SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
Commission File No. 0-16056
TRUDY CORPORATION
353 Main Avenue
Norwalk, Conn. 06851
Incorporated in the State of DELAWARE
Federal Identification No. 06-1007765
Telephone: (203) 846-2274
Trudy Corporation has filed all reports required to be filed by section 13 or 15
(d) of the Securities Act of 1934 during the preceding twelve months and has
been subject to such filing requirements for the past year.
SHARES OUTSTANDING AT
June 30, 1999
Common Stock, $.0001 par value 331,222,249 shares
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TRUDY CORPORATION
INDEX PAGE NUMBER
PART I. FINANCIAL INFORMATION
Balance Sheets - June 30, 1999 (unaudited) and March 31, 1999.............2
Statements of Operations (unaudited) for the three months ended
June 30, 1999 and June 30, 1998..................................3
Statements of Cash Flows (unaudited) for the three months ended
June 30, 1999 and June 30, 1998 .................................4
Notes to Financial Statements (unaudited).................................5
Management's Discussion and Analysis .....................................7
PART II. OTHER INFORMATION .............................................10
SIGNATURES ..............................................................11
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<TABLE>
<CAPTION>
Trudy Corporation
Balance Sheets
June 30, March 31,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 49,605 $ 624
Accounts receivable, net of allowance for doubtful accounts of $50,044
and $53,794 at June 30 and March 31, 1999, respectively 169,556 246,049
Inventories, net of reserve for obsolescence of $255,000
at June 30 and March 31, 1999 1,469,838 1,501,204
Prepaid expenses and other current assets 153,357 50,842
--------------------------
Total current assets 1,842,356 1,798,719
Property and equipment, net 107,937 114,185
Pre-publication costs and royalty advances 234,722 205,212
--------------------------
Total assets $ 2,185,015 $ 2,118,116
==========================
Liabilities and shareholders' deficit Current liabilities:
Accounts payable and accrued expenses $ 704,006 $ 477,696
Line of credit in default 697,234 770,000
Long-term debt in default 186,099 200,349
Current portion of notes payable - related parties 776,322 626,322
--------------------------
Total current liabilities 2,363,661 2,074,367
Notes payable to related parties 173,941 171,408
Shareholders' deficit:
Common stock: $.0001 par value:
Authorized shares - 850,000,000
Issued and outstanding shares - 331,222,249 at June 30 and March 31, 1999 33,123 33,123
Additional paid-in capital 4,000,316 4,000,316
Accumulated deficit (4,386,026) (4,161,098)
--------------------------
Total shareholders' deficit (352,587) (127,659)
--------------------------
Total liabilities and shareholders' deficit $ 2,185,015 $ 2,118,116
==========================
See accompanying notes.
</TABLE>
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Trudy Corporation
Statements of Operations
Three Months Ended June 30,
1999 1998
------------------------------
(Unaudited) (Unaudited)
Net sales $ 422,292 $ 710,733
Cost of sales 295,984 454,640
------------------------------
Gross profit 126,308 256,093
Operating expenses:
Selling, general and administrative 372,172 357,876
Depreciation and amortization 8,019 9,000
------------------------------
Loss from operations (253,883) (110,783)
Other income (expense):
Interest expense (29,413) (15,243)
Other income 58,368 4,203
------------------------------
Net loss before income taxes (224,928) (121,823)
Income tax benefit (provision) -- --
------------------------------
Net loss $ (224,928) $ (121,823)
==============================
Net loss per share:
Basic and diluted ($0.00) ($0.00)
==============================
Weighted average shares used in computation:
Basic and diluted 331,222,249 331,222,249
==============================
See accompanying notes.
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<TABLE>
<CAPTION>
Trudy Corporation
Statements of Cash Flows
Three Months Ended June 30,
1999 1998
---------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($224,928) ($121,823)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 8,019 9,000
Amortization of pre-publication costs 32,700 36,000
Provision for losses on accounts receivable 3,500 7,500
Changes in operating assets and liabilities:
Accounts receivable 72,993 (222,235)
Inventories 31,366 (185,451)
Prepaid expenses and other current assets (102,516) (1,616)
Accounts payable and accrued expenses 226,309 18,471
----------------------
Net cash used in/(provided by) operating activities 47,443 (460,154)
INVESTING ACTIVITIES
Purchases of property and equipment (1,770) (14,056)
Pre-publication and royalty advances, net (62,211) 16,398
----------------------
Net cash used in investing activities (63,981) 2,342
FINANCING ACTIVITIES
Net proceeds on short-term borrowings 140,000 (2,375)
Proceeds from issuance of loans - long-term -- 470,000
Repayment of loans - long-term (84,481) (6,086)
Advances from related party 10,000 --
----------------------
Net cash provided by financing activities 65,519 461,539
----------------------
Net increase in cash and cash equivalents 48,981 3,727
Cash and cash equivalents at beginning of period 624 --
----------------------
Cash and cash equivalents at end of period $ 49,605 $ 3,727
======================
</TABLE>
See accompanying notes.
