ITEM 1. DESCRIPTION OF BUSINESS
General Development of Business
Trudy Corporation (hereinafter referred to as the ‘Company’), publishes children’s books, books with read- and sing-along audio tapes and CD’s and designs, manufactures and markets children’s musical instruments, electronics and plush stuffed animals for sale to domestic and international retail and wholesale customers on a returnable and non-returnable basis. The Company’s products are sold under the trade names (i.e. imprints) of Studio Mouse, Soundprints, Little Soundprints, Music for Little People and Fetching Books.
Trudy Corporation was organized as a Connecticut corporation under the name Norwest Manufacturing Corporation on September 14, 1979, changed its name to Trudy Toys Company, Inc. on December 5, 1979, changed its name to Trudy Corporation on March 27, 1984 and was re-incorporated as a Delaware corporation on February 25, 1987. On July 27, 1987 the Company first offered shares of common stock for sale to the public.
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Segments
The Company sells its products in approximately 50 different channels of trade, both domestically and internationally to, on average, more than 40,000 customers. For further information please refer Management’s Discussion and Analysis in this Form 10-K.
Products and Licensing
The Company holds a non-exclusive publishing license with Disney Licensed Publishing, an imprint of Disney Children’s Book Group, LLC (“Disney”) for the territories of North America. The license was effective through December 31, 2008. The Company operated under a contract extension through June 30, 2009 and a renewal is in negotiation. The license provides for the Studio Mouse imprint to publish certain novelty book and audio CD formats for distribution into the licensed territories, as well as the United Kingdom, Russia, nine African countries and many select countries throughout Asia, the Middle East, Eastern Europe, Latin America, and the Caribbean, with more countries pending approval. The agreement includes a 3 year distribution period for an expanded line of novelty books with audio CD’s with content based on an educational platform. The licensed characters include core properties such as Disney Princess and Winnie-the-Pooh, selected Disney Channel shows, as well as feature films including Disney-Pixar titles such as “Finding Nemo” “Cars”, and Disney feature films such as “Pirates of the Caribbean” as well as Disney’s own animation releases such as “Chicken Little.” The license also includes Spanish language for distribution in North America, Latin America and Spain and bilingual rights for North America and various other territories throughout the world. The Company also holds a non-exclusive publishing license with The Walt Disney Company Iberia, S.L. for Spain that is effective through June 30, 2009 with a renewal in negotiation.
The material published is targeted to a preschool through early elementary school audience and contains early childhood developmental and educational content utilizing popular Disney characters. Since the inception of the license the Company has published over 130 Disney-branded titles in English and Spanish. For the fiscal year ended March 31, 2009 sales of Disney-licensed product represented 41.7% of total sales. In the fiscal year ended March 31, 2008 sales of Disney-licensed product represented 53.4% of total sales. The Disney license requires royalties to be paid.
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The Company holds a non-exclusive license from the Smithsonian Institution to create and/or distribute Smithsonian-licensed fiction titles through September 30, 2012. The license, allows for the sale of educational components and bundled kits, under the Soundprints and Studio Mouse imprints, containing realistic wildlife plush toys, storybooks, and audio-books in various formats. For the fiscal year ended March 31, 2009 sales of Smithsonian-licensed product represented 26.5% of total sales. For the fiscal year ended March 31, 2008 sales of Smithsonian-licensed product represented 21.6% of total sales. The Smithsonian license requires royalties to be paid.
Disney-licensed Products
In June 2008, the Company released the first two titles in a new series, Imagine & Write™. These titles feature the Disney Fairies and Disney Pirates characters. The content focuses on creative writing and illustrating. Each title features a patent-pending zip-shut format with carrying handle, two pens, an audio CD, and stickers. The Company has plans to expand and further develop this format for fiscal 2010.
Early in calendar year 2009, the Company launched two new series, Read, Play & Go!™ and Step-by-Step™. The Read, Play & Go!™ titles feature Mickey Mouse Clubhouse and Winnie the Pooh characters. The content focus is on early learning concepts such as the alphabet, numbers, and shapes. Each title features a carry-along nylon handle and audio CD. The Step-by-Step™ titles feature Disney Princess and Disney*Pixar Cars characters. The content focus is on spelling and letter recognition. The series features interchangeable puzzle pieces and an audio CD. The Company has plans for additional titles in both formats for fiscal 2010.
The Company also continued to publish new Disney titles from successful series in the customary formats, Learn-on-the-Go™, Carry-a-Tune™, Learn & Carry™, Zip & Carry™, Travel Pack™ and Storybook Sets™ formats. In fiscal year 2009, the company introduced updated versions of the successful Princess Happy Endings and Winnie the Pooh Friends Collection Storybook Set titles.
Overall, the Company introduced 103 new titles in fiscal 2009, 83 new titles in fiscal 2008, and has plans to increase new introductions in future years.
Smithsonian-licensed products
Late in the fall of 2008, the Company launched the first six paperback titles in the Smithsonian Alphabet Book series. These books feature the same beautiful original artwork and clever rhyming text as the hardcover versions and also come with the full-sized tear-out poster and audio CD. Among the titles released is the Teachers’ Choice Award-winning Alphabet of Insects. Also in May of 2008, the company released its first Smithsonian Zip & Carry™, Animals A to Z, based on the successful Alphabet Book, Alphabet of Animals.
In July of 2008, the Company launched a line of plush toys to accompany the popular Smithsonian board book series entitled “Baby Animals”. It was introduced with new packaging that houses the book and plush toy in an attractive set. In February of 2009, the company introduced the next title in this series about a puppy exploring his world. The Company has plans for additional titles in this format for fiscal 2010.
In February of 2009 under an exclusive one year distribution agreement with Baker and Taylor, the Company published and shipped six bilingual (Spanish and English) titles repurposed from the popular Smithsonian Backyard and Oceanic series. These bilingual editions were to be distributed into school libraries and classrooms throughout North America.
In March of 2009, the Company released the next two titles in the Smithsonian I Love My™ series, “I Love My Brother” and “I Love My Sister.” These titles continue to enjoy a strong sell-through and the company is planning additional titles and like series in this format for fiscal 2010.
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Proprietary Products
Early Spring 2008, the Company released another title in its successful Pet Tales™ series featuring content created in conjunction with the American Veterinary Medical Association (AVMA) and the Nantucket Shipwreck and Lifesaving Museum entitled Marshall: A Nantucket Sea Rescue based on a real-life story. The partnership created unique sales opportunities for the company. Also in September of 2008, the company published a pet-themed Learn & Carry™, also created in conjunction with the AVMA.
Sesame Workshop-licensed products
In the Fall of 2008, the company launched new titles showcasing several Sesame Workshop-licensed titles in its existing successful formats, such as the Zip & Carry™, Carry-a-Tune™, and Read, Listen & Learn.™ Additionally, in March of 2009, the company released titles in two new formats, Step-by-Step™ and Read, Play & Go™ featuring Sesame Street characters Elmo and Abby Cadabby. These titles add strong pre-sales and follow through in conjunction with the release of Sesame Street’s Abby in Wonderland DVD.
In August of 2008, the company launched the Sesame Subjects brand. The two titles were released in the Learn on the Go™ format and introduced the concepts of dinosaurs and the human body. Each title included a fold-out poster, stickers, and an audio CD in a padded board book cover with a zipper enclosure and nylon carry handle. The audio CD featured read-along narration and an original song sung by “Chris Knowings” from the Sesame Street television show to add to the overall value of the products.
Formats
Fiscal year 2009 marked the development of several new formats and related digital media opportunities for the company. In early Spring of 2009, the Company was pleased partner with Audible.com and Follett Digital to introduce a range of the Company’s successful titles as e-book downloads. Below is a summary of some of the Company’s unique formats and a sampling of the licensed properties that are combined with these formats:
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In early 2009, the Company launched two new formats designed to address the market opportunity for unique book and CD combinations:
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The Read, Play & Go!™ format is a 7 by 7 inch, 20-page board book with a casebound hardcover, audio CD and carry-along handle, with a retail price of $9.99. This format was launched with Disney-licensed content featuring Disney Mickey Mouse Clubhouse and Winnie the Pooh content as well as Sesame-licensed content featuring Elmo and Abby Cadabby. It was first launched in English and then in Spanish for Spain. The Company is continuing to release titles in this format.
