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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, 1999 0-16056
TRUDY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-1007765
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
353 Main Avenue, Norwalk, Connecticut 06851-1552
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(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
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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, 1999 total revenues for the Company were
$3,390,884. As of March 31, 1999, 331,222,249 shares of Common Stock, $.0001 par
value per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registration Statement on Form S-18
(File Number 33-14379B) are incorporated by reference into Item 13 of this
report.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
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. As used herein, the terms "Trudy" or
"Soundprints" include Trudy Corporation and its Connecticut predecessor, except
as the context may otherwise require.
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 expected to close in the third 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.
Futech designs, publishes, hires contractors to manufacture, and
markets interactive, educational, promotional, and entertainment products
targeted primarily towards children. Futech's patented technology utilizes
specialized conductive ink to print interactive touch points. These touch points
trigger speech, music, and sound effects. Janex designs, hires contractors to
manufacture, and markets children's toys, banks, flashlights, and battery
operated toothbrushes. Fundex develops, markets, and distributes a variety of
games and toys for both children and adults. DaMert creates and produces toy and
gift products with nature and science themes targeted primarily to children.
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PRODUCTS AND LICENSING
Soundprints 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 toys and educational kits,
storybooks, and audio cassettes. Since 1991, Soundprints has published a total
of 60 titles in four different series under the Smithsonian license. Royalties
are paid to the Smithsonian at the rate of 5.0% of net sales on all licensed
products.
Soundprints also has a license from The Nature Conservancy to develop a
series of habitat books, toys and audio cassettes. The first four titles in the
habitat series were introduced in the spring of 1997. The orientation of the
habitat series has been toward both the education and trade markets. Through
March 1999, twelve Nature Conservancy titles have been published. The license
from the Nature Conservancy runs to January 2000.
Market reception of the Smithsonian and Nature Conservancy series has
been extremely positive as a result of the high perceived value of the book and
plush animal sets. Each season Soundprints introduces five to seven new titles.
In addition to new titles in the Smithsonian and Nature Conservancy series, a
non-licensed international series, combining books and dolls, was launched this
spring. In the fall of 1999, a new series of photographic board books
accompanied by soft cotton velour toys for toddlers will be launched in
cooperation with the Smithsonian Institution National Zoological Park.
MARKETING AND SALES
Soundprints' products are sold to book, toy, and specialty store
retailers; warehouse clubs; and book, gift and educational distributors by an
in-house sales staff and independent commissioned sale representatives. In
addition, Soundprints mails a catalog directly to consumers, schools, and
libraries and an in-house telemarketing staff receives and processes phone,
Internet and mail orders.
A potential growth area is the educational market. Schools and
libraries have discovered how to use Soundprints' products as supplemental
classroom reading material. School book clubs and book fairs have experienced
impressive sales growth to both students and teachers. In addition to actual
book sales, subsidiary rights are sold to book club operators who also purchase
plush toys to accompany the books.
During fiscal year 1999, sales to retailers, principally book, toy, and
specialty stores, were flat or off somewhat from the prior year. Sales to
aquarium, museum, and zoo stores continued to increase because of the nature
theme of the products. Sales to independent booksellers have been the most
volatile as these retailers continue to be adversely affected by the market
penetration of the superstore chains and Internet booksellers.
CUSTOMERS
One customer accounted for 28.8% of sales in 1999 with this same
customer representing 35.2% in 1998.
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MANUFACTURING AND PRODUCT DESIGN
Plush and toy product design is done in "design rooms" managed by
Soundprints' overseas contractors. Storybooks are created by free-lance authors
and illustrators working under the direction of Soundprints' editorial and
graphic design staff. Audio is produced by an award-winning sound designer
overseen by Soundprints' editorial department.
Soundprints produces the majority of its products by sub-contracting
with independent toy factories and printing plants located in Asia.
Approximately ninety-five percent of the toys are purchased from one vendor in
China, but Trudy has other qualified sources of supply from which it has
purchased in the past. Trudy owns the design of each existing toy product
(except for Smithsonian plush toys which are co-trademarked with Smithsonian
Institution) and actively manages the design of new products. Trudy believes
that production could quickly be transferred to other companies in China,
Bangladesh, and Sri Lanka if production were not available from the vendor in
China, or if more favorable pricing became available. Books are purchased from a
U.S. company which subcontracts production to various printers in the Far East.
These manufacturers can also perform certain other functions such as the
labeling and packaging of product for volume shipments directly to specific
customers. Audio cassettes are duplicated locally. Delivery has been
satisfactory from all suppliers.
Originally a plush toy manufacturer, Soundprints discontinued its plush
toy sewing operations in 1990 and now concentrates its operational expertise on
package assembly of the toy, book and tape components for fulfillment to retail
and mail order customers.
BACKLOG
As of March 31, 1999, Trudy's order backlog was approximately $40,000.
Orders are generally shipped promptly unless items are on back order or the
customer requests a later delivery date. As of March 31, 1998, Trudy's order
backlog was approximately $470,000. Sales in this industry and backlog figures
are volatile and may change dramatically from month to month. The order backlog
level in March 1998 was primarily the result of several large orders placed by
the Company's largest customers.
Although orders are subject to cancellation, this happens only rarely.
GOVERNMENTAL REGULATIONS
Trudy is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world.
Trudy endeavors to comply with all applicable regulations.
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COMPETITION
Management believes Soundprints is the leading supplier of licensed,
realistic plush toys packaged with an educational book and audio cassette. Trudy
is not aware of any direct competitors in this market, although there are a few
publishers who compete by combining plush toys with single titles of children's
classic books. Soundprints believes that its competitive advantages are its
unique editorial genre, its superior design and the perceived high quality of
its products relative to the retail price, in addition to the licenses with the
Smithsonian Institution and The Nature Conservancy.
EMPLOYEES
As of March 31, 1999, Trudy had 21 full-time employees, all in its
Norwalk facility, consisting of 11 persons in sales and administration, seven in
shipping and handling, and three 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.
Soundprints' ability to design, manufacture, market, and sell products
depends largely upon its ability to attract and retain highly skilled personnel,
particularly in the product design, publishing, and sales areas. Over the last
year, Soundprints has upgraded positions in editorial and sales management in
terms of professionalism and experience to further improve the quality and
distribution of its products and their value to the customer.
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. Direct mail sales are concentrated in
the October - December quarter.
ITEM 2. PROPERTIES
Trudy leases warehouse and administrative facilities in a 27,000 square
foot building at 353 Main Avenue in Norwalk, Connecticut. The building is
located 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
Trudy'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.
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The Main Avenue property was purchased and financed independently of
Trudy. Renovations to the site however required the use of a $300,000
installment loan payable over eight years. This bank loan is collateralized with
the Trudy lease contract, as well as a Trudy Corporation guarantee. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Trudy believes that its facilities are adequate for all of its
foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings 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, 1999 through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Trudy common stock,
although it is traded sporadically on the OTC Bulletin Board under the symbol
"TRDY." As of March 31, 1999, there were approximately 1,479 stockholders of
record of Trudy common stock, as shown on the records of our transfer agent.
