the investment and financial community
having worked for Donaldson, Lufkin & Jenrette as well as Morgan Stanley in New
York. Currently, he is a partner with Cramer, Rosenthal & McGlynn. Mr. Filoon
received his B.A. from Bowdoin College.
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Elizabeth Prial was elected Vice President of Sales in October 1994
after serving for three years as Director of Sales. In 1996 Ms. Prial became
Publisher for the Company. Prior to joining the Trudy Corporation she worked in
juvenile publishing with Warner Books, Putnam, and others. Mrs. Prial attended
the New York Fashion Institute of Design.
William T. Carney was named Vice President and Chief Financial Officer
on March 23, 1998. Mr. Carney replaced Peter P. Ogilvie who left the Company on
March 31, 1998. Mr. Carney has held various financial management positions with
Pechiney/American National Can and Ford Motor Company. Mr. Carney received an
A.B. from Dartmouth College and an M.B.A. from the Wharton School.
ITEM 11. EXECUTIVE COMPENSATION
In 1998 no employee of the Company received compensation exceeding $100,000.
William W. Burnham, the President and Chief Executive Officer, received cash
compensation totaling $78,517.
The Company has not entered into employment agreements with any of its
executives.
Mr. Burnham is entitled to reimbursement for business-related expenses and
severance benefits in the event of termination of his employment. Additionally,
Mr. Burnham is provided with medical insurance as a part of his compensation
package.
STOCK OPTIONS
On March 3, 1987, both the Board of Directors and shareholders of the Company
adopted the 1987 Stock Option Plan (the "Plan"). The Plan provides that options
granted thereunder are intended to qualify either as "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986 (the
"Code") or non-qualified options.
The Plan is administered by the Board of Directors. The Company has reserved
22,500,000 shares of Common Stock for issuance to employees, officers,
directors, and outside consultants of the Company under the Plan. Under the
Plan, the Board of Directors determines which participants shall receive
options, the time period during which the option may be partially or fully
exercised, the number of shares of Common Stock that may be purchased under each
option, and the option price. The per share exercise price of the Common Stock
subject to the option may not be less than the fair market value of the Common
Stock on the date the option is granted. The aggregate fair market value
(determined as of the date the option is granted) of the Common Stock that any
person may purchase in any calendar year pursuant to the issuance of incentive
stock options in any calendar year may not exceed $100,000 plus any "unused
limit carryover," within the meaning of Section 442A(c)(4) of the Code,
available to such person in such year. Options under the Plan must be granted
within ten years from the effective date of the Plan. The exercise of options
granted under the Plan cannot exceed ten years from the date of grant. No person
who owns, directly or indirectly, at the time of the granting of an option to
him, more than 10% of the total combined voting power of all classes of stock of
the Company shall be eligible to receive any options under the Plan unless the
option price is at least 110% of the fair market value of the Common Stock
subject to the option, determined on the date of grant.
15
<PAGE>
No option may be transferred by an optionee other than by will or the laws of
descent and distribution, and during the lifetime of an optionee the option will
be exercisable only by him. In the event of termination of employment other than
by death or disability, the optionee will have three months after such
termination within which to exercise the option to the extent it was exercisable
at the date of such termination. Upon termination of employment of an optionee
by reason of death or permanent total disability, his option remains exercisable
for one year thereafter to the extent it was exercisable on the date of such
termination.
As of March 31, 1998, 14,680,000 shares were subject to outstanding options.
Peter P. Ogilvie exercised his options on 6,765,000 shares on March 23, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1998, certain information with
respect to the beneficial ownership of the Common Stock by each person known by
the Company to be the beneficial owner of more than 5% of the outstanding Common
Stock. Except as otherwise noted, the shareholders listed in the table have sole
voting and investment powers with respect to the shares indicated. As of March
31, 1998, the Company had 1483 stockholders of record.
Name and Address of Amount and Nature of Percentage of
Beneficial Owner Beneficial Ownership Class
------------------- -------------------- ------------
William W. Burnham 111,090,000 33.5%
353 Main Avenue
Norwalk, CT 06851
Peter B. Burnham 35,410,000 10.7%
Petersham, MA
Alice B. Burnham 61,500,000 18.6%
353 Main Avenue
Norwalk, CT 06851
Note - The percentages given for each individual assume that options or warrants
over which the individual has voting power have been exercised, but no other
options or warrants have been exercised.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased its former office and manufacturing facility in Norwalk,
Connecticut from Norwest Management Company (the "Partnership"). William W.