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Step-by-Step™ format is a 7 x 9 inch puzzle book with 10 pages, a padded casebound cover, and an audio CD in a patented CD storage tray for $15.99, and was first released with content featuring Disney Princess, Disney*Pixar Cars, and Sesame Street. This format was launched in English for sale in the domestic specialty, trade and mass markets.
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In 2009 the Company also launched a variety of titles with the digital distributors noted above for sales to the school and library market and directly to consumers in a PDF -based digital eBook format and an audio-visual MP4 format.
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In November 2008, the Company received 3,000 units of a uniquely designed MP3 player made with a proprietary design and trademarked in the Company’s Bebop™ and Carry-a-Tune™ trademarks and, the Company believes, is safe for all ages, has parental volume control, an LCD display and an open system for downloading audio content from the Company’s and other audio libraries. The “Carry-a-Tune™” player is offered only in direct-to-consumer markets and was introduced in the Music for Little People™ catalog mailing in the Fall of 2008, the StudioMouse catalog in Spring 2009 as well as on the Company’s and various other e-commerce sites.
Marketing and Sales
The Company’s products are sold both nationally and internationally to book, toy, and specialty store resellers, warehouse clubs and book, gift and educational distributors by an in-house sales staff and approximately 100 independent commissioned sales representatives. The Company historically mailed a catalog directly to consumers, schools, and libraries. While this was discontinued in 2004 as a result of poor results, the Company restarted its catalog initiative in the fall of 2008 in conjunction with the purchase of the direct-to-consumer and school and library business assets from Musical Kidz, LLC d/b/a Music For Little People™.
A Vice President of Sales, Assistant Sales Manager, as well as a team of independent representatives call on mass merchandisers and non-returnable specialty book accounts such as Target, Costco, Barnes and Noble, T.J. Maxx and Wal-Mart. They also handle direct sales to international accounts, domestic specialty accounts and other retailers and wholesalers. The Vice President of Sales also supervises several networks of independent sales representatives totaling over 100 sales people who call on all other applicable book, gift and toy sales channels. Two independent sales representatives specifically call on specialty sales customers in the home shopping television, door-to-door and display marketing channels. The Vice President of Direct-to-Consumer Sales oversees sales direct-to-consumer sales under the Music for Little People™ imprint. The Chairman and Director of Corporate Development and the CEO each handle sales development in certain targeted international territories.
The Company sells its products to accounts on both a returnable and a non-returnable basis.
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Manufacturing and Product Design
Plush and toy product designs are executed with the Company’s oversight by overseas contractors. Book content is created by freelance authors and illustrators working under the direction of and in conjunction with the Company’s editorial and graphic design staff. Audio is produced by sound designers overseen by the Company’s editorial department. Instruments and electronics are developed by skilled manufacturers with the oversight of the Company’s development staff.
The Company manufactures the majority of its products by sub-contracting with independent stuffed toy factories, compact disc duplicators, toy manufacturers and printing plants located in Asia. Toys purchased during the year were purchased from one vendor in China, but the Company has other qualified sources of supply from which it has purchased in the past. Books and audio are procured from multiple vendors in China, Indonesia and Singapore. The Company co-copyrights with the Smithsonian Institution the design of each Smithsonian toy; the design of each Disney toy is owned by Disney. The designs of other stuffed toy products are proprietary to the Company.
The Company does not own any of the Disney-branded and Sesame-branded book and audio products, other than the basic copyrights to its musical compositions and its right to its patented and patent-pending proprietary formats; Disney and Sesame retain all other content rights, and actively manage the release of new products. The Company believes that production could quickly be transferred to other vendors in China or other countries if production were not available from its current vendors or if more favorable pricing became available elsewhere. Printers can also perform certain other functions such as receiving and consolidating stuffed toys from the original manufacturer, creating and printing packaging, and labeling and repacking product combinations for volume orders for drop shipment directly to large customers. Audiocassettes and limited number of CD’s are duplicated domestically in the United States. All other CD’s are duplicated in Hong Kong, China and Singapore and shipped to the Asian book printer to be inserted into the books. Substantially all purchases are in U.S. dollars.
Governmental Regulations
The Company is subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Products Safety Act. Those laws empower the Consumer Products Safety Commission (the “CPSC”) to protect children from hazardous products. The CPSC has the authority to exclude from the market, articles that are found to be hazardous and can require a manufacturer to repurchase such products under certain circumstances. Any such determination by the CPSC is subject to court review. Similar laws exist in some states and cities in the United States and in many jurisdictions throughout the world. The Company endeavors to comply with all applicable regulations.
Competition
The Company is the leading supplier of licensed educational books and audiobooks that are often packaged with realistic plush toys. The Company is not aware of any direct competitors in this unique market although there are a small number of publishers who compete by combining plush toys with single titles of children’s classic books or licensed sound books. Management believes that the Company’s innovative approach to packaging audio CDs with educational novelty books also differentiates its products in the marketplace and has little competition from other publishers in this market niche, although more publishers are experimenting with combining some form of CD with various book formats such as workbooks, sticker books and activity books. The Company believes that its competitive advantages lie in its licenses with Disney, the Smithsonian Institution and Sesame Workshop, its unique editorial genre, its innovative formats, its superior design, its creative approach to new product development including book formats, electronic formats and the perceived high quality of its products relative to the retail price.
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However, other than the aforementioned specific niche market, many publishers and distributors compete with the Company for sales. Many are larger and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products. It is possible that increased competition or improved performance by these competitors may impact the Company’s market share, profit margin and operating results.
The Company relies on selected distributors to gain access to key channels of trade such as retail book wholesalers and library distributors. The Company is dependent upon these resellers and as a result poor performance on their part can have an adverse impact on the Company’s profit margin and operating results.
The Company’s ability to design, manufacture, market and sell high quality, desirable products depends largely upon its ability to attract and retain highly skilled personnel, particularly in the product design, publishing and sales areas. Inability to retain highly skilled individuals could impact the Company’s financial performance.
Employees
As of March 31, 2009 the Company had 27 full-time and 2part-time employees, based in its Norwalk, Connecticut facility. The Company also has 1 full-time and 2 part-time employees in Redway, California, following the acquisition of the Music For Little People direct-to-consumer and school & library business. As of August 31, 2009 the Company had 24 full-time, 3part-time and 4 temporary employees based in its Norwalk, Connecticut facility. The company still had the 3 employees at its Redway, California location.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 27,000 square foot warehouse and administrative facility at 353 Main Avenue in Norwalk, Connecticut. The building is located approximately 45 miles northeast of New York City. This building is owned by a limited liability company of three partners. Its principal member who owns over 90% equity is the Company’s Chairman. A former Director and Officer and a current Director each have a minority interest. The property was purchased and financed independently of the Company.
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The Company signed a three year lease, effective May 1, 2008 that holds the Company responsible for payment of taxes, insurance and utilities.
The Company also leases a small space in Redway, California to house the 3 employees allocated to the Music for Little People™ direct-to-consumer and school and library business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is occasionally subject to claims and legal proceedings that arise in the ordinary course of its business activities. In the opinion of Management, these claims in the aggregate do not have a material effect on the Company’s financial statements or its business operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company did not submit any matters to a vote of its security holders during the fourth quarter of the fiscal year ended March 31, 2009.
PART II
Item 5.
Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s Common Stock traded on the OTC Bulletin Board under the symbol “TRDY.OB” until August 14, 2009 when its stock was delisted for failure to file this annual report on a timely basis. After August 14, 2009, the stock was traded on the Pink Sheets.
As of June 30, 2009 the price of the Company’s Common Stock was $0.002 per share. The prices presented were bid quotations, as reported by the OTC Bulletin Board Market, which reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions.
