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 September 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
September 30, 1999
Common Stock, $.0001 par value 349,822,249 shares
<PAGE>
TRUDY CORPORATION
INDEX PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Balance Sheets - September 30, 1999 and June 30, 1999 (unaudited) ......... 2
Statements of Operations (unaudited) for the six and three months ended
September 30, 1999 and September 30, 1998 ............... 3
Statements of Cash Flows (unaudited) for the six months ended
September 30, 1999 and September 30, 1998 ............... 4
Notes to Financial Statements (unaudited) ................................. 5
Management's Discussion and Analysis ...................................... 7
PART II. OTHER INFORMATION ............................................... 11
SIGNATURES................................................................. 12
<PAGE>
<TABLE>
<CAPTION>
TRUDY CORPORATION
Balance Sheets
September 30, March 31,
1999 1999
-------------- ------------
(Unaudited) (Audited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ -- $ 624
Account receivable
Net of allowance for doubtful accounts of $46,875 at
September 30, 1999 and $53,794 at June 30, 1999 362,026 246,049
Inventories, net 1,662,570 1,501,204
Prepaid expenses and other current assets 239,651 50,842
----------- -----------
Total current assets 2,264,247 1,798,719
Property and equipment, net 101,143 114,185
Pre-publication costs and royalty advances 247,077 205,212
=========== ===========
Total assets 2,612,467 2,118,116
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Checks drawn in excess of cash balances 11,473 --
Accounts payable and accrued expenses 931,394 477,696
Advances from potential merger partner 593,841 --
Line of credit in default -- 770,000
Long-term debt in default -- 200,349
Current portion of notes payable - related parties 766,322 626,322
----------- -----------
Total current liabilities 2,303,030 2,074,367
Bank demand note 638,483 --
Notes payable to related parties 176,474 171,408
Shareholders' equity (deficit):
Common stock: $.0001 par value:
Authorized shares - 850,000,000
Issued and outstanding shares - 349,822,249 at September 30, 1999
and 331,222,249 at March 31, 1999 34,982 33,122
Additional paid-in capital 4,073,376 4,056,636
Accumulated deficit (4,613,878) (4,217,418)
----------- -----------
Total shareholders' equity (deficit) (505,520) (127,660)
=========== ===========
Total liabilities and shareholders' equity (deficit) $ 2,612,467 $ 2,118,116
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
TRUDY CORPORATION
STATEMENTS OF OPERATIONS
Three Month Period Ended Sept. 30, Six Month Period Ended Sept. 30,
---------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 716,643 $ 1,021,468 $ 1,138,935 $ 1,732,201
Cost of sales 586,312 527,246 882,296 981,886
------------- ------------- ------------- -------------
Gross profit 130,331 494,222 256,639 750,315
Operating expenses:
Selling, general and administrative 276,955 397,101 649,127 754,977
Depreciation and amortization 8,019 26,500 16,038 35,500
------------- ------------- ------------- -------------
Income (loss) from operations (154,643) 70,621 (408,526) (40,162)
Other income (expense):
Interest expense (28,847) (40,778) (58,260) (56,021)
Other income 11,956 6,056 70,325 10,258
------------- ------------- ------------- -------------
Net loss before income taxes (171,534) 35,899 (396,461) (85,925)
Income tax benefit (provision) -- -- -- --
------------- ------------- ------------- -------------
Net income (loss), before extraordinary item (171,534) 35,899 (396,461) (85,925)
Extraordinary item, net of income taxes of $40,000 -- -- -- --
============= ============= ============= =============
Net income (loss) $ (171,534) $ 35,899 $ (396,461) $ (85,925)
============= ============= ============= =============
Net income (loss) per share:
============= ============= ============= =============
Basic and diluted $ -- $ -- $ -- $ --
============= ============= ============= =============
Weighted average shares used in computation:
============= ============= ============= =============
Basic and diluted 334,254,856 331,222,249 332,746,839 331,222,249
============= ============= ============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
Cash Flow
<TABLE>
<CAPTION>
TRUDY CORPORATION
Statements of Cash Flows
Six Month Period Ended
--------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Cash Flow from Operating Activities: (Unaudited) (Unaudited)
<S> <C> <C>
NET INCOME (LOSS) $ (396,461) $ (85,925)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Extraordinary item -- --
Depreciation 16,038 35,500
Amortization of pre-publication costs 65,400 72,000
Provision for losses on accounts receivable (3,168) 5,937
Common stock issued for services 18,600 --
Changes in operating assets and liabilities:
Accounts receivable (112,809) (428,527)
Inventories (181,134) (143,658)
Prepaid expenses and other current assets (189,134) (379,650)
Accounts payable and accrued expenses 490,328 306,761
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (292,340) (617,562)
--------------- ---------------
INVESTING ACTIVITIES
Purchases of property and equipment (2,995) (49,513)
Pre-publication and royalty advances, net (107,265) (92,148)
--------------- ---------------
Net cash used in investing activities (110,260) (141,661)
FINANCING ACTIVITIES
Net proceeds/(payments) on short-term borrowings .. (142,754) 452,051
Repayment of loans - long-term (189,111) (11,540)
Advances from related party 733,841 388,711
--------------- ---------------
Net cash provided by financing activities 401,976 829,222
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (624) 69,999
Cash and cash equivalents at beginning of year 624 --
=============== ===============
CASH AND CASH EQUIVALENTS AT END OF YEAR $ -- $ 69,999
=============== ===============
</TABLE>
See accompanying notes
4
<PAGE>
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 six months ended September 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. (Futech). 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 fourth quarter of calendar 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 378 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.