Burnham and Peter B. Burnham each own a 50% interest in the Partnership. The
Company vacated these premises in July 1997 for less expensive space at 353 Main
Avenue in Norwalk, CT.
16
<PAGE>
As regards the Water Street property, the Company has guaranteed any deficiency
in the Partnership's repayment of an industrial revenue bond issued in
connection with the Partnership's acquisition of the building leased to the
Company. As of March 31, 1998, $1,500,000 remained outstanding on the bond,
which is due in annual installments through September 1, 2009. William W.
Burnham and Peter B. Burnham have indemnified the Company for any liability
which the Company might incur as a result of the guaranty. In addition, these
individuals have agreed to pledge to the Company a portion of their Common Stock
of the Company equal to 150% of the then outstanding principal balance of the
bond in order to secure this indemnification.
As regards the Main Avenue property, the building is owned by a Connecticut
limited liability corporation, Noreast Management LLC, which is owned jointly by
William W. Burnham, Peter P. Ogilvie, and Fred Filoon. To effect refurbishment
on this building, Noreast Management borrowed $300,000 as an eight year loan
from a local bank. This loan was secured by personal guarantees from both Mr.
Burnham and Mr. Ogilvie, an assignment of the lease, and a guarantee by Trudy
Corporation.
In previous years, the Company had borrowed an aggregate of $454,729 from
William W. Burnham, Peter B. Burnham and members of their families. The loans
bear interest at the rate of 10% per annum. On March 31, 1987, the note holders
contributed to the Company's capital an aggregate of $374,205 of these notes
payable. The balance of $80,525 in demand loans was converted to five-year term
loans with interest payments quarterly in arrears at the greater of 10% per
annum or the applicable Federal rate. Interest accruals aggregating $20,801 have
further increased the indebtedness to $101,326. These notes remain outstanding
as no payments have been made. The President considers these notes long-term.
As of March 31, 1998 the Company has borrowed an aggregate of $368,047 in cash
advances from William W. Burnham to finance inventory purchases and catalog
printing. This total is comprised of promissory notes which bear interest at the
rate of 12% per annum. The notes are secured with a pledge of all of the
Company's inventory, accounts receivable, and equipment. On March 31, 1998, Mr.
Burnham forgave the unpaid accrued interest, totaling $96,320, on these notes.
In July and August, 1998, William W. Burnham made additional loans to the
company totaling $338,900 to fund an investment in a new computer system and
seasonal working capital requirements. The note for the computer system is for
$28,900 and bears an interest rate of 8%. It is due in July 1999. The note for
the working capital totals $310,000 and bears an interest rate of 8%. It is due
in October 1998.
17
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a)(1) FINANCIAL STATEMENTS Page
----
Independent Auditors' Report........................................F-1
Balance Sheets, March 31, 1998 and 1997.............................F-2
Statement of Income and Deficit, years
ended March 31, 1998 and 1997 ....................................F-3
Statements of Cash Flows, years
ended March 31, 1998 and 1997.....................................F-4
Notes to Financial Statements................................F-5 - F-19
Schedules not listed have been omitted because they are not required, are
inapplicable, or the required information has been given in the financial
statements or notes thereto.
(b) REPORTS ON FORM 8-K
Not Applicable
(c) EXHIBITS
The following documents are incorporated by reference to the Company's
registration statement on Form S-18 (file number 33-14379B):
3a. Certificate of Incorporation
3b. Certificate of Amendment of Certificate of Incorporation
3c. By-laws of Company
3d. Certificate of Incorporation of Norwest Manufacturing Company
3e. Certificate Amending Certificate of Incorporation of Norwest Manufacturing
Company dated December 5, 1979
3f. Certificate Amending Certificate of Incorporation of Trudy Toys Company,
Inc. dated March 27, 1984
10. Material contracts
18
<PAGE>
ABRAMS AND COMPANY, P.C.
- --------------------------------------------------------------------------------
Certified Public Accountants
Suite 4 South 1
One Huntington Quadrangle
Melville, N.Y. 11747-4406
INDEPENDENT AUDITORS' REPORT
To The Stockholders
Trudy Corporation
Norwalk, Connecticut
We have audited the accompanying balance sheets of Trudy Corporation as of March
31, 1998 and 1997 and the related statements of income and deficit and cash
flows for each of the three years in the period ended March 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 as of March
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles.