Since its organization, Trudy has not paid any dividends on its common stock and
does not anticipate paying dividends in the foreseeable future. We anticipate
that all earnings in the foreseeable future will be retained for development of
Trudy's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the financial statements and notes thereto included
elsewhere herein.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1999 1998 1997
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Net sales 100.0% 100.0% 100.0%
Cost of sales 64.0 54.9 52.6
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Gross profit 36.0 45.1 47.4
Selling, general and administrative
expenses and depreciation 70.1 43.9 38.3
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Income (loss) from operations (34.1) 1.2 9.1
Other income (expense) (2.3) (1.3) (3.5)
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Income (loss) before benefit (provision) for
income taxes (36.4) (0.1) 5.6
Income tax (provision) benefit (11.1) 3.1 1.7
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Income (loss) before extraordinary item (47.5) 3.0 7.3
Extraordinary item (net of income taxes) -- 1.1 --
----- ----- -----
Net income (loss) (47.5) 4.1 7.3
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
NET SALES. Net sales for the year ended March 31, 1999 were $3,390,884
as compared with net sales of $4,977,599 for the year ended March 31, 1998.
Sales to warehouse clubs, the largest distribution channel, were down $775,443
or 44% to $977,961 due to the clubs' decision to purchase more conservatively
and minimize inventory carryover. Direct response sales of $961,624 were
$269,554 or 22% lower than last year. Catalog marketers, in general, experienced
reduced buying early in the pre-holiday season (September) due to financial
market uncertainty. Sales of $671,946 to bookstores and specialty retailers were
down $492,101 or 42% from last year as the number of independent bookstores
continues to decline and specialty stores have become more selective in their
purchases. Sales to schools and education wholesalers continue to increase as a
result of the Company's decision to target its direct marketing toward this
growing market segment.
COST OF SALES. Cost of sales of $2,168,685 decreased from $2,730,401 in
the prior year primarily because of the lower level of sales volume. In
percentage terms, cost of sales increased to 64.0% from 54.9%. The higher
percentage is the result of the acceleration of amortization of product
development costs and increased reserves for inventory obsolescence in 1999.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expenses increased to $2,355,787 from $2,168,322. The increase is
the result of the accelerated write-off of royalty advances, the recording of
sub-right royalty expenses, and a $53,080 write-off of a computer operating
system purchased in December 1997 because it was determined that the new system
did not meet the Company's requirements. Lower royalty and sales commission
expenses resulting from lower revenue were offset by the higher cost of a larger
consumer catalog mailing.
DEPRECIATION EXPENSE. Depreciation expense increased to $22,175 from
$17,449 in the prior year due to increased investment in computer systems.
INCOME/(LOSS) FROM OPERATIONS. Income/(loss) from operations was a loss
of $1,155,763 compared with income of $61,427 in the prior year. The decline is
primarily the result of lower sales and the accelerated write-offs cited above.
INTEREST EXPENSE. Interest expense increased to $111,604 from $102,099
last year as a result of higher borrowing needed to fund working capital
requirements and operating losses.
OTHER INCOME. Other income of $34,134 decreased from $35,904 in the
prior year.
NET INCOME/(LOSS). A net loss of $1,611,233 for the year ended March
31, 1999 compares to a profit of $203,552 in the prior year. In addition to the
changes discussed above, the decline is also the result of the write-off of
$378,000 of deferred tax assets in 1999 and two non-recurring gains recorded
last year: an income tax benefit of $152,000 and an after tax gain of $56,320
from the forgiving of accrued interest on loans made to the Company by its
President.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
NET SALES. 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. Cost of sales of $2,730,401 increased from $2,522,688 in
the prior year. In percentage terms to sales, cost of sales increased from 52.6%
to 54.9% 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 EXPENSE. Selling, general, and
administrative ("SG&A") expenses increased from $1,821,927 to $2,168,322. Higher
advertising and catalog expenses along with outside telemarketing costs and
sales salaries account for the increase.
INCOME FROM OPERATIONS. Consequently, income from operations of $61,427
was down from $451,795 in 1997.
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INTEREST EXPENSE. 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.
NON-RECURRING EXPENSE AND GAIN. 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.
INCOME TAX BENEFIT. The Company recognized an income tax benefit of
$152,000 in 1998, as a result of net operating loss carry-forwards.
NET INCOME. As a result of the above factors, net income of $203,552
for the period was below last year's level of $351,676.
LIQUIDITY AND CAPITAL RESOURCES
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. The line of
credit bears interest at the rate of prime plus .25% and the term loan bears
interest at the rate of 8.75%. In March 1999, Trudy negotiated an extension of
the 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 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 June 30, 1999, these loans remain
unpaid. The balances as of June 30, 1999 are $697,234 on the line of credit and
$186,099 on the term loan. On May 28, 1999, Alice 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. Management has no assurances that Futech currently has the financial
resources to honor this agreement. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
In July 1998, William W. Burnham loaned the Company $28,900 to fund
conversion costs for a second computer system. 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 was due in sixty days. As of June 30, 1999 these loans
remain unpaid. Payment will be made as part of the terms of the merger agreement
with Futech. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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Accounts receivable were $246,049 on March 31, 1999 compared with $321,898 on
March 31, 1998. The decrease is due to lower sales volume in the last quarter of
the fiscal year compared with last year. Inventory levels were $1,501,204 on
March 31, 1999 compared with $1,574,901 on March 31, 1998. Actual unit inventory
increased because of slower turnover resulting from the downturn in sales along
with the need to stock new titles and toys. The reserve for inventory
obsolescence was increased by $205,000.
YEAR 2000 COMPLIANCE STATUS
The Company utilizes software and computer technologies that are
essential to its operations. The Company periodically evaluates the ongoing and
expected future business requirements of its purchased software applications.
The Company has not accelerated its plans to replace or update existing systems
because of the Year 2000 issue. During 1999 and as a result of general business
needs, the Company upgraded its computer system and operating software used for
accounting, order processing, and inventory management. The company relies on a
single operating system for the vast majority of its needs. After a two-month
trial period, the Company determined that the new software system did not meet
its operating needs. A second system was installed in August 1998. The Company
believes that the new equipment and software are Year 2000 compliant. The
Company also installed a new telephone system, which the Company believes is
Year 2000 compliant, in 1999 to improve communications. The total cost of the
computer hardware and two operating systems was approximately $100,000. The
telephone system is leased for approximately $500 per month. The Company does
not expect to need to make additional investments related to Year 2000
compliance but will continue to make improvements to its systems to meet
business requirements.
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. The Company is dependent upon its
customers for sales and cash flow. The Company currently does not believe that
it is subject to its customers' and suppliers' Year 2000 efforts, although if
the Company's customers or vendors experience Year 2000 problems, the Company's
results of operations could be materially adversely affected. Although the
Company has not developed a formal contingency plan to deal with Year
2000-related disruptions, the Company believes that it could function
effectively with manual systems until alternative systems were implemented.