5
<PAGE>
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 September, sales to Futech
for six months fiscal year-to-date, have totaled $424,936. Sales to Futech are
made at deep discounts usually reserved for the Company's most favored
customers. Due to the sales volume to Futech, the discounts negatively impact
the Company's revenues and margins. Futech is also funding some of the Company's
working capital needs and through September 30, 1999 has advanced $593,841 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.
Subsequent to the end of the quarter, on October 5, 1999, Alice B. Burnham
loaned the Company $180,000 to meet immediate cash needs. The note bears an
interest rate of 8% and is to be repaid on or before December 1, 1999 from mail
order catalog sales receipts or other resources. The entire loan was personally
guaranteed by Mr. Vincent W. Goett, Chairman of Futech Interactive Products,
Inc.
On September 15, 1999 the Corporation issues 18,600,000 shares of its common
stock to various individuals in exchange for services. Such shares were issued
with an estimated fair market value of $0.001 per share and resulted in $18,600
of expense. On the same date, the Company also agreed to issue an additional
13,500,000 shares of its common stock to an individual upon the completion of
the proposed merger discussed in Note 2.
6
<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 fourth quarter of calendar 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 378 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 September 30, 1999 were
$716,643, a decrease of $304,825 compared with the same period last year. Sales
to warehouse clubs were approximately $582,000 last year, while there were no
sales this year. However, the Company's backlog reflects warehouse club orders
approximating $384,000 at distributor discount pricing to Futech. Warehouse club
sales are scheduled to ship in the fourth quarter of fiscal year 2000. Sales to
customers other than warehouse clubs totaling approximately $717,000 were up 63%
in the second quarter of this year compared to sales of $439,000 for the same
time period last year. Due to a one month delay in the mailing of the Company's
direct mail catalog, sales to consumers, libraries and schools were
approximately $120,000 lower in the second quarter of fiscal year 2000 than in
the second quarter last year. Since June 1999, the Company has sold its products
to Futech which is acting as a distributor. Sales to Futech in the second
quarter ending September 30, 1999 were $349,607. These sales are at deep
discounts which has negatively impacted the Company's results.
A net loss of $171,534 for the three months ended September 30, 1999 compares to
a net income of $35,899 for the same period last year. This decline in
profitability was primarily the result of the lower sales volume and lower
margin recognized on the distributor sales to Futech. 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
7
<PAGE>
efforts based on sales forecasts and backlog for the third quarter of this
fiscal year compared to the comparable period last year. Interest expense of
$28,847 was lower than last year's level as the Company's working capital loans
were slightly reduced with advances from Futech. Other income increased to
$11,956 from $6,506 last year primarily as a result of royalty income from the
sale of publication sub-rights.
LIQUIDITY AND CAPITAL RESOURCES
On September 29, 1999, Trudy Corp. successfully refinanced its First Union bank
debt with Wilmington Trust FSB. 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. Both the revolving credit and
the term loans outstanding balances totaling $991,100 became due on June 15,
1999. Approximately $361,900 of the revolving credit loan was paid down prior to
the refinancing in September through the sales of inventory to Futech. A demand
note for $638,483 was signed between Wilmington Trust FSB and Trudy Corp. to
repay the First Union loans in full and cover closing costs. The interest rate
on the demand note is Libor plus one percentage point and can be adjusted
quarterly. The loan is fully collateralized with the personal assets of Mr.
William Burnham, Mrs. Alice Burnham and Mr. Peter Burnham. With the completion
of the refinancing, the Company is no longer in default with any bank or
commercial creditor.
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 Wilmington Trust FSB. This agreement
was took effect on June 1, 1999 since the effective date of the merger had not
occurred by then. 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 $943,448 from inventory purchases and working capital advances
through September 30, 1999.
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. As stated above, the Company successfully refinanced its bank
borrowings but the loan from Mrs. Burnham remain unpaid, although interest
payments are being made.