As explained in Note 13 to the financial statements, as of April 1, 1995, the
Company changed its method of accounting for pre-publication costs.
June 26, 1998, except as to Note 18a, the dates of which are July 10, 1998 and
August 5, 1998
F-1
<PAGE>
TRUDY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets
Cash $ -- $ 2,939
Accounts receivable 321,898 173,697
Inventories 1,574,901 1,404,590
Prepaid expenses and other current assets 84,596 68,480
Prepaid income taxes 21,134 1,010
Deferred income taxes 59,000 40,000
----------- -----------
Total current assets 2,061,529 1,690,716
----------- -----------
Plant and equipment (net) 129,769 65,539
Pre-publication costs and royalty advances 379,546 351,183
Deferred income taxes 319,000 216,000
----------- -----------
TOTAL ASSETS $ 2,889,844 $ 2,323,438
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Checks drawn in excess of cash balances $ 23,517 $ --
Accounts payable and accrued expenses 295,176 345,708
Current portion of long-term debt 49,350 11,647
Current portion of notes payable to related parties
and accrued interest 287,612 368,047
----------- -----------
Total current liabilities 655,655 725,402
Bank note payable 388,689 145,000
Long-term debt 200,650 29,166
Notes payable to related parties 161,276 151,143
----------- -----------
TOTAL LIABILITIES 1,406,270 1,050,711
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock, par value $.0001;
850,000,000 shares authorized;
331,222,249 (1998) and 324,457,249 (1997)
shares issued and outstanding 33,123 32,446
Capital in excess of par value 4,000,316 3,993,698
Accumulated deficit (2,549,865) (2,753,417)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,483,574 1,272,727
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,889,844 $ 2,323,438
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
TRUDY CORPORATION
STATEMENTS OF INCOME AND DEFICIT
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 4,977,599 $ 4,796,410 $ 4,096,219
------------- ------------- -------------
Operating costs and expenses (exclusive of depreciation)
Cost of sales 2,780,401 2,522,688 2,428,007
Selling, general and administrative 2,118,322 1,821,927 1,443,800
------------- ------------- -------------
4,898,723 4,344,615 3,871,807
------------- ------------- -------------
Income from operations 78,876 451,795 224,412
------------- ------------- -------------
Other income (expense)
Other income 35,904 11,976 17,979
Relocation expense -- (124,384) --
Interest expense, net (102,099) (55,077) (48,884)
Depreciation (17,449) (13,634) (20,211)
------------- ------------- -------------
(83,644) (181,119) (51,116)
------------- ------------- -------------
(Loss) Income before benefit for income taxes (4,768) 270,676 173,296
------------- ------------- -------------
Income tax benefit 152,000 81,000 144,761
------------- ------------- -------------
Income before extraordinary item and
cumulative effect of change in accounting principle 147,232 351,676 318,057
Extraordinary item (net of income taxes of $40,000) 56,320 -- --
Cumulative effect of change in accounting principle
(net of income taxes of $45,376) -- -- 53,268
------------- ------------- -------------
NET INCOME $ 203,552 $ 351,676 $ 371,325
Deficit - beginning of period (2,753,417) (3,105,093) (3,476,418)
------------- ------------- -------------
DEFICIT - END OF PERIOD $ (2,549,865) $ (2,753,417) $ (3,105,093)
============= ============= =============
Basic net (loss) income per share:
Income before extraordinary item and
cumulative effect of change in accounting principle $ 0.000454 $ 0.001093 $ 0.000999
Extraordinary item 0.000173 -- --
Cumulative effect of change in accounting principle -- -- 0.000167
------------- ------------- -------------
BASIC NET (LOSS) INCOME PER SHARE $ 0.000627 $ 0.001093 $ 0.001166
============= ============= =============
WEIGHTED AVERAGE OF NUMBER OF SHARES OUTSTANDING 324,598,187 321,790,582 318,457,249
============= ============= =============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
TRUDY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 203,552 $ 351,676 $ 371,325
Adjustments to reconcile income to net cash
provided by operating activities
Extraordinary item (56,320) -- --
Cumulative effect of change in accounting principle -- -- (53,268)
Amortization of pre-publication costs 107,137 90,715 30,556
Depreciation 17,449 13,634 20,211
(Gain)/Loss on disposal of property, plant and equipment (300) 131,777 (4,110)
Provision for losses on accounts receivables 45,157 35,474 64,553
Compensation -- 12,000 --
Deferred income taxes (162,000) (81,000) (145,376)
Changes in current assets and current liabilities
Accounts receivable (193,358) 714,867 (527,043)
Inventories (170,311) (410,333) (310,927)
Prepaid expenses and other current assets (16,116) 77,709 (55,634)
Prepaid income taxes (20,124) -- --