The Year 2000 discussion includes forward-looking statements, therefore
there can be no assurance that the Company will not experience Year 2000
problems. However, based upon the progress to date, the Company believes that it
is unlikely that the actual results will differ significantly from those
estimated and unlikely that the Year 2000 compliance will have a material
adverse effect on the Company's financial condition.
INFLATION
The Company does not believe that inflation has a significant impact on
its operations.
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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
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 implementation of our strategies;
o the availability of additional capital;
o variations in stock prices and interest rates;
o competition and fluctuations in quarterly operating results;
and
o other risks and uncertainties described in our filings with
the SEC.
We make no commitments 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and schedules are included in this Annual
Report on Form 10-KSB beginning on Page F-1.
ITEM 8. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS
As previously reported in the Company's Current Report on Form 8-K
dated April 12, 1999, the Company's Board of Directors approved the engagement
of Ernst & Young LLP as its independent auditor for the fiscal year ending March
31, 1999 to replace the firm of Abrams and Company, P.C., which was dismissed as
auditor of the Company effective April 9, 1999. Ernst & Young LLP is the
independent auditor used by Futech Interactive Products, Inc., one of the other
merging companies.
The reports of Abrams and Company, P.C. on the Company's financial
statements for the past two fiscal years did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In connection with the audits of the
Company's financial statements for each of the two fiscal years ended March 31,
1997 and 1998, there were no disagreements with Abrams and Company, P.C. on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope procedures which, if not resolved to the satisfaction of
Abrams and Company, P.C. would have caused Abrams and Company, P.C. to make
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reference to these matters in their report. The Company requested Abrams and
Company, P.C. to furnish Trudy with a letter addressed to the Securities
Exchange Commission stating whether it agrees with the above statements and such
letter was furnished.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Trudy at June 30, 1999 are as
follows:
NAME AGE POSITION
Alice B. Burnham 52 Director
William W. Burnham 57 Chairman of the Board of Directors,
President and Treasurer
Peter D. Nalle 52 Director
Fred M. Filoon 57 Director
Elisabeth T. Prial 41 Director
William T. Carney 45 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 Trudy are as follows:
Alice B. Burnham was elected a director of Trudy in October 1994. As a
major shareholder and wife of the President, she had long been familiar with the
workings of Trudy. Mrs. Burnham manages her own interior design business in New
Canaan, Connecticut and is active in civic and professional affairs. Mrs.
Burnham received her degree from Briarcliff College.
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William W. Burnham has been President and a director of Trudy 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.
Peter D. Nalle was named a director of Trudy 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 M. Filoon was named a director of Trudy in January 1993. Mr.
Filoon has 30 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.
Elisabeth T. Prial was named Vice President and Publisher of Futech on
May 24, 1999. Prior to joining Futech, Ms. Prial served as the Vice President of
Sales of Trudy since October 1994 and Publisher of Trudy since 1996. For the
three years prior to October 1994, Ms. Prial served as Director of Sales of
Trudy. Prior to joining Trudy Corporation she worked in juvenile publishing with
Warner Books, Putnam, and others. Mrs. Prial received her degree from the New
York Fashion Institute of Technology.
William T. Carney was named Vice President and Chief Financial Officer
on March 23, 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 10. EXECUTIVE COMPENSATION
In 1999 no employee of the Company received compensation exceeding
$100,000. William W. Burnham, the President and Chief Executive Officer,
received cash compensation totaling $84,622.
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.
Page 14
<PAGE>
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.
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, 1999, 14,680,000 shares were subject to outstanding
options.
Page 15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Trudy's common stock at June 30, 1999, with respect to (i) each
person known to Trudy to own beneficially more than five percent of the
outstanding shares of Trudy's common stock, (ii) each director of Trudy, (iii)
each of the executive officers of Trudy and (iv) all directors and executive
officers of Trudy as a group.
- --------------------------------------------------------------------------------
Trudy Common Stock
Name Beneficially Owned(1) Percent of Class
- --------------------------------------------------------------------------------
William W. Burnham(2)(3)(4) 115,090,000 32.8%
- --------------------------------------------------------------------------------
Alice B. Burnham(2)(3)(5) 63,250,000 18.1%
- --------------------------------------------------------------------------------
Peter B. Burnham 35,410,000 10.1%
216 Hardwick Road
Petersham, MA
- --------------------------------------------------------------------------------
Peter D. Nalle (3) 2,750,000 0.8%
- --------------------------------------------------------------------------------
Fred M. Filoon (3)(6) 5,250,000 1.5%
- --------------------------------------------------------------------------------
Elisabeth T. Prial (3)(7) 12,000,000 3.4%
- --------------------------------------------------------------------------------
William T. Carney (3) 3,000,000 0.9%
- --------------------------------------------------------------------------------
All executive officers and directors
as a group (6 persons) (4)(5)(6)(7) 201,340,000 55.7%
- --------------------------------------------------------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon exercise of stock options which are
currently exercisable or which become exercisable within 60 days of the
date of the table are deemed beneficially owned by the optionee. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons or entities named in the table above have sole
voting and investment power with respect to all shares of Trudy common
stock shown as beneficially owned by them.
(2) Husband and wife.
(3) The address of each of these individuals is: c/o Trudy Corporation, 353
Main Avenue, Norwalk, Connecticut 06851-1552.
Page 16
<PAGE>
(4) Includes 2,000,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
(5) Includes 1,000,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
(6) Includes 3,000,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
(7) Includes 6,500,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Main Avenue property leased by Trudy is owned by a Connecticut
limited liability corporation, Noreast Management LLC, which is owned jointly by
William W. Burnham, the Chairman of the Board of Directors and President of
Trudy, P. Ogilvie, a former officer and director of Trudy, and Fred Filoon, a
director of Trudy. 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. Pursuant to the merger
agreement, Mr. Burnham has agreed to indemnify New Futech for any all claims
relating to hazardous waste associated with this property for all periods of
time prior to the closing of the mergers.
In previous years, Trudy 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 have increased the indebtedness to $173,941 as of June 30,
1999.
As of March 31, 1998, Trudy has borrowed an aggregate of $383,742 in
cash advances (including accrued interest) 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. No further interest expense has been accrued on
these loans. The aggregate balance of these loans, as of June 30, 1999, was
$287,422.
Page 17
<PAGE>
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 was due
in October 1998, but remains unpaid. The aggregate balance of these loans as of
June 30, 1999 was $364,332.
New Futech has agreed, as part of the merger agreement, to repay
certain loans owing by Trudy to William W. Burnham and two of his family members
in the aggregate amount (including accrued interest through January 31, 1999) of
$800,000. Interest will continue to accrue only on the debt owing to the family
members until the mergers occur. No interest will accrue on the debts owing to
Mr. Burnham from February 1, 1999 through the effective time of the mergers.