Subsequent to the end of the quarter, on October 5, 1999, Alice B. Burnham
loaned the Company $180,000 to finance the postage for the Company's library and
consumer catalog mailing. The note bears an interest rate of 8% and is to be
repaid on or before December 1, 1999 from mail order catalog sales receipts or
other resources. The entire loan was personally guaranteed by Mr. Vincent W.
Goett, Chairman of Futech Interactive Products, Inc.
8
<PAGE>
YEAR 2000 COMPLIANCE STATUS
The Year 2000 (Y2k) represents special concerns for business computing. This
issue has grown in importance as the use of computers has become more pervasive
and the dependence on computers has increased. Trudy could be materially and
adversely affected by the Year 2000 issue, either directly or indirectly. This
could occur as a result of a system failure or miscalculation causing disruption
to operations including a temporary inability to process transactions, send
invoices, ship goods, receive goods, pay vendors and employees or engage in
normal business activities. In order to minimize the internal possibility of a
Y2k problem, during 1998, the Company upgraded its telephone equipment, voice
mail system, 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. Support for these systems is from outside
third party vendors who maintain a staff of fully trained personnel in
troubleshooting and problem solving. All other computer software is "off the
shelf" and is not critical to the daily operation of the business. If any of
these products fail in Year 2000, they can be easily replaced and operational.
To date the cost of the system upgrades is approximately $40,000 plus the lease
cost of the telephone system.
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. Because of the broad range of possible
issues and the large number of variables involved, it is impossible to quantify
the potential cost of solving the problems should the Company's remediation
efforts, or the efforts of those companies with which Trudy does business, not
be successful.
At this time we do not know whether the Company's suppliers will be able to
deliver goods and services or whether customers will be able to place orders
beyond December 31, 1999. If our suppliers are not able to provide the necessary
products or services as a result of Y2k compliance problems, we may be forced to
seek other suppliers or cease doing business, even temporarily, with such
vendors. Several vendors who supply plush stuffed animals are based in the Far
East and do not have Y2k compliance programs. Trudy's inventory of pieces and
finished kits should be sufficient at year end 1999 to minimize the impact of
any Y2k related problem these suppliers may encounter. Additionally, if our
major customers are not able to function as a result of Y2k compliance problems,
Trudy may be forced to substantially reduce operations, or worst case,
discontinue operations until such problems are resolved.
We have not received written representations from all of the Company's suppliers
assuring us that they are Y2k compliant. Several companies, including Northeast
Utilities and SNET (telephone utility) have included readiness statements with
their monthly bills. Virtually all of Trudy's major suppliers are larger
businesses with more complicated systems. This includes utility companies,
financial institutions and suppliers of products. We believe, because of their
size and stature in industry, they have developed comprehensive Y2k compliance
programs to ensure a smooth transition into the new year. Any failure to address
any unforeseen Y2k issue
9
<PAGE>
could adversely affect our business, financial condition and results of
operations.
Trudy has not developed a contingency plan and, at this time, has not scheduled
a time at which such a plan will be created.
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:
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
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.
10
<PAGE>
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.
Pre-Effective Amendment Number 3 to the Form S-4 was filed with the SEC on
October 8, 1999. 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
On September 22, 1999 the Registrant filed Form 8-K with the SEC announcing
on September 21, 1999 that Ms. Elisabeth T, Prial resigned as Director of Trudy
Corporation effective September 15, 1999. On September 10, 1999, Mr. William
Carney resigned as Vice President, Chief Financial Officer and Secretary to
pursue a position with a new employer. Richard Saltz was named interim Chief
Financial Officer and Secretary on September 15, 1999.
11
<PAGE>
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: NOVEMBER 10, 1999 By: /s/ WILLIAM W. BURNHAM
------------------ -------------------------
William W. Burnham,
Chairman and Chief Executive Officer
12
<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> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 408,901
<ALLOWANCES> 46,875
<INVENTORY> 1,662,570
<CURRENT-ASSETS> 2,264,247
<PP&E> 101,143 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,612,467
<CURRENT-LIABILITIES> 2,303,030
<BONDS> 814,957
0
0
<COMMON> 34,982
<OTHER-SE> (540,502)
<TOTAL-LIABILITY-AND-EQUITY> 2,612,467
<SALES> 1,138,935
<TOTAL-REVENUES> 1,138,935
<CGS> 882,296
<TOTAL-COSTS> 665,165
<OTHER-EXPENSES> (70,325)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,260
<INCOME-PRETAX> (396,461)
<INCOME-TAX> 0
<INCOME-CONTINUING> (396,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396,461)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
<FN>
<F1>
The value for PP&E represents net amounts.
</FN>
</TABLE>