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TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business and Basis of Presentation
Trudy Corporation, which does business under the name Soundprints, publishes
juvenile storybooks and audio cassettes which are sold in conjunction with
contract-manufactured educational toys to the retail, education and mail order
markets. Trudy Corporation was initially 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.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2000. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended March 31, 1999.
2. Pending Merger with Futech Interactive Products (Delaware) Inc.
As previously reported, in December 1998, Trudy signed a letter of intent to
merge with Futech Interactive Products, Inc. On March 3, 1999 Trudy entered into
a merger agreement with Futech. This merger agreement was subsequently
renegotiated and replaced with a new merger agreement dated as of June 7, 1999
providing for the mergers of Trudy, Futech, Fundex Games, Ltd., DaMert Company
and Janex International, Inc. into a newly incorporated Delaware company ("New
Futech") or a subsidiary thereof. The transaction is now expected to close at
the end of the third quarter or beginning of the fourth quarter of 1999.
The agreement covers the acquisition of all of the Common Stock of Trudy,
including shares subject to option, for a purchase price of approximately $3.5
million, payable in a combination of New Futech Common Stock (valued at $3.0
million) and cash of approximately $456,000. In addition, New Futech will repay
certain loans to Trudy by the President and certain of his family members,
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approximating $800,000 plus accrued interest. On a fully diluted basis,
approximately 377 million shares of Common Stock of Trudy will be issued and
outstanding. The transaction is intended to be tax-free to shareholders of Trudy
in respect to the stock portion of the consideration. The merger is subject to a
number of conditions, including shareholder approval of all of the parties.
3. Related Party Transactions
In June 1999, the Company began selling its products to Futech. Futech has
assumed sales responsibility for the majority of the Company's trade accounts
and will act as a distributor of the Company. Through June, sales have totaled
$75,329. Futech is also funding some of the Company's working capital needs and
through June 30, 1999 has advanced $10,000 to the Company.
On May 28, 1999, Alice B. Burnham, a director of the Company and wife of the
President, loaned the Company $140,000 to meet immediate cash needs. The note
bears an interest rate of 8% and was to be paid on July 2, 1999 after a
financing plan between the Company, Futech, and the Company's bank was to be
developed. This plan has not yet been finalized and the loan remains unpaid,
although interest payments are being made.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Merger with Futech Interactive Products, Inc.
- ---------------------------------------------
As previously reported, in December 1998, Trudy signed a letter of intent to
merge with Futech Interactive Products, Inc. On March 3, 1999 Trudy entered into
a merger agreement with Futech. This merger agreement was subsequently
renegotiated and replaced with a new merger agreement dated as of June 4, 1999
providing for the mergers of Trudy, Futech, Fundex Games, Ltd., DaMert Company
and Janex International, Inc. into a newly incorporated Delaware company ("New
Futech") or a subsidiary thereof. The transaction is now expected to close at
the end of the third quarter or beginning of the fourth quarter of 1999.
The agreement covers the acquisition of all of the Common Stock of Trudy,
including shares subject to option, for a purchase price of approximately $3.5
million, payable in a combination of New Futech Common Stock (valued at $3.0
million) and cash of approximately $456,000. In addition, New Futech will repay
certain loans to Trudy by the President and certain of his family members,
approximating $800,000 plus accrued interest. On a fully diluted basis,
approximately 377 million shares of Common Stock of Trudy will be issued and
outstanding. The transaction is intended to be tax-free to shareholders of Trudy
in respect to the stock portion of the consideration. The merger is subject to a
number of conditions, including shareholder approval of all of the parties.
Results of Operations and Net Results
- -------------------------------------
Trudy Corporation's revenues for the three months ended June 30, 1999 were
$422,292, a decrease of $288,441 compared with the same period last year. Sales
to warehouse clubs were approximately $285,000 last year, while there were no
similar sales this year. Sales in other segments for the first quarter were
roughly equal to sales in the first quarter of last year. Sales to schools at
$51,000 were up approximately 40% over last year as the company continues to
target the educational market as a growth area. Since June 1999, the Company has
begun to sell its products to Futech which is acting as a distributor. Sales to
Futech through June 30, 1999 were $75,329.
A net loss of $224,928 for the three months ended June 30, 1999 compares to a
loss of $121,823 for the same period last year. This decline in profitability
was primarily the result of the lower sales volume. Although the Company has
taken selective action to reduce overhead costs in the face of lower sales
levels, it has continued to commit resources to new product development and
marketing and sales efforts in the expectation that sales levels will increase
in the fall after the merger with Futech is concluded. Interest expense of
$29,413 was nearly double last year's level as the Company's working capital
loans are significantly higher. Other income increased to $58,368 from $4,203
last year primarily as a result of royalty income from the sale of publication
sub-rights.
