Form 10QSB for TRUDY CORP
17-Aug-2007
Quarterly Report
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES.
Overview
Net Sales for the Company's June Quarter of fiscal 2008 increased 8.6% versus the comparable quarter of fiscal 2007. This is primarily a result of revenue increases among domestic direct-to-consumer book distributors and the Company's international mass market distributors, including customers in Latin America and Spain. The increases were broad-based across the Company's major product lines, including Disney-branded products, Sesame Workshop and Peep and the Big Wide World, the WGBH-Boston early science development television property. The Company's profit margin remained relatively stable, declining slightly from 33.6% in the prior year to 33.3% in the same quarter for the current year. The three month period resulted in a net loss of $440,625 versus a loss of $349,481 for the prior year. Despite an increase in revenue and gross profit, the expanded loss resulted from increases in selling, general and administrative expenses.
As noted above, net sales for the first quarter of fiscal 2008 increased 8.6% versus the prior year. Sparking these increases were the Company's introduction of lower-priced formats under the Disney and Sesame licenses. Sales of Disney-licensed products as a percentage of total Company sales, increased from 32.2% to 43.3% for the quarter versus the comparable quarter a year ago. Sesame Workshop-licensed product sales were 9.8% of Company revenue. There were no Sesame Workshop-licensed sales in the prior year's quarter since this license was first introduced in November 2006. Smithsonian-licensed product sales declined from 34.0% of Company sales to 27.0%, although revenue from the product line remained stable.
Percentage of Sales by license
for the quarters ended June 30
--------------------------------
License 2007 2006
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Disney 43.3% 32.2%
Smithsonian 27.0 34.0
Proprietary 14.6 24.9
Sesame Workshop 9.8 0.0
All other 5.3 8.9
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Total 100.0 100.0
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15
Sales increases, net of
provisions for returns, for the
three months ended June 30,
----------------------------
Sales channel 2007 2006 Variance % change
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Domestic
Direct-to-Consumer Book
Distributors $ 235,836 $ 13,334 $ 222,502 NMF
International Mass Market
Distributors 208,814 45,918 162,896 354.8%
Domestic Mass Market
Distributors 62,019 16,874 45,145 267.5
Domestic
Direct-to-Consumers
(returnable) 42,593 0 42,593 NMF
Sales increases for the quarter were selective across major sales channels. A growing channel for the Company are sales to distributors who sell direct to the consumer by mail order catalog, the internet or door-to-door canvassing without the benefit of returnability. This channel generated $235,836 in revenue in the June Quarter versus negligible sales in the comparable quarter a year ago.
Sales to international mass market distributors increased $162,896 from $45,918 in the prior year to $208,814 for the three months ended June 30, 2007. The increase was a result of ongoing sales and distribution successes of the Company's two Spanish language distributors in Latin America and Spain, which are expanding their offerings of the Company's two prime licenses, Disney and Sesame Workshop, in these territories.
Sales to domestic mass market distributors increased nearly four fold as a result of expanded distribution of lower priced formats into the mass market retailers such as Toys R Us and Wal*Mart.
Domestic direct-to-consumer returnable sales were $42,593 for the three months ended June 30, 2007. There were no sales in this division in the prior year. The major customer in this division is a home shopping channel who successfully sold through a Smithsonian multi-title book, CD and plush toy combination within the allotted air time.
Several other channels of trade experienced increased sales including education and consumer catalogs, international trade book retailers, specialty retailers and schools and libraries.
Sales decreases, net of
provisions for returns, for the
three months ended June 30,
----------------------------
Sales channel 2007 2006 Variance % change
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Domestic Warehouse Club
Distributors $ 70,434 $ 339,761 $ (269,327) (79.3)
Domestic Book Retailers 22,377 57,319 (34,942) (61.0)
Domestic warehouse club distributors decreased from $339,761 to $70,434 in the current quarter, primarily as a result of the temporary slowdown of business of Baker & Taylor's purchase of AMS as well as the general timing of orders.
Several other channels of trade including international sub rights royalties, Canadian book distributors, and international trade book distributors also experienced decreased sales.
COST OF SALES.
The Company's cost of sales for the quarter ended June 30, 2007 increased $54,093 from $597,727 in the prior year to $651,820 in the current year, an increase of 9.0%, as a result of the increased sales volume. Cost of sales as a percentage of net sales increased from 66.4% to 66.7% in the current quarter as a result of a change in the sales mix. A slight decrease in product development and warehousing expenses offset the increase.
GROSS PROFIT.
The resulting gross profit for the quarter ended June 30, 2007 increased 7.6% to $325,079 versus the prior quarter's gross profit of $302,124. Gross margin was 33.3% in the current quarter versus 33.6% in the quarter ended June 30, 2006.
SELLING, GENERAL & ADMINISTRATIVE COSTS.
The Company's selling, general, and administrative costs increased 22.7% or $135,633 to $732,732 for the three months ended June 30, 2007 versus $597,099 for the three months ended June 30, 2006. As a percentage of net sales, selling, general and administrative expenses increased from 66.4% of net sales from the prior quarter to 75.0% of net sales in the current quarter.
In the June Quarter, 2007 the Company attended two international trade shows which were not held in the comparable quarter of 2006. As a result trade show
expenses increased $66,711. Travel and entertainment expenses related to these two shows were $13,827.