Accounts payable and accrued expenses (50,532) (443,487) 365,734
--------- --------- ---------
NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES (295,766) 493,032 (243,979)
--------- --------- ---------
Cash flows from investing activities
Pre-publication and royalty advances (135,500) (217,463) (51,846)
Additions to plant and equipment (81,679) (30,264) (21,362)
Proceeds from sale of equipment 300 -- 4,110
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (216,879) (247,727) (69,098)
Cash flows from financing activities
Change in short-term borrowings (105,598) (400,251) 401,525
Proceeds from issuance of loans - long-term 648,822 28,288 60,133
Repayment of loans - long-term (40,813) (15,605) (5,854)
Proceeds from exercise of stock options 7,295 -- --
--------- --------- ---------
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 509,706 (387,568) 455,804
--------- --------- ---------
Net change in cash (2,939) (142,263) 142,727
Cash, beginning of year 2,939 145,202 2,475
--------- --------- ---------
CASH, END OF YEAR $ -- $ 2,939 $ 145,202
========= ========= =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The Company designs, manufactures, and markets plush stuffed animals
and publishes children's books and audiocassettes for sale to both
retail and wholesale customers. All Company product is sold under the
"doing business as" name of Soundprints since the corporate
restructuring of the early 1990's.
REVENUE RECOGNITION
Sales are recognized when goods are shipped. Certain publishing
products are sold to the customer with a right of return. Customers
have no right of return on plush. For those sales where the customer
has the right of return of books, revenues from such sales represent
gross sales less a provision for future returns. Returned goods
included in inventory are valued at estimated realizable value, not
exceeding cost.
INVENTORIES
Inventories are stated at the lower of cost, on a FIFO basis, or
market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are
amortized over the lesser of the lease term or the useful life using
the straight-line method.
PRE-PUBLICATION COSTS AND ROYALTY ADVANCES
Pre-publication costs, including the costs for separations, recordings
and copyright fees, are amortized generally over a five-year period
using the sum-of-the-year's-digits method.
Prepaid advances on royalties are amortized as the books are sold, or
five years, whichever is less.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
F-5
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
ADVERTISING COSTS
Advertising costs are expensed as incurred, except for catalogs and
brochures which are all amortized over the period benefited not to
exceed the publication date of the new brochure or twelve months,
whichever is less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments
including cash, accounts receivable, inventories, prepaid advances, and
other current assets, accounts payable and accrued expenses approximate
fair value due to the short-term maturity of the instruments.
Pre-publication costs and royalty advances, bank note payable, and
other debt approximate the carrying value.
Deferred tax assets are reduced by an appropriate valuation allowance
if it is management's judgment that part of the deferred tax asset will
not be realized. Tax credits are accounted for as reductions of the
current provision for income taxes in the year in which the related
expenditures are incurred.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded to
reflect the tax benefit and consequences of future years' differences
between the tax bases of assets and liabilities and their financial
reporting amounts.
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be disposed of," was issued ("SFAS 121"). SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held
and used or disposed of by an entity be reviewed for impairment
whenever events of changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has adopted this
statement and determined that no impairment loss need be recognized for
applicable assets.
F-6
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock.
BASIC NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128") which requires presentation of basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS") by
all entities that have publicly-traded common stock or potential common
stock (options, warrants, convertible securities, or contingent stock
arrangements). SFAS 128 also requires presentation of earnings per
share by an entity that has made a filing or is in the process of
filing with a regulatory agency in preparation for the sale of those
securities in a public market.
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation
of dilutive EPS does not assume conversion, exercise, or contingent
exercise of securities that would have an antidilutive effect on
earnings.
CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
F-7
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable $ 353,259 $ 213,697
Less: Allowance for doubtful accounts (31,361) 40,000
----------- -----------
Ending Balance $ 321,898 $ 173,697
=========== ===========
The changes in the allowance for doubtful accounts
are as follows:
1998 1997
----------- -----------
Beginning balance $ 40,000 $ 27,240
Provision for doubtful accounts 45,157 35,474
----------- -----------
85,157 62,714
Less: Write-offs (53,796) (22,714)
----------- -----------
Ending Balance $ 31,361 $ 40,000
=========== ===========
3. INVENTORIES
Inventories are summarized as follows:
1998 1997
----------- -----------
Raw material $ 50,880 $ 24,324
Finished goods 1,524,021 1,380,266
----------- -----------
TOTAL $ 1,574,901 $ 1,404,590
=========== ===========
</TABLE>
Inventory was reduced for slow-moving items for 1998, 1997, and 1996 by
approximately $50,000, $42,000, and $32,000, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Included in prepaid expenses and other current assets are prepaid
catalogs and brochures approximating $53,000 (1998) and $42,000 (1997).
F-8
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS
(a) LAND AND BUILDING
As of March 31, 1996 and through July 1996, the Company leased its land
and building from Norwest Management, a partnership owned equally by
the president and his brother. The provisions of the 25-year lease,
expiring in 2009 between Trudy and Norwest, called for monthly payments
sufficient to pay all amounts due under a bond purchase agreement among
the Connecticut Development Authority, Norwest, and Trudy.
Subsequently, the terms were amended (see succeeding paragraph). The
bonds bear interest at a variable rate (3.70% at March 1995). Proceeds
of these bonds were used to construct the building. Effective April 1,
1988, the terms of the lease were modified such that Trudy would
receive a first right of refusal, valid for the term of the lease, to
purchase the land and building at 95% of the then fair-market value. In
addition, monthly rental payments would be limited to the greater of
95% of the fair-market rental of the lease property, determined at the
commencement of each fiscal year, or all amounts due under the bond
agreement.
As of July 1996, the majority tenant exercised its option to occupy the
entire building for the next four-and-one-half years. As a result, the
Company relocated all of its operations.
(i) CONTINGENCY
Trudy is a guarantor of a $1,500,000 letter of credit issued
by Citibank on behalf of Norwest. This letter of credit was
issued to support the sale of $3,000,000 of industrial
development bonds, the proceeds of which were used to finance
the construction of Trudy's facility.
The original letter of credit, which is used to ensure payment
of the bond, expired in late September 1994 and was renewed by
Citibank for a five-year term. As part of the renewal process
all corporate covenants were dropped from the new letter of
credit.
The president and a former director of Trudy are also personal
guarantors of the bond issue and have indemnified Trudy for
any liability which Trudy might incur as a result of Trudy's
guaranty. In addition, these individuals have pledged a
portion (as determined by the current stock price) of their
common shares as additional collateral. At March 31, 1998, the
individuals have pledged 100% of their shares. Pursuant to the
terms of this bond purchase agreement, Trudy is restricted
from declaring or paying dividends.
F-9
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(ii) RENT
The Company leases warehouse, administrative, and support
facilities in a 26,000 square foot building at 353 Main Street
in Norwalk, Connecticut. The building is owned by a limited
liability company, the owners of which are the Company's
president, a former member of management, and a director of
the Company.
Future minimum rental commitments, excluding taxes, insurance
and utilities, under the revised leases are $110,000 per year
through 2004, and then $57,000 through 2009.
Rent expense for office and factory was approximately $30,000
and $76,000 respectively in 1998; $31,200 and $72,800 in 1997,
and an aggregate of $42,000, excluding taxes, insurance, and
utilities in 1996.
The eight-year lease on the new premises requires that real
estate taxes, repairs, and utilities be paid by the Company.
Minimum annual rentals are as follows:
1999 $ 110,000
2000 110,000
2001 110,000
2002 110,000
2003 110,000
Thereafter 395,000
------------
$ 945,000
============
The Company is a guarantor on an installment loan made to the
limited liability company. At March 31, 1998, the balance of
the installment loan approximated $238,000.
F-10
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(b) NOTES PAYABLE AND EXTRAORDINARY ITEM
Notes payable to related parties are to the president (short-term) and
his family (long-term), and bear interest at 8 to 12% per annum, or the
applicable Treasury note rate, with principal payments due in future
years. There are no definite repayment terms for the long-term portion.
As of March 31, 1998, the president agreed to forgive the approximately
$96,000 of interest on his loan. Accordingly, such amount, net of
related income taxes is reflected as an extraordinary item.
1998 1997
---------- ----------
Notes payable $ 448,888 $ 519,190
Less: Current maturity (287,612) (368,047)
---------- ----------
TOTAL $ 161,276 $ 151,143
========== ==========
The long-term obligation includes principal of $101,326 and accrued
interest approximating $60,000 and $50,000 in 1998 and 1997,
respectively.