Beginning on the closing date of the mergers, interest will accrue on the
outstanding balance of all of these loans at four percent (4%) per annum. At the
closing, New Futech will repay 25% of the outstanding balance, and thereafter
will repay three equal amounts of principal plus all accrued interest at six
month intervals.
In connection with the New Futech mergers, William W. Burnham will be
employed as the Vice President of Specialty Markets of New Futech. Mr. Burnham
will also be a director of New Futech and will receive a three year employment
agreement providing for a base salary of $100,000 per year and stock options for
a total of 20,000 shares of New Futech common stock, vesting in equal, annual
installments over the three year period and with an exercise price of $7.50 per
share. Some of the officers and directors of the other merging companies will
also receive employment agreements and stock options in connection with the
mergers.
Trudy has agreed to pay James P. McGough of JPMC Associates, Trudy's
mergers and acquisitions consulting firm, total compensation of approximately
$167,000 for his services in connection with the Trudy merger. Mr. McGough will
be paid $43,670 and granted 13,500,000 shares of Trudy common stock prior to the
closing of the mergers. The 13,500,000 shares of Trudy common stock will be
converted in the mergers into cash in the amount of $16,330 and 14,314 shares of
New Futech common stock.
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
Trudy that it was in default of certain covenants of its loans which have become
due on June 15, 1999. Management has no assurances that Futech currently has the
financial resources to honor this agreement.
On May 28, 1999, Alice Burnham, a director of Trudy 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 Trudy, Futech, and Trudy's bank, First Union was to be
developed. This plan has not yet been finalized and the loan remains unpaid.
Page 18
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS PAGE
Independent Auditors' Reports F-1-F-2
Balance Sheets, March 31, 1999 and 1998 F-3
Statement of Operations, years ended March 31, 1999 and 1998 F-4
Statement of Shareholders' Equity (Deficit),
years ended March 31, 1999 and 1998 F-5
Statement of Cash Flows, years ended March 31, 1999 and 1998 F-6
Notes to Financial Statements F-7-F-17
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.
2. The Exhibits listed in the Exhibit Index following the
Signatures page, which is incorporated herein by this
reference.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated April 12, 1999.
Page 19
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C>
2 Merger Agreement dated as of June 7, 1999, Filed as Appendix A to the
by and among Trudy Corporation, Janex Prospectus/Proxy Statement included
International, Inc., Futech Interactive in the Registration Statement on
Products, Inc., Fundex Games, Ltd., DaMert Form S-4 of Futech Interactive
Company, Futech Interactive Products Products (Delaware) Inc. and Futech
(Delaware) Inc., and Futech Toys & Games, Toys & Games, Inc. (File 333-80131)
Inc. dated June 7, 1999 and incorporated
herein by reference
3.1 Certificate of Incorporation of Trudy Filed as Exhibit 3 a. to Trudy's
Corporation ("Trudy"), as adopted Registration Statement on Form S-18
February 24, 1987 (file 33-4379B) dated May 22, 1987
and incorporated herein by reference
3.2 Agreement of Merger, dated as of March 23, Filed as Exhibit 3.2T to the
1987 between Trudy Corporation, a Registration Statement on Form S-4
Connecticut corporation, and Trudy, a of Futech Interactive Products
Delaware corporation (Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
3.3 Certificate of Amendment of Certificate of Filed as Exhibit 3 b. to Trudy's
Incorporation of Trudy, as adopted May 13, Registration Statement on Form S-18
1987 (file 33-4379B) dated May 22, 1987
and incorporated herein by reference
3.4 Bylaws of Trudy Filed as Exhibit 3 c. to Trudy's
Registration Statement on Form S-18
(file 33-4379B) dated May 22, 1987
and incorporated herein by reference
4.1 Articles 4, 9, 10, 11 and 12 of the Filed as Exhibit 3 a. to Trudy's
Certificate of Incorporation of Trudy Registration Statement on Form S-18
Corporation. (file 33-4379B) dated May 22, 1987
See Exhibit 3.1 and Exhibit 3.3 and incorporated herein by reference
4.2 Articles 5 and 6 of the Agreement of Filed as Exhibit 4.2T to the
Merger, dated as of March 23, 1987 between Registration Statement on Form S-4
Trudy Corporation, a Connecticut of Futech Interactive Products
corporation, and Trudy Corporation, a (Delaware) Inc. and Futech Toys &
Delaware corporation. Games, Inc. (File 333-80131) dated
See Exhibit 3.2 June 7, 1999 and incorporated
herein by reference
</TABLE>
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C>
4.3 Articles II, III, V, IX and X of the Bylaws Filed as Exhibit 3 c. to Trudy's
of Trudy. See Exhibit 3.4 Registration Statement on Form S-18
(file 33-4379B) dated May 22, 1987
and incorporated herein by reference
4.4 Specimen Common Stock Certificate of Trudy Filed as Exhibit 4.4T to Amendment
No. 1 of the Registration Statement
on Form S-4 of Futech Interactive
Products (Delaware) Inc. and Futech
Toys & Games, Inc. (File 333-80131)
dated June 28, 1999 and
incorporated herein by reference
10.1 Security Interest Agreement dated May 16, Filed as Exhibit 10.1T to the
1991 between Trudy and William W. Burnham Registration Statement on Form S-4
regarding Mr. Burnham hypothecating and of Futech Interactive Products
assigning his personal Investment Savings (Delaware) Inc. and Futech Toys &
Account at Union Trust as collateral for Games, Inc. (File 333-80131) dated
Trudy to effect the opening of the Letters June 7, 1999 and incorporated
of Credit for $8,160 and $28,300 herein by reference
10.2 Security Interest Agreement (#2) dated July Filed as Exhibit 10.2T to the
31, 1991 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $16,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.3 Security Interest Agreement (#3) dated Filed as Exhibit 10.3T to the
August 5, 1991 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding Mr. Burnham hypothecating of Futech Interactive Products
and assigning his personal Investment (Delaware) Inc. and Futech Toys &
Savings Account and Union Trust as Games, Inc. (File 333-80131) dated
collateral for Trudy to effect the opening June 7, 1999 and incorporated
of the Letters of Credit for $12,960 for herein by reference
T.E. Squirrels and $11,180 for Wolves
10.4 Security Interest Agreement (#4) dated Filed as Exhibit 10.4T to the
August 20, 1991 between Trudy and William Registration Statement on Form S-4
S. Burnham regarding a $30,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
</TABLE>
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C>
10.5 Security Interest Agreement (#5) dated Filed as Exhibit 10.5T to the
September 5, 1991 between Trudy and William Registration Statement on Form S-4