As of March 31, 2009, there were 1,427 common stockholders of record; there were 1,415 as of March 31, 2008.
Since its organization, the Company has not paid any dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. Future dividend policy is subject to the discretion of the Board of Directors and is dependent on a number of factors including future earnings, capital requirements, and the financial condition of the Company.
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Item 7.
Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein.
Critical Accounting Policies
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Allowances for doubtful accounts are based on historical experience and known factors regarding specific customers and industries in which customers operate. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
Revenues from product sales are recognized in the period when persuasive evidence of an arrangement with the customer exists, the products are shipped and title has transferred to the customer, all significant obligations have been delivered, and collection is considered probable. Since many of the product shipments are accompanied with the right of return, a provision for estimated returns on these sales is made at the time of sale, in accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists”, based on historical experience.
The Company maintains allowances for product returns. These allowances are based on historical experience and known factors regarding specific information from customers or a product’s known sell-through performance in the marketplace. If product return rates exceeded the established allowances, additional allowances would be required. For the most recent March Quarter 2009, due to the strained economic environment and downturn in consumer retail spending the Company did not record revenues for the majority of its returnable accounts due to an increased delay in payments from these accounts. Despite previously negotiated terms of sale, many accounts with right of return have delayed payments for goods until they themselves have received payment. Such sales were deemed to be consignment sales and would not be recorded as revenue until payment was made. The Company will review these changes in payments received in future quarters to determine whether it is still necessary to defer these sales, or if market conditions have improved sufficiently to provide for recognizing revenue in accordance with the Company’s historical manner of booking sales upon invoice with an appropriate reserve for product returns.
The Company writes down its inventories for estimated slow moving and obsolete goods based upon historical selling patterns, assumptions about future demand and market conditions. A significant sudden increase in the demand for the Company’s products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. Additionally, the Company’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the write-down required for excess and obsolete inventory. In the future, if the Company’s inventory is determined to be overvalued, it would be required to recognize such costs in its cost of goods sold at the time of such determination. Likewise, if the Company does not properly estimate the lower of cost or market of its inventory and it is therefore determined to be undervalued, it may have over-reported its cost of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of the Company’s inventory and its reported operating results.
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The Company defers certain costs related to the development of new titles and amortizes these costs over the estimated useful lives when published.
Fiscal Year Ended March 31, 2009 Compared to Fiscal Year Ended March 31, 2008
Results of Operations
NET SALES.
Overview
Consolidated net sales for the year ended March 31, 2009 were $5,833,843 compared to $5,922,901 for the year ended March 31, 2008, a decrease of $89,058, or 1.5%.
The Company’s profit margin deteriorated from 39.9% in the prior year to 33.7% in the current year, resulting in gross profit for the current year of $1,967,601 compared with gross profit for the prior year of $2,365,093. The Company’s fiscal 2009 net loss was $1,291,602 versus a net loss of $775,255 for the prior year, an increased loss of $515,918. The gross profit decline was due to a change in the sales mix, an increase in warehousing, freight and fulfillment costs associated primarily with the direct-to-consumer business and the economic environment which contributed to a change in consumer buying habits. Additionally, a change in retail and wholesale customer payment habits resulted in a change in the Company’s recognition of revenue. For the March Quarter 2009, sales to many larger returnable accounts were treated as “consignment” sales and, therefore, some revenue for the March quarter for these accounts was not recognized unless payment was later received.
Sales Declines
International mass market distributor sales decreased $482,114 as a result of the deterioration in the South American economy. The Company’s exclusive distributor in Mexico to the rest of South America for Spanish language product cancelled significant orders due to sluggish sales and excessive inventory of previously purchased (non-returnable) product.
Domestic Drug and Supermarket sales declined $265,294 year over year, as a result of an opportunistic sale to a national drug chain that only occurred in fiscal 2008.
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Domestic book club sales declined $124,603 in the current year, again, as a result of opportunistic sales made in fiscal 2008 to the country’s largest school book club operator which did not repeat in fiscal 2009.
Canadian book distributor sales decreased $172,535 as a result of a dispute between the Company and the Company’s primary Canadian distributor with regard to return privileges and monies deemed to be owed to the Company. As of August 18, 2009, the Company and its Canadian distributor terminated their relationship on amicable terms. Any monies owing were offset by an agreement not to return any additional product. The Company has appointed a new distributor with a distribution agreement providing for sales on a non-returnable basis for fiscal 2010 and fiscal 2011.
Domestic book distributor direct (display marketers) sales declined $89,706 as a result of a freeze on purchases by a major national display marketer and deteriorating market conditions.
Domestic non-returnable discount retailer sales declined $109,339 as a result of reduced consumer demand and the reluctance by certain retailers to accept the Company’s price increases imposed by cost increases from its Asian printers.
Sales Increases
For the year ended March 31, 2009, several divisions recorded an increase in net sales versus the prior fiscal year. This was primarily attributed to an increase in direct to consumer product sales into Amazon.com and the Music For Little People direct-to-consumer catalog and web sales divisions.
Additionally, a large increase in sales to a major home shopping channel produced sales growth in the returnable direct-to-consumer retailer category as a result of successful testing and roll-outs of book, plush and audio CD product packages. Sales in this channel increased $366,727 in fiscal 2009 over the prior year.
Music For Little People direct response sales increased $576,218 versus the prior year. On March 7 2008, the Company completed its asset purchase of the Music for Little People direct-to-consumer and library business. As a result sales for this channel of trade for fiscal 2008 represent less than one month of sales. Music For Little People internet distributor account sales, through such online retailers as Amazon.com increased $526,764 versus the prior year. As noted above, the fiscal 2008 sales represent sales that took place only in the last 23 days of March. Combined Music for Little People sales to all consumer and education channels were $1,132,910.
Sales to Domestic warehouse club distributors nearly doubled in fiscal 2009 to $130,353 as compared with $68,689 in the prior year. This was a result of the strengthening demand in this channel after a difficult prior year in which the key distributor in this channel filed for bankruptcy protection.
Finally, the Company continues its concerted efforts to manage its inventories. As a result, close out sales for fiscal year 2009 increased $132,919 over fiscal year 2008.
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The remaining net change in sales was the result of sales increases and decreases over the rest of the Company’s 42 divisions, including but not limited to domestic close-out accounts, domestic warehouse club distributors, international display marketer sales, and increases in sales were also seen in military bases, international retailers (both trade and mass market) and international trade book distributors.
COST OF SALES.
The Company’s cost of sales for the year ended March 31, 2009 increased $308,004 from $3,557,808 in the prior year to $3,851,554 in the current year, an increase of 8.7%. Cost of sales as a percentage of net sales increased from 60.0% to 66.3% in the current year. The most significant contributor to the increased cost of sales came from the outsourced warehousing, freight and fulfillment costs related to the Music For Little People direct-to-consumer business. Subsequent to year end the Company terminated its arrangement with the applicable fulfillment provider and moved the related fulfillment and warehousing operations to another more competitive service provider. As a percentage of net sales, direct product costs (cost of goods excluding overhead and miscellaneous costs) in aggregate decreased from 42.8% to 41.4% as a result of the high gross margins associated with the direct-to-consumer business sales and the large increase in sales from this sales channel. In addition, in January 2009, the Company instituted an across the board price increase of approximately 10% on its suggested retail prices. This price increase was mandated due to cost increases from product manufacturers in Asia. Because of customer vendor agreements which were locked in for the fiscal year, the Company believes that the full effect of the price increase will not be evident until the completion of fiscal 2010.
GROSS PROFIT.
The resulting gross profit for the year ended March 31, 2009 decreased 16.8% to $1,967,601 versus the prior year’s gross profit of $2,365,093. Gross margin declined from 39.9% in the prior year to 33.7% for the year ended March 31, 2009.
SELLING, GENERAL & ADMINISTRATIVE COSTS.