Interest expense on related party notes, which is only being charged on
the long-term debt approximated $10,000 for each of the three years,
1998, 1997, and 1996.
6. PLANT AND EQUIPMENT AND RELOCATION COST
(a) PLANT AND EQUIPMENT
Plant and equipment consist of the following:
1998 1997
---------- ----------
Machinery and equipment $ 343,806 $ 262,128
Furniture and fixtures 34,630 35,601
---------- ----------
378,436 297,729
Less: Accumulated depreciation
and amortization (248,667) (232,190)
---------- ----------
TOTAL $ 129,769 $ 65,539
========== ==========
(b) RELOCATION COST
The relocation cost consists primarily of the write-off of leasehold
improvements related to the Company's former facility.
F-11
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. PRE-PUBLICATION COSTS AND ROYALTY ADVANCES
Pre-publication costs and royalty advances consist of the following:
1998 1997
----------- -----------
Royalties advances (net) $ 79,353 $ 52,331
----------- -----------
Pre-publication costs 577,818 495,712
Less: Accumulated amortization of
pre-publication costs (277,625) (196,861)
----------- -----------
300,193 298,851
----------- -----------
$ 379,546 $ 351,182
=========== ===========
8. NOTES PAYABLE AND LONG-TERM DEBT
(a) NOTES PAYABLE - BANK
On July 14, 1997, the Company entered into a loan agreement which
provides for a line of credit of $1,200,000. The agreement contains
restrictive covenants including, but not limited to, tangible net worth
(as defined) and indebtedness.
The borrowing base is limited to the lesser of the stated line of
credit or the "Maximum Principal Amount," as defined.
Interest on the notes outstanding, $388,689 at March 31, 1998, under
the line of credit is at the Bank's prime rate (8.5% at March 31, 1998)
plus 0.5%. The note is payable in monthly installments of accrued
interest only until fully paid. In any event, all principal and accrued
interest shall be due and payable on April 30, 1999.
The loan is collateralized by the assets of the Company and personal
guarantees of certain shareholders.
The weighted average interest rate at March 31,1998 approximated 9.0%
and 8.5% at March 31, 1997.
F-12
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(b) LINE OF CREDIT
The Company's letter of credit facility is $300,000, of which $252,000
is unused at March 31, 1998.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Bank notes payable
8 3/4% note payable in monthly
installments of $6,207 including
interest beginning May 1, 1998
through April 30, 2002. $ 250,000 $ --
Prime rate (8.5% at March 31, 1997)
plus 1%, due January 1, 2000,
payable in 60 monthly installments
of $833 plus interest. -- 39,167
Prime rate plus 0.5%, due September 1, 1997,
payable in monthly installments of $278 plus
interest. -- 1,646
---------- ----------
TOTAL 250,000 40,813
Less: Current maturity (49,350) (11,647)
---------- ----------
$ 200,650 $ 29,166
========== ==========
</TABLE>
Maturity of long-term debt is as follows:
1999 $ 49,350
2000 59,267
2001 64,584
2002 70,555
2003 6,244
----------
TOTAL $ 250,000
==========
F-13
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable and accrued expenses are the following:
1998 1997
--------- ---------
Accrued wages and related taxes $ 34,270 $ 34,118
Customer credit balances 8,453 11,753
--------- ---------
$ 42,723 $ 45,871
========= =========
10. INCOME TAXES
The Company's tax benefit is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
Current - State $ 10,000 $ -- $ 615
Deferred - Federal (162,000) (81,000) (145,376)
------------ ------------- -----------
$ (152,000) $ (81,000) $ (144,761)
============ ============= ===========
The benefit for income taxes varies from the amount computed by
applying the U.S. Federal income tax rate to income before
extraordinary item and cumulative effect of accounting change, as
follows:
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
Provision for income taxes,
computed at expected statutory rate (39.0)% 39.0% 39.0%
State income tax net of federal benefit 138.4 -- --
Effect of graduated rate on
statutory rate (85.6) (10.6) (10.0)
Utilization of net operating loss (332.6) (58.4) (112.5)
------------ ------------- ----------
TOTAL (318.8)% (30.0)% (83.5)%
============ ============= ==========
The deferred tax assets consisted of:
1998 1997
------------ -------------
<S> <C> <C>
Reserves and accruals $ 65,000 $ 90,000
Tax loss carry-forwards 1,061,000 1,238,000
------------ -------------
Total 1,126,000 1,328,000
Less: Valuation allowance (748,000) (1,072,000)
------------ -------------
TOTAL $ 378,000 $ 256,000
============ =============
Current portion $ 59,000 $ 40,000
Non-current 319,000 216,000
------------ -------------
TOTAL $ 378,000 $ 256,000
============ =============
</TABLE>
F-14
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
In accordance with SFAS 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or
all of the deferred tax asset will not be realized. The valuation
allowance decreased by $292,000 in 1998 and $125,000 in 1997.