W. Burnham regarding a $30,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.6 Security Interest Agreement (#6) dated Filed as Exhibit 10.6T to the
October 18, 1991 between Trudy and William Registration Statement on Form S-4
W. Burnham regarding a $10,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.7 Security Interest Agreement (#7) dated Filed as Exhibit 10.7T to the
January 24, 1992 between Trudy and William Registration Statement on Form S-4
W. Burnham regarding a $12,500 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.8 Security Interest Agreement (#9) dated Filed as Exhibit 10.8T to the
April 30, 1992 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $15,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.9 Security Interest Agreement (#12) dated Filed as Exhibit 10.9T to the
August 25, 1992 between Trudy and William Registration Statement on Form S-4
N. Burnham regarding a $16,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.10 Security Interest Agreement (#13) dated Filed as Exhibit 10.10T to the
September 25, 1992 between Trudy and Registration Statement on Form S-4
William W. Burnham regarding a $50,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
</TABLE>
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C>
10.11 Security Interest Agreement (#14) dated Filed as Exhibit 10.11T to the
October 5, 1992 between Trudy and William Registration Statement on Form S-4
W. Burnham regarding a $13,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.12 Security Interest Agreement (#15) dated Filed as Exhibit 10.12T to the
March 12, 1993 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $45,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.13 Security Interest Agreement (#16) dated May Filed as Exhibit 10.13T to the
19, 1993 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $15,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.14 Security Interest Agreement (#17) dated Filed as Exhibit 10.14T to the
March 29, 1995 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $4,800 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.15 Security Interest Agreement (#18) dated Filed as Exhibit 10.15T to the
July 10, 1998 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $28,900 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
</TABLE>
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C>
10.16 Security Interest Agreement (#19) dated Filed as Exhibit 10.16T to the
August 5, 1998 between Trudy and William W. Registration Statement on Form S-4
Burnham regarding a $310,000 loan of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.17 Loan Agreement dated March 30, 1998 between Filed as Exhibit 10.17T to the
First Union National Bank and Trudy Registration Statement on Form S-4
of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.18 Security Agreement dated March 30, 1998 Filed as Exhibit 10.18T to the
between First Union National Bank and Trudy Registration Statement on Form S-4
of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.19 First Union Bank Modification Number Two to Filed as Exhibit 10.19T to the
Loan Agreement dated March 1, 1999. Registration Statement on Form S-4
of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.20 Landlord Subordination and Waiver dated Filed as Exhibit 10.20T to the
March 30, 1998 between First Union National Registration Statement on Form S-4
Bank and Noreast Management LLC of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.21 Promissory Note dated March 30, 1998 in the Filed as Exhibit 10.21T to the
amount of $1,200,000 by Trudy d/b/a TMC Registration Statement on Form S-4
Soundprints in favor of First Union of Futech Interactive Products
National Bank (Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
</TABLE>
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C>
10.22 Promissory Note dated March 30, 1998 in the Filed as Exhibit 10.22T to the
amount of $250,000 by Trudy d/b/a TMC Registration Statement on Form S-4
Soundprints in favor of First Union of Futech Interactive Products
National Bank (Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.23 Lease Agreement between Noreast Management Filed as Exhibit 10.23T to the
LLC and TMC/Soundprints, Inc. (Trudy) dated Registration Statement on Form S-4
December 5, 1994 of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.24 The Nature Conservancy letter of Filed as Exhibit 10.24T to the
understanding with Soundprints (Trudy) Registration Statement on Form S-4
dated December 5, 1994 of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.25 Smithsonian/Soundprints Agreement dated Filed as Exhibit 10.25T to the
June 17,1997 between Smithsonian Registration Statement on Form S-4
Institution and Soundprints, a division of of Futech Interactive Products
Trudy (Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.26 Consent to Assignment of the June 17, 1997 Filed as Exhibit 10.26T to the
Smithsonian/Soundprints Agreement from Registration Statement on Form S-4
Soundprints Agreement from Soundprints to of Futech Interactive Products
Futech Interactive Products, dated march 3, (Delaware) Inc. and Futech Toys &
1999 Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
10.27 Trudy 1987 Stock Option Plan Filed as Exhibit 10.27T to the
Registration Statement on Form S-4
of Futech Interactive Products
(Delaware) Inc. and Futech Toys &
Games, Inc. (File 333-80131) dated
June 7, 1999 and incorporated
herein by reference
</TABLE>
<PAGE>
TRUDY CORPORATION
(COMMISSION FILE NO. 0-16056)
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
- ------- ----------- ----------------------------- ---------
<S> <C> <C> <C>
10.28 Letter agreement dated March 3, 1999 X
between Trudy and Futech regarding Futech's
financial assistance to Trudy.
23 Consent of Ernst & Young LLP X
27 Financial Data Schedule X
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Trudy Corporation
We have audited the accompanying balance sheet of Trudy Corporation as of March
31, 1999, and the related statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trudy Corporation at March 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's operating
loss, deficiency in net assets, and default under its borrowing agreement raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to those matters are also described in Note 1. The March 31, 1999
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
June 11, 1999
F-1
<PAGE>
Report of Abrams and Company, P.C., Independent Auditors
To The Stockholders
Trudy Corporation
Norwalk, Connecticut
We have audited the accompanying balance sheet of Trudy Corporation as of March
31, 1998, and the related statements of operations, shareholders' equity, and
cash flows for the year then ended. 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 audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trudy Corporation at March 31,
1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Abrams and Company, P.C.