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Liquidity and Capital Resources
- -------------------------------
In March 1999, Trudy negotiated an extension of its bank line of credit through
June 15, 1999. An integral part of the March 3, 1999 merger agreement with
Futech, which remains in effect as part of the New Futech merger agreement, is
an agreement by Futech to assist in providing the working capital needs of
Trudy, if needed, to maintain sales momentum and assure that Trudy is not in
default of its loan agreements, including its borrowings from First Union
National Bank. This agreement was to take effect on June 1, 1999 if the
effective date of the merger agreement had not occurred by then. On May 13, 1999
First Union notified the Company that it was in default of covenants requiring
the maintenance of a ratio of total liabilities to tangible net worth of not
more than 2.50 to 1.00 and a minimum level of net tangible worth of $750,000 and
both loans became due on June 15, 1999. As of August 13, 1999, the total balance
on these loans has been reduced to $661,000 from $970,000 on March 31, 1999
primarily as a result of the sale of inventory to Futech. On May 28, 1999, Alice
B. Burnham, a director of the Company and wife of the President, loaned the
Company $140,000 to meet immediate cash needs. The note bears an interest rate
of 8% and was to be paid on July 2, 1999 after a financing plan between the
Company, Futech, and the Company's bank was to be developed. This plan has not
yet been finalized and the loans from the bank and Mrs. Burnham remain unpaid,
although interest payments are being made. The Company is also working closely
with Futech to provide funds for immediate cash needs and to support fall sales.
Management has no assurances that Futech currently has the financial resources
to pay the Company's bank loans and meet these other cash requirements. However,
Futech has contributed $543,685 from inventory purchases and working capital
advances through August 13, 1999.
Year 2000 Compliance Status
- ---------------------------
During 1998, the Company upgraded its computer system and MAS90 software used
for accounting, order processing, and inventory management. The Company believes
that this equipment and software is Year 2000 compliant. The Company is working
with key third party vendors to understand their ability to continue to provide
services and products through the change to 2000. The Company intends to
continue to partner with its key third party vendors to avoid any business
interruptions in 2000.
Forward-looking Statements
- --------------------------
We have made forward-looking statements in this report that are subject to a
number of risks and uncertainties, including without limitation, those described
in our Annual Report on Form 10-KSB for the year ended March 31, 1999 and other
risks and uncertainties indicated from time to time in our filings with the SEC.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include the information concerning possible or assumed future results
of operations. Also, when we use words such as "believes," "expects,"
"anticipates" or similar expressions, we are making forward-looking statements.
Readers should understand that the following important factors, in addition to
those discussed in the referenced SEC filings, could affect our future financial
results, and could cause actual results to differ materially from those
expressed in our forward-looking statements:
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o the planned merger with Futech:
o the implementation of our strategy;
o the availability of additional capital;
o variations in stock prices and interest rates;
o fluctuations in quarterly operating results; and
o 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.
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PART II OTHER INFORMATION
Item 5. Other Information
On June 7, 1999, a Form S-4 was filed with the Securities and Exchange
Commission relating to the proposed merger to which the Company is a party. The
Company's Board of Directors has authorized the merger transaction whereby the
Company and four other entities will merge into a newly incorporated entity
known as Futech Interactive Products (Delaware) Inc. and a subsidiary thereof.
The merger is subject to shareholder approval of all the merging entities.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
27. Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No reports were filed by the Company during the three months ended June
30, 1999.
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SIGNATURES
Pursuant to the requirements 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
(REGISTRANT)
Date: August 13, 1999 By: /s/ WILLIAM W. BURNHAM
----------------------------------------
William W. Burnham,
Chairman and Chief Executive Officer
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<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> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 49,605
<SECURITIES> 0
<RECEIVABLES> 217,350 <F1>
<ALLOWANCES> 53,794
<INVENTORY> 1,469,838
<CURRENT-ASSETS> 1,842,356
<PP&E> 107,937 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,185,015
<CURRENT-LIABILITIES> 2,363,661
<BONDS> 173,941
0
0
<COMMON> 33,123
<OTHER-SE> (385,710)
<TOTAL-LIABILITY-AND-EQUITY> 2,185,015
<SALES> 422,292
<TOTAL-REVENUES> 422,292
<CGS> 295,984
<TOTAL-COSTS> 676,175
<OTHER-EXPENSES> (58,368)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,413
<INCOME-PRETAX> (224,928)
<INCOME-TAX> 0
<INCOME-CONTINUING> (224,928)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224,928)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
<FN>
<F1> The values for Receivables and PP&E represent net amounts.
</FN>
</TABLE>