The Company’s selling, general, and administrative costs increased $162,765 to $3,200,260 from $3,037,495 for the year ended March 31, 2009, an increase of 5.4%.
Increased costs include salaries, amortization expenses and catalog expense and credit card processing fee increases associated with the direct-to-consumer Music for Little People business. Included in the acquisition were four new employees, rent, benefits and other overhead expenses, in addition to larger credit card processing fees associated with the higher volume of direct to consumer orders. These increases were partially offset by decreases in royalty expenses, other outside services and service contracts. Royalty expenses declined 26.7% as a result of the change in mix to non-royalty bearing products, these products largely being sold in through the Music for Little People divisions.
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LOSS FROM OPERATIONS.
The resulting loss from operations for the year ended March 31, 2009 was $1,232,659 versus a loss of $672,402 for the prior year. As a percentage of net sales, the loss from operations was 21.1% for the current year versus a loss of 11.4% for the prior year.
OTHER INCOME/EXPENSE.
Total other expense (net) for the year ended March 31, 2009 decreased 42.7% to an expense of $58,943. In December, 2008 the Company recorded a $55,000 debt extinguishment. This debt related to a former joint venture partner that filed for bankruptcy in the Republic of South Africa. A principal shareholder has indemnified the Company against any future claims from this extinguishment.
NET LOSS.
As a result of the items discussed above, the Company’s net loss for the year ended March 31, 2009 was $1,291,602 compared to a net loss of $775,255 for the comparable prior fiscal year.
Impact of New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires the recognition of a tax position when it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based upon the technical merits of the position. The provisions of FIN 48 are effective for the Company on April 1, 2007. The Company does not expect the adoption of FIN 48 to have a material impact on the financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure assets and liabilities. SFAS 157 defines fair value and establishes a framework for measuring fair value; however, SFAS 157 does not expand the use of fair value in any new circumstances. The provisions of SFAS 157 are effective for the Company on April 1, 2008. The Company did not experience any significant changes due to the adoption of this pronouncement.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”. The FASB’s SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of SFAS 115 became effective for us as of January 1, 2008. SFAS 159 establishes a fair value option that permits entities to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value options have been elected in earnings at each subsequent reporting date. For the period ended March 31, 2009, there were no applicable items on which the fair value option was elected.
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In December 2007, the Financial Accounting Standards Board issued FASB Statement No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R provides additional guidance on improving the relevance, representational faithfulness, and comparability of the financial information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The company had no acquisitions applicable to SFAS 141R as of March 31, 2009.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendment to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” and is not expected to have a significant impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163 Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60. SFAS 163 resolves existing inconsistencies in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”. SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation and clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS 163 is not expected to have a significant impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS 165 (“SFAS 165”), “Subsequent Events.” This pronouncement establishes standards for accounting for and disclosing subsequent events (events which occur after the balance sheet date but before financial statements are issued or are available to be issued). SFAS 165 requires an entity to disclose the date subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. It is effective for interim and annual periods ending after June 15, 2009. This pronouncement was not effective for the year end March 31, 2009. The Company plans on adopting this pronouncement in subsequent filings.
On May 1, 2009, the Emerging Issues and Task Force issued EITF No. 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). EITF 07-05 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of EITF 07-05 has affected the accounting for certain freestanding warrants and preferred stock that contain exercise price adjustment features (“down round provisions”). This was not applicable to the financials statements as of March 31, 2009.
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In June 2009, the FASB issued SFAS 168 (“SFAS 168”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non grandfathered non-SEC accounting literature not included in the Codification will become non authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of FAS 168 to have an impact on the Company’s results of operations, financial condition or cash flows.
Liquidity and Capital Resources
The Company has suffered recurring losses from operations and has a deficiency in net assets. Such factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company continues to explore alternative financing options other than those from its principal shareholder in the event that cash flow does not materialize in line with current expectations. If additional funding options were not to materialize, the Company would be forced to explore other options including bankruptcy.
Additional working capital would be required to fund new growth opportunities through a strategic acquisition and/or new educational publishing initiatives. It is believed a strategic or private equity investor or even a consolidation with another publisher or new media entity would allow the Company to better position itself for growth by providing working capital for future publishing initiatives. In June 2009, the Company broke off the sale of substantially all its assets to PCS Edventures!.com, Inc by mutual agreement.
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The Company continues to suffer from a lack of working capital. At March 31, 2009 the Company had a net asset deficiency of $1,333,071 versus a deficiency at March 31, 2008 of $152,669. Working capital deteriorated $1,225,306 from a deficiency of $1,328,930 at March 31, 2008 to a deficiency of $2,554,236 in the current year. This is primarily a result of additional borrowings from a principal shareholder/officer for working capital needs.
Accounts payable and accrued expenses increased $285,980 versus the prior year from $1,480,379 to $1,766,359 as of March 31, 2009. Royalties and commissions payable increased 57.2% to $554,060 as of March 31, 2009 versus $352,398 the prior year.
Accounts receivable decreased $499,997 from $1,542,275 to $1,042,278.
As of July 14, 2009, the balance on the Company’s revolving line of credit was $807,706 out of $850,000 available. As of March 31, 2008 the balance on the Company’s revolving line of credit was $764,000 out of $850,000 available to the Company. The line of credit matured August 25, 2009. An extension for repayment of the balance is currently being negotiated.
As of September 18, 2009 the Company’s backlog was approximately $2,175,000.
In the quarter ended September 30, 2008, the Company received an additional $106,800 in short-term notes from its principal shareholder (William W. Burnham, Chairman of the Board). The notes are demand notes.
In the quarter ended December 31, 2008 the Company received an additional $103,829 in short-term notes from this principal shareholder. These notes are demand notes.
The terms of these notes can be found in Note 5 to the financial statements.
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Item 8.
Item 8. Financial Statements
Trudy Corporation
Financial Report
March 31, 2009
Contents
Page
M&K CPAS, PLLC Independent Auditors’ Report for the fiscal year ended March 31, 2009
DHL&S Independent Auditors’ Report for the fiscal year ended March 31, 2008
Balance Sheets
Statements of Operations
Statements of Shareholders’ Deficit
Statements of Cash Flows
Notes to Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Trudy Corporation
Norwalk, CT 06851
We have audited the accompanying balance sheet of Trudy Corporation (the “Company”) as of March 31, 2009, and the related statement of operations, shareholders’ deficit and cash flows for the year ended March 31, 2009. 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. The financial statements of Trudy Corporation as of March 31, 2008 and for the year then ended, were audited by other auditors whose report dated July 14, 2008 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 as of March 31, 2009 and the results of its operations, changes in stockholders’ deficit and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
September 29, 2009
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Report of Independent Registered Public Accounting Firm
To The Shareholders
Trudy Corporation
Norwalk, Connecticut
We have audited the accompanying balance sheet of Trudy Corporation as of March 31, 2008, and the related statements of operations, shareholders’ 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2008 financial statements referred to above present fairly, in all material respects, the financial position of Trudy Corporation at March 31, 2008, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a deficiency in net assets. Such factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Dworken, Hillman, LaMorte & Sterczala, P.C.
July 14, 2008
Shelton, Connecticut
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Trudy Corporation
Balance Sheets
March 31, 2009 & 2008
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
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Trudy Corporation
Statements of Operations
For the Twelve Month Periods Ended March 31, 2009 & March 31, 2008
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
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Trudy Corporation
Changes in Shareholders’ Deficit
Years ended March 31, 2009 & 2008
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
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Trudy Corporation and Subsidiary
Statements of Cash Flows
The accompanying summary of significant accounting policies and notes to financial statements are an integral part of the financial statements.
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Trudy Corporation
Notes To Financial Statements
1. Summary of Significant Accounting Policies
Description of Business
Trudy Corporation (hereinafter referred to as the ‘Company’), publishes children’s books and audiobooks and designs, manufactures and markets plush stuffed animals and selected musical instruments and audio players for sale to domestic and international retail and wholesale customers. The Company’s products are sold under the trade names (i.e. imprints) of Studio Mouse, Soundprints, Little Soundprints, Music for Little People and Fetching Books.