----------------------------
Melville, NY
June 26, 1998
F-2
<PAGE>
Trudy Corporation
Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1998 1999
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 624
Accounts receivable, net of allowance for doubtful accounts of $31,361
and $50,044 at March 31, 1998 and 1999, respectively
321,898 246,049
Inventories, net 1,574,901 1,501,204
Prepaid expenses and other current assets 105,730 50,842
Deferred income taxes 59,000 --
--------------------------
Total current assets 2,061,529 1,798,719
Property and equipment, net 129,769 114,185
Pre-publication costs and royalty advances 379,546 205,212
Deferred income taxes 319,000 --
--------------------------
Total assets $ 2,889,844 $ 2,118,116
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities:
Checks drawn in excess of cash balances $ 23,517 $ --
Accounts payable and accrued expenses 295,176 477,696
Line of credit in default -- 770,000
Current portion of long-term debt 49,350 --
Long-term debt in default -- 200,349
Current portion of notes payable - related parties 287,612 626,322
--------------------------
Total current liabilities 655,655 2,074,367
Bank note payable 388,689 --
Long-term debt 200,651 --
Notes payable to related parties 161,276 171,408
Shareholders' equity (deficit):
Common stock: $.0001 par value:
Authorized shares - 850,000,000
Issued and outstanding shares - 331,222,249 at March 31, 1998 and 1999
33,123 33,123
Additional paid-in capital 4,000,316 4,000,316
Accumulated deficit (2,549,865) (4,161,098)
--------------------------
Total shareholders' equity (deficit) 1,483,574 (127,659)
--------------------------
Total liabilities and shareholders' equity (deficit) $ 2,889,844 $ 2,118,116
==========================
SEE ACCOMPANYING NOTES
</TABLE>
F-3
<PAGE>
Trudy Corporation
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1999
------------------------------
<S> <C> <C>
Net sales $ 4,977,599 $ 3,390,884
Cost of sales 2,730,401 2,168,685
------------------------------
Gross profit 2,247,198 1,222,199
Operating expenses:
Selling, general and administrative 2,168,322 2,355,787
Depreciation and amortization 17,449 22,175
------------------------------
Income (loss) from operations 61,427 (1,155,763)
Other income (expense):
Interest expense (102,099) (111,604)
Other income 35,904 34,134
------------------------------
Net loss before income taxes (4,768) (1,233,233)
Income tax benefit (provision) 152,000 (378,000)
------------------------------
Net income (loss), before extraordinary item 147,232 (1,611,233)
Extraordinary item, net of income taxes of $40,000 56,320 --
------------------------------
Net income (loss) $ 203,552 $ (1,611,233)
==============================
Net income (loss) per share:
Basic and diluted $ 0.00 $ 0.00
==============================
Weighted average shares used in computation:
Basic and diluted 324,598,187 331,222,249
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
<TABLE>
<CAPTION>
Trudy Corporation
Statements of Shareholders' Equity (Deficit)
COMMON STOCK ADDITIONAL TOTAL
-------------------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1997 324,457,249 $32,446 $3,993,698 $(2,753,417) $ 1,272,727
Issuance of common stock 6,765,000 677 6,618 -- 7,295
Net income -- -- -- 203,552 203,552
--------------------------------------------------------------------------------
Balance at March 31, 1998 331,222,249 33,123 4,000,316 (2,549,865) 1,483,574
Net loss -- -- -- (1,611,233) (1,611,233)
--------------------------------------------------------------------------------
Balance at March 31, 1999 331,222,249 $33,123 $4,000,316 $(4,161,098) $ (127,659)
================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
<TABLE>
<CAPTION>
Trudy Corporation
Statements of Cash Flows
YEAR ENDED MARCH 31
1998 1999
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 203,552 $(1,611,233)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Extraordinary item (56,320) --
Depreciation 17,449 22,175
Amortization of pre-publication costs 107,137 140,121
(Gain)/loss on disposal of property and equipment (300) 53,080
Loss on write down of pre-publication costs and royalty advances -- 199,901
Provision for losses on accounts receivable 45,157 33,596
Provision for slow moving inventory 50,000 205,000
Deferred income taxes (162,000) 378,000
Changes in operating assets and liabilities:
Accounts receivable (193,358) 42,253
Inventories (220,311) (131,303)
Prepaid expenses and other current assets (16,116) 54,888
Prepaid income taxes (20,124) --
Accounts payable and accrued expenses (50,532) 182,520
--------------------------
Net cash used in/(provided by) operating activities (295,766) (431,002)
INVESTING ACTIVITIES
Purchases of property and equipment (81,679) (59,671)
Pre-publication and royalty advances, net (135,500) (165,688)
Proceeds from sale of equipment 300 --
--------------------------
Net cash used in investing activities (216,879) (225,359)
FINANCING ACTIVITIES
Net proceeds on short-term borrowings (105,598) 706,637
Proceeds from issuance of loans - long-term 648,822 --
Repayment of loans - long-term (40,813) (49,652)
Proceeds from exercise of common stock options 7,295 --
--------------------------
Net cash provided by financing activities 509,706 656,985
--------------------------
Net increase (decrease) in cash and cash equivalents
(2,939) 624
Cash and cash equivalents at beginning of year 2,939 --
==========================
Cash and cash equivalents at end of year $ -- $ 624
==========================
Cash paid for interest $ 85,003 $ 78,027
Cash paid for income taxes 35,957 --
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Trudy Corporation
Notes to Financial Statements
March 31, 1999
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Trudy Corporation (Company) designs, manufactures and markets plush stuffed
animals and publishes children's books and audiocassettes for sale to both
retail and wholesale customers, both domestically and internationally.
All Company product is sold under the trade name of Soundprints.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred operating losses,
negative working capital and has failed to meet certain provisions of its credit
agreement at March 31, 1999. The Company has been funded through loans from
certain principal shareholders. The inability of the Company to attract
additional capital and ultimately, to achieve profitability, could result in
discontinuation of the Company's business.
The Company's ultimate ability to continue as a going concern depends on the
market acceptance of products utilizing its proprietary agreements with certain
licensees, and the achievement of operating profits and positive cash flow.
The Company is party to a merger agreement dated June 7, 1999 with Futech
Interactive Products, Inc. ("Futech") and certain other companies and
shareholders thereof. Under the terms of the merger, Futech will acquire all of
the Company's outstanding stock for $456,330 in cash (net of broker's fee of
$43,670) and 400,000 shares of Futech stock. Futech has also agreed to provide
working capital advances to the Company and to assure that the Company is not in
default under any of its loan agreements, however, management has no assurances
that Futech currently has the financial resources to honor this agreement. Under
the terms of the merger, Futech has also agreed to repay approximately $800,000
of loans and interest payable to the Company's president and his family. The
merger is subject to closing conditions, including shareholder approval. The
Company is depending upon additional financial resources that it expects to
receive from Futech. Should the merger with Futech not occur, management plans
to obtain additional financial resourcing from yet to be identified third
parties and/or seek potential acquirers who would provide additional resources.
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.
Certain amounts shown in the prior year financial statements have been
reclassified to conform with the current year financial statement presentation.
F-7
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from customers and also include
$25,761 of expenses related to the merger with Futech which will be reimbursed
by Futech.
The Company transacts business on a credit basis with its customers. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral or other security to support
credit sales, but provides an allowance for bad debts based on historical
experience and specifically identified risks.
The Company's largest customer, Advanced Marketing Services, Inc., totaled
approximately 35.2 percent and 28.8 percent of net sales in 1998 and 1999.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined by various methods which approximate
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the assets which
range from five to seven years for machinery and equipment, and furniture and
fixtures. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1999, the Company has the following financial instruments: cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
long-term debt. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates their fair value
based on the liquidity of these financial instruments or based on their
short-term nature. The carrying value of long-term debt approximates fair market
value based on the market interest rates available to the Company for debt of
similar risk and maturities.
F-8
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE
The Company recognizes revenue upon shipment of the product to the customer,
with appropriate allowances made for estimated returns and uncollectible
accounts.
The Company sells certain goods under a license from the Smithsonian Institution
("Smithsonian"). Sales with the Smithsonian name approximated 90 percent and 80
percent of net sales in the years ended March 31, 1998 and 1999, respectively.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
statement employs an asset and liability approach for financial accounting and
reporting of deferred income taxes. Generally, SFAS 109 allows for recognition
of deferred tax assets in the current period for the future benefit of net
operating loss carryforwards and items for which expenses have been recognized
for financial statement purposes but will be deductible in future periods. A
valuation allowance is recognized, if on the weight of the available evidence it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, to the extent that
the exercise price of the Company's employee stock options equals management's
estimate of the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
Deferred expense on stock and options issued to officers and directors for
services or other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.
The Company periodically issues shares of its common stock to employees and
vendors for services provided to the Company. Shares issued for services are
valued at the Company's estimate of fair value of the common stock at the date
of issuance.