The Company has net operating loss carry-forwards approximating
$2,524,000 that may be used to offset future taxable income.
Net operating losses expire as follows:
YEAR AMOUNT
---- -----------
2004 $ 539,000
2005 157,000
2006 1,246,000
2007 324,000
2008 258,000
-----------
$ 2,524,000
===========
11. CONCENTRATION OF CREDIT RISK
(a) LICENSE AGREEMENT
On June 17, 1997, the Company executed the "Smithsonian/Soundprints
Agreement," which superseded the 1988 agreement, whereby the
Smithsonian granted a personal and non-transferable license to utilize
the names "Smithsonian Institution" and "Smithsonian" for products and
purposes as defined in the agreement. The agreement expires on
September 30, 2002.
The agreement further provides, among other matters, for royalties on
sales by the Company. The royalties are subject to certain minimum
amounts, which vary throughout the term of the contract.
Sales with the Smithsonian name approximated 90% in 1998, 94% in 1997,
and 92% in 1996.
F-15
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(b) MAJOR CUSTOMERS
Major customers accounted for approximately the following sales:
# of customers %
--------------------- ----------------
1998 1 35
1997 1 37
1996 2 44
(c) MANUFACTURING
The Company produces the majority of its products by subcontracting
with a number of independent plush and printing factories located in
Bangladesh, Thailand, and China. The Company settles their accounts in
U.S. dollars. These outside manufacturers also perform certain other
functions (for example, the labeling and packaging of product for final
shipment direct to the customer). Three of these manufacturers from
Singapore, Indonesia, and Thailand account for 95% of the work
performed by outside manufacturers.
12. OTHER INCOME AND OTHER FINANCIAL DATA
(a) OTHER INCOME
Components of other income are as follows:
1998 1997 1996
--------- --------- ---------
Royalty income $ 29,091 $ 7,845 $ 11,869
Income from list rental 6,926 4,131 --
Commission income -- -- 4,110
Gain on sale of equipment 300 -- 2,000
Other (413) -- --
--------- --------- ---------
$ 35,904 $ 11,976 $ 17,979
========= ========= =========
(a) INTEREST EXPENSE
Interest expense in 1998, 1997, and 1996 is net of interest income of
$6,803, $24,039, and $9,499 respectively.
F-16
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(b) SALES
Included in sales in 1996 is approximately $56,000 related to a
reduction of a previously recorded obligation which is no longer
considered due.
(c) ADVERTISING COSTS
Advertising costs approximated $76,000, $13,000, and $17,000 in 1998,
1997, and 1996, respectively.
13. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In 1996, the Company changed the components of pre-publication costs by
including all direct costs associated with such costs. These costs
include author, illustrator and narrator fees, separation, studio, and
tape costs. Further, the Company changed its method of amortization of
such costs from a straight-line method over a one-and-a-half-year
period to the sum of the years' digits method over a four-year period.
Management believes that the change in methods more accurately reports
the financial results of the Company's operations and reflects the
methods used by other companies in the industry.
14. STOCK OPTION AGREEMENTS AND STOCKHOLDERS' EQUITY
(a) STOCK OPTION AGREEMENTS
On March 3, 1987, the Company adopted a stock option plan ("the Plan").
The Company has reserved 22,500,000 shares of common stock for issuance
to employees, officers, directors, and outside consultants under the
Plan. Unless otherwise provided in the specific option grant, the
options terminate upon termination of employment or the tenth
anniversary of the effective date of the option, whichever comes
earlier. At March 31, 1998, $96,500 of options are available for grant.