Trudy Corporation was organized as a Connecticut corporation under the name Norwest Manufacturing Corporation on September 14, 1979, changed its name to Trudy Toys Company, Inc. on December 5, 1979, changed its name to Trudy Corporation on March 27, 1984 and was re-incorporated as a Delaware corporation on February 25, 1987. On July 27, 1987 the Company first offered shares of common stock for sale to the public.
Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of March 31, 2009 and 2008, respectively.
Credit Risk
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 also obtains credit insurance on customers when it is deemed warranted. As of March 31, 2009 and 2008 the Company had allowances for bad debt of $100,000 and $75,000, respectively.
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The Company also carries an allowance for promotional or cooperative advertising where the Company agrees to pay for a portion of ads run by a merchandiser in order to promote sales of the Company’s products that are in, or soon will be, in the stores. As of March 31, 3009 and 2008 the Company had allowances for promotional and coop advertising of $23,000 and $30,000, respectively.
Inventories
Inventories, which consist principally of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company reviews its inventory for obsolescence and provides for obsolescence when the inventory is deemed to be unsaleable over a reasonable time.
Market value is determined by the sales price that the Company would expect to receive to liquidate quantities of inventory. Valuation reserves are estimated based on quantities on hand, historical and forecasted sales. As of March 31, 2009 and 2008, the Company had allowances for inventory obsolescence of $264,991 and $275,000, respectively.
Equipment
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 three to ten years for machinery and equipment, and furniture and fixtures, and from one to three years for computer software and hardware.
Pre-Publication Costs
Pre-publication costs are title development costs including but not limited to authors, illustrators and other artists, narration, audio production, and studio time for recording and mixing final audio products. These costs are capitalized through the date of publication. At the date of publication the costs begin amortization on an accelerated method over their expected revenue generating lives. The accelerated method is based on historical and future expected sales.
Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management performs ongoing business reviews and evaluates impairment indicators based on qualitative and quantitative factors. If it is determined that the carrying amount of an asset cannot be fully recovered, an impairment loss is recognized.
Revenue
Revenues are recorded in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements.”
Revenues from product sales are recognized in the period when persuasive evidence of an arrangement with the customer exists, the products are shipped and title has transferred to the customer, the price is considered fixed and/or determinable, and collection is reasonably assured. Since many of the product shipments are accompanied with the right of return, a provision for estimated returns on these sales is made at the time of sale, in accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists”, based on historical experience. Returned product is resold when possible. Historically, a portion of returned product is deemed unsaleable and is destroyed.
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For the most recent March Quarter 2009, due to the strained economic environment and downturn in consumer retail spending the Company did not record revenues for the majority of its returnable accounts due to an increased reluctance for these accounts to pay on invoices when they came due. Such sales were deemed to be consignment sales and would not be recorded as revenue until payment was made. The Company will review this change in collection in future quarters to determine whether market conditions have improved sufficiently to necessitate a return to the historical method of booking sales upon invoice with an appropriate reserve for product returns.
Royalties
The Company records royalty revenue as earned and provides for its royalty expense at the time the royalty income is recorded. Royalty advances are recorded as earned when such advances represent a nonrefundable guarantee and there are no obligations to perform services. Advance royalty payments are recorded as expense when such advance represents a nonrefundable guarantee. The Company periodically assessed advances as to whether they will be recoverable during the term of the contract. Any portion of advances that appear not to be recoverable from future royalties are charged to expense.
Government Taxes
Product sales are presented net of sales tax collected and remitted to governmental authorities.
Subsidiary Licensing Rights
Depending upon the terms of its various licensing agreements, the Company can lease its intellectual property rights to another party. The associated income is recorded as either advances against royalties or royalties. The associated expenses due to the authors, illustrators or licensors are a percentage of such income for use of their text, illustrations, content or imprimaturs.
Due to changes in the Company’s business, effective December 31, 2006, royalty revenue is presented as a component of net sales. All periods presented conform with this presentation.
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 for tax purposes 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.
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Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R), replacing SFAS 123 and superseding Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R requires public companies to recognize compensation expense for the cost of awards of equity compensation effective for fiscal years beginning after July 1, 2005.
This compensation cost will be measured as the fair value of the award estimated using an option-pricing model on the grant date. The provisions of SFAS No. 123R were effective for Trudy on April 1, 2006. The adoption of SFAS No. 123R did not have a material impact on the financial statements since the Company has no outstanding stock options.
The Company periodically issues shares of its common stock to employees as grants. Shares issued for services are valued either at the Company’s estimate of the fair value of the common stock at the date of issuance or based on the market price at the date of issuance.
Income/Loss Per Share Computation
Income/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 by dividing net income/loss by the weighted average number of outstanding common shares. Diluted earnings per share is computed using the weighted average number of outstanding 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, if any, using the if-converted method. There were no dilutive securities for the fiscal year ended March 31, 2009.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, “Reporting Comprehensive Income” (Statement 130). Statement 130 establishes rules for the reporting and display of comprehensive income and its components. Comprehensive income (loss) for the Company is the same as net income (loss) for all periods presented.
Segments of an Enterprise and Related Information
The Company has 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.
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Advertising
Advertising costs are expensed as incurred, except for catalogs and brochures which are all amortized over the period benefited not to exceed twelve months from the publication date. The Company provides cooperative advertising allowances to certain customers. These allowances are accounted for in accordance with the requirements of Emerging Issues Task Force Statement No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer”.
Advertising expense related to catalogs and brochures was $141,411 and $32,136 for the years ended March 31, 2009 and 2008, respectively.
Other advertising expense was $43,723 and $1,435 for the years ended March 31, 2009 and 2008, respectively.
Fair Value of Financial Instruments
In February of 2007 the Financial Accounting Standards Board issued FASB Statement No. 157 Fair Value Measurement at inception. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.
·
Level 1. Observable inputs such as quoted prices in active markets;
·
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
·
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company had no instruments in which SFAS 157 was applied to as of March 31, 2009.
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In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”. The FASB’s SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of SFAS 115 became effective for us as of January 1, 2008. SFAS 159 establishes a fair value option that permits entities to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value options have been elected in earnings at each subsequent reporting date. For the period ended March 31, 2009, there were no applicable items on which the fair value option was elected.
The Company has the following financial instruments: cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable and accrued expenses and notes payable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and notes payable approximate their fair value based on the liquidity of these financial instruments or based on their short-term nature.
New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board issued FASB Statement No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R provides additional guidance on improving the relevance, representational faithfulness, and comparability of the financial information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company had no acquisitions applicable to SFAS 141R as of March 31, 2009.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendment to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” and is not expected to have a significant impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163 Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60. SFAS 163 resolves existing inconsistencies in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”. SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation and clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS 163 is not expected to have a significant impact on our consolidated financial statements.
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In May 2009, the FASB issued SFAS 165 (“SFAS 165”), “Subsequent Events.” This pronouncement establishes standards for accounting for and disclosing subsequent events (events which occur after the balance sheet date but before financial statements are issued or are available to be issued). SFAS 165 requires an entity to disclose the date subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. It is effective for interim and annual periods ending after June 15, 2009. This pronouncement was not effective for the year end March 31, 2009. The Company plans on adopting this pronouncement in subsequent filings.
On May 1, 2009, the Emerging Issues Task Force issued EITF No. 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). EITF 07-05 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of EITF 07-05 has affected the accounting for certain freestanding warrants and preferred stock that contain exercise price adjustment features (“down round provisions”). This was not applicable to the financials statements as of March 31, 2009.
In June 2009, the FASB issued SFAS 168 (“SFAS 168”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non grandfathered non-SEC accounting literature not included in the Codification will become non authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of FAS 168 to have an impact on the Company’s results of operations, financial condition or cash flows.