F-9
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE COMPUTATION
Loss per share is computed in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128). Basic earnings
per share is computed using the weighted average number of common shares.
Diluted earnings per share is computed using the weighted average number of
common shares and common share equivalents during the period. Dilutive common
share equivalents consist of employee stock options using the treasury method
and dilutive convertible securities using the if-converted method.
COMPREHENSIVE LOSS
As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components. Comprehensive loss for
the Company is the same as net loss for all periods presented.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective April 1, 1998, the Company adopted the FASB's SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company has determined it has no reportable segments
under Statement 131.
ADVERTISING
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. Included in
prepaid expenses and other current assets are prepaid catalogs and brochures of
approximately $53,000 and $22,000 at March 31, 1998 and March 31, 1999,
respectively.
Advertising expense was approximately $76,000 and $58,000, respectively, for the
years ended March 31, 1998 and 1999.
F-10
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31
1998 1999
-----------------------------
<S> <C> <C>
Raw materials $ 50,880 $ 58,439
Finished goods 1,574,021 1,697,765
-----------------------------
1,624,901 1,756,204
Reserve for slow-moving inventory 50,000 255,000
-----------------------------
$1,574,901 $1,501,204
=============================
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31
1998 1999
-----------------------------
<S> <C> <C>
Machinery and equipment $ 343,806 $ 311,987
Furniture and fixtures 34,630 47,909
-----------------------------
378,436 359,896
Accumulated depreciation 248,667 245,711
-----------------------------
$ 129,769 $ 114,185
=============================
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
MARCH 31
1998 1999
-----------------------------
<S> <C> <C>
Accounts payable $ 206,234 $ 225,359
Accrued royalties 22,385 156,037
Accrued payroll 34,271 29,164
Accrued interest 2,758 18,261
Commissions payable 12,777 13,685
Other 16,751 35,190
-----------------------------
$ 295,176 $ 477,696
=============================
</TABLE>
F-11
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
5. COMMITMENTS
LINE OF CREDIT IN DEFAULT
The Company had a loan agreement with a bank which provided up to $1.2 million
of available funds at an interest rate of the bank's prime rate plus 0.25
percent (8.0 percent at March 31, 1999). The loan agreement expired on June 15,
1999. The line is collateralized by eligible accounts receivable and inventory
as well as personal guarantees of certain shareholders.
LONG-TERM DEBT IN DEFAULT
Long-term debt consists of a promissory note collateralized by the assets of the
Company. The terms of the note are for monthly installments of $6,207 including
interest at 8.75 percent, until April 30, 2002 when all remaining principal and
interest is due.
COMPLIANCE WITH FINANCIAL COVENANTS
Certain financial covenants are required to be met in connection with the
long-term debt and line of credit agreement including tangible net worth and
indebtedness. At March 31, 1999, the Company has failed to meet these
requirements. As a result of this noncompliance, there are various options
available to the lending institution including the immediate repayment of
outstanding balances of both loans. The bank many also increase the interest
rate of the loans to a default rate, which is 300 basis points higher than the
stated rate.
In accordance with SFAS No. 78, "Classification of Obligations That Are Callable
by the Creditor," the Company has classified the balance of the term loan and
line of credit borrowings as a current liability. Management of the Company has
met with the lenders in an attempt to restructure the credit facility, or
otherwise satisfactorily resolve the defaults. It is not possible, however, to
predict at this time the success of management's efforts. No assurance can be
given that the outcome of the Company's negotiating efforts with the lenders
will not adversely affect the Company's business, financial condition, results
of operations and cash flows.
F-12
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
5. COMMITMENTS (CONTINUED)
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
MARCH 31
1998 1999
-----------------------
<S> <C> <C>
$365,387 in aggregated promissory notes to the president of the Company at
interest rates varying between 8 to 12 percent. Note terms have passed and
payments are made as cash flows permit. Notes are collateralized by cash,
accounts receivable, inventory, and furniture and fixtures. $ 287,612 $ 287,422
$28,900 promissory note to the president, collateralized by cash, accounts
receivable, inventory, and furniture and fixtures, payable in total including
8 percent interest on July 10, 1999. -- 28,900
$310,000 promissory note to the president, collateralized by cash, accounts
receivable, inventory and furniture and fixtures, payable in total including
8 percent interest on October 5, 1998. -- 310,000
$101,326 family loan at 10 percent interest, noncompound- ing. There
are no established repayment terms. 161,276 171,408
-----------------------
448,888 797,730
Less current portion 287,612 626,322
-----------------------
$ 161,276 $ 171,408
=======================
</TABLE>
On May 28, 1999, a director of the Company and wife of the Company's president
loaned the Company $140,000 to meet immediate cash needs. The note bears
interest at 8 percent and was due (but not paid) on July 2, 1999.
As of March 31, 1998, the president agreed to forgive the approximately $96,000
of interest in addition to amending the Company's borrowing terms to omit any
future interest on his loan. Accordingly, such amount, net of related income
taxes is reflected as an extraordinary item.
F-13
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
5. COMMITMENTS (CONTINUED)
LEASE COMMITMENTS
The Company leases its building from a related party and miscellaneous other
items under noncancelable operating leases. Rent expense was approximately
$106,000 and $108,000 during the years ended March 31, 1998 and 1999,
respectively. Future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at March 31, 1999:
2000 $ 111,524
2001 111,681
2002 111,260
2003 110,000
2004 110,000
Thereafter 27,500
----------
Total minimum lease payments $ 581,965
==========
OTHER COMMITMENTS
The Smithsonian has granted the Company a nontransferable license to utilize the
names "Smithsonian Institution" and "Smithsonian" for products and purposes as
defined in the license agreement. The agreement expires on September 30, 2002.
The agreement requires the Company to pay royalties of 5 percent on products
sold using the Smithsonian name. The Company has guaranteed the following
minimum royalty amounts:
Period Amount
------------------------------------ ----------
October 1, 1998 - September 30, 1999 $ 95,000
October 1, 1999 - September 30, 2000 100,000
October 1, 2000 - September 30, 2001 105,000
October 1, 2001 - September 30, 2002 110,000
The Company is also a guarantor on an installment loan made to Noreast
Management LLC ("Noreast") a limited liability company of which the Company's
president is a member. The Company leases its current facility from Noreast. The
purpose of the loan was to fund improvements to the facility currently occupied
by the Company. The loan is payable in 95 monthly installments of $3,125, plus
interest at 9.5 percent. At March 31, 1999, the balance of the installment loan
was $200,000.