Administrative expenses also increased as a result of fees paid to strategic consultants which resulted in an added expense in the current quarter of $32,813. Additional factors contributing to the increase in selling and administrative expenses were the increase in commissions and professional fees.
LOSS FROM OPERATIONS.
For the quarter ended June 30, 2007, the loss from operations was $407,653 versus a loss of $294,975 for the prior year's quarter.
OTHER EXPENSE.
The Company's other expense for the quarter ended June 30, 2007 was $32,972 versus a $54,506 for the quarter ended June 30, 2006. Interest expense decreased for the quarter versus the comparable quarter a year ago as a result of the conversion of shareholder debt into equity in July, 2006.
NET LOSS.
As a result of the items discussed above, the Company's net loss for the quarter ended June 30, 2007 was $440,625 compared to a net loss of $349,481 for the comparable prior quarter.
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 were effective for the Company on April 1, 2007. The Company's adoption of FIN 48 did not 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 does not expect the adoption of SFAS 157 to have a material impact on the financial statements.
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of operations are based upon the Company's financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements 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. The Company annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies (see summary of significant accounting policies more fully described on Note 2 of notes to our financial statements), the following policies involve a higher degree of judgment and/or complexity:
Pre-Publication Costs
Pre-publication costs are deferred and amortized on an accelerated method over their expected revenue generating lives.
Prepaid Catalog Costs
Catalogs and brochures are amortized over the period benefited, not to exceed the publication date of the subsequent brochure or twelve months, whichever is less.
Inventory
The company reviews its inventory for obsolescence and provides for obsolescence when the inventory becomes unsaleable over a reasonable time.
Reserve for Returns
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. The Company attempts to resell all returned product whenever possible.
Liquidity and Capital Resources
For the quarters
ended June 30,
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2007 2006 Variance % change
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Net assets (deficiency) $ 75,462 $ (1,357,806) $ 1,433,268 NMF
Working capital (deficiency) (447,792) (528,815) 81,023 15.3%
Accounts receivable, net 1,091,152 743,651 347,501 46.7
Accounts payable and accrued
expenses 1,227,675 1,573,713 (346,038) -22.0
Royalties and commissions payable 303,222 207,856 95,366 31.5
At June 30, 2007 the Company had net assets of $75,462 versus a deficiency at June 30, 2006 of $1,357,806. Working capital improved by $81,023 from a deficiency of $528,815 to a deficiency of $447,592 at June 30, 2007. The change is primarily due to the conversion of debt to equity in July, 2006.
Accounts receivable increased from $743,651 at June 30, 2006 to $1,091,152 at June 30, 2007, an increase of $347,501. The increase is due to the timing of payments from customers and the change in the customer mix and the credit terms occasionally provided to international customers. Accounts payable and accrued expenses decreased $346,038 versus the prior year from $1,573,713 to $1,227,675 at June 30, 2007. Royalties and commissions payable increased $95,366 versus the prior year from $207,856 at June 30, 2006 to $303,222 at June 30, 2007 primarily as a result of the sales mix and the increased level of sales.
Expected cash flows from operations supplemented by anticipated lending sources are forecast to be adequate in covering the Company's operations. Although the Company does not expect to run out of available funds in the coming fiscal year, it does expect that the need for capital will continue to eclipse the limits of its revolving credit facility, including the amended facility of $850,000, the additional bank borrowing of $100,000 and the shareholder note of $234,000, if revenue growth is to be realized. The Company continues to explore alternative financing options in the event that cash flow does not materialize in line with current expectations. Additional working capital would be required to fund new growth opportunities and publication initiatives. It is believed a strategic or private equity investor would allow the Company to better position itself for growth by providing working capital for future publishing initiatives and even a strategic acquisition.
As of August 7, 2007, the balance on the Company's revolving line of credit was $726,206 out of $850,000 available. As of June 30, 2007 the balance on the Company's revolving line of credit was $734,206 out of $850,000 available to the Company.
As of August 13, 2007 the Company's backlog was approximately $1,450,000.
On November 28, 2006 the Company received a $260,000 short-term note from its principal shareholder (William W. Burnham, Chairman of the Board). The note is due August 31, 2007. Interest is payable monthly at 6.50%. Mr. Burnham was repaid approximately $26,000 of this note in the quarter ended June 30, 2007.
The Company is in discussions with both Mr. Burnham and the Bank to extend the $260,000 note due to Mr. Burnham and the $100,000 note due to the Bank. Both notes are due at the end of August, 2007 and the Company does not foresee any problems with these refinancings.
Forward-looking Statements
We have made forward-looking statements in this report that are subject to a number of risks and uncertainties, including without limitation, those described in our Annual Report on Form 10-KSB for the year ended March 31, 2007 and other risks and uncertainties indicated from time to time in our filings with the SEC. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the information concerning possible or assumed future results of operations. Also, when we use words such as "believes," "expects," "anticipates" or similar expressions, we are making forward-looking statements. Readers should understand that the following important factors, in addition to those discussed in the referenced SEC filings, could affect our future financial results, and could cause actual results to differ materially from those expressed in our forward-looking statements:
o The implementation of our strategies;
o The availability of additional capital;
o Variations in stock prices and interest rates;
o Fluctuations in quarterly operating results; and
o Other risks and uncertainties described in our filings with the SEC.
We make no commitment to disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements.
AI