Goodwill and Other Intangibles
The Company tests its intangible assets for impairment on an annual basis, or between annual tests if it is determined that a significant event or change in circumstances warrant such testing. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”) which requires a comparison of the carrying value of goodwill to the fair value of the reporting unit. If the fair value of the reporting unit is less than the fair value of the goodwill, an adjustment to the carrying value of goodwill is required. See Note 5 for further discussion on other intangible assets impairment.
Intangible Assets related to Music for Little People are amortized on a straight line basis over their estimated useful lives. Useful lives range between five and ten years and are based on the terms of the agreements in place. Intangibles were evaluated for impairment on accordance with FAS 142.
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Shipping and Handling Fees and Costs
The Company records amounts billed to customers for shipping and handling and related costs incurred for shipping and handling as components of “Product revenues” and “Cost of product revenues” respectively.
Going Concern
The Company has suffered recurring losses from operations and has a deficiency in net assets. Such factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company continues to explore alternative financing options other than those from its principal shareholder in the event that cash flow does not materialize in line with current expectations. If additional funding options were not to materialize, the Company would be forced to explore other options including bankruptcy.
2. Accounts Receivable
Accounts receivable consist of the following:
3. Inventories
Inventories consist of the following:
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4. Equipment
Equipment consists of the following:
Depreciation expense for the years ended March 31, 2009 and 2008 was $19,288 and 16,693, respectively.
5. Intangibles
Intangible assets purchased in March 2008 consist of the following:
An impairment analysis was performed in the current fiscal year and no assets were impaired as a result.
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6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
7. Deferred Revenue
Deferred Revenue had the following balances:
The Company accepts orders from certain international accounts on a non-returnable, non-cancellable basis. The company records these orders as receivables at the time the order contract is executed and later classifies the orders as sales once the product ships.
8. Royalties & Commissions Payable
Royalties & Commissions Payable consist of the following:
Royalties and commissions are both paid at varying percentages of either sales or net sales, depending on the contract.
Royalties are paid to licensors such as Disney and the Smithsonian. Commissions are paid to the Company’s approximately 100 independent sales representatives.
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9. Notes Payable, Bank and Related Parties
Notes payable, banks and related parties includes the following:
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10. Concentrations and Credit Risk
(a) Sales
As shown in the above table, for the twelve month period ended March 31, 2009, revenues from no clients represented more than 7.0% of total revenues. As of March 31, 2008, 10.8% of the Company’s revenue was from one client. All other individual customers comprised less than 10% of total sales for the year ended March 31, 2009. The Company does not require collateral to support accounts receivable or financial instruments subject to credit risk though it does pursue credit insurance on the larger accounts.
All other individual customers comprised less than 10% of total accounts receivable (net) for the year ended March 31, 2009.
(b) Cost of Sales
The Company produces its products by sub-contracting with independent printing plants and toy factories located in Asia and throughout the United States. In the fiscal year ended March 31, 2009, the company purchased 94% of its books from three vendors in China and one print broker in the U.S. The Company has other qualified sources of supply from which it has purchased in the past.
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As mentioned above, books are also purchased from a U.S. broker, which subcontracts production to various printers in Asia. 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 in the United States and CDs are primarily duplicated in China although domestic duplication is available. The Company believes that production could quickly be transferred to other vendors in China or other countries if production were not available from its current vendors or if more favorable pricing became available elsewhere.
11. Related Party Transactions
The Company is involved in several transactions with existing officers and shareholders of the Company and entities, which are controlled by these individuals, collectively “related parties”. The following is a summary of this activity:
The Main Avenue property leased by the Company is owned by a Connecticut limited liability company, Noreast Management LLC, which is owned jointly by William W. Burnham, the Chairman of the Company, Peter Ogilvie, a former Director and Officer of the Company, and Fred M. Filoon, a Director of the Company. Rent expense totaled $116,998 and $95,521 for the twelve months ended March 31, 2009 and 2008, respectively.
As of March 31, 2009, the Company has borrowings from related parties of $1,894,959. Interest to related parties totaled $67,686 and $47,718 for the twelve months ended March 31, 2009 and 2008, respectively. Repayments to related parties totaled $64,042 for the twelve months ended March 31, 2009.
Guarantor fees for Mr. Burnham for the year ended March 31, 2009 were $12,613.
On June 19, 2006 Mr. Bradford Mead was elected to the Board of Directors. Mr. Mead is the President of Delta Capital Group, Inc, the Company’s investment banking advisor. Delta Capital Group received fees in the amount of $3,000 and $14,470 from the Company in fiscal years 2009 and 2008, respectively.
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12. Income Taxes
The components of income tax (benefit) are as follows:
The deferred tax asset represents expected future tax savings resulting from the Company’s reserves and allowances expensed for financial reporting purposes but not for tax purposes and net operating loss carryforwards. As of March 31, 2009, the Company has a net operating loss carryforward in excess of $4.0 million for federal income tax purposes which expire at various dates through 2027. Utilization of these benefits is primarily subject to the extent of future earnings of the Company, and may be limited by, among other things, shareholder changes, including the possible issuance by the Company of additional shares in one or more financing transactions. The Company has established a valuation allowance for the portion of possible tax savings not likely to be realized by the end of the carryforward period.
13. Stock-Based Compensation
On July 14, 2005 the Board of Directors voted to set aside 30,000,000 shares of common stock to be used as a pool from which management may recommend to the board stock grants for certain employees and Directors. While stock rewarded to employees or Directors requires the approval of the Board, such stock reward recommendations are made at Management’s sole discretion. As of March 31, 2009, 11,000,000 shares have been awarded to employees and Directors.
During fiscal 2009 the Company granted an aggregate of 4,000,000 shares to certain employees and Directors for their respective services rendered to the Company. The shares were valued at either $0.003/share or the closing price of the Company’s Common Stock as reported by the OTC Bulletin Board on November 11, 2008. The value of these grants was $11,200.
14. Benefit Plan
The Company has adopted a 401(k) Retirement Plan, which is available to 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 of total employee contributions up to a maximum of 3 percent of the individual employee salary. The Company made approximately $28,733 and $27,749 in matching contributions to the Plan in 2009, and 2008, respectively. Matching contributions increased as a result of increased plan participation and an increase in individual contributions.
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15. Supplemental Disclosure of Cash Flow information
(a) Schedule of non-cash financing activities
On March 7, 2008 the Company purchased certain assets from the children’s audio publisher, Musical Kidz LLC, pertaining to its mail-order and ecommerce divisions. Musical Kidz is the publisher of children’s music distributed on the record label, Music for Little People (MFLP).
Consideration for the transaction included $200,000 in the Company’s authorized but unissued Common Stock. $100,000 in authorized but unissued Trudy Common Stock, resulted in an issuance of 25,641,026shares of the Company common stock on March 7, 2008. The additional $100,000 in common stock was issued on March 7, 2009 and resulted in an issuance of 55,555,556 shares of the Company common stock.
In fiscal 2009 the Company recorded a capital lease obligation with a five year life. Equal payments are made on a monthly basis. The capital lease asset and obligation were recorded at the present value of future payments. The asset is being amortized on a straight line basis over the life of the lease.
16. Commitments
(a) Commitments
The Company leases its building and certain equipment under a non-cancelable short-term operating lease from a limited liability company owned by the Company’s Chairman and a principal shareholder, a current Board member, and a former Director and Officer. Other items are also leased under non-cancelable operating leases from third parties.
The Company has subleased part of its warehouse space at a rental of $1,700 per month expiring in June 2012.
Future minimum payments and sublease receivables under non-cancelable operating leases with initial terms of one year or more consisted of the following at March 31, 2009:
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The Company recognizes rent expense on a straight line basis over the life of the lease. Rent expense totaled $116,998 and $95,521 for the twelve months ended March 31, 2009 and 2008, respectively.
In fiscal 2009 the Company recorded a capital lease obligation with a five year life. Equal payments are made on a monthly basis. The capital lease asset and obligation were recorded at the present value of future payments. The asset is being amortized on a straight line basis over the life of the lease.