F-14
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
6. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
MARCH 31
1998 1999
--------------------------
<S> <C> <C>
Current - State $ 10,000 $ --
Deferred - Federal (162,000) 378,000
--------------------------
$ (152,000) $ 378,000
==========================
The provision (benefit) for income tax differs from the U.S. federal statutory rate as follows:
MARCH 31
1998 1999
--------------------------
<S> <C> <C>
Income tax provision (benefit) at statutory rate (39.0)% (34.0)%
Net operating loss for which no current benefit has been taken
-- 34.0
Establishment of valuation reserve for deferred tax assets
-- 30.7
State income tax net of federal benefit 138.4 --
Effect of graduated rate on statutory rate (85.6) --
Utilization of net operating loss (332.6) --
--------------------------
Income tax provision (benefit) (318.8)% 30.7%
==========================
The deferred tax assets consist of the following:
MARCH 31
1998 1999
--------------------------
<S> <C> <C>
Reserves and accruals $ 65,000 $ 157,000
Net operating loss carryforwards 1,061,000 1,156,000
--------------------------
Total gross deferred tax assets 1,126,000 1,313,000
Less valuation allowance (748,000) (1,313,000)
--------------------------
$ 378,000 $ --
==========================
Current $ 59,000 $ --
Non-current 319,000 --
==========================
$ 378,000 $ --
==========================
</TABLE>
F-15
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The Company has a net operating loss carryforward of $3,400,000 for Federal
income tax purposes, which begins to expire in 2004, to the extent not
previously utilized.
The realization of the Company's deferred tax assets is dependent on future
profits, which are not assured, accordingly, a valuation allowance equal to the
net deferred tax assets has been provided at March 31, 1999. The valuation
allowance for deferred tax assets decreased $324,000 during the year ended March
31, 1998 due to the utilization of net operating loss carryforwards and
increased by $565,000 during the year ended March 31, 1999 due to the
establishment of valuation reserves against all net deferred tax assets.
7. STOCK-BASED COMPENSATION
The Company has stock options outstanding under its 1987 Stock Option Plan ("the
Plan"). No further options may be granted under the Plan. Existing options
expire upon the earlier of employee termination or ten years from the date of
grant. Options outstanding have exercise prices from $0.001 to $0.002 and have a
weighted average remaining life of 65 months.
A summary of the Company's stock option activity, and related information is as
follows:
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
---------------------------
Outstanding at April 1, 1997 21,603,500 $ 0.001
Granted -- --
Exercised (6,765,000) 0.001
Forfeited/canceled (158,500) 0.011
---------------------------
Outstanding at March 31, 1998 14,680,000 0.001
Granted -- --
Exercised -- --
Forfeited -- --
---------------------------
Outstanding at March 31, 1999 14,680,000 $ 0.001
===========================
Exercisable at end of year 14,680,000
============
F-16
<PAGE>
Trudy Corporation
Notes to Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the minimum value option pricing model
assuming a risk-free interest rate of 5 percent; dividend yield of 0 percent;
and a weighted-average expected life of the option of 5 years for the year ended
March 31, 1999. Pro forma expense under SFAS No. 123 was not material in the
years ended March 31, 1998 and 1999.
Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
8. BENEFIT PLAN
Effective January 1, 1999, the Company adopted a 401(k) Retirement Plan, which
covers substantially all employees of the Company that have completed one year
of service. The plan permits participants to contribute to the plan, subject to
Internal Revenue Code restrictions, and the plan directs the Company to make
matching contributions of 50 percent on the first 3 percent of employee
contributions. During the year ended March 31, 1999, the Company made $2,260 in
matching contributions to the Plan and paid $830 in administrative expenses.
F-17
<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 Chief Executive Officer
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/s/ WILLIAM W. BURNHAM Chairman of the Board, July 14, 1999
----------------------- President and Chief Executive Officer
William W. Burnham
/s/ ALICE B. BURNHAM Director July 14, 1999
-----------------------
Alice B. Burnham
/s/ FRED M. FILOON Director July 14, 1999
-----------------------
Fred M. Filoon
/s/ PETER D. NALLE Director July 14, 1999
-----------------------
Peter D. Nalle
/s/ ELISABETH T. PRIAL Director July 14, 1999
-----------------------
Elisabeth T. Prial
/s/ WILLIAM T. CARNEY Chief Financial and July 14, 1999
----------------------- Accounting Officer
William T. Carney
</TABLE>
[GRAPHIC LOGO]
SOUNDprints
March 3, 1999
Futech Interactive Products, Inc.
2999 N. 44th Street, Suite 225
Phoenix, AZ 85018
Attn: Mr. Vincent W. Goett, Chairman and Chief Executive Officer
Dear Sirs:
In consideration of the mutual covenants and agreements herein contained, set
forth below are additional terms (which are an integral part of the Agreement
and Plan of Merger between us) with regard to the timetable for financing the
merger and Futech's assistance with Trudy's working capital needs in the event
of a delay in the closing of the merger.
The proxy solicitation materials and Registration Statement prepared for use in
connection with Trudy's meeting of shareholders will be filed as promptly as
practical with the SEC, which filing will not be later than April 13, 1999.
Futech shall retain and compensate counsel of its own choosing to prepare the
proxy solicitation materials and Registration Statement and ancillary materials,
subject to the review of Trudy counsel, compensation for which will be
pre-agreed. After review and comments, if any, by the SEC, Trudy and Futech
shall use their best efforts to cause the Registration Statement to be effective
and the proxy materials to be mailed not later than May 10, 1999.
If the Effective Date of the Merger has not occurred by June 1, 1999, Futech
will assist in providing the working capital needs of Trudy, if needed, to
maintain sales momentum until the closing and assure that it is not in default
under any of its loan agreements, including its borrowings from First Union.
Please confirm your agreement by signing two copies of this letter and returning
an executed original to us.
Very truly yours,
TRUDY CORPORATION
By: /s/ WILLIAM W. BURNHAM
----------------------------------------
William W. Burnham
Chairman and Chief Executive Officer
AGREED TO:
FUTECH INTERACTIVE PRODUCTS, INC.
By: /s/ VINCENT W. GOETT
----------------------------------------
Vincent W. Goett
Chairman and Chief Executive Officer
A DIVISION OF
SOUNDPRINTS TRUDY CORPORATION
- --------------------------------------------------------------------------------
355 MAIN AVENUE o NORWALK, CONNECTICUT 06851-1552
o (203) 846-2774 o Fax (203) 846-1776 o E-mail: [email protected]
<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> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 624
<SECURITIES> 0
<RECEIVABLES> 296,093 <F1>
<ALLOWANCES> 500,044
<INVENTORY> 1,501,204
<CURRENT-ASSETS> 1,798,719
<PP&E> 114,185 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,118,116
<CURRENT-LIABILITIES> 2,074,367
<BONDS> 171,408
0
0
<COMMON> 33,123
<OTHER-SE> (160,782)
<TOTAL-LIABILITY-AND-EQUITY> 2,118,116
<SALES> 3,390,884
<TOTAL-REVENUES> 3,390,884
<CGS> 2,168,685
<TOTAL-COSTS> 4,546,647
<OTHER-EXPENSES> (34,134)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,604
<INCOME-PRETAX> (1,233,233)
<INCOME-TAX> 378,000
<INCOME-CONTINUING> (1,611,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,611,233)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
<FN>
<F1> The values for Receivables and PP&E represent net amounts.
</FN>
</TABLE>