F-17
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
A summary of options under the Company's Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE AGGREGATE
SHARES PER SHARE PRICE
------------ -------------- -----------
<S> <C> <C> <C>
Outstanding at March 31, 1996 21,123,500 .001 - .002 $ 23,315
Options issued in 1997 480,000 .002 960
------------ -----------
Outstanding at March 31, 1997 21,603,500 24,275
Options exercised (6,765,000) .001 (6,765)
Options terminated (158,500) .008 - .015 (1,820)
------------ -----------
Outstanding at March 31, 1998 14,680,000 .001 - .002 $ 15,690
============ ===========
</TABLE>
The shares become exercisable on such dates and during such periods and
for such number of shares as determined pursuant to the provisions of
the instrument evidencing each option. 14,680,000 shares were
exercisable at March 31, 1998.
The weighted average exercise price at March 31, 1997 was $0.001.
The effect on net income and earnings per share, if SFAS 123 had been
applied, is not material.
(b) STOCKHOLDERS' EQUITY
(1) In connection with the exercise of the 6,765,000 shares,
capital stock increased by $677 and paid-in capital increased
by $6,619.
(2) In 1997, the Board authorized the issuance and distribution
of 6,000,000 shares of stock as part of the Company's ongoing
program of incentive compensation. Both the stock options and
the stock issuance were valued at an estimated market value
of $0.002 per share. Accordingly, $12,000 of compensation has
been reflected in the financial statements as a charge to
operations, par value of outstanding shares increased by
$600, and capital in excess of par value increased by
$11,400.
F-18
<PAGE>
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES
Sales under various agreements are subject to royalties ranging from 5%
to 8.5% of net sales of licensed products. Certain of these agreements
call for minimum royalty payments. At March 31, 1998, aggregate minimum
royalty commitments under all licensing agreements totaled
approximately $100,000. Historically, the Company has exceeded the
minimum amounts due.
16. SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997 1996
----------- ------------ ------------
Taxes paid $ 35,957 $ nil $ nil
=========== ============ ============
Interest paid $ 85,003 $ 66,283 $ 21,679
=========== ============ ============
NON-CASH TRANSACTIONS FROM OPERATING ACTIVITIES
In 1997 the Company issued 6,000,000 shares of stock to directors,
employees, and employee-directors valued at $12,000 ($0.002 per share).
(See Note 14(b).)
17. RECLASSIFICATIONS
Certain reclassifications were made to the 1997 and 1996 financial
statements to conform to those used in 1998.
18. SUBSEQUENT EVENTS
a) On July 10, 1998, the President loaned the Company $28,900 at 8%
to acquire additional computer equipment, and on August 5, 1998, a
$310,000 working capital loan at 8%. The loans are due in July
1999 and October 1998, respectively.
b) The Company agreed to convert its software and at the same time
address the Year 2000 compliance. Costs incurred, through March
31, 1998, in connection with such conversion approximated $48,000.
Subsequent to March 31, 1998, the Company decided to cancel the
current conversion and substitute another software system.
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRUDY CORPORATION
By: /s/ WILLIAM W. BURNHAM
----------------------------------
William W. Burnham, President
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant on the dates indicated.
/s/ WILLIAM W. BURNHAM Chairman of the Board, August , 1998
------------------------ President and Treasurer
William W. Burnham
/s/ ALICE B. BURNHAM Director August , 1998
----------------------
Alice B. Burnham
/s/ FRED M. FILOON Director August , 1998
----------------------
Fred M. Filoon
/s/ PETER D. NALLE Director August , 1998
------------------------
Peter D. Nalle
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations
(unaudited).
</LEGEND>
<CIK> 0000815098
<NAME> Trudy Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 321,898 <F1>
<ALLOWANCES> 0
<INVENTORY> 1,575,901
<CURRENT-ASSETS> 2,061,529
<PP&E> 129,769 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,889,844
<CURRENT-LIABILITIES> 655,655
<BONDS> 750,615
0
0
<COMMON> 33,123
<OTHER-SE> 1,450,451
<TOTAL-LIABILITY-AND-EQUITY> 2,889,844
<SALES> 4,977,599
<TOTAL-REVENUES> 4,977,599
<CGS> 2,780,401
<TOTAL-COSTS> 4,898,723
<OTHER-EXPENSES> (18,455)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,099
<INCOME-PRETAX> (4,768)
<INCOME-TAX> (152,000)
<INCOME-CONTINUING> 147,232
<DISCONTINUED> 0
<EXTRAORDINARY> 56,320
<CHANGES> 0
<NET-INCOME> 203,552
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<FN>
<F1> The values for Receivables and PP&E represent net amounts.
</FN>
</TABLE>