(b) Royalties
The Company has executed multi-year licensing deals with Disney Licensed Publishing, Sesame Workshop and WGBH. Each license requires royalties to be paid on a quarterly basis based on recorded sales.
(c) Contingencies
As of March 31, 2009 the Company maintained a letter of credit of $500,000 related to the Disney license guaranteed by the Chairman of the Company. The $500,000 letter of credit expired on June 15, 2009. The Company operated under a contract extension through June, 2009 and a renewal is in negotiation.
The Company is occasionally subject to claims and legal proceedings that arise in the ordinary course of its business activities. In the opinion of Management, these claims in the aggregate do not have a material effect on the Company’s financial statements or its business operations.
17. Business Combination
On March 7, 2008 the Company acquired the operating segment Music For Little People from Musical Kidz, Inc. (“MFLP”) for consideration including cash, stock, and contingent payments based on future earnings which is described in detail below. MFLP is an award winning catalog and e-commerce website (musicforlittlepeople.com) directed to the consumer and educational market and includes complementary third party products.
This purchase has been accounted for as a business purchase pursuant to SFAS 141. We have evaluated this transaction and believe that the historical cost of the tangible assets acquired approximated fair market value given the current nature of the assets acquired. The fair value of the intangible assets was calculated using a discounted cash flow model of the expected net cash flows from these assets over the next five years. These assets will be amortized over their determined life, being the length of the current contract in effect as at the day of the acquisition. The useful lives rage from five to ten years. The purchase also included an earn-out payment provision for each of the fiscal years ending March 31, 2009, 2010 and 2011 for Musical Kidz if certain net income goals were met from the business being purchased. For the fiscal year ended March 31, 2009 the net income goals were not achieved so no earn out was recorded.
The Company was required to issue $100,000 of Trudy Common Stock on the acquisition date, and $100,000 of Trudy Common Stock one year after the acquisition date. The Company issued 25,641,026 shares of Common Stock on the acquisition date, and 55,555,556 shares one year after the acquisition date. The shares issued at closing were calculated using the average price per share on the fifteen (15) days prior to the March 7, 2008 closing. The additional $100,000 of shares issued on the first year’s anniversary of the transaction’s closing, March 7, 2009, were valued at the average closing price per share for the ten (10) trading days preceding the date of issuance. Financing for the acquisition came from a loan from Trudy’s principal shareholder.
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The breakdown of the purchase price is as follows:
The fair value of the net assets acquired is recorded as follows:
18. Subsequent Events
Delinquent Filing & Market for Company’s Common Stock
This Annual Report on Form 10-K was due to be filed no later than July 14, 2009 with the SEC. The Company was not able to meet that deadline and as a result, on August 15, 2009 the Company’s common stock was delisted from the OTC Bulletin Board for failure to file this annual report on a timely basis. Further, the Company’s 10Q for the quarter ended June 30, 2009 has not yet been filed. It is Management’s intention to bring its filing status current and relist the Company’s common stock on the OTC Bulletin Board.
Subsequent to fiscal year end the Company borrowed an additional $490,493 from the Company’s principal shareholder/officer.
On June 8, 2009 the Company and PCS jointly announced that the two companies have terminated discussions for PCS to acquire substantially all of the assets and assume certain liabilities of Trudy Corporation.
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Item 9(a). Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer and the Chief Financial Officer conducted an evaluation of the Company’s critical disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2009. Based on that evaluation, Management identified the following weaknesses:
(i)
As of March 31, 2009, the Company does not have adequate office and financial staffing in place to effectively control the level of transaction activity and consistently address the complex accounting matters that arise.
(ii)
A principal shareholder and Director of the Company who is involved in certain functions of the daily operations of the Company, could in theory override normal operating procedures.
(iii)
The Company currently does not have an Audit Committee.
Given the above identified matters, Management believes that disclosure controls and procedures are not effective. Further, even with proper oversight and controls, Management does not expect that our disclosure controls and procedures or our internal controls will necessarily prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the registrant would be detected.
(b) Management’s Report on Internal Control Over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of Management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controls. Based on our evaluation, Management concluded that our internal controls over financial reporting were not effective as of March 31, 2009 with certain deficiencies noted previously.
(c) Changes in Internal Control Over Financial Reporting.
The Company’s existing internal controls over financial reporting rely upon certain minimum staffing levels which were not maintained in the year ended March 31, 2009 or subsequent to year end.
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PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(A) of the Exchange Act
Set forth below are the names and ages of all the directors and the executive officers of the Registrant and the positions and offices held by such persons as of June 30, 2008:
Name
Age
Position
Mr. William W. Burnham
Chairman of the Board, Director of Corporate Development, Director
Ms. Ashley C. Andersen Zantop
Chief Executive Officer, President, Publisher, Director
Mr. Hakim Bangash
Director
Mrs. Alice B. Burnham
Director
Mr. Fred M. Filoon
Director
Mr. Bradford Mead
Director
Mr. William Sondheim
Director
Ms. Patty Sullivan
Director
Mr. Fell C. Herdeg
Officer
William W. Burnham was President, Chief Executive Officer, and Chairman of the Board of Directors of the Company from 1979 to 2005 and served as Acting Chief Financial Officer from 2003 to June, 2006. In August 2005 the Board of Directors elected Mr. Burnham to the additional position of Director of Corporate Development. He 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 graduated from Trinity College and received an M.B.A. degree from Columbia University.
Ashley C. Andersen Zantop joined the Company in March of 2000 as Associate Publisher and was promoted to Executive Vice President and Publisher in September 2002. She has been a member of the Board since June 2002. In August, 2005 the Board of Directors promoted Ashley C. Andersen Zantop to President, Chief Executive Officer and Publisher. In June 2006, Ms. Andersen Zantop was appointed Acting Chief Financial Officer by the Board of Directors. Ms. Andersen Zantop began her career in publishing in 1989 with Plymouth Press, Vergennes, VT and worked in the field for several years as an editor, graphic artist and art director. Ms. Andersen Zantop is a graduate of the University of Michigan School of Literature, Science and the Arts and the University of Michigan School of Education.
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Mr. Bangash is the founder and chief executive officer of Redrum Entertainment in partnership with Hollywood producer Joel Silver and his Dark Castle production company. Redrum is a convergent media company dedicated to the content categories of thriller, suspense and horror. Prior to this, Mr. Bangash was a principal at Orchid Ventures, a private consulting firm and venture fund for entertainment and media companies. Orchid focuses on early stage media companies and entertainment projects including independent films. Orchid financed over a dozen independent films including the Academy Award winning Sling Blade and Academy Award-nominated You Can Count on Me. Mr. Bangash is a graduate of Dartmouth College and holds an MBA from the Graduate School of Business at Columbia University.
Alice B. Burnham has served as a director of the Company since 1994. As a major shareholder and wife of Mr. Burnham, she has long been familiar with the Company. Mrs. Burnham manages her own interior design business in New Canaan, Connecticut and is active in civic and professional affairs. Mrs. Burnham graduated from Briarcliff College.
Fred M. Filoon has served as a director of the Company since 1993. Mr. Filoon has over thirty years of experience in the investment and financial community having worked for Donaldson, Lufkin & Jenrette and Morgan Stanley. He is presently a partner with Cramer, Rosenthal & McGlynn, a private investment advisory firm in New York City. Mr. Filoon graduated from Bowdoin College.
William Sondheim is currently president of the retail and direct response division of Gaiam, a lifestyle-media company catering to people who value personal development, ecological living, natural health and inspirational entertainment. Prior to this Mr. Sondheim was executive vice president at DualDisc Worldwide, a division of Sony BMG Music Entertainment. Mr. Sondheim has extensive work experience in the music and entertainment field with positions in Goodtimes Entertainment, Polygram Video USA, Orion Home Video and Columbia Pictures Home Video. Mr. Sondheim is a graduate of Kenyon College.
Patty Sullivan has served as a Director of the Company since February, 2004. Ms. Sullivan served as Executive Vice President, and Publisher and Executive Vice President of Sales, Marketing, and Licensing at Golden Books from 1996 to 1999. She served as the Senior Vice President of Sales and Marketing at Random House from 1993-1996 and went on to be Senior Vice President and Publisher at Simon & Schuster, where she launched Nickelodeon Books in 1995. Ms. Sullivan has had her own successful consulting and licensing business for several years, with such clients as Scholastic, Barnes & Noble, Lamaze Books, the American Academy of Pediatrics, and Build-A-Bear Workshop.
Brad Mead is the President of Delta Capital Group, a New England investment banking firm dealing with companies doing less than $50 million in sales. Mr. Mead founded Delta Capital Group in 1993 after selling his founding share of Baron Capital Group, a nationwide consulting and hospitality real estate firm he founded in 1984. Prior to Baron, Mr. Mead was Director of International Commercial Programs for the Grumman Aerospace Corporation in Bethpage, New York. Mr. Mead is a graduate of The Wharton School of The University of Pennsylvania.
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Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, directors and persons who beneficially own more than 10% of the Company’s Common Stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (“SEC”). Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by such persons. In fiscal year 2009 all Directors and Officers were granted shares of the Company’s common stock (see Executive Compensation and Compensation of Directors below). To the Company’s knowledge none of these people have filed Form 4s. Pursuant to the terms of purchase of Musical Kidz, LLC, on March 7, 2009 Musical Kidz received additional shares which resulted in total common stock ownership of greater than 10%. To the Company’s knowledge no Form 3 has been filed.
Item 11.
Item 11. Executive Compensation
The particulars of compensation paid to the following persons:
(a) our principal executive officer;
(b) each of our two most highly compensated executive officers who were serving as executive officers at the end of our fiscal year ended March 31, 2009; and
(c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of our fiscal year ended March 31, 2009, collectively referred to herein as our named executive officers, for our fiscal years ended March 31, 2009 and 2008, are set forth in the following summary compensation table, except that no disclosure is provided for any named executive officer whose total compensation does not exceed $100,000 for the respective fiscal year:
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Employment of Named Executive Officers
The Company has not entered into any employment agreements and there are no compensatory plans or arrangements with respect to the employment of Ms. Andersen Zantop or any other employee resulting from his or her resignation, retirement or other termination of employment or from a change of control.
Outstanding Stock Options and Equity Awards at Fiscal Year-End
As of March 31, 2009, there were no outstanding unexercised options for stock and there were no equity incentive plan awards for our named executive officers.
Options Grants in the Year Ended March 31, 2009
None.
Aggregated Options Exercised in the Year Ended March 31, 2009 and Year End Option Values
None.
Repricing of Options
None.
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Compensation of Directors
Directors are paid with stock grants that are awarded periodically. In fiscal year 2009 the Directors were granted the below listed number of shares of the Company’s common stock:
Director Compensation
Stock Grants
On July 14, 2005 the Board of Directors voted to set aside 30,000,000 shares of common stock to be used as a pool from which management may recommend to the board stock grants for certain employees and directors. While stock rewarded to employees or Directors requires the approval of the Board, such stock reward recommendations are made at Management’s discretion.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of the Company’s Common Stock as of June 30, 2009, with respect to (i) each person known to the Company to own beneficially more than five percent of the outstanding shares of the Company’s Common Stock, (ii) each director of the Company, (iii) each Officer of the Company, and (iv) all Directors and Officers of the Company as a group.
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 the Company’s 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.
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Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Compensation Committee
The Company’s compensation committee is comprised of Mr. Fred Filoon, a current board member; Mr. William W. Burnham, a principal shareholder and Chairman of the Board; and Ashley C. Andersen Zantop, Chief Executive Officer and President of the Company. Management has traditionally consulted with the three Directors who are members of the compensation committee when considering employees for significant promotions, compensation increases and all appointments or promotions of individuals to officer positions. All recommendations of the Compensation Committee are subject to the vote of the Board.
The Company is involved in several transactions with existing officers and shareholders of the Company and entities which are controlled by these individuals, collectively “related parties”. The following is a summary of this activity:
The Main Avenue property leased by the Company is owned by a Connecticut limited liability company, Noreast Management LLC, which is owned by William W. Burnham, the Chairman of the Company, Peter Ogilvie, a former Director and Officer of the Company, and Fred M. Filoon, a Director of the Company. Rent expense totaled $116,998 and $95,521 for the twelve months ended March 31, 2009 and 2008, respectively.
As of March 31, 2009, the Company has borrowings from related parties of 1,894,959. The terms of these notes can be found in Note 5 to the financial statements. Interest to related parties totaled $67,686 and $47,718 for the twelve months ended March 31, 2009 and 2008, respectively. Repayments to related parties totaled $62,042 for the twelve months ended March 31, 2009.
Guarantor fees paid or accrued and yet to be paid to Mr. Burnham for the year ended March 31, 2008 were $12,613.
On June 19, 2006 Mr. Bradford Mead was elected to the Board of Directors. Mr. Mead is the President of Delta Capital Group, Inc, the Company’s investment banking advisor. Delta Capital Group received fees in the amount of $3,000 and $14,470 from the Company in fiscal years 2009 and 2008, respectively.
Item 14.
Item 14. Principal Accountant Fees and Services
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The Company currently does not have an Audit Committee.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) Exhibits
(b) Reports on Form 8-K
1.
Item 7.01 Regulation FD Disclosure.
In a press release dated February 4, 2009, Trudy and PCS Edventures!.com, Inc. (“PCS”), an Idaho corporation, announced a Letter of Intent for the acquisition by PCS of substantially all the assets of Trudy.
Item 8.01 Other Events
The Registrant and PCS jointly announced that the two companies have entered into a Letter of Intent providing for the PCS to acquire substantially all of the assets and assume certain liabilities of Trudy. A copy of the Letter of Intent was attached as Exhibit 99.2.
2.
Item 4.01 Changes in Registrant’s Certifying Accountant
On April 6, 2009, Trudy Corporation (the “Company”) notified Dworken, Hillman, LaMorte & Sterczala (DHL&S) they had been dismissed as the Company’s auditor. The dismissal was approved by the Board of Directors.
DHL&S audited the financial statements for the fiscal years ended March 31, 2007 and 2008. Except as described below, the audit reports of DHL&S on the financial statements of the Company for the fiscal years ended March 31, 2007 and 2008 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to audit scope or accounting principles. DHL&S’s 2008 audit report relating to the audit of the Company’s financial statements for the fiscal year ended March 31, 2008 included an emphasis paragraph relating to an uncertainty as to the Company’s ability to continue as a going concern.
The Company has engaged M&K CPAS, PLLC. (“MKA”) to assume the role of its new certifying accountant. The decision to engage MKA was approved by the Board of Directors.
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3.
Item 7.01 Regulation FD Disclosure.
In a Press Release dated June 8, 2009, the Company and PCS Edventures!.com, Inc. (“PCS”), an Idaho corporation, announced that the two companies have terminated discussions for PCS to acquire substantially all of the assets and assume certain liabilities of Trudy Corporation.
Item 8.01 Other Events
The Registrant and PCS jointly announced that the two companies have terminated discussions for PCS to acquire substantially all of the assets and assume certain liabilities of Trudy Corporation.
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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.
Dated: September 29, 2009
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 and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William W. Burnham
Chairman of the Board
September 29, 2008
William W. Burnham
Director of Corporate Development
/s/ Ashley C. Andersen Zantop
Chief Executive Officer, President,
September 29, 2008
Ashley C. Andersen Zantop
/s/ Hakim Bangash
Director
September 29, 2008
Hakim Bangash
/s/ Alice B. Burnham
Director
September 29, 2008
Alice B. Burnham
/s/ Fred M. Filoon
Director
September 29, 2008
Fred M. Filoon
/s/ Bradford Mead
Director
September 29, 2008
Brad Mead
/s/ William Sondheim
Director
September 29, 2008
William Sondheim
/s/ Patty Sullivan
Director
September 29, 2008
Patty Sullivan
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